**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 THESECURITIES
                  EXCHANGE ACT OF 1934**For
                  the quarterly period ended****March
                  31, 2007****Commission**
              
              **Name
                  of Registrants, State of Incorporation,**
              
              **I.R.S.
                  Employer****File
                  Number**
              
              **Address
                  and Telephone Number**
              
              **Identification
                  No.**001-32462
              
              PNM
                  Resources, Inc.
              
              85-0468296(A
                  New Mexico Corporation)Alvarado
                  SquareAlbuquerque,
                  New Mexico 87158(505)
                  241-2700001-06986
              
              Public
                  Service Company of New Mexico
              
              85-0019030(A
                  New Mexico Corporation)Alvarado
                  SquareAlbuquerque,
                  New Mexico 87158(505)
                  241-2700002-97230
              
              Texas-New
                  Mexico Power Company
              
              75-0204070(A
                  Texas Corporation)4100
                  International Plaza,P.O.
                  Box 2943Fort
                  Worth, Texas 76113(817)
                  731-0099




Indicate
        by check mark whether PNM Resources, Inc. (“PNMR”) and Public Service Company of
        New Mexico (“PNM”) (1) have filed all reports required to be filed by
        Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
        preceding 12 months (or for such shorter period that the registrant was
        required to file such reports) and (2) have been subject to such filing
        requirements for the past 90 days. YES ü NO
 
 Indicate
        by check mark whether Texas-New Mexico Power Company (“TNMP”) (1) has filed
        all reports required to be filed by Section 13 or 15(d) of the
        Securities Exchange Act of 1934 during the preceding 12 months (or for such
        shorter period that the registrant was required to file such reports) and
        (2) has been subject to such filing requirements for the past 90 days.
 YES  NO ü
 
 (NOTE:
        As
        a voluntary filer, not subject to the filing requirements, TNMP filed all
        reports under Section 13 or 15(d) of the Securities Exchange Act of 1934
        during
        the preceding 12 months.)









Indicate
          by check mark whether PNMR is a large accelerated filer, an accelerated
          filer,
          or a non-accelerated filer (as defined in Rule 12b-2 of the Act).
 
 Large
                    accelerated filerü
                Accelerated
                    filer
                Non-accelerated
                    filer
 
 Indicate
          by check mark whether each of PNM and TNMP is a large accelerated filer,
          accelerated filer, or non-accelerated filer (as defined in Rule 12b-2 of
          the
          Act).
 
 Large
                    accelerated filer
                Accelerated
                    filer
                Non-accelerated
                    filerü
 
 Indicate
          by check mark whether any of the registrants is a shell company (as defined
          in
          Rule 12b-2 of the Exchange Act). YES  NO  ü
 
 As
          of May
          1, 2007, 76,687,480 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 May 1, 2007 was
          39,117,799 all held by PNMR (and none held by non-affiliates).
 
 The
          total
          number of shares of common stock of TNMP outstanding as of May 1, 2007
          was 6,358
          all held indirectly by PNMR (and none held by non-affiliates).
 
 **PNM
          AND TNMP MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (H) (1)
          (a) AND
          (b) OF FORM 10-Q AND ARE THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
          FORMAT PURSUANT TO GENERAL INSTRUCTION (H) (2).**
 
 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 (and its subsidiary). TNMP makes no representations as to
          the
          information relating to PNMR and its subsidiaries other than TNMP (and
          its
          subsidiaries). 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 (and its subsidiary) or TNMP (and
          its
          subsidiaries), respectively, are not incorporated by reference
          therein.




ii


**PNM
        RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
        SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
        MEXICO POWER COMPANY AND SUBSIDIARIES**
 
 **INDEX**
 
 **Page
                  No.****GLOSSARY**
              1**PART
                  I. FINANCIAL INFORMATION**ITEM
                  1. FINANCIAL STATEMENTS (Unaudited)PNM
                  RESOURCES, INC. AND SUBSIDIARIESCONDENSED
                  CONSOLIDATED STATEMENTS OF EARNINGS
              4Three
                  Months Ended March 31, 2007 and 2006CONDENSED
                  CONSOLIDATED BALANCE SHEETS
              5March
                  31, 2007 and December 31, 2006CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
              7Three
                  Months Ended March 31, 2007 and 2006CONDENSED
                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
              9Three
                  Months Ended March 31, 2007 and 2006PUBLIC
                  SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARYCONDENSED
                  CONSOLIDATED STATEMENTS OF EARNINGS
              10Three
                  Months Ended March 31, 2007 and 2006CONDENSED
                  CONSOLIDATED BALANCE SHEETS
              11March
                  31, 2007 and December 31, 2006CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
              13Three
                  Months Ended March 31, 2007 and 2006CONDENSED
                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
              15Three
                  Months Ended March 31, 2007 and 2006TEXAS-NEW
                  MEXICO POWER COMPANY AND SUBSIDIARIESCONDENSED
                  CONSOLIDATED STATEMENTS OF EARNINGS
              16Three
                  Months Ended March 31, 2007 and 2006CONDENSED
                  CONSOLIDATED BALANCE SHEETS
              17March
                  31, 2007 and December 31, 2006CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
              19Three
                  Months Ended March 31, 2007 and 2006CONDENSED
                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
              21Three
                  Months Ended March 31, 2007 and 2006NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              22ITEM
                  2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND
                  RESULTS OF OPERATIONS
              58ITEM3.
                  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              85ITEM4.
                  CONTROLS AND PROCEDURES
              94**PART
                  II. OTHER INFORMATION**ITEM
                  1. LEGAL PROCEEDINGS
              96ITEM
                  1A. RISK FACTORS
              96ITEM
                  6. EXHIBITS
              97**SIGNATURE**
              98


iii




**GLOSSARY**
 
 **Definitions****:**Afton
              Afton
                  Generating StationALJ
              Administrative
                  Law JudgeAltura
              Altura
                  Power L.P.APS
              Arizona
                  Public Service CompanyAvistar
              Avistar,
                  Inc.BART
              Best
                  Available Retrofit TechnologyBoard
              Board
                  of Directors of PNMRBTU
              British
                  Thermal UnitCal
                  PX
              California
                  Power ExchangeCal
                  ISO
              California
                  Independent System OperatorCascade
              Cascade
                  Investment, L.L.C.Company
              PNM
                  Resources, Inc. and SubsidiariesConstellation
              Constellation
                  Energy Commodities Group, Inc.CTC
              Competition
                  Transition ChargeDecatherm
              Million
                  BTUsEaR
              Earnings
                  at RiskECJV
              ECJV
                  Holdings, LLCECMT
              EnergyCo
                  Marketing and Trading, LLCEEI
              Edison
                  Electric InstituteEIP
              Eastern
                  Interconnection ProjectEITF
              Emerging
                  Issues Task ForceEnergyCo
              EnergyCo,
                  LLC, a joint venture between PNMR and ECJVEPA
              United
                  States Environmental Protection AgencyERCOT
              Electric
                  Reliability Council of TexasESI
              Electric
                  Service IdentifierESPP
              Employee
                  Stock Purchase PlanFASB
              Financial
                  Accounting Standards BoardFCPSP
              First
                  Choice Power Special Purpose, L.P.FERC
              Federal
                  Energy Regulatory CommissionFIN
              FASB
                  Interpretation NumberFIP
              Federal
                  Implementation PlanFirst
                  Choice
              First
                  Choice Power, L. P. and SubsidiariesFour
                  Corners
              Four
                  Corners Power PlantGAAP
              Generally
                  Accepted Accounting Principles in the UnitedStates
                  of AmericaISO
              Independent
                  System OperatorLuna
              Luna
                  Energy FacilityMMBTUs
              Million
                  BTUsMoody’s
              Moody’s
                  Investor Services, Inc.MW
              MegawattMWh
              Megawatt
                  HourNavajo
                  Acts
              Navajo
                  Nation Air Pollution Prevention and Control Act, the NavajoNationSafe
                  Drinking Water Act, and the
                Navajo Nation Pesticide Act
 
  1
   Ninth
                  Circuit
              United
                  States Court of Appeals for the Ninth CircuitNMED
              New
                  Mexico Environment DepartmentNMPRC
              New
                  Mexico Public Regulation CommissionNOPR
              Notice
                  of Proposed RulemakingNSPS
              New
                  Source Performance StandardsNSR
              New
                  Source ReviewNYMEX
              New
                  York Mercantile ExchangeOATT
              Open
                  Access Transmission TariffO&M
              Operations
                  and MaintenancePGAC
              Purchased
                  Gas Adjustment ClausePG&E
              Pacific
                  Gas and Electric Co.PNM
              Public
                  Service Company of New Mexico and SubsidiaryPNM
                  Facility
              PNM’s
                  $400 Million Unsecured Revolving Credit FacilityPNMR
              PNM
                  Resources, Inc. and SubsidiariesPNMR
                  Facility
              PNMR’s
                  $600 Million Unsecured Revolving Credit FacilityPPA
              Power
                  Purchase AgreementPSA
              Power
                  Supply AgreementPSD
              Prevention
                  of Significant DeteriorationPUCT
              Public
                  Utility Commission of TexasPVNGS
              Palo
                  Verde Nuclear Generating StationREC
              Renewable
                  Energy CertificatesREP
              Retail
                  Electricity ProviderRMC
              Risk
                  Management CommitteeRTO
              Regional
                  Transmission OrganizationSDG&E
              San
                  Diego Gas and Electric CompanySEC
              United
                  States Securities and Exchange CommissionSFAS
              FASB
                  Statement of Financial Accounting StandardsSJCC
              San
                  Juan Coal CompanySJGS
              San
                  Juan Generating StationSOAH
              State
                  Office of Administrative HearingsS&P
              Standard
                  and Poors Ratings ServicesTECA
              Texas
                  Electric Choice ActTNMP
              Texas-New
                  Mexico Power Company and SubsidiariesTNP
              TNP
                  Enterprises, Inc. and SubsidiariesThroughput
              Volumes
                  of gas delivered, whether or not owned by the CompanyTwin
                  Oaks
              Assets
                  of Twin Oaks Power, L.P. and Twin Oaks Power III, L.P.VaR
              Value
                  at Risk
 
  2
  
 **Accounting
                  Pronouncements, (as amended)****:**EITF
                  03-11
              EITF
                  Issue No. 03-11 “*Reporting
                  Realized Gains and Losses on Derivative Instruments that are Subject
                  to
                  FASB Statement*
                *No. 133 and Not**Held
                  for Trading Purposes*”EITF
                  03-13
              EITF
                  Issue No. 03-13 “*Applying
                  the Conditions in Paragraph 42 of FASB**Statement
                  No. 144 in Determining Whether to*
                *Report Discontinued Operations*“FIN
                  48
              FIN
                  No. 48 “*Accounting
                  for Uncertainty in Income Taxes*”SFAS
                  5
              SFAS
                  No. 5 “*Accounting
                  for Contingencies*”SFAS
                  57
              SFAS
                  No. 57 “*Related
                  Party Disclosures*”SFAS
                  71
              SFAS
                  No. 71 “*Accounting
                  for Effects of Certain Types of Regulation*”SFAS
                  128
              SFAS
                  No. 128 “*Earnings
                  per Share*”SFAS
                  133
              SFAS
                  No. 133 “*Accounting
                  for Derivative Instruments and Hedging Activities*”SFAS
                  141
              SFAS
                  No. 141 “*Business
                  Combinations*”SFAS
                  144
              SFAS
                  No.144 “*Accounting
                  for the Impairment or Disposal of Long-Lived
                  Assets”*SFAS
                  149
              SFAS
                  No. 149 “*Amendment
                  of Statement 133 on Derivative Instruments and**Hedging
                  Activities*”




3




**PART
        I. FINANCIAL INFORMATION**
 
 **ITEM
        1. FINANCIAL STATEMENTS**
 
 **PNM
        RESOURCES, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF EARNINGS**
 (Unaudited)
  **Three
                    Months Ended March 31,****2007**
                
                **2006**(In
                    thousands, except share information)**Operating
                    Revenues:**Electric
                
                $
                436,807
                
                $
                448,216Gas
                
                
                216,484
                
                
                207,476Other
                
                
                210
                
                
                109Total
                    operating revenues
                
                
                653,501
                
                
                655,801**Operating
                    Expenses:**Cost
                    of energy sold
                
                
                378,520
                
                
                425,972Administrative
                    and general
                
                
                71,206
                
                
                65,305Energy
                    production costs
                
                
                47,500
                
                
                37,587Depreciation
                    and amortization
                
                
                40,442
                
                
                34,330Transmission
                    and distribution costs
                
                
                22,567
                
                
                19,050Taxes
                    other than income taxes
                
                
                18,620
                
                
                16,964Income
                    taxes
                
                
                13,969
                
                
                10,247Total
                    operating expenses
                
                
                592,824
                
                
                609,455Operating
                    income
                
                
                60,677
                
                
                46,346**Other
                    Income and Deductions:**Interest
                    income
                
                
                10,788
                
                
                10,151Gains
                    on investment securities
                
                
                70
                
                
                966Other
                    income
                
                
                2,012
                
                
                2,201Equity
                    in net loss of EnergyCo
                
                
                (662
                )
                
                -Carrying
                    charges on regulatory assets
                
                
                -
                
                
                1,973Other
                    deductions
                
                
                (987
                )
                
                (1,516
                )Other
                    income taxes
                
                
                (3,950
                )
                
                (5,101
                )Net
                    other income and deductions
                
                
                7,271
                
                
                8,674Earnings
                    before interest charges
                
                
                67,948
                
                
                55,020**Interest
                    Charges**:Interest
                    on long-term debt
                
                
                24,009
                
                
                22,531Other
                    interest charges
                
                
                13,838
                
                
                6,032Total
                    interest charges
                
                
                37,847
                
                
                28,563**Preferred
                    Stock Dividend Requirements of Subsidiary**
                
                
                132
                
                
                132**Net
                    Earnings**
                
                $
                29,969
                
                $
                26,325**Net
                    Earnings per Common Share (see Note 5):**Basic
                
                $
                0.39
                
                $
                0.38Diluted
                
                $
                0.38
                
                $
                0.38**Dividends
                    Declared per Common Share**
                
                $
                0.23
                
                $
                0.22
 
 The
        accompanying notes, as they relate to PNMR, are an integral part of these
        financial statements.
  4
  **PNM
        RESOURCES, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 (Unaudited)
  **March
                    31,**
                
                **December
                    31,****2007**
                
                **2006**(In
                    thousands)**ASSETS****Utility
                    Plant:**Electric
                    plant in service
                
                $
                4,278,802
                
                $
                4,263,068Gas
                    plant in service
                
                
                732,152
                
                
                721,168Common
                    plant in service and plant held for future use
                
                
                159,925
                
                
                157,0645,170,879
                
                
                5,141,300Less
                    accumulated depreciation and amortization
                
                
                1,668,056
                
                
                1,639,1563,502,823
                
                
                3,502,144Construction
                    work in progress
                
                
                262,850
                
                
                230,871Nuclear
                    fuel, net of accumulated amortization of $17,296 and
                    $14,008
                
                
                32,610
                
                
                28,844Net
                    utility plant
                
                
                3,798,283
                
                
                3,761,859**Other
                    Property and Investments:**Investment
                    in PVNGS lessor notes
                
                
                245,356
                
                
                257,659Equity
                    in net loss of EnergyCo
                
                
                1,838
                
                
                -Other
                    investments
                
                
                177,759
                
                
                169,720Non-utility
                    property, net of accumulated depreciation of $2,967 and
                    $2,812
                
                
                7,307
                
                
                7,565Total
                    other property and investments
                
                
                432,260
                
                
                434,944**Current
                    Assets:**Cash
                    and cash equivalents
                
                
                44,986
                
                
                123,419Special
                    deposits
                
                
                818
                
                
                5,146Accounts
                    receivable, net of allowance for uncollectible accounts of $6,792
                    and
                    $6,899
                
                
                199,719
                
                
                168,126Unbilled
                    revenues
                
                
                82,482
                
                
                116,878Other
                    receivables
                
                
                73,396
                
                
                73,744Inventories
                
                
                69,712
                
                
                63,329Regulatory
                    assets
                
                
                2,833
                
                
                17,507Derivative
                    instruments
                
                
                54,290
                
                
                59,312Income
                    taxes receivable
                
                
                61,526
                
                
                65,210Other
                    current assets
                
                
                62,820
                
                
                63,414Total
                    current assets
                
                
                652,582
                
                
                756,085**Deferred
                    Charges:**Regulatory
                    assets
                
                
                547,084
                
                
                553,564Pension
                    asset
                
                
                9,508
                
                
                8,853Goodwill
                
                
                494,513
                
                
                495,738Other
                    intangible assets, net of accumulated amortization of $2,380
                    and
                    $2,052
                
                
                101,874
                
                
                102,202Derivative
                    instruments
                
                
                22,897
                
                
                39,886Other
                    deferred charges
                
                
                73,401
                
                
                77,703Total
                    deferred charges
                
                
                1,249,277
                
                
                1,277,946$
                6,132,402
                
                $
                6,230,834
  The
        accompanying notes, as they relate to PNMR, are an integral part of these
        financial statements.
  5
  **PNM
        RESOURCES, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 (Unaudited)
  **March
                    31,**
                
                **December
                    31,****2007**
                
                **2006**(In
                    thousands, except share information)**CAPITALIZATION
                    AND LIABILITIES****Capitalization:**Common
                    stockholders' equity:Common
                    stock outstanding (no par value, 120,000,000 shares authorized:
                    issuedand
                    outstanding 76,683,386 and 76,648,472 shares)
                
                $
                1,039,908
                
                $
                1,040,451Accumulated
                    other comprehensive income, net of income tax
                
                
                13,855
                
                
                28,909Retained
                    earnings
                
                
                637,907
                
                
                623,936Total
                    common stockholders' equity
                
                
                1,691,670
                
                
                1,693,296Cumulative
                    preferred stock of subsidiary without mandatory redemptionrequirements
                    ($100 stated value, 10,000,000 shares authorized:115,293
                    issued and outstanding)
                
                
                11,529
                
                
                11,529Long-term
                    debt
                
                
                1,766,994
                
                
                1,765,907Total
                    capitalization
                
                
                3,470,193
                
                
                3,470,732**Current
                    Liabilities:**Short-term
                    debt
                
                
                739,345
                
                
                764,345Accounts
                    payable
                
                
                190,070
                
                
                214,229Accrued
                    interest and taxes
                
                
                55,269
                
                
                98,789Regulatory
                    liabilities
                
                
                16,131
                
                
                1,172Derivative
                    instruments
                
                
                49,698
                
                
                71,019Other
                    current liabilities
                
                
                222,209
                
                
                226,507Total
                    current liabilities
                
                
                1,272,722
                
                
                1,376,061**Long-Term
                    Liabilities:**Accumulated
                    deferred income taxes
                
                
                582,501
                
                
                577,443Accumulated
                    deferred investment tax credits
                
                
                29,383
                
                
                30,236Regulatory
                    liabilities
                
                
                400,101
                
                
                398,170Asset
                    retirement obligations
                
                
                62,602
                
                
                61,338Accrued
                    pension liability and postretirement benefit cost
                
                
                132,461
                
                
                134,799Derivative
                    instruments
                
                
                21,075
                
                
                16,290Other
                    deferred credits
                
                
                161,364
                
                
                165,765Total
                    long-term liabilties
                
                
                1,389,487
                
                
                1,384,041**Commitments
                    and Contingencies (see Note 9)**$
                6,132,402
                
                $
                6,230,834
  The
        accompanying notes, as they relate to PNMR, are an integral part of these
        financial statements.
  6
  **PNM
        RESOURCES, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 (Unaudited)
  **Three
                    Months Ended****March
                    31,****2007**
                
                **2006**(In
                    thousands)**Cash
                    Flows From Operating Activities:**Net
                    earnings
                
                $
                29,969
                
                $
                26,325Adjustments
                    to reconcile net earnings to net cash flows from operating
                    activities:Depreciation
                    and amortization
                
                
                47,432
                
                
                40,011Allowance
                    for equity funds used during construction
                
                
                (454
                )
                
                (47
                )Deferred
                    income tax expense (benefit)
                
                
                14,282
                
                
                (10,279
                )Equity
                    in net loss of EnergyCo
                
                
                662
                
                
                -Net
                    unrealized gains on derivatives
                
                
                (3,795
                )
                
                (2,703
                )Realized
                    gains on investment securities
                
                
                (811
                )
                
                (1,407
                )Carrying
                    charges on regulatory assets and liabilities
                
                
                (1,018
                )
                
                (2,833
                )Amortization
                    of fair value of acquired Twin Oaks sales contract
                
                
                (20,035
                )
                
                -Amortization
                    of emissions allowances
                
                
                701
                
                
                -Amortization
                    of fair value of acquired First Choice contracts
                
                
                (361
                )
                
                (4,402
                )Stock
                    based compensation expense
                
                
                4,381
                
                
                4,373Excess
                    tax benefit from stock-based payment arrangements
                
                
                (6
                )
                
                (313
                )Other,
                    net
                
                
                1,317
                
                
                2,456Changes
                    in certain assets and liabilities:Accounts
                    receivable
                
                
                (31,487
                )
                
                22,461Other
                    receivables
                
                
                14,703
                
                
                14,180Unbilled
                    revenues
                
                
                34,396
                
                
                23,296Regulatory
                    assets
                
                
                4,624
                
                
                22,144Other
                    assets
                
                
                2,799
                
                
                11,043Accrued
                    pension liability and postretirement benefit costs
                
                
                (2,776
                )
                
                (2,841
                )Accounts
                    payable
                
                
                (25,897
                )
                
                (102,149
                )Accrued
                    interest and taxes
                
                
                (6,008
                )
                
                24,751Deferred
                    credits
                
                
                (5,783
                )
                
                (5,436
                )Other
                    liabilities
                
                
                (13,213
                )
                
                (26,184
                )Net
                    cash flows from operating activities
                
                
                43,622
                
                
                32,446**Cash
                    Flows From Investing Activities:**Utility
                    plant additions
                
                
                (89,484
                )
                
                (51,727
                )Proceeds
                    from sales of investment securities
                
                
                31,803
                
                
                30,449Purchases
                    of investment securities
                
                
                (36,365
                )
                
                (30,301
                )Proceeds
                    from sales of utility plant
                
                
                4,572
                
                
                -Return
                    of principal on PVNGS lessor notes
                
                
                11,612
                
                
                10,956Investment
                    in EnergyCo
                
                
                (2,500
                )
                
                -Other,
                    net
                
                
                4,290
                
                
                870Net
                    cash flows from investing activities
                
                
                (76,072
                )
                
                (39,753
                )
 
 The
        accompanying notes, as they relate to PNMR, are an integral part of these
        financial statements.
  7
  **PNM
        RESOURCES, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 (Unaudited)
  **Three
                    Months Ended****March
                    31,****2007**
                
                **2006**(In
                    thousands)**Cash
                    Flows From Financing Activities:**Short-term
                    debt borrowings (repayments), net
                
                
                (25,000
                )
                
                (1,213
                )Issuance
                    of common stock
                
                
                1,070
                
                
                671Proceeds
                    from stock option exercise
                
                
                6,509
                
                
                1,765Purchases
                    of common stock to satisfy stock awards
                
                
                (11,587
                )
                
                (2,853
                )Excess
                    tax benefits from stock-based payment arrangements
                
                
                6
                
                
                313Dividends
                    paid
                
                
                (16,863
                )
                
                (13,758
                )Other,
                    net
                
                
                (118
                )
                
                (47
                )Net
                    cash flows from financing activities
                
                
                (45,983
                )
                
                (15,122
                )**Change
                    in Cash and Cash Equivalents**
                
                
                (78,433
                )
                
                (22,429
                )**Cash
                    and Cash Equivalents at Beginning of Period**
                
                
                123,419
                
                
                68,199**Cash
                    and Cash Equivalents at End of Period**
                
                $
                44,986
                
                $
                45,770**Supplemental
                    Cash Flow Disclosures:**Interest
                    paid, net of capitalized interest
                
                $
                37,218
                
                $
                25,750Income
                    taxes paid (refunded), net
                
                $
                -
                
                $
                -
 
 The
        accompanying notes, as they relate to PNMR, are an integral part of these
        financial statements.
  8
  **PNM
        RESOURCES, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**
 (Unaudited)
  **Three
                    Months Ended March 31,****2007**
                
                **2006**(In
                    thousands)**Net
                    Earnings**
                
                $
                29,969
                
                $
                26,325**Other
                    Comprehensive Income:****Unrealized
                    gains (losses) on investment securities**:Unrealized
                    holding gains arising during the period,net
                    of income tax expense of $1,420 and $7,605
                
                
                2,167
                
                
                11,604Reclassification
                    adjustment for (gains) included in netearnings,
                    net of income tax expense of $435 and $319
                
                
                (663
                )
                
                (486
                )**Fair
                    value adjustment for certain derivative
                    transactions:**Change
                    in fair market value of designated cash flow hedges,net
                    of income tax benefit of $11,886 and $9,064
                
                
                (18,112
                )
                
                (14,646
                )Reclassification
                    adjustment for (gains) losses included innet
                    earnings, net of income tax expense (benefit)of
                    $(954) and $1,195
                
                
                1,554
                
                
                (1,484
                )**Total
                    Other Comprehensive Income (Loss)**
                
                
                (15,054
                )
                
                (5,012
                )**Total
                    Comprehensive Income**
                
                $
                14,915
                
                $
                21,313
  The
        accompanying notes, as they relate to PNMR, are an integral part of these
        financial statements.
  9
  **PUBLIC
        SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **A
        WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF EARNINGS**
 (Unaudited)
  **Three
                    Months Ended March 31,****2007**
                
                **2006**(In
                    thousands)**Operating
                    Revenues:**Electric
                
                $
                240,325
                
                $
                311,467Gas
                
                
                216,484
                
                
                207,476Total
                    operating revenues
                
                
                456,809
                
                
                518,943**Operating
                    Expenses:**Cost
                    of energy sold
                
                
                264,881
                
                
                339,262Administrative
                    and general
                
                
                44,382
                
                
                41,128Energy
                    production costs
                
                
                40,505
                
                
                37,587Depreciation
                    and amortization
                
                
                26,356
                
                
                24,855Transmission
                    and distribution costs
                
                
                17,641
                
                
                14,307Taxes
                    other than income taxes
                
                
                8,686
                
                
                9,313Income
                    taxes
                
                
                14,832
                
                
                14,962Total
                    operating expenses
                
                
                417,283
                
                
                481,414Operating
                    income
                
                
                39,526
                
                
                37,529**Other
                    Income and Deductions:**Interest
                    income
                
                
                8,702
                
                
                9,353Gains
                    on investment securities
                
                
                58
                
                
                944Other
                    income
                
                
                1,141
                
                
                884Other
                    deductions
                
                
                (609
                )
                
                (851
                )Other
                    income taxes
                
                
                (3,492
                )
                
                (4,011
                )Net
                    other income and deductions
                
                
                5,800
                
                
                6,319Earnings
                    before interest charges
                
                
                45,326
                
                
                43,848**Interest
                    Charges**:Interest
                    on long-term debt
                
                
                12,437
                
                
                11,859Other
                    interest charges
                
                
                3,655
                
                
                1,561Total
                    interest charges
                
                
                16,092
                
                
                13,420**Net
                    Earnings**
                
                
                29,234
                
                
                30,428**Preferred
                    Stock Dividend Requirements**
                
                
                132
                
                
                132**Net
                    Earnings Available for Common Stock**
                
                $
                29,102
                
                $
                30,296
 
 The
        accompanying notes, as they relate to PNM, are an integral part of these
        financial statements.
  10
  **PUBLIC
        SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **A
        WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 (Unaudited)
  **March
                    31,**
                
                **December
                    31,****2007**
                
                **2006**(In
                    thousands)**ASSETS****Utility
                    Plant:**Electric
                    plant in service
                
                $
                2,909,250
                
                $
                2,742,795Gas
                    plant in service
                
                
                732,152
                
                
                721,168Common
                    plant in service and plant held for future use
                
                
                57,082
                
                
                72,8063,698,484
                
                
                3,536,769Less
                    accumulated depreciation and amortization
                
                
                1,361,127
                
                
                1,279,3492,337,357
                
                
                2,257,420Construction
                    work in progress
                
                
                243,335
                
                
                191,403Nuclear
                    fuel, net of accumulated amortization of $17,296 and
                    $14,008
                
                
                32,610
                
                
                28,844Net
                    utility plant
                
                
                2,613,302
                
                
                2,477,667**Other
                    Property and Investments:**Investment
                    in PVNGS lessor notes
                
                
                245,356
                
                
                257,659Other
                    investments
                
                
                146,210
                
                
                138,777Non-utility
                    property
                
                
                979
                
                
                966Total
                    other property and investments
                
                
                392,545
                
                
                397,402**Current
                    Assets:**Cash
                    and cash equivalents
                
                
                6,433
                
                
                11,886Special
                    deposits
                
                
                548
                
                
                376Accounts
                    receivable, net of allowance for uncollectible accounts of $1,703
                    and
                    $1,788
                
                
                155,013
                
                
                122,648Unbilled
                    revenues
                
                
                56,575
                
                
                81,166Other
                    receivables
                
                
                61,434
                
                
                62,040Affiliate
                    accounts receivable
                
                
                -
                
                
                7,879Inventories
                
                
                58,101
                
                
                51,801Regulatory
                    assets
                
                
                2,833
                
                
                17,507Income
                    taxes receivable
                
                
                2,731
                
                
                13,222Derivative
                    instruments
                
                
                26,755
                
                
                27,750Other
                    current assets
                
                
                53,184
                
                
                51,231Total
                    current assets
                
                
                423,607
                
                
                447,506**Deferred
                    Charges:**Regulatory
                    assets
                
                
                406,492
                
                
                410,979Derivative
                    instruments
                
                
                18,168
                
                
                12,504Goodwill
                
                
                102,562
                
                
                -Other
                    deferred charges
                
                
                64,804
                
                
                66,465Total
                    deferred charges
                
                
                592,026
                
                
                489,948$
                4,021,480
                
                $
                3,812,523
  The
        accompanying notes, as they relate to PNM, are an integral part of these
        financial statements.
  11
  **PUBLIC
        SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **A
        WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 (Unaudited)
  **March
                    31,**
                
                **December
                    31,****2007**
                
                **2006**(In
                    thousands, except share information)**CAPITALIZATION
                    AND LIABILITIES****Capitalization:**Common
                    stockholder's equity:Common
                    stock outstanding (no par value, 40,000,000 shares
                    authorized:39,117,799
                    shares issued and outstanding)
                
                $
                932,483
                
                $
                765,500Accumulated
                    other comprehensive income, net of income tax
                
                
                12,741
                
                
                8,761Retained
                    earnings
                
                
                434,004
                
                
                404,261Total
                    common stockholder's equity
                
                
                1,379,228
                
                
                1,178,522Cumulative
                    preferred stock without mandatory redemption requirements($100
                    stated value, 10,000,000 shares authorized: 115,293 shares
                    issuedand
                    outstanding)
                
                
                11,529
                
                
                11,529Long-term
                    debt
                
                
                988,400
                
                
                987,205Total
                    capitalization
                
                
                2,379,157
                
                
                2,177,256**Current
                    Liabilities:**Short-term
                    debt
                
                
                245,700
                
                
                250,274Accounts
                    payable
                
                
                128,918
                
                
                138,577Affiliate
                    accounts payable
                
                
                23,676
                
                
                16,898Accrued
                    interest and taxes
                
                
                41,949
                
                
                41,340Regulatory
                    liabilities
                
                
                16,131
                
                
                1,172Derivative
                    instruments
                
                
                26,099
                
                
                43,096Other
                    current liabilities
                
                
                58,744
                
                
                82,262Total
                    current liabilities
                
                
                541,217
                
                
                573,619**Long-Term
                    Liabilities:**Accumulated
                    deferred income taxes
                
                
                390,836
                
                
                359,416Accumulated
                    deferred investment tax credits
                
                
                28,917
                
                
                29,404Regulatory
                    liabilities
                
                
                358,829
                
                
                344,036Asset
                    retirement obligations
                
                
                61,812
                
                
                60,493Accrued
                    pension liability and postretirement benefit cost
                
                
                127,298
                
                
                129,595Derivative
                    instruments
                
                
                10,894
                
                
                14,100Other
                    deferred credits
                
                
                122,520
                
                
                124,604Total
                    long-term liabilities
                
                
                1,101,106
                
                
                1,061,648**Commitments
                    and Contingencies (see Note 9)**$
                4,021,480
                
                $
                3,812,523
  The
        accompanying notes, as they relate to PNM, are an integral part of these
        financial statements.
  12
  **PUBLIC
        SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **A
        WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 (Unaudited)
  **Three
                    Months Ended March 31,****2007**
                
                **2006**(In
                    thousands)**Cash
                    Flows From Operating Activities:**Net
                    earnings
                
                $
                29,234
                
                $
                30,428Adjustments
                    to reconcile net earnings to net cash flows from operating activities:Depreciation
                    and amortization
                
                
                32,854
                
                
                29,780Allowance
                    for equity funds used during construction
                
                
                (380
                )
                
                1Deferred
                    income tax expense (benefit)
                
                
                7,137
                
                
                (11,889
                )Net
                    unrealized gains on derivatives
                
                
                (3,892
                )
                
                (504
                )Realized
                    gains on investment securities
                
                
                (811
                )
                
                (1,407
                )Carrying
                    charges on other regulatory assets and liabilities
                
                
                (1,018
                )
                
                (1,297
                )Other,
                    net
                
                
                (923
                )
                
                (105
                )Changes
                    in certain assets and liabilities, net of amounts acquired:Accounts
                    receivable
                
                
                (22,552
                )
                
                19,292Unbilled
                    revenues
                
                
                28,122
                
                
                18,131Regulatory
                    assets
                
                
                3,947
                
                
                23,102Other
                    assets
                
                
                11,851
                
                
                17,715Accrued
                    pension liability and postretirement benefit costs
                
                
                (1,457
                )
                
                (566
                )Accounts
                    payable
                
                
                (12,482
                )
                
                (86,523
                )Accrued
                    interest and taxes
                
                
                9,388
                
                
                36,804Deferred
                    credits
                
                
                (4,570
                )
                
                (2,855
                )Other
                    liabilities
                
                
                (6,935
                )
                
                (24,089
                )Net
                    cash flows from operating activities
                
                
                67,513
                
                
                46,018**Cash
                    Flows From Investing Activities:**Utility
                    plant additions
                
                
                (80,335
                )
                
                (38,806
                )Proceeds
                    from sales of investment securities
                
                
                31,803
                
                
                30,449Purchases
                    of investment securities
                
                
                (36,365
                )
                
                (30,301
                )Proceeds
                    from sales of utility plant assets
                
