** **
| **UNITED STATES**                                                                |
|----------------------------------------------------------------------------------|
| **SECURITIES AND EXCHANGE COMMISSION**                                           |
| Washington, D.C.  20549                                                     |
|                                                                                  |
| **FORM 10-Q**                                                                    |
| (Mark One)                                                                       |
|  [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE               |
| SECURITIES EXCHANGE ACT OF 1934                                                  |
|                                                                                  |
| **For the quarterly period ended	June 30, 2005**                                 |
|                                                                                  |
| - OR -                                                                           |
|                                                                                  |
| [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15  (d) OF THE             |
| SECURITIES EXCHANGE ACT OF 1934                                                  |
|                                                                                  |
| For the transition period from _______________  to   _________________ |
|                                                                                  |
|                                                                             |   |   |  |   |
| **Commission**                                                                   |  | **Name of Registrants,  State of Incorporation,**
**I.R.S. Employer**

**File Number**

**Address and Telephone Number**

**Identification No.**

333-32170

PNM  Resources, Inc.

85-0468296

(A  New Mexico Corporation)

Alvarado    Square

Albuquerque, New Mexico  87158

(505)  241-2700

1-6986

Public  Service Company of New Mexico

85-0019030

(A  New Mexico Corporation)

Alvarado    Square

Albuquerque, New Mexico  87158

(505)  241-2700

2-97230

Texas-New  Mexico Power Company

75-0204070

(A  Texas Corporation)

4100  International Plaza, 

P.O.    Box 2943

Fort    Worth, Texas  76113

(817) 731-0099
Indicate by check mark whether the registrants (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 registrants were required to file such reports), and  (2) have been subject to such filing requirements for the past 90 days.   YES   X    NO      	

Indicate by check mark whether each Registrant is an  accelerated filer (as defined in Rule 12b-2 of the Act).  

PNM Resources, Inc.  ("PNMR")                                                     YES  	X     NO                    Public Service Company of New Mexico  ("PNM")                       YES          NO 	X                Texas-New Mexico Power Company  ("TNMP")                           YES         NO 	X   

As of August 1, 2005, 68,741,421 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 

August 1, 2005 was 39,117,799 all held by PNMR.

The total number of shares of Common Stock of TNMP  outstanding as of

August 1, 2005 was 10,705 all held indirectly by  PNMR.

This Form 10-Q 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-Q is  incorporated by reference into any filing with the SEC made by PNM or TNMP,  the portions of this Form 10-Q that relate to PNMR and its subsidiaries other  than PNM or TNMP, respectively are not incorporated by reference therein. 	

On June 6, 2005, PNMR completed itsacquisition of TNP Enterprises, Inc. and Subsidiaries.  See Note 2 - "TNPAcquisition," in the Notes to Consolidated Financial Statements under Part I,Item 1, of this report for further information.  Commencing with this Form 10-Qfor the quarter ended June 30, 2005, TNMP is included in the  filing of PNMRand PNM.

ii

**PNM RESOURCES,INC. AND SUBSIDIARIESPUBLIC SERVICECOMPANY OF NEW MEXICO AND SUBSIDIARIES TEXAS-NEW MEXICOPOWER COMPANY**

**INDEX**

**Page No.**

GLOSSARY

**1**

** **

**PART I.  FINANCIAL INFORMATION:**

** **

** **

ITEM 1.  FINANCIAL STATEMENTS  (Unaudited)

** **

** **

PNM Resources, Inc. and  Subsidiaries

** **

Consolidated Statements of  Earnings

** **

Three and Six Months Ended June  30, 2005 and 2004

**4**

Consolidated Balance Sheets

** **

June 30, 2005 and December 31,  2004

**5**

Consolidated Statements of Cash  Flows

** **

Six Months Ended June 30, 2005  and 2004

**7**

Consolidated Statements of  Comprehensive Income

** **

Three and Six Months Ended June  30, 2005 and 2004

**9**

Public Service Company of New Mexico and Subsidiaries

** **

Consolidated Statements of  Earnings

** **

Three and Six Months Ended June  30, 2005 and 2004

**10**

Consolidated Balance Sheets

** **

June 30, 2005 and December 31,  2004

**11**

Consolidated Statements of Cash  Flows

** **

Six Months Ended June 30, 2005  and 2004

**13**

Consolidated Statements of  Comprehensive Income

** **

Three and Six Months Ended June  30, 2005 and 2004

**15**

Texas-New Mexico Power Company

** **

Consolidated Statements of  Earnings

** **

Three and Six Months Ended June  30, 2005 and 2004

**16**

Consolidated Balance Sheets

** **

June 30, 2005 and December 31,  2004

**18**

Consolidated Statements of Cash  Flows

** **

Six Months Ended June 30, 2005  and 2004

**20**

Consolidated Statements of  Comprehensive Income (Loss)

** **

Three and Six Months Ended June  30, 2005 and 2004

**22**

 Notes to the Consolidated  Financial Statements

**24**

** **

ITEM 2.  MANAGEMENT'S DISCUSSION  AND ANALYSIS OF

** **

                  FINANCIAL CONDITION AND RESULTS OF  OPERATIONS

**85**

** **

ITEM 3.  QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT

** **

                  MARKET RISK

**152**

** **

ITEM 4.  CONTROLS AND PROCEDURES

**152**

iii

 

**PART II.  OTHER INFORMATION:**

 

 

ITEM 1.  LEGAL PROCEEDINGS

**153**

** **

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

**153**

** **

ITEM 5.  OTHER INFORMATION

**154**

** **

ITEM 6.  EXHIBITS

**156**

** **

Signature

**158**

 iv
****
**GLOSSARY**

Afton..................................... 

Afton Generating Station

ALJ........................................ 

Administrative Law Judge

APB....................................... 

Accounting Principles Board

APS....................................... 

Arizona Public Service Company

AR  Securitization................. 

Accounts Receivable Securitization

Board..................................... 

Board of Directors

BTU....................................... 

British Thermal Unit

Cal PX................................... 

California Power Exchange

Cal ISO.................................. 

California Independent System Operator

Cascade................................. 

Cascade  Investment, LLC

Clean Air Act....................... 

The Clean Air Act Amendments of 1990

Congress............................... 

United States Congress

Constellation......................... 

Constellation Energy  Commodities Group, Inc. 

CPUC.................................... 

California Public Utilities Commission

Decatherm............................ 

1,000,000 BTUs

Delta...................................... 

Delta-Person Limited Partnership

DOJ....................................... 

United States Department of Justice

EaR........................................ 

Earnings at Risk

EIP......................................... 

Eastern Interconnection Project

EITF....................................... 

Emerging Issues Task Force

EPE........................................ 

El Paso Electric Company

EPA....................................... 

United States Environmental Protection Agency

ERCOT.................................. 

Electric  Reliability Council of Texas

ERP........................................	

Equipment Replacement Provision

FASB.....................................	

Financial Accounting Standards Board

FCPSP................................... 

First Choice Power Special Purpose, L.P.

FERC..................................... 

Federal Energy Regulatory Commission

First Choice........................... 

First Choice Power, L. P.

FIP......................................... 

Federal Implementation Plan

Four Corners......................... 

Four Corners Power Plant

GAAP.................................... 

Generally Accepted Accounting Principles in the United

   States of America

Gathering  Company............ 

Sunterra  Gas Gathering Company, a wholly‐owned 

    subsidiary of PNM Resources, Inc.

GCT....................................... 

Grand Canyon   Trust

Global  Electric Agreement... 

Signed by  PNMR and other parties in 2002; provided for a five-year rate path for New Mexico j  urisdictional customers beginning in September 2003

Great  Southwestern............. 

Great  Southwestern Construction, Inc.

IRS......................................... 

United  States Internal Revenue Service

LIBOR................................... 

London Interbank Offered Rate

Lordsburg............................. 

Lordsburg Generating Station

Luna...................................... 

Luna Energy Facility

MMBTUs............................... 

Million British Thermal Units

Moody's................................. 

Moody's Investor Services, Inc.

1

MW....................................... 

Megawatt

MWh..................................... 

Megawatt Hour

Navajo Acts.......................... 

Navajo Nation Air Pollution Prevention and Control Act,  the

   Navajo Nation Safe Drinking Water Act, and the Navajo

   Nation Pesticide Act

Ninth Circuit........................ 

United States Court of Appeals for the Ninth Circuit

NMED................................... 

New Mexico Environment Department

NMPRC................................. 

New Mexico Public Regulation Commission, successor to the	

   NMPUC

NMPUC................................ 

New Mexico Public Utility Commission

NNHPD................................ 

Navajo Nation Historic Preservation Department

NRC...................................... 

United States Nuclear Regulatory Commission

NSPS..................................... 

New Source Performance Standards

NSR....................................... 

New Source Review

OATT.................................... 

Open Access Transmission Tariff

O&M..................................... 

Operations and Maintenance Expense

PGAC.................................... 

PNM's Purchased Gas Adjustment Clause

PG&E.................................... 

Pacific Gas and Electric Co.

PNM...................................... 

Public Service Company of New Mexico

PNMR................................... 

PNM  Resources, Inc.

PPA....................................... 

Power  Purchase Agreement

PSA....................................... 

Power  Supply Agreement

PSD....................................... 

Prevention  of Significant Deterioration

Processing  Company............ 

Sunterra  Gas Processing Company, a wholly‐owned 

    subsidiary of PNM Resources, Inc.

PUCT.................................... 

Public  Utility Commission of Texas

PUHCA................................. 

The Public  Utility Holding Company Act of 1935

PURPA.................................. 

Public  Utility Regulatory Policy Act of 1978

PVNGS.................................. 

Palo Verde Nuclear Generating Station

RMRR.................................... 

Routine Maintenance, Repair or Replacement

RTO....................................... 

Regional Transmission Organization

Reeves  Station....................... 

Reeves Generating Station

Restructuring  Act................. 

New  Mexico Electric Utility Industry Restructuring Act of 1999, as amended

RMC...................................... 

Risk Management Committee

Senate Bill 7.......................... 

Legislation that established retail competition in Texas

SCE........................................ 

Southern California Edison Company

SDG&E.................................. 

San Diego Gas and Electric Company

SEC........................................	

United States Securities and Exchange Commission

SESCO...................................	

San Angelo Electric Service Company

SFAS.....................................	

Statement of Financial Accounting Standards

SJCC...................................... 

San Juan Coal Company

SJGS....................................... 

San Juan Generating Station

SO2........................................ 

Sulfur Dioxide

S&P....................................... 

Standard and Poor's Ratings Services

SW Acquisition..................... 

SW Acquisition, L.P.

TCEQ.................................... 

Texas Commission on Environmental Quality

2

TECA.................................... 

Texas Electric Choice Act (also known as Senate Bill 7)

TNMP.................................... 

Texas‐New Mexico Power Company

TNP....................................... 

TNP Enterprises, Inc.

Throughput.......................... 

Volumes of gas delivered, whether or not owned by the

   Company

USBR.....................................	

United States Bureau of Reclamation

USFS...................................... 

United States Forest Service

VAR...................................... 

Value at Risk

WSPP.................................... 

Western  Systems Power Pool

3

**ITEM 1. FINANCIAL STATEMENTS**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**PNM RESOURCES,  INC. AND SUBSIDIARIES**

**CONSOLIDATED  STATEMENTS OF EARNINGS **

**(Unaudited) **

** **

** **

** **

** **

** **

** **

** **

**Three Months Ended**

** **

**Six Months Ended**

**June 30,**

** **

**June 30,**

**2005**

** **

**2004**

** **

**2005**

** **

**     2     2004**

** **

(In thousands,  except per share amounts)

**Operating Revenues:**

 Electric

$ 322,553

$ 289,389

$ 584,943

$ 550,636

 Gas

82,384

80,886

247,670

256,760

 Other

317

 

128

554

379

    Total operating revenues

405,254

370,403

833,167

807,775

**Operating Expenses:**

 Cost of energy sold

238,191

213,527

485,669

477,013

 Administrative and general

52,448

42,575

93,496

82,949

 Energy production costs

39,806

36,688

75,838

74,242

 Depreciation and amortization

31,185

26,431

60,012

52,568

 Transmission and distribution costs

15,050

14,150

29,113

29,642

 Taxes, other than income taxes

10,571
   
8,262

19,442

17,746

 Income taxes

(1,203)

6,506

12,573

17,817

    Total operating expenses

386,048
   
348,139

776,143

751,977

    Operating income

19,206
   
22,264

57,024

55,798

**Other Income and Deductions:**

 Interest income

11,622

8,844

20,922

18,765

 Other income

2,634

1,746

6,344

3,413

 Carrying charges on regulatory assets

525

-

525

-

 Other deductions

(6,903)

(614)

(10,010)

(3,986)

 Other income taxes 

(2,512)

(3,190)

(6,011)

(6,186)

    Net other income and deductions

5,366

6,786

11,770

12,006

**Interest Charges**

20,963

12,055

34,544

25,884

** **

**Preferred Stock Dividend**

**  Requirements**

2,068

146

2,200

293

** **

**Net Earnings**

** **

$     1,541

** **

$  16,849

$   32,050

$  41,627

** **

** **

** **

**Net Earnings per Common Share:**

** **

** **

** **

** **

** **

**  Basic**

** **

$       0.02

** **

$      0.28

** **

$      0.51

$      0.69

** **

** **

** **

**  Diluted**

** **

$       0.02

** **

$      0.28

** **

$      0.50

$      0.68

** **

** **

** **

** **

** **

** **

** **

**Dividends Paid per Common Share**

** **

$     0.185

** **

$      0.16

** **

$      0.37

$      0.31

The accompanying notes, as they relate to  PNMR, are an integral part of these financial statements.

4

**PNM RESOURCES, INC. AND SUBSIDIARIES**
**CONSOLIDATED BALANCE SHEETS**

(Unaudited)

** **

** **

**June 30,**

** **

**December 31,**

** **

**2005**

** **

**2004**

(In thousands)

**ASSETS**

**Utility Plant:**

 Electric plant in service

$3,248,815

$2,488,961

 Gas plant in service

690,229

680,487

 Common plant in service and plant held for future use

153,450

140,818

4,092,494

3,310,266

 Less accumulated depreciation and amortization

1,316,618

1,135,510

2,775,876

2,174,756

 Construction work in progress

138,516

124,381

 Nuclear fuel, net of accumulated amortization of $14,963 and $16,448

26,436

25,449

     Net utility plant

2,940,828

2,324,586

**Other Property and Investments:**

 Investment in lessor notes

297,999

308,680

 Other investments

141,668

139,848

 Non-utility property, net of accumulated depreciation of $6 and

     $1,773

4,815

1,437

     Total other property and investments

444,482

449,965

**Current Assets:**

 Cash and cash equivalents

222,962

17,195

 Special deposits

2,684

-

 Accounts receivable, net of allowance for uncollectible accounts

     of $3,258 and  $1,329

106,131

96,600

 Unbilled revenues

101,821

104,708

 Other receivables

55,881

48,393

 Inventories

43,143

41,352

 Regulatory assets

11,977

3,339

 Other current assets

66,223

51,967

     Total current assets

610,822

363,554

**Deferred charges:**

 Regulatory assets

358,956

217,196

 Prepaid pension cost

89,390

87,336

 Goodwill

482,761

-

 Other intangible assets

63,043

-

 Other deferred charges

54,102

44,998

     Total deferred charges

1,048,252

349,530

$5,044,384

$3,487,635

The accompanying notes, as they relate to PNMR, are an integral part of  these financial statements.

5

**PNM RESOURCES, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

(Unaudited)

**June 30,**

**December 31,**

**2005**

**2004**

(In thousands)

**CAPITALIZATION AND LIABILITIES**

**Capitalization:**

 Common stockholders' equity:

    Common stock outstanding (no par value)

$  803,888

$  638,826

    Accumulated other comprehensive loss, net of tax

(85,388)

(89,813)

    Retained earnings

570,704

550,566

       Total common stockholders' equity

1,289,204

1,099,579

 Cumulative preferred stock of subsidiary without mandatory redemption  

       ($100 par value)	

11,529

11,529

 Cumulative preferred stock of subsidiary, redeemable (no par value)

221,648

-

 Long-term debt

1,938,038

987,823

     Total capitalization

3,460,419

2,098,931

**Current Liabilities:**

 Short-term debt

20,700

94,700

 Accounts payable

119,705

117,645

 Accrued interest and taxes

49,222

15,796

 Other current liabilities

135,051

128,476

     Total current liabilities

324,678

356,617

**Deferred Credits:**

 Accumulated deferred income taxes

399,048

284,528

 Accumulated deferred investment tax credits

35,746

35,360

 Regulatory liabilities

373,095

327,419

 Asset retirement obligations

52,744

50,361

 Additional minimum pension liability

164,801

164,801

 Accrued pension liability

4,043

-

 Accrued postretirement benefit cost

21,054

16,102

 Other deferred credits

208,756

153,516

     Total deferred credits

1,259,287

1,032,087

Commitments and Contingencies (see Note 8)

-

-

$5,044,384

$3,487,635

The accompanying  notes, as they relate to PNMR, are an integral part of these financial  statements.

6

**PNM RESOURCES,  INC. AND SUBSIDIARIES**

**CONSOLIDATED  STATEMENTS OF CASH FLOWS**

(Unaudited)

** **

**Six Months Ended**

**June 30,**

**2005**

** **

**2004**

(In thousands)

**Cash Flows From Operating Activities:**

 Net earnings  

$  32,050

$  41,627

 Adjustments to reconcile net earnings to net cash flows

    from operating activities:

Depreciation and amortization

69,510

67,095

Allowance for equity funds used during  construction

(1,196)

(318)

Accumulated deferred income tax	

4,381

2,473

Net unrealized gains on trading and  investment contracts

(812)

(4,557)

 Changes in certain assets and liabilities:

Accounts receivable

23,364

15,369

Unbilled revenues

36,661

12,344

Accrued post-retirement benefit costs

(1,091)

(323)

Other assets

(18,421)

13,744

Accounts payable

(44,382)

(24,987)

Accrued taxes

33,494

28,187

Accrued interest

8,386

24

Deferred credits

(8,602)

(1,946)

Other liabilities

(17,676)

(7,045)

Net cash flows from operating activities

115,666

141,687

**Cash Flows From Investing Activities:**

 Utility plant additions

(73,751)

(55,611)

 Nuclear fuel additions

(5,159)

(4,600)

 Utility plant additions related to allowance for borrowed funds	

     used during construction and capitalized interest

(1,039)

(1,519)

 Return of principal of PVNGS lessor notes

10,112

10,274

 Cash acquired from purchase of TNP, net of cash paid

34,531

-

 Other 

1,618

(6,159)

            Net cash flows from investing activities

(33,688)

(57,615)
The accompanying  notes, as they relate to PNMR, are an integral part of these financial  statements.
7

**PNM RESOURCES,  INC. AND SUBSIDIARIES**

**CONSOLIDATED  STATEMENTS OF CASH FLOWS**

(Unaudited)

** **

**Six Months Ended**

**June 30,**

**2005**
   
**2004**

(In thousands)

** **

**Cash Flows From Financing Activities:**

 Short-term debt borrowings (repayments), net

(74,000)

(63,442)

 Long-term debt borrowings

239,832

-

 Long-term debt repayments

(110,532)

-

 Issuance of common stock

101,231

-

 Exercise of employee stock options

(10,263)

(7,444)

 Dividends paid

(25,299)

(19,216)

 Other 

2,820

(1,018)

            Net cash flows from financing activities

123,789

(91,120)

Increase (decrease) in cash and cash equivalents

205,767

(7,048)

Beginning of period

17,195

12,694

End of period

$    222,962

$   5,646

**Supplemental Cash Flow Disclosures:**

 Interest paid, net of capitalized interest

$      13,541

$ 23,555

 Income taxes (refunded), net

$    (16,176)

$ (5,508)

**Supplemental schedule of noncash investing and financing activities**:

    The Company purchased all of the  outstanding common shares of TNP for $107.6 million in cash

      and $87.4 million in PNMR common  stock.  In conjunction with the acquisition, liabilities were

      assumed as follows:

Fair value of assets acquired

$1,494,744

Cash paid for TNP common shares

(107,602)

PNMR common stock exchanged for TNP common  stock

(87,392)

Liabilities assumed

$1,299,750

The accompanying  notes, as they relate to PNMR, are an integral part of these financial  statements.

8

**PNM RESOURCES, INC. AND  SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF  COMPREHENSIVE INCOME**

**(Unaudited)**

** **

** **

**Three Months Ended**

**Six Months Ended**

** **

**June 30,**

**June 30,**

** **

**2005**

** **

**2004**

**2005**

** **

**2004**

** **

(In thousands)

** **

**Net Earnings**

$  1,541

$ 16,849

$ 32,050

$ 41,627

Other Comprehensive Income, net	

of tax:

**Unrealized gain (loss) on securities:**

Unrealized holding gains (losses)

during the period, net of income

tax (expense) benefit of $(437),	

$(48), $(402) and $(326)

667

74

612

497

Reclassification adjustment for	

amounts included in net income,

net of income tax (expense)

benefit of $134, $257,	

        $662 and $435

(204)

(392)

(1,010)

(664)

**Additional minimum pension liability**

**  adjustment, net of income tax expense**

**  of $(12)**

-

-

-

19

**Mark-to-market adjustment for**

**certain derivative transactions:**

Change in fair market value of	

designated cash flow hedges,

net of income tax (expense)

benefit of $(1,996), $(1,342),	

3,098

2,048

6,118

4,087

        $(3,975) and $(2,678)

Reclassification for amounts in net

income, net of income tax

(expense) benefit of $23, $(430)

$849 and $209

(35)

657

(1,295)

(319)

**Total Other Comprehensive Income (Loss)** 	

3,526

2,387

4,425

3,620

**Total Comprehensive Income**

$  5,067

$ 19,236

$ 36,475

$ 45,247

The accompanying  notes, as they relate to PNMR, are an integral part of these financial  statements.

9

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

**A WHOLLY OWNED  SUBSIDIARY OF PNM RESOURCES, INC.**

**CONSOLIDATED  STATEMENTS OF EARNINGS**

**(Unaudited)**

** **

** **

** **

** **

** **

** **

** **

**Three Months Ended**

** **

**Six Months Ended**

**June 30,**

** **

**June 30,**

**2005**

** **

**2004**

** **

**2005**

** **

**2004**

** **

(In thousands)

** **

**Operating Revenues:**

 Electric

$ 271,436

$ 289,389

$ 535,570

$ 550,636

 Gas

82,384

80,886

247,670

256,760

    Total operating revenues

353,820

370,275

783,240

807,396

**Operating Expenses:**

 Cost of energy sold

208,316

213,524

457,414

476,940

 Administrative and general

42,158

44,985

82,407

84,019

 Energy production costs

39,816

36,688

75,880

74,242

 Depreciation and amortization

27,964

25,824

55,909

51,440

 Transmission and distribution costs

13,925

14,150

28,014

29,642

 Taxes, other than income taxes

7,459

 

7,719

15,751

16,282

 Income taxes

227

5,706

15,025

18,021

    Total operating expenses

339,865

 

348,596

730,400

750,586

    Operating income

13,955

 

21,679

52,840

56,810

**Other Income and Deductions**

 Interest income

9,097

8,744

18,303

18,516

 Other income

2,185

1,775

5,461

3,269

 Other deductions

(5,675)

(274)

(7,229)

(1,591)

 Other income taxes

(2,315)

(3,296)

(6,002)

(6,978)

    Net other income and deductions

3,292

6,949

10,533

13,216

**Interest Charges**

13,117

12,691

26,757

26,585

** **

**Net Earnings**

4,130

15,937

36,616

43,441

** **

**Preferred Stock Dividend**

**  Requirements**

132

146

264

293

** **

**Net Earnings Available for**

** **

** **

**  Common Stock**

** **

$    3,998

** **

$  15,791

$   36,352

$  43,148

** **

** **

** **

The accompanying  notes, as they related to PNM, are an integral part of these financial  statements.

10
****
**PUBLIC SERVICE  COMPANY OF NEW MEXICO AND SUBSIDIARIES**

**A WHOLLY OWNED  SUBSIDIARY OF PNM RESOURCES, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

** **

** **

**June 30,**

** **

**December 31,**

** **

**2005**

** **

**2004**

(In thousands)

**ASSETS**

**Utility Plant:**

 Electric plant in service

$2,533,442

$2,488,961

 Gas plant in service

690,229

680,487

 Common plant in service and plant held for future use

97,141

97,369

3,320,812

3,266,817

 Less accumulated depreciation and amortization

1,164,525

1,125,444

2,156,287

2,141,373

 Construction work in progress

101,181

110,406

 Nuclear fuel, net of accumulated amortization of $14,963 and $16,448

26,436

25,449

     Net utility plant

2,283,904

2,277,228

**Other Property and Investments:**

 Investment in lessor notes

297,999

308,680

 Other investments

131,000

116,134

 Non-utility property

966

966

     Total other property and investments

429,965

425,780

**Current Assets:**

 Cash and cash equivalents

7,714

16,448

 Accounts receivable, net of allowance for uncollectible accounts

     of $1,359 and  $1,329

68,416

96,600

 Unbilled revenues

64,565

104,708

 Other receivables

49,012

45,717

 Inventories

41,574

41,246

 Regulatory assets

11,978

3,339

 Other current assets

47,248

39,933

     Total current assets

290,507

347,991

**Deferred charges:**

 Regulatory assets

216,990

217,196

 Prepaid pension cost

89,390

87,336

 Other deferred charges

32,992

38,199

     Total deferred charges

339,372

342,731

$3,343,748

$3,393,730

The accompanying  notes, as they relate to PNM, are an integral part of these financial  statements.
11

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

**A WHOLLY OWNED  SUBSIDIARY OF PNM RESOURCES, INC.**

**CONSOLIDATED  BALANCE SHEETS**

**(Unaudited)**

**June 30,**

**December 31,**

**2005**

**2004**

(In thousands)

**CAPITALIZATION AND LIABILITIES**

**Capitalization:**

 Common stockholder's equity:

    Common stock outstanding ($5 par value)	

$   195,589

$   195,589

    Paid-in-capital

556,752

556,761

    Accumulated other comprehensive loss, net of tax

(86,244)

(89,813)

    Retained earnings

327,807

371,455

       Total common stockholder's equity

993,904

1,033,992

 Cumulative preferred stock of subsidiary without mandatory redemption  

       ($100 par value)	

11,529

11,529

 Long-term debt

987,043

987,676

     Total capitalization

1,992,476

2,033,197

**Current Liabilities:**

 Short-term debt

18,800

60,400

 Accounts payable

56,274

116,763

 Intercompany accounts payable

109,079

38,700

 Accrued interest and taxes

40,528

28,783

 Other current liabilities

88,255

91,765

     Total current liabilities

312,936

336,411

**Deferred Credits:**

 Accumulated deferred income taxes

286,424

278,907

 Accumulated deferred investment tax credits

33,813

35,360

 Regulatory liabilities

334,608

327,419

 Asset retirement obligations

52,744

50,361

 Additional minimum pension liability

164,801

164,801

 Accrued postretirement benefit cost

14,173

16,102

 Other deferred credits

151,773

151,172

     Total deferred credits

1,038,336

1,024,122

Commitments and Contingencies (see Note 8)

-

-

$3,343,748

$3,393,730

The accompanying  notes, as they relate to PNM, are an integral part of these financial  statements.

12

**PUBLIC SERVICE  COMPANY OF NEW MEXICO AND SUBSIDIARIES	A WHOLLY OWNED  SUBSIDIARY OF PNM RESOURCES, INC.	CONSOLIDATED STATEMENTS OF CASH FLOWS**(Unaudited)
**Six Months Ended June 30,**   
**2005**

** **

**2004**

(In thousands)

**Cash Flows From Operating Activities:**

 Net earnings

$  36,616

$  43,441

 Adjustments to reconcile net earnings to net cash flows

    from operating activities:

Depreciation and amortization

66,868

65,941

Allowance for equity funds used during  construction

(1,163)

(307)

Accumulated deferred income tax	

3,720

2,473

Net unrealized gains on trading and  investment contracts          	

(812)

(4,557)

 Changes in certain assets and liabilities:

Accounts receivable

28,184

15,369

Unbilled revenues

40,143

12,344

Accrued post-retirement benefit costs

(3,983)

(323)

Other assets

(10,958)

9,208

Accounts payable

(68,594)

(15,628)

Accrued interest and taxes

11,745

25,259

Other liabilities

(16,361)

(5,785)

Net cash flows from operating activities

 85,405

147,435

**Cash Flows From Investing Activities:**

 Utility plant additions

(53,969)

(54,527)

 Nuclear fuel additions

(5,159)

(4,600)

 Utility plant additions related to allowance for borrowed funds used

     during construction and capitalized interest

(759)

(1,371)

 Purchase of bond investments

-

(12,247)

 Return of principal of PVNGS lessor notes

10,112

10,274

 Other 

(1,972)

(4,145)

            Net cash flows from investing activities

(51,747)

(66,616)

** **
The accompanying  notes, as they relate to PNM, are an integral part of these financial  statements.
 

13

**PUBLIC SERVICE  COMPANY OF NEW MEXICO AND SUBSIDIARIESA WHOLLY OWNED  SUBSIDIARY OF PNM RESOURCES, INC.CONSOLIDATED  STATEMENTS OF CASH FLOWS**(Unaudited)
**Six Months EndedJune 30,**   
**2005**
   
**2004**

** **
(In thousands)
**Cash Flows From Financing Activities:**

 Short-term debt borrowings (repayments), net

(41,600)

(62,400)

 Dividends paid

(264)

(293)

 Other financing

(228)

(177)

 Change in intercompany accounts

(300)

(24,567)

            Net cash flows from financing activities

(42,392)

(87,437)

Increase (decrease) in cash and cash equivalents

(8,734)

(6,618)

Beginning of period

16,448

11,607

End of period

$    7,714

$    4,989

**Supplemental Cash Flow Disclosures:**

 Interest paid, net of capitalized interest

$  25,680

$  25,272

 Income taxes paid (refunded), net

$           3

$   (2,749)

The accompanying notes, as they relate to	PNM, are an integral part of these financial statements.
14

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

**A WHOLLY OWNED  SUBSIDIARY OF PNM RESOURCES, INC.**

**CONSOLIDATED STATEMENTS OF  COMPREHENSIVE INCOME**

**(Unaudited)**

** **

** **

**Three Months Ended**

**Six Months Ended**

** **

**June 30,**

**June 30,**

** **

**2005**

** **

**2004**

**2005**

**2004**

** **

(In thousands)

** **

**Net Earnings**

$ 3,998

$ 15,791

$ 36,352

$ 43,148

Other Comprehensive Income, net of tax:
                     
**Unrealized gain (loss) on securities:**

Unrealized holding gains (losses) during

the period, net of income tax

(expense) benefit of $(437), $(48),	

$(402) and $(326)

667

74

612

497

Reclassification adjustment for amounts

included in net income, net of	

Income tax (expense) benefit of $134,

$257, $662 and $435

(204)

(392)

(1,010)

(664)

**Additional minimum pension liability**

**  adjustment, net of income tax expense**

**  of $(12)**

-

-

-

19

**Mark-to-market adjustment for certain**

**   derivative transactions:**

Change in fair market value of	

designated cash flow hedges, net of

income tax (expense) benefit of

$(1,469), ($1,342), $(3,448)	

and $(2,678)

2,242

2,048

5,262

4,087

Reclassification for amounts in net	

income, net of income tax (expense)

benefit of $23, $(430), $849 and $209

(35)

657

(1,295)

(319)

**Total Other Comprehensive Income (Loss)** 	

2,670

2,387

3,569

3,620

**Total Comprehensive Income**

$ 6,668

$ 18,178

$ 39,921

$ 46,768

** **

** **

The accompanying notes, as  they relate to PNM, are an integral part of these financial statements.

15

**TEXAS-NEW MEXICO  POWER COMPANY**

**A WHOLLY OWNED  SUBSIDIARY OF PNM RESOURCES, INC.**

**CONSOLIDATED  STATEMENTS OF EARNINGS**

**(Unaudited)**

** **

** **

**Post-Acquisition**

**Pre-Acquisition**

**Pre-Acquisition**

** **

**For the period**

**For the period**

**For the period**

** **

**June 6-June 30,**

**April 1-June 6,**

**April 1-June 30,**

** **

**2005**

**2005**

**2004**

** **

(In thousands)

**Operating Revenues:**

 Electric

$  19,235

$  46,939

$  65,069

    Total operating revenues	

19,235

46,939

 65,069

**Operating Expenses:**

 Cost of energy sold

6,702

16,793

24,611

 Administrative and general

2,183

4,551

7,279

 Depreciation and amortization

2,085

5,436

7,403

 Transmission and distribution costs

1,150
   
3,944

4,890

 Taxes, other than income taxes

1,885
   
3,195

5,952

 Income taxes

1,168
   
3,325

2,569

    Total operating expenses

15,173
   
37,244

52,704

    Operating income

4,062
   
9,695

12,365

**Other Income and Deductions:**

 Interest income

87

359

95

 Other income

111

251

342

 Carrying charges on regulatory assets

525

1,394

-

 Other deductions

(11)

(30)

(26)

 Other income taxes

(271)

(197)

(142)

     Net other income and deductions

441

1,777

269

**Interest Charges**

1,956

5,088

7,034

** **

**Net Earnings Before Extraordinary Item**

2,547

6,384

5,600

** **

 Extraordinary item - disallowance

     of stranded costs, net of taxes

-

-

(97,836)

** **

**Net Earnings (Loss)**

$    2,547

$    6,384

$ (92,236)

The accompanying notes, as  they relate to TNMP, are an integral part of these financial statements.

16

**TEXAS-NEW MEXICO  POWER COMPANY**

**A WHOLLY OWNED  SUBSIDIARY OF PNM RESOURCES, INC.**

**CONSOLIDATED  STATEMENTS OF EARNINGS**

**(Unaudited)**

** **

** **

**Post-Acquisition**

**Pre-Acquisition**

**Pre-Acquisition**

** **

**For the period**

**For the period**

**For the period**

** **

**June 6-June 30,**

**January 1-June 6,**

**January 1-June 30,**

** **

**2005**

**2005**

**2004**

** **

(In thousands)

**Operating Revenues:**

  Electric

$   19,235

$ 112,820

$ 126,722

    Total operating revenues	

19,235

112,820

126,722

**Operating Expenses:**

 Cost of energy sold

6,702

43,885

47,645

 Administrative and general

2,183

11,048

14,564

 Depreciation and amortization

2,085

12,954

14,752

 Transmission and distribution costs

1,150

 

9,111

9,929

 Taxes, other than income taxes

1,885

 

9,228

11,190

 Income taxes

1,168

 

4,529

4,738

    Total operating expenses

15,173

 

90,755

102,818

    Operating income

4,062

 

22,065

23,904

**Other Income and Deductions:**

 Interest income

87

650

306

 Other income

111

523

688

 Carrying charges on regulatory assets

525

(1,407)

-

 Other deductions

(11)

(79)

(109)

 Other income taxes

(271)

(372)

(311)

     Net other income and deductions

441

(685)

574

**Interest Charges**

1,956

12,120

14,134

** **

**Net Earnings Before Extraordinary Item**

2,547

9,260

10,344

** **

 Extraordinary item - disallowance

     of stranded costs, net of taxes

-

-

(97,836)

** **

**Net Earnings (Loss)**

$    2,547

$    9,260

$ (87,492)

The accompanying notes, as  they relate to TNMP, are an integral part of these financial statements.

17

**TEXAS-NEW MEXICO  POWER COMPANY**

**A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

** **

** **

**June 30,**

** **

**December 31,**

** **

**2005**

** **

**2004**

(In thousands)

**ASSETS**

**Utility Plant:**

 Electric plant in service

$   860,655

$ 845,900

 Construction work in progress

4,436

4,261

 Common plant in service and plant held for future use

589

589

865,680

850,750

 Less accumulated depreciation and amortization

288,645

276,081

     Net utility plant

577,035

574,669

**Other Property and Investments:**

 Other investments 

531

530

 Non-utility property, net of accumulated depreciation of $3 and $3

2,121

343

     Total other property and investments

2,652

873

**Current Assets:**

 Cash and cash equivalents

65,506

65,759

 Special deposits

2,414

3,086

 Accounts receivable, net of allowance for uncollectible accounts	

     of $70 and $191

11,889

12,739

 Federal income tax refund

32,058

22,912

 Unbilled revenues

7,821

7,576

 Other receivables

10,106

10,083

 Inventories

1,273

1,505

 Other current assets

1,702

7,526

     Total current assets

132,769

131,186

**Deferred charges:**

** **Recoverable stranded costs

87,316

87,316

 Recoverable carrying charges on stranded costs

52,134

48,130

 Other regulatory assets

2,516

8,105

 Goodwill

449,061

-

 Other deferred charges

21,523

22,227

     Total deferred charges

612,550

165,778

Commitments and Contingencies (see Note 8)

-

-

$1,325,006

$ 872,506

The accompanying  notes, as they relate to TNMP, are an integral part of these financial  statements.

18

**TEXAS-NEW MEXICO  POWER COMPANY**

**A WHOLLY OWNED  SUBSIDIARY OF PNM RESOURCES, INC.**

**CONSOLIDATED  BALANCE SHEETS**

**(Unaudited)**

**June 30,**

**December 31,**

**2005**

**2004**

(In thousands)

**CAPITALIZATION AND LIABILITIES**

**Capitalization:**

 Common stockholder's equity:

    Common stock outstanding ($10 par value)	

$          107

$         107

    Paid-in-capital

652,346

197,751

    Accumulated other comprehensive loss, net of tax

-

(1,761)

    Retained earnings

2,547

(6,795)

       Total common stockholder's equity

655,000

189,302

 Long-term debt

415,716

415,569

     Total capitalization

1,070,716

604,871

**Current Liabilities:**

 Accounts payable

11,068

15,649

 Accrued interest and taxes

18,511

22,647

 Other current liabilities

9,017

6,738

     Total current liabilities

38,596

45,034

**Deferred Credits:**

 Accumulated deferred income taxes

125,701

138,249

 Accumulated deferred investment tax credits

1,933

2,326

 Regulatory liabilities

38,486

40,729

 Accrued pension liability

4,043

4,844

 Accrued postretirement benefit cost

6,881

2,693

 Other deferred credits

38,650

33,760

     Total deferred credits

215,694

222,601

$1,325,006

$ 872,506

The accompanying  notes, as they relate to TNMP, are an integral part of these financial  statements.

19

**TEXAS-NEW MEXICO  POWER COMPANY**

**A WHOLLY OWNED  SUBSIDIARY OF PNM RESOURCES, INC.**

**CONSOLIDATED  STATEMENTS OF CASH FLOWS**

**(Unaudited)**

** **

** **

** **

** **

** **

** **

**Post-Acquisition**

** **

**Pre-Acquisition**

** **

**Pre-Acquisition**

**For the period**

** **

**For the period**

** **

**For the period**

**June 6-June 30,**

** **

**January 1-June 6,**

** **

**January 1-June 30,**

**2005**

** **

**2005**

** **

**2004**

**Cash Flows From Operating Activities:**

(In thousands)

 Net earnings (loss)

$   2,547

$   9,260

$ (87,492)

 Adjustments to reconcile net earnings to net cash flows

    from operating activities:

Depreciation and amortization

2,261

14,042

16,068

Allowance for equity funds used during  construction

(8)

(60)

(555)

Accumulated deferred income tax

5,133

(1,411)

25,102

Carrying charges on deferred stranded cost

(525)

1,407

-

Disallowance of stranded costs, net of  taxes

-

-

97,836

 Changes in certain assets and liabilities:

Accounts receivable

1,172

(344)

(2,366)

Unbilled revenues

(139)

(106)

1,807

Accounts payable

799

(3,931)

(996)

Accrued interest and taxes

(3,401)

(3,998)

(24,803)

Other liabilities

(1,187)

2,066

(1,440)

Net cash flows from operating activities

6,652

16,925

23,161

**Cash Flows From Investing Activities:**

 Utility plant additions

(1,674)

(19,270)

(22,351)

 Acquisition costs

(3,473)

-

-

 Utility plant additions related to allowance for borrowed funds used

     during construction and capitalized interest

(11)

(73)

(273)

 Other 

753

(82)

55

            Net cash flows from investing activities

(4,405)

(19,425)

(22,569)

** **The accompanying  notes, as they relate to TNMP, are an integral part of these financial  statements.**  **

20

**TEXAS-NEW MEXICO  POWER COMPANY**

**A WHOLLY OWNED  SUBSIDIARY OF PNM RESOURCES, INC.**

**CONSOLIDATED  STATEMENTS OF CASH FLOWS**

**(Unaudited)**

** **

** **

** **

** **
   
** **

**Post-Acquisition**

** **

**Pre-Acquisition**
   
**Pre-Acquisition**

**For the period**

** **

**For the period**
   
**For the period**

**June 6-June 30,**

** **

**January 1-June 6,**
   
**January 1-June 30,**

**2005**

** **

**2005**
   
**2004**

** **

(In thousands)

**Cash Flows From Financing Activities:**

 Long-term debt repayments

-

-

(9,296)

 Dividends paid

-

-

(6,000)

            Net cash flows from financing activities

-

-

(15,296)

Increase (decrease) in cash and cash equivalents

2,247

(2,500)

(14,704)

Beginning of period

63,259

65,759

56,907

End of period

$  65,506

$  63,259

$  42,203

**Supplemental Cash Flow Disclosures:**

 Interest paid, net of capitalized interest

$           1

$  12,868

$  13,215

 Income taxes paid (refunded), net

$            -

$            -

$            -

** **

** **

** **

** **

** **

** **

The accompanying  notes, as they relate to TNMP, are an integral part of these financial  statements.

21

**TEXAS-NEW MEXICO POWER COMPANY**

**A WHOLLY OWNED SUBSIDIARY OF  PNM RESOURCES**

**CONSOLIDATED STATEMENTS OF  COMPREHENSIVE INCOME**

**(Unaudited)**

** **

** **

**Post-Acquisition**

**Pre-Acquisition**

**Pre-Acquisition**

** **

**For the period**

**For the period**

**For the period**

** **

**June 6-June 30,**

**April 1-June 6,**

**April 1-June 30,**

** **

**2005**

**2005**

**2004**

(In thousands)

**Net Earnings  **
$   2,547$   6,384$ (92,236)
Other Comprehensive Income, net of tax:

 

 

 

**Cash flow hedges, net of tax:**

Interest rate hedge, net of reclassification

   adjustment net of income tax benefit

   of $0, $1,004 and $79

-

1,632

129

Total cash flow hedges

-

1,632

129

**Total Comprehensive Income (Loss)**

$   2,547

$   8,016

$ (92,107)

In conjunction with the acquisition of TNP  by PNMR, the interest rate hedge was

fair valued and was charged to goodwill.

The accompanying  notes, as they relate to TNMP, are an integral part of these financial  statements.

