PUBLIC SERVICE CO OF NEW MEXICO - PNM Resources€¦ · FORM 10-Q PUBLIC SERVICE CO OF NEW MEXICO...

FORM 10-Q

PUBLIC SERVICE CO OF NEW MEXICO

(Quarterly Report)

Filed 8/9/2006 For Period Ending 6/30/2006

Address ALVARADO SQUARE, MS2706

ALBUQUERQUE, New Mexico 87158

Telephone 505-848-2700

CIK 0000081023

Industry Electric Utilities

Sector Utilities

Fiscal Year 12/31

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q (Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

− OR −

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _________________

Commission Name of Registrants, State of Incorporation, I.R.S. Employer File Number Address and Telephone Number Identification No. 001-32462 PNM Resources, Inc. 85-0468296

(A New Mexico Corporation) Alvarado Square Albuquerque, New Mexico 87158 (505) 241-2700

001-06986 Public Service Company of New Mexico 85-0019030 (A New Mexico Corporation) Alvarado Square Albuquerque, New Mexico 87158 (505) 241-2700

002-97230 Texas-New Mexico Power Company 75-0204070 (A Texas Corporation) 4100 International Plaza, P.O. Box 2943 Fort Worth, Texas 76113 (817) 731-0099

Indicate by check mark whether 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 �

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 �

(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).

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).

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 �

As of August 1, 2006, 69,592,245 shares of common stock, no par value per share, of PNMR were outstanding. The total number of shares of Common Stock of PNM outstanding as of August 1, 2006 was 39,117,799 all held by PNMR (and none held

by non-affiliates). The total number of shares of Common Stock of TNMP outstanding as of August 1, 2006 was 9,615 all held indirectly by PNMR (and

none held by non-affiliates). PNM AND TNMP MEET THE CONDITIONS SET FORTH IN GENER AL INSTRUCTIONS (H) (1) (a) AND (b) OF FORM 10-

Q AND ARE THEREFORE FILING THIS FORM WITH THE REDUC ED 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. TNMP makes no representations as to the information relating to PNMR and its subsidiaries other than TNMP. When this Form 10-Q is incorporated by reference into any filing with the SEC made by PNM or TNMP, the portions of this Form 10-Q that relate to PNMR and its subsidiaries other than PNM or TNMP, respectively are not incorporated by reference therein.

Large accelerated filer � Accelerated filer Non-accelerated filer

Large accelerated filer Accelerated filer Non-accelerated filer �

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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 Subsidiaries Condensed Consolidated Statements of Earnings

Three and Six Months Ended June 30, 2006 and 2005 3 Condensed Consolidated Balance Sheets

June 30, 2006 and December 31, 2005 4 Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2006 and 2005 6 Condensed Consolidated Statements of Comprehensive Income

Three and Six Months Ended June 30, 2006 and 2005 8 Public Service Company of New Mexico and Subsidiary

Condensed Consolidated Statements of Earnings Three and Six Months Ended June 30, 2006 and 2005 9

Condensed Consolidated Balance Sheets June 30, 2006 and December 31, 2005 10

Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2006 and 2005 12

Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended June 30, 2006 and 2005 14

Texas-New Mexico Power Company and Subsidiaries Condensed Consolidated Statements of Earnings

Three and Six Months Ended June 30, 2006 and 2005 15 Condensed Consolidated Balance Sheets

June 30, 2006 and December 31, 2005 17 Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2006 and 2005 19 Condensed Consolidated Statements of Comprehensive Income

Three and Six Months Ended June 30, 2006 and 2005 21 Notes to Condensed Consolidated Financial Statements 23

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL 68

CONDITION AND RESULTS OF OPERATIONS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 106

ITEM 4. CONTROLS AND PROCEDURES 112 PART II. OTHER INFORMATION:

ITEM 1. LEGAL PROCEEDINGS 114

ITEM 1A. RISK FACTORS 114

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 114

ITEM 5. OTHER EVENTS 114

ITEM 6. EXHIBITS 115

Signature 116

iii

GLOSSARY

Afton Afton Generating Station ALJ Administrative Law Judge Altura Altura Power L.P. APB Accounting Principles Board APS Arizona Public Service Company Avistar Avistar, Inc. Board Board of Directors BTU British Thermal Unit Cal PX California Power Exchange Cal ISO California Independent System Operator Company PNM Resources, Inc. and Subsidiaries Constellation Constellation Energy Commodities Group, Inc. Decatherm 1,000,000 BTUs Delta Delta-Person Limited Partnership EaR Earnings at Risk EIP Eastern Interconnection Project EITF Emerging Issues Task Force EPA United States Environmental Protection Agency EPE El Paso Electric Company ERCOT Electric Reliability Council of Texas ESPP Employee Stock Purchase Plan FASB Financial Accounting Standards Board FCPSP First Choice Power Special Purpose, L.P. Federal Funds Rate Overnight Rate on Federal funds transactions with members of the Federal Reserve System, as

published by the Federal Reserve Bank FERC Federal Energy Regulatory Commission First Choice First Choice Power, L. P. and Subsidiaries Four Corners Four Corners Power Plant GAAP Generally Accepted Accounting Principles in the United States of America LIBOR London Interbank Offered Rate Lordsburg Lordsburg Generating Station Luna Luna Energy Facility MMBTUs Million British Thermal Units Moody's Moody’s Investor Services, Inc. MW Megawatt MWh Megawatt Hour NMPRC New Mexico Public Regulation Commission NSPS New Source Performance Standards NSR New Source Review OASIS Open Access Same Time Information System OATT Open Access Transmission Tariff OMOI Office of Market Oversight and Investigation O&M Operations and Maintenance PEP PNMR Omnibus Performance Equity Plan PGAC Purchased Gas Adjustment Clause PNM Public Service Company of New Mexico and Subsidiary PNMR PNM Resources, Inc. and Subsidiaries PPA Power Purchase Agreement

PUCT Public Utility Commission of Texas

1

PVNGS Palo Verde Nuclear Generating Station Reeves Reeves Generating Station REP Retail Electricity Provider RMC Risk Management Committee RMRR Routine Maintenance, Repair or Replacement SDG&E San Diego Gas and Electric Company SEC United States Securities and Exchange Commission Sempra Sempra Generation, a subsidiary of Sempra Energy SESCO San Angelo Electric Service Company SFAS Statement of Financial Accounting Standards SJCC San Juan Coal Company SJGS San Juan Generating Station S&P Standard and Poors Ratings Services SPS Southwestern Public Service Company TCEQ Texas Commission on Environmental Quality TECA Texas Electric Choice Act TNMP Texas-New Mexico Power Company and Subsidiaries TNP TNP Enterprises, Inc. and Subsidiaries Throughput Volumes of gas delivered, whether or not owned by the Company Twin Oaks Assets of Twin Oaks Power, L.P. and Twin Oaks Power III, L.P. VaR Value at Risk WSPP Western Systems Power Pool

2

ITEM 1. FINANCIAL STATEMENTS

PNM RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

Three Months Ended Six Months Ended June 30, June 30, 2006 2005 2006 2005 (In thousands, except per share amounts) Operating Revenues:

Electric $ 477,603 $ 322,676 $ 925,819 $ 585,119 Gas 68,869 82,261 276,345 247,494 Other 197 317 306 554

Total operating revenues 546,669 405,254 1,202,470 833,167 Operating Expenses:

Cost of energy sold 306,500 238,191 732,472 485,669 Administrative and general 66,311 52,786 131,616 94,095 Energy production costs 43,714 39,805 81,301 75,838 Depreciation and amortization 37,953 35,637 72,283 64,464 Transmission and distribution costs 21,314 15,051 40,364 29,113 Taxes, other than income taxes 18,261 10,571 35,225 19,442 Income taxes 6,190 (3,367 ) 16,437 10,024

Total operating expenses 500,243 388,674 1,109,698 778,645 Operating income 46,426 16,580 92,772 54,522

Other Income and Deductions:

Interest income 8,916 11,622 19,067 20,922 Other income 1,922 2,634 5,089 6,344 Carrying charges on regulatory assets 2,004 525 3,977 525 Other deductions (2,497 ) (1,542 ) (4,013 ) (3,678 ) Other income taxes (3,834 ) (4,677 ) (8,935 ) (8,561 )

Net other income and deductions 6,511 8,562 15,185 15,552 Interest Charges 36,498 21,533 65,061 35,824 Preferred Stock Dividend Requirements of

Subsidiary 132 2,068 264 2,200 Net Earnings $ 16,307 $ 1,541 $ 42,632 $ 32,050 Net Earnings per Common Share (see Note 5):

Basic $ 0.24 $ 0.02 $ 0.62 $ 0.51

Diluted $ 0.23 $ 0.02 $ 0.61 $ 0.50 Dividends Declared per Common Share $ 0.22 $ 0.19 $ 0.44 $ 0.37

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

3

PNM RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) June 30, December 31, 2006 2005 (In thousands) ASSETS Utility Plant:

Electric plant in service $ 4,020,138 $ 3,315,642 Gas plant in service 728,494 711,823 Common plant in service and plant held for future use 144,764 135,849

4,893,396 4,163,314 Less accumulated depreciation and amortization 1,428,793 1,374,599

3,464,603 2,788,715 Construction work in progress 144,514 168,195 Nuclear fuel, net of accumulated amortization of $13,758 and $14,679 28,086 27,182

Net utility plant 3,637,203 2,984,092

Other Property and Investments:

Investment in lessor notes 271,000 286,678 Other investments 137,020 180,013 Non-utility property, net of accumulated depreciation of $2,372 and $22 7,898 4,214

Total other property and investments 415,918 470,905

Current Assets:

Cash and cash equivalents 73,890 68,199 Special deposits 5,159 534 Accounts receivable, net of allowance for uncollectible accounts of $4,856 and $3,653 127,726 128,834 Unbilled revenues 100,900 151,773 Other receivables 64,296 64,285 Inventories 60,547 52,037 Regulatory assets 830 28,058 Other current assets 108,087 102,577

Total current assets 541,435 596,297

Deferred Charges:

Regulatory assets 357,106 347,279 Prepaid pension cost 93,471 91,444 Goodwill 495,441 499,155 Other intangible assets, net of accumulated amortization of $1,397 and $742 102,857 78,512 Other deferred charges 94,112 57,025

Total deferred charges 1,142,987 1,073,415

$ 5,737,543 $ 5,124,709


4

PNM RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) June 30, December 31, 2006 2005 (In thousands) CAPITALIZATION AND LIABILITIES Capitalization:

Common stockholders’ equity: Common stock outstanding (no par value, 120,000,000 shares authorized: issued

69,216,719 and 68,786,286 at June 30, 2006 and December 31, 2005, respectively) $ 826,899 $ 813,425 Accumulated other comprehensive loss, net of tax (99,168 ) (91,589 ) Retained earnings 592,115 564,623

Total common stockholders’ equity 1,319,846 1,286,459

Cumulative preferred stock of subsidiary without mandatory redemption ($100 stated value, 10,000,000 shares authorized: issued 115,293 at June 30, 2006 and December 31, 2005) 11,529 11,529

Long-term debt 1,743,555 1,746,395

Total capitalization 3,074,930 3,044,383 Current Liabilities:

Short-term debt 842,500 332,200 Accounts payable 136,504 206,648 Accrued interest and taxes 63,720 27,815 Regulatory liabilities 1,600 7,085 Other current liabilities 259,554 149,748

Total current liabilities 1,303,878 723,496

Long-Term Liabilities:

Accumulated deferred income taxes 433,049 451,263 Accumulated deferred investment tax credits 31,989 33,806 Regulatory liabilities 395,000 402,253 Asset retirement obligations 58,175 55,646 Accrued pension liability and postretirement benefit cost 223,930 227,202 Other deferred credits 216,592 186,660

Total long-term liabilities 1,358,735 1,356,830

Commitments and Contingencies (see Note 9) − −

$ 5,737,543 $ 5,124,709


5

PNM RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) Six Months Ended June 30, 2006 2005 (In thousands)

Cash Flows From Operating Activities: Net earnings $ 42,632 $ 32,050 Adjustments to reconcile net earnings to net cash flows from operating activities:

Depreciation and amortization 81,465 69,510 Allowance for equity funds used during construction (73 ) (1,196 ) Accumulated deferred income tax (7,920 ) 4,381 Net unrealized (gains)/losses on trading and marketing securities 1,864 (812 ) Realized gains on investment securities (1,839 ) (2,229 ) Carrying charges on deferred stranded costs (3,978 ) (525 ) Interest on retail competition transition obligation 885 − Carrying charges on other regulatory assets and liabilities (1,829 ) (1,317 ) Amortization of fair value of acquired Twin Oaks sales contract (16,878 ) − Amortization of emissions allowances 832 − Amortization of fair value of acquired First Choice contracts (2,780 ) (370 ) Stock based compensation expense 5,513 − Excess tax benefits from stock-based payment arrangements (908 ) − Other, net 1,203 318 Changes in certain assets and liabilities, net of amounts acquired:

Accounts receivable - customer 25,314 23,046 Accounts receivable - other (4,888 ) (5,918 ) Unbilled revenues 46,947 36,661 Regulatory assets 21,120 (9,087 ) Other assets (4,445 ) (1,561 ) Accrued postretirement benefit costs (5,299 ) (1,091 ) Accounts payable (88,241 ) (44,382 ) Accrued interest and taxes 36,812 41,880 Other liabilities (13,884 ) (25,921 )

Net cash flows from operating activities 111,625 113,437 Cash Flows From Investing Activities:

Utility plant additions (123,288 ) (74,790 ) Nuclear fuel additions (5,280 ) (5,159 ) Proceeds from sales of securities 45,322 41,910 Purchases of securities (45,738 ) (42,693 ) Return of principal PVNGS lessor notes 11,297 10,681 Cash acquired from purchase of TNP, net of cash paid − 34,531 Twin Oaks business acquisition (481,015 ) − Other, net 2,309 4,061

Net cash flows used for investing activities (596,393 ) (31,459 )


6

PNM RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) Six Months Ended June 30, 2006 2005 (In thousands) Cash Flows From Financing Activities:

Short-term borrowings (repayments), net 30,300 (74,000 ) Short-term bridge loan for Twin Oaks acquisition 480,000 − Long-term debt borrowings − 239,832 Long-term debt repayments − (110,532 ) Issuance of common stock 9,281 101,231 Repurchase of common stock-based payments (1,965 ) (10,263 ) Excess tax benefits from stock-based payment arrangements 908 − Dividends paid (29,029 ) (25,299 ) Other, net 964 2,820

Net cash flows from financing activities 490,459 123,789 Increase in Cash and Cash Equivalents 5,691 205,767 Beginning of Period 68,199 17,195 End of Period $ 73,890 $ 222,962 Supplemental Cash Flow Disclosures:

Interest paid, net of capitalized interest $ 67,495 $ 13,541

Income taxes paid (refunded), net $ (11,586 ) $ (16,176 )


7

PNM RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) Three Months Ended Six Months Ended June 30, June 30, 2006 2005 2006 2005 (In thousands)

Net Earnings $ 16,307 $ 1,541 $ 42,632 $ 32,050 Other Comprehensive Income (Loss):

Unrealized gain (loss) on securities :

Unrealized holding gains (losses) arising during the period, net of tax (expense) benefit of $154, $(437), $(6,953) and $(402) (236 ) 667 10,610 612

Reclassification adjustment for gains included in net income, net of tax expense of $606, $134, $427 and $662 (924 ) (204 ) (652 ) (1,010 )

Fair value adjustment for certain derivative transactions:

Change in fair market value of designated cash flow hedges, net of tax (expense) benefit of $2,557, $(1,996), $8,177 and $(3,975) (5,130 ) 3,098 (13,612 ) 6,118

Reclassification adjustment for (gains) losses included in net income, net of tax expense (benefit) of $(2,059), $23, $2,619 and $849 3,723 (35 ) (3,925 ) (1,295 )

Total Other Comprehensive Income (Loss) (2,567 ) 3,526 (7,579 ) 4,425 Total Comprehensive Income $ 13,740 $ 5,067 $ 35,053 $ 36,475


8

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 Six Months Ended June 30, June 30, 2006 2005 2006 2005 (In thousands) Operating Revenues:

Electric $ 259,298 $ 270,005 $ 570,765 $ 532,448 Gas 68,869 82,261 276,345 247,494

Total operating revenues 328,167 352,266 847,110 779,942 Operating Expenses:

Cost of energy sold 185,410 206,798 524,672 454,210 Administrative and general 40,520 42,496 81,648 82,975 Energy production costs 42,080 39,806 79,667 75,839 Depreciation and amortization 24,289 32,417 49,144 60,362 Transmission and distribution costs 15,916 13,898 30,223 27,961 Taxes, other than income taxes 8,414 7,459 17,727 15,751 Income taxes (1,254 ) (1,677 ) 13,708 12,966

Total operating expenses 315,375 341,197 796,789 730,064 Operating income 12,792 11,069 50,321 49,878


Interest income 8,670 9,097 18,023 18,303 Other income 1,705 2,185 3,533 5,461 Other deductions (1,504 ) (864 ) (2,355 ) (2,028 ) Other income taxes (3,444 ) (4,220 ) (7,455 ) (8,061 )

Net other income and deductions 5,427 6,198 11,746 13,675 Interest Charges 14,899 13,137 28,319 26,937 Net Earnings 3,320 4,130 33,748 36,616 Preferred Stock Dividend Requirements 132 132 264 264 Net Earnings Available for Common Stock $ 3,188 $ 3,998 $ 33,484 $ 36,352

The accompanying notes, as they relate to PNM, 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 BALANCE SHEETS (Unaudited)

June 30, December 31, 2006 2005 (In thousands) ASSETS Utility Plant:

Electric plant in service $ 2,673,780 $ 2,576,182 Gas plant in service 728,494 711,823 Common plant in service and plant held for future use 72,806 74,857

3,475,080 3,362,862 Less accumulated depreciation and amortization 1,241,740 1,205,386

2,233,340 2,157,476 Construction work in progress 115,161 137,663 Nuclear fuel, net of accumulated amortization of $13,758 and $14,679 28,086 27,182

Net utility plant 2,376,587 2,322,321


Investment in lessor notes 271,000 286,678 Other investments 127,097 170,422 Non-utility property 966 966


Current Assets:

Cash and cash equivalents 2,720 12,690 Special deposits 376 263 Accounts receivable, net of allowance for uncollectible accounts of $1,440 and $1,435 68,805 108,569 Unbilled revenues 55,907 121,453 Other receivables 60,630 53,546 Affiliate accounts receivable 8,613 − Inventories 49,017 50,411 Regulatory assets 830 28,058 Other current assets 69,184 75,885


Deferred Charges:

Regulatory assets 226,130 223,325 Prepaid pension cost 93,471 91,444 Other deferred charges 44,984 41,720

Total deferred charges 364,585 356,489

$ 3,456,317 $ 3,587,751


10



June 30, December 31, 2006 2005 (In thousands) CAPITALIZATION AND LIABILITIES Capitalization:

Common stockholder’s equity: Common stock outstanding (no par value, 40,000,000 shares authorized:

issued 39,117,799 at June 30, 2006 and December 31, 2005) $ 765,500 $ 765,500 Accumulated other comprehensive loss, net of tax (94,950 ) (90,515 ) Retained earnings 366,025 332,542

Total common stockholder’s equity 1,036,575 1,007,527

Cumulative preferred stock without mandatory redemption ($100 stated value, 10,000,000 shares authorized: issued 115,293 at June 30, 2006 and December 31, 2005) 11,529 11,529

Long-term debt 986,377 987,068

Total capitalization 2,034,481 2,006,124 Current Liabilities:

Short-term debt 100,200 128,200 Accounts payable 70,385 170,517 Affiliate accounts payable 61,274 50,070 Accrued interest and taxes 49,898 15,951 Regulatory liabilities 1,600 7,085 Other current liabilities 84,537 91,668

Total current liabilities 367,894 463,491


Accumulated deferred income taxes 278,693 300,752 Accumulated deferred investment tax credits 30,842 32,266 Regulatory liabilities 338,258 346,007 Asset retirement obligations 57,438 54,940 Accrued pension liability and postretirement benefit cost 214,834 217,092 Other deferred credits 133,877 167,079

Total long-term liabilities 1,053,942 1,118,136

Commitments and Contingencies (see Note 9) − − $ 3,456,317 $ 3,587,751


11


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Six Months Ended June 30, 2006 2005 (In thousands)

Cash Flows From Operating Activities: Net earnings $ 33,748 $ 36,616 Adjustments to reconcile net earnings to net cash flows from operating activities:

Depreciation and amortization 57,771 66,868 Allowance for equity funds used during construction 1 (1,163 ) Accumulated deferred income tax (15,001 ) 3,720 Net unrealized (gains)/losses on trading securities 1,965 (812 ) Realized gains on investment securities (1,842 ) (2,229 ) Carrying charges on other regulatory assets and liabilities (1,829 ) (1,317 ) Changes in certain assets and liabilities:

Accounts receivable - customer 39,764 28,184 Accounts receivable - other (7,084 ) (3,296 ) Unbilled revenues 65,547 40,143 Regulatory assets 22,846 (10,069 ) Other assets (7,384 ) 3,738 Accrued postretirement benefit costs (4,285 ) (3,983 ) Accounts payable (100,132 ) (68,594 ) Accrued interest and taxes 33,570 11,745 Other liabilities (16,914 ) (16,376 )

Net cash flows from operating activities 100,741 83,175 Cash Flows From Investing Activities:

Utility plant additions (94,728 ) (54,728 ) Nuclear fuel additions (5,280 ) (5,159 ) Proceeds from sales of securities 45,322 41,910 Purchases of securities (45,738 ) (42,693 ) Return of principal PVNGS lessor notes 11,297 10,681 Other, net 6,601 472

Net cash flows used for investing activities (82,526 ) (49,517 )


12



Six Months Ended June 30, 2006 2005 (In thousands) Cash Flows From Financing Activities:

Short-term borrowings (repayments), net (28,000 ) (41,600 ) Long-term debt repayments (298 ) − Dividends paid (264 ) (264 ) Change in affiliate borrowings − (300 ) Other, net 377 (228 )

Net cash flows used for financing activities (28,185 ) (42,392 )

Decrease in Cash and Cash Equivalents (9,970 ) (8,734 ) Beginning of Period 12,690 16,448 End of Period $ 2,720 $ 7,714 Supplemental Cash Flow Disclosures:

Interest paid, net of capitalized interest $ 30,193 $ 25,680

Income taxes paid, net $ 457 $ 3


13


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

Three Months Ended Six Months Ended June 30, June 30, 2006 2005 2006 2005 Net Earnings Available for Common Stock $ 3,188 $ 3,998 $ 33,484 $ 36,352

Other Comprehensive Income (Loss):

Unrealized gain (loss) on securities : Unrealized holding gains (losses) arising during

the period, net of tax (expense) benefit of $154, $(437), $(6,953) and $(402) (236 ) 667 10,610 612

Reclassification adjustment for gains included in net income, net of tax expense of $606, $134, $427 and $662 (924 ) (204 ) (652 ) (1,010 )

Fair value adjustment for certain

derivative transactions: Change in fair market value of designated

cash flow hedges, net of tax (expense) benefit of $606, $(1,469), $6,563 and $(3,448) (926 ) 2,242 (10,015 ) 5,262

Reclassification adjustment for gains included in net income, net of tax expense of $3, $23 and $2,869 and $849 (4 ) (35 ) (4,378 ) (1,295 )

Total Other Comprehensive Income (Loss) (2,090 ) 2,670 (4,435 ) 3,569 Total Comprehensive Income $ 1,098 $ 6,668 $ 29,049 $ 39,921


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TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

Post-Acquisition Post-Acquisition Pre-Acquisition Three months ended For the period For the period June 30, June 6-June 30, April 1-June 6, 2006 2005 2005 (In thousands) Operating Revenues:

Electric $ 61,456 $ 19,235 $ 46,938 Total operating revenues 61,456 19,235 46,938

Operating Expenses:

Cost of energy sold 22,651 6,702 16,793 Administrative and general 9,688 2,183 4,551 Depreciation and amortization 7,832 2,085 5,436 Transmission and distribution costs 5,399 1,150 3,944 Taxes, other than income taxes 5,872 1,885 3,195 Income taxes 1,238 1,125 2,808

Total operating expenses 52,680 15,130 36,727 Operating income 8,776 4,105 10,211


Interest income 81 87 360 Other income 125 111 252 Carrying charges on regulatory assets 2,004 525 1,394 Other deductions (32 ) (11 ) (30 ) Other income taxes (847 ) (314 ) (715 )

Net other income and deductions 1,331 398 1,261 Interest Charges 7,271 1,956 5,088 Net Earnings $ 2,836 $ 2,547 $ 6,384

The accompanying notes, as they relate to TNMP, 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)

Post-Acquisition Post-Acquisition Pre-Acquisition Six months ended For the period For the period June 30, June 6-June 30, January 1-June 6, 2006 2005 2005 (In thousands) Operating Revenues:

Electric $ 124,141 $ 19,235 $ 112,820 Total operating revenues 124,141 19,235 112,820

Operating Expenses:

Cost of energy sold 49,823 6,702 43,885 Administrative and general 20,919 2,183 11,048 Depreciation and amortization 15,563 2,085 12,954 Transmission and distribution costs 10,112 1,150 9,111 Taxes, other than income taxes 11,479 1,885 9,228 Income taxes 558 1,125 5,055

Total operating expenses 108,454 15,130 91,281 Operating income 15,687 4,105 21,539


Interest income 336 87 650 Other income 311 111 523 Carrying charges on regulatory assets 3,977 525 (1,407 ) Other deductions (62 ) (11 ) (79 ) Other income taxes (1,759 ) (314 ) 154

Net other income and deductions 2,803 398 (159 )

Interest Charges 14,498 1,956 12,120 Net Earnings $ 3,992 $ 2,547 $ 9,260


16

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


June 30, December 31, 2006 2005 (In thousands) ASSETS Utility Plant:

Electric plant in service $ 893,196 $ 877,893 Construction work in progress 6,683 7,138 Common plant in service and plant held for future use 589 589

900,468 885,620 Less accumulated depreciation and amortization 308,383 296,611

Net utility plant 592,085 589,009


Other investments 548 548 Non-utility property, net of accumulated depreciation of $3 and $3 2,120 2,120


Current Assets:

Cash and cash equivalents 18,732 16,228 Accounts receivable, net of allowance for uncollectible accounts of $79 and $100 11,058 13,191 Federal income tax refund 33,671 36,392 Unbilled revenues 5,962 6,679 Affiliate accounts receivable 10,809 − Other receivables 720 6,087 Inventories 1,495 1,478 Other current assets 794 1,211


Deferred Charges:

Stranded costs 87,316 87,316 Carrying charges on stranded costs 37,895 33,918 Other regulatory assets 5,765 2,720 Goodwill 363,763 367,245 Other deferred charges 3,339 4,948

Total deferred charges 498,078 496,147

$ 1,176,072 $ 1,169,090


17

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


June 30, December 31, 2006 2005 (In thousands) CAPITALIZATION AND LIABILITIES Capitalization:

Common stockholder’s equity: Common stock outstanding ($10 par value, 12,000,000 shares authorized:

issued 9,615 at June 30, 2006 and December 31, 2005) $ 96 $ 96 Paid-in-capital 492,812 494,287 Accumulated other comprehensive loss, net of tax (29 ) (29 ) Retained earnings 9,442 5,450

Total common stockholder’s equity 502,321 499,804

Long-term debt 416,012 415,864

Total capitalization 918,333 915,668 Current Liabilities:

Accounts payable 11,833 11,913 Affiliate accounts payable 17,545 − Accrued interest and taxes 13,459 24,250 Accrued payroll and benefits 671 3,268 Other current liabilities 6,824 5,516

Total current liabilities 50,332 44,947


Accumulated deferred income taxes 139,669 139,405 Accumulated deferred investment tax credits 1,147 1,540 Regulatory liabilities 56,742 56,246 Accrued pension liability 2,202 3,585 Accrued postretirement benefit cost 6,894 6,525 Other deferred credits 753 1,174

Total long-term liabilities 207,407 208,475

Commitments and Contingencies (see Note 9) − − $ 1,176,072 $ 1,169,090


18

TEXAS-NEW MEXICO POWER COMPANY A WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


Post-Acquisition Post-Acquisition Pre-Acquisition Six months ended For the period For the period June 30, June 6-June 30, January 1-June 6, 2006 2005 2005 (In thousands)

Cash Flows From Operating Activities: Net earnings $ 3,992 $ 2,547 $ 9,260 Adjustments to reconcile net earnings to net cash flows from

operating activities: Depreciation and amortization 15,712 2,261 14,042 Allowance for equity funds used during construction (74 ) (8 ) (60 ) Accumulated deferred income tax 1,877 75 (1,267 ) Carrying charges on deferred stranded costs (3,978 ) (525 ) 1,407 Interest on retail competition transition obligation 885 − − Other, net (21 ) (1 ) (120 ) Changes in certain assets and liabilities:

Accounts receivable 2,154 823 149 Unbilled revenues 717 (139 ) (106 ) Other assets 7,053 (1,468 ) (3,800 ) Accrued postretirement benefit costs (1,014 ) (2,583 ) 495 Accounts payable (79 ) 652 (5,379 ) Accrued interest and taxes (10,872 ) 1,586 (4,134 ) Change in affiliate accounts 6,736 1,249 47 Other liabilities (2,583 ) 2,180 4,819

Net cash flows from operating activities 20,505 6,649 15,353 Cash Flows From Investing Activities:

Utility plant additions (18,152 ) (1,685 ) (17,822 ) Other, net 69 840 (242 ) Acquisition costs − (3,473 ) −

Net cash flows used for investing activities (18,083 ) (4,318 ) (18,064 )


19



Post-Acquisition Post-Acquisition Pre-Acquisition Six months ended For the period For the period June 30, June 6-June 30, January 1-June 6, 2006 2005 2005 (In thousands) Cash Flows From Financing Activities:

Other, net 82 − 127 Net cash flows from financing activities 82 − 127

Increase/(Decrease) in Cash and Cash Equivalents 2,504 2,331 (2,584 ) Beginning of Period 16,228 63,175 65,759 End of Period $ 18,732 $ 65,506 $ 63,175 Supplemental Cash Flow Disclosures:

Interest paid, net of capitalized interest $ 18,439 $ 1 $ 12,868

Income taxes paid, net $ − $ − $ 2,456


20



Post-Acquisition Post-Acquisition Pre-Acquisition Three months ended For the period For the period June 30, June 6-June 30, April 1-June 6, 2006 2005 2005 (In thousands) Net Earnings $ 2,836 $ 2,547 $ 6,384

Other Comprehensive Income: Interest rate hedge net of reclassification adjustment, net of

income tax benefit (expense) of $0 , $0 and $1,004 $ − $ − $ 1,632 Total Other Comprehensive Income $ − $ − $ 1,632 Total Comprehensive Income $ 2,836 $ 2,547 $ 8,016


21



Post-Acquisition Post-Acquisition Pre-Acquisition Six months ended For the period For the period June 30, June 6-June 30, January 1-June 6, 2006 2005 2005 (In thousands) Net Earnings $ 3,992 $ 2,547 $ 9,260

Other Comprehensive Income: Interest rate hedge net of reclassification adjustment, net of

income tax benefit (expense) of $0 , $0 and $1,084 $ − $ − $ 1,761 Total Other Comprehensive Income $ − $ − $ 1,761 Total Comprehensive Income $ 3,992 $ 2,547 $ 11,021


22

(1) Significant Accounting Policies and Responsibility for Financial Statements

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 June 30, 2006 and December 31, 2005, the consolidated results of its operations and comprehensive income for the three and six months ended June 30, 2006 and 2005 and the consolidated statements of cash flows for the six months ended June 30, 2006 and 2005. 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. PNMR’s four primary subsidiaries are PNM, TNMP, First Choice and Altura. 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, 2005 that are included in their respective Annual Reports on Form 10-K/A (Amendment No. 2) for the year ended December 31, 2005. The results of operations presented in the accompanying Condensed Consolidated Financial Statements are not necessarily representative of operations for an entire year.

TNP Acquisition

As discussed in Note 2, on June 6, 2005, PNMR completed the acquisition of TNP effective at 8:00 AM Central Daylight Time. The

acquisition was accounted for using the purchase method of accounting. The purchase accounting entries are reflected on PNMR’s financial statements as of the purchase date. PNMR “pushed down” the effects of purchase accounting to the financial statements of TNP’s principal subsidiaries, TNMP and First Choice. Accordingly, TNMP’s post-acquisition financial statements reflect a new basis of accounting, and separate financial statements and note amounts in tabular format are presented for pre-acquisition and post-acquisition periods, separated by a heavy black line.

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 clearly indicated as such.

Change in Presentation

Certain amounts in the 2005 Condensed Consolidated Financial Statements and Notes thereto for PNMR, PNM and TNMP have been

reclassified to conform to the 2006 financial statement presentation. Specifically, certain amounts in the 2005 Condensed Consolidated Financial Statements and Notes thereto of TNMP have been reclassified to conform to PNMR’s presentation for comparability.

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of the Company and subsidiaries in which it owns a majority

voting interest. Corporate administrative and general expenses, which represent costs that are driven primarily by corporate level activities, are allocated to the business segments. Other significant intercompany transactions between PNMR, PNM and TNMP in 2006 or 2005 include energy purchases and sales, dividends paid on common stock, the redemption of common stock of TNMP, and consolidation of the PVNGS capital trust. All significant intercompany transactions and balances have been eliminated. See Note 12.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT S (Unaudited)

23

Financial Statement Preparation

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires

management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual recorded amounts could differ from those estimated. Goodwill and Other Intangible Assets

The excess purchase price over the fair value of the assets acquired and the liabilities assumed by PNMR for its June 6, 2005 acquisition

of TNP was recorded as goodwill. Under the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), the Company does not amortize goodwill. Certain intangible assets are amortized over their estimated useful lives. Goodwill and non-amortizing intangible assets are evaluated for impairment at least annually, or more frequently if events and circumstances indicate that the goodwill and intangible assets might be impaired. Goodwill for TNMP and First Choice and the First Choice trade name, which is a non-amortized intangible asset, were evaluated for impairment as of April 1, 2006. As a result of the evaluation, no impairment was recognized. Other intangible assets subject to amortization are evaluated for impairment in accordance with SFAS No. 144 “ Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) when events and circumstances indicate that the assets might be impaired. As of June 30, 2006, goodwill on PNMR’s and TNMP's Condensed Consolidated Balance Sheet decreased $3.7 million and $3.5 million, respectively, for amounts recorded as a result of corrections to deferred taxes related to pre-acquisition periods.

Decommissioning Costs

Accounting for decommissioning costs for nuclear and fossil-fuel generation involves significant estimates related to costs to be incurred many years in the future after plant closure. Changes in these estimates could significantly impact PNMR’s and PNM’s financial position, results of operations and cash flows. PNM owns and leases nuclear and fossil-fuel facilities that are within and outside of its retail service areas. In accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations” (“SFAS 143”), PNM is only required to recognize and measure decommissioning liabilities for tangible long-lived assets for which a legal obligation exists. Adoption of the statement changed the method of accounting for both nuclear generation decommissioning and fossil-fuel generation decommissioning. Nuclear decommissioning costs and related accruals are based on site-specific estimates of the costs for removing all radioactive materials and other structures at the site. PNM’s accruals for Units 1, 2 and 3 have been made based on such estimates, the guidelines of the NRC and the probability of a license extension. PVNGS Unit 3 is excluded from PNM’s retail rates while PVNGS Units 1 and 2 are included. PNM collects a provision for ultimate decommissioning of PVNGS Units 1 and 2 in its rates and recognizes a corresponding expense and liability for these amounts. PNM believes that it will continue to be able to collect in rates for its legal asset retirement obligations for nuclear generation activities included in the ratemaking process.

Stock-Based Compensation

See Note 6 for a comprehensive discussion of the accounting for stock-based compensation expense, including a discussion of the

assumptions used to estimate the fair market value of awards.




24

Carrying Charges on Stranded Costs

TNMP’s estimate of allowable carrying charges on stranded costs that it may recover from its transmission and distribution customers is based on a United States Supreme Court ruling and the PUCT’s application of that ruling. As of June 30, 2006 and December 31, 2005, the regulatory asset recorded on the Condensed Consolidated Balance Sheets for carrying costs was $37.9 million and $33.9 million, respectively (see Note 10). As of June 30, 2006, the equity-related portion of carrying costs totaled $29.5 million. TNMP expects to collect the equity-related portion of carrying costs from customers but is prohibited under GAAP from recognizing those amounts in its consolidated financial statements until the actual receipt of the equity-related portion of carrying costs from customers.

(2) Acquisitions Twin Oaks

On April 18, 2006, PNMR’s wholly owned subsidiary, Altura, purchased the Twin Oaks business, which included a 305 MW coal-fired

power plant located 150 miles south of Dallas, Texas for $480.0 million in cash plus the assumption of contracts and liabilities. The results of Twin Oaks operations have been included in the Consolidated Financial Statements of PNMR from that date. PNMR acquired Twin Oaks to expand the Company’s merchant generation fleet in order to serve a growing wholesale market in the Southwest. PNMR secured bridge financing for Altura to close the transaction (see Note 7). In addition, PNMR incurred transaction and other costs of $1.0 million.

The following table presents the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Altura obtained, or is in the process of obtaining, independent valuations of acquired property and intangible assets; thus, the allocation

of the purchase price is subject to adjustment and will be finalized within one year of the acquisition. The Purchase Agreement also includes the development rights for a possible 600-megawatt expansion of the plant, which PNMR has

classified as an intangible asset. The necessary permits for the plant expansion are being obtained, which are expected in 2007. An additional $2.5 million payment will be made to the seller upon the issuance of an air permit for the expansion and an additional $2.5 million will be paid upon Altura beginning construction of the expansion. PNMR has not made a decision regarding the Twin Oaks expansion, but it is considering a variety of options, including self development or sale to a third party.




At April 18, 2006 (In thousands)

Net utility plant $ 595,336 Other current assets 10,341 Other intangible assets 25,000 Other deferred charges 99,598

Total assets acquired 730,275 Other current liabilities 96,088 Other deferred credits 153,173

Total liabilities assumed 249,261

Net assets acquired $ 481,014

25

As part of the acquisition of Twin Oaks, PNMR determined the fair value of two contractual obligations to sell power. The first

contract obligates PNMR to sell power through September 2007 at which time the second contract begins and extends for three years. In comparing the pricing terms of the contractual obligations against the forward price of electricity in the relevant market, PNMR concluded that the contracts were below market. In accordance with SFAS No. 141, as amended, “Business Combinations” (“SFAS 141”), the contracts were recorded at fair value and will be amortized as an increase in operating revenue over the contract lives. The amortization matches the difference between the forward price curve and the contractual obligations for each month in accordance with the contract as of the acquisition date. For the first contract, $95.2 million was recorded in other current liabilities and $52.7 million was recorded in other deferred credits. For the second contract, $29.7 million was recorded in other deferred credits.

The following unaudited pro forma financial information presents a summary of PNMR’s consolidated results of operations for the three

and six months ended June 30, 2006 and 2005 assuming the acquisition of Twin Oaks had been completed as of January 1, 2006 and 2005, respectively, including adjustments, which are based upon preliminary estimates, to reflect the allocation of the purchase price to the acquired net assets. The pro forma financial information does not include synergy savings that may result from the business combination and is not necessarily indicative of the results of operations if the acquisition had been effective as of these dates. In addition, the pro forma financial information does not include results of operations from TNP prior to its acquisition on June 6, 2005.

TNP

On June 6, 2005, PNMR acquired all of the outstanding common shares of TNP, including its principal subsidiaries, TNMP and First Choice. The aggregate purchase price was $1,221 million, including a net payment to the previous owner of $162.0 million consisting of $74.6 million of cash and common stock valued at $87.4 million. The results of TNP’s operations have been included in the Condensed Consolidated Financial Statements of PNMR from that date.




For the Three Months Ended

For the Six Months Ended

June 30, June 30, 2006 2005 2006 2005 (In thousands, except per share amounts) Operating revenues $ 559,375 $ 452,788 $ 1,262,178 $ 928,771 Operating expenses $ 506,659 $ 418,032 $ 1,146,775 $ 836,894 Earnings before extraordinary item $ 21,631 $ 12,927 $ 57,512 $ 55,826 Net earnings $ 21,631 $ 12,927 $ 57,512 $ 55,826 Net earnings per common share:

Basic $ 0.31 $ 0.20 $ 0.84 $ 0.89 Diluted $ 0.31 $ 0.19 $ 0.83 $ 0.87

26

(3) Segment Information

The following segment presentation is based on the methodology that the Company’s management uses for making operating decisions

and assessing performance of its various business activities. The following presentation reports operating results without regard to the effect of accounting or regulatory changes and similar other items not related to normal operations. A reconciliation from the segment presentation to the GAAP financial statements is provided.

REGULATED OPERATIONS

PNM Electric

PNM Electric consists of the operations of PNM, a regulated utility. PNM Electric provides integrated electricity services that include

the generation, transmission and distribution of electricity for retail electric customers in New Mexico and the sale of transmission to third parties as well as to the Wholesale and TNMP Electric segments.

TNMP Electric

TNMP Electric consists of the operations of TNMP, a regulated utility. In Texas, TNMP Electric provides regulated transmission and distribution services to its customers which include First Choice. In New Mexico, TNMP Electric provides integrated electricity services that include the transmission, distribution, purchase and sale of electricity to its New Mexico customers as well as transmission to third parties and to PNM. TNMP Electric's Texas and New Mexico operations are subject to traditional cost-of-service regulation.




27

PNM Gas

PNM Gas distributes natural gas to most of the major communities in New Mexico. The customer base of PNM Gas includes both sales-

service customers and transportation-service customers. PNM Gas purchases natural gas in the open market and resells it at cost to its sales-service customers. As a result, increases or decreases in gas revenues resulting from gas price fluctuations do not impact PNMR’s or PNM’s consolidated gross margin or earnings.

UNREGULATED OPERATIONS

Wholesale

For PNMR and PNM, Wholesale consists of the generation and sale of electricity into the wholesale market. Wholesale sells the unused

capacity of PNM's jurisdictional assets as well as the capacity of PNM’s wholesale plants excluded from retail rates. Although the FERC has jurisdiction over the rates of Wholesale, the Company includes Wholesale in the unregulated portion of its business because Wholesale is not subject to traditional rate of return regulation.

The Wholesale segment included in PNMR’s results of operations also includes the results of Altura from the date of acquisition of

Twin Oaks on April 18, 2006 (see Note 2). Altura is not included in the results of operations for PNM. Adjustments related to EITF Issue 03-11, “ Reporting Realized Gains and Losses on Derivative Instruments that are Subject to FASB

Statement No. 133 and Not Held for Trading Purposes ” (“EITF 03-11”), are included in Corporate and Other. This requires a net presentation of trading gains and losses and realized gains and losses for certain non-trading derivatives. Management evaluates Wholesale operations on a gross presentation basis due to its primarily net asset-backed marketing strategy and the importance it places on the Company’s ability to repurchase and remarket previously sold capacity.

First Choice

First Choice is a certified retail electric provider operating in Texas, which allows it to provide electricity to residential, small and large

commercial, industrial and institutional customers. Although First Choice is regulated in certain respects by the PUCT under ERCOT, the Company includes First Choice in the unregulated portion of its business because First Choice is not subject to traditional rate of return regulation.

CORPORATE AND OTHER

PNMR provides energy and technology related services through its wholly owned subsidiary, Avistar, and those results are included in

the Corporate and Other segment. PNMR Services Company is also included in the Corporate and Other segment.




28

PNMR Segment Information

Summarized financial information for PNMR by business segment for the three months ended June 30, 2006 is as follows (in

thousands):




Regulated Unregulated Segments of Business PNM TNMP PNM First Corporate Electric Electric Gas Wholesale Choice & Other Consolidated 2006: Operating revenues $ 144,080 $ 43,437 $ 68,869 $ 141,820 $ 154,908 $ (6,445 ) (a ) $ 546,669

Intersegment revenues 2,256 18,019 92 12,674 - (33,041 ) - Total revenues 146,336 61,456 68,961 154,494 154,908 (39,486 ) 546,669

Less: Cost of energy 43,308 22,652 42,168 119,869 118,073 (39,570 ) (a) 306,500 Intersegment energy

Transfer 8,524 - - (8,524 ) - - - Gross margin 94,504 38,804 26,793 43,149 36,835 84 240,169 Operating expenses 66,564 20,957 25,881 18,380 15,367 2,451 (b) 149,600 Depreciation and

amortization 14,316 7,831 5,994 7,155 510 2,147 37,953 Income taxes 1,852 1,239 (3,236 ) 3,219 7,363 (4,247 ) (b) 6,190 Operating income 11,772 8,777 (1,846 ) 14,395 13,595 (267 ) 46,426 Interest income 6,626 81 468 1,323 116 302 8,916 Other income/(deductions) 216 2,097 (11 ) 330 (225 ) (1,110 ) 1,297 Other income taxes (2,709 ) (847 ) (181 ) (654 ) 42 515 (3,834 ) Interest charges (8,946 ) (7,271 ) (3,091 ) (9,512 ) (248 ) (7,430 ) (36,498 )

Segment net income (loss) $ 6,959 $ 2,837 $ (4,661 ) $ 5,882 $ 13,280 $ (7,990 ) $ 16,307 Gross property additions $ 46,114 $ 10,936 $ 9,633 $ 5,797 $ - $ 4,267 $ 76,747 At June 30, 2006: Total assets $ 1,935,934 $ 1,131,593 $ 616,678 $ 1,082,632 $ 374,640 $ 596,066 $ 5,737,543 Goodwill $ - $ 363,763 $ - $ - $ 131,678 $ - $ 495,441

(a) Reflects EITF 03-11 impact, under which wholesale revenues and the associated cost of energy of $6.6 million are reclassified to a net margin basis in accordance with GAAP.

(b) Includes TNP and Twin Oaks acquisition integration costs of $1.8 million and an income tax benefit of $0.7 million in income taxes.

29

Summarized financial information for PNMR by business segment for the three months ended June 30, 2005 is as follows (in thousands):




Regulated Unregulated Segments of Business PNM TNMP PNM First Corporate Electric Electric* Gas Wholesale Choice* & Other Consolidated 2005: Operating revenues $ 137,314 $ 12,684 $ 82,261 $ 139,273 $ 43,031 $ (9,309 ) (a) $ 405,254



transfer (3,412 ) - - 3,412 - - - Gross margin 97,195 12,533 29,092 19,217 8,948 78 167,063 Operating expenses 65,786 5,086 24,234 11,080 3,197 8,830 (b) 118,213 Depreciation and

amortization 17,495 2,085 5,596 4,041 105 6,315 (c) 35,637 Income taxes 2,155 1,175 (1,442 ) 44 2,020 (7,319 ) (b,c,e) (3,367 )

Operating income 11,759 4,187 704 4,052 3,626 (7,748 ) 16,580 Interest income 6,473 87 487 1,303 161 3,111 11,622 Other income/(deductions) 1,020 625 408 405 (15 ) (2,894 ) (d) (451 )

Other income taxes (2,967 ) (314 ) (354 ) (677 ) (51 ) (314 ) (d) (4,677 ) Interest charges (8,471 ) (1,956 ) (2,905 ) (3,987 ) (28 ) (4,186 ) (e) (21,533 )

Segment net income (loss) $ 7,814 $ 2,629 $ (1,660 ) $ 1,096 $ 3,693 $ (12,031 ) $ 1,541 Gross property additions $ 26,091 $ 1,685 $ 9,774 $ 2,855 $ 46 $ 9,805 $ 50,256 At December 31, 2005: Total assets $ 1,937,811 $ 1,169,090 $ 721,021 $ 421,377 $ 318,820 $ 556,590 $ 5,124,709 Goodwill $ - $ 367,245 $ - $ - $ 131,910 $ - $ 499,155


(b) Includes acquisition related costs of $4.6 million and regulatory costs of $2.3 million in operating expenses and an income tax benefit of $2.7 million in income taxes associated with the NMPRC’s approval of the TNP acquisition.