                
                4,572
                
                
                -Return
                    of principal on PVNGS lessor notes
                
                
                11,612
                
                
                10,956Other,
                    net
                
                
                871
                
                
                652Net
                    cash flows from investing activities
                
                
                (67,842
                )
                
                (27,050
                )
  The
        accompanying notes, as they relate to PNM, are an integral part of these
        financial statements.
  13
  **PUBLIC
        SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **A
        WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 (Unaudited)
  **Three
                    Months Ended March 31,****2007**
                
                **2006**(In
                    thousands)**Cash
                    Flows From Financing Activities:**Short-term
                    debt borrowings (repayments), net
                
                
                (4,574
                )
                
                (24,913
                )Dividends
                    paid
                
                
                (132
                )
                
                (132
                )Other,
                    net
                
                
                (418
                )
                
                23Net
                    cash flows from financing activities
                
                
                (5,124
                )
                
                (25,022
                )**Change
                    in Cash and Cash Equivalents**
                
                
                (5,453
                )
                
                (6,054
                )**Cash
                    and Cash Equivalents at Beginning of Period**
                
                
                11,886
                
                
                12,690**Cash
                    and Cash Equivalents at End of Period**
                
                $
                6,433
                
                $
                6,636**Supplemental
                    Cash Flow Disclosures:**Interest
                    paid, net of capitalized interest
                
                $
                21,883
                
                $
                11,935Income
                    taxes paid (refunded), net
                
                $
                -
                
                $
                -**Supplemental
                    schedule of noncash investing and financing
                    activities**:As
                    of January 1, 2007, TNMP transferred its New Mexico operational
                    assets and
                    liabilities to PNMR througha
                    redemption of TNMP’s common stock. PNMR contemporaneously contributed the
                    TNMPNew
                    Mexico operational assets and liabilities to PNM. See Note
                    14.Assets
                    transferred
                
                $
                216,422Liabilities
                    transferred
                
                
                49,438Net
                    assets transferred - increase in common stockholder's
                    equity
                
                $
                166,984
  The
        accompanying notes, as they relate to PNM, are an integral part of these
        financial statements.
  14
  **PUBLIC
        SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **A
        WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**
 (Unaudited)
  **Three
                    Months Ended March 31,****2007**
                
                **2006**(In
                    thousands)**Net
                    Earnings Available for Common Stock**
                
                $
                29,102
                
                $
                30,296**Other
                    Comprehensive Income (Loss):****Unrealized
                    gains (losses) on investment securities**:Unrealized
                    holding gains arising during the period,net
                    of income tax expense of $1,420 and $7,605
                
                
                2,167
                
                
                11,604Reclassification
                    adjustment for (gains) included in netearnings,
                    net of income tax expense of $435 and $319
                
                
                (663
                )
                
                (486
                )**Fair
                    value adjustment for certain derivative
                    transactions:**Change
                    in fair market value of designated cash flow hedges,net
                    of income tax (expense) benefit of $(1,013) and $6,607
                
                
                1,545
                
                
                (10,081
                )Reclassification
                    adjustment for (gains) losses included in netearnings,
                    net of income tax expense (benefits) of $(610) and $2,217
                
                
                931
                
                
                (3,382
                )**Total
                    Other Comprehensive Income (Loss)**
                
                
                3,980
                
                
                (2,345
                )**Total
                    Comprehensive Income**
                
                $
                33,082
                
                $
                27,951
 
 The
        accompanying notes, as they relate to PNM, are an integral part of these
        financial statements.
  15
  **TEXAS-NEW
        MEXICO POWER COMPANY AND SUBSIDIARIES**
 **A
        WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF EARNINGS**
 (Unaudited)
  **Three
                    Months Ended March 31,****2007**
                
                **2006**(In
                    thousands)**Electric
                    Operating Revenues**
                
                $
                40,928
                
                $
                35,547**Operating
                    Expenses:**Cost
                    of energy sold
                
                
                7,171
                
                
                6,448Administrative
                    and general
                
                
                8,902
                
                
                9,215Depreciation
                    and amortization
                
                
                7,000
                
                
                6,174Transmission
                    and distribution costs
                
                
                4,923
                
                
                3,745Taxes
                    other than income taxes
                
                
                4,825
                
                
                5,190Income
                    taxes
                
                
                352
                
                
                (1,679
                )Total
                    operating expenses
                
                
                33,173
                
                
                29,093Operating
                    income
                
                
                7,755
                
                
                6,454**Other
                    Income and Deductions:**Interest
                    income
                
                
                88
                
                
                255Other
                    income
                
                
                276
                
                
                168Carrying
                    charges on regulatory assets
                
                
                -
                
                
                1,973Other
                    deductions
                
                
                (27
                )
                
                (24
                )Other
                    income taxes
                
                
                (76
                )
                
                (907
                )Net
                    other income and deductions
                
                
                261
                
                
                1,465Earnings
                    before interest charges
                
                
                8,016
                
                
                7,919**Interest
                    Charges**:Interest
                    on long-term debt
                
                
                6,432
                
                
                6,432Other
                    interest charges
                
                
                646
                
                
                802Total
                    interest charges
                
                
                7,078
                
                
                7,234**Net
                    Earnings From Continuing Operations**
                
                
                938
                
                
                685**Discontinued
                    Operations, net of income tax****expense
                    of $0 and $1,003**
                
                
                -
                
                
                471**Net
                    Earnings**
                
                $
                938
                
                $
                1,156
 
 The
        accompanying notes, as they relate to TNMP, are an integral part of these
        financial statements.
  16
  **TEXAS-NEW
        MEXICO POWER COMPANY AND SUBSIDIARIES**
 **A
        WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 (Unaudited)
  **March
                    31,**
                
                **December
                    31,****2007**
                
                **2006**(In
                    thousands)**ASSETS****Utility
                    Plant:**Electric
                    plant in service
                
                $
                774,716
                
                $
                925,538Common
                    plant in service and plant held for future use
                
                
                488
                
                
                589775,204
                
                
                926,127Less
                    accumulated depreciation and amortization
                
                
                267,013
                
                
                326,404508,191
                
                
                599,723Construction
                    work in progress
                
                
                10,318
                
                
                13,799Net
                    utility plant
                
                
                518,509
                
                
                613,522**Other
                    Property and Investments:**Other
                    investments
                
                
                555
                
                
                511Non-utility
                    property, net of accumulated depreciation of $0 and $3
                
                
                2,110
                
                
                2,120Total
                    other property and investments
                
                
                2,665
                
                
                2,631**Current
                    Assets:**Cash
                    and cash equivalents
                
                
                92
                
                
                2,542Accounts
                    receivable, net of allowance for uncollectible accounts of $0
                    and
                    $31
                
                
                7,184
                
                
                10,317Federal
                    income tax receivable
                
                
                40,068
                
                
                40,473Unbilled
                    revenues
                
                
                2,170
                
                
                6,000Affiliate
                    accounts receivable
                
                
                12,011
                
                
                -Other
                    receivables
                
                
                4,850
                
                
                1,515Inventories
                
                
                1,549
                
                
                1,509Other
                    current assets
                
                
                205
                
                
                944Total
                    current assets
                
                
                68,129
                
                
                63,300**Deferred
                    Charges:**Stranded
                    costs
                
                
                88,956
                
                
                89,949Carrying
                    charges on stranded costs
                
                
                41,112
                
                
                41,584Other
                    regulatory assets
                
                
                10,525
                
                
                11,052Goodwill
                
                
                260,183
                
                
                363,764Pension
                    asset
                
                
                9,508
                
                
                8,853Other
                    deferred charges
                
                
                7,647
                
                
                9,205Total
                    deferred charges
                
                
                417,931
                
                
                524,407$
                1,007,234
                
                $
                1,203,860
  The
        accompanying notes, as they relate to TNMP, are an integral part of these
        financial statements.
  17
  **TEXAS-NEW
        MEXICO POWER COMPANY AND SUBSIDIARIES**
 **A
        WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 (Unaudited)
  **March
                    31,**
                
                **December
                    31,****2007**
                
                **2006**(In
                    thousands, except share information)**CAPITALIZATION
                    AND LIABILITIES****Capitalization:**Common
                    stockholder’s equity:Common
                    stock outstanding ($10 par value, 12,000,000 shares authorized:6,358
                    and 9,615 shares issued and outstanding)
                
                $
                64
                
                $
                96Paid-in-capital
                
                
                326,111
                
                
                492,812Accumulated
                    other comprehensive income, net of income tax
                
                
                562
                
                
                562Retained
                    earnings
                
                
                24,049
                
                
                21,149Total
                    common stockholder’s equity
                
                
                350,786
                
                
                514,619Long-term
                    debt
                
                
                419,127
                
                
                420,546Total
                    capitalization
                
                
                769,913
                
                
                935,165**Current
                    Liabilities:**Short
                    term debt - affiliate
                
                
                29,200
                
                
                -Accounts
                    payable
                
                
                3,639
                
                
                11,332Affiliate
                    accounts payable
                
                
                6,460
                
                
                15,673Accrued
                    interest and taxes
                
                
                15,892
                
                
                23,110Other
                    current liabilities
                
                
                5,058
                
                
                10,102Total
                    current liabilities
                
                
                60,249
                
                
                60,217**Long-Term
                    Liabilities:**Accumulated
                    deferred income taxes
                
                
                126,979
                
                
                145,641Accumulated
                    deferred investment tax credits
                
                
                467
                
                
                832Regulatory
                    liabilities
                
                
                41,272
                
                
                54,134Accrued
                    pension liability and postretirement benefit cost
                
                
                5,163
                
                
                5,203Other
                    deferred credits
                
                
                3,191
                
                
                2,668Total
                    long-term liabilities
                
                
                177,072
                
                
                208,478**Commitments
                    and Contingencies (see Note 9)**$
                1,007,234
                
                $
                1,203,860
  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.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 (Unaudited)
  **Three
                    Months Ended March 31,****2007**
                
                **2006**(In
                    thousands)**Cash
                    Flows From Operating Activities:**Net
                    earnings
                
                $
                938
                
                $
                1,156Adjustments
                    to reconcile net earnings tonet
                    cash flows from operating activities:Depreciation
                    and amortization
                
                
                6,905
                
                
                7,805Rate
                    case amortization
                
                
                938
                
                
                -Allowance
                    for equity funds used during construction
                
                
                (74
                )
                
                (47
                )Deferred
                    income tax expense (benefit)
                
                
                (1,247
                )
                
                430Carrying
                    charges on deferred stranded costs
                
                
                -
                
                
                (1,973
                )Interest
                    on retail competition transition obligation
                
                
                -
                
                
                437Other,
                    net
                
                
                (350
                )
                
                340Changes
                    in certain assets and liabilities:Accounts
                    receivable
                
                
                (6,532
                )
                
                2,173Unbilled
                    revenues
                
                
                299
                
                
                (316
                )Other
                    assets
                
                
                548
                
                
                1,838Accrued
                    pension liability and postretirement benefit costs
                
                
                (185
                )
                
                (507
                )Accounts
                    payable
                
                
                (4,870
                )
                
                725Accrued
                    interest and taxes
                
                
                (4,481
                )
                
                (6,477
                )Change
                    in affiliate accounts
                
                
                (13,610
                )
                
                4,528Other
                    liabilities
                
                
                (2,123
                )
                
                (2,072
                )Net
                    cash flows from operating activities
                
                
                (23,844
                )
                
                8,040**Cash
                    Flows From Investing Activities:**Utility
                    plant additions
                
                
                (7,804
                )
                
                (7,216
                )Other,
                    net
                
                
                (3
                )
                
                31Net
                    cash flows from investing activities
                
                
                (7,807
                )
                
                (7,185
                )
 
 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.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 (Unaudited)
  **Three
                    Months Ended March 31,****2007**
                
                **2006**(In
                    thousands)**Cash
                    Flow From Financing Activities:**Short-term
                    debt - affiliate
                
                
                29,200
                
                
                -Other,
                    net
                
                
                1
                
                
                34Net
                    cash flows from financing activities
                
                
                29,201
                
                
                34**Change
                    in Cash and Cash Equivalents**
                
                
                (2,450
                )
                
                889**Cash
                    and Cash Equivalents at Beginning of Period**
                
                
                2,542
                
                
                16,228**Cash
                    and Cash Equivalents at End of Period**
                
                $
                92
                
                $
                17,117**Supplemental
                    Cash Flow Disclosures:**Interest
                    paid, net of capitalized interest
                
                $
                5,912
                
                $
                5,482Income
                    taxes paid (refunded), net
                
                $
                -
                
                $
                -**Supplemental
                    schedule of noncash investing and financing
                    activities**:As
                    of January 1, 2007, TNMP transferred its New Mexico operational
                    assets and
                    liabilities to PNMR througha
                    redemption of TNMP’s common stock. PNMR contemporaneously contributed the
                    TNMPNew
                    Mexico operational assets and liabilities to PNM. See Note
                    14.Assets
                    transferred
                
                $
                216,422Liabilities
                    transferred
                
                
                49,438Net
                    assets transferred - common stock redeemed
                
                $
                166,984
  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.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**
 (Unaudited)
  **Three
                    Months Ended March 31,****2007**
                
                **2006**(In
                    thousands)**Net
                    Earnings and Total Comprehensive Income (Loss)**
                
                $
                938
                
                $
                1,156
 
 The
        accompanying notes, as they relate to TNMP, are an integral part of these
        financial statements.


21




**PNM
        RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
        SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
        MEXICO POWER COMPANY**  **AND
        SUBSIDIARIES**
 
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
 
 **(1)**
                **Significant
                    Accounting Policies and Responsibility for Financial
                    Statements**
 **Financial
        Statement Preparation**
 
 In
        the
        opinion of the management of PNMR, the accompanying unaudited interim Condensed
        Consolidated Financial Statements reflect all normal and recurring accruals
        and
        adjustments which are necessary to present fairly the Company’s financial
        position at March 31, 2007 and December 31, 2006, the consolidated results
        of
        its operations and comprehensive income for the three months ended March
        31,
        2007 and 2006 and the consolidated statements of cash flows for the three
        months
        ended March 31, 2007 and 2006. The preparation of financial statements in
        conformity with generally accepted accounting principles in the United States
        requires management to make estimates and assumptions that affect the reported
        amounts of assets and liabilities, disclosure of contingent assets and
        liabilities at the date of the financial statements and the reported amounts
        of
        revenues and expenses during the reporting period. Actual results could
        ultimately differ from those estimated.
 
 These
        Condensed Consolidated Financial Statements are unaudited, and certain
        information and note disclosures normally included in the Company’s annual
        Consolidated Financial Statements have been condensed or omitted, as permitted
        under the applicable rules and regulations. Readers of these financial
        statements should refer to PNMR’s, PNM’s and TNMP’s audited Consolidated
        Financial Statements and Notes thereto for the year ended December 31, 2006
        that
        are included in their respective Annual Reports on Form 10-K for the year
        ended
        December 31, 2006. The results of operations presented in the accompanying
        Condensed Consolidated Financial Statements are not necessarily representative
        of operations for an entire year.
 
 **Presentation**
 
 The
        Notes
        to Condensed Consolidated Financial Statements include disclosures for PNMR,
        PNM
        and TNMP. For discussion purposes, this report will use the term “Company” when
        discussing matters of common applicability to PNMR, PNM and TNMP. Discussions
        regarding only PNMR, PNM or TNMP will be indicated as such. Certain amounts
        in
        the 2006 Condensed Consolidated Financial Statements and Notes thereto for
        PNMR,
        PNM and TNMP have been reclassified to conform to the 2007 financial statement
        presentation.
 
 At
        December 31, 2006, certain income tax receivables and payables were shown
        on a
        net basis. At March 31, 2007, these income tax receivables and payables are
        shown gross on the Condensed Consolidated Balance Sheet. For comparability,
        the
        December 31, 2006 balances have been reclassified resulting in income tax
        receivables and payables each being increased by $65.2 million for PNMR,
        $13.2
        million for PNM, and $4.1 million for TNMP.
 
 **Principles
        of Consolidation**
 
 The
        Condensed Consolidated Financial Statements include the accounts of the Company
        and subsidiaries in which it owns a majority voting interest and the PVNGS
        Capital Trust. PNMR’s primary subsidiaries are PNM, TNMP, First Choice and
        Altura. Corporate administrative and general expenses, which represent costs
        that are driven primarily by corporate level activities, are allocated to
        the
        business segments. Other significant intercompany transactions between PNMR,
        PNM
        and TNMP in 2007 or 2006 include energy purchases and sales, dividends paid
        on
        common stock and consolidation of the PVNGS Capital Trust. All significant
        intercompany transactions and balances have been eliminated. (See Note
        12.)
 
 22
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
   **(2)**
              **Acquisition
                  of Twin Oaks**
 
 On
        April
        18, 2006, PNMR’s wholly owned subsidiary, Altura, purchased the Twin Oaks
        business, which included the 305 MW coal-fired Twin Oaks power plant located
        150
        miles south of Dallas, Texas. The results of Twin Oaks operations have been
        included in the Consolidated Financial Statements of PNMR from that date.
 
 As
        part
        of the acquisition of Twin Oaks, PNMR determined the fair value of two
        contractual obligations to sell power. The first contract obligates PNMR
        to sell
        power through September 2007 at which time the second contract begins and
        extends for three years. In comparing the pricing terms of the contractual
        obligations against the forward price of electricity in the relevant market,
        PNMR concluded that the contracts were below market. In accordance with SFAS
        141, as amended, the contracts were recorded at fair value and will be amortized
        as an increase in operating revenue over the contract lives. The amortization
        matches the difference between the forward price curve and the contractual
        obligations for each month in accordance with the contract as of the acquisition
        date. For the first contract, $94.9 million was recorded in other current
        liabilities and $52.4 million was recorded in other deferred credits for
        a
        contract total of $147.3 million. As of March 31, 2007, the Company had
        amortized $90.9 million, including $20.0 million during the three months
        ended
        March 31, 2007, leaving a balance on the first contract of $56.4 million.
        For
        the second contract, $29.6 million was recorded in other deferred credits.
        See
        Note 4 for information on the accounting treatment of these contracts.
 
 The
        following unaudited pro forma financial information presents a summary of
        PNMR’s
        consolidated results of operations for the three months ended March 31, 2006
        assuming the acquisition of Twin Oaks had been completed as of January 1,
        2006,
        including adjustments to reflect the allocation of the purchase price to
        the
        acquired net assets. The pro forma financial information does not include
        synergy savings that may result from the business combination and is not
        necessarily indicative of the results of operations if the acquisition had
        been
        effective as of this date.
 
 **For
                  the Three Months****Ended
                  March 31, 2006**(In
                  thousands, except per share amounts)Operating
                  revenues
              
              $
              694,948Operating
                  expenses
              
              $
              637,004Net
                  earnings
              
              $
              31,137Net
                  earnings per common share:Basic
              
              $
              0.45Diluted
              
              $
              0.45
  23
 
  **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  **(3)**
              **Segment
                  Information**
 
 The
        following segment presentation is based on the methodology that the Company’s
        management uses for making operating decisions and assessing performance
        of its
        various business activities. The following presentation reports operating
        results without regard to the effect of accounting or regulatory changes
        and
        similar other items not related to normal operations. As discussed below
        and
        effective January 1, 2007, TNMP’s New Mexico operations were transferred to PNM
        Electric. See Note 14. The 2006 segment information is presented as previously
        reported and does not reflect this transfer.
 
 **REGULATED
        OPERATIONS**
 
 **PNM
        Electric**
 
 PNM
        Electric is a regulated utility that provides integrated electricity services
        that include the generation, transmission and distribution of electricity
        for
        retail electric customers in New Mexico and the sale of transmission to third
        parties as well as to the PNM Wholesale segment.
 
 **TNMP
        Electric**
 
 TNMP
        Electric is a regulated utility operating in Texas and, through December
        31,
        2006, in New Mexico. TNMP’s operations are subject to traditional cost of
        service regulation. TNMP provides regulated transmission and distribution
        services in Texas under the TECA.
 
 Through
        December 31, 2006, TNMP provided integrated electric services that included
        the
        transmission, distribution, and sale of electricity to its New Mexico customers
        as well as transmission to third parties and to PNM. Effective January 1,
        2007,
        TNMP’s New Mexico operations were transferred to PNM. PNM Wholesale was the sole
        electricity supplier for the transferred operations both before and after
        the
        transfer of assets.
 
 **PNM
        Gas**
 
 PNM
        Gas
        is a regulated utility that distributes natural gas to most of the major
        communities in New Mexico. The customer base of PNM Gas includes both
        sales-service customers and transportation-service customers. PNM Gas purchases
        natural gas in the open market and resells it at cost to its sales-service
        customers. As a result, increases or decreases in gas revenues resulting
        from
        gas price fluctuations do not impact PNMR’s or PNM’s consolidated gross margin
        or earnings.
 
 **UNREGULATED
        OPERATIONS**
 
 **Wholesale**
 
 PNMR
        Wholesale includes PNM Wholesale and Altura and consists of the generation
        and
        sale of electricity into the wholesale market. PNM Wholesale sells the unused
        capacity of PNM’s jurisdictional assets as well as the capacity of PNM’s
        wholesale plants excluded from retail rates. Although the FERC has jurisdiction
        over the rates of PNM Wholesale, the Company includes PNM Wholesale in the
        unregulated portion of its business because PNM Wholesale is not subject
        to
        traditional rate of return regulation. Altura is included in the results
        of
        operations for PNMR from the date of acquisition of Twin Oaks on April 18,
        2006
        (See Note 2). Power from Twin Oaks is sold at wholesale in markets served
        by
        ERCOT.
  24
 
  **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
 
 **First
        Choice**
 
 First
        Choice is a certified retail electric provider operating in Texas, which
        allows
        it to provide electricity to residential, small and large commercial, industrial
        and institutional customers. Although First Choice is regulated in certain
        respects by the PUCT, PNMR includes First Choice in the unregulated portion
        of
        its business because First Choice is not subject to traditional rate of return
        regulation.
 
 **CORPORATE
        AND OTHER**
 
 PNMR
        provides energy and technology related services through its wholly owned
        subsidiary, Avistar, and those results are included in the Corporate and
        Other
        segment. PNMR Services Company provides corporate services to the Company
        and
        its subsidiaries and is also included in the Corporate and Other
        segment.
 
 Adjustments
        related to EITF 03-11 are included in Corporate and Other. This requires
        a net
        presentation of all realized gains and losses on non-normal derivative
        transactions that do not physically deliver and that are offset by similar
        transactions during settlement. Management evaluates Wholesale operations
        on a
        gross presentation basis due to its primarily net asset-backed marketing
        strategy and the importance it places on the Company’s ability to repurchase and
        remarket previously sold capacity.
 
  25
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  **PNMR
        SEGMENT INFORMATION**
 
 Summarized
        financial information for PNMR by business segment for the three months ended
        March 31, 2007 is as follows (in thousands):
  **Regulated**
                
                
                
                **Unregulated**Segments
                    of Business
                
                **PNM**
                
                **TNMP**
                
                **PNM**
                
                
                
                **First**
                
                **Corporate****Electric
                    (c)**
                
                **Electric
                    (c)**
                
                **Gas**
                
                **Wholesale**
                
                **Choice**
                
                **and
                    Other**
                
                
                **Consolidated****2007:**Operating
                    revenues
                
                $
                167,875
                
                $
                24,161
                
                $
                216,484
                
                $
                125,867
                
                $
                135,518
                
                $
                (16,404
                )
                (a)
                
                $
                653,501Intersegment
                    revenues
                
                
                2,238
                
                
                16,767
                
                
                48
                
                
                8,684
                
                
                47
                
                
                (27,784
                )
                
                
                
                -**Total
                    Revenues**
                
                
                170,113
                
                
                40,928
                
                
                216,532
                
                
                134,551
                
                
                135,565
                
                
                (44,188
                )
                
                
                
                653,501Cost
                    of energy
                
                
                66,502
                
                
                7,171
                
                
                161,713
                
                
                76,347
                
                
                110,816
                
                
                (44,029
                )
                (a)
                
                
                378,520Intersegment
                    energy transfer
                
                
                (5,658
                )
                
                -
                
                
                -
                
                
                5,658
                
                
                -
                
                
                -
                
                
                
                
                -**Gross
                    Margin**
                
                
                109,269
                
                
                33,757
                
                
                54,819
                
                
                52,546
                
                
                24,749
                
                
                (159
                )
                
                
                
                274,981Operating
                    expenses
                
                
                72,312
                
                
                18,650
                
                
                25,612
                
                
                25,701
                
                
                15,157
                
                
                2,461
                
                (b)
                
                
                159,893Depreciation
                    and amortization
                
                
                16,385
                
                
                7,000
                
                
                6,181
                
                
                7,759
                
                
                471
                
                
                2,646
                
                
                
                
                40,442Income
                    taxes
                
                
                4,257
                
                
                352
                
                
                7,922
                
                
                3,937
                
                
                3,407
                
                
                (5,906
                )
                (b)
                
                
                13,969**Operating
                    Income**
                
                
                16,315
                
                
                7,755
                
                
                15,104
                
                
                15,149
                
                
                5,714
                
                
                640
                
                
                
                
                60,677Interest
                    income
                
                
                6,117
                
                
                88
                
                
                996
                
                
                1,438
                
                
                483
                
                
                1,666
                
                
                
                
                10,788Other
                    income (deductions)
                
                
                137
                
                
                249
                
                
                122
                
                
                298
                
                
                (42
                )
                
                (463
                )
                
                
                
                301Other
                    income taxes
                
                
                (2,476
                )
                
                (76
                )
                
                (443
                )
                
                (687
                )
                
                (157
                )
                
                (111
                )
                
                
                
                (3,950
                )Net
                    interest charges
                
                
                (9,819
                )
                
                (7,078
                )
                
                (3,015
                )
                
                (9,141
                )
                
                (115
                )
                
                (8,679
                )
                
                
                
                (37,847
                )**Segment
                    Net Earnings (Loss)**
                
                $
                10,274
                
                $
                938
                
                $
                12,764
                
                $
                7,057
                
                $
                5,883
                
                $
                (6,947
                )
                
                
                $
                29,969**Gross
                    Property Additions**
                
                $
                61,921
                
                $
                7,804
                
                $
                7,150
                
                $
                10,589
                
                $
                (114
                )
                $
                2,134
                
                
                
                $
                89,484**At
                  March 31,
                  2007:**
                
                $
                2,357,886
                
                $
                986,568
                
                $
                684,430
                
                $
                1,044,787
                
                $
                342,472
                
                $
                716,259
                
                
                
                $
                6,132,402**Total
                  Assets****Goodwill**
                
                $
                102,562
                
                $
                260,183
                
                $
                -
                
                $
                -
                
                $
                131,768
                
                $
                -
                
                
                
                $
                494,513
  
 (a)
            Reflects
                EITF 03-11 impact, under which wholesale revenues and the associated
                cost
                of energy of $16.6 million are reclassified to a net margin basis
                in
                accordance with GAAP. (b)
            Includes
                EnergyCo formation costs of $1.2 millionincluded
                in operating expensesand
                an income tax benefit of $0.5 million included in income
                taxes. (c)
            Operations
                and assets, including goodwill, transferred from TNMP Electric to
                PNM
                Electric onJanuary
                1,2007
                are included in PNM Electric and excluded from TNMP
                Electric. 
  26
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  Summarized
        financial information for PNMR by business segment for the three months ended
        March 31, 2006 is as follows (in thousands):
  **Regulated**
                
                
                
                **Unregulated**Segments
                    of Business
                
                **PNM**
                
                **TNMP**
                
                **PNM**
                
                
                
                **First**
                
                **Corporate****Electric
                    (c)**
                
                **Electric
                    (c)**
                
                **Gas**
                
                **Wholesale**
                
                **Choice**
                
                **and
                    Other**
                
                
                **Consolidated****2006:**Operating
                    revenues
                
                $
                136,596
                
                $
                46,969
                
                $
                207,476
                
                $
                164,311
                
                $
                105,082
                
                $
                (4,633
                )
                (a)
                
                $
                655,801Intersegment
                    revenues
                
                
                2,182
                
                
                15,716
                
                
                49
                
                
                15,177
                
                
                -
                
                
                (33,124
                )
                
                
                
                -**Total
                    Revenues**
                
                
                138,778
                
                
                62,685
                
                
                207,525
                
                
                179,488
                
                
                105,082
                
                
                (37,757
                )
                
                
                
                655,801Cost
                    of energy
                
                
                45,474
                
                
                27,172
                
                
                157,691
                
                
                142,877
                
                
                90,335
                
                
                (37,577
                )
                (a)
                
                
                425,972Intersegment
                    energy transfer
                
                
                (5,178
                )
                
                -
                
                
                -
                
                
                5,178
                
                
                -
                
                
                -
                
                
                
                
                -**Gross
                    Margin**
                
                
                98,482
                
                
                35,513
                
                
                49,834
                
                
                31,433
                
                
                14,747
                
                
                (180
                )
                
                
                
                229,829Operating
                    expenses
                
                
                67,154
                
                
                21,532
                
                
                25,090
                
                
                11,785
                
                
                13,178
                
                
                167
                
                (b)
                
                
                138,906Depreciation
                    and amortization
                
                
                14,972
                
                
                7,731
                
                
                5,920
                
                
                3,161
                
                
                498
                
                
                2,048
                
                
                
                
                34,330Income
                    taxes
                
                
                3,072
                
                
                (673
                )
                
                6,266
                
                
                5,014
                
                
                300
                
                
                (3,732
                )
                (b)
                
                
                10,247**Operating
                    Income**
                
                
                13,284
                
                
                6,923
                
                
                12,558
                
                
                11,473
                
                
                771
                
                
                1,337
                
                
                
                
                46,346Interest
                    income
                
                
                6,511
                
                
                255
                
                
                1,265
                
                
                1,279
                
                
                392
                
                
                449
                
                
                
                
                10,151Other
                    income (deductions)
                
                
                198
                
                
                2,129
                
                
                101
                
                
                706
                
                
                (10
                )
                
                368
                
                
                
                
                3,492Other
                    income taxes
                
                
                (2,656
                )
                
                (912
                )
                
                (541
                )
                
                (786
                )
                
                (139
                )
                
                (67
                )
                
                
                
                (5,101
                )Net
                    interest charges
                
                
                (8,597
                )
                
                (7,227
                )
                
                (2,997
                )
                
                (3,821
                )
                
                (224
                )
                
                (5,697
                )
                
                
                
                (28,563
                )**Segment
                    Net Earnings (Loss)**
                
                $
                8,740
                
                $
                1,168
                
                $
                10,386
                
                $
                8,851
                
                $
                790
                
                $
                (3,610
                )
                
                
                $
                26,325**Gross
                    Property Additions**
                
                $
                30,316
                
                $
                7,216
                
                $
                4,365
                
                $
                3,751
                
                $
                297
                
                $
                5,782
                
                
                
                $
                51,727**At
                    March 31, 2006:****Total
                    Assets**
                
                $
                1,913,142
                
                $
                1,168,674
                
                $
                650,588
                
                $
                406,267
                
                $
                327,431
                
                $
                536,861
                
                
                
                $
                5,002,963**Goodwill**
                
                $
                -
                
                $
                367,245
                
                $
                -
                
                $
                -
                
                $
                131,910
                
                $
                -
                
                
                
                $
                499,155
 
 (a)
            Reflects
                EITF 03-11 impact, under which wholesale revenues and the associated
                cost
                of energy of $4.7 million are reclassified to a net margin basis
                in
                accordance with GAAP. (b)
            Includes
                TNP acquisition integration costs of $0.9 million included in operating
                expenses and an income tax benefit of $0.4 million included in income
                taxes. (c)
            Operations
                and assets, including goodwill, transferred from TNMP Electric to
                PNM
                Electric on January 1, 2007 are excluded from PNM Electric and included
                in
                TNMP Electric. 
  27
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  **PNM
        SEGMENT INFORMATION**
 
 Summarized
        financial information for PNM by business segment for the three months ended
        March 31, 2007 is as follows (in thousands):
  Segments
                    of Business
                
                **PNM**
                
                **PNM**
                
                **PNM**
                
                **Corporate****Electric
                    (b)**
                
                **Gas**
                
                **Wholesale**
                
                **and
                    Other**
                
                
                **Consolidated****2007:**Operating
                    revenues
                
                $
                167,875
                
                $
                216,484
                
                $
                89,064
                
                $
                (16,614
                )
                (a)
                
                $
                456,809Intersegment
                    revenues
                
                
                2,238
                
                
                48
                
                
                8,684
                
                
                (10,970
                )
                
                
                
                -**Total
                    Revenues**
                
                
                170,113
                
                
                216,532
                
                
                97,748
                
                
                (27,584
                )
                
                
                
                456,809Cost
                    of energy
                
                
                66,502
                
                
                161,713
                
                
                64,181
                
                
                (27,515
                )
                (a)
                
                
                264,881Intersegment
                    energy transfer
                
                
                (5,658
                )
                
                -
                
                
                5,658
                
                
                -
                
                
                
                
                -**Gross
                    Margin**
                
                
                109,269
                
                
                54,819
                
                
                27,909
                
                
                (69
                )
                
                
                
                191,928Operating
                    expenses
                
                
                72,312
                
                
                25,612
                
                
                13,441
                
                
                (151
                )
                
                
                
                111,214Depreciation
                    and amortization
                
                
                16,385
                
                
                6,181
                
                
                3,150
                
                
                640
                
                
                
                
                26,356Income
                    taxes
                
                
                4,257
                
                
                7,922
                
                
                3,039
                
                
                (386
                )
                
                
                
                14,832**Operating
                    Income**
                
                
                16,315
                
                
                15,104
                
                
                8,279
                
                
                (172
                )
                
                
                
                39,526Interest
                    income
                
                
                6,117
                
                
                996
                
                
                1,321
                
                
                268
                
                
                
                
                8,702Other
                    income (deductions)
                
                
                137
                
                
                122
                
                
                298
                
                
                (99
                )
                
                
                
                458Other
                    income taxes
                
                
                (2,476
                )
                
                (443
                )
                
                (641
                )
                
                68
                
                
                
                
                (3,492
                )Net
                    interest charges
                
                
                (9,819
                )
                
                (3,015
                )
                
                (3,642
                )
                
                384
                
                
                
                
                (16,092
                )**Segment
                    Net Earnings**
                
                $
                10,274
                
                $
                12,764
                
                $
                5,615
                
                $
                449
                
                
                
                $
                29,102**Gross
                    Property Additions**
                
                $
                61,921
                
                $
                7,150
                
                $
                11,264
                
                $
                -
                
                
                
                $
                80,335**At
                    March 31, 2007:****Total
                    Assets**
                
                $
                2,392,709
                
                $
                693,168
                
                $
                395,056
                
                $
                540,547
                
                
                
                $
                4,021,480**Goodwill**
                
                $
                102,562
                
                $
                -
                
                $
                -
                
                $
                -
                
                
                
                $
                102,562
 
 (a)
            Reflects
                EITF 03-11 impact, under which wholesale revenues and the associated
                cost
                of energy of $16.6 million are reclassified to a net margin basis
                in
                accordance with GAAP. (b)
            Includes
                operations and assets, including goodwill, transferred from TNMP
                Electric
                to PNM Electric on January 1, 2007. 
  28
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  Summarized
        financial information for PNM by business segment for the three months ended
        March 31, 2006 is as follows (in thousands):
  Segments
                    of Business
                
                **PNM**
                
                **PNM**
                
                **PNM**
                
                **Corporate****Electric
                    (b)**
                
                **Gas**
                
                **Wholesale**
                
                **and
                    Other**
                
                
                **Consolidated****2006:**Operating
                    revenues
                
                $
                136,596
                
                $
                207,476
                
                $
                164,311
                
                $
                (4,741
                )
                (a)
                
                $
                503,642Intersegment
                    revenues
                
                
                2,058
                
                
                49
                
                
                -
                
                
                (2,107
                )
                
                
                
                -Affiliated
                    Sales
                
                
                124
                
                
                -
                
                
                15,177
                
                
                -
                
                
                
                
                15,301**Total
                    Revenues**
                
                
                138,778
                
                
                207,525
                
                
                179,488
                
                
                (6,848
                )
                
                
                
                518,943Cost
                    of energy
                
                
                45,474
                
                
                157,691
                
                
                142,877
                
                
                (6,780
                )
                (a)
                
                
                339,262Intersegment
                    energy transfer
                
                
                (5,178
                )
                
                -
                
                
                5,178
                
                
                -
                
                
                
                
                -**Gross
                    Margin**
                
                
                98,482
                
                
                49,834
                
                
                31,433
                
                
                (68
                )
                
                
                
                179,681Operating
                    expenses
                
                
                67,154
                
                
                25,090
                
                
                11,785
                
                
                (1,694
                )
                
                
                
                102,335Depreciation
                    and amortization
                
                
                14,972
                
                
                5,920
                
                
                3,161
                
                
                802
                
                
                
                
                24,855Income
                    taxes
                
                
                3,072
                
                
                6,266
                
                
                5,014
                
                
                610
                
                
                
                
                14,962**Operating
                    Income**
                
                
                13,284
                
                
                12,558
                
                
                11,473
                
                
                214
                
                
                
                
                37,529Interest
                    income
                
                
                6,511
                
                
                1,265
                
                
                1,279
                
                
                298
                
                
                
                
                9,353Other
                    income/(deductions)
                
                
                198
                
                
                101
                
                
                706
                
                
                (160
                )
                
                
                
                845Other
                    income taxes
                
                
                (2,656
                )
                
                (541
                )
                
                (786
                )
                
                (28
                )
                
                
                
                (4,011
                )Net
                    interest charges
                
                
                (8,597
                )
                
                (2,997
                )
                
                (3,821
                )
                
                1,995
                
                
                
                
                (13,420
                )**Segment
                    Net Earnings**
                
                $
                8,740
                
                $
                10,386
                
                $
                8,851
                
                $
                2,319
                
                
                
                $
                30,296**Gross
                    Property Additions**
                
                $
                30,316
                
                $
                4,365
                
                $
                3,751
                
                $
                374
                
                
                
                $
                38,806**At
                    March 31, 2006:****Total
                    Assets**
                
                $
                1,913,142
                
                $
                650,588
                
                $
                406,267
                
                $
                480,548
                
                
                
                $
                3,450,545
 (a)
            Reflects
                EITF 03-11 impact, under which wholesale revenues and the associated
                cost
                of energy of $4.7 million are reclassified to a net margin basis
                in
                accordance with GAAP. (b)
            Excludes
                operations and assets, including goodwill, transferred from TNMP
                Electric
                to PNM Electric on January 1, 2007. 
 **TNMP
        SEGMENT INFORMATION**
 
 TNMP
        operates in only one reportable segment; therefore tabular presentation of
        segment data is not presented.
 