22

**TEXAS-NEW MEXICO POWER COMPANY**

**A WHOLLY OWNED SUBSIDIARY OF  PNM RESOURCES, INC.**

**CONSOLIDATED STATEMENTS OF  COMPREHENSIVE INCOME**

**(Unaudited)**

** **

** **

** **

** **

**Post-Acquisition**

**Pre-Acquisition**

**Pre-Acquisition**

** **

**For the period**

**For the period**

**For the period**

** **

**June 6-June 30,**

**January 1-June 6,**

**January 1-June 30,**

** **

**2005**

**2005**

**2004**

** **

(In thousands)

**Net Earnings**
$     2,547$   9,260$ (87,492)
Other Comprehensive Income, net of tax:

 

 

 

**Cash flow hedges, net of tax:**

Interest rate hedge, net of reclassification

   adjustment net of income tax benefit

   of $0, $1,084 and $159

-

1,761

258

Total cash flow hedges

-

1,761

258

**Total Comprehensive Income (Loss)**

$   2,547

$ 11,021

$ (87,234)

In conjunction with the acquisition of TNP  by PNMR, the interest rate hedge was

fair valued and was charged to goodwill.

The accompanying  notes, as they relate to TNMP, are an integral part of these financial  statements.

 23

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

**(1)     Accounting Policiesand Responsibility for Financial Statements**

Inthe opinion of the management of PNM Resources, Inc. and Subsidiaries ("PNMR"or the "Company"), the accompanying unaudited interim consolidated financialstatements reflect all normal and recurring accruals and adjustments which arenecessary to present fairly the Company's financial position at June 30, 2005and December 31, 2004, the consolidated results of its operations andcomprehensive income for the three and six months ended June 30, 2005 and 2004and the consolidated statements of cash flows for the six months ended June 30,2005 and 2004.  These consolidated financial statements are unaudited, andcertain information and note disclosures normally included in the Company'sannual consolidated financial statements have been condensed or omitted, aspermitted under the applicable rules and regulations.  The Company's threeprimary subsidiaries are Public Service Company of New Mexico and Subsidiaries("PNM"), Texas-New Mexico Power Company and Subsidiaries ("TNMP") and FirstChoice Power, L.P. ("First Choice").  Readers of these financial statementsshould refer to PNMR's, PNM's and TNMP's audited consolidated financialstatements and notes thereto for the year ended December 31, 2004 that areincluded in the respective Annual Reports on Form 10-K for the year endedDecember 31, 2004.  The results of operations presented in the accompanyingfinancial statements are not necessarily representative of operations for anentire year.

*TNPAcquisition*

As discussedin Note 2, on June 6, 2005, PNMR completed the previously announced acquisitionof TNP Enterprises, Inc. ("TNP") effective at 8:00 AM Central Daylight Time. Prior to the consummation of the acquisition, TNP was a privately owned holdingcompany based in Fort Worth, Texas.  TNP's principal subsidiaries are TNMP, aregulated utility operating in Texas and New Mexico, and First Choice, acertified retail electric provider operating in Texas.  First Choice consistsof First Choice Power, L.P. and First Choice Power Special Purpose, L.P. 

Theacquisition was accounted for using the purchase method of accounting.  Underthis method, the purchase price was allocated to the fair market value of theassets acquired and the liabilities assumed.  The excess purchase price overthe fair value of the assets acquired and the liabilities assumed was allocatedto goodwill at TNMP and goodwill and other intangible assets at First Choice. As a result, TNMP and First Choice have recorded purchase accounting fair valueadjustments to their respective assets and liabilities, including deferredassets, regulatory assets and pension and postretirement liabilities.  PNMR isin the process of completing a third party valuation of acquired property andintangible assets, therefore, the allocation of the purchase price to theacquired net assets is subject to adjustment.  The excess of the purchase priceover net assets acquired has been allocated preliminarily to goodwill in theamount of $482.8 million and other intangible assets in the amount of $63.1million. 

The purchaseaccounting entries are reflected on PNMR's financial statements as of thepurchase date.  PNMR "pushed down" the effects of purchase accounting to thefinancial statements of TNMP and First Choice.  Accordingly, TNMP'spost-acquisition financial statements reflect a new basis of accounting, andseparate financial statements are presented for pre-acquisition andpost-acquisition periods, separated by a heavy black line.  

24

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

*Goodwill and Other IntangibleAssets*

The excesspurchase price over the fair value of the assets acquired and the liabilitiesassumed by PNMR for its June 6, 2005 acquisition of TNP was allocated togoodwill and other intangible assets.  Under the provisions of SFAS No. 142*,"Goodwill and Other Intangible Assets,"* PNMR does not amortize goodwill. Certain intangible assets are amortized over their estimated useful lives.  Goodwilland intangible assets are evaluated for impairment at least annually, onDecember 31, or more frequently if events and circumstances indicate that thegoodwill or other intangible assets might be impaired.  See Note 2 for furtherdetails about goodwill and other intangible assets.

*Presentation*

The Notes toConsolidated Financial Statements include disclosures for PNMR, PNM and TNMP. For discussion purposes, this report will use the term "Company" whendiscussing matters of common applicability to PNMR, PNM and TNMP.  Discussionsregarding only PNMR, PNM or TNMP will be clearly indicated as such.  

PNMR was established asa holding company in 2001.  On December 30, 2004, PNMR became a registeredholding company under PUHCA.  As a result of the requirement to register as aholding company, PNMR created PNMR Services Company, a wholly-owned services company,which began operation on January 1, 2005. 

PNMR performedsubstantially all of the corporate activities of PNM from 2001 to 2004.  Theseactivities were billed to PNM on a cost basis and were allocated to thebusiness units.  The services functions previously performed by PNMR wereassumed by PNMR Services Company effective January 1, 2005.  

Until June 6, 2005, TNMPprovided First Choice and TNP with corporate support services, includingaccounting, finance, information services, legal and human resources, under ashared services agreement with First Choice dated March 1, 2001 and a similaragreement with TNP dated June 6, 1997.  These services were billed at TNMP'scost and, in return, TNP and First Choice compensated TNMP for the servicesprovided.  These agreements were in effect through June 6, 2005 when they werereplaced by a new shared services arrangement with PNMR Services Company.

Effective with the closeof the acquisition of TNP on June 6, 2005, all TNMP employees who wereproviding corporate support to TNP and First Choice became employees of PNMRServices Company.  PNMR Services Company provides corporate services to all ofPNMR's business units, including PNM, Avistar, Inc., TNP, TNMP and First Choiceper shared services agreements.  These services are billed at cost on a monthlybasis and allocated to the business units.

25

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

Certain amounts in the 2004 Consolidated FinancialStatements and Notes thereto for PNMR, PNM and TNMP have been reclassified toconform to the 2005 financial statement presentation.  Specifically, certainamounts in the 2004 Consolidated Financial Statements and Notes thereto of TNMPhave been reclassified to conform to PNMR's presentation for comparability.

In addition, in the PNMR and TNMP Consolidated Statements of Cash Flowsfor the six months ended June 30, 2005, PNMR and TNMP changed theclassification of changes in restricted cash balances to present such changesas an investing activity.  PNMR and TNMP previously presented such changes asan operating activity.  In the accompanying PNMR and TNMP ConsolidatedStatements of Cash Flows for the six months ended June 30, 2004, the changes inthese cash balances were reclassified to be consistent with the 2005presentation.  This reclassification resulted in a $0.8 million increase toPNMR investing cash flows and a corresponding decrease to PNMR operating cashflows from the amounts previously reported.  This reclassification resulted inless than a $0.1 million increase to TNMP investing cash flows and a correspondingdecrease to TNMP operating cash flows from the amounts previously reported.

PNMR

*Stock Based Compensation*

The Company accounts forstock-based compensation using the intrinsic value method prescribed inAccounting Principles Board Opinion No. 25, "*Accounting for*Stock*Issued to Employees*" ("APB 25").  Compensation cost for stock options, if any, ismeasured as the excess of the quoted market price of PNMR's stock at the dateof grant over the exercise price of the granted stock option.  Restricted stockis recorded as compensation cost over the requisite vesting periods based onthe market value on the date of grant.

26
**
**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

At June 30,2005, PNMR had three stock-based employee compensation plans.  Stock optionscontinue to be granted under only two of the plans.  Had compensation expensefor PNMR's stock options been recognized based on the fair value on the grantdate under the methodology prescribed by SFAS No. 123, "Accounting forStock-Based Compensation" ("SFAS 123"), the effect on PNMR's pro forma net earningsand pro forma diluted earnings per share would be as follows (in thousands,except per share data):

**Three****Months  Ended**

**Six Months Ended**
**June 30,**

**June 30,**

**2005**

** **

**2004**

** **

**2005**

** **

**2004**

Net  earnings

$  1,541

$16,849

$32,050

$41,627

Deduct:   Total stock-based employee

    compensation  expense determined

    under  fair value based method for all

    awards,  net of related tax effects

(346)

(741)

(693)

(1,407)

Pro forma net earnings

$  1,195

$16,108

$31,357

$40,220

Earnings per share:

     Basic  - as reported

$    0.02

$    0.28

$   0.51

$  0.69

     Basic - pro forma

$    0.02

$    0.27

$   0.50

$  0.67

     Diluted  - as reported

$    0.02

$    0.28

$   0.50

$  0.68

     Diluted  - pro forma

$    0.02

$    0.26

$   0.49

$  0.66

SFAS No. 123(revised 2004), "*Share Based Payment*" ("SFAS 123R"), supersedes APB 25. SFAS 123R requires the recognition of compensation expense, over the requisiteservice period, in an amount equal to the fair value of share-based paymentsgranted to employees.  The fair value of the share-based payments, excludingliability awards, is computed at the date of grant and will not be remeasured. The fair value of liability awards will be remeasured at each reporting datethrough the settlement date with the change in fair value recognized ascompensation expense over that period.  SFAS 123R applies to all transactionsinvolving the issuance, by a company, of its own equity in exchange for goodsor services.  SFAS 123R does not change the accounting guidance for share-basedpayment transactions with parties other than employees provided in SFAS 123 asoriginally issued and EITF Issue No. 96-18, "*Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services*."  SFAS 123R will be effectivefor PNMR beginning January 1, 2006.  For options issued on or prior to December31, 2005, PNMR expects that the effect of SFAS 123R on PNMR's results ofoperations will not be materially different from the pro forma amountspresented in the table above for the applicable time period.  PNMR anticipatesthat the calculation of the fair value of any options issued after December 31,2005 will not be materially different from the fair value estimated in the proforma amounts presented in the table above.

27

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

PNM

*Decommissioning Costs*

Accounting fordecommissioning costs for nuclear and fossil-fuel generation involvessignificant estimates related to costs to be incurred many years in the futureafter plant closure.  Changes in these estimates could significantly impact theCompany's financial position, results of operations and cash flows.  PNM ownsand leases nuclear and fossil-fuel facilities that are within and outside ofits retail service areas.  PNM adopted the accounting requirements of SFAS No.143,*"Accounting for Asset Retirement Obligations"* (*"*SFAS 143*"*),on January 1, 2003.  Under SFAS 143, PNM is only required to recognize andmeasure decommissioning liabilities for tangible long-lived assets for which alegal obligation exists.  Adoption of the statement changed the method ofaccounting for both nuclear generation decommissioning and fossil-fuelgeneration decommissioning. Nuclear decommissioning costs are based onsite-specific estimates of the costs for removing all radioactive and otherstructures at the site.  PVNGS Unit 3 is excluded from PNM's retail rates whilePVNGS Units 1 and 2 are included.  PNM collects a provision for ultimate decommissioningof PVNGS Units 1 and 2 in its rates and recognizes a corresponding expense andliability for these amounts.  Fossil-fuel decommissioning costs are alsoapproved by the NMPRC as a component of the Company's depreciation rates.  PNMbelieves that it will continue to be able to collect in rates for its legalasset retirement obligations for nuclear and fossil-fuel generation activitiesincluded in the ratemaking process. 

In addition, PNM has acontractual obligation with the PVNGS participants to fund separately thenuclear decommissioning cost at a level in excess of what PNM has identified asits legal asset retirement obligation under SFAS 143.  The contractual fundingobligation is based on a site-specific estimate prepared by a third party.  PNM'smost recent site-specific estimates for nuclear decommissioning costs weredeveloped in 2004, using 2004 cost factors, and are based on promptdismantlement decommissioning, reflecting the costs of removal discussed above,with such removal occurring shortly after operating license expiration.  PNM'sshare of the contractual funding obligation through the end of the licensingterms is approximately $216.7 million (measured in 2004 dollars).  Theestimates are subject to change based on a variety of factors, including costescalation, changes in technology applicable to nuclear decommissioning andchanges in federal, state or local regulations.  The operating licenses forPVNGS Units 1, 2 and 3 will expire in 2025, 2026, and 2027, respectively.  PNMdoes not have a similar contractual funding obligation related to itsfossil-fuel plants.

28

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

TNMP

*Extraordinary Item*

In the secondquarter of 2004, TNMP recorded a loss of  $97.8 million related to the PUCTtrue-up proceeding regarding TNMP's stranded costs.  The PUCT allowed TNMP torecover $87.3 million of the $266.5 million that TNMP requested as strandedcost.  This decision resulted in a loss of $155.2 million before tax ($97.8million after tax).  TNMP recorded the  $97.8 million after tax loss as an extraordinaryitem in accordance with the requirements of SFAS No. 101, "*RegulatedEnterprises - Accounting for the Discontinuance of the Application of FASBStatement No. 71." *

**(2)     TNP Acquisition **

OnJune 6, 2005, PNMR acquired all of the outstanding common shares of TNP and itssubsidiaries, TNMP and First Choice.  The results of TNP's operations have beenincluded in the consolidated financial statements of PNMR from that date.  PNMRacquired TNP in order to complement its existing New *Mexico* electric operationsand to expand into the retail and wholesale markets in Texas.  As of June 6,2005, TNMP served 49,000 electric customers in southern New Mexico and 207,000transmission and distribution customers in Texas.  First Choice is acompetitive retail electric provider in Texas, serving an additional 56,000electric customers.

29

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

The aggregate purchaseprice was $1,277 million, including a payment to the previous owner of $175.0million consisting of $87.6 million of cash and common stock valued at $87.4million.  In addition, PNMR assumed $1,034 million of TNP debt and preferredstock and incurred transaction and other costs of $67.7 million.  The value ofthe 4,326,336 common shares issued wasdetermined based on $20.20 per common share as provided for in the StockPurchase Agreement.  Thepurchase price was based on an estimated purchase price in accordance with the Stock Purchase Agreement,dated as of July 24, 2004 by and between PNMR and SW Acquisition.  The final purchase pricewill be determined under a specified adjustment mechanism.  PNMR had 45 daysfollowing the closing to propose a final purchase price.  The end of the 45-dayperiod was on July 21, 2005, and PNMR proposed a final purchase price on thatdate which would reflect a reduction in the purchase price.  Under the StockPurchase Agreement,the seller had an opportunity to contest the proposed final purchase price andhas notified PNMR that it objects to PNMR's proposed adjustments.  There is adispute mechanism for resolving disputes regarding the final purchase price.

The following tablepresents the estimated fair values of the assets acquired and liabilitiesassumed at the date of acquisition.  

**At June 6, 2005**	(In thousands)

Net utility plant

$580,423

Other property and investments

3,785

Current assets

213,229

Goodwill

482,761

Other intangible assets

63,109

Deferred assets

151,437

 Total assets acquired

1,494,744

Current liabilities

65,988

Long-term debt

814,725

Preferred stock

219,711

Deferred liabilities

199,326

 Total liabilities assumed

1,299,750

 Net assets acquired

$194,994

PNMR obtained, or is inthe process of obtaining, independent valuations of acquired property andintangible assets; thus, the allocation of the purchase price is subject toadjustment and will be finalized within one year of the acquisition.  Of the$63.1 million of acquired intangible assets, $53.2 million was assigned to thetrade name "First Choice" based on a "relief from royalty" approach using a1.0% royalty rate.  The trade name has an indefinite useful life; therefore, noamortization will be recognized, but the asset will be evaluated for impairmenteach reporting period.  The other $9.9 million intangible asset was assigned tothe First Choice customer list.  The useful life of the customer list isestimated to be approximately eight years; therefore the asset will beamortized on a straight-line basis over an eight-year period.

30

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

As part of the acquisition,PNMR acquired a contractual obligation to purchase power.  In comparing thepricing terms of the contractual obligation against the forward price ofelectricity in the relevant market, PNMR concluded that the contract was abovemarket.  In accordance with SFAS No. 141, as amended, *"BusinessCombinations"* ("SFAS 141"), the contract was recorded at fair value and adeferred liability of $3.8 million was recorded that will be amortized as a reduction in cost ofenergy over approximatelythree years.  The amortization matches the difference between the forward pricecurve and the contractual obligation for each month in accordance with thecontract as of the acquisition date.

PNMR also acquired acontractual obligation to sell power to certain commercial and industrialcustomers.  This contractual obligation was fair valued in accordance with SFAS141.  The valuation was based on the difference between the current market ratescharged by the Company for these customers compared to the contractual rateembedded in the customer agreement.  As a result of the analysis, the Companydetermined that its rates for these contractual customers are below marketrates and recorded a deferred liability of $3.5 million that will be amortizedinto revenues over the contract life, or approximately three years.  Theamortization matches the difference between the retail market rate and thecontractual obligation for each month as of the date of acquisition.

TNP's largest subsidiary, TNMP, is a regulatedutility, therefore, the valuation of the majority of the assets and liabilitieswere determined within the context of Statement of Accounting FinancialStandards No. 71, *"Accounting for the Effects of Certain Types ofRegulation,"* and did not change significantly.

The $482.8 million of goodwill was assigned to theTNMP and First Choice segments in the amounts of $449.1 million and $33.7million, respectively.  Of that total amount, $67.0 million is expected to bedeductible for income tax purposes.

31

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

The following unaudited pro forma financialinformation presents a summary of PNMR's consolidated results of operations forthe three and six months ended June 30, 2005 and 2004 assuming the acquisitionof TNP had been completed as of January 1, 2004, including adjustments, whichare based upon preliminary estimates, to reflect the allocation of the purchaseprice to the acquired net assets.  The pro forma financial information does notinclude synergy savings that may result from the business combination and isnot necessarily indicative of the results of operations if the acquisition hadbeen effective as of these dates.  

**For the Three	Months Ended**

** **

**For the Six	Months Ended**

**June 30,**

** **

**June 30,**

**2005**

** **

**2004**

** **

**2005**

** **

**2004**

(In thousands)

Operating revenues

$500,634

$539,120

$1,057,690

$1,130,189

Operating expenses

$464,870

$ 491,709

$   974,560

$1,031,548

Earnings before  extraordinary item

$  12,832

$   29,332

$     38,432

$     58,951

Net earnings (loss)

$  12,832

$(68,504)

$     38,432

$   (38,885)

Net earnings (loss) per  common share:

 Basic

$      0.19

$    (1.00)

$         0.56

$       (0.57)

 Diluted

$      0.18

$    (0.99)

$         0.55

$       (0.56)

Reference is made to theCurrent Report on Form 8-K/A filed by PNMR on August 2, 2005 in connection withthe acquisition of TNP.  The Form 8-K/A incorporates by reference the auditedand unaudited financial statements of TNP required by Form 8-K Item 9.01 (a)and includes the pro forma financial information required by Form 8-K Item 9.01(b).

* Acquisition Settlements*

* *In April 2005, the PUCT issued a written orderfinding that the acquisition is consistent with the public interest.  The ordersettles all matters in the Texas regulatory proceedings relating to theacquisition.  TNMP implemented a $13.0 million annual reduction to its Texas retail delivery base rates beginning May 1, 2005, in accordance with the order.  OnJuly 1, 2005, TNMP also implemented a $3.0 million annual credit to its Texas retail delivery base rates for expected synergy savings.  The Synergy Savings Creditswill remain in effect for twenty-four months, and will provide total of $6.0million in reductions to the Texas retail delivery base rates.

* *As a result of thesettlement in New Mexico for PNMR's acquisition of TNP, TNMP agreed toimplement an approximate $9.6 million annual rate reduction, which includessynergy savings, effective January 1, 2006, to most of its New Mexicocustomers.  Phelps Dodge, TNMP's largest New Mexico commercial customer, isserved through a contractual arrangement, and is excluded from the ratereduction.  PNMR has also agreed to integrate the New Mexico operations of TNMPinto PNM by January 1, 2007.  Effective January 1, 2008, 

32

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

TNMP's rates will bereduced by an additional $0.5 million through December 31, 2008; and on January1, 2009, TNMP's rates will be reduced by an additional $0.5 million throughDecember 31, 2010.  As part of the rate reduction, the current fuel andpurchased power adjustment clause will be eliminated once amounts in thebalancing account as of December 31, 2005 are collected or returned to customers.

** (3)     Segment Information**

PNMR is an investor-owned holding company of energyand energy related businesses.  Its three primary subsidiaries are PNM, TNMPand First Choice.  PNM is an integrated public utility with regulatedoperations primarily engaged in the generation, transmission and distributionof electricity, transmission, distribution and sale of natural gas within theState of New Mexico, and unregulated operations primarily focused on the saleand marketing of electricity in the Western United States.  TNMP is a regulatedutility operating in Texas and New Mexico.  In Texas, TNMP provides regulatedtransmission and distribution services.  In New Mexico, TNMP providesintegrated electric services that include thetransmission, distribution, purchase and sale of electricity to its New Mexico customers.  First Choice is a competitive retail electric provideroperating in Texas.  In addition, PNMR provides energy and technology relatedservices through its wholly owned subsidiary, Avistar, Inc.

The following segmentpresentation is based on the methodology that the Company's management uses formaking operating decisions and assessing performance of its various businessactivities.  The following presentation reports operating results without regardto the effect of accounting or regulatory changes and similar one-time itemsnot related to normal operations.  A reconciliation from the segmentpresentation to the GAAP financial statements is provided.

In conjunction with the TNP acquisition, management changed its businesssegment reporting.  As it currently operates, PNMR's principal businessesinclude regulated operations and unregulated operations.    Regulated Operations include thesegments PNM Electric, TNMP Electric and PNM Gas.  Unregulated Operationsinclude the segments PNM Wholesale and First Choice.  Company management hascombined two segments previously reported separately, Transmission andElectric, to form one reportable segment, PNM Electric, as this combinedsegment represents an integral part of serving utility customers.  This alsomakes the PNM Electric segment comparable with the TNMP Electric segment.  Theprior year amounts have been restated to reflect this change for comparisonpurposes.

**REGULATED OPERATIONS**

**PNMElectric**

PNM Electric is anintegrated electric utility that consists of the generation, transmission anddistribution of electricity for retail electric customers in New Mexico and thesale of 

33

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

transmission to third parties as well as to PNM Wholesale and TNMP. PNM Electric provides retail electric service to a large area of north central New Mexico, including the cities of Albuquerque and Santa Fe, and certain other areas of New Mexico.  Customer rates for retail electric service are set by the NMPRC based on theprovisions of the Global Electric Agreement (see Note 9).  PNM Electric owns orleases transmission lines, interconnected with other utilities in New Mexico, and south and east into Texas, west into Arizona, and north into Colorado and Utah.

**TNMP Electric**

** **TNMP Electric consists of the operations of TNMP. TNMP is a regulated utility operating in Texas and New Mexico.  In Texas, TNMP provides regulated transmission and distribution services under the provisionsof TECA, the legislation that established retail competition in Texas (Senate Bill 7).  In New Mexico, TNMP provides integrated electricity services that include the transmission,distribution, purchase and sale of electricity to its New Mexico customers aswell as transmission to third parties and to PNM.  TNMP's Texas and New Mexico operations are subject to traditional cost-of-service regulation. 

** PNMGas**

PNM Gas distributes natural gas to most of themajor communities in New Mexico, including two of New Mexico's three largestmetropolitan areas, Albuquerque and Santa Fe.  The customer base of PNM Gasincludes both sales-service customers and transportation-service customers. PNM Gas purchases natural gas in the open market and resells it at cost to itsdistribution customers.  As a result, increases or decreases in gas revenuesresulting from wholesale gas price fluctuations do not impact the Company'sconsolidated gross margin or earnings.

**UNREGULATED OPERATIONS**

**PNMWholesale**

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

Long-term contracts include sales tofirm-requirements and other wholesale customers with multi-year arrangements. Short-term sales generally include transactions entered into for up to twoyears.  They also include spot market, hour ahead, day ahead, and week ahead andforward market opportunities in which PNM Wholesale utilizes its asset backedstrategy.  Also 

34

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

included in short-term sales are sales of any excess generationnot required to fulfill PNM Electric's retail load and contractualcommitments.  Short-term sales also cover the revenue credit to retailcustomers as specified in the Global Electric Agreement.  PNM Wholesalealso sells transmission services to TNMP.

Inaddition, adjustments related to EITF Issue 02-03, "*Issues Related toAccounting for Contracts Involved in Energy Trading and Risk ManagementActivities,*" and 03-11, "*Reporting Realized Gains and Losses onDerivative Instruments that are subject to FASB statement No. 133 and Not Heldfor Trading Purposes,*" are included in Corporate and Other.  Theseaccounting pronouncements require a net presentation of trading gains andlosses and realized gains and loss for certain non-trading derivatives. Management evaluates PNM Wholesale operations on a gross presentation basis dueto its primarily net asset-backed marketing strategy and the importance itplaces on the Company's ability to repurchase and remarket previously soldcapacity.  

**First Choice**

** **First Choice is a certified retail electricprovider operating in Texas, which allows it to provide electricity toresidential, small and large commercial, industrial and institutionalcustomers.  First Choice performs all activities in Texas with Texas retail customers, including acquiring new retail customers, setting up retailaccounts, handling customer inquiries and complaints, and acting as a liaisonbetween the transmission and distribution companies and retail customers. First Choice was organized in 2000 to act as TNMP's affiliated retail electricprovider, as required by TECA, the legislation that established retailcompetition in Texas (also known as Senate Bill 7).  

**CORPORATE AND OTHER**

On December 30, 2004, PNMR became a registeredholding company under PUHCA.  As a result of the requirement to register as aholding company, PNMR created PNMR Services Company, a services company, whichbegan operation on January 1, 2005, subject to final approval of a servicescompany application filed with the SEC in January 2005.  The comprehensiveenergy legislation enacted by Congress and signed by the President on August 8,2005, would result in the repeal of PUHCA on a delayed basis.  PNMR is in theprocess of evaluating the effects of that repeal, along with the otherprovisions of the legislation.

PNMR provides energy and technology relatedservices through its wholly owned subsidiary, Avistar, Inc., and those resultsare included in the Corporate and Other segment.

35

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

PNMRSegment Information

Summarized financial information for PNMR bybusiness segment for the three months ended June 30, 2005 is as follows (inthousands):

**Regulated**

** **

**Unregulated**

** **

** **

** **

** **

Segments  of Business

**PNM	Electric**

** **

** TNMP Electric***

** **

**PNM	Gas**

** **

**PNM	Wholesale**

** **

**First Choice***

** **

**Corporate  & Other**

** **

** 	Consolidated**

**2005:**
           
Operating  revenues:
$ 137,314$    19,224
$  82,262
$  139,273 $ 43,031 $ (15,850)
(a)

$  405,254

    Intersegment revenues
1,467 11 122 3,009 - (4,609)
-

**Total  revenues**
138,781 19,235 82,384 142,282 43,031 (20,459)
405,254
   Less:  Cost of energy44,998 6,702 53,292 119,653 34,083 (20,537)
(a)

238,191

    Intersegment energy
           
transfer
(3,412) - - 3,412 - -
-

**Gross  margin**
97,195 12,533 29,092 19,217 8,948 78
167,063

Operating  expenses
65,473 5,086 24,210 11,080 3,197 8,829
(b)

117,875

Depreciation  and 
           
      amortization
17,495 2,085 5,596 4,041 105 1,863
31,185

Income  taxes
2,278 1,218 (1,433) 44 2,020 (5,330)
(b,d)

(1,203)

**Operating  income**
11,949 4,144 719 4,052 3,626 (5,284)
19,206
           
Interest  Income
6,472 87 487 1,303 161 3,112
11,622

Other  
           
   income/(deductions)
708 625 383 405 (15) (7,918)
(c)

(5,812)

Other  income taxes
(2,843) (271) (344) (677) (51) 1,674
(c)

(2,512)

Interest  charges
(8,472) (1,956) (2,905) (3,987) (28) (3,615)
(d)

(20,963)

**Segment  net income (loss)**
$    7,814 $       2,629 $   (1,660) $       1,096 $    3,693 $ (12,031)
$       1,541
           
**Total  assets at**
           
**   June 30, 2005**
$1,782,443 $1,265,183 $555,078 $   430,605 $227,089 $783,986
$ 5,044,384

**Goodwill**
$               - $   449,061 $            - $               - $  33,700 $            -
$    482,761

**Gross  property additions**
$     26,091 $       1,685 $    9,774 $       2,855 $         46 $    9,805
$      50,256

(a)   Reflects EITF 03-11 impact, under which wholesale revenues and the associated cost ofenergy of $9.6 million are reclassified to a net margin basis in accordancewith GAAP.

(b)   Includesacquisition related costs of $4.6 million and regulatory costs of $2.3 millionin operating expenses and an income tax benefit of $2.7 million in income taxesassociated with the NMPRC's approval of the TNP acquisition.

(c)   Includes TNP debt refinancing costs of $1.3 million and a write-off of software costs of$4.5 million in other income/(deductions) and an income tax benefit of $1.2million in the income taxes.

(d)  Includes TNP debt refinancing costs of $4.4 million in interest charges and an incometax benefit of $1.7 million in income taxes.

*    Includesresults from June 6 through June 30, 2005.

36

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

Summarizedfinancial information for PNMR by business segment for the three months endedJune 30, 2004 is as follows (in thousands):

**Regulated**

** **

**Unregulated**

** **

** **

** **

** **

Segments  of Business

**PNM	Electric**

** **

**TNMP Electric**

** **

**PNM	Gas**

** **

**PNM	Wholesale**

** **

**First	Choice**

** **

**Corporate  & Other**

** **

** Consolidated**

**2004:**
         
** **
 
Operating  revenues:
$   133,706$         -
$ 80,540
$ 163,684 $          - $  (9,281)
(a)

$ 368,649

    Intersegment revenues
1,408 - 346 - - -
1,754

**Total  revenues**
135,114 - 80,886 163,684 - (9,281)
370,403
   Less:  Cost of energy45,775 - 51,650 125,507 - (9,405)
(a)

213,527

    Intersegment energy
        -  
transfer
(10,924) - - 10,924 - -
-

**Gross  margin**
100,263 - 29,236 27,253 - 124
156,876

Operating  expenses
66,452 - 25,139 11,890 - (1,806)
101,675

Depreciation  and 
           
      amortization
16,690 - 4,738 3,754 - 1,249
26,431

Income  taxes
3,342 - (1,338) 3,253 - 1,249
6,506

**Operating  income**
13,779 - 697 8,356 - (568)
22,264
           
Interest  Income
7,133 - 219 1,350 - 142
8,844

Other  
           
   income/(deductions)
144 - (14) 284 - 572
986

Other  income taxes
(2,881) - (81) (647) - 419
(3,190)

Interest  charges
(8,678) - (2,737) (3,392) - 2,752
(12,055)

**Segment  net income (loss)**
$       9,497 $         - $  (1,916) $     5,951 $          - $    3,317
$      16,849
           

**Total  assets at**
           

**    December  31, 2004**
$1,764,032 $         - $512,538 $ 430,493 $          - $780,572
$ 3,487,635

**Gross property  additions**
$     22,254 $         - $    7,748 $     1,926 $          - $       933
$      32,861

(a)   ReflectsEITF 03-11 impact, under which wholesale revenues and the associated cost ofenergy of $9.4 million are reclassified to a net margin basis in accordancewith GAAP.

37

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

Summarizedfinancial information for PNMR by business segment for the six months endedJune 30, 2005 is as follows (in thousands):

**Regulated**

** **

**Unregulated**

** **

** **

** **

** **

Segments  of Business

**PNM	Electric**

** **

**TNMP Electric***

** **

**PNM Gas**

** **

**PNM	Wholesale**

** **

**First Choice***

** **

**Corporate  & Other**

** **

** Consolidated**

**2005:**
           
Operating  revenues:
$  269,805$    19,224
$ 247,494
$  271,277 $ 43,031 $ (17,664)
(a)

$    833,167

    Intersegment revenues
3,158 11 176 3,009 - (6,354)
-

**Total  revenues**
272,963 19,235 247,670 274,286 43,031 (24,018)
833,167
   Less:  Cost of energy92,401 6,702 167,727 208,965 34,083 (24,209)
(a)

485,669

    Intersegment energy
           
transfer
(17,535) - - 17,535 - -
-

**Gross  margin**
198,097 12,533 79,943 47,786 8,948 191
347,498

Operating  expenses
128,576 5,086 48,304 21,968 3,197 10,758
(b)

217,889

Depreciation  and 
           
      amortization
35,053 2,085 11,172 8,028 105 3,569
60,012

Income  taxes
6,870 1,218 5,795 3,875 2,020 (7,205)
(b,d)

12,573

**Operating  income**
27,598 4,144 14,672 13,915 3,626 (6,931)
57,024
           
Interest  Income
13,688 87 1,243 2,647 161 3,096
20,922

Other  
           
   income/(deductions)
1,030 625 464 1,338 (15) (8,783)
(c)

(5,341)

Other  income taxes
(5,827) (271) (676) (1,578) (51) 2,392
(c)

(6,011)

Interest  charges
(17,114) (1,956) (5,829) (8,003) (28) (1,614)
(d)

(34,544)

**Segment  net income (loss)**
$     19,375 $       2,629 $    9,874 $       8,319 $    3,693 $ (11,840)$      32,050           
**Total  assets at**
           
**   June 30, 2005**
$1,782,443 $1,265,183 $555,078 $   430,605 $227,089 $ 783,986
$ 5,044,384

**Goodwill**
$               - $   449,061 $            - $               - $  33,700 $             -
$    482,761

**Gross  property additions**
$     40,715 $       1,685 $  18,721 $       4,169 $         46 $   14,613
$      79,949

(a)   Reflects EITF 03-11 impact, under which wholesale revenues and the associated cost ofenergy of $11.7 million are reclassified to a net margin basis in accordancewith GAAP.

(b)   Includesacquisition related costs of $4.6 million in operating expenses and an incometax benefit of $2.7 million in income taxes.

(c)   Includes TNP debt refinancing costs of $1.3 million and a write-off of software costs of$4.5 million in other income/(deductions) and an income tax benefit of $1.2million in income taxes.

(d)  Includes TNP debt refinancing costs of $4.4 million in interest charges and an income taxbenefit of $1.7 million in income taxes.

*    Includesresults from June 6 through June 30, 2005.

38

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

Summarizedfinancial information for PNMR by business segment for the six months endedJune 30, 2004 is as follows (in thousands):

**Regulated**

** **

**Unregulated**

** **

** **

** **

** **

Segments  of Business

**PNM**

**Electric**

** **

**TNMP Electric**

** **

**PNM**

**Gas**

** **

**PNM**

**Wholesale**

** **

**First Choice**

** **

**Corporate  & Other**

** **

** **

**Consolidated**

**2004:**
           
Operating  revenues:
$   266,741$         -
$ 256,346
$ 291,175 $         - $ (9,724)
(a)

$ 804,538

  Intersegment  revenues
2,823 - 414 - - -
3,237

**Total  revenues**
269,564 - 256,760 291,175 - (9,724)
807,775
   Less:  Cost of energy90,872 - 180,798 215,373 - (10,030)
(a)

477,013

    Intersegment energy
           
transfer
(24,337) - - 24,337 - -
-

**Gross  margin**
203,029 - 75,962 51,465 - 306
330,762

Operating  expenses
131,239 - 49,718 23,138 - 484
204,579

Depreciation  and 
           
      amortization
33,368 - 9,467 7,508 - 2,225
52,568

Income  taxes
8,329 - 4,474 5,555 - (541)
17,817

**Operating  income**
30,093 - 12,303 15,264 - (1,862)
55,798
           
Interest  Income
14,080 - 1,158 2,738 - 789
18,765

Other  
           
   income/(deductions)
272 - (82) 719 - (1,775)
(866)

Other  income taxes
(5,682) - (426) (1,369) - 1,291
(6,186)

Interest  charges
(17,383) - (5,476) (6,786) - 3,761
(25,884)

**Segment  net income (loss)**
$     21,380 $         - $     7,477 $   10,566 $          - $    2,204
$      41,627
           
**Total  assets at**
           
   	**December  31, 2004**
$1,764,032 $         - $ 512,538 $ 430,493 $          - $780,572
$ 3,487,635

Gross property  additions
$     40,160 $         - $   13,989 $     4,725 $          - $    2,856
$      61,730

(a)   Reflects EITF 03-11 impact, under which wholesale revenues and the associated cost ofenergy of $10.1 million are reclassified to a net margin basis in accordancewith GAAP.

39

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

PNMSegment Information

Summarizedfinancial information for PNM by business segment for the three months endedJune 30, 2005 is as follows (in thousands):

Segments  of Business

**PNM	Electric**

** **

**PNM	Gas**

** **

**PNM	Wholesale**

** **

**Other**

** **

** 	Consolidated**

**2005:**

**Operating  revenues:**
$ 138,781
$ 82,384
$ 142,282
$  (9,627)

(a)

$ 353,820

    Less:  Cost of energy
44,99853,292119,653
(9,627)

(a)

208,316

   Intersegment energy
   
     transfer
(3,412)-3,412
-

-

**Gross  margin**
97,19529,09219,217
-

145,504

Operating  expenses
65,47324,21011,080
2,595

103,358

Depreciation and
   
     amortization
17,4955,5964,041
832

27,964

Income  taxes
2,278(1,433)44
(662)

227

Operating  income
11,9497194,052
(2,765)

13,955
   
Interest  Income
6,4724871,303
835

9,097

Other  income/(deductions)
708383405
(5,118)

(b)

(3,622)

Other  income taxes
(2,843)(344)(677)
1,549

(b)

(2,315)

Interest  charges
(8,472)(2,905)(3,987)
2,247

(13,117)

**Segment  net income (loss)**
$      7,814$   (1,660)$      1,096
$    (3,252)

$       3,998

**Total  assets at**

**   June 30, 2005**

$1,782,443

$555,078

$  430,605

$575,622

$3,343,748

**Gross  property additions**

$      26,091

$     9,774

$      2,855

$    (3,822)

$     34,898

(a)   Reflects EITF 03-11 impact, under which wholesale revenues and the associated cost ofenergy of $9.6 million are reclassified to a net margin basis in accordancewith GAAP.

(b)   Includesacquisition related costs of $4.4 million and regulatory costs of $2.3 millionin operating expenses and an income tax benefit of $2.6 million in income taxesassociated with the NMPRC's approval of the TNP acquisition.

40

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

Summarizedfinancial information for PNM by business segment for the three months endedJune 30, 2004 is as follows (in thousands):

Segments  of Business

**PNM	Electric**

** **

**PNM	Gas**

** **

**PNM	Wholesale**

** **

**Other**

** **

** 	Consolidated**

**2004:**

**Operating  revenues:**
$  135,114
$  80,886
$ 163,684
$   (9,409)

(a)

$   370,275

    Less:  Cost of energy
45,77551,650125,507
(9,408)

(a)

213,524

    Intersegment energy
   
     transfer
(10,924)-10,924
-

-

**Gross  margin**
100,26329,23627,253
(1)

156,751

Operating  expenses
66,45225,13911,890
61

103,542

Depreciation  and 
   
     amortization
16,6904,7383,754
642

25,824

Income  taxes
3,342(1,338)3,253
449

5,706

**Operating  income**
13,7796978,356
(1,153)

21,679
   
Interest  Income
7,1332191,350
42

8,744

Other  income/(deductions)
144(14)284
941

1,355

Other  income taxes
(2,881)(81)(647)
313

(3,296)

Interest  charges
(8,678)(2,737)(3,392)
2,116

(12,691)

**Segment  net income (loss)**
$      9,497$    (1,916)$     5,951
$    2,259

$     15,791

**Total  assets at**

**     December 31, 2004**

$1,764,032

$  512,538

$  430,493

$686,667

$3,393,730

**Gross  property additions**

$     22,254

$      7,748

$      1,926

$     1,116

$     33,044

(a)   ReflectsEITF 03-11 impact, under which wholesale revenues and the associated cost ofenergy of $9.4 million are reclassified to a net margin basis in accordancewith GAAP.

41

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

Summarizedfinancial information for PNM by business segment for the six months ended June30, 2005 is as follows (in thousands):

Segments  of Business

**PNM	Electric**

** **

**PNM	Gas**

** **

**PNM	Wholesale**

** **

**Other**

** **

** 	Consolidated**

**2005:**

**Operating  revenues:**
$  272,963
$ 247,670
$ 274,286
$   (11,679)

(a)

$   783,240

    Less:  Cost of energy
92,401167,727208,965
(11,679)

(a)

457,414

Intersegment  energy
    
     transfer
(17,535)- 17,535
-

-

**Gross  margin**
198,09779,943 47,786
-

325,826

Operating  expenses
128,57648,304 21,968
3,204

202,052

Depreciation  and 
    
     amortization
35,05311,172 8,028
1,656

55,909

Income  taxes
6,8705,795 3,875
(1,515)

15,025

**Operating  income**
27,59814,672 13,915
(3,345)

52,840
   
Interest  Income
13,6881,2432,647
725

18,303

Other  income/(deductions)
1,0304641,338
(4,864)

(b)

(2,032)

Other  income taxes
(5,827)(676)(1,578)
2,079

(b)

(6,002)

Interest  charges
(17,114)(5,829)(8,003)
4,189

(26,757)

**Segment  net income (loss)**
$    19,375$     9,874$     8,319
$    (1,216)

$     36,352

**Total  assets at**

**   June 30, 2005**

$1,782,443

$  555,078

$  430,605

$575,622

$3,343,748

**Gross  property additions**

$     40,715

$    18,721

$      4,169

$    (3,718)

$     59,887

(a)   Reflects EITF 03-11 impact, under which wholesale revenues and the associated cost ofenergy of $11.7 million are reclassified to a net margin basis in accordancewith GAAP.

(b)   Includesacquisition related costs of $4.4 million and regulatory costs of $2.3 millionassociated with the NMPRC's approval of the TNP acquisition in operatingexpenses and an income tax benefit of $2.6 million in income taxes.

