Notice of Annual Meeting of Shareholders

Tuesday, May 16, 2006

9:00 a.m., Mountain Daylight Time

South Broadway Cultural Center

1025 Broadway, SE

Albuquerque, New Mexico

April 7, 2006

Dear Shareholder:

You are cordially invited to attend the Annual Meeting of Shareholders of PNM Resources, Inc.   The meeting will be held on Tuesday, May 16, 2006, at 9:00 a.m. (Mountain Daylight Time), at the South Broadway Cultural Center, 1025 Broadway, SE, Albuquerque, New Mexico.  A map to the meeting location is included on the back page of this proxy statement for your reference.

At the meeting, shareholders are being asked to:

•                  Elect nine (9) directors.

•                  Act upon a proposal to approve the appointment of Deloitte & Touche LLP, as independent public accountants for 2006.

•                  Approve an amendment to the Restated Articles of Incorporation of PNM Resources, Inc. eliminating the authority of the Board of Directors to classify itself through the Company’s bylaws.

•                  Transact any other business properly brought up at the meeting.

Holders of PNM Resources, Inc. common stock of record at the close of business on March 27, 2006, may vote at the meeting.

This proxy statement and proxy card are being distributed on or about April 7, 2006.  Your vote is important.  The continuing interest of our shareholders in the business of PNM Resources, Inc. is appreciated and we hope you will be able to attend.

TABLE OF CONTENTS

i

PNM Resources, Inc.

Proxy Statement for 2006 Annual Meeting of Shareholders

Tuesday, May 16, 2006

SUMMARY OF PROPOSALS YOU ARE ASKED TO VOTE ON

This proxy statement summarizes the information you need to know to vote at the 2006 Annual Meeting of Shareholders (“Annual Meeting”).  You do not need to attend the Annual Meeting to vote your shares.  We first mailed the proxy statement and proxy card to shareholders on or about April 7, 2006.

Proposal 1 – Election of Directors

Previously the Board of Directors of PNM Resources, Inc. (“the Board”) was divided into three (3) classes with three-year staggered terms so that approximately one-third (1/3) of the directors were elected at each Annual Meeting.  In February 2006, the Board amended the bylaws to declassify itself and to provide for the annual election of all directors.  As discussed below in Proposal 3, the Board is also seeking to amend the Restated Articles of Incorporation of PNM Resources, Inc., to preclude the Board from reclassifying itself without shareholder approval. 

The Board recommends Adelmo E. Archuleta, Julie A. Dobson, Woody L. Hunt, Charles E. McMahen, Manuel T. Pacheco, Robert M. Price, Bonnie S. Reitz, Jeffry E. Sterba, and Joan B. Woodard for election to the Board at the Annual Meeting.  Detailed information on these nominees is provided on page 5.  Directors will be elected for one-year terms. 

If a nominee becomes unavailable for election, proxy holders will vote for another nominee proposed by the Board.

The Board of Directors unanimously recommends a vote FOR each director nominee.

Proposal 2 – Approval of Independent Public Accountants

The Audit and Ethics Committee (“Audit Committee”) of the Board, which is composed entirely of independent non-employee directors, selects and hires the independent registered public accountant, subject to ratification by the Company’s shareholders, to audit the Company’s books.  The Audit Committee has selected Deloitte & Touche LLP to audit the Company’s consolidated financial statements for the fiscal year beginning January 1, 2006. 

Representatives of Deloitte & Touche LLP will attend the Annual Meeting, where they will have the opportunity to make statements and answer questions.  If shareholders fail to ratify the appointment of Deloitte & Touche LLP, the Audit Committee would reconsider its selection.

The Board of Directors unanimously recommends a vote FOR the appointment of Deloitte & Touche LLP, as independent public accountants for fiscal year 2006.

Proposal 3 – Approval of the Amendment to the Restated Articles of Incorporation of PNM Resources Inc. Eliminating the Classification of the Board of Directors

The Board is asking shareholders to approve an amendment to the Restated Articles of Incorporation of PNM Resources, Inc. to eliminate a provision allowing the Board to classify itself through the bylaws.  The Board believes that providing shareholders with the opportunity to elect the entire Board on an annual basis is consistent with the Board’s continued commitment to best practices in corporate governance. 

The Board of Directors unanimously recommends a vote FOR the Approval of the Amendment to the Restated Articles of Incorporation of PNM Resources, Inc.

1

INTRODUCTION

PNM Resources, Inc. (“PNM Resources,” “PNMR,” or the “Company”) is an investor-owned holding company of energy and energy-related businesses based in Albuquerque, New Mexico and trades on the New York Stock Exchange (“NYSE”) under the symbol “PNM.”  Through its utility and energy service subsidiaries, PNM Resources supplies electricity to approximately 744,000 homes and businesses in New Mexico and Texas and natural gas to approximately 478,000 customers in New Mexico. Its utility subsidiaries are Public Service Company of New Mexico (“PNM”) and Texas-New Mexico Power (“TNMP”).   

Other subsidiaries include First Choice Power, a deregulated competitive retail electric provider in Texas, and Avistar, an energy and technology related services company. PNM Resources and its subsidiaries also sell power on the wholesale market in the west. For more information, visit www.pnmresources.com.

GOVERNANCE

The Board recognizes the importance of corporate governance to the proper management of the Company.  Accordingly, the Board has organized the various governance policies adopted and practiced over the years into a consolidated Corporate Governance Principles document so that investors, employees, customers, regulators and the community may be aware of the policies followed by the Company.  These principles have been approved by the full Board after analysis of policy considerations, and peer benchmarks.  The Board has chosen those practices they believe to be in the best interests of its investors.  Because the Board recognizes the on-going debate with regard to corporate governance practices, it has charged its Governance and Public Policy Committee with reviewing the principles at least annually (or more often if necessary) and recommending any necessary changes to the Board.

The Corporate Governance Principles document, as amended on February 14, 2006 to provide Stock Ownership Guidelines for Directors, is attached as Appendix A, and can also be found on PNM Resources’ website at www.pnmresources.com/ge/cg.  The principles document sets forth key practices and addresses the following:

•                  Responsibilities of the Board

•                  Process for Director Nominations

•                  Director Qualifications

•                  Director Independence

•                  Planning/Oversight Functions

•                  Stock Ownership Guidelines

•                  Director Service

CODE OF ETHICS

The Company has adopted a code of ethics, Do the Right Thing-Principles of Business Conduct, that applies to all directors, officers (including the principal executive officer, principal financial officer and principal accounting officer) and employees.  Do the Right Thing is available in print to any shareholder who requests it by writing to the Ethics and Compliance Department, PNM Resources, Inc., Alvarado Square, MS-2804, Albuquerque New Mexico 87158.  Do the Right Thing is also available on our website at www.pnmresources.com/ge/ec.  The Company will post amendments to or waivers from its code of ethics (to the extent applicable to the Company’s executive officers and directors) at this location on its website.

Concerns relating to financial statement disclosures, accounting, internal accounting controls, or auditing matters, and other matters involving violations of law are handled in accordance with the complaint procedures adopted by the Audit Committee that are posted on the Company’s website at

2

www.pnmresources.com/ge/cg. The Company also established an anonymous/confidential hotline through which employees may report concerns about the Company’s business practices.

ATTENDANCE AND VOTING MATTERS

Admission tickets will be distributed at the registration tables in the lobby of the South Broadway Cultural Center prior to the Annual Meeting.  Attendance is limited to shareholders of record on March 27, 2006.  If your shares are held in the name of your broker, bank, or other nominee, please bring an account statement or letter from the nominee indicating that you are the beneficial owner of the shares as of the record date.

For your convenience, we have established four easy methods for voting:

Your shares will be voted in the manner you indicate.  In the absence of specific instructions, proxies will be voted by those named in the proxy FOR the election of the directors nominated, FOR the approval of the selection of Deloitte & Touche LLP (“Deloitte & Touche”), as independent public accountants, and FOR approval of the amendment to the Restated Articles of Incorporation of PNM Resources, Inc., and on all other matters in accordance with their judgment.  Any subsequent vote by any means will change your prior vote.  The last vote actually received before the Annual Meeting will be the one counted.  You may also revoke your proxy by voting in person at the Annual Meeting.

Each share of PNM Resources common stock you own entitles you to one vote.  As of March 27, 2006, there were 68,786,286 shares of PNM Resources common stock outstanding.

Quorum and Vote Necessary for Action - A quorum of shareholders is necessary to hold a valid meeting. If at least a majority of the PNM Resources common stock outstanding on the record date is represented at the Annual Meeting, in person or by proxy, a quorum will exist.

A quorum and the affirmative vote of the holders of a majority of the shares of PNM Resources common stock present, in person or by proxy, and entitled to vote at the Annual Meeting are required to elect directors, and approve the appointment of independent public accountants.   Abstentions will have the effect of a vote against these matters, while broker non-votes will not be counted in calculating voting results on these matters. 

A quorum and the affirmative vote of the holders of a majority of the shares of PNM Resources common stock entitled to vote at the Annual Meeting are required to amend the Restated Articles of Incorporation of PNM Resources.   Abstentions and broker non-votes will have the effect of a vote against this matter.

