Notice of Annual Meeting of Shareholders

Wednesday, May 28, 2008

9:00 a.m., Mountain Daylight Time

South Broadway Cultural Center

1025 Broadway SE

Albuquerque, New Mexico

April 28, 2008

Dear Shareholder:

You are cordially invited to attend the Annual Meeting of Shareholders of PNM Resources, Inc.   The meeting will be held on Wednesday, May 28, 2008, 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.

·                  Approve an amendment to PNM Resources, Inc. Employee Stock Purchase Plan.

·                  Ratify appointment of Deloitte & Touche LLP as independent public accountants for 2008.

·                  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 April 8, 2008, may vote at the meeting.

This proxy statement and proxy card are being distributed on or about April 28, 2008.  Whether or not you plan to attend the meeting, please complete and return the accompanying proxy card or vote by telephone or the Internet promptly, so that we can be assured of having a quorum present at the meeting and so your shares may be voted in accordance with your wishes.  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

GLOSSARY OF TERMS USED IN THIS PROXY

ii

PNM Resources, Inc.

Proxy Statement for 2008 Annual Meeting of Shareholders

Wednesday, May 28, 2008

SOME QUESTIONS YOU MAY HAVE REGARDING THIS PROXY STATEMENT

Why am I receiving these materials?

This proxy statement summarizes the information you need to know to vote at the 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 28, 2008.  For a complete listing of terms defined and used in this proxy statement, see the Glossary on page ii.

Who may vote at the Annual Meeting?

You may vote all of the shares of our common stock that you own at the close of business on April 8, 2008, the record date.  On the record date, PNM Resources had 76,917,037 shares of common stock outstanding and entitled to be voted on at the Annual Meeting.  You may cast one vote for each share of common stock held by you on all matters presented at the Annual Meeting.

What proposals will be voted on at the Annual Meeting?

The following three proposals will be considered and voted on at the Annual Meeting:

Proposal 1 – Elect Nine Directors

All nine current members of the Board are seeking election for one-year terms at this year’s Annual Meeting.  The Board recommends:

for election to the Board at the Annual Meeting.  Detailed information about these nominees is provided beginning on page 6.

If a nominee becomes unavailable for election, proxy holders will vote for another nominee proposed by the Board or the seat will remain vacant until the Board proposes another nominee.

Proposal 2 – Approve an Amendment to the PNM Resources, Inc. Employee Stock Purchase Plan

The Board is asking shareholders to approve amending the current Employee Stock Purchase Plan to increase the number of shares available for employee purchases under the plan by 180,000 shares to a total of 550,000 shares.  The plan allows employee participants to purchase PNM Resources stock on an after-tax basis at 95% of its fair market value.  The plan promotes employee share ownership in the Company and facilitates employee retention.

Proposal 3 – Ratify Appointment of Independent Public Accountants

The 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, 2008.

1

Representatives of Deloitte & Touche 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, the Audit Committee would reconsider its selection.

How do I vote my shares?

For your convenience, we have established four easy methods for voting shares held in your name:

Your shares will be voted in the manner you indicate.

What is a proxy?

A proxy is your legal designation of another person (the “proxy”) to vote on your behalf.  By completing and returning the enclosed proxy card or voting by telephone or the Internet, you are giving the proxy committee (Adelmo E. Archuleta, Julie A. Dobson, and Joan B. Woodard) appointed by the Board the authority to vote your shares in the manner you indicate on your proxy card.  If you sign and return your proxy card without indicating how you want your shares to be voted, the proxy committee will vote your shares as follows:

     FOR the election of the directors nominated,

     FOR the amendment to the PNM Resources, Inc. Employee Stock Purchase Plan, and

     FOR the appointment of Deloitte & Touche as independent public accountants for 2008.

Can I change my vote or revoke my proxy?

Yes.  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.

What happens if additional matters are presented at the Annual Meeting?

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 their judgment.  Shareholders attending the meeting will directly vote on those matters.