42

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

Summarizedfinancial information for PNM by business segment for the six months ended June30, 2004 is as follows (in thousands):

Segments  of Business

**PNM	Electric**

** **

**PNM	Gas**

** **

**PNM	Wholesale**

** **

**Other**

** **

** 	Consolidated**

**2004:**

**Operating  revenues:**
$  269,564
$ 256,760
$ 291,175
$    (10,103)

(a)

$   807,396

    Less:  Cost of energy
90,872180,798215,373
(10,103)

(a)

476,940

    Intersegment energy
   
     transfer
(24,337)-24,337
-

-

**Gross  margin**
203,02975,96251,465
-

330,456

Operating  expenses
131,23949,71823,138
90

204,185

Depreciation  and
   
     amortization
33,3689,4677,508
1,097

51,440

Income  taxes
8,3294,4745,555
(337)

18,021

**Operating  income**
30,09312,30315,264
(850)

56,810
   
Interest  Income
14,0801,1582,738
540

18,516

Other  income/(deductions)
272(82)719
476

1,385

Other  income taxes
(5,682)(426)(1,369)
499

(6,978)

Interest  charges
(17,383)(5,476)(6,786)
3,060

(26,585)

**Segment  net income (loss)**
$    21,380$     7,477$   10,566
$     3,725

$     43,148

**Total  assets at**

**     December 31, 2004**

$1,764,032

$  512,538

$  430,493

$686,667

$3,393,730

**Gross  property additions**

$     40,160

$    13,989

$      4,725

$     1,624

$     60,498

(a)   ReflectsEITF 03-11 impact, under which wholesale revenues and the associated cost ofenergy of $10.1 million are reclassified to a net margin basis in accordancewith GAAP.

TNMP

TNMPoperates in only one reportable segment; therefore tabular presentation ofsegment data is not relevant.

**(4)     Fair Value of Financial Instruments**

The Companymay enter into agreements for derivative instruments, including options andswaps, to manage risks related to changes in interest rates.  At the inceptionof any such transaction, the Company documents relationships between thehedging instruments and the items being hedged.  This documentation includesthe strategy that supports executing the specific transaction.  

43

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

PNMR

*EnhancedCash Management Program*

The Companyhas an enhanced cash management program that includes a preferred stock dividendcapture strategy and various absolute return strategies that have the objectiveof achieving higher returns.  The Company's initial investment in its enhancedcash management program was $10.0 million and an additional $2.0 million wasinvested in February 2005.  As of June 30, 2005 and December 31, 2004, thebalance in this investment, including profits and interest, was $13.5 millionand $10.6 million, respectively.

*FirstChoice Natural Gas Hedges*

From time to time, FirstChoice enters into natural gas swaps.  The swaps are purchased to mitigatecommodity price risk associated with purchase power price volatility.  Theswaps are effective in offsetting future cash flow volatility caused byincreases in natural gas prices.  The fair value of the natural gas swaps as ofJune 30, 2005, was an asset of $1.4 million, which is recorded on PNMR'sbalance sheet as a current asset.  For the period of June 6 through June 30,2005, First Choice's purchased power expense includes pre-tax gains of $2.2million ($1.3 million after tax) related to the settlement of natural gasswaps.

In addition, FirstChoice recorded unrealized gains (losses), after June 6, 2005, associated with its natural gas hedges in othercomprehensive income as shown in the following table.  

**For the Period of June 6 through  June 30, 2005**

	Before-Tax

	Tax Benefit

After-	Tax
         
 

Amount

(Expense)

 

Amount

(In thousands)

Change in  market value

$ 1,383

$      527

$     856

Other  comprehensive income (loss)

$ 1,383

$     527

$      856

PNM

PNMcontributes to trusts established to fund its share of the decommissioningcosts of PVNGS and pension and other postretirement benefits.  The trusts heldcertain equity securities as of June 30, 2005.  These equity securities alsoexpose PNM to losses in fair value.  Approximately 59% of the securities heldby the various trusts were equity securities as of June 30, 2005.  Similar tothe debt securities held for funding, decommissioning and certain pension andother postretirement costs, PNM does not recover or earn a return through rateson any losses or gains on these equity securities.  

44

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

*Retail Natural Gas Contracts*

Pursuant to a 1997 orderissued by the NMPRC, PNM is authorized to hedge certain portions of natural gassupply contracts to protect PNM's natural gas customers from the risk ofadverse price fluctuations in the natural gas market.  Hedge gains and losses arerecoverable through the Company's PGAC if deemed prudently incurred by theNMPRC.  As a result, earnings are not affected by gains or losses generated bythese instruments. 

PNM purchased $4.0million of natural gas options during the second quarter and first six monthsof 2005 to protect its natural gas customers from the risk of rising pricesduring the 2005-2006 heating season.  In total, PNM plans to expendapproximately $7.2 million in 2005 to purchase gas options that essentially capthe amount PNM would pay for each volume of gas subject to the options duringthe winter heating season.  PNM expects to recover its option premiums as acomponent of the PGAC during the months of October 2005 through February 2006. 

PNM entered intofixed-for-float financial transactions to hedge a portion of its winter gaspurchase portfolio. PNM has hedged 10.9 million MMBtus utilizing thefixed-for-float strategy for the next two winter heating seasons. 

*WholesaleElectricity Contracts*

The PNM Wholesalesegment has entered into various forward physical contracts for the purchaseand sale of electricity with the intent to optimize its net generationposition.  These contracts, which are derivatives, do not qualify for normalpurchase and sale designation pursuant to GAAP, and are marked to market.

For the threemonths ended June 30, 2005, PNM Wholesale settled derivative forward contractsfor the sale of electricity that generated $41.4 million of electric revenuesby delivering 0.8 million MWh.  For the three months ended June 30, 2005, PNMWholesale settled derivative forward contracts for the purchase of electricityof $36.0 million or 0.7 million MWh to support these contractual sales andother open market sales opportunities.  For the six months ended June 30, 2005,PNM Wholesale settled derivative forward contracts for the sale of electricitythat generated $79.4 million of electric revenues by delivering 1.5 millionMWh.  For the six months ended June 30, 2005, PNM Wholesale settled derivativeforward contracts for the purchase of electricity of $64.2 million or 1.3million MWh to support these contractual sales and other open market salesopportunities.  

45

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

For the threemonths ended June 30, 2004, PNM Wholesale settled derivative forward contractsfor the sale of electricity that generated $45.5 million of electric revenuesby delivering 0.9 million MWh.  For the three months ended June 30, 2004, PNMWholesale settled derivative forward contracts for the purchase of electricityof $43.5 million or 0.9 million MWh to support these contractual sales andother open market sales opportunities.  

For the sixmonths ended June 30, 2004, PNM Wholesale settled derivative forward contractsfor the sale of electricity that generated $72.5 million of electric revenuesby delivering 1.6 million MWh.  For the six months ended June 30, 2004, PNMWholesale settled derivative forward contracts for the purchase of electricityof $68.2 million or 1.5 million MWh to support these contractual sales andother open market sales opportunities.  

Asof June 30, 2005, PNM Wholesale had open derivative forward contract positionsto buy $46.3 million and to sell $64.9 million of electricity.  At June 30,2005, PNM Wholesale had a gross mark-to-market gain (asset position) on thesederivative forward contracts of $5.9 million and a gross mark-to-market loss(liability position) of $4.3 million, recorded in other assets and liabilities,respectively.  The change in mark-to-market valuation is recognized in earningseach period and is recorded in operating revenues and cost of energy, asapplicable.

The PNMWholesale segment also entered into forward physical contracts for the sale ofPNM's electric capacity in excess of its retail and wholesale firm requirementneeds, including reserves.  In addition, PNM Wholesale entered into forwardphysical contracts for the purchase of retail needs, including reserves, whenresource shortfalls exist.  PNM Wholesale generally accounts for these asnormal sales and purchases as defined by SFAS 133.  From time to time PNM makesforward purchases to serve its retail needs when the cost of purchased power isless than the incremental cost of its generation.  At June 30, 2005, PNMWholesale had open forward positions classified as normal sales of electricityof $140.3 million and normal purchases of electricity of $48.9 million, whichwill be reflected in the financial statements upon physical delivery.

Theoperations of the PNM Wholesale segment, including both firm commitments andother wholesale sale activities, are managed primarily through a netasset-backed strategy, whereby PNM Wholesale's aggregate net open position iscovered by its own excess generation capabilities. PNM Wholesale is exposed tomarket risk if its generation capabilities were disrupted or if its retail loadrequirements were greater than anticipated. If PNM Wholesale were required tocover all or a portion of its net open contract position, it would have to meetits commitments through market purchases.

PNM Wholesaleis exposed to credit risk in the event of non-performance or non-payment bycounterparties of its financial and physical derivative instruments.  PNMWholesale uses a credit management process to assess and monitor the financialconditions of counterparties.  PNM Wholesale's credit risk with its largestcounterparty as of June 30, 2005 and December 31, 2004 was $14.9 million and$26.2 million, respectively.

46

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

*WholesaleGas Contracts*

The PNM Wholesalesegment enters into various forward contracts for the purchase of natural gaswith the intent to optimize its net generation position.  These contracts,which are derivatives, do not qualify for normal purchase and sale designationpursuant to GAAP, and are marked to market.  

As of June 30, 2005, PNMWholesale had open derivative forward contract positions to sell $26.0 millionof natural gas.  At June 30, 2005, PNM Wholesale had a gross mark-to-marketgain (asset position) on these derivative forward contracts of $8.5 million anda gross mark-to-market loss (liability position) of $7.2 million, recorded inother current assets and liabilities, respectively.  The change inmark-to-market valuation is recognized in earnings each period and is recordedin operating revenues and cost of energy as applicable. 

TNMP

*Normal Purchases and Sales*

In the normalcourse of business, TNMP enters into commodity contracts, which include components for additional purchases or sales of electricity, in order to meetcustomer requirements.  Criteria by which option-type and forward contracts forelectricity can qualify for the normal purchase and sales exception has beendefined by SFAS 133.  In accordance with these GAAP pronouncements, managementhas determined that its contracts for electricity qualify for the normalpurchases and sales exception.  Accordingly, TNMP does not account for itselectricity contracts as derivatives.

47

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

**(5)     Earnings Per Share**

Inaccordance with SFAS No. 128, "*Earnings per Share"*("SFAS 128"), dualpresentation of basic and diluted earnings per share has been presented inPNMR's Consolidated Statements of Earnings.  The following reconciliationillustrates the impact on the share amounts of potential common shares and theearnings per share amounts:

** **

**Three Months Ended**

** **

**Six Months Ended**

** **

**June 30,**

** **

**June 30,**

** **

**2005 **

** **

**2004**

** **

**2005**

** **

**2004**

**Basic:**

**Net  Earnings**

$  1,541

$ 16,849

$ 32,050

$ 41,627

Average  Number of Common

      Shares Outstanding

65,534

60,404

63,057

60,396

**Net  Earnings per Share of**

**      Common Stock (Basic)**

$    0.02

$     0.28

$     0.51

$     0.69

** **

**Diluted:**

**Net  Earnings**

$  1,541

$ 16,849

$ 32,050

$ 41,627

Average  Number of Common 

      Shares Outstanding

65,534

60,404

63,057

60,396

Dilutive  Effect of Common Stock 

      Equivalents (a)

955

755

953

797

Average  Common and Common 

     Equivalent Shares Outstanding

66,489

61,159

64,010

61,193

**Net  Earnings per Share of Common**

**     Stock (Diluted)**

$     0.02

$     0.28

$     0.50

$     0.68

(a)     Excludes the effect of average anti-dilutive common stockequivalents related to out-of-the-money options of 4,154 and 798,900 for thethree months and 232,006 and 635,481 for the six months ended June 30, 2005 and2004, respectively.

48

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

**(6)     Capitalization**

PNMR

* Revolving and Other Credit Facilities*

AtJune 30, 2005, PNMR had a $400.0 million unsecured revolving credit facility(the "PNMR Facility") with an expiration date of November 15, 2009.  At June30, 2005, there were no outstanding borrowings under the PNMR Facility.  AtJune 30, 2005, PNMR also had $15.0 million in local lines of credit. In July2005, PNMR entered into an agreement to obtain an additional $25.0 millionlocal line of credit, expiring August 16, 2005. There were $1.9 million ofoutstanding borrowings under the local lines of credit at June 30, 2005. 

OnJune 23, 2005, PNMR established a commercial paper program under which it mayissue up to $400.0 million in commercial paper for up to 270 days. Thecommercial paper is unsecured and the proceeds are used for short-term cashmanagement needs. The PNMR Facility serves as a backstop for the outstandingcommercial paper. At June 30, 2005, there were no outstanding borrowings underthe commercial paper program.  In order to fund a portion of the cost ofredemption of TNP's preferred stock and senior notes in July 2005, PNMR issued$370.0 million of commercial paper short-term notes under the PNMR commercialpaper program.

At June 30, 2005, FirstChoice had up to $100.0 million of borrowing capacity under the PNMR Facility. Any borrowings made by First Choice under this sublimit are guaranteed byPNMR.  At June 30, 2005, First Choice had no borrowings outstanding.

*Financing Activities*

* *PNMR has a universalshelf registration statement filed with the SEC for the issuance of debtsecurities and equity securities, preferred stock, purchase contracts, purchasecontract units and warrants.  As of June 30, 2005, PNMR had approximately $400.9million of remaining unissued securities under this registration statement. 

Effective January 1,2005, PNMR entered into a $50.0 million loan agreement with PNMR ServicesCompany, a wholly-owned subsidiary.  In addition, PNMR made a $5.0 *million* equitycontribution to PNMR Services Company in January 2005.  These steps were takento provide PNMR Services Company with liquidity for its operations.

PNMRhas entered into three fixed-to-floating interest rate swaps with an aggregatenotional principal amount of $150.0 million.  Under these swaps, PNMR receivesa 4.40% fixed interest payment on the notional principal amount on asemi-annual basis and pays a floating rate equal to the six month LIBOR plus58.15 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 March 15, 2005, to 3.84%.  The swap is accountedfor as a fair-value hedge with a fair-market value (liability position) ofapproximately $0.9 million as of June 30, 2005.

49

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

*CommonStock and Equity Unit Offerings*

In March 2005,PNMR issued 3,910,000 shares of its common stock at $26.76 per share.  PNMRreceived net proceeds from this offering, after deducting underwriting discountsand commissions and estimated expenses, of approximately $101.0 million. Inaddition, in March 2005, PNMR completed a public offering of 4,945,0006.75% equity units yielding net proceeds after fees of $239.6 million. 

In conjunctionwith the acquisition of TNP, on June 6, 2005, PNMR made an equity investment ofapproximately $110.5 million in TNP, which TNP used to repay in full amountsowing under TNP's credit agreement.  In addition, pursuant to PNMR'sacquisition 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 ("SeniorNotes").  On July 6, 2005, TNP redeemed the Preferred Stock by tendering $224.6million to the holders of the Preferred Stock and redeemed the Senior Notes bytendering $296.5 million to holders of the Senior Notes.  In order to fund a portion of the cost of redemption ofTNP's Preferred Stock and Senior Notes, PNMR issued $370.0 million ofcommercial paper short-term notes under the PNMR commercial paper program. The balance of the funds necessary for the redemption came from other cash availableto PNMR and the total redemption amount was  an  equity investment by PNMR inTNP.

PNM

*Revolving and Other Credit Facilities*

* *AtJune 30, 2005, PNM had a $300.0 million unsecured revolving credit facility(the "PNM Facility") with an expiration date of November 21, 2006. At June 30,2005, PNM also had $23.5 million in local lines of credit and a $20.0 millionborrowing arrangement with PNMR. There were no outstanding borrowings under thePNM Facility or the local lines of credit at June 30, 2005.

PNMhas a commercial paper program under which PNM may issue up to $300.0 millionin commercial paper for up to 365 days. The commercial paper is unsecured andthe proceeds are used for short-term cash management needs. The PNM Facilityserves as a backstop for the outstanding commercial paper. As of June 30, 2005,PNM had $18.8 million in commercial paper outstanding.

50

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

*FinancingActivities*

* *As of June 30, 2005, PNMhad approximately $200.0 million of remaining unissued securities registeredunder its previously filed shelf registration statement.  

*Dividends*

InJune 2005, the Board of PNM declared a dividend of $80.0 million that was paidto PNMR in July 2005.

TNMP

*Revolving and Other Credit Facilities*

* *In June 2005, TNMP filed anapplication with the NMPRC to become a borrower and issue notes of up to $100.0million under the PNMR Facility of $400.0 million.  In July 2005, the NMPRCissued an order approving the application.  In July 2005, TNMP, as aco-applicant with PNMR, filed with the SEC for approval to become a borrowerunder the PNMR Facility.  Required SEC approval remains pending and isexpected in the third quarter of 2005.

*Financing Activities*

In June 2003, TNMP issued$250.0 million of 6.125% senior notes due in 2008. In May 2003, TNMP executed a$250.0 million Treasury rate lock transaction designed to manage interest raterisk associated with the issuance of the senior notes. TNMP paid $4.2 millionupon the issuance of senior notes in June 2003 to settle the rate lock. Through the date of the acquisition, the cost of rate lock was recorded inaccumulated other comprehensive income and was being amortized to interestexpense over the life of the senior notes.  In conjunction with the acquisitionof TNP by PNMR on June 6, 2005, the balance for the rate lock remaining inaccumulated other comprehensive income was recorded at fair market valueas of the date of acquisition in accordance with SFAS 141.  The fair marketvalue was determined to be zero and the balance of $1.7million was charged to goodwill.

**(7)     Pension and OtherPostretirement Benefit Plans**

PNMRand its subsidiaries maintain a qualified defined benefit pension plan that wasfrozen in late 1997 with regard to new participants, a plan providing medicaland dental benefits to eligible retirees, and an executive retirement program. PNMR maintains the legal obligation for the benefits owed to participants underthese plans (the "PNM Plans").  TNMP also maintains a qualified defined benefitpension plan covering substantially all of its employees, a plan providingmedical and dental benefits to eligible retirees and an executive retirementprogram (the "TNMP Plans").

Participantsin the PNM Plans currently include eligible employees and retirees of PNMR andother subsidiaries of PNMR.  Participants in the TNMP Plans include eligibleemployees and retirees of TNMP, First Choice and other subsidiaries of TNP.

51

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

Thetotal net periodic benefit cost or income from the PNM Plans, in addition tothe net periodic benefit cost from the TNMP Plans from the date of PNMR'sacquisition of TNP, or June 6, 2005 through June 30, 2005 is included in theconsolidated statement of earnings of PNMR.  The TNMP Plan amounts includedin the results of PNMR are as follows:  pension plan income of $41,000,other postretirement benefit expense of $59,000 and executive retirement planexpense of $6,000.

PNMPlans

Thefollowing table shows the net periodic benefit cost or income of the PNM Plans.

**Three Months Ended June 30,**

**Pension Plan**

** **

**Other Post-Retirement Benefits**

** **

**Executive Retirement Program**
 
**2005**

** **

**2004**

** **

**2005**

** **

**2004**

** **

**2005**

** **

**2004**

(In thousands)
**Components of Net Periodic****Benefit Cost/(Income)**
    Service cost

$     477	

 $  1,085

$    645

 $     601

$    16

 $    26

    Interest cost

7,567

7,340

1,648

1,826

295

310

    Expected return on assets

(10,042)

(9,843)

(1,318)

(1,232)

-

-

    Transition obligation

-

-

-

455

-

-

    Prior service cost amortization

79

79

(1,702)

(1,050)

34

37

    Net loss amortization

892

1,158

1,490

1,234

43

33

 Net Periodic Benefit Cost/(Income)

$ (1,027)

 $   (181)

$   763

 $  1,834

$  388

 $  406

 
   
**Six Months Ended June 30,**
**Pension Plan**

** **

**Other Post-Retirement Benefits**

** **

**Executive Retirement Program**
 
**2005**

** **

**2004**

** **

**2005**

** **

**2004**

** **

**2005**

** **

**2004**

(In thousands)
**Components of Net Periodic****Benefit Cost/(Income)**
    Service cost

$     954	

 $  2,170

$  1,290

 $  1,202

$     32

 $    51

    Interest cost

15,134

14,680

3,296

3,652

590

620

    Expected return on assets

(20,084)

(19,686)

(2,636)

(2,464)

-

-

    Transition obligation

-

-

-

909

-

-

    Prior service cost amortization

158

158

(3,404)

(2,099)

68

75

    Net loss amortization

1,784

2,315

2,980

2,468

86

66

 Net Periodic Benefit Cost/(Income)

$ (2,054)

 $   (363)

$  1,526

 $  3,668

$   776

 $  812

52

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

Forthe three months ended June 30, 2005 and 2004, PNM contributed approximately$1.5 million each period to trusts for other postretirement benefits.  For thesix months ended June 30, 2005 and 2004, PNM contributed approximately $3.1million each period to trusts for other postretirement benefits.  PNM expectsto make additional contributions during the remainder of 2005 totaling $3.0million to trusts for other postretirement benefits.  PNM does not anticipatemaking any contributions to the pension plan during 2005.****

TNMPPlans

Thefollowing table shows the net periodic benefit cost of the TNMP Plans.

**Three Months Ended June 30,**

**Pension Plan**

** **

**Other Post-Retirement Benefits**

** **

**Executive Retirement Program**
 
**2005**

** **

**2004**

** **

**2005**

** **

**2004**

** **

**2005**

** **

**2004**

(In thousands)
**Components of Net Periodic****Benefit Cost**
    Service cost

$   530	

$    443

$  119

 $  102

$  16

 $    53

    Interest cost

1,104

1,119

166

155

38

49

    Expected return on assets

(1,539)

(1,424)

(88)

(74)

-

12

    Transition obligation

-

-

55

81

-

-

    Prior service cost amortization

(20)

(29)

-

-

(14)

(21)

    Net loss amortization

-

-

-

-

18

40

 Net Periodic Benefit Cost

$     75

$    109

$ 252

 $  264

$  58

 $  133

**Six Months Ended June 30,**

**Pension Plan**

** **

**Other Post-Retirement Benefits**

** **

**Executive Retirement Program**
 
**2005**

** **

**2004**

** **

**2005**

** **

**2004**

** **

**2005**

** **

**2004**

(In thousands)
**Components of Net Periodic****Benefit Cost**
    Service cost

$1,035

 $   938

$   235

 $  204

$    40

 $  107

    Interest cost

2,220

2,295

334

310

84

99

    Expected return on assets

(2,960)

(2,957)

(169)

(148)

-

25

    Transition obligation

-

-

136

162

-

-

    Prior service cost amortization

(49)

(58)

-

-

(35)

(42)

    Net loss amortization

-

-

-

-

45

79

 Net Periodic Benefit Cost

$   246

 $  218

$  536

 $  528

$  134

 $  268

For the threemonths ended June 30, 2005 and 2004, TNMP contributed approximately $0.3million per period to trusts for the other postretirement benefits.  For thesix months ended June 30, 2005 and 2004, TNMP contributed approximately $0.4million each period to trusts for the 

53

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

other postretirement benefits.  TNMPexpects to make contributions totaling $1.0 million to trusts for otherpostretirement benefits during 2005.  TNMP does not anticipate making anycontributions to the pension plan during 2005.

In conjunctionwith the acquisition of TNP by PNMR on June 6, 2005, the benefit obligationsfor the TNMP Plans were recorded at the fair market value as of the date ofacquisition in accordance with SFAS 141 and as a result, PNMR recorded anadditional pension and postretirement liability of $5.5 million which increasedgoodwill.  The fair market value of the obligations was actuarially determinedusing a measurement date of June 6, 2005 and a discount rate of 5.25%, revisedfrom 5.75% at December 31, 2004, based onthe average yield of high quality investments.  The weighted averageexpected rate of return on plan assets was 9.0% for the pension and executiveretirement plans and 6.9% for the other postretirement plans. There is nochange to the on-going measurement date of the TNMP Plans; it will remainDecember 31.  

**(8)     Commitments andContingencies**

PNMR

**Tax Refund Litigation**

* *In November 2004, the United States Department ofJustice filed a complaint against the Company in federal court, alleging that approximately$4.2 million of income tax refunds claimed and received for the 1998 and 1999tax years were erroneously paid.  The complaint sought return of that refundamount, plus interest, a 10% surcharge and costs.  The Company filed an answerin response to the complaint denying all the material allegations.

* *The suit arose from refundsgranted in connection with the 1998 and 1999 tax years.  The refunds wereclaimed on amended returns filed in September 2002 and were paid by the IRS inNovember and December 2002.  The government's complaint alleged that theCompany did not correctly elect to deduct research and experimental expenses,and that certain costs did not qualify as research and experimental. Therefore, the government asserted that the Company is not entitled to therefunds.  In July 2005, the Company settled with the DOJ and the parties havefiled a joint stipulation of dismissal of the case with prejudice.

54

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

**Other**

Thereare various claims and lawsuits pending against the Company.  The Company isalso subject to federal, state and local environmental laws and regulations,and is currently participating in the investigation and remediation of numeroussites.  In addition, the Company periodically enters into financial commitmentsin connection with its business operations.  It is not possible at this timefor the Company to determine fully the effect of all litigation and other legalproceedings on its consolidated financial statements.  However, the Company hasrecorded a liability where the litigation effects can be reasonably estimatedand where an outcome is considered probable.  The Company does not expect thatany known lawsuits, environmental costs and commitments will have a materialadverse effect on its financial condition or results of operations, althoughthe outcome of litigation, investigations and other legal proceedings isinherently uncertain.

TheCompany is involved in various legal proceedings in the normal course of itsbusiness.  The associated legal costs for these legal matters are accrued whenincurred.  It is also the Company's policy to accrue for legal costs expectedto be incurred in connection with SFAS No. 5, "*Accounting for Contingencies*"("SFAS 5"), legal matters when it is probable that a SFAS 5 liability has beenincurred and the amount of expected legal costs to be incurred is reasonablyestimable.  These estimates include costs for external counsel and otherprofessional fees.

PNM

**PVNGS Liability andInsurance Matters**

ThePVNGS participants have financial protection for public liability resultingfrom nuclear energy hazards to the full limit of liability under federal law. This potential liability is covered by primary liability insurance provided bycommercial insurance carriers in the amount of $300.0 million and the balanceby an industry‐wide retrospective assessment program. If losses at anynuclear power plant covered by the programs exceed the primary liabilityinsurance limit, PNM could be assessed retrospective adjustments.  The maximumassessment per reactor under the program for each nuclear incident isapproximately $101.0 million.  The retrospective assessment is subject to anannual limit of $10.0 million per reactor per incident which will be increasedto $15.0 million as described below under "Price-Anderson ActRenewal."  Based upon PNM's 10.2% interest in the three PVNGS units, PNM'smaximum potential assessment per incident for all three units is approximately$31.0 million, with an annual payment limitation of approximately $3.0 million perincident which will become $4.5 million when the annual limit per reactor perincident is changed to $15.0 million as discussed above.  If the funds providedby this retrospective assessment program prove to be insufficient, Congresscould impose revenue-raising measures on the nuclear industry to pay claims.

55

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

**Price-Anderson Act Renewal**

The EnergyPolicy Act of 2005 (see "Federal Energy Legislation" below) extendsthe Price-Anderson Act for 20 years.  The Price-Anderson Act provides forimmediate, no-fault insurance coverage for the public in case of a nuclearreactor accident.  It requires nuclear plant operators to purchase all theprivate insurance available to them (currently $300.0 million) to serve as aprimary level of coverage.  If this amount is insufficient to cover claimsarising from an accident, companies are required to contribute to a fund thatprovides a secondary level of coverage.  The Energy Policy Act of 2005raises the maximum required fee at the secondary level from $63.0 millionto $95.8 million per reactor, which is already reflected in the $101.0 millionmaximum assessment discussed under "PVNGS Liability and Insurance Matters"above, which includes a provision for legal costs, and raises the annualsecondary level payout from $10.0 million to $15.0 million per reactor,adjusting the payout for inflation in the future.  

**Water Supply**

Becauseof New Mexico's arid climate and current drought conditions, there is a growingconcern in New Mexico about the use of water for power plants.  Theavailability of sufficient water supplies to meet all the needs of the state,including growth, is a major issue.  The Company has secured water rights inconnection with the Afton and Lordsburg plants and water availability does notappear to be an issue for these plants at this time. 

TheFour Corners region of New Mexico, in which SJGS and Four Corners are located,experienced drought conditions during 2002 through 2004 that could haveaffected the water supply for the Company's generation plants.  While snowconditions were very favorable in 2005, in future years, if adequateprecipitation is not received in the watershed that supplies the Four Corners region, the plants could be impacted.  Consequently, PNM, APS and BHP Billitonhave undertaken activities to secure additional water supplies for SJGS, Four Corners and related mines.  The USBRwas requested to approve two supplemental contracts, one with the JicarillaApache Nation, PNM, and BHP Billiton for the SJGS and a second contract withthe Jicarilla Apache Nation, APS and BHP Billiton for Four Corners, for aone-year term ending December 31, 2005.  Approvals for the agreement have beenobtained.  PNM has also entered into a voluntary shortage sharing agreementwith tribes and other water users in the San Juan Basin for a one-year termending December 31, 2005.  Approvals for the agreement have been obtained. Similar agreements were entered into in 2003 and 2004.  Although the Company does not believe that its operations will bematerially affected by the drought conditions at this time, it cannot forecastthe weather situation or its ramifications, or how regulations and legislationmay impact the Company's situation in the future, should the shortages occur inthe future.  

**Conflicts at San Juan Mine Involving Oil andGas Leaseholders**

TheSJCC, through leases with the federal government and the State of New Mexico, owns coal interests with respect to an underground mine.  Certain gas producershave leases in the 

56

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

area of the underground coal mine and have asserted claimsagainst SJCC that its coal mining activities are interfering with gasproduction in the San Juan area.  The Company understands that discussions withgas leaseholders are ongoing, although no formal litigation has been filed.  TheCompany is unable to predict the outcome of this matter.

**Navajo Nation Environmental Issues**

Four Corners is located on theNavajo Reservation and is held under an easement granted by the federalgovernment as well as a lease from the Navajo Nation.  APS is the Four Cornersoperating agent and PNM owns a 13% ownership interest in Units 4 and 5 of Four Corners.

InJuly 1995, the Navajo Nation enacted the Navajo Acts.  The Navajo Acts purportto give the Navajo Nation EPA authority to promulgate regulations covering airquality, drinking water, and pesticide activities, including those activitiesthat occur at Four Corners.  On October 17, 1995, the Four Corners participantsfiled a lawsuit in the District Court of the Navajo Nation, Window RockDistrict, challenging the applicability of the Navajo Acts as to Four Corners.  The District Court has stayed these proceedings pursuant to a request by theparties.  In May 2005, APS and the Navajo Nation signed a Voluntary ComplianceAgreement which would resolve the dispute regarding the air pollution andcontrol acts portion of the lawsuit.  Upon approval of the Voluntary ComplianceAct by the EPA, APS will dismiss the pending claims related to the Clean AirAct.   

InFebruary 1998, the EPA issued regulations identifying those Clean Air Actprovisions for which it is appropriate to treat Native American tribes in thesame manner as states. The EPA has announced that it has not yet determinedwhether the Clean Air Act would supersede pre-existing binding agreementsbetween the Navajo Nation and the Four Corners participants that could limitthe Navajo Nation's environmental regulatory authority over Four Corners.  TheCompany believes that the Clean Air Act does not supersede these pre-existingagreements.  The Company cannot currently predict the outcome of this matter.

InApril 2000, the Navajo Tribal Council approved operating permit regulationsunder the Navajo Nation Air Pollution Prevention and Control Act. The FourCorners participants believe that the regulations fail to recognize that theNavajo Nation did not intend to assert jurisdiction over Four Corners.  In July2000, each of the Four Corners participants filed a petition with the NavajoSupreme Court for review of the operating permit regulations.  Thoseproceedings have been stayed, pending the settlement negotiations mentionedabove.  The Company cannot currently predict the outcome of this matter.

**New Source Review Rules**

InNovember 1999, the DOJ, at the request of the EPA, filed complaints againstseven companies, alleging that the companies over the past 25 years had mademodifications to their plants in violation of the NSR requirements and in somecases the NSPS regulations, which

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

could result in the requirement to makecostly environmental additions to older power plants. Whether or not the EPAwill ultimately prevail is uncertain at this time.  There have been a number ofdecisions regarding the pending enforcement cases against the seven companies,and some cases have been settled.  Some of the decisions have ruled in favor ofthe EPA and others have ruled in favor of the companies.  The two most recentdecisions, the Alabama Power Company decision and the Fourth Circuit Court ofAppeals decision in the Duke Energy case, accepted the legal theories advancedby the companies.  At this time, it continues to be unclear what the finalresolution of the issues surrounding the NSR enforcement cases will be and theimpact, if any, on PNM's operations.

Nocomplaint has been filed against PNM by the EPA, and the Company believes thatall of the routine maintenance, repair, and replacement work undertaken at itspower plants was and continues to be in accordance with the requirements of NSRand NSPS.  However, in October 2000, the NMED made an information request ofPNM, advising PNM that the NMED was in the process of assisting the EPA in theEPA's nationwide effort of verifying that changes made at the country'sutilities have not inadvertently triggered a modification under the Clean AirAct's PSD policies.  PNM has responded to the NMED information request.  InJune 2002, PNM received another information request from the NMED for a list ofcapital projects budgeted or completed in 2001 or 2002.  PNM has responded tothe additional NMED information request.

InDecember 2002, the EPA promulgated certain long-awaited revisions to the NSRrules, along with proposals to revise the RMRR exclusion contained in theregulations.  In August 2003, the EPA issued its ERP rule, clarifying whatconstitutes RMRR of damaged or worn equipment, subject to safeguards to assureconsistency with the Clean Air Act.  It provides that replacements of equipmentare routine only if the new equipment is (i) identical or functionallyequivalent to the equipment being replaced; (ii) does not cost more than 20% ofthe replacement value of the unit of which the equipment is a part; (iii) doesnot change the basic design parameters of the unit; and (iv) does not cause theunit to exceed any of its permitted emissions limits.  Legal challenges to theERP rule have been filed by several states; other states have intervened insupport of the rule. How such challenges will ultimately be resolved cannot bepredicted but an appellate court order has stayed the effect of the ERP rulepending the outcome of the litigation.  Also in late 2003 and early 2004,several groups filed petitions requesting the EPA to reconsider several aspectsof the ERP rule.  In June 2005, the EPA published its decision in response tothe petitions for reconsideration.  EPA rejected all of the petitioner'srequests and reaffirmed the ERP rule.  The Company is unable to determine theimpact of this matter.

**The Clean Air Act**

InJuly 1999, the EPA published its final regional haze regulations and in May2004, the EPA proposed revisions to the regulations and proposed guidelines forbest available retrofit technology.  The purpose of the regional hazeregulations is to address regional haze visibility 

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

impairment in the 156 Class1 areas in the nation, which consist of national parks, wilderness areas andother similar areas.  The final rule calls for all states to establish goalsand emission reduction strategies for improving visibility in all the Class 1areas.  These rules were litigated, and in 2002 portions of the rule werevacated and remanded.  In early 2005, the United States Court of Appeals forthe District of Columbia Circuit found that the EPA's Western Regional AirPartnership Annex regulation, an optional alternative approach for westernstates, was illegal.  In June 2005, the EPA issued the Clean Air VisibilityRule.  This rule addressed the issues that were vacated and remanded in 2002. The EPA will be issuing additional revisions to the regional haze rule toaddress the Western Regional Air Partnership Annex regulation later in 2005.

TheCompany cannot predict at this time what the impact of the implementation ofthe regional haze rule will be on the Company's coal-fired power plantoperations.  Potentially, additional sulfur dioxide emission reductions andnitrogen oxide emission reductions could be required.  The nature and cost ofcompliance with these potential requirements cannot be determined at thistime.  However, the Company does not anticipate any material adverse impact onits financial condition or results of operations.

**Citizen Suit Under the Clean Air Act**

TheGCT filed a citizen suit in federal district court in New Mexico against PNM(but not against the other SJGS co-owners) in May 2002.  The suit alleged twoviolations of the Clean Air Act and related regulations and permits.  First,GCT argued that the plant had violated the federal PSD rules, as well as thecorresponding provisions of the New Mexico Administrative Code, at SJGS Units 3and 4.  Second, GCT alleged that the plant had "regularly violated" the 20%opacity limit contained in SJGS's operating permit and set forth in federal andstate regulations at Units 1, 3 and 4.  The lawsuit sought penalties as well asinjunctive and declaratory relief.  PNM denied the material allegations in thecomplaint. 

By letterdated April 29, 2004, GCT provided a notice of intent to sue as ajurisdictional prerequisite to filing another citizens' suit under the CleanAir Act.  The notice of intent contained allegations that PNM continued toviolate the applicable opacity standard for SJGS Units 1, 3 and 4 following thefiling of the suit above, that PNM violated its duty to operate SJGS in amanner consistent with good air pollution control practices for minimizingpollution and that PNM failed to properly report emissions deviations andcertify compliance with applicable air emissions standards.   

By order of thecourt, PNM and GCT entered into settlement discussions.  The discussions wereexpanded to include the NMED to address the "Excess Emission Reports" disclosedbelow.  In March 2005, PNM entered into a consent decree with the NMED and GCT whichwas approved by the court in May 2005.  Under the terms of the consent decree,PNM and other plant owners will invest more than $200.0 million in new pollutioncontrol technology.  The capital costs of the technology are estimated to be$110.0 million, with an 

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

additional $80.0 to $90.0 million estimated foroperating and maintenance costs over the next 10 years.  PNM's portion of costswill be approximately 47% of the total capital and operating costs.  Theconsent decree resolves the foregoing lawsuit, the notice of intent, andcertain threatened air quality claims by the NMED (see "Excess EmissionsReports" below).  PNM plans to file for an air permit with the NMED prior tostarting construction on certain new equipment required by the consent decree. The issue of the plaintiffs' attorney fees and costs has been reserved forfurther discussion, or for determination by the court in the event PNM and the plaintiffsare unable to agree to an appropriate award.  Plaintiff's filed an agreedmotion for an extension until August 9, 2005 to submit their application forattorney fees and costs.

**Four Corners Air Emissions**

The GCT, SierraClub and National Parks Conservation Association, recently petitioned the EPAto issue a FIP and a final Title V operating permit to regulate air emissionsfrom Four Corners. The FIP has been pending at the EPA since 1999, and thepetition seeks to speed up the process of issuance.  The Company is unable topredict the outcome of this proceeding, but does not anticipate any materialadverse impact on PNMR's or PNM's financial condition or results ofoperations.  APS is the operator of Four Corners, and PNM will continue tomonitor developments in this proceeding.

**Excess Emissions Reports**

As required by law,whenever there are excess emissions from SJGS, due to such causes as start-up,shutdown, upset, breakdown or certain other conditions, PNM makes filings withthe NMED.  For several years, PNM had been in discussions with NMED concerningexcess emissions reports for the period after January 1997.  During this time,the NMED investigated the circumstances of these excess emissions and whetherthese emissions involved any violation of applicable SJGS permits orregulations.  In September 2003, the NMED advised that it would not excusecertain of the excess emissions that were the subject of PNM's excess emissionsreporting.  The NMED also adopted a new construction of PNM's operating permitrelating to opacity compliance at SJGS.  In May 2004, the NMED issued a "draft"compliance order that included allegations that SJGS violated certainapplicable air quality limitations.  This matter was resolved in conjunctionwith the GCT settlement described above under "Citizen Suit Under the Clean AirAct".

** Archeological Site Disturbance**

PNMhired Great Southwestern to conduct certain climb and tighten activities on anumber of electric transmission lines in New Mexico during 2001.  Those linestraverse a combination of federal, state, tribal and private properties in New Mexico.  In late May 2002, the USFS notified PNM that apparent disturbances toarcheological sites had been discovered in and around the rights-of-way forPNM's transmission lines in the Carson National Forest in New Mexico.  GreatSouthwestern had performed climb and tighten activities on those transmissionlines.  

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

PNMconfirmed the existence of the disturbances, as well as disturbances associatedwith certain arroyos that may raise issues under the Clean Water Act.  PNMcontracted for an archeological assessment and a proposed remediation plan withrespect to the disturbances and has provided the assessment to the USFS and thefederal Bureau of Land Management.  The Santa Fe National Forest issued anotice of non-compliance to PNM for alleged non-compliance with the terms andconditions of PNM's special use authorization relating to maintenance of PNM'spower lines on USFS land.  

Byletter dated March 22, 2004, the NNHPD indicated that it would not pursueeither criminal or civil damages under the Archeological Resources ProtectionAct and proposed a stipulation to address disturbances on Navajo Nation Land.  PNM and Great Southwestern entered into a letter agreement, dated June 7, 2004,with the NNHPD for a survey of potential impacts on Navajo Nation land.  Ifdisturbed cultural resources are encountered, appropriate treatment plans willbe implemented.  Under the terms of the June 7, 2004 letter agreement, theNNHPD agreed to release all claims against PNM and Great Southwestern for anyimpacts on Navajo Nation land arising from the climb and tighten project.  Thecultural survey of Navajo Nation land impacted by the climb and tightenactivities was conducted in October 2004.  PNM provided drafts of the surveyreports to the NNHPD and received comments.  A revised survey was provided tothe NNHPD in late June 2005 and PNM is awaiting any further comments.  TheCompany is unable to predict the outcome of this matter and cannot predict thepotential impact on the Company's operations.

**Santa Fe Generating Station**

PNMand the NMED conducted investigations of gasoline and chlorinated solventgroundwater contamination detected beneath PNM's former Santa Fe GeneratingStation site to determine the source of the contamination pursuant to a 1992Settlement Agreement between PNM and the NMED.

PNMbelieves that the data compiled indicates observed groundwater contaminationoriginated from off-site sources.  However, in August 2003, PNM elected toenter into a fifth amendment to the 1992 Settlement Agreement with the NMED toavoid a prolonged legal dispute, whereby PNM agreed to supplement remediationfacilities by installing an additional extraction well and two new monitoringwells to address remaining gasoline contamination in the groundwater at and inthe vicinity of the site.  PNM will continue to operate the remediationfacilities until the groundwater is cleaned up to applicable federal standardsor until such time as the NMED determines that additional remediation is notrequired, whichever is earlier.  The City of Santa Fe, the NMED and PNM enteredinto an amended Memorandum of Understanding relating to the continued operationof the well and the remediation facilities called for under the latest amendedSettlement Agreement.

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

InSeptember 2003, PNM was verbally informed that the Superfund Oversight Sectionof the NMED is conducting an investigation into the chlorinated solventcontamination in the vicinity of the former Santa Fe Generating Station site. The investigation will study possible sources for the chlorinated solvents inthe groundwater.  The NMED indicated that it expects to complete itsinvestigation in September 2005.

** Natural Gas Royalties Qui TamLitigation**

In 1999, a complaintwas served alleging violations of the False Claims Act by PNM and itssubsidiaries, Gathering Company and Processing Company (collectively, the"Company" for purposes of this discussion), by purportedly failing to properlymeasure natural gas from Federal and tribal properties in New Mexico, andconsequently, underpaying royalties owed to the Federal government.  A privaterealtor is pursuing the lawsuit.  The complaint was served after the DOJdeclined to intervene to pursue the lawsuit. The complaint seeks actualdamages, treble damages, costs and attorneys fees, among other relief.