  29
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  **(4)**
              **Energy
                  Related Derivative
                  Contracts**
 
 **OVERVIEW**
 
 GAAP
        defines the fair value of a financial instrument as the amount at which the
        instrument could be exchanged in a current transaction between willing parties,
        other than in a forced sale or liquidation. Although management uses its
        best
        judgment in estimating the fair value of these financial instruments, there
        are
        inherent limitations in any estimation technique. Fair value is based on
        current
        market quotes. The market prices used to fair value the Company’s energy
        portfolio are based on closing exchange prices and over-the-counter
        quotations.
 
 The
        Company may enter into agreements for the sale or purchase of derivative
        instruments, including options and swaps, to manage risks related to changes
        in
        natural gas prices and electric prices. At the inception of any such
        transaction, the Company documents the relationships between the hedging
        instruments and the items being hedged. This documentation includes the strategy
        that supports executing the specific transaction. See Note 7 for additional
        information regarding interest rate swaps.
 
 The
        Company utilizes the following derivative instruments by commodity
        type:
 
 *Energy
        Contracts* -
        forward derivative physical and financial purchases and sales of electricity
        and
        gas with the intent of optimizing the Company’s net generation position and to
        take advantage of existing market opportunities.
 
 *Gas
        Fixed-for-Float Swaps* -
        forward financial and physical contracts and sales of fixed-for-float price
        swaps to manage the price risk associated with electricity and gas and to
        hedge
        the variable component of certain heat-rate based power products.
 
 *Options* -
        forward
        physical and financial purchases and sales of electric and gas option-type
        derivative instruments with the intent of optimizing the Company’s net
        generation position and to take advantage of existing market
        opportunities.
 
 *PGAC
        portion of options, swaps and hedges* -
        forward financial and physical transactions to hedge a portion of PNM’s winter
        gas purchase portfolio.
 
 **PNMR**
 
 In
        addition to the commodity transactions that PNM enters into as described
        above,
        two other subsidiaries of PNMR enter into commodity transactions.
 
 **Normal
        Sales and Purchases Transactions**
 
 PNMR’s
        subsidiary, First Choice, enters into physical energy contracts to meet the
        needs of its competitive customer load. These contracts qualify for the “normal
        sales and purchases” accounting exception pursuant to SFAS 133, as the energy
        purchased is physically delivered and sold to First Choice customers within
        ERCOT. Expenses related to these purchases are recorded in cost of energy
        at the
        time of delivery.
 
 PNMR’s
        subsidiary, Altura, at the time of acquisition of Twin Oaks (see Note 2),
        assumed an existing contract for the energy output of the Twin Oaks facility.
        This contract qualifies for the “normal sales and purchases” accounting
        exception pursuant to SFAS 133, as the energy sold is physically delivered
        within ERCOT to meet the needs of the purchaser's load requirements. Revenue
        related to this sale is recorded in electric revenues at the time of
        delivery.
  30
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  **Hedge
        Accounting Transactions**
 
 First
        Choice also enters into natural gas swaps and options to hedge the variable
        component of certain heat-rate power contracts used to serve retail customer
        load. The heat-rate contracts are priced based on a gas-to-power conversion
        factor using the NYMEX last day natural gas rates. Both the natural gas swaps
        and options qualify for cash flow hedge accounting treatment under SFAS 133.
        The
        natural gas swaps and the underlying power contract both contain like terms
        as
        both are indexed to NYMEX last day rates. Therefore the transactions are
        effective and no hedge ineffectiveness is recorded. The settlement day for
        the
        natural gas option contracts is one day prior to NYMEX last day. PNMR has
        tested
        the effectiveness and determined that the transactions are highly effective
        in
        offsetting changes associated with the underlying power contract. The
        ineffectiveness reported through the income statement as of March 2007 was
        immaterial. The maximum length of time over which First Choice is hedging
        its
        exposure to the variability in future cash flows is through October
        2007.
 
 Altura,
        at the time of the acquisition of Twin Oaks (see Note 2), assumed an existing
        forward contract for the energy output of the Twin Oaks facility. This forward
        physical contract is designated as a hedge of the cash flow risk associated
        with
        Twin Oaks’ forecasted excess generation. This hedge is effective in offsetting
        future cash flow volatility caused by changes in the forward price of
        electricity and qualifies for hedge accounting under SFAS 133. There is no
        hedge
        ineffectiveness on this transaction because the hedged transaction and the
        hedged item are based on the same forward curve. Any market changes in valuation
        are recorded in other comprehensive income. The length of time over which
        Twin
        Oaks is hedging its exposure to the variability in future cash flows is through
        December 2010.
 
 **Mark-to-Market
        Transactions**
 
 *Electricity
        Contracts*
 
 First
        Choice enters into various forward physical and financial contracts for the
        purchase and sale of electricity with the intent of optimizing market
        opportunities. These contracts, which are derivatives, do not qualify for
        “normal” or “hedge” designation pursuant to SFAS 133, and are marked to market.
        The change in market valuation is recognized in earnings each period.
 
 *Gas
        Contracts*
 
 First
        Choice enters into various gas contracts on a trading basis to optimize market
        opportunities. These contracts are marked to market in accordance with SFAS
        133.
        The change in market valuation is recognized in earnings each period.
 
  31
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  PNMR’s
        commodity derivative instruments are summarized as follows:
 
 **March
                  31,**
              
              **December
                  31,**
              
              **March
                  31,**
              
              **December
                  31,****2007**
              
              **2006**
              
              **2007**
              
              **2006****Type
                  of Derivative**
              
              **Mark-to-Market
                  Instruments**
              
              **Hedge
                  Instruments**(In
                  thousands)**Current****Assets**Energy
                  contracts
              
              $
              14,924
              
              $
              17,773
              
              $
              5,494
              
              $
              7,208Gas
                  fixed-for-float swaps and futures
              
              
              19,828
              
              
              21,875
              
              
              3,901
              
              
              4,655Options
              
              
              4,682
              
              
              4,032
              
              
              -
              
              
              -Derivative
                  assets for gas off-system salesforward
                  physical trades
              
              
              479
              
              
              -
              
              
              -
              
              
              -PGAC
                  portion of options, swaps and hedges
              
              
              -
              
              
              -
              
              
              3,302
              
              
              16,748Total
                  Current Assets
              
              
              39,913
              
              
              43,680
              
              
              12,697
              
              
              28,611**Deferred
                  Charges**Energy
                  contracts
              
              
              2,581
              
              
              2,666
              
              
              -
              
              
              26,991Gas
                  fixed-for-float swaps
              
              
              14,041
              
              
              7,288
              
              
              3,200
              
              
              1,872Options
              
              
              3,075
              
              
              1,028
              
              
              -
              
              
              -PGAC
                  portion of options, swaps and hedges
              
              
              -
              
              
              -
              
              
              749
              
              
              3,337Total
                  Deferred Charges
              
              
              19,697
              
              
              10,982
              
              
              3,949
              
              
              32,200**Total
                  Assets**
              
              
              59,610
              
              
              54,662
              
              
              16,646
              
              
              60,811**Current
                  Liabilities**Energy
                  contracts
              
              
              (18,782
              )
              
              (16,499
              )
              
              (808
              )
              
              -Gas
                  fixed-for-float swaps
              
              
              (17,139
              )
              
              (21,518
              )
              
              (384
              )
              
              (6,845
              )Options
              
              
              (4,008
              )
              
              (4,003
              )
              
              -
              
              
              (109
              )PGAC
                  portion of options, swaps and hedges
              
              
              -
              
              
              -
              
              
              (3,302
              )
              
              (16,748
              )Total
                  Current Liabilities
              
              
              (39,929
              )
              
              (42,020
              )
              
              (4,494
              )
              
              (23,702
              )**Long-Term
                  Liabilities**Energy
                  contracts
              
              
              (6,583
              )
              
              (7,472
              )
              
              (6,356
              )
              
              (154
              )Gas
                  fixed-for-float swaps
              
              
              (2,144
              )
              
              (862
              )
              
              (835
              )
              
              (1,915
              )Options
              
              
              (3,693
              )
              
              (842
              )
              
              -
              
              
              -PGAC
                  portion of options, swaps and hedges
              
              
              -
              
              
              -
              
              
              (749
              )
              
              (3,337
              )Total
                  Long-Term Liabilities
              
              
              (12,420
              )
              
              (9,176
              )
              
              (7,940
              )
              
              (5,406
              )**Total
                  Liabilities**
              
              
              (52,349
              )
              
              (51,196
              )
              
              (12,434
              )
              
              (29,108
              )**Net
                  Total Assets and Liabilities**
              
              $
              7,261
              
              $
              3,466
              
              $
              4,212
              
              $
              31,703
 
 Gains
        or
        losses related to hedged instruments are reclassified from accumulated other
        comprehensive income when the hedged transaction settles and impacts earnings.
        The amounts, other than PGAC, shown as current assets and current liabilities,
        relate to contracts that will be settled in the next twelve months.
 
  32
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  **PNM**
 
 **Normal
        Sales and Purchases Transactions**
 
 PNM
        enters into physical gas contracts to meet the needs of its gas retail
        sales-service customers. These contracts qualify for “the normal sales and
        purchases” accounting exceptions pursuant to SFAS 133.
 
 PNM
        also
        enters into forward physical contracts for the sale of PNM’s electric capacity
        in excess of its retail and wholesale firm requirement needs, including
        reserves. In addition, PNM enters into forward physical contracts for the
        purchase of retail needs, including reserves, when resource shortfalls are
        forecast to exist. PNM generally accounts for these as normal sales and
        purchases as defined by SFAS 133. From time to time PNM makes forward purchases
        to serve its retail needs when the cost of purchased power is less than the
        incremental cost of its generation.
 
 The
        operations of PNM, including both firm commitments and other wholesale sale
        activities, are managed primarily through a net asset-backed strategy, whereby
        PNM’s aggregate net open position is covered by its own excess generation
        capabilities. PNM is exposed to market risk if its generation capabilities
        were
        disrupted or if its retail load requirements were greater than anticipated.
        If
        PNM were required to cover all or a portion of its net open contract position,
        it would have to meet its commitments through market purchases.
 
 **Hedge
        Accounting Transactions**
 
 *PGAC*
 
 The
        NMPRC
        has authorized PNM to use financial instruments to hedge certain portions
        of
        natural gas supply contracts during the winter months to protect PNM’s
        sales-service gas customers from the risk of adverse price fluctuations in
        the
        natural gas market. PNM has elected to use call options and financial swaps
        to
        hedge certain portions of the physical gas purchase contracts used exclusively
        for resale to PNM’s sales-service gas customers. The contracts qualify for hedge
        accounting treatment under SFAS 133. Option premium expenses are deferred
        on
        PNM’s balance sheet as a regulatory asset as incurred and amortized into the
        PGAC for recovery as a component of gas costs during the winter heating season.
        Option premium expense and hedge gains and losses from both types of instruments
        are passed through PNM’s PGAC with no income statement effect if deemed
        prudently incurred by the NMPRC.
 
 PNM
        also
        enters into financial swaps to hedge the variable portion of its winter gas
        portfolio. PNM has hedged 6.1 million MMBtus utilizing the fixed-for-float
        strategy for 2006-2007 and the 2007-2008 winter heating season. Any settled
        fixed-for-float financial transactions are passed through PNM’s
        PGAC.
 
 *Wholesale
        Electricity*
 
 PNM
        enters into various forward physical contracts to hedge the cash flow risk
        associated with PNM’s forecasted excess generation. These hedges are effective
        in offsetting future cash flow volatility caused by changes in the forward
        price
        of electricity and qualify for hedge accounting under SFAS 133. There is
        no
        hedge ineffectiveness on these transactions because the hedged transactions
        and
        the hedged item are based on the same forward curve. Any market changes in
        valuation are recorded in other comprehensive income. The
        maximum length of time over which PNM is hedging its exposure to the variability
        in future cash flows is through September 2008.
 
 33
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  *Wholesale
        Gas*
 
 PNM
        also
        enters into various fixed-for-float price swaps to manage the costs associated
        with running PNM’s gas generation units. The hedges are effective in offsetting
        future cash flow volatility caused by changes in natural gas prices. There
        is no
        hedge ineffectiveness on these transactions because the hedged transactions
        and
        the hedged item are based on the same forward curve. Any market changes in
        valuation from inception until March 30, 2007 are recorded in other
        comprehensive income; market valuation changes from March 30, 2007 until
        settlement are marked to market. The maximum length of time over which PNM
        is
        hedging its exposure to the variability in future cash flows is through June
        2016.
 
 *SO* *2* *Allowances*
 
 PNM
        has
        entered into a fair value hedge to protect against fair-value changes to
        the
        Company’s SO *2* emission
        allowances inventory. PNM assessed the effectiveness of the fair value hedge
        based on the changes in the intrinsic value of the hedging instrument and
        the
        hedged item. At March 31, 2007, PNM recognized an ineffectiveness gain on
        the
        hedging transaction of $1.1 million.
 
 **Mark-to-Market
        Transactions**
 
 *Wholesale
        Electricity*
 
 PNM
        enters into various commodity derivative instruments, including but not limited
        to, forward physical contracts and options for the purchase and sale of
        electricity with the intent of optimizing market opportunities. These derivative
        contracts do not qualify for “the normal sales and purchases” exceptions or
“hedge” designation pursuant to SFAS 133, and are marked to market. The change
        in market valuation is recognized in earnings each period.
 
 *Wholesale
        Gas*
 
 PNM
        enters into various fixed for float price swaps and physical gas purchases
        to
        manage the price risk of certain forward sales of power and the costs associated
        with running PNM's gas generation units. These contracts are marked to market
        in
        accordance with GAAP. The change in market valuation is recognized in earnings
        each period.
 
 *Liquidity
        Reserves*
 
 The
        market prices used to value PNM mark-to-market energy transactions and cash
        flow
        contracts are based on index prices and broker quotations. PNM enters into
        long-term physical option contracts and long-term financial gas swap contracts
        that are classified as derivatives and consequently marked to market through
        earnings. Generally, market data to value these types of transactions at
        PNM is
        available for up to 5 years for gas swaps and up to 18 months for options.
        The
        remaining time period, referred to as the illiquid period, is valued using
        internally developed pricing data. As a result, PNM records liquidity reserves
        on these contracts for market gains and losses in the illiquid period. PNM
        regularly assesses the validity and availability of pricing data for the
        illiquid period of its derivative transactions and adjusts its liquidity
        reserves, accordingly.
 
 PNM
        also
        records liquidity reserves for the illiquid period for electricity contracts.
        This period is greater than five years which requires internal model assumptions
        and calculations to establish a forward market curve.
 
  34
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  PNM’s
        commodity derivative instruments are summarized as follows:
 
 **March
                  31,**
              
              **December
                  31,**
              
              **March
                  31,**
              
              **December
                  31,****2007**
              
              **2006**
              
              **2007**
              
              **2006****Type
                  of Derivative**
              
              **Mark-to-Market
                  Instruments**
              
              **Hedge
                  Instruments**(In
                  thousands)**Current****Assets**Energy
                  contracts
              
              $
              8,253
              
              $
              16,374
              
              $
              -
              
              $
              1,057Gas
                  fixed-for-float swaps
              
              
              6,544
              
              
              1,950
              
              
              3,656
              
              
              1,615Options
              
              
              2,841
              
              
              2,986
              
              
              -
              
              
              -Derivative
                  assets for gas off-system salesforward
                  physical trades
              
              
              479
              
              
              -
              
              
              -
              
              
              -PGAC
                  portion of options, swaps and hedges
              
              
              -
              
              
              -
              
              
              3,302
              
              
              16,748Total
                  Current Assets
              
              
              18,117
              
              
              21,310
              
              
              6,958
              
              
              19,420**Deferred
                  Charges**Energy
                  contracts
              
              
              -
              
              
              2,666
              
              
              -
              
              
              -Gas
                  fixed-for-float swaps
              
              
              12,172
              
              
              7,101
              
              
              3,200
              
              
              1,872Options
              
              
              2,797
              
              
              825
              
              
              -
              
              
              -PGAC
                  portion of options, swaps and hedges
              
              
              -
              
              
              -
              
              
              749
              
              
              3,337Total
                  Deferred Charges
              
              
              14,969
              
              
              10,592
              
              
              3,949
              
              
              5,209**Total
                  Assets**
              
              
              33,086
              
              
              31,902
              
              
              10,907
              
              
              24,629**Current
                  Liabilities**Energy
                  contracts
              
              
              (11,069
              )
              
              (10,928
              )
              
              (808
              )
              
              -Gas
                  fixed-for-float swaps
              
              
              (4,492
              )
              
              (6,440
              )
              
              (330
              )
              
              (2,872
              )Options
              
              
              (2,933
              )
              
              (3,255
              )
              
              -
              
              
              -PGAC
                  portion of options, swaps and hedges
              
              
              -
              
              
              -
              
              
              (3,302
              )
              
              (16,748
              )Total
                  Current Liabilities
              
              
              (18,494
              )
              
              (20,623
              )
              
              (4,440
              )
              
              (19,620
              )**Long-Term
                  Liabilities**Energy
                  contracts
              
              
              (4,214
              )
              
              (7,472
              )
              
              (1,194
              )
              
              (154
              )Gas
                  fixed-for-float swaps
              
              
              (291
              )
              
              (421
              )
              
              (835
              )
              
              (1,915
              )Options
              
              
              (3,610
              )
              
              (801
              )
              
              -
              
              
              -PGAC
                  portion of options, swaps and hedges
              
              
              -
              
              
              -
              
              
              (749
              )
              
              (3,337
              )Total
                  Long-Term Liabilities
              
              
              (8,115
              )
              
              (8,694
              )
              
              (2,778
              )
              
              (5,406
              )**Total
                  Liabilities**
              
              
              (26,609
              )
              
              (29,317
              )
              
              (7,218
              )
              
              (25,026
              )**Net
                  Total Assets and Total Liabilities**
              
              $
              6,477
              
              $
              2,585
              
              $
              3,689
              
              $
              (397
              )
 
 Gains
        or
        losses related to hedged instruments are reclassified from accumulated other
        comprehensive income when the hedged transaction settles and impacts earnings.
        The amounts, other than PGAC, shown as current assets and current liabilities,
        relate to contracts that will be settled in the next twelve months.
   35
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  **(5)**
              **Earnings
                  Per Share**
 
 In
        accordance with SFAS 128, dual presentation of basic and diluted earnings
        per
        share has been presented in the Condensed Consolidated Statements of Earnings
        of
        PNMR. The following reconciliation illustrates the impact on the share amounts
        of potential common shares and the earnings per share amounts:
  **Three
                    Months Ended****March
                    31,****2007**
                
                **2006**(In
                    thousands, except per share amounts)**Net
                    Earnings**
                
                $
                29,969
                
                $
                26,325**Average
                    Number of Common Shares Outstanding**
                
                
                76,659
                
                
                68,787Dilutive
                    effect of common stock equivalents:Stock
                    options and restricted stock
                
                
                701
                
                
                497Equity-linked
                    units
                
                
                739
                
                
                91**Average
                    Common and Common Equivalent Shares Outstanding**
                
                
                78,099
                
                
                69,375**Net
                    Earnings per Share of Common Stock:**Basic
                
                $
                0.39
                
                $
                0.38Diluted
                
                $
                0.38
                
                $
                0.38
 (a)
              Excludes
                  the effect of average anti-dilutive common stock equivalents related
                  to
                  out-of-the-money options of zero and 722,306 for the three months
                  ended
                  March 31, 2007 and 2006, respectively.
  36
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  **(6)**
              **Stock-Based
                  Compensation**
 
 Information
        concerning the Company’s stock-based compensation plans is contained in Note 13
        of the Notes to Consolidated Financial Statements in the 2006 Annual Reports
        on
        Form 10-K.
 
 *Stock
        Options*
 
 The
        following table represents stock option activity for the three months ended
        March 31, 2007:
 
 **Weighted-****Weighted-**
              
              **Aggregate**
              
              **Average****Average**
              
              **Intrinsic**
              
              **Remaining****Exercise**
              
              **Value**
              
              **Contract
                  Life****Stock
                  Options**
              
              **Shares**
              
              **Price**
              
              (In
                  thousands)
              
              (Years)Outstanding
                  at beginning of period
              
              
              2,999,606
              
              $
              21.02Granted
              
              
              754,000
              
              $
              30.50Exercised
              
              
              (278,859
              )
              $
              20.11Forfeited
              
              
              (11,636
              )
              $
              27.26Outstanding
                  at end of period
              
              
              3,463,111
              
              $
              23.11
              
              $
              31,737
              
              
              7.57Options
                  exercisable at end of period
              
              
              1,848,561
              
              $
              19.03
              
              $
              24,525
              
              
              6.17Options
                  available for future grant
              
              
              2,485,793
 
  37
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  The
        following table provides additional information concerning stock option activity
        for the three months ended March 31:
 
 **Stock
                  Options**
              
              **2007**
              
              **2006**(In
                  thousands,
                except
                  per share amounts)Weighted-average
                  grant date fair value per share of options granted
              
              $
              4.70
              
              $
              3.87Total
                  intrinsic value of options exercised during the period
              
              $
              3,103
              
              $
              851
 
 **Restricted
        Stock**
 
 The
        following table summarizes nonvested restricted stock activity for the three
        months ended March 31, 2007:
 
 **Weighted-****Average****Grant-Date****Nonvested
                  Restricted Stock**
              
              **Shares**
              
              **Fair
                  Value**Nonvested
                  at beginning of period
              
              161,769
              
              $24.55Granted
              
              94,000
              
              $28.76Vested
              
              (64,301)
              
              $23.24Nonvested
                  at end of period
              
              191,468
              
              $25.93
 
 The
        total
        fair value of shares of restricted stock that vested during the three months
        ended March 31, 2007 was $2.0 million.
  38
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  **(7)**
              **Capitalization**
 
 Information
        concerning the Company’s financing activities is contained in Note 6 of the
        Notes to Consolidated Financial Statements in the Annual Reports on Form
        10-K.
        PNMR and PNM have revolving credit facilities for borrowings up to $600 million
        and $400 million, respectively, that primarily expire in 2011 and local lines
        of
        credit amounting to $15 million and $13.5 million, respectively. PNMR and
        PNM
        also have commercial paper programs under which they may issue up to $400
        million and $300 million of commercial paper, respectively. PNMR entered
        into a
        short-term bridge loan agreement for temporary financing of Twin Oaks (See
        Note
        2). The revolving credit facilities serve as support for the commercial paper
        programs. Operationally, this means the aggregate borrowings under the
        commercial paper program and the revolving credit facility for each of PNMR
        and
        PNM cannot exceed the maximum amount of the revolving credit facility for
        that
        entity.
 
 Short-term
        debt outstanding consists of:
 
 **March
                  31,**
              
              **December
                  31,****Short-term
                  Debt**
              
              **2007**
              
              **2006**(In
                  thousands)Commercial
                  paper programs:PNMR
              
              $
              244,150
              
              $
              263,550PNM
              
              
              245,700
              
              
              251,300PNMR
                  bridge loan
              
              
              249,495
              
              
              249,495$
              739,345
              
              $
              764,345
 
 On
        April
        17, 2007, PNMR repaid the balance due on the bridge loan. To facilitate the
        repayment, PNMR borrowed $250.5 million under its revolving credit facility.
        Reflecting this borrowing, at May 1, 2007, PNMR and PNM had $48.8 million
        and
        $188.8 million of availability under their respective revolving credit
        facilities and local lines of credit, including reductions of availability
        due
        to outstanding letters of credit and amounts outstanding under the commercial
        paper programs.
 
 As
        of
        March 31, 2007 TNMP had outstanding borrowings of $29.2 million from PNMR
        under
        their intercompany loan agreement.
 
 PNMR
        has
        entered into three fixed-to-floating interest rate swaps with an aggregate
        notional principal amount of $150.0 million. The swaps are accounted for
        as
        fair-value hedges with a liability position of approximately $2.8 million
        at
        March 31, 2007, with a corresponding reduction of long-term debt.
 
 PNMR
        offers new shares of PNMR common stock through the PNM Direct Plan and an
        equity
        distribution agreement. For the three months ended March 31, 2007, PNMR had
        sold
        a combined total of 22,704 shares of its common stock through the PNMR Direct
        Plan and the equity distribution agreement for net proceeds of $0.7 million.
        PNMR also issued 12,210 shares of its common stocks for $0.4 million through
        its
        ESPP during the three months ended March 31, 2007.
 
  39
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  **(8)**
              **Pension
                  and Other Postretirement Benefit
                  Plans**
 
 PNMR
        and
        its subsidiaries maintain a qualified defined benefit pension plan, a plan
        providing medical and dental benefits to eligible retirees, and an executive
        retirement program (“PNM Plans”). PNMR maintains the legal obligation for the
        benefits owed to participants under these plans. TNMP also maintains a qualified
        defined benefit pension plan covering substantially all of its employees,
        a plan
        providing medical and death benefits to eligible retirees and an executive
        retirement program (“TNMP Plans”). Readers should refer to Note 12 of the
        Consolidated Financial Statements in the Company’s Annual Report on Form 10-K
        for the year ended December 31, 2006 for additional information on these
        plans.
 
 **PNM
        Plans**
 
 The
        following table presents the components of the PNM Plans’ net periodic benefit
        cost (income):
 
 **Three
                  Months Ended March 31,****Pension
                  Plan**
              
              **Other
                  Postretirement Benefits**
              
              **Executive
                  Retirement Program****2007**
              
              **2006**
              
              **2007**
              
              **2006**
              
              **2007**
              
              **2006**(In
                  thousands)**Components
                  of Net Periodic****Benefit
                  Cost (Income)**Service
                  cost
              
              $
              36
              
              $
              126
              
              $
              632
              
              $
              678
              
              $
              14
              
              $
              14Interest
                  cost
              
              
              7,953
              
              
              7,710
              
              
              1,928
              
              
              1,842
              
              
              272
              
              
              264Expected
                  long-term return on assets
              
              
              (10,194
              )
              
              (10,138
              )
              
              (1,463
              )
              
              (1,354
              )
              
              -
              
              
              -Amortization
                  of net (gain) loss
              
              
              971
              
              
              1,210
              
              
              1,460
              
              
              1,670
              
              
              24
              
              
              25Amortization
                  of prior service cost
              
              
              79
              
              
              79
              
              
              (1,422
              )
              
              (1,422
              )
              
              3
              
              
              3**Net
                  Periodic Benefit Cost (Income)**
              
              $
              (1,155
              )
              $
              (1,013
              )
              $
              1,135
              
              $
              1,414
              
              $
              313
              
              $
              306
 
 For
        the
        three months ended March 31, 2007 and 2006, PNM made contributions totaling
        $1.5
        million and zero to trusts for other postretirement benefits. PNM expects
        to
        make contributions totaling $6.7 million during 2007 to trusts for other
        postretirement benefits. PNM does not anticipate making any contributions
        to the
        pension plan during 2007.
  40
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  **TNMP
        Plans**
 
 The
        following table presents the components of the TNMP Plans’ net periodic benefit
        cost (income):
 
 **Three
                  Months Ended March 31,****Pension
                  Plan**
              
              **Other
                  Postretirement Benefits**
              
              **Executive
                  Retirement Program****2007**
              
              **2006**
              
              **2007**
              
              **2006**
              
              **2007**
              
              **2006**(In
                  thousands)**Components
                  of Net Periodic****Benefit
                  Cost (Income)**Service
                  cost
              
              $
              -
              
              $
              -
              
              $
              98
              
              $
              106
              
              $
              -
              
              $
              -Interest
                  cost
              
              
              1,057
              
              
              1,085
              
              
              165
              
              
              178
              
              
              19
              
              
              19Expected
                  long-term return on assets
              
              
              (1,710
              )
              
              (1,754
              )
              
              (114
              )
              
              (114
              )
              
              -
              
              
              -Amortization
                  of net (gain) loss
              
              
              (2
              )
              
              -
              
              
              (39
              )
              
              -
              
              
              -
              
              
              -Amortization
                  of prior service cost
              
              
              -
              
              
              -
              
              
              15
              
              
              15
              
              
              -
              
              
              -**Net
                  Periodic Benefit Cost (Income)**
              
              $
              (655
              )
              $
              (669
              )
              $
              125
              
              $
              185
              
              $
              19
              
              $
              19
 
 For
        the
        three months ended March 31, 2007 and 2006, TNMP did not make any contributions
        to trusts for other postretirement benefits. TNMP expects to make contributions
        totaling $0.7 million during 2007 to trusts for other postretirement benefits.
        TNMP does not anticipate making any contributions to the pension plan during
        2007.
 
 **(9)**
              **Commitments
                  and Contingencies**
 
 **OVERVIEW**
 
 There
        are
        various claims and lawsuits pending against the Company. The Company is also
        subject to federal, state and local environmental laws and regulations, and
        is
        currently participating in the investigation and remediation of numerous
        sites.
        In addition, the Company periodically enters into financial commitments in
        connection with its business operations. It is not possible at this time
        for the
        Company to determine fully the effect of all litigation and other legal
        proceedings on its results of operations or financial position. It is the
        Company’s policy to accrue for expected costs in accordance with SFAS 5, when it
        is probable that a SFAS 5 liability has been incurred and the amount of expected
        costs of these items to be incurred is reasonably estimable. These estimates
        include costs for external counsel and other professional fees. The Company
        is
        also involved in various legal proceedings in the normal course of its business.
        The associated legal costs for these routine matters are accrued when the
        legal
        expenses are incurred. The Company does not expect that any known lawsuits,
        environmental costs and commitments will have a material adverse effect on
        its
        financial condition or results of operations, although the outcome of
        litigation, investigations and other legal proceedings is inherently
        uncertain.
  41
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  **COMMITMENTS
        AND CONTINGENCIES RELATED TO THE ENVIRONMENT**
 
 **PNM**
 
 ***Renewable
        Portfolio Standard***
 
 The
        Renewable Energy Act of 2004 was enacted to encourage the development of
        renewable energy in New Mexico. As amended effective July 1, 2007, the act
        establishes a mandatory renewable energy portfolio standard requiring a utility
        to acquire a renewable energy portfolio equal to 5% of retail electric sales
        by
        January 1, 2006 and increasing to 10% by 2011, 15% by 2015 and 20% by 2020.
        The
        act provides for streamlined proceedings for approval of utilities’ renewable
        energy procurement plans, assures utilities recovery of costs incurred
        consistent with approved procurement plans and requires the NMPRC to establish
        a
        reasonable cost threshold for the procurement of renewable resources to prevent
        excessive costs being added to rates.
 