3

Shares Held In Street Name - If your shares are registered in your name on the books and records of the Company’s transfer agent, you are a registered stockholder.  If your shares are held for you in the name of your broker or bank, your shares are held in street name.   If you do not return your proxy and your shares are held in street name, your brokerage firm may vote your shares on certain “routine” matters.   When a brokerage firm votes its customers’ unvoted shares on routine matters, these shares are counted to determine if a quorum exists to conduct business at the meeting.  The election of directors and the approval of the appointment of Deloitte & Touche as independent public accountants for 2006 are considered routine matters for which brokerage firms may vote your shares without your proxy.

A broker non-vote occurs when a broker is not permitted under NYSE rules to vote on a matter without instructions from the beneficial owner of the shares and no instruction is given.    Proposal 3 (approve the Amendment to the Restated Articles of Incorporation of PNM Resources, Inc) is considered a non-routine matter.  Your shares cannot be voted on this matter without receipt of your voting instructions.  We encourage you to provide instructions to your broker by giving your proxy.  This ensures that your shares will be voted at the meeting. 

Shares Held in the Retirement Savings Plan – If you are a participant in the PNM Resources, Inc. Retirement Savings Plan
(“401(k) Plan”), and shares of PNM Resources have been allocated to your account under the PNM Resources Stock Fund investment option of the 401(k) Plan, then you will receive a separate vote authorization form and supplemental materials on voting instructions for these shares from the Corporate Investment Committee.

Voting Registered Shares (Including Shares Held in the Employee Stock Purchase Plan (“ESPP”)) and 401(k) Plan Shares – Please use the enclosed proxy card to vote your registered shares, which includes shares purchased by employees through the ESPP prior to the record date.  Thus, if you are a registered shareholder and have shares allocated to your 401(k) Plan account, you will need to vote your registered shares with the proxy card and vote your 401(k) Plan shares with the 401(k) Plan vote authorization form.

Matters Raised at the Meeting not Included in this Proxy Statement – The Board knows of no other business to be conducted at the Annual Meeting other than those discussed in this proxy statement.  If any other matter is properly presented, the proxy committee will vote on the matter in accordance with its judgment.  Shareholders attending the meeting will directly vote on those matters.

PROPOSAL 1:  ELECTION OF DIRECTORS (PROPOSAL 1 ON YOUR PROXY CARD)

General Information

Nine (9) current directors are seeking election for one-year terms at this year’s Annual Meeting.  Robert G. Armstrong is retiring from the Board at the Annual Meeting following 15 years of service.  We gratefully acknowledge his dedicated service, support and leadership, and contributions to PNM Resources during his tenure.  In anticipation of Mr. Armstrong’s retirement, the Board elected Woody L. Hunt to the Board on September 27, 2005.  There are no vacancies as the Board fixed the number of directors at nine (9) effective with the 2006 Annual Meeting. 

Mr. Charles E. McMahen, a current non-management director, recommended Woody L. Hunt for Board consideration as a director candidate.  The Governance and Public Policy Committee interviewed Mr. Hunt and subsequently recommended his election to the full Board.  On September 27, 2005, the Board elected Mr. Hunt as a director of PNM Resources.  No third party fees were paid in 2005 for identifying Board candidates.

The nomination and election for this term of service will result in Mr. Robert M. Price serving for more than twelve (12) years on the Board.  The Board deemed that due to the addition of two new directors within the last year and to better coordinate an effective transition to new directors, it is in the best interest of PNM Resources for Mr. Price to continue to serve on the Board.  Prior to his election in 2003, and in accordance with the Directors’ Service Policy, referenced in this proxy on page 9, Mr. Price submitted a written resignation to the Board for acceptance at such time as the Board, in its discretion, deems advisable.  There is no current expectation that the resignation would be accepted by the Board within the one-year term.

4

Previously the Board was divided into three (3) classes with three-year staggered terms so that approximately one-third (1/3) of the directors were elected at each Annual Meeting.  In February 2006, the Board amended the bylaws to declassify itself and to provide for the annual election of all directors.  Board members with terms that expired in 2007 and 2008 voluntarily waived their rights to the remainder of their terms so that the shareholders would have the opportunity to elect the entire Board at this year’s Annual Meeting. 

Each nominee has consented to being nominated and to serve if elected. In the unlikely event that any nominee becomes unable to serve for any reason, the proxies will be voted for a substitute nominee selected by the Board upon the recommendation of the Governance and Public Policy Committee of the Board. 

 All of the director nominees are non-employee independent directors, except Jeffry E. Sterba, Chief Executive Officer of the Company.  Biographical information regarding each nominee is shown below.

DIRECTORS NOMINATED THIS YEAR – TERM EXPIRING IN 2007

5

6

7

The Board of Directors unanimously recommends a vote FOR each director nominee.

DIRECTOR INDEPENDENCE

The Board has affirmatively determined that all of the directors, except Jeffry E. Sterba, are independent of PNM Resources and its management.  Mr. Sterba is considered an inside director because of his employment as the senior executive.  In addition to determining that all of the non-employee directors of PNM Resources satisfy all of the specific independence criteria set forth in the NYSE listing standards, the Board determined that there were no direct or indirect relationships between PNM Resources and each non-employee director (other than service on the Board or a Board committee, or being a shareholder or a retail utility customer of the Company).

BOARD MEETINGS

The Chairman of the Board presides at all meetings of the shareholders and of the Board.  In circumstances where the independent directors meet without the Chairman, the Board selects a presiding director.  A presiding director is nominated and approved by the current independent directors.  Dr. Joan B. Woodard currently serves as the 2006 presiding director, and the next presiding director will be elected at the February 2007 Board meeting, the first meeting of the year.  The director selected is responsible for facilitating and chairing the independent directors’ meetings scheduled for that year.  The independent directors meet at least twice a year without management present, and will meet more often as the need arises. 

In 2005, the full Board met seven times.  The independent directors held four regularly scheduled meetings in 2005.  Attendance in 2005 at full Board and committee meetings exceeded 98%.  

Directors are encouraged to attend the Annual Meeting, and as stated in the Corporate Governance Principles (Appendix A), directors are responsible for attending all director meetings and for reviewing materials provided in advance of each meeting.  Directors are expected to actively participate in Board and committee meetings.  All directors attended the 2005 Annual Meeting held on May 17, 2005.

8

COMMUNICATION WITH THE BOARD

Shareholders wishing to communicate with the Board, or with a specific director, may do so by writing to the Board, or to the particular director, and delivering the communication in person or mailing it to: Board of Directors, c/o Corporate Secretary, PNM Resources, Inc., Alvarado Square, MS-0806, Albuquerque, New Mexico 87158. All shareholder communications will be relayed to the Board of Directors or an appropriate committee of the Board.  If the shareholder desires to communicate a concern directly with the Board without initial review by the Corporate Secretary, the concern should be submitted in writing, in a sealed envelope addressed to the Board, in care of the Corporate Secretary, with a notation indicating that it is to be opened only by the Board.  The Corporate Secretary shall promptly forward the unopened envelope to the Board.  From time to time, the Board may change the process for shareholder communications with the Board or its members. Please refer to the Company’s website www.pnmresources.com/ge/cg for any changes in this process.

Shareholders and other interested parties wishing to communicate directly with the presiding director or with the non-management directors as a group may do so by writing to Presiding Director, c/o Corporate Secretary, PNM Resources, Inc., Alvarado Square, MS-0806, Albuquerque, New Mexico 87158.

DIRECTORS’ SERVICE POLICY

On February 19, 2002, the Board adopted a revised Directors’ Service Policy addressing various aspects of board service, retirement practices, terms of office and inside directors.  The current Directors’ Service Policy can be found on page A-7 of the Corporate Governance Principles, (Appendix A) and on the Company’s website at www.pnmresources.com/ge/cg.  As previously noted, prior to his election in 2003, and in accordance with the Directors’ Service Policy, Mr. Price submitted a written resignation to the Board for acceptance at such time as the Board, in its discretion, deems advisable.  There is no current expectation that the resignation would be accepted by the Board within the one-year term.      

BOARD COMMITTEES AND THEIR FUNCTIONS

The Board has four standing committees: the Audit and Ethics Committee, the Finance Committee, the Governance and Public Policy Committee, and the Human Resources and Compensation Committee.    A summary of the committee responsibilities is included below. 

Audit and Ethics Committee (“Audit Committee”)

9

Mr. Robert G. Armstrong served on the Audit Committee throughout 2005 and is retiring from the Board and all Board committees on May 16, 2006.

*Ms. Dobson served as Chair of the Audit Committee throughout 2005 and currently serves as a member of the Audit Committee.   Mr. McMahen was elected Chair for 2006. 

Finance Committee

*Mr. Price served as Chair of the Finance Committee throughout 2005 and currently serves as a member of the Finance Committee.   Ms. Dobson was elected Chair for 2006. 