The Company is currentlyparticipating with other defendants in a motion to dismiss on the ground thatthe realtor does not meet certain jurisdictional requirements for bringing suitunder the False Claims Act.  In May 2005, a Special Master issued a report andrecommendation that recommended to the court that several defendants, includingthe Company, be dismissed from the case on this ground.  The Company expectsthe relator to object to the Special Master's recommendation regarding theCompany.  If so, the Chief Judge of the federal district court for the Districtof Wyoming will hear and rule on the objection.  The Company is vigorouslydefending this lawsuit.  If the Special Master's recommendation regardingdismissal of the Company on jurisdictional grounds is not sustained, theCompany is unable to estimate the potential liability, if any, or to predictthe ultimate outcome of this lawsuit. 

**Asbestos Cases**

PNMwas named in 2003 as one of a number of defendants in 21 personal injurylawsuits relating to alleged exposure to asbestos.  All of these cases involveclaims of individuals, or their descendents, who worked for contractorsbuilding, or working at, PNM power plants.  Some of the claims relate toconstruction activities during the 1950s and 1960s, while other claimsgenerally allege exposure during the last 30 years.  PNM has nevermanufactured, sold or distributed products containing asbestos.  PNM has beendismissed with prejudice from all but two of the remaining cases.  PNM wasinsured by a number of different insurance policies during the time period atissue in these cases.  Although the Company is unable to fully predict theoutcome of this litigation, the Company believes that these legal proceedingswill not have a material impact on its financial condition.

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

**SESCO Matter**

InOctober 2003, the TCEQ requested information from PNM concerning anyinvolvement that PNM had with SESCO, a former electrical equipment repair andsales company located in San Angelo, Texas.  PNM was informed that the TCEQ andthe EPA claim to have identified contamination of the soil and groundwater atthe site.  

TCEQis conducting a site investigation of a SESCO facility pursuant to the TexasSolid Waste Act and the SESCO site has been referred to the Superfund SiteDiscovery and Assessment Program.  The primary concern appears to bepolychlorinated biphenyls in soil and groundwater on and adjacent to the site. The TCEQ is conducting the site investigation to determine what remediationactivities are required at the SESCO site and to identify potentiallyresponsible parties.  In January 2004, PNM submitted its preliminary responseto the TCEQ request for information.  The response states that PNM previouslyhad a requirements contract with SESCO for the repair of electrictransformers.  It appears that a number of transformers were sent to SESCO forrepair.  In addition, it appears that PNM sold a number of retired transformersto SESCO.  An informational meeting took place in Austin, Texas in April 2004where the status of the SESCO site and the possible establishment of apotentially responsible parties' committee was discussed.  In February 2005,PNM agreed to participate in the potentially responsible parties' committeeknown as the "Working Group".  PNM is voluntarily participating with the othersin the investigation and may participate in any required remediation at theSESCO facility.  Common counsel was recently hired to represent the commoninterests of the members of the Working Group.  The Working Group'sinvestigation into persons and entities that sent transformers and otherequipment to SESCO is ongoing.  PNM is still investigating its role in thematter, and is unable to predict the outcome at this time.

Asdiscussed below, TNMP is also involved in the SESCO matter.

** Coal Combustion Waste Disposal**

* *SJCCcurrently disposes of coal combustion products consisting of fly ash, bottomash, and gypsum from SJGS in the surface mine pits adjacent to the plant.  PNMand SJCC have been participating in various sessions sponsored by EPA toconsider rulemaking for the disposal of coal combustion products. Therulemaking would be pursuant to the Bevill Amendment of the ResourceConservation and Recovery Act.  PNM cannot predict the outcome of this matterbut does not believe currently that it will have a material adverse impact onthe financial condition of the Company or its operations.

** Western United States Wholesale Power Market**

Variouscircumstances, including electric power supply shortages, weather conditions,gas supply costs, transmission constraints, and alleged market manipulation bycertain sellers, resulted in the well-publicized "California energy crisis" andin the bankruptcy filings of the 

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

Cal PX and of PG&E.  However, since thethird quarter of 2001, conditions in the Western wholesale power market havechanged substantially because of regulatory actions, conservation measures, theconstruction of additional generation, a decline in daily natural gas pricesrelative to levels reached during the California energy crisis and regionaleconomic conditions.  

Asa result of the foregoing conditions in the Western market, the FERC and otherfederal and state governmental authorities initiated investigations, litigationand other proceedings relevant to the Company and other sellers.  The moresignificant of these in relation to the Company are summarized below.

*California Refund Proceeding*

SDG&E and other California buyers filed a complaint with the FERC in 2000 against sellers into the California wholesale electric market.  Hearings were held in September 2002, and the ALJissued the "Proposed Findings on California Refund Liability" in December 2002,in which it was determined that the Cal ISO had, for the most part, correctlycalculated the amounts of the potential refunds owed by sellers.  The ALJidentified what were termed "ballpark" figures for the amount of refunds dueunder the order in an appendix to the proposed findings document.  Pursuant tothe FERC's order, PNM filed, in conjunction with the competitive suppliergroup, initial comments in January 2003 to the ALJ's preliminary findingsaddressing errors the Company believes the ALJ made in the proposed findings,and filed reply comments in February 2003.  

Prior to the December 2002ALJ decision, the Ninth Circuit ordered the FERC to allow the parties in thecase to provide additional evidence regarding alleged market manipulation bysellers.  Several California parties submitted additional evidence in March2003 to support their position that virtually all market participants,including PNM, either engaged in specific market manipulation strategies orfacilitated such strategies.  PNM maintains that it did not engage in improperwholesale activities, and filed reply evidence in March 2003, denying theallegations against it.  

In March 2003, the FERCissued an order substantially adopting the ALJ's findings in the December 2002decision, but requiring a change to the formula used to calculate refunds.  TheFERC raised concerns that the indices for California gas prices, a majorelement in the refund formula, had been subject to potential manipulation andwere unverifiable.  The effect of this change would be to increase PNM's refundliability.  In October 2003, the FERC issued its order on rehearing in which itaffirmed its decision to change the gas price indices used to calculate therefund amounts.  This has the effect of increasing the Company's amount ofrefund.  The precise amounts, however, will not be certain until the Cal ISOand Cal PX recalculate the refund amounts.  In a report filed by the Cal ISO inMarch 2005, the Cal ISO indicated that the Cal PX had concluded itsrecalculation of the adjustments for hourly price mitigation.  The Cal ISO iswaiting to receive audited fuel cost information from market participants as aresult of the fuel cost proceedings currently pending at the FERC beforefinalizing its recalculated refund

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

amounts.  In June 2004, the FERC hosted asettlement conference in which the California parties proposed a settlementtemplate for the California refund proceedings.  The Company has engaged indiscussions with California parties based upon the template provided in thesettlement conference, but is unable to predict whether settlement will bereached.

In September 2004, theNinth Circuit issued its decision in one of the lead appellate cases addressingthe FERC's refund order.  The Ninth Circuit upheld the FERC's authority toestablish the market-based rate framework under the Federal Power Act, but heldthat the FERC violated its administrative discretion by declining toinvestigate whether it should order refunds from sellers who failed to providetransaction-specific reports to the FERC as required by its rules.  The NinthCircuit determined that the FERC has the authority to order refunds for thesetransactions if it elects to do so and remanded the case to the FERC forfurther proceedings, including a determination as to whether additional refundsare appropriate.  PNM participated with other competitive sellers requestingrehearing by the Ninth Circuit, which is still pending.  Additional appeals arestill pending before the Ninth Circuit, including *CPUC vs FERC*, a case addressingthe scope of market transactions subject to refund.  PNM has participated inthis appeal as one of the members of the competitive sellers group.  TheCompany cannot predict the ultimate outcome of any FERC proceeding that mayresult from these appeals, or whether PNM will be ultimately directed to makeany additional future refunds as the result of the decision; however, theCompany has recorded a reserve for this contingency.

*Pacific Northwest RefundProceeding*

In addition to the California refund proceedings, Puget Sound Energy, Inc. filed a complaint at the FERCalleging that spot market prices in the Pacific Northwest wholesale electricmarket were unjust and unreasonable.  In September 2001, the ALJ issued arecommended decision and declined to order refunds associated with wholesaleelectric sales in the Pacific Northwest.  In a ruling similar to the one issuedin the California refund proceeding, the FERC allowed additional discovery totake place and the submission of additional evidence in the case in March2003.  In June 2003, the FERC issued an order terminating the proceeding andadopting the ALJ's recommendation that no refunds should be ordered.  Severalparties in the proceeding filed requests for rehearing and in November 2003, theFERC denied rehearing and reaffirmed its prior ruling that refunds were notappropriate for spot market sales in the Pacific Northwest during the firsthalf of 2001.  In November 2003, the Port of Seattle filed an appeal of theFERC's order denying rehearing in the Ninth Circuit, which is still pending. As a participant in the proceedings before the FERC, PNM is also participatingin the appeal proceedings.  The Ninth Circuit has scheduled oral arguments inthe appeal for September 2005.  The Company is unable to predict the ultimateoutcome of this appeal, or whether PNM will ultimately be directed to make anyrefunds.

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

*FERCShow Cause Orders*

The FERC initiated a marketmanipulation investigation, partially in response to the bankruptcy filing ofthe Enron Corporation and to allegations that Enron Corporation may haveengaged in manipulation of portions of the Western wholesale power market.  Inconnection with that investigation, all sellers into Western electric and gasmarkets were required to submit data regarding short-term transactions in2000-2001.  In March 2003, the FERC staff issued its final report, whichaddressed various types of conduct that the FERC staff believed may haveviolated market monitoring protocols in the Cal ISO and Cal PX tariffs.  Basedon the final report, the FERC issued orders to certain companies, includingEnron Corporation, requiring them to show cause why the FERC should not revoketheir authorizations to sell electricity at market-based rates.  In addition,the FERC staff recommended that the FERC issue orders requiring certainentities to show cause why they should not be required to disgorge profitsassociated with conduct deemed to violate the Cal ISO and Cal PX tariffs, or besubject to other remedial action.  

In June 2003, the FERCissued two separate orders to show cause against PNM and over sixty othercompanies.  In the first order, the Gaming Practices Order, the FERC assertedthat certain entities, including PNM, appeared to have participated inactivities that constitute gaming and/or anomalous market behavior in violationof the Cal ISO and Cal PX tariffs during the period January 1, 2000 to June 20,2001.  Specifically, PNM is alleged to have engaged in a practice termed "FalseImport," which the FERC defined as the practice of exporting power generated by California and then reimporting it into California in order to avoid pricecaps on energy generated in California.  These allegations are based primarilyon an initial Cal ISO report and the additional evidentiary submission by California parties.  The Cal ISO was ordered to submit additional information on which theentities subject to the Show Cause Order should respond.  For PNM, thepotential disgorgement for alleged "False Import" transactions covers theperiod May 1, 2000 to October 1, 2000.  After review of the additional Cal ISOdata and consultation with PNM, the FERC trial staff filed a motion to dismissPNM from the case in August 2003.  In September 2003, the California partiesfiled their objection to the dismissal of PNM from the case.  In January 2004,the FERC issued an order granting trial staff's motion to dismiss PNM from theGaming Practices docket on grounds that the FERC staff's investigation did notreveal that PNM engaged in the practice of "False Import."  As a result, theCompany has been dismissed from the Gaming Practices proceedings.

In the second order to showcause, the Gaming Partnerships Order, the FERC asserted that certain entities,including PNM, acted in concert with Enron Corporation and other marketparticipants to engage in activities that constitute gaming and/or anomalousmarket behavior in violation of the Cal ISO and Cal PX tariffs during theperiod January 1, 2000 to June 20, 2001.  Specifically, PNM is alleged to haveentered into "partnerships, alliances or other arrangements" with thirteen ofits customers that allegedly may have been used as market manipulationschemes.  The precise basis for certain of the FERC's allegations is not clearfrom the Gaming Partnerships Order, although it appears that most arise out ofPNM's provision of 

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

"parking and lending" services to the identified companies. The potential remedies include disgorgement of unjust profits, as well asnon-monetary remedies such as revocation of a seller's market-based rateauthority.  

In September 2003, PNMfiled its responses to the Gaming Partnerships Order indicating that it did notengage in the alleged "partnerships, alliances or other arrangements" with thealleged parties.  In October 2003, PNM filed testimony and exhibits in the casereasserting its response previously filed.  In January 2004, the FERC issued anorder granting the FERC staff's motion to dismiss seven of the thirteen PNMcustomers on grounds that there was no evidence to conclude that thesecompanies used their commercial relationship with PNM to game the Cal ISO andCal PX markets.  InFebruary 2004, the FERC staff and the California parties filed testimony in thecase.  The FERC staff did not identify any improper conduct by PNM.  The California parties alleged that PNM provided false information regarding parkingtransactions that allowed other parties to game the California market.  In March 2004, the FERCapproved the settlements entered into by two of the thirteen PNM customers anddismissed another of PNM's customers from the proceeding.  Of the threeremaining PNM customers in the docket, the FERC staff entered into settlementagreements with two of them.  In May 2004, the Chief ALJ issued an ordersuspending the procedural schedule in the docket pursuant to the California parties' request to enable the parties to engage in settlement discussions ofall matters related to the "California energy crisis."  In September 2004, theFERC staff filed a motion to dismiss PNM from the docket and to enter into asettlement of certain parking and lending transactions.  The staff's motionstated that after investigation and review there was no evidence that PNMeither engaged in a gaming practice that violated the Cal ISO or Cal PX tariffsby directly transacting through the Cal ISO or Cal PX markets, or shared anyunjust profits earned by PNM's customers that may have engaged in gamingpractices.  Additionally, PNM entered into a settlement of certain mattersoutside the scope of the docket related to historic parking and lendingtransactions, under which PNM agreed not to provide parking and lendingservices prospectively without first meeting certain requirements agreed towith the FERC staff.  Additionally, PNM agreed to pay $1.0 million insettlement to the FERC to obtain satisfaction of all issues related to anypotential liability stemming from the provision of such services historically. In October 2004, the California parties filed their opposition to the motion todismiss and settlement.  Both PNM and the FERC staff made filings in which theyvigorously supported the motion to dismiss PNM from the docket and thesettlement reached with the FERC staff.  In July 2005, the FERC issued its order granting thestaff's motion to dismiss PNM from the Gaming Partnerships docket.  In itsorder, the FERC agreed with its trial staff's assessment of the record in thecase and found that PNM did not engage in prohibited gaming practices asdefined in the FERC's Gaming Partnership Order during the relevant timeperiod.  The FERC also approved the settlement on the parking and lendingservices, finding that the settlement covered matters that were beyond thescope of matters set for hearing as part of the Gaming Partnerships Order.  TheFERC also denied the California parties' request to keep the docket open as toPNM and terminated the PNM docket.

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

*California Power Exchange and Pacific Gas and ElectricBankruptcies*

InJanuary and February 2001, SCE and the major purchasers of power from the Cal ISOand Cal PX, defaulted on payments due to the Cal ISO for power purchased fromthe Cal PX in 2000.  These defaults caused the Cal PX to seek bankruptcyprotection.  PG&E subsequently also sought bankruptcy protection.  PNM hasfiled 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 2000and 2001 total approximately $7.9 million.  Both the PG&E and Cal PX bankruptcy cases have confirmedplans of reorganization in which the claims of various creditors have beenspecially classified and are waiting a final determination by the FERC beforethe claims are actually paid.  The PG&E bankruptcy case has an escrowaccount and the Cal PX bankruptcy has established a settlement account, both ofwhich are awaiting a determination by the FERC setting the level of claims andallocating the funds.

*CaliforniaAttorney General Complaint*

InMarch 2002, the California Attorney General filed a complaint with the FERCagainst numerous sellers regarding prices for wholesale electric sales into theCal ISO and Cal PX markets and to the California Department of WaterResources.  PNM was among the sellers identified in this complaint and filedits answer and motion to intervene.  In its answer, PNM defended its pricingand challenged the theory of liability underlying the California AttorneyGeneral's complaint.  In May 2002, the FERC entered an order denying theCalifornia Attorney General's request to initiate a refund proceeding, but directedsellers, including PNM, to comply with additional reporting requirements withregard to certain wholesale power transactions.  PNM has made filings requiredby the May 2002 order.  The California Attorney General filed a petition forreview in the Ninth Circuit.  PNM intervened in the Ninth Circuit appeal andparticipated as a party in that proceeding.  As noted above, in September 2004,the Ninth Circuit issued its decision upholding the FERC's authority toestablish the market-based rate framework under the Federal Power Act, but heldthat the FERC violated its administrative discretion by declining toinvestigate whether it should order refunds from sellers who failed to providetransaction-specific reports to the FERC as required by its rules.  The NinthCircuit determined that the FERC has the authority to order refunds for thesetransactions if it elects to do so and remanded the case back to the FERC forfurther proceedings, including a determination as to whether additional refundsare appropriate.  PNM participated with other competitive sellers requestingrehearing en banc by the Ninth Circuit, which is still pending.  The Companycannot predict the ultimate outcome of the FERC proceeding on remand, orwhether PNM will be ultimately directed to make any additional refunds as theresult of the decision.  

* California Antitrust Litigation*

* *Severalclass action lawsuits have been filed in California state courts againstelectric generators and marketers, alleging that the defendants violated thelaw by manipulating the 

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

market to grossly inflate electricity prices.  Nameddefendants in these lawsuits include Duke Energy Corporation and relatedentities along with other named sellers into the California market and numerousother unidentified defendants. Certain of these lawsuits were consolidated forhearing in state court in San Diego, California.  In May 2002, the nameddefendants served a cross-claim on PNM.  Duke Energy Corporation alsocross-claimed against many of the other sellers into California.  Duke EnergyCorporation asked for declaratory relief and for indemnification for anydamages that might ultimately be imposed on it.  Several defendants removed thecase to federal court in California.  The federal judge has entered an orderremanding the matter to state court, but the effect of that ruling has beenstayed pending appeal.  PNM has joined with other cross-defendants in motionsto dismiss the cross-claim.  The Company believes it has meritorious defensesbut cannot predict the outcome of this matter.

InMay 2005, the California Attorney General filed a lawsuit against PNM, PowerEx,a Canadian energy trading company, and the Colorado River Commission, in California state court alleging that PNM and PowerEx conspired to engage in unfair tradepractices involving overcharges for electricity in violation of California state antitrust laws.  The lawsuit claims that California customers wereovercharged over a billion dollars and requests the court to award actual andtreble damages.  In June 2005, PowerEx filed a Notice of Removal that served toremove the lawsuit to the Federal District Court for the Eastern District ofCalifornia.  Both PNM and PowerEx filed motions to the dismiss the lawsuit inJune 2005, on grounds that the California Attorney General's lawsuit ispreempted by federal law and even as to the allegations under California statelaw, failed to state a claim for which relief can be granted.  PNM and PowerExrely upon legal precedent in the Ninth Circuit holding that state antitrust claimsasserting unlawful wholesale power prices under the Federal Power Act arepreempted and a complainant's only remedy lies in FERC proceedings.  Suchproceedings are already currently pending at the FERC and the CaliforniaAttorney General is already heavily involved in these proceedings.  TheCompany's motion to dismiss is still pending.  The Company cannot predict theoutcome of this litigation, or whether the Company will be required to make anyrefunds or pay damages as a result of this litigation.

* BlockForward Agreement Litigation*

In February 2002, PNM wasserved with a declaratory relief complaint filed by the State of California in California state court. The state's declaratory relief complaint seeks adetermination that the state is not liable for its commandeering of certainenergy contracts known as "Block Forward Agreements".  The Block ForwardAgreements were a form of futures contracts for the purchase of electricity atbelow-market prices and served as security for payment by PG&E and SCE fortheir electricity purchases through the Cal PX.  When PG&E and SCEdefaulted on payment obligations incurred through the Cal PX, the Cal PX movedto liquidate the Block Forward Agreements to satisfy in part the obligationsowed by PG&E and SCE.  Before the Cal PX could liquidate the Block ForwardAgreements, the State of California commandeered them for its own purposes.  InMarch 2001, PNM and other similarly situated sellers of electricity through theCal PX filed claims for damages with the California Victims 

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

Compensation andGovernment Claims Board (the "Victims Claims Board" for purposes of thisdiscussion) on the theory that the state, by commandeering the Block ForwardAgreements, had deprived them of security to which they were entitled under theterms of the Cal PX's tariff.  The Victims Claims Board denied PNM's claim inMarch 2002.  PNM filed a complaint against the State of California in California state court in September 2002, seeking damages for the state's commandeering ofthe Block Forward Agreements and requesting judicial coordination with thestate's declaratory relief action filed in February 2002 on the basis that thetwo actions raise essentially the same issues.  The California state courtjudge delayed establishing a procedural schedule for the case pending adetermination of the Cal PX's status in the litigation.  The judge has sinceheld that the Cal PX could represent the interests of Cal PX participants inthe litigation.  In March 2004, both the Cal PX and the State of Californiafiled demurrers against each other's actions, alleging each other's actionsfailed to state a cause of action and that the issues raised in the other'scase were identical to the issues raised in their own cases.  In a hearing heldin April 2004, the judge determined not to rule on the demurrers until thespecific market participants named in the declaratory action proceedingaffirmatively determined whether they would agree to be bound by any judgmentreached in the Cal PX complaint action.  As a result of the judge's orderissued in May 2004, the various parties in the case were presented with aproposed stipulation under which the sellers would agree that the Cal PX wouldrepresent their interest in the proceedings, the sellers would agree to be boundby any judgment in the case, the sellers would dismiss their complaints againstthe State of California, and in turn, the State of California would dismiss itscross-complaints against the sellers, and the Cal PX would amend its complaintto indicate that it is bringing the lawsuit on behalf of the sellers.  PNMagreed with the stipulation and executed the stipulation agreement.  TheCompany cannot predict the outcome of the litigation involving the Cal PX andthe State of California, or whether PNM will be awarded any damages as a resultof the litigation.

In separate proceedingsbefore the FERC involving the collection of costs associated with the Cal PXwind-up activities, the subject of the Block Forward Agreement litigation hasbecome an element of the ongoing settlement discussions.  If the terms of thesettlement are accepted by the parties in the wind-up costs proceedings, California market participants, including PNM, will have the option to opt-in tovoluntarily agree to continue funding on a going-forward basis the expensesassociated with the block forward agreement litigation.  Alternatively, marketparticipants could agree to take an assignment of the Cal PX's claim and theycould then continue to prosecute the claim with the condition that any recoverythat may ultimately be achieved would be deposited into a FERC account fordistribution as the FERC deems appropriate.  In the event that none of theparties opt-in to fund the litigation or no assignment of the claim is made,then the Cal PX must dismiss the claim with prejudice.  The Company is unableto predict at this point in time if the settlement terms as they relate to theBlock Forward Agreement litigation will be accepted by the parties in the CalPX wind-up activities proceedings, or will be accepted by the FERC.

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

**Wholesale Power MarketingAntitrust Suit**

InJune 2004, PNM received notice that PNM has been included in a list of 56defendants that have been sued by the City of Tacoma Department of PublicUtilities in federal district court in the State of Washington.  PNM has beenlisted in a class of defendants referred to as the "Trading Defendants", whoallegedly engaged in buying, selling and marketing power in California andother locations in the Western United States.  The complaint alleges theTrading Defendants acted in concert among themselves and with "Non-DefendantTrading Co-Conspirators" that were engaged in conduct that amounted to marketmanipulations, which the complaint defines as a pattern of activities that hadthe purpose and effect of creating the impression that the demand for power washigher, the supply of power was lower, or both, than was in fact the case.  Thecomplaint identified specific conduct that allegedly amounted to marketmanipulations, including the submission of false information andmisrepresentation regarding load schedules, bids, power supply, transmissioncongestion, source and destination of energy, the supply and provision ofenergy and ancillary services.  The complaint alleged the activities of theTrading Defendants, along with "Generator Defendants", who are defined asgenerators who generated power for sale into California and other Westernmarkets, and the co-conspirators, resulted in substantially increased pricesfor energy in the Pacific Northwest spot market in excess of what otherwisewould have been the price absent such unlawful acts, in violation of antitrustlaws.  The complaint asserted damages in excess of $175.0 million from themultiple defendants.  There have been three recent Ninth Circuit decisionsthat, collectively, appear to make Plaintiffs' case more difficult to prevail. As a result, PNM joined a motion to dismiss the City of Tacoma Department ofPublic Utilities complaint given Ninth Circuit precedent.  In a decision issuedin February 2005, the district court judge in the case granted defendants'motion to dismiss.  As a result, the antitrust lawsuit against PNM filed by theCity of Tacoma Department of Public Utilities was dismissed.  In March 2005,the City of Tacoma Department of Public Utilities filed an appeal in the NinthCircuit contesting the district court's decision to dismiss the complaint.  PNMwill participate in the appeal in support of the dismissal.  The Company cannotpredict the outcome of this appeal, or whether PNM will be required to make anyrefunds or pay damages as a result of this litigation.

** FERC Rule Making**

Overthe past several years, the FERC has issued numerous rules that have impactedthe wholesale energy business.  The FERC is attempting to remedy what it seesas undue discrimination in the provision of interstate transmission servicesand to ensure just and reasonable rates for electric energy within and amongregional power markets.  

Inaddition, the FERC has issued final rules that have an impact on the wholesaleenergy business and participants in the wholesale energy markets, includingPNM.  In August 2003, the FERC issued Order 2003, which requires electricutilities that own or control electric transmission facilities to set out standardprocedures and a standard agreement for interconnecting generators larger than20 MW, and to make such revisions as necessary to its

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

 OATT to comply with therequirements of the new rule.  PNM made its initial compliance filing inJanuary 2004 and, in September 2004, PNM received notice that its revisedtariff filing was accepted by the FERC.  In December 2004, the FERC issuedOrder 2003-B, which provided additional clarification on certain matters andrequired additional modifications to the pro forma tariff.  PNM joined anindustry group requesting rehearing of Order 2003-B, and also separately filedits petition for rehearing of Order 2003-B, both of which are still pendingbefore the FERC.  In February 2005, PNM made its compliance filing pursuant toOrder 2003-B.  In March 2005, PNM received notice that its compliance filingwas accepted by FERC.  In July 2005 the FERC issued Order 2003-C, in which itaffirmed, with certain clarifications, the fundamentals in the FERC Order2003-B, and denied PNM's petition for rehearing.  In addition, in May 2005, theFERC issued a rulemaking, designated as Order 2006, in which it established therequirement for public utilities to amend their OATTs to include the FERC'sstandardized procedures for interconnecting small generators, no larger than 20MW.  Order 2006 states that the OATTs of all non-independent transmissionproviders are deemed revised to include the procedures and no formal OATTamendment will be required until compliance is due in the FERC's rulemaking onelectronic tariff filings, which is still pending.  

InApril 2004, the FERC announced the establishment of a new interim two-prongedmarket power screen to be applied in market based rate cases.  In May 2004, theFERC issued procedural orders in pending market based rate application/renewalcases, including PNM's case, requiring the use of the new two-pronged interimscreen and requiring PNM to make its revised market based rate filing by August2004.  In July 2004, the FERC issued an order affirming its interim two-prongedmarket screen test.  PNM filed its triennial market power screen analyses inAugust 2004 utilizing the new two-pronged interim screen as required by theFERC's order.  In its filing, PNM noted that, although fewer in nature due torecent system improvements, it continued to face transmission constraints inNorthern New Mexico and would continue to abide by the cost-based ratelimitation on transmission service during times of transmission constraints forthe Northern New Mexico market.  PNM also noted that for the EPE control area,PNM's wholesale market share screen was slightly above 20% during two seasons. In October 2004, PNM made a supplemental filing utilizing more detailed loadand generation data contained in EPE's market power screen filing, whichresulted in PNM having a revised wholesale market share result below 20% forall seasons.  In December 2004, the FERC issued its order in PNM's market basedrate filing finding that the FERC is initiating a proceeding to determine ifPNM's mitigation measure in Northern New Mexico is sufficiently adequate toprevent the exercise of market power.  The FERC's order also requiredadditional explanation of PNM's revised wholesale market share calculation. PNM filed a petition for rehearing contesting the FERC's findings regarding theEPE control area, and arguing that PNM lacks generation market power in Northern New Mexico given the transmission access available to transmission customers inthat market and the pre-existing mitigation measure that FERC previouslyapproved in 1996.  The FERC also established that rates reviewed under thisproceeding for transactions completed in these two markets would be subject torefund effective March 6, 2005.  The Company is currently reviewing alternativesfor resolution of the issues with the FERC.  It is unclear whether resolutionwill include a requirement for refunds.

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

InFebruary 2005, PNM made its compliance filing, in which the Company's expertpresented various revised screen analyses for the EPE control area andconcluded that the FERC should continue to permit PNM to make sales atmarket-based rates in that control area.  The analyses showed that the screenfailures disappear when the input data reflect the realities of economic andphysical conditions in the Southern New Mexico market.  PNM was of the viewthat the screen failure scenarios do not warrant the conclusion that PNMpossesses generation market power in EPE's control area.

PNM'sexpert further concluded that the FERC should continue to permit PNM to makesales at market-based rates in PNM's Northern New Mexico control area, subjectto the existing mitigation provision contained in PNM's market-based salestariff.  PNM's expert concluded that PNM does not have the potential to exercisegeneration market power because customers enjoy access to robust markets duringthe hours that concerned the FERC, and given that the pre-existing mitigationwould prevent any exercise of generation market power in the event oftransmission constraints.  PNM's expert also concluded that, if the FERCdetermines that PNM should not be permitted to sell at market-based rates inits Northern New Mexico control area, the FERC nevertheless should permit PNMto sell at market-based rates at San Juan because San Juan is outside thetransmission constraint path.  In March 2005, EPE filed a motion in theproceeding expressing concern that PNM may have market power in the SouthernNew Mexico market and requesting the FERC to impose a price mitigationmechanism for PNM sales to EPE in Southern New Mexico.  PNM filed its responsecontesting EPE's claim that PNM has market power in the Southern New Mexicomarket and opposing EPE's proposed mitigation measure.  PNM, in April 2005,also filed a motion for appointment of a settlement judge in an effort to reachresolution on the issues pending in the proceeding.

InApril 2005, the FERC issued an Order denying PNM's petition for rehearingregarding the FERC's finding that the existing mitigation measure for theNorthern New Mexico control area was insufficient; rejecting PNM's February2005 compliance filing as to both the Northern and Southern New Mexico controlareas and requiring PNM to submit a compliance filing within 30 days containingone of the alternatives listed in the Order; and denying PNM's motion forassignment of a settlement judge.  ** **The FERC's Order also clarified thatmarket based sales made at SJGS are sales made within PNM's Northern controlarea and are subject to these proceedings.   PNM is considering its options tomarket-based rates in the areas of concern identified by the FERC.  PNMreceived an extension of time to make its compliance filing until July 2005. Also, in June 2005, PNM filed a petition for judicial review of the FERC'sDecember 2004 and April 2005 orders in the United States Court of Appeals forthe District of Columbia Circuit.  In its appeal, PNM requests the court toreview the legality of the FERC's orders.  In July 2005, PNM made itscompliance filing at the FERC.  The filing indicated that, as a result of thecompletion of its analysis pursuant to the FERC's order, PNM did show failuresin its own control area, but did not show failures in the EPE control area,with the exception of one measure.  The Company maintained its position thatwhen the historical data is considered, it is clear that PNM does not possessgeneration market power in either the PNM or EPE control 

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

area destinationmarkets and it should maintain its market-based sales authority in thosemarkets.  In the event the FERC does not so find, PNM also proposed mitigationmeasures in both the PNM and EPE control area destination markets that will beapplicable during the limited time periods when the failures occurred.  TheCompany cannot predict the outcome of the additional FERC proceedings on theCompany's financial position or results of operations; however, should the FERCdetermine that PNM has generation market power in these two markets, PNM couldcontinue to make sales at cost-based or otherwise mitigated rates and thus nothave future revenues subject to refund in this matter.  The Company also cannotpredict the outcome of the court appeal of the FERC's prior orders.  

InJuly 2005, the FERC issued an order terminating its proceeding on standardmarket design, stating that since issuance of the standard market design noticeof proposed rulemaking, the electric industry has made significant progress inthe development of voluntary RTOs/ISOs which has allowed interested parties,through region-specific proceedings, to shape the development of independententities to reflect the needs of each particular region.  The FERC alsoindicated that it intends to consider revisions to the Order No. 888 pro formaOATT to reflect the electric utility industry's and the FERC's experience withopen access transmission of the last decade.

TNMP

**TNMP True-Up Proceeding**

In July2004, the PUCT issued its decision in TNMP's stranded cost true-up proceeding. The purpose of the true-up proceeding was to quantify and reconcile the amountof stranded costs that TNMP may recover from its transmission and distributioncustomers.  The PUCT decision established $128.4 million as TNMP's strandedcosts and allowed TNMP to recover $87.3 million of the $266.5 million that TNMPrequested for its true-up balance. 

InAugust 2004, TNMP filed a motion for rehearing of the PUCT decision.  InOctober 2004, the PUCT denied all of TNMP's motions for rehearing except for anissue related to a June 2004 Texas Supreme Court ruling that addressed recoveryof carrying charges on recoverable stranded costs back to January 1, 2002, thedate that competition began in Texas. 

In March2005, the PUCT administrative law judge issued a proposal for decision in thetrue-up proceeding.  The decision recommended that TNMP be allowed recovery of$41.7 million of carrying charges on stranded costs for the period January 1,2002 through July 21, 2004, and was consistent with amounts recorded by TNMP. In accordance with provisions within SFAS No. 92, *"Regulated Enterprises -Accounting for Phase-In Plans"* ("SFAS 92"), TNMP recorded $27.2 million ofcarrying charges to the income statement for the period January 1, 2002 throughJuly 21, 2004, in the fourth quarter of 2004.  TNMP was limited in itsrecognition for income statement purposes to only the debt related portion ofthe carrying charges, and TNMP was prohibited from income statement recognitionof the equity portion of the carrying charges until the actual receipt of thoseamounts from customers.

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

In April2005, the PUCT announced its decision that TNMP will be allowed to recoverinterest at a lower rate than the administrative law judge adopted.  The lowerrate results in $39.2 million of carrying costs on stranded costs for theperiod January 1, 2002 through July 21, 2004.  The PUCT rejected theadministrative law judge proposal that TNMP be allowed to utilize the weightedaverage cost of debt inherent in its 2000 Unbundled Cost of Service filing. Instead, the PUCT utilized TNMP's actual weighted average cost of debt as ofDecember 31, 2001.  Accordingly, TNMP reduced the carrying costs for incomestatement recognition for the period January 1, 2002 through July 21, 2004 by$4.1 million, and reduced the total carrying charges for income statementrecognition for the period January 1, 2002 through December 31, 2004 by $4.7million during the first quarter of 2005.  TNMP's accrual for 2005 carryingcharges is also based on the PUCT ruling.  As of June 30, 2005, the equityportion of the carrying charges on stranded costs that TNMP was prohibited fromrecognition through the income statement until actual receipt from customerstotaled $22.1 million.

In July2005, the PUCT confirmed TNMP's calculation of the carrying costs on strandedcosts in a written order.

Sixty daysfollowing the date on which the true-up order becomes final and appealable,TNMP is required to make a 60-day rate review filing.  TNMP's case willestablish a competition transition charge for recovery of the true-up balanceand address the liability associated with amounts in excess of established costof services rates.  TNMP's competition transition charge will take effect nolater than 30 days following a final order on TNMP's 60-day rate review. 

**SESCO Matter**

** **Asdiscussed above in the PNM discussion, in October 2003, the TCEQ notifiedapproximately 50 companies, including TNMP, that releases of hazardoussubstances had been documented from a site owned and operated by SESCO.  TNMPpurchased transformers from the vendor and also sent some transformers to thevendor for repair and/or disposal.  The owner and operator of the site havefiled for bankruptcy and the site is under the control of the bankruptcytrustee. In August 2004, 15 of the companies identified by TCEQ as potentiallyresponsible parties, including TNMP, formed the initial Working Group to managethe remediation efforts and determine the allocation of responsibility amongthe potentially responsible parties.   Common counsel was recentlyhired to represent the common interests of the members of the Working Group. The Working Group's investigation into persons and entities that senttransformers and other equipment to SESCO is ongoing.  TNMP isstill investigating its role in the matter, and is unable to predict theoutcome at this time.

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

**(9)     Regulatoryand Rate Matters**

PNMR

**FederalEnergy Legislation**

** **OnAugust 8, 2005, the President signed the Energy Policy Act of 2005 into law. Among other things, the Act contained provisions that: 
-  Make electricreliability rules mandatory on all market participants;
-  Create a self-regulatingreliability organization to enforce reliability rules, with FERC oversight; 
-  Coordinate the federalpermitting process for transmission facilities by giving DOE lead agencyauthority;
-  Require federal landagencies to expedite approvals for vegetation management activities onrights-of-way to meet mandatory reliability standards;
-  Repeal PUHCA whileincreasing FERC merger review authority;
-  Establish conditions foreliminating PURPA mandatory purchase obligations and revises criteria for newqualifying facilities seeking to sell power under the mandatory purchaseobligation;
-  Require FERC to providetransmission investment incentives and assure cost recovery for reliabilityinvestments;
-  Reduce depreciable livesfor electric transmission lines and natural gas pipelines from 20 years to 15years;
-  Reduce the cost recoveryperiod for power plant pollution control equipment from 20 years to 5 years;
-  Revise the tax treatmentof the trust funds set aside for decommissioning of nuclear power plants; 
-  Provide FERC withgreater enforcement authority and the ability to impose larger penalties forFederal Power Act violations;
-  Authorize the FederalTrade Commission to issue rules protecting consumer privacy and prohibitingunfair trade practices;
-  Provide FERC withbroader authority to prevent market manipulation;
-  Provide tax credits fornew energy efficient homes and for energy efficient home improvements andappliances;
-  Provide tax credits forsolar energy, fuel cells and distributed generation;
-  Establish a climatechange technology program that directs the Secretary of Energy to lead aninter-agency process to develop and implement a national climate technologystrategy; 
-  Extend the placed-inservice date through 2007 for qualifying renewable energy facilities; 
-  Provide tax credits forelectricity produced at new nuclear power plants; and
-  Provide incentives forclean coal power initiatives, including tax credits for integrated gasificationcombined cycle projects.

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

**RetailCompetition**

Asdiscussed in Note 1, the Texas electricity market has been open to retailcompetition since January 1, 2002.  In accordance with Senate Bill 7, TNMPprovides transmission and distribution services at regulated rates to variousretail electric providers that, in turn, provide retail electric service withinTNMP's Texas service area.  First Choice, TNMP's affiliated retail electricprovider, performs activities related to the sale of electricity to retailcustomers in Texas.

OnJune 1, 2004, several changes to customer protection rules in Texas becameeffective.  Of the changes, the rules related to disconnection for non-paymentand the required amount of a customer deposit are having the greatest impact onFirst Choice.  The new rule for disconnection for non-payment states that if acustomer does not make a payment or payment arrangement until after the finaldue date specified in the disconnect notice, the retail electric provider isallowed to disconnect the customer.  The previous rule only allowed the retailelectric provider to terminate service and drop the customer to the retailelectric provider that was affiliated with the customer's transmission anddistribution service provider, or to the provider of last resort fornon-payment.  The new rule for the required amount of deposit states that thedeposit shall not exceed the greater of one-fifth of the estimated annualbilling or the sum of the next two month's estimated billings.  The previousrule stated that the deposit could not exceed the greater of one-sixth of theestimated annual billing or the sum of the next two month's estimated billings.

FirstChoice is responsible for energy supply related to the sale of electricity toretail customers in Texas.  Senate Bill 7 contains no provisions for thespecific recovery of fuel and purchased power costs, although First Choice canrequest that the PUCT change the price-to-beat fuel factor twice a year torecognize changes in natural gas prices.  The rates charged to new customersacquired by First Choice outside of TNMP's service territory are not regulatedby the PUCT, but are negotiated with each customer.  As a result, changes infuel and purchased power costs will affect First Choice's operating results.

**Price-to-Beat Fuel Factor**

OnApril 11, 2005, in response to increases in natural gas prices, First Choicefiled a request with the PUCT to increase its price-to-beat fuel factor byapproximately 5.30%, based on a gas price of $7.845 per MMBTU.  First Choiceestimates that the increase in the price-to-beat fuel factor would increaseannual revenues by approximately $6.6 million.  The PUCT approved the increasein May 2005.  The April 2005 price-to-beat fuel filing was First Choice's firstfor 2005.  First Choice is allowed two price-to-beat fuel factor filings during2005.

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

**60-Day Rate Review**

** **FirstChoice is required to make a filing to reset its price-to-beat base rate nolater than 30 days after TNMP files its 60-day rate review.  If the July 15,2005 decision of the PUCT in TNMP's true-up proceeding becomes final andappealable, First Choice will file its price-to-beat  base rate case in earlyDecember 2005.  First Choice will file its price-to-beat fuel factor caseshortly before the PUCT issues an order in TNMP's case.  First Choice's resultingrates will take effect no later than 30 days following a final order on TNMP's60-day rate review.  The Texas acquisition stipulation also provides that FirstChoice will request that the PUCT recognize in its new price-to-beat base ratesthe TNMP rate reduction and the synergy savings credit provided for in thestipulation. 

**Final Fuel Reconciliation**

InJanuary 2004, the PUCT issued an order that disallowed $15.7 million of fueland energy related purchased power costs that TNMP incurred in 2000 and 2001,prior to retail competition.  TNMP recorded the $10.1 million net of tax effectof the disallowance in the fourth quarter of 2003, and subsequently appealedthe PUCT decision to the district court.  On June 10, 2005, the District Courtaffirmed the PUCT order, effectively denying TNMP's appeal. 

**Energy Agreement**

In2003, First Choice and Constellation executed a three-year power supplyagreement that resulted in Constellation being the primary supplier of powerfor First Choice's customers through the end of 2007. Additionally,Constellation has agreed to supply power in certain transactions under theagreement beyond the date when that commitment expires. 

In2004, First Choice Power Special Purpose Entity ("FCPSP"), a bankruptcy remoteentity, was created pursuant to the agreement with Constellation to hold allcustomer contracts, wholesale power contracts, and certain natural gascontracts previously held by First Choice.  Constellation received a lienagainst the assets of FCPSP to cover the settlement exposure and the mark-to-market exposure rather thanrequiring FCPSP to post alternate collateral for the purchase of power supply. In addition, FCPSP is restricted by covenants that limit the size of FCPSP'sunhedged market positions and require that sales by FCPSP retain a positiveretail margin.  The agreement does not, however, permit Constellation to demandadditional collateral irrespective of its credit exposure under the agreement. If, however, a change in electricity or gas forward prices increasesConstellation's credit exposure to FCPSP beyond a limit based onConstellation's liens in cash and accounts receivable, Constellation will haveno obligation to supply additional power to customers of FCPSP unless FCPSPprovides letters of credit or other collateral acceptable to Constellation, andFCPSP will be constrained in its ability to sign up additional customers untilthat credit shortfall is corrected.