 In
        August
        2006, PNM filed its annual renewable energy portfolio report and 2007 renewable
        energy procurement plan. In its procurement plan, PNM stated that it would
        continue to procure renewable energy and RECs from wind and solar photovoltaic
        facilities and to capitalize the costs for recovery in its next rate case
        in
        accordance with a stipulation approved by the NMPRC in 2003. The procurement
        plan requested the NMPRC to amend PNM’s solar photovoltaic program to eliminate
        the annual ceiling on new customer subscriptions, to approve the procurement
        of
        renewable energy and RECs from a biomass facility under a 20-year PPA beginning
        in 2009 and to authorize recovery of the costs of procurement under the PPA,
        including costs related to imputed debt. The NMPRC issued a final order on
        December 14, 2006 which approved the amendment to the photovoltaic program,
        approved the procurement under the biomass PPA, and recognized a “disputable
        presumption” of the reasonableness of the costs of energy and capacity under the
        PPA. The NMPRC denied PNM’s request to recover imputed debt costs, but gave PNM
        leave to present the issue again in a rate case. On February 6, 2007, the
        NMPRC
        entered an order reopening the case with the limited purpose of reconsidering
        its determination that the act creates only a “disputable presumption” of the
        reasonableness of costs incurred under an approved procurement plan and invited
        briefs on that issue. PNM, the NMPRC staff, and the New Mexico Attorney General
        filed briefs. A decision is pending.
 
 ***The
        Clean Air Act***
 
 *Regional
        Haze*
 
 In
        2005,
        the EPA issued the final rule addressing regional haze and guidelines for
        BART
        determinations. The purpose of the regional haze regulations is to address
        regional haze visibility impairment in the United States’ national parks and
        wilderness areas. The rule calls for all states to establish goals and emission
        reduction strategies for improving visibility in these areas. In October
        2006,
        the EPA issued the final BART alternatives rule which made revisions to the
        2005
        regional haze rules. In particular, the alternatives rule defines how an
        SO 2 emissions trading program developed by the Western Regional Air Partnership,
        a
        voluntary organization of western states, tribes and federal agencies, can
        be
        used by western states. New Mexico will be participating in the SO 2 program,
        which is a trading program that will be implemented if SO 2 reduction milestones, which are still being developed, are not met. The NMED
        has
        requested a BART analysis for nitrogen oxides and particulate be done for
        each
        of the four units at SJGS. The Company is working to complete this analysis
        in
        early June 2007, and upon completion will submit the analysis to the NMED.
        Potentially, additional nitrogen oxide emission reductions could be required.
        The nature and cost of compliance with these potential requirements cannot
        be
        determined at this time.
 
 42
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  *New
        Source Review Rules*
 
 In
        2003,
        the EPA issued a rule clarifying what constitutes routine maintenance, repair,
        and replacement of damaged or worn equipment, subject to safeguards to assure
        consistency with the Clean Air Act. In March 2006, a panel of the Court of
        Appeals for the District of Columbia Circuit vacated this rule. The action
        by
        the court did not eliminate the NSR exclusion for routine maintenance, repair,
        and replacement work nor did the decision rule on what activities are physical
        changes. The EPA’s authority to write a rule based on the current NSPS hourly
        emission increase test remains in place, although the U.S. Supreme Court
        agreed
        to hear an appeal of the 4 th U.S.
        Circuit Court of Appeals ruling in favor of Duke Energy Corp with respect
        to the
        hourly emission increase test being the appropriate method for calculating
        an
        emissions increase for PSD purposes. On April 2, 2007, the U.S. Supreme Court
        issued its decision. In a unanimous decision, the U.S. Supreme Court vacated
        the
        decision of the Fourth U.S. Circuit Court of Appeals and remanded for further
        proceedings consistent with the U.S. Supreme Court’s opinion. The decision
        precludes the use of an increase in the maximum hourly emission rate for
        determining an emissions increase for PSD purposes. The decision did not
        eliminate the NSR exclusion for routine maintenance, repair, or replacement,
        nor
        did it preclude the EPA from promulgating a regulation allowing an emission
        increase test for PSD purposes to be based on an increase in the maximum
        hourly
        emission rate. EPA has announced that it will proceed with revision of the
        NSR
        rules to specify that only activities that increase an emitting unit’s hourly
        rate of emissions triggers a major modification. The Company is unable to
        determine the impact of this matter on its results of operations and financial
        position.
 
 *Citizen
        Suit Under the Clean Air Act*
 
 PNM
        reached an impasse with the Grand Canyon Trust and Sierra Club (“Plaintiffs”)
        and with the NMED with respect to certain matters under the Consent Decree
        of
        May 10, 2005.  As a result, PNM filed petitions with the United States
        District Court for the District of New Mexico on October 6 and 12, 2006,
        seeking
        a determination that PNM had complied with the Consent Decree with respect
        to
        the matters at issue. The controversies related to PNM’s reports on NOX controls
        and demisters at SJGS.  PNM reached an agreement with the Plaintiffs and
        the NMED concerning these issues which was set forth in a Stipulated Order.
        The
        Court entered the Stipulated Order approving the settlement on December 27,
        2006. The settlement does not require any additional material expenditures
        with
        respect to the implementation of the Consent Decree. Counsel for Plaintiffs
        has
        submitted statements to PNM for payment of attorneys fees and costs incurred
        with respect to post-decree administration and disputes. PNM is presently
        reviewing these statements. If no agreement is reached on the fee and cost
        request, Plaintiffs have until May 29, 2007 to file an application for an
        award
        of fees and costs.
 
 The
        Consent Decree includes a provision whereby stipulated penalties are assessed
        for non-compliance with specified emissions limits. Stipulated penalty amounts
        are placed in escrow on a quarterly basis pending review of SJGS’s emissions
        performance for each quarter. For the years 2005 and 2006, PNM has placed
        $1.2
        million into escrow as potential stipulated penalties. By letter dated March
        20,
        2007, the NMED and Plaintiffs requested information concerning PNM’s calculation
        of potential stipulated penalty amounts and the amounts held in escrow. PNM
        is
        presently formulating its response to the March 20, 2007 letter.
 
 *Navajo
        Nation Environmental Issues*
 
 Four
        Corners is located on the Navajo Reservation and is held under an easement
        granted by the federal government as well as a lease from the Navajo Nation.
        APS
        is the Four Corners operating agent and PNM owns a 13.0% ownership interest
        in
        Units 4 and 5 of Four Corners.
 
 The
        Navajo Acts, enacted in 1995, purport to give the Navajo Nation EPA authority
        to
        promulgate regulations covering air quality, drinking water, and pesticide
        activities, including those activities that occur at Four Corners. In October
        1995, the Four Corners participants filed a lawsuit in the District Court
        of the
        Navajo Nation, Window Rock District, challenging the applicability of the
        Navajo
        Acts as to Four Corners. The District Court stayed these proceedings pursuant
        to
        a request by the parties and the parties are seeking to negotiate a
        settlement.
 
 In
        2000,
        the Navajo Tribal Council approved operating permit regulations under the
        Navajo
        Nation Air Pollution Prevention and Control Act. The Four Corners participants
        believe that the regulations fail to recognize that the Navajo Nation did
        not
        intend to assert jurisdiction over Four Corners. Each of the Four Corners
        participants filed a petition with the Navajo Supreme Court for review of
        the
        operating permit regulations. Those proceedings have been stayed, pending
        the
        outcome of the settlement negotiations mentioned above.
 
 43
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  In
        May
        2005, APS and the Navajo Nation signed a Voluntary Compliance Agreement which
        would resolve the dispute regarding the Air Pollution and Control Act portion
        of
        the lawsuit for the term of the Voluntary Compliance Agreement. On
        March
        21, 2006, the EPA determined that the Navajo Nation was eligible for “treatment
        as a state” for the purpose of entering into a supplemental delegation agreement
        with the EPA to administer the Clean Air Act Title V, Part 71 federal permit
        program over Four Corners. The EPA entered into the supplemental delegation
        agreement with the Navajo Nation on the same day. Because the EPA’s approval was
        consistent with the requirements of the Voluntary Compliance
        Act, SRP
        and APS sought and
        obtained dismissal
        of the pending litigation in the Navajo Nation Supreme Court, as well as
        the
        pending litigation in the Navajo Nation District Court to the extent the
        claims
        relate to the Clean Air Act. The agreement does not address or resolve any
        dispute relating to other Navajo Acts.
 
 The
        Company cannot currently predict the outcome of these matters.
 
 *Four
        Corners Federal Implementation Plan Litigation*
 
 In
        September 1999, the EPA proposed a FIP to set air quality standards at certain
        power plants, including Four Corners.  On July 26, 2006, the Sierra Club
        sued the EPA in an attempt to force the EPA to issue a final FIP to limit
        emissions at the Four Corners.  On September 12, 2006, the EPA proposed a
        revised FIP to establish air quality standards at Four Corners.
 
 APS,
        the
        Four Corners operator, intervened in the proceeding as a defendant in order
        to
        protect the interests of the participants. The Sierra Club and the EPA reached
        a
        settlement over the timing of the issuance of the FIP and a Consent Decree
        was
        lodged with the Court on December 13, 2006 and notice of the lodging of the
        Consent Decree was published in the March 15, 2007 Federal Register. Under
        the
        terms of the proposed Consent Decree, the EPA on April 30, 2007, issued
        the final FIP for Four Corners.  The FIP essentially federalizes the
        requirements contained in the New Mexico State Implementation Plan, which
        Four
        Corners has historically followed. In
        the
        case of sulfur dioxide, the FIP includes an emission limit that Four Corners
        has
        achieved following a successful program to determine if additional reductions
        could be made with the existing controls. The
        FIP
        also includes a requirement to control fugitive dust within 18 months after
        the
        FIP becomes effective. The Company is unable to determine the impact of these
        matters on its results of operations and financial position.
 
 In
        addition, on August 21, 2006, the EPA proposed a FIP to implement “minor New
        Source Review” on Tribal reservations. The FIP, if finalized, would apply to
        Four Corners and would require preconstruction review and permitting of
        plant projects that meet specified criteria. PNM does not currently expect
        this
        FIP to have a material adverse effect on its financial position, results
        of
        operations, cash flows or liquidity.
 
 ***Santa
        Fe Generating Station***
 
 PNM
        and
        the NMED conducted investigations of gasoline and chlorinated solvent
        groundwater contamination detected beneath PNM’s former Santa Fe Generating
        Station site to determine the source of the contamination pursuant to a 1992
        settlement agreement between PNM and the NMED.
 
 PNM
        believes that the data compiled indicates observed groundwater contamination
        originated from off-site sources. However, in 2003, PNM elected to enter
        into a
        fifth amendment to the 1992 Settlement Agreement with the NMED to avoid a
        prolonged legal dispute, whereby PNM agreed to supplement remediation facilities
        by installing an additional extraction well and two new monitoring wells
        to
        address remaining gasoline contamination in the groundwater at and in the
        vicinity of the site. These wells were completed in 2004. PNM will continue
        to
        operate the remediation facilities until the groundwater is cleaned up to
        applicable federal standards or until such time as the NMED determines that
        additional remediation is not required, whichever is earlier. The City of
        Santa
        Fe, the NMED and PNM entered into an amended Memorandum of Understanding
        relating to the continued operation of the well and the remediation facilities
        called for under the latest amended Settlement Agreement. The well continues
        to
        operate and meets federal drinking water standards. PNM is not able to assess
        the duration of this project.
 
 44
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  PNM
        has
        been verbally informed that the Superfund Oversight Section of the NMED is
        conducting an investigation into the chlorinated solvent contamination in
        the
        vicinity of the former Santa Fe Generating Station site. The investigation
        will
        study possible sources for the chlorinated solvents in the groundwater. The
        NMED
        investigation is ongoing.
 
 ***Coal
        Combustion Waste Disposal***
 
 SJCC
        currently disposes of coal combustion products consisting of fly ash, bottom
        ash, and gypsum from SJGS in the surface mine pits adjacent to the plant.
        PNM
        and SJCC have been participating in various sessions sponsored by EPA to
        consider rulemaking for the disposal of coal combustion products. The rulemaking
        would be pursuant to the Bevill Amendment of the Resource Conservation and
        Recovery Act. PNM cannot predict the outcome of this matter but does not
        believe
        currently that it will have a material adverse impact on its results of
        operations or financial position.
 
 **OTHER
        COMMITMENTS AND CONTINGENCIES**
 
 **PNM**
 
 ***PVNGS
        Liability and Insurance Matters***
 
 The
        PVNGS
        participants have financial protection for public liability resulting from
        nuclear energy hazards to the full limit of liability under federal law.
        This
        potential liability is covered by primary liability insurance provided by
        commercial insurance carriers in the amount of $300.0 million and the balance
        by
        an industry-wide retrospective assessment program. If losses at any nuclear
        power plant covered by the programs exceed the primary liability insurance
        limit, PNM could be assessed retrospective adjustments. The maximum assessment
        per reactor under the program for each nuclear incident is approximately
        $101.0
        million. The retrospective assessment is subject to an annual limit of $15.0
        million per reactor per incident. Based upon PNM’s 10.2% interest in the three
        PVNGS units, PNM’s maximum potential assessment per incident for all three units
        is approximately $31.0 million, with an annual payment limitation of
        approximately $4.5 million. If the funds provided by this retrospective
        assessment program prove to be insufficient, Congress could impose
        revenue-raising measures on the nuclear industry to pay claims.
 
 ***San
        Juan River Adjudication***
 
 In
        1975,
        the State of New Mexico filed an action entitled “State of New Mexico v. United
        States, et al.”, in the District Court of San Juan County, New Mexico, to
        adjudicate all water rights in the San Juan River Stream System. The Company
        was
        made a defendant in the litigation in 1976. The action is expected to adjudicate
        water rights used at Four Corners and at SJGS (see “Water Supply” above). The
        Navajo Nation and various parties announced a settlement of the Nation’s
        reserved surface water rights. Congressional legislation as well as other
        approvals will be required to implement the settlement. The Company cannot
        at
        this time anticipate the effect, if any, of any water rights adjudication
        on the
        present arrangements for water at SJGS and Four Corners. It is PNM’s
        understanding that final resolution of the case cannot be expected for several
        years. PNM is unable to predict the ultimate outcome of this
        matter.
 
 45
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  ***Conflicts
        at San Juan Mine Involving Oil and Gas Leaseholders***
 
 SJCC,
        through leases with the federal government and the State of New Mexico, owns
        coal interests with respect to the San Juan underground mine. Certain gas
        producers have leases in the area of the underground coal mine and have asserted
        claims against SJCC that its coal mining activities are interfering with
        gas
        production. The Company understands that SJCC has reached a settlement with
        Western Gas for certain wells in the mine area. The Western Gas settlement
        however, does not resolve all of Western Gas’ potential claims in the larger San
        Juan underground mine area. SJCC has also reached a settlement with another
        gas
        leaseholder, Burlington Resources, for certain wells in the mine area. PNM
        cannot predict the outcome of any future disputes between SJCC and Western
        Gas
        or other gas leaseholders.
 
 ***Western
        United States Wholesale Power Market***
 
 Various
        circumstances, including electric power supply shortages, weather conditions,
        gas supply costs, transmission constraints and alleged market manipulation
        by
        certain sellers, resulted in the well-publicized California energy crisis
        and in
        the bankruptcy filings of the Cal PX and of PG&E. As a result of the
        conditions in the western market, the FERC and other federal and state
        governmental authorities initiated investigations, litigation and other
        proceedings relevant to the Company and other sellers. The more significant
        of
        these in relation to the Company are summarized below.
 
 *California
        Refund Proceeding*
 
 SDG&E
        filed a complaint with the FERC in 2000 against sellers into the California
        wholesale electric market. In 2002, the FERC ALJ issued the Proposed Findings
        on
        California Refund Liability, in which it determined that the Cal ISO and
        Cal PX
        had, for the most part, correctly calculated the amounts of the potential
        refunds owed by most sellers and identified approximations for the amount
        of
        refunds due. In 2003, the FERC issued an order substantially adopting the
        findings from the ALJ’s 2002 decision, but requiring a change to the formula
        used to calculate refunds, which had the effect of increasing the refund
        amounts
        owed by most sellers. In August 2005, the FERC issued an order setting out
        the
        process by which sellers into the Cal ISO and Cal PX markets could make cost
        recovery filings pursuant to the FERC’s prior orders that indicated sellers
        would get the opportunity to submit evidence demonstrating that the refund
        methodology creates a revenue shortfall for their transactions during the
        refund
        period (October 2, 2000 through June 20, 2001). Included in PNM’s submittal were
        objections to the limited amount of time the FERC allowed for sellers to
        complete their respective submittals, and the FERC’s arbitrary decision to allow
        only marketers, and not load serving entities such as PNM, to include a return
        component in their cost filings. PNM participated with certain other sellers
        to
        request rehearing of these issues before the FERC. In September 2005, PNM
        made
        its cost recovery filing identifying its costs associated with sales into
        the
        Cal ISO and Cal PX markets during the refund period. In January 2006, the
        FERC
        issued its order on the cost recovery filings, acting on 23 filings that
        were
        made by multiple sellers. The FERC accepted that portion of PNM’s filing
        submitted as prescribed by the FERC’s August 2005 order, but rejected the
        alternative filings that included a return component for PNM as a load serving
        entity. The effect of the FERC’s order is that PNM’s allowed cost offset against
        its refund liability is zero. In February 2006, PNM filed a petition for
        rehearing requesting FERC to reconsider its order and allow PNM to include
        a
        return on equity. While PNM believes it has meritorious legal arguments,
        the
        Company cannot predict the outcome of this cost recovery proceeding at this
        time.
 
 As
        previously reported, there have been a number of additional appeals pending
        before the United States Court of Appeals for the Ninth Circuit with regard
        to
        FERC’s orders issued in the various California market refund dockets and PNM has
        participated in various appeals as one of the members of the Competitive
        Sellers
        Group. The Ninth Circuit has held a number of mediation conferences in these,
        and the multiple other appeals pending before it, to assess the opportunities
        for settlement, in which PNM has participated. The Ninth Circuit issued an
        order
        declaring a 45-day time out period to allow parties the opportunity to assess
        the recent court decisions and the potential for settlement of cases. In
        October
        2006, the Ninth Circuit extended the time out period in several of the cases.
        In
        September 2006, a mediation conference was convened at the California Public
        Utilities Commission to assess the potential settlement of the refund
        proceedings. The conference was attended by, among others, PNM, the other
        buyers
        and sellers, FERC personnel, a settlement judge and mediator from the Ninth
        Circuit, and a former FERC ALJ (whose help was enlisted by the Ninth Circuit)
        to
        aid in the mediation process. Representatives of PNM continue to attend and
        participate in the mediation sessions being hosted by the Ninth Circuit.
        By
        notice issued in January 2007, the parties to the appeals were advised that
        the
        former FERC ALJ will no longer participate in the mediation efforts. The
        Company
        cannot predict the ultimate outcome of FERC proceedings that may result
        from the decisions in these appeals, or whether PNM will be ultimately directed
        to make any additional future refunds as the result of these court decisions,
        or
        whether settlement will be reached in the case.
 
 46
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  *Pacific
        Northwest Refund Proceeding*
 
 Puget
        Sound Energy, Inc. filed a complaint at the FERC alleging that spot market
        prices in the Pacific Northwest wholesale electric market were unjust and
        unreasonable. In 2003, the FERC issued an order recommending that no refunds
        should be ordered. Several parties in the proceeding filed requests for
        rehearing and the FERC denied rehearing and reaffirmed its prior ruling that
        refunds were not appropriate for spot market sales in the Pacific Northwest
        during the first half of 2001. The Port of Seattle then filed an appeal of
        the
        FERC’s order denying rehearing in the Ninth Circuit, which is still pending. As
        a participant in the proceedings before the FERC, PNM is also participating
        in
        the appeal proceedings. Oral argument in the case was held on January 8,
        2007.
        The Company is unable to predict the ultimate outcome of this appeal, or
        whether
        PNM will ultimately be directed to make any refunds for these
        transactions.
 
 *FERC
        Gaming Partnerships Order*
 
 In
        2003,
        in the Gaming Partnerships Order, the FERC asserted that certain entities,
        including PNM, acted in concert with Enron Corporation and other market
        participants to engage in activities that constitute gaming and/or anomalous
        market behavior in violation of the Cal ISO and Cal PX tariffs during 2000
        and
        2001. In 2003, PNM filed its responses to the Gaming Partnerships Order
        indicating that it did not engage in the alleged partnerships, alliances
        or
        other arrangements.
 
 In
        2004,
        the FERC issued an order granting the FERC staff’s motion to dismiss seven of
        the thirteen PNM customers on grounds that there was no evidence to conclude
        that these companies used their commercial relationship with PNM to game
        the Cal
        ISO and Cal PX markets. The FERC approved the settlements entered into by
        two of
        the 13 PNM customers and dismissed another of PNM’s customers from the
        proceeding. Of the three remaining PNM customers in the docket, the FERC
        staff
        entered into settlement agreements with two of them. In 2004, the FERC staff
        filed a motion to dismiss PNM from the docket and to enter into a settlement
        of
        certain parking and lending transactions. The staff’s motion stated that after
        investigation and review there was no evidence that PNM either engaged in
        a
        gaming practice that violated the Cal ISO or Cal PX tariffs. Additionally,
        PNM
        entered into a settlement of certain matters outside the scope of the docket
        related to historic parking and lending transactions, under which PNM agreed
        not
        to provide parking and lending services prospectively without first meeting
        certain requirements agreed to with the FERC staff. Additionally, PNM agreed
        to
        pay $1.0 million in settlement to the FERC to obtain satisfaction of all
        issues
        related to any potential liability stemming from the provision of parking
        and
        lending services historically. In July 2005, the FERC issued its order granting
        the staff’s motion to dismiss PNM from the Gaming Partnerships docket. In its
        order, the FERC found that PNM did not engage in prohibited gaming practices
        as
        defined in the FERC’s Gaming Partnership Order and also approved the settlement
        on the parking and lending services. The FERC also denied the California
        parties’ request to keep the docket open as to PNM and terminated the PNM
        docket. Subsequently, the California parties filed their petition for rehearing
        at the FERC objecting to the FERC’s dismissal of PNM from the Gaming Partnership
        investigation and objecting to the settlement reached with the FERC staff.
        The
        petition for rehearing is pending before FERC and PNM cannot predict the
        ultimate outcome of the rehearing petition. In August 2005, Enron, the final
        of
        the original 13 PNM customers, entered into a settlement agreement with the
        FERC
        staff, the California parties and others that was contested by several parties.
        In November 2005, the FERC issued an order approving the joint offer of
        settlement. Various parties have either objected to the settlement or otherwise
        sought efforts to stay or overturn FERC’s order. The Enron settlement
        proceedings continue to be ongoing at FERC. PNM cannot predict the final
        outcome
        of this proceeding.
  47
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  *California
        Power Exchange and Pacific Gas and Electric Bankruptcies*
 
 In
        2001,
        Southern California Edison Company and the major purchasers of power from
        the
        Cal ISO and Cal PX defaulted on payments due to the Cal ISO for power purchased
        from the Cal PX in 2000. These defaults caused the Cal PX to seek bankruptcy
        protection. PG&E subsequently also sought bankruptcy protection. PNM has
        filed its proofs of claims in the Cal PX and PG&E bankruptcy proceedings.
        Amounts due to PNM from the Cal ISO or Cal PX for power sold to them in 2000
        and
        2001 total approximately $7.9 million. Both the PG&E and Cal PX bankruptcy
        cases have confirmed plans of reorganization in which the claims of various
        creditors have been specially classified and are waiting a final determination
        by the FERC before the claims are actually paid. The PG&E bankruptcy case
        has an escrow account and the Cal PX bankruptcy has established a settlement
        account, both of which are awaiting final determination by the FERC setting
        the
        level of claims and allocating the funds.
 
 *California
        Attorney General Complaint*
 
 In
        2002,
        the California Attorney General filed a complaint with the FERC against numerous
        sellers, including PNM, regarding prices for wholesale electric sales into
        the
        Cal ISO and Cal PX markets and to the California Department of Water Resources.
        In 2002, the FERC entered an order denying the California Attorney General’s
        request to initiate a refund proceeding, but directed sellers, including
        PNM, to
        comply with additional reporting requirements with regard to certain wholesale
        power transactions. The California Attorney General filed a petition for
        review
        in the Ninth Circuit. The Ninth Circuit issued a decision upholding the FERC’s
        authority to establish the market-based rate framework under the Federal
        Power
        Act, but held that the FERC violated its administrative discretion by declining
        to investigate whether it should order refunds from sellers who failed to
        provide transaction-specific reports to the FERC as required by its rules.
        The
        Ninth Circuit determined that the FERC has the authority to order refunds
        for
        these transactions if it elects to do so and remanded the case back to the
        FERC
        for further proceedings, including a determination as to whether additional
        refunds are appropriate. In December 2006, PNM joined a group of sellers
        in
        filing a petition for writ of certiorari in the United States Supreme Court
        challenging the decision by the Ninth Circuit. The Company cannot predict
        the
        ultimate outcome of the FERC proceeding on remand,
        or whether PNM will be ultimately directed to make any additional refunds
        as the
        result of the decision.
 
 *California
        Antitrust Litigation*
 
 In
        May
        2005, the California Attorney General filed a lawsuit in California state
        court
        against PNM, PowerEx, and the Colorado River Commission alleging that PNM
        and
        PowerEx conspired to engage in unfair trade practices involving overcharges
        for
        electricity in violation of California state antitrust laws. In April 2006,
        the
        Federal District Court issued its decision denying the California Attorney
        General’s motion to remand the case back to the state court, and granted PNM’s
        and PowerEx’s motions to dismiss the case. The California Attorney General has
        appealed the case to the Ninth Circuit. Briefs have been filed in the case
        by
        the parties, but oral argument has not yet been scheduled. The Company cannot
        predict the final outcome of this litigation nor whether PNM will be required
        to
        make refunds or pay damages under these claims.
 
 ***Wholesale
        Power Marketing Antitrust Suit***
 
 In
        2004,
        PNM received notice that it was included in a list of 56 defendants that
        were
        sued by the City of Tacoma Department of Public Utilities in Federal District
        Court in the State of Washington. PNM was listed in a class of defendants
        referred to as the Trading Defendants, who allegedly engaged in buying, selling
        and marketing power in California and other locations in the western United
        States. The complaint alleged the Trading Defendants acted in concert among
        themselves and with Non-Defendant Trading Co-Conspirators and engaged in
        conduct
        that amounted to market manipulation. The complaint identified specific conduct
        that allegedly amounted to market manipulation, including the submission
        of
        false information and misrepresentation regarding load schedules, bids, power
        supply, transmission congestion, source and destination of energy, the supply
        and provision of energy and ancillary services. The complaint alleged the
        activities of the Trading Defendants, along with Generator Defendants and
        the
        Co-Conspirators, resulted in substantially increased prices for energy in
        the
        Pacific Northwest spot market in
   48
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  excess
        of
        what otherwise would have been the price and asserted damages in excess of
        $175.0 million from the multiple defendants. There have been three Ninth
        Circuit
        decisions that, collectively, appear to make the plaintiff’s case more difficult
        to prevail. As such, PNM joined a motion to dismiss the City of Tacoma
        Department of Public Utilities complaint given Ninth Circuit precedent. In
        February 2005, the district court judge in the case granted defendants’ motion
        to dismiss. As a result, the antitrust lawsuit against PNM filed by the City
        of
        Tacoma Department of Public Utilities was dismissed. In March 2005, the City
        of
        Tacoma Department of Public Utilities filed an appeal in the Ninth Circuit
        contesting the district court’s decision to dismiss the complaint. PNM
        participated in the appeal in support of the dismissal and joined in defendants’
brief filed in the Ninth Circuit, as well as a motion for summary affirmance.
        The defendants’ motion for summary affirmance of the district court was denied
        and the case was assigned to a merits panel for argument. Subsequently, the
        defendants were notified that plaintiffs were willing to enter a stipulation
        dismissing the appeal if defendants were willing to bear their own costs.
        PNM
        joined the numerous other defendants and agreed to the stipulation. In March
        2007, the Ninth Circuit dismissed the appeal with prejudice pursuant to the
        stipulation of the parties. The case has been terminated with no liability
        to
        PNM.
 
 ***Regional
        Transmission Issues***
 
 *Transmission
        Services*
 
 In
        July
        2005, the FERC issued an order terminating its proceeding on standard market
        design, stating that since issuance of the standard market design notice
        of
        proposed rulemaking, the electric industry has made significant progress
        in the
        development of voluntary RTOs and ISOs. In September 2005, the FERC issued
        a
        Notice of Inquiry on Preventing Undue Discrimination and Preference in
        Transmission Services seeking information from the industry regarding the
        provisions of the OATT for possible revision in a future rulemaking. On May
        18,
        2006, FERC issued a NOPR to reform its pro forma OATT. FERC emphasized that
        its
        purpose for the NOPR was not to create new market structures, redesign approved
        RTO or ISO markets, require transmission owners to divest control over
        transmission, impinge on state jurisdiction, or weaken the protection of
        native
        load customers. Core OATT elements were retained, including comparability
        requirements, protection of native load, state’s jurisdiction over bundled
        retail load, functional unbundling to address undue discrimination, and
        reciprocity. PNM and TNMP have filed Comments and Supplemental Comments in
        this
        proceeding. In February 2007, FERC issued Order 890 setting out the new OATT
        rule, which will become effective in May 2007. Order 890 addressed several
        elements of transmission service, including: (1) requiring greater consistency
        and transparency in calculating available transfer capacity for transmission;
        (2) requiring transparent transmission planning and customer access to
        transmission plans; (3) reform of rollover rights; and (4) clarification
        of
        various ambiguities in transmission rights under the new OATT. Order 890
        also
        required numerous compliance filings to be made by transmission providers.
        Order
        890 also attempted to clarify certain elements of transmission service utilized
        for network generation resources, but still left uncertain the transmission
        used
        for such resources that pre-dated transmission open access. PNM filed a petition
        for rehearing seeking clarification of this issue in regards to one such
        generation resource that PNM has under contract. Numerous other entities
        also
        filed petitions for rehearing and/or clarification. Additionally, a number
        of
        entities, including EEI, have requested extensions of time for making several
        of
        the compliance filings due under the order issued in the NOPR. Order 890
        is
        still pending before the FERC. The Company cannot predict what impact the
        final
        rule will have on its operations.
  49
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  *Transmission
        Pricing*
 
 In
        November 2005, the FERC issued a NOPR titled Promoting Transmission Investment
        through Pricing Reform. In the proposed rulemaking, the FERC noted declining
        investment in the national transmission grid and proposed certain incentive
        actions it is considering to increase transmission investment to
        improve the reliability of the national transmission grid. In addition to
        the
        incentive proposals, the FERC would implement additional reporting requirements
        for public utilities that operate transmission systems. In July 2006, FERC
        issued its Final Rule 679 to promote transmission investment through pricing
        reform. With its rule, FERC provided various incentives intended to promote
        transmission investment within the context of existing procedural requirements,
        with some flexibility. The FERC did not grant outright incentives to any
        public
        utility, but rather, identified incentives that it would allow when justified
        in
        the context of individual utility petitions for declaratory orders or rate
        filings made pursuant to existing rate change requirements. Under the FERC’s
        rule, each applicant must demonstrate a nexus between the incentive sought
        and
        the transmission investment being made. In August 2006, various entities,
        including EEI, filed requests for rehearing requesting the FERC to modify
        its
        rule. PNM supported EEI’s position in the filing. On December 22, 2006, FERC
        issued its order on rehearing and retained its proposed rate treatments for
        transmission incentives, but modified the way in which theses incentives
        are
        applied in three principal respects to address the comments received on the
        rule. Initially, the order on rehearing will require each applicant to explain
        whether any siting process being relied upon for a rebuttable presumption
        that
        the project is necessary to ensure reliability or reduce congestion does
        contain
        such review. The rehearing order also clarified that this rebuttable presumption
        applies only to whether the project reduces congestion or encourages
        reliability, not the additional requirements of the Final Rule. Additionally,
        the rehearing order requires applicants to demonstrate that the total package
        of
        incentives being proposed is tailored to address the demonstrable risks or
        challenges faced by the transmission provider in undertaking the project.
        As
        such, if some of the incentives in the package reduce the risks of the project,
        that fact will be taken into account in any request for an enhanced return
        on
        equity. The rehearing order also clarified that the FERC does not intend
        to
        grant incentive returns “routinely” or that, when granted, they will always be
        at the “top” of the zone of reasonableness. Rather, each transmission provider
        will, first, be required to justify a higher ROE under the required nexus
        test
        and, second, to justify where in the zone of reasonableness that return should
        lie. The rehearing order indicated the FERC will entertain requests for a
        specific return on equity determination in a petition for declaratory order.
        PNM
        intends to continue to monitor and participate in additional developments
        in
        these FERC notices and rulemakings.
 
 ***Natural
        Gas Royalties Qui Tam Litigation***
 
 In
        1999,
        a private relator served a complaint alleging violations of the False Claims
        Act
        by PNM and its wholly owned subsidiaries, Sunterra Gas Gathering Company
        and
        Sunterra Gas Processing Company (collectively, the “Company” for purposes of
        this discussion), by purportedly failing to properly measure natural gas
        from
        federal and tribal properties in New Mexico, and consequently, underpaying
        royalties owed to the federal government. The complaint seeks actual damages,
        treble damages, costs and attorneys fees, among other relief.
 
 The
        Company joined with other defendants in a motion to dismiss on the ground
        that
        the relator does not meet certain jurisdictional requirements for bringing
        suit
        under the False Claims Act. On October 20, 2006, the United States District
        Court for the District of Wyoming issued an order granting the motion and
        dismissing some of the defendants, including the Company. The relator has
        appealed to the U.S. Court of Appeals for the Tenth Circuit.
 
 The
        Company has reached an agreement in principle with the private relator pursuant
        to which the relator will move to dismiss his appeal, the Company will forego
        any efforts to seek attorney fees, costs and expenses, and the parties will
        provide mutual releases. When fully implemented, the Company will have no
        further potential liability from this litigation.
  50
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  ***Biomass
        Project***
 
 PNM
        has
        entered into a 20-year contract for the purchase of 35 MW of capacity from
        a
        renewable biomass power generation facility in central New Mexico to commence
        in
        2009.  The purchase power agreement is contingent upon the satisfaction of
        certain conditions precedent  as
        outlined in the purchase power agreement. The contract contains several
        conditions that must be met, including
        obtaining permits, completion of financial closing by April 2, 2007 and the
        start of construction by July 2, 2007. The biomass project owner was unable
        to
        complete the financial closing on April 2, 2007. As a result, PNM delivered
        a
        Remediable Event of Default letter to the biomass project owner and is currently
        evaluating the response to that letter.
 
 ***Valencia
        Energy Facility***
 
 On
        April
        18, 2007, PNM entered into a power purchase agreement to purchase all of
        the
        electric capacity and energy from the Valencia Energy Facility, a proposed
        natural gas-fired power plant to be constructed near Albuquerque, New Mexico.
        A
        third-party will build, own and operate the facility while PNM will be the
        sole
        purchaser of the electricity generated. The total projected construction
        cost
        for the facility is from $100 million to $105 million. The term of the proposed
        power purchase agreement would be for 20 years beginning June 1, 2008, with
        the
        full output of the plant estimated up to an average of 150 MW. PNM will have
        the
        option to purchase and own up to 50% of the plant after it reaches commercial
        operation. PNM estimates that the plant will typically operate during peak
        periods of energy demand in summer (less than 18% of the time on an annual
        basis). The Company is evaluating the accounting treatment for the purchase
        power agreement.
 