Governance and Public Policy Committee (“GPPC”)

10

The GPPC will consider director candidates proposed by shareholders. Director candidates recommended by shareholders will be evaluated against the same criteria as nominees submitted by the GPPC. Candidates must be highly qualified and exhibit both willingness and interest in serving on the Board. Candidates should represent the interests of all shareholders and not those of a special interest group. A shareholder wishing to nominate a candidate should forward the candidate’s name and a detailed background of the candidate’s qualifications, appropriate biographical information and signed consent to serve to the Secretary of the Company, taking into consideration the criteria for new directors:

•                  directors should be individuals of the highest character and integrity and have inquiring minds, vision and the ability to work well with others and exercise good judgment;

•                  directors should be free of any conflict of interest which would violate any applicable law or regulation or interfere with the proper performance of the responsibilities of a director;

•                  directors should possess substantial and significant experience which would be of particular importance to the Company in the performance of the duties of a director;

•                  directors should have sufficient time available to devote to the affairs of the Company in order to carry out the responsibilities of a director;

•                  directors should have the capacity and desire to represent the balanced, best interests of the shareholders as a whole and not primarily a special interest group or constituency; and

•                  directors should have an equity ownership interest in the Company prior to commencing service on the Board. Each director’s ownership interest should increase over time, consistent with applicable insider trading restrictions, so that an appropriate amount of stock is accumulated.

General Board attributes and director qualifications can also be found on page A-3 of the Corporate Governance Principles (Appendix A). 

The GPPC conducted a board search and all candidates were evaluated utilizing the same criteria.  Mr. Charles E. McMahen, a current non-management director, recommended Woody L. Hunt for Board consideration as a director candidate.  The GPPC interviewed Mr. Hunt and subsequently recommended his election to the full Board.  On September 27, 2005, the Board elected Mr. Hunt as a director of PNM Resources.  No third party fees were paid in 2005 for identifying Board candidates.

Mr. Robert G. Armstrong served on the GPPC throughout 2005 and is retiring from the Board and all Board committees on May 16, 2006.

Human Resources and Compensation Committee (“HRCC”)

11

PNM Resources Common Stock Owned by Executive Officers and Directors

(As of March 14, 2006)

(a)          Beneficial ownership means the sole or shared power to vote, or to direct the voting of a security and/or investment power with respect to a security.

(b)         Shares held in the individual’s name, individually or jointly with others, or in the name of a bank, broker, or nominee for the individual’s account.

(c)          The number of shares directors and executive officers have a right to acquire through stock option exercises within 60 days after March 14, 2006, and number of shares that executive officers have a right to acquire through the Executive Savings Plan and the Executive Savings Plan II upon the participant’s death or termination of employment.  As of March 14, 2006, the Executive Savings Plan share rights consist of 6,069 and the Executive Savings Plan II share rights consist of the 4,679 of the 491,646 shares reported for Jeffry E. Sterba, and an additional 9,861 shares of the 722,906 shares reported for directors and executive officers as a group.

*Less than 1% of PNM Resources outstanding shares of common stock.

12

Ownership of More than Five Percent of PNM Resources’ Common Stock

(1)          As reported on Schedule 13G dated February 14, 2006, filed with the SEC by Cascade Investment, L.L.C. (“Cascade”).  The filing reported that all shares held by Cascade may be deemed to be beneficially owned by William H. Gates III as the sole member of Cascade.  As explained more clearly below under “Transaction with Cascade”, on October 7, 2005, PNM Resources issued 4,000,000 equity-linked units to Cascade.  Pursuant to the transaction, Cascade has the right to purchase shares of common stock from the Company, the exact number of shares depending on the average closing price per share of PNM Resources common stock over a 20-day trading period ending on the third trading day immediately preceding the purchase contract settlement date, subject to anti-dilution adjustments. Under the terms of the equity-linked units, Cascade can purchase a minimum of 3,981,600 shares and a maximum of 4,778,000 shares upon settlement of the purchase contracts.  The number of shares in the table does not reflect any shares that Cascade would be entitled to purchase and does not take into account any anti-dilution adjustments.  Certain regulatory approvals must be obtained prior to settling the purchase contracts with common stock if such settlement would result in Cascade owning 10% or more of the outstanding common stock of PNM Resources.

(2)          As reported on Schedule 13G dated February 10, 2006, filed with the SEC by EARNEST Partners, LLC.

Except for the information related to the number of shares that Cascade may have the right to acquire in footnote (1) above, the information provided above is based on reports filed with the SEC.  PNM Resources makes no representation as to the accuracy or completeness of the information.  These are the only persons known to PNM Resources to be the beneficial owners of more than five percent of PNM Resources’ common stock, as of March 27, 2006. 

Transaction with Cascade

On August 16, 2004, we announced that Cascade had agreed to invest $100 million in equity-linked units to be issued by PNM Resources.  Cascade is the largest holder of our common stock.  This investment and securities issuance was a key element in the financing that we assembled to fund the purchase of TNP Enterprises, Inc. and its subsidiaries, including TNMP and First Choice Power that was completed in June 2005.  In October 2005, we completed the private offering to Cascade of 4,000,000 equity-linked units at 6.625%.  PNM Resources received $100 million in proceeds from this transaction and used the proceeds to repay short-term borrowings, which included borrowings for the acquisition of TNP Enterprises, Inc. 

Each equity-linked unit consists of a purchase contract and a 2.5% undivided beneficial ownership interest in one of PNM Resources’ senior notes. The ownership interest in the senior notes has been initially pledged to secure Cascade’s obligation to purchase PNM Resources common stock or preferred

13

stock (at Cascade’s option) under the related purchase contract. Each purchase contract obligates Cascade to purchase, and PNM Resources to sell, at a purchase price of $25.00 in cash, a number of shares of PNM Resources common stock or preferred stock on or before November 16, 2008 (the purchase contract settlement date).  Pursuant to the transaction, Cascade has the right to settle the purchase contract early and purchase shares of common stock from the Company, the exact number of shares depending on the average closing price per share of PNM Resources common stock over a 20-day trading period ending on the third trading day immediately preceding the purchase contract settlement date, subject to anti-dilution adjustments.  Subject to certain contractual and legal requirements being satisfied, Cascade has the option to settle its obligations under the purchase contracts and purchase the shares of common stock at any time prior to the fifth business day immediately preceding the purchase contract settlement date.

DIRECTOR COMPENSATION

Of PNM Resources’ current directors, only Mr. Sterba is a salaried employee and receives no compensation for serving on the Board.  Non-employee directors receive their annual retainer in the form of cash and stock-based compensation as determined by the Board.  The following is the current director compensation: 

*The options and restricted stock rights granted under the PNM Resources Omnibus Performance Equity Plan will vest in three equal annual installments beginning on the first anniversary of the grant.  The exercise price of the stock option is equal to the fair market value of the common stock on the date of grant.  Fair market value is determined by the closing price of the NYSE on the date of the grant. 

As discussed below, directors will hold seventy-five percent of the annual restricted stock award until the required multiple of annual cash retainer is achieved.  This amount of restricted stock is held until six months after termination of board service.

Directors are also reimbursed for any board-related expenses, such as travel expenses incurred to attend Board and Committee meetings and director education programs sponsored by educational and other institutions.

The following table details the 2005 compensation for non-employee directors.

14

2005 Non-Employee Director Compensation

(a)          The grant date valuation was calculated using the Black-Scholes option pricing model assuming stock price volatility of 24.29%, a risk-free rate of return of 3.79% and an annual dividend yield of 2.55%.

(b)         Based on the NYSE closing market price of PNM stock on the grant date of issuance, May 17, 2005.

STOCK OWNERSHIP GUIDELINES

The GPPC is responsible for recommending Board compensation levels and stock ownership guidelines.  The Stock Ownership Guidelines were adopted in December 2005 and amended in February 2006. 

The Board believes that directors should be shareholders and have a financial stake in the Company. The Board requires that newly elected directors, before commencing board service, become shareholders in the Company.

The GPPC establishes and recommends to the full Board minimum stock ownership guidelines for directors.  According to the guidelines, within three years, directors should hold stock equal to two times the annual retainer.  Within five years, the amount of ownership should be five times the annual retainer.  Directors will hold seventy-five percent of the annual restricted stock award until the required multiple of annual cash retainer is achieved.  This amount of restricted stock is held until six months after termination of board service.

The Stock Ownership Guidelines will be reviewed periodically for any appropriate changes.  The Guidelines can be found on page A-7 of the Corporate Governance Principles document, attached as Appendix A, and can also be found on PNM Resources’ website at www.pnmresources.com/ge/cg.

15

PERFORMANCE GRAPH

The following graph assumes that $100 was invested on December 31, 2000, in PNM* Common Stock, the S&P 500 Stock Index and the S&P Midcap 400 Utilities Index, and that all dividends were reinvested.  Historical performance does not necessarily predict future results.  PNM Resources’ common stock is traded on the NYSE.  On May 18, 2004, the Company’s Board approved a 3-for-2 stock split that took place on June 11, 2004 for shareholders of record on June 1, 2004. 

Comparison of 5 Year Cumulative Total Return

Among PNM Resources, Inc.*, the S&P 500 Index

and the S&P Midcap 400 Utilities Index

(Data Source:   Bloomberg)

*$100 invested on December 31, 2000 in stock or index – including reinvestment of dividends; fiscal year ending December 31.  The graph and table track the performance of PNM common stock through 2001, and following the mandatory share exchange on December 31, 2001, whereby PNM Resources became the publicly traded parent of PNM, thereafter reflect the performance of PNM Resources common stock.