FCPSPmay terminate the agreement upon 30 days' prior written notice to Constellationfor any reason, but the agreement and all liens securing the agreement remainin effect with respect to transactions entered into prior to the terminationuntil both parties have fulfilled all of their obligations with respect to suchtransactions or such transactions have been terminated for default or reasonsrelated to regulatory changes.  

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**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

PNM

**Global Electric Agreement**

TheGlobal Electric Agreement was signed in 2003.  The Global Electric Agreementprovided for the repeal of a majority of the Restructuring Act, a fixed ratepath, procedures for PNM's participation in unregulated generating plantactivities and other regulatory issues.  The rate path is effective throughDecember 31, 2007, at which time rates are subject to review by the NMPRC. Based on the normal time frame for rate proceedings in New Mexico of 10 months,a change in rates would not happen until late 2008.  As a result of the repealof the Restructuring Act, PNM re-applied the accounting requirements of SFAS71, as amended, "Accounting for the Effects of Certain Types of Regulation," toits regulated generation activities.

**Transmission Rate Case**

InMarch 2005, PNM filed a notice with the FERC to increase its wholesale electrictransmission revenues by $7.8 million annually.  If approved, the rate increasewould apply to all of PNM's wholesale electric transmission service customers,which includes other utilities, electric co-operatives and entities that usePNM's transmission system to transmit power at the wholesale level.  The proposedrate increase would not impact PNM's retail customers.  On May 25, 2005, theFERC issued an order in the case suspending the new rates for the standardfive-month period and made the new rates effective November 1, 2005, subject torefund.  Additionally, pursuant to the FERC's order, a settlement judge hasbeen assigned to the case and a settlement conference was held on July 20,2005.  A second settlement conference is scheduled in September 2005.  TheCompany is unable to predict the outcome of the rate proceeding or if theparties will be able to reach a settlement in the case.  

**(10)   Variable Interest Entities**

PNMR/PNM

FASB Interpretation No.46, "*Consolidation of Variable Interest Entities*" (Revised December2003) ("FIN 46R"), became effective January 1, 2004 for those entitiesconsidered to be special purpose entities, and March 31, 2004 for others.  FIN46R expands the requirement of a business enterprise to consolidate an entitybeyond the concept of a controlling interest.  Under FIN 46R, a businessenterprise will consolidate an entity if that entity is a variable interestentity, the business enterprise is the primary beneficiary of the entity andthe entity's risks are not effectively dispersed among all parties involved.  Avariable interest entity has certain characteristics that effectivelydemonstrate that the equity investor does not have economic substance, bear therisks and receive the rewards of the entity or direct the entity's activities. The interpretation requires that an enterprise review its variable interestsand determine if consolidation is appropriate.

79

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

Under the model forconsolidation promulgated by FIN 46R, a PPA may qualify as a variable interestif its terms expose the purchaser to variability in supply or operating costsand the contract is for a significant portion of the entity's generatingcapacity.  PNMR evaluated its PPAs under the provisions of FIN 46R anddetermined that one purchase contract entered into prior to December 31, 2003qualifies as a variable interest.  PNMR was unable to obtain the necessaryinformation needed to determine if PNMR was the primary beneficiary and ifconsolidation was needed despite efforts including a formal written request tothe operator of the entity supplying power under the PPA.  The operator citedlegal and competitive reasons for refusing to provide the information. 

This variable interestPPA is a contract to purchase 132 MW of capacity and energy expiring in June2020.  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 offuel and O&M.  For the three months ended June 30, 2005 and 2004, thecapacity and O&M charge was $1.6 million and $1.3 million, respectively,and the energy charges were $0.2 million and $0.2 million, respectively.  Forthe six months ended June 30, 2005 and 2004, the capacity and O&M chargewas $3.3 million and $2.5 million, respectively, and the energy charges were$0.6 million and $0.3 million, respectively.  The contract is for the fulloutput of a specific gas generating plant and is currently accounted for as anoperating lease by PNM.  Under this contract PNM is exposed to changes in thecosts to produce energy and operate the plant.  

PNMR also has interestsin other variable interest entities created before January 31, 2003, for whichPNMR is not the primary beneficiary.  These arrangements include PNMR'sinvestment in a limited partnership and certain PNM leases.  The aggregatemaximum loss exposure at June 30, 2005 that PNMR could be required to record inits income statement as a result of these arrangements totals approximately$5.3 million.  The creditors of these variable interest entities do not haverecourse to the general credit of PNMR in excess of the aggregate maximum lossexposure.

**(11)   Related Party Transactions**

As a result of PNMR's acquisitionof TNP on June 6, 2005, PNMR, TNMP and PNM are considered related parties asdefined in SFAS No. 57, *"Related Party Disclosures."*

PNMR ServicesCompany provides corporate services to PNMR's business units including PNM,Avistar, Inc., TNP, TNMP and First Choice per shared services agreements. These services are billed at cost on a monthly basis and allocated to thebusiness units.  

PNM and TNMPhave engaged in, and may in the future engage in, affiliate transactions in thenormal course of business. These transactions primarily consist of power andtransmission purchases by TNMP from PNM.  Transactions between affiliates arereported separately on their financial statements, but are eliminated in theconsolidation of PNMR's financial statements.  

80

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

PNMR

TNP and Laurel HillCapital Partners ("Laurel Hill") were parties to a ManagementServices Agreement under which Laurel Hill provided certain management andfinancial advisory services to TNP.  The agreement was terminated at the timeof the acquisition. 

TNP incurred fees for advisoryservices by the original limited partners of SW Acquisition, pursuant toprovisions of the SW Acquisition limited partnership agreement.

 

**Three Months**

** **

**Six Months**

 

**Ended June 30,**

** **

**Ended June 30,**

 
 

**2005**

** **

**2004**

** **

**2005**

** **

**2004**

 
 
**Laurel Hill**

(In thousands)

 
Management and financial  advisory services

$       42

$       63

 $     104

$     363

 
Management and financial  advisory services 

 
   payable as of June 30,  2005

$          -

$          -

 
Management and financial  advisory services

 
   payable as of December  31, 2004

$          -

$          -

 
 
**SW Acquisition**

 
Advisory services

$          -

$     250

$          -

$     500

 
Advisory services payable  as of June 30, 2005

$          -

$          -

 
Advisory services payable  as of

 
   December 31, 2004

$ 1,000

$ 1,000

PNM

PNM sellselectricity and energy-scheduling services to TNMP under a long-term wholesalepower contract.  PNM also sells transmission services to TNMP and TNMP providestransmission services to PNM under an agreement.

81

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

The tables below describe the nature and amount oftransactions PNM has with PNMR and TNMP.  Since TNMP became a related partyeffective on the date of PNMR's acquisition of TNP, the reported amounts forTNMP reflect the period from June 6, 2005 through June 30, 2005.  

 

 

**Three Months**

** **

**Six Months**

 

**Ended June 30,**

** **

**Ended June 30,**

    
**2005**

** **

**2004**

** **

**2005**

** **

**2004**

 
**PNMR**

(In thousands)

 
Shared services billings

$ 25,754

$29,029

$51,290

$ 57,319

 
Shared services receivable  as of June 30, 2005

$   7,505

$  7,505

 
Shared services receivable  as of 

 
   December 30, 2004

$31,875
$31,875
 
 
**TNMP**

 
Electricity and energy  scheduling service 

 
   billings from PNM

$    2,904

$          -

$ 2,904

$           -

 
Electricity and energy  scheduling services 

 
   payable as of June 30,  2005

$    2,904

$ 2,904

 
 
Transmission billings to  TNMP

$       139

$          -

$    139

$           -

 
Transmission charges  receivable as of 

 
   June 30, 2005

$       139

$    139

 
 
Transmission billings from  TNMP

$         11

$          -

$      11

$           -

 
Transmission charges  payable as of 

 
   June 30, 2005

$         11

$      11

TNMP

TNMP purchases all the electricity for its New Mexico customers' needs and energy-scheduling services under the long-term wholesalepower contract with PNM described above.  TNMP also purchases transmissionservices from PNM in New Mexico.  Additionally, TNMP provides transmissionservices to PNM in New Mexico under the agreement described above. 

Until June 6, 2005, TNMPprovided First Choice and TNP with corporate support services, includingaccounting, finance, information services, legal and human resources, under ashared 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 Choicecompensated TNMP for the use of the services.  These agreements were in effectthrough June 6, 2005 when they were replaced by a new shared servicesarrangement.  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 Choicebecame employees of PNMR Services Company.  PNMR Services Company providescorporate services to TNMP per a shared services agreement.

82

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

**Three Months Ended June 30,**

** **

**Six Months Ended June 30,**

**2005**

** **

**2004**

** **

**2005**

** **

**2004**

 

** **

** **

(In thousands)

** **

** **

**PNM**

** **

** **

** **

** **

** **

** **

** **

Electricity and energy  scheduling service 

   billings from PNM

 $  2,904

$          -

$  2,904

$          -

Electricity and energy  scheduling services 

   payable as of June 30,  2005

$  2,904

$  2,904

Transmission billings from  PNM

$     139

$          -

$     139

$          -

Transmission charges  payable

   as of June 30, 2005

$     139

$     139

Transmission billings to  PNM

$       11

$          -

$       11

$          -

Transmission charges  receivable as

   of June 30, 2005

$       11

$       11

**TNP**

Shared services billings

$     642

$     756

$  1,225

$  1,201

Shared services receivable  as of June 30, 2005

$     436

$     436

Shared services receivable  as of

   December 31, 2004

$     115
$     115
**First Choice**

Shared services billings

$  4,366

$  3,588

$ 	8,505

$  7,264

Shared services receivable  as of June 30, 2005

$  2,967

$  2,967

Shared services receivable  as of 

   December 31, 2004

$  1,549
$  1,549
Transmission and  distribution billings

$19,907

$23,420

$38,071

$43,505

Transmission and  distribution charges

   receivable as of June  30, 2005

$11,724

$11,724

Transmission and  distribution charges

   receivable as of  December 31, 2004

$11,768
$11,768
**PNMR**

Shared services billings

$  2,416

$          -

$ 2,416

$          -

Shared services payable as  of June 30, 2005

$  2,416

$ 2,416

83

**PNM RESOURCES, INC. AND SUBSIDIARIES,PUBLIC SERVICE COMPANY OF NEW MEXICOTEXAS-NEW MEXICO POWER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)

**(12)   New Accounting Pronouncements**

On June 1,2005, the FASB issued SFAS No. 154, "*Accounting Changes and ErrorCorrections*" ("SFAS 154").  SFAS 154 applies to all voluntary changes inaccounting principle, and changes the requirements for accounting for andreporting of a change in accounting principle.  SFAS 154 requires retrospectiveapplication to prior periods' financial statements of a voluntary change inaccounting principle unless it is impracticable. Prior accounting rulesrequired that most voluntary changes in accounting principle be recognized byincluding in net income of the period of the change the cumulative effect ofchanging to the new accounting principle. SFAS 154 will improve financialreporting because its requirements enhance the consistency of financialinformation between periods.  SFAS 154requires that a change in the method of depreciation, amortization, ordepletion for long-lived, non-financial assets be accounted for as a change inaccounting estimate that is affected by a change in accounting principle. Previously, such a change was reported as a change in accounting principle.  SFAS 154 iseffective for accounting changes and corrections of errors made beginningJanuary 1, 2006.  The Company does not expect that the adoption will have asignificant effect on its results of operations or financial condition whenadopted.

FASB Interpretation No. 47, *"Accounting for Conditional AssetRetirement Obligations"*("FIN 47").  Due to diverse accountingpractices, in March 2005, the FASB issued FIN 47 which states that an entity isrequired to recognize a liability for the fair value of a conditional assetretirement obligation (ARO) when incurred if the liability's fair value can bereasonably estimated.  The Interpretation clarifies when an entity would havesufficient information to reasonably estimate the fair value of the ARO.  AnARO would be reasonably estimable if: (a) it is evident that the fair value ofthe obligation is embodied in the acquisition price of the asset, (b) an activemarket exists for the transfer of the obligation, or (c) sufficient informationexists to apply an expected present value technique.  Upon application of FIN47, amounts will be measured using current information, assumptions andinterest rates.  The recognized asset retirement cost will be measured as ofthe date the ARO was incurred.  Cumulative accretion and accumulateddepreciation will be recorded for the time period from the date the liabilitywould have been recognized had the provisions of this Interpretation been ineffect when the liability was incurred to the date of adoption of thisInterpretation.  The cumulative effect of initially applying FIN 47 should berecognized as a change in accounting principle.  FIN 47 will be effective forthe year ending December 31, 2005.  The Company is currently evaluating theimpact of adopting FIN 47 and is unable to predict its impact on the Company'soperating results and financial position at this time.  

84

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The followingManagement's Discussion and Analysis of Financial Condition and Results ofOperations for PNMR, PNM and TNMP is presented both on a combined basis asapplicable, and on a separate basis.  For discussion purposes, this report willuse the term "Company" when discussing matters of common applicability to PNMR,PNM and TNMP.  Discussions regarding specific contractual obligations generallyreference the company that is legally obligated.  In the case of contractualobligations of PNM and TNMP, these obligations are consolidated with PNMR andits subsidiaries under GAAP.  

The Company ispositioned as a merchant utility, primarily operating as a regulated energyservice provider.  The Company is engaged in the sale and marketing ofelectricity in the competitive wholesale energy marketplace.  In addition,through First Choice, the Company is a retail electric provider in Texas under legislation that established retail competition.  As a utility, PNM has anobligation to serve its customers under the jurisdiction of the NMPRC whileTNMP operates under the jurisdiction of the PUCT in Texas and the NMPRC in New Mexico. 

In conjunction with theTNP acquisition, management changed its business segment reporting.  As itcurrently operates, PNMR's principal businesses include regulated operationsand unregulated operations.    

* ****RegulatedOperations***

The regulated operationsstrategy is directed at supplying reasonably priced and reliable energy toretail customers through customer-driven operational excellence, high qualitycustomer service, cost efficient processes, and improved overall organizationalperformance.

**PNM Electric**

** **PNM Electric is anintegrated electric utility that consists of generation, transmission anddistribution of electricity for retail electric customers in New Mexico andtransmission of sales to third parties as well as to PNM Wholesale and TNMP. PNM Electric provides retail electric service to a large area of north central New Mexico, including the cities of Albuquerque and Santa Fe, and certain other areas of New Mexico.  Customer rates for retail electric service are set by the NMPRC based on theprovisions of the Global Electric Agreement.  (See Note 9 - "Regulatoryand Rate Matters, Global Electric Agreement," in the Notes to ConsolidatedFinancial Statements.)  PNM Electric owns or leases transmission lines,interconnected with other utilities in New Mexico, south and east into Texas, west into Arizona, and north into Colorado and Utah.

**PNM Gas**

** **PNM Gas distributesnatural gas to most of the major communities in New Mexico, including two of New Mexico's three largest metropolitan areas, Albuquerque and Santa Fe.  Customer base forPNM Gas includes both sales-service customers and transportation-servicecustomers.  PNM Gas operates under a purchase gas adjustment clause that allowsit to purchase natural gas in the open market and resell it at cost to itsdistribution customers.  As a result, increases or decreases in gas revenuesresulting from wholesale gas price fluctuations do not impact the Company'sconsolidated gross margin or earnings.

85

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**TNMP Electric**

** **TNMP Electric is aregulated utility operating in Texas and New Mexico.  In Texas, TNMP providesregulated transmission and distribution services under TECA.  In New Mexico, TNMP provides integrated electric services that include the transmission,distribution, purchase and sale of electricity to its New Mexico customers aswell as transmission to third parties and to PNM.  TNMP's Texas and New Mexico operations are subject to traditional cost of service regulation.

***UnregulatedOperations***

**PNM Wholesale**

PNM Wholesale is engagedin the generation and sale of electricity into the wholesale market based ontwo product lines that include long-term contracts and short-term sales. PNM Wholesale also sells transmission services to TNMP.  Thesource of these sales is supply created by selling the unused capacity ofjurisdictional assets as well as the capacity of PNM's wholesale plantsexcluded from retail rates.  Both regulated and unregulated generation isjointly dispatched in order to improve reliability, provide the most economicpower to retail customers and maximize profits on any wholesale transactions. The strategy utilized by the Company calls for net asset-backed energy salessupported by long-term contracts into the wholesale market, whereby theCompany's aggregate net open forward electric sales position, includingshort-term sales and long-term contracts, is covered by its forecasted excessgeneration capacity.  Management actively monitors the net asset-backed salesby the use of stringent risk management policies.  The Company's future growthplans call for approximately 75% of its new generation portfolio to becommitted through long-term contracts as required by the Global ElectricAgreement Growth will be dependent on market development and on the Company'sability to generate funds for the future expansion.  The Company will continueto operate in the wholesale market and seek reasonably priced asset additions. Expansion of the Company's generating portfolio will depend on the Company'sability to acquire favorably priced assets at strategic locations and to securelong-term commitments for the purchase of power from the acquired plants.

**First Choice**

** **First Choice is acertified retail electric provider operating in Texas, which allows it toprovide electricity to residential, small and large commercial, industrial andinstitutional customers.  First Choice performs all activities in Texas with Texas retail customers, including acquiring new retail customers, setting upretail accounts, handling customer inquiries and complaints, and acting as aliaison between the transmission and distribution companies and retailcustomers.  First Choice was organized in 2000 to act as TNMP's affiliatedretail electric provider, as required by TECA.

86

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

***Corporate andOther***

PNMR was established asthe holding company in 2001.  On December 30, 2004, PNMR became a registeredholding company under PUHCA.  PNMR also created a new subsidiary called PNMRServices Company, which began operating on January 1, 2005. 

The comprehensive energylegislation signed by the President on August 8, 2005, will result in therepeal of PUHCA on a delayed basis.  PNMR is in the process of evaluating theeffects of that repeal, along with the other provisions of the legislation.

PNMR performedsubstantially all of the corporate activities of PNM from 2001 to 2004.  Theseactivities were billed to PNM on a cost basis to the extent they were for thecorporate management of PNM and were allocated to the business units.  The servicesfunctions previously performed by PNMR were assumed by PNMR Services Companyeffective January 1, 2005.

TNMP provided FirstChoice and TNP with corporate support services under a shared servicesagreement with First Choice and a similar agreement with TNP.  These serviceswere billed at TNMP's cost and, in return, TNP and First Choice compensatedTNMP for the use of the services.  These agreements were in effect through June6, 2005 when they were replaced by a new service arrangement.

Effective with theacquisition of TNP on June 6, 2005, (see Note 2 - "TNP Acquisition," in theNotes to the Consolidated Financial Statements) all TNMP employees who wereproviding corporate support to TNP and First Choice became employees of PNMRServices Company.  PNMR Services Company provides corporate services to all ofPNMR's business units including PNM, Avistar, Inc., TNP, TNMP and First Choicebased on shared services agreements.  These services are billed at cost on amonthly basis and are allocated to the business units. 

The following discussionand analysis should be read in conjunction with the consolidated financialstatements and related notes contained herein.  Trends and contingencies of amaterial nature are discussed to the extent known.  Refer to "DisclosureRegarding Forward Looking Statements" and "Risk Factors" at theend of this Item 2.

**COMPETITIVESTRATEGY**

The Company'svision is to "Build America's Best Merchant Utility." To achieve thisobjective, management intends to:  

*Grow Regulated and Unregulated Operations*.  The Company intends togrow both its retail and wholesale business by expanding its current operationsand by acquiring additional value-enhancing assets.  As evidenced by the Lunaand TNP acquisitions, the Company intends to continue to grow its revenues byexpanding its geographic coverage in the Southwest, a region which not onlyexhibits rapid customer and load growth, but which the Company knows well.  TheCompany plans to focus on best practices in integrating its acquisitions tocreate a stronger presence in the Southwest market.  The Company also intendsto increase its presence in the 

87

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Southwest market by buying additionalgenerating resources and selling power from those resources through long-termcontracts.  In addition, the Company expects that the acquisition of FirstChoice as part of the TNP acquisition will provide a solid foundation for entryinto the competitive retail market in Texas.  In addition, PNMR intends tocontinue to provide energy and technology related services through its whollyowned subsidiary, Avistar, Inc.

*Acquire AdditionalGenerating Assets in the Southwest Region*.  The Company intends to enhance anddiversify its presence in the Southwest region through the acquisition ofquality generation assets to serve the Company's retail and wholesale loadwhile maintaining diversity of fuel mix.  The Company plans to increaselong-term sales contracts in tandem with increases in its generation capacity. The Company expects to do this through the addition of gas-fired generationplants and the acquisition of coal-fired facilities, the acquisition ordevelopment of renewable or clean technology resources and/or the use oflong-term purchase contracts for power.  As in the past, the Company intends tocontinue a disciplined approach to any acquisition, to match acquisitions todemand and to hedge capacity with long-term contracts.

*Maintain Prudent CostControls*. Management continues to maintain cost control procedures and expects toimplement similar control procedures at TNMP and First Choice.  As a result ofPNM's coal contract, the Company's fuels group has also been able to mitigatethe Company's exposure to coal prices at the SJCC through December 2017, whichthe Company believes will help it improve or maintain gross margins if coalcosts rise. 

*Continue to Improve CreditStrength and Reduce Cost of Capital*.  A high priority and long term commitment is tomaintain the Company's investment grade rating in any type of regulatory ornatural gas or electricity price scenario.  The Company believes TNP offers anopportunity to derive additional value through the stronger credit profile ofthe combined entity.  Since December 31, 2002, the Company has reduced itsweighted average cost of long-term debt from 6.56% at December 31, 2002 to4.77% at December 31, 2004.  In addition, the Company expects to reduce TNP'scurrent financing costs by at least $40.0 million annually, on a pre-tax basis,through the refinancing of TNP's relatively high-cost capital.  In conjunction with theacquisition of TNP, on June 6, 2005, PNMR made an equity investment ofapproximately $110.5 million in TNP, which TNP used to repay in full amountsowing under TNP'scredit agreement. In addition, in July 2005, PNMR provided funds to TNP to enable TNP to redeemits preferred stock and senior notes.  See "Financing Activities - PNMR" belowin "Liquidity and Capital Resources" for further details of this transaction. 

*Commitment to CorporateCitizenship*. The Company is committed to its guiding principle, "Do the Right Thing."  Thiscommitment serves as the cornerstone of the Company's ethics and complianceefforts and underscores its effort to ensure that dealings with customers,employees, shareholders and business partners are above reproach.  This isevidenced by the Company's environmental sustainability program with aggressivefive-year goals for reducing water usage, improving air quality, reducing wastestreams and becoming a leader in the development of renewable energy. 

88

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**ACQUISITION**

** ***Acquisitionof TNP.* On June 6, 2005, PNMR acquired all of the outstanding common sharesof TNP and its subsidiaries, TNMP and First Choice.  The results of TNP'soperations have been included in the consolidated financial statements of PNMRfrom that date.  PNMR acquired TNP in order to complement its existing New Mexico electric operations and to expand into the retail and wholesale markets in Texas.  As of June 6, 2005, TNMP served 49,000 electric customers in southern New Mexico and 207,000 transmission and distribution customers in Texas.  First Choice is acompetitive retail electric provider in Texas, and served an additional 56,000electric customers as of June 6, 2005.

The aggregatepurchase price was $1,277 million, including a payment to the previous owner of$175.0 million consisting of $87.6 million of cash and common stock valued at$87.4 million.  In addition, PNMR assumed $1,034 million of TNP debt andpreferred stock and incurred transaction and other costs of $67.7 million.  Thevalue of the 4,326,336 common shares issued was determined based on $20.20 percommon share as provided for in the Stock Purchase Agreement.  The purchaseprice was based on an estimated purchase price in accordance with the StockPurchase Agreement, dated as of July 24, 2004 by and between PNMR and SWAcquisition.  The final purchase price will be determined under a specifiedadjustment mechanism.  PNMR had 45 days following the closing to propose afinal purchase price.  The end of the 45-day period was on July 21, 2005, andPNMR proposed a final purchase price on that date which would reflect areduction in the purchase price.  Under the Agreement, the seller had anopportunity to contest the proposed final purchase price and has notified PNMRthat it objects to PNMR's proposed adjustments.  There is a dispute mechanismfor resolving disputes regarding the final purchase price.  See Note 2 - "TNPAcquisition," in the Notes to Consolidated Financial Statements for additionalinformation.

Reference is made to the CurrentReport on Form 8-K/A filed by PNMR on August 2, 2005 in connection with theacquisition of TNP.  The Form 8-K/A incorporates by reference the audited andunaudited financial statements of TNP required by Form 8-K Item 9.01 (a) andincludes the pro forma financial information required by Form 8-K Item 9.01(b).

**OVERALLOUTLOOK**

The Company experiencedlower than expected earnings growth in the first six months of 2005 primarilydue to unexpected plant outages, the extension of planned outages, the accelerationof a scheduled outage and other non-recurring charges for refinancing and TNPacquisition integration costs.  The Company expects to incur lower plantoperating costs and recover a portion of the reduction in revenue related tothe accelerated outage schedule in the fourth quarter of 2005 when the SJGSUnit 4 planned outage would otherwise have occurred. In addition, the Companyexpects to experience added earnings growth resulting from the acquisition ofTNP.   

89

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**RESULTS OF OPERATIONS**

**Three Months Ended June 30, 2005Compared to Three Months Ended June 30, 2004**

**PNMR**

PNMR'snet earnings for the three months ended June 30, 2005 were $1.5 million or$0.02 per diluted share of common stock, compared to $16.8 million or $0.28 perdiluted share of common stock in the three months ended June 30, 2004.  Thedecrease in earnings was driven primarily by acquisition related costs andother non-recurring charges of $11.1 million, net of income taxes, whichconsisted of TNP debt refinancing costs of $4.2 million, acquisitionintegration costs of $2.8 million, the write-off of software costs of $2.7million and the recognition of a regulatory liability of $1.4 millionassociated with the NMPRC's approval of the TNP acquisition.  In addition, asnoted above in "Overall Outlook, " PNM experienced poor plant performance dueto unexpected plant outages and the extension of plant outages, which reducedthe amount of electricity PNM sold in the wholesale market and forced PNM topurchase power at higher market prices to meet jurisdictional and wholesaleneeds.  These decreases to net earnings were partially offset by the additionof the TNP operations for June 6 through June 30, 2005.

Thefollowing discussion is based on the methodology that management uses for makingoperating decisions and assessing performance of its various businessactivities.  See Note 3 - "Segment Information," in the Notes to theConsolidated Financial Statements for additional information regarding theseresults and the consolidated financial statements.

Inaddition, adjustments related to EITF Issue 03-11, "*Reporting Realized Gainsand Losses on Derivative Instruments That Are Subject to FASB Statement No. 133and Not Held for Trading Purposes*", are excluded.  This accountingpronouncement requires a net presentation of realized gains and losses forcertain non-trading derivatives.  Management evaluates wholesale operations ona gross presentation basis due to its primarily net-asset-backed marketingstrategy and the importance it places on PNMR's ability to repurchase andremarket previously sold capacity.

Corporatecosts, income taxes and non-operating items are discussed on a consolidatedbasis for PNMR and are in conformity with the presentation in the PNMRconsolidated financial statements.

90

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**RegulatedOperations**

**PNM Electric**

Thetable below sets forth the operating results for PNM Electric.

** **
**Three Months Ended June 30,**         
**2005**

**2004**

**Variance**
         (In thousands)      
**Operating revenues:**

**$ 138,781**

**$ 135,114**

**$  3,667**

Less: Cost of energy

44,998

45,775

(777)

            Intersegment energy transfer

(3,412)

(10,924)

7,512

**Gross margin**

**97,195**

** **

**100,263**

** **

**(3,068)**

Energy production costs

31,800

29,268

2,532

Transmission and distribution O&M

7,240

7,331

(91)

Customer related expense

4,679

4,545

134

Administrative and general

2,411

2,436

(25)

**  Total non-fuel O&M**

**46,130**

** **

**43,580**

** **

**2,550**

Corporate allocation

14,753

17,897

(3,144)

Depreciation and amortization

17,495

16,690

805

Taxes  other than income taxes

4,590

4,975

(385)

Income taxes

2,278

3,342

(1,064)

**  Total non-fuel operating expenses**

**85,246**

** **

**86,484**

** **

**(1,238)**

**Operating income**

**$   11,949**

**$ 13,779**

** **

**$ (1,830)**

Thefollowing table shows electric revenues by customer class and averagecustomers:

**PNM ElectricRevenues**

**Three Months Ended**

** **

**June 30,**

** **

**2005**

** **

**2004**

**Variance**

(In thousands except  customers)

Residential

$  50,044

$  46,821

$ 3,223

Commercial

63,723

63,114

609

Industrial

15,340

15,373

(33)

Transmission

4,574

4,420

154

Other

5,100

5,386

(286)

$138,781

$135,114

$ 3,667

** **

Average customers   	

416,231

405,325

10,906

91

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Thefollowing table shows electric sales by customer class:
PNM Electric Sales
**Three Months Ended**

** **

**June 30,**

** **

**2005**

** **

**2004**

**Variance**

(Megawatt hours)

Residential

606,419

567,825

38,594

Commercial

872,242

862,490

9,752

Industrial

317,672

318,633

(961)

Other

62,147

65,038

(2,891)

1,858,480

1,813,986

44,494

Operatingrevenues increased $3.7 million, or 2.7%, from the prior year quarter.  Retailelectricity sales increased 2.5%, to 1.9 million MWh in the second quarter of2005 compared to 1.8 million MWh in the second quarter of 2004.  Customergrowth was 2.7% quarter over quarter and a 2.2% increase in weather normalizedretail electric load growth resulted in a $3.4 million increase in revenues. 

Thegross margin, or operating revenues minus cost of energy sold and intersegmentenergy transfer, decreased $3.1 million, or 3.1%, over the prior year quarterdue to a reduction in power plant availability and higher purchase powerprices, partially offset by retail load growth.

Totalnon-fuel O&M expenses increased $2.6 million, or 5.9%, over the prior yearquarter primarily due to increased energy production costs.  Energy productioncosts increased $2.5 million, or 8.7%, due to higher plant maintenance costs inthe second quarter of 2005 compared to the same period in 2004.  Plant outagesat SJGS increased costs by $1.4 million.  A planned outage at Reeves increasedcosts $0.7 million.  A forced outage at Four Corners in the second quarter of2005 caused a $0.5 million increase. 

Depreciationand amortization increased $0.8 million, or 4.8%, over the prior year quarterdue to asset and software additions placed in service in December 2004.  TheCompany expects to see depreciation continue to increase in the future as aresult of increased investment in new information technology platforms.

** TNMPElectric**

** **PNMRacquired TNP on June 6, 2005, and results in this section are presented fromthe acquisition date forward only.  For the three months, which includesresults from June 6 to June 30, 2005, the TNMP Electric segment increased PNMRrevenues by $19.2 million.

92

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Thetable below sets forth the operating results for TNMP Electric.

**For the Period**

**June 6 - June 30, 2005**

(In thousands)

 
**Operating revenues**:

 External customers

$ 19,224

 Intersegment revenues

11

 **Total revenues**

**19,235**

Less: Cost of energy

6,702

**Gross margin**

**12,533**

Transmission and distribution O&M

1,150

Customer related expense

302

Administrative and general

288

**  Total non-fuel O&M**

1,740

Corporate allocation

1,461

Depreciation and amortization

2,085

Taxes other than income taxes

1,885

Income taxes

1,218

**  Total non-fuel operating expenses**          	

**8,389**

**Operating income**

**$   4,144**

Thefollowing table shows electric revenues by customer class and averagecustomers:

**TNMP ElectricRevenues**

**For the Period**

**June 6 - June  30, 2005**

(In  thousands except customers)

Residential

$   8,664

General Services

2,257

Primary/Economy/Transmission

2,595

Secondary

3,314

Municipal/Lighting

616

Other

1,789

$ 19,235

** **

Average customers

258,251

93

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Thefollowing table shows electric sales by customer class:
TNMP Electric Sales
**For the Period**

**June 6 - June  30, 2005**

(Megawatt  hours)

Residential

297,972

General Services

17,340

Primary/Economy/Transmission

145,458

Secondary

148,198

Municipal/Lighting

9,450

618,418

** PNM Gas**

Thetable below sets forth the operating results for PNM Gas.

**Three Months  Ended**

** **

** **

**June 30,**

** **

** **

**2005**

** **

**2004**

** **

**Variance**

(In thousands)

**Operating revenues**:

**$ 82,384**

** **

** **

**$ 80,886**

** **

**$ 1,498**

Less: Cost of energy

53,292

51,650

1,642

**Gross margin**

**29,092**

** **

** **

**29,236**

** **

**(144)**

Energy production costs

569

480

89

Transmission and distribution O&M           	

6,672

6,807

(135)

Customer related expense

5,038

4,729

309

Administrative and general

1,359

1,388

(29)

**  Total non-fuel O&M**

**13,638**

** **

** **

**13,404**

** **

**234**

Corporate allocation

8,514

9,868

(1,354)

Depreciation and amortization

5,596

4,738

858

Taxes other than income taxes

2,058

1,867

191

Income taxes

(1,433)

(1,338)

(95)

**  Total non-fuel operating expenses**           	

**28,373**

** **

** **

**28,539**

** **

**(166)**

**Operating income**

**$     719**

** **

** **

**$      697**

** **

**$      22**

94

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Thefollowing table shows gas revenues by customer and average customers:

**PNM Gas Revenues**

**Three Months Ended**

** **

**June 30,**

** **

**2005**

** **

**2004**

**Variance**

(In thousands except  customers)

Residential

$ 43,350

$  39,053

$  4,297

Commercial

13,418

12,796

622

Industrial

282

622

(340)

Transportation*

3,129

3,639

(510)

Other

22,205

24,776

(2,571)

$ 82,384

$ 80,886

$  1,498

** **

Average customers

469,797

459,398

10,399

*  Customer owned gas.

Thefollowing table shows gas throughput by customer class:
PNM Gas Throughput
**Three Months Ended**

** **

**June 30,**

** **

**2005**

** **

**2004**

**Variance**

(Thousands of decatherms)

Residential

3,946

3,334

612

Commercial

1,576

1,455

121

Industrial

45

88

(43)

Transportation*

9,102

13,014

(3,912)

Other

3,194

4,077

(883)

17,863

21,968

(4,105)

*Customer-ownedgas

Operatingrevenues increased $1.5 million, or 1.9%, over the prior year quarter. Residential and commercial revenues increased $4.3 million and $0.6 million,respectively, primarily due to average customer growth of 2.3%.  Theseincreases were partially offset by total gas sales volumes, which decreased18.7% primarily due to decreased off-system transportation volume caused by areduced basis difference between the Permian and San Juan basins, resulting indecreased revenues of $0.9 million, which is included in the $0.5 millionchange in transportation revenues.  In addition, other revenue decreased $2.6million primarily due to less off-system gas sales opportunities and lowerirrigation usage.

 95

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Depreciationand amortization increased $0.9 million, or 18.1%, over the prior year quarterprimarily due to asset and software additions placed in service in December2004.  The Company expects to see depreciation continue to increase in thefuture as a result of increased investment in new information technologyplatforms.

** UnregulatedOperations**

** PNMWholesale**

Thetable below sets forth the operating results for PNM Wholesale.

** **

**Three Months Ended**

** **

** **

** **

**June 30, 2005**

** **

** **

** **

**2005**

** **

**2004**

** **

**Variance**
** **

(In thousands)

**Operating revenues**:

**$ 142,282**

** **

**$ 163,684**

** **

**$ (21,402)**

Less: Cost of energy

119,653

125,507

(5,854)

            Intersegment energy transfer

3,412

10,924

(7,512)

**Gross margin**

**19,217**

** **

**27,253**

** **

**(8,036)**

Energy production costs

7,447

6,940

507

Transmission and distribution O&M

13

13

-

Customer related expense

104

469

(365)

Administrative and general

1,689

2,415

(726)

**  Total non-fuel O&M**

**9,253**

** **

**9,837**

** **

**(584)**

Corporate allocation

1,016

1,177

(161)

Depreciation and amortization

4,041

3,754

287

Taxes other than income taxes

811

876

(65)

Income taxes

44

3,253

(3,209)

**  Total non-fuel operating expenses**           	

**15,165**

** **

**18,897**

** **

**(3,732)**

**Operating income**

**$     4,052**

** **

**$     8,356**

** **

**$  (4,304)**

Thefollowing table shows revenues by customer class:

**PNM Wholesale Revenues**

**Three Months Ended**

** **

**June 30,**

** **

**2005**

** **

**2004**

**Variance**

(In thousands)

Long-term contracts*

$  37,897

$ 40,302

$   (2,405)

Short-term sales *

104,385

123,382

(18,997)

$142,282

$163,684

$ (21,402)

*Includesmark-to-market gains/(losses).

96

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Thefollowing table shows sales by customer class:

**PNM WholesaleSales**

**Three Months Ended**

** **

**June 30,**

** **

**2005**

** **

**2004**

**Variance**

(Megawatt hours)

Long-term contracts

563,482

718,389

(154,907)

Short-term sales

1,949,416

2,530,319

(580,903)

2,512,898

3,248,708

(735,810)

Operatingrevenues decreased $21.4 million, or 13.1%, from the prior year quarter.  Thisdecrease in wholesale electric sales primarily reflects lower sales volumesresulting from below normal levels of plant performance.  This decrease was partiallyoffset by higher average wholesale sales prices, which increased 8.3% over theprior year quarter.  Long-term contracts revenues decreased $2.4 million from2004 due primarily to the expiration of a customer contract, partially offsetby increased load growth and index-based prices on existing contracts andhigher SO2 sales.  Short-term sales decreased $19.0 million compared to thesecond quarter of 2004 due to decreased volumes caused by a reduction in plantavailability, partially offset by an increase in sales prices.  PNM Wholesalesold wholesale (bulk) power of 2.5 million MWh of electricity for the threemonths ended June 30, 2005 compared to 3.2 million MWh for the same period in2004, a decrease of 22.6%.  

Thegross margin, or operating revenues minus cost of energy sold and intersegmentenergy transfer, decreased $8.0 million, or 29.5%, from the prior yearquarter.  Decreased plant availability reduced the availability of lessexpensive excess energy for sale in the wholesale market.  In addition, higherpurchase power contract prices further reduced margin.  Long-term sales margindecreased $0.6 million due to lower sales volumes resulting from the expirationof a long-term contract and increased use of gas-fired generation to compensatefor the Company's base plant outages.  Short-term margin decreased $7.4 millionprimarily resulting from lower plant availability and increased purchase powerprices.  PNM Wholesale had an unfavorable change in the unrealizedmark-to-market position of $1.0 million ($0.2 million gain in 2005 versus $1.2million gain in 2004).

Totalnon-fuel O&M decreased $0.6 million, or 5.9%, from the prior year quarter. Energy production costs increased $0.5 million primarily due to higher plantmaintenance costs in 2005 compared to 2004, resulting from the plant outages. Customer-related expense decreased $0.4 million due to lower bonus costs. Administration and general expense decreased $0.7 million, primarily due to acustomer billing settlement.  Depreciation and amortization expenses increased$0.3 million due to the addition of new technology platforms that were placedin service in December 2004.  The Company expects to see depreciation increasein the future as a result of this increased investment in new technologyplatforms.

97

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**FirstChoice**

PNMRacquired TNP on June 6, 2005.  Results in this section are presented from theacquisition date forward only.  For the three months ended June 30, 2005, whichincludes results from June 6 to June 30, 2005, the First Choice segmentincreased PNMR revenues by $43.0 million.

Thetable below sets forth the operating results for First Choice.

**For the Period**

**June 6 - June 30, 2005**

(In thousands)

 
**Operating revenues**:

 External customers

$ 43,031

 Intersegment revenues

-

 **Total revenues**

**43,031**

Less: Cost of energy

34,083

**Gross margin**

**8,948**

Energy production costs

-

Transmission and distribution O&M

-

Customer related expense

466

Administrative and general

1,089

**  Total non-fuel O&M**

1,555

Corporate allocation

1,130

Depreciation and amortization

105

Taxes other than income taxes

512

Income taxes

2,020

**  Total non-fuel operating expenses**

**5,322**

**Operating income**

**$   3,626**

Thefollowing table shows electric revenues by customer class and averagecustomers:

**First ChoiceElectric Revenues**

**For the Period**

**June 6 - June  30, 2005**

(In  thousands except customers)

Residential

$ 29,265

Mass-market

6,615

Mid-market

5,864

Other

1,287

$ 43,031

** **

Average customers

216,782

98

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Thefollowing table shows electric sales by customer class:
First Choice Electric Sales
**For the Period**

**June 6 - June  30, 2005**

(Megawatt  hours)

Residential

246,332

Mass-market

55,424

Mid-market

67,420

Other

2,949

372,125

** Corporateand Other**

** ***CorporateAdministrative and General Expenses*

Corporateadministrative and general expenses, which represent costs that are drivenprimarily by corporate-level activities, are allocated to the business segmentsand presented in the corporate allocation line item in the segment statements. These costs increased $7.1 million or 27.5 % over the prior year period to$33.0 million.  This increase is due to acquisition-related costs of $3.2million, increased labor costs of $1.9 million resulting from the transfer ofemployees from operations to corporate, increased legal costs of $0.7million related to PUHCA filings, financing of PNMR's hybrid income termsecurities and tax matters and increased audit fees of $0.6 million.

**PNMRConsolidated**

*OtherIncome and Deductions*

Interestincome increased $2.8 million, or 31.4%, due to short-term interest of $1.7million from PNMR's investment in hybrid income term securities, favorableinvestment performance in PNMR's cash management program resulting in increasedinterest of $0.6 million.

Otherincome increased $0.9 million, or 50.9% due to increased gains of $0.7 millionfrom investments in PNMR's cash management program and other miscellaneousinvestment income of $0.6 million.  

Carrying charges on regulatory assets were $0.5 million in 2005. This income represents interest from TNMP regulatory assets from the date ofacquisition.

Otherdeductions increased $6.3 million due to the write-off of software costs of$4.5 million and other miscellaneous adjustments of $1.9 million.  

*InterestCharges*

* *Interest chargesincreased $8.9 million due to refinancing costs of $3.2 million related to thehybrid income term securities, short-term interest costs of $0.9 million foroperations and $4.0 million related to debt from the TNP operations, which PNMRdid not have in the prior year. 

99

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*IncomeTaxes*

PNMR'sconsolidated income tax expense was $1.3 million for the three months endedJune 30, 2005, compared to $9.7 million for the three months ended June 30,2004.  The decrease was due to the impact of lower pre-tax earnings.  PNMR'seffective income tax rates for the three months ended June 30, 2005 and 2004were 26.62% and 36.33%, respectively.  The decrease in the effective tax ratewas due to an increase in permanent tax benefits.