 **(10)**
              **Regulatory
                  and Rate Matters**
 
 **PNMR**
 
 ***Price-to-Beat
        Base Rate Reset***
 
 Based
        on
        the terms of the Texas stipulation related to the acquisition of TNP, First
        Choice made a filing to reset its price-to-beat base rates in December 2005.
        First Choice’s price-to-beat base rate case was consolidated with TNMP’s 60-day
        rate review (see “60-Day Rate Review” below). First Choice requested that the
        PUCT recognize in its new price-to-beat base rates the TNMP rate reduction
        and
        the synergy savings credit provided for in the TNP acquisition stipulation.
        In
        May 2006, TNMP, First Choice, the PUCT staff and other parties filed a
        non-unanimous settlement agreement (“NUS”). On July 20, 2006, the ALJ reopened
        the record to accept argument concerning the provisions for accumulated deferred
        federal income taxes and the carrying charges on stranded costs. Subsequently,
        on August 24, 2006, the ALJ issued a Proposal For Decision urging the PUCT
        to
        reject the NUS. After the parties filed exceptions to the Proposal For Decision,
        the PUCT unanimously rejected the ALJ’s proposal and approved the NUS on
        November 2, 2006. The PUCT made First Choice’s new price-to-beat base rates
        effective on December 1, 2006, as First Choice had requested. As price-to-beat
        rates expired on December 31, 2006, the approved rates are no longer applicable. In
        January 2007, TNMP’s 60-Day Rate Review proceeding, and the underlying NUS, was
        appealed by various Texas cities to the district court, in Austin, Texas.
        TNMP
        and FCP have intervened and will defend the PUCT’s Final Order approving the
        NUS.
 
 ***Energy
        Agreement***
 
 In
        2003,
        First Choice and Constellation executed a power supply agreement that resulted
        in Constellation being the primary supplier of power for First Choice’s
        customers through the end of 2006. Additionally, Constellation has agreed
        to
        supply power in certain transactions under the agreement beyond the date
        when
        that commitment expired.
 
 51
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  In
        2004,
        FCPSP, a bankruptcy remote entity, was created pursuant to the agreement
        with
        Constellation to hold all customer contracts previously held by First Choice.
        Constellation received a lien against the assets of FCPSP to cover the
        settlement exposure and the mark-to-market exposure rather than requiring
        FCPSP
        to post alternate collateral for the purchase of power supply. In addition,
        FCPSP is restricted by covenants that limit the size of FCPSP’s unhedged market
        positions and require that sales by FCPSP retain a positive retail margin.
        The
        agreement does not, however, permit Constellation to demand additional
        collateral irrespective of its credit exposure under the agreement. If, however,
        a change in electricity or gas forward prices increases Constellation’s credit
        exposure to FCPSP beyond a limit based on Constellation’s liens in cash and
        accounts receivable, Constellation will have no obligation to supply additional
        power to customers of FCPSP unless FCPSP provides letters of credit or other
        collateral acceptable to Constellation, and FCPSP will be constrained in
        its
        ability to sign up additional customers until that credit shortfall is
        corrected. The existing pricing mechanism under the Constellation power supply
        agreement expired on December 31, 2006. In addition, Constellation has agreed
        to
        supply power in certain transactions under the PSA beyond the date when that
        commitment expired. The obligations of Constellation to act as a qualified
        scheduling entity continue until the expiration of the agreement on December
        31,
        2007.
 
 FCPSP
        may
        terminate the agreement upon 30 days prior written notice to Constellation
        for
        any reason, but the agreement and all liens securing the agreement remain
        in
        effect with respect to transactions entered into prior to the termination
        until
        both parties have fulfilled all of their obligations with respect to such
        transactions or such transactions have been terminated for default or reasons
        related to regulatory changes.
 
 **PNM**
 
 ***Gas
        Rate Case***
 
 On
        May
        30, 2006, PNM filed a general gas rate case that asked the NMPRC to approve
        an
        increase in the service fees charged to its 481,000 natural gas customers.
        The
        proposal would increase the set monthly fee, the charge tied to monthly usage,
        and miscellaneous on-demand service fees. Those fees are separate from the
        cost
        of gas charged to customers. The monthly cost of gas charge would not be
        affected by the fee increase. The petition requests an increase in base gas
        service rates of $20.5 million and an increase in miscellaneous on-demand
        service rates of approximately $0.2 million. The request is designed to provide
        PNM’s gas utility an opportunity to earn an 11% return on equity, which is
        consistent with the average return allowed ten comparable natural gas utilities.
        The petition also requests approval of a line item that provides a true-up
        mechanism for operational costs when system-wide gas consumption is lower
        or
        higher than what is designed in the rates. A hearing on the case was conducted
        before a hearing examiner in December 2006. On January 25, 2007, the Commission
        voted to extend the suspension period for the new rates from March 25 for
        up to
        ninety days. A final order is expected from the NMPRC in the second quarter
        of
        2007.
 
 ***Electric
        Rate Case***
 
 On
        February 21, 2007, PNM filed a general electric rate case that asked the
        NMPRC
        to approve an increase in service fees to all of PNM’s retail customers except
        those formerly served by TNMP. The application requests an annual increase
        in
        electric service revenues of $68.9 million effective January 1, 2008, an
        increase of approximately 12.3% over test period revenues. The request is
        designed to provide PNM’s electric utility an opportunity to earn a 10.75%
        return on equity. The application also requests authorization to implement
        a
        Fuel and Purchased Power Adjustment Clause through which changes in the cost
        of
        fuel and purchased power, above or below the costs included in base rates,
        will
        be passed through to customers on a monthly basis. The NMPRC has suspended
        the
        operation of the proposed new rates through December 23, 2007 and has scheduled
        a hearing to begin September 5, 2007. A motion of the New Mexico Attorney
        General requesting an extension of the suspension period for an additional
        three
        months is pending before the NMPRC.
  52
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  **TNMP**
 
 ***TNMP
        Competitive Transition Charge True-Up Proceeding***
 
 The
        purpose of the true-up proceeding was to quantify and reconcile the amount
        of
        stranded costs that TNMP may recover from its transmission and distribution
        customers. A 2004 PUCT decision established $87.3 million as TNMP’s stranded
        costs.
 
 In
        July
        2005, the PUCT issued a final order confirming the calculation of carrying
        costs
        and the amount of stranded costs allowed for recovery. TNMP and other parties
        appealed the July PUCT order. On July 24, 2006, the district court in Austin,
        Texas affirmed the PUCT order. TNMP has appealed that decision to the Texas
        Third Court of Appeals in Austin, Texas and has filed its briefs. Oral argument
        is scheduled for May 9, 2007.
 
 ***Interest
        Rate for Calculating Carrying Charges on TNMP’s Stranded
        Cost***
 
 The
        PUCT
        approved an amendment to the true-up rule at its June 29, 2006 open meeting.
        The
        amendment will result in a lower interest rate that TNMP is allowed to collect
        on the unsecuritized true-up balance through a stranded cost. The PUCT concluded
        that the correct rate at which a utility should accrue carrying costs through
        a
        stranded cost is the weighted average of an adjusted form of its marginal
        cost
        of debt and its unadjusted historical cost of debt, with the weighting based
        on
        the utility’s most recently authorized capital structure. The new rate is yet to
        be determined, but this change will affect TNMP by lowering the current approved
        carrying cost rate of 10.93%. This change in carrying charges will affect
        the
        rates set in TNMP’s stranded cost filing. The rule went into effect on July 20,
        2006, and TNMP has made its compliance filing. Because the PUCT staff disagrees
        with TNMP’s calculation of the interest rate, the matter was referred to SOAH
        for a hearing on the merits. The parties have filed and submitted testimony.
        Initial briefs were filed on April 6, 2007 with reply briefs filed on April
        16,
        2007. At this time, the Company cannot predict the outcome of this
        matter.
 
 ***60-Day
        Rate Review***
 
 In
        November 2005, TNMP made its required 60-day rate review filing. TNMP’s case
        establishes a competition transition charge for recovery of the true-up balance.
        As noted above, TNMP’s 60-day rate review, along with First Choice’s
        price-to-beat rate reset filing, were consolidated. See “Price-To-Beat Base Rate
        Reset” above for further updates. On November 2, 2006, the PUCT issued a signed
        order which would allow TNMP to begin collecting its true-up balance, which
        includes carrying charges over a 14 year period. The order also allows TNMP
        to
        collect expenses associated with several cases over a three year period.
        The
        PUCT allowed TNMP to begin collecting its competition transition charge and
        its
        rate case expenses on December 1, 2006. In January 2007, this proceeding
        was
        appealed by various Texas cities to the district court, in Austin, Texas.
        TNMP
        and First Choice have intervened and will defend the PUCT’s Final Order in this
        proceeding.
 
 **(11)**
              **EnergyCo
                  Joint Venture**
 
 In
        January 2007, PNMR and ECJV, a wholly owned subsidiary of Cascade, created
        a new
        unregulated energy company, temporarily named EnergyCo, which will serve
        expanding U.S. markets throughout the Southwest, Texas and the West. Under
        the
        terms of the agreement, PNMR and ECJV each have a 50 percent ownership interest
        in EnergyCo, a limited liability company. To fund startup expenses, both
        members
        contributed $2.5 million to EnergyCo in the three months ended March 31,
        2007.
        In February 2007, the EnergyCo Board of Directors formed ECMT. ECMT is the
        subsidiary of EnergyCo that is expected to perform future marketing and trading
        activity for the joint venture.
 
 53
 **PNM
                RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
                SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
                MEXICO POWER COMPANY**  **AND
                SUBSIDIARIES**
 
 **NOTES
                TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  PNMR,
        ECJV and EnergyCo have signed a non-binding letter of intent which provides
        for
        PNMR to contribute to EnergyCo its ownership of the subsidiaries that hold
        Twin
        Oaks at fair market value of approximately $554 million, for ECJV to make
        a
        related cash contribution to EnergyCo equal to 50% of the Twin Oaks contribution
        amount and for EnergyCo to make a related cash distribution to PNMR equal
        to 50%
        of the Twin Oaks contribution amount. PNMR expects to contribute Twin Oaks
        to
        EnergyCo on or about June 1, 2007.
 
 PNMR
        accounts for its investment in EnergyCo using the equity method of accounting.
        PNMR records as income its percentage share of earnings or loss and
        distributions of EnergyCo and carries its investment at cost, adjusted for
        its
        share of undistributed earnings or losses.
 
 **(12)**
              **Related
                  Party Transactions**
 
 PNMR,
        PNM
        and TNMP are considered related parties as defined in SFAS 57. PNMR
        Services Company provides corporate services to PNMR and its subsidiaries.
        Additional i nformation
        concerning the Company’s related party transactions is contained in Note 20 of
        the Notes to Consolidated Financial Statements in the Annual Reports on Form
        10-K.
 
 See
        Note
        14 for information concerning the transfer of operations from TNMP to PNM.
        The
        table below summarizes the nature and amount of other transactions among
        PNMR,
        PNM and TNMP:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006**(In
                  thousands)Electricity,
                  transmission and related services billings:PNM
                  to TNMP
              
              $
              126
              
              $
              15,232TNMP
                  to PNMR
              
              
              16,513
              
              
              15,287Shared
                  services billings from PNMR to:PNM
              
              $
              25,800
              
              $
              31,617TNMP
              
              
              5,512
              
              
              9,340Capital
                  expenditures fee billings from PNMR to:PNM
              
              $
              99
              
              $
              -TNMP
              
              
              18
              
              
              -Income
                  tax sharing payments from:PNM
                  to PNMR
              
              $
              -
              
              $
              -TNMP
                  to PNMR
              
              
              -
              
              
              -
 
  54
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
 
 **(13)**
              **New
                  Accounting Pronouncements**
 
 Please
        refer to Note 21 of the Consolidated Financial Statements in the Company's
        Annual Reports on Form 10-K for the year ended December 31, 2006 for information
        regarding recently issued accounting pronouncements that could have a material
        impact on the Company. No accounting pronouncements issued since that report
        are
        expected to have a material impact on the Company's Consolidated Financial
        Statements. See Note 15 for discussion concerning the adoption of FIN 48
        as of
        January 1, 2007.
 
 **(14)**
              **Discontinued
                  Operations**
 
 In
        connection with the acquisition of TNP and its principal subsidiaries, TNMP
        and
        First Choice, the NMPRC stipulated that all TNMP’s New Mexico operations would
        transfer to the ownership of PNM. This transfer took place on January 1,
        2007
        when TNMP transferred its New Mexico operational assets and liabilities to
        PNMR
        through a redemption of TNMP’s common stock. PNMR contemporaneously contributed
        the TNMP New Mexico operational assets and liabilities to PNM.
 
 In
        accordance with SFAS 144 and EITF 03-13, the Company determined that the
        New
        Mexico operations component of TNMP is required to be reported as discontinued
        operations in the TNMP Condensed Consolidated Statements of Operations for
        the
        period January 1, 2006 through March 31, 2006. Due to the fact the net assets
        were distributed to TNMP’s parent, PNMR, the assets and liabilities were
        considered “held and used” up until the date of transfer and, according to SFAS
        144, are not classified as “held for sale” within TNMP’s Consolidated Balance
        Sheet at December 31, 2006. No gain or loss or impairments were recognized
        on
        the disposition due to the fact the transfer was among entities under common
        control. Furthermore, the TNMP New Mexico operations are subject to traditional
        rate of return regulation. Subsequent to the transfer, the NMPRC regulates
        these
        operations in the same manner as prior to the transfer. Under SFAS 71, the
        assets and liabilities were recorded by PNM at TNMP’s carrying amounts, which
        represent their fair value within the regulatory environment.
 
 Under
        SFAS 154, the asset transfer did not meet the definition of a “change in
        reporting entity” since PNM’s financial statement composition remained unchanged
        after the transfer. The assets and operations transferred from TNMP are in
        the
        same line of business as PNM and are immaterial to both PNM’s assets and net
        earnings.
 
 The
        following table summarizes the results classified as discontinued operations
        in
        TNMP’s Condensed Consolidated Statements of Earnings:
 
 **Three
                  Months****Ended****March
                  31, 2006**(In
                  thousands)Operating
                  revenue
              
              $
              27,137Operating
                  expenses and other income
              
              
              25,663Earnings
                  from operations of discontinued operations, before income
                  tax
              
              
              1,474Income
                  tax expense
              
              
              1,003Earnings
                  from discontinued operations
              
              $
              471
 
  55
 
 **PNM
            RESOURCES, INC. AND SUBSIDIARIES**
 **PUBLIC
            SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY**
 **TEXAS-NEW
            MEXICO POWER COMPANY**  **AND
            SUBSIDIARIES**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (Unaudited)
  The
        following table summarizes the TNMP New Mexico assets and liabilities
        transferred to PNM:
 
 **January
                  1,****2007**(In
                  thousands)Utility
                  plant, net
              
              $
              96,610Other
                  property and investments
              
              
              12Current
                  assets
              
              
              15,444Goodwill
              
              
              102,562Deferred
                  charges
              
              
              1,794Total
                  assets transferred to PNM
              
              
              216,422Long-term
                  debt
              
              
              1,065Current
                  liabilities
              
              
              17,313Deferred
                  credits and other liabilities
              
              
              31,060Total
                  liabilities transferred to PNM
              
              
              49,438Net
                  assets transferred between entities
              
              $
              166,984




**(15)**  **Income
        Taxes**
 
 In
        July
        2006, the FASB issued FIN 48, which requires that the Company recognize only
        the
        impact of tax positions that, based on their technical merits, are more likely
        than not to be sustained upon an audit by the taxing authority. FIN 48 also
        specifies standards for recognizing interest income and expense.
 
 The
        Company adopted the provisions of FIN 48 on January 1, 2007. As a result
        of the
        implementation of FIN 48, PNMR established a liability under FIN 48 of $33.9
        million, reduced its previously recorded tax liabilities by $39.9 million,
        increased the January 1, 2007 balance of retained earnings by $1.6 million,
        increased interest payable by $3.2 million, and decreased goodwill by $1.2
        million. PNM established an asset under FIN 48 of $3.6 million, reduced its
        previously recorded tax liabilities by $3.6 million, increased the January
        1,
        2007 balance of retained earnings by $0.6 million, and increased interest
        receivable by $0.6 million. TNMP established no liability under FIN 48, recorded
        interest receivable of $3.3 million, increased the January 1, 2007 balance
        of
        retained earnings by $2.0 million, and decreased goodwill by $1.3 million.
  As
          of
          January 1, 2007 under FIN 48, PNMR had $33.9 million of unrecognized tax
          benefits, all of which would affect the effective tax rate if recognized;
          PNM
          had $3.6 million of unrecognized tax expense, none of which would affect
          the
          effective tax rate if recognized; and TNMP had no unrecognized tax benefits.
          There have been no significant changes to these amounts during the quarter
          ended
          March 31, 2007. The Company has agreed to a tentative agreement with the
          IRS
          regarding substantially all of the unrecognized tax benefits. This agreement
          must be approved by the Joint Committee on Taxation. The issue will be
          considered settled once the Joint Committee review process is complete.
          While it
          cannot be assured, it is anticipated that approximately $31.3 million of
          unrecognized tax benefits of PNMR and $3.3 million of unrecognized tax
          expense
          of PNM will reverse by March 31, 2008.
 Estimated
        interest income related to refunds expected to be received is included in
        Other
        Income and estimated interest expense and penalties are included in Interest
        Expense in the Consolidated Statement of Operations. Interest income under
        FIN
        48 for the three months ended March 31, 2007 was $1.0 million for PNMR. At
        March
        31, 2007, PNMR had accumulated accrued interest expense and penalties of
        $2.2
        million.
 
 56
 The
        Company files a Federal consolidated and several consolidated and separate
        state
        income tax returns. The tax years prior to 2001 are closed to examination
        by
        either Federal or state taxing authorities. The years 2001-2004 are currently
        under Federal income tax examination. Additionally, the reporting years
        2003-2006 are currently under Texas franchise tax examination. Based on the
        status and the process involved in finalizing these examinations, it is not
        possible to estimate the impact, if any, upon the Company’s previously recorded
        uncertain tax positions.






57




**ITEM
        2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS**
 
 The
        following Management’s Discussion and Analysis of Financial Condition and
        Results of Operations for PNMR, PNM and TNMP is presented both on a combined
        basis as applicable, and on a separate basis. For discussion purposes, this
        report will use the term “Company” when discussing matters of common
        applicability to PNMR, PNM and TNMP. Discussions regarding specific contractual
        obligations generally reference the entity that is legally obligated. In
        the
        case of contractual obligations of PNM and TNMP, these obligations are combined
        with PNMR and its subsidiaries. A reference to a “Note” in this Item 2 refers to
        the accompanying Notes to Condensed Consolidated Financial Statements included
        in Item 1.
 
 **RESULTS
        OF OPERATIONS - EXECUTIVE SUMMARY**
 
 During
        the first quarter of 2007, PNMR experienced higher earnings over the prior
        year
        primarily due to increased price margins on First Choice Power customer sales,
        the Twin Oaks acquisition, the effects of colder weather and increased
        performance at PVNGS. However, the first quarter results were negatively
        impacted by the absence of the PNM Wholesale forward sale of first-quarter
        excess resources used in 2006, lower levels of plant performance at SJGS
        and
        Four Corners, increased coal costs, higher interest expense due to higher
        short-term borrowings, and the remarketing of Pollution Control Revenue Bonds.
        The Company cannot predict what impact the changes in market prices for power
        and natural gas will have on its future results of operations.
 
 ***Business
        and Strategy***
 
 *Overview*
 
 The
        Company is positioned as a merchant utility, principally operating as a
        regulated energy service provider. The Company is engaged in the sale and
        marketing of electricity in the competitive wholesale energy marketplace.
        In
        addition, through First Choice, PNMR is a retail electric provider in Texas
        under legislation that established retail competition. PNM and TNMP are under
        the jurisdiction of the FERC. PNM is under the jurisdiction of the NMPRC
        while
        TNMP operates under the jurisdiction of the PUCT in Texas.
 
 PNMR
        intends to enhance and diversify its presence in the southwest region through
        the acquisition or development of quality generation assets, including renewable
        or clean technology resources, to serve the Company’s retail and wholesale load
        while maintaining diversity of fuel mix. PNMR also plans to increase long-term
        sales contracts in tandem with increases in its generation capacity. As in
        the
        past, PNMR intends to continue a disciplined approach to any acquisition,
        to
        match acquisitions to demand and to hedge capacity with long-term
        contracts.
 
 *EnergyCo
        Joint Venture*
 
 The
        EnergyCo joint venture with ECJV is a new unregulated energy company that
        will
        serve expanding U.S. markets throughout the Southwest, Texas and the West.
        ECJV
        is a wholly owned subsidiary of Cascade, which is PNMR’s second-largest
        shareholder.
 
 PNMR’s
        strategy for unregulated operations is focused on some of the nation’s growing
        power markets. PNMR intends to capitalize on the growth opportunities in
        these
        markets through its participation and ownership in EnergyCo. In particular,
        it
        is anticipated that ECJV will commit capital for the acquisition of assets
        and
        that Cascade will make significant guarantees of certain EnergyCo debt
        obligations to increase EnergyCo’s scale in its anticipated business
        lines:
 
 ·
            Competitive
                retail electricity sales; ·
            Development,
                operation and ownership of diverse generation assets;
                and ·
            Wholesale
                marketing and trading to optimize its assets. 
 To
        fund
        startup expenses, both members contributed $2.5 million to EnergyCo in the
        three
        months ended March 31, 2007.
  58
  In
        February 2007, the EnergyCo Board of Directors formed ECMT. ECMT is the
        subsidiary of EnergyCo that is expected to perform future marketing and trading
        activity for the joint venture.
 
 PNMR
        ,
        ECJV and EnergyCo have signed a non-binding letter of intent which provides
        for
        PNMR to contribute to EnergyCo its ownership of the subsidiaries that hold
        Twin
        Oaks at fair market value of approximately $554 million, for ECJV to make
        a
        related cash contribution to EnergyCo equal to 50% of the Twin Oaks contribution
        amount and for EnergyCo to make a related cash distribution to PNMR equal
        to 50%
        of the Twin Oaks contribution amount. PNMR expects to contribute Twin Oaks
        on or
        about June 1, 2007 and its impact is expected to reduce PNMR’s 2007 earnings per
        diluted share by approximately $0.05.
 
 *TNMP
        Asset Transfer to PNM*
 
 In
        connection with the acquisition of TNP, the NMPRC approved a stipulation
        that
        called for the integration of TNMP’s New Mexico assets into PNM. The asset
        transfer occurred as of January 1, 2007 at which time the transferred New
        Mexico
        assets and operations became reportable under the PNM Electric segment rather
        than TNMP Electric.
 
 *Segment
        Information*
 
 The
        following discussion is based on the segment methodology that the Company’s
        management uses for making operating decisions and assessing performance
        of its
        various business activities; therefore, operating results for each segment
        are
        presented without regard to the effect of accounting or regulatory changes
        and
        similar other items not related to normal operations. Except for the section
        “Results of Operation - TNMP,” references to 2006 amounts in the following
        discussion are to 2006 information as previously reported and have not been
        adjusted to reflect the transfer of TNMP’s New Mexico operations that are
        discussed above. See Note 3 for more information on the Company’s operating
        segments.
 
 The
        following discussion and analysis should be read in conjunction with the
        Condensed Consolidated Financial Statements and Notes thereto. Trends and
        contingencies of a material nature are discussed to the extent known. Refer
        also
        to “Disclosure Regarding Forward Looking Statements” in this Item 2 and to Part
        II, Item 1A. “Risk Factors.”
 
  59
  **RESULTS
        OF OPERATIONS - PNMR**
 
 **THREE
        MONTHS ENDED MARCH 31, 2007**
 **COMPARED
        TO THREE MONTHS ENDED MARCH 31, 2006**
 
 PNMR’s
        net earnings for the three months ended March 31, 2007 were $30.0 million,
        or
        $0.38 per diluted share of common stock, compared to $26.3 million, or $0.38
        per
        diluted share of common stock for the three months ended March 31, 2006.
        The
        increase in earnings was driven primarily by increased price margins on First
        Choice Power customer sales, the acquisition of Twin Oaks, the effects of
        colder
        weather, and improved performance at PVNGS. These increases were partially
        offset by the absence of the PNM Wholesale forward sale of first-quarter
        excess
        resources used in 2006, lower levels of plant performance at SJGS and Four
        Corners, increased coal costs, higher interest expense due to higher short-term
        borrowings, and the remarketing of Pollution Control Revenue Bonds. Net earnings
        per diluted share of common stock remained flat due to an increase in the
        average number of shares of common stock outstanding during the first three
        months of 2007 compared to the same period in 2006, due primarily to the
        public
        offering of 5,750,000 shares in December 2006.
 
 The
        following discussion is based on the methodology that management uses for
        making
        operating decisions and assessing performance of its various business
        activities. See Note 3 for additional information regarding these results
        and
        the Consolidated Financial Statements.
 
 Adjustments
        related to EITF 03-11 are included in Corporate and Other. This requires
        a net
        presentation of all realized gains and losses on non-normal derivative
        transactions that do not physically deliver and that are offset by similar
        transactions during settlement. Management evaluates Wholesale operations
        on a
        gross presentation basis due to its primarily net asset-backed marketing
        strategy and the importance it places on the Company’s ability to repurchase and
        remarket previously sold capacity.
 
 Income
        taxes and non-operating items are discussed on a consolidated basis for PNMR
        as
        presented in PNMR’s Condensed Consolidated Financial Statements.
 
  60
  **Regulated
        Operations**
 
 ***PNM
        Electric***
 
 The
        table
        below sets forth the operating results for PNM Electric:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006**
              
              **Variance**(In
                  thousands)Total
                  revenues
              
              $
              170,113
              
              $
              138,778
              
              $
              31,335Cost
                  of energy
              
              
              66,502
              
              
              45,474
              
              
              21,028Intersegment
                  energy transfer
              
              
              (5,658
              )
              
              (5,178
              )
              
              (480
              )Gross
                  margin
              
              
              109,269
              
              
              98,482
              
              
              10,787Energy
                  production costs
              
              
              30,934
              
              
              29,243
              
              
              1,691Transmission
                  and distribution O&M
              
              
              9,679
              
              
              7,645
              
              
              2,034Customer
                  related expense
              
              
              4,503
              
              
              3,730
              
              
              773Administrative
                  and general
              
              
              4,380
              
              
              2,691
              
              
              1,689Total
                  non-fuel O&M
              
              
              49,496
              
              
              43,309
              
              
              6,187Corporate
                  allocation
              
              
              16,977
              
              
              17,648
              
              
              (671
              )Depreciation
                  and amortization
              
              
              16,385
              
              
              14,972
              
              
              1,413Taxes
                  other than income taxes
              
              
              5,839
              
              
              6,197
              
              
              (358
              )Income
                  taxes
              
              
              4,257
              
              
              3,072
              
              
              1,185Total
                  non-fuel operating expenses
              
              
              92,954
              
              
              85,198
              
              
              7,756Operating
                  income
              
              $
              16,315
              
              $
              13,284
              
              $
              3,031
 
 
 The
        following table shows PNM Electric revenues by customer class, including
        intersegment revenues, which are eliminated within the presentation of the
        PNMR
        Condensed Consolidated Statements of Earnings and shown in the PNMR Segment
        Information in Note 3, and average number of customers:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006**
              
              **Variance**(In
                  thousands, except customers)Residential
              
              $
              67,797
              
              $
              55,328
              
              $
              12,469Commercial
              
              
              64,707
              
              
              57,079
              
              
              7,628Industrial
              
              
              23,450
              
              
              14,741
              
              
              8,709Transmission
              
              
              8,866
              
              
              7,045
              
              
              1,821Other
              
              
              5,293
              
              
              4,585
              
              
              708$
              170,113
              
              $
              138,778
              
              $
              31,335Average
                  customers
              
              
              487,001
              
              
              425,919
              
              
              61,082
 
  61
  The
        following table shows PNM Electric MWh sales by customer class:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006**
              
              **Variance**(Megawatt
                  hours)Residential
              
              
              820,630
              
              
              688,472
              
              
              132,158Commercial
              
              
              876,954
              
              
              803,700
              
              
              73,254Industrial
              
              
              470,277
              
              
              314,008
              
              
              156,269Other
              
              
              56,367
              
              
              54,863
              
              
              1,5042,224,228
              
              
              1,861,043
              
              
              363,185
 
 Operating
        revenues increased $31.3 million, or 22.6%, for the three months ended March
        31,
        2007, compared to the same period of 2006. Average customers grew 14.3% quarter
        over quarter and retail MWh sales increased 19.5%. The increases in revenues,
        customers and MWhs sales were primarily due to the transfer of southern New
        Mexico operations from TNMP. Such operations had $27.1 million in revenues,
        49,480 customers and 0.3 million MWhs in the first quarter 2006 results of TNMP.
        In addition to the transfer of these operations, PNM Electric revenues increased
        $4.2 million generally driven by load growth and colder weather.
 
 The
        gross
        margin, or operating revenues minus cost of energy sold and intersegment
        energy
        transfer, increased $10.8 million, or 11.0%, for the three months ended March
        31, 2007, compared to the same period in 2006. The increase to margin was
        mainly
        due to the transfer of southern New Mexico operations from TNMP of $6.4 million,
        improved performance at PVNGS of $5.3 million, and increased usage due to
        load
        growth and colder weather of $3.8 million. These increases were partially
        offset
        by higher
        generation costs of $2.8 million, largely as a result of increased coal costs
        at
        SJGS, and decreased
        performance at Four Corners and SJGS of $1.3 million and $1.2 million,
        respectively.
 
 Total
        non-fuel O&M expenses increased $6.2 million, or 14.3%, for the three months
        ended March 31, 2007, compared to the same period of 2006. Energy production
        costs increased $1.7 million, or 5.8%, due to increased outage costs of $1.0
        million, primarily at SJGS, and the absence of a $0.7 million PVNGS
        decommissioning and decontamination credit received in the first quarter
        of
        2006. Transmission and distribution O&M expenses increased $2.0 million, or
        26.6%, mainly due to the transfer of southern New Mexico operations from
        TNMP of
        $1.0 million and increased labor costs of $0.8 million. Customer related
        expenses increased $0.8 million, or 20.7%, primarily due to an increase in
        labor
        costs of $0.4 million and the transfer of southern New Mexico operations
        from
        TNMP of $0.3 million. Administrative and general expenses increased $1.7
        million, or 62.8%, primarily due to an increase in pension and benefit costs
        of
        $3.5 million, as costs were recorded as part of administrative and general
        expenses in 2007 versus recorded as corporate allocation charges in 2006,
        as
        discussed below. These increases to expense were partially offset by higher
        capitalized costs of $1.9 million related to increased construction activity,
        largely as a result of environmental work at SJGS and expansion of the Afton
        plant.
 
 Corporate
        allocation charges decreased $0.7 million, or 3.8%, primarily due to lower
        pension and benefit costs of $3.5 million, as costs were recorded as part
        of
        administrative and general expenses in 2007 versus recorded through the
        corporate allocation in 2006, as discussed above. This decrease was mostly
        offset by the transfer of southern New Mexico operations from TNMP of $1.6
        million and an increase in incentive-based compensation. Depreciation and
        amortization increased $1.4 million, or 9.4%, mainly due to the transfer
        of
        southern New Mexico operations from TNMP of $1.6 million, the transfer of
        the
        Afton plant to a jurisdictional resource of $0.5 million, which is offset
        in the
        Wholesale segment, and an increase in asset base of $0.4 million. These
        increases were partially offset by reduced depreciation at Four Corners due
        to
        assets that fully depreciated of $0.6 million and a life extension of the
        plant
        of $0.5 million. Taxes other than income decreased $0.4 million, or 5.8%,
        due to
        a reduction of prior year Native American taxes of $0.9 million, partially
        offset by the transfer of southern New Mexico operations from TNMP of $0.4
        million.
  62
  ***TNMP
        Electric***
 
 The
        table
        below sets forth the operating results for TNMP Electric:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006**
              
              **Variance**(In
                  thousands)Operating
                  revenues
              
              $
              40,928
              
              $
              62,685
              
              $
              (21,757
              )Cost
                  of energy
              
              
              7,171
              
              
              27,172
              
              
              (20,001
              )Gross
                  margin
              
              
              33,757
              
              
              35,513
              
              
              (1,756
              )Energy
                  production costs
              
              
              4,923
              
              
              4,713
              
              
              210Customer
                  related expense
              
              
              971
              
              
              1,204
              
              
              (233
              )Administrative
                  and general
              
              
              2,231
              
              
              398
              
              
              1,833Total
                  non-fuel O&M
              
              
              8,125
              
              
              6,315
              
              
              1,810Corporate
                  allocation
              
              
              5,700
              
              
              9,610
              
              
              (3,910
              )Depreciation
                  and amortization
              
              
              7,000
              
              
              7,731
              
              
              (731
              )Taxes
                  other than income taxes
              
              
              4,825
              
              
              5,607
              
              
              (782
              )Income
                  taxes
              
              
              352
              
              
              (673
              )
              
              1,025Total
                  non-fuel operating expenses
              
              
              26,002
              
              
              28,590
              
              
              (2,588
              )Operating
                  income
              
              $
              7,755
              
              $
              6,923
              
              $
              832
 
 
 The
        following table shows TNMP Electric revenues by customer class, including
        intersegment revenues, which are eliminated within the presentation of the
        PNMR
        Condensed Consolidated Statements of Earnings and shown in the PNMR Segment
        Information in Note 3, and average number of customers:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006****(1)**
              
              **Variance**(In
                  thousands, except customers)Residential
              
              $
              14,760
              
              $
              19,271
              
              $
              (4,511
              )Commercial
              
              
              15,969
              
              
              20,599
              
              
              (4,630
              )Industrial
              
              
              1,744
              
              
              13,319
              
              
              (11,575
              )Other
              
              
              8,455
              
              
              9,496
              
              
              (1,041
              )$
              40,928
              
              $
              62,685
              
              $
              (21,757
              )Average
                  customers(2)
              
              
              225,380
              
              
              271,103
              
              
              (45,723
              )
 
 (1)
        The
        customer class revenues presented above for the three months ended March
        31,
        2006 have been reclassified from prior year presentation in order to be
        consistent with current year presentation, as a result of changes in customer
        classifications. Additionally, the average customer count presented above
        for
        the three months ended March 31, 2006 has been reclassified from prior year
        presentation in order to be consistent with the current year presentation
        for
        the ESI ID customer count methodology used by the ERCOT.
 