The S&P Midcap 400 Utilities Index include the following companies: AGL Resources, Alliant Energy Corporation, Aqua America, Inc., Aquila Inc., Black Hills Corporation, DPL, Inc., Duquesne Light Holdings, Inc., Energy East Corporation, Equitable Resources Inc., Great Plains Energy, Inc., Hawaiian Electric Industries, Idacorp, Inc., MDU Resources Group Inc., National Fuel Gas Company, Northeast Utilities, Nstar.com Inc., OGE Energy Corporation, Oneok Inc., Pepco Holdings, Inc., PNM Resources, Inc., Puget Energy Inc., Questar Corporation, Scana Corporation, Sierra Pacific Resources Inc., Vectren, Westar Energy Inc., WGL Holdings Inc., Wisconsin Energy Corporation, and WPS Resources Corporation.

16

AUDIT AND ETHICS COMMITTEE REPORT

The following Audit Committee Report does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this report by reference therein. 

The Committee.  The Audit and Ethics Committee (the “Audit Committee”) of the Board of Directors consists of five non-employee directors: Adelmo E. Archuleta, Robert G. Armstrong, Julie A. Dobson, Woody L. Hunt and Charles E. McMahen.  Ms. Dobson chaired the Audit Committee through 2005. Each member of the Audit Committee is an independent director as defined by the current NYSE listing standards and the Company’s independence guidelines.  In addition, the Board has unanimously determined that all Audit Committee members are financially literate under current NYSE listing standards and that Ms. Dobson, Mr. Hunt and Mr. McMahen of the Audit Committee, qualify as “audit committee financial experts” within the meaning of the SEC regulations. The Audit Committee’s responsibilities are specifically noted below in the Audit Committee Charter section.  No members of the Audit Committee received any compensation from the Company during the last fiscal year other than directors’ fees.

Audit Committee Charter.   The Audit Committee Charter, revised December 2003, in Appendix B to this proxy statement, sets forth the Audit Committee’s principal accountabilities, including monitoring:

•                  The integrity of the Company’s financial statements, system of disclosure and internal controls regarding finance, accounting, legal, compliance and ethics that management and the Board have established;

•                  Compliance with legal and regulatory requirements by the Company;

•                  The independent accountant’s qualifications and independence;

•                  The performance of the Company’s internal audit function and independent accountants;

•                  Approval of independent accountant services and fees for audit and non-audit services to be provided.

The Charter also may be found on the Company’s website located at www.pnmresources.com/ge/cg.

Audit Committee Report.  The Audit Committee Report is included in this proxy statement to comply with Item 306 of SEC Regulation S-K governing disclosures related to Audit Committee members and auditor services. The Audit Committee has prepared the following report for inclusion in this proxy statement.  The Audit Committee met eight times during 2005.  The Audit Committee schedules its meetings to ensure appropriate time is provided to complete the required tasks.  The Audit Committee’s meetings include, whenever appropriate, executive sessions with the Company’s independent registered public accountants (independent accountant) and with the Company’s internal auditors, in each case without the presence of the Company’s management.

The Audit Committee reviews and discusses with both management and the Company’s independent accountant all consolidated annual and quarterly financial statements prior to their issuance. During 2005, management represented to the Audit Committee that all PNM Resources’ consolidated financial statements presented to the Audit Committee were prepared in accordance with generally accepted accounting principles and fairly represent the Company’s financial position.  Management reviewed significant accounting and disclosure issues with the Audit Committee.  The Audit Committee discussed with the independent accountants, matters required by Statement on Auditing Standards No. 61 (Communication with Audit Committees) including the quality of the Company’s accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements.  The independent accountants also provided to the Audit Committee the written disclosures and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees).  The Audit Committee also discussed with the independent accountants the firm’s independence, including a review of audit and non-audit fees.

17

Management is responsible for PNM Resources’ internal controls and financial reporting process. The independent accountants are responsible for performing an independent audit of PNM Resources’ consolidated financial statements in accordance with generally accepted auditing standards and to issue a report. The Audit Committee’s responsibility is to monitor and oversee these processes.

The Audit Committee continues to monitor the performance of the Company’s internal auditing function, reviewing staffing levels and steps taken to implement recommended improvements in internal controls and procedures.

The Board, upon recommendation of the Audit Committee, engaged Deloitte & Touche to serve as independent accountants for fiscal year 2005, subject to shareholder approval.  No relationship exists between PNM Resources and Deloitte & Touche, other than the usual relationship between independent accountant and client. 

In 1992, the Board adopted an Independent Accountant Evaluation and Selection Policy (“Policy”). The Policy was adopted because the Board considers it desirable to periodically change independent accountants in a manner that maintains the appearance and reality of independence and to obtain new perspectives, but not so frequently as to be disruptive or hinder the development of company and operational in-depth knowledge. According to that Policy, each year the Audit Committee evaluates the quality and cost of services provided by the independent accountants. A major review is conducted every five years that includes a request for proposal unless extraordinary circumstances exist. After fifteen years of continued service, PNM Resources will consider changing independent accountants.

The Audit Committee adopted a policy governing audit, audit-related and non-audit fees and services in compliance with the Sarbanes-Oxley Act.  This policy requires pre-approval by the Audit Committee of all audit and non-audit services to be provided by the independent accountants and allows use of a budget pre-approved by the Audit Committee for identified services.  This policy delegates to the Audit Committee chair authority to pre-approve services not covered by the budget between Audit Committee meetings with reports to be made at the following Audit Committee meeting.  This policy identifies services that the independent accountants are prohibited from performing, consistent with legal requirements.  A copy of this policy is available at www.pnmresources.com/ge/cg. The types of services approved by the Committee are for non-audit fees as follows:  employee benefit plans; consultations related to adoption of new accounting or auditing procurements, disclosure requirements, or other regulations; and SEC and regulatory compliance.

The Audit Committee has adopted a process to handle complaints in compliance with the Sarbanes-Oxley Act.  This process includes procedures for the submission of complaints or concerns regarding financial statement disclosures, accounting, internal accounting controls or auditing matters and other matters involving violations of law.  A copy of these procedures is available at www.pnmresources.com/ge/cg.

Based on the Audit Committee’s discussions with management and the independent accountants, and the Audit Committee’s review of the representations of management, and the report of the independent accountants to the Audit Committee, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in PNM Resources’ Annual Report on Form 10-K for the year ended December 31, 2004, filed with the SEC.  Subsequent to year-end 2005, the 2005 report was approved at the Committee’s meeting on February 13, 2006. 

18

INDEPENDENT AUDITOR FEES

Audit Fees for 2005 and 2004

The following table represents aggregate fees billed to the Company for fiscal year ended December 31, 2005 and 2004 by Deloitte & Touche, the Company’s principal accounting firm. 

(a)          Audit fees in 2005 include additional fees incurred due to the acquisition of TNP Enterprises, Inc. (“TNP”) on June 6, 2005.

(b)         Primarily financial accounting and reporting consultations.  Audit-related fees in 2005 include fees for activities associated with the TNP acquisition.

(c)          Tax fees in 2004 represent a settlement of the 2000 engagement, a contingent fee arrangement related to tax planning opportunities and compliance issues, tax planning related to 2004 property tax issues and assistance in setting up procedures to comply with new reportable transactions regulations.

(d)         All fees have been approved by the Audit Committee.

The Audit and Ethics Committee reviewed and approved, in advance, all audit-related and tax services and concluded that the provision of these services by Deloitte & Touche was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions.  The Audit Committee preapproves all auditing services and all permitted non-audit services.  The Audit Committee also determined that, beginning March 31, 2002, the auditor of PNM Resources’ books and records would not be eligible to provide consulting services for PNM Resources without prior approval of the Audit Committee, and certain services prohibited by law. 

PROPOSAL 2:  APPROVAL OF INDEPENDENT PUBLIC ACCOUNTANTS (PROPOSAL 2 ON YOUR PROXY CARD)

The Board is recommending that the shareholders approve the selection of Deloitte & Touche as independent public accountants for 2006.

The Audit Committee has performed its annual evaluation of the quality and cost of services provided by Deloitte & Touche and an assessment of auditor independence.  The Audit Committee reported to the Board complete satisfaction with the services provided by Deloitte & Touche and recommended that Deloitte & Touche be selected as independent public accountants for 2006.  The Board agrees with the Audit Committee’s recommendations, as described in the Audit Committee report contained in this proxy statement.

A representative of Deloitte & Touche will be available at the Annual Meeting to respond to questions and to make any statement the representative may desire.

The Board of Directors unanimously recommends a vote FOR the appointment of Deloitte & Touche LLP as independent public accountants for fiscal year 2006.

19

PROPOSAL 3:  APPROVAL OF THE AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF PNM RESOURCES, INC. ELIMINATING THE CLASSIFICATION OF THE BOARD OF DIRECTORS  (PROPOSAL 3 ON YOUR PROXY CARD)

The Company’s Restated Articles of Incorporation (“Articles”) currently permit the directors to create classes of directors in accordance with the bylaws.    Previously, the bylaws provided for 3 classes of directors so that approximately one-third (1/3) of the directors were elected at each annual meeting to serve a 3-year term.  In February 2006, the Board amended the bylaws to declassify the Board and provide for the annual election of all directors. 

The Board also adopted, subject to shareholder approval, amendments to revise Article VI of the Restated Articles of Incorporation to eliminate the authority of the Board to classify itself by amending the bylaws.  The Board has set the current number of directors at 9.  The proposal would not change the present number of directors and the Board would retain the authority to change that number and to fill any vacancies or newly created directorships.

If the proposal is adopted, then if circumstances arise in the future where the Board believed that a classified board was in the best interests of the Company and its shareholders, the Board would require shareholder approval to amend the Articles to give the Board authority to do so.