(c) Includes a write-off of software costs of $4.5 million in depreciation and amortization expense and an income tax benefit of $1.8 million in the income taxes.

(d) Includes income from proceeds earned on the TNP debt refinancing of $1.3 million and an income tax expense of $0.5 million in the income taxes.

(e) Includes TNP debt refinancing costs of $4.9 million in interest charges and an income tax benefit of $1.8 million in income taxes.

* Includes results from June 6 through June 30, 2005

30

Summarized financial information for PNMR by business segment for the six months ended June 30, 2006 is as follows (in thousands):




Regulated Unregulated Segments of Business PNM TNMP PNM First Corporate Electric Electric Gas Wholesale Choice & Other Consolidated 2006: Operating revenues $ 280,676 $ 90,406 $ 276,345 $ 306,131 $ 259,990 $ (11,078 ) (a) $ 1,202,470

Intersegment revenues 4,438 33,735 141 27,851 - (66,165 ) - Total revenues 285,114 124,141 276,486 333,982 259,990 (77,243 ) 1,202,470


transfer 3,346 - - (3,346 ) - - - Gross margin 192,986 74,318 76,627 74,582 51,582 (97 ) 469,998 Operating expenses 133,718 42,489 50,971 30,165 28,545 2,618 (b) 288,506 Depreciation and

amortization 29,288 15,563 11,914 10,316 1,008 4,194 72,283 Income taxes 4,924 566 3,030 8,233 7,663 (7,979 ) (b) 16,437 Operating income (loss) 25,056 15,700 10,712 25,868 14,366 1,070 92,772 Interest income 13,137 336 1,733 2,602 508 751 19,067 Other income/(deductions) 414 4,226 90 1,036 (235 ) (742 ) 4,789 Other income taxes (5,365 ) (1,759 ) (722 ) (1,440 ) (97 ) 448 (8,935 ) Interest charges (17,543 ) (14,498 ) (6,088 ) (13,333 ) (472 ) (13,127 ) (65,061 )

Segment net income $ 15,699 $ 4, 005 $ 5,725 $ 14,733 $ 14,070 $ (11,600 ) $ 42,632 Gross property additions $ 76,430 $ 18,152 $ 13,998 $ 9,548 $ 297 $ 10,143 $ 128,568 At June 30, 2006: Total assets $ 1,935,934 $ 1,131,593 $ 616,678 $ 1,082,632 $ 374,640 $ 596,066 $ 5,737,543 Goodwill $ - $ 363,763 $ - $ - $ 131,678 $ - $ 495,441


(b) Includes TNP and Twin Oaks acquisition integration costs of $2.8 million and an income tax benefit of $1.1 million in income taxes.

31

Summarized financial information for PNMR by business segment for the six months ended June 30, 2005 is as follows (in thousands):




Regulated Unregulated Segments of Business PNM TNMP PNM First Corporate Electric Electric* Gas Wholesale Choice* & Other Consolidated 2005: Operating revenues $ 269,805 $ 12,684 $ 247,494 $ 271,277 $ 43,031 $ (11,124 ) (a) $ 833,167



transfer (17,535 ) - - 17,535 - - - Gross margin 198,097 12,533 79,943 47,786 8,948 191 347,498 Operating expenses 129,123 5,086 48,325 21,968 3,197 10,789 (b) 218,488 Depreciation and

amortization 35,053 2,085 11,172 8,028 105 8,021 (c) 64,464 Income taxes 6,654 1,175 5,787 3,875 2,020 (9,487 ) (b,c,e) 10,024 Operating income (loss) 27,267 4,187 14,659 13,915 3,626 (9,132 ) 54,522 Interest income 13,689 87 1,243 2,647 161 3,095 20,922 Other income/(deductions) 1,577 625 485 1,338 (15 ) (3,019 ) (d) 991 Other income taxes (6,044 ) (314 ) (684 ) (1,578 ) (51 ) 110 (d) (8,561 ) Interest charges (17,114 ) (1,956 ) (5,829 ) (8,003 ) (28 ) (2,894 ) (e) (35,824 )

Segment net income $ 19,375 $ 2,629 $ 9,874 $ 8,319 $ 3,693 $ (11,840 ) $ 32,050 Gross property additions $ 40,715 $ 1, 685 $ 18,721 $ 4,169 $ 46 $ 14,613 $ 79,949 At December 31, 2005: Total assets $ 1,937,811 $ 1,169,090 $ 721,021 $ 421,377 $ 318,820 $ 556,590 $ 5,124,709 Goodwill $ - $ 367,245 $ - $ - $ 131,910 $ - $ 499,155




(d) Includes income from proceeds earned on the TNP debt refinancing of $1.3 million and an income tax expense of $0.5 million in the income taxes.

(e) Includes TNP debt refinancing costs of $4.9 million in interest charges and an income tax benefit of $1.8 million in income taxes.

* Includes results from June 6 through June 30, 2005

32

PNM Segment Information

Summarized financial information for PNM by business segment for the three months ended June 30, 2006 is as follows (in thousands):




Segments of Business PNM PNM PNM Electric Gas Wholesale Other Consolidated 2006: Operating revenues $ 144,080 $ 68,869 $ 109,063 $ (6,642 ) (a) $ 315,370

Intersegment revenues 2,256 92 12,674 (2,225 ) 12,797 Total revenues 146,336 68,961 121,737 (8,867 ) 328,167

Less: Cost of energy 43,308 42,168 108,756 (8,822 ) (a) 185,410 Intersegment energy transfer 8,524 - (8,524 ) - -

Gross margin 94,504 26,793 21,505 (45 ) 142,757 Operating expenses 66,564 25,881 14,928 (443 ) 106,930 Depreciation and amortization 14,316 5,994 3,191 788 24,289 Income taxes 1,852 (3,236 ) (180 ) 310 (1,254 )

Operating income 11,772 (1,846 ) 3,566 (700 ) 12,792 Interest income 6,626 468 1,276 300 8,670 Other income/(deductions) 216 (11 ) 315 (451 ) 69 Other income taxes (2,709 ) (181 ) (630 ) 76 (3,444 ) Interest charges (8,946 ) (3,091 ) (3,842 ) 980 (14,899 )

Segment net income $ 6,959 $ (4,661 ) $ 685 $ 205 $ 3,188 Gross property additions $ 46,114 $ 9,633 $ 5,797 $ (342 ) $ 61,202 At June 30, 2006: Total assets $ 1,943,340 $ 616,678 $ 410,579 $ 485,720 $ 3,456,317


33

Summarized financial information for PNM by business segment for the three months ended June 30, 2005 is as follows (in thousands):






Less: Cost of energy 44,998 53,292 119,653 (11,145 ) (a) 206,798 Intersegment energy transfer (3,412 ) - 3,412 - -

Gross margin 97,195 29,092 19,217 (36 ) 145,468 Operating expenses 65,786 24,234 11,080 2,559 (b) 103,659 Depreciation and amortization 17,495 5,596 4,041 5,285 (c) 32,417 Income taxes 2,155 (1,442 ) 44 (2,434 ) (b,c) (1,677 )

Operating income 11,759 704 4,052 (5,446 ) 11,069 Interest income 6,473 487 1,303 834 9,097 Other income/(deductions) 1,020 408 405 (644 ) 1,189 Other income taxes (2,967 ) (354 ) (677 ) (222 ) (4,220 ) Interest charges (8,471 ) (2,905 ) (3,987 ) 2,226 (13,137 )

Segment net income $ 7,814 $ (1,660 ) $ 1,096 $ (3,252 ) $ 3,998 Gross property additions $ 26,091 $ 9,774 $ 2,855 $ (3,822 ) $ 34,898 At December 31, 2005: Total assets $ 1,937,811 $ 721,021 $ 421,377 $ 507,542 $ 3,587,751




34

Summarized financial information for PNM by business segment for the six months ended June 30, 2006 is as follows (in thousands):






Less: Cost of energy 88,782 199,859 251,633 (15,602 ) (a) 524,672 Intersegment energy transfer 3,346 - (3,346 ) - -

Gross margin 192,986 76,627 52,938 (113 ) 322,438 Operating expenses 133,718 50,971 26,713 (2,137 ) 209,265 Depreciation and amortization 29,288 11,914 6,352 1,590 49,144 Income taxes 4,924 3,030 4,834 920 13,708 Operating income (loss) 25,056 10,712 15,039 (486 ) 50,321 Interest income 13,137 1,733 2,555 598 18,023 Other income/(deductions) 414 90 1,021 (611 ) 914 Other income taxes (5,365 ) (722 ) (1,416 ) 48 (7,455 ) Interest charges (17,543 ) (6,088 ) (7,663 ) 2,975 (28,319 )

Segment net income $ 15,699 $ 5,725 $ 9,536 $ 2,524 $ 33,484 Gross property additions $ 76,430 $ 13,998 $ 9,548 $ 32 $ 100,008 At June 30, 2006: Total assets $ 1,943,340 $ 616,678 $ 410,579 $ 485,720 $ 3,456,317


35

Summarized financial information for PNM by business segment for the six months ended June 30, 2005 is as follows (in thousands):

TNMP

TNMP operates in only one reportable segment; therefore tabular presentation of segment data is not required.




Segments of Business PNM PNM PNM Electric Gas Wholesale Other Consolidated 2005: Operating revenues $ 269,805 $ 247,494 $ 271,277 $ (11,679 ) (a) $ 776,897 Intersegment revenues 3,158 176 3,009 (3,298 ) 3,045 Total revenues 272,963 247,670 274,286 (14,977 ) 779,942

Less: Cost of energy 92,401 167,727 208,965 (14,883 ) (a) 454,210 Intersegment energy transfer (17,535 ) - 17,535 - -

Gross margin 198,097 79,943 47,786 (94 ) 325,732 Operating expenses 129,123 48,325 21,968 3,110 (b) 202,526 Depreciation and amortization 35,053 11,172 8,028 6,109 (c) 60,362 Income taxes 6,654 5,787 3,875 (3,350 ) (b,c) 12,966 Operating income (loss) 27,267 14,659 13,915 (5,963 ) 49,878 Interest income 13,689 1,243 2,647 724 18,303 Other income/(deductions) 1,577 485 1,338 (231 ) 3,169 Other income taxes (6,044 ) (684 ) (1,578 ) 245 (8,061 ) Interest charges (17,114 ) (5,829 ) (8,003 ) 4,009 (26,937 )

Segment net income $ 19,375 $ 9,874 $ 8,319 $ (1,216 ) $ 36,352 Gross property additions $ 40,715 $ 18,721 $ 4,169 $ (3,718 ) $ 59,887 At December 31, 2005: Total assets $ 1,937,811 $ 721,021 $ 421,377 $ 507,542 $ 3,587,751




36

(4) Fair Value of Commodity Financial Instruments

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 PNM’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 details regarding interest rate swaps that PNMR and PNM have entered into.

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 purchases 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 used to serve customer load. 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 and TNMP enter into as described below, two other subsidiaries of PNMR enter

into commodity transactions.

Normal Sales and Purchases Transactions PNMR’s subsidiary, First Choice, enters into physical energy contracts to meet the needs of its competitive and price-to-beat customer

load. These contracts qualify for “normal” accounting designation pursuant to SFAS No. 133, “ Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as the energy purchased is physically delivered and sold to First Choice customers within ERCOT. Expenses related to these purchases are recorded in cost of energy at the time of delivery.

PNMR’s subsidiary, Altura, at the time of acquisition of Twin Oaks (see Note 2), assumed an existing contract for the energy output

of the Twin Oaks facility. This contract qualifies for “normal” accounting designation pursuant to SFAS 133, as the energy sold is physically delivered within ERCOT to meet the needs of the purchaser's load requirements. Revenue related to this sale is recorded in electric revenues at the time of delivery.




37

Hedge Accounting Transactions

First Choice also enters into natural gas transactions to hedge the variable component of certain heat-rate power products used to serve customer load. These products are priced based on gas to power conversion rates using the spot price for natural gas. The contracts qualify for hedge accounting treatment under SFAS 133 and there is no hedge ineffectiveness on these transactions because the underlying contract and the derivative instrument are both indexed to the NYMEX rates. Any market changes in valuation are recorded in other comprehensive income. The maximum length of time over which First Choice is hedging its exposure to the variability in future cash flows is December 2006.

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 Altura’s 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. The value of the electricity hedge is recorded in other deferred charges. 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 Altura is hedging its exposure to the variability in future cash flows is through September 2010.

Mark-to-Market Transactions

Electricity Contracts

First Choice enters into various forward physical contracts for the purchase and sale of electricity with the intent of optimizing market opportunities. These contracts, which are derivatives, do not qualify for “normal” or “hedge” designation pursuant to SFAS 133, and are marked to market. The change in market valuation is recognized in earnings each period.

Gas Contracts

First Choice enters into various gas contracts to optimize market opportunities. These contracts are marked to market in accordance with SFAS 133. The change in market valuation is recognized in earnings each period.




38

PNMR’s commodity derivative instruments are summarized as follows:

Gains or losses are reclassified from accumulated other comprehensive income when the hedged transaction settles and impacts

earnings. The amount which will be reclassified in the next twelve months represents the net of current assets and current liabilities, excluding the PGAC, in the above table.




June 30, December 31, June 30, December 31, 2006 2005 2006 2005 Type of Derivative Mark-to-Market Instruments Hedge Instruments (In thousands) Current Assets

Energy Contracts $ 25,967 $ 11,650 $ 252 $ 6,616 Gas fixed for float swaps 11,231 6,488 3,990 10,465 Options 1,751 3,746 - 261 PGAC portion of options, swaps and hedges - - 3,412 7,528

Total Current Assets 38,949 21,884 7,654 24,870 Deferred Charges

Energy Contracts 2,477 3,477 6,090 - Gas fixed for float swaps 768 12,459 2,056 13,614 Options 1,515 5,329 - - PGAC portion of options, swaps and hedges - - 1,622 (5,906 )

Total Deferred Charges 4,760 21,265 9,768 7,708 Total Assets $ 43,709 $ 43,149 $ 17,422 $ 32,578 Current Liabilities

Energy Contracts $ (23,815 ) $ (7,333 ) $ (209 ) $ (503 ) Gas fixed for float swaps (11,607 ) (7,151 ) (5,410 ) (3,970 ) Options (1,362 ) (3,293 ) (8,286 ) (844 ) PGAC portion of options, swaps and hedges - - (3,412 ) 3,942

Total Current Liabilities (36,784 ) (17,777 ) (17,317 ) (1,375 )

Long-Term Liabilities

Energy Contracts (2,623 ) (3,444 ) (1,008 ) - Gas fixed for float swaps (354 ) (12,257 ) (221 ) - Options (1,284 ) (5,143 ) - - PGAC portion of options, swaps and hedges - - (1,622 ) (5,564 )

Total Long-Term Liabilities (4,261 ) (20,844 ) (2,851 ) (5,564 )

tTTo tal Liabilities $ (41,045 ) $ (38,621 ) $ (20,168 ) $ (6,939 )

39

The following table details the changes in the net asset or liability position from one period to the next for mark to market energy transactions for the operations of First Choice and Wholesale:

The net change in fair value on PNMR’s commodity derivative instruments designated as hedging instruments are summarized as

follows:

PNM Normal Sales and Purchases Transactions

PNM enters into physical gas contracts to meet the needs of its gas retail sales-service customers. These contracts qualify for “normal”

accounting designations pursuant to SFAS 133 as the gas is physically delivered and sold to end-use customers. 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 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.




Three Months Ended June 30, Six Months Ended June 30, 2006 2005 2006 2005 (In thousands) Amount realized on contracts delivered

during period $ (3,966 ) $ (322 ) $ (4,108 ) $ (254 ) Changes in fair value 308 211 2,244 1,066 Net change recorded as mark-to-market $ (3,658 ) $ (111 ) $ (1,864 ) $ 812

Three Months Ended June 30, Six Months Ended June 30, 2006 2005 2006 2005 Type of Derivative Hedge Instruments (In thousands) Change in fair value of energy contracts $ 6,557 $ 1,127 $ (988 ) $ (2,194 ) Change in fair value of gas fixed for float swaps (6,133 ) 3,310 (19,694 ) 9,530 Change in the fair value of options (2,401 ) 583 (7,703 ) 583 Net change in fair value $ (1,977 ) $ 5,020 $ (28,385 ) $ 7,919

40

Hedge Accounting Transactions

PGAC The NMPRC has authorized PNM to use financial instruments to hedge certain portions of natural gas supply contracts during the winter

months to protect PNM’s sales-service gas customers from the risk of adverse price fluctuations in the natural gas market. PNM has elected to use call options and financial swaps to hedge certain portions of the physical gas purchase contracts used exclusively for resale to PNM’s sales-service gas customers. The contracts qualify for hedge accounting treatment under SFAS 133. Option premium expenses are deferred on PNM’s balance sheet as prepaid gas costs as incurred and amortized into the PGAC for recovery as a component of gas costs during the winter heating season. Option premium expense and hedge gains and losses from both types of instruments are passed through PNM’s PGAC with no income statement effect if deemed prudently incurred by the NMPRC.

PNM also enters into financial swaps to hedge the variable portion of its winter gas portfolio. PNM has hedged 13.2 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.

Gas Off-System Sales

PNM enters into physical and financial swaps to hedge the variable component of its physical natural gas purchases and sales. Both the hedges and the underlying contracts are indexed to the NYMEX rates, and the price movements in the financial transactions offset price movements in the underlying contracts. The hedges are based on prices for spot gas delivered to pipelines at basins within the state of New Mexico. The hedges are effective in offsetting future cash flow volatility caused by changes in natural gas prices. These hedges qualify as cash flow hedges pursuant to SFAS 133. The value of the natural gas hedges are recorded in other current assets. Valuation prior to settlement and eventual settled margins from these types of transactions are shared on a 70%/30% basis with PNM’s customers and PNM, respectively. The eventual settled margins from the 70% of these transactions are returned to PNM’s customers. The maximum length of time over which PNM is hedging its exposure to the variability in future cash flows is through December 2006.

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. The value of the electricity hedges are recorded in other deferred charges. 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.

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 increases in natural gas prices. There is no hedge ineffectiveness on these transactions because the hedged transactions and the hedged item are based on the same forward curve. Any market changes in valuation are recorded in other comprehensive income. The maximum length of time over which PNM is hedging its exposure to the variability in future cash flows is through June 2016.




41

Mark-to-Market Transactions

Wholesale Electricity

PNM enters into various forward physical contracts for the purchase and sale of electricity with the intent of optimizing market opportunities. These contracts, which are derivatives, do not qualify for “normal” or “hedge” designation pursuant to SFAS 133, and are marked to market. The change in market valuation is recognized in earnings each period.

Wholesale Gas PNM enters into various fixed-for-float price swaps to manage the price risk of certain forward sales of power. These contracts, along

with the underlying power sales, are marked to market in accordance with GAAP. The change in mark-to-market valuation is recognized in earnings each period and is recorded in operating revenues, if a sales position, and cost of energy, if a purchase position, as applicable. The change in market valuation is recognized in earnings each period.




42

PNM’s commodity derivative instruments are summarized as follows:

Gains or losses are reclassified from accumulated other comprehensive income when the hedged transaction settles and impacts

earnings. The amount which will be reclassified in the next twelve months represents the net of current assets and current liabilities, excluding the PGAC in the above table.




June 30, December 31, June 30, December 31, 2006 2005 2006 2005 Type of Derivative Mark-to-Market Instruments Hedge Instruments (In thousands) Current Assets

Energy Contracts $ 13,314 $ 6,126 $ 252 $ 6,616 Gas fixed for float swaps 1,037 2,074 3,990 9,150 Options 748 2,136 - - PGAC portion of options, swaps and hedges - - 3,412 7,528

Total Current Assets 15,099 10,336 7,654 23,294 Deferred Charges

Energy Contracts 1,886 3,477 - - Gas fixed for float swaps 535 12,459 2,056 13,614 Options 1,515 5,329 - - PGAC portion of options, swaps and hedges - - 1,622 (5,906 )

Total Deferred Charges 3,936 21,265 3,678 7,708 Total Assets $ 19,035 $ 31,601 $ 11,332 $ 31,002 Current Liabilities

Energy Contracts $ (14,628 ) $ (5,931 ) $ (209 ) $ (503 ) Gas fixed for float swaps (187 ) (351 ) (1,090 ) (1,255 ) Options (363 ) (2,217 ) - - PGAC portion of options, swaps and hedges - - (3,412 ) 3,942

Total Current Liabilities (15,178 ) (8,499 ) (4,711 ) 2,184 Long-Term Liabilities

Energy Contracts (2,280 ) (3,444 ) (1,008 ) - Gas fixed for float swaps - (12,257 ) (221 ) - Options (1,284 ) (5,143 ) - - PGAC portion of options, swaps and hedges - - (1,622 ) (5,564 )

Total Long-Term Liabilities (3,564 ) (20,844 ) (2,851 ) (5,564 )

tTTo tal Liabilities $ (18,742 ) $ (29,343 ) $ (7,562 ) $ (3,380 )

43

The following table details the changes in the net asset or liability position from one period to the next for mark to market energy transactions for the operations of Wholesale:

The net change in fair value on PNM’s commodity derivative instruments designated as hedging instruments are summarized as

follows:

TNMP Normal Sales and Purchases Transactions

In the normal course of business, TNMP enters into commodity contracts, which include components for additional purchases or sales of electricity, in order to meet customer requirements. Criteria by which option-type and forward contracts for electricity can qualify for the normal purchase and sales exception have been defined by SFAS 133. In accordance with SFAS 133, management has determined that its contracts for electricity qualify for the normal purchases and sales exception. Revenue related to sales of electricity is recorded in electric revenues at the time of delivery. Expenses related to purchases of electricity are recorded in cost of energy at the time of delivery.




Three Months Ended June 30, Six Months Ended June 30, 2006 2005 2006 2005 (In thousands) Amount realized on contracts delivered

during period $ (658 ) $ (322 ) $ (85 ) $ (254 ) Changes in fair value (1,811 ) 211 (1,880 ) 1,066 Net change recorded as mark-to-market $ (2,469 ) $ (111 ) $ (1,965 ) $ 812

Three months ended June 30, Six months ended June 30, 2006 2005 2006 2005 Type of Derivative Hedge Instruments (In thousands) Change in fair value of energy contracts $ 466 $ 1,127 $ (7,078 ) $ (2,194 ) Change in fair value of gas fixed for float swaps (2,019 ) 2,510 (16,774 ) 8,730 Net change in fair value $ (1,553 ) $ 3,637 $ (23,852 ) $ 6,536

44

In accordance with SFAS No. 128, “ Earnings per Share,” dual presentation of basic and diluted earnings per share has been presented

in the Condensed Consolidated Statements of Earnings. The following reconciliation illustrates the impact on the share amounts of potential common shares and the earnings per share amounts:

PNMR has various types of stock-based compensation programs, including stock options, restricted stock and performance shares

granted under the PEP. PNMR also has an ESPP. All stock-based compensation is granted through stock-based employee compensation plans maintained by PNMR. Although certain PNM and TNMP employees participate in the PNMR plans, PNM and TNMP do not have separate employee stock-based compensation plans. Readers should refer to Note 13 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K/A (Amendment No. 2) for the year ended December 31, 2005 for additional information on these plans.




(5) Earnings Per Share

Three Months Ended Six Months Ended June 30, June 30, 2006 2005 2006 2005 (In thousands, except per share amounts) Basic: Net Earnings $ 16,307 $ 1,541 $ 42,632 $ 32,050 Average Number of Common Shares Outstanding 68,852 65,534 68,819 63,057 Net Earnings per Share of

Common Stock (Basic) $ 0.24 $ 0.02 $ 0.62 $ 0.51 Diluted: Net Earnings $ 16,307 $ 1,541 $ 42,632 $ 32,050 Average Number of Common Shares Outstanding 68,852 65,534 68,819 63,057 Dilutive Effect of Common Stock

Equivalents (a) 581 955 530 953 Average Common and Common

Equivalent Shares Outstanding 69,433 66,489 69,349 64,010 Net Earnings per Share of Common

Stock (Diluted) $ 0.23 $ 0.02 $ 0.61 $ 0.50

(a) Excludes the effect of average anti-dilutive common stock equivalents related to out-of-the-money options of 661,855 and 4,154 for the three months and 736,869 and 232,006 for the six months ended June 30, 2006 and 2005, respectively. Excludes the effect of anti-dilutive equity-linked units of 4,945,000 for the three and six months ended June 30, 2006 and 2005 (see Note 7).

(6) Stock-Based Compensation

45

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment ” ("SFAS 123R"), utilizing the

modified prospective approach. Prior to the adoption of SFAS 123R, stock option grants, performance shares and ESPP issuances were accounted for in accordance with the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and accordingly, no compensation expense was recognized for these awards. Restricted stock was also accounted for under APB 25 and compensation expense was recognized for restricted stock awards prior to the adoption of SFAS 123R. “Restricted stock” is the name of these awards provided for in the PEP and refers to awards of stock subject to vesting. It does not refer to restricted shares with contractual post-vesting restrictions as defined in SFAS 123R.

Under the modified prospective approach, SFAS 123R applies to all new awards and to awards that were outstanding on January 1, 2006

that are subsequently modified, repurchased or cancelled. Compensation expense recognized in 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and compensation expense for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Prior periods were not restated to reflect the impact of adopting the new standard.

The unearned stock-based compensation related to stock options and restricted stock awards is being amortized to compensation

expense over the requisite vesting period, which is generally equally over three years. However, plan provisions provide that upon retirement, participants become 100% vested in stock options and restricted stock awards; therefore, in accordance with SFAS 123R, compensation expense for stock options and restricted stock awards to participants that are retirement eligible on the grant date is recognized immediately at the grant date and is not amortized over a period of time.

Total compensation expense for stock-based payment arrangements recognized by PNMR for the three and six months ended June 30,

2006 was $1.1 million and $5.5 million, respectively. Of this total expense, $0.9 million and $4.2 million was allocated to PNM for the three and six months ended June 30, 2006, respectively, and $0.2 million and $0.9 million was allocated to TNMP for the three and six months ended June 30, 2006, respectively. No compensation expense was recognized by PNMR, PNM or TNMP for the three or six months ended June 30, 2005.

The total tax benefit recognized by PNMR for the three and six months ended June 30, 2006 was $0.5 million and $2.2 million,

respectively. At June 30, 2006, PNMR had approximately $6.0 million of unrecognized compensation expense related to stock-based payments that is expected to be recognized over a weighted-average period of 1.5 years.

PNMR receives a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of

the price at which the options are sold over the exercise prices of the options and a tax deduction for increases in the value of equity instruments issued under stock-based payment arrangements. Prior to the adoption of SFAS 123R, all tax benefits resulting from the exercise of stock options and stock-based payment arrangements were reported as operating cash flows in the Condensed Consolidated Statements of Cash Flows. In accordance with SFAS 123R, for the six months ended June 30, 2006, PNMR’s Condensed Consolidated Statements of Cash Flows presentation reports the tax benefits from the exercise of stock options and stock-based payments as financing cash flows. For the six months ended June 30, 2006, $0.9 million of tax benefits were reported as financing cash flows rather than operating cash flows in PNMR’s Condensed Consolidated Statements of Cash Flows.

All stock incentives (options, restricted stock and performance shares) issued to employees and non-employee directors are awarded

according to the applicable plan terms. The source of shares for exercised stock options, delivery of vested restricted stock and performance shares is shares acquired on the open market, rather than newly issued shares. During 2006, PNMR expects to repurchase between 1,200,000 shares and 2,000,000 shares for these awards using an independent broker. The source of shares for the ESPP is primarily newly issued shares.




46

The following table illustrates the reduction to PNMR’s earnings and basic and diluted earnings per share due to the adoption of SFAS 123R for the three and six months ended June 30, 2006:

The following table illustrates the effect on PNMR’s net earnings and diluted earnings per share had PNMR accounted for stock-based

compensation in accordance with SFAS No. 123, “Share-Based Payment ” for the three and six months ended June 30, 2005:




Three Months

Ended Six Months

Ended June 30, 2006

(In thousands, except per

share amounts) Reduction - PNMR income from operations $ 807 $ 3,515 Reduction - PNMR income before income taxes $ 807 $ 3,515 Reduction - PNMR net earnings $ 492 $ 2,142 Reduction - PNMR earnings per share

Basic $ 0.01 $ 0.03 Diluted $ 0.01 $ 0.03

Three Months Ended

Six Months Ended

June 30, 2005

(In thousands, except per

share amounts) Net earnings $ 1,541 $ 32,050 Add: Stock compensation expense included

in reported income, net of related tax effects - - Deduct: Total stock-based employee

compensation expense determined under fair value based method for all awards, net of related tax effects (346 ) (693 )

Pro forma net earnings $ 1,195 $ 31,357 Earnings per share:

Basic - as reported $ 0.02 $ 0.51

Basic - pro forma $ 0.02 $ 0.50

Diluted - as reported $ 0.02 $ 0.50

Diluted - pro forma $ 0.02 $ 0.49

47

Stock Options

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards with the following

weighted-average assumptions for the indicated periods:

The assumptions above are based on multiple factors, including historical exercise patterns of employees in relatively homogeneous

groups with respect to exercise and post-vesting employment termination behaviors, expected future exercising patterns for these same homogeneous groups and both the implied and historical volatility of PNMR’s stock price.

The following table represents stock option activity for the six months ended June 30, 2006:




Six Months Ended June 30, 2006 2005 Dividend yield 3.33% 2.55% Expected volatility 21.70% 24.29% Risk-free interest rate 4.37% 3.79% Expected life of option (years) 4.14 4.23

Weighted- Weighted- Average Aggregate Average Exercise Intrinsic Remaining

Stock Options Shares Price Value Contract Life (In thousands, except share and per share amounts) Outstanding at beginning of period 3,016,549 $ 18.97 Granted 817,200 $ 24.07 Exercised (268,576 ) $ 15.59 Forfeited or expired (79,294 ) $ 21.53 Outstanding at end of period 3,485,879 $ 20.37 $ 16,000 7.44 Years Options exercisable at end of period 2,057,966 $ 17.51 $ 15,331 6.29 Years Options available for future grant 3,325,987

48

The following table summarizes stock option activity for the six months ended June 30:

Restricted Stock

The PEP, described in Note 13 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K/A (Amendment No. 2) for the year ended December 31, 2005, allows for the issuance of restricted stock awards. As noted above, “restricted stock” is the name of these awards provided for in the PEP and refers to awards of stock subject to vesting. It does not refer to restricted shares with contractual post-vesting restrictions as defined in SFAS 123R. The compensation expense for these awards was determined based on the market price of PNMR stock on the date of grant reduced by the present value of future dividends applied to the total number of shares that were anticipated to fully vest and then amortized over the vesting period.

The Company estimates the fair value of restricted stock awards based on the market price of PNMR common stock on the date of grant

reduced by the present value of estimated future dividends with the following weighted-average assumptions for the indicated periods:




Stock Options 2006 2005

(In thousands,

except per share amounts) Weighted-average grant date fair value of options granted $ 3.87 $ 5.41 Total fair value of options that vested during the period $ 4,632 $ 4,322 Total intrinsic value of options exercised during the period $ 2,556 $ 11,547

Six Months Ended June 30, 2006 2005 Expected quarterly dividends per share $0.20 N/A Risk-free interest rate 4.64% N/A

49

The following table summarizes nonvested restricted stock activity for the six months ended June 30, 2006:

The following table summarizes restricted stock activity for the six months ended June 30:

Performance Shares

The PEP allows for the issuance of performance share awards. Under the provisions of SFAS 123R, the compensation expense for these awards was determined based on the market price of PNMR common stock on the date of grant applied to the total numbers of shares that were anticipated to be awarded.

ESPP

Under the ESPP, employees were allowed to purchase shares of PNMR’s common stock at a 15% discount of the lower of the market price of stock at the beginning of the offering period and end of each purchase period for the six months ended June 30, 2006. Under the provisions of SFAS 123R, the compensation expense for the shares issued under the ESPP was determined based on the fair value of PNMR's common stock using the Black-Scholes model. Beginning July 1, 2006, the discount rate was changed to 5%, and the look-back feature was eliminated; therefore, the plan is no longer considered compensatory.




Weighted- Average Grant-Date

Nonvested Restricted Stock Shares Fair Value Nonvested at beginning of period 109,044 $ 24.92 Granted 105,400 $ 21.86 Vested (39,571 ) $ 24.69 Forfeited (6,684 ) $ 22.35 Nonvested at end of period 168,189 $ 23.17

Nonvested Restricted Stock 2006 2005

(In thousands,

except per share amounts) Weighted-average grant date fair value of shares granted $ 21.86 $ 26.80 Total fair value of shares that vested during the period $ 977 $ 276

50

PNMR Long-Term Debt

See “PNM” below for details about the April 2006 remarketing of PNM’s pollution control revenue bonds.

Revolving and Other Credit Facilities

PNMR has a $600.0 million unsecured revolving credit facility (the “PNMR Facility”). The PNMR Facility has an expiration date of August 15, 2010 and includes two one-year extension options that are subject to approval by a majority of the lenders. At June 30, 2006, there were no outstanding borrowings under the PNMR Facility; however, $107.7 million of letters of credit are outstanding, which reduces the available capacity under the PNMR Facility.

At June 30, 2006, PNMR also had $15.0 million in local lines of credit. There were no outstanding borrowings under the local lines of

credit at June 30, 2006. PNMR has a commercial paper program under which it may issue up to $400.0 million in commercial paper for up to 270 days. The

commercial paper is unsecured and the proceeds are used for short-term cash management needs. The PNMR Facility serves as a backstop for the outstanding commercial paper. At June 30, 2006, PNMR had $126.3 million of commercial paper outstanding.

At June 30, 2006, First Choice had up to $300.0 million of borrowing capacity under the PNMR Facility. Any borrowings made by First

Choice under this sublimit are guaranteed by PNMR. At June 30, 2006, First Choice had no outstanding borrowings under the PNMR Facility. In addition, at June 30, 2006, First Choice had $5.5 million of letters of credit outstanding, which reduces the available capacity under the PNMR Facility. TNMP is also a borrower under the PNMR Facility (see “TNMP” below).

Financing Activities

On April 18, 2006, PNMR entered into a short-term loan agreement for temporary financing of the Twin Oaks acquisition (see Note 2).

Under the term loan agreement, PNMR was permitted to borrow up to $480.0 million in a single draw on or after April 18, 2006, to finance the acquisition of Twin Oaks and related expenses. Term loans made under this agreement bear interest at a base rate (the greater of the prime rate in effect and the Federal Funds rate plus ½ of 1%) or an adjusted Eurodollar rate (equal to the British Bankers Association LIBOR rate plus an additional percentage based on PNMR’s then current long-term senior unsecured non-credit enhanced debt rating). On April 18, 2006, PNMR borrowed $480.0 million under the term loan agreement. PNMR used the proceeds of the loan to make capital contributions totaling $480.0 million to Altura through the two wholly owned subsidiaries that are partners in Altura to provide the funds for the acquisition of Twin Oaks. PNMR must repay the loan by April 17, 2007, unless accelerated in accordance with the terms of the agreement or prepaid in whole or in part upon the issuance of certain additional equity or debt.

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 June 30, 2006, PNMR had approximately $400.0 million of remaining unissued securities under this registration statement.




(7) Capitalization

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PNMR has entered into three fixed-to-floating interest rate swaps with an aggregate notional principal amount of $150.0 million. Under these swaps, PNMR receives a 4.40% fixed interest payment on the notional principal amount on a semi-annual basis and pays a floating rate equal to the six month LIBOR plus 58.15 basis points (0.5815%) on the notional amount through September 15, 2008. The initial floating rate was 1.91% and will be reset every six months. The floating rate was reset on March 15, 2006, to a weighted average rate of 5.65%. The swaps are accounted for as fair-value hedges with a liability position of approximately $6.0 million at June 30, 2006, recorded in other current liabilities with a corresponding reduction of long-term debt. There was no hedge ineffectiveness for the three and six months ended June 30, 2006 or June 30, 2005.

During October 2004, PNMR entered into two forward starting floating-to-fixed rate interest rate swaps with an aggregate notional

principal amount of $100.0 million. These swaps became effective August 1, 2005 with a termination date of November 15, 2009. Under these swaps, PNMR received a floating rate equal to the three month LIBOR rate on the notional principal amount which paid a fixed interest rate of 3.975% on the notional principal amount on a quarterly basis. The initial floating rate was set on August 1, 2005, at 3.693% to be reset every three months. As of the last adjustment date, the weighted average interest rate was 5.149%. From November 2004 through June 30, 2005, the swaps were accounted for as cash flow hedges against the PNMR Facility. Effective June 30, 2005, the swaps were de-designated as cash flow hedges. As such, changes in market valuations are marked-to-market and recorded as unamortized gains or losses in the appropriate period. Prior to the de-designation, the increase in fair market value of $0.4 million was recorded in accumulated other comprehensive income on PNMR’s Condensed Consolidated Balance Sheet at June 30, 2006 and December 31, 2005. For the three and six months ended June 30, 2006, $0.2 million and $1.4 million, respectively, was recognized in other income on PNMR’s Condensed Consolidated Statement of Earnings. No comparable amount was recognized for the three and six months ended June 30, 2005. These two interest rate swaps were sold on May 19, 2006. The current amount recorded in other comprehensive income will be recognized in income over a 3 year period ending in November 2009.

In March 2005, PNMR issued 3,910,000 shares of its common stock at $26.76 per share. PNMR received net proceeds from this offering, after deducting underwriting discounts, commissions and expenses, of approximately $101.0 million. In March 2005, PNMR also completed a public offering of 4,945,000 equity-linked units at 6.75%, yielding net proceeds after discounts, commissions and expenses of approximately $239.6 million. In October 2005, PNMR completed a private offering of 4,000,000 equity-linked units at 6.625%. PNMR received $100.0 million in proceeds from this transaction and there were no underwriting discounts or commissions.

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. For the six months ended June 30, 2006, 371,725 new shares of PNMR common stock were sold for total proceeds of $9.3 million.

PNM

Long-Term Debt

On April 1, 2006, PNM remarketed its $46.0 million 2003 Series A and $100.0 million Series B pollution control revenue bonds

resulting in an interest rate fixed to maturity on April 1, 2033 of 4.875% annually.

Revolving and Other Credit Facilities PNM has a $400.0 million unsecured credit agreement (the “PNM Facility”). The PNM Facility was for a one-year term, which was to

expire on August 17, 2006. On July 6, 2006, the NMPRC approved extending the maturity for this facility to August 17, 2010, which will become effective upon receipt of the NMPRC order by the agent bank. The PNM Facility also includes two one-year extension options, which were also approved by NMPRC. These additional extension options are still subject to approval by a majority of the lenders. There were no amounts outstanding under the PNM Facility as of June 30, 2006.




52

At June 30, 2006, PNM also had $23.5 million in local lines of credit and a $20.0 million borrowing arrangement with PNMR. There

were no outstanding borrowings under the local lines of credit or the borrowing arrangement with PNMR at June 30, 2006; however, $4.5 million of letters of credit were outstanding, which reduces the available capacity under the PNM Facility.

PNM has a commercial paper program under which PNM may issue up to $300.0 million in commercial paper for up to 365 days. The

commercial paper is unsecured and the proceeds are used for short-term cash management needs. The PNM Facility serves as a backstop for the outstanding commercial paper. As of June 30, 2006, PNM had $100.2 million in commercial paper outstanding.

Financing Activities

PNM has a universal shelf registration statement filed with the SEC for the issuance of debt securities, equity securities, preferred stock, purchase contracts, purchase contract units and warrants. As of June 30, 2006, PNM had approximately $200.0 million of remaining unissued securities registered under its universal shelf registration statement.

TNMP

Revolving and Other Credit Facilities

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 June 30, 2006, TNMP had no outstanding borrowings under the PNMR Facility; however, TNMP had $2.4 million in letters of credit outstanding, which reduces the available capacity under the PNMR Facility.

PNMR and its subsidiaries maintain a qualified defined benefit pension plan, a plan providing medical and dental benefits to eligible

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

Participants in the PNM Plans include eligible employees and retirees of PNMR and other subsidiaries of PNMR. Participants in the

TNMP Plans include eligible employees and retirees of TNMP, First Choice and other subsidiaries of TNP. The PNM pension plan was frozen at the end of 1997, with regard to new participants, salary levels and benefits. Additional credited service can be accrued under the PNM pension plan up to a limit determined by age and service. The TNMP pension plan was frozen at December 31, 2005, with regard to new participants, salary levels and benefits.

The total net periodic benefit cost or income from the PNM Plans, in addition to the net periodic benefit cost from the TNMP Plans from

the date of PNMR’s acquisition of TNP, or June 6, 2005, is included in the Condensed Consolidated Statements of Earnings of PNMR.




(8) Pension and Other Postretirement Benefit Plans

53

PNM Plans

The following table presents the components of PNM net periodic benefit cost/(income) recognized in the Condensed Consolidated

Statements of Earnings:

For the three months ended June 30, 2006 and 2005, PNM contributed approximately $3.1 million and $1.5 million, respectively, to

trusts for other postretirement benefits. For the six months ended June 30, 2006 and 2005, PNM contributed approximately $3.1 million and $3.1 million, respectively, to trusts for other postretirement benefits. PNM expects to make contributions totaling $6.4 million during 2006 to trusts for other postretirement benefits. PNM does not anticipate making any contributions to the pension plan during 2006.




Three Months Ended June 30,

Pension Plan

Other Postretirement Benefits

Executive Retirement Program

2006 2005 2006 2005 2006 2005 (In thousands)

Service cost $ 126 $ 477 $ 678 $ 645 $ 14 $ 16 Interest cost 7,710 7,567 1,842 1,648 264 295 Expected long-term return on assets (10,139 ) (10,042 ) (1,355 ) (1,318 ) - - Amortization of net loss 1,210 892 1,670 1,490 25 43 Amortization of prior service cost 79 79 (1,422 ) (1,702 ) 3 34 Net periodic benefit cost/(income) $ (1,014 ) $ (1,027 ) $ 1,413 $ 763 $ 306 $ 388

Six Months Ended June 30,

Pension Plan

Other Postretirement Benefits

Executive Retirement Program

2006 2005 2006 2005 2006 2005 (In thousands)

Service cost $ 252 $ 954 $ 1,356 $ 1,290 $ 28 $ 32 Interest cost 15,420 15,134 3,684 3,296 528 590 Expected long-term return on assets (20,277 ) (20,084 ) (2,709 ) (2,636 ) - - Amortization of net loss 2,420 1,784 3,340 2,980 50 86 Amortization of prior service cost 158 158 (2,844 ) (3,404 ) 6 68 Net periodic benefit cost/(income) $ (2,027 ) $ (2,054 ) $ 2,827 $ 1,526 $ 612 $ 776

54

TNMP Plans

The following tables present the components of TNMP net pension cost/(income) recognized in the Condensed Consolidated Statements of Earnings:




Three Months Ended June 30, Post- Post- Pre- Acquisition Acquisition Acquisition April 1- June 6- April 1- June 30, June 30, June 6, 2006 2005 2005 (In thousands) Service cost $ - $ 187 $ 343 Interest cost 1,085 345 759 Expected long-term rate of return on plan assets (1,754 ) (573 ) (966 ) Amortization of prior service cost - - (20 )

Net periodic pension benefit cost/(income) $ (669 ) $ (41 ) $ 116

Six Months Ended June 30, Post- Post- Pre- Acquisition Acquisition Acquisition January 1- June 6- January 1- June 30, June 30, June 6, 2006 2005 2005 (In thousands) Service cost $ - $ 187 $ 848 Interest cost 2,170 345 1,875 Expected long-term rate of return on plan assets (3,508 ) (573 ) (2,387 ) Amortization of prior service cost - - (49 )

Net periodic pension benefit cost/(income) $ (1,338 ) $ (41 ) $ 287

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The following tables present the components of TNMP postretirement benefit cost recognized in the Condensed Consolidated Statements of Earnings:




Three Months Ended June 30, Post- Post- Pre- Acquisition Acquisition Acquisition April 1- June 6- April 1- June 30, June 30, June 6, 2006 2005 2005 (In thousands) Service cost $ 106 $ 40 $ 79 Interest cost 178 52 114 Expected long-term rate of return on plan assets (114 ) (33 ) (55 ) Amortization of transition obligation - - 55 Amortization of prior service cost 15 - - Net periodic postretirement benefit cost $ 185 $ 59 $ 193

Six Months Ended June 30, Post- Post- Pre- Acquisition Acquisition Acquisition January 1- June 6- January 1- June 30, June 30, June 6, 2006 2005 2005 (In thousands) Service cost $ 212 $ 40 $ 195 Interest cost 356 52 282 Expected long-term rate of return on plan assets (228 ) (33 ) (136 ) Amortization of transition obligation - - 136 Amortization of prior service cost 30 - - Net periodic postretirement benefit cost $ 370 $ 59 $ 477

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The following tables present the components of TNMP executive retirement program cost recognized in the Condensed Consolidated Statements of Earnings:

For the three months ended June 30, 2006 and 2005, TNMP contributed approximately $0.0 million and $0.3 million, respectively, for

the other postretirement benefits. For the six months ended June 30, 2006, TNMP did not make any contributions to trusts for other postretirement benefits. For the three and six months ended June 30, 2005, TNMP contributed $0.4 million to trusts for other postretirement benefits. TNMP expects to make contributions totaling $1.2 million during 2006 to trusts for other postretirement benefits. TNMP does not anticipate making any contributions to the pension plan during 2006.

There are various claims and lawsuits pending against the Company. The Company is also subject to federal, state and local

environmental laws and regulations, and is currently participating in the investigation and remediation of numerous sites. In addition, the Company periodically enters into financial commitments in connection with its business operations. It is not possible at this time for the Company to determine fully the effect of all litigation and other legal proceedings on its results of operations or financial position. It is the Company’s policy to accrue for expected legal costs in accordance with SFAS No. 5, “ Accounting for Contingencies ” (“SFAS 5”), when it is probable that a SFAS 5 liability has been incurred and the amount of expected legal costs to be incurred is reasonably estimable. These




Three Months Ended June 30, Post- Post- Pre- Acquisition Acquisition Acquisition April 1- June 6- April 1- June 30, June 30, June 6, 2006 2005 2005 (In thousands) Service cost $ - $ - $ 16 Interest cost 19 6 32 Amortization of net loss - - 18 Amortization of prior service cost - - (14 )

Net periodic executive retirement program cost $ 19 $ 6 $ 52

Six Months Ended June 30, Post- Post- Pre- Acquisition Acquisition Acquisition January 1- June 6- January 1- June 30, June 30, June 6, 2006 2005 2005 (In thousands) Service cost $ - $ - $ 40 Interest cost 38 6 78 Amortization of net loss - - 45 Amortization of prior service cost - - (35 )

Net periodic executive retirement program cost $ 38 $ 6 $ 128

(9) Commitments and Contingencies

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.