**RESULTS OF OPERATIONS**

** Six Months Ended June 30, 2005Compared to Six Months Ended June 30, 2004**

**PNMR**

PNMR'snet earnings for the six months ended June 30, 2005 were $32.1 million or $0.50per diluted share of common stock, a 23.0% decrease in net earnings compared to$41.6 million or $0.68 per diluted share of common stock in the six monthsended June 30, 2004. The decrease in earnings was driven primarily byacquisition related costs and other non-recurring charges of $11.1 million, netof income taxes, which consisted of TNP debt refinancing costs of $4.2 million,acquisition integration costs of $2.8 million, software write-off of $2.7million and the recognition of a regulatory liability of $1.4 millionassociated with the NMPRC's approval of the TNP acquisition.  In addition, theCompany experienced poor plant performance, which reduced the amount ofelectricity the Company sold on the wholesale market and forced the Company topurchase power at higher market prices to meet jurisdictional and wholesaleneeds.  These decreases to net earnings were partially offset by the additionof the TNP operations for June 6 through June 30, 2005 and an increase in costof service gas rates.

Thefollowing discussion is based on the methodology that management uses formaking operating decisions and assessing performance of its various businessactivities.  See Note 3 - "Segment Information," in the Notes to ConsolidatedFinancial Statements for additional information regarding these results and theconsolidated financial statements.

Inaddition, adjustments related to EITF Issue 03-11, "*Reporting Realized Gainsand Losses on Derivative Instruments That Are Subject to FASB Statement No. 133and Not Held for Trading Purposes*", are excluded.  This accountingpronouncement requires a net presentation of realized gains and losses forcertain non-trading derivatives.  Management evaluates wholesale operations ona gross presentation basis due to its primarily net-asset-backed marketingstrategy and the importance it places on the Company's ability to repurchaseand remarket previously sold capacity.

Corporatecosts, income taxes and non-operating items are discussed on a consolidatedbasis for PNMR and are in conformity with the presentation in the PNMR consolidatedfinancial statements.

100

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**PNMElectric**

Thetable below sets forth the operating results for PNM Electric.

** **

**Six Months Ended**

** **

** **

**June 30,**

** **

** **

**2005**

**2004**

**Variance**

** **

(In thousands)

**Operating revenues:**

**$ 272,963**

**$ 269,564**

**$   3,399**

Less: Cost of energy

92,401

90,872

1,529

            Intersegment energy transfer           	

(17,535)

(24,337)

6,802

**Gross margin**

**198,097**

** **

**203,029**

** **

**(4,932)**

Energy production costs       	

60,281

59,091

1,190

Transmission and distribution O&M           	

14,625

15,224

(599)

Customer related expense    	

8,700

8,655

45

Administrative and general  

4,741

2,614

2,127

**  Total non-fuel O&M**         	

**88,347**

** **

**85,584**

** **

**2,763**

Corporate allocation

30,211

35,198

(4,987)

Depreciation and amortization

35,053

33,368

1,685

Taxes other than income taxes

10,018

10,457

(439)

Income taxes

6,870

8,329

(1,459)

**  Total non-fuel operating expenses**

**170,499**

** **

**172,936**

** **

**(2,437)**

**Operating income**

**$    27,598**

**$    30,093**

** **

**$ (2,495)**

Thefollowing table shows electric revenues by customer class and averagecustomers:

**PNM ElectricRevenues**

**Six Months Ended**

** **

**June 30,**

** **

**2005**

** **

**2004**

**Variance**

(In thousands except  customers)

Residential

$ 104,058

$ 100,953

$ 3,105

Commercial

119,889

119,865

24

Industrial

30,543

30,260

283

Transmission

9,038

8,834

204

Other

9,435

9,652

(217)

$ 272,963

$ 269,564

$ 3,399

** **

Average customers

415,028

404,285

10,743

101

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Thefollowing table shows electric sales by customer class:

**PNM Electric Sales**

**Six Months Ended**

** **

**June 30,**

** **

**2005**

** **

**2004**

**Variance**

(Megawatt hours)

Residential

1,260,512

1,223,309

37,203

Commercial

1,639,618

1,639,332

286

Industrial

633,488

629,308

4,180

Other  

114,016

115,727

(1,711)

3,647,634

3,607,676

39,958

Operatingrevenues increased $3.4 million, or 1.3%, over the prior year.  Retailelectricity sales increased 1.1%, to 3.65 million MWh in the first six monthsof 2005 compared to 3.61 million MWh in the first six months of 2004.  HeatingDegree Days for Albuquerque declined approximately 2.5% to 2,778 during the sixmonths ended June 30, 2005 compared to 2,848 during the six months ended June30, 2004, resulting in a decrease in revenues of $1.0 million.  In addition, adecrease of $1.3 million was attributable to the 2004 leap year, with 2005including one less day of revenues.  Customer growth was 2.7% year over yearand weather-normalized retail electric load growth was 2.1% in 2005.  Averagecustomer load growth, when normalized for the impact of weather and the leapyear, increased revenues by $5.6 million. 

Thegross margin, or operating revenues minus cost of energy sold and intersegmentenergy transfer, decreased $4.9 million, or 2.4%, from the prior year due to areduction in power plant availability due to plant outages and higher purchasepower prices, partially offset by retail load growth.

Totalnon-fuel O&M expenses increased $2.8 million, or 3.2%, over the prioryear.  Energy production costs increased $1.2 million, or 2.0%, due to higherplant maintenance costs in the six months ended June 30, 2005 compared to thesame period in 2004.  Plant outage costs at SJGS increased $1.1 million andReeves planned outages increased costs $1.7 million.  These increases werepartially offset by reduced outage costs at Four Corners of $1.2 million.  OnMarch 26, 2005, a circulating water pipe ruptured and forced SJGS Unit Four tobe taken offline.  This unexpected three-week outage was combined with aplanned minor overhaul of the same unit as the Company then accelerated theplanned outage to minimize the economic impact of the shutdown.  SJGS Unit Fourwas back online on April 17, 2005.  Energy production costs increased due tothis outage, however the Company expects to have lower operating costs andrecover a portion of the lost revenue in the fourth quarter of 2005 when thePVNGS Unit Four planned outage would otherwise have occurred. 

Transmissionand distribution O&M expense decreased $0.6 million, or 3.9%, primarily dueto reductions of meter-related costs, maintenance costs and labor costs in2005.  Administrative and general increased $2.1 million over the prior yearprimarily due to increased labor costs of $1.3 million due in part to salaryincreases, increased benefit costs at SJGS of $0.3 million, and increased legalcosts of $0.3 for routine business matters.

102

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Depreciationand amortization increased $1.7 million, or 5.1%, over the prior year due toasset and software additions placed in service in December 2004.  The Companyexpects to see depreciation continue to increase in the future as a result ofincreased investment in new information technology platforms.

**TNMPElectric**

PNMRacquired TNP on June 6, 2005.  The operating results that are included on aconsolidated basis in PNMR's financial statements for the six months ended June30, 2005 for TNMP, a subsidiary of TNP, are the same as the three months endedJune 30, 2005.

** PNM Gas**

Thetable below sets forth the operating results for PNM Gas.

**Six Months Ended**

** **

** **

**June 30,**

** **

** **

**2005**

** **

**2004**

** **

**Variance**

(In thousands)

**Operating revenues**:

**$ 247,670**

** **

** **

**$ 256,760**

** **

**$ (9,090)**

Less: Cost of energy   

167,727

180,798

(13,071)

**Gross margin**

**79,943**

** **

** **

**75,962**

** **

**3,981**

Energy production costs

1,197

1,013

184

Transmission and distribution O&M           	

13,367

14,392

(1,025)

Customer related expense

9,313

8,865

448

Administrative and general

2,538

1,957

581

**  Total non-fuel O&M**

**26,415**

** **

** **

**26,227**

** **

**188**

Corporate allocation

17,883

19,466

(1,583)

Depreciation and amortization

11,172

9,467

1,705

Taxes other than income taxes

4,006

4,025

(19)

Income taxes

5,795

4,474

1,321

**  Total non-fuel operating expenses**

**65,271**

** **

** **

**63,659**

** **

**1,612**

**Operating income**

**$   14,672**

** **

** **

**$  12,303**

** **

**$    2,369**

103

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Thefollowing table shows gas revenues by customer and average customers:

**PNM Gas Revenues**

**Six Months Ended**

** **

**June 30,**

** **

**2005**

** **

**2004**

**Variance**

(In thousands except  customers)

Residential

$ 151,619

$ 154,791

$ (3,172)

Commercial

45,349

48,952

(3,603)

Industrial

925

1,290

(365)

Transportation*

7,117

7,943

(826)

Other  

42,660

43,784

(1,124)

$ 247,670

$ 256,760

$ (9,090)

** **

Average customers

470,066

460,263

9,803

*  Customer owned gas.

Thefollowing table shows gas throughput by customer class:

**PNM Gas Throughput**

**Six Months Ended**

** **

**June 30,**

** **

**2005**

** **

**2004**

**Variance**

(Thousands of decatherms)

Residential

16,704

17,348

(644)

Commercial

5,885

6,273

(388)

Industrial

130

192

(62)

Transportation*

17,252

20,734

(3,482)

Other

5,985

7,135

(1,150)

45,956

51,682

(5,726)

*Customer-ownedgas

Operatingrevenues decreased $9.1 million, or 3.5%, over the prior year.  Warmer weatherin 2005 compared to 2004 caused a $4.5 million decrease in revenues.  As notedabove in "PNM Electric", Heating Degree Days for Albuquerque declinedapproximately 2.5% in 2005 compared to 2004.  In addition, total gas salesvolumes decreased 11.1% primarily due to decreased off-system transportationvolume caused by a reduced basis difference between the Permian and San Juan basins, resulting in decreased revenues of $0.9 million.  In addition, otherrevenue decreased $1.1 million primarily due to lower irrigation customerusage.  These decreases were offset somewhat by average customer growth of2.1%, which increased gas revenues $2.6 million, and an increase of $6.7million due to a cost of service rate increase beginning in April 2004.

104

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Thegross margin, or operating revenues minus cost of energy sold, increased $4.0million, or 5.2%, over the prior year.  This increase was due mainly tocustomer growth and the NMPRC-approved rate increase, partially offset by theimpact of warmer weather in 2005 compared to 2004 described above.  

Totalnon-fuel O&M expenses were largely unchanged over the prior year. Transmission and distribution O&M expense decreased $1.0 million, or 7.1%,primarily due to reduced labor costs.  This decrease was mostly offset by a$0.6 million increase in administrative and general expense, which was alsoprimarily attributable to labor costs.

Depreciationand amortization increased $1.7 million, or 18.0%, over the prior yearprimarily due to asset and software additions placed in service in December2004.  The Company expects to see depreciation continue to increase in thefuture as a result of increased investment in new information technologyplatforms.

** UnregulatedOperations**

** PNMWholesale**

Thetable below sets forth the operating results for PNM Wholesale.

** **

**Six Months Ending**

** **

** **

** **

**June 30,**

** **

** **

** **

**2005**

** **

**2004**

** **

**Variance**

** **

** **

** **

** **

** **

** **

**Operating revenues**:

**$ 274,286**

** **

**$ 291,175**

** **

**$ (16,889)**

Less: Cost of energy

208,965

215,373

(6,408)

            Intersegment energy transfer           	

17,535

24,337

(6,802)

**Gross margin**

**47,786**

** **

**51,465**

** **

**(3,679)**

Energy production costs

14,402

14,138

264

Transmission and distribution O&M

21

26

(5)

Customer related expense

382

888

(506)

Administrative and general

3,383

3,978

(595)

**  Total non-fuel O&M**

**18,188**

** **

**19,030**

** **

**(842)**

Corporate allocation

2,053

2,309

(256)

Depreciation and amortization

8,028

7,508

520

Taxes other than income taxes

1,727

1,799

(72)

Income taxes

3,875

5,555

(1,680)

**  Total non-fuel operating expenses**           	

**33,871**

** **

**36,201**

** **

**(2,330)**

**Operating income**

**$  13,915**

** **

**$   15,264**

** **

**$  (1,349)**

105

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Thefollowing table shows revenues by customer class:

**PNM Wholesale Revenues**

**Six Months Ended**

** **

**June 30,**

** **

**2005**

** **

**2004**

**Variance**

(In thousands)

Long-term contracts*

$  75,372

$   76,884

$  (1,512)

Short-term sales *

198,914

214,291

(15,377)

$274,286

$ 291,175

$(16,889)

*Includesmark-to-market gains/(losses).

Thefollowing table shows sales by customer class:

**PNM WholesaleSales**

**Six Months Ended**

** **

**June 30,**

** **

**2005**

** **

**2004**

**Variance**

(Megawatt hours)

Long-term contracts

1,288,885

1,432,810

(143,925)

Short-term sales

4,074,439

4,797,164

(722,725)

5,363,324

6,229,974

(866,650)

Operatingrevenues decreased $16.9 million, or 5.8%, from the prior year.  This decreasein wholesale electric sales primarily reflects lower sales volumes resultingfrom below normal levels of plant performance.  This decrease was partiallyoffset by average wholesale sales prices, which increased 10.6% over the prioryear period.  Long-term contracts revenues decreased $1.5 million, or 2.0% from2004 due primarily to the expiration of a customer contract, partially offsetby increased load growth and index-based prices of existing contracts andhigher SO2 credit sales.  Short-term sales decreased $15.4 million primarilydue to decreased volumes caused by a reduction in plant availability, partiallyoffset by higher sales prices.  The Company sold wholesale (bulk) power of 5.4million MWh of electricity for the six months ended June 30, 2005 compared to6.2 million MWh for the same period in 2004, a decrease of 13.9%.  

Thegross margin, or operating revenues minus cost of energy sold and intersegmentenergy transfer, decreased $3.7 million, or 7.2%, from the prior year. Decreased plant availability and higher purchase power contract pricesdecreased the availability of less expensive excess energy for sale in thewholesale market.  Long-term sales margin decreased $0.6 million due to lowersales volumes and increased use of gas-fired generation to compensate for theCompany's base plant outages.  These margin decreases were partially offset byincreased load growth on existing contracts and higher SO2 credit sales. Short-term margin decreased $3.1 million primarily resulting from lower plantavailability.  The Company had an unfavorable change in the unrealizedmark-to-market position of $0.5 million ($1.1 million gain in 2005 versus $1.6million gain in 2004).

106

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Totalnon-fuel O&M decreased $0.8 million, or 4.4%, from the prior year. Customer related expense decreased $0.5 million due to lower bonus costs. Administration and general decreased $0.6 million primarily due to a customerbilling settlement in 2004.  

Depreciationand amortization increased $0.5 million, or 6.9%, over the prior year due tothe addition of new technology platforms that were placed in service inDecember 2004.  The Company expects to see depreciation increase in the futureas a result of this increased investment in new technology platforms. 

** FirstChoice**

** **PNMResources acquired TNP Enterprises on June 6, 2005.   The operating resultsthat are included on a consolidated basis for PNMR's financial statements forthe six months ended June 30, 2005 for First Choice, a subsidiary of TNP, arethe same as the three months ended June 30, 2005.

**Corporateand Other**

*CorporateAdministrative and General Expenses*

Corporateadministrative and general expenses, which represent costs that are drivenprimarily by corporate-level activities, are allocated to the business segmentsand presented in the corporate allocation line item in the segment statements. These costs increased $4.6 million or 8.4 % over the prior year to $59.2million.  This increase is due to acquisition related costs of $3.2 million,increased labor costs of $2.3 million resulting from the transfer of employeesfrom operations to corporate,increased legal costs of $1.6 million related to PUHCA filings, financing ofPNMR's hybrid income term securities and business and tax matters and increasedand increased audit fees of $0.6 million.  These increases were partiallyoffset by lower pension and benefits costs of $3.8 million resulting fromhigher returns on pension investments.

** PNMRConsolidated**

* OtherIncome and Deductions*

* *Interestincome increased $2.2 million, or 11.5% due to short-term interest of $1.7million from PNMR's investment in hybrid income term securities, favorableinvestment performance in PNMR's cash management program resulting in increasedinterest of $1.3 million.

Otherincome increased $2.9 million, or 85.9%, due to increased gains of $1.7 millionfrom investments in PNMR's cash management program and $1.1 million frominvestments in PNM's decommissioning trust and other miscellaneous investmentincome of $0.3 million.

Carrying charges on regulatory assets were $0.5 million in 2005. This income represents interest from TNMP regulatory assets from the date ofacquisition.

Otherdeductions increased $6.0 million due to the write-off of software costs of$4.5 million and other miscellaneous adjustments of $1.6 million.  

107

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*InterestCharges*

* *Interest chargesincreased $8.7 million due to refinancing costs of $3.2 million related to thehybrid income term securities, short-term interest costs of $0.9 million foroperations and $4.0 million related to debt from the TNP operations, which PNMRdid not have in the prior year. 

*IncomeTaxes*

PNMR'sconsolidated income tax expense was $18.6 million for the six months ended June30, 2005, compared to $24.0 million for the six months ended June 30, 2004.  The decrease was due to the impact of lower pre-tax earnings.  PNMR's effectiveincome tax rates for the six months ended June 30, 2005 and 2004 were 35.17%and 36.41%, respectively.  The decrease in the effective tax rate was due to anincrease in permanent tax benefits.

**RESULTS OF OPERATIONS**

**Three Months Ended June 30, 2005Compared to Three Months Ended June 30, 2004**

**PNM**

PNM'ssegments are PNM Electric, PNM Gas and PNM Wholesale and are identical to thesegments presented above in "Results of Operations" for PNMR. Income taxes andnon-operating items are discussed on a consolidated basis for PNM and are inconformity with the presentation in PNM's consolidated financial statements.

** PNM Consolidated**

** ***OtherIncome and Deductions*

Otherincome increased $0.4 million, or 23.1%, due to increased gains frominvestments in PNM's cash management program.  Other deductions increased $5.4million due to the write-off of software costs of $4.5 million and othermiscellaneous adjustments of $0.9 million.  

* IncomeTaxes*

PNM'sconsolidated income tax expense was $2.5 million for the three months endedJune 30, 2005, compared to $9.0 million for the three months ended June 30,2004.   The decrease was due to the impact of lower pre-tax earnings.  PNM'seffective income tax rates for the three months ended June 30, 2005 and 2004were 38.10% and 36.10%, respectively.  

108

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**RESULTS OF OPERATIONS**

** Six Months Ended June 30, 2005Compared to Six Months Ended June 30, 2004**

**PNM**

Asnoted previously in the second quarter presentation, PNM's segments are PNMElectric, PNM Gas and PNM Wholesale and are identical to the segments presentedabove in "Results of Operations" for PNMR. Income taxes and non-operating itemsare discussed on a consolidated basis for PNM and are in conformity with thepresentation in PNM's consolidated financial statements.

**PNMConsolidated**

* OtherIncome and Deductions*

Otherincome increased $2.2 million, or 67.1%, due to favorable investmentperformance in PNM's cash management program.  Other deductions increased $5.6million due to the write-off of software costs of $4.5 million and othermiscellaneous adjustments of $1.2 million.  

* IncomeTaxes*

PNM'sconsolidated income tax expense was $21.0 million for the six months ended June30, 2005, compared to $25.0 million for the six months ended June 30, 2004.  The decrease was due to the impact of lower pre-tax earnings.  PNM's effectiveincome tax rates for the six months ended June 30, 2005 and 2004 were 36.48%and 36.53%, respectively. 

**RESULTS OF OPERATIONS**

**Three Months Ended June 30, 2005Compared to Three Months Ended June 30, 2004**

**TNMP**

TNMPoperates in only one reportable segment, "TNMP Electric."  See Note 3 -"Segment Information," in the Notes to Consolidated Financial Statements foradditional information regarding these results and the consolidated financialstatements.  Results for the three months ended June 30, 2005 include theeffects of purchase accounting, which is not included in the three months endedJune 30, 2004.

109

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Thetable below sets forth the operating results for TNMP.
Three Months Ended
** **

** **

 
**June 30,**

** **

** **

 
**2005**

** **

**2004**

** **

**Variance**

 
(In thousands)

 
 
**Operating revenues**:

 
 External customers

$ 66,163

$ 65,069

$     1,094

 
 Intersegment revenues

11

-

11

 
 **Total revenues**

**66,174**

** **

**65,069**

** **

**1,105**

 
Less: Cost of energy

23,495

24,611

(1,116)

 
**Gross margin**

**42,679**

** **

**40,458**

** **

**2,221**

 
**Operating Expenses:**

** **

** **

** **

** **

** **

 
Transmission and distribution O&M           	

5,094

4,890

204

 
Customer related expense

1,165

1,248

(83)

 
Administrative and general

5,569

6,031

(462)

 
**  Total non-fuel O&M**

**11,828**

** **

**12,169**

** **

**(341)**

 
Depreciation and amortization

7,521

7,403

118

 
Taxes other than income taxes

5,080

5,952

(872)

 
Income taxes

4,493

2,569

1,924

 
**  Total non-fuel operating expenses**

**28,922**

** **

**28,093**

** **

**829**

 
**Operating income**

**  13,757**

** **

** 12,365**

** **

** 1,392**

 
**Other Income and deductions:**

** **

** **

** **

** **

** **

 
Carrying charges on regulatory assets

1,919

** **

- 

** **

1,919

 
Other income

808

437

371

 
Other deductions

(41)

(26)

(15)

 
Other income taxes

(468)

(142)

(326)

 
 **Net other income and deductions**

**2,218**

**269**

**1,949**

 
**Interest Charges**

**(7,044)**

**(7,034)**

** **

**(10)**

 
**Net Income before extraordinary item:**

**8,931**

** **

**5,600**

** **

**3,331**

 
**Extraordinary item:**

 
   Disallowance of stranded costs, net of tax

-

(97,836)

97,836

 
**Net Earnings (loss)**

**$  8,931**

** **

**$ (92,236)**

** **

**$ 101,167**

110

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Thefollowing table shows electric revenues by customer class and averagecustomers:

**TNMP ElectricRevenues**

**Three Months Ended**

** **

**June 30,**

** **

**2005**

** **

**2004**

**Variance**

(In thousands except  customers)

Residential

$ 22,642

$  22,000

$    642

General Services

7,934

7,751

183

Primary/Economy/Transmission

11,326

11,878

(552)

Secondary

14,278

14,084

194

Municipal Lighting

2,510

2,569

(59)

Other

7,484

6,787

697

$ 66,174

$  65,069

$ 1,105

** **

Average customers

257,352

253,386

3,966

Thefollowing table shows electric sales by customer class:

**TNMP ElectricSales**

**Three Months Ended**

** **

**June 30,**

** **

**2005**

** **

**2004**

**Variance**

(Megawatt hours)

Residential

697,802

640,169

57,633

General Services

61,826

60,690

1,136

Primary/Economy/Transmission

561,963

442,733

119,230

Secondary

515,843

501,114

14,729

Municipal/Lighting

39,650

31,263

8,387

1,877,084

1,675,969

201,115

Grossmargin for the three months ended June 30, 2005 increased $2.2 million, or5.5%, compared with the second quarter of 2004.  The increase was primarily dueto a $1.6 million increase in revenues due to higher sales resulting from warmweather, and by a $1.7 million decrease in transmission expenses, net oftransmission revenues, due to lower transmission costs from TXU ElectricDelivery Company and Lower Colorado River Authority as compared to the sameperiod in 2004.  In addition there was a $0.5 million increase in revenuesassociated with growth in customers.  Partially offsetting these increases werereductions in revenues due to lower rates that took effect May 1, 2005.  Theincrease in other electric revenue reflects a timing difference in pole rentalbillings that were booked in the current quarter, however, these billings werereflected in the first quarter of 2004.  Operating expenses include purchased powerand transmission expense, which decreased by $1.1 million for the three monthsended June 30, 2005.

111

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Non-fueloperating expenses increased $0.8 million due primarily to an increase of $1.9million in income tax expense, offset by a decrease in non-fuel O&M of $0.3million and a decrease in taxes other than income of $0.9 million. The decreasein non-fuel O&M was due to reductions in legal claims from 2004's secondquarter.  Taxes other than income taxes decreased $0.9 million and $0.1 millionfor the three and six months ended June 30, 2005, compared with thecorresponding periods in 2004.  The decreases were primarily related to lowerad valorem taxes incurred during 2005 due to lower taxable values resulting forTNMP's May 2005 rate decrease.

Otherincome and deductions increased $1.9 million due to increased interest incomecalculated on stranded costs as authorized by the PUCT.

Inthe second quarter of 2004 TNMP recorded a loss of $97.8 million related to thePUCT true-up proceeding regarding TNMP's stranded costs. The PUCT allowed TNMPto recover $87.3 million of the $266.5 million that TNMP requested as strandedcost. This decision resulted in a loss of $155.2 million before tax ($97.8million after tax).  TNMP recorded the $97.8 million after tax loss as anextraordinary item in the second quarter of 2004.

**RESULTS OF OPERATIONS**

** Six Months Ended June 30, 2005Compared to Six Months Ended June 30, 2004**

**TNMP**

** **TNMPoperates in only one reportable segment, "TNMP Electric."  See Note 3 -"Segment Information," in the Notes to ConsolidatedFinancial Statements for additional information regarding these results and theconsolidated financial statements.  Results for the six months ended June 30,2005 include the effects of purchase accounting, which is not included in thesix months ended June 30, 2004.

112

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **Thetable below sets forth the operating results for TNMP.
       Six Months Ended
** **

** **

 
**June 30**

** **

** **

 
**2005**

** **

**2004**

** **

**Variance**

 
(In thousands)

 
 
**Operating revenues**:

 
 External customers

$ 132,044

$ 126,722

$   5,322

 
 Intersegment revenues

11

-

11

 
 **Total revenues**

**132,055**

** **

**126,722**

** **

**5,333**

 
Less: Cost of energy

50,587

47,645

2,942

 
**Gross margin**

**81,468**

** **

**79,077**

** **

**2,391**

 
**Operating expenses:**

 
Transmission and distribution O&M

10,261

9,929

332

 
Customer related expense

2,405

2,489

(84)

 
Administrative and general

10,826

12,075

(1,249)

 
**  Total non-fuel O&M**

**23,492**

** **

**24,493**

** **

**(1,001)**

 
Depreciation and amortization

15,039

14,752

287

 
Taxes other than income taxes

11,113

11,190

(77)

 
Income taxes

5,697

4,738

959

 
**  Total non-fuel operating expenses**

**55,341**

** **

**55,173**

** **

**168**

 
**Operating income**

**26,127**

** **

**23,904**

** **

**2,223**

 
**Other income and deduction:**

 
Carrying charges on regulatory assets

(882)

-

(882)

 
Other income

1,371

994

377

 
Other deductions

(90)

(109)

19

 
Other income taxes

(643)

(311)

(332)

 
**   Net income and deductions**

(244)

574

(818)

 
**Interest charges**

(14,076)

(14,134)

58

 
**Net earnings before extraordinary**

 
**   item**

11,807

10,344

1,463

 
**Extraordinary item:**

 
Disallowance of stranded cost,

 
   net of tax

-

(97,836)

97,836

 
**Net earnings (loss)**

$  11,807

$(87,492)

$ 99,299

113

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Thefollowing table shows electric revenues by customer class and averagecustomers:

**TNMP ElectricRevenues**

**Six Months Ended**

** **

**June 30,**

** **

**2005**

** **

**2004**

**Variance**

(In thousands except  customers)

Residential

$  43,499

$  42,556

$    943

General Services

15,240

14,691

549

Primary/Economy/Transmission

26,074

22,671

3,403

Secondary

27,159

26,861

298

Municipal/Lighting

4,891

4,957

(66)

Other

15,192

14,986

206

$132,055

$126,722

$ 5,333

** **

Average customers

256,817

252,944

3,873

Thefollowing table shows electric sales by customer class:

**TNMP ElectricSales**

**Six Months Ended**

** **

**June 30,**

** **

**2005**

** **

**2004**

**Variance**

(Megawatt hours)

Residential

1,242,501

1,189,042

53,459

General Services

115,478

113,714

1,764

Primary/Economy/Transmission

1,164,249

1,037,488

126,761

Secondary

898,775

897,191

1,584

Municipal/Lighting

73,559

70,439

3,120

3,494,562

3,307,874

186,688

Gross margin for the six months ended June 30,2005, increased by $2.4 million, or 3.02%, compared with the corresponding 2004period.  The overall increase is attributed to a $1.2 million increase in salesdue to hot weather, and higher revenues associated with growth in customers. Partially offsetting these increases were reductions in revenue due to lowerrates.

Cost of energy expenses increased by $2.9 millionfor the six months ended June 30, 2005, as compared to their respective periodsin 2004.  The increase is entirely attributed to high purchased power coststhat were incurred in the first quarter of 2005.

Net income and deductions decreased by $0.8million from the second quarter of 2004 due primarily to the carrying chargeson stranded costs as authorized by the PUCT.

114

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**CRITICAL ACCOUNTINGPOLICIES**

TheCompany employs certain critical accounting policies that require use ofjudgments and assumptions that are subject to uncertainty.  The amountsreported in the consolidated interim financial statements that are related tothose critical accounting policies could be different if either differentjudgments were made or different assumptions were used.  Those criticalaccounting policies are discussed below.

*PurchaseAccounting*. The acquisitionof TNP was accounted for using the purchase method of accounting as prescribedin SFAS 141; accordingly, purchase accounting adjustments have been reflectedin the financial statements of TNP for all periods subsequent to June 6, 2005. The business operations of TNP were not significantly changed as a result ofthe acquisition, and post-acquisition and pre-acquisition operating results,except as noted in the discussion, are comparable.

*Goodwilland Intangible Assets*. Inaccordance with SFAS 141, the Company has revalued the assets and liabilitiesacquired at their respective fair values.  In accordance with SEC regulations,the difference between the purchase price and the fair value of the assetsacquired and liabilities assumed is recorded by the acquired businesses. Goodwill and other intangible assets and liabilities were also recorded by theacquired businesses and are either amortized or are measured for impairmentannually, on December 31, in accordance with SFAS 142.

Asof June 30, 2005, there have been no other significant changes with regard tothe critical accounting policies disclosed in PNMR's PNM's and TNMP's AnnualReports on Forms 10-K for the year ended December 31, 2004.  The policiesdisclosed included the accounting for:  revenue recognition; regulatory assetsand liabilities; asset impairment; pension plan; self-insurance; contingentliabilities and environmental issues.  

**LIQUIDITY ANDCAPITAL RESOURCES**

PNMR

AtJune 30, 2005, PNMR had cash and short-term investments of $223.0 millioncompared to $17.2 million in cash and short-term investments at December 31,2004.  

Cashprovided by operating activities for the six months ended June 30, 2005 was$115.7 million compared to $141.7 million for the six months ended June 30,2004.  PNMR's net earnings for the six months ended June 30, 2005 were $32.1million, a 23.0% decrease in net earnings compared to $41.6 million in the sixmonths ended June 30, 2004, which contributed to the decrease in cash providedby operating activities. The decrease in earnings was driven primarily byacquisition related costs and other non-recurring charges.  In addition, theCompany experienced poor plant performance, which reduced the amount ofelectricity the Company sold on the wholesale market and forced the Company topurchase power at higher market prices to meet jurisdictional and wholesaleneeds.  These decreases to net earnings were partially offset by the additionof the TNP operations for June 6 through June 30, 2005 and an increase in costof service gas rates.  A decrease in accounts payable due to higher gas costsin the fourth quarter of 2004 also decreased cash provided by operatingactivities.  The decrease was offset in part by increases in cash flows fromgreater efficiency in management of accounts receivables, including the PGAC.

115

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Cash used forinvesting activities was $33.7 million for the six months ended June 30, 2005compared to $57.6 million for the six months ended June 30, 2004.  Cash flowsused for investing activities were lower in the current period due primarily tothe cash balances acquired from TNP, net of the cash paid to acquire TNP. Thedecrease in cash flows used for investing activities was offset in part byincreased cash payments for utility plant additions.  

Cashgenerated by financing activities was $123.8 million for the six months endedJune 30, 2005 compared to cash used for financing activities of $91.1 millionfor the six months ended June 30, 2004.  Cash generated from financingactivities in 2005 was due to the issuance of the Equity Units for $239.8million and the issuance of common stock for $101.2 million, partially offsetby repayment of short-term debt of $74.0 million and the repayment of $110.5million under the TNP Credit Agreement.  Financing activities in 2004 consistedprimarily of short-term debt repayments.

PNM

Cashprovided by operating activities for the six months ended June 30, 2005 was$85.4 million compared to $147.4 million for the six months ended June 30,2004.  This decrease in cash flows was due primarily to reduced levels ofaccounts payable and accrued interest, offset in part increased collections ofaccounts receivable.

Cash used forinvesting activities was $51.7 million for the six months ended June 30, 2005compared to $66.6 million for the six months ended June 30, 2004.  The decreasein cash used for investing activities was due primarily to a $12.2 millionpurchase in bond investments in 2004 that did not recur in 2005. 

Cashused by financing activities was $42.4 million for the six months ended June30, 2005 compared to cash used for financing activities of $87.4 million forthe six months ended June 30, 2004.  The decrease in cash used for financingactivities resulted from short-term debt repayments that were $20.8 millionlower in 2005 compared to the same period last year. 

TNMP

TNMP'scash flow from operations for the six months ended June 30, 2005 wasessentially unchanged from the prior period. TNMP's cash flow from operationswas $0.4 million higher  in the current period than in the six months endedJune 30, 2004.  

Cash used for investing activities was $23.8 million for the six monthsended June 30, 2005 compared to $22.6 million for the six months ended June 30,2004.  Utility plant additions decreased as a result of lower capital spendingin anticipation of the acquisition of TNP by PNMR. 

TNMP had no financing activities for the six months ended June 30, 2005. Cash used for financing activities for the six months ended June 30, 2004 was$15.3 million.  Financing activities in 2004 consisted primarily of short-termdebt repayments and dividends paid.

116

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*CapitalRequirements*

* *PNMR

Totalcapital requirements include construction expenditures as well as other majorcapital requirements and cash dividend requirements for both common andpreferred stock.  The main focus of the Company's current construction programis upgrading generation resources, upgrading and expanding the electric and gastransmission and distribution systems and purchasing nuclear fuel.  Projectionsfor total capital requirements for 2005, including TNMP and First Choice, are$294.5 million with projections for construction expenditures for 2005constituting $267.5 million of that total.  Total capital requirements,including TNMP and First Choice, are projected to be $1,340 million andconstruction expenditures are projected to be $1,198 million for 2005-2009. These estimates are under continuing review and subject to on-goingadjustment.  This projection includes $49.0 million for the acquisition andconstruction of Luna, $49.0 million for PNM's estimated share of capital costsfor new pollution control technology at SJGS and $124.3 million for expansionat Afton.  In July 2005, PNM filed with the NMPRC an application for aCertificate of Public Convenience and Necessity in which PNM requested NMPRCapproval to include in PNM's retail rate base in its next retail electric ratecase the costs associated with the conversion of the Afton generating stationfrom a combustion turbine to a combined cycle unit utilizing one of PNM'sturbines in storage.  The Company continues to look for appropriately pricedgeneration acquisition and expansion opportunities to support retail electricload growth, the continued expansion of its long-term contract business and tosupplement its natural transmission position in the Southwest and West.

Duringthe six months ended June 30, 2005, the Company utilized cash generated fromoperations and cash on hand, as well as its liquidity arrangements, to coverits capital requirements and construction expenditures.  The Companyanticipates that internal cash generation and current debt capacity will besufficient to meet all of its capital requirements and constructionexpenditures for the years 2005 through 2009.  To cover the difference in theamounts and timing of cash generation and cash requirements, the Companyintends to use short-term borrowings under its current and future liquidityarrangements.

PNM

Themain focus of PNM's current construction program is upgrading generationresources, upgrading and expanding the electric and gas transmission anddistribution systems and purchasing nuclear fuel.  Projections for totalcapital requirements for 2005 are $215.5 million with projections forconstruction expenditures for 2005 constituting $188.5 million of that total. Total capital requirements are projected to be $1,036 million and constructionexpenditures are projected to be $894.3 million for 2005-2009.  These estimatesare under continuing review and subject to on-going adjustment.  

117

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

TNMP

Themain focus of TNMP's current construction program is upgrading and expandingthe electric transmission and distribution systems.  Projections for totalcapital requirements for 2005 are $37.6 million.  Total capital requirementsare projected to be $243.1 million for 2005-2009.  These estimates are undercontinuing review and subject to on-going adjustment.  

*Liquidity*

PNMR

Asof August 1, 2005, PNMR had $440.0 million of liquidity arrangements.  Theliquidity arrangements consist of $400.0 million from an unsecured revolvingcredit facility, referred to as the PNMR Facility for purposes of thisdiscussion, and $40.0 million in local lines of credit.  This includes the$25.0 million local line of credit expiring on or before August 16, 2005.  Asof August 1, 2005, there were no amounts borrowed against the PNMR Facility orthe local lines of credit.  PNMR provides a guarantee of borrowings made by FirstChoice under the PNMR facility.  As of August 1, 2005, First Choice did nothave any borrowing under this program.

PNMRhas 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 isunsecured and the proceeds will be used for short-term cash management needs. The PNMR Facility serves as a backstop for the outstanding commercial paper. As of August 1, 2005, there were $380.8 million of borrowings outstanding underthis program.

PNMR'sability, if required, to access the capital markets at a reasonable cost and toprovide for other capital needs is largely dependent upon its ability to earn afair return on equity, its results of operations, its credit ratings, obtainingrequired regulatory approvals and financial and wholesale market conditions. Financing flexibility is enhanced by providing a high percentage of totalcapital requirements from internal sources and having the ability, ifnecessary, to issue long-term securities and to obtain short-term credit. 

PNMR'scredit outlook was considered stable by S&P and Moody's as of the date ofthis report.  The Company is committed to maintaining or improving itsinvestment grade ratings.  In March 2005, S&P and Moody's rated PNMR'ssenior notes issued as part of its equity unit sales (see "FinancingActivities" below) "BBB-" and "Baa3", respectively.  The PNMR commercial paperprogram discussed above has been rated "A2" by S&P and "P3" by Moody's.

Investorsare cautioned that a security rating is not a recommendation to buy, sell orhold securities, that it is subject to revision or withdrawal at any time bythe assigning rating organization, and that each rating should be evaluatedindependently of any other rating.

InJuly 2005, the Board of PNMR approved an 8% increase in PNMR's common stockdividend for an indicated annual rate of $0.80 per share.  This increases thenext quarterly dividend to $0.20 per share, payable August 19, 2005, to PNMRshareholders of record as of August 1, 2005.  

118

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

PNM

Asof August 1, 2005, PNM had $393.5 million of liquidity arrangements.  Theliquidity arrangements consist of $300.0 million from an unsecured revolvingcredit facility, referred to as the PNM Facility for purposes of thisdiscussion, $70.0 million from an AR Securitization program and $23.5 millionin local lines of credit.  As of August 1, 2005, there were no amounts borrowedagainst the PNM Facility, the AR Securitization, or the local lines of credit. At August 1, 2005, PNM also had a $20.0 million borrowing arrangement withPNMR, which is not included in the $393.5 million of liquidity arrangementsnoted above.  As of August 1, 2005 there were no amounts outstanding under thisarrangement.

PNMhas a commercial paper program under which PNM may issue up to $300.0 millionin commercial paper for up to 365 days.  The commercial paper is unsecured andthe proceeds are used for short-term cash management needs.  The PNM Facilityserves as a backstop for the outstanding commercial paper.  As of August 1,2005, PNM had $94.9 million in commercial paper outstanding under this program.

PNM'sability, if required, to access the capital markets at a reasonable cost and toprovide for other capital needs is largely dependent upon its ability to earn afair return on equity, its results of operations, its credit ratings, obtainingrequired regulatory approvals and financial and wholesale market conditions. Financing flexibility is enhanced by providing a high percentage of total capital requirementsfrom internal sources and having the ability, if necessary, to issue long-termsecurities and to obtain short-term credit. 

PNM'scredit outlook was considered stable by S&P and Moody's as of the date ofthis report.  The Company is committed to maintaining or improving itsinvestment grade ratings.  As of June 30, 2005, S&P rated PNM's businessposition as six, its senior unsecured notes as "BBB" with a stable outlook andits preferred stock as "BB+".  As of June 30, 2005, Moody's rated PNM's seniorunsecured notes as "Baa2" and its preferred stock as "Ba1".  In April 2004,S&P assigned its "A-2" corporate credit and short-term debt ratings toPNM's rated commercial paper program.  In April 2004, Moody's assigned its"P-2" corporate credit and short-term debt ratings to PNM's rated commercialpaper program.  

InJune 2005, the Board of PNM declared a dividend of $80.0 million that was paidto PNMR in July 2005.

TNMP

InJune 2005, TNMP filed an application with the NMPRC to become a borrower andissue notes of up to $100.0 million under the PNMR Facility of $400.0 million.In July 2005, the NMPRC issued an order approving the application.  RequiredSEC approval remains pending and is expected in the third quarter of 2005.  

TNMP's ability, ifrequired, to access the capital markets at a reasonable cost and to provide forother capital needs is largely dependent upon its ability to earn a fair returnon equity, its results of operations, its credit ratings, obtaining requiredregulatory approvals and financial and wholesale market conditions. Financing flexibility is enhanced by providing a high percentage of totalcapital requirements from internal sources and having the ability, if necessary,to issue long-term securities and to obtain short-term credit.

TNMP'scredit outlook was considered stable by S&P and Moody's as of the date ofthis report.  The Company is committed to maintaining or improving itsinvestment grade ratings.  As of June 30, S&P rated TNMP's senior unsecurednotes at "BBB."  In May 2005, Moody's upgraded TNMP's senior unsecured notes to"Baa3."

119

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*ContingentProvisions of Certain Obligations*

* *PNMR,PNM and TNMP have a number of debt obligations and other contractualcommitments that contain contingent provisions.  Some of these, if triggered,could affect the liquidity of the Company.  PNMR, PNM or TNMP could be requiredto provide security, immediately pay outstanding obligations or be preventedfrom drawing on unused capacity under certain credit agreements if thecontingent requirements were to be triggered.  The most significantconsequences resulting from these contingent requirements are detailed in thediscussion below.

PNMR

Thecommitted PNMR Facility contains a "ratings trigger," for pricing purposesonly.  If PNMR is downgraded or upgraded by the ratings agencies, the resultwould be an increase or decrease in interest cost, respectively.  The PNMRFacility contains a material adverse change provision, which, if triggered,could prevent PNMR from drawing on its unused capacity under the PNMR Facilityexcept for drawing to repay any outstanding commercial paper.  In addition, thePNMR Facility contains a contingent requirement that requires PNMR to maintaina debt-to-capital ratio, inclusive of off-balance sheet debt, of less than 65%as well as maintenance of an earnings before interest, taxes, depreciation andamortization to interest ratio of 2.75 times.  If PNMR's debt-to-capital ratio,inclusive of off-balance sheet debt, were to exceed 65% or its interestcoverage ratio falls below 2.75, it could be required to repay all borrowingsunder the PNMR Facility, be prevented from drawing on the unused capacity underthe PNMR Facility, and be required to provide security for all outstandingletters of credit issued under the PNMR Facility.