Supporters of classified boards believe that they promote continuity and stability and assist a company in long-term strategic planning. Supporters also believe that classified boards enhance shareholder value and allow a company to respond to a takeover attempt in a reasoned manner. However, some investors view classified boards as reducing directors’ accountability to shareholders. Critics also believe that classified boards discourage takeovers and thus detract from shareholder value.

The Board is committed to principles of corporate democracy and is mindful that many shareholder groups favor unclassified boards.  After a review of the arguments for and against classified boards, the Board decided in February 2006 that it was an appropriate time to declassify the Board by amending the bylaws. 

The Board believes that the proposal to amend the Articles so that the Board could not reclassify itself without shareholder approval is consistent with its goal of implementing corporate governance policies that are designed to maximize management accountability to shareholders.  If adopted, the proposal would ensure that shareholders retain the opportunity each year to register their views on the performance of the entire Board.  Accordingly, the Board has determined that eliminating the Board’s authority to classify itself is in the best interests of the Company and its shareholders.  Therefore, the Board unanimously recommends that the shareholders approve amending Article VI of the Articles by deleting the last sentence thereof as shown below:

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.

A quorum and the affirmative vote of the holders of a majority of the shares of PNM Resources common stock entitled to vote at the Annual Meeting are required to amend the Restated Articles of Incorporation of PNM Resources.   Abstentions and broker non-votes will have the effect of a vote against this matter.

The Board of Directors unanimously recommends a vote FOR Approval of the Amendment to the Restated Articles of Incorporation of PNM Resources, Inc.

20

HUMAN RESOURCES AND COMPENSATION COMMITTEE REPORT

The following Human Resources and Compensation Committee Report and the performance graph included elsewhere in this proxy statement do not constitute soliciting material and should not be deemed filed or incorporated by reference into any other PNM Resources filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent PNM Resources specifically incorporates this report or the performance graph by reference therein.

Overview

The Human Resources and Compensation Committee (the “Committee”) of PNM Resources (“PNMR” or the “Company”) defines, oversees and administers the company’s compensation program for all officers (executive and non-executive officers) and also establishes guidelines for employee compensation programs.  PNMR’s Executive Officers are those individuals holding positions above the level of Vice President in the Company, including Chief Executive Officer, with broad job responsibilities and policy-making authority. Currently, Company officers include eight (8) officers designated as executive officers and sixteen (16) officers designated as non-executive officers.  Non-Executive Officers are those individuals in the position of Vice President. The Committee’s role is to oversee PNMR’s compensation plans and policies; annually review, determine and approve all current as well as post-employment components of officer compensation, and administer PNMR’s equity incentive plans (including reviewing and approving equity grants to the Company’s officers).  These responsibilities are reflected in the Committee’s current charter, and the Committee and the Board review and revise the charter annually.

The Board determines the Committee’s membership, which is currently composed of five (5) non-employee directors. Each member of the Committee is an independent director as defined by the current NYSE listing standards and the Company’s independence guidelines.  The Committee meets at scheduled times during the year, and met six times during 2005.  The Committee Chairman reports on Committee actions and recommendations at all regularly scheduled Board meetings. PNMR’s Compensation and Benefits Department and the Company’s Corporate Secretary support the Committee in its work and in some cases act pursuant to delegated authority to fulfill various functions in administering PNMR’s compensation programs. In addition, the Committee has the authority to engage the services of outside advisers, experts and others to assist the Committee and to provide periodic reviews of the effectiveness and competitiveness of PNMR’s executive compensation structure. All consultants providing information or advice to the Committee must adhere to the Executive Compensation Consultants Policy, which was adopted by the Committee in December 2005 to ensure independence of the consultant.  During 2005, the Committee utilized the services of two outside compensation consulting firms, Kennedy & Rand Consulting and Aon Consulting, Inc., to assist the Committee in its review of the compensation structure for all officers.

General Compensation Philosophy and Objectives

PNMR’s compensation philosophy is that total direct compensation will vary with performance in achieving Company financial and non-financial objectives, and that any long-term incentive compensation will be closely aligned with the shareholders’ interests. This philosophy applies to all PNMR employees, with a more significant level of variability and compensation at risk as an employee’s level of responsibility increases.

The Committee establishes compensation guidelines and compensation targets for PNMR’s Chief Executive Officer (“CEO”) and other executive and non-executive officers consistent with PNMR’s compensation philosophy and business objectives with actual amounts based upon the performance of PNMR, its subsidiaries and business units, and the individual performance of such executive and non-executive officers.  The Committee’s overall goal is to establish a compensation program that:

•                  links the interests of management and shareholders;

•                  aligns executive compensation with long-term PNM Resources performance; and

21

•                  attracts and retains executives of high caliber and ability.

In 2005, the Committee also reaffirmed PNMR’s compensation philosophy design priorities with respect to pay-for-performance, retention of key employees, cost management, alignment with shareholders’ interests and continued focus on corporate governance.

The Company seeks to attract, motivate and retain highly qualified executives responsible for achieving the Company’s financial and non-financial objectives and creating shareholder value.  In 2005, the Committee reviewed its executive compensation plans and objectives and reaffirmed the following compensation design principles:

•                  Compensation will be related to performance.  The proportion of an individual’s total compensation that varies with individual and company objectives will increase as the individual’s business responsibilities increase.  Thus, a significant portion of executive compensation should be directly linked to achieving specific financial and non-financial objectives.

•                  Compensation will be competitive and cost effective.  PNMR desires to motivate and retain key employees.  Total cash compensation (base salaries plus performance-based cash incentives) will approximate the average of the company’s peer group, with the potential for higher than average total compensation when the company performs better than average.  However, the Committee will look at all components of compensation (e.g. salary, cash and equity performance incentives, equity awards, retirement benefits) in making adjustments to any compensation component.  The compensation paid for each position will also be of fair value relative to other positions in the Company. 

•                  Compensation will align executives’ interests with investors’ interests.  A portion of executive compensation will be equity based (stock options and restricted stock vesting over a 3-year period) and based on the actual financial performance of the Company over a 3-year period (performance shares and performance cash) to align executives’ interests with those of the Company’s stockholders.   This is reinforced by stock ownership guidelines for executives established in 2006 and which are discussed later in this report.

•                  Compensation will be subject to independent review and evaluation.  As discussed above, an independent committee of the Board, with the assistance of independent compensation consultants will be, and is, responsible for reviewing and establishing compensation for all executive and non-executive officers.

The Committee’s review of PNMR’s executive compensation programs and practices includes an analysis, for each executive or officer, of all elements of compensation, consisting of base salaries; short-term cash incentives; long-term cash and non-cash incentives; retirement programs and other potential post-employment benefits; and health and welfare benefits. The Committee compared these compensation components separately and in the aggregate to competitive market data for compensation programs of utility and energy companies generally considered to be comparable to PNMR.  In particular, the Committee uses both relevant, published, median compensation survey data for companies it considers competitors for executive talent, mainly in the utility industry, and other companies, where appropriate, as well as actual compensation data from a peer group of similarly situated energy companies in terms of size, complexity, location and mission.  The published compensation data includes the Towers Perrin Compensation Data Bank Executive Compensation Database for the Energy Services Industry as well as Watson Wyatt’s Executive Compensation Service Top Management Report with appropriate samples drawn from utility industry by unit size.  This compensation review confirmed that, in the Committee’s view, PNMR’s executive compensation program elements individually and in the aggregate strongly support and reflect the compensation philosophy, as follows:

•                  PNMR’s base salaries approximate the 50^th percentile targets for companies of similar size and revenue base.

•                  PNMR’s performance-based cash incentives target payouts are at the average for its industry.

22

•                  PNMR’s total cash compensation (base salaries plus performance-based cash incentives) approximates the average of its peer group, with the potential for higher than average total cash compensation when PNMR’s performance is higher than average, and lower than average total cash compensation when PNMR’s performance is lower than average.

•                  As an incentive for future performance, the Committee utilizes annual stock option grants to provide the appropriate performance-based focus on creation of long-term shareholder value, with vesting in one-third increments beginning the year after the grant date.

•                  The Committee also grants restricted stock rights, with vesting in one-third increments beginning the year after the grant date, to ensure an appropriate degree of equity ownership with a focus on retention for key officers.

•                  The Committee also awards additional long-term incentives in the form of performance shares and performance cash to focus executive attention on other important long-term Company financial goals.  Award amounts are based on the performance of PNMR compared to its peer group over a three-year period (as measured by total shareholder returns).  Performance shares have been eliminated as a program component and the final trailing award will be in 2007.

Total compensation for the majority of PNMR employees, including executive and non-executive officers, consists of the following components:

•                  Annual cash compensation consists of base salary, a broad-based annual pay-for-performance cash incentive dependent on achievement of performance goals and PNMR’s earnings per share (“EPS”) for the performance period, covering most employees of PNMR.  PNMR also provides incentives through specific business unit incentive plans (in our competitive wholesale and retail marketing and trading businesses), designed to achieve performance and financial targets specific to the business unit.  Short-term annual cash awards are made to officers through the Officer Incentive Plan to reward achievement of specific EPS target levels and financial and non-financial objectives developed for each officer.