57

PNM

Conflicts at San Juan Mine Involving Oil and Gas Leaseholders

The SJCC, through leases with the federal government and the State of New Mexico, owns coal interests with respect to the San Juan

underground mine. Certain gas producers have leases in the area of the underground coal mine and have asserted claims against SJCC that its coal mining activities are interfering with gas production. The Company understands that SJCC has reached a settlement in principle with Western Gas for certain wells in the mine area. The Western Gas settlement however, does not resolve all potential claims by Western Gas 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.

Asbestos Cases

PNM was named in 2003 as one of a number of defendants in 21 personal injury lawsuits relating to alleged exposure to asbestos. All of

these cases involve claims of individuals, or their descendents, who worked for contractors building, or working at, PNM power plants. Some of the claims relate to construction activities during the 1950s and 1960s, while other claims generally allege exposure during the last 30 years. PNM has never manufactured, sold or distributed products containing asbestos. PNM had previously been dismissed with prejudice from all but two of the remaining cases. On May 25, 2006, the matter was dismissed with prejudice as to all claims due to plaintiffs' non-compliance with the case management order and failure to prosecute.

New Source Review Rules

In 2003, the EPA issued its rule regarding RMRR, clarifying what constitutes routine maintenance, repair, and replacement of damaged

or worn equipment, subject to safeguards to assure consistency with the Clean Air Act. In March 2006, a panel of the Court of Appeals for the District of Columbia Circuit vacated this rule. The action by the court did not eliminate the NSR exclusion for routine maintenance, repair, and replacement work nor did the decision rule on what activities are physical changes. The EPA’s authority to write a rule based on the current NSPS hourly emission increase test remains in place. The Company is unable to determine the impact of this matter on its results of operations and financial position.

Four Corners Federal Implementation Plan Litigation

On July 26, 2006, the Rio Grande Chapter of the Sierra Club sued the EPA in Federal District Court in New Mexico in an attempt to

force the EPA to adopt a federal implementation plan to limit emissions at Four Corners. The relief sought by the Sierra Club, in part, is for an order directing the EPA to issue a final federal implementation plan for Four Corners with all expedition, but in no event later than 60 days. APS owns three units at the power plant, while the two other units are owned in varying percentages by Southern California Edison, APS, PNM, Salt River Project, Tucson Electric Power and EPE. The Company is unable to predict the outcome of this matter at this time.

SESCO Matter

TCEQ is conducting a site investigation of SESCO, a former electrical equipment repair and sales company located in San Angelo,

Texas and the SESCO site has been referred to the Superfund Site Discovery and Assessment Program. The primary concern appears to be polychlorinated biphenyls in soil and groundwater on and adjacent to




58

the site. PNM is classified as a de minimis potentially responsible party. PNM has agreed to settle for a premium payment of $0.3 million, including past contribution credits, to release PNM from further project economic and risk liability with certain exceptions. The settlement offer is contingent upon final approval of the administrative order by the TCEQ. PNM is unable to predict the outcome at this time. As discussed below, TNMP is also involved in the SESCO matter.

California Refund Proceeding

SDG&E and other California buyers filed a complaint with the FERC in 2000 against sellers into the California wholesale electric

market. In 2002, the FERC ALJ issued the Proposed Findings on California Refund Liability, in which it determined that the Cal ISO had, for the most part, correctly calculated the amounts of the potential refunds owed by sellers and identified ballpark figures for the amount of refunds due. In 2003, the FERC issued an order substantially adopting the findings from the ALJ’s 2002 decision, but requiring a change to the formula used to calculate refunds, which had the effect of increasing the refund amounts owed by 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 their cost recovery filings pursuant to the FERC’s prior orders that indicated sellers would get the opportunity to submit evidence demonstrating that the refund methodology creates a revenue shortfall for their transactions during the refund period. Included in PNM's submittal were objections to the limited amount of time the FERC allowed for sellers to complete their respective submittals, and the FERC’s arbitrary decision to allow only marketers, and not load serving entities such as PNM, to include a return component in their cost filings. PNM participated with other competitive sellers to request rehearing of these issues before the FERC. In September 2005, PNM made its cost recovery filing identifying its costs associated with sales into the Cal ISO and Cal PX markets during the refund period. In January 2006, the FERC issued its order on the cost recovery filings, acting on 23 filings that were made by multiple sellers. The FERC accepted that portion of PNM’s filing submitted as prescribed by the FERC’s August 2005 order, but rejected the alternative filings that included a return component for PNM as a load serving entity. The effect of the FERC’s order is that PNM’s allowed cost offset against its refund liability is zero. 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. In addition, the Company has engaged in settlement discussions with California parties based upon a template provided by the FERC, but is unable to predict whether settlement will be reached.

As previously reported, there have been a number of additional appeals pending before the United States Court of Appeals for the Ninth Circuit (“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. One such case, involved the issues regarding the scope of transactions subject to refund and the timeframe for which FERC could order refunds for sales into the CAISO and CalPX markets. On August 2, 2006, the Ninth Circuit issued its decision in the case in which it denied the California Parties' request to include bilateral energy transactions, i.e., those that took place outside the established CAISO and CalPX organized markets, as those eligible for refund in the refund proceedings at FERC. The court’s decision did grant, however, requests by the California parties to include transactions of greater than 24 hours and energy exchange transactions as eligible for refund in the refund proceedings (such transactions were previously excluded). The California parties had also sought to have FERC apply the mitigated price remedy to transactions in the May-September 2000 time period, based on allegations of pervasive tariff violations. The court concluded that FERC did not provide a reasoned response to the arguments raised by the California parties, and the Ninth Circuit has required FERC to reconsider whether to order remedies for transactions resulting from tariff violations that occurred prior to October 2, 2000. The court order remands the matter to FERC to further consider these arguments on the merits. Additionally, as previously reported, i n September 2004, the Ninth Circuit issued its decision in the another case in which the Ninth Circuit upheld 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




59

remanded the case to the FERC for further proceedings, including a determination as to whether additional refunds are appropriate. PNM participated with other competitive sellers requesting rehearing by the Ninth Circuit of its decision. At the end of July 2006, the Ninth Circuit denied the competitive sellers’ petition for rehearing. 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.

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 Court of Appeals. 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.

Generation Market Power Filings

In its order on PNM’s 2001 triennial market-based rate filing, the FERC initiated an investigation to determine if PNM’s mitigation measure in northern New Mexico is sufficiently adequate to prevent the exercise of market power and also required additional explanation of PNM’s revised wholesale market share calculation. The FERC determined that rates reviewed under this proceeding for transactions completed in the Northern New Mexico and EPE control areas would be subject to refund effective March 6, 2005. In its July 2005 compliance filing at the FERC, PNM indicated that, as a result of the completion of its analysis pursuant to the FERC’s order, PNM did show failures in its own control area, but did not show failures in the EPE control area, with the exception of one measure. PNM maintained its position that when the historical data is considered, it is clear that PNM does not possess generation market power in either the PNM or EPE control area destination markets and PNM should maintain its market-based sales authority in those markets.

In April 2006, the FERC issued its order in which it determined that PNM rebutted the presumption of market power in its home control

area and terminated the investigation regarding PNM’s home control area and terminated the refund period; therefore, PNM can continue to charge market-based rates in its home control area in central and northern New Mexico. The FERC also determined that PNM’s analysis could rebut the presumption of market power in EPE’s control area, but that it needed additional information regarding periods of transmission constraint. The FERC order gave PNM 60 days to file additional information regarding market power during periods of transmission constraint or, alternatively, propose cost-based mitigation measures for the EPE control area during periods of transmission constraint. In June 2006, PNM filed a proposed cost-based mitigated rate proposal to apply in the EPE control area during periods of transmission constraints. No comments have been filed objecting to PNM's filing. PNM's filing is pending before the FERC and PNM cannot predict the outcome of this proceeding at this time.

FERC Office of Market Oversight and Investigations

In November 2005, PNM received notice that the FERC Division of Operational Audits of the Office of Market Oversight and

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




60

In preparing for an on-site visit by OMOI as part of its audit, and during the visit itself, the Company discovered computer system paths

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

PNM has been cooperating, and will continue to cooperate, fully with the FERC to complete the audit. The Company cannot predict the

outcome of the audit or whether the FERC will make any adverse findings related to PNM’s compliance with the FERC’s rules and regulations. TNMP

SESCO Matter

As discussed above in the PNM “SESCO Matter,” TNMP is classified as a de minimis potentially responsible party in this matter.

TNMP has agreed to settle for a premium payment of $0.3 million, including past contribution credits, to release TNMP from further project economic and risk liability with certain exceptions. The settlement offer is contingent upon final approval of the administrative order by the TCEQ. TNMP is unable to predict the outcome at this time.

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 acquisition stipulation. In May 2006, TNMP, First Choice, the PUCT Staff and other parties filed a non-unanimous settlement agreement. The parties have presented evidence and briefs related to approval of the settlement. 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. If the settlement is approved, new rates will be effective with energy delivered October 1, 2006. The Company is unable to predict the outcome of this matter at this time.

Energy Agreement

In 2003, First Choice and Constellation executed a power supply agreement that resulted in Constellation being the primary supplier of

power for First Choice’s customers through the end of 2006. Additionally, Constellation has agreed to supply power in certain transactions under the agreement beyond the date when that commitment expires.

In 2004, FCPSP, a bankruptcy remote entity, was created pursuant to the agreement with Constellation to hold all customer contracts,

wholesale power contracts, and certain natural gas contracts previously held by First Choice. Constellation received a lien against the assets of FCPSP to cover the settlement exposure and the mark-to-




(10) Regulatory and Rate Matters

61

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 expires 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.

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 PRC to approve an increase in the service fees charged to its 481,000 natural gas customers. The proposal would increase the set monthly fee, the charge tied to monthly usage, and miscellaneous on-demand service fees. Those fees are separate from the cost of gas charged to customers. The monthly cost of gas charge would not be affected by the fee increase. The petition requests an increase in base gas service rates of $20.5 million and an increase in miscellaneous on-demand service rates of approximately $0.2 million. The request is designed to provide PNM’s gas utility an opportunity to earn an 11% return on equity, which is consistent with the average return allowed 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. PNM anticipates that a hearing on the case will be conducted in December 2006.

Transmission Rate Case

In March 2005, PNM filed a notice with the FERC to increase its wholesale electric transmission revenues. If approved, the rate increase

would apply to all of PNM's wholesale electric transmission service customers, which includes other utilities, electric co-operatives and entities, including Wholesale, that purchase wholesale transmission service from PNM. In May 2005, the FERC issued an order in the case suspending the new rates for the standard five-month period and made the new rates effective November 1, 2005, subject to refund. In April 2006, PNM and parties in the case filed an uncontested settlement agreement with the FERC settlement judge that, if approved, would result in an increase in electric transmission revenues of approximately $4.6 million annually. The FERC staff took issue with one element of settlement regarding the standard by which the FERC or a non-party to the settlement could challenge the settlement. PNM responded to the FERC staff’s expression of its issue and identified that the FERC had previously approved settlements containing the standard of review language reflected in PNM’s settlement. In June 2006, the FERC ALJ certified the settlement to the FERC as a contested settlement. The settlement is now pending for action before the FERC. PNM cannot predict the outcome of this proceeding at this time.




62

Complaint Against Southwestern Public Service Company

In September 2005, PNM filed a complaint under the Federal Power Act against SPS. PNM believes that through its fuel cost adjustment clause, SPS has been overcharging PNM for deliveries of energy under three contracts, and continues to do so. PNM requested that the FERC investigate charges from SPS under its fuel clause for the period 2001 through 2004. PNM’s complaint also alleges that SPS’ demand charge rates for interruptible power sales are excessive and requested that the FERC set a refund effective date of September 13, 2005 for these rates. Settlement conferences were held before a FERC settlement judge throughout the first quarter of 2006. Upon the failure of the parties to reach a settlement, the judge recommended the case proceed to hearing. Fuel cost charges for 2005 and 2006 are being addressed in a separate fuel charge adjustment clause case currently pending before the FERC, in which PNM is an intervenor. The hearing has been held in that case and in May 2006, the ALJ issued an initial decision in that proceeding recommending that SPS make refunds to customers, including PNM, for misapplication of charges in its fuel cost adjustment clause. The parties in that proceeding are currently filing their exceptions to the initial decision, which will go to the FERC for review. Additionally, in November 2005, SPS filed an electric transmission rate case proposing to raise rates charged to customers effective July 2006. PNM has intervened in the case and objected to the proposed rate increase. While PNM and SPS continue to engage in settlement discussions in this docket, PNM cannot predict if settlement will be reached in the SPS rate case docket or the outcome of the remaining SPS proceedings at the FERC. TNMP

TNMP 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 April 2005, the PUCT ruled that TNMP be allowed recovery of $39.2 million of carrying charges on stranded costs for the period

January 1, 2002 through July 21, 2004. TNMP was limited under GAAP in its recognition for income statement purposes to only the debt related portion of the carrying charges, and TNMP was prohibited from income statement recognition of the equity portion of the carrying charges until the actual receipt of those amounts from customers. As of June 30, 2006, the debt-related portion totaled $37.9 million and is included in Carrying Charges on Stranded Costs in TNMP’s Condensed Consolidated Balance Sheet. As of June 30, 2006, the equity-related portion of carrying costs totaled $29.5 million. TNMP expects to collect its total carrying costs from customers.

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 is considering an appeal of that decision. Additionally, the PUCT has adopted an amended rule that will reduce the amount of carrying charges recognized in earnings by TNMP on a prospective basis. The PUCT approved an amendment to the true-up rule at the 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 Competition Transition Charge (CTC). The Commission concluded that the correct rate at which a utility should accrue carrying costs through a CTC 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 marginal cost of debt will be based upon the average yield for long-term public utility bonds of the utility's credit rating published in Moody's Credit Perspectives, and will be grossed-up to account for the effects of federal income taxes. The new rate is yet to be determined, but this change will effect TNMP by lowering the current approved interest rate of 10.93%. This change in carrying charges will affect the rates set in TNMP's CTC filing. The rule went into effect on July 20, 2006, and TNMP is required to make a compliance filing within thirty days.

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 Rate Reset" above for further updates.




63

PNMR and PNM

PNM has evaluated its PPAs under the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (Revised

December 2003) (“FIN 46R”), and determined that one purchase contract entered into prior to December 31, 2003 qualifies as a variable interest. Although PNM has continued to make ongoing efforts to obtain information, PNM was unable to obtain the necessary information needed to determine if PNM was the primary beneficiary and if consolidation was needed despite efforts including a formal written request to the operator of the entity supplying power under the PPA. The operator cited legal and competitive reasons for refusing to provide the information.

This variable interest PPA is a contract under an operating lease to purchase 132 MW of capacity and energy expiring in June 2020. The

contract contains a fixed capacity charge, a fixed O&M charge, and a variable energy charge that subjects PNM to the changes in the cost of fuel and O&M. For the three months ended June 30, 2006 and 2005, the capacity and O&M charge was $1.9 million and $1.6 million, respectively, and the energy charges were $0.5 million and $0.2 million, respectively. For the six months ended June 30, 2006 and 2005, the capacity and O&M charge was $3.7 million and $3.3 million, respectively, and the energy charges were $0.4 million and $0.6 million, respectively. The contract is for the full output of a specific gas generating plant and is currently accounted for as an operating lease by PNM. Under this contract PNM is exposed to changes in the costs to produce energy and operate the plant.

PNM also has interests in other variable interest entities created before January 31, 2003, for which PNM is not the primary beneficiary.

These arrangements include PNM’s investment in a limited partnership and certain PNM leases. The aggregate maximum loss exposure at June 30, 2006, that PNM could be required to record in its Condensed Consolidated Statement of Earnings as a result of these arrangements totals approximately $4.6 million. The creditors of these variable interest entities do not have recourse to the general credit of PNM or PNMR in excess of the aggregate maximum loss exposure.

PNMR, PNM and TNMP are considered related parties as defined in SFAS No. 57, “ Related Party Disclosures .” TNMP became a

related party effective on the date of PNMR’s acquisition of TNP. PNMR Services Company provides corporate services to PNMR and its subsidiaries including PNM, Avistar, TNP, TNMP, First Choice

and Altura in accordance with shared services agreements. These services are billed at cost on a monthly basis and allocated to the subsidiaries. In addition, PNMR pays certain expenses for PNM and TNMP that are then reimbursed to PNMR.

PNMR files a consolidated federal income tax return with its affiliated companies. A tax allocation agreement exists between PNMR

and each of its affiliated companies. These agreements provide that the subsidiary company will compute its taxable income on a stand-alone basis. If the result is a net tax liability, such amount shall be paid to PNMR. If there are net operating losses and/or tax credits, the subsidiary shall receive payment for the tax savings from PNMR to the extent that PNMR is able to utilize those benefits. For the three and six months ended June 30, 2006, PNM and TNMP made no tax-sharing payments to PNMR. For the three and six months ended June 30, 2005, PNMR made $18.2 million of tax-sharing payments to PNM. For the period June 6 through June 30, 2005, TNMP made no tax-sharing payments to PNMR.




(11) Variable Interest Entities

(12) Related Party Transactions

64

In February 2006, the Board approved affiliate borrowing arrangements between PNMR and its subsidiaries that would authorize each

subsidiary to borrow up to $50.0 million from PNMR. Neither PNM nor TNMP has any amounts outstanding under this borrowing agreement as of June 30, 2006 and December 31, 2005.

PNM and TNMP have engaged in, and may in the future engage in, affiliate transactions in the normal course of business. These

transactions primarily consist of power and transmission purchases and certain shared planning and design services billed to TNMP from PNM. Transactions between affiliates are reported separately on their financial statements, but are eliminated in the consolidation of PNMR’s financial statements.

PNM

Pursuant to an affiliate borrowing agreement, PNM has issued a promissory note for $20.0 million to PNMR payable on or before September 30, 2006. Under the agreement, PNM agrees to pay all applicable interest on the outstanding balance at the interest rates provided in the agreement. As of June 30, 2006 and December 31, 2005, there is no outstanding balance on the promissory note.

PNM sells electricity and energy-scheduling services to TNMP under a long-term wholesale power contract. The tables below describe the nature and amount of material transactions PNM has with PNMR and TNMP. TNMP became a related

party effective on the date of PNMR’s acquisition of TNP, or June 6, 2005; therefore, the related party transaction amounts between PNMR, PNM and TNMP are reported after that date.




Three Months Ended Six Months Ended June 30, June 30, 2006 2005 2006 2005 (In thousands) PNMR Transactions with PNM Shared services billings from PNMR to PNM $ 30,759 $ 25,754 $ 62,376 $ 51,290 PNM Transactions with TNMP Electricity & energy-scheduling billings to TNMP $ 12,358 $ 2,904 $ 27,371 $ 2,904

June 30, 2006 December 31, 2005 (In thousands) PNM payable to PNMR $61,274 $50,070 PNM receivable from TNMP net of transmission purchases $ 8,613 $ 4,130

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TNMP

Effective with the close of the acquisition of TNP on June 6, 2005, all TNMP employees who were providing corporate support to TNP and First Choice became employees of PNMR Services Company. PNMR Services Company provides corporate services to TNMP per a shared services agreement.

TNMP purchases all the electricity for its New Mexico customers’ needs (except for one major customer) and energy-scheduling

services under the long-term wholesale power contract with PNM described above. TNMP sells transmission services to First Choice. The tables below describe the nature and amount of transactions TNMP has with PNMR and PNM. TNMP became a related party

effective on the date of PNMR’s acquisition of TNP, or June 6, 2005; therefore, the related party transaction amounts between TNMP, PNMR and PNM are reported after that date.




Three Months Ended Six Months Ended June 30, June 30, 2006 2005 2006 2005 (In thousands) TNMP Transactions with PNMR Shared services billings from PNMR $ 8,948 $ 1,145 $ 18,288 $ 1,145 TNMP Transactions with PNM Electricity & energy-scheduling billings from PNM $ 12,358 $ 2,904 $ 27,371 $ 2,904 TNMP Transactions with First Choice Transmission service billing to First Choice $ 17,880 $ 7,502 $ 33,167 $ 7,502

June 30, 2006 December 31, 2005 (In thousands) TNMP payable to PNMR $ 8,932 $3,043 TNMP payable to PNM net of transmission sales $ 8,613 $4,130 TNMP receivable from First Choice $10,809 $9,565

66

In July 2006, the FASB issued Interpretation No. 48, “ Accounting for Uncertainty in Income Taxes ” (“FIN 48”). FIN 48 requires that

the Company recognize only the impact of tax positions that, based on their merits, are more likely than not to be sustained upon IRS audit. It also requires expanded financial statement disclosure of such positions. FIN 48 is effective for the 2007 fiscal year. The Company is currently evaluating the impact of FIN 48, if any, on its financial statements.

In February 2006, the FASB issued SFAS No. 155, “ Accounting for Certain Hybrid Instruments," (an Amendment of FASB Statements No. 133 and 140)” (“SFAS 155”). The standard allows financial instruments that have embedded derivatives to be accounted for as a whole, eliminating the need to bifurcate the derivative from its host, if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. The standard is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company is currently evaluating the effect that the adoption of SFAS 155 will have on its results of operations and financial condition, but does not expect it will have a material impact.




(13) New Accounting Pronouncements

67

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 consolidated with PNMR and its subsidiaries under GAAP. 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 six months of 2006, the Company experienced higher earnings from the prior year primarily due to the TNP and Twin

Oaks acquisitions. However, 2006 results were impacted by plant outages at PVNGS, the last phase of a 2003 agreed upon retail electric rate reduction, higher purchased power costs, consumer conservation in response to high natural gas prices and charges for financing. Strong performance at PNM's SJGS and Four Corners plants helped to offset the impact of the Unit 1 extended outage at PVNGS. The TNP acquisition was accretive to earnings during the first full year of operation after the transaction was completed. Twin Oaks contributed $5.2 million, net of income taxes year-to-date. The Company cannot predict what impact the increase in market prices for power and natural gas will have on its future results of operations.

PVNGS Operations

PNM is a participant of PVNGS, of which APS is the operating agent. APS operated PVNGS Unit 1 at reduced power levels from

December 25, 2005 through March 18, 2006, due to a vibration in the PVNGS Unit 1 shutdown cooling lines. As a result, PNM received approximately 24 MW of power from PVNGS Unit 1 of capacity rated load of 130 MW during this period, based on its 10.2% undivided interest in PVNGS. On March 18, 2006, APS shut down PVNGS Unit 1 completely to perform inspections and tests, after which APS determined that certain work could be performed to assure that PVNGS Unit 1 will be operating during the peak summer months. APS moved the valve which was vibrating closer to the reactor vessel. APS then restarted the unit and performed testing documenting that the vibrations were no longer a problem. Tests also confirmed that the new fuel load was performing as designed, that the new steam generators were operating satisfactorily, and that the new low-pressure steam turbine internals were performing safely. APS reconnected Unit 1 to the electrical grid on July 7, 2006. The Unit achieved full power on July 16, 2006.

The operation of PVNGS not only affected PNM’s ability to make off-system sales, but also caused PNM to purchase power to serve

its retail electric customers. PNM estimates that the shut-down of PVNGS Unit 1 resulted in a reduction in consolidated gross margin, or operating revenues minus cost of energy sold, of $22.5 million before income taxes for the six months ended June 30, 2006.

Business and Strategy

The Company is positioned as a merchant utility, primarily operating as a regulated energy service provider. The Company is engaged

in the sale and marketing of electricity in the competitive wholesale energy marketplace. In addition, through First Choice, the Company is a retail electric provider in Texas under legislation that established retail competition. PNM 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 and the NMPRC in New Mexico.

The Company intends to develop both its retail and wholesale business by expanding its current operations and by acquiring additional

value-enhancing assets. On April 18, 2006, PNMR’s wholly owned subsidiary, Altura, purchased Twin Oaks, a 305 MW coal-fired power plant located 150 miles south of Dallas, Texas, from subsidiaries of Sempra for $480.0 million in cash. The Twin Oaks purchase agreement also includes the development rights for a possible 600 MW expansion of the plant. The necessary permits for the expansion are being obtained, which are expected in 2007. An additional $2.5 million payment will be made to Sempra upon the issuance of an air permit for the expansion and an additional $2.5 million will be paid if and when Altura begins construction of the expansion. PNMR has not made a decision regarding the Twin Oaks expansion, but it is considering a variety of options, including self development or sale to a third party.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FIN ANCIAL CONDITION AND RESULTS OF OPERATIONS

68

Also in April 2006, construction of Luna, a combined-cycle power plant near Deming, New Mexico was completed and the plant became operational. PNM owns one-third of the plant and managed the construction project. Luna will operate as a PNM merchant facility and PNM's 190 MW share of its power will be sold into the wholesale market.

PNM reached agreement in July 2006 with an unaffiliated supplier to purchase up to 32 MW of renewable power and energy from a

biomass-fueled generating plant to be constructed in New Mexico. The contract for purchasing power extends for 20 years. Biomass fuel consists of resources such as agricultural waste, woody vegetation and small diameter timber. The agreement is subject to approval by the NMPRC.

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. See Note 3 for a detailed description of 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.”

RESULTS OF OPERATIONS - PNMR

THREE MONTHS ENDED JUNE 30, 2006

COMPARED TO THREE MONTHS ENDED JUNE 30, 2005 PNMR’s net earnings for the three months ended June 30, 2006 were $16.3 million, or $0.23 per diluted share of common stock,

compared to $1.5 million or $0.02 per diluted share of common stock for the three months ended June 30, 2005. The Company experienced higher earnings primarily due to First Choice operations, which PNMR did not have until the TNP acquisition in June 2005 and the addition of Twin Oaks, which PNMR acquired in April 2006. Earnings were negatively impacted by below normal levels of plant performance due to the outages at PVNGS which reduced the amount of electricity PNM could sell into the wholesale market and forced PNM to purchase power to meet its jurisdictional and contractual wholesale needs. Also affecting PNMR's earnings was the last phase of an agreed upon 2003 rate reduction which went into effect September 2005 and charges for financing. The Company expects to request an increase in current PNM electric rates, to become effective January 1, 2008.

As noted above, the following discussion is based on the segment methodology that management uses for making operating decisions

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

Corporate costs, income taxes and non-operating items are discussed on a consolidated basis for PNMR and are in conformity with the

presentation in PNMR’s Condensed Consolidated Financial Statements.


69

Regulated Operations

PNM Electric

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

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

PNM Electric Revenues


Three Months Ended June 30, 2006 2005 Variance (In thousands) Operating revenues $ 146,336 $ 138,781 $ 7,555 Less: Cost of energy 43,308 44,998 (1,690 )

Intersegment energy transfer 8,524 (3,412 ) 11,936 Gross margin 94,504 97,195 (2,691 )

Energy production costs 30,874 31,800 (926 ) Transmission and distribution O&M 8,723 7,240 1,483 Customer related expense 4,228 4,679 (451 ) Administrative and general (1,054 ) 2,723 (3,777 )

Total non-fuel O&M 42,771 46,442 (3,671 ) Corporate allocation 18,515 14,753 3,762 Depreciation and amortization 14,316 17,495 (3,179 ) Taxes other than income taxes 5,278 4,591 687 Income taxes 1,852 2,155 (303 )

Total non-fuel operating expenses 82,732 85,436 (2,704 )

Operating income $ 11,772 $ 11,759 $ 13

Three Months Ended June 30, 2006 2005 Variance (In thousands, except customers)

Residential $ 52,026 $ 50,044 $ 1,982 Commercial 65,572 63,723 1,849 Industrial 15,588 15,340 248 Transmission 7,193 4,574 2,619 Other 5,957 5,100 857

$ 146,336 $ 138,781 $ 7,555

Average customers 428,626 416,231 12,395

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The following table shows electric sales by customer class:

PNM Electric Sales

Operating revenues increased $7.6 million, or 5.4%, for the three months ended June 30, 2006 compared to the same period of 2005.

Retail electricity sales increased 6.6%, to 1.98 million MWh in the second quarter of 2006 compared to 1.86 million MWh for the same period in 2005. Customer growth was 3.0% quarter over quarter, and weather-normalized retail electric load growth for the second quarter of 2006 was 5.5%. Customer load growth, when normalized for the impact of weather, increased revenues by $6.2 million. Increased usage due to warmer weather increased revenues $1.6 million. In addition, increased transmission revenues, primarily from point-to-point customers, increased revenues $2.4 million. These revenue increases were partially offset by a decrease in revenues of $3.4 million due to a 2.5% rate reduction that was effective beginning September 2005.

The gross margin, or operating revenues minus cost of energy sold and intersegment energy transfer, decreased $2.7 million, or 2.8%,

for the three months ended June 30, 2006 primarily due to the reduction in power plant availability and the rate decrease. Plant outages at PVNGS during the quarter created an increase in purchased power expense to serve load. These decreases were partially offset by increased revenues associated with retail load growth and warmer weather.

Total non-fuel O&M expenses decreased $3.7 million, or 7.9%, for the three months ended June 30, 2006 compared to the same period

of 2005. Energy production costs decreased $0.9 million, or 2.9%. Reduced plant outages at SJGS, Four Corners and Reeves decreased expenses $2.1 million. These decreases were partially offset by plant outage costs at PVNGS which increased expenses $1.1 million in the second quarter of 2006. Transmission and distribution O&M expenses increased $1.5 million or 20.5% primarily due to increased maintenance costs for outage restoration and reliability purposes. Customer related expenses decreased $0.5 million or 9.6% primarily due to a transfer of employees to the corporate level (and allocated through the corporate allocation). Administrative and general expenses decreased $3.8 million due to higher capitalized costs of $2.2 million for increased construction activity, lower legal and consulting costs of $0.8 million related to routine business matters, and several immaterial items.

Depreciation and amortization decreased $3.2 million, or 18.2% primarily due to an increase in the estimated useful life at SJGS. Taxes

other than income increased $0.7 million or 15.0% primarily due to adjustments to reflect the property values in 2005.


Three Months Ended June 30, 2006 2005 Variance (Megawatt hours)

Residential 647,422 606,419 41,003 Commercial 929,221 872,242 56,979 Industrial 332,579 317,672 14,907 Other 71,558 62,147 9,411

1,980,780 1,858,480 122,300

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TNMP Electric

PNMR acquired TNP, the parent of TNMP, on June 6, 2005, and results in this section are presented from the acquisition date forward only. Comparable results from 2005 are not presented.

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


TNMP Electric Revenues

* Under TECA, customers of TNMP Electric in Texas have the ability to choose First Choice or any other REP to provide energy.

However, TNMP Electric delivers energy to customers within its service area regardless of the REP chosen. Therefore, TNMP Electric earns revenue for the delivery of energy to First Choice and First Choice earns revenue on the usage of that energy by its customers. The average customers reported above include 146,549 and 157,813 customers of TNMP Electric at June 30, 2006 and 2005, respectively, who have chosen First Choice as their REP. These TNMP Electric customers are also included below in the First Choice segment. For PNMR consolidated reporting purposes, these customers are included only once in the consolidated customer count.


Three Months

Ended

For the Period June 30, June 6 - June 30, 2006 2005 (In thousands) Operating revenues $ 61,456 $ 19,235 Less: Cost of energy 22,652 6,702 Gross margin 38,804 12,533 Transmission and distribution O&M 5,399 1,150 Customer related expense 1,396 302 Administrative and general (114 ) 288

Total non-fuel O&M 6,681 1,740 Corporate allocation 8,404 1,461 Depreciation and amortization 7,831 2,085 Taxes other than income taxes 5,872 1,885 Income taxes 1,239 1,175

Total non-fuel operating expenses 30,027 8,346 Operating income $ 8,777 $ 4,187

Three Months

Ended

For the Period June 30, June 6 - June 30, 2006 2005 (In thousands, except customers)

Residential $ 20,651 $ 7,857 Commercial 22,661 6,522 Industrial 8,576 2,607 Other 9,568 2,249

$ 61,456 $ 19,235

Average customers * 262,268 258,251

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TNMP Electric Sales *

* The MWh reported above include 635,125 and 257,770 MWh used by customers of TNMP Electric at June 30, 2006 and 2005,

respectively, who have chosen First Choice as their REP. These MWh are also included below in the First Choice segment. TNMP Electric’s gross margin was $38.8 million for the three months ended June 30, 2006. The significant factors that impacted gross

margin include a decrease in revenues due to rate reductions in both Texas and New Mexico, lower revenues due to a reduction in operations of a major customer in New Mexico and increased transmission costs. These decreases were partially offset by customer growth and weather impacts.


Three Months

Ended

For the Period June 30, June 6 - June 30, 2006 2005 (Megawatt hours)

Residential 806,148 275,271 Commercial 931,064 189,767 Industrial 401,524 144,791 Other 31,756 8,590

2,170,492 618,419

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PNM Gas

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

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

PNM Gas Revenues

*Customer-owned gas.


Three Months Ended June 30, 2006 2005 Variance (In thousands) Operating revenues $ 68,961 $ 82,384 $ (13,423 ) Less: Cost of energy 42,168 53,292 (11,124 )

Gross margin 26,793 29,092 (2,299 )

Energy production costs 615 569 46 Transmission and distribution O&M 7,186 6,672 514 Customer related expense 4,609 5,038 (429 ) Administrative and general (233 ) 1,384 (1,617 )

Total non-fuel O&M 12,177 13,663 (1,486 ) Corporate allocation 11,559 8,514 3,045 Depreciation and amortization 5,994 5,596 398 Taxes other than income taxes 2,145 2,057 88 Income taxes (3,236 ) (1,442 ) (1,794 )

Total non-fuel operating expenses 28,639 28,388 251 Operating income/(loss) $ (1,846 ) $ 704 $ (2,550 )

Three Months Ended June 30, 2006 2005 Variance (In thousands, except customers)

Residential $ 38,514 $ 43,350 $ (4,836 ) Commercial 13,363 13,418 (55 ) Industrial 1,514 282 1,232 Transportation* 2,827 3,129 (302 ) Other 12,743 22,205 (9,462 )

$ 68,961 $ 82,384 $ (13,423 )


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The following table shows gas throughput by customer class:

PNM Gas Throughput


Operating revenues decreased $13.4 million, or 16.3%, for the three months ended June 30, 2006, compared to the same period of 2005, primarily due to decreased sales volumes due to warmer weather and customer conservation resulting from higher natural gas prices. These decreases were partially offset by higher natural gas prices and customer growth. PNM Gas purchases natural gas in the open market and resells it at no profit to its sales-service customers. As a result, increases or decreases in gas revenues driven by gas costs do not impact the consolidated gross margin or earnings of PNM Gas. Total gas sales volumes decreased 13.1% and customer growth increased 2.3% quarter over quarter.

The gross margin, or operating revenues minus cost of energy sold, decreased $2.3 million, or 7.9%, for the three months ended June

30, 2006 compared to the same period of 2005. Warmer weather reduced customer usage, which caused gross margin to decrease $1.8 million and conservation reduced usage $1.7 million. These decreases were offset by customer growth, which increased margin $1.5 million.

Total non-fuel O&M expenses decreased $1.5 million, or 10.9%, for the three months ended June 30, 2006 compared to the same

period of 2005. Administrative and general expenses decreased $1.6 million primarily due to higher capitalized costs resulting from higher construction activity.


Three Months Ended June 30, 2006 2005 Variance (Thousands of decatherms)

Residential 3,058 3,946 (888 ) Commercial 1,391 1,576 (185 ) Industrial 195 45 150 Transportation* 9,371 9,102 269 Other 1,501 3,194 (1,693 )

15,516 17,863 (2,347 )

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Unregulated Operations Wholesale

The table below sets forth the operating results for Wholesale:


Three Months Ended June 30, 2006 2005 Variance (In thousands) Operating revenues $ 154,494 $ 142,282 $ 12,212 Less: Cost of energy 119,869 119,653 216

Intersegment energy transfer (8,524 ) 3,412 (11,936 )

Gross margin 43,149 19,217 23,932 Energy production costs 12,238 7,447 4,791 Transmission and distribution O&M 31 13 18 Customer related expense 304 104 200 Administrative and general 1,853 1,689 164

Total non-fuel O&M 14,426 9,253 5,173 Corporate allocation 1,882 1,016 866 Depreciation and amortization 7,155 4,041 3,114 Taxes other than income taxes 2,072 811 1,261 Income taxes 3,219 44 3,175

Total non-fuel operating expenses 28,754 15,165 13,589 Operating income $ 14,395 $ 4,052 $ 10,343

76

The following table shows revenues by customer class:

Wholesale Revenues

The following table shows sales by customer class:

Wholesale Sales

Operating revenues increased $12.2 million, or 8.6%, for the three months ended June 30, 2006, compared to the same period of 2005,

primarily due to the acquisition of Twin Oaks. Twin Oaks increased revenue by $32.8 million of which $15.7 million related to an existing power agreement and $16.9 million for the amortization of the fair value of a sales contract existing as of the date of the acquisition (see Note 2). Wholesale sold 2.67 million MWh of electricity in the second quarter of 2006 compared to 2.51 million MWh for the same period in 2005, an increase of 6.3%. These increases were partially offset by a decrease in short-term sales of $23.8 million resulting from decreased marketing activity due to reduced plant availability.

The gross margin, or operating revenues minus cost of energy sold and intersegment energy transfer, increased $23.9 million for the

three months ended June 30, 2006 compared to the same period of 2005 primarily due to the addition of Twin Oaks. The long-term sales margin increased $19.6 million for the three months ended June 30, 2006, compared to the same period of 2005,

due to the addition of Twin Oaks, which increased margin $21.6 million. This increase was partially offset by plant outage costs of $1.6 million. Short-term margin increased $4.4 million due to a decrease in purchase prices, partially offset by lower plant availability and increased retail loads, which caused a decrease in energy available to sell in the wholesale market. PNM Wholesale's mark-to-market position decreased $2.4 million in the second quarter of 2006, from a $0.1 million decrease for the same period in 2005.

Total non-fuel O&M expenses increased $5.2 million, or 55.9%, for the three months ended June 30, 2006. Energy production costs

increased $4.8 million, or 64.3%, primarily due to PVNGS increased outage costs of $3.0 million and the addition of Twin Oaks costs of $1.6 million and Luna costs of $0.8 million, which the Company did not have in 2005. These increases were partially offset by the elimination of a regulatory liability, which decreased expenses $0.6 million.

Depreciation and amortization increased $3.1 million, or 77.1%, for the three months ended June 30, 2006 primarily due to the addition

of Twin Oaks, which increased expense $4.0 million, partially offset by changes in the depreciation rates at the Afton and Lordsburg plants, which decreased expense $0.6 million. Taxes other than income increased $1.3 million primarily due to the addition of Twin Oaks.


Three Months Ended June 30, 2006 2005 Variance (In thousands)

Long-term contracts $ 73,924 $ 37,897 $ 36,027 Short-term sales 80,570 104,385 (23,815 )

$ 154,494 $ 142,282 $ 12,212

Three Months Ended June 30, 2006 2005 Variance (Megawatt hours)

Long-term contracts 1,102,365 563,482 538,883 Short-term sales 1,569,151 1,949,416 (380,265 )

2,671,516 2,512,898 158,618

77

First Choice

PNMR acquired TNP on June 6, 2005, and results in this section are presented from the acquisition date forward only. Comparable results from 2005 are not presented.

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


First Choice Electric Revenues


Three Months

Ended

For the Period June 30, June 6 - June 30, 2006 2005 (In thousands) Operating revenues $ 154,908 $ 43,031 Less: Cost of energy 118,073 34,083 Gross margin 36,835 8,948 Customer related expense 2,411 466 Administrative and general 8,444 1,089

Total non-fuel O&M 10,855 1,555 Corporate allocation 3,156 1,130 Depreciation and amortization 510 105 Taxes other than income taxes 1,356 512 Income taxes 7,363 2,020


Three Months

Ended

For the Period June 30, June 6 - June 30, 2006 2005 (In thousands, except customers)

Residential $ 89,181 $ 29,265 Mass-market 23,789 6,615 Mid-market 33,866 5,864 Other 8,072 1,287

$ 154,908 $ 43,031


78


First Choice Electric Sales *

* See note above in the TNMP Electric segment discussion about the impact of TECA. First Choice’s gross margin was $36.8 million for the three months ended June 30, 2006. The significant factors that impacted gross

margin included increases in price margins driven by increased competitive and price to beat sales prices and an increase in mark-to-market gains. These increases were partially offset by customer attrition and amortization of the fair value of sales and purchase contracts existing as of the date of the acquisition. As part of the acquisition of TNP, PNMR determined the fair value of a First Choice contractual obligation to purchase power and an obligation to sell power that are being amortized over the contract lives, or approximately three years.

Corporate and Other Corporate Administrative and General Expenses

Corporate administrative and general expenses, which represent costs that are driven primarily by corporate-level activities, are allocated

to the business segments and are presented in the corporate allocation line item in the segment statements. These costs increased $9.3 million, or 26.6%, to $44.3 million for the three months ended June 30, 2006 compared to the same period of 2005. This increase was primarily due to $5.7 million in additional expenses for insurance, benefits and corporate support activities for TNP, which PNMR did not incur until the acquisition of TNP in June 2005. Wages and benefit costs increased $3.8 million due to a transfer of employees to corporate and increases in projected payout of employee incentive programs. Maintenance fees for software increased $2.1 million. Legal and consulting expenses increased $1.1 million for routine business matters. Stock-based compensation expense increased $0.6 million, primarily due to the adoption of SFAS 123R (see Note 6). These increases were partially offset by a decrease of $3.3 million of acquisition related costs. Depreciation Expense

Corporate and other depreciation expense decreased $4.2 million, or 66.0%, to $2.1 million, primarily due to the write-off of software costs in the second quarter of 2005. Taxes Other Than Income

Corporate and other taxes other than income increased $0.8 million to $1.5 million primarily due to an increase in payroll taxes resulting from a transfer of employees to corporate and a higher tax base from the TNP acquisition.


Three Months Ended

For the Period June 30, June 6 - June 30 2006 2005 (Megawatt hours)

Residential 636,662 246,332 Mass-market 161,019 55,424 Mid-market 308,420 67,420 Other 13,183 2,949

1,119,284 372,125

79

PNMR Consolidated Other Income and Deductions

Interest income decreased $2.7 million, or 23.3%, for the three months ended June 30, 2006 due primarily to interest earned on the investment of proceeds related to the sale of hybrid income term securities invested from March 31, 2005 until the TNP acquisition on June 6, 2005.

Other income decreased $0.7 million or 27.0% from the prior year quarter primarily due to lower returns on investments. Carrying charges on regulatory assets were $2.0 million for the three months ended June 30, 2006. This represents interest income on

TNMP regulatory assets. Other deductions increased approximately $1.0 million or 61.9% for the three months ended June 30, 2006 due primarily to an

increase in investment losses. Interest Charges

PNMR’s consolidated interest charges increased by $15.0 million for the three months ended June 30, 2006, compared to the same period of 2005, primarily due to $5.1 million of interest charges related to debt from the TNP acquisition, which PNMR did not incur until the acquisition of TNP in June 2005, interest and refinancing costs of $1.3 million related to the equity-linked units issued in March and October of 2005, $5.7 million of interest charges related to the bridge loan associated with the Altura purchase of Twin Oaks, which occurred on April 18, 2006, and $4.4 million of interest charges related to commercial paper borrowings. These increased charges were partially offset by $0.8 million of interest capitalized in connection with capital construction projects.

Income Taxes

PNMR’s consolidated income tax expense was $10.0 million for the three months ended June 30, 2006, compared to $1.3 million for the same period of 2005. PNMR’s effective operating income tax rates for the three months ended June 30, 2006 and 2005 were 38.4% and 40.5%, respectively. PNMR’s effective non-operating income tax rates for the three months ended June 30, 2006 and 2005 were 37.1% and 35.3%, respectively.


80

RESULTS OF OPERATIONS - PNMR

SIX MONTHS ENDED JUNE 30, 2006

COMPARED TO SIX MONTHS ENDED JUNE 30, 2005 PNMR’s net earnings for the six months ended June 30, 2006 were $42.6 million, or $0.61 per diluted share of common stock, compared

to $32.1 million or $0.50 per diluted share of common stock for the six months ended June 30, 2005 primarily due to the First Choice operations and the addition of Twin Oaks. As discussed above, PNM experienced below normal levels of plant performance due to unexpected plant outages at PVNGS, which reduced the amount of electricity PNM sold in the wholesale market and forced PNM to purchase power to meet jurisdictional and contractual wholesale needs. Also affecting PNMR's earnings was the last phase of an agreed upon 2003 rate reduction which went into effect September 2005 and charges for financing.

As noted above, the following discussion is based on the segment methodology that management uses for making operating decisions

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

Corporate costs, income taxes and non-operating items are discussed on a consolidated basis for PNMR and are in conformity with the

presentation in PNMR’s Condensed Consolidated Financial Statements.


81

Regulated Operations

PNM Electric

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


PNM Electric Revenues


Six Months Ended June 30, 2006 2005 Variance (In thousands) Operating revenues $ 285,114 $ 272,963 $ 12,151 Less: Cost of energy 88,782 92,401 (3,619 )

Intersegment energy transfer 3,346 (17,535 ) 20,881 Gross margin 192,986 198,097 (5,111 )

Energy production costs 60,117 60,281 (164 ) Transmission and distribution O&M 16,368 14,625 1,743 Customer related expense 7,958 8,700 (742 ) Administrative and general 1,637 5,290 (3,653 )

Total non-fuel O&M 86,080 88,896 (2,816 ) Corporate allocation 36,163 30,209 5,954 Depreciation and amortization 29,288 35,053 (5,765 ) Taxes other than income taxes 11,475 10,018 1,457 Income taxes 4,924 6,654 (1,730 )

Total non-fuel operating expenses 167,930 170,830 (2,900 )

Operating income $ 25,056 $ 27,267 $ (2,211 )

Six Months Ended June 30, 2006 2005 Variance (In thousands, except customers)

Residential $ 107,354 $ 104,058 $ 3,296 Commercial 122,651 119,889 2,762 Industrial 30,329 30,543 (214 ) Transmission 14,238 9,038 5,200 Other 10,542 9,435 1,107

$ 285,114 $ 272,963 $ 12,151


82


PNM Electric Sales

Operating revenues increased $12.2 million, or 4.5%, for the six months ended June 30, 2006 compared to the same period of 2005.

Retail electricity sales increased 5.3%, to 3.84 million MWh in the first six months of 2006 compared to 3.65 million MWh for the same period in 2005. Customer growth was 3.0% year over year and weather-normalized retail electric load growth for the first six months of 2006 was 4.8%. Customer load growth, when normalized for the impact of weather, increased revenues by $11.7 million. Increased usage due to warmer weather increased revenues $1.5 million. In addition, increased transmission revenues, primarily from point-to-point customers, increased revenues $5.2 million. These revenue increases were partially offset by a decrease in revenues of $6.9 million due to a 2.5% rate reduction which was effective beginning September 2005.