 (2)
        Under
        TECA, customers of TNMP Electric in Texas have the ability to choose First
        Choice or any other REP to provide energy. The average customers reported
        above
        include 135,707 and 149,014 customers of TNMP Electric at March 31, 2007
        and
        2006, respectively, who have chosen First Choice as their REP. These TNMP
        Electric customers are also included below in the First Choice segment. For
        PNMR
        consolidated reporting purposes, these customers are included only once in
        the
        consolidated customer count.
  63
  The
        following table shows TNMP Electric MWh sales by customer class:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006****(2)**
              
              **Variance**(Megawatt
                  hours(1))Residential
              
              
              538,462
              
              
              527,880
              
              
              10,582Commercial
              
              
              459,149
              
              
              480,586
              
              
              (21,437
              )Industrial
              
              
              407,345
              
              
              556,056
              
              
              (148,711
              )Other
              
              
              24,122
              
              
              28,959
              
              
              (4,837
              )1,429,078
              
              
              1,593,481
              
              
              (164,403
              )
 
 
 (1)
        The
        MWh sales reported above include 473,014 and 474,841 MWh used by customers
        of
        TNMP Electric at March 31, 2007 and 2006, respectively, who have chosen First
        Choice as their REP. These MWh are also included below in the First Choice
        segment.
 
 (2)
        The
        customer class sales presented above for the three months ended March 31,
        2006
        have been reclassified from prior year presentation in order to be consistent
        with current year presentation, as a result of changes in customer
        classifications.
 
 The
        PUCT
        issued a signed order on November 2, 2006 related to the stranded costs incurred
        by TNMP as part of the deregulation of the Texas energy market and the
        associated carrying charges. As part of this order, TNMP will recover
        approximately $160 million over 14 years to recover the CTC and related carrying
        costs and approximately $5 million over the course of three years to recover
        rate case expenses. Also as part of this order, TNMP will return approximately
        $4 million to customers over the course of one year related to industrial
        fuel
        costs. The recovery of the CTC and rate case expenses, net of the industrial
        fuel credit, will result in increases to revenues in the period that these
        charges are billed or credited to customers.
 
 TNMP
        also
        recorded regulated assets and liabilities to account for the customer
        collections and credits. As these charges are collected from and credited
        to
        customers, the amount of the assets and liabilities will be amortized through
        the income statement. The amortization of these assets and liabilities will
        result in an increase in administrative and general expenses related to the
        rate
        case expenses, and an increase in depreciation and amortization costs related
        to
        the net of the CTC asset and industrial fuel credit liability
        amortizations.
 
 Operating
        revenues decreased $21.8 million, or 34.7%, for the three months ended March
        31,
        2007, compared to the same period of 2006. Average customers fell 16.9% quarter
        over quarter and retail electricity sales decreased 10.3% to 1.4 million
        MWhs in
        the first quarter of 2007, compared to 1.6 million MWhs in the same period
        of
        2006. The decreases in revenues, customers and sales MWhs were primarily
        due to
        the transfer of southern New Mexico operations from TNMP, which resulted
        in the
        transfer of $27.1 million in revenues, 49,480 customers and 0.3 million MWhs
        that were included in the first quarter 2006 results of TNMP to PNM. After
        consideration of the transfer of southern New Mexico operations to PNM, TNMP
        Electric revenues increased $5.4 million. TNMP collected $4.0 million in
        additional revenues during the first three months of 2007 related to the
        PUCT
        order discussed above, which consists of the net of a $4.6 million increase
        for
        the collection of the CTC, a $0.4 million increase for the collection of
        rate
        case expenses, and a $1.0 million decrease related to a industrial fuel credit
        to customers. In addition, revenues increased due to load growth and colder
        weather.
 
 Gross
        margin decreased $1.8 million, or 4.9%, for the three months ended March
        31,
        2007, compared to the same period of 2006, mainly due to the transfer of
        southern New Mexico operations to PNM Electric of $6.4 million and a $0.7
        million increase in transmission expenses from third-party providers, which
        were
        partially offset by the $4.0 million increase in revenues associated with
        the
        PUCT signed order discussed above and increases due to load growth and colder
        weather.
 
 64
  Total
        non-fuel O&M expenses increased $1.8 million, or 28.7%, for the three months
        ended March 31, 2007, compared to the same period of 2006. Administrative
        and
        general expenses increased $1.8 million, or 460.6%, primarily due to $2.3
        million of pension and benefit costs and regulatory costs that were recorded
        in
        administrative and general expenses in the first quarter of 2007 versus recorded
        through the corporate allocation in 2006, as discussed below. In addition,
        administrative and general expenses increased $0.4 million related to the
        recognition of rate case expenses that are recovered in revenues by the PUCT
        signed order discussed above. These increases were partially offset by a
        $0.4
        million decrease in pension and benefit costs and the transfer of $0.2 million
        of expenses related to southern New Mexico operations to PNM
        Electric.
 
 Corporate
        allocation charges decreased $3.9 million, or 40.7%, for the three months
        ended
        March 31, 2007, compared to the same period of 2006, primarily due to the
        transfer of southern New Mexico operations to PNM Electric of $1.6 million
        and
        $2.3 million of pension and benefit costs and regulatory expenses that were
        recorded in administrative and general expenses in the first quarter of 2007
        versus being recorded through the corporate allocation in 2006, as discussed
        above. Depreciation and amortization expense decreased $0.7 million, or 9.5%,
        to
        $7.0 million for the three months ended March 31, 2007. The transfer of southern
        New Mexico operations to PNM Electric decreased depreciation and amortization
        expenses by $1.6 million. This decrease was partially offset by the $0.5
        million
        net increase in amortization of CTC and industrial fuel credit assets and
        liabilities related to the PUCT order discussed above and an increase in
        expense
        of $0.3 million due to an increase in the asset base. Taxes other than income
        decreased $0.8 million, or 13.9%, mainly due to the transfer of southern
        New
        Mexico operations to PNM Electric of $0.4 million and a reduction in Texas
        franchise tax, which was recorded to taxes other than income in 2006 versus
        being included in operating income taxes in 2007, resulting in no net impact
        to
        earnings.
 
 
  65
  ***PNM
        Gas***
 
 The
        table
        below sets forth the operating results for PNM Gas:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006**
              
              **Variance**(In
                  thousands)Operating
                  revenues
              
              $
              216,532
              
              $
              207,525
              
              $
              9,007Cost
                  of energy
              
              
              161,713
              
              
              157,691
              
              
              4,022Gross
                  margin
              
              
              54,819
              
              
              49,834
              
              
              4,985Energy
                  production costs
              
              
              485
              
              
              488
              
              
              (3
              )Transmission
                  and distribution O&M
              
              
              7,939
              
              
              6,668
              
              
              1,271Customer
                  related expense
              
              
              3,601
              
              
              3,538
              
              
              63Administrative
                  and general
              
              
              2,720
              
              
              1,501
              
              
              1,219Total
                  non-fuel O&M
              
              
              14,745
              
              
              12,195
              
              
              2,550Corporate
                  allocation
              
              
              8,819
              
              
              10,755
              
              
              (1,936
              )Depreciation
                  and amortization
              
              
              6,181
              
              
              5,920
              
              
              261Taxes
                  other than income taxes
              
              
              2,048
              
              
              2,140
              
              
              (92
              )Income
                  taxes
              
              
              7,922
              
              
              6,266
              
              
              1,656Total
                  non-fuel operating expenses
              
              
              39,715
              
              
              37,276
              
              
              2,439Operating
                  income
              
              $
              15,104
              
              $
              12,558
              
              $
              2,546
 
 
 The
        following table shows PNM Gas revenues by customer class, including intersegment
        revenues, which are eliminated within the presentation of the PNMR Condensed
        Consolidated Statements of Earnings and shown in the PNMR Segment Information
        in
        Note 3, and average number of customers:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006**
              
              **Variance**(In
                  thousands, except customers)Residential
              
              $
              152,331
              
              $
              141,637
              
              $
              10,694Commercial
              
              
              45,186
              
              
              44,021
              
              
              1,165Industrial
              
              
              583
              
              
              737
              
              
              (154
              )Transportation(1)
              
              
              5,014
              
              
              4,659
              
              
              355Other
              
              
              13,418
              
              
              16,471
              
              
              (3,053
              )$
              216,532
              
              $
              207,525
              
              $
              9,007Average
                  customers
              
              
              491,995
              
              
              480,655
              
              
              11,340
 
 (1)
        Customer-owned gas.
  66
  The
        following table shows PNM Gas throughput by customer class:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006**
              
              **Variance**(Thousands
                  of Decatherms)Residential
              
              
              13,944
              
              
              11,962
              
              
              1,982Commercial
              
              
              4,634
              
              
              4,166
              
              
              468Industrial
              
              
              63
              
              
              72
              
              
              (9
              )Transportation(1)
              
              
              10,800
              
              
              11,031
              
              
              (231
              )Other
              
              
              1,326
              
              
              1,566
              
              
              (240
              )30,767
              
              
              28,797
              
              
              1,970
 
 (1)
        Customer-owned gas.
 
 PNM
        Gas
        purchases natural gas in the open market and resells it at no profit to its
        sales-service customers. As a result, increases or decreases in gas revenues
        driven by gas costs do not impact the gross margin or operating income of
        PNM
        Gas. Operating revenues increased $9.0 million, or 4.3%, for the three months
        ended March 31, 2007, compared to the same period of 2006, primarily due
        to
        $23.9 million of increased usage due to colder weather and $4.9 million due
        to
        customer growth. These increases were partially offset by lower gas prices
        of
        $9.2 million, $8.7 million of decreased usage due to customer conservation,
        and
        $1.9 million of reduced off-system sales transactions resulting from a lack
        of
        market activity. Sales volumes increased 6.8% as a result of colder weather
        and
        a 2.4% increase in average customer counts, partially offset by customer
        conservation.
 
 Gross
        margin increased $5.0 million, or 10.0%, for the three months ended March
        31,
        2007, compared to the same period of 2006. Increased customer usage resulting
        from colder weather caused gross margin to increase $4.2 million and customer
        growth increased gross margin by $1.8 million. These increases were partially
        offset by decreased customer usage due to conservation of $0.9 million.
 
 Total
        non-fuel O&M expenses increased $2.6 million, or 20.9%, for the three months
        ended March 31, 2007, compared to the same period of 2006. Transmission and
        distribution O&M expenses increased $1.3 million, or 19.1%, largely due to
        increased repair and maintenance costs and a $0.7 million increase in labor
        costs, as costs were recorded to transmission and distribution O&M expenses
        in 2007 versus administrative and general expenses in 2006, as discussed
        below.
        Administrative and general expenses increased $1.2 million, or 81.2%, mainly
        due
        to $2.1 million of pension and benefit expenses that were included in
        administrative and general expenses in the first quarter of 2007 versus being
        recorded through the corporate allocation in the first quarter of 2006, as
        discussed below. This increase was partially offset by a decrease in labor
        costs, as costs were recorded to transmission and distribution O&M expenses
        in 2007 versus being included in administrative and general expenses in 2006,
        as
        discussed above.
 
 Corporate
        allocation charges decreased $1.9 million, or 18.0%, for the three months
        ended
        March 31, 2007, compared to the same period of 2006, primarily due to $2.3
        million of costs that were recorded to administrative and general expenses
        in
        2007 versus being recorded through the corporate allocation in 2006, as
        discussed above, primarily related to pension and benefit costs. This decrease
        was partially offset by a $0.3 million increase in incentive-based compensation.
        Depreciation and amortization increased $0.3 million, or 4.4%, largely due
        to an
        increase in asset base.
 
 
  67
  **Unregulated
        Operations**
 
 ***Wholesale***
 
 The
        table
        below sets forth the operating results for Wholesale:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006**
              
              **Variance**(In
                  thousands)Operating
                  revenues
              
              $
              134,551
              
              $
              179,488
              
              $
              (44,937
              )Cost
                  of energy
              
              
              76,347
              
              
              142,877
              
              
              (66,530
              )Intersegment
                  energy transfer
              
              
              5,658
              
              
              5,178
              
              
              480Gross
                  margin
              
              
              52,546
              
              
              31,433
              
              
              21,113Energy
                  production costs
              
              
              16,117
              
              
              7,898
              
              
              8,219Transmission
                  and distribution O&M
              
              
              50
              
              
              19
              
              
              31Customer
                  related expense
              
              
              423
              
              
              258
              
              
              165Administrative
                  and general
              
              
              2,179
              
              
              1,441
              
              
              738Total
                  non-fuel O&M
              
              
              18,769
              
              
              9,616
              
              
              9,153Corporate
                  allocation
              
              
              3,182
              
              
              1,193
              
              
              1,989Depreciation
                  and amortization
              
              
              7,759
              
              
              3,161
              
              
              4,598Taxes
                  other than income taxes
              
              
              3,750
              
              
              976
              
              
              2,774Income
                  taxes
              
              
              3,937
              
              
              5,014
              
              
              (1,077
              )Total
                  non-fuel operating expenses
              
              
              37,397
              
              
              19,960
              
              
              17,437Operating
                  income
              
              $
              15,149
              
              $
              11,473
              
              $
              3,676
 
 
 The
        following table shows Wholesale revenues by class of sales transactions,
        including intersegment revenues, which are eliminated within the presentation
        of
        the PNMR Condensed Consolidated Statements of Earnings and shown in the PNMR
        Segment Information in Note 3:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006**
              
              **Variance**(In
                  thousands)Long-term
                  contracts
              
              $
              75,494
              
              $
              31,234
              
              $
              44,260Short-term
                  sales
              
              
              59,057
              
              
              148,254
              
              
              (89,197
              )$
              134,551
              
              $
              179,488
              
              $
              (44,937
              )
 
  68
  The
        following table shows Wholesale MWh sales by customer class:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006**
              
              **Variance**(Megawatt
                  hours)Long-term
                  contracts
              
              
              1,162,214
              
              
              578,544
              
              
              583,670Short-term
                  sales
              
              
              1,440,366
              
              
              2,220,752
              
              
              (780,386
              )2,602,580
              
              
              2,799,296
              
              
              (196,716
              )
 
 Operating
        revenues decreased $44.9 million, or 25.0%, from the prior year. This decrease
        in Wholesale electric sales was primarily due to decreased short-term sales
        of
        $89.2 million, or 60.2%. The decrease in short-term sales is mainly due to
        lower
        mark-to-market revenues of $27.2 million, an 11.4% decrease in average sales
        price, and a decrease in revenues from marketing activity, including the
        absence
        of market opportunities that allowed for the forward sale of first quarter
        2006
        excess resources in September 2005 when market prices were high. When prices
        fell in early 2006, PNM Wholesale covered the forward sales with lower-priced
        market purchases and utilized the excess resources to create additional sales
        opportunities. Short-term revenues were further decreased by a decrease in
        sales
        of $4.7 million to a large industrial customer in New Mexico. These decreases
        were partially offset by a net increase in plant availability, as increased
        outages at SJGS and Four Corners were more than offset by significantly stronger
        performance at PVNGS, which increased the availability of less expensive
        excess
        energy available to be sold in the wholesale market. The decreases in short-term
        sales were partially offset by an increase in long-term contracts of $44.3
        million, or 141.7%. The acquisition of Twin Oaks, which took place in April
        2006, increased long-term revenue by $36.8 million, of which $16.4 million
        related to an existing power agreement and $20.0 million for the amortization
        of
        the fair value of a sales contract existing as of the date of the acquisition
        (see Note 2). Long-term revenues also increased as a result of a new customer
        contract of $9.3 million. Wholesale sold 2.6 million MWh of electricity in
        the
        first quarter of 2007 compared to 2.8 million MWh for the same period in
        2006, a
        decrease of 7.0%.
 
 Gross
        margin increased $21.1 million, or 67.2%, for the three months ended March
        31,
        2007, compared to the same period of 2006, primarily due to the acquisition
        of Twin Oaks, which increased margin $24.6
        million .
        The
        increase in revenues due to an increase in plant availability, net of the
        associated increase in generation costs, increased margin by $4.1
        million. The change in PNM Wholesale’s mark-to-market positions increased $4.1
        million during the three months ended March 31, 2007, compared to increases
        of
        $0.5 million during the same period of 2006 and resulting in a $3.6 million
        increase to gross margin. These increases were partially offset by the absence
        of first quarter 2006 forward sales discussed above of $10.8 million and
        a $0.5
        million increase in coal costs, largely at SJGS.
 
 Total
        non-fuel O&M expenses increased $9.2 million, or 95.2%, for the three months
        ended March 31, 2007, compared to the same period of 2006. Energy production
        costs increased $8.2 million, or 104.1%, due primarily to the addition of
        the
        Twin Oaks and Luna power plants of $7.0 million and $0.7 million, respectively,
        both of which were not operational under PNMR in the first quarter of 2006.
        Costs also increased due to the absence of a $0.4 million PVNGS decommissioning
        and decontamination credit received in the first quarter of 2006. Administrative
        and general costs increased $0.7 million, or 51.2%, mainly due to a reduction
        of
        prior-year PVNGS payroll expenses in the first quarter of 2006, the addition
        of
        Twin Oaks costs, and an increase in pension and benefit costs that were recorded
        as administrative and general expenses in the first quarter of 2007 versus
        recorded through the corporate allocation in 2006, as discussed
        below.
 
 Corporate
        allocation charges increased $2.0 million, or 166.7%, for the three months
        ended
        March 31, 2007, compared to same period of 2006, primarily due to the addition
        of Twin Oaks, which was partially offset by pension and benefit costs that
        were
        recorded as administrative and general expenses in the first quarter of 2007
        versus being recorded in the corporate allocation line item in 2006, as
        discussed above. Depreciation and amortization increased $4.6 million, or
        145.5%, mainly due to the addition of Twin Oaks and Luna operations of $4.6
        million and $0.5 million, respectively, which was partially offset by the
        transfer of the Afton plant to a jurisdictional resource of $0.5 million.
        Taxes
        other than income increased $2.8 million or 284.2%, mainly due to the addition
        of Twin Oaks.
  69
  ***First
        Choice***
 
 The
        table
        below sets forth the operating results for First Choice:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006**
              
              **Variance**(In
                  thousands)Operating
                  revenues
              
              $
              135,565
              
              $
              105,082
              
              $
              30,483Cost
                  of energy
              
              
              110,816
              
              
              90,335
              
              
              20,481Gross
                  margin
              
              
              24,749
              
              
              14,747
              
              
              10,002Customer
                  related expense
              
              
              3,864
              
              
              3,577
              
              
              287Administrative
                  and general
              
              
              9,145
              
              
              3,612
              
              
              5,533Total
                  non-fuel O&M
              
              
              13,009
              
              
              7,189
              
              
              5,820Corporate
                  allocation
              
              
              1,914
              
              
              4,809
              
              
              (2,895
              )Depreciation
                  and amortization
              
              
              471
              
              
              498
              
              
              (27
              )Taxes
                  other than income taxes
              
              
              234
              
              
              1,180
              
              
              (946
              )Income
                  taxes
              
              
              3,407
              
              
              300
              
              
              3,107Total
                  non-fuel operating expenses
              
              
              19,035
              
              
              13,976
              
              
              5,059Operating
                  income
              
              $
              5,714
              
              $
              771
              
              $
              4,943
 
 
 The
        following table shows First Choice electric operating revenues by customer
        class, including intersegment revenues, which are eliminated within the
        presentation of the PNMR Condensed Consolidated Statements of Earnings and
        shown
        in the PNMR Segment Information in Note 3, and number of customers:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006**(1)
              
              **Variance**(In
                  thousands, except customers)Residential
              
              $
              85,552
              
              $
              59,601
              
              $
              25,951Mass-market
              
              
              16,169
              
              
              18,821
              
              
              (2,652
              )Mid-market
              
              
              30,557
              
              
              19,447
              
              
              11,110Trading(4)
              
              
              1,134
              
              
              1,836
              
              
              (702
              )Other
              
              
              2,153
              
              
              5,377
              
              
              (3,224
              )$
              135,565
              
              $
              105,082
              
              $
              30,483Actual
                  customers(2,3)
              
              
              256,931
              
              
              219,071
              
              
              37,860
 
 (1)
        The
        customer class revenues presented above for the three months ended March
        31,
        2006 have been reclassified from prior year presentation in order to be
        consistent with current year presentation, as a result of changes in customer
        classifications. Additionally, the customer counts presented above for the
        three
        months ended March 31, 2006 have been reclassified from prior year presentation
        in order to be consistent with the current year presentation for the ESI
        ID
        customer count methodology used by the ERCOT.
 
 (2)
        See
        note above in the TNMP Electric segment discussion about the impact of
        TECA.
 
 (3)
        Due
        to the competitive nature of First Choice’s business, actual customer count at
        March 31 is presented in the table above as a more representative business
        indicator than the average customers that are shown in the table for TNMP
        customers. First Choice had 256,465 average customers and 220,525 average
        customers for the three months ended March 31, 2007 and 2006, respectively.
        The
        220,525 average customers for the three months ended March 31, 2006 have
        been
        reclassified from prior year presentation in order to be consistent with
        the
        current year presentation for the ESI ID customer count methodology used
        by the
        ERCOT.
 
 (4)
        Includes gas trading.
  70
  The
        following table shows First Choice MWh electric sales by customer
        class:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006**(2)
              
              **Variance**(Megawatt
                  hours(1))Residential
              
              
              614,908
              
              
              427,544
              
              
              187,364Mass-market
              
              
              99,866
              
              
              121,027
              
              
              (21,161
              )Mid-market
              
              
              259,876
              
              
              177,643
              
              
              82,233Other
              
              
              9,279
              
              
              13,005
              
              
              (3,726
              )983,929
              
              
              739,219
              
              
              244,710
 
 (1)  See
        note
        above in the TNMP Electric segment discussion about the impact of
        TECA.
 
 (2)  The
        customer class sales presented above for the three months ended March 31,
        2006
        have been reclassified from prior year presentation in order to be consistent
        with current year presentation, as a result of changes in customer
        classifications.
 
 Operating
        revenues increased $30.5 million, or 29.0%, for the three months ended March
        31,
        2007, compared to the same period of 2006. The increase in revenues was
        primarily due to $28.2 million in increased usage due to colder weather and
        customer growth as well as $5.4 million due to increased sales prices. These
        increases were partially offset by lower mark-to-market gains.
 
 Gross
        margin increased $10.0 million, or 67.8%, for the three months ended March
        31,
        2007, compared to the same period of 2006, primarily due to improved price
        margins on customer sales of $12.8 million, which was partially offset by
        a
        decrease in the net change of mark-to-market positions.
 
 Total
        non-fuel O&M expenses increased $5.8 million, or 81.0%, for the three months
        ended March 31, 2007, compared to the same period of 2006. Customer related
        expenses increased $0.3 million, or 8.0%, due to an increase in bad debt
        expense. Administrative and general expenses increased $5.5 million, or 153.2%,
        mainly due to an increase in costs related to the outsourcing of customer
        service operations to Alliance Data Systems of $2.6 million and higher
        incentive-based compensation expenses of $1.2 million. In addition, advertising
        costs and the costs to acquire customers increased as a result of efforts
        to
        grow the customer base.
 
 Corporate
        allocation charges decreased $2.9 million, or 60.2%, for the three months
        ended
        March 31, 2007, compared to the same period of 2006, primarily due to a decrease
        in the percentage of costs allocated to First Choice in the first quarter
        of
        2007 compared to the same period in 2006 to better align shared service costs
        with the services provided. Taxes other than income decreased $0.9 million,
        or
        80.2%, largely due to lower gross receipts tax related to Price-to-Beat customer
        revenues.
 
 **Corporate
        and Other**
 
 ***Corporate
        Allocations***
 
 Corporate
        allocations, which represent costs that are driven by shared service activities,
        are allocated to the business segments and are presented in the corporate
        allocation line item in each of the business segment financial summaries.
        In
        total, these costs decreased $7.4 million, or 16.8% to $36.6 million for
        the
        three months ended March 31, 2007, compared to the same period of 2006. This
        decrease was due to $9.1 million of costs recorded directly to each business
        segment’s administrative and general costs in 2007, versus being recorded
        through the corporate allocation line item in 2006, primarily related to
        pension
        and benefit costs and regulatory expenses, and a $0.5 million net decrease
        in
        consulting costs related to internal audits, legal services, Sarbanes-Oxley
        and
        tax compliance costs. These decreases were partially offset by a $0.9 million
        increase in incentive-based compensation, a $0.7 million increase in
        depreciation expense for shared service software, and an increase in costs
        allocated to the business segments in the first quarter of 2007 versus held
        at
        Corporate and Other in 2006, as discussed below.
  71
  ***Administrative
        and General Expenses***
 
 As
        discussed above, costs that are driven by shared service activities are
        allocated to the business segments through the corporate allocation. Costs
        related to corporate-level activities are retained in the Corporate and Other
        segment. These costs increased $1.3 million for the three months ended March
        31,
        2007 compared to the same period of 2006, primarily due to an increase in
        non-recurring costs related to the formation of EnergyCo and a net change
        of
        legal liabilities, partially offset by a decrease in costs allocated to the
        business segments in the first quarter of 2007 versus held at Corporate and
        Other in 2006, as discussed above.
 
 ***Depreciation
        Expense***
 
 Corporate
        and Other depreciation expense increased $0.6 million, or 29.3%, to $2.6
        million
        for the three months ended March 31, 2007, primarily due to an increase in
        asset
        base as a result of new software implementation for shared services. These
        expenses were allocated to the business segments through the corporate
        allocation.
 
 ***Taxes
        Other Than Income***
 
 Corporate
        and Other taxes other than income increased $1.1 million, or 123.0%, to $1.9
        million for the three months ended March 31, 2007, primarily due to a $0.5
        million increase in tax liabilities, a $0.2 million increase in FICA taxes
        in
        2007 associated with the prior year, and an increase in payroll taxes due
        to
        increased labor costs and taxes associated with stock options that have been
        exercised.
 
 **PNMR
        Consolidated**
 
 ***Other
        Income and Deductions***
 
 Interest
        income increased $0.6 million, or 6.3%, primarily due to interest income
        of $1.0
        million on tax assets recorded under FIN 48, which was partially offset by
        a
        lower level of interest income earned on the PVNGS lessor notes due to lower
        principal balances.
 
 Gains
        on
        investment securities decreased $0.9 million, or 92.8%, primarily due to
        lower
        realized gains related to PVNGS decommissioning trust assets.
 
 Carrying
        charges on regulatory assets decreased $2.0 million due to the absence of
        interest income earned on TNMP stranded costs in 2006 based on the collection
        of
        costs ordered by the PUCT, as discussed in the TNMP Electric segment.
 
 ***Interest
        Charges***
 
 PNMR’s
        consolidated interest charges increased by $9.3 million for the three months
        ended March 31, 2007, compared to the same period of 2006. The increase is
        primarily due to $5.3 million of interest charges related to the bridge loan
        associated with the Altura purchase of Twin Oaks, which occurred on April
        18,
        2006, increased interest on short-term borrowings of $3.2 million, and the
        remarketing of $146 million of Pollution Control Revenue Bonds from a 2.1%
        variable rate to a 4.875% fixed rate of $1.3 million, which was partially
        offset
        by reduced interest expense on tax liabilities of $0.7 million.
 
 ***Income
        Taxes***
 
 PNMR’s
        consolidated income tax expense was $17.9 million for the three months ended
        March 31, 2007, compared to $15.3 million for the same period in 2006. The
        increase in consolidated income tax expense was due to an increase in pre-tax
        earnings and an increase in the overall effective income tax rate, due partially
        to the inclusion of Texas franchise taxes in operating income tax in 2007
        versus
        taxes other than income in 2006, as discussed in the TNMP Electric segment,
        resulting in no impact to net earnings. PNMR’s effective operating income tax
        rates for the three months ended March 31, 2007 and 2006 were 38.0% and 36.6%,
        respectively. PNMR’s effective non-operating income tax rates for the three
        months ended March 31, 2007 and 2006 were 35.2% and 37.0%,
        respectively.
  72
  **RESULTS
        OF OPERATIONS - PNM**
 
 **THREE
        MONTHS ENDED MARCH 31, 2007**
 **COMPARED
        TO THREE MONTHS ENDED MARCH 31, 2006**
 
 PNM’s
        segments are PNM Electric, PNM Gas and PNM Wholesale. The PNM Electric and
        PNM
        Gas segments are identical to the segments presented above in “Results of
        Operations” for PNMR. The PNM Wholesale segment reported for PNM does not
        include Altura (see Note 2 and Note 3).
 
 PNM’s
        operating revenues decreased by $62.1 million, or 12.0%, for the three months
        ended March 31, 2007, compared to the same period of 2006. Gross margin
        increased $12.2 million, or 6.8%, compared to the prior year quarter. PNM
        Electric segment gross margins increased $10.8 million from the prior year
        quarter, while PNM Gas segment gross margins increased $5.0 million from
        the
        prior year quarter, as discussed above. PNM Wholesale segment gross margins
        decreased $3.5 million, resulting predominately from the absence of marketing
        opportunities that allowed for the forward sale of excess energy in the first
        quarter of 2006, which was partially offset by increases in plant performance,
        primarily at PVNGS, and an increase in mark-to-market gains.
 
 Total
        operating expenses decreased $64.1 million, or 13.3%, from the prior year
        quarter, of which $74.4 million is a decrease in cost of energy included
        in
        gross margin above.
 
 Administrative
        and general costs increased $3.3 million, or 7.9%, primarily due to the transfer
        of southern New Mexico operations from TNMP to PNM, an increase in legal
        liabilities, and an increase in incentive-based compensation, which were
        partially offset by an increase in capitalized costs related to construction
        activity at the SJGS and Afton plants.
 
 Energy
        production costs increased $2.9 million, or 7.8%, as a result of increased
        plant
        outage costs, largely at SJGS, the addition of Luna operations, which began
        in
        April 2006, and the absence of a PVNGS decommissioning and decontamination
        credit received in the first quarter of 2006.
 
 Depreciation
        and amortization expenses increased $1.5 million, or 6.0%, primarily due
        to the
        transfer of southern New Mexico operations from TNMP, the addition of Luna
        operations, and an overall increase in asset base. These increases were
        partially offset by reduced depreciation at Four Corners of $0.7 million
        due to
        a group of assets that fully depreciated during the last year and $0.6 million
        due to a life extension.
 
 Transmission
        and distribution costs increased $3.3 million, or 23.3%, mainly due to the
        transfer of southern New Mexico operations from TNMP as well as higher repairs
        and maintenance costs.
 
 Taxes
        other than income decreased $0.6 million, or 6.7%, due to a reduction in
        Native
        American taxes caused by a true-up in the first quarter of 2006, which was
        partially offset by the transfer of southern New Mexico operations from
        TNMP.
 
 PNM’s
        consolidated income tax expense was $18.3 million for the three months ended
        March 31, 2007, compared to $19.0 million for the same period of 2006. PNM’s
        effective operating income tax rates for the three months ended March 31,
        2007
        and 2006 were 38.8% and 38.3%, respectively. PNM’s effective non-operating
        income tax rates for the three months ended March 31, 2007 and 2006 were
        37.6%
        and 38.8%, respectively.
  73
  **RESULTS
        OF OPERATIONS - TNMP**
 
 **THREE
        MONTHS ENDED MARCH 31, 2007**
 **COMPARED
        TO THREE MONTHS ENDED MARCH 31, 2006**
 
 TNMP
        operates in only one reportable segment, “TNMP Electric.” Results for the three
        months ended March 31, 2006 present TNMP’s New Mexico operations as discontinued
        operations, as these operations were transferred to PNM on January 1, 2007.
        The
        impacts of the discontinued operations are not included in the changes discussed
        below.
 
 The
        PUCT
        issued an order on November 2, 2006 related to the stranded costs incurred
        by
        TNMP as part of the deregulation of the Texas energy market and the associated
        carrying charges. As part of this order, TNMP will recover approximately
        $160
        million over 14 years to recover the CTC and their related carrying costs
        and
        approximately $5 million over the course of three years to recover rate case
        expenses. Also as part of this order, TNMP will return approximately $4 million
        to customers over the course of one year related to industrial fuel costs.
        The
        recovery of the CTC and rate case expenses, net of the industrial fuel credit,
        will result in increases to revenues in the period that these charges are
        billed
        or credited to customers.
 
 TNMP
        also
        recorded regulated assets and liabilities to account for the customer
        collections and credits. As these charges are collected from and credited
        to
        customers, the amount of the assets and liabilities will be amortized through
        the income statement. The amortization of these assets and liabilities will
        result in an increase in administrative and general expenses related to the
        rate
        case expenses, and an increase in depreciation and amortization costs related
        to
        the net of the CTC asset and industrial fuel credit liability
        amortizations.
 
 TNMP’s
        operating revenues from continuing operations increased by $5.4 million,
        or
        15.1%, for the three months ended March 31, 2007, compared to the same period
        of
        2006. Gross margin increased $4.7 million, or 16.0%, compared to the prior
        year
        quarter. TNMP collected $4.0 million in additional revenues during the first
        three months of 2007 related to the PUCT order discussed above, which consists
        of the net of a $4.6 million increase for the collection of CTC, a $0.4 million
        increase for the collection of rate case expenses, and a $1.0 million decrease
        related to a industrial fuel credit to customers. Revenues and gross margin
        also
        increased due to load growth and colder weather.
 
 Total
        operating expenses increased $4.1 million, or 14.0%, from the prior year
        quarter, of which $0.7 million is an increase in cost of energy included
        in
        gross margin above.
 
 Administrative
        and general costs decreased $0.3 million, or 3.4%, primarily due to lower
        pension and benefit costs.
 
 Depreciation
        and amortization expenses increased $0.8 million, or 13.4%, due to the $0.5
        million net increase in amortization of CTC and industrial fuel credit assets
        and liabilities related to the PUCT order discussed above and an increase
        in
        expense of $0.3 million due to an increase in the asset base.
 
 Transmission
        and distribution costs increased $1.2 million, or 31.5%, primarily due to
        an
        increase in labor and fleet vehicle expenses.
 
 Taxes
        other than income decreased $0.4 million, or 7.0%, due to a reduction in
        Texas
        franchise tax, which was recorded to taxes other than income in 2006 versus
        included in operating income taxes in 2007, resulting in no net impact to
        earnings.
 
 TNMP’s
        consolidated income tax expense was $0.4 million for the three months ended
        March 31, 2007, compared to a benefit of $0.8 million for the same period
        of
        2006. TNMP’s effective operating income tax rates for the three months ended
        March 31, 2007 and 2006 were 34.2% and 68.3%, respectively. TNMP’s effective
        non-operating income tax rates for the three months ended March 31, 2007
        and
        2006 were 22.6% and 38.2%, respectively.
 
  74
  **CRITICAL
        ACCOUNTING POLICIES AND ESTIMATES**
 
 The
        preparation of financial statements in accordance with GAAP requires Company
        management to select and apply accounting policies that best provide the
        framework to report the results of operations and financial position for
        PNMR,
        PNM and TNMP. The selection and application of those policies requires
        management to make difficult, subjective and/or complex judgments concerning
        reported amounts of revenue and expenses during the reporting period and
        the
        reported amounts of assets and liabilities at the date of the financial
        statements. As a result, there exists the likelihood that materially different
        amounts would be reported under different conditions or using different
        assumptions.
 