•                  Key PNMR employees realize long-term incentive compensation through the granting of market value, time-vesting stock options. PNMR’s employees at the management level, including executive and non-executive officers, are eligible to receive stock options. Stock options require PNMR’s stock price to appreciate in order for its employees to realize any benefit, thus directly aligning the interests of employees and shareholders.  Officers also realize long-term incentive potential through restricted stock awards and performance cash awards.

•                  PNMR employees can also acquire PNMR stock through a tax-qualified employee stock purchase plan (“ESPP”), which is generally available to all employees. This plan allows participants to buy PNMR stock at a discount to the market price with up to 10% of their base salary (subject to IRS limits), with the objective of allowing employees to profit when the value of PNMR stock increases over time. Under applicable tax law, no plan participant may purchase more than $25,000 in market value of PNMR stock in any calendar year (based on the market value of PNMR stock on the last trading day prior to the beginning of the enrollment period for each subscription period).

•                  PNMR offers retirement benefits to its employees through tax-qualified plans, including a 401(k) Retirement Savings Plan, company-funded frozen Pension Plans, and through a non-qualified supplemental deferred compensation plan for executive and non-executive officers.

•                  PNMR provides health and welfare benefits for substantially all of its employees, and shares the cost of health and welfare benefits with its employees.  The cost of these benefits is dependent on the level of benefits coverage an employee elects. PNMR’s executive and non-executive officers participate in the same health and welfare plans as provided for the employees.

Review of Components of Executive Compensation

In addition to the review of each separate component of executive compensation, as described above, the Committee has also reviewed these components in the aggregate for the Company’s CEO and four other most highly compensated Executive Officers.  A tally sheet setting forth all the above components was prepared and reviewed by the Committee affixing dollar amounts under various payout scenarios for:  salary, cash bonus, equity and long-term incentive compensation, the dollar value to the executive and cost to the Company of all perquisites and other personal benefits, the earnings and

23

accumulated payout obligations under the Company’s non-qualified deferred compensation program, the actual projected payout obligations under the Company’s supplemental deferred compensation plan and under several potential severance and change-in-control scenarios.

Based on this review, the Committee determined that the Company’s CEO and four other most highly compensated Executive Officers’ total compensation in 2005 (and, in the case of the severance and change-in-control scenarios, the potential payouts) in the aggregate were reasonable and not excessive. Furthermore, as disclosed above, the Committee also relied upon determinations by Kennedy & Rand Consulting and Aon Consulting, Inc., based on their marketplace executive compensation analyses. Thus, the Committee considers both the individual components of total compensation for the Company’s CEO and four other most highly compensated Executive Officers, as well as the components in the aggregate as to their individual and overall amounts and their relative mix within the total compensation program for each officer to make its determinations.

The Committee determines on an annual basis, the compensation for PNMR’s executive and non-executive officers, including the CEO.  Each year, the Committee determines the annual base salary and an individual pay-for-performance incentive award amount for each of PNMR’s officers. In determining these amounts, the Committee reviews competitive market data and peer group executive compensation information that is derived from compensation surveys.

Committee Determinations by Compensation Element for 2005

The Committee most recently determined executive and non-executive officer compensation in February 2006, when it determined incentive payments for 2005 and set base salary amounts for 2006. In determining 2006 compensation, the Committee reviewed the total cash compensation (base salary plus incentive) from continuing employment, the future value of stock options, restricted stock rights, performance shares and cash, the value of any deferred compensation and retirement benefits, and the value of health care benefits.

Committee determinations with respect to each element of executive compensation are discussed in detail below.

Base Salaries

Executive and Non-Executive Officers.  Each year, the Committee reviews the base salaries of PNMR’s executive and non-executive officers and determines salary rank within a salary range comprised of the base salaries of officers and executives in comparable positions within the utilities and energy industry.  For 2005, the Committee established the base salaries of PNMR’s officers at a level tied to the median of this competitive range, but also consistent with the individual executive’s performance and Company and business unit performance.   The Committee considers the results achieved by the executive, his or her future potential, scope of responsibilities and experience, and competitive salary practices.  In general, officers with the highest level and amount of responsibility have the lowest percentage of their compensation fixed as base salary and the highest percentage dependent on variable performance-based standards.

Short-Term Annual Incentive Compensation

Officer Incentive Plan.  In 2005, executive officers including the CEO, participated in a short-term “at risk” cash compensation plan (with the exception of Vice Presidents of one of the PNMR subsidiary companies, First Choice Power). The purpose of the plan is to motivate and reward executive officers for their contributions to PNMR’s performance by tying a large portion of their cash compensation to PNMR’s annual financial performance.  Under this plan, performance targets were established for three levels of achievement:  Threshold, Stretch and Optimal.  The plan is designed to pay up to twenty percent (20%) of the award opportunity based upon the achievement of performance targets tied to individual performance goals, company-wide customer satisfaction, cost control, and operations efficiency, and to pay up to eighty percent (80%) of the award opportunity based upon the achievement of corporate EPS targets. 

24

After the end of each year, PNMR multiplies the officer’s individual performance goal achievement level by the multiplier tied to the EPS achievement for the year to calculate the actual incentive payout amounts.  The EPS targets for the plan are approved by the Board on an annual basis.  In 2005, the Threshold corporate EPS target of $1.56 was achieved, and awards were paid in March 2006.  The Committee reviews and authorizes each officer’s individual incentive payment.

The key feature of the formula is that the multiplier and the resulting payout are closely linked to PNMR’s financial and operational performance for the year.  Over the past four years, the multiplier approved by the Committee for incentive payout purposes has ranged from 0.00 (for 2002) to 5.00 (for 2004).  For 2005 incentive payments, the multiplier was 1.25.  For purposes of the incentive formula, EPS is PNMR’s net income related to running the (on-going) business divided by the number of shares of PNM Resources, Inc. common stock outstanding.

Significant achievements during 2005 included the following:

•                  total shareholder return ranked in the 76^th percentile of the S&P Midcap 400 Utility Index,

•                  earnings growth in 2005 of 9.8%, and an annual compound growth rate since 2002 of 9.1%, and

•                  P/E Ratio average 2.47 points above the median P/E for the S4ELUT Index.

Executive short-term incentive plan target award opportunities vary by responsibility between 25% and 70% of base salary, with actual awards ranging between 0% to a maximum of 150% of target based on performance and subject to plan funding levels achieved.

Long-Term Incentive Compensation

The PNM Resources, Inc. Omnibus Performance Equity Plan (“PEP”) provides the Committee the opportunity to make equity-based compensation awards to employees and executives, at their discretion, including:  incentive stock options, non-qualified stock options, restricted shares rights, performance shares, performance units, and stock appreciation rights.  The PEP was amended in 2005 to permit non-employee Board members to participate, to increase the number of authorized shares available for award, to extend the term of the plan from 2010 to 2015 and to facilitate compliance with Section 409A of the Internal Revenue Code.

Under the PEP, PNMR has considerable flexibility to structure awards in a manner that provides incentives to officers and employees that recognizes and rewards achievement of long-term growth and profits. The Committee believes that stock ownership provides additional incentives for eligible employees to devote their best efforts to PNMR’s financial success as well as to perform in the best interests of shareholders, customers, and employees.  In determining the equity awards to be granted annually to all participants, including Executive Officers, the Committee considers the amount of stock based equity compensation grants already held by participants, dilution, the burn rate commitment to shareholders discussed below, the number of shares of common stock outstanding and the performance of the company during the preceding year.  The Committee established the guidelines for the number of awards available to each participant.

Officer Awards.  In 2005, the Committee continued with a new approach to long-term incentive compensation for PNMR officers that it first implemented in 2004.   Under the new approach, grants made to officers fall under three award components:  stock options, restricted stock rights (each awarded under the PEP), and long-term performance cash (awarded outside of the PEP).  The Committee believes that the new long-term incentive approach delivers competitive levels of incentive compensation, but with less dilutive impact and more retention power than the previous long-term incentive award structure, which included long-term performance shares.  These changes also reflect the Committee’s philosophy that long-term incentive compensation serves three purposes: to align the interests of executives with those of its shareholders (through stock options and restricted stock), promote PNMR’s long-term performance goals (through performance-based share and cash awards), and further executive retention (through time-vested option and restricted stock rights).  Awards of long-term performance shares are no longer made, although there are trailing awards with potential payouts through 2007.

25

Stock Options.  To reward and retain key employees, PNMR uses stock options as its primary long-term incentive vehicle. Under the PEP, all executive and non-executive officers receive annual grants of non-qualified stock options.  The PEP provides that the Committee, in its sole and absolute discretion, will declare the level of options to be granted.  Options generally vest in one-third increments over a three-year period beginning on the first anniversary of the grant.  All options are granted with the exercise price equal to the fair market value of PNMR stock on the date of the grant, and option re-pricing is expressly prohibited by the terms of the PEP.

Prior to obtaining shareholder approval in 2005 to increase the number of authorized shares under the PEP, PNMR committed to its shareholders that it would not make annual awards for the period of 2005-2007 (the “burn rate commitment”) to exceed an average of 2% of the issued and outstanding shares as of each year-end.  Despite these restrictions, the Committee strongly believes that equity award compensation will align the interests of management employees with shareholders.   Therefore, rather than eliminate or reduce eligibility for management employees who have participated in the plan, the Committee determined to continue its use of stock options and other equity awards for officers and stock options for the management employee population. For years beginning after January 1, 2006, management employees will receive options awards based on individual performance, including the employee’s potential impact on the future financial performance of PNMR. 