The gross margin, or operating revenues minus cost of energy sold and intersegment energy transfer, decreased $5.1 million, or 2.6%,

for the six months ended June 30, 2006 primarily due to the reduction of power plant availability and the rate decrease. Plant outages at PVNGS during the first six months created an increase in purchased power requirements to serve load. These decreases were partially offset by increased revenues associated with retail load growth.

Total non-fuel O&M expenses decreased $2.8 million, or 3.2%, for the six months ended June 30, 2006 compared to the same period of

2005. Energy production costs were relatively unchanged in the second quarter of 2006. Reduced plant outages at Reeves ($1.6 million), Four Corners ($0.6 million), and SJGS ($0.2 million), were mostly offset by increased plant outage costs of $1.3 million at PVNGS. In addition, a new water sharing agreement at SJGS with the Jicarilla Apache Tribe, which started in January 2006, increased energy production costs by $0.3 million. Transmission and distribution O&M expenses increased $1.7 million or 11.9% primarily due to increased maintenance costs for outage restoration and reliability purposes. Customer related expenses decreased $0.7 million, or 8.5%, primarily due to a transfer of employees to the corporate level and allocated through the corporate allocation. Administrative and general expenses decreased $3.7 million, or 69.1%, due to higher capitalized costs of $2.1 million and lower legal and consulting costs of $1.2 million related to routine business matters.

Depreciation and amortization decreased $5.8 million, or 16.4%, primarily due to an increase in the estimated useful life at SJGS,

partially offset by asset additions placed in service during 2005. Taxes other than income increased $1.5 million or 14.5% due to a general increase in property taxes from various taxing authorities.


Six Months Ended June 30, 2006 2005 Variance (Megawatt hours)

Residential 1,335,894 1,260,512 75,382 Commercial 1,732,921 1,639,618 93,303 Industrial 646,587 633,488 13,099 Other 126,421 114,016 12,405

3,841,823 3,647,634 194,189

83

TNMP Electric

PNMR acquired TNP, the parent of TNMP, on June 6, 2005, and results in this section are presented for 2006 only, comparable results from 2005 are not presented.

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


TNMP Electric Revenues

* Under TECA, customers of TNMP Electric in Texas have the ability to choose First Choice or any other REP to provide energy.

However, TNMP Electric delivers energy to customers within its service area regardless of the REP chosen. Therefore, TNMP Electric earns revenue for the delivery of energy to First Choice and First Choice earns revenue on the usage of that energy by its customers. The average customers reported above include 147,782 and 157,813 customers of TNMP Electric at June 30, 2006 and 2005, respectively, who have chosen First Choice as their REP. These TNMP Electric customers are also included below in the First Choice segment. For PNMR consolidated reporting purposes, these customers are included only once in the consolidated customer count.


Six Months Ended

For the Period June 30, June 6 - June 30, 2006 2005 (In thousands) Operating revenues $ 124,141 $ 19,235 Less: Cost of energy 49,823 6,702 Gross margin 74,318 12,533 Transmission and distribution O&M 10,112 1,150 Customer related expense 2,600 302 Administrative and general 284 288

Total non-fuel O&M 12,996 1,740 Corporate allocation 18,014 1,461 Depreciation and amortization 15,563 2,085 Taxes other than income taxes 11,479 1,885 Income taxes 566 1,175


Six Months Ended

For the period June 30, June 6 - June 30, 2006 2005 (In thousands, except customers)

Residential $ 39,931 $ 7,857 Commercial 43,507 6,522 Industrial 21,640 2,607 Other 19,063 2,249

$ 124,141 $ 19,235


84


TNMP Electric Sales *

* The MWh reported above include 1,109,966 and 257,770 MWh used by customers of TNMP Electric at June 30, 2006 and 2005,

respectively, who have chosen First Choice as their REP. These MWh are also included below in the First Choice segment. TNMP Electric’s gross margin was $74.3 million for the six months ended June 30, 2006. The significant factors that impacted gross

margin include a decrease in revenues due to rate reductions in both Texas and New Mexico, lower revenues due to a reduction in operations of a major customer in New Mexico and increased transmission costs. These decreases were partially offset by customer growth year over year.


Six Months Ended

For the period June 30, June 6 - June 30, 2006 2005 (Megawatt hours)

Residential 1,334,494 275,271 Commercial 1,426,121 189,767 Industrial 942,643 144,791 Other 60,715 8,590

3,763,973 618,419

85

PNM Gas

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

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

PNM Gas Revenues



Six Months Ended June 30, 2006 2005 Variance (In thousands) Operating revenues $ 276,486 $ 247,670 $ 28,816 Less: Cost of energy 199,859 167,727 32,132 Gross margin 76,627 79,943 (3,316 )

Energy production costs 1,103 1,197 (94 ) Transmission and distribution O&M 13,854 13,367 487 Customer related expense 8,147 9,313 (1,166 ) Administrative and general 1,268 2,561 (1,293 )

Total non-fuel O&M 24,372 26,438 (2,066 ) Corporate allocation 22,314 17,881 4,433 Depreciation and amortization 11,914 11,172 742 Taxes other than income taxes 4,285 4,006 279 Income taxes 3,030 5,787 (2,757 )

Total non-fuel operating expenses 65,915 65,284 631 Operating income $ 10,712 $ 14,659 $ (3,947 )

Six Months Ended June 30, 2006 2005 Variance (In thousands, except customers)

Residential $ 180,151 $ 151,619 $ 28,532 Commercial 57,384 45,349 12,035 Industrial 2,251 925 1,326 Transportation* 7,486 7,117 369 Other 29,214 42,660 (13,446 )

$ 276,486 $ 247,670 $ 28,816


86

The following table shows gas throughput by customer class:

PNM Gas Throughput


Operating revenues increased $28.8 million, or 11.6%, for the six months ended June 30, 2006, compared to the same period of 2005, primarily due to higher natural gas prices in 2006. PNM Gas purchases natural gas in the open market and resells it at no profit to its sales-service customers. As a result, increases or decreases in gas revenues driven by gas costs do not impact the consolidated gross margin or earnings of PNM Gas. Total gas sales volumes decreased 3.6% primarily due to customer conservation resulting from higher natural gas prices and warmer weather in 2006. Customer growth increased 2.2% year over year.

The gross margin, or operating revenues minus cost of energy sold, decreased $3.3 million, or 4.1%, for the six months ended June 30,

2006 compared to the same period of 2005. Reduced customer usage resulting from customer conservation caused gross margin to decrease $5.6 million and warmer weather reduced margin $1.6 million. These decreases were offset by customer growth discussed above, which increased margin $4.1 million.

Total non-fuel O&M expenses decreased $2.1 million, or 7.8% for the six months ended June 30, 2006 compared to the same period

of 2005. Customer related expenses decreased $1.2 million, or 12.5%, primarily due to a reduction in labor costs, which were charged to the business segments in 2005 but were recorded at the corporate level (and allocated through the corporate allocation) in 2006. Administrative and general expenses decreased $1.3 million primarily due to higher capitalized costs resulting from an increase in construction activity.

Depreciation and amortization increased $0.7 million, or 6.6%, primarily due to asset and software additions placed in service during

2005.


Six Months Ended June 30, 2006 2005 Variance (Thousands of decatherms)

Residential 15,020 16,704 (1,684 ) Commercial 5,557 5,885 (328 ) Industrial 267 130 137 Transportation* 20,402 17,252 3,150 Other 3,067 5,985 (2,918 )

44,313 45,956 (1,643 )

87

Unregulated Operations Wholesale

The table below sets forth the operating results for Wholesale:


Six Months Ended June 30, 2006 2005 Variance (In thousands) Operating revenues $333,982 $ 274,286 $ 59,696 Less: Cost of energy 262,746 208,965 53,781

Intersegment energy transfer (3,346 ) 17,535 (20,881 )

Gross margin 74,582 47,786 26,796 Energy production costs 20,136 14,402 5,734 Transmission and distribution O&M 50 21 29 Customer related expense 562 382 180 Administrative and general 3,294 3,383 (89 )

Total non-fuel O&M 24,042 18,188 5,854 Corporate allocation 3,075 2,053 1,022 Depreciation and amortization 10,316 8,028 2,288 Taxes other than income taxes 3,048 1,727 1,321 Income taxes 8,233 3,875 4,358

Total non-fuel operating expenses 48,714 33,871 14,843 Operating income $ 25,868 $ 13,915 $ 11,953

88

The following table shows revenues by customer class:

Wholesale Revenues

The following table shows sales by customer class:

Wholesale Sales

Operating revenues increased $59.7 million, or 21.8%, for the six months ended June 30, 2006 compared to the same period of 2005.

This increase in wholesale electric sales was primarily due to increased short-term sales of $29.9 million, or 15.0%, resulting from a 15.9% increase in average short-term prices in 2006 compared to 2005. In addition, long-term contracts increased $29.8 million, or 39.5%, primarily due to the acquisition of Twin Oaks. Twin Oaks increased revenue by $32.8 million of which $15.7 million related to an existing power agreement and $16.9 million for the amortization of the fair value of a sales contract existing as of the date of the acquisition (see Note 2). Wholesale sold 5.47 million MWh of electricity in 2006 compared to 5.36 million MWh in 2005, an increase of 2.0%. These increases were partially offset by a decrease in revenues from PNM long-term contracts of $3.0 million in 2006 due primarily to the expiration of a customer contract in March 2005, partially offset by growth in other long-term contracts and increases in contract pricing.

The gross margin, or operating revenues minus cost of energy sold and intersegment energy transfer, increased $26.8 million, or

56.1%, for the six months ended June 30, 2006, compared to the same period of 2005, primarily due to the addition of Twin Oaks, which increased margin $21.6 million. In addition, margin increased due to the forward sale of first quarter 2006 excess resources in September 2005 when market prices were high. When prices fell in early 2006, PNM Wholesale covered the forward sales with lower-priced market purchases and utilized the excess resources to create additional sales opportunities. This strategy resulted in an increase in gross margin of approximately $10.8 million. This increase was offset by a $9.7 million decrease due to reduced plant availability and increased retail load, which reduced the availability of less expensive excess energy for sale in the wholesale market. In addition, the net loss of a customer contract caused a decrease of $1.5 million in gross margin.

The long-term sales margin increased $16.4 million for the six months ended June 30, 2006, compared to the same period of 2005, due

to the addition of Twin Oaks margin of $21.6 million, partially offset by plant outage costs of $3.9 million. Short-term margin increased $10.4 million primarily due to the forward sale discussed above and higher market prices, partially offset by lower plant availability and increased retail loads, which caused a decrease in energy available to sell in the Wholesale market. PNM Wholesale's mark-to-market position decreased $2.0 million in 2006, from a $0.8 million increase in 2005.


Six Months Ended June 30, 2006 2005 Variance (In thousands)

Long-term contracts $ 105,158 $ 75,372 $ 29,786 Short-term sales 228,824 198,914 29,910

$ 333,982 $ 274,286 $ 59,696

Six Months Ended June 30, 2006 2005 Variance (Megawatt hours)

Long-term contracts 1,680,909 1,288,885 392,024 Short-term sales 3,789,903 4,074,439 (284,536 )

5,470,812 5,363,324 107,488

89

Total non-fuel O&M expenses increased $5.9 million, or 32.2%, for the six months ended June 30, 2006. Energy production costs

increased $5.7 million, or 39.8%, due primarily to increased planned outage costs of $3.9 million at PVNGS Unit 3 and the addition of Twin Oaks costs of $1.6 million and Luna cost of $0.8 million, which the Company did not have in 2005. These increases were partially offset by the write-off of a regulatory liability, which decreased expenses $0.6 million.

Depreciation and amortization increased $2.3 million, or 28.5% for the six months ended June 30, 2006 primarily due to the addition of

Twin Oaks and depreciation expense for assets placed in service during 2005, partially offset by changes in the depreciation rates at the Afton and Lordsburg plants. Taxes other than income increased $1.3 million or 76.5% primarily due to the addition of Twin Oaks.


90

First Choice

PNMR acquired TNP on June 6, 2005, and results in this section are presented from the acquisition date forward only . The table below sets forth the operating results for First Choice:


First Choice Electric Revenues


Six Months Ended For the Period June 30, June 6 - June 30 2006 2005 (In thousands) Operating revenues $ 259,990 $ 43,031 Less: Cost of energy 208,408 34,083 Gross margin 51,582 8,948 Customer related expense 5,988 466 Administrative and general 12,056 1,089

Total non-fuel O&M 18,044 1,555 Corporate allocation 7,965 1,130 Depreciation and amortization 1,008 105 Taxes other than income taxes 2,536 512 Income taxes 7,663 2,020


Six Months Ended For the Period June 30, June 6 - June 30 2006 2005 (In thousands, except customers)

Residential $ 148,782 $ 29,265 Mass-market 42,730 6,615 Mid-market 53,313 5,864 Other 15,165 1,287

$ 259,990 $ 43,031


91


First Choice Electric Sales *

* See note above in the TNMP Electric segment discussion about the impact of TECA. First Choice’s gross margin was $51.6 million for the six months ended June 30, 2006. The significant factors that impacted gross

margin include increases in price margins driven by increased competitive and price to beat sales prices, an increase in mark-to-market gains and an amortization benefit of sales and purchase contracts existing at the time of the acquisition. As part of the acquisition of TNP, PNMR determined the fair value of a First Choice contractual obligation to purchase power and an obligation to sell power that are being amortized over the contract lives, or approximately three years. These increases were partially offset by customer attrition.

Corporate and Other Corporate Administrative and General Expenses

Corporate administrative and general expenses, which represent costs that are driven primarily by corporate-level activities, are allocated

to the business segments and are presented in the corporate allocation line item in the segment statements. These costs increased $25.3 million, or 40.6%, to $87.6 million for the six months ended June 30, 2006 compared to the same period of 2005. This increase was primarily due to $17.8 million in additional expenses for insurance, benefits and corporate support activities for TNP, which PNMR did not incur until the acquisition of TNP in June 2005. Stock-based compensation expense increased $4.6 million due to the adoption of SFAS 123R (see Note 6). Legal and consulting expenses increased $2.5 million for audit fees, SEC compliance, tax matters and integration charges. Wages and benefit costs increased $3.5 million due to a transfer of employees to corporate and increases in projected payouts of employee incentive programs. These increases were partially offset by a decrease of $2.4 million of acquisition related costs.

Depreciation Expense

Corporate and other depreciation expense decreased $3.8 million, or 47.7%, to $4.2 million, primarily due to the write-off of software costs in the second quarter of 2005. Taxes Other Than Income

Corporate and other taxes other than income increased $1.1 million, or 85.6%, to $2.4 million primarily due to an increase in payroll taxes resulting from a transfer of employees to Corporate and a higher tax base from the TNP acquisition.


Six Months Ended For the period June 30, June 6 - June 30, 2006 2005 (Megawatt hours)

Residential 1,064,206 246,332 Mass-market 282,789 55,424 Mid-market 486,063 67,420 Other 25,445 2,949

1,858,503 372,125

92

PNMR Consolidated Other Income and Deductions

Interest income decreased $1.9 million, or 8.9% for the six months ended June 30, 2006 due primarily to interest earned on the investment of proceeds related to the sale of hybrid income term securities, invested from March 31, 2005 until the TNP acquisition on June 6, 2005.

Other income decreased $1.3 million or 19.8% primarily due to lower returns on investments. Carrying charges on regulatory assets were $4.0 million for the six months ended June 30, 2006. This represents interest income on

TNMP regulatory assets.

Interest Charges

PNMR’s consolidated interest charges increased by $29.2 million for the six months ended June 30, 2006, compared to the same period of 2005, primarily due to $12.6 million of interest charges related to debt from the TNP operations, which PNMR did not incur until the acquisition of TNP in June 2005, interest and refinancing costs of $5.6 million related to the equity-linked units issued in March and October of 2005, $5.7 million of interest charges related to the bridge loan associated with the Altura purchase of Twin Oaks, which occurred on April 18, 2006, $1.0 million of interest charges for pollution control bonds due to increased interest rates, $1.4 million of interest charges related to rate increases on PNMR swaps, $3.0 million of interest for hybrid income term securities and $7.8 million of interest charges related to commercial paper borrowings. These increased charges were partially offset by $2.4 million of interest capitalized in connection with capital construction projects and $2.0 million of TNMP debt retirement in connection with the purchase of TNMP in June 2005. Income Taxes

PNMR’s consolidated income tax expense was $25.4 million for the six months ended June 30, 2006, compared to $18.6 million for the same period of 2005. PNMR’s effective operating income tax rates for the six months ended June 30, 2006 and 2005 were 37.2% and 34.9%, respectively. PNMR’s effective non-operating income tax rates for the six months ended June 30, 2006 and 2005 were 37.0% and 35.5%, respectively.


93

RESULTS OF OPERATIONS - PNM

THREE AND SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 2005

PNM’s segments are PNM Electric, PNM Gas and Wholesale. The PNM Electric and PNM Gas segments are identical to the

segments presented above in “Results of Operations” for PNMR. The Wholesale segment reported for PNM does not include Altura (see Note 2 and Note 3).

PNM’s operating revenues decreased $24.1 million, or 6.8%, for the three months ended June 30, 2006, compared with the same period of 2005. Gross margin decreased $2.7 million, or 1.9%, compared with the prior year quarter. These decreases were primarily due to a decrease in the Electric segment gross margin of $2.7 million and the Gas segment gross margin of $2.3 million discussed above. These decreases were partially offset by an increase in the PNM Wholesale segment gross margin of $2.3 million, which increased primarily due to a decrease in purchase prices, partially offset by lower plant availability and increased retail loads, which caused a decrease in energy available to sell in the market.

Total operating expenses decreased $25.8 million, or 7.6%, for the three months ended June 30, 2006, compared with the same period

of 2005, due primarily to a decrease in cost of energy of $21.4 million. Administrative and general expenses decreased $2.0 million primarily due to higher capitalized costs of $1.1 million and lower legal and consulting costs of $0.8 million. Depreciation expenses decreased $8.1 million as a result of a write-off of software costs of $4.5 million in the second quarter of 2005, an increase in the estimated useful life at SJGS and some fully depreciated plant at Four Corners, partially offset by additions to fixed assets.

PNM’s consolidated income tax expense was $2.2 million for the three months ended June 30, 2006, compared to $2.5 million for the

same period of 2005. PNM’s effective operating income tax benefit rates for the three months ended June 30, 2006 and 2005 were 37.3% and 44.8%, respectively. PNM’s effective non-operating income tax rates for the three months ended June 30, 2006 and 2005 were 38.8% and 40.5%, respectively.

PNM’s operating revenues increased $67.2 million, or 8.6%, for the six months ended June 30, 2006, compared with the same period

of 2005. Gross margin decreased $3.3 million, or 1.0%, compared with the prior year. These decreases were primarily due to a decrease in the Electric segment gross margin of $5.1 million and the Gas segment gross margin of $3.3 million discussed above. These decreases were partially offset by an increase in the PNM Wholesale segment gross margin of $5.2 million, which increased primarily due to a first quarter forward sale, partially offset by lower plant availability and increased retail loads, which caused a decrease in energy available to sell in the market.

Total operating expenses increased $66.7 million, or 9.1%, for the six months ended June 30, 2006, compared with the same period of

2005, due primarily to an increase in cost of energy of $70.5 million. Administrative and general expenses decreased $1.3 million primarily due to higher capitalized cost of $2.1 million and lower legal and consulting costs of $1.2 million. Depreciation expenses decreased $11.2 million as a result of a write-off of software costs of $4.5 million in the second quarter of 2005, an increase in the estimated useful life at SJGS and some fully depreciated plant at Four Corners, partially offset by additions to fixed assets.

PNM’s consolidated income tax expense was $21.2 million for the six months ended June 30, 2006, compared to $21.0 million for the

same period of 2005. PNM’s effective operating income tax rates for the six months ended June 30, 2006 and 2005 were 38.4% and 36.1%, respectively. PNM’s effective non-operating income tax rates for the six months ended June 30, 2006 and 2005 were 38.8% and 37.1%, respectively.


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RESULTS OF OPERATIONS - TNMP

THREE AND SIX MONTHS ENDED JUNE 30, 2006

COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 2005

TNMP operates in only one reportable segment, “TNMP Electric.” Results include the effect of purchase accounting on June 6, 2005. Amounts for the period January 1 through June 6, 2005 are pre-acquisition and amounts after June 6, 2005 are post-acquisition. See Note 1.

TNMP’s operating revenues decreased $4.7 million, or 7.2%, for the three months ended June 30, 2006, compared with the same period of 2005. Gross margin decreased $3.9 million, or 9.1%, compared with the prior year quarter. The significant factors that impacted gross margin include a decrease in revenues due to rate reductions in conjunction with the acquisition in both Texas and New Mexico, lower revenues due to a reduction in operations of a major customer in New Mexico and increased transmission costs. These decreases were partially offset by customer growth and weather impacts.

Total operating expenses increased $0.8 million, or 1.6%, for the three months ended June 30, 2006, compared with the same period

of 2005, due primarily to an increase in non-fuel operating expenses of $1.8 million. Administrative and general expenses increased $2.9 million primarily due to increased labor, employee benefits, consulting and insurance expenses, including expenses allocated to TNMP from PNMR. The increase in administrative and general expense was partially offset by decreased operating income tax expenses of $2.7 million. Depreciation expenses increased as a result of additions to fixed assets.

TNMP’s consolidated income tax expense was $2.1 million for the three months ended June 30, 2006, compared to $5.0 million for the

same period of 2005. TNMP’s effective operating income tax rates for the three months ended June 30, 2006 and 2005 were 45.1% and 35.1%, respectively. TNMP’s effective non-operating income tax rates for the three months ended June 30, 2006 and 2005 were 38.9% and 38.3%, respectively.

TNMP’s operating revenues decreased $7.9 million, or 6.0%, for the six months ended June 30, 2006, compared with the same period

of 2005. Gross margin decreased $7.2 million, or 8.8%, compared with the prior year first and second quarters. The significant factors that impacted gross margin include a decrease in revenues due to rate reductions in conjunction with the acquisition in both Texas and New Mexico, lower revenues due to a reduction in operations of a major customer in New Mexico and increased transmission costs. These decreases were partially offset by customer growth.

Total operating expenses increased $2.0 million, or 1.9%, for the six months ended June 30, 2006, compared with the same period of 2005, due primarily to an increase in non-fuel operating expenses of $3.4 million. Administrative and general expenses increased $7.7 million primarily due to increased labor, employee benefits, consulting and insurance expenses, including expenses allocated to TNMP from PNMR. The increase in administrative and general expense was partially offset by decreased operating income tax expenses of $5.7 million. Depreciation expenses increased as a result of additions to fixed assets.

TNMP’s consolidated income tax expense was $2.3 million for the six months ended June 30, 2006, compared to $6.3 million for the same period of 2005. TNMP’s effective operating income tax rates for the six months ended June 30, 2006 and 2005 were 31.9% and 34.8%, respectively. TNMP’s effective non-operating income tax rates for the six months ended June 30, 2006 and 2005 were 38.6% and 40.1%, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with GAAP requires Company management to select and apply accounting policies that best provide the framework to report the results of operations and financial position for PNMR, PNM and TNMP. The selection and application of those policies requires management to make difficult subjective or complex judgments concerning reported amounts of revenue and expenses during the reporting period and the reported amounts of assets and liabilities at the date of the financial statements. As a result, there exists the likelihood that materially different amounts would be reported under different conditions or using different assumptions.


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As of June 30, 2006, 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/A (Amendment No. 2) for the year ended December 31, 2005. 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 and financial instruments. Effective January 1, 2006, the Company adopted SFAS 123R, utilizing the modified prospective approach. See Note 6 for a comprehensive discussion of the accounting for stock-based compensation expense, including a discussion of the assumptions used to estimate the fair market value of awards .

LIQUIDITY AND CAPITAL RESOURCES Statements of Cash Flow PNMR

At June 30, 2006, PNMR had cash and short-term investments of $73.9 million compared to $68.2 million in cash and short-term investments at December 31, 2005.

Cash provided by operating activities for the six months ended June 30, 2006 was $111.6 million compared to $113.4 million for the six months ended June 30, 2005. PNMR's net earnings for the six months ended June 30, 2006 increased 33.0%, to $42.6 million from $32.1 million, for the six months ended June 30, 2005. The slight decrease in cash from operating activities was due to a decrease in accounts payable resulting from PNM’s decreased gas purchases and payments for gas purchased in prior periods for the 2005-2006 winter heating season. The slight decrease in cash from operating activities was offset in part higher net earnings.

Cash used for investing activities for the six months ended June 30, 2006 was $596.4 million compared to cash used of $31.5 million

for the six months ended June 30, 2005. The increase in cash used for investing activities in the current period was due primarily to increased cash payments for utility plant additions and the purchase of the Twin Oaks business.

Cash provided from financing activities for the six months ended June 30, 2006 was $490.5 million compared to cash provided from

financing activities of $123.8 million for the six months ended June 30, 2005. During the six months ended June 30, 2006, PNMR borrowed $480 million in short term debt and used the proceeds to acquire the Twin Oaks business. During the six months ended June 30, 2005, PNMR issued equity-linked units for $239.8 million and common stock for $101.2 million and repaid $74.0 million of short-term debt, as well as the repaying of $110.5 million of long-term debt related to the acquisition of TNP, which did not recur in 2006. PNM

At June 30, 2006, PNM had cash and short-term investments of $2.7 million compared to $12.7 million in cash and short-term investments at December 31, 2005.

Cash provided by operating activities for the six months ended June 30, 2006 was $100.7 million compared to $83.2 million for the

six months ended June 30, 2005. PNM's net earnings for the six months ended June 30, 2006 decreased 7.9 %, to $33.7 million from $36.6 million, for the six months ended June 30, 2005. The increase in cash from operations was due primarily to a decrease in accounts receivable and unbilled revenues resulting from the collection of the higher levels of accounts receivable balances during the 2005-2006 winter heating season, an increase in cash from current regulatory assets due to lower levels of PGAC accounts receivable resulting from collections of PGAC balances from customers and lower levels of billings to customers and an increase in accrued interest and taxes due to higher current income taxes resulting from collections of PGAC balances from customers and property tax accruals. The increase in cash from operations was offset in part by a decrease in accounts payable resulting from decreased gas purchases and the payment of outstanding gas purchases as of December 31, 2005.


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Cash used for investing activities for the six months ended June 30, 2006 was $82.5 million compared to $49.5 million for the six

months ended June 30, 2005. The increase in cash flows used for investing activities was due primarily to higher levels of utility plant additions.

Cash used for financing activities for the six months ended June 30, 2006 was $28.2 million compared to $42.4 million for the six

months ended June 30, 2005. The decrease in cash used for financing activities was due primarily to lower levels of short-term debt repayments. TNMP

At June 30, 2006, TNMP had cash and short-term investments of $18.7 million compared to $16.2 million in cash and short-term investments at December 31, 2005.

Cash provided by operating activities for the six months ended June 30, 2006 was $20.5 million compared to $22.0 million for the six

months ended June 30, 2005. TNMP's net earnings for the six months ended June 30, 2006 decreased 66.2%, to $4.0 million from $11.8 million, for the six months ended June 30, 2005, which contributed to the decrease in cash provided by operating activities for the six months ended June 30, 2006.

Cash used for investing activities for the six months ended June 30, 2006 was $18.1 million compared to $22.4 million for the six

months ended June 30, 2005. The decrease in cash used for investing activities resulted from lower levels of utility plant additions for the six months ended June 30, 2006 and the absence in 2006 of costs related to PNMR's acquisition of TNMP.

Cash from financing activities for the six months ended June 30, 2006 was relatively unchanged, as compared to the same period of

2005. Capital Requirements PNMR

Total capital requirements include construction expenditures as well as other major capital requirements and cash dividend requirements

for both common and preferred stock. The main focus of the Company’s current construction program is upgrading generation resources, upgrading and expanding the electric and gas transmission and distribution systems and purchasing nuclear fuel. Projections for total capital requirements for 2006, including TNMP and First Choice, are $397.1 million with projections for construction expenditures for 2006 constituting $358.0 million of that total. Total capital requirements, including TNMP and First Choice, are projected to be $1,649.7 million and construction expenditures are projected to be $1,421.0 million for 2006-2010. These estimates are under continuing review and subject to on-going adjustment. This projection includes $147.0 million for PNM’s expansion at Afton. In November 2005, PNM filed a joint stipulation with the NMPRC that would allow PNM to convert Afton to a combined cycle plant and bring Afton into retail rates effective January 1, 2008. The stipulation is subject to approval by the NMPRC. This projection is 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 six months ended June 30, 2006, the Company utilized cash generated from operations and cash on hand, as well as its liquidity arrangements, to cover its capital requirements and construction expenditures, including the acquisition of the Twin Oaks business. It is expected that the permanent financing for the $480.0 million purchase price for the Twin Oaks business will come from the issuance of debt and equity structured to maintain PNMR’s investment grade rating. The Company anticipates that internal cash generation and current debt capacity in combination with the Twin Oaks permanent financing will be sufficient to meet all of its capital requirements and construction expenditures for the years 2006 through 2010. To cover the difference in the amounts and timing of cash generation and cash requirements, the Company intends to use short-term borrowings under its current and future liquidity arrangements.


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PNM

The main focus of PNM’s current construction program is to upgrade generation resources, to upgrade and expand the electric and gas transmission and distribution systems and to purchase nuclear fuel. Projections for total capital requirements for 2006 are $267.0 million with projections for construction expenditures for 2006 constituting $288.4 million of that total. Total capital requirements are projected to be $978.7 million and construction expenditures are projected to be $1,109.4 million for the years 2006 through 2010. These estimates are under continuing review and subject to on-going adjustment. This projection includes $147.0 million for PNM’s expansion at Afton, as discussed above. TNMP

The main focus of TNMP’s current construction program is to upgrade and expand its electric transmission and distribution systems. Projections for total capital requirements for 2006 are $42.5 million. Total capital requirements are projected to be $231.9 million for the years 2006 through 2010. These estimates are under continuing review and subject to on-going adjustment.

As previously reported, in 2005, the NMPRC approved a stipulation in connection with the acquisition of TNP which called for the

integration of TNMP's New Mexico assets into PNM effective January 1, 2007. On August 8, 2006, PNMR, PNM, TNMP and TNP filed an application with FERC requesting necessary approvals under the Federal Power Act for the transfer of TNMP's New Mexico and Arizona assets to PNM effective January 1, 2007. In accordance with conditions imposed by FERC on the earlier issuance of debt by TNMP, the applicants committed that an appropriate proportion of debt issued under those FERC conditions would be retired with cash contributed by PNMR. The application stated that the retired TNMP debt would be equal to, at a minimum, the ratio of TNMP New Mexico and Arizona property additions to Texas property additions funded by such debt. The applicants also committed that TNMP debt would be retired to the extent necessary or advisable to maintain a TNMP equity to debt capitalization ratio in excess of 30%, to maintain any required interest coverage ratios, and to maintain TNMP's credit rating.

Liquidity PNMR

At August 1, 2006, PNMR had $615.0 million of liquidity arrangements. The liquidity arrangements consist of $600.0 million from an unsecured revolving credit facility, referred to as the PNMR Facility for purposes of this discussion, and $15.0 million in local lines of credit. As of August 1, 2006, there were no amounts borrowed under the PNMR Facility and no amounts borrowed under the local lines of credit. PNMR had $107.7 million of letters of credit outstanding.

At August 1, 2006, First Choice had up to $300.0 million of borrowing capacity under the PNMR Facility. Any borrowings made by

First Choice under this sublimit are guaranteed by PNMR. At August 1, 2006, First Choice had no borrowings outstanding under the PNMR Facility; however, First Choice had $1.8 million of letters of credit outstanding, which reduces the available capacity under the PNMR Facility. TNMP is also a borrower under the PNMR Facility, see “TNMP” detail below.

In addition, in February 2006, the Board approved affiliate borrowing arrangements between PNMR and its subsidiaries that would

authorize each subsidiary to borrow up to $50.0 million from PNMR. PNMR has established a commercial paper program under which it may issue up to $400.0 million in commercial paper for up to 270

days. The commercial paper is unsecured and the proceeds are used for short-term cash management needs. The PNMR Facility serves as a backstop for the outstanding commercial paper. At August 1, 2006, there were $126.3 million of borrowings outstanding under this program.

PNMR’s ability, if required, to access the capital markets at a reasonable cost and to provide for other capital needs is largely

dependent upon its ability to earn a fair return on equity, its results of operations, its credit ratings, its ability to obtain required regulatory approvals and conditions in the financial and wholesale markets. Financing flexibility is enhanced by providing a high percentage of total capital requirements from internal sources and having the ability, if necessary, to issue long-term securities and to obtain short-term credit.


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Moody’s considered PNMR's credit outlook stable and S&P considered PNMR’s outlook negative as of the date of this report. As of June 30, 2006, S&P and Moody’s rated PNMR’s senior unsecured notes issued in March 2005 (see “Financing Activities” below) as BBB- and Baa3, respectively. PNMR's commercial paper program discussed above has been rated P-3 by Moody's 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 August 1, 2006, PNM had $423.5 million of liquidity arrangements. The liquidity arrangements consist of $400.0 million from an

unsecured revolving credit facility, referred to as the PNM Facility for purposes of this discussion and $23.5 million in local lines of credit. At August 1, 2006, there were no amounts borrowed against the local lines of credit or the PNM Facility; however, $4.5 million of letters of credit were outstanding, which reduces the available capacity under the PNM Facility.

At August 1, 2006, PNM also had a $20.0 million borrowing arrangement with PNMR, which is not included in the $423.5 million of

liquidity arrangements discussed above. At August 1, 2006 there were no amounts outstanding under this arrangement.

PNM has a commercial paper program under which PNM may issue up to $300.0 million in commercial paper for up to 365 days. The commercial paper is unsecured and the proceeds are used for short-term cash management needs. The PNM Facility serves as a backstop for PNM's outstanding commercial paper. At August 1, 2006, PNM had $98.2 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.

Moody’s considered PNM's credit outlook stable and S&P considered PNM’s outlook negative as of the date of this report. As of June

30, 2006, S&P rated PNM’s business position as six and its senior unsecured notes as BBB. As of June 30, 2006, 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 August 1, 2006, TNMP had no outstanding borrowings under the PNMR Facility, but did have $2.4 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.


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Moody’s considered TNMP's credit outlook stable and S&P considered TNMP’s outlook negative as of the date of this report. As of

June 30, 2006, S&P rated TNMP’s senior unsecured notes at BBB. As of June 30, 2006, Moody’s rated TNMP’s senior unsecured notes at Baa3. The Company is committed to maintaining or improving its investment grade ratings.

Off-Balance Sheet Arrangements

The Company’s off-balance sheet arrangements consist of PNM’s operating lease obligations for PVNGS Units 1 and 2, the EIP transmission line and the entire output of Delta, a gas-fired generating plant. These arrangements help ensure PNM the availability of lower-cost generation needed to serve customers.

As of June 30, 2006, there have been no significant changes to the Company’s off-balance sheet arrangements reported in the 2005

Annual Reports on Form 10-K/A (Amendment No. 2). 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 2005 Annual Reports on Form 10-K/A (Amendment No. 2). As of June 30, 2006, there have been no significant changes to the Company’s contractual obligations from December 31, 2005 except for the Twin Oaks acquisition. Contingent Provisions of Certain Obligations

PNMR, PNM and TNMP have a number of debt obligations and other contractual commitments that contain contingent provisions. Some of these, if triggered, could affect the liquidity of the Company. PNMR, PNM or TNMP could be required to provide security, immediately pay outstanding obligations or be prevented from drawing on unused capacity under certain credit agreements if the contingent requirements were to be triggered. The most significant consequences resulting from these contingent requirements are detailed in the discussion below.

PNMR

The committed PNMR Facility contains a “ratings trigger,” for pricing purposes only. If PNMR is downgraded or upgraded by the

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

PNMR’s term loan agreement for financing the acquisition of Twin Oaks in April 2006 (see Note 2 and Note 7) includes customary

covenants, including requirements that PNMR maintain a debt-to-capital ratio, inclusive of off-balance sheet debt, of less than 65%. The term loan agreement includes customary events of default, including a cross default provision and a change in control provision. If an event of default occurs, the administrative agent may, or upon the request and direction of lenders holding more than 50% of the outstanding term loan shall, declare the unpaid principal and interest on the term loan to be due and payable. Such acceleration will occur automatically in the event of an insolvency or bankruptcy default.

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.


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

If a contingent requirement were to be triggered under the PNM Facility resulting in an acceleration of the outstanding loans under the

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

TNMP

TNMP’s borrowing availability under the committed PNMR Facility contains a “ratings trigger,” for pricing purposes only. If TNMP is

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

Financing Activities PNMR

On April 18, 2006, PNMR entered into a short-term loan agreement for temporary financing of the Twin Oaks acquisition (see Note 2).

Under the term loan agreement, PNMR was permitted to borrow up to $480.0 million in a single draw on or after April 18, 2006, to finance the acquisition of Twin Oaks and related expenses. Term loans made under this agreement bear interest at a base rate (the greater of the prime rate in effect and the Federal Funds rate plus ½ of 1%) or an adjusted Eurodollar rate (equal to the British Bankers Association LIBOR rate plus an additional percentage based on PNMR’s then current long-term senior unsecured non-credit enhanced debt rating). On April 18, 2006, PNMR borrowed $480.0 million under the term loan agreement. PNMR must repay the loan by April 17, 2007, unless accelerated in accordance with the terms of the agreement or prepaid in whole or in part upon the issuance of certain additional equity or debt. It is expected that the permanent financing for the $480.0 million Twin Oaks purchase price will come from the issuance of debt and equity structured to maintain PNMR’s investment grade rating. On August 3, 2006, $20.0 million of the term loan was repaid.

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 June 30, 2006, PNMR had approximately $400.0 million of remaining unissued securities under this universal registration statement.

PNMR has entered into three fixed-to-floating interest rate swaps with an aggregate notional principal amount of $150.0 million. Under

these swaps, PNMR receives a 4.40% fixed interest payment on the notional principal amount on a semi-annual basis and pays a floating rate equal to the six month LIBOR plus 58.15 basis points (0.5815%) on the notional amount through September 15, 2008. The initial floating rate was 1.91% and will be reset every six months. The floating rate was reset on March 15, 2006, to a weighted average rate of 5.65%. The swaps are accounted for as fair-value hedges with a liability position of approximately $6.0 million at June 30, 2006 with a corresponding reduction of long-term debt. There was no hedge ineffectiveness for the three and six months ended June 30, 2006 or June 30, 2005.


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During October 2004, PNMR entered into two forward starting floating-to-fixed rate interest rate swaps with an aggregate notional principal amount of $100.0 million. These swaps became effective August 1, 2005 with a termination date of November 15, 2009. Under these swaps, PNMR received a floating rate equal to the three month LIBOR rate on the notional principal amount which paid a fixed interest rate of 3.975% on the notional principal amount on a quarterly basis. The initial floating rate was set on August 1, 2005, at 3.693% to be reset every three months. As of the last adjustment date, the weighted average interest rate was 5.149%. From November 2004 through June 30, 2005, the swaps were accounted for as a cash flow hedge against the PNMR Facility. Effective June 30, 2005, the swaps were de-designated as cash flow hedges. As such, changes in market valuations were marked-to-market and recorded as unamortized gains or losses in the appropriate period. Prior to the de-designation, the increase in fair market value of $0.4 million was recorded in accumulated other comprehensive income on PNMR’s Condensed Consolidated Balance Sheet at June 30, 2006 and December 31, 2005. For the three and six months ended June 30, 2006, $0.2 and $1.4 million, respectively, was recognized in other income on PNMR’s Condensed Consolidated Statement of Earnings. No comparable amount was recognized for the three and six months ended June 30, 2005. These two interest rate swaps were sold on May 19, 2006. The current amount recorded in other comprehensive income will be recognized in income over a 3 year period ending in November 2009.

In March 2005, PNMR issued 3,910,000 shares of its common stock at $26.76 per share. PNMR received net proceeds from this offering, after deducting underwriting discounts, commissions and expenses, of approximately $101.0 million. In March 2005, PNMR also completed a public offering of 4,945,000 equity-linked units at 6.75%, yielding net proceeds after deducting discounts, commissions and expenses of approximately $239.6 million. In October 2005, PNMR completed a private offering of 4,000,000 equity-linked units at 6.625%. PNMR received $100.0 million in proceeds from this transaction and there were no underwriting discounts or commissions.

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. For the quarter ended June 30, 2006, 371,725 new shares of PNMR common stock were sold for total proceeds of $9.3 million. From June 30, 2006 through August 1, 2006, 375,526 shares of common stock were issued at a weighted average price of $25.93. The total proceeds from the issuance were $9.7 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 June 30, 2006, 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.


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Capital Structure PNMR

PNMR’s capitalization, including current maturities of long-term debt, at June 30, 2006 and December 31, 2005 is shown below:

Total capitalization does not include as debt the present value of PNM’s operating lease obligations for PVNGS Units 1 and 2, EIP

and the Delta operating lease, which was approximately $168.0 million as of June 30, 2006 and $170.9 million as of December 31, 2005.

PNM

PNM’s capitalization, including current maturities of long-term debt, at June 30, 2006 and December 31, 2005 is shown below:

TNMP

TNMP’s capitalization, including current maturities of long-term debt, at June 30, 2006 and December 31, 2005 is shown below:


June 30, December 31, 2006 2005

Common Equity 42.9 % 42.3 % Preferred Stock 0.4 % 0.4 % Long-term Debt 56.7 % 57.3 %

Total Capitalization 100.0 % 100.0 %

June 30, December 31, 2006 2005

Common Equity 51.0 % 50.2 % Preferred Stock 0.6 % 0.6 % Long-term Debt 48.4 % 49.2 %


June 30, December 31, 2006 2005

Common Equity 54.7 % 54.6 % Long-term Debt 45.3 % 45.4 %


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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 that materially affected PNMR, PNM or TNMP this period; however, see Note 6 for

discussion of SFAS 123R .

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS Statements made in this filing that relate to future events or PNMR’s, PNM’s or TNMP’s expectations, projections, estimates,

intentions, goals, targets and strategies, are made pursuant to the Private Securities Litigation Reform Act of 1995. Readers are cautioned that all forward-looking statements are based upon current expectations and estimates and PNMR, PNM and TNMP assume no obligation to update this information.

Because actual results may differ materially from those expressed or implied by these forward-looking statements, PNMR, PNM and

TNMP caution readers not to place undue reliance on these statements. PNMR’s, PNM’s and TNMP’s business, financial condition, cash flow and operating results are influenced by many factors, which are often beyond their control, that can cause actual results to differ from those expressed or implied by the forward-looking statements. These factors include:


• The potential unavailability of cash 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, • The risk that the Twin Oaks power plant will not be successfully integrated into PNMR, • Conditions in the financial markets affecting PNMR’s permanent financing for the Twin Oaks power plant acquisition, • Weather, including impacts on PNMR and its subsidiaries of the hurricanes in the Gulf Coast region, • Water supply, • Changes in fuel costs, • Availability of fuel supplies, • The effectiveness of risk management and commodity risk transactions, • Seasonality and other changes in supply and demand in the market for electric power, • Variability of wholesale power prices and natural gas prices, • Volatility and liquidity in the wholesale power markets and the natural gas markets, • Changes in the competitive environment in the electric and natural gas industries, • The performance of generating units, including PVNGS, and transmission systems, • The market for electrical generating equipment, • The ability to secure long-term power sales, • The risks associated with completion of generation, 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.

104

Any material changes to risk factors occurring after the filing of PNMR’s, PNM’s or TNMP’s 2005 Annual Report on Form 10-K/A

(Amendment No. 2) are disclosed in Item 1A, Risk Factors, in this Form 10-Q. For information about the risks associated with the use of derivative financial instruments see Item 3. “Quantitative and Qualitative

Disclosure 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.


105

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 energy markets.

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 purchase or sale designation are recorded on the balance sheet at fair market value at each period end. The changes in fair market value are recognized in earnings unless transactions are designated as cash flow hedges and specific hedge accounting criteria are met. Should an energy transaction qualify as a cash flow hedge under SFAS 133, fair market value changes from period to period are recognized on the balance sheet with a corresponding charge to other comprehensive income. Gains or losses are reclassified from accumulated other comprehensive income when the hedged transaction settles and impacts 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

PNM’s wholesale operations, including long-term contracts and short-term sales, are managed primarily through a net asset-backed

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

First Choice is responsible for energy supply related to the sale of electricity to retail customers in Texas. TECA contains no

provisions for the specific recovery of fuel and purchased power costs. First Choice operates within a competitive marketplace; however, to the extent that it serves former TNMP customers under the provisions of the price-to-beat service, it has the ability to file with the PUCT to change the price-to-beat fuel factor twice each year, in the event of significant changes in natural gas prices. The rates charged to new customers acquired by First Choice outside of TNMP’s service territory are not regulated by the PUCT, but are negotiated with each customer. As a result, changes in fuel and purchased power costs will affect First Choice’s operating results. First Choice is exposed to market risk to the extent that its retail rates or cost of supply fluctuates with market prices. Additionally, fluctuations in First Choice retail load requirements greater than anticipated may subject First Choice to market risk. First Choice’s basic strategy is to minimize its exposure to fluctuations in market energy prices by matching fixed price sales contracts with fixed price supply. In addition, First Choice utilizes discrete market-based transactions to take advantage of opportunities that present themselves in the ordinary course of business. These positions are subject to market risk that is not mitigated by First Choice's retail operations.

Additionally, in connection with the issuance of a final stranded cost true-up order for TNMP, the PUCT will adjust First Choice’s

fuel factor portion of the price-to-beat downward if natural gas prices are below the prices embedded in the then-current rates. The acquisition of TNP occurred on June 6, 2005. Therefore, in the following tables First Choice activity is included in the PNMR

activity from June 6, 2005 only.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABO UT MARKET RISK

106

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

Condensed Consolidated Balance Sheet:

The mark-to-market energy transactions represent net assets at June 30, 2006 and December 31, 2005 after netting all applicable open

purchase and sale contracts. 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 Wholesale:

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 June 30, 2006

As of June 30, 2006, 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%.


June 30, December 31, 2006 2005 (In thousands) Mark-to-Market Energy Contracts:

Current asset $ 38,949 $ 21,884 Long-term asset 4,760 21,265

Total mark-to-market assets 43,709 43,149 Current liability (36,784 ) (17,777 ) Long-term liability (4,261 ) (20,844 )

Total mark-to-market liabilities (41,045 ) (38,621 )

Net fair value of mark-to-market energy contracts $ 2,664 $ 4,528

Six Months Ended June 30, 2006 2005 (In thousands) Sources of Fair Value Gain/(Loss): Fair value at beginning of period $ 4,528 $ 2,073 Amount realized on contracts delivered during period (4,108 ) (254 ) Changes in fair value 2,244 1,066 Net fair value at end of period $ 2,664 $ 2,885 Net change recorded as mark-to-market $ (1,864 ) $ 812

Maturities Less than

1 year 1-3 Years 4+ Years Total (In thousands)

$2,165 $272 $227 $2,664

Risk Management Activities

PNM’s Wholesale Operations measure the market risk of its long-term contracts and wholesale activities using a VaR calculation to maintain the Company’s total exposure within management-prescribed limits. For PNM's wholesale operations, the Company measures VaR for all transactions that are not directly asset related and have economic risk. The VaR limit established for these transactions is $5.0 million. For the three months ended

107

June 30, 2006, the average VaR amount for these transactions was $0.9 million, with high and low VaR amounts for the period of $1.9 million and $0.5 million, respectively. The VaR amount for these transactions at June 30, 2006 was $1.6 million. For the three months ended June 30, 2005, the average VaR amount for these transactions was $0.3 million, with high and low VaR amounts for the period of $1.0 million and $0.1 million, respectively. The total VaR amount for these transactions at June 30, 2005 was $1.0 million.