PNM

PNM'sstandard purchase agreement for the procurement of gas for its retail customerscontains a contingent requirement that could require PNM to provide securityfor its gas purchase obligations if the seller were to reasonably believe thatPNM was unable to fulfill its payment obligations under the agreement.

Themaster agreement for the sale of electricity in the WSPP contains a contingentrequirement that could require PNM to provide security if its debt were to fallbelow investment grade rating.  The WSPP agreement also contains a contingentrequirement, commonly called a material adverse change provision, which couldrequire PNM to provide security if a material adverse change in its financialcondition or operations were to occur.

Thecommitted PNM Facility contains a "ratings trigger," for pricing purposesonly.  If PNM is downgraded or upgraded by the ratings agencies, the resultwould be an increase or decrease in interest cost, respectively.  The PNMFacility contains a material adverse charge provision, which, if triggered,could prevent PNM from drawing on its unused capacity under the PNM Facility. The material adverse charge provision does allow drawing to repay outstandingcommercial paper.  In addition, the PNM Facility contains a contingentprovision 

120

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

that requires PNM to maintain a debt-to-capital ratio, inclusive ofoff-balance sheet debt, of less than 65% as well as maintenance of an earningsbefore interest, taxes, depreciation and amortization to interest ratio of 3.0times.  If PNM's debt-to-capital ratio, inclusive of off-balance sheet debt,were to exceed 65% or its interest coverage ratio falls below 3.0, PNM could berequired to repay all borrowings under the PNM Facility, be prevented fromdrawing on the unused capacity under the PNM Facility, and be required toprovide security for all outstanding letters of credit issued under the PNMFacility.  

Ifa contingent requirement were to be triggered under the PNM Facility resultingin an acceleration of the outstanding loans under the PNM Facility, across-default provision in the PVNGS leases could occur if the acceleratedamount is not paid.  If a cross-default provision is triggered, the lessorshave the ability to accelerate their rights under the leases, includingacceleration of all future lease payments.  

* Financing Activities*

* *PNMR

PNMR has auniversal shelf registration statement filed with the SEC for the issuance ofdebt securities and equity securities, preferred stock, purchase contracts,purchase contract units and warrants.  As of June 30, 2005, PNMR hadapproximately $400.9 million of remaining unissued securities under thisregistration statement.  

Effective January 1,2005, PNMR entered into a $50.0 million loan agreement with PNMR ServicesCompany, a wholly-owned subsidiary.  In addition, PNMR made a $5.0 millionequity contribution to PNMR Services Company in January 2005.  These steps weretaken to provide PNMR Services Company with liquidity for its operations.

PNMRhas entered into three fixed to floating interest rate swaps with an aggregatenotional principal amount of $150.0 million.  Under these swaps, PNMR receivesa 4.40% fixed interest payment on the notional principal amount on a semi-annualbasis and pays a floating rate equal to the six month LIBOR plus 58.15 basispoints (0.5815%) on the notional amount through September 15, 2008.  Theinitial floating rate was 1.91% and will be reset every six months.  Thefloating rate was reset on March 15, 2005, to 3.84%.  The swap is accounted foras a fair-value hedge with a fair-market value (liability position) ofapproximately $0.9 million as of June 30, 2005.

In March 2005,PNMR issued 3,910,000 shares of its common stock at $26.76 per share.  PNMRreceived net proceeds from this offering, after deducting underwritingdiscounts and commissions and estimated expenses, of approximately $101.0million.  In addition, in March 2005, PNMR also completed a public offering of4,945,000 6.75% equity units yielding net proceeds after fees of $239.6million.  

In conjunctionwith the acquisition of TNP, on June 6, 2005, PNMR made an equity investment ofapproximately $110.5 million in TNP, which TNP used to repay in full amountsowing under TNP's credit agreement.  In addition, pursuant to PNMR'sacquisition 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

121

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 Redeemable Preferred Stock, Series D (collectively, "Preferred Stock"),and (c) TNP's 10.25% Senior Subordinated Notes due 2010, Series B ("SeniorNotes").  On July 6, 2005, TNP redeemed the Preferred Stock by tendering $224.6million to the holders of the Preferred Stock and redeemed the Senior Notes bytendering $296.5 million to holders of the Senior Notes.  In order to fund a portion of the cost of redemption ofTNP's Preferred Stock and Senior Notes, PNMR issued $370.0 million ofcommercial paper short-term notes under the PNMR commercial paper program. The balance of the funds necessary for the redemption came from other cashavailable to PNMR and the total redemption amount was an equity investment byPNMR in TNP.

In August2004, PNMR had announced that Cascade had agreed to invest $100.0 million inequity-linked securities to be issued by PNMR.  In June 2005, PNMR and Cascadeamended their agreement to include a provision that the closing for theagreement would not occur more than 35 days after the closing date of theacquisition of TNP.  In July 2005, PNMR and Cascade further amended theagreement to include a provision that the closing for the agreement shall occurno later than August 14, 2005, to facilitate determination of the final form ofthe equity-linked securities.  PNMR and Cascade have tentatively agreed toextend the closing date to no later than September 30, 2005.  PNMR intends touse the funds from the closing of the agreement to pay off a portion of thecommercial paper issued in July 2005 to fund the redemption of TNP debt discussedabove.  

PNM

Asof June 30, 2005, PNM had approximately $200.0 million of remaining unissuedsecurities registered under its previously filed shelf registration statement. No additional first mortgage bonds may be issued under PNM's mortgage. Theamount of senior unsecured notes that may be issued is not limited by thesenior unsecured notes indenture.  However, debt-to-capital requirements incertain PNM's financial instruments and regulatory agreements would ultimatelylimit the amount of additional debt PNM would issue.

TNMP

InJune 2005, TNMP filed an application with the NMPRC to become a borrower andissue notes of up to $100.0 million under the PNMR Facility of $400.0 million.In July 2005, the NMPRC issued an order approving the application.  Required SEC approval remains pending and isexpected in the third quarter of 2005.  

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

122

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*Capital Structure*

* *PNMR

PNMR'scapitalization, including current maturities of long-term debt, at June 30,2005 and December 31, 2004 is shown below:

 
** **

**June 30,**
   
**December 31,**

 
** **

**2005**

 

**2004**

** **

** **

** **

** **

 
Common  Equity

37.3%

52.4%

 
Preferred  Stock

6.7%

0.6%

 
Long‐term  Debt

56.0%

47.0%

 
Total  Capitalization

100.0%

100.0%

 

     Total capitalization does not include as debt the present value of PNM'soperating lease obligations for PVNGS Units 1 and 2, EIP and the Delta operating lease,which was approximately $173.5 million as of June 30, 2005 and $176.0 millionas of December 31, 2004.

The change in the Company'scapitalization is due to the issuance of common stock and equity units in March2005 and the acquisition of TNP on June 6, 2005.  For additional information onthe acquisition, refer to Note 2 - "TNP Acquisition," in the Notes toConsolidated Financial Statements.

PNM

PNM'scapitalization, including current maturities of long-term debt, at June 30,2005 and December 31, 2004 is shown below:

 
** **

**June 30,**
   
**December 31,**

 
** **

**2005**

 

**2004**

** **

** **

** **

** **

 
Common  Equity

49.9%

50.8%

 
Preferred  Stock

0.6%

0.6%

 
Long‐term  Debt

49.5%

48.6%

 
Total  Capitalization

100.0%

100.0%

123

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

TNMP

TNMP'scapitalization, including current maturities of long-term debt, at June 30,2005 and December 31, 2004 is shown below:

 
** **

**June 30,**
   
**December 31,**

 
** **

**2005**
   
**2004**

** **

** **

** **

** **

 
Common  Equity

61.2%

31.3%

 
Long‐term  Debt

38.8%

68.7%

 
Total  Capitalization

100.0%

100.0%

The change in TNMP'scapitalization is due to the acquisition of TNP on June 6, 2005 and the effectsof push down accounting.

**QUANTITATIVE AND QUALITATIVE DISCLOSUREABOUT MARKET RISK**

TheCompany uses derivative financial instruments to manage risk as it relates tochanges in natural gas and electric prices, changes in interest rates and,historically, adverse market changes for investments held by the Company'svarious trusts.  Additionally, the Company uses derivative instruments based oncertain financial composite indices as part of its enhanced cash managementprogram.  The Company also uses certain derivative instruments for wholesalepower marketing transactions in order to take advantage of favorable pricemovements and market timing activities in the wholesale power markets.  Thefollowing additional information is provided.

PNMR controls the scope ofits various forms of risk through a comprehensive set of policies andprocedures and oversight by senior level management and the PNMR Board.  TheBoard's Finance Committee sets the risk limit parameters.  The RMC, comprisedof corporate and business segment officers and other managers, oversees all ofthe activities, which include commodity price, credit, equity, interest rateand business risks.  The RMC has oversight for the ongoing evaluation of theadequacy of the risk control organization and policies.  PNMR has a riskcontrol organization, headed by a Risk Manager, which is assignedresponsibility for establishing and enforcing the policies, procedures andlimits and evaluating the risks inherent in proposed transactions, on anenterprise-wide basis.

The RMC's responsibilitiesspecifically include:  establishment of a general policy regarding riskexposure levels and activities in each of the business segments; authority toapprove the types of instruments traded; authority to establish a generalpolicy regarding counterparty exposure and limits; authorization and delegationof transaction limits; review and approval of controls and procedures; reviewand approval of models and assumptions used to calculate mark-to-market and riskexposure; authority to approve and open brokerage and counterparty accounts;review of hedging and risk activities; and quarterly reporting to the FinanceCommittee and the PNMR Board on these activities.  

The RMC also proposes risklimits, such as VAR and EaR to the Finance Committee.  The Finance Committeeultimately sets the Company's risk limits. 

It is the responsibility ofeach business segment to create its own control procedures and policies withinthe parameters established by the Finance Committee.  The RMC reviews andapproves these policies, which are created with the assistance of the CorporateController, Director of Internal Audit and the Director of Financial RiskManagement.  Each business segment's policies address the following controls: authorized risk exposure limits; authorized instruments and markets; authorizedpersonnel; policies on segregation of duties; policies on mark-to-marketaccounting; responsibilities for deal capture; confirmation procedures;responsibilities for reporting results; statement on the role of derivativetransactions; and limits on individual transaction size (nominal value).

124

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

To the extent an openposition exists, fluctuating commodity prices can impact financial results andfinancial position, either favorably or unfavorably.  As a result, the Companycannot predict with certainty the impact that its risk management decisions mayhave on its businesses, operating results or financial position.

*Commodity Risk*

Marketingand procurement of energy often involve market risks associated with managingenergy commodities and establishing open positions in the energy markets,primarily on a short-term basis.  These risks fall into three differentcategories:  price and volume volatility, credit risk of counterparties andadequacy of the control environment.  The Company's operations subject tomarket risk routinely enter into various derivative instruments such as forwardcontracts, option agreements and price basis swap agreements to hedge price andvolume risk on their purchase and sale commitments, fuel requirements and toenhance returns and minimize the risk of market fluctuations on the wholesaleoperations.

PNM'swholesale operations, including long-term contracts and and short-term sales,are managed primarily through a net asset-backed marketing strategy, wherebyPNM's aggregate net open forward contract position is covered by its forecastedexcess generation capabilities. PNM is exposed to market risk if its generationcapabilities were to be disrupted or if its retail load requirements were to begreater than anticipated.  If PNM were required to cover all or a portion ofits net open contract position as a result of the aforementioned unexpectedsituations, it would have to meet its commitments through market purchases. Inaddition, the wholesale operations utilize discrete market-based transactionsto take advantage of opportunities that present themselves in the ordinarycourse of business. These positions are subject to market risk that is not mitigatedby PNM's generation capabilities.

FirstChoice is responsible for energy supply related to the sale of electricity toretail customers in Texas.  TECA contains no provisions for the specificrecovery of fuel and purchased power costs, although First Choice can requestthat the PUCT change the price-to-beat fuel factor twice a year to recognizechanges in natural gas prices.  The rates charged to new customers acquired byFirst 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 andpurchased power costs will affect First Choice's operating results.  First Choice is exposed to market risk tothe extent that its retail rates or cost of supply fluctuates with marketprices. First Choice's basic strategy is to minimize its exposure tofluctuations in market energy prices by matching fixed price sales contractswith fixed price supply. 

FirstChoice operates within a competitive marketplace; however, to the extent thatit serves former TNMP customers under the provisions of the price-to-beatservice, it has the ability to file with the PUCT to change the price-to-beatfuel factor twice each year, in the event of significant changes in natural gasprices.  Additionally, in connection with the issuance of a final stranded costtrue-up order for TNMP the PUCT will adjust First Choice's fuel factor portionof the price-to-beat downward if natural gas prices are below the pricesembedded in the then-current rates.  See Note 8 - "Commitments andContingencies - TNMP True-Up Proceeding," and Note 9 - "Regulatory and RateMatters - Retail Competition," in the Notes to Consolidated FinancialStatements.

125

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*Accountingfor Derivatives*

* *Under the derivativeaccounting rules and the related accounting rules for energy contracts, PNMRaccounts for its various financial derivative instruments for the purchase andsale of energy differently based on management's intent when entering into thecontract.  Energy contracts that meet the definition of a derivative under SFAS133 and do not qualify for a normal purchase or sale designation are recordedon the balance sheet at fair market value at each period end.  The changes infair market value are recognized in earnings unless specific hedge accountingcriteria are met.  Should an energy transaction qualify as a hedge under SFAS133, fair market value changes from year to year are recognized on the balancesheet with a corresponding charge to other comprehensive income.  Gains orlosses are recognized when the hedged transaction settles.  Derivatives thatmeet the normal sales and purchases exceptions within SFAS 133 are not markedto market but rather recorded in results of operations when the underlyingtransaction settles.  

The following table showsPNM's wholesale operations' net fair value of mark-to-market energy contractsincluded in the balance sheet:
 
**June 30,**

** **

**December 31,**
 
**2005**

** **

**2004**

(In thousands)

Mark-to-Market Energy  Contracts:

 Current asset

$ 6,672

$   6,890

 Long-term asset

7,743

316

       Total  mark-to-market assets

14,415

7,206

 Current liability

(4,422)

(5,007)

 Long-term liability

(7,108)

(126)

       Total  mark-to-market liabilities

(11,530)

(5,133)

Net fair value of  mark-to-market energy contracts

$ 2,885

$   2,073

Themark-to-market energy transactions represent net assets at June 30, 2005 andDecember 31, 2004 after netting all applicable open purchase and salecontracts. 

Themarket prices used to value PNM's mark-to-market energy transactions are basedon index prices and broker quotations.  Generally, market data to value thesetransactions is available for the next 18-month period only; the remaining timeperiod, referred to as the illiquid period, is valued using internally developedpricing data.  As a result, the Company records liquidity reserves on thesecontracts for market gains and losses in the illiquid period, effectivelylimiting the mark-to-market valuation to a rolling 18-month period.  TheCompany regularly assesses the validity and availability of pricing data forthe illiquid period of its derivative transactions and adjusts its liquidityreserves, accordingly.

126

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Thefollowing table provides detail of changes in the PNM's wholesale operations'mark-to-market energy transactions' net asset or liability balance sheetposition from one period to the next:

** **

**Six Months Ended**
** **

**June 30,**

 
**2005**

** **

**2004**

(In thousands)

Sources of Fair Value Gain/(Loss)

Fair value at beginning of year

$ 2,073

$    433

Amount realized on contracts delivered

   during period

(254)

1,714

-

-

Changes in fair value

1,066

2,843

Net fair value at end of period

$ 2,885

$ 4,990

Net change recorded as mark-to-market

$    812

$ 4,557

Thefollowing table provides the maturity of the net assets/(liabilities) of theCompany, giving an indication of when these mark-to-market amounts will settleand generate/(use) cash.  The following values were determined using brokerquotes:

**Fair Value at June 30, 2005**

**Maturities**

**Less than**

** **

** **

** **

** **

** **

** **

**1 year**

** **

**1-3 Years**

** **

**4+ Years**

** **

**Total**

** **

** **

(In thousands)

** **

** **

$2,219

$439

$227

$2,885

Asof June 30, 2005, a decrease in market pricing of PNM's mark-to-market energytransactions by 10% would have resulted in a decrease in net earnings of lessthan 1%.  Conversely, an increase in market pricing of these transactions by10% would have resulted in an increase in net earnings of less than 1%.

Inthe normal course of business, TNMP and First Choice enter into commoditycontracts in order to meet customer requirements.  Criteria by whichoption-type and forward contracts for electricity can qualify for the normalpurchase and sales exception has been defined by SFAS No. 133, *"Accountingfor Derivative Instruments and Hedging Activities,"* as amended by SFAS No.149, *"Amendments of Statement 133 on Derivative Instruments and HedgingActivities."*  In accordance with these pronouncements, management hasdetermined that TNMP's and First Choice's contracts for electricity qualify forthe normal purchases and sales exception.  Accordingly, TNMP and First Choicedo not account for their electricity contracts as derivatives.

With regard to itshedging activities, First Choice recorded unrealized gains (losses), net ofreclassification adjustments after June 6, 2005, associated with its naturalgas hedges in other comprehensive income, to the extent the hedge is effective,as shown in the following table.  

127

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

On June 6, 2005, PNMR acquired 100% of theoutstanding common *shares* of TNP and its subsidiaries, TNMP and First Choice. The reported amounts reflect the period from June 6, 2005 through June 30,2005.  
         
**For the Period of  June 6 through June 30, 2005**
         
Before-Tax

Tax Benefit

After-Tax
         
Amount

(Expense)
   
Amount
         
*(In thousands)*
         
Change in market value

 $(3,046)

 $ 1,161

 $ (1,885)

Reclassification adjustments

    3,913

(1,492)

     2,421

Other comprehensive income

 $    867

 $  (331)

 $    536

*RiskManagement Activities*

PNM'sWholesale Operations measure the market risk of its long-term contracts andwholesale activities using a VAR calculation to maintain the Company's totalexposure within management-prescribed limits.  The Company's VAR calculationreports the possible market loss for the respective transactions.  Thiscalculation is based on the transaction's fair market value on the reportingdate.  Accordingly, the VAR calculation is not a measure of the potentialaccounting mark-to-market loss.  In 2005, the Company adopted the Monte Carlo simulation model of VAR.  The Monte Carlo model utilizes a random generatedsimulation based on historical volatility to generate portfolio values.  TheCompany continues to utilize the two-tailed confidence level at 99%.  VARmodels are relatively sophisticated.  The quantitative risk information,however, is limited by the parameters established in creating the model.  Theinstruments being evaluated may trigger a potential loss in excess ofcalculated amounts if changes in commodity prices exceed the confidence levelof the model used.  The VAR methodology employs the following criticalparameters:  volatility estimates, market values of open positions, appropriatemarket-oriented holding periods and seasonally adjusted correlation estimates. The Company's VAR calculation considers the Company's forward position for thenext eighteen months.  The Company uses a holding period of three days as theestimate of the length of time that will be needed to liquidate the positions. The volatility and the correlation estimates measure the impact of adverseprice movements both at an individual position level as well as at the totalportfolio level.  The two-tailed confidence level established is 99%.  Forexample, 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'spre-tax gain or loss in liquidating the portfolio would not exceed $10.0million in the three days that it would take to liquidate the portfolio. 

128

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

In2005, the Company revised its methodologies for calculating VAR in order to improveits ability to measure and manage risk.  As a result, the Company also revisedits VAR limits to be consistent with the new methodologies.  As previouslydiscussed, the Company adopted the Monte Carlo statistical simulationapproach.  In addition, the Company redefined the types of transactions onwhich it measures VAR.  The total VAR is now based solely on its merchantactivities and excludes all effects from the retail operations and the jointdispatch model employed by the Company.  The total VAR limit established is$18.0 million.  For the three months ended June 30, 2005, the average total VARamount was $12.2 million, with high and low VAR amounts for the period of $16.4million and $4.0 million, respectively.  The total VAR amount at June 30, 2005was $14.4 million.  In addition, the Company defined a sub-set of the total VARthat captures all transactions that are not directly asset related and haveeconomic risk.  The VAR limit established for these transactions is $5.0million.  For the three months ended June 30, 2005, the average VAR amount forthese transactions was $0.3 million, with high and low VAR amounts for theperiod of $1.0 million and $0.1 million, respectively.  The VAR amount forthese transactions at June 30, 2005 was $1.0 million.

In2004, the Company utilized the variance/covariance model of VAR, which is aprobabilistic model that measures the risk of loss to earnings in marketsensitive instruments.  The variance/covariance model relies on statisticalrelationships to analyze how changes in different markets can affect aportfolio of instruments with different characteristics and market exposure. For the three months ended June 30, 2004 the Company's average total VAR amountas reported was $17.8 million, with high and low VAR amounts for the period of$21.6 million and $14.2 million, respectively.  The total VAR amount at June30, 2004 was $17.0 million.  In the prior year the Company also measured VARfor a subset of transactions that were marked-to-market in accordance with SFAS133.  The VAR limit established for these transactions was $2.0 million.  Forthe three months ended June 30, 2004, the average VAR amount for thesetransactions was $0.4 million, with high and low VAR amounts for the period of$1.1 million and $0.1 million, respectively.  The total VAR amount at June 30,2004 was $0.5 million.  Because of the nature of the Monte Carlo simulationmethod now utilized by the Company, reporting of the 2004 VAR amounts using theCompany's new approach is neither practical nor representational of theCompany's management of risk in 2004.

FirstChoice measures the market risk of its activities using an EaR calculation tomaintain the Company's total exposure within management-prescribed limits.Because of its obligation to serve, First Choice must take its obligations tosettlement. Accordingly, a measure that evaluates the settlement of FirstChoice's positions against earnings provides management with a useful tool tomanage its portfolio. First Choice's EaR calculation reports the possiblelosses against forecasted earnings for its retail load and supply portfolio.This calculation is based on First Choice's forecasted earnings on thereporting date.  The Company utilizes a Delta/Gamma approximation model ofEaR.  The Delta/Gamma model calculates a price change within a given timeframe, correlation and volatility parameters for each price curve utilized invaluing the mark-to-market of each position to develop a change in value forany position. This process is repeated multiple times to calculate a standarddeviation, which is used to arrive at an EaR amount based on a certainconfidence level. The model uses the Delta/Gamma approximation to model theoptionality related to Price-to-Beat rate resets by both the Company and thePUCT as discussed above. First Choice utilizes the one-tailed confidence levelat 95%.  EaR models are relatively sophisticated.  The quantitative riskinformation, however, is limited by the parameters established in creating themodel.  The instruments being evaluated may trigger a 

129

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

potential loss in excessof calculated amounts if changes in commodity prices exceed the confidencelevel of the model used.  The EaR calculation considers the Company's forwardposition for the next twelve months and holds each position to settlement.  Thevolatility and the correlation estimates measure the impact of adverse pricemovements both at an individual position level as well as at the totalportfolio level. For example, if EaR is calculated at $10.0 million, it isestimated at a 95% confidence level that if prices move against First Choice'spositions, the losses against the Company's forecasted earnings over the nexttwelve months would not exceed $10.0 million. 

Forthe three months ended June 30, 2005, the average total EaR amount was $10.1million, with high and low EaR amounts for the period of $11.5 million and $9.7million, respectively.  The total EaR amount at June 30, 2005 was $9.8million.  

InJuly 2005, the Finance Committee approved new risk measures for First Choice.These measures were designed to give First Choice management flexibility toexecute its strategies to reduce the risk inherent in the portfolio and to takeadvantage of market opportunities in a controlled and limited fashion. The Companyadopted an EaR limit of $25 million. Upon successful execution of FirstChoice's strategy to mitigate risk by locking in its floating supply costs atfavorable prices, these limits are expected to be lowered to match the new riskprofile. In addition, the Company adopted two new VAR measures to monitor themarket based mitigation strategies of First Choice management.  The first VARlimit is based on the same total retail load and supply portfolio as the EaRmeasure; however, the VAR measure is intended to capture the effects of changesin market prices over a 10 day holding period. This holding period isconsidered appropriate given the nature of First Choice's supply portfolio andthe constraints faced by First Choice in the ERCOT market. The calculationutilizes the same Monte Carlo simulation approach described above at a 95%confidence level. This VAR limit was established at $7.5 million. The secondVAR limit was established for transactions that are subject to mark-to-marketaccounting as defined by SFAS 133 and SFAS 149. This calculation captures theeffect of changes in market prices over a three day holding period and utilizesthe same Monte Carlo simulation approach described above at a 95% confidencelevel. 

TheCompany's risk measures are regularly monitored by the Company's RMC.  The RMChas put in place procedures to ensure that increases in risk measures thatexceed the prescribed limits are reviewed and, if deemed necessary, acted uponto reduce exposures.  The VAR and EaR limits represent an estimate of thepotential gains or losses that could be recognized on the Company's portfolios,subject to market risk, given current volatility in the market, and are notnecessarily indicative of actual results that may occur, since actual future gainsand losses will differ from those estimated.  Actual gains and losses maydiffer due to actual fluctuations in market prices, operating exposures, andthe timing thereof, as well as changes to the underlying portfolios during theyear.

*Credit Risk*

TheCompany is exposed to credit losses in the event of non-performance ornon-payment by counterparties.  The Company manages credit on a consolidatedbasis and uses a credit management process to assess and monitor the financialconditions of counterparties.  Credit exposure is regularly monitored by theRMC. The RMC has put in place procedures to ensure that increases in creditrisk measures that exceed the prescribed limits are reviewed and, if deemednecessary, acted upon to reduce exposures.   

130

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Thefollowing table provides information related to PNM's credit exposure as ofJune 30, 2005.  The Company does not hold any credit collateral as of June 30,2005.  The table further delineates that exposure by the credit worthiness(credit rating) of the counterparties and provides guidance as to theconcentration of credit risk to individual counterparties PNM may have.  Alsoprovided is an indication of the maturity of a Company's credit risk by creditratings of the counterparties.

**Schedule of PNM Wholesale Credit RiskExposureJune 30, 2005**

** Net**

**(b)**

**Number**

**Exposure**

**Net**

**of**

**of**

**Credit**

**Counter**

**Counter-**

**Risk**

**-parties**

**parties**

**Rating (a)**

**Exposure**

**>10%**

**>10%**

(Dollars in  thousands)

Investment grade

$50,312

1

$14,928

Non-investment grade

Internal ratings

   Investment grade

       272

   Non-investment grade

    5,785

        Total

$56,369

$14,928

(a)       ***Rating* -**Included in "Investment Grade" arecounterparties with a minimum S&P rating of BBB- or Moody's rating ofBaa3.  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.  Thecategory "Internal Ratings - Investment Grade" includes those counterpartiesthat are internally rated as investment grade in accordance with the guidelinesestablished in the Company's credit policy.

(b)     The ***Net Credit Risk******Exposure***isthe net credit exposure to PNM from its Wholesale Operations.  This includeslong-term contracts, forward sales and short-term sales. The exposure capturesthe net amounts due to PNM from receivables/payables for realized transactions,delivered and unbilled revenues, and mark-to-market gains/losses (pursuant tocontract terms).  Exposures are offset according to legally enforceable nettingarrangements and reduced by credit collateral.  Credit collateral includes cashdeposits, letters of credit and performance bonds received fromcounterparties.  Amounts are presented before those reserves that are determinedon a portfolio basis.

131

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Maturity of Credit Risk ExposureAs of June 30,2005**

** **

** **

** **

** **

** **

** **

**Total**

** **

**Less than**

** **

** **

**Net**

**Rating**

** **

**2 Years**

** **

**2-5 Years**

** **

**Exposure**

(In thousands)

Investment grade

$45,320

$4,992

$50,312

Non-investment grade

Internal ratings

   Investment grade

          272

       272

   Non-investment grade

       5,785

    5,785

        Total

   $51,377

$4,992

$56,369

* *TheCompany provides for losses due to market and credit risk.  PNM's credit riskwith its largest counterparty as of June 30, 2005 and December 31, 2004 was$14.9 million and $26.2 million, respectively.

First Choice is subjectto credit risk from non-performance by its supply counterparties to the extentthese contracts have a mark-to-market value in the favor of First Choice. TheConstellation power supply agreement established FCPSP, a bankruptcy remotespecial purpose entity, to hold all of First Choice's customer contracts andwholesale power and gas contracts.  Constellation received a lien on accountsreceivable, customer contracts, cash, and the equity of FCPSP as security forFirst Choice's performance under the power supply agreement.  The provisions ofthis agreement severely limit First Choice's ability to secure power from alternatesources. Additionally, the terms of the security agreement do not requireConstellation to post collateral for any mark-to-market balances in FirstChoice's favor. At June 30, 2005, the supply contracted with Constellation wasin a favorable mark-to-market position for First Choice. When netted againstamounts owed to Constellation, this exposure was approximately $35.4 million. The Constellation power supply agreement collateral provisions will continueuntil the expiration of the agreement on December 31, 2007.

First Choice hascontinued to see a reduction in bad debt expense from its retail customers dueto reduced customer receivables resulting partially from effective disconnectpolicies, increased collection activity and refined consumer credit andsecuritization policies.  Bad debt expenses for the six months ended June 30,2005 and 2004 were $1.5 million and $4.0 million, respectively.  

*Retail Gas Supply Hedging Activities*

PNM hedgescertain portions of natural gas supply contracts in order to protect its retailcustomers from adverse price fluctuations in the natural gas market.  Thefinancial impact of all hedge gains and losses, including the related costs ofthe program, is recoverable through the PGAC.  As a result, earnings are not affectedby gains and losses generated by these instruments.

132

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

In order to protect itsnatural gas customers from the risk of rising prices during the 2005-2006heating season, in total, PNM plans to expend approximately $7.2 million in2005 to purchase gas options that essentially cap the amount PNM would pay foreach volume of gas subject to the options during the winter heating season. PNM expects to recover its option premiums as a component of the PGAC duringthe months of October 2005 through February 2006.

* InterestRate Risk*

PNMR

Duringthe three and six months ended June 30, 2005, PNMR contributed cash ofapproximately $1.5 million and $3.1 million, respectively, to other postretirement benefits for plan year 2005. The securities held by the trusts hadan estimated fair value of $604.4 million as of June 30, 2005, of whichapproximately 28% were fixed-rate debt securities that subject the Company torisk of loss of fair value with movements in market interest rates.  If rateswere to increase by 50 basis points from their levels at June 30, 2005, thedecrease in the fair value of the securities would be 2.84% or $4.8 million.  PNMR does not currently recover or return through rates any losses or gains onthese securities.  The Company, therefore, is at risk for shortfalls in itsfunding of its obligations due to investment losses.  The Company does notbelieve that long-term market returns over the period of funding will be lessthan required for the Company to meet its obligations.  However, this belief isbased on assumptions about future returns that are inherently uncertain.

PNM 

PNMhas long-term debt which subjects it to the risk of loss associated withmovements in market interest rates.  The majority of PNM's long-term debt isfixed-rate debt, and therefore, does not expose PNM's earnings to a major riskof loss due to adverse changes in market interest rates.  However, the fairvalue of all long-term debt instruments would increase by approximately 2.2%,or $23 million, if interest rates were to declineby 50 basis points from their levels at June 30, 2005.  As of June 30, 2005,the fair value of PNM's long-term debt was approximately $1.02 billion as compared to a book value of $987million.  In general, an increase in fair value would impact earnings and cashflows to the extent not recoverable in rates if PNM were to re-acquire all or aportion of its debt instruments in the open market prior to their maturity.

TNMP 

In June 2003, TNMP issued$250.0 million of 6.125% Senior Notes due in 2008. In May 2003, TNMP executed a$250.0 million Treasury rate lock transaction designed to manage interest raterisk associated with the issuance of the senior notes. TNMP paid $4.2 millionupon the issuance of senior notes in June 2003 to settle the rate lock. Through the date of the acquisition, the cost of rate lock was recorded inaccumulated other comprehensive income and was being amortized to interestexpense over the life of the senior notes.  In conjunction with the acquisitionof TNP by PNMR on June 6, 2005, the balance for the rate lock remaining inaccumulated other comprehensive income was recorded at fair market valueas of the date of acquisition in accordance with SFAS 141.  The fair marketvalue was determined to be zero and the balance of $1.7million was charged to goodwill.

133

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

During the period ofJune 6 through June 30, 2005, TNMP contributed cash of just under $0.1 millionto other post retirement benefits for plan year 2005.  The securities held bythe trusts for pension plan and other postretirement plan had an estimatedfair value of $86.4 million as of June 30, 2005, of which 76% were invested inmoney market funds.  TNMP does not currently recover or return through ratesany losses or gains on these securities.

*EquityMarket Risk*

PNMR

PNMR has a cashmanagement structure that includes a preferred stock dividend capture strategyand various absolute return strategies that have the objective of achievingreturns higher than that associated with cash management plans and with bondlike volatility.  PNMR's initial investment in the enhanced cash managementprogram was $10.0 million and an additional $2.0 million was invested inFebruary 2005.  As of June 30, 2005 and December 31, 2004, the balance in thisinvestment, including profits and interest, was $13.5 million and $10.6million, respectively.

PNM

PNMcontributes to trusts established to fund its share of the decommissioningcosts of PVNGS and pension and other postretirement benefits.  The trusts holdcertain equity securities as of June 30, 2005.  These equity securities alsoexpose the Company to losses in fair value.  Approximately 59% of thesecurities held by the various trusts were equity securities as of June 30,2005.   Similar to the debt securities held for funding decommissioning andcertain pension and other postretirement costs, PNM does not recover or earn areturn through rates on any losses or gains on these equity securities.

TNMP 

TNMP and itssubsidiaries sponsor a defined benefit pension plan covering substantially allof its employees.  TNMP also sponsors a health care plan that provides postretirement medical and death benefits.  Contributions are made to trusts thatfund both of these employee benefits.  The trusts held a certain equity mutualfund as of June 30, 2005, which exposes TNMP to losses in fair value. Approximately 22% of the assets in the retiree medical and death benefit trustswere invested in an equity index mutual fund. Approximately 24% of the assetsin the pension were invested in an equity index mutual fund as of June 30,2005.

**OTHERISSUES FACING THE COMPANY**

See Note 8 - "Commitmentsand Contingencies," in the Notes to Consolidated Financial Statements.

134

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**NEW ACCOUNTING STANDARDS**

There have been no newaccounting standards that materially affected the Company this period.  SeeNote 1 - "Summary of the Business and Significant Accounting Policies - StockBased Compensation," in the Notes to Consolidated Financial Statements for discussion of*SFAS No.123 (revised 2004), "Share Based Payment."*

** DISCLOSURE REGARDING FORWARD LOOKINGSTATEMENTS**

Statements made in thisfiling that relate to future events or PNMR's, PNM's or TNMP's expectations,projections, estimates, intentions, goals, targets and strategies, are madepursuant to the Private Securities Litigation Reform Act of 1995.  Readers arecautioned that all forward-looking statements are based upon currentexpectations and estimates and PNMR, PNM and TNMP assume no obligation toupdate this information. 

Because actual results maydiffer materially from those expressed or implied by these forward-lookingstatements, PNMR, PNM and TNMP caution readers not to place undue reliance onthese statements.  PNMR's, PNM's and TNMP's business, financial condition, cashflow and operating results are influenced by many factors, which are oftenbeyond their control, that can cause actual results to differ from thoseexpressed or implied by the forward-looking statements.  These factors include:
-  The potentialunavailability of cash at TNP and its subsidiaries,
-  The risk that TNP andits subsidiaries will not be integrated successfully into PNMR,
-  The risk that thebenefits of the TNP acquisition will not be fully realized or will take longerto realize than expected,
-  Disruption from the TNPacquisition making it more difficult to maintain relationships with customers,employees, suppliers or other third parties,
-  Changing conditions inthe financial markets relevant to the TNP acquisition,
-  The outcome of anyappeals of the PUCT order in the stranded cost true-up proceeding or theacquisition proceeding, 
-  The ability of FirstChoice to attract and retain customers,
-  Changes in ERCOTprotocols,
-  Changes in the cost ofpower acquired by First Choice,
-  Collections experience, 
-  Insurance coverageavailable for claims made in litigation,
-  Fluctuations in interestrates,
-  Weather, 
-  Water supply, 
-  Changes in fuel costs, 
-  Availability of fuelsupplies,
-  The effectiveness ofrisk management and commodity risk transactions,
-  Seasonality and otherchanges in supply and demand in the market for electric power,
-  Variability of wholesalepower prices,
-  Volatility in marketliquidity,
-  Changes in thecompetitive environment in the electric and natural gas industries, 

135

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**
-  The performance ofgenerating units and transmission systems,
-  The ability of theCompany to secure long-term power sales,
-  The risks associatedwith completion of construction of Luna, including construction delays andunanticipated cost overruns,
-  State and federalregulatory and legislative decisions and actions,
-  The outcome of legalproceedings,
-  Changes in applicableaccounting principles,
-  The performance ofstate, regional and national economies, and
-  The other factorsdescribed in "Risk Factors" in this report.

See also"Quantitative and Qualitative Disclosure About Market Risk" above forinformation about the risks associated with PNMR's, PNM's and TNMP's use ofderivative financial instruments.

**SECURITIES ACT DISCLAIMER**

Certain securities to beissued in connection with the TNP acquisition transaction and commercial paperdescribed in this report have not been registered under the Securities Act of1933, as amended, or any state securities laws and may not be reoffered or soldin the United States absent registration or an applicable exemption from theregistration requirements of the Securities Act of 1933 and applicable statesecurities laws. This report does not constitute an offer to sell or thesolicitation of an offer to buy any securities. 

**RISK FACTORS**

The business and financialresults of PNMR, PNM and TNMP are subject to a number of risks anduncertainties, including those set forth below and under the heading"Management's Discussion and Analysis of Financial Condition and Results ofOperations" in this report.  This discussion incorporates potential risks forPNMR, PNM and TNMP.

 

**PNMR may fail tosuccessfully integrate acquisitions, including TNP, into its other businessesor otherwise fail to achieve the anticipated benefits of pending and futureacquisitions.**

 

As part of PNMR's growthstrategy, PNMR is pursuing, and intends to continue to pursue, a disciplined acquisitionstrategy.  While PNMR expects to identify potential synergies, cost savings,and growth opportunities prior to the acquisition and integration of acquiredcompanies or assets, PNMR may not be able to achieve these anticipated benefitsdue to, among other things: 
-  delaysor difficulties in completing the integration of acquired companies or assets, 
-  higherthan expected costs or a need to allocate resources to manage unexpectedoperating difficulties,
-  diversionof the attention and resources of its management,

136

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**
-  relianceon inaccurate assumptions in evaluating the expected benefits of a givenacquisition,
-  inabilityto retain key employees or key customers of acquired companies, and 
-  assumptionof liabilities unrecognized in the due diligence process.

With respect to the TNP acquisitio, PNMR cannot assure that itwill be able to successfully integrate TNP with PNMR's businesses.  The integration of TNP with PNMR's otherbusinesses will present significant challenges and, as a result, PNMR may notbe able to operate the combined company as effectively as expected.  Also, evenif PNMR manages to realize greater than anticipated benefits from theintegration of TNP into its business, PNMR's regulated subsidiaries may berequired by their regulators to return these benefits to ratepayers.  Inconnection with the Texas and New Mexico settlements relating to the TNPacquisition, for example, TNMP agreed to provide ratepayers in Texas and New Mexico with rate credits over various periods of time resulting fromanticipated synergy savings from the acquisition.  PNMR may also fail toachieve the anticipated benefits of the acquisition as quickly or ascost-effectively as anticipated or may not be able to achieve those benefits atall.  

 

While PNMR expects thatthis acquisition will be accretive to earnings and cash flow in the first fullyear of operation after the transaction is completed, this expectation is basedon important assumptions, including assumptions related to interest rates,market prices for power, its ability to achieve operational benefits fromoperating the companies as a unified operation and the number of TNMP'scustomers that PNMR will be able to retain, which may ultimately be incorrect. In addition, the agreement TNMP has entered into with the PUCT staff and othersrelating to the TNP acquisition includes a two-year electric rate freeze and a$13.0 million annual rate reduction in TNMP's retail delivery rates effectiveMay 1, 2005, which could adversely affect profitability if costs at TNMP arenot controlled.  Additionally, the agreement entered into with the NMPRC staffand others provides TNMP's New Mexico electric customers with a three-phase 15%rate reduction to begin January 2006 and end December 2010.  As a result, ifPNMR is unable to integrate its businesses with TNP effectively or achieve thebenefits anticipated, PNMR's business, financial position, results ofoperations and liquidity may be materially adversely affected.

** **

**PNMR, PNM and TNMP aresubject to complex government regulation, which may have a negative impact ontheir business, financial position and results of operations.**

** **

PNMR, PNM and TNMP aresubject to comprehensive regulation by several federal, state and localregulatory agencies, which significantly influences their operating environmentand may affect their ability to recover costs from utility customers. Inparticular, the NMPRC, the PUCT, the SEC, the FERC, the NRC, the EPA, ERCOT,the NMED and the TCEQ regulate many aspects of their utility operations, includingsiting and construction of facilities, conditions of service, the issuance ofsecurities, and the rates that the regulated entities can charge customers.PNMR, PNM and TNMP are required to have numerous permits, approvals andcertificates from these agencies to operate their business. The rates that PNMand TNMP are allowed to charge for their retail services significantlyinfluence PNMR's and those subsidiaries' business, financial position, resultsof operations and liquidity.  Due to pending federal regulatory reforms, thepublic utility industry continues to undergo change.  

137

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

OnAugust 8, 2005, the President signed the Energy Policy Act of 2005 into law.  The legislation covers many areas, including the items set forth in Note 9 -"Regulatory and Rate Matters," in the Notes to the Consolidated FinancialStatements and elsewhere in this report.  The Energy Policy Act of 2005requires several rule makings by the FERC and other governmental agencies inorder to implement its provisions.  PNMR is in the process of evaluating theeffect of the Energy Policy Act of 2005. 

PNMR and its subsidiariesare unable to predict the impact on their business and operating results fromthe future regulatory activities of any agency that regulates them or from theimplementation of the EnergyPolicy Act of 2005. Changes in regulations or the imposition of additional regulations may requirePNMR and its regulated subsidiaries to incur additional expenses or changebusiness operations, and therefore may have an adverse impact on PNMR's andthose subsidiaries' results of operations.  

 

**PNM's retail electric ratereduction and retail electric rate freeze, and the New Mexico settlementrelating to the TNP acquisition, could adversely affect its profit margin if itdoes not control costs.**

 

With NMPRC approval, PNMagreed to decrease its retail electric rates by 6.5% in two phases as follows:4% effective September 1, 2003, and an additional 2.5% effective September 1,2005.  PNM also agreed to freeze these reduced retail electric ratesthrough December 31, 2007.  PNM's costs, however, are not frozen.  Inaddition, the TNP acquisition settlement in New Mexico provides resolution onhow synergy savings will be allocated among PNM's gas and electric customers. Pursuant to the TNP acquisition stipulation in New Mexico:
-  PNM's413,000 electric customers will receive rate credits totaling $4.6 million ornearly $1.84 million annually over a 30-month period beginning January 2008.	
-  PNM's471,000 gas customers will receive $4.3 million in rate credits over fiveyears, or $860,000 annually, beginning June 6, 2005. Thus, PNM's ability tomaintain its profit margins depends upon increased demand for electricity andPNM's efforts to control costs incurred in supplying that electricity, including,in particular, its coal costs.