Annual stock option grants for executive and non-executive officers are a key element of PNMR’s market-competitive total compensation. In 2005, the Committee approved annual stock option grants for PNMR’s executive officers, non-executive officers and management employees. The Committee based grant amounts on factors such as the relative job scope, expected future contributions to the growth and development of the company, and competitiveness of grants relative to PNMR’s peer group.  Equity ownership by officers is further emphasized through share retention and ownership guidelines established by the Committee, which are discussed later in this report.

Restricted Stock Rights.  Under the PEP, all executive officers receive annual grants of restricted stock rights.  The PEP provides that the Committee, in its sole and absolute discretion, will declare the level of restricted stock rights to be granted.  Restricted stock rights generally vest in one-third increments over a three-year period beginning on the first anniversary of the grant.   

Long-Term Performance Cash.  The award of long-term performance cash links a portion of each executive officer’s potential total compensation to the Total Shareholder Return of the Company.  During the performance period 2004-2006, these “at risk” awards are tied to company TSR performance relative to the S&P Midcap 400 Utility Index over a three-year performance period.  Officers may receive cash for three-year performance periods (or partial awards in the first two years of the program).   A target is established for each officer, and the officer can realize zero percent to 200 percent of the target depending on the TSR performance.

Although the PEP allows for awards of incentive stock options, performance units and stock appreciation rights, awards of these incentive components are not currently utilized under the compensation structure.

Until February 2005, performance shares were awarded to all executive and non-executive officers through the Long-Term Performance Share Program, which was designed to reward achievement of three-year financial performance goals tied to Company Total Shareholder Return (“TSR”) relative to the Philadelphia Utility Index over a three-year performance period.  If PNMR’s TSR exceeds the Index by 1%-9%, target awards are paid.  If PNMR’s TSR exceeds the Index by 10%-20%, awards are paid at the 150% of target levels.  If PNMR’s TSR exceeds the Index by more than 20%, awards are capped at 200% of target levels.  For the 2003-2005 performance period, PNMR’s TSR underperformed the Philadelphia Utility Index by 1.52 percentage points.  Therefore, the performance threshold was not met and no awards for this performance period were awarded in February 2006.

26

Stock Ownership Guidelines

Because the Committee believes in linking the interests of management and shareholders, the Committee has set stock ownership guidelines for PNMR’s officers, effective January 1, 2006.  The ownership guidelines specify the value of shares that PNMR officers must accumulate and hold within five years of the later of the effective date of the program or the date of appointment as an officer.  The specific share requirements are based on a multiple of annual base salary, with the higher multiples applicable to officers having the highest levels of responsibility as follows:

As part of the stock ownership guidelines, each officer will be required to hold 75 percent of each annual Restricted Stock Right grant until such time the officer achieves the multiple of annual base salary. This amount of restricted stock will be held until six (6) months after termination of employment. 

The Committee will review annually the share ownership levels of each officer to determine compliance with the stock ownership requirements.  Officers may accumulate and hold shares from any source, including the ESPP, brokerage accounts and the non-qualified deferred compensation plan.  Shares acquired in the tax-qualified Retirement Savings Plan are excluded.  In December 2008, each officer will be required to achieve progress towards the share ownership requirements by holding shares equal or greater than two times his/her annual base salary.

Retirement Benefits

PNMR offers retirement benefits to its employees through tax-qualified plans including an employee and employer funded 401(k) Plan and employer-funded frozen pension plans.  PNMR also has a non-tax-qualified supplemental deferred compensation plan for PNMR officers.

The retirement benefits under the tax-qualified plans for PNMR officers are the same as those available for other eligible employees.  The RSP results in individual participant balances that reflect a combination of: (1) the employee deferring a portion of his or her cash compensation; (2) annual matching contribution amount contributed by the company on behalf of the employee, (3) the age-based contributions made by the company on behalf of the employee in an amount ranging from 3% to 10% of eligible compensation, (4) the annual contributions and/or deferred amounts being invested at the direction of the employee (the same investment choices are available to all participants); and (5), as in (4), the continuing reinvestment of the investment returns until the accounts are paid out. This means that similarly situated employees, including PNMR’s executive officers, may have materially different account balances because of a combination of factors: the number of years that the person has participated in the plan; the amount of money contributed, or compensation deferred, at the election of the participant from year to year; and the investments chosen by the participant with regard to those plans providing for participant investment direction. Except with respect to the frozen pension plans, these plans do not involve any guaranteed minimum returns or above-market returns; the investment returns are dependent upon actual investment results.

The RSP provides a retirement savings vehicle that allows for before-tax contributions by employees, company matching and age-based contributions and tax-deferred earnings. Employees may generally contribute up to 100% of eligible annual pay to the RSP, not to exceed the annual IRS limit ($15,000 for 2006).  Employees at least 50 years of age by the end of the plan year are eligible to make 401(k) catch-up contributions (to a maximum of $5,000 for 2006). Employees direct their own investments in the RSP.

Upon completion of three months of service, the RSP provides a company matching contribution equal to 75 percent of the first 6 percent of eligible compensation the employee defers into the plan. 

27

Additional company contributions are made based on the employee’s age as follows:

The company age-based contributions are made irrespective of whether or not the employee defers compensation into the plan.  All contributions made under the plan vest immediately.

The frozen pension plans offer retirement income as determined by the pension formula under each plan.  The PNM Resources, Inc. Employees’ Retirement Plan (“ERP”) is a defined benefit pension plan that was frozen as of December 31, 1997.  The ERP provides retirement income based on the highest three-year average pay as of 1997, Social Security covered compensation, and length of service upon separation. The Texas-New Mexico Power Company Pension Plan (“TNMP Pension Plan”) is a cash balance pension plan that was frozen as of December 31, 2005.  The TNMP Pension Plan provides retirement income under a cash balance formula. 

In addition, officers can elect to defer eligible compensation into the PNM Resources, Inc. Executive Savings Plan II (“ESP II”), a non-qualified supplemental deferred compensation plan.   The former non-qualified plan, the PNM Resources, Inc. Executive Savings Plan (“ESP”) was frozen as of December 31, 2004.   The ESP II runs concurrent with the qualified deferred compensation plan.  The participant can make before-tax deferrals to the ESP II up to 100% of available, eligible compensation.  PNMR makes a matching contribution equal to 75 percent of the first 6 percent of eligible compensation deferred.  Additionally, when the participant reaches the annual IRS compensation limit in the RSP found in Section 401(a)(17) governing maximum eligible compensation ($220,000 for 2006), the company age-based contribution continues in the ESP II.  Executive Officers also receive a supplemental target contribution in the ESP II in an amount determined by the plan’s actuary (not to exceed $70,000 annually).

Participants direct the investment of their deferrals in ESP and ESP II among the same investment options as are available in the RSP; thus, there is no guaranteed return. Upon enrollment, participants make a one-time irrevocable distribution election, from among several distribution options, to be effective following separation from employment. ESP and ESP II amounts are subject to the same vesting and investment provisions as under the RSP, with the exception of the target supplemental contribution, which has a two-year vesting requirement. All participant balances in ESP and ESP II are unfunded obligations of PNMR; increases and decreases based on “investment” of the balances are also unfunded amounts reflected as hypothetical returns equal to the actual returns of investments designated by a participant or the company.

Company Performance and CEO Compensation

The company’s compensation program is designed to promote the achievement of corporate and business objectives. This pay-for-performance program is most clearly exemplified in the compensation of PNMR’s Chief Executive Officer, Jeffry E. Sterba. The Committee determines Mr. Sterba’s base salary and incentive in the same manner as described for all executive officers. In setting compensation levels for the Chief Executive Officer, the Committee considers comparative market data specific to the utility and energy industry.  In February 2006, the Committee set Mr. Sterba’s base salary at $750,000, which represented an increase of $25,000, or 3.448%, from his 2005 salary of $725,000.  In determining Mr. Sterba’s 2006 base salary, the Committee evaluated his performance in the prior years, and also considered competitive utility industry data from the Towers Perrin Energy Services Industry Executive Compensation Database 2005 Report.  The Committee took into consideration the evaluation of Mr. Sterba’s performance conducted by the entire Board of Directors of the company.  Mr. Sterba’s 2005 individual performance goals included measurements related to long-term growth opportunities, public policy engagement, constituency development, corporate governance and leadership. 

28

Mr. Sterba’s 2006 base salary is 103% of the market average, which aligns with the Committee’s philosophy to target base salary at the 50^th percentile.  The Committee did not change his incentive target award of 70%, which is at the market average, with the expectation that actual cash compensation would depend on company performance as reflected in the operation of the incentive plan formula.

Under the Officer Incentive Plan, Mr. Sterba’s actual pay-for-performance incentive for 2005 (paid in 2006) was $248,500. This incentive, like the incentives paid to each of PNMR’s other executive officers under the Officer Incentive Plan, was less than the maximum amount payable under the plan formula.

In February 2006, the Committee awarded Mr. Sterba 67,500 stock options, which become exercisable in 2007 through 2009 in one-third annual increments. These stock options expire 10 years from the grant date.  The Committee also awarded Mr. Sterba 30,000 Restricted Stock Rights, which also vest in one-third increments from 2007 through 2009.  The Committee also awarded a Performance Cash award of $161,996 based on the performance measures described previously.  No award of trailing Performance Shares was made as the Threshold achievement level was not met.