First Choice measures the market risk of its activities using an EaR calculation to maintain the Company’s total exposure within

management-prescribed limits. The EaR limit established for First Choice’s transactions is $25.0 million. For the six months ended June 30, 2006, the average EaR amount was $9.1 million, with high and low EaR amounts for the period of $11.9 million and $6.8 million, respectively. The total EaR amount at June 30, 2006 was $9.8 million.

In addition, the Company adopted two new VaR measures to monitor the market based mitigation strategies of First Choice

management. The first VaR limit is based on the same total retail load and supply portfolio as the EaR measure; however, the VaR measure is intended to capture the effects of changes in market prices over a 10 day holding period. This VaR limit was established at $7.5 million. The VaR amount for these transactions was $2.75 million at June 30, 2006. For the six months ended June 30, 2006, the high, low and average mark-to-market VaR amounts were $4.3 million, $2.1 million and $3.1 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, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” The VaR limit established for these transactions is $3.0 million. The VaR amount for these transactions was $0.9 million at June 30, 2006. For the six months ended June 30, 2006, the high, low and average mark-to-market VaR amounts were $1.2 million, $0.3 million and $0.7 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.


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Credit Risk

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

In addition, counterparties expose the Company to credit losses in the event of non-performance or non-payment. The Company

manages credit on a consolidated basis and uses a credit management process to assess and monitor the financial conditions of counterparties. Credit exposure is regularly monitored by the RMC. The RMC has put 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.

The following table provides information related to Wholesale’s credit exposure as of June 30, 2006. The Company does not hold any

credit collateral as of June 30, 2006. The table further delineates that exposure by the credit worthiness (credit rating) of the counterparties and provides guidance as to the concentration of credit risk to individual counterparties Wholesale may have. Also provided is an indication of the maturity of a Company’s credit risk by credit ratings of the counterparties.

Wholesale

Schedule of Credit Risk Exposure June 30, 2006


Net (b) Number Exposure Net of of Credit Counter Counter- Risk -parties parties Rating (a) Exposure >10% >10% (Dollars in thousands) Investment grade $ 96,865 4 $ 64,619 Non-investment grade 901 - - Internal ratings

Investment grade 315 - - Non-investment grade 6,308 - -

Total $ 104,389 $ 64,619

(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 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.

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Wholesale

Maturity of Credit Risk Exposure June 30, 2006

The Company provides for losses due to market and credit risk. Credit risk for Wholesale's largest counterparty as of June 30, 2006 and

December 31, 2005 was $27.4 million and $20.5 million, respectively. First Choice

First Choice is subject to credit risk from non-performance by its supply counterparties to the extent these contracts have a mark-to-market value in the favor of First Choice. The Constellation power supply agreement established FCPSP, a bankruptcy remote special purpose entity, to hold all of First Choice's customer contracts 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 June 30, 2006, the supply contracted with Constellation was in an unfavorable mark-to-market position for FCPSP. When netted against amounts owed to Constellation, this exposure was approximately $68.3 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 expires 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 June 30, 2006 and December 31, 2005 was $11.7 million and $14.6 million and the tenor of these exposures was less than two years.

First Choice’s retail bad debt expense for the three months ended June 30, 2006 was $2.4 million. First Choice expects bad debt expense

to decrease in subsequent periods as the impacts from the Gulf Coast hurricanes, including waiver of customer deposits for hurricane victims, diminish. In addition, 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 senior notes issued as part of the equity-linked units sold in March and October 2005 will be remarketed in 2008. If the remarketing is successful, the interest rate on the senior notes may change to a rate selected by the remarketing agent, and the maturity of the senior notes may be extended to a date selected by PNMR. If the remarketing of the senior notes is not successful, the maturity and interest rate of the senior notes will not change and holders of the equity-linked units will have the option of putting their senior notes to PNMR to satisfy their obligations under the purchase contracts. PNMR expects that the remarketing of the senior notes will be successful.

PNM has long-term debt which subjects it to the risk of loss associated with movements in market interest rates. The majority of PNM’s long-term debt is fixed-rate debt, and therefore, does not expose PNM’s earnings to a major risk of loss due to adverse changes in market interest rates. However, the fair value of all long-term debt instruments would increase by approximately 4.0%, or $39.6 million, if interest rates were to decline by 50 basis


Total Less than Net Rating 2 Years 2-5 Years >5 Years Exposure (In thousands) Investment grade $ 90,770 $ 5,455 $ 639 $ 96,864 Non-investment grade 901 - - 901 Internal ratings

Investment grade 315 - - 315 Non-investment grade 6,308 - - 6,308

Total $ 98,294 $ 5,455 $ 639 $ 104,388

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points from their levels at June 30, 2006. At June 30, 2006, the fair value of PNM's long-term debt was approximately $987.0 billion as compared to a book value of $985.9 million. In general, an increase in fair value would impact earnings and cash flows to the extent not recoverable in rates if PNM were to re-acquire all or a portion of its debt instruments in the open market prior to their maturity.

PNM’s $146.0 million, 2.1% pollution control bonds with a maturity date of April 1, 2033, were required to be remarketed in April

2006. Following the remarketing, the interest rate on the pollution control bonds was changed to a fixed rate of 4.875% annually. During the three and six months ended June 30, 2006, PNM did not contribute cash to fund PVNGS decommissioning, pension and

other postretirement benefits for plan year 2006. The securities held by the trusts had an estimated fair value of $638.5 million at June 30, 2006, of which approximately 24.12% 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 June 30, 2006, the decrease in the fair value of the fixed-rate securities would be approximately 3.5%, or $5.4 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 1.0%, or $4.2 million, if interest rates were to decline by 50 basis points from their levels at June 30, 2006. At June 30, 2006, the fair value of TNMP's long-term debt was approximately $424.5 million as compared to a book value of $425.0 million. In general, an increase in fair value would impact earnings and cash flows to the extent not recoverable in rates if TNMP were to re-acquire all or a portion of its debt instruments in the open market prior to their maturity.

During the three and six months ended June 30, 2006, TNMP did not contribute cash to fund pension and other postretirement benefits

for plan year 2006. The securities held by the trusts had an estimated fair value of $86.1 million at June 30, 2006, of which approximately 27.8% 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 June 30, 2006, the decrease in the fair value of the fixed-rate securities would be approximately 2.9%, or $0.7 million. TNMP, therefore, is at risk for shortfalls in its funding of its obligations due to investment losses. TNMP does not believe that long-term market returns over the period of funding will be less than required for TNMP to meet its obligations. However, this belief is based on assumptions about future returns that are inherently uncertain. Equity Market Risk

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 June 30, 2006. These equity securities also expose the Company to losses in fair value. Approximately 62.6% of the securities held by the various trusts were equity securities as of June 30, 2006. Similar to the debt securities held for funding decommissioning and certain pension and other postretirement costs, PNM does not recover or earn a return through rates on any losses or gains on these equity securities.

The trusts established to fund TNMP’s pension and other postretirement benefits hold certain equity securities at June 30, 2006. These equity securities also expose the Company to losses in fair value. Approximately 59.8% of the securities held by the various trusts were equity securities as of June 30, 2006. TNMP does not recover or earn a return through rates on any losses or gains on these equity securities.


111

ITEM 4. CONTROLS AND PROCEDURES PNMR Disclosure Controls and Procedures

PNMR maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of its disclosure controls and procedures as of the end of the period covered by this report conducted by management, with the participation of the Chief Executive and Chief Financial Officer, the Chief Executive and Chief Financial Officer believe that these controls and procedures are effective to ensure that PNMR meets the requirements of SEC Regulation 13A, Rule 13a-15(e) and Rule 15d-15(e). Changes in Internal Controls

The following material changes in internal controls occurred during the second quarter of 2006:

TNP Acquisition

PNMR is currently undergoing a diligent effort to ensure TNP’s compliance with Section 404 of the Sarbanes-Oxley Act of 2002. As integration activities occur, PNMR continues to integrate PNMR’s internal controls into TNP’s operations.

Twin Oaks Acquisition

PNMR is currently undergoing a diligent effort to integrate Twin Oaks' and PNMR’s internal control activities to ensure that PNMR maintains its compliance with Section 404 of the Sarbanes-Oxley Act of 2002. It is expected that this effort will continue during the remainder of 2006 and into 2007.

Except as described above, there were no other changes in internal control over financial reporting that occurred during the second quarter of 2006 that have materially affected, or are reasonably likely to materially affect PNMR’s internal control over financial reporting.

PNM

Disclosure Controls and Procedures

PNM maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of 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 meets the requirements of SEC Regulation 13A, Rule 13a-15(e) and Rule 15d-15(e).


o Implemented a new application to process accounts payable activities and modified the related business process controls. o Implemented a new application to process gas purchasing and miscellaneous accounts receivable and billing activities and modified

the related business process controls for one of its subsidiaries, PNM. o Upgraded the general ledger system to enhance existing functionality and to add new functionality for use in analysis and financial

reporting.

112

Changes in Internal Controls


Except as described above, there were no other changes in internal control over financial reporting that occurred during the second

quarter of 2006 that have materially affected, or are reasonably likely to materially affect PNM’s internal control over financial reporting.

TNMP Disclosure Controls and Procedures

TNMP maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of its disclosure controls and procedures as of the end of the period covered by this report conducted by management, with the participation of the Chief Executive and Principal Financial Officer, the Chief Executive and Principal 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


Except as described above, there were no other changes in internal control over financial reporting that occurred during the second

quarter of 2006 that have materially affected, or are reasonably likely to materially affect TNMP’s internal control over financial reporting.

o Implemented a new application to process accounts payable activities and modified the related business process controls. o Implemented a new application to process gas purchasing and miscellaneous accounts receivable and billing activities and modified

the related business process controls. o Upgraded the general ledger system to enhance existing functionality and to add new functionality for use in analysis and financial

reporting.

o Implemented a new application to process accounts payable activities and modified the related business process controls. o Upgraded the general ledger system to enhance existing functionality and to add new functionality for use in analysis and financial

reporting.

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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.

ITEM 1A. RISK FACTORS

As of the date of this report, there have been no material changes with regard to the Company’s Risk Factors disclosed in PNMR’s, PNM’s and TNMP’s Annual Reports on Forms 10-K/A (Amendment No. 2) for the year ended December 31, 2005. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Annual Meeting

The annual meeting of shareholders was held on May 16, 2006. The matters voted on at the meeting and the results were as follows:

The election of the following nominees to serve as directors as follows:

The approval of the selection by the Company’s Board of Deloitte & Touche LLP as independent auditors for the fiscal year ending

December 31, 2006, was voted on, as follows:

The approval of an amendment to the Restated Articles of Incorporation of PNM Resources, Inc. to eliminate the authority of the Board

to classify itself by amending the bylaws, was voted on, as follows:

ITEM 5. OTHER EVENTS

None

• Asbestos Cases • SESCO Matter (for both PNM and TNMP) • California Refund Proceeding • TNMP True-Up Proceeding

Director Votes For Votes Against or

Withheld Terms expiring in 2007: Adelmo E. Archuleta 61,731,760 192,210 Julie A. Dobson 61,723,253 200,717 Woody L. Hunt 61,730,796 193,174 C. E. McMahen 61,729,836 194,134 M. T. Pacheco 61,719,470 204,500 R. M. Price 57,915,087 4,008,883 B. S. Reitz 61,718,240 205,730 Jeffry E. Sterba 57,936,128 3,987,842 Joan B. Woodard 61,731,251 192,719

Votes For Votes Against or Withheld Abstentions 61,778,325 90,648 54,996

Votes For Votes Against or Withheld Abstentions 60,059,637 1,714,389 149,943

114

ITEM 6. EXHIBITS

** designates each management contract or compensatory plan or arrangement required to be identified.

3.1 PNMR Articles of Incorporation of PNM Resources, as amended through June 21, 2006. 10.4 PNMR Term Loan Agreement, dated as of April 17, 2006, among PNM Resources, as borrower, the lenders

identified therein and Lehman Commercial Paper Inc., as administrative agent. 10.43** PNMR PNMR Fourth Amendment to the PNM Resources Non-Union Severance Pay Plan executed April

19, 2006. 12.1 PNMR Ratio of Earnings to Fixed Charges 12.2 PNMR Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 31.1 PNMR Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 PNMR Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.3 PNM Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.4 PNM Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.5 TNMP Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.6 TNMP Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 PNMR Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 PNMR Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.3 PNM Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.4 PNM Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.5 TNMP Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.6 TNMP Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

115

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: August 9, 2006 /s/ Thomas G. Sategna Thomas G. Sategna Vice President and Corporate Controller (Officer duly authorized to sign this report)

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EXHIBIT 3.1

ARTICLES OF INCORPORATION OF

PNM RESOURCES, INC.

AS AMENDED THROUGH JUNE 21, 2006

1

OFFICE OF THE

PUBLIC REGULATION COMMISSION

CERTIFICATE OF AMENDMENT

OF

PNM RESOURCES, INC.

3314747

The Public Regulation Commission certifies that duplicate originals of the Articles of Amendment attached hereto,

duly signed and verified pursuant to the provisions of the BUSINESS CORPORATION ACT (53-11-1 to 53-18-12 NMSA 1978)

have been received by it and are found to conform to law.

Accordingly, by virtue of the authority vested in it by law, the Public Regulation Commission issues this Certificate of Amendment and attaches hereto a duplicate original of the Articles of Amendment.

Dated: JUNE 21, 2006

In testimony whereof, the Public Regulation of the State of New Mexico has caused this certificate to be signed by its Chairman and the seal of said Commission to affixed at the City of Santa Fe. /s/Ben R. Lujan _______________________ Chairman

/s/Ann Echols ________________________ Bureau Chief

2

ARTICLES OF AMENDMENT TO

THE RESTATED ARTICLES OF INCORPORATION

OF

PNM RESOURCES, INC.

Pursuant to the provisions of NMSA 1978, Section 53-13-4 (2001), PNM Resources, Inc. adopts the following Articles of Amendment

to its Restated Articles of Incorporation:

“The number of directors of the Corporation shall be as specified in the Bylaws but shall be no less than five (5) and no more

than twelve (12). The number of directors may be increased or decreased from time to time as provided in the Bylaws so long as no decrease shall have the effect of shortening the term of any incumbent director.”

PNM RESOURCES, INC. By: /s/ Jeffry E. Sterba ___________ JEFFRY E. STERBA

Chairman, President and Chief Executive Officer

DATED: May 23, 2006.

I. The first paragraph of Article VI is amended to read:

II. This amendment was adopted by the shareholders on May 16, 2006. III. The number of shares outstanding and entitled to vote on the amendment was 68,786,286. IV. The number of shares voting in favor of the amendment was 60,042,704 with 1,713,917 being cast against and 148,018

abstaining.

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OFFICE OF THE PUBLIC REGULATION COMMISSION

CERTIFICATE OF AMENDMENT

OF

PNM RESOURCES, INC.

3298742

The Public Regulation Commission certifies that duplicate originals of the Articles of Amendment attached hereto,

duly signed and verified pursuant to the provisions of the BUSINESS CORPORATION ACT (53-11-1 to 53-18-12 NMSA 1978)

have been received by it and are found to conform to law.

Accordingly, by virtue of the authority vested in it by law, the Public Regulation Commission issues this Certificate of Amendment and attaches hereto a duplicate original of the Articles of Amendment.

Dated: JUNE 27, 2005

In testimony whereof, the Public Regulation of the State of New Mexico has caused this certificate to be signed by its Chairman and the seal of said Commission to affixed at the City of Santa Fe.

/s/Ben R. Lujan ______________________________

Chairman /s/Ann Echols ________________________________

Bureau Chief

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ARTICLES OF AMENDMENT TO

THE RESTATED ARTICLES OF INCORPORATION

OF

PNM RESOURCES, INC.

Pursuant to the provisions of NMSA 1978, Section 53-13-4 (2001), PNM Resources, Inc. adopts the following Articles of Amendment

to its Restated Articles of Incorporation: I. Article IV.C. is amended to read:

“C. Preferred Stock. The Board of Directors is authorized by resolution to provide from time to time for the issuance of shares of Preferred Stock in series and to fix, from time to time before issuance, the designation, preferences, privileges and voting powers of the shares of each series of Preferred Stock and its restrictions or qualifications, limited to the following:

(1) the serial designation, authorized number of shares and the stated value;

(2) the dividend rate, if any, the date or dates on which the dividends will be payable, and the extent to which the dividends may be cumulative;

(3) the price or prices at which shares may be redeemed, and any terms, conditions and limitations upon any redemption;

(4) the amount or amounts to be received by the holders in the event of dissolution, liquidation, or winding up of the Corporation;

(5) any sinking fund provisions for redemption or purchase of shares of any series;

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II. This amendment was adopted by the shareholders on May 17, 2005. III. The number of shares outstanding and entitled to vote on the amendment was 60,464,595. IV. The number of shares voting in favor of the amendment was 38,776,109 with 11,808,944 being cast against and 198,038

votes abstaining.

(6) the terms and conditions, if any, on which shares may be converted into, or exchanged for, shares of other capital stock, or of other series of Preferred Stock, of the Corporation; and

(7) the voting rights, if any, for the shares of each series, limited to circumstances when:

(a) the Corporation fails to pay dividends on the applicable series;

(b) a proposed amendment to these Articles would have an adverse impact on the rights and privileges of the preferred stockholders; and

(c) a series of Preferred Stock is convertible into Common Stock, in which case the Board of Directors may confer upon the holders of such Preferred Stock, voting as a single class with holders of Common Stock, the same number of votes to which the number of shares of Common Stock into which the shares of Preferred Stock are convertible are entitled on all matters submitted to a vote of holders of Common Stock at a meeting of shareholders other than for the election of directors; provided, however, that the Board may confer the voting rights described in this clause (c) only to the extent that the aggregate amount of Preferred Stock outstanding with such voting rights is convertible to no more than Twelve (12) Million shares of Common Stock.”

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PNM RESOURCES, INC.

By: /s/ Jeffry E. Sterba ___________ JEFFRY E. STERBA Chairman, President and Chief Executive Officer

DATED: June 20, 2005

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RESTATED ARTICLES OF INCORPORATION

OF

PNM RESOURCES, INC.

These Restated Articles of Incorporation are executed in the manner prescribed by the New Mexico Business Corporation Act pursuant to a resolution adopted by the Board of Directors of PNM Resources, Inc. on November 16, 2001. The Restated Articles of Incorporation correctly set forth without change the corresponding provisions of the original Articles of Incorporation of PNM Resources, Inc. (formerly named Manzano Corporation) as filed March 3, 2000, as amended on April 12, 2001 and July 13, 2001, and supercede the original Articles of Incorporation and all previous amendments thereto.

ARTICLE I

Name

The name of the Corporation is PNM Resources, Inc.

ARTICLE II

Period of Duration

The period of its duration is perpetual.

ARTICLE III

Purpose

The purposes of the Corporation are to hold the voting securities of other companies and to engage in any other lawful business for which corporations may be incorporated under the laws of the State of New Mexico. The Corporation shall have all the powers that are lawful for a corporation to exercise under New Mexico law.

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ARTICLE IV

Authorized Number of Shares

A. Authorized Capital Shares . The total number of shares of stock which the Corporation shall have the authority to issue is One Hundred Thirty (130) Million shares, of which One Hundred Twenty (120) Million shares shall be Common Stock, no par value, and Ten (10) Million shares shall be Preferred Stock, no par value. Common Stock and Preferred Stock shall be issued for such minimum consideration as authorized by the Board of Directors.

B. Common Stock. The Board of Directors is authorized by resolution to provide from time to time for the issuance of shares of Common Stock subject to the following restrictions and qualifications:

(1) Dividends. Subject to any rights of holders of Preferred Stock, such dividends (payable in cash, stock or otherwise) as may be determined by the Board of Directors may be declared and paid on the Common Stock from time to time from any available funds, property or shares.

(2) Voting Rights . Subject to any rights of holders of Preferred Stock to vote on a matter as a class or series, each outstanding share of Common Stock shall be entitled to one vote on each matter submitted to a vote of holders of Common Stock at a meeting of shareholders. Cumulative voting for the election of directors of the Corporation shall not be permitted.

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(3) Liquidation, Dissolution or Winding Up . In the event of any liquidation, dissolution or winding up of the Corporation, the holders of Common Stock shall be entitled to receive the net balance of any assets of the Corporation remaining after any distribution of the assets of the Corporation to the holders of Preferred Stock to the extent necessary to satisfy any preferences to the assets. C. Preferred Stock. The Board of Directors is authorized by resolution to provide from time to time for the issuance of shares

of Preferred Stock in series and to fix, from time to time before issuance, the designation, preferences, privileges and voting powers of the shares of each series of Preferred Stock and its restrictions or qualifications, limited to the following:

(1) the serial designation, authorized number of shares and the stated value; (2) the dividend rate, if any, the date or dates on which the dividends will be payable, and the extent to which the

dividends may be cumulative; (3) the price or prices at which shares may be redeemed, and any terms, conditions and limitations upon any

redemption; (4) the amount or amounts to be received by the holders in the event of dissolution, liquidation, or winding up of the

Corporation;

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(5) any sinking fund provisions for redemption or purchase of shares of any series; (6) the terms and conditions, if any, on which shares may be converted into, or exchanged for, shares of other capital

stock, or of other series of Preferred Stock, of the Corporation; and (7) the voting rights, if any, for the shares of each series, limited to circumstances when:

(a) the Corporation fails to pay dividends on the applicable series; and (b) when a proposed amendment to these Articles would have an adverse impact on the rights and privileges

of the preferred stockholders. D. Preemptive Rights . The holders of Common Stock or Preferred Stock shall not have a preemptive right to acquire

authorized but unissued shares, securities convertible into shares or carrying a right to subscribe to or acquire shares, except under such terms and conditions as may be provided by the Board of Directors in its sole judgment.

ARTICLE V

Stock Rights and Options

The Board of Directors in its sole judgment may create and issue rights or options entitling the holders, which may include directors,

officers or employees of the Corporation, to purchase from the Corporation shares of any class of stock.

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ARTICLE VI

Directors

The number of directors of the Corporation shall be as specified in the Bylaws but shall be no less than five (5) and no more than twelve (12). The number of directors may be increased or decreased from time to time as provided in the Bylaws so long as no decrease shall have the effect of shortening the term of any incumbent director. To the extent and in the manner provided by law, the directors may be classified as to the time for which they severally hold office, in accordance with the Bylaws of the Corporation.

The initial Board of Directors shall consist of seven members, and the names and addresses of the persons who are to serve as the initial Directors until the first annual meeting of shareholders, or until their successors shall have been elected and qualified, are:

Name Address John T. Ackerman 165 Sol de Oro Court

Corrales, NM 87048

Robert G. Armstrong 2608 North Washington Roswell, NM 88201

Joyce A. Godwin 904 Brazos Place SE Albuquerque, NM 87123

Benjamin F. Montoya Alvarado Square, MS 2824 Albuquerque, NM 87158

Theodore F. Patlovich 11109 Bobcat NE Albuquerque, NM 87122

Robert M. Price 14579 Grand Ave. S., Suite 100 Burnsville, MN 55306

Jeffry E. Sterba Alvarado Square, MS 2802 Albuquerque, NM 87158

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ARTICLE VII

Limitation on Liability

The liability of the directors of the Corporation for monetary damages shall be eliminated or limited to the fullest extent permissible under New Mexico law as may be amended from time to time .

ARTICLE VIII

Address of Initial Registered Office and Name of Initial Registered Agent

The address of the Corporation's initial registered office is : Alvarado Square, MS 2822, Albuquerque, NM 87158. The name of the

Corporation's initial registered agent at that address is Patrick T. Ortiz .

ARTICLE IX

Incorporator The name and address of the Incorporator is Public Service Company of New Mexico, Alvarado Square, Albuquerque, New Mexico

87158. Dated February 18, 2002.

PNM RESOURCES, INC. By: /s/ Jeffry E. Sterba Jeffry E. Sterba, Chairman, President and Chief Executive Officer

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EXECUTION COPY

EXHIBIT 10.4

$480,000,000

TERM LOAN AGREEMENT

among

PNM RESOURCES, INC. , as the Borrower,

THE LENDERS IDENTIFIED HEREIN,

AND

LEHMAN COMMERCIAL PAPER INC.,

as Administrative Agent

DATED AS OF APRIL 18, 2006

LEHMAN BROTHERS INC., as Sole Lead Arranger and Sole Book Manager

Table of Contents

Page SECTION 1 DEFINITIONS AND ACCOUNTING TERMS 1 1.1 Definitions. 1 1.2 Computation of Time Periods and Other Definitional Provisions. 14 1.3 Accounting Terms/Calculation of Financial Covenants. 14 1.4 Time. 14 1.5 Rounding of Financial Covenants. 14 1.6 References to Agreements and Requirement of Laws. 14

SECTION 2 TERM LOAN 15 2.1 Term Loan Commitments. 15 2.2 Procedure for Term Loan Borrowing. 15 2.3 Repayment of Term Loans. 15 2.4 Continuations and Conversions. 15 2.5 Minimum Amounts. 16 2.6 Evidence of Debt. 16

SECTION 3 GENERAL PROVISIONS APPLICABLE TO TERM LOANS 16 3.1 Interest. 16 3.2 Payments Generally. 17 3.3 Prepayments. 17 3.4 Fees. 18 3.5 Payment in full at Maturity. 18 3.6 Computations of Interest and Fees. 18 3.7 Pro Rata Treatment. 19 3.8 Sharing of Payments. 19 3.9 Capital Adequacy. 20 3.10 Eurodollar Provisions. 20 3.11 Illegality. 20 3.12 Requirements of Law; Reserves on Eurodollar Loans. 21 3.13 Taxes. 21 3.14 Compensation. 24 3.15 Determination and Survival of Provisions. 24

SECTION 4 CONDITIONS PRECEDENT TO CLOSING 24 4.1 Closing Conditions. 24

SECTION 5 REPRESENTATIONS AND WARRANTIES 27 5.1 Organization and Good Standing. 27 5.2 Due Authorization. 27 5.3 No Conflicts. 27 5.4 Consents. 27 5.5 Enforceable Obligations. 27 5.6 Financial Condition. 28 5.7 No Material Change. 28 5.8 No Default. 28 5.9 Litigation. 28 5.10 Taxes. 28

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5.11 Compliance with Law. 29 5.12 ERISA. 29 5.13 Use of Proceeds; Margin Stock. 30 5.14 Government Regulation. 30 5.15 Solvency. 30 5.16 Disclosure. 30 5.17 Environmental Matters. 30 5.18 Material Leases. 30 5.19 Material Lease Interest Payments and Discount Rate. 31 5.20 Certain Documents. 31

SECTION 6 AFFIRMATIVE COVENANTS 31 6.1 Information Covenants. 31 6.2 Financial Covenants. 33 6.3 Preservation of Existence and Franchises. 33 6.4 Books and Records. 34 6.5 Compliance with Law. 34 6.6 Payment of Taxes and Other Indebtedness. 34 6.7 Insurance. 34 6.8 Performance of Obligations. 34 6.9 Use of Proceeds. 34 6.10 Audits/Inspections. 34 6.11 Ownership of Certain Subsidiaries. 35

SECTION 7 NEGATIVE COVENANTS 35 7.1 Nature of Business. 35 7.2 Consolidation and Merger. 35 7.3 Sale or Lease of Assets. 35 7.4 Affiliate Transactions. 36 7.5 Liens. 36 7.6 Accounting Changes. 37 7.7 Burdensome Agreements. 37

SECTION 8 EVENTS OF DEFAULT 37 8.1 Events of Default. 37 8.2 Acceleration; Remedies. 39 8.3 Allocation of Payments After Event of Default. 40

SECTION 9 AGENCY PROVISIONS 41 9.1 Appointment and Authority. 41 9.2 Rights as a Lender. 41 9.3 Exculpatory Provisions. 41 9.4 Reliance by Administrative Agent. 42 9.5 Delegation of Duties. 42 9.6 Resignation of Administrative Agent. 42 9.7 Non-Reliance on Administrative Agent and Other Lenders. 43 9.8 No Other Duties, Etc. 43 9.9 Administrative Agent May File Proofs of Claim. 43

SECTION 10 MISCELLANEOUS 44 10.1 Notices; Effectiveness; Electronic Communication. 44

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10.2 Right of Set-Off. 46 10.3 Successors and Assigns. 46 10.4 No Waiver; Remedies Cumulative. 49 10.5 Attorney Costs, Expenses, Taxes and Indemnification by Borrowers. 49 10.6 Amendments, Etc. 50 10.7 Counterparts. 51 10.8 Headings. 51 10.9 Survival of Indemnification and Representations and Warranties. 51 10.10 Governing Law; Venue; Service. 52 10.11 Waiver of Jury Trial; Waiver of Consequential Damages. 52 10.12 Severability. 52 10.13 Further Assurances. 53 10.14 Confidentiality. 53 10.15 Entirety. 53 10.16 Binding Effect; Continuing Agreement. 53 10.17 Regulatory Statement. 54 10.18 USA Patriot Act Notice. 54 10.19 Acknowledgment. 54 10.20 Replacement of Lenders. 54

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SCHEDULES

EXHIBITS

Schedule 1.1 Commitments Schedule 5.18 Material Leases Schedule 5.19 Material Lease Interest Payments and Discount Rate Schedule 10.1 Notices Schedule 10.3 Processing and Recording Fees

Exhibit 2.6(b) Form of Note Exhibit 2.4 Form of Notice of Continuation/Conversion Exhibit 6.1(c) Form of Compliance Certificate Exhibit 10.3(b) Form of Assignment and Assumption

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EXECUTION COPY

EXHIBIT 10.4

TERM LOAN AGREEMENT

THIS TERM LOAN AGREEMENT (this “ Credit Agreement ”) is entered into as of April 18, 2006 among PNM RESOURCES, INC., a New Mexico corporation (the “ Borrower ”), the Lenders party hereto, LEHMAN COMMERCIAL PAPER INC., as administrative agent (in such capacity, the “ Administrative Agent ”), and LEHMAN BROTHERS INC., as sole lead arranger and sole book-manager (in such capacity, the “Arranger ”).

RECITALS

WHEREAS , the Borrower will enter into a transaction whereby, through a subsidiary, it will acquire all or substantially all of the assets of Twin Oaks Power and Twin Oaks Power III (as defined herein) (collectively, the “ Acquired Business ”; such transaction, the “ Acquisition ”).

WHEREAS, for the purposes of financing the Acquisition and the payment of related fees and expenses, the Borrower has requested that the Lenders provide a term loan facility in an aggregate principal amount of $480,000,000; and

WHEREAS , the Lenders party hereto are willing to make such term loan facility available upon and subject to the terms and conditions set forth herein;

NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

SECTION 1

DEFINITIONS AND ACCOUNTING TERMS 1.1 Definitions .

The following terms shall have the meanings specified herein unless the context otherwise requires. Defined terms herein shall include in the singular number the plural and in the plural the singular:

“ Acquired Business ” has the meaning set forth in the recitals hereto.

“ Acquisition ” has the meaning set forth in the recitals hereto.

“ Acquisition Agreement ” means the Purchase and Sale Agreement dated as of January 14, 2006, by and among Twin Oaks Power, LP, Twin Oaks Power III, LP, Sempra Energy, Altura Power, L.P. and PNM Resources, Inc.

“ Acquisition Documentation ” means collectively, the Acquisition Agreement and all schedules, exhibits, annexes and amendments thereto and all side letters and agreements affecting the terms thereof or entered into in connection therewith, in each case, as amended, supplemented or otherwise modified from time to time.

“ Adjusted Eurodollar Rate ” means the Eurodollar Rate plus the Applicable Percentage.

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“ Administrative Agent ” means LCPI or any successor administrative agent appointed pursuant to Section 9.6.

“ Administrative Agent’s Office ” means the Administrative Agent’s address and, as appropriate, account as set forth on

Schedule 10.1 or such other address or account as the Administrative Agent may from time to time notify the Borrower and the Lenders.

“ Administrative Questionnaire ” means an Administrative Questionnaire in a form supplied by the Administrative Agent.

“ Affiliate ” means, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and officers of such Person), controlled by or under direct or indirect common control with such Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power (a) to vote 10% or more of the securities having ordinary voting power for the election of directors of such corporation or (b) to direct or cause direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise.

“ Agent-Related Persons ” means the Administrative Agent, together with its Affiliates and the officers, directors, employees, agents and attorneys-in-fact of the Administrative Agent and its Affiliates.

“ Applicable Percentage ” means 0.625%; provided, that if at any time the Borrower shall fail to maintain a Debt Rating of at least BBB- from S&P and of at least a Baa3 from Moody’s, the Applicable Percentage shall equal 0.875%.

“ Approved Fund ” means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

“ Arranger ” has the meaning set forth in the preamble hereto.

“ Assignee Group ” means two or more Eligible Assignees that are Affiliates of one another or two or more Approved Funds managed by the same investment advisor.

“ Assignment and Assumption ” means an assignment and assumption substantially in the form of Exhibit 10.3(b) .

“ Authorized Officer ” means any of the president, chief executive officer, chief financial officer or officer of treasury of the Borrower.

“ Bankruptcy Code ” means the Bankruptcy Code in Title 11 of the United States Code, as amended, modified, succeeded or replaced from time to time.

“ Base Rate ” means for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Rate in effect on such day plus ½ of 1%. For purposes hereof: “ Prime Rate ” shall mean the prime lending rate as set forth on the British Banking Association Telerate Page 5 (or such other comparable publicly available page as may, in the reasonable opinion of the Administrative Agent after notice to the Borrower, replace such page for the purpose of displaying such rate if such rate no longer appears on the British Bankers Association Telerate page 5), as in effect from time to time. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually available. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate or the Federal Funds Rate, respectively.

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“ Base Rate Loan ” means any Term Loan bearing interest at a rate determined by reference to the Base Rate.

“ Borrower ” has the meaning set forth in the preamble hereto.

“ Borrower Obligations ” means, without duplication, all of the obligations of the Borrower to the Lenders and the Administrative Agent, whenever arising, under this Credit Agreement, the Notes, or any of the other Credit Documents.

“ Business Day ” means any day other than a Saturday, a Sunday, a legal holiday or a day on which banking institutions are authorized or required by Law or other governmental action to close in New York, New York; provided that in the case of Eurodollar Loans such day is also a day on which dealings are conducted by and between banks in the London interbank market.

“ Capital Stock ” means (a) in the case of a corporation, all classes of capital stock of such corporation, (b) in the case of a partnership, partnership interests (whether general or limited), (c) in the case of a limited liability company, membership interests and (d) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person; including, in each case, all warrants, rights or options to purchase any of the foregoing.

“ Change of Control ” means the occurrence of any of the following: (a) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have “beneficial ownership” of all Capital Stock that such person or group has the right to acquire (such right, an “ option right ”), whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of twenty-five (25%) of the Capital Stock of the Borrower entitled to vote for members of the board of directors or equivalent governing body of the Borrower on a fully diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right); (b) during any period of 24 consecutive months, a majority of the members of the board of directors or other equivalent governing body of the Borrower cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body (excluding, in the case of both clause (ii) and clause (iii), any individual whose initial nomination for, or assumption of office as, a member of that board or equivalent governing body occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any person or group other than a solicitation for the election of one or more directors by or on behalf of the board of directors); or (c) any Person or two or more Persons acting in concert shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation thereof, will result in its or their acquisition of the power to exercise, directly or indirectly, a controlling influence over the management or policies of the Borrower, or control over the Voting Stock of the Borrower on a fully-diluted basis (and taking into account all such Voting Stock that such Person or group has the right to acquire pursuant to any option right) representing twenty-five (25%) or more of the combined voting power of such Voting Stock.

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“ Closing Date ” means the date of this Credit Agreement, which is the first date all the conditions precedent in Section 5.1 are satisfied or waived in accordance with Section 5.1.

“ Code ” means the Internal Revenue Code of 1986 and the rules and regulations promulgated thereunder, as amended, modified, succeeded or replaced from time to time.

“ Compliance Certificate ” means a fully completed and duly executed officer’s certificate in the form of Exhibit 6.1(c) , together with a Covenant Compliance Worksheet.

“ Consolidated Capitalization ” means, with respect to any Person, the sum of (a) all of the shareholders’ equity or net worth of such Person and its Subsidiaries, as determined in accordance with GAAP plus (b) Consolidated Indebtedness of such Person and its Subsidiaries plus (c) the outstanding principal amount of Preferred Stock plus (d) 75% of the outstanding principal amount of Specified Securities of such Person and its Subsidiaries.

“ Consolidated Indebtedness ” means, as of any date of determination, with respect to any Person and its Subsidiaries on a consolidated basis, an amount equal to (a) all Indebtedness of such Person and its Subsidiaries as of such date minus (b) the outstanding principal amount of stranded cost securitization bonds of such Person and its Subsidiaries minus (c) an amount equal to the lesser of (i) 75% of the outstanding principal amount of Specified Securities of such Person and its Subsidiaries or (ii) 10% of Consolidated Capitalization (calculated assuming clause (i) above is applicable).

“ Consolidated Interest Expense ” means, for any period, with respect to any Person and its Subsidiaries on a consolidated basis, an amount equal to total interest expense of such Person and its Subsidiaries for such period (including, without limitation, all such interest expense accrued or capitalized during such period, whether or not actually paid during such period), as determined in accordance with GAAP.

“ Consolidated Net Income ” means, with respect to any Person, the consolidated net income of such Person and its Subsidiaries, as determined in accordance with GAAP.

“ Constellation Agreement ” means that certain Power Supply and Service Agreement dated December 22, 2003 between First Choice and Constellation Energy, as amended, and any future amendments, replacements or extensions thereof (so long as such amendments, replacements or extensions are not materially less favorable to the Borrower and its Subsidiaries).

“ Contingent Obligation ” means, with respect to any Person, any direct or indirect liability of such Person with respect to any Indebtedness, liability or other obligation (the “primary obligation”) of another Person (the “primary obligor”), whether or not contingent, (a) to purchase, repurchase or otherwise acquire such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor in respect thereof to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of any such primary obligation

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against loss or failure or inability to perform in respect thereof; provided , however , that, with respect to the Borrower and its Subsidiaries, the term Contingent Obligation shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation of any Person shall be deemed to be an amount equal to the maximum amount of such Person’s liability with respect to the stated or determinable amount of the primary obligation for which such Contingent Obligation is incurred or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder).

“ Covenant Compliance Worksheet ” shall mean a fully completed worksheet in the form of Schedule I to Exhibit 6.1(c) .

“ Credit Agreement ” has the meaning set forth in the Preamble hereof.

“ Credit Documents ” means this Credit Agreement, the Notes, any Notice of Continuation/Conversion, and any other document, agreement or instrument entered into or executed in connection with the foregoing.

“ Debt Rating ” means the long term unsecured senior non-credit enhanced debt rating of the Borrower by S&P and Moody’s.

“ Debtor Relief Laws ” means the Bankruptcy Code, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally.

“ Default ” means any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default.

“ Default Rate ” means an interest rate equal to two percent (2%) plus the rate that otherwise would be applicable (or if no rate is applicable, the Base Rate plus two percent (2%) per annum).

“ Dollars ” and “ $ ” means dollars in lawful currency of the United States of America.

“ Eligible Assignee ” means (a) a Lender, (b) an Affiliate of a Lender, (c) an Approved Fund and (d) any other Person (other than a natural person) approved by the Administrative Agent and the Borrower (such approval not to be unreasonably withheld or delayed); provided that (i) the Borrower’s consent is not required during the existence and continuation of a Default or an Event of Default, (ii) approval by the Borrower shall be deemed given if no objection is received by the assigning Lender and the Administrative Agent from the Borrower within five Business Days after notice of such proposed assignment has been delivered to the Borrower and (iii) neither the Borrower nor any Subsidiary or Affiliate of the Borrower shall qualify as an Eligible Assignee.

“ Environmental Claims ” means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, accusations, allegations, notices of noncompliance or violation, investigations (other than internal reports prepared by any Person in the ordinary course of its business and not in response to any third party action or request of any kind) or proceedings relating in any way to any actual or alleged violation of or liability under any Environmental Law or relating to any permit issued, or any approval given, under any such Environmental Law (collectively, “ Claims ”), including, without limitation, (a) any and all Claims by Governmental Authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law and (b) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Substances or arising from alleged injury or threat of injury to human health or the environment.

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“ Environmental Laws ” shall mean any and all federal, state and local laws, statutes, ordinances, rules, regulations, permits, licenses, approvals, rules of common law and orders of courts or Governmental Authorities, relating to the protection of human health or occupational safety or the environment, now or hereafter in effect and in each case as amended from time to time, including, without limitation, requirements pertaining to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation, handling, reporting, licensing, permitting, investigation or remediation of Hazardous Substances.

“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute, and all rules and regulations from time to time promulgated thereunder.

“ ERISA Affiliate ” means any Person (including any trade or business, whether or not incorporated) that would be deemed to be under “common control” with, or a member of the same “controlled group” as, the Borrower or any of its Subsidiaries, within the meaning of Sections 414(b), (c), (m) or (o) of the Code or Section 4001 of ERISA.

“ ERISA Event ” means (a) a Reportable Event with respect to a Plan or a Multiemployer Plan, (b) a complete or partial withdrawal by the Borrower, any of its Subsidiaries or any ERISA Affiliate from a Multiemployer Plan, or the receipt by the Borrower, any of its Subsidiaries or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA, (c) the distribution by the Borrower, any of its Subsidiaries or any ERISA Affiliate under Section 4041 or 4041A of ERISA of a notice of intent to terminate any Plan or the taking of any action to terminate any Plan, (d) the commencement of proceedings by the PBGC under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Borrower, any of its Subsidiaries or any ERISA Affiliate of a notice from any Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan, (e) the institution of a proceeding by any fiduciary of any Multiemployer Plan against the Borrower, any of its Subsidiaries or any ERISA Affiliate to enforce Section 515 of ERISA, which is not dismissed within thirty (30) days, (f) the imposition upon the Borrower, any of its Subsidiaries or any ERISA Affiliate of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA, or the imposition or threatened imposition of any Lien upon any assets of the Borrower, any of its Subsidiaries or any ERISA Affiliate as a result of any alleged failure to comply with the Code or ERISA in respect of any Plan, (g) the engaging in or otherwise becoming liable for a nonexempt Prohibited Transaction by the Borrower, any of its Subsidiaries or any ERISA Affiliate, (h) a violation of the applicable requirements of Section 404 or 405 of ERISA or the exclusive benefit rule under Section 401(a) of the Code by any fiduciary of any Plan for which the Borrower, any of its Subsidiaries or any ERISA Affiliate may be directly or indirectly liable, (i) the adoption of an amendment to any Plan that, pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, would result in the loss of tax-exempt status of the trust of which such Plan is a part if the Borrower, any of its Subsidiaries or any ERISA Affiliate fails to timely provide security to such Plan in accordance with the provisions of such sections or (j) the withdrawal of the Borrower, any of its Subsidiaries or any ERISA Affiliate from a Multiple Employer Plan during a play year in which it was a substantial employer (as such term is defined in Section 4001(a)(2) of ERISA), or the termination of a Multiple Employer Plan.

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“ Eurodollar Loan ” means a Term Loan bearing interest based at a rate determined by reference to the Adjusted Eurodollar Rate.

“ Eurodollar Rate ” means, for any Interest Period with respect to a Eurodollar Loan, the rate per annum equal to the British Bankers Association LIBOR Rate (“ BBA LIBOR ”), as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, for Dollar deposits (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period. If such rate is not available at such time for any reason, then the “Eurodollar Rate” for such Interest Period shall be the rate per annum determined by reference to such other comparable publicly available services for displaying eurodollar rates as may be reasonably selected by the Administrative Agent.

“ Event of Default ” has the meaning set forth in Section 8.1.

“ Exchange Act ” means the Securities Exchange Act of 1934, and the rules and regulations promulgated thereunder, as amended, modified, succeeded or replaced from time to time.

“ Existing Credit Agreement ” means the Amended and Restated Credit Agreement, dated as of August 15, 2005, among the Borrower, First Choice Power, L.P., the lenders and financial institutions party thereto, Bank of America, N.A., as administrative agent, and Wachovia Bank, National Association, as syndication agent, and Citibank, N.A., JPMorgan Chase Bank, N.A. and Union Bank of California, N.A., as co-documentation agents.

“ Federal Funds Rate ” means, for any day, the rate per annum equal to the weighted average (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average of the quotations for the day of such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it (rounded upward, if necessary, to a whole multiple of 1/100 of 1%).

“ Fee Letters ” means (a) the credit facility fee letter, dated January 17, 2006, among the Borrower, LCPI and Lehman Brothers Inc., as amended, modified, supplemented or restated from time to time and (b) the administrative agent fee letter, dated April 142006, among the Borrower and LCPI, as amended, modified, supplemented or restated from time to time.

“ Financial Officer ” means the chief financial officer, vice president-finance, principal accounting officer or officer of treasury of the Borrower.

“ First Choice ” means First Choice Power Special Purpose, L.P., a Texas limited partnership, and its successors.

“ First Choice Securitization ” means the accounts receivable securitization effected by the Constellation Agreement, and any replacements or extensions thereof (so long as such replacements or extensions are not materially less favorable to the Borrower and its Subsidiaries).

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“ First Mortgage Bonds ” means those first mortgage bonds issued pursuant to the FMB Indenture.

“ Fiscal Quarter ” means each of the calendar quarters ending as of the last day of each March, June, September and December.

“ Fiscal Year ” means the calendar year ending December 31.

“ FMB Indenture ” means the Indenture of Mortgage and Deed of Trust, dated as of June 1, 1947, between PSNM and The Bank of New York (formerly Irving Trust Company), as trustee thereunder, as supplemented and amended.

“ Foreign Lender ” has the meaning set forth in Section 3.13(f).

“ Fund ” means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.

“ GAAP ” means generally accepted accounting principles in the United States set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession) or that are promulgated by any Governmental Authority having appropriate jurisdiction.

“ Governmental Authority ” means any domestic or foreign nation or government, any state or other political subdivision thereof and any central bank thereof, any municipal, local, city or county government, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government (including, without limitation, any state dental board) and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing.

“ Hazardous Substances ” means any substances or materials (a) that are or become defined as hazardous wastes, hazardous substances, pollutants, contaminants or toxic substances under any Environmental Law, (b) that are defined by any Environmental Law as toxic, explosive, corrosive, ignitable, infectious, radioactive, mutagenic or otherwise hazardous, (c) the presence of which require investigation or response under any Environmental Law, (d) that constitute a nuisance, trespass or health or safety hazard to Persons or neighboring properties, (e) that consist of underground or aboveground storage tanks, whether empty, filled or partially filled with any substance, or (f) that contain, without limitation, asbestos, polychlorinated biphenyls, urea formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived substances or wastes, crude oil, nuclear fuel, natural gas or synthetic gas.