 As
        of
        March 31, 2007, there have been no significant changes with regard to the
        critical accounting policies disclosed in PNMR’s, PNM’s and TNMP’s Annual
        Reports on Forms 10-K for the year ended December 31, 2006. The policies
        disclosed included the accounting for revenue recognition, regulatory assets
        and
        liabilities, asset impairment, goodwill and other intangible assets, purchase
        accounting, pension and postretirement benefits, decommissioning costs,
        financial instruments and market risk. See
        Note
        15 for discussion concerning the adoption of FIN 48 as of January 1,
        2007.
 
 **LIQUIDITY
        AND CAPITAL RESOURCES**
 
 **Statements
        of Cash Flow**
 
 ***PNMR***
 
 At
        March
        31, 2007, PNMR had cash and short-term investments of $45.0 million compared
        to
        $123.4 million in cash and short-term investments at December 31, 2006.
 
 Cash
        provided by operating activities for the three months ended March 31, 2007
        was
        $43.6 million compared to $32.4 million for the three months ended March
        31,
        2006. The
        increase was primarily due to increases in First Choice Power earnings due
        to
        customer and sales growth combined with reduced purchased power prices, PNM
        utility gross margins driven by load growth and colder weather and improved
        plant performance, which were partially offset by higher coal costs, decreases
        in wholesale marketing activity, and increased interest charges on higher
        short-term debt borrowings. This increase was partially offset by payments
        of
        higher current liabilities outstanding at December 31, 2006 due to increase
        incentive based compensation for the 2006 year compared to 2005 and higher
        interest payables related to higher short-term borrowings. Other significant
        decreases in cash flows included a decrease in cash collections from customer
        receivables compared to 2006, resulting from higher than normal gas and market
        prices in December 2005 that were collected during the first three months
        of
        2006, and a decrease in accrued taxes. These decreases were partially offset
        by
        reduced payments for gas purchases due to lower gas prices .
 
 Cash
        used
        for investing activities for the three months ended March 31, 2007 was $76.1
        million compared to $39.8 million for the three months ended March 31, 2006.
        The
        increase in cash used for investing activities in the current period was
        due
        primarily to $37.8 million of increased cash payments for utility plant
        additions.
 
 Cash
        used
        for financing activities for the three months ended March 31, 2007 was $46.0
        million compared to $15.1 million for the three months ended March 31, 2006.
        During the three months ended March 31, 2007, PNMR made short-term debt
        repayments of $25.0 million, $11.6 million of purchases of common stock to
        satisfy stock awards, and $16.9 million of dividends paid, compared to $1.2
        million of short-term debt payments, $2.9 million of purchases of common
        stock
        to satisfy stock awards, and $13.8 million of dividends paid during the first
        three months ended March 31, 2006.
 
 ***PNM***
 
 At
        March
        31, 2007, PNM had cash and short-term investments of $6.4 million compared
        to
        $11.9 million in cash and short-term investments at December 31, 2006.
  75
  Cash
        provided by operating activities increased 46.7% to $67.5 million for the
        three
        months ended March 31, 2007 compared to $46.0 million for the three months
        ended
        March 31, 2006. This
        increase was largely due to increases in gross margins driven by load growth
        and
        colder weather and improved plant performance, partially offset by increased
        coal costs, decreased wholesale marketing activity, and increased interest
        charges on higher short-term debt borrowings. Significant decreases in cash
        flows included a decrease in cash collections from customer receivables compared
        to 2006, resulting from higher than normal gas and market prices in December
        2005 that were collected during the first three months of 2006, and a decrease
        in accrued taxes. These decreases were more than offset by reduced payments
        for
        gas purchases due to lower gas prices and increased payments received on
        affiliate receivables from TNMP related to purchased power and transmission of energy.
  Cash
        used
        for investing activities for the three months ended March 31, 2007 was $67.8
        million compared to $27.1 million for the three months ended March 31, 2006,
        a
        decrease of $40.8 million due to a $41.5 million increase in cash used for
        utility plant additions.
 
 Cash
        used
        for financing activities for the three months ended March 31, 2007 was $5.1
        million compared to $25.0 million for the three months ended March 31, 2006.
        The
        decrease in cash used for financing activities was due primarily to lower
        levels
        of short-term debt repayments.
 
 ***TNMP***
 
 At
        March
        31, 2007, TNMP had cash and short-term investments of $0.1 million compared
        to
        $2.5 million in cash and short-term investments at December 31, 2006.
 
 Cash
        used
        for operating activities for the three months ended March 31, 2007 was $23.8
        million compared to cash provided by operating activities of $8.0 million
        for
        the three months ended March 31, 2006. TNMP’s net earnings decreased due to the
        transfer of its New Mexico operations to PNM on January 1, 2007. In addition
        to
        the decrease in net earnings, TNMP used $18.4 million of cash to settle
        affiliate liabilities to First Choice Power and other REPs related to retail
        competition in Texas as ordered under TECA. Other increased uses of cash
        during
        the three months ended March 31, 2007 included payments on 2006 year-end
        current
        liabilities, as costs related to the purchased power and transmission of
        energy
        increased over the prior year, including payments for purchased power to
        PNM.
 
 Cash
        used
        for investing activities for the three months ended March 31, 2007 was $7.8
        million compared to $7.2 million for the three months ended March 31, 2006.
        The
        increase in cash used for investing activities resulted from higher levels
        of
        utility plant additions for the three months ended March 31, 2007.
 
 Cash
        provided by financing activities for the three months ended March 31, 2007
        included $29.2 million received from an intercompany loan provided by
        PNMR.
  **Capital
        Requirements**
 
 ***PNMR***
 
 Total
        capital requirements consist of construction expenditures and cash dividend
        requirements for both common and preferred stock, subject to board review
        or
        approval. The main focus of PNMR’s current construction program is upgrading
        generation resources, including those relating to pollution control, upgrading
        and expanding the electric and gas transmission and distribution systems,
        and
        purchasing nuclear fuel. Projections for total capital requirements for 2007
        are
        $457.5 million, including construction expenditures of $386.5 million. Total
        capital requirements for the years 2007-2011 are projected to be $2,406.2
        million, including construction expenditures of $1,980.8 million. This
        projection includes $56.0 million for completion of the expansion at Afton.
        These estimates are under continuing review and subject to on-going adjustment.
 
 The
        Company continues to look for appropriately priced generation acquisition
        and
        expansion opportunities to support retail electric load growth, for the
        continued expansion of its long-term contract business, and to supplement
        its
        natural transmission position in the southwest and west areas of the United
        States.
 
 During
        the first quarter of 2007, the Company utilized cash generated from operations
        and cash on hand, as well as its liquidity arrangements, to cover its capital
        requirements and construction expenditures. On April 18, 2006, PNMR borrowed
        $480.0 million under a bridge loan facility for temporary financing of the
        Twin
        Oaks acquisition. On April 17, 2007, PNMR repaid the remaining principal
        balance
        of $249.5 million under the bridge loan at its maturity through a borrowing
        of
        $250.5 million under the PNMR Facility, PNMR’s $600.0 million revolving credit
        facility. In addition to the $250.5 million borrowing by PNMR, PNMR and PNM
        have
        an aggregate of $486.2 million of commercial paper outstanding as of May
        1,
        2007. PNMR, including its subsidiaries, also has $716.6 million in senior
        unsecured notes and $347.3 million in equity-linked units (which include
        a debt
        component) that will come due through 2011, none of which are due within
        the
        next twelve months.
 
 76
  As
        discussed under “Results of Operations - Executive Summary” above, PNMR has
        entered into a non-binding letter of intent under which Twin Oaks would be
        transferred to EnergyCo and PNMR would receive a cash distribution from EnergyCo
        of approximately $277 million. PNMR anticipates this transaction will occur
        on
        or about June 1, 2007. If this cash distribution does occur, PNMR expects
        the
        above borrowing on the PNMR Facility will be repaid from the
        proceeds.
 
 The
        equity-linked units contain mandatory obligations under which the holders
        are
        required to purchase $347.3 million of PNMR equity securities in 2008. The
        equity-linked units also provide that prior to settlement of those purchase
        obligations the debt, which is scheduled to mature in 2010, will be remarketed.
        If the remarketing is successful, the debt may be extended to dates selected
        by
        PNMR and the interest rates will be adjusted to the current rates at that
        date.
        If the remarketing of the debt is not successful, the holders of the
        equity-linked units may satisfy their obligations to purchase PNMR equity
        securities by tendering the debt to PNMR. The effect of these terms is that,
        if
        the remarketing is successful, PNMR would receive $347.3 million in cash
        for its
        equity securities and the debt would continue to mature in 2010 or such later
        date selected by PNMR in the remarketing. If the remarketing is not successful,
        the issuance of PNMR equity securities would offset the retirement of the
        debt
        without requiring payment in cash by PNMR. PNMR expects the remarketing of
        the
        debt will be successful.
 
 In
        addition to cash anticipated to be received from the EnergyCo distribution
        and
        the equity-linked units, described above, and its internal cash generation,
        the
        Company anticipates that it will be necessary to obtain additional permanent
        financing in the form of debt refinancing, new debt, and/or new equity in
        order
        to fund its capital requirements and the repayment of senior unsecured notes
        during the 2007-2011 period. To the extent the cash anticipated to be received
        from the EnergyCo distribution and the equity-linked units is not received,
        the
        need for new financing will be increased. Although the Company currently
        has no
        specific plans or commitments for additional permanent financing, it believes
        that its internal cash generation, credit arrangements, and access to capital
        markets will provide sufficient resources to meet the Company’s capital
        requirements and retire its senior unsecured notes at maturity. To cover
        the
        difference in the amounts and timing of cash generation and cash requirements,
        the Company intends to use short-term borrowings under its current and future
        liquidity arrangements.
 
 ***PNM***
 
 The
        main
        focus of PNM’s current construction program, subject
        to board review or approval ,
        is to
        upgrade generation resources, to upgrade and expand the electric and gas
        transmission and distribution systems and to purchase nuclear fuel. Projections
        for total capital requirements for 2007 are $318.5 million, including
        construction expenditures of $318.0 million. Total capital requirements for
        the
        years 2007 through 2011 are projected to be $1,670.9 million, including
        construction expenditures of $1,668.3 million. This includes $56.0 million
        for
        PNM’s expansion of Afton and $116.0 million for the SJGS environmental project
        to install low NOX combustion control and mercury reduction technologies,
        as
        well as equipment to increase SO 2 controls. Also included in PNM’s capital requirements are $24.0 million for the
        Rio Puerco second phase loop, which will install approximately 15 miles of
        gas
        pipeline, and $38.0 million to add a 345,000 volt switching station to Rio
        Puerco. These estimates are under continuing review and subject to on-going
        adjustment.
 
 No
        amounts are outstanding under the PNM Facility, PNM’s $400.0 million revolving
        credit facility. In addition to $221.6 million of commercial paper outstanding
        as of May 1, 2007, PNM has $300.0 million in senior unsecured notes that
        will
        come due in September 2008.
 
 In
        addition to its internal cash generation, PNM anticipates that it will be
        necessary to obtain additional capital in the form of debt refinancing, new
        debt, and/or equity infusions from PNMR in order to fund its capital
        requirements and the repayment of senior unsecured notes during the 2007-2011
        period. Although PNM currently has no specific plans or commitments for
        additional permanent financing, it believes that its internal cash generation,
        credit arrangements, and access to capital markets will provide sufficient
        resources to meet PNM’s capital requirements and retire its senior unsecured
        notes at maturity. To cover the difference in the amounts and timing of cash
        generation and cash requirements, PNM intends to use short-term borrowings
        under
        its current and future liquidity arrangements.
 
 77
 ***TNMP***
 
 The
        main
        focus of TNMP’s current construction program, subject
        to board review or approval ,
        is to
        upgrade and expand its electric transmission and distribution systems.
        Projections for total capital requirements for 2007 are $46.8 million. Total
        capital requirements are projected to be $219.0 million for the years 2007
        through 2011. These estimates are under continuing review and subject to
        on-going adjustment.
 
 After
        receipt of required regulatory approvals, including approval from the FERC,
        TNMP’s New Mexico and Arizona assets were transferred to PNM effective January
        1, 2007. In accordance with conditions imposed by the FERC on debt previously
        issued by TNMP, the Company committed that an appropriate proportion of debt
        issued under those FERC conditions would be retired with cash contributed
        by
        PNMR and that the retired TNMP debt would result in, at a minimum, the ratio
        of
        TNMP New Mexico and Arizona property additions to Texas property additions
        funded by such debt. The Company also committed that TNMP debt would be retired
        to the extent necessary or advisable to maintain a TNMP equity to debt
        capitalization ratio in excess of 30%, to maintain any required interest
        rate
        coverage ratios, and to maintain TNMP’s credit rating. No TNMP debt has yet been
        retired as a result of the asset transfer.
  In
        addition to $29.2 million of borrowings from PNMR as of May 1, 2007, TNMP
        has
        $248.9 million and $167.7 million of senior unsecured notes that become due
        in
        June 2008 and January 2009, respectively.
 
 In
        addition to its internal cash generation, TNMP anticipates that it will be
        necessary to obtain additional capital in the form of debt refinancing, new
        debt, and/or equity infusions from PNMR in order to fund its capital
        requirements and the repayment of senior unsecured notes during the 2007-2011
        period. Although TNMP currently has no specific plans or commitments for
        additional permanent financing, it believes that its internal cash generation,
        credit arrangements, and access to capital markets will provide sufficient
        resources to meet TNMP’s capital requirements and retire its senior unsecured
        notes at maturity. To cover the difference in the amounts and timing of cash
        generation and cash requirements, TNMP intends to use short-term borrowings
        under its current and future liquidity arrangements.
 
 **Liquidity**
 
 ***Borrowing
        Arrangements Between PNMR and Subsidiaries***
 
 In
        February 2006, the Board approved affiliate borrowing arrangements between
        PNMR
        and its subsidiaries that would authorize each subsidiary to borrow up to
        $50.0
        million from PNMR.
 
 Pursuant
        to a separate borrowing arrangement, PNM has issued a $20.0 million promissory
        note to PNMR.  Initially this promissory note was payable on or before
        September 30, 2006.  The agreement was extended prior to its expiration and
        is now payable on or before September 30, 2007.  As of May 1, 2007 there
        were no outstanding borrowings on the promissory note.
 
 ***PNMR***
 
 At
        May 1,
        2007, PNMR, exclusive of PNM, had $615.0 million of liquidity arrangements.
        The
        liquidity arrangements consist of $600.0 million from the PNMR Facility that
        primarily expires in 2011 and $15.0 million in local lines of credit. As
        of May
        1, 2007, PNMR had $250.5 borrowed under the PNMR Facility and no amounts
        borrowed under the local lines of credit. PNMR had $49.2 million of letters
        of
        credit outstanding.
  PNMR
        has
        established a commercial paper program under which it may issue up to $400.0
        million in commercial paper for up to 270 days. The commercial paper is
        unsecured and the proceeds are used for short-term cash management needs.
        The
        PNMR Facility serves as a backstop for the outstanding commercial paper.
        Operationally, this means the aggregate borrowings under the commercial paper
        program and the revolving credit facility for PNMR cannot exceed the maximum
        amount of the PNMR Facility. At May 1, 2007, there were $264.6 million of
        borrowings outstanding under this program.
 
 78
  PNMR’s
        ability, if required, to access the capital markets at a reasonable cost
        and to
        provide for other capital needs is largely dependent upon its ability to
        earn a
        fair return on equity, its results of operations, its credit ratings, its
        ability to obtain required regulatory approvals and conditions in the financial
        and wholesale markets. Financing flexibility is enhanced by providing a high
        percentage of total capital requirements from internal sources and having
        the
        ability, if necessary, to issue long-term securities and to obtain short-term
        credit.
 
 On
        April
        16, 2007, Moody’s changed the rating of PNMR's credit outlook to negative from
        stable. S&P considered PNMR’s outlook negative as of the date of this
        report. As of March 31, 2007, S&P and Moody’s rated PNMR’s senior unsecured
        notes issued in March 2005 (see “Financing Activities” below) as BBB- and Baa3,
        respectively. PNMR's commercial paper program, which is discussed above,
        has
        been rated P-3 by Moody's and A-3 by S&P. The Company is committed to
        maintaining or improving its investment grade ratings.
 
 Investors
        are cautioned that a security rating is not a recommendation to buy, sell
        or
        hold securities, that it is subject to revision or withdrawal at any time
        by the
        assigning rating organization, and that each rating should be evaluated
        independently of any other rating.
 
 ***PNM***
 
 At
        May 1,
        2007, PNM had $413.5 million of liquidity arrangements. The liquidity
        arrangements consist of $400.0 million from the PNM Facility that primarily
        expires in 2011 and $13.5 million in local lines of credit. At May 1, 2007,
        there were no amounts borrowed against the local lines of credit or the PNM
        Facility; however, $3.1 million of letters of credit were outstanding, which
        reduces the available capacity under the PNM Facility.
 
 PNM
        has a
        commercial paper program under which PNM may issue up to $300.0 million in
        commercial paper for up to 365 days. The commercial paper is unsecured and
        the
        proceeds are used for short-term cash management needs. The PNM Facility
        serves
        as a support for PNM's outstanding commercial paper. Operationally, this
        means
        the aggregate borrowings under the commercial paper program and the revolving
        credit facility for PNM cannot exceed the maximum amount of the PNM Facility.
        At
        May 1, 2007, PNM had $221.6 million in commercial paper outstanding under
        this
        program.
 
 PNM’s
        ability, if required, to access the capital markets at a reasonable cost
        and to
        provide for other capital needs is largely dependent upon its ability to
        earn a
        fair return on equity, its results of operations, its credit ratings, its
        ability to obtain required regulatory approvals and conditions in the financial
        and wholesale markets. Financing flexibility is enhanced by providing a high
        percentage of total capital requirements from internal sources and having
        the
        ability, if necessary, to issue long-term securities and to obtain short-term
        credit.
 
 On
        April
        16, 2007, Moody’s changed the rating of PNM’s credit outlook to negative from
        stable. S&P considered PNM’s outlook negative as of the date of this report.
        As of March 31, 2007, S&P rated PNM’s business position as six and its
        senior unsecured notes as BBB. As of March 31, 2007, Moody’s rated PNM’s senior
        unsecured notes as Baa2 and its preferred stock as Ba1. PNM's commercial
        paper
        program has been rated P-2 by Moody's and A-3 by S&P. The Company is
        committed to maintaining or improving its investment grade ratings.
 
 ***TNMP***
 
 TNMP
        is a
        borrower and can issue notes of up to $100.0 million under the PNMR Facility.
        Any borrowings made by TNMP under this sublimit are not guaranteed by PNMR.
        At
        May 1, 2007, TNMP had no outstanding borrowings under the PNMR Facility,
        but did
        have $1.9 million letters of credit outstanding, which reduces available
        capacity under the PNMR Facility.
 
 TNMP’s
        ability, if required, to access the capital markets at a reasonable cost
        and to
        provide for other capital needs is largely dependent upon its ability to
        earn a
        fair return on equity, its results of operations, its credit ratings, its
        ability to obtain required regulatory approvals and conditions in the financial
        and wholesale markets. Financing flexibility is enhanced by providing a high
        percentage of total capital requirements from internal sources and having
        the
        ability, if necessary, to issue long-term securities and to obtain short-term
        credit.
  On
          April
          16, 2007, Moody’s changed the rating of TNMP’s credit outlook to negative from
          stable. S&P considered TNMP’s outlook negative as of the date of this
          report. As of March 31, 2007, S&P rated TNMP’s senior unsecured notes at
          BBB. As of March 31, 2007, Moody’s rated TNMP’s senior unsecured notes at Baa3.
          The Company is committed to maintaining or improving its investment grade
          ratings.
 79
 
 **Off-Balance
        Sheet Arrangements**
 
 The
        Company’s off-balance sheet arrangements primarily consist of PNM’s operating
        lease obligations for PVNGS Units 1 and 2, the EIP transmission line, and
        the
        entire output of Delta, a gas-fired generating plant. These arrangements
        help
        ensure PNM the availability of lower-cost generation needed to serve customers.
        In addition, PNMR’s investment in EnergyCo is accounted for under the equity
        method of accounting. See Note 15 for further discussion of this
        arrangement.
 
 As
        of
        March 31, 2007, there have been no significant changes to the Company’s
        off-balance sheet arrangements reported in the 2006 Annual Reports on Form
        10-K.
 
 **Commitments
        and Contractual Obligations**
 
 PNMR,
        PNM
        and TNMP have contractual obligations for long-term debt, operating leases,
        purchase obligations and certain other long-term liabilities that were
        summarized in a table of contractual obligations in the 2006 Annual Reports
        on
        Form 10-K. The adoption of FIN 48, effective January 1, 2007, was not material
        to the Company’s contractual obligations. Under FIN 48, certain liabilities
        related to uncertain tax positions were recognized. See Note 15 for a discussion
        of these obligations and timing of the payments.
 
 **Contingent
        Provisions of Certain Obligations**
 
 PNMR,
        PNM
        and TNMP have a number of debt obligations and other contractual commitments
        that contain contingent provisions. Some of these, if triggered, could affect
        the liquidity of the Company. PNMR, PNM or TNMP could be required to provide
        security, immediately pay outstanding obligations or be prevented from drawing
        on unused capacity under certain credit agreements if the contingent
        requirements were to be triggered. The most significant consequences resulting
        from these contingent requirements are detailed in the discussion
        below.
 
 ***PNMR***
 
 The
        PNMR
        Facility contains a “ratings trigger,” for pricing purposes only. If PNMR is
        downgraded or upgraded by the ratings agencies, the result would be an increase
        or decrease in interest cost, respectively. In addition, the PNMR Facility
        contains a contingent requirement that requires PNMR to maintain a
        debt-to-capital ratio, inclusive of off-balance sheet debt, of less than
        65%. If
        PNMR’s debt-to-capital ratio, inclusive of off-balance sheet debt, were to
        exceed 65%, it could be required to repay all borrowings under the PNMR
        Facility, be prevented from drawing on the unused capacity under the PNMR
        Facility, and be required to provide security for all outstanding letters
        of
        credit issued under the PNMR Facility.
 
 ***PNM***
 
 PNM's
        standard purchase agreement for the procurement of gas for its retail customers
        contains a contingent requirement that could require PNM to provide security
        for
        its gas purchase obligations if the seller were to reasonably believe that
        PNM
        was unable to fulfill its payment obligations under the agreement.
 
 The
        master agreement for the sale of electricity in the WSPP contains a contingent
        requirement that could require PNM to provide security if its debt were to
        fall
        below investment grade rating. The WSPP agreement also contains a contingent
        requirement, commonly called a material adverse change provision, which could
        require PNM to provide security if a material adverse change in its financial
        condition or operations were to occur.
 
 The
        PNM
        Facility contains a “ratings trigger,” for pricing purposes only. If PNM is
        downgraded or upgraded by the ratings agencies, the result would be an increase
        or decrease in interest cost, respectively. In addition, the PNM Facility
        contains a contingent provision that requires PNM to maintain a debt-to-capital
        ratio, inclusive of off-balance sheet debt, of less than 65%. If PNM’s
        debt-to-capital ratio, inclusive of off-balance sheet debt, were to exceed
        65%,
        PNM could be required to repay all borrowings under the PNM Facility, be
        prevented from drawing on the unused capacity under the PNM Facility, and
        be
        required to provide security for all outstanding letters of credit issued
        under
        the PNM Facility.
 
 80
  If
        a
        contingent requirement were to be triggered under the PNM Facility resulting
        in
        an acceleration of the outstanding loans under the PNM Facility, a cross-default
        provision in the PVNGS leases could occur if the accelerated amount is not
        paid.
        If a cross-default provision is triggered, the lessors have the ability to
        accelerate their rights under the leases, including acceleration of all future
        lease payments.
 
 ***TNMP***
 
 TNMP’s
        borrowing availability under the PNMR Facility contains a “ratings trigger,” for
        pricing purposes only. If TNMP is downgraded or upgraded by the ratings
        agencies, the result would be an increase or decrease in interest cost,
        respectively. In addition, the PNMR Facility contains a contingent requirement
        that requires TNMP to maintain a debt-to-capital ratio, inclusive of off-balance
        sheet debt, of less than 65%. If TNMP’s debt-to-capital ratio, inclusive of
        off-balance sheet debt, were to exceed 65%, TNMP could be required to repay
        all
        borrowings under the PNMR Facility, be prevented from drawing on the unused
        capacity under the PNMR Facility, and be required to provide security for
        all
        outstanding letters of credit issued under the PNMR Facility.
 
 **Financing
        Activities**
 
 ***PNMR***
 
 On
        April
        17, 2007, PNMR repaid the balance due on the bridge loan. To facilitate the
        repayment, PNMR borrowed $250.5 million under its revolving credit facility.
        As
        of May 1, 2007, PNMR and PNM had $48.8 million and $188.8 million of
        availability under their respective revolving credit facilities and local
        lines
        of credit, including reductions of availability due to outstanding letters
        of
        credit.
 
 PNMR
        has
        a universal shelf registration statement filed with the SEC for the issuance
        of
        debt securities and equity securities, preferred stock, purchase contracts,
        purchase contract units and warrants. As of March 31, 2007, PNMR had
        approximately $400.0 million of remaining unissued securities under this
        universal registration statement. In addition, in August 2006, PNMR filed
        a new
        shelf registration statement with the SEC. This new registration statement
        can
        be amended at any time to include additional securities of PNMR. As a result,
        this new shelf registration statement has unlimited availability, subject
        to
        certain restrictions and limitations.
 
 Pursuant
        to the terms of the PNM Direct Plan, PNMR began offering new shares of PNMR
        common stock through the plan beginning June 1, 2006. PNMR may also waive
        the
        maximum investment limit upon request in individual cases pursuant to the
        terms
        of the plan. In August 2006, PNMR entered into an equity distribution agreement
        to offer and sell up to 8 million shares of PNMR common stock from time to
        time.
        The agreement provides that PNMR will not sell more shares than needed for
        the
        aggregate gross proceeds from such sales to reach $200.0 million. From January
        1, 2007 through May 1, 2007, PNMR had sold a combined total of 26,798 shares
        of
        its common stock through the PNMR Direct Plan and the equity distribution
        agreement for net proceeds of $0.8 million.
 
 ***PNM***
 
 PNM
        has a
        universal shelf registration statement filed with the SEC for the issuance
        of
        debt securities, equity securities, preferred stock, purchase contracts,
        purchase contract units and warrants. As of March 31, 2007, PNM had
        approximately $200.0 million of remaining unissued securities registered
        under
        its shelf registration statement.
 
 ***TNMP***
 
 Depending
        on TNMP’s future business strategy, capital needs and market conditions, TNMP
        could enter into additional long-term financings for the purpose of
        strengthening TNMP’s balance sheet, funding growth and reducing its cost of
        capital. The Company continues to evaluate its investment and debt retirement
        options to optimize its financing strategy and earnings potential. The amount
        of
        senior unsecured notes that may be issued is not limited by the senior unsecured
        notes indenture. However, debt-to-capital requirements in certain of TNMP’s
        financial instruments and regulatory agreements would ultimately limit the
        amount of additional debt TNMP would issue.
 
 81
 **Capital
        Structure**
 
 ***PNMR***
 
 PNMR’s
        capitalization, including current maturities of long-term debt, at March
        31,
        2007 and December 31, 2006 is shown below:
 
 **March
                  31,**
              
              **December
                  31,****2007**
              
              **2006**Common
                  equity
              
              
              48.7
              %
              
              48.8
              %Preferred
                  stock
              
              
              0.3
              %
              
              0.3
              %Long-term
                  debt
              
              
              51.0
              %
              
              50.9
              %Total
                  capitalization
              
              
              100.0
              %
              
              100.0
              %
 
 Total
        capitalization does not include as debt operating lease
        obligations.
 
 ***PNM***
 
 PNM’s
        capitalization, including current maturities of long-term debt, at March
        31,
        2007 and December 31, 2006 is shown below:
 
 **March
                  31,**
              
              **December
                  31,****2007**
              
              **2006**Common
                  equity
              
              
              58.0
              %
              
              54.1
              %Preferred
                  stock
              
              
              0.5
              %
              
              0.5
              %Long-term
                  debt
              
              
              41.5
              %
              
              45.4
              %Total
                  capitalization
              
              
              100.0
              %
              
              100.0
              %
 
 ***TNMP***
 
 TNMP’s
        capitalization, including current maturities of long-term debt, at March
        31,
        2007 and December 31, 2006 is shown below:
 
 **March
                  31,**
              
              **December
                  31,****2007**
              
              **2006**Common
                  equity
              
              
              45.6
              %
              
              55.0
              %Long-term
                  debt
              
              
              54.4
              %
              
              45.0
              %Total
                  capitalization
              
              
              100.0
              %
              
              100.0
              %
 
 The
        tables for PNM and TNMP above reflect the transfer of TNMP’s New Mexico
        operations as of January 1, 2007, which decreased the common equity of TNMP
        and
        increased the common equity of PNM. This transfer had no impact on PNMR.
        See
        Note 14.
 
  82
  **OTHER
        ISSUES FACING THE COMPANY**
 
 See
        Notes
        9 and 10 for a discussion of commitments and contingencies and rate and
        regulatory matters facing the Company.
 
 **NEW
        ACCOUNTING STANDARDS**
 
 There
        have been no new accounting standards issued that materially affected PNMR,
        PNM
        or TNMP this period; however, see Note 15 for discussion of FIN 48
        implementation.
 
 **DISCLOSURE
        REGARDING FORWARD LOOKING STATEMENTS**
 
 Statements
        made in this filing that relate to future events or PNMR’s, PNM’s or TNMP’s
        expectations, projections, estimates, intentions, goals, targets and strategies,
        are made pursuant to the Private Securities Litigation Reform Act of 1995.
        Readers are cautioned that all forward-looking statements are based upon
        current
        expectations and estimates and PNMR, PNM and TNMP assume no obligation to
        update
        this information.
 
 Because
        actual results may differ materially from those expressed or implied by these
        forward-looking statements, PNMR, PNM and TNMP caution readers not to place
        undue reliance on these statements. PNMR’s, PNM’s and TNMP’s business, financial
        condition, cash flow and operating results are influenced by many factors,
        which
        are often beyond their control, that can cause actual results to differ from
        those expressed or implied by the forward-looking statements. These factors
        include:
 
 ·
            The
                risk that EnergyCo is unable to identify and implement profitable
                acquisitions or that the contribution of assets to EnergyCo by PNMR
                may
                not be implemented as expected, ·
            The
                potential unavailability of cash from PNMR’s subsidiaries due to
                regulatory, statutory and contractual
                restrictions, ·
            The
                outcome of any appeals of the PUCT order in the stranded cost true-up
                proceeding, ·
            The
                ability of First Choice to attract and retain
                customers, ·
            Changes
                in ERCOT protocols, ·
            Changes
                in the cost of power acquired by First
                Choice, ·
            Collections
                experience, ·
            Insurance
                coverage available for claims made in
                litigation, ·
            Fluctuations
                in interest rates, ·
            Conditions
                affecting PNMR’s ability to access the financial
                markets, ·
            Weather, ·
            Water
                supply, ·
            Changes
                in fuel costs, ·
            Availability
                of fuel supplies, ·
            The
                effectiveness of risk management and commodity risk
                transactions, ·
            Seasonality
                and other changes in supply and demand in the market for electric
                power, ·
            Variability
                of wholesale power prices and natural gas
                prices, ·
            Volatility
                and liquidity in the wholesale power markets and the natural gas
                markets, ·
            Changes
                in the competitive environment in the electric and natural gas
                industries, ·
            The
                performance of generating units, including PVNGS, SJGS and Four Corners,
                and transmission systems, ·
            The
                ability to secure long-term power sales, ·
            The
                risk that the Company and its subsidiaries may have to commit to
                substantial capital investments and additional operating costs to
                comply
                with new environmental control requirements including possible future
                requirements to address concerns about global climate
                change, ·
            The
                risks associated with completion of generation, including pollution
                control equipment at SJGS and the expansion of the Afton Generating
                Station, transmission, distribution and other projects, including
                construction delays and unanticipated cost
                overruns, ·
            State
                and federal regulatory and legislative decisions and
                actions, ·
            The
                outcome of legal proceedings, ·
            Changes
                in applicable accounting principles, and ·
            The
                performance of state, regional and national
                economies.  83
  Any
        material changes to risk factors occurring after the filing of PNMR’s, PNM’s or
        TNMP’s 2006 Annual Report on Form 10-K are disclosed in Item 1A, Risk Factors,
        in Part II of this Form 10-Q.
 
 For
        information about the risks associated with the use of derivative financial
        instruments see Item 3. “Quantitative and Qualitative Disclosures About Market
        Risk.”
 
 **SECURITIES
        ACT DISCLAIMER**
 
 Certain
        securities, including commercial paper described in this report, have not
        been
        registered under the Securities Act of 1933, as amended, or any state securities
        laws and may not be reoffered or sold in the United States absent registration
        or an applicable exemption from the registration requirements of the Securities
        Act of 1933 and applicable state securities laws. This Form 10-Q does not
        constitute an offer to sell or the solicitation of an offer to buy any
        securities.
 
  84
  **ITEM
        3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK**
  The
        Company uses derivative financial instruments to manage risk as it relates
        to
        changes in natural gas and electric prices, changes in interest rates and,
        historically, adverse market changes for investments held by the Company’s
        various trusts. The Company also uses certain derivative instruments for
        wholesale power marketing and natural gas transactions in order to take
        advantage of favorable price movements and market timing activities in these
        power markets. The following additional information is provided.
 
 PNMR
        controls the scope of its various forms of risk through a comprehensive set
        of
        policies and procedures and oversight by senior level management and the
        PNMR
        Board. The Board’s Finance Committee sets the risk limit parameters. The RMC,
        comprised of corporate and business segment officers and other managers,
        oversees all of the activities, which include commodity price, credit, equity,
        interest rate and business risks. The RMC has oversight for the ongoing
        evaluation of the adequacy of the risk control organization and policies.
        PNMR
        has a risk control organization, headed by an Executive Director of Financial
        Risk Management, which is assigned responsibility for establishing and enforcing
        the policies, procedures and limits and evaluating the risks inherent in
        proposed transactions, on an enterprise-wide basis.
 
 The
        RMC’s
        responsibilities specifically include: establishment of a general policy
        regarding risk exposure levels and activities in each of the business segments;
        authority to approve the types of instruments traded; authority to establish
        a
        general policy regarding counterparty exposure and limits; authorization
        and
        delegation of transaction limits; review and approval of controls and
        procedures; review and approval of models and assumptions used to calculate
        mark-to-market and risk exposure; authority to approve and open brokerage
        and
        counterparty accounts; review of hedging and risk activities; and quarterly
        reporting to the Finance Committee and the PNMR Board on these activities.
 