In 2006, PNMR also contributed $22,050.01 to Mr. Sterba’s account under the tax-qualified 401(k) Plan and allocated $258,402.62 to Mr. Sterba’s account under the non-qualified deferred compensation plan. In general, Mr. Sterba’s retirement plan accounts are available to Mr. Sterba only upon retirement or termination from PNMR as an employee, or upon achievement of normal retirement age, disability or death.

The Committee also reviewed perquisites and other compensation paid to Mr. Sterba for fiscal 2005, and found these amounts to be reasonable.

Ongoing Committee Activities

On an ongoing basis, the Committee reviews, monitors and evaluates PNM Resources’ executive compensation programs both in the aggregate and in their component parts to assure that they effectively support Company strategy and achieve the Committee’s goals.

Certain Tax Matters

Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Tax Code”), generally prohibits publicly held companies, such as PNM Resources, from deducting, for federal income tax purposes, annual compensation in excess of $1 million paid to any of certain key executives, except to the extent compensation is based upon the attainment of performance goals set by the Committee pursuant to plans approved by the shareholders. To the extent possible, the Committee intends to structure the compensation of executive officers in a manner to permit the compensation paid to these individuals to be allowed as a deduction for federal income tax purposes.  The Committee, however, may choose to provide compensation that is not deductible in order to incentivize, retain or to secure the services of key executives when it determines that it is in the best interests of the Company to do so.

The Committee is pleased to submit this report to PNMR’s stockholders and believes that PNMR’s pay-for-performance executive compensation sets the standard for best-in-class executive compensation practices.

29

EXECUTIVE COMPENSATION AS OF DECEMBER 31, 2005

Summary Compensation Table

(a)          Amounts include sale of accrued vacation hours.

(b)         Bonus paid in 2006 for 2005 performance according to the Officer Incentive Plan. Similarly, the bonus for 2004 performance was paid in 2005 and the bonus for 2003 performance was paid in 2004.  The Officer Incentive Plan ties a portion of officer compensation to company-wide earnings per share, business unit performance, and individual performance.

(c)          Amounts are less than the established reporting thresholds.  The 2005 “Other Annual Compensation” amounts are as follows: Sterba $28,181, Smith $17,381, Ortiz $26,928, and Real $22,764.

(d)         Amounts in table above are calculated using the closing price on the date of grant.  Amounts listed below are calculated using the closing price at year-end.  At December 31, 2005, the named executive officers held the following shares of restricted stock, having the values stated below, based upon a $24.49 closing price of the Company’s Common Stock as reported on the New York Stock Exchange on December 30, 2005, the last business day prior to the end of the fiscal year.

Restricted stock rights vest as follows:  (i) on the first anniversary of the grant date, 33%; (ii) on the second anniversary of the grant date, 67%; and (iii) on the third anniversary of the grant date, 100%.  In the event of a change in control, the grantee’s nonvested restricted stock rights fully vest.

(e)          Amounts represent the 401(k) Company match and contributions under the Retirement Savings Plan, plus amounts pursuant to the Executive Savings Plan, and the ESP II, plans that provide executives with contribution benefits for earnings more than the IRS limits imposed for qualified plans.  See the description of the amended Executive Savings Plan and the description of the ESP II elsewhere in this proxy statement under “Retirement Plans and Related Matters — 401(k) Plan” and the “— Executive Savings Plans” and “Equity Compensation Plan Information.”

(f)            Relocation expense reimbursement.

(g)         Amounts have been adjusted to reflect the three-for-two stock split on June 11, 2004.

30

OPTION GRANTS AND EXERCISES IN 2005

Under the PEP, non-qualified stock option grants are awarded to all executive officers, including Mr. Sterba, as well as other key employees.  Grants for 2005 were approved and awarded in May 2005 and are reported in the table below.

Option Grants in Last Fiscal Year (2005)

Individual Grants(a)

(a)          The options shown in this table were granted in 2005 under the Omnibus Performance Equity Plan.

(b)         The grant date valuation was calculated using the Black-Scholes option pricing model assuming stock price volatility of 24.29%, a risk-free rate of return of 3.79% and an annual dividend yield of 2.55%.

No options granted under the PEP in 2005 were exercisable in 2005.  The table below reflects (1) unexercised options granted under a previous expired plan, the Performance Stock Plan (“PSP”), as well as options granted under the PEP and (2) exercised options granted.

Aggregated Option Exercises in 2005 and 2005 Year-End Option Values

(a)          Value equals the year-end stock price ($24.49) minus the exercise price, times the number of shares underlying the option.  “In-the-Money” means that the year-end stock price was greater than the exercise price of the option.

(b)         Value of shares exercised is the market value of the shares on the exercise date minus the exercise price.

31

Long-Term Incentive Plans — Awards in Fiscal Year 2005

The Long-Term Performance Share program links a portion of the participants’ total long-term incentive opportunity to the Company’s Total Shareholder Return (“TSR”).  Participants may earn a minimum of 0% percent to a maximum of 200% of the target award based on the Company’s TSR performance relative to the Philadelphia Utility Index over a three-year period. The dollar value of the 2005 performance share awards is reflected in the “LTIP Payouts” column of the Summary Compensation Table.

RETIREMENT PLANS AND RELATED MATTERS

Employees’ Retirement Plan

PNM Resources sponsors the ERP, a noncontributory defined benefit pension plan.  Effective January 1, 1998, the ERP was closed to new participants.  Prior to January 1, 1998, employees who had at least one year of service and who had attained the age of 21 years were eligible to become participants.

Benefits under the ERP are based on the participant’s service and compensation.  Under the ERP, a participant’s “Credited Service” is used for purposes of determining the amount of the participant’s benefit.  The ERP was amended as of January 1, 1998, to limit a participant’s Credited Service to the Credited Service earned as of December 31, 1997, plus a limited amount of future service.  The amount of Credited Service earned after December 31, 1997, is based on the participant’s age and years of Credited Service as of December 31, 1997.  Participants in the ERP continue to accrue “Total Service,” which is the service measure used for purposes of determining a participant’s vesting and eligibility for early and other retirement benefits.  A participant’s compensation used for ERP benefit calculations was frozen as of December 31, 1997.

No contributions to the plan were made in 2005.  The contribution amount is actuarially determined based upon the number of ERP participants, the participants’ ages, compensation, and service. The amount of any contribution with respect to any one person cannot be determined.

Supplemental Employee Retirement Agreements

Messrs. Ortiz and Sterba have entered into supplemental employee retirement agreements (“SERPs”) with PNM Resources.  In 2006, PNM Resources anticipates that the SERPs may need to be amended to comply with the American Jobs Creation Act.

32

Agreement with Mr. Sterba

Mr. Sterba’s SERP provides him with a supplemental retirement benefit calculated, generally, using the ERP benefit formula, but disregarding certain limitations imposed by the Tax Code on the amount of compensation that may be considered in calculating an ERP benefit and the maximum benefit that may be provided by the ERP.  The benefit under the SERP is reduced by the benefit actually due under the ERP.  For purposes of determining his benefit under the SERP, the SERP provides Mr. Sterba will be treated as having 30 years of Credited Service since he remained employed until February 28, 2005.  Mr. Sterba’s SERP also provides for payment of enhanced severance benefits in lieu of the severance benefits otherwise payable under the Non-Union Severance Plan.  The Non-Union Severance Pay Plan is discussed on page 35.

Agreement with Mr. Ortiz

Mr. Ortiz’ SERP provides him with a supplemental retirement benefit calculated, generally, using the ERP benefit formula, but disregarding certain limitations imposed by the Tax Code on the amount of compensation that may be considered in calculating an ERP benefit and the maximum benefit that may be provided by the ERP.  The benefit under the SERP is reduced by the benefit actually due under the ERP.  For purposes of determining his benefit under the SERP, the SERP provides that Mr. Ortiz has 10 years of Credited Service as of January 1, 2000 and earns 2 years of Credited Service for each year of continuous employment for the years 2000 through 2009.  Accordingly, if Mr. Ortiz remains employed by the Company through December 31, 2009, he will have 30 years of Credited Service.  If Mr. Ortiz is terminated for cause, he will receive no additional service credit for purposes of the SERP.  However, if Mr. Ortiz is terminated by the Company for any other reason, is constructively terminated or his termination is as a result of a change in control, his SERP provides for payment of an enhanced supplemental retirement benefit in lieu of the supplemental retirement benefit otherwise payable under the Officer Retention Plan.  Mr. Ortiz’ SERP also provides for payment of enhanced severance benefits in lieu of the severance benefits otherwise payable under the Non-Union Severance Plan.  The Non-Union Severance Pay Plan is discussed on page 35 and the Officer Retention Plan is discussed on page 35.

Retirement Tables

The following table shows the annual benefits that would be provided under the ERP and (in the cases of Messrs. Sterba and Ortiz) the SERPs to participants who retire at the indicated compensation and Credited Service levels and who elect to receive benefits, calculated on a straight-life annuity basis (i.e., payable over the participant’s life).  Benefits shown are maximum annual benefits payable at age 65 to participants who retire at age 65.  The amounts shown in the table are not subject to any deduction for Social Security benefits or other offset amounts.

Plan Benefit Table