“ Hedging Agreements ” means, collectively, interest rate protection agreements, equity index agreements, foreign currency exchange agreements, option agreements or other interest or exchange rate or commodity price hedging agreements (other than forward contracts for the delivery of power or gas written by the Borrower to its jurisdictional and wholesale customers in the ordinary course of business).

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“ Indebtedness ” means, with respect to any Person (without duplication), (a) all indebtedness and obligations of such Person

for borrowed money or in respect of loans or advances of any kind, (b) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments, (c) all reimbursement obligations of such Person with respect to surety bonds, letters of credit and bankers’ acceptances (in each case, whether or not drawn or matured and in the stated amount thereof), (d) all obligations of such Person to pay the deferred purchase price of property or services, (e) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person, (f) all obligations of such Person as lessee under leases that are or are required to be, in accordance with GAAP, recorded as capital leases, to the extent such obligations are required to be so recorded, (g) the net termination obligations of such Person under any Hedging Agreements, calculated as of any date as if such agreement or arrangement were terminated as of such date in accordance with the applicable rules under GAAP, (h) all Contingent Obligations of such Person, (i) all obligations and liabilities of such Person incurred in connection with any transaction or series of transactions providing for the financing of assets through one or more securitizations or in connection with, or pursuant to, any synthetic lease or similar off-balance sheet financing, (j) the aggregate amount of uncollected accounts receivable of such Person subject at the time of determination to a sale of receivables (or similar transaction) to the extent such transaction is effected with recourse to such Person (whether or not such transaction would be reflected on the balance sheet of such Person in accordance with GAAP), (k) all obligations, contingent or otherwise, under the Material Leases, (l) all Specified Securities and (m) all indebtedness referred to in clauses (a) through (l) above secured by any Lien on any property or asset owned or held by such Person regardless of whether the indebtedness secured thereby shall have been assumed by such Person or is nonrecourse to the credit of such Person.

“ Indemnified Liabilities ” has the meaning set forth in Section 10.5(b).

“ Indemnitees ” has the meaning set forth in Section 10.5(b).

“ Insured Series First Mortgage Bonds ” means First Mortgage Bonds in the aggregate principal amount of $65,000,000 pledged by PSNM to secure guarantees of $65,000,000 principal amount of pollution control revenue bonds issued by the City of Farmington, New Mexico, for the benefit of PSNM, which pollution control revenue bonds are also supported by a municipal bond insurance policy issued by AMBAC Indemnity Corporation.

“ Interest Payment Date ” means, (a) as to any Eurodollar Loan, the last day of each Interest Period applicable to such Eurodollar Loan and the Maturity Date; provided , however , that if any Interest Period for a Eurodollar Loan exceeds three months, the respective dates that fall every three months after the beginning of such Interest Period shall also be Interest Payment Dates and (b) as to any Base Rate Loan, the last Business Day of each Fiscal Quarter and the Maturity Date.

“ Interest Period ” means, as to each Eurodollar Loan, the period commencing on the date such Eurodollar Loan is disbursed or converted to or continued as a Eurodollar Loan and ending on the date one, two, three or six months thereafter, as selected by the Borrower on the Closing Date or in any Notice of Continuation/Conversion; provided that:

( a ) any Interest Period that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day;

( b ) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which

there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and

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( c ) no Interest Period shall extend beyond the Maturity Date.

“ Laws ” means, collectively, all international, foreign, federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of law.

“ LCPI ” means Lehman Commercial Paper Inc., together with its successors and assigns.

“ Lender ” means any of the Persons identified as a “Lender” on the signature pages hereto and any Eligible Assignee which may become a Lender by way of assignment in accordance with the terms hereof, together with their successors and permitted assigns.

“ Lending Office ” means, as to any Lender, the office or offices of such Lender described as such in such Lender’s Administrative Questionnaire, or such other office or offices as a Lender may from time to time notify the Borrower and the Administrative Agent.

“ Lien ” means any mortgage, pledge, hypothecation, assignment, security interest, lien (statutory or otherwise), preference, priority, charge or other encumbrance of any nature, whether voluntary or involuntary, including, without limitation, the interest of any vendor or lessor under any conditional sale agreement, title retention agreement, capital lease or any other lease or arrangement having substantially the same effect as any of the foregoing.

“ Margin Stock ” has the meaning ascribed to such term in Regulation U.

“ Material Adverse Change ” means a material adverse change in the condition (financial or otherwise), operations, business, performance, properties or assets of the Borrower and its Subsidiaries, taken as a whole.

“ Material Adverse Effect ” means a material adverse effect upon (a) the ability of the Borrower to complete the Acquisition, (b) the business, assets, liabilities (actual or contingent), operations, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries, taken as a whole, (c) the ability of the Borrower or any of its Subsidiaries to perform its obligations under this Credit Agreement or any of the other Credit Documents or (d) the legality, validity or enforceability of this Credit Agreement or any of the other Credit Documents or the rights and remedies of the Administrative Agent and the Lenders hereunder and thereunder.

“ Material Lease ” means any lease by PSNM of its leasehold interests in (i) Unit 1 or Unit 2, and related common facilities, of the Palo Verde Nuclear Generating Station or (ii) the electric transmission line, and related facilities, known as the Eastern Interconnection Project, including, without limitation, any lease set forth on Schedule 5.18 hereto.

“ Maturity Date ” means April 17, 2007.

“ Moody’s ” means Moody’s Investors Service, Inc. and its successors.

“ Multiemployer Plan ” means any “multiemployer plan” within the meaning of Section 4001(a)(3) of ERISA to which the Borrower, any of its Subsidiaries or any ERISA Affiliate makes, is making or is obligated to make contributions or has made or been obligated to make contributions.

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“ Multiple Employer Plan ” means a Single Employer Plan to which the Borrower, any of its Subsidiaries or any ERISA Affiliate and at least one employer other than the Borrower, any of its Subsidiaries or any ERISA Affiliate are contributing sponsors.

“ Net Cash Proceeds ” means, in connection with any issuance or sale of equity securities or debt securities or instruments or the incurrence of loans, the cash proceeds received from such issuance or incurrence, net of attorneys’ fees, investment banking fees, accountants’ fees, underwriting discounts and commissions and other customary fees and expenses actually incurred in connection therewith.

“ Note ” has the meaning set forth in Section 2.6 (b).

“ Notice of Continuation/Conversion ” means a request by the Borrower to continue an existing Eurodollar Loan to a new Interest Period or to convert a Eurodollar Loan to a Base Rate Loan or a Base Rate Loan to a Eurodollar Loan, in the form of Exhibit 2.4 .

“ Other Taxes ” has the meaning set forth in Section 3.13(b).

“ PBGC ” means the Pension Benefit Guaranty Corporation and any successor thereto.

“ Participant ” has the meaning set forth in Section 10.3(d).

“ Participation Interest ” means the purchase by a Lender of a participation in any Term Loan as provided in Section 3.8.

“ Person ” means any individual, partnership, joint venture, firm, corporation, limited liability company, association, trust or other enterprise (whether or not incorporated), or any Governmental Authority.

“ Plan ” means any “employee benefit plan” (within the meaning of Section 3(3) of ERISA) which is covered by ERISA and with respect to which the Borrower, any of its Subsidiaries or any ERISA Affiliate is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an “employer” within the meaning of Section 3(5) of ERISA.

“ Preferred Stock ” means, with respect to any Person, all preferred Capital Stock issued by such Person in which the terms thereof do not require such Capital Stock to be redeemed or to make mandatory sinking fund payments.

“ Prime Rate ” has the meaning set forth in the definition of Base Rate in this Section 1.1.

“ Pro Rata Share ” means as to any Lender at any time, the percentage which the unpaid principal amount of such Lender’s Term Loans then constitutes of the aggregate unpaid principal amount of the Term Loans then outstanding.

“ Prohibited Transaction ” means any transaction described in (a) Section 406 of ERISA that is not exempt by reason of Section 408 of ERISA or by reason of a Department of Labor prohibited transaction individual or class exemption or (b) Section 4975(c) of the Code that is not exempt by reason of Section 4975(c)(2) or 4975(d) of the Code.

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“ Property ” means any right, title or interest in or to any property or asset of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible.

“ PSNM ” means Public Service Company of New Mexico, a New Mexico corporation.

“ Register ” has the meaning set forth in Section 10.3(c).

“ Regulations T, U and X ” means Regulations T, U and X, respectively, of the Federal Reserve Board, and any successor regulations.

“ Reportable Event ” means (a) any “reportable event” within the meaning of Section 4043(c) of ERISA for which the notice under Section 4043(a) of ERISA has not been waived by the PBGC (including any failure to meet the minimum funding standard of, or timely make any required installment under, Section 412 of the Code or Section 302 of ERISA, regardless of the issuance of any waivers in accordance with Section 412(d) of the Code), (b) any such “reportable event” subject to advance notice to the PBGC under Section 4043(b)(3) of ERISA, (c) any application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code, and (d) a cessation of operations described in Section 4062(e) of ERISA.

“ Required Lenders ” means at any time, the holders of more than 50% of the aggregate unpaid principal amount of the Term Loans then outstanding.

“ Requirement of Law ” means, with respect to any Person, the organizational documents of such Person and any Law applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject or otherwise pertaining to any or all of the transactions contemplated by this Credit Agreement and the other Credit Documents.

“ Responsible Officer ” means the president, the chief executive officer, the co-chief executive officer, the chief financial officer, any executive officer, vice president-finance, principal accounting officer or officer of treasury of the Borrower, and any other officer or similar official thereof responsible for the administration of the obligations of the Borrower in respect of this Credit Agreement and the other Credit Documents.

“ Restricted Payment ” means, with respect to any Person, any dividend or other distribution (whether in cash, securities or other property) with respect to any Capital Stock of such Person.

“ S&P ” means Standard & Poor’s Rating Service, a division of The McGraw-Hill Companies, Inc. and its successors.

“ Securities Act ” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

“ Single Employer Plan ” means any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan or Multiple Employer Plan.

“ Solvent ” means, with respect to any Person as of a particular date, that on such date (a) such Person is able to pay its debts and other liabilities, Contingent Obligations and other commitments as they mature in the normal course of business, (b) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay as such debts and liabilities mature in their ordinary course, (c) such Person is not engaged in a business or a transaction, and is not about to

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engage in a business or a transaction, for which such Person’s assets would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such Person is engaged or is to engage, (d) the fair value of the assets of such Person is greater than the total amount of liabilities, including, without limitation, Contingent Obligations, of such Person and (e) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured.

“ Specified Securities ” means, with respect to any Person, (a) all preferred Capital Stock issued by such Person and required by the terms thereof to be redeemed or for which mandatory sinking fund payments are due, (b) all securities issued by such Person that contain two distinct components, typically medium-term debt and a forward contract for the issuance of common stock prior to the debt maturity, including such securities commonly referred to by their tradenames as “FELINE PRIDES”, “PEPS”, “HITS”, “SPACES” and “DECS” and generally referred to as “equity units” and (c) all other securities issued by such Person that are similar to those described in the forgoing clauses (a) and (b).

“ Subsidiary ” means, as to any Person, (a) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time, any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through Subsidiaries, and (b) any partnership, association, joint venture or other entity in which such person directly or indirectly through Subsidiaries has more than a 50% equity interest at any time. Any reference to Subsidiary herein, unless otherwise identified, shall mean a Subsidiary, direct or indirect, of the Borrower. Any reference to a Subsidiary of the Borrower herein shall not include any Subsidiary that is inactive, has minimal or no assets and does not generate revenues.

“ Taxes ” has the meaning set forth in Section 3.13(a).

“ Term Loan ” has the meaning set forth in Section 2.1 .

“ Term Loan Commitment ” means as to any Lender, the obligation of such Lender, if any, to make a Term Loan to the Borrower hereunder in a principal amount not to exceed the amount set forth under the heading “Commitment” opposite such Lender’s name on Schedule 1.1 hereto, or, as the case may be, in the Assignment and Acceptance pursuant to which such Lender became a party hereto, as the same may be changed from time to time pursuant to the terms hereof. The original aggregate amount of the Term Loan Commitment is $480,000,000.

“ TNMP ” means Texas-New Mexico Power Company, a Texas corporation.

“ Total Assets ” means all assets of the Borrower and its Subsidiaries as shown on its most recent quarterly consolidated balance sheet, as determined in accordance with GAAP.

“ Twin Oaks Power ” means Twin Oaks Power, LP, a Texas limited partnership.

“ Twin Oaks Power III ” means Twin Oaks Power III, LP, a Texas limited partnership.

“ Type ” means, with respect to a Term Loan, its character as a Base Rate Loan or a Eurodollar Loan.

“ Voting Stock ” means the Capital Stock of a Person that is then outstanding and normally entitled to vote in the election of directors and other securities of such Person convertible into or exercisable for such Capital Stock (whether or not such securities are then currently convertible or exercisable).

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1.2 Computation of Time Periods and Other Definitional Provisions .

For purposes of computation of periods of time hereunder, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding.” References in this Credit Agreement to “Articles”, “Sections”, “Schedules” or “Exhibits” shall be to Articles, Sections, Schedules or Exhibits of or to this Credit Agreement unless otherwise specifically provided. 1.3 Accounting Terms/Calculation of Financial Covenants .

Except as otherwise expressly provided herein, all accounting terms used herein or incorporated herein by reference shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Administrative Agent or the Lenders hereunder shall be prepared, in accordance with GAAP applied on a consistent basis. Notwithstanding anything to the contrary in this Credit Agreement, for purposes of calculation of the financial covenants set forth in Section 6.2, all accounting determinations and computations thereunder shall be made in accordance with GAAP as in effect as of the date of this Credit Agreement applied on a basis consistent with the application used in preparing the most recent financial statements of the Borrower referred to in Section 4.1(e). In the event that any changes in GAAP after such date are required to be applied to the Borrower and would affect the computation of the financial covenants contained in Section 6.2, such changes shall be followed only from and after the date this Credit Agreement shall have been amended to take into account any such changes. 1.4 Time .

All references to time herein shall be references to Central Standard Time or Central Daylight Time, as the case may be, unless specified otherwise. 1.5 Rounding of Financial Covenants .

Any financial ratios required to be maintained by the Borrower pursuant to this Credit Agreement shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is expressed herein and rounding the result up or down to the nearest number (with a rounding-up if there is no nearest number). 1.6 References to Agreements and Requirement of Laws .

Unless otherwise expressly provided herein: (a ) references to organization documents, agreements (including the Credit Documents) and other contractual instruments shall be deemed to include all subsequent amendments, restatements, extensions, supplements and other modifications thereto, but only to the extent that such amendments, restatements, extensions, supplements and other modifications are not prohibited by any Credit Document and (b ) references to any Requirement of Law shall include all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting such Requirement of Law.

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SECTION 2

TERM LOAN FACILITY 2.1 Term Loan Commitments .

Subject to the terms and conditions hereof, the Lenders severally agree to make term loans (each, a “ Term Loan ”) to the Borrower on the Closing Date in an amount for each Lender not to exceed the amount of the Term Loan Commitment of such Lender. The Term Loans may from time to time be Eurodollar Loans or Base Rate Loans, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.2 and 2.4. 2.2 Procedure for Term Loan Borrowing .

The Borrower shall deliver to the Administrative Agent a notice (which must be received by the Administrative Agent prior to 10:00 A.M., New York City time, one Business Day prior to the anticipated Closing Date) requesting that the Lenders make the Term Loans on the Closing Date. The Term Loans made on the Closing Date shall initially be Eurodollar Loans. Upon receipt of such notice the Administrative Agent shall promptly notify each Lender thereof. Not later than 12:00 Noon, New York City time, on the Closing Date each Lender shall make available to the Administrative Agent at the Administrative Agent’s Office an amount in immediately available funds equal to the Term Loan to be made by such Lender. The Administrative Agent shall make available to the Borrower the aggregate of the amounts made available to the Administrative Agent by the Lenders, in like funds as received by the Administrative Agent. 2.3 Repayment of Term Loans .

The Term Loan of each Lender shall mature on the Maturity Date and the outstanding balance of the Term Loans shall be repaid in full on such date. The Borrower hereby further agrees to pay interest on the unpaid principal amount of the Term Loans from time to time outstanding from the date hereof until payment in full thereof at the rates per annum and on the dates set forth in Section 3.1. 2.4 Continuations and Conversions .

Subject to the terms below, the Borrower shall have the option, on any Business Day prior to the Maturity Date, to continue existing Eurodollar Loans for a subsequent Interest Period, to convert Base Rate Loans into Eurodollar Loans or to convert Eurodollar Loans into Base Rate Loans. By no later than 11:00 a.m. (a) on the date of the requested conversion of a Eurodollar Loan to a Base Rate Loan and (b) three Business Days prior to the date of the requested continuation of a Eurodollar Loan or conversion of a Base Rate Loan to a Eurodollar Loan, the Borrower shall provide telephonic notice to the Administrative Agent, followed promptly by a written Notice of Continuation/Conversion in the form of Exhibit 2.4 , setting forth whether the Borrower wishes to continue or convert such Term Loans. Notwithstanding anything herein to the contrary, (A) except as provided in Section 3.11, Eurodollar Loans may only be continued or converted into Base Rate Loans on the last day of the Interest Period applicable thereto, (B) Eurodollar Loans may not be continued nor may Base Rate Loans be converted into Eurodollar Loans during the existence and continuation of a Default or an Event of Default and (C) any request to continue a Eurodollar Loan that fails to comply with the terms hereof or any failure to request a continuation of a Eurodollar Loan at the end of an Interest Period shall be deemed a request to convert such Eurodollar Loan to a Base Rate Loan on the last day of the applicable Interest Period.

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2.5 Minimum Amounts .

Each request for a borrowing, conversion or continuation shall be subject to the requirements that (a) each Eurodollar Loan shall be in a minimum amount of $5,000,000 and in integral multiples of $1,000,000 in excess thereof, (b) each Base Rate Loan shall be in a minimum amount of $3,000,000 and in integral multiples of $100,000 in excess thereof and (c) no more than five Eurodollar Loans shall be outstanding hereunder at any one time. For the purposes of this Section 2.5, separate Eurodollar Loans that begin and end on the same date, as well as Eurodollar Loans that begin and end on different dates, shall all be considered as separate Eurodollar Loans. 2.6 Evidence of Debt .

(a) The Term Loans made by each Lender shall be evidenced by one or more accounts or records maintained by such Lender and by the Administrative Agent in the ordinary course of business. The accounts or records maintained by the Administrative Agent and each Lender shall be conclusive absent manifest error of the amount of the Term Loans made by the Lenders to the Borrower and the interest and payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrower hereunder to pay any amount owing with respect to its Borrower Obligations. In the event of any conflict between the accounts and records maintained by any Lender and the accounts and records of the Administrative Agent in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error.

(b) The Borrower agrees that, upon the request to the Administrative Agent by any Lender, the Borrower will

promptly execute and deliver to such Lender a promissory note of the Borrower evidencing any Term Loans of such Lender, substantially in the form of Exhibit 2.6(b) (a “ Note ”) with appropriate insertions as to date and principal amount; provided , that delivery of Notes shall not be a condition precedent to the occurrence of the Closing Date.

SECTION 3

GENERAL PROVISIONS APPLICABLE

TO TERM LOANS

3.1 Interest .

(a) Interest Rate . Subject to Sections 3.1(b), (i) all Base Rate Loans shall accrue interest at the Base Rate and (ii) all Eurodollar Loans shall accrue interest at the Adjusted Eurodollar Rate.

(b) Default Rate of Interest .

(i) After the occurrence, and during the continuation, of an Event of Default pursuant to

Section 8.1(a), the principal of and, to the extent permitted by Law, interest on the Term Loans and any other amounts owing hereunder or under the other Credit Documents (including without limitation fees and expenses) shall bear interest, payable on demand, at the Default Rate.

(ii) After the occurrence, and during the continuation, of an Event of Default (other than an

Event of Default pursuant to Section 8.1(a)), at the request of the Required Lenders, the principal of and, to the extent permitted by Law, interest on the Term Loans and any other amounts owing hereunder or under the other Credit Documents (including without limitation fees and expenses) shall bear interest, payable on demand, at the Default Rate.

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(iii) Interest Payments . Interest on Term Loans shall be due and payable in arrears on each Interest Payment Date.

3.2 Payments Generally .

(a) No Deductions; Place and Time of Payments . All payments to be made by the Borrower shall be made without condition or deduction for any counterclaim, defense, recoupment or setoff. Except as otherwise expressly provided herein, all payments by the Borrower hereunder shall be made to the Administrative Agent, for the account of the respective Lenders to which such payment is owed, at the Administrative Agent’s Office in Dollars and in immediately available funds not later than 2:00 p.m. on the date specified herein. The Administrative Agent will promptly distribute to each Lender its Pro Rata Share (or other applicable share as provided herein) of such payment in like funds as received by wire transfer to such Lender’s Lending Office. All payments received by the Administrative Agent after 2:00 p.m. shall be deemed received on the next succeeding Business Day and any applicable interest or fee shall continue to accrue.

(b) Payment Dates . Subject to the definition of “ Interest Period ,” if any payment to be made by the

Borrower shall come due on a day other than a Business Day, payment shall be made on the next following Business Day, and such extension of time shall be reflected in computing interest or fees, as the case may be.

(c) Several Obligations . The obligations of the Lenders hereunder to make Term Loans are several and not

joint. The failure of any Lender to make a Term Loan on the Closing Date shall not relieve any other Lender of its corresponding obligation to do so, and no Lender shall be responsible for the failure of any other Lender to so make its Term Loan.

(d) Funding Offices . Nothing herein shall be deemed to obligate any Lender to obtain the funds for any Term

Loan in any particular place or manner or to constitute a representation by any Lender that it has obtained or will obtain the funds for any Term Loan in any particular place or manner.

3.3 Prepayments .

(a) Voluntary Prepayments . The Borrower shall have the right to prepay its outstanding Term Loans in whole or in part from time to time without premium or penalty; provided , however , that (i) all prepayments under this Section 3.3(a) shall be subject to Section 3.14, (ii) Eurodollar Loans may only be prepaid on three Business Days’ prior written notice to the Administrative Agent, (iii) each such partial prepayment of Eurodollar Loans shall be in the minimum principal amount of $5,000,000 and integral multiples of $1,000,000 and (iv) each such partial prepayment of Base Rate Loans shall be in the minimum principal amount of $500,000 and integral multiples of $100,000 or, in the case of clauses (iii) and (iv), if less than such minimum amounts, the entire principal amount thereof then outstanding.

(b) Mandatory Prepayments . If any Capital Stock shall be issued (other than issuances pursuant to employee

stock plans), or Indebtedness incurred (other than under the Existing Credit Agreement or pursuant to the issuance of commercial paper in the ordinary course of business), by the Borrower or any of its Subsidiaries (other than PSNM and TNMP), then on the date of such issuance or incurrence, the Term Loans shall be prepaid by an amount equal to the amount of the Net Cash Proceeds of such issuance or incurrence.

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3.4 Fees .

(a) To the extent that any Term Loans remain outstanding on November 15, 2006, on such date the Borrower shall pay to the Administrative Agent for the account of each Lender a funding fee equal to 0.50% of the outstanding amount of the Term Loan of such Lender.

(b) The Borrower agrees to pay to LCPI and the Arranger, for their own respective accounts, the fees in the

amounts and on the dates previously agreed to in the Fee Letters. 3.5 Payment in full at Maturity .

On the Maturity Date, the entire outstanding principal balance of all Term Loans, together with accrued but unpaid interest and all fees and other sums owing under the Credit Documents, shall be due and payable in full, unless accelerated sooner pursuant to Section 8.2; provided that if the Maturity Date is not a Business Day, then such principal, interest, fees and other sums shall be due and payable in full on the next preceding Business Day. 3.6 Computations of Interest and Fees .

(a) Calculation of Interest and Fees . Except for Base Rate Loans that are based upon the Prime Rate, in which case interest shall be computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, all computations of interest and fees hereunder shall be made on the basis of the actual number of days elapsed over a year of 360 days. Interest shall accrue from and including the Closing Date (or continuation or conversion) to but excluding the last day occurring in the period for which such interest is payable. Each determination by the Administrative Agent of an interest rate or fee hereunder shall be conclusive and binding for all purposes, absent manifest error.

(b) Usury . It is the intent of the Lenders and the Borrower to conform to and contract in strict compliance

with applicable usury Law from time to time in effect. All agreements between the Lenders and the Borrower are hereby limited by the provisions of this subsection which shall override and control all such agreements, whether now existing or hereafter arising and whether written or oral. In no way, nor in any event or contingency (including but not limited to prepayment or acceleration of the maturity of the Borrower Obligations), shall the interest taken, reserved, contracted for, charged, or received under this Credit Agreement, under the Notes or otherwise, exceed the maximum nonusurious amount permissible under applicable Law. If, from any possible construction of any of the Credit Documents or any other document, interest would otherwise be payable in excess of the maximum nonusurious amount, any such construction shall be subject to the provisions of this subsection and such documents shall be automatically reduced to the maximum nonusurious amount permitted under applicable Law, without the necessity of execution of any amendment or new document. If any Lender shall ever receive anything of value which is characterized as interest on the Term Loans under applicable Law and which would, apart from this provision, be in excess of the maximum nonusurious amount, an amount equal to the amount which would have been excessive interest shall, without penalty, be applied to the reduction of the principal amount owing on the Term Loans and not to the payment of interest, or refunded to the Borrower or the other payor thereof if and to the extent such amount which would have been excessive

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exceeds such unpaid principal amount of the Term Loans. The right to demand payment of the Term Loans or any other Indebtedness evidenced by any of the Credit Documents does not include the right to accelerate the payment of any interest which has not otherwise accrued on the date of such demand, and the Lenders do not intend to charge or receive any unearned interest in the event of such demand. All interest paid or agreed to be paid to the Lenders with respect to the Term Loans shall, to the extent permitted by applicable Law, be amortized, prorated, allocated, and spread throughout the full stated term (including any renewal or extension) of the Term Loans so that the amount of interest on account of the Term Loans does not exceed the maximum nonusurious amount permitted by applicable Law.

3.7 Pro Rata Treatment .

Except to the extent otherwise provided herein, each payment or prepayment of principal of any Term Loan, each payment of interest and each conversion or continuation of any Term Loans shall be allocated pro rata among the relevant Lenders in accordance with their Pro Rata Shares. In the event any principal, interest, fee or other amount paid to any Lender pursuant to this Credit Agreement or any other Credit Document is rescinded or must otherwise be returned by the Administrative Agent, (a) such principal, interest or other amount that had been satisfied by such payment shall be revived, reinstated and continued in full force and effect as if such payment had not occurred and (b) such Lender shall, upon the request of the Administrative Agent, repay to the Administrative Agent the amount so paid to such Lender, with interest for the period commencing on the date such payment is returned by the Administrative Agent until the date the Administrative Agent receives such repayment at a rate per annum equal to the Federal Funds Rate if repaid within two (2) Business Days after such request and thereafter the Base Rate. 3.8 Sharing of Payments .

The Lenders agree among themselves that, except to the extent otherwise provided herein, in the event that any Lender shall obtain payment in respect of any Term Loan or any other obligation owing to such Lender under this Credit Agreement through the exercise of a right of setoff, banker’s lien or counterclaim, or pursuant to a secured claim under Section 506 of the Bankruptcy Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable Debtor Relief Law or other similar Law or otherwise, or by any other means, in excess of its Pro Rata Share of such payment as provided for in this Credit Agreement, such Lender shall promptly pay in cash or purchase from the other Lenders a participation in such Term Loans and other obligations in such amounts, and make such other adjustments from time to time, as shall be equitable to the end that all Lenders share such payment in accordance with their Pro Rata Shares. The Lenders further agree among themselves that if payment to a Lender obtained by such Lender through the exercise of a right of setoff, banker’s lien, counterclaim or other event as aforesaid shall be rescinded or must otherwise be returned, each Lender which shall have shared the benefit of such payment shall, by payment in cash or a repurchase of a participation theretofore sold, return its share of that benefit (together with its share of any accrued interest payable with respect thereto) to each Lender whose payment shall have been rescinded or otherwise returned. The Borrower agrees that (a) any Lender so purchasing such a participation may, to the fullest extent permitted by Law, exercise all rights of payment, including setoff, banker’s lien or counterclaim, with respect to such participation as fully as if such Lender were a holder of such Term Loan or other obligation in the amount of such participation and (b) the Borrower Obligations that have been satisfied by a payment that has been rescinded or otherwise returned shall be revived, reinstated and continued in full force and effect as if such payment had not occurred. Except as otherwise expressly provided in this Credit Agreement, if any Lender or the Administrative Agent shall fail to remit to any other Lender an amount payable by such Lender or the Administrative Agent to such other Lender pursuant to this Credit Agreement on the date when such amount is due, such payments shall be made

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together with interest thereon for each date from the date such amount is due until the date such amount is paid to the Administrative Agent or such other Lender at a rate per annum equal to the Federal Funds Rate. If under any applicable Debtor Relief Law or other similar Law, any Lender receives a secured claim in lieu of a setoff to which this Section 3.8 applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders under this Section 3.8 to share in the benefits of any recovery on such secured claim. 3.9 Capital Adequacy .

If any Lender determines that the introduction after the Closing Date of any Law, rule or regulation or other Requirement of Law regarding capital adequacy or any change therein or in the interpretation thereof, or compliance by such Lender (or its Lending Office) therewith, has or would have the effect of reducing the rate of return on the capital or assets of such Lender or any corporation controlling such Lender as a consequence of such Lender’s obligations hereunder (taking into consideration its policies with respect to capital adequacy and such Lender’s desired return on capital), then from time to time upon demand of such Lender (with a copy of such demand to the Administrative Agent), the Borrower shall pay to such Lender such additional amounts as will compensate such Lender for such reduction . 3.10 Eurodollar Provisions .

If the Administrative Agent determines (which determination shall be conclusive and binding upon the Borrower) in connection with any request for a Eurodollar Loan or a conversion to or continuation thereof that (i) deposits in Dollars are not being offered to banks in the applicable offshore interbank market for the applicable amount and Interest Period of such Eurodollar Loan, (ii) adequate and reasonable means do not exist for determining the Eurodollar Rate for such Eurodollar Loan, or (iii) the Eurodollar Rate for such Eurodollar Loan does not adequately and fairly reflect the cost to the Lenders of funding such Eurodollar Loan, the Administrative Agent will promptly notify the Borrower and the Lenders. Thereafter, the obligation of the Lenders to make or maintain Eurodollar Loans shall be suspended until the Administrative Agent revokes such notice. Upon receipt of such notice, the Borrower may revoke any pending Notice of Continuation/Conversion with respect to Eurodollar Loans or, failing that, will be deemed to have converted such request into a request for a conversion into a Base Rate Loan in the amount specified therein. 3.11 Illegality .

If any Lender determines that any Requirement of Law has made it unlawful, or that any Governmental Authority has asserted that it is unlawful, for any Lender or its applicable Lending Office to make, maintain or fund Eurodollar Loans, or materially restricts the authority of such Lender to purchase or sell, or to take deposits of Dollars in the London interbank market, or to determine or charge interest rates based upon the Eurodollar Rate, then, on notice thereof by such Lender to the Borrower through the Administrative Agent, any obligation of such Lender to make or continue Eurodollar Loans or to convert Base Rate Loans to Eurodollar Loans shall be suspended until such Lender notifies the Administrative Agent and the Borrower that the circumstances giving rise to such determination no longer exist. Upon receipt of such notice, the Borrower shall, upon demand to the Borrower from such Lender (with a copy to the Administrative Agent), prepay or, if applicable, convert all Eurodollar Loans of such Lender to Base Rate Loans, either on the last day of the Interest Period thereof, if such Lender may lawfully continue to maintain such Eurodollar Loans to such day, or immediately, if such Lender may not lawfully continue to maintain such Eurodollar Loans. Upon any such prepayment or conversion, the Borrower shall also pay interest on the amount so prepaid or converted, together with any amounts due with respect thereto pursuant to Section 3.14.

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3.12 Requirements of Law; Reserves on Eurodollar Loans .

(a) Changes in Law . If any Lender determines that as a result of the introduction of or any change in, or in the interpretation of, any Requirement of Law, or such Lender’s compliance therewith, there shall be any increase in the cost to such Lender of agreeing to make or making, funding or maintaining Eurodollar Loans, or a reduction in the amount received or receivable by such Lender in connection with any of the foregoing (excluding for purposes of this Section 3.12 any such increased costs or reduction in amount resulting from (i) Taxes or Other Taxes (as to which Section 3.13 shall govern) and (ii) reserve requirements contemplated by subsection (b) below), then from time to time, upon demand of such Lender (through the Administrative Agent), the Borrower shall pay to such Lender such additional amounts as will compensate such Lender for such increased cost or reduction in yield.

(b) Reserves . The Borrower shall pay to each Lender (to the extent such Lender has not otherwise been

compensated therefore hereunder), as long as such Lender shall be required to maintain reserves with respect to liabilities or assets consisting of or including Eurodollar funds or deposits (currently known as “Eurodollar liabilities”), additional interest on the unpaid principal amount of each Eurodollar Loan equal to the actual costs of such reserves allocated to such Loan by such Lender (as determined by such Lender in good faith, which determination shall be conclusive absent demonstrable error), which, shall be due and payable on each date on which interest is payable on such Loan; provided that the Borrower shall have received at least 15 days’ prior notice (with a copy to the Administrative Agent) of such additional interest from such Lender. If a Lender fails to give notice 15 days prior to the relevant Interest Payment Date, such additional interest shall be due and payable 15 days from receipt of such notice.

3.13 Taxes .

(a) Payment of Taxes . Any and all payments by the Borrower to or for the account of the Administrative Agent or any Lender under any Credit Document shall be made free and clear of and without deduction for any and all present or future income, stamp or other taxes, duties, levies, imposts, deductions, assessments, fees, withholdings or similar charges, and all liabilities with respect thereto, but excluding, in the case of the Administrative Agent and each Lender, taxes imposed on or measured by its net income, and franchise taxes imposed on it (in lieu of net income taxes), by the jurisdiction (or any political subdivision thereof) under the Laws of which the Administrative Agent or such Lender, as the case may be, is organized or maintains its Lending Office (all such non-excluded present or future income, stamp or other taxes, duties, levies, imposts, deductions, assessments, fees, withholdings or similar charges, and liabilities being hereinafter referred to as “ Taxes ”). If the Borrower shall be required by any Requirement of Law to deduct any Taxes from or in respect of any sum payable under any Credit Document to the Administrative Agent or any Lender, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.13(a)), the Administrative Agent or such Lender, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other Governmental Authority in accordance with applicable Requirements of Law, and (iv) within 30 days after the date of such payment, the Borrower shall furnish to the Administrative Agent (which shall forward the same to such Lender, if applicable) the original or a certified copy of a receipt evidencing payment thereof, to the extent such receipt is issued therefor, or other written proof of payment thereof that is reasonably satisfactory to the Administrative Agent.

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(b) Additional Taxes . In addition, the Borrower agrees to pay any and all present or future stamp, court or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under any Credit Document or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, any Credit Document (hereinafter referred to as “ Other Taxes ”).

(c) No Deduction for Taxes . If the Borrower shall be required to deduct or pay any Taxes or Other Taxes

from or in respect of any sum payable under any Credit Document to the Administrative Agent or any Lender, the Borrower shall also pay to the Administrative Agent (for the account of such Lender) or to such Lender, at the time interest is paid, such additional amount that such Lender specifies as necessary to preserve the after-tax yield (after factoring in all taxes, including taxes imposed on or measured by net income) such Lender would have received if such Taxes or Other Taxes had not been imposed.

(d) Indemnification . The Borrower agrees to indemnify the Administrative Agent and each Lender for (i) the

full amount of Taxes and Other Taxes (including any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 3.13(d)) paid by the Administrative Agent and such Lender, and (ii) any liability (including penalties, interest and expenses) arising therefrom or with respect thereto.

(e) Exemption from Taxes . In the case of any payment hereunder or under any other Credit Document by or

on behalf of the Borrower through an account or branch outside the United States, or on behalf of the Borrower by a payor that is not a United States person, if the Borrower determines that no taxes are payable in respect thereof, the Borrower shall furnish, or shall cause such payor to furnish, to the Administrative Agent, an opinion of counsel reasonably acceptable to the Administrative Agent stating that such payment is exempt from Taxes. For purposes of this subsection (e), the terms “United States” and “United States person” shall have the meanings specified in Section 7701 of the Code.

(f) Foreign Lenders . Each Lender that is a foreign corporation, foreign partnership or foreign trust within the

meaning of the Code (a “ Foreign Lender ”) shall deliver to the Administrative Agent, prior to receipt of any payment subject to withholding under the Code, two duly signed completed copies of either IRS Form W-8BEN or any successor thereto (relating to such Lender and entitling it to an exemption from, or reduction of, withholding tax on all payments to be made to such Lender by the Borrower pursuant to this Credit Agreement), as appropriate, or IRS Form W-8ECI or any successor thereto (relating to all payments to be made to such Lender by the Borrower pursuant to this Credit Agreement) or such other evidence satisfactory to the Borrower and the Administrative Agent that such Lender is entitled to an exemption from, or reduction of, United States withholding tax. Thereafter and from time to time, each such Lender shall (i) promptly submit to the Administrative Agent such additional duly completed and signed copies of one of such forms (or such successor forms as shall be adopted from time to time by the relevant United States taxing authorities), as appropriate, as may reasonably be requested by the Borrower or the Administrative Agent and then be available under then current United States Laws and regulations to avoid, or such evidence as is satisfactory to the Borrower and the Administrative Agent of any available exemption from or reduction of, United States withholding taxes in respect of all payments to be made to such Lender by the Borrower pursuant to this Credit Agreement, (ii) promptly notify the Administrative Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction, and (iii) take such steps as shall not be materially disadvantageous to it, in the reasonable judgment of such Lender, and as may be reasonably necessary (including the re-designation of its Lending Office) to avoid any Requirement of Law that the Borrower make

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any deduction or withholding for taxes from amounts payable to such Lender. If the forms or other evidence provided by such Lender at the time such Lender first becomes a party to this Credit Agreement indicate a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from Taxes unless and until such Lender provides the appropriate forms certifying that a lesser rate applies, whereupon withholding tax at such lesser rate only shall be considered excluded from Taxes for periods governed by such forms; provided, however, that, if at the date of any assignment pursuant to which a Lender becomes a party to this Credit Agreement, the assignor Lender was entitled to payments under Section 3.13(a) in respect of United States withholding tax with respect to interest paid at such date, then, to such extent, the term Taxes shall include (in addition to withholding taxes that may be imposed in the future or other amounts otherwise includable in Taxes) United States withholding tax, if any, applicable with respect to the assignee Lender on such date. If such Lender fails to deliver the above forms or other evidence, then the Administrative Agent may withhold from any interest payment to such Lender an amount equal to the applicable withholding tax imposed by Sections 1441 and 1442 of the Code, without reduction. If any Governmental Authority asserts that the Administrative Agent did not properly withhold any tax or other amount from payments made in respect of such Lender, such Lender shall indemnify the Administrative Agent therefor, including all penalties and interest, any taxes imposed by any jurisdiction on the amounts payable to the Administrative Agent under this Section 3.13(f), and costs and expenses (including the reasonable fees and expenses of legal counsel) of the Administrative Agent. For any period with respect to which a Lender has failed to provide the Borrower with the above forms or other evidence (other than if such failure is due to a change in the applicable Law, or in the interpretation or application thereof, occurring after the date on which such form or other evidence originally was required to be provided or if such form or other evidence otherwise is not required), such Lender shall not be entitled to indemnification under subsection ( a) or (c) of this Section 3.13 with respect to Taxes imposed by the United States by reason of such failure; provided, however, that should a Lender become subject to Taxes because of its failure to deliver such form or other evidence required hereunder, the Borrower shall take such steps as such Lender shall reasonably request to assist such Lender in recovering such Taxes. The obligation of the Lenders under this Section 3.13(f) shall survive the payment of all Borrower Obligations and the resignation or replacement of the Administrative Agent.

(g) Reimbursement . In the event that an additional payment is made under Section 3.13(a) or (c) for the

account of any Lender and such Lender, in its reasonable judgment, determines that it has finally and irrevocably received or been granted a credit against or release or remission for, or repayment of, any tax paid or payable by it in respect of or calculated with reference to the deduction or withholding giving rise to such payment, such Lender shall, to the extent that it determines that it can do so without prejudice to the retention of the amount of such credit, relief, remission or repayment, pay to the Borrower such amount as such Lender shall, in its reasonable judgment, have determined to be attributable to such deduction or withholding and which will leave such Lender (after such payment) in no worse position than it would have been in if the Borrower had not been required to make such deduction or withholding. Nothing herein contained shall interfere with the right of a Lender to arrange its tax affairs in whatever manner it thinks fit nor oblige any Lender to claim any tax credit or to disclose any information relating to its tax affairs or any computations in respect thereof or require any Lender to do anything that would prejudice its ability to benefit from any other credits, reliefs, remissions or repayments to which it may be entitled.

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3.14 Compensation .

Upon the written demand of any Lender, the Borrower shall promptly compensate such Lender for and hold such Lender harmless from any loss, cost or expense incurred by it as a result of:

(a) any continuation, conversion, payment or prepayment of any Eurodollar Loan of the Borrower on a day other than the last day of the Interest Period for such Eurodollar Loan (whether voluntary, mandatory, automatic, by reason of acceleration, or otherwise); or

(b) any failure by the Borrower (for a reason other than the failure of such Lender to make a Eurodollar Loan)

to prepay, borrow, continue or convert any Eurodollar Loan on the date or in the amount previously requested by the Borrower. The amount each such Lender shall be compensated pursuant to this Section 3.14 shall include, without limitation, (i) any loss incurred by such Lender in connection with the re-employment of funds prepaid, repaid, not borrowed or paid, as the case may be and (ii) any reasonable out-of-pocket expenses (including the reasonable fees and expenses of legal counsel) incurred and reasonably attributable thereto .

For purposes of calculating amounts payable by the Borrower to the Lenders under this Section 3.14, each Lender shall be deemed to have funded each Eurodollar Loan made by it at the Eurodollar Rate for such Loan by a matching deposit or other borrowing in the London interbank market for a comparable amount and for a comparable period, whether or not such Eurodollar Loan was in fact so funded. 3.15 Determination and Survival of Provisions .

All determinations by the Administrative Agent or a Lender of amounts owing under Sections 3.9 through 3.14, inclusive, shall, absent manifest error, be conclusive and binding on the parties hereto and all amounts owing thereunder shall be due and payable within ten Business Days of demand therefor. In determining such amount, the Administrative Agent or such Lender may use any reasonable averaging and attribution methods. Section 3.9 through 3.14, inclusive, shall survive the termination of this Credit Agreement and the payment of all Borrower Obligations.

SECTION 4

CONDITIONS PRECEDENT TO CLOSING 4.1 Closing Conditions .

The obligation of the Lenders to enter into this Credit Agreement and make the Term Loans is subject to satisfaction of the following conditions:

(a) Executed Credit Documents . Receipt by the Administrative Agent of duly executed copies of: (i) this Credit Agreement, (ii) the requested Notes and (iii) all other Credit Documents, each in form and substance reasonably acceptable to the Lenders in their sole discretion.

(b) Acquisition. The Acquisition shall have been consummated pursuant to the Acquisition Documentation in

form and substance reasonably satisfactory to the Lenders, and no provision thereof shall have been waived, amended, supplemented or otherwise modified in a manner which adversely affects the Administrative Agent or the Lenders without the consent of the Lenders.

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(c) Authority Documents . Receipt by the Administrative Agent of the following:

(i) Organizational Documents . Copies of the articles of incorporation of the Borrower, certified to be true and complete as of a recent date by the appropriate Governmental Authority of the state or other jurisdiction of its formation and copies of the bylaws of the Borrower, certified by a secretary or assistant secretary (or the equivalent) of the Borrower to be true and correct as of the Closing Date.

(ii) Resolutions . Copies of resolutions of the board of directors of the Borrower approving

and adopting this Credit Agreement, the Acquisition Documentation and the other Credit Documents to which it is a party, the transactions contemplated herein and therein and authorizing execution and delivery hereof and thereof, certified by a secretary or assistant secretary (or the equivalent) of the Borrower to be true and correct and in full force and effect as of the Closing Date.

(iii) Good Standing . Copies of certificates of good standing, existence or its equivalent with

respect to the Borrower certified as of a recent date by the appropriate Governmental Authority of the state or other jurisdiction of its formation.

(iv) Incumbency . An incumbency certificate of the Borrower and certified by a secretary or

assistant secretary (or the equivalent) of the Borrower to be true and correct as of the Closing Date.

(d) Opinions of Counsel . Receipt by the Administrative Agent of opinions of counsel from outside counsel to the Borrower, in form and substance acceptable to the Administrative Agent, addressed to the Administrative Agent and the Lenders and dated the Closing Date.

(e) Financial Statements . Receipt by the Administrative Agent of a copy of (i) the annual consolidated

financial statements (including balance sheets, income statements and cash flow statements) of the Borrower and its Subsidiaries for Fiscal Years 2004 and 2005, audited by independent public accountants of recognized national standing and (ii) such other financial information regarding the Borrower as the Administrative Agent may reasonably request.

(f) Material Adverse Effect . Since December 31, 2005, there shall have been no development or event

relating to or affecting the Borrower or any of its Subsidiaries that has had or could be reasonably expected to have a Material Adverse Effect and no Material Adverse Change in the facts and information regarding the Borrower and its Subsidiaries as represented to date.

(g) Litigation . There shall not exist any material order, decree, judgment, ruling or injunction or any material

pending or threatened action, suit, investigation or proceeding against the Borrower or any of its Subsidiaries except as represented to date.

(h) Consents . All consents, approvals, authorizations, orders, filings and other actions by or with any

Governmental Authority or other Person necessary in connection with the Acquisition, the financing contemplated hereby, and the continuing operations of the Borrower and its Subsidiaries and the Acquired Business shall have been obtained or made and be in full force and effect.

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(i) Officer’s Certificates . Receipt by the Administrative Agent of a certificate or certificates executed by an

Authorized Officer of the Borrower as of the Closing Date stating that (i) the Borrower and each of its Subsidiaries are in compliance in all material respects with all existing material financial obligations and all material Requirements of Law, (ii) there does not exist any material order, decree, judgment, ruling or injunction or any material pending or threatened action, suit, investigation or proceeding against the Borrower or any of its Subsidiaries , (iii) the financial statements and information delivered to the Administrative Agent on or before the Closing Date were prepared in good faith and in accordance with GAAP and (iv) immediately after giving effect to this Credit Agreement, the other Credit Documents, all the transactions contemplated herein or therein to occur on such date and to the Acquisition, (A) the Borrower is Solvent, (B) no Default or Event of Default exists, (C) no default or event of default exists under the Existing Credit Agreement or under any other material Indebtedness of the Borrower or any of its Subsidiaries, (D) all representations and warranties contained herein and in the other Credit Documents are true and correct in all material respects, (E) since December 31, 2005, there has been no development or event relating to or affecting the Borrower or any of its Subsidiaries that has had or could be reasonably expected to have a Material Adverse Effect and there exists no event, condition or state of facts that could result in or reasonably be expected to result in a Material Adverse Change and (F) the Borrower is in compliance with each of the financial covenants set forth in Section 6.2, as of December 31, 2005, as demonstrated in the Covenant Compliance Worksheet attached to such certificate.