 The
        RMC
        also proposes risk limits, such as VaR and EaR, to the Finance Committee.
        The
        Finance Committee ultimately sets the Company's risk limits.
 
 It
        is the
        responsibility of each business segment to create its own control procedures
        and
        policies within the parameters established by the Finance Committee. The
        RMC
        reviews and approves these policies, which are created with the assistance
        of
        the Corporate Controller, Director of Internal Audit and the Executive Director
        of Financial Risk Management. Each business segment’s policies address the
        following controls: authorized risk exposure limits; authorized instruments
        and
        markets; authorized personnel; policies on segregation of duties; policies
        on
        mark-to-market accounting; responsibilities for deal capture; confirmation
        procedures; responsibilities for reporting results; statement on the role
        of
        derivative transactions; and limits on individual transaction size (nominal
        value).
 
 To
        the
        extent an open position exists, fluctuating commodity prices can impact
        financial results and financial position, either favorably or unfavorably.
        As a
        result, the Company cannot predict with certainty the impact that its risk
        management decisions may have on its businesses, operating results or financial
        position.
 
 **Accounting
        for Derivatives**
 
 Under
        the
        derivative accounting rules and the related accounting rules for energy
        contracts, the Company accounts for its various financial derivative instruments
        for the purchase and sale of energy differently based on the contract terms.
        Energy contracts that meet the definition of a derivative under SFAS 133
        and do
        not qualify for a normal sales and purchase exceptions are recorded on the
        balance sheet at fair value at each period end. The changes in fair value
        are
        recognized in earnings unless specific hedge accounting criteria are met.
        Should
        an energy transaction qualify as a hedge under SFAS 133, fair value changes
        from
        year to year are recognized on the balance sheet with a corresponding charge
        to
        other comprehensive income to the extent effective. Gains or losses are
        recognized when the hedged transaction settles and affects earnings. Derivatives
        that meet the normal sales and purchases exceptions within SFAS 133 are not
        marked to market but rather recorded in results of operations when the
        underlying transaction settles.
 
 **Commodity
        Risk**
 
 Marketing
        and procurement of energy often involve market risks associated with managing
        energy commodities and establishing open positions in the energy markets,
        primarily on a short-term basis. These risks fall into three different
        categories: price and volume volatility, credit risk of counterparties and
        adequacy of the control environment. The Company’s operations subject to market
        risk routinely enter into various derivative instruments such as forward
        contracts, option agreements and price basis swap agreements to hedge price
        and
        volume risk on their purchase and sale commitments, fuel requirements and
        to
        enhance returns and minimize the risk of market fluctuations.
  85
  PNM’s
        wholesale operations, including long-term contracts and short-term sales,
        are
        managed primarily through a net asset-backed marketing strategy, whereby
        PNM’s
        aggregate net open forward contract position is covered by its forecasted
        excess
        generation capabilities. PNM would be exposed to market risk if its generation
        capabilities were to be disrupted or if its retail load requirements were
        to be
        greater than anticipated. If PNM were required to cover all or a portion
        of its
        net open contract position as a result of the aforementioned unexpected
        situations, it would have to meet its commitments through market purchases.
        As
        such, PNM is exposed to risks related to fluctuations in the market price
        of
        energy that could impact the sales price or purchase price of energy. In
        addition, the wholesale operations utilize discrete market-based transactions
        to
        take advantage of opportunities that present themselves in the ordinary course
        of business. These positions are subject to market risk that is not mitigated
        by
        PNM’s generation capabilities.
 
 First
        Choice is responsible for energy supply related to the sale of electricity
        to
        retail customers in Texas. TECA contains no provisions for the specific recovery
        of fuel and purchased power costs. The rates charged to new customers acquired
        by First Choice outside of TNMP’s service territory are not regulated by the
        PUCT, but are negotiated with each customer. As a result, changes in fuel
        and
        purchased power costs will affect First Choice’s operating results. First Choice
        is exposed to market risk to the extent that its retail rates or cost of
        supply
        fluctuates with market prices. Additionally, fluctuations in First Choice
        retail
        load requirements greater than anticipated may subject First Choice to market
        risk. First Choice’s basic strategy is to minimize its exposure to fluctuations
        in market energy prices by matching fixed price sales contracts with fixed
        price
        supply. In addition, First Choice utilizes discrete market-based transactions
        to
        take advantage of opportunities that present themselves in the ordinary course
        of business. These positions are subject to market risk that is not mitigated
        by
        First Choice's retail operations.
 
 The
        following table shows the net fair value of mark-to-market energy contracts
        for
        First Choice and PNM Wholesale included in PNMR’s Condensed Consolidated Balance
        Sheet:
 
 **March
                  31,**
              
              **December
                  31,****2007**
              
              **2006**(In
                  thousands)Mark-to-market
                  energy contracts:Current
                  asset
              
              $
              39,913
              
              $
              43,680Long-term
                  asset
              
              
              19,697
              
              
              10,982Total
                  mark-to-market assets
              
              
              59,610
              
              
              54,662Current
                  liability
              
              
              (39,929
              )
              
              (42,020
              )Long-term
                  liability
              
              
              (12,420
              )
              
              (9,176
              )Total
                  mark-to-market liabilities
              
              
              (52,349
              )
              
              (51,196
              )Net
                  fair value of mark-to-market energy contracts
              
              $
              7,261
              
              $
              3,466
 
 The
        mark-to-market energy transactions represent net assets at March 31, 2007
        and
        December 31, 2006 after netting all applicable open purchase and sale contracts.
 
 The
        market prices used to value PNMR mark-to-market energy contracts are based
        on
        available market data, including index prices and broker quotations. These
        valuations can be limited by the availability of market data. When market
        data
        is unavailable or lacks sufficient granularity to develop reliable pricing,
        the
        Company utilizes internally developed pricing data. As a result, the Company
        records liquidity reserves on these contracts for the unrealized market gains
        and losses in this illiquid period. Generally, the liquid period on which
        the
        Company’s valuations are based is up to 18 months for option type contracts and
        from three to five years for gas and electric commodities. The Company regularly
        assesses the validity and availability of pricing data for the illiquid period
        of its derivative transactions and adjusts its liquidity reserves,
        accordingly.
  86
  The
        following table details the changes in the net asset or liability balance
        sheet
        position from one period to the next for mark to market energy transactions
        for
        the operations of First Choice and PNM Wholesale:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006**(In
                  thousands)Sources
                  of fair value gain (Loss):Fair
                  value at beginning of year
              
              $
              3,466
              
              $
              3,619Amount
                  realized on contracts delivered during period
              
              
              499
              
              
              1,202Changes
                  in fair value
              
              
              3,296
              
              
              1,501Net
                  fair value at end of period
              
              $
              7,261
              
              $
              6,322Net
                  change recorded as mark-to-market
              
              $
              3,795
              
              $
              2,703
 
 The
        net
        change in fair value on PNMR’s commodity derivative instruments designated as
        hedging instruments is summarized as follows:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006****Type
                  of Derivative**
              
              **Hedge
                  Instruments**(In
                  thousands)Change
                  in fair value of energy contracts
              
              $
              (35,718
              )
              $
              (7,541
              )Change
                  in fair value of gas fixed for float swaps
              
              
              8,118
              
              
              (19,740
              )Change
                  in the fair value of options
              
              
              109
              
              
              1,008Net
                  change in fair value
              
              $
              (27,491
              )
              $
              (26,273
              )
 
 The
        following table provides the maturity of the net assets (liabilities) of
        PNMR,
        giving an indication of when these mark-to-market amounts will settle and
        generate (use) cash. The following values were determined using broker
        quotes:
  **Fair
          Value at March 31** **,
          2007**
 
 **Maturities****Less
                    than****1
                    year**
                
                **1-3
                    Years**
                
                **4+
                    Years**
                
                **Total**(In
                    thousands)$(16)
                
                $4,113
                
                $3,164
                
                $7,261
 As
        of
        March 31, 2007, a decrease in market pricing of PNMR’s mark-to-market energy
        transactions by 10% would have resulted in a decrease in net earnings of
        less
        than 1%. Conversely, an increase in market pricing of these transactions
        by 10%
        would have resulted in an increase in net earnings of less than
        1%.
  87
  The
        following table shows the net fair value of mark-to-market energy contracts
        for
        PNM in PNM’s Condensed Consolidated Balance Sheet:
 
 **March
                  31,**
              
              **December
                  31,****2007**
              
              **2006**(In
                  thousands)Mark-to-market
                  energy contracts:Current
                  asset
              
              $
              18,117
              
              $
              21,310Long-term
                  asset
              
              
              14,969
              
              
              10,592Total
                  mark-to-market assets
              
              
              33,086
              
              
              31,902Current
                  liability
              
              
              (18,494
              )
              
              (20,623
              )Long-term
                  liability
              
              
              (8,115
              )
              
              (8,694
              )Total
                  mark-to-market liabilities
              
              
              (26,609
              )
              
              (29,317
              )Net
                  fair value of mark-to-market energy contracts
              
              $
              6,477
              
              $
              2,585
 
 The
        mark-to-market energy transactions represent net assets at March 31, 2007
        and
        December 31, 2006 after netting all applicable open purchase and sale contracts.
 
 The
        market prices used to value PNM mark-to-market energy contracts are based
        on
        available market data, including index prices and broker quotations. These
        valuations can be limited by the availability of market data. When market
        data
        is unavailable or lacks sufficient granularity to develop reliable pricing,
        the
        Company utilizes internally developed pricing data. As a result, the Company
        records liquidity reserves on these contracts for the unrealized market gains
        and losses in this illiquid period. Generally, the liquid period on which
        the
        Company’s valuations are based is up to 18 months for option type contracts and
        from three to five years for gas and electric commodities. The Company regularly
        assesses the validity and availability of pricing data for the illiquid period
        of its derivative transactions and adjusts its liquidity reserves,
        accordingly.
 
 The
        following table details the changes in the net asset or liability balance
        sheet
        position from one period to the next for mark-to-market energy transactions
        for
        the operations of PNM:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006**(In
                  thousands)Sources
                  of fair value gain (Loss):Fair
                  value at beginning of year
              
              $
              2,585
              
              $
              2,258Amount
                  realized on contracts delivered during period
              
              
              (1,452
              )
              
              572Changes
                  in fair value
              
              
              5,344
              
              
              (68
              )Net
                  fair value at end of period
              
              $
              6,477
              
              $
              2,762Net
                  change recorded as mark-to-market
              
              $
              3,892
              
              $
              504
 
 The
        net
        change in fair value on PNM’s commodity derivative instruments designated as
        hedging instruments is summarized as follows:
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006****Type
                  of Derivative**
              
              **Hedge
                  Instruments**(In
                  thousands)Change
                  in fair value of energy contracts
              
              $
              (2,905
              )
              $
              (7,541
              )Change
                  in fair value of gas fixed-for-float swaps
              
              
              6,991
              
              
              (14,763
              )Change
                  in the fair value of options
              
              
              -
              
              
              -Net
                  change in fair value
              
              $
              4,086
              
              $
              (22,304
              )
 
 88
  The
        following table provides the maturity of the net assets (liabilities) of
        PNM,
        giving an indication of when these mark-to-market amounts will settle and
        generate (use) cash. The following values were determined using broker
        quotes:
 
 **Fair
        Value at March 31** **,
        2007**
 
 **Maturities****Less
                  than****1
                  year**
              
              **1-3
                  Years**
              
              **4+
                  Years**
              
              **Total**(In
                  thousands)$(377)
              
              $3,690
              
              $3,164
              
              $6,477
 
 As
        of
        March 31, 2007, a decrease in market pricing of PNM’s mark-to-market energy
        transactions by 10% would have resulted in a decrease in net earnings of
        less
        than 1%. Conversely, an increase in market pricing of these transactions
        by 10%
        would have resulted in an increase in net earnings of less than 1%.
 
 **Risk
        Management Activities**
 
 PNM
        Wholesale measures the market risk of its long-term contracts and wholesale
        activities using a VaR calculation to maintain the Company’s total exposure
        within management-prescribed limits. The Company’s VaR calculation reports the
        possible market loss for the respective transactions. This calculation is
        based
        on the transaction’s fair market value on the reporting date. Accordingly, the
        VaR calculation is not a measure of the potential accounting mark-to-market
        loss. The Company utilizes the Monte Carlo simulation model of VaR. The Monte
        Carlo model utilizes a random generated simulation based on historical
        volatility to generate portfolio values. VaR models are relatively
        sophisticated. The quantitative risk information, however, is limited by
        the
        parameters established in creating the model. The instruments being evaluated
        may trigger a potential loss in excess of calculated amounts if changes in
        commodity prices exceed the confidence level of the model used. The VaR
        methodology employs the following critical parameters: volatility estimates,
        market values of open positions, appropriate market-oriented holding periods
        and
        seasonally adjusted correlation estimates. The Company’s VaR calculation
        considers the Company’s forward position for the next eighteen months. The
        Company uses a holding period of three days as the estimate of the length
        of
        time that will be needed to liquidate the positions. The volatility and the
        correlation estimates measure the impact of adverse price movements both
        at an
        individual position level as well as at the total portfolio level. The
        two-tailed confidence level established is 99%. For example, if VaR is
        calculated at $10.0 million, it is estimated that in 990 out of 1000 market
        simulations the Company’s pre-tax gain or loss in liquidating the portfolio
        would not exceed $10.0 million in the three days that it would take to liquidate
        the portfolio.
 
 PNM
        Wholesale measures VaR for all transactions that are not directly asset related
        and have economic risk. For the three months ended March 31, 2007, the average
        VaR amount for these transactions was $2.0 million, with high and low VaR
        amounts for the period of $3.5 million and $0.8 million, respectively. The
        VaR
        amount for these transactions at March 31, 2007 was $3.5 million. For the
        three
        months ended March 31, 2006, the average VaR amount for these transactions
        was
        $1.8 million, with high and low VaR amounts for the period of $3.7 million
        and
        $0.8 million, respectively. The total VaR amount for these transactions at
        March
        31, 2006 was $0.9 million.
 
 First
        Choice measures the market risk of its activities using an EaR calculation
        to
        maintain PNMR’s total exposure within management-prescribed limits. Because of
        its obligation to serve customers, First Choice must take its obligations
        to
        settlement. Accordingly, a measure that evaluates the settlement of First
        Choice’s positions against earnings provides management with a useful tool to
        manage its portfolio. First Choice’s EaR calculation reports the possible losses
        against forecasted earnings for its retail load and supply portfolio. This
        calculation is based on First Choice’s forecasted earnings on the reporting
        date. The Company utilizes a Delta/Gamma approximation model of EaR. The
        Delta/Gamma model calculates a price change within a given time frame,
        correlation and volatility parameters for each price curve utilized in valuing
        the mark-to-market of each position to develop a change in value for any
        position. This process is repeated multiple times to calculate a standard
        deviation, which is used to arrive at an EaR amount based on a certain
        confidence level. First Choice utilizes the one-tailed confidence level at
        95%.
        EaR models are relatively sophisticated. The quantitative risk information,
        however, is limited by the parameters established in creating the model.
        The
        instruments being evaluated may trigger a potential loss in excess of calculated
        amounts if changes in commodity prices exceed the confidence level of the
        model
        used. The EaR calculation considers the Company’s forward position for the next
        twelve months and holds each position to settlement. The volatility and the
        correlation estimates measure the impact of adverse price movements both
        at an
        individual position level as well as at the total portfolio level. For example,
        if EaR is calculated at $10.0 million, it is estimated that in 950 out of
        1000
        market scenarios calculated by the model the losses against the Company’s
        forecasted earnings over the next twelve months would not exceed $10.0 million.
  89
  The
        EaR
        limit established for First Choice’s transactions is $25.0 million. For the
        three months ended March 31, 2007, the average EaR amount was $15.5 million,
        with high and low EaR amounts for the period of $20.5 million and $9.3 million,
        respectively. The total EaR amount at March 31, 2007 was $16.3
        million.
 
 In
        addition, the Company utilizes two VaR measures to manage its market risk.
        The
        first VaR limit is based on the same total retail load and supply portfolio
        as
        the EaR measure; however, the VaR measure is intended to capture the effects
        of
        changes in market prices over a 10 day holding period. This holding period
        is
        considered appropriate given the nature of First Choice’s supply portfolio and
        the constraints faced by First Choice in the ERCOT market. The calculation
        utilizes the same Monte Carlo simulation approach described above at a 95%
        confidence level. The VaR amount for these transactions was $4.9 million
        at
        March 31, 2007. For the three months ended March 31, 2007, the high, low
        and
        average mark-to-market VaR amounts were $6.2 million, $2.1 million and $4.5
        million, respectively.
 
 The
        second VaR limit was established for First Choice transactions that are subject
        to mark-to-market accounting as defined by SFAS 133 and SFAS 149 *.* This
        calculation captures the effect of changes in market prices over a three-day
        holding period and utilizes the same Monte Carlo simulation approach described
        above at a 95% confidence level. The VaR amount for these transactions was
        $1.9
        million at March 31, 2007. For the three months ended March 31, 2007, the
        high,
        low and average mark-to-market VaR amounts were $2.4 million, $0.7 million
        and
        $1.7 million, respectively.
 
 The
        Company's risk measures are regularly monitored by the Company's RMC. The
        RMC
        has put in place procedures to ensure that increases in risk measures that
        exceed the prescribed limits are reviewed and, if deemed necessary, acted
        upon
        to reduce exposures. The VaR and EaR limits represent an estimate of the
        potential gains or losses that could be recognized on the Company’s portfolios,
        subject to market risk, given current volatility in the market, and are not
        necessarily indicative of actual results that may occur, since actual future
        gains and losses will differ from those estimated. Actual gains and losses
        may
        differ due to actual fluctuations in market prices, operating exposures,
        and the
        timing thereof, as well as changes to the underlying portfolios during the
        year.
  90
  **Credit
        Risk**
 
 The
        Company manages credit on a consolidated basis and uses a credit management
        process to assess and monitor the financial conditions of counterparties.
        Credit
        exposure is regularly monitored by the RMC. The RMC has put procedures in
        place
        to ensure that increases in credit risk measures that exceed the prescribed
        limits are reviewed and, if deemed necessary, acted upon to reduce exposures.
 
 *PNM
        Wholesale*
 
 The
        following table provides information related to PNM Wholesale’s credit exposure
        as of March 31, 2007.  The table further delineates that exposure by the
        credit worthiness (credit rating) of the counterparties and provides guidance
        as
        to the concentration of credit risk to individual counterparties PNM Wholesale
        may have.
 
 **PNM
        Wholesale**
 **Schedule
        of Credit Risk Exposure**
 **March
        31, 2007**
 
 **Net****(b)**
              
              **Number**
              
              **Exposure****Net**
              
              **of**
              
              **of****Credit**
              
              **Counter**
              
              **Counter-****Risk**
              
              **-parties**
              
              **parties****Rating
                  (a)**
              
              **Exposure**
              
              **>10%**
              
              **>10%**(Dollars
                  in thousands)Investment
                  grade
              
              $
              82,300
              
              
              2
              
              $
              48,719Internal
                  ratingsInvestment
                  grade
              
              
              91
              
              
              -
              
              
              -Non-investment
                  grade
              
              
              537
              
              
              -
              
              
              -Total
              
              $
              82,928
              
              
              
              
              $
              48,719
 
 (a)
            The***Rating*******included
                in “Investment Grade” is for counterparties with a minimum S&P rating
                of BBB- or Moody's rating of Baa3. If the counterparty has provided
                a
                guarantee by a higher rated entity (e.g., its parent), determination
                is
                based on the rating of its guarantor. The category “Internal Ratings -
                Investment Grade” includes those counterparties that are internally rated
                as investment grade in accordance with the guidelines established
                in the
                Company’s credit policy. 
 (b)
              The***Net
                  Credit Risk******Exposure***is
                  the net credit exposure to PNM from PNM Wholesale operations. This
                  includes long-term contracts, forward sales and short-term sales.
                  The
                  exposure captures the net amounts due to PNM from receivables/payables
                  for
                  realized transactions, delivered and unbilled revenues, and mark-to-market
                  gains/losses (pursuant to contract terms). Exposures are offset
                  according
                  to legally enforceable netting arrangements and reduced by credit
                  collateral. Credit collateral includes cash deposits, letters of
                  credit
                  and performance bonds received from counterparties. Amounts are
                  presented
                  before those reserves that are determined on a portfolio
                  basis.
 
 
 91
  The
        following table provides  an
        indication of the maturity of credit risk by credit ratings of the
        counterparties.
 
 **PNM
        Wholesale**
 **Maturity
        of Credit Risk Exposure**
 **March
        31, 2007**
 
 **Greater**
              
              **Total****Less
                  than**
              
              
              
              **than**
              
              **Net****Rating**
              
              **2
                  Years**
              
              **2-5
                  Years**
              
              **5
                  Years**
              
              **Exposure**(In
                  thousands)Investment
                  grade
              
              $
              61,232
              
              $
              17,747
              
              $
              3,321
              
              $
              82,300Internal
                  ratingsInvestment
                  grade
              
              
              91
              
              
              -
              
              
              -
              
              
              91Non-investment
                  grade
              
              
              537
              
              
              -
              
              
              -
              
              
              537Total
              
              $
              61,860
              
              $
              17,747
              
              $
              3,321
              
              $
              82,928
 
 The
        Company provides for losses due to market and credit risk. Credit risk for
        PNM
        Wholesale's largest counterparty as of March 31, 2007 and December 31, 2006
        was
        $34.6 million and $29.7 million, respectively.
 
 *First
        Choice*
 
 First
        Choice is subject to credit risk from non-performance by its supply
        counterparties to the extent these contracts have a mark-to-market value
        in the
        favor of First Choice. The Constellation power supply agreement established
        FCPSP, a bankruptcy remote special purpose entity, to hold all of First Choice's
        customer contracts and wholesale power and gas contracts. Constellation received
        a lien on accounts receivable, customer contracts, cash, and the equity of
        FCPSP
        as security for FCPSP’s performance under the power supply agreement. The
        provisions of this agreement severely limit FCPSP’s ability to secure power from
        alternate sources. Additionally, the terms of the security agreement do not
        require Constellation to post collateral for any mark-to-market balances
        in
        FCPSP’s favor. At March 31, 2007, the supply contracted with Constellation was
        in a unfavorable mark-to-market position for FCPSP. When netted against amounts
        owed to Constellation, this exposure was approximately $30.1 million. The
        Constellation power supply agreement collateral provisions will continue
        as long
        as FCPSP is purchasing power from Constellation to serve retail customers.
        The
        existing pricing mechanism under the Constellation power supply agreement
        expired on December 31, 2006, and the obligations of Constellation to act
        as a
        qualified scheduling entity continue until the expiration of the agreement
        on
        December 31, 2007. First Choice's credit exposure to other counterparties
        at
        March 31, 2007 was $1.1 million and the tenor of these exposures extends
        through
        2010.
 
 First
        Choice’s retail bad debt expense for the three months ended March 31, 2007 was
        $3.9 million. A reduction in bad debt expense from retail customers is expected
        due to reduced customer receivables resulting partially from effective
        disconnect policies, increased collection activity and refined consumer credit
        and securitization policies.
 
 **Interest
        Rate Risk**
 
 PNMR’s
        debt issued as part of the equity-linked units sold in March and October
        2005
        will be remarketed in 2008. If the remarketing is successful, the interest
        rate
        on the debt may change to a rate selected by the remarketing agent, and the
        maturity of the debt may be extended to a date selected by PNMR. If the
        remarketing of the debt is not successful, the maturity and interest rate
        of the
        debt will not change and holders of the equity-linked units will have the
        option
        of putting their debt to PNMR to satisfy their obligations under the purchase
        contracts. PNMR expects that the remarketing of the debt will be
        successful.
  92
  PNM
        has
        long-term debt which subjects it to the risk of loss associated with movements
        in market interest rates. The majority of PNM’s long-term debt is fixed-rate
        debt, and therefore, does not expose PNM’s earnings to a major risk of loss due
        to adverse changes in market interest rates. However, the fair value of all
        long-term debt instruments would increase by approximately 1.8%, if interest
        rates were to decline by 50 basis points from their levels at March 31, 2007.
        In
        general, an increase in fair value would impact earnings and cash flows to
        the
        extent not recoverable in rates if PNM were to reacquire all or a portion
        of its
        debt instruments in the open market prior to their maturity.
 
 During
        the three months ended March 31, 2007, PNM contributed cash of approximately
        $1.5 million to fund other post retirement benefits. PNM also contributed
        cash
        of approximately $4.9 million to the PVNGS nuclear decommissioning trust
        for the
        plan year 2006. The securities held by the trusts had an estimated fair value
        of
        $693.8 million at March 31, 2007, of which approximately 24.9% were fixed-rate
        debt securities that subject PNM to risk of loss of fair value with movements
        in
        market interest rates. If rates were to increase by 50 basis points from
        their
        levels at March 31, 2007, the decrease in the fair value of the fixed-rate
        securities would be approximately 3.4%, or $5.9 million. PNM does not currently
        recover or return through rates any losses or gains on these securities.
        PNM,
        therefore, is at risk for shortfalls in its funding of its obligations due
        to
        investment losses. PNM does not believe that long-term market returns over
        the
        period of funding will be less than required for PNM to meet its obligations.
        However, this belief is based on assumptions about future returns that are
        inherently uncertain.
 
 TNMP
        has
        long-term debt which subjects it to the risk of loss associated with movements
        in market interest rates. The majority of TNMP’s long-term debt is fixed-rate
        debt, and therefore, does not expose TNMP’s earnings to a major risk of loss due
        to adverse changes in market interest rates. However, the fair value of all
        long-term debt instruments would increase by approximately 0.5%, if interest
        rates were to decline by 50 basis points from their levels at March 31, 2007.
        In
        general, an increase in fair value would impact earnings and cash flows to
        the
        extent not recoverable in rates if TNMP were to re-acquire all or a portion
        of
        its debt instruments in the open market prior to their maturity.
 
 During
        the three months ended March 31, 2007, TNMP did not contribute cash to fund
        pension and other postretirement benefits for plan year 2007. The securities
        held by the trusts had an estimated fair value of $89.5 million at March
        31,
        2007, of which approximately 23.2% were fixed-rate debt securities that subject
        TNMP to risk of loss of fair value with movements in market interest rates.
        If
        rates were to increase by 50 basis points from their levels at March 31,
        2007,
        the decrease in the fair value of the fixed-rate securities would be
        approximately 4.2%, or $0.9 million. TNMP, therefore, is at risk for shortfalls
        in its funding of its obligations due to investment losses. TNMP does not
        believe that long-term market returns over the period of funding will be
        less
        than required for TNMP to meet its obligations. However, this belief is based
        on
        assumptions about future returns that are inherently uncertain.
 
 **Equity
        Market Risk**
 
 The
        trusts established to fund PNM’s share of the decommissioning costs of PVNGS and
        pension and other postretirement benefits hold certain equity securities
        at
        March 31, 2007. These equity securities also expose PNM to losses in fair
        value.
        Approximately 61.0% of the securities held by the various trusts were equity
        securities as of March 31, 2007. Similar to the debt securities held for
        funding
        decommissioning and certain pension and other postretirement costs, PNM does
        not
        recover or earn a return through rates on any losses or gains on these equity
        securities.
 
 The
        trusts established to fund TNMP’s pension and other postretirement benefits hold
        certain equity securities
        at March
        31,
        2007. These equity securities also expose the Company to losses in fair value.
        Approximately 55.4% of the securities held by the various trusts were equity
        securities as of March 31, 2007. TNMP does not recover or earn a return through
        rates on any losses or gains on these equity securities.
 
  93
  **ITEM
        4. CONTROLS AND PROCEDURES**
 
 **PNMR**
 
 **Disclosure
        of controls and procedures**
 
 PNMR
        maintains disclosure controls and procedures designed to ensure that it is
        able
        to collect the information it is required to disclose in the reports it files
        with the SEC, and to process, summarize and disclose this information within
        the
        time periods specified in the rules of the SEC. Based on an evaluation of
        its
        disclosure controls and procedures as of the end of the period covered by
        this
        report conducted by management, with the participation of the Chief Executive
        and Chief Financial Officer, the Chief Executive and Chief Financial Officer
        believe that these controls and procedures are effective to ensure that PNMR
        meets the requirements of SEC Regulation 13A, Rule 13a-15(e) and Rule
        15d-15(e).
 
 **Changes
        in internal controls**
 
 The
        following material changes in internal controls occurred during the first
        quarter of 2007:
 
 ·
            Expanded
                the functionality of an existing module of an accounting application
                at
                TNMP to record accounts receivable and billing activities for Texas
                market
                ERCOT electronic data interchange transactions and modified the related
                business process controls. 
 ·
            PNMR
                is currently engaged in a diligent effort to integrate Twin Oaks'
                and
                PNMR’s internal control activities to ensure that PNMR maintains its
                compliance with Section 404 of the Sarbanes-Oxley Act of 2002. It
                is
                expected that this effort will continue through the end of 2007. 
 Except
        as
        described above, there have been no other changes in PNMR’s internal controls
        over financial reporting for the quarter ended March 31, 2007, that have
        materially affected, or are reasonably likely to materially affect, PNMR’s
        internal control over financial reporting.
 
 **PNM**
 
 **Disclosure
        of controls and procedures**
 
 PNM
        maintains disclosure controls and procedures designed to ensure that it is
        able
        to collect the information it is required to disclose in the reports it files
        with the SEC, and to process, summarize and disclose this information within
        the
        time periods specified in the rules of the SEC. Based on an evaluation of
        its
        disclosure controls and procedures as of the end of the period covered by
        this
        report conducted by management, with the participation of the Chief Executive
        and Chief Financial Officer, the Chief Executive and Chief Financial Officer
        believe that these controls and procedures are effective to ensure that PNM
        is
        able to meet the requirements of SEC Regulation 13A, Rule 13a-15(e) and Rule
        15d-15(e).
 
 **Changes
        in internal controls**
 
 There
        have been no changes in PNM’s internal controls over financial reporting for the
        quarter ended March 31, 2007, that have materially affected, or are reasonably
        likely to materially affect, PNM’s internal control over financial
        reporting.
  94
  **TNMP**
 
 **Disclosure
        of controls and procedures**
 
 TNMP
        maintains disclosure controls and procedures designed to ensure that it is
        able
        to collect the information it is required to disclose in the reports it files
        with the SEC, and to process, summarize and disclose this information within
        the
        time periods specified in the rules of the SEC. Based on an evaluation of
        its
        disclosure controls and procedures as of the end of the period covered by
        this
        report conducted by management, with the participation of the Chief Executive
        and Chief Financial Officer, the Chief Executive and Chief Financial Officer
        believe that these controls and procedures are effective to ensure that TNMP
        meets the requirements of SEC Regulation 13A, Rule 13a-15(e) and Rule
        15d-15(e).
 
 **Changes
        in internal controls**
 
 The
        following material changes in internal controls occurred during the first
        quarter of 2007:
 
 ·
            Expanded
                the functionality of an existing module of an accounting application
                to
                record accounts receivable and billing activities for Texas market
                ERCOT
                electronic data interchange transactions and modified the related
                business
                process controls. 
 Except
        as
        described above, there have been no changes in TNMP’s internal controls over
        financial reporting for the quarter ended March 31, 2007, that have materially
        affected, or are reasonably likely to materially affect, TNMP’s internal control
        over financial reporting.
  95
  **PART
        II - OTHER INFORMATION**
 
 **ITEM
        1. LEGAL PROCEEDINGS**
 
 See
        Notes
        9 and 10 in the Notes to Condensed Consolidated Financial Statements for
        information related to the following matters, for PNMR, PNM and TNMP,
        incorporated in this item by reference.
 
 ·
            Citizen
                Suit Under the Clean Air Act ·
            Navajo
                Nation Environmental Issues ·
            Four
                Corners Federal Implementation Plan
                Litigation ·
            Wholesale
                Power Marketing Antitrust Suit ·
            Legal
                Proceedings discussed under the caption, “Western United States Wholesale
                Power Market” ·
            Natural
                Gas Royalties Qui Tam Litigation ·
            TNMP
                Competitive Transition Charge True-Up
                Proceeding ·
            San
                Juan River Adjudication 
 **ITEM
        1A. RISK FACTORS**
 
 As
        of the
        date of this report, there have been no material changes with regard to the
        Risk
        Factors disclosed in PNMR’s, PNM’s and TNMP’s Annual Reports on Form 10-K for
        the year ended December 31, 2006.
 
  96
  **ITEM
        6. EXHIBITS**
 
 10.3
              PNMR
              Second
                  Amendment to Credit Agreement dated as of December 20, 2006 among
                  PNM
                  Resources, First Choice Power, L.P. and TNMP, as borrowers, the
                  lenders
                  party thereto and Bank of America, N.A., as administrative
                  agent10.89
              PNM
              Amendment
                  Four to Underground Coal Sales Agreement effective March 7, 2007
                  among San
                  Juan Coal Company, PNM and Tucson Electric Power
                  Company12.1
              PNMR
              Ratio
                  of Earnings to Fixed Charges12.2
              PNMR
              Ratio
                  of Earnings to Combined Fixed Charges and Preferred Stock
                  Dividends31.1
              PNMR
              Chief
                  Executive Officer Certification Pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 200231.2
              PNMR
              Chief
                  Financial Officer Certification Pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 200231.3
              PNM
              Chief
                  Executive Officer Certification Pursuant to Section 302 of theSarbanes-Oxley
                  Act of 200231.4
              PNM
              Chief
                  Financial Officer Certification Pursuant to Section 302 of theSarbanes-Oxley
                  Act of 200231.5
              TNMP
              Chief
                  Executive Officer Certification Pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 200231.6
              TNMP
              Chief
                  Financial Officer Certification Pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 200232.1
              PNMR
              Chief
                  Executive Officer Certification Pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 200232.2
              PNMR
              Chief
                  Financial Officer Certification Pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 200232.3
              PNM
              Chief
                  Executive Officer Certification Pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 200232.4
              PNM
              Chief
                  Financial Officer Certification Pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 200232.5
              TNMP
              Chief
                  Executive Officer Certification Pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 200232.6
              TNMP
              Chief
                  Financial Officer Certification Pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002
 
  97
  **SIGNATURE**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrants
        have
        duly caused this report to be signed on their behalf by the undersigned
        thereunto duly authorized.
 
 **PNM
                  RESOURCES, INC.**
                **PUBLIC
                  SERVICE COMPANY OF NEW MEXICO**
                **TEXAS-NEW
                  MEXICO POWER COMPANY**(Registrants)Date:
                  May 10, 2007
              /s/
                  Thomas G. SategnaThomas
                  G. SategnaVice
                  President and Corporate Controller(Officer
                  duly authorized to sign this
                  report)
 
 98