PNM does not have thebenefit of a fuel adjustment clause for its retail electric operations thatwould allow it to recover increased fuel and purchased power costs fromcustomers.  Therefore, to the extent that PNM has not hedged its fuel and powercosts, it is exposed to changes in fuel and power prices to the extent fuel forits electric generating facilities and power must be purchased on the openmarket in order for it to serve its retail electric customers.  PNM anticipatesbeing able to reduce base fuel costs as a result of its revised coal contractrelating to the new underground mine serving SJGS.  However, if theanticipated base fuel cost savings do not occur because of problems at the newmine or if PNM cannot control other operating expenses, the retail electricrate freeze may decrease PNM's profit margin.  The retail electric ratefreeze will also affect PNM's ability to earn a return or recover from itscustomers costs associated with investments in generation, transmission anddistribution facilities since it will not be able to increase retail electricrates to recover those costs until at least after the end of the rate freeze. For example, in connection with the electric retail rate freeze stipulation,PNM 

138

**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

agreed to invest $60.0 million per year through 2007 in gas and electricutility infrastructure, increasing to $64.0 million per year after PNM and TNMPare integrated.  If future recovery of these costs ceases to be probable, PNMwould be required to record a charge to earnings in the period for the portionof the costs that were determined not to be recoverable.  The electric retailrate freeze stipulation does, however, allow PNM to seek a general rateadjustment for certain changes in environmental or tax laws.

** **

PNMR and PNM are not ableto predict what rate treatment PNM will receive following the expiration of theretail electric rate freeze in New Mexico.  Some of the factors that influencerates are largely outside their control. In response to competitive, economic,political, legislative and/or regulatory pressures,  PNM may have to agree tofurther rate freezes, rate refunds or rate reductions, any or all of whichcould have a significant adverse effect on PNMR's and PNM's business, financialposition, results of operations and liquidity.

 

**The impact from the TNPacquisition settlements could adversely affect TNMP's profit margin if TNMPdoes not control costs.**

** **

The TNP acquisitionsettlements for TNMP in Texas and New Mexico provide for the following:
-  atwo-year electric rate freeze that includes a $13.0 million annual ratereduction in TNMP's retail delivery rates effective May 1, 2005,
-  a $6.0million synergy savings credit amortized over 24 months effective after theclosing of the transaction,
-  athree-phase rate reduction totaling 15%, beginning January 2006 and endingDecember 2010, provides for TNMP's electric customers in southern New Mexico.  The rate reduction, which includes TNMP's annual synergy-savings allocation will lower TNMP electric rates by $9.6 million in the first year, and 
-  maintainingPNM as the power supplier for TNMP's New Mexico needs through 2010. 

In addition, as part of the  New Mexico settlement relating to the TNP acquisition, TNMP's current fueland purchased power adjustment clauses will be eliminated no later than March31, 2006.  Also, the New Mexico settlement requires the integration of TNMP's New Mexico assetsinto PNM effective January 1, 2007.  The companies, however, will maintainseparate rates through 2010.****

** **

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

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**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**The ability of First Choiceto attract and retain customers and its ability to mitigate the fluctuation incosts of energy supply could have a significant adverse effect on PNMR'sbusiness, financial position, results of operations and liquidity.**

 

In 2002, retail competitionbegan in Texas under the provisions of Senate Bill 7.  Prior to 2002, TNMPoperated as an integrated utility in Texas.  In accordance with Senate Bill 7and in compliance with a plan approved by the PUCT, TNMP separated its Texas utility operations into three components: (1) an unregulated retail sales businessoperated by First Choice; (2) a regulated power transmission and distributionbusiness operated by TNMP and (3) power generation, a business which TNMP is nolonger engaged in.

 

As a result of theacquisition of TNP, PNMR is exposed to competition in the unregulated Texas retail electricity market through First Choice, which serves customers atprice-to-beat rates and customers at competitive rates.  In order to competeeffectively in the Texas retail electricity market, First Choice must be ableto attract and retain customers on the basis of cost and service, whilemanaging the cost of its energy supply.  The ability of First Choice to competesuccessfully in the Texas market could have a significant effect on PNMR'sbusiness, financial position, results of operations and liquidity.

 

**PNM is currently thesubject of several regulatory proceedings and named in multiple lawsuits withrespect to PNM's participation in the United States' Western energy markets. **

The FERC is conductingindustry-wide proceedings and investigations related to the allegeddysfunctions of the organized California market and the Pacific Northwest marketduring 2000 and 2001. 

California Refund Proceeding

SDG&E and other California buyers filed a complaint with the FERC in 2000 against sellers into the California wholesale electric market.  Hearings were held in September 2002, and the ALJissued the "Proposed Findings on California Refund Liability" in December 2002,in which it was determined that the Cal ISO had, for the most part, correctlycalculated the amounts of the potential refunds owed by sellers.  The ALJidentified what were termed "ballpark" figures for the amount of refunds dueunder the order in an appendix to the proposed findings document.  Pursuant tothe FERC's order, PNM filed, in conjunction with the competitive suppliergroup, initial comments in January 2003 to the ALJ's preliminary findingsaddressing errors PNMR believes the ALJ made in the proposed findings, andfiled reply comments in February 2003.  

Prior to the December 2002ALJ decision, the Ninth Circuit ordered the FERC to allow the parties in thecase to provide additional evidence regarding alleged market manipulation bysellers.  Several California parties submitted additional evidence in March2003 to support their position that virtually all market participants,including PNM, either engaged in specific market manipulation strategies orfacilitated such strategies.  PNM maintains that it did not engage in improperwholesale activities, and filed reply evidence in March 2003, denying theallegations against it.  

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**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

In March 2003, the FERCissued an order substantially adopting the ALJ's findings in the December 2002decision, but requiring a change to the formula used to calculate refunds.  TheFERC raised concerns that the indices for California gas prices, a majorelement in the refund formula, had been subject to potential manipulation andwere unverifiable.  The effect of this change would be to increase PNM's refundliability.  In October 2003, the FERC issued its order on rehearing in which itaffirmed its decision to change the gas price indices used to calculate therefund amounts.  This has the effect of increasing PNMR's amount of refund. The precise amounts, however, will not be certain until the Cal ISO and Cal PXrecalculate the refund amounts.  In a report filed by the Cal ISO in March2005, the Cal ISO indicated that the Cal PX had concluded its recalculation ofthe adjustments for hourly price mitigation.  The Cal ISO is waiting to receiveaudited fuel cost information from market participants as a result of the fuelcost proceedings currently pending at the FERC before finalizing itsrecalculated refund amounts.  In June 2004, the FERC hosted a settlementconference in which the California parties proposed a settlement template forthe California refund proceedings.  PNMR has engaged in discussions with California parties based upon the template provided in the settlement conference, but isunable to predict whether settlement will be reached.

In September 2004, theNinth Circuit issued its decision in one of the lead appellate cases addressingthe FERC's refund order.  The Ninth Circuit upheld the FERC's authority toestablish the market-based rate framework under the Federal Power Act, but heldthat the FERC violated its administrative discretion by declining toinvestigate whether it should order refunds from sellers who failed to providetransaction-specific reports to the FERC as required by its rules.  The NinthCircuit determined that the FERC has the authority to order refunds for thesetransactions if it elects to do so and remanded the case to the FERC forfurther proceedings, including a determination as to whether additional refundsare appropriate.  PNM participated with other competitive sellers requestingrehearing by the Ninth Circuit, which is still pending.  Additional appeals arestill pending before the Ninth Circuit, including *CPUC vs FERC*, a caseaddressing the scope of market transactions subject to refund.  PNM hasparticipated in this appeal as one of the members of the competitive sellersgroup.  The Company cannot predict the ultimate outcome of any FERC proceedingthat may result from these appeals, or whether PNM will be ultimately directedto make any additional future refunds as the result of the decision; however,the Company has recorded a reserve for this contingency.

Pacific Northwest RefundProceeding

In addition to the California refund proceedings, Puget Sound Energy, Inc. filed a complaint at the FERCalleging that spot market prices in the Pacific Northwest wholesale electricmarket were unjust and unreasonable.  In September 2001, the ALJ issued arecommended decision and declined to order refunds associated with wholesaleelectric sales in the Pacific Northwest.  In a ruling similar to the one issuedin the California refund proceeding, the FERC allowed additional discovery totake place and the submission of additional evidence in the case in March2003.  In June 2003, the FERC issued an order terminating the proceeding andadopting the ALJ's recommendation that no refunds should be ordered.  Severalparties in the proceeding filed requests for rehearing and in November 2003,the FERC denied rehearing and reaffirmed its prior ruling that refunds were notappropriate for spot market sales in the Pacific Northwest during the firsthalf of 2001.  In November 2003, the Port of Seattle filed an 

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**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

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, PNMR is also participatingin the appeal proceedings.  The Ninth Circuit has scheduled oral arguments inthe appeal for September 2005.  PNMR is unable to predict the ultimate outcomeof this appeal, or whether PNM will ultimately be directed to make any refunds.

California Attorney GeneralComplaint

InMarch 2002, the California Attorney General filed a complaint with the FERCagainst numerous sellers regarding prices for wholesale electric sales into theCal ISO and Cal PX markets and to the California Department of WaterResources.  PNM was among the sellers identified in this complaint and filedits answer and motion to intervene.  In its answer, PNM defended its pricingand challenged the theory of liability underlying the California AttorneyGeneral's complaint.  In May 2002, the FERC entered an order denying theCalifornia Attorney General's request to initiate a refund proceeding, butdirected sellers, including PNM, to comply with additional reportingrequirements with regard to certain wholesale power transactions.  PNM has madefilings required by the May 2002 order.  The California Attorney General fileda petition for review in the Ninth Circuit.  PNM intervened in the NinthCircuit appeal and participated as a party in that proceeding.  As noted above,in September 2004, the Ninth Circuit issued its decision upholding the FERC'sauthority to establish the market-based rate framework under the Federal PowerAct, but held that the FERC violated its administrative discretion by decliningto investigate whether it should order refunds from sellers who failed toprovide transaction-specific reports to the FERC as required by its rules.  TheNinth Circuit determined that the FERC has the authority to order refunds forthese transactions if it elects to do so and remanded the case back to the FERCfor further proceedings, including a determination as to whether additionalrefunds are appropriate.  PNM participated with other competitive sellersrequesting rehearing en banc by the Ninth Circuit, which is still pending. PNMR cannot predict the ultimate outcome of the FERC proceeding on remand, orwhether PNM will be ultimately directed to make any additional refunds as theresult of the decision.  

Wholesale Power MarketingAntitrust Suit

InJune 2004, PNM received notice that PNM has been included in a list of 56defendants that have been sued by the City of Tacoma Department of PublicUtilities in federal district court in the State of Washington.  PNM has beenlisted in a class of defendants referred to as the "Trading Defendants", whoallegedly engaged in buying, selling and marketing power in California andother locations in the Western United States.  The complaint alleges theTrading Defendants acted in concert among themselves and with "Non-DefendantTrading Co-Conspirators" that were engaged in conduct that amounted to marketmanipulations, which the complaint defines as a pattern of activities that hadthe purpose and effect of creating the impression that the demand for power washigher, the supply of power was lower, or both, than was in fact the case.  Thecomplaint identified specific conduct that allegedly amounted to marketmanipulations, including the submission of false information andmisrepresentation regarding load schedules, bids, power supply, transmissioncongestion, source and destination of energy, the supply and provision ofenergy and ancillary services.  The complaint alleged the activities of theTrading Defendants, along with "Generator Defendants", who are defined asgenerators who generated power for sale into California and other Westernmarkets, and the co-

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**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

conspirators, resulted in substantially increased pricesfor energy in the Pacific Northwest spot market in excess of what otherwisewould have been the price absent such unlawful acts, in violation of antitrustlaws.  The complaint asserted damages in excess of $175.0 million from themultiple defendants.  There have been three recent Ninth Circuit decisionsthat, collectively, appear to make Plaintiffs' case more difficult to prevail. As a result, PNM joined a motion to dismiss the City of Tacoma Department of PublicUtilities complaint given Ninth Circuit precedent.  In a decision issued inFebruary 2005, the district court judge in the case granted defendants' motionto dismiss.  As a result, the antitrust lawsuit against PNM filed by the Cityof Tacoma Department of Public Utilities was dismissed.  In March 2005, theCity of Tacoma Department of Public Utilities filed an appeal in the NinthCircuit contesting the district court's decision to dismiss the complaint.  PNMwill participate in the appeal in support of the dismissal.  PNMR cannotpredict the outcome of this appeal, or whether PNMR will be required to makeany refunds or pay damages as a result of this litigation.

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

PNM has a10.2% undivided interest in PVNGS, with portions of its interests in Units 1and 2 held under leases.  PVNGS is subject to environmental, health andfinancial risks such as the ability to dispose of spent nuclear fuel, theability to maintain adequate reserves for decommissioning, potentialliabilities arising out of the operation of these facilities, and the costs ofsecuring the facilities against possible terrorist attacks and unscheduledoutages due to equipment and other problems.  PNM maintains nucleardecommissioning trust funds and external insurance coverage to minimize itsfinancial exposure to some of these risks; however, it is possible that damagescould exceed the amount of insurance coverage.  Although the decommissioningtrust funds are designed to provide adequate funds for decommissioning at theend of the expected life of the PVNGS units, there is the risk of insufficientdecommissioning trust funds in the event of early decommissioning of the units.

The NRC hasbroad authority under federal law to impose licensing and safety-relatedrequirements for the operation of nuclear generation facilities. In the eventof non-compliance, the NRC has the authority to impose fines or shut down aunit, or both, depending upon its assessment of the severity of the situation,until compliance is achieved.  In addition, if a serious nuclear incident wereto 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 anuclear facility anywhere in the world could cause the NRC to limit or prohibitthe operation or licensing of any domestic nuclear unit.  Each PVNGS leasedescribes certain events, including "Events of Loss" or "Deemed Loss Events",the occurrence of which could require PNM to, among other things, (i) pay thelessor and the equity investor, in return for the investor's interest in PVNGS,cash in the amount provided in the lease and (ii) assume debt obligationsrelating to the PVNGS lease. The "Events of Loss" generally relate tocasualties, accidents and other events at PVNGS, which would severely,adversely affect the ability of the operating agent, APS, to operate, and theability of PNM to earn a return on its interests in, PVNGS.  The "Deemed LossEvents" consist mostly of legal and regulatory changes (such as changes in lawmaking the sale and leaseback transactions illegal, or changes in law makingthe lessors liable for nuclear decommissioning obligations). PNMR and PNMbelieve that the probability of such "Events of Loss" or "Deemed Loss Events"occurring is remote for the following reasons: (i) to a

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**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 large extent,prevention of "Events of Loss" and some "Deemed Loss Events" is within thecontrol of the PVNGS participants, including PNMR, and the PVNGS operatingagent, through the general PVNGS operational and safety oversight process and(ii) with respect to other "Deemed Loss Events," which would involve asignificant change in current law and policy, they are unaware of any pendingproposals or proposals being considered for introduction in Congress, or in anystate legislative or regulatory body that, if adopted, would cause any of thoseevents.

**PNMR's and its electricsubsidiaries' financial performance may be adversely affected if their powerplants and transmission and distribution system are not successfully operated.**

PNMR's and itselectric subsidiaries' financial performance depends on the successfuloperation of their generation, transmission and distribution assets. Unscheduled or longer than expected maintenance outages, other performanceproblems with the electric generation assets, severe weather conditions,accidents and other catastrophic events, disruptions in the delivery of fueland other factors could reduce its excess generation capacity and thereforelimit the electric subsidiaries' ability to opportunistically sell excess powerin the wholesale market.  Diminished generation capacity could also result inthe aggregate net open forward electric sales position being larger thanforecasted generation capacity.  If this were to occur, purchases ofelectricity in the wholesale market would be required under contracts priced atthe time of execution or, if in the spot market, at the then-current marketprice.  There can be no assurance that sufficient electricity would beavailable at reasonable prices, or at all, if such a situation were to occur. Failures of transmission or distribution facilities may also causeinterruptions in the services the electric subsidiaries provide.  Thesepotential generation, distribution and transmission problems, and anypotentially related service interruptions, could result in lost revenues andadditional costs.

**PNMR's, PNM's and TNMP'scounterparties may not meet their obligations to us.**

PNMR and itsoperating subsidiaries are exposed to risk that counterparties, which owe themmoney, energy or other commodities or services, will not be able to performtheir obligations.  The possibility that certain counterparties may fail toperform their obligations has increased due to financial difficulties, in somecases brought on by improper or illegal accounting and business practices,affecting some participants in the energy industry.  Should the counterpartiesto these arrangements fail to perform, PNMR or its affected subsidiary might beforced to honor the underlying commitment at then-current market prices.  Insuch event, PNMR or the affected subsidiary might incur losses in addition toamounts, if any, already paid to the counterparties.

**The operations of PNMR and itsoperating subsidiaries are subject to risks beyond their control that mayreduce their revenues.**

** **PNMR's and itsoperating subsidiaries' revenues are affected by the demand for electricity andnatural gas.  That demand can vary greatly based upon:
-  weatherconditions, seasonality and temperature extremes,

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**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**
-  fluctuationsin economic activity and growth in PNMR's service area and the Western regionof the United States, 
-  theextent of additional energy available from current or new competitors, and 
-  theability of First Choice to attract and retain customers.

Weatherconditions will impact the revenues that PNMR and its operating subsidiariesobtain from electric wholesale sales.  Very warm and very coldtemperatures, especially for prolonged periods, can dramatically increase thedemand for electricity for cooling and heating, respectively, as opposed to theeffect of more moderate temperatures.  Very warm temperatures inside thesubsidiary's service territory reduce the amount of power available to sell onthe wholesale market.

Droughtconditions in New Mexico generally, and especially in the Four Corners region,in which the San Juan Generating Station and the Four Corners GeneratingStation are located, may affect the water supply for PNM's generatingplants.  If adequate precipitation is not received in the watershed thatsupplies the Four Corners areas, PNM may have to decrease generation at theseplants, which would reduce PNM's ability to sell excess power on the wholesalemarket and reduce its revenues.  As such, if the drought conditions continue orregulators or legislators take action to limit the PNM's supply of water, PNM'sand PNMR's business may be adversely impacted.  Although PNM has been able tomaintain adequate access to water in the past, PNM cannot be certain that itwill be able to do so in the future.

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

PNMR and itsoperating subsidiaries rely on access to both short-term money markets andlonger-term capital markets as a source of liquidity for any capitalrequirements not satisfied by the cash flow from our operations, which couldinclude capital requirements for energy infrastructure investments and fundingnew projects. If PNMR and its operating subsidiaries are not able to accesscapital at competitive rates or at all, PNMR's ability to implement its growthstrategy and its ability to finance capital requirements, if needed, will belimited.  Market disruptions or any downgrade of PNMR's or its operating subsidiaries'credit rating may increase the cost of borrowing or adversely affect theirability to raise capital through the issuance of securities or other borrowingarrangements, which could have a material adverse effect on their business,financial position, results of operations and liquidity.  These disruptionscould include:
-  aneconomic downturn,
-  changesin capital market conditions generally,
-  thebankruptcy of an unrelated energy company,
-  increasedmarket prices for electricity and gas,
-  terroristattacks or threatened attacks on facilities of PNMR's operating subsidiaries orthose of unrelated energy companies, and
-  deteriorationin the overall health of the utility industry.

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**ITEM 2.  MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **Asignificant reduction in the credit ratings of PNMR or its operatingsubsidiaries could materially and adversely affect their business, financialposition, results of operations and liquidity.

PNMR, PNM andTNMP cannot be sure that any of their current ratings will remain in effect forany given period of time or that a rating will not be lowered or withdrawnentirely by a rating agency.  Any downgrade: 
-  couldincrease borrowing costs, which would diminish financial results, 
-  couldrequire payment of a higher interest rate in future financings and thepotential pool of investors and funding sources could decrease,
-  couldincrease borrowing costs under certain of existing credit facilities, 
-  couldalso require the provision of additional support in the form of letters ofcredit or cash or other collateral to various counterparties, 
-  could limitaccess to or increase the cost of access to the commercial paper market, and 
-  belowinvestment grade credit ratings would also require approvals from the NMPRC fornew wholesale plant projects and for continuing to participate in wholesaleplant projects of more than a certain dollar value and under certainconditions. 

The ratingsfrom rating agencies reflect only the views of such rating agencies and are notrecommendations to buy, sell or hold our securities.  Each rating should beevaluated independently of any other rating.  Any downgrade or withdrawal ofPNMR's, PNM's or TNMP's current ratings may have an adverse effect on themarket price of their outstanding debt.

** Costs of environmentalcompliance, liabilities and litigation could exceed PNMR's and its operatingsubsidiaries' estimates which could adversely affect their business,financial position, results of operations and liquidity. **

Compliancewith federal, state and local environmental laws and regulations may result inincreased capital, operating and other costs, including remediation andcontainment expenses and monitoring obligations.  PNMR, PNM and TNMP cannotpredict how they would be affected if existing environmental laws andregulations were revised, or if new environmental laws and regulations seekingto protect the environment were adopted, but any such changes could increasetheir financing requirements or otherwise adversely affect their business,financial position, results of operations and liquidity.  Revised or additionallaws and regulations could also result in additional operating restrictions ontheir facilities or increased compliance costs that may not be fullyrecoverable in rates, thereby reducing net income.  For example, any futurechanges in the interpretation of the Clean Air Act's new source reviewprovisions could potentially increase operating and maintenance costssubstantially.  Similarly, in March 2005, the EPA adopted the Clear Air ActMercury Rule, which is intended to reduce mercury emissions from coal-firedgeneration plants.  PNMR and PNM cannot be certain how this rule will affectthem.  

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

** PNMR's business, results ofoperations and financial position may be adversely affected if PNMR and itsoperating subsidiaries do not successfully compete for wholesale customers andgeneration plant acquisition opportunities.  Wholesale plants will be exposedto price risk to the extent they must compete for the sale of energy andcapacity. **

The electricutility industry has experienced a substantial increase in competition at thewholesale level, caused by changes in federal law and regulatory policy. As aresult of the Public Utility Regulatory Policies Act of 1978 and the EnergyPolicy Act of 1992, competition in the wholesale electricity market has greatlyincreased due to a greater participation by traditional electricity suppliers,non-utility generators, independent power producers, wholesale power marketersand brokers, and due to the trading of energy futures contracts on variouscommodities exchanges. In 1996, the FERC issued new rules on transmissionservice to facilitate competition in the wholesale market on a nationwidebasis.  The rules give greater flexibility and more choices to wholesale powercustomers.  Also, in July 2002, the FERC issued a notice of proposed rulemaking(which has not yet been adopted) related to open access transmission serviceand standard electricity market design. 

As a result ofthe changing regulatory environment and the relatively low barriers to entry (whichinclude, in addition to open access transmission service, relatively lowconstruction costs for new generating facilities), PNMR expects competition tosteadily increase. This increased competition could affect load forecasts,acquisition opportunities and wholesale energy sales and related revenues. Given that during 2004, PNM's sales in the wholesale electric market accountedfor approximately 62% of our total MWh sales, the impact of these changes onPNMR's and PNM's financial results could be material.  The effect on theirbusiness, results of operations and financial position could vary depending onthe extent to which:
-  PNMR	and its operating subsidiaries are able to acquire additional generation to	compete in the wholesale market,
-  newopportunities are created for the expansion of wholesale load, and 
-  currentwholesale customers elect to purchase from other suppliers after existingcontracts expire.

PNM's long-term contracts to supply power expirefrom 2006 through 2020.  PNM's ability to renew these contracts at termscomparable to those currently in place is dependent upon prevailing marketconditions at the time of negotiations. 

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To the extentelectric capacity generated by wholesale plants is not under contract to besold or committed to serving its retail electric load, either now or in thefuture, the business, results of operations and financial position of PNMR andPNM will generally depend on the prices that can be obtained for energy andcapacity in New Mexico and adjacent markets.  Among the factors that wouldinfluence these prices, all of which are beyond PNMR's and PNM's control to asignificant degree, are those described in the next risk factor.

** PNMR and its operatingsubsidiaries may not be able to mitigate fuel and wholesale electricity pricingrisks, which could result in unanticipated liabilities or increased volatilityin earnings.**

The businessand operations of PNMR and its operating subsidiaries are subject to changes inpurchased power prices and fuel costs that may cause increases in the amountsthat must be paid for power supplies on the wholesale market and the cost ofproducing power in owned generation plants.  As evidenced by the California energy crisis in 2000-2001, prices for electricity, fuel and natural gas may fluctuatesubstantially over relatively short periods of time and expose PNMR and itsoperating subsidiaries to significant commodity price risks.

Among thefactors that could affect market prices for electricity and fuel are:
-  prevailingmarket prices for coal, oil, natural gas and other fuels used in PNM'sgeneration plants, including associated transportation costs, and supplies ofsuch commodities,
-  changesin the regulatory framework for the commodities markets that PNMR and itsoperating subsidiaries rely on for purchased power and fuel,
-  liquidityin the general wholesale electricity market,
-  theactions of external parties; such as the FERC or independent system operators,that may impose price limitations and other mechanisms to address some of thevolatility in the United States' Western energy markets,
-  weatherconditions impacting demand for electricity or availability of hydroelectricpower or fuel supplies,
-  therate of growth in electricity as a result of population changes, regionaleconomic conditions and the implementation of conservation programs, 
-  unionand labor relations,
-  naturaldisasters, wars, embargoes and other catastrophic events, and
-  changesin federal and state energy and environmental laws and regulations. 

PNMR and itsoperating subsidiaries rely on derivatives such as forward contracts, futurescontracts, options and swaps to manage these risks.  They attempt to managetheir exposure from these activities through enforcement of established risklimits and risk management procedures.  PNMR and its operating subsidiariescannot be certain that these strategies will be successful in managing pricingrisk, or that they will not result in net liabilities as a result of futurevolatility in these markets.

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In addition,although PNMR and its operating subsidiaries routinely enter into contracts tooffset positions (i.e. to hedge its exposure to the risks of demand, marketeffects of weather and changes in commodity prices), they do not always hedgethe entire exposure of their operations from commodity price volatility. Furthermore, their ability to hedge exposure to commodity price volatilitydepends on liquid commodity markets.  To the extent the commodity markets areilliquid, they may not be able to execute their risk management strategies, whichcould result in greater open positions than they would prefer at a given time. To the extent that open positions exist, fluctuating commodity prices canimprove or diminish the business, financial position, results of operations andliquidity of PNMR and its operating subsidiaries. 

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

PNMR, PNM andTNMP evaluate their tangible long-lived assets for impairment wheneverindicators of impairment exist pursuant to SFAS 144.  These potentialimpairment triggers would include fluctuating market conditions as a result ofindustry deregulation; planned and scheduled customer purchase commitments; futuremarket penetration; fluctuating market prices resulting from factors includingchanging fuel costs and other economic conditions; weather patterns; and othermarket trends.  Accounting rules require that if the sum of the undiscountedexpected future cash flows from a company's asset (excluding interest chargesthat will be recognized as expenses when incurred) is less than the carryingvalue of the asset, then asset impairment must be recognized in the financialstatements.  The amount of impairment recognized is the difference between thefair value of the asset and the carrying value of the asset.  PNMR and PNMdetermined that no triggering events occurred during the period for theirgeneration assets.  

PNM has threeturbines, which are currently in storage, with a combined carrying value ofapproximately $79.7 million.  PNM believes that it will be able to place two ofthe turbines in service and recover the costs of these two turbines in rates. In July 2005, PNM filed with the NMPRC an application for a Certificate ofPublic Convenience and Necessity in which PNM requested NMPRC approval toinclude in PNM's retail rate base in its next retail electric rate case thecosts associated with the conversion of the Afton generating station from a combustionturbine to a combined cycle unit utilizing one of the turbines in storage. PNMR and PNM analyzed the remaining turbine for impairment and concluded noimpairment existed based on their plans for its use.  The carrying amount ofthis turbine at June 30, 2005, 2005 was $16.6 million.  PNMR and PNM expect tobegin construction utilizing this turbine over the next several years.  If PNMRand PNM were unable to realize these plans, PNMR and PNM would be forced torecognize a loss with respect to the carrying value of the turbine depending onprevailing market conditions.  PNMR and PNM will continue to analyze theturbine for impairment in accordance with SFAS 144.

**Impairments of goodwill andintangible assets of PNMR and its subsidiaries could adversely affect theirbusiness, financial position, liquidity and results of operations. **

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PNMR recorded$482.8 million of goodwill as a result of its acquisition of TNP.  As requiredby SFAS 142, PNMR evaluates goodwill for impairment annually and between annualtests whenever indicators of impairment exist pursuant to SFAS 142. Impairmentof goodwill exists when the carrying amount of goodwill exceeds its impliedfair value.  The implied value of goodwill shall be determined in the samemanner as the amount of goodwill recognized in a business combination isdetermined. 

PNMR alsorecorded $63.1 million of other intangible assets as a result of itsacquisition of TNP.  Of the $63.1 million of acquired intangible assets, $53.2million was assigned to the trade name "First Choice".  The trade name has anindefinite useful life and therefore, no amortization will be recognized untilits useful life is determined to be no longer indefinite. PNMR will evaluatethe remaining useful life of the First Choice trade name each reporting periodas required by SFAS 142 to determine whether events or circumstances continueto support an indefinite useful life.

The remaining$ 9.9 million of acquired intangible assets was assigned to the First Choicecustomer list.  The useful life of the customer list is estimated to be eightyears and will be amortized on a straight-line basis over eight years. PNMRwill evaluate the remaining useful life of the First Choice customer list eachreporting period as required by SFAS 144 to determine whether events orcircumstances continue to support the remaining amortization period. 

** Actual results could differfrom estimates used to prepare PNMR's, PNM's and TNMP's financial statements.**

In preparingthe financial statements in accordance with GAAP, management must often makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues, expenses and related disclosures at the date of thefinancial statements and during the reporting period. Some of those judgments canbe subjective and complex, and actual results could differ from thoseestimates.  For more information about these estimates and assumptions, see"Management's Discussion and Analysis of Financial Condition and Results ofOperations - Critical Accounting Policies and Estimates".  

**Provisions of PNMR'sorganizational documents, as well as several other statutory and regulatoryfactors, will limit another party's ability to acquire PNMR and could deprivePNMR's shareholders of the opportunity to gain a takeover premium for shares ofPNMR's common stock.**

PNMR'srestated articles of incorporation and by-laws include a number of provisionsthat may have the effect of discouraging persons from acquiring large blocks ofPNMR's common stock or delaying or preventing a change in control of PNMR. Thematerial provisions that may have such an effect include:
-  authorizationfor the PNMR Board to issue PNMR's preferred stock in series and to fix rightsand preferences of the series (including, among other things, whether, and towhat extent, the shares of any series will have voting rights, subject tocertain limitations, and the extent of the preferences of the shares of anyseries with respect to dividends and other matters),
-  provisionsclassifying PNMR's Board into three classes, with the directors being electedfor staggered terms,

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-  advancenotice procedures with respect to any proposal other than those adopted orrecommended by PNMR's Board, and
-  provisionsspecifying that only a majority of the Board, the chairman of the Board, thepresident or holders of not less than one-tenth of all of PNMR's sharesentitled to vote may call a special meeting of stockholders.

Under the New Mexico Public Utility Act, approval of the NMPRC isrequired for certain transactions that may result in our change in control orexercise of control.  Certain acquisitions by any person of PNMR's outstandingvoting securities would also require approval of the SEC under PUHCA.  Se Note9 - "Regulatory and Rate Matters," in the Notes to ConsolidatedFinancial Statements for further discussion.

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**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURE ABOUT MARKET RISK**

See"Quantitative and Qualitative Disclosure About Market Risk" in "Item 2.Management's Discussion and Analysis of Financial Condition and Results ofOperations".

** ITEM 4.  CONTROLS ANDPROCEDURES**

*Disclosure Controls andProcedures*

PNM and TNMPeach maintain disclosure controls and procedures designed to ensure that it isable to collect the information it is required to disclose in the reports itfiles with the SEC, and to process, summarize and disclose this informationwithin the time periods specified in the rules of the SEC.  Based on anevaluation of each of the registrants' disclosure controls and procedures as ofthe end of the period covered by this report conducted by the registrants'management, with the participation of the Chief Executive and Chief FinancialOfficers, the Chief Executive and Chief Financial Officers believe that thesecontrols and procedures are effective to ensure that each of the registrants isable to collect, process, and disclose the information it is required todisclose in the reports it files with the SEC within the required time periods.

*Changes in Internal Controls*

The followingmaterial changes in internal controls occurred during the second quarter of2005: i) implemented a new application utilized in the deal capture andaccounting processes for PNM Wholesale activities and ii) upgraded anapplication utilized in accounting for the PNM Wholesale activities. 

*TNP Acquisition*

With theacquisition, the Company developed an interface process to transfer thefinancial reporting information from TNP to the system that the Company uses toproduce its consolidated financial statements for internal and externalreporting.  This was the only material change in internal control that resultedfrom the acquisition.  The Company is currently undergoing a diligent effort toensure TNP's compliance with Section 404 of the Sarbanes-Oxley Act of 2002.  Asintegration activities occur, the Company will continue to integrate theCompany's internal controls into TNP's operations.  It is expected that thiseffort will continue during the remainder of 2005 and into 2006. 

Except asdescribed above, there were no other changes in internal control over financialreporting that occurred during the second quarter of 2005 that have materiallyaffected, or are reasonably likely to materially affect the Company's internalcontrol over financial reporting.

152

**PART II - OTHER INFORMATION**

** ITEM 1. LEGAL PROCEEDINGS**

See Note 8 -"Commitments and Contingencies," in the Notes to Consolidated FinancialStatements for information related to the following matters, incorporated inthis item by reference.
-  Tax Refund Litigation 
-  Navajo NationEnvironmental Issues
-  Citizen Suit Under theClean Air Act
-  Excess Emissions Reports 
-  Santa Fe Generating Station
-  Natural GasRoyalties Qui Tam Litigation
-  Asbestos Cases
-  SESCO Matter (for bothPNM and TNMP)
-  Legal Proceedingsdiscussed under the captions "Western United States Wholesale PowerMarket" and "FERC Rule Making"
-  Wholesale PowerMarketing Antitrust Suit
-  TNMP True-Up Proceeding

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

**AnnualMeeting**

The annual meeting ofshareholders was held on May 17, 2005.  The matters voted on at the meeting andthe results were as follows:

The election of thefollowing nominees to serve as directors as follows:

Director

Votes For

Votes	AgainstOr Withheld

         Terms expiring in 2008 (Class "A" Directors):

Adelmo E. Archuleta

49,748,081

5,344,233

Julie A. Dobson

49,955,446

5,136,868

Charles E. McMahen

53,356,190

1,736,124

        

The approval of theselection by the Company's Board of Deloitte & Touche LLP as independentauditors for the fiscal year ending December 31, 2005, was voted on, asfollows:

Votes For

Votes	AgainstOr Withheld

Abstentions

39,462,877

15,523,385

106,051

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The approval of anamendment to the Restated Articles of Incorporation of PNM Resources, Inc. toauthorize the granting of additional voting rights to holders of any series ofpreferred stock that is convertible into common stock, subject to a cap on theamount of preferred stock that may be outstanding at any one time with theadditional new voting rights, was voted on, as follows:

	Votes For

Votes	AgainstOr Withheld

	Abstentions

38,794,199

11,810,465

               198,920

The approval of theAmended and Restated Omnibus Performance Equity Plan, which permitsnon-employee Board members to participate and increases the number of sharesavailable for award by 4,500,000 shares, to extend the term of the plan to 2015and to make changes to the plan to facilitate compliance with Section 409A ofthe Internal Revenue Code of 1985, as amended, was voted on, as follows:

	Votes For

Votes	AgainstOr Withheld

	Abstentions

38,033,740

11,868,962

               875,295

** ITEM 5.  OTHER EVENTS**
**COMPANY WEBSITE**
The Company's internet address is http://www.pnmresources.com.  (This isa new internet address that became effective April 26, 2005.)  The contents ofthis website address are not a part of this Form 10-Q.  The Company's filingswith the SEC, including annual reports on Form 10-K, quarterly reports on Form10-Q, current reports on Form 8-K and amendments to those reports, filed orfurnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Actof 1934, are accessible free of charge at http://www.pnmresources.com as soonas reasonably practicable after the Company electronically files such materialwith, or furnishes it to, the SEC, and, upon request, are available in printfrom the Company free of charge.  Additionally, the Company's CorporateGovernance Principles, code of ethics (Do the Right Thing-Principles ofBusiness Conduct) and charters of the Company's Audit and Ethics Committee,Governance and Public Policy Committee, Human Resources and CompensationCommittee and Finance Committee are available on the Company's website athttp://www.pnmresources.com/ge/index and such information is available inprint, without charge, to any shareholder who requests it.  On the pnm.comwebsite, a click on any portion of the "Investing" or "Governance"sections will automatically inform the user of the new website and provide adirect link to pnmresources.com.

154

**NewTNMP Bylaws**

** **On August 4,2005, the board of directors of TNMP approved new bylaws that became effectiveon August 4, 2005.  A copy of TNMP's new bylaws is attached hereto as exhibit3.2.2.  On June 6, 2005 (and reported in Item 5.03 of a Current Report on Form8-K filed by TNMP on June 10, 2005), TNMP amended and modified its bylaws topermit the execution, in connection with the acquisition by PNMR of TNP and itssubsidiaries, of a unanimous written consent of the shareholder and directorsof TNMP by its sole shareholder and director, without the necessity for furthernotice to, or act or approval of such shareholder or director.  These amendedbylaws were replaced on August 4, 2005 by the new bylaws.

* Summary of Changes to the TNMP bylaws*

* *Article 1 of the previousTNMP bylaws on offices was deleted and replaced by Article VI, Section 4 of thenew bylaws which provides that the principal office shall be established andmaintained at a place designated by the board of directors.  Article I of thenew bylaws on shareholder meetings provides that the annual meeting shall beheld at the time and the place specified by the board (instead of every fourthFriday in April) and provides that notice must be mailed to shareholders notless than 30 days before the meeting and that the record date shall not exceed30 days before the meeting date.  Article II on directors (Article III of theold bylaws) now provides that the number of directors shall be not less than 3nor more than 12 (instead of  9 members including one independent director). The new bylaws do not anticipate having the position of advisory director. Special meetings may be held whenever called by the chairman, the president orany 3 directors (instead of by the chairman, president, secretary or any 2directors).  The provisions on removal and retirement of directors, vacancy,regular meeting dates and payment of dividends were deleted.  Theindemnification of officers and directors to the full extent authorized by Texas law is now contained in Article II, Section 7 instead of in Article VII, Section 5.

TNMP bylaws now contain anew Article III on contracts and negotiable instruments which discussesauthorized signatories and shareholder ratification of certain contracts oracts.  Article IV of the new bylaws provides that the officers of TNMP shall bea president, secretary, treasurer, controller and one or more vice presidentselected annually by the board of directors.  There is no longer any specificsection on salaries and contracts with officers.  Article V, section 4 providesthat record dates may be fixed and stock transfer books may be closed for notmore than 30 days nor less than 10 days before any shareholder meeting (insteadof not more than 50 days as in Article II, section 6(b) and Article VI, section6 of the old bylaws).  The directors may amend bylaws, except that only thecommon shareholders of TNMP are authorized to amend the bylaw provisionsrelating to the number of directors, compensation of directors and selection ofthe chairman and president.

 

**Officersof TNMP and TNP**

 

On August 5, 2005, theBoards of Directors of TNMP and TNP confirmed that J. R. Loyack, Senior VicePresident and Chief Financial Officer of PNMR and PNM, will also serve as theChief Financial Officer of TNMP and TNP, respectively, and that T. G. Sategna,Vice President and Corporate Controller and Chief Accounting Officer of PNMRand PNM, will also serve as Chief Accounting Officer for TNMP and TNP,respectively.

 

155

**ITEM 6.  EXHIBITS**

3.1

PNMR

Articles of Incorporation of PNMR, as amended through June  27, 2005

3.1.2

TNMP

Articles of Incorporation of TNMP, as amended through July  8, 2005

3.2.3

TNMP

Bylaws of TNMP as adopted on August 4, 2005

10.9

PNMR

Consent and Waiver Dated as of April 5, 2005 to  Receivables Purchase Agreement Dated as of April 8, 2003 among PNM  Receivables Corp., as seller, PNM, as servicer, the Investors, Bank of  America, N.A., as successor-in-interest to Fleet Securities, Inc., as  managing agent and deal agent.

**10.31.1

PNMR

First Amendment to the PNM Resources, Inc. Non-Union  Severance Pay Plan effective June 6, 2005

**10.31.2

PNMR

Second Amendment to the PNM Resources, Inc. Non-Union  Severance Pay Plan effective June 6, 2005.

**10.56.1

PNMR

First Amendment to the PNM Resources, Inc. Executive  Savings Plan II effective June 6, 2005

**10.63

TNMP

Texas-New Mexico Company Excess Benefit Plan, As Amended  and Restated Effective October 1, 1996.

10.86.1

PNM

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).

12.1

PNMR

Ratio of Earnings to Fixed Charges.

12.2

PNMR

Ratio of Earnings to Combined Fixed Charges and Preferred  Stock Dividends.

12.3

TNMP

Ratio of Earnings to Fixed Charges.

31.1

PNMR/PNM

Chief Executive Officer Certification Pursuant to Section  302 of the Sarbanes-Oxley Act of 2002.

31.2

PNMR/PNM

Chief Financial Officer Certification Pursuant to Section  302 of the Sarbanes-Oxley Act of 2002.

31.3

TNMP

Chief Executive Officer Certification Pursuant to Section  302 of the Sarbanes-Oxley Act of 2002.

31.4

TNMP

Chief Financial Officer Certification Pursuant to Section  302 of the Sarbanes-Oxley Act of 2002.

32.1

PNMR/PNM

Chief Executive Officer Certification Pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.

156

32.2

PNMR/PNM

Chief Financial Officer Certification Pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.

32.3

TNMP

Chief Executive Officer Certification Pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.

32.4

TNMP

Chief Financial Officer Certification Pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.

** designates each managementcontract or compensatory plan or arrangement required to be identified.

157

**Signature**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrants have duly caused this report to be signedon their behalf by the undersigned thereunto duly authorized.

**PNM RESOURCES, INC. 		PUBLIC SERVICE COMPANY OF  NEW MEXICO	TEXAS-NEW MEXICO POWER  COMPANY**

(Registrants)
 
Date:   August 8, 2005

/s/ Thomas G.  Sategna

Thomas G. Sategna

Vice President and  Corporate Controller

(Officer duly  authorized to sign this report)

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