(j) Fees and Expenses . Unless waived by the Person entitled thereto, payment by the Borrower of all fees and

expenses owed by the Borrower to the Administrative Agent or the Arranger on or before the Closing Date, including, without limitation, as set forth in the Fee Letters.

(k) Debt Rating. The Borrower’s Debt Rating on the Closing Date shall be BBB- or better by S&P and Baa3

or better by Moody’s.

(l) PATRIOT Act . The Lenders shall have received, sufficiently in advance of the Closing Date, all documentation and other information required by bank regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations, including without limitation the United States PATRIOT Act.

(m) Representations and Warranties . The representations and warranties made by the Borrower in any Credit

Document are true and correct in all material respects at and as if made as of such date.

(n) No Default . There shall not exist any Default or Event of Default under this Credit Agreement and no default or event of default shall exist under the Existing Credit Agreement or under any other material indebtedness or agreement of the Borrower, any of its Subsidiaries or in any way in connection with the Acquired Business.

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SECTION 5

REPRESENTATIONS AND WARRANTIES

To induce the Administrative Agent and the Lenders to enter into this Credit Agreement and to induce the Lenders to make the Term Loans, the Borrower represents and warrants to the Administrative Agent and the Lenders as follows: 5.1 Organization and Good Standing .

Each of the Borrower and its Subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) is duly qualified and in good standing as a foreign entity authorized to do business in every other jurisdiction where the failure to so qualify would have a Material Adverse Effect and (c) has the requisite power and authority to own its properties and to carry on its business as now conducted and as proposed to be conducted. 5.2 Due Authorization .

The Borrower (a) has the requisite power and authority to execute, deliver and perform this Credit Agreement and the other Credit Documents to which it is a party, to incur the obligations herein and therein provided for and to consummate the Acquisition and (b) has been authorized by all necessary action to execute, deliver and perform this Credit Agreement, the other Credit Documents to which it is a party and the Acquisition Documentation. 5.3 No Conflicts .

Neither the execution and delivery of this Credit Agreement and the other Credit Documents, nor the consummation of the financing herein or therein, nor performance of and compliance with the terms and provisions hereof and thereof by the Borrower, nor the consummation of the Acquisition contemplated by the Acquisition Documentation will (a) violate or conflict with any provision of its organizational documents, (b) violate, contravene or conflict with any law (including without limitation, the Federal Power Act, as amended), regulation (including without limitation, Regulation U and Regulation X), order, writ, judgment, injunction, decree or permit applicable to it, (c) violate, contravene or conflict with contractual provisions of, or cause an event of default under, any indenture, loan agreement, mortgage, deed of trust, contract or other agreement or instrument to which it is a party or by which it may be bound, the violation of which would have or would be reasonably expected to have a Material Adverse Effect or (d) result in or require the creation of any Lien upon or with respect to its properties. 5.4 Consents .

No consent, approval, authorization, order, or filing, registration, qualification or other action by or with any court or other Governmental Authority or other Person is required in connection with the execution, delivery or performance of this Credit Agreement, the other Credit Documents or any of the Acquisition Documentation that has not been obtained or made and is in full force and effect. 5.5 Enforceable Obligations .

This Credit Agreement and the other Credit Documents to which it is a party have been duly executed and delivered and constitute the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, except as may be limited by Debtor Relief Laws or similar laws affecting creditors’ rights generally or by general equitable principles.

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5.6 Financial Condition .

The financial statements delivered to the Lenders pursuant to Section 4.1(e) and pursuant to Sections 6.1(a) and (b): (i) have been prepared in accordance with GAAP except that the quarterly financial statements are subject to year-end adjustments and have fewer footnotes than annual statements and (ii) present fairly the financial condition, results of operations and cash flows of the Borrower and its Subsidiaries as of such date and for such periods. No opinion provided with respect to the Borrower’s financial statements pursuant to Section 6.1 (or as to any prior annual financial statements) has been withdrawn. 5.7 No Material Change .

(a) Since December 31, 2005, there has been no development or event relating to or affecting the Borrower or any of its Subsidiaries which would have or would reasonably be expected to have a Material Adverse Effect.

(b) Since December 31, 2005, there has been no sale, transfer or other disposition by the Borrower or any of

its Subsidiaries of any material part of its business or property, and no purchase or other acquisition by the Borrower or any of its Subsidiaries of any business or property (including the Capital Stock of any other Person) material in relation to the financial condition of the Borrower or any of its Subsidiaries, in each case which is not (i) reflected in the most recent financial statements delivered to the Lenders pursuant to Section 4.1(e) or 6.1 or in the notes thereto or (ii) otherwise permitted by the terms of this Credit Agreement and communicated to the Lenders.

5.8 No Default .

Neither the Borrower nor any of its Subsidiaries is in default in any respect under any contract, lease, loan agreement, indenture, mortgage, security agreement or other agreement or obligation to which it is a party or by which any of its properties is bound which default would have or would reasonably be expected to have a Material Adverse Effect. No Default or Event of Default presently exists and is continuing. No default or event of default exists under the Existing Credit Agreement or under any material Indebtedness of the Borrower or any of its Subsidiaries. 5.9 Litigation .

There are no actions, suits, investigations or legal, equitable, arbitration or administrative proceedings, pending or, to the knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries which would have or would reasonably be expected to have a Material Adverse Effect. 5.10 Taxes .

Each of the Borrower and its Subsidiaries has filed, or caused to be filed, all material tax returns (federal, state, local and foreign) required to be filed and paid all amounts of taxes shown to be due (including interest and penalties) and has paid all other taxes, fees, assessments and other governmental charges (including mortgage recording taxes, documentary stamp taxes and intangibles taxes) owed by it, except for such taxes which are not yet delinquent or that are being contested in good faith and by proper proceedings, and against which adequate reserves are being maintained in accordance with GAAP.

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5.11 Compliance with Law .

Each of the Borrower and its Subsidiaries is in compliance with all laws, rules, regulations, orders and decrees applicable to it or to its properties, unless such failure to comply would not have or would not reasonably be expected to have a Material Adverse Effect. 5.12 ERISA .

Except as would not result or reasonably be expected to result in a Material Adverse Effect:

(a) During the five-year period prior to the date on which this representation is made or deemed made: (i) no ERISA Event has occurred, and, to the best knowledge of the Borrower, no event or condition has occurred or exists as a result of which any ERISA Event would be reasonably expected to occur, with respect to any Plan; (ii) no “accumulated funding deficiency,” as such term is defined in Section 302 of ERISA and Section 412 of the Code, whether or not waived, has occurred with respect to any Plan; (iii) each Plan has been maintained, operated, and funded in compliance with its own terms and in material compliance with the provisions of ERISA, the Code, and any other applicable federal or state laws; and (iv) no Lien in favor or the PBGC or a Plan has arisen or is reasonably likely to arise on account of any Plan.

(b) The actuarial present value of all “benefit liabilities” under each Single Employer Plan (determined within

the meaning of Section 401(a)(2) of the Code, utilizing the actuarial assumptions used to fund such Plans), whether or not vested, did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the current value of the assets of such Plan allocable to such accrued liabilities, except as disclosed in the Borrower’s financial statements.

(c) Neither the Borrower nor any ERISA Affiliate has incurred, or, to the best knowledge of the Borrower, is

reasonably expected to incur, any withdrawal liability under ERISA to any Multiemployer Plan or Multiple Employer Plan. Neither the Borrower nor any ERISA Affiliate has received any notification that any Multiemployer Plan is in reorganization (within the meaning of Section 4241 of ERISA), is insolvent (within the meaning of Section 4245 of ERISA), or has been terminated (within the meaning of Title IV of ERISA), and no Multiemployer Plan is, to the best knowledge of the Borrower, reasonably expected to be in reorganization, insolvent, or terminated.

(d) No prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) or

breach of fiduciary responsibility has occurred with respect to a Plan which has subjected or would be reasonably likely to subject the Borrower or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the Code, or under any agreement or other instrument pursuant to which the Borrower or any ERISA Affiliate has agreed or is required to indemnify any person against any such liability.

(e) The present value (determined using actuarial and other assumptions which are reasonable with respect to

the benefits provided and the employees participating) of the liability of the Borrower and each ERISA Affiliate for post-retirement welfare benefits to be provided to their current and former employees under Plans which are welfare benefit plans (as defined in Section 3(1) of ERISA), net of all assets under all such Plans allocable to such benefits, are reflected on the financial statements referenced in Section 6.1 in accordance with FASB 106.

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(f) Each Plan which is a welfare plan (as defined in Section 3(1) of ERISA) to which Sections 601-609 of ERISA and Section 4980B of the Code apply has been administered in compliance in all material respects with such sections.

5.13 Use of Proceeds; Margin Stock .

The proceeds of the Term Loans will be used solely for the purposes specified in Section 6.9. None of such proceeds will be used for the purpose of (a) (i) purchasing or carrying any Margin Stock or (ii) reducing or retiring any Indebtedness which was originally incurred to purchase or carry Margin Stock, or (iii) for any other purpose that might constitute this transaction a “purpose credit” within the meaning of Regulation U or (b) for the acquisition of another Person unless the board of directors (or other comparable governing body) or stockholders, as appropriate, of such Person has approved such acquisition. 5.14 Investment Company Act .

The Borrower is not an “investment company” registered or required to be registered under the Investment Company Act of 1940, as amended, or controlled by such a company. 5.15 Solvency .

The Borrower is and, after the consummation of the transactions contemplated by this Credit Agreement and by the Acquisition Documentation, will be Solvent. 5.16 Disclosure .

Neither this Credit Agreement, the Acquisition Documentation nor any financial statements delivered to the Administrative Agent or the Lenders nor any other document, certificate or statement furnished to the Administrative Agent or the Lenders by or on behalf of the Borrower in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein or herein, taken as a whole, not misleading. 5.17 Environmental Matters .

Except as would not result or reasonably be expected to result in a Material Adverse Effect: (a) each of the properties of the Borrower and its Subsidiaries (the “ Properties ”) and all operations at the Properties are in substantial compliance with all applicable Environmental Laws, (b) there is no undocumented or unreported violation of any Environmental Law with respect to the Properties or the businesses operated by the Borrower and its Subsidiaries (the “ Businesses ”) that the Borrower is aware of, and (c) there are no conditions relating to the Businesses or Properties that have given rise to or would reasonably be expected to give rise to a liability under any applicable Environmental Laws. 5.18 Material Leases .

Set forth on Schedule 5.18 hereto is a complete and accurate list of the Material Leases on the date hereof, showing the expiration date and annual rental cost thereof. PSNM is entitled to exercise all of the rights of lessee purported to be granted to PSNM under each such Material Lease.

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5.19 Material Lease Interest Payments and Discount Rate .

Schedule 5.19 hereto, as most recently provided to the Administrative Agent, sets forth the same (a) amounts with respect to the interest portion of payments under the Material Leases of PSNM and (b) discount rate used to calculate the net present value of all amounts payable under the Material Leases as have been most recently provided (or that PSNM intends to provide shortly) to Moody’s and S&P or as have otherwise been ag reed to by the Required Lenders. 5.20 Certain Documents .

The Borrower has delivered to the Administrative Agent a complete and correct copy of the Acquisition Documentation, including any amendments, supplements or modifications with respect thereto.

SECTION 6

AFFIRMATIVE COVENANTS

The Borrower covenants and agrees that until the payment in full of all of its Borrower Obligations: 6.1 Information Covenants .

The Borrower will furnish, or cause to be furnished, to the Lenders:

(a) Annual Financial Statements . As soon as available, and in any event within 120 days after the close of each Fiscal Year of the Borrower, a consolidated balance sheet and income statement of the Borrower and its Subsidiaries, as of the end of such Fiscal Year, together with the related consolidated statements of income and of cash flows for such Fiscal Year, setting forth in comparative form figures for the preceding Fiscal Year, all such financial information described above to be in reasonable form and detail and, in each case, audited by independent certified public accountants of recognized national standing reasonably acceptable to the Required Lenders and whose opinion shall be furnished to the Lenders, and shall be to the effect that such financial statements have been prepared in accordance with GAAP (except for changes with which such accountants concur) and shall not be limited as to the scope of the audit or qualified in any respect.

(b) Quarterly Financial Statements . As soon as available, and in any event within 60 days after the close of

each Fiscal Quarter of the Borrower (other than the fourth Fiscal Quarter), a consolidated balance sheet and income statement of the Borrower and its Subsidiaries as of the end of such Fiscal Quarter, together with the related consolidated statement of income for such Fiscal Quarter and a year to date statement of cash flows, in each case setting forth in comparative form figures for the corresponding period of the preceding Fiscal Year, all such financial information described above to be in reasonable form and detail and reasonably acceptable to the Required Lenders, and, in each case, accompanied by a certificate of a Financial Officer of the Borrower to the effect that such quarterly financial statements fairly present in all material respects the financial condition of such Person and have been prepared in accordance with GAAP, subject to changes resulting from audit and normal year-end audit adjustments and except that the quarterly financial statements have fewer footnotes than annual statements.

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(c) Officer’s Certificate . At the time of delivery of the financial statements provided for in Sections 6.1(a) and 6.1(b) above, a certificate of a Financial Officer substantially in the form of Exhibit 6.1(c) : (i) setting forth calculations demonstrating compliance by the Borrower with the financial covenants set forth in Section 6.2 as of the end of such fiscal period and (ii) stating that no Default or Event of Default exists, or if any Default or Event of Default does exist, specifying the nature and extent thereof and what action the Borrower proposes to take with respect thereto.

(d) Reports . Notice of the filing by the Borrower of any Form 10-Q, Form 10-K or Form 8-K with the SEC

promptly upon the filing thereof and copies of all financial statements, proxy statements, notices and reports as the Borrower shall send to its shareholders concurrently with the mailing of any such statements, notices or reports to its shareholders.

(e) Notices . Upon the Borrower obtaining knowledge thereof, the Borrower will give written notice to the

Administrative Agent within ten days of (i) the occurrence of a Default or Event of Default, specifying the nature and extent thereof and what action the Borrower proposes to take with respect thereto and (ii) the occurrence of any of the following with respect to the Borrower or any of its Subsidiaries (A) the pendency or commencement of any litigation, arbitration or governmental proceeding against the Borrower or any of its Subsidiaries which, if adversely determined, would have or would reasonably be expected to have a Material Adverse Effect, (B) one or more judgments, orders, or decrees shall be entered against the Borrower or any of its Subsidiaries involving a liability of $5,000,000 or more, in the aggregate or (C) the institution of any proceedings against the Borrower or any of its Subsidiaries with respect to, or the receipt of notice by such Person of potential liability or responsibility for violation or alleged violation of, any federal, state or local law, rule or regulation (including, without limitation, any Environmental Law), the violation of which would have or would reasonably be expected to have a Material Adverse Effect.

(f) ERISA . Upon the Borrower or any ERISA Affiliate obtaining knowledge thereof, the Borrower will give

written notice to the Administrative Agent promptly (and in any event within ten days) of any of the following which would result in or reasonably would be expected to result in a Material Adverse Effect: (i) any event or condition, including, but not limited to, any Reportable Event, that constitutes, or would be reasonably expected to lead to, an ERISA Event; (ii) with respect to any Multiemployer Plan, the receipt of notice as prescribed in ERISA or otherwise of any withdrawal liability assessed against the Borrower or any of its ERISA Affiliates, or of a determination that any Multiemployer Plan is in reorganization or insolvent (both within the meaning of Title IV of ERISA); (iii) the failure to make full payment on or before the due date (including extensions) thereof of all amounts which the Borrower or any of its Subsidiaries or ERISA Affiliates is required to contribute to each Plan pursuant to its terms and as required to meet the minimum funding standard set forth in ERISA and the Code with respect thereto; or (iv) a change in the funding status of any Plan, in each case together with a description of any such event or condition or a copy of any such notice and a statement by an officer of the Borrower briefly setting forth the details regarding such event, condition, or notice, and the action, if any, which has been or is being taken or is proposed to be taken with respect thereto. Promptly upon request, the Borrower shall furnish the Lenders with such additional information concerning any Plan as may be reasonably requested, including, but not limited to, copies of each annual report/return (Form 5500 series), as well as all schedules and attachments thereto required to be filed with the Department of Labor and/or the Internal Revenue Service pursuant to ERISA and the Code, respectively, for each “plan year” (within the meaning of Section 3(39) of ERISA).

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(g) Debt Ratings . Prompt notice of any change in the Debt Ratings of the Borrower.

(h) Other Information . With reasonable promptness upon any such request, such other information regarding the business, properties or financial condition of the Borrower as the Lenders may reasonably request.

Documents required to be delivered pursuant to Section 6.1(a), (b) or (d) (to the extent any such documents are included in materials

otherwise filed with the Securities and Exchange Commission) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which the Borrower posts such documents, or provides a link thereto on the Borrower’s website on the Internet at the website address listed on Schedule 10.1 ; or (ii) on which such documents are posted on the Borrower’s behalf on an Internet or intranet website, if any, to which each Lender and the Administrative Agent have access (whether a commercial, third-party website or whether sponsored by the Administrative Agent); provided that: (A) the Borrower shall deliver paper copies of such documents to the Administrative Agent or any Lender that requests the Borrower to deliver such paper copies until a written request to cease delivering paper copies is given by the Administrative Agent or such Lender and (B) the Borrower shall notify the Administrative Agent and each Lender (by telecopier or electronic mail) of the posting of any such documents and provide to the Administrative Agent by electronic mail electronic versions ( i.e. , soft copies) of such documents. Notwithstanding anything contained herein, in every instance the Borrower shall be required to provide paper copies of the Officer’s Certificate required by Section 6.1(c) to the Administrative Agent. Except for such Officer’s Certificate, the Administrative Agent shall have no obligation to request the delivery or to maintain copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by the Borrower with any such request for delivery, and each Lender shall be solely responsible for requesting delivery to it or maintaining its copies of such documents. 6.2 Financial Covenants .

(a) Debt Capitalization . At all times the ratio of (i) Consolidated Indebtedness of the Borrower to (ii) Consolidated Capitalization of the Borrower shall be less than or equal to 0.65 to 1.0. For purposes of such calculation, the portion of Consolidated Indebtedness of the Borrower attributable to obligations under Material Leases shall be the net present value (using (i) the discount rate (A) set forth in Schedule 5.19 , so long as Schedule 5.19 specifies the same relevant discount rate as is used in calculating such net present value provided to Moody’s and S&P or (B) the discount rate used in calculating such net present value provided to Moody’s and S&P or (ii) any such other rate as shall be proposed by the Borrower (and agreed upon by the Required Lenders)) of all amounts payable under the Material Leases.

6.3 Preservation of Existence and Franchises .

(a) Except in a transaction permitted by Section 7.2, the Borrower will do (and will cause each of its Subsidiaries to do) all things necessary to preserve and keep in full force and effect its existence and rights, franchises and authority.

(b) The Borrower will maintain (and will cause each of its Subsidiaries to maintain) its properties in good

condition and not waste or otherwise permit such properties to deteriorate, reasonable wear and tear excepted.

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6.4 Books and Records .

The Borrower will keep (and will cause each of its Subsidiaries to keep) complete and accurate books and records of its transactions in accordance with good accounting practices on the basis of GAAP (including the establishment and maintenance of appropriate reserves). 6.5 Compliance with Law .

The Borrower will comply (and will cause each of its Subsidiaries to comply) with all laws (including, without limitation, all Environmental Laws and ERISA laws), rules, regulations and orders, and all applicable restrictions imposed by all Governmental Authorities, applicable to it and its properties, if the failure to comply would have or would reasonably be expected to have a Material Adverse Effect. 6.6 Payment of Taxes and Other Indebtedness .

The Borrower will (and will cause each of its Subsidiaries to) pay, settle or discharge (a) all taxes, assessments and governmental charges or levies imposed upon it, or upon its income or profits, or upon any of its properties, before they shall become delinquent, (b) all lawful claims (including claims for labor, materials and supplies) which, if unpaid, might give rise to a Lien upon any of its properties, and (c) all of its other Indebtedness as it shall become due (to the extent such repayment is not otherwise prohibited by this Credit Agreement); provided , however , that the Borrower and its Subsidiaries shall not be required to pay any such tax, assessment, charge, levy, claim or Indebtedness which is being contested in good faith by appropriate proceedings and as to which adequate reserves therefor have been established in accordance with GAAP, unless the failure to make any such payment (i) would give rise to an immediate right to foreclose or collect on a Lien securing such amounts or (ii) would have or would be reasonably expected to have a Material Adverse Effect. 6.7 Insurance .

The Borrower will (and will cause each of its Subsidiaries to) at all times maintain in full force and effect insurance (including worker’s compensation insurance and general liability insurance) in such amounts, covering such risks and liabilities and with such deductibles or self-insurance retentions as are in accordance with normal industry practice. 6.8 Performance of Obligations .

The Borrower will perform (and will cause each of its Subsidiaries to perform) in all material respects all of its obligations under the terms of all material agreements, indentures, mortgages, security agreements or other debt instruments to which it is a party or by which it is bound. 6.9 Use of Proceeds .

The proceeds of the Term Loan may be used solely to finance the Acquisition and to pay related fees and expenses. 6.10 Audits/Inspections .

Upon reasonable notice and during normal business hours, the Borrower will permit representatives appointed by the Administrative Agent or the Lenders, including, without limitation, independent accountants, agents, attorneys, and appraisers to visit and inspect the Borrower’s property, including its books and records, its accounts receivable and inventory, the Borrower’s facilities and its

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other business assets, and to make photocopies or photographs thereof and to write down and record any information such representative obtains and shall permit the Administrative Agent or such Lender or its representatives to investigate and verify the accuracy of information provided to it and to discuss all such matters with the officers, employees and representatives of the Borrower; provided, that an officer or authorized agent of the Borrower shall be present during any such discussions between the officers, employees or representatives of the Borrower and the representatives of the Administrative Agent or any Lender. 6.11 Ownership of Certain Subsidiaries .

The Borrower shall (a) at all times, own and control 100% of the Voting Stock of PSNM and (b) at all times, own and control, directly or indirectly, 100% of the Voting Stock of TNMP.

SECTION 7

NEGATIVE COVENANTS

Unless otherwise approved in writing by the Required Lenders, the Borrower covenants and agrees that until the payment in full of its Borrower Obligations: 7.1 Nature of Business .

The Borrower will not materially alter the character of its business from that conducted as of the Closing Date. 7.2 Consolidation and Merger .

The Borrower will not (a) enter into any transaction of merger or (b) consolidate, liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution); provided that, so long as no Default or Event of Default shall exist or be caused thereby a Person may be merged or consolidated with or into the Borrower so long as the Borrower shall be the continuing or surviving Person. 7.3 Sale or Lease of Assets .

The Borrower will not (nor will it permit its Subsidiaries to) sell, lease, transfer or otherwise dispose of, any of its assets (including, without limitation, all or substantially all of its assets, whether in one transaction or a series of related transactions) except (a) with respect to the Borrower, sales of accounts receivable and energy services contract revenues by PSNM in connection with sales of accounts receivable and energy services contract revenues so long as such other sales are non-recourse to the Borrower and are otherwise on customary market terms; (b) with respect to First Choice, the sales of accounts receivable in connection with the First Choice Securitization, (c) with respect to the Borrower, transfers of assets to PNMR Services Company, a wholly-owned operational services Borrower, in the ordinary course of business, (d) sales of assets (excluding those permitted in clauses (a), (b) and (c) hereof) for fair value, if the aggregate value of all such transactions in any calendar year, does not exceed 25% of the book value of Total Assets of the Borrower, as calculated as of the end of the most recent Fiscal Quarter, and (e) sale, lease, transfer or other disposition, at less than fair value, of any other assets of the Borrower and its Subsidiaries, provided that the aggregate book value of such assets shall not exceed $10,000,000 in any calendar year.

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7.4 Affiliate Transactions .

The Borrower will not enter into any transaction or series of transactions, whether or not in the ordinary course of business, with any Affiliate other than on terms and conditions substantially as favorable as would be obtainable in a comparable arm’s-length transaction with a Person other than an Affiliate. 7.5 Liens .

The Borrower will not ( nor will it permit its Subsidiaries to) contract, create, incur, assume or permit to exist any Lien with respect to any of its property or assets of any kind (whether real or personal, tangible or intangible), whether now owned or hereafter acquired, securing any Indebtedness other than the following: ( a ) Liens securing Borrower Obligations, ( b ) Liens for taxes not yet due or Liens for taxes being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the property subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof), ( c ) Liens in respect of property imposed by law arising in the ordinary course of business such as materialmen’s, mechanics’, warehousemen’s, carrier’s, landlords’ and other nonconsensual statutory Liens which are not yet due and payable, which have been in existence less than 90 days or which are being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the property subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof), ( d ) pledges or deposits made in the ordinary course of business to secure payment of worker’s compensation insurance, unemployment insurance, pensions or social security programs, ( e ) Liens arising from good faith deposits in connection with or to secure performance of tenders, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (other than obligations in respect of the payment of borrowed money), ( f ) Liens arising from good faith deposits in connection with or to secure performance of statutory obligations and surety and appeal bonds, ( g ) easements, rights-of-way, restrictions (including zoning restrictions), minor defects or irregularities in title and other similar charges or encumbrances not, in any material respect, impairing the use of the encumbered property for its intended purposes, ( h ) judgment Liens that would not constitute an Event of Default, ( i ) Liens arising by virtue of any statutory or common law provision relating to banker’s liens, rights of setoff or similar rights as to deposit accounts or other funds maintained with a creditor depository institution, ( j ) any Lien created or arising over any property which is acquired, constructed or created by the Borrower or its Subsidiaries , but only if (i) such Lien secures only principal amounts (not exceeding the cost of such acquisition, construction or creation) raised for the purposes of such acquisition, construction or creation, together with any costs, expenses, interest and fees incurred in relation thereto or a guarantee given in respect thereof, (ii) such Lien is created or arises on or before 180 days after the completion of such acquisition, construction or creation, (iii) such Lien is confined solely to the property so acquired, constructed or created and any improvements thereto and (iv) the aggregate principal amount of all Indebtedness at any one time outstanding that is secured by such Liens shall not exceed $50,000,000 ( k ) any Lien on Margin Stock, ( l ) Liens with respect to the Indebtedness evidenced by the FMB Indenture, but only to the extent of the Insured Series First Mortgage Bonds, and the “permitted encumbrances” under the FMB Indenture, (m) with respect to First Choice, (i) the assignment of, or Liens on, accounts receivable in connection with First Choice Securitization and the filing of related financing statements under the Uniform Commercial Code of the applicable jurisdictions and (ii) other Liens in connection with the Constellation Agreement, (n) the assignment of, or Liens on, demand, energy or wheeling revenues, or on capacity reservation or option fees, payable to the Borrower or any of its Subsidiaries with respect to any wholesale electric service or transmission agreements, the assignment of, or Liens on, revenues from energy services contracts, and the assignment of, or Liens on, capacity reservation or option fees payable to the Borrower or such Subsidiary with respect to asset sales permitted herein, (o) any extension, renewal or replacement

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(or successive extensions, renewals or replacements), as a whole or in part, of any Liens referred to in the foregoing clauses (a) through (n), for amounts not exceeding the principal amount of the Indebtedness secured by the Lien so extended, renewed or replaced, provided that such extension, renewal or replacement Lien is limited to all or a part of the same property or assets that were covered by the Lien extended, renewed or replaced (plus improvements on such property or assets), (p) Liens on Property that is subject to a Material Lease that is classified as an operating lease as of the Closing Date but which is subsequently converted into a capital lease, (q) Liens securing obligations under Hedging Agreements entered into in the ordinary course of business and not for speculative purposes, (r) Liens granted by bankruptcy-remote special purpose Subsidiaries to secure stranded cost securitization bonds, (s) Liens upon any property in favor of the administrative agent for the benefit of the lenders under the Existing Credit Agreement (as may be amended, supplemented or otherwise modified from time to time) securing Indebtedness thereunder and (t) Liens on Property, in addition to those otherwise permitted by clauses (a) through (s) above, securing, directly or indirectly, Indebtedness or obligations of the Borrower and its Subsidiaries arising pursuant to other agreements entered into in the ordinary course of business which do not exceed, in the aggregate at any one time outstanding, $50,000,000. 7.6 Accounting Changes .

The Borrower will not (nor will it permit any of its Subsidiaries to) make or permit any change in accounting policies or reporting practices, except as required by GAAP, or as permitted by GAAP, if the amounts involved are not material. 7.7 Burdensome Agreements .

The Borrower will not (nor will it permit any of its Subsidiaries to) enter into any contractual obligation (other than (i) the Credit Documents, (ii) the Constellation Agreement and related agreements, (iii) with respect to clause (b) only, restrictions on pledges of Capital Stock of any utility Subsidiary or significant Subsidiary contained in the indentures, if any, executed in connection with the issuance of Specified Securities by the Borrower pursuant to commitments with Cascade Investment, L.L.C. and (iv) the Existing Credit Agreement (as may be amended, supplemented or otherwise modified from time to time)) that limits the ability (a) of any Subsidiary of the Borrower to make Restricted Payments to the Borrower or to otherwise transfer property to the Borrower or (b) of the Borrower to create, incur, assume or suffer to exist Liens on its property in favor of the Administrative Agent, for the benefit of the Lenders.

SECTION 8

EVENTS OF DEFAULT 8.1 Events of Default .

An Event of Default with respect to the Borrower shall exist upon the occurrence of any of the following specified events (each an “ Event of Default ”):

(a) Payment . The Borrower shall: (i) default in the payment when due of any principal of any of its Term Loans; or (ii) default, and such default shall continue for three or more Business Days, in the payment when due of any interest on the Term Loans or of any fees or other amounts owing by it hereunder, under any of the other Credit Documents or in connection herewith or therewith.

(b) Representations . Any representation, warranty or statement made or deemed to be made by the Borrower

herein, in any of the other Credit Documents, or in any statement or certificate delivered or required to be delivered pursuant hereto or thereto shall prove untrue in any material respect on the date as of which it was deemed to have been made.

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(c) Covenants . The Borrower shall:

(i) default in the due performance or observance of any term, covenant or agreement contained in Sections 6.1(e)(i), 6.2, 6.3(a) (solely with respect to the existence of the Borrower), 6.9, 6.10, 6.11 or 7.1 through 7.7, inclusive; or

(ii) default in the due performance or observance by it of any term, covenant or agreement

(other than those referred to in subsections (a), (b) or (c)(i) of this Section 8.1) contained in this Credit Agreement or any other Credit Document and such default shall continue unremedied for a period of at least 10 days after the earlier of the Borrower becoming aware of such default or notice thereof given by the Administrative Agent.

(d) Credit Documents . Any Credit Document shall fail to be in force and effect or the Borrower shall so

assert or any Credit Document shall fail to give the Administrative Agent or the Lenders the rights, powers, liens and privileges purported to be created thereby.

(e) Bankruptcy, etc . The occurrence of any of the following with respect to the Borrower or any of its

Subsidiaries (i) a court or governmental agency having jurisdiction in the premises shall enter a decree or order for relief in respect of the Borrower or any of its Subsidiaries in an involuntary case under any applicable Debtor Relief Law now or hereafter in effect, or appoint a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Borrower or any of its Subsidiaries or for any substantial part of their property or ordering the winding up or liquidation of its affairs; or (ii) an involuntary case under any applicable Debtor Relief Law now or hereafter in effect is commenced against the Borrower or any of its Subsidiaries and such petition remains unstayed and in effect for a period of 60 consecutive days; or (iii) the Borrower or any of its Subsidiaries shall commence a voluntary case under any applicable Debtor Relief Law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of such Person or any substantial part of its property or make any general assignment for the benefit of creditors; or (iv) the Borrower or any of its Subsidiaries admit in writing its inability to pay its debts generally as they become due or any action shall be taken by any Person in furtherance of any of the aforesaid purposes.

(f) Defaults under Other Agreements .

(i) The Borrower or any of its Subsidiaries shall default in the due performance or

observance (beyond the applicable grace period with respect thereto) of any material obligation or condition of any contract or lease to which it is a party, if such default would have or would reasonably be expected to have a Material Adverse Effect.

(ii) With respect to any Indebtedness of the Borrower or any of its Subsidiaries (other than

Indebtedness outstanding under this Credit Agreement) in excess of $20,000,000 in the aggregate (A) the Borrower or any of its Subsidiaries shall (x) default in any payment (beyond the applicable grace period with respect thereto, if any) with respect to such Indebtedness, or (y) default (after giving effect to any applicable grace period) in the observance or performance of any covenant or agreement relating to such Indebtedness or contained in any instrument or agreement evidencing, securing or

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relating thereto, or any other event or condition shall occur or condition exist, the effect of which default or other event or condition is to cause or permit the holder or the holders of such Indebtedness (or any trustee or agent on behalf of such holders) to cause (determined without regard to whether any notice or lapse of time is required) such Indebtedness to become due prior to its stated maturity; or (B) such Indebtedness shall be declared due and payable, or required to be prepaid other than by a regularly scheduled required prepayment prior to the stated maturity thereof; or (C) such Indebtedness shall mature and remain unpaid.

(g) Judgments . Any judgment, order or decree involving a liability of $20,000,000 or more, or one or more

judgments, orders, or decrees involving a liability of $40,000,000 or more, in the aggregate, shall be entered against the Borrower or any of its Subsidiaries and such judgments, orders or decrees shall continue unsatisfied, undischarged and unstayed for a period ending on the first to occur of (i) the last day on which such judgment, order or decree becomes final and unappealable and, where applicable, with the status of a judicial lien or (ii) 60 days; provided that if such judgment, order or decree provides for periodic payments over time then the Borrower or such Subsidiary shall have a grace period of 30 days with respect to each such periodic payment.

(h) ERISA . The occurrence of any of the following events or conditions if any of the same would have or

would be reasonably expected to have a Material Adverse Effect: (i) any “accumulated funding deficiency,” as such term is defined in Section 302 of ERISA and Section 412 of the Code, whether or not waived, shall exist with respect to any Plan, or any lien shall arise on the assets of the Borrower or any ERISA Affiliate in favor of the PBGC or a Plan; (ii) an ERISA Event shall occur with respect to a Single Employer Plan which is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA; (iii) an ERISA Event shall occur with respect to a Multiemployer Plan or Multiple Employer Plan which is, in the reasonable opinion of the Required Lenders, likely to result in (A) the termination of such Plan for purposes of Title IV of ERISA, or (B) the Borrower or any ERISA Affiliate incurring any liability in connection with a withdrawal from, reorganization of (within the meaning of Section 4241 of ERISA), or insolvency (within the meaning of Section 4245 of ERISA) of such Plan; or (iv) any prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) or breach of fiduciary responsibility shall occur which would be reasonably expected to subject the Borrower or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the Code, or under any agreement or other instrument pursuant to which the Borrower or any ERISA Affiliate has agreed or is required to indemnify any person against any such liability.

(i) Change of Control . There shall occur a Change of Control.

8.2 Acceleration; Remedies .

Upon the occurrence and during the continuation of an Event of Default, the Administrative Agent may or, upon the request and direction of the Required Lenders, shall take the following actions without prejudice to the rights of the Administrative Agent or any Lender to enforce its claims against the Borrower, except as otherwise specifically provided for herein:

(a) Acceleration of Term Loans . Declare the unpaid principal of and any accrued interest in respect of all Term Loans and any and all other Borrower Obligations of any and every kind owing by the Borrower to the Administrative Agent or the Lenders under the Credit Documents to be due, whereupon the same shall be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.

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(b) Enforcement of Rights . To the extent permitted by Law enforce any and all rights and interests created and existing under applicable Law and under the Credit Documents, including, without limitation, all rights of set-off.

Notwithstanding the foregoing, if an Event of Default specified in Section 8.1(e) shall occur, then all Term Loans, all accrued interest in respect thereof, all accrued and unpaid fees and other Borrower Obligations owing to the Administrative Agent and the Lenders by the Borrower hereunder shall immediately become due and payable without the giving of any notice or other action by the Administrative Agent or the Lenders, which notice or other action is expressly waived by the Borrower. Notwithstanding the fact that enforcement powers reside primarily with the Administrative Agent, each Lender has, to the extent permitted by Law, a separate right of payment and shall be considered a separate “creditor” holding a separate “claim” within the meaning of Section 101(5) of the Bankruptcy Code or any other insolvency statute. 8.3 Allocation of Payments After Event of Default .

Notwithstanding any other provisions of this Credit Agreement, after the occurrence and during the continuation of an Event of Default, all amounts collected or received by the Administrative Agent or any Lender from the Borrower or any of its Subsidiaries on account of amounts outstanding under any of the Credit Documents shall be paid over or delivered as follows:

FIRST, to the payment of all reasonable out-of-pocket costs and expenses (including the reasonable fees and expenses of legal counsel) of the Administrative Agent or any of the Lenders in connection with enforcing the rights of the Administrative Agent and the Lenders under the Credit Documents against the Borrower, ratably among them in proportion to the amounts described in this clause “FIRST” payable to them;

SECOND, to payment of any fees owed to the Administrative Agent or any Lender, ratably among them in proportion to the

amounts described in this clause “SECOND” payable to them;

THIRD, to the payment of all accrued interest payable to the Lenders hereunder, ratably among them in proportion to the amounts described in this clause “THIRD” payable to them;

FOURTH, to the payment of the outstanding principal amount of the Term Loans, ratably among them in proportion to the

amounts described in this clause “FOURTH” payable to them;

FIFTH, to all other Borrower Obligations which shall have become due and payable under the Credit Documents and not repaid pursuant to clauses “FIRST” through “FOURTH” above, ratably among the holders of the Borrower Obligations in proportion to the amounts described in this clause “FIFTH” payable to them; and

SIXTH, the payment of the surplus, if any, to whomever may be lawfully entitled to receive such surplus.

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SECTION 9

AGENCY PROVISIONS 9.1 Appointment and Authority .

Each of the Lenders hereby irrevocably appoints LCPI to act on its behalf as the Administrative Agent hereunder and under the other Credit Documents and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto. The provisions of this Section are solely for the benefit of the Administrative Agent and the Lenders, and the Borrower shall not have rights as a third party beneficiary of any of such provisions. 9.2 Rights as a Lender .

The Person serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent and the term “Lender” or “Lenders” shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Administrative Agent hereunder in its individual capacity. Such Person and its Affiliates may accept deposits from, lend money to, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if such Person were not the Administrative Agent hereunder and without any duty to account therefor to the Lenders. 9.3 Exculpatory Provisions .

The Administrative Agent shall not have any duties or obligations except those expressly set forth herein and in the other Credit Documents. Without limiting the generality of the foregoing, the Administrative Agent:

(a) shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;

(b) shall not have any duty to take any discretionary action or exercise any discretionary powers, except

discretionary rights and powers expressly contemplated hereby or by the other Credit Documents that the Administrative Agent is required to exercise as directed in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein or in the other Credit Documents), provided that the Administrative Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Administrative Agent to liability or that is contrary to any Credit Document or applicable law; and

(c) shall not, except as expressly set forth herein and in the other Credit Documents, have any duty to disclose,

and shall not be liable for the failure to disclose, any information relating to the Borrower, its Subsidiaries or any of its Affiliates that is communicated to or obtained by the Person serving as the Administrative Agent or any of its Affiliates in any capacity.

The Administrative Agent shall not be liable for any action taken or not taken by it (a) with the consent or at the request of the

Required Lenders (or such other number or percentage of the Lenders as shall be necessary, or as the Administrative Agent shall believe in good faith shall be necessary, under the

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circumstances as provided in Sections 10.6 and 8.2 ) or (b) in the absence of its own gross negligence or willful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until notice describing such Default is given to the Administrative Agent by the Borrower or a Lender.

The Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Credit Agreement or any other Credit Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Credit Document or any other agreement, instrument or document or (v) the satisfaction of any condition set forth in Section 4 or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent. 9.4 Reliance by Administrative Agent .

The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon. In determining compliance with any condition hereunder to the making of a Term Loan that by its terms must be fulfilled to the satisfaction of a Lender, the Administrative Agent may presume that such condition is satisfactory to such Lender unless the Administrative Agent shall have received notice to the contrary from such Lender prior to the making of such Term Loan. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. 9.5 Delegation of Duties .

The Administrative Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Credit Document by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all of its duties and exercise its rights and powers by or through their respective Agent-Related Persons. The exculpatory provisions of this Section shall apply to any such sub-agent and to the Agent-Related Persons of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent. 9.6 Resignation of Administrative Agent .

The Administrative Agent may at any time give notice of its resignation to the Lenders and the Borrower. Upon receipt of any such notice of resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor, which shall be a bank with an office in the United States, or an Affiliate of any such bank with an office in the United States. If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may on behalf of the Lenders, appoint a successor Administrative Agent meeting

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the qualifications set forth above; provided that if the Administrative Agent shall notify the Borrower and the Lenders that no qualifying Person has accepted such appointment, then such resignation shall nonetheless become effective in accordance with such notice and (a) the retiring Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Credit Documents and (b) all payments, communications and determinations provided to be made by, to or through the Administrative Agent shall instead be made by or to each Lender directly, until such time as the Required Lenders appoint a successor Administrative Agent as provided for above in this Section. Upon the acceptance of a successor’s appointment as Administrative Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring (or retired) Administrative Agent, and the retiring Administrative Agent shall be discharged from all of its duties and obligations hereunder or under the other Credit Documents (if not already discharged therefrom as provided above in this Section). The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the retiring Administrative Agent’s resignation hereunder and under the other Credit Documents, the provisions of this Section and Section 10.5 shall continue in effect for the benefit of such retiring Administrative Agent, its sub-agents and their respective Agent Related Persons in respect of any actions taken or omitted to be taken by any of them while the retiring Administrative Agent was acting as Administrative Agent. 9.7 Non-Reliance on Administrative Agent and Other Lenders .

Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender or any of their Agent-Related Persons and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender or any of their Agent-Related Persons and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Credit Document or any related agreement or any document furnished hereunder or thereunder. 9.8 No Other Duties, Etc .

Anything herein to the contrary notwithstanding, none of the bookrunner, arranger or agent listed on the cover page hereof shall have any powers, duties or responsibilities under this Agreement or any of the other Credit Documents, except in its capacity, as applicable, as the Administrative Agent or a Lender hereunder. 9.9 Administrative Agent May File Proofs of Claim .

In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Borrower, the Administrative Agent (irrespective of whether the principal of any Term Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise

(a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Term Loans and all other Borrower Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders and the Administrative Agent under Sections 3.4 and 10.5) allowed in such judicial proceeding; and

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(b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;

and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Sections 3.4 and 10.5.

Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Borrower Obligations or the rights of any Lender or to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding.

SECTION 10

MISCELLANEOUS 10.1 Notices; Effectiveness; Electronic Communication .

(a) Notices Generally . Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in subsection (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier as follows, and all notices and other communications expressly permitted hereunder to be given by telephone shall be made to the applicable telephone number, as follows:

(i) if to the Borrower or the Administrative Agent, to the address, telecopier number,

electronic mail address or telephone number specified for such Person on Schedule 10.1 ; and

(ii) if to any other Lender, to the address, telecopier number, electronic mail address or telephone number specified in its Administrative Questionnaire.

Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by telecopier shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next business day for the recipient). Notices delivered through electronic communications to the extent provided in subsection (b) below, shall be effective as provided in such subsection (b).

(b) Electronic Communications . Notices and other communications to the Lenders hereunder may be

delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender pursuant to Section 2 if such Lender has notified the Administrative Agent that it is incapable of receiving notices under such

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Section by electronic communication. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications.

Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall

be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.

(c) Borrower Materials/The Platform . The Borrower hereby acknowledges that (i) the Administrative Agent

and/or the Arranger will make available to the Lenders materials and/or information provided by or on behalf of the Borrower hereunder (collectively, “ Borrower Materials ”) by posting the Borrower Materials on IntraLinks or another similar electronic system (the “ Platform ”). THE PLATFORM IS PROVIDED “AS IS” AND “AS AVAILABLE.” THE AGENT PARTIES (AS DEFINED BELOW) DO NOT WARRANT THE ACCURACY OR COMPLETENESS OF THE BORROWER MATERIALS OR THE ADEQUACY OF THE PLATFORM, AND EXPRESSLY DISCLAIM LIABILITY FOR ERRORS IN OR OMISSIONS FROM THE BORROWER MATERIALS. NO WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, IS MADE BY ANY AGENT PARTY IN CONNECTION WITH THE BORROWER MATERIALS OR THE PLATFORM. In no event shall the Administrative Agent or any of its Agent-Related Persons (collectively, the “ Agent Parties ”) have any liability to the Borrower, any Lender or any other Person for losses, claims, damages, liabilities or expenses of any kind (whether in tort, contract or otherwise) arising out of the Borrower’s or the Administrative Agent’s transmission of Borrower Materials through the Internet, except to the extent that such losses, claims, damages, liabilities or expenses are determined by a court of competent jurisdiction by a final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Agent Party; provided , however , that in no event shall any Agent Party have any liability to the Borrower, any Lender or any other Person for indirect, special, incidental, consequential or punitive damages (as opposed to direct or actual damages).

(d) Change of Address, Etc . Each of the Borrower and the Administrative Agent may change its address,

telecopier or telephone number for notices and other communications hereunder by notice to the other parties hereto. Each other Lender may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the Borrower and the Administrative Agent. In addition, each Lender agrees to notify the Administrative Agent from time to time to ensure that the Administrative Agent has on record (i) an effective address, contact name, telephone number, telecopier number and electronic mail address to which notices and other communications may be sent and (ii) accurate wire instructions for such Lender.

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(e) Reliance by Administrative Agent and Lenders . The Administrative Agent and the Lenders shall be entitled to rely and act upon any notices purportedly given by or on behalf of the Borrower even if (i) such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any confirmation thereof. The Borrower shall indemnify the Administrative Agent, each Lender and the Agent-Related Persons of each of them from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of the Borrower. All telephonic notices to and other telephonic communications with the Administrative Agent may be recorded by the Administrative Agent, and each of the parties hereto hereby consents to such recording.

10.2 Right of Set-Off .

In addition to any rights now or hereafter granted under applicable Law or otherwise, and not by way of limitation of any such rights, upon the occurrence of an Event of Default and the commencement of remedies described in Section 8.2, each Lender is authorized at any time and from time to time, without presentment, demand, protest or other notice of any kind (all of which rights being hereby expressly waived), to set-off and to appropriate and apply any and all deposits (general or special) and any other indebtedness at any time held or owing by such Lender (including, without limitation, branches, agencies or Affiliates of such Lender wherever located) to or for the credit or the account of the Borrower against obligations and liabilities of the Borrower to the Lenders hereunder, under the Notes, the other Credit Documents or otherwise, irrespective of whether the Administrative Agent or the Lenders shall have made any demand hereunder and although such obligations, liabilities or claims, or any of them, may be contingent or unmatured, and any such set-off shall be deemed to have been made immediately upon the occurrence of an Event of Default even though such charge is made or entered on the books of such Lender subsequent thereto. The Borrower hereby agrees that any Person purchasing a participation in the Term Loans hereunder pursuant to Sections 3.8 or 10.3(d) may exercise all rights of set-off with respect to its participation interest as fully as if such Person were a Lender hereunder. 10.3 Successors and Assigns .

(a) Successors and Assigns Generally . The provisions of this Credit Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Administrative Agent and each Lender (except as contemplated by Section 7.2), and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an Eligible Assignee in accordance with the provisions of subsection (b) of this Section, (ii) by way of participation in accordance with the provisions of subsection (d) of this Section, or (iii) by way of pledge or assignment of a security interest subject to the restrictions of subsection (f) of this Section. Nothing in this Credit Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in subsection (d) of this Section and, to the extent expressly contemplated hereby, the Agent-Related Persons of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Credit Agreement.

(b) Assignments by Lenders . Any Lender may at any time assign to one or more Eligible Assignees all or a

portion of its rights and obligations under this Credit Agreement (including all or a portion of its Term Loans at the time owing to it); provided that

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(i) except in the case of an assignment of the entire remaining amount of the assigning Lender’s Term Loans at the time owing to it or in the case of an assignment to a Lender or an Affiliate of a Lender or an Approved Fund with respect to a Lender, the principal outstanding balance of the Loans of the assigning Lender subject to each such assignment, determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if “Trade Date” is specified in the Assignment and Assumption, as of the Trade Date, shall not be less than $5,000,000 unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, the Borrower otherwise consents (each such consent not to be unreasonably withheld or delayed); provided , however , that concurrent assignments to members of an Assignee Group and concurrent assignments from members of an Assignee Group to a single Eligible Assignee (or to an Eligible Assignee and members of its Assignee Group) will be treated as a single assignment for purposes of determining whether such minimum amount has been met;

(ii) each partial assignment shall be made as an assignment of a proportionate part of all the

assigning Lender’s rights and obligations under this Credit Agreement with respect to the Term Loans assigned;

(iii) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee in the amount, if any, required as set forth in Schedule 10.3 , and the Eligible Assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.

Subject to acceptance and recording thereof by the Administrative Agent pursuant to subsection (c) of this Section, from and after the effective date specified in each Assignment and Assumption, the Eligible Assignee thereunder shall be a party to this Credit Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Credit Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Credit Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Credit Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Sections 3.9 , 3.12 , 3.13 , 3.14 , and 10.5(b) with respect to facts and circumstances occurring prior to the effective date of such assignment. Upon request, the Borrower (at its expense) shall execute and deliver a Note to the assignee Lender. Any assignment or transfer by a Lender of rights or obligations under this Credit Agreement that does not comply with this subsection shall be treated for purposes of this Credit Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection (d) of this Section.

(c) Register . The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall

maintain at the Administrative Agent’s Office a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders and principal amounts of the Term Loans owing to, each Lender pursuant to the terms hereof from time to time (the “ Register ”). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Credit Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower at any reasonable time and from time to time upon reasonable prior notice. In addition, at any time that a request for a consent for a material or substantive change to the Credit Documents is pending, any Lender may request and receive from the Administrative Agent a copy of the Register.

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(d) Participations . Any Lender may at any time, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to any Person (other than a natural person or the Borrower or any of the Borrower’s Affiliates or Subsidiaries) (each, a “ Participant ”) in all or a portion of such Lender’s rights and/or obligations under this Credit Agreement (including all or a portion of its Term Loans); provided that (i) such Lender’s obligations under this Credit Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent and the Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Credit Agreement.

Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain

the sole right to enforce this Credit Agreement and to approve any amendment, modification or waiver of any provision of this Credit Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification described in the first proviso to Section 10.6 that affects such Participant. Subject to subsection (e) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 3.9 , 3.12 3.13 and 3.14 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection (b) of this Section. To the extent permitted by Law, each Participant also shall be entitled to the benefits of Section 3.7 as though it were a Lender, provided such Participant agrees to be subject to Section 3.8 as though it were a Lender.

(e) Limitations upon Participant Rights . A Participant shall not be entitled to receive any greater payment

under Section 3.9 , 3.12 , 3.13 , or 3.14 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower’s prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 3.13 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 3.13(f) as though it were a Lender.

(f) Certain Pledges . Any Lender may at any time pledge or assign a security interest in all or any portion of

its rights under this Credit Agreement (including under its Note, if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

(g) Electronic Execution of Assignments . The words “execution,” “signed,” “signature,” and words of like

import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act.

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10.4 No Waiver; Remedies Cumulative .

No failure or delay on the part of the Administrative Agent or any Lender in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between the Borrower and the Administrative Agent or any Lender shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies provided herein are cumulative and not exclusive of any rights or remedies which the Administrative Agent or any Lender would otherwise have. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Administrative Agent or the Lenders to any other or further action in any circumstances without notice or demand. 10.5 Attorney Costs, Expenses, Taxes and Indemnification by Borrowers .

(a) The Borrower agrees (i) to pay or reimburse the Administrative Agent and the Arranger for all costs and expenses incurred in connection with the development, preparation, negotiation and execution of this Credit Agreement and the other Credit Documents and any amendment, waiver, consent or other modification of the provisions hereof and thereof (whether or not the transactions contemplated hereby or thereby are consummated), and the consummation and administration of the transactions contemplated hereby and thereby, including all reasonable fees and expenses of legal counsel and all charges of Intralinks, and (ii) to pay or reimburse the Administrative Agent and each Lender for all costs and expenses incurred in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Credit Agreement or the other Credit Documents (including all such costs and expenses incurred during any “workout” or restructuring in respect of the Borrower Obligations and during any legal proceeding, including any proceeding under any Debtor Relief Law), including all reasonable fees and expenses of legal counsel. The foregoing costs and expenses shall include all search, filing, recording, and appraisal charges and fees and taxes related thereto, and other out-of-pocket expenses incurred by the Administrative Agent and the Arranger and the cost of independent public accountants and other outside experts retained by the Administrative Agent, the Arranger or any Lender. Other than costs and expenses payable in connection with the closing of the transactions contemplated by this Credit Agreement pursuant to Section 10.5(a) (which shall be payable on the Closing Date unless otherwise agreed by the Administrative Agent and the Arranger), all amounts due under this Section 10.5 shall be payable within ten Business Days after demand therefor. The agreements in this Section shall survive the repayment of all Borrower Obligations.

(b) Whether or not the transactions contemplated hereby are consummated, the Borrower shall indemnify and

hold harmless each Agent-Related Person, each Lender and their respective Affiliates, directors, officers, employees, counsel, agents and attorneys-in-fact (collectively the “ Indemnitees ”) from and against any and all liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses and disbursements (including the reasonable fees and expenses of legal counsel) of any kind or nature whatsoever which may at any time be imposed on, incurred by or asserted against any such Indemnitee in any way relating to or arising out of or in connection with (i) the execution, delivery, enforcement, performance or administration of any Credit Document or any other agreement, letter or instrument delivered in connection with the transactions contemplated thereby or the consummation of the transactions contemplated thereby or in connection with the Acquisition, (ii) any Term Loan Commitment, Term Loan or the use of the proceeds therefrom, or (iii) any actual or alleged presence or release of Hazardous Substances on or from any property

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currently or formerly owned or operated by the Borrower, any Subsidiary of the Borrower, or any Environmental Claim related in any way to the Borrower or any Subsidiary of the Borrower, (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory (including any investigation of, preparation for, or defense of any pending or threatened claim, investigation, litigation or proceeding) and regardless of whether any Indemnitee is a party thereto or (v) any civil penalty or fine assessed by the Office of Foreign Assets Control (the “ OFAC ”) against, and all reasonable costs and expenses (including counsel fees and disbursements) incurred in connection with defense thereof, by the Administrative Agent or any Lender as a result of conduct of the Borrower that violates a sanction enforced by OFAC (all the foregoing, collectively, the “ Indemnified Liabilities ”), in all cases, whether or not caused by or arising, in whole or in part, out of the negligence of the Indemnitee; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses or disbursements are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. No Indemnitee shall be liable for any damages arising from the use by others of any information or other materials obtained through IntraLinks or other similar information transmission systems in connection with this Credit Agreement, nor shall any Indemnitee have any liability for any indirect or consequential damages relating to this Credit Agreement or any other Credit Document or arising out of its activities in connection herewith or therewith (whether before or after the Closing Date).

(c) To the extent that the Borrower for any reason fails to indefeasibly pay any amount required under

subsection (a) or (b) of this Section to be paid by it to the Administrative Agent (or any sub-agent thereof) or any Agent-Related Persons of any of the foregoing, each Lender severally agrees to pay to the Administrative Agent (or any such sub-agent) or such Agent-Related Persons, as the case may be, such Lender’s Pro Rata Share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent (or any such sub-agent) in its capacity as such, or against any Agent-Related Persons of any of the foregoing acting for the Administrative Agent (or any such sub-agent).

All amounts due under this Section 10.5 shall be payable within ten Business Days after demand therefor. The agreements in this Section shall survive the resignation of the Administrative Agent, the replacement of any Lender and the repayment, satisfaction or discharge of all the Borrower Obligations.

10.6 Amendments, Etc.

No amendment or waiver of any provision of this Credit Agreement or any other Credit Document, and no consent to any departure by the Borrower therefrom, shall be effective unless in writing signed by the Required Lenders and the Borrower, and acknowledged by the Administrative Agent, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided , however , that no such amendment, waiver or consent shall:

(a) waive any condition set forth in Section 4.1 without the written consent of each Lender;

(b) extend or increase the Term Loan Commitment of any Lender without the written consent of such Lender;

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(c) postpone any date fixed by this Credit Agreement or any other Credit Document for any payment (excluding mandatory prepayments) of principal, interest or fees or other amounts due to the Lenders (or any of them) hereunder or under any other Credit Document without the written consent of each Lender directly affected thereby;

(d) reduce the principal of, or the rate of interest specified herein on, any Term Loans or (subject to clause (iv)

of the second proviso to this Section 10.6 ) any fees or other amounts payable hereunder or under any other Credit Document without the written consent of each Lender directly affected thereby; provided , however , that only the consent of the Required Lenders shall be necessary to amend the definition of “Default Rate” or to waive any obligation to pay interest at the Default Rate;

(e) change Section 3.8 or Section 8.3 in a manner that would alter the pro rata sharing of payments required

thereby without the written consent of each Lender;

(f) change any provision of this Section or the definition of “Required Lenders” or any other provision hereof specifying the number or percentage of Lenders required to amend, waive or otherwise modify any rights hereunder or make any determination or grant any consent hereunder without the written consent of each Lender;

(g) change Section 10.3 in any manner without the written consent of each Lender; or

(h) release the Borrower from its obligations, or consent to the assignment or transfer by the Borrower of any

of its rights and obligations under (or in respect of) the Credit Documents without the written consent of each Lender. and, provided further , that (i) no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required above, affect the rights or duties of the Administrative Agent under this Credit Agreement or any other Credit Document and (ii) the Fee Letters may be amended, or rights or privileges thereunder waived, in a writing executed only by the parties thereto. 10.7 Counterparts .

This Credit Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. 10.8 Headings .

The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Credit Agreement. 10.9 Survival of Indemnification and Representations and Warranties .

(a) Survival of Indemnification . All indemnities set forth herein shall survive the execution and delivery of this Credit Agreement and the making of any Term Loans and the repayment of the Term Loans and other Borrower Obligations.

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(b) Survival of Representations and Warranties . All representations and warranties made hereunder and in any other Credit Document or other document delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery hereof and thereof. Such representations and warranties have been or will be relied upon by the Administrative Agent and each Lender, regardless of any investigation made by the Administrative Agent or any Lender or on their behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default or Event of Default at the time of any Term Loans, and shall continue in full force and effect as long as any Term Loan or any other Borrower Obligation hereunder shall remain unpaid or unsatisfied.

10.10 Governing Law; Venue; Service .

(a) THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (INCLUDING SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW). Any legal action or proceeding with respect to this Credit Agreement or any other Credit Document may be brought in the courts of the State of New York or of the United States for the Southern District of New York, and, by execution and delivery of this Credit Agreement, the Borrower hereby irrevocably accepts for itself and in respect of its Property, generally and unconditionally, the jurisdiction of such courts.

(b) The Borrower irrevocably consents to the service of process in any action or proceeding with respect to

this Credit Agreement or any other Credit Document by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at the address for notices pursuant to Section 10.1, such service to become effective ten days after such mailing. Nothing herein shall affect the right of a Lender to serve process in any other manner permitted by Law.

10.11 Waiver of Jury Trial; Waiver of Consequential Damages .

EACH OF THE PARTIES TO THIS CREDIT AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS CREDIT AGREEMENT, ANY OF THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY. Each of the parties to this Credit Agreement agrees not to assert any claim against any other party hereto, Administrative Agent, any Lender, any of their Affiliates, or any of their respective directors, officers, employees, attorneys or agents, on any theory of liability, for special, indirect, consequential or punitive damages arising out of or otherwise relating to any of the transactions contemplated herein and in the other Credit Documents. 10.12 Severability .

If any provision of any of the Credit Documents is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions.

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10.13 Further Assurances .

The Borrower agrees, upon the request of the Administrative Agent, to promptly take such actions, as reasonably requested, as is necessary to carry out the intent of this Credit Agreement and the other Credit Documents. 10.14 Confidentiality .

Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its and its Affiliates’ respective partners, directors, officers, employees, agents, advisors and representatives (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority purporting to have jurisdiction over it (including any self-regulatory authority, such as the National Association of Insurance Commissioners), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party hereto, (e) in connection with the exercise of any remedies hereunder or under any other Credit Document or any action or proceeding relating to this Credit Agreement or any other Credit Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Credit Agreement or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower and its obligations, (g) with the consent of the Borrower or (h) to the extent such Information (x) becomes publicly available other than as a result of a breach of this Section or (y) becomes available to the Administrative Agent, any Lender, or any of their respective Affiliates on a nonconfidential basis from a source other than the Borrower.

For purposes of this Section, “ Information ” means all information received from the Borrower or any Subsidiary or any of their respective businesses, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by the Borrower or any Subsidiary, provided that, in the case of information received from the Borrower or any Subsidiary after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. 10.15 Entirety .

This Credit Agreement together with the other Credit Documents and the Fee Letters represent the entire agreement of the parties hereto and thereto, and supersede all prior agreements and understandings, oral or written, if any, including any commitment letters or correspondence relating to the Credit Documents or the transactions contemplated herein and therein. 10.16 Binding Effect; Continuing Agreement .

(a) This Credit Agreement shall become effective at such time when all of the conditions set forth in Section 4.1 have been satisfied or waived by the Lenders and it shall have been executed by the Borrower and the Administrative Agent, and the Administrative Agent shall have received copies hereof (telefaxed or otherwise) which, when taken together, bear the signatures of each Lender, and thereafter this Credit Agreement shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent and each Lender and their respective successors and assigns.

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(b) This Credit Agreement shall be a continuing agreement and shall remain in full force and effect until all Term Loans, interest, fees and other Borrower Obligations have been paid in full. Upon termination, the Borrower shall have no further obligations (other than the indemnification provisions and other provisions that by their terms survive) under the Credit Documents; provided that should any payment, in whole or in part, of the Borrower Obligations be rescinded or otherwise required to be restored or returned by the Administrative Agent or any Lender, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, then the Credit Documents shall automatically be reinstated and all amounts required to be restored or returned and all costs and expenses incurred by the Administrative Agent or any Lender in connection therewith shall be deemed included as part of the Borrower Obligations.

10.17 Regulatory Statement .

Pursuant to the terms of an order issued by the New Mexico Public Regulation Commission and a stipulation that has been approved by the New Mexico Public Regulation Commission, the Borrower is required to include the following separateness covenants in any debt instrument:

The Borrower, PSNM and TNMP are being operated as separate corporate and legal entities. In agreeing to make loans to the Borrower, the Borrower’s lenders are relying solely on the creditworthiness of the Borrower based on the assets owned by the Borrower, and the repayment of the loan will be made solely from the assets of the Borrower and not from any assets of PSNM or TNMP; and the Borrower’s lenders will not take any steps for the purpose of procuring the appointment of an administrative receiver or the making of an administrative order for instituting any bankruptcy, reorganization, insolvency, wind up or liquidation or any like proceeding under applicable law in respect of PSNM or TNMP.

10.18 USA Patriot Act Notice .

Each Lender and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “ Act ”), it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender or the Administrative Agent, as applicable, to identify the Borrower in accordance with the Act. 10.19 Acknowledgment .

Section 6 and Section 7 of this Credit Agreement contain affirmative and negative covenants applicable to the Borrower. Each of the parties to this Credit Agreement acknowledges and agrees that any such covenants that require the Borrower to cause any of its Subsidiaries to take or to refrain from taking specified actions will be enforceable unless prohibited by applicable law or regulatory requirement. 10.20 Replacement of Lenders .

If (a) any Lender requests compensation under Section 3.12, (b) the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.13 or (c) a Lender (a “Non-Consenting Lender”) does not consent to a proposed change, waiver, discharge or termination with respect to any Credit Document that has been approved by

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the Required Lenders as provided in Section 10.6 but requires unanimous consent of all Lenders or all Lenders directly affected thereby (as applicable), then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 10.3), all of its interests, rights and obligations under this Agreement and the related Credit Documents to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment), provided that:

(i) the Borrower shall have paid to the Administrative Agent the assignment fee specified in Section 10.3(b);

(ii) such Lender shall have received payment of an amount equal to the outstanding

principal of its Term Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Credit Documents (including any amounts under Section 3.14) from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts);

(iii) in the case of any such assignment resulting from a claim for compensation under

Section 3.12 or payments required to be made pursuant to Section 3.13, such assignment will result in a reduction in such compensation or payments thereafter;

(iv) such assignment does not conflict with applicable Laws; and

(v) in the case of any such assignment resulting from a Non-Consenting Lender’s failure to

consent to a proposed change, waiver, discharge or termination with respect to any Credit Document, the applicable replacement bank, financial institution or Fund consents to the proposed change, waiver, discharge or termination; provided that the failure by such Non-Consenting Lender to execute and deliver an Assignment and Assumption shall not impair the validity of the removal of such Non-Consenting Lender and the mandatory assignment of such Non-Consenting Lender’s outstanding Term Loans pursuant to this Section shall nevertheless be effective without the execution by such Non-Consenting Lender of an Assignment and Assumption.

A Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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Each of the parties hereto has caused a counterpart of this Credit Agreement to be duly executed and delivered as of the date first above written. BORROWER :

PNM RESOURCES, INC. a New Mexico corporation By: /s/ Wendy A. Carlson Name: Wendy A. Carlson Title: Vice President, Treasury and Taxation

S-1

LENDERS :

LEHMAN COMMERCIAL PAPER INC. , individually in its capacity as a Lender and in capacity as Administrative Agent By: /s/ Janine M. Shugan Name: Janine M. Shugan Title: Authorized Signatory

Signature Page to Amended and Restated Credit Agreement PNM Resources, Inc.

S-2

LENDERS :

BANK OF AMERICA, N.A. As a Lender By: /s/ Kevin P. Bertelsen Name: Kevin P. Bertelsen Title: Senior Vice President


S-3

LENDERS :

CITICORP NORTH AMERICA, INC. As a Lender By: /s/ Stuart J. Gleu Name: Stuart J. Gleu Title: Director


S-4

LENDERS :

MERRILL LUNCH BANK USA, As a Lender By: /s/ Louis Alder Name: Louis Alder Title: Director


S-5

LENDERS :

MORGAN STANLEY BANK. As a Lender By: /s/ Daniel Twenge Name: Daniel Twenge Title: Vice President


S-6

SCHEDULE 1.1 (a)

COMMITMENTS

Lender

Commitment

Lehman Commercial Paper Inc. $160,000,000.00 Bank of America, N.A. $ 80,000,000.00 Citigroup Global Markets, Inc. $ 80,000,000.00 Merrill Lynch Bank USA $ 80,000,000.00 Morgan Stanley Bank $ 80,000,000.00 Total

$480,000,000.00

SCHEDULE 5.18

MATERIAL LEASES Description Expiration Annual Rent Palo Verde Unit 1

Facility Lease dated as of December 16, 1985 between 1/15/2015 $ 5,580,122.54 PNM and U.S. Bank National Association (successor to State Street Bank and Trust Company, successor to The First National Bank of Boston), as Owner Trustee under a Trust Agreement dated as of December 16, 1985, with MFS Leasing Corp. as Owner Participant, as amended. Facility Lease dated as of December 16, 1985 between 1/15/2015 $ 15,693,862.76 PNM and U.S. Bank National Association (successor to State Street Bank and Trust Company, successor to The First National Bank of Boston), as Owner Trustee under a Trust Agreement dated as of December 16, 1985, with Daimler Chrysler Services North America LLC (as successor to Chrysler Financial Corporation), as Owner Participant, as amended. Facility Lease dated as of December 15, 1986 between 1/15/2015 $ 4,757,769.00 PNM and U.S. Bank National Association (successor to State Street Bank and Trust Company, successor to The First National Bank of Boston), as Owner Trustee under a Trust Agreement dated as of December 15, 1986, with Palo Verde 1- PNM [December 75] Corporation (successor-in-interest to Chase Manhattan Realty Leasing Corporation), as Owner Participant (Unit 1), as amended. Facility Lease dated as of July 31, 1986 between 1/15/2015 $ 6,974,313.00 PNM and U.S. Bank National Association (successor to State Street Bank and Trust Company, successor to The First National Bank of Boston), as Owner Trustee under a Trust Agreement dated as of July 31, 1986, with Palo Verde 1- PNM [August 50] Corporation (successor-in-interest to Chase Manhattan Realty Leasing Corporation), as Owner Participant (Unit 1), as amended. Total - Unit 1 $ 33,006.067.10

Description Expiration Annual Rent Palo Verde Unit 2 Facility Lease dated as of August 12, 1986 between 1/15/2016 $ 5,742, 060.00 PNM and U.S. Bank National Association (successor to State Street Bank and Trust Company, successor to The First National Bank of Boston), as Owner Trustee under a Trust Agreement dated as of August 12, 1986, with MFS Leasing Corp. as Owner Participant, as amended. Facility Lease dated as of August 12, 1986 between 1/15/2016 $ 9,958,478.04 PNM and U.S. Bank National Association (successor to State Street Bank and Trust Company, successor to The First National Bank of Boston), as Owner Trustee under a Trust Agreement dated as of August 12, 1986, with CGI Capital, Inc., as Owner Participant, as amended. Facility Lease dated as of August 12, 1986 between 1/15/2016 $ 9,569,653.00 PNM and U.S. Bank National Association (successor to State Street Bank and Trust Company, successor to The First National Bank of Boston), as Owner Trustee under a Trust Agreement dated as of August 12, 1986, with Palo Verde Leasing Corporation (successor-in-interest to First Chicago Lease Holdings, Inc.) as Owner Participant, as amended. Facility Lease dated as of August 12, 1986 between 1/15/2016 $ 4,743,012.00 PNM and U.S. Bank National Association (successor to State Street Bank and Trust Company, successor to The First National Bank of Boston), as Owner Trustee under a Trust Agreement dated as of August 12, 1986, with MFS Leasing Corp. (successor-in-interest to Beneficial Leasing Group, Inc.), as Owner Participant, as amended. Facility Lease dated as of December 15, 1986 between 1/15/2016 $ 3,272,560.40 PNM and U.S. Bank National Association (successor to State Street Bank and Trust Company, successor to The First National Bank of Boston), as Owner Trustee under a Trust Agreement dated as of December 15, 1986, with Palo Verde 2- PNM [December 35] Corporation (successor-in-interest to Chase Manhattan Realty Leasing Corporation), as Owner Participant (Unit 2), as amended. Total - Unit 2 $ 33,285.763.44

Description Expiration Annual Rent Eastern Interconnection Project (EIP) Amended and Restated Lease dated as of September 1, 4/1/2015 $ 2,675,739.30* 1993, between PNM as Lessee, and U.S. Bank National $ 2,844,913.50 Association (successor to State Street Bank and Trust Company,( as successor to The First National Bank of Boston), as Owner Trustee under a Trust Agreement dated as of January 2, 1985, with General Foods Credit Corporation, as Lessor. Total EIP $ 2,675,739.30* $ 2,844,913.50 * 1994 Only

SCHEDULE 5.19

MATERIAL LEASE INTEREST PAYMENTS AND DISCOUNT RATE

Schedule 5.19 Material Lease Interest Payments and Discount Rates (Numbers in $000)

EIP (Discount Rate 12.85%)

PVNGS (Discount Rate 10.25%)

Date Total Payment Interest Payment Principal Payment Loan Balance EoY 2005 1,299,597 328,435 971,162 1,890,229 2006 608,408 231,380 377,028 1,513,201 2007 642,648 180,402 462,245 1,050,955 2008 683,422 117,815 565,607 485,348 2009 58,795 62,474 -3,678 489,027 2010 112,898 62,962 49,936 439,091 2011 53,990 56,485 -2,495 441,586 2012 498,398 56,811 441,586 0 2013 2014 2015 2016 2017 2018 2019 Total 3,958,155 1,096,764 2,861,390

Date Total Payment Interest Payment Principal Payment Loan Balance EoY 2005 14,380,430 12,148,338 2,232,092 116,288,282 2006 15,239,058 11,919,549 3,319,509 112,968,773 2007 16,147,881 11,579,299 4,568,582 108,400,191 2008 17,117,049 11,111,020 6,006,029 102,394,162 2009 14,895,517 10,495,402 4,400,115 97,994,046 2010 13,670,429 10,044,390 3,626,039 94,368,007 2011 14,513,604 9,672,721 4,840,883 89,527,124 2012 26,655,935 9,176,530 17,479,405 72,047,719 2013 29,233,436 7,384,891 21,848,545 50,199,174 2014 34,358,781 5,145,415 29,213,366 20,985,809 2015 19,428,445 2,151,045 17,277,400 3,708,409 2016 4,088,521 380,112 3,708,409 0 2017 2018 2019 Total 219,729,086 101,208,712 118,520,374

SCHEDULE 10.1

NOTICES COMPANY: PNM Resources, Inc. Alvarado Square Albuquerque, NM 87158 Attention: Wendy Carlson, Treasurer Telephone: 505.241.2215 Telecopier: 505.241.2369 Electronic Mail: [email protected] Website Address: www.pnmresouces.com ADMINISTRATIVE AGENT: Administrative Agent’s Office (for payments and Requests for Credit Extensions): Lehman Brothers, Inc.. 745 7th Avenue, 5th Floor New York, NY Mail Code: 10019 Attention: Michelle Rosolinsky Telephone: 212-526-6590 Telecopier: 646-758-5015 Electronic Mail: [email protected] ABA#: 021-0000-89 A/C#: 30434141 A/C Name: LCPI Bank Loans Agency Ref: PNM Resources Other Notices as Administrative Agent : Lehman Commercial Paper Inc. 745 7th Avenue, 5th Floor New York, NY Mail Code: 10019 Attention: Maria A. McClain Telephone: 212-526-0859 Telecopier: 917-522-0592 Electronic Mail: [email protected]

SCHEDULE 10.3

PROCESSING AND RECORDING FEES

The Administrative Agent will charge a processing and recordation fee (an “ Assignment Fee ”) in the amount of $2,500 for each assignment; provided , however , that in the event of two or more concurrent assignments to members of the same Assignee Group (which may be effected by a suballocation of an assigned amount among members of such Assignee Group) or two or more concurrent assignments by members of the same Assignee Group to a single Eligible Assignee (or to an Eligible Assignee and members of its Assignee Group), the Assignment Fee will be $2,500 plus the amount set forth below:

Transaction

Assignment Fee

First four concurrent assignments or suballocations to members of an Assignee Group (or from members of an Assignee Group, as applicable)

-0-

Each additional concurrent assignment or suballocation to a member of such Assignee Group (or from a member of such Assignee Group, as applicable)

$500

EXHIBIT 2.6(b)

FORM OF NOTE

Lender: ______________ ____________, 200_

FOR VALUE RECEIVED, PNM RESOURCES, INC., a New Mexico corporation (the “ Borrower ”), hereby promises to pay to the order of the Lender referenced above (the “ Lender ”), at the Administrative Agent’s Office set forth in that certain Term Loan Agreement dated as of April 18, 2006 (as amended, modified, extended or restated from time to time, the “ Credit Agreement ”) among the Borrower, the Lenders party thereto (including the Lender), Lehman Brothers Inc. as sole lead arranger and sole book-manager and Lehman Commercial Paper Inc., as administrative agent (the “ Administrative Agent ”) (or at such other place or places as the holder of this Note may designate), the aggregate unpaid principal amount of the Term Loan made by the Lender to the Borrower under the Credit Agreement, in lawful money and in immediately available funds, on the dates and in the principal amounts provided in the Credit Agreement, and to pay interest on the unpaid principal amount of each Term Loan made by the Lender to the Borrower, at such office, in like money and funds, at the rates per annum and on the dates provided in the Credit Agreement.

This Note is one of the Notes referred to in the Credit Agreement and evidences the Term Loans made by the Lender to the Borrower thereunder. Capitalized terms used in this Note have the respective meanings assigned to them in the Credit Agreement and the terms and conditions of the Credit Agreement are expressly incorporated herein and made a part hereof.

The Credit Agreement provides for the acceleration of the maturity of the Term Loans evidenced by this Note upon the occurrence of certain events (and for payment of collection costs in connection therewith) and for prepayments of Term Loans upon the terms and conditions specified therein. In the event this Note is not paid when due at any stated or accelerated maturity, the Borrower agrees to pay, in addition to principal and interest, all costs of collection, including reasonable attorney fees.

The date, amount, type, interest rate and duration of Interest Period (if applicable) of the Term Loan made by the Lender to the Borrower, and each payment made on account of the principal thereof, shall be recorded by the Lender on its books; provided that the failure of the Lender to make any such recordation or endorsement shall not affect the obligations of the Borrower to make a payment when due of any amount owing under the Credit Agreement or under this Note in respect of the Term Loan to be evidenced by this Note, and each such recordation or endorsement shall be prima facie evidence of such information, absent manifest error.

Except as permitted by Section 10.3(b) of the Credit Agreement, this Note may not be assigned by the Lender to any other Person.

THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN AC CORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (INCLUDING SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW.)

IN WITNESS WHEREOF, the Borrower has caused this Note to be executed as of the date first above written.

PNM RESOURCES, INC. By: Name: Title:

EXHIBIT 2.4

FORM OF NOTICE OF CONTINUATION/CONVERSION

TO: LEHMAN COMMERCIAL PAPER INC., as Administrative Agent RE: Term Loan Agreement dated as of April 18, 2006 among PNM Resources, Inc. (the “ Borrower ”),

Lehman Commercial Paper Inc., as Administrative Agent, the Lenders named therein and Lehman Brothers Inc. as sole lead arranger and sole book-manager (as the same may be amended, modified, extended or restated from time to time, the “ Credit Agreement ”)

DATE: ___________, 200_

________ one month ________ two months ________ three months ________ six months

1. This Notice of Continuation/Conversion is made pursuant to the terms of the Credit Agreement. All capitalized terms used herein unless otherwise defined shall have the meanings set forth in the Credit Agreement.

2. Please be advised that Borrower is requesting that a portion of the current outstanding Term Loans advanced to it in the amount of $___________, currently accruing interest at ____________, be extended or converted as of ________, 200__ at the interest rate option set forth in paragraph 3 below.

3. The interest rate option applicable to the extension or conversion of all or part of the existing Term Loans referenced above shall be:

a. ________ the Base Rate

b. ________ the Adjusted Eurodollar Rate for an Interest Period of:


4. As of the date hereof, no Default or Event of Default has occurred and is continuing.

EXHIBIT 6.1(c)

FORM OF

COMPLIANCE CERTIFICATE TO: LEHMAN COMMERCIAL PAPER INC., as Administrative Agent RE: Term Loan Agreement dated as of April 18, 2006 among PNM Resources, Inc. (the “ Borrower ”),

Lehman Commercial Paper Inc., as Administrative Agent, the Lenders named therein and Lehman Brothers Inc. as sole lead arranger and sole book-manager (as the same may be amended, modified, extended or restated from time to time, the “ Credit Agreement ”)

DATE: _____________, 200__

Pursuant to the terms of the Credit Agreement, I, ________________, a Financial Officer of the Borrower hereby certify on behalf of the Borrower that, as of the quarter ending ___________, 200__, the statements below are accurate and complete in all respects (all capitalized terms used below shall have the meanings set forth in the Credit Agreement):


a. Attached hereto as Schedule 1 are calculations (calculated as of the date of the financial statements referred to in paragraph c. below) demonstrating compliance by the Borrower with the financial covenants contained in Section 6.2 of the Credit Agreement.

b. No Default or Event of Default exists under the Credit Agreement, except as indicated on a separate page attached hereto, together with an explanation of the action taken or proposed to be taken by the Borrower with respect thereto.

c. The quarterly/annual financial statements for the fiscal quarter/year ended ___________, 200_ which accompany this certificate fairly present in all material respects the financial condition of the Borrower and its Subsidiaries and have been prepared in accordance with GAAP, subject to changes resulting from normal year-end audit adjustments and except that the quarterly financial statements have fewer footnotes than annual statements.

SCHEDULE 1

TO EXHIBIT 6.1(c)

FINANCIAL COVENANT CALCULATIONS

∗ For purposes of such calculation, the portion of Consolidated Indebtedness attributable to obligations under Material Leases shall be the net present value (using (i) the discount rate (A) set forth in Schedule 5.19 of the Credit Agreement, so long as such Schedule 5.19 specifies the same relevant discount rate as is used in calculating such net present value provided to Moody’s and S&P or (B) the discount rate used in calculating such net present value provided to Moody’s and S&P or (ii) any such other rate as shall be proposed by the Borrower (and agreed upon by the Required Lenders) of all amounts payable under the Material Leases.

A. Debt Capitalization

1. Consolidated Indebtedness of the Borrower ∗ $ 2. Consolidated Capitalization of the Borrower $ 3. Debt to Capitalization Ratio (Line A1 ÷ A2) ___________ to 1.0

Maximum Permitted .65 to 1.0

EXHIBIT 10.3(b)

FORM OF

ASSIGNMENT AND ASSUMPTION

This Assignment and Assumption (the “ Assignment and Assumption ”) is dated as of the Effective Date set forth below and is entered into by and between ____________ (the “ Assignor ”) and _________________ (the “ Assignee ”). Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (as amended, the “ Credit Agreement ”), receipt of a copy of which is hereby acknowledged by the Assignee. The Standard Terms and Conditions set forth in Schedule 1 attached hereto (the “ Standard Terms and Conditions ”) are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.

For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below (a) all of the Assignor’s rights and obligations in its capacity as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of the Assignor under the respective facilities identified below (including, without limitation, any Letters of Credit, guarantees, and swingline loans included in such facilities) and (b) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as a Lender) against any Person, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (a) above (the rights and obligations sold and assigned pursuant to clauses (a) and (b) above being referred to herein collectively as, the “ Assigned Interest ”). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor.

1. Assignor:

__________________________________

2. Assignee:

___________________________________ and is an Affiliate/Approved Fund of __________________

3. Borrower:

PNM Resources, Inc.

4. Administrative Agent:

Lehman Commercial Paper Inc. as the Administrative Agent under the Credit Agreement

6. Assigned Interest:

7. After giving effect to the foregoing assignment, the Assignor and the Assignee shall have the following Pro Rata Shares and outstanding Loans:

8. Trade Date: ______________ Effective Date: __________ __, 200__

5. Credit Agreement:

Term Loan Agreement dated as of April 18 , 2006 among the Borrower, the Lenders party thereto, Lehman Brothers Inc. as sole lead arranger and sole book-manager and the Administrative Agent.

Aggregate Amount of Term Loans for

all Lenders

Amount of Term Loans

Assigned

Percentage Assigned of Term Loans

$ $ %

Pro Rata Share Outstanding Term Loans Assignor Assignee

The terms set forth in this Assignment and Assumption are hereby agreed to:

ASSIGNOR [NAME OF ASSIGNOR] By: Name: Title: ASSIGNEE [NAME OF ASSIGNEE] By: Name: Title:

Consented to and Accepted if applicable: LEHMAN COMMERCIAL PAPER INC., as Administrative Agent By: Name: Title: Consented to if applicable: PNM RESOURCES, INC. By: Name: Title:

SCHEDULE 1 TO EXHIBIT 10.3(b)

TERMS AND CONDITIONS FOR

ASSIGNMENT AND ASSUMPTION

1. Representations and Warranties .

1.1. Assignor . The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Credit Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Documents or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Credit Document or (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Credit Document.

1.2. Assignee . The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken

all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) it meets all requirements of an Eligible Assignee under the Credit Agreement (subject to receipt of such consents as may be required under the Credit Agreement), (iii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder, (iv) it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant to Section 6.1 thereof, as applicable, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Lender, and (v) if it is a foreign lender, attached to the Assignment and Assumption is any documentation required to be delivered by it pursuant to the terms of the Credit Agreement, duly completed and executed by the Assignee; and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Credit Documents are required to be performed by it as a Lender.

2. Payments . From and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned

Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date.

3. General Provisions . This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the State of New York.

Exhibit 10.43

FOURTH AMENDMENT

TO THE PNM RESOURCES, INC.

NON-UNION SEVERANCE PAY PLAN

Effective January 1, 2002, Public Service Company of New Mexico (“PNM”) adopted the Public Service Company of New Mexico Benefits My Way Plan (the “BMW Plan”). Effective November 27, 2002, sponsorship of the BMW Plan was transferred from PNM to PNM Resources, Inc. (“PNM Resources”) and the Plan as renamed the “PNM Resources, Inc. Benefits My Way Plan.” The BMW Plan consisted of a number of component programs including Program 12, Non-Union Severance Pay Program (the “Non-Union Severance Program”). Effective as of January 1, 2004, PNM Resources amended and restated the BMW Plan to divide it into a number of separate plans that replace several of the component programs in effect on December 31, 2003. As part of the amendment and restatement, the PNM Resources, Inc. Non-Union Severance Pay Plan (the “Plan”) was created as a successor plan to the Non-Union Severance Program, effective as of January 1, 2004. The Plan has since been amended on three previous occasions. By this instrument, PNM Resources now desires to amend the Plan as set forth below.

1. Except as otherwise provided, this Fourth Amendment shall be effective as of April 19, 2006. 2. Section 2.1(bb) ( Year of Service ) of the Plan is hereby amended by adding a new paragraph to the end thereof:

PNM Resources and Altura Power, L.P. entered into an agreement to purchase certain assets of Twin Oaks Power LP and its affiliates (collectively, “Twin Oaks”) (the “Twin Oaks Transaction”). Upon the close of the Twin Oaks Transaction, for purposes of calculating the Years of Service of a “Twin Oaks Transferred Employee,” each Twin Oaks Transferred Employee shall receive credit for all service with Twin Oaks as if such service were performed for the Company. Service will be credited on a reasonably uniform basis for all Twin Oaks Transferred Employees.

For this purpose, a “Twin Oaks Transferred Employee” is any employee who was employed by Twin Oaks on the closing date of the Twin Oaks Transaction and who immediately thereafter is employed by the Company.

3. This Fourth Amendment amends only the provisions of the Plan as noted above, and those provisions not expressly

amended shall be considered in full force and effect. Notwithstanding the foregoing, this Fourth Amendment shall supersede the provisions of the Plan to the extent those provisions are inconsistent with the provisions and intent of this Fourth Amendment.

IN WITNESS WHEREOF, PNM Resources has caused this Fourth Amendment to be executed as of this 19th day of April, 2006.

PNM RESOURCES, INC.

By: /s/ Alice A. Cobb

Its: Senior Vice President and Chief Administrative Officer

2

Exhibit 12.1

PNM RESOURCES, INC. AND SUBSIDIARIES

Ratio or Earnings to Fixed Charges (1,000's)

Six Months Line Ended Year Ended December 31, No. 6/30/06 2005 2004 2003 2002 2001

Fixed charges, as defined by the Securities and Exchange Commission:

1 Interest on Long-term Debt $ 46,798 $ 75,736 $ 46,702 $ 59,429 $ 56,409 $ 62,716 2 Amortization of Debt Premium, Discount

and Expenses 2,141 3,642 2,697 2,838 2,302 2,346 3 Other Interest 16,123 14,299 2,319 5,423 2,859 (42) 4 Estimated Interest Factor of Lease Rental Charges 10,681 20,643 19,617 20,452 23,233 22,856

5 Total Fixed Charges $ 75,743 $ 114,320 $ 71,335 $ 88,142 $ 84,803 $ 87,876

Earnings, as defined by the Securities and Exchange Commission:

6 Consolidated Net Earnings from Continuing Operations $ 46,896 $ 71,021 $ 88,258 $ 59,138 $ 64,272 $ 150,433

7 Income Taxes 25,372 32,861 49,247 27,889 33,032 81,063 8 Add Fixed Charges as Above 75,743 114,320 71,335 88,142 84,803 87,876

9 Earnings Available for Fixed Charges $144,011 $ 218,202 $ 208,840 $ 175,169 $ 182,107 $ 319,372

10 Ratio for Earnings to Fixed Charges 1.90 1.91 2.93 1.99 2.15 3.63

Exhibit 12.2

PNM RESOURCES, INC. AND SUBSIDIARIES

Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend (1,000's)

Six Months Line Ended Year Ended December 31, No. 6/30/06 2005 2004 2003 2002 2001

Fixed charges, as defined by the Securities and Exchange Commission:

1 Interest on Long-term Debt $ 46,798 $ 75,736 $ 46,702 $ 59,429 $ 56,409 $ 62,716 2 Amortization of Debt Premium, Discount and

Expenses 2,141 3,642 2,697 2,838 2,302 2,346 Other Interest 16,123 14,299 2,319 5,423 2,859 (42)

4 Estimated Interest Factor of Lease Rental Charges 10,681 20,643 19,617 20,452 23,233 22,856

5 Total Fixed Charges 75,743 114,320 71,335 88,142 84,803 87,876 6 Preferred dividend requirements 264 2,868 572 586 586 586 7 Total Fixed Charges and Preferred dividend

requirements $ 76,007 $117,188 $ 71,907 $ 88,728 $ 85,389 $ 88,462 Earnings, as defined by the Securities and Exchange Commission:

8 Consolidated Net Earnings from Continuing Operations $ 42,896 $ 71,021 $ 88,258 $ 59,138 $ 64,272 $150,433

9 Income Taxes 25,372 32,861 49,247 27,889 33,032 81,063 10 Add Fixed Charges as Above 75,743 114,320 71,335 88,142 84,803 87,876

11 Earnings Available for Fixed Charges $144,011 $218,202 $208,840 $175,169 $182,107 $319,372

12 Ratio for Earnings to Fixed Charges 1.89 1.86 2.90 1.97 2.13 3.61

EXHIBIT 31.1

CERTIFICATION

I, Jeffry E. Sterba, certify that:

1. I have reviewed this quarterly report on Form 10-Q of PNM Resources, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (each registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Date: August 9, 2006 /s/ Jeffry E. Sterba Jeffry E. Sterba, Chairman, President and Chief Executive Officer PNM Resources, Inc.

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the

registrant’s internal control over financial reporting.

EXHIBIT 31.2

CERTIFICATION

I, Charles N. Eldred, certify that:

1. I have reviewed this quarterly report on Form 10-Q of PNM Resources, Inc.;










Date: August 9, 2006 /s/ Charles N. Eldred Charles N. Eldred, Senior Vice President, and Chief Financial Officer PNM Resources, Inc.



EXHIBIT 31.3

CERTIFICATION

I, Jeffry E. Sterba, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Public Service Company of New Mexico;










Date: August 9, 2006 /s/ Jeffry E. Sterba Jeffry E. Sterba, Chairman, President and Chief Executive Officer Public Service Company of New Mexico



EXHIBIT 31.4

CERTIFICATION

I, Charles N. Eldred, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Public Service Company of New Mexico;










Date: August 9, 2006 /s/ Charles N. Eldred Charles N. Eldred, Senior Vice President, and Chief Financial Officer Public Service Company of New Mexico



EXHIBIT 31.5

CERTIFICATION

I, W. Douglas Hobbs, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Texas-New Mexico Power Company;



4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:


b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (each registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and



Date: August 9, 2006 /s/ W. Douglas Hobbs W. Douglas Hobbs, President and Chief Executive Officer Texas-New Mexico Power Company

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

EXHIBIT 31.6

CERTIFICATION

I, Thomas G. Sategna, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Texas-New Mexico Power Company;



4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:


b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (each registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and



Date: August 9, 2006 /s/ Thomas G. Sategna Thomas G. Sategna, Vice President, Controller and Treasurer Texas-New Mexico Power Company

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. § 1350, AS ADOPTED PURSUANT TO § 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q for the period ended June 30, 2006, for PNM Resources, Inc. (“Company”), as filed with the Securities and Exchange Commission on August 9, 2006 (“Report”), I, Jeffry E. Sterba, Chairman, President and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of § 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 9, 2006 By: /s/ Jeffry E. Sterba Jeffry E. Sterba Chairman, President and Chief Executive Officer

EXHIBIT 32.2


In connection with the Quarterly Report on Form 10-Q for the period ended June 30, 2006, for PNM Resources, Inc. (“Company”), as filed with the Securities and Exchange Commission on August 9, 2006 (“Report”), I, Charles N. Eldred, Senior Vice President, and Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:



Date: August 9, 2006 By: /s/ Charles N. Eldred Charles N. Eldred Senior Vice President, and Chief Financial Officer

EXHIBIT 32.3


In connection with the Quarterly Report on Form 10-Q for the period ended June 30, 2006, for Public Service Company of New Mexico (“Company”), as filed with the Securities and Exchange Commission on August 9, 2006 (“Report”), I, Jeffry E. Sterba, Chairman, President and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:



Date: August 9, 2006 By: /s/Jeffry E. Sterba Jeffry E. Sterba Chairman, President and Chief Executive Officer

EXHIBIT 32.4


In connection with the Quarterly Report on Form 10-Q for the period ended June 30, 2006, for Public Service Company of New Mexico (“Company”), as filed with the Securities and Exchange Commission on August 9, 2006 (“Report”), I, Charles N. Eldred, Senior Vice President, and Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:



Date: August 9, 2006 By: /s/ Charles N. Eldred Charles N. Eldred Senior Vice President, and Chief Financial Officer

EXHIBIT 32.5


In connection with the Quarterly Report on Form 10-Q for the period ended June 30, 2006, for Texas-New Mexico Power Company (“Company”), as filed with the Securities and Exchange Commission on August 9, 2006 (“Report”), I, W. Douglas Hobbs, President and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:



Date: August 9, 2006 By: /s/ W. Douglas Hobbs W. Douglas Hobbs President and Chief Executive Officer

EXHIBIT 32.6


In connection with the Quarterly Report on Form 10-Q for the period ended June 30, 2006, for Texas-New Mexico Power Company (“Company”), as filed with the Securities and Exchange Commission on August 9, 2006 (“Report”), I, Thomas G. Sategna, Vice President, Controller and Treasurer of the Company, certify pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:



Date: August 9, 2006 By: /s/ Thomas G. Sategna Thomas G. Sategna Vice President, Controller and Treasurer

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