Why did I receive more than one proxy card?

You will receive multiple proxy cards if you hold your shares in different ways (e.g., joint tenancy, trusts, custodial accounts) or in multiple accounts.  Note that the proxy card for shares registered in your name will

2

include any shares acquired by employee purchases through the ESPP.  If your shares are held by a broker (i.e., in “street name”), you will receive your proxy card or other voting information from your broker, and you will return your proxy card or cards to your broker.  You should vote on and sign each proxy card you receive.

How do I vote my RSP shares?

If you participate in the RSP, our 401(k) plan for our employees, and shares have been allocated to your account under the PNMR Stock Fund investment option, then you will receive a separate vote authorization form and supplemental materials on voting instructions for these shares from the PNMR Corporate Investment Committee.  Thus, if you have shares allocated to your RSP account, you will need to vote your RSP shares with the RSP vote authorization form.

What constitutes a quorum and why is a quorum required?

A quorum of shareholders is necessary to conduct business at the Annual 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.  Abstentions, withheld votes, and broker non-votes will be counted as present for quorum purposes.

What vote is required to approve each proposal?

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, approve the amendment to the Employee Stock Purchase Plan, and ratify the appointment of independent public accountants.   Abstentions and withheld votes 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.

What is the difference between a “shareholder of record” and a “street name” holder?

These terms describe how your shares are held. If your shares are registered directly in your name with BNY Mellon Investor Services, the Company’s transfer agent, you are a “shareholder of record.” If your shares are held in the name of a brokerage, bank, trust or other nominee as a custodian, you are a “street name” holder.

What happens if I don’t give my broker voting instructions for my “street name” shares?

If you do not give your broker voting instructions, your brokerage firm may vote your “street name” 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 ratification of the appointment of Deloitte & Touche as independent public accountants for 2008 are considered routine matters for which brokerage firms may vote your shares without your voting instructions.

What is a broker non-vote?

A broker non-vote occurs when a broker is not permitted under NYSE rules to vote on a “non-routine” matter without instructions from the beneficial owner of the shares and no instruction is given.  The approval of Proposal 2 (Approve the Amendment to the Employee Stock Purchase Plan) is considered a non-routine matter and so 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.

How are votes withheld, abstentions and broker non-votes treated?

Votes withheld and abstentions are deemed as “present” at the Annual Meeting, are counted for quorum purposes, and will have the same effect as a vote against the matter.  Broker non-votes, if any, while counted for

3

general quorum purposes, are not deemed to be “present” with respect to any matter for which a broker does not have authority to vote.

Who may attend the Annual Meeting?

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 April 8, 2008.  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.

Can I vote my shares in person at the Meeting?

If you are a “shareholder of record,” you may vote your shares in person at the Meeting.  If you hold your shares in “street name,” you must obtain a proxy from your broker, banker, trustee or nominee, giving you the right to vote the shares at the Meeting.

Who pays the cost of this proxy solicitation?

The enclosed proxy is being solicited on behalf of PNM Resources’ Board of Directors.  This solicitation is being made by mail but also may be made in person, by telephone or via the Internet.  The Company has hired Georgeson Shareholder Communications, Inc., to assist in the solicitation for an estimated fee of $6,500, plus any out-of-pocket expenses.   PNM Resources will pay all costs related to solicitation.  BNY Mellon Investor Services is tabulating the vote.

Is this proxy statement the only way that proxies are being solicited?

No.  As stated above, the Company has retained Georgeson Shareholder Communications, Inc., to aid in the solicitation of proxy materials. In addition to mailing these proxy materials, certain Directors, officers or employees of the Company may solicit proxies by telephone, facsimile, e-mail or personal contact. They will not be specifically compensated for doing so.

Where can I find voting results of the Annual Meeting?

The final voting results will be published in our quarterly report on form 10-Q for the second quarter of fiscal year 2008.

Whom should I call with other questions?

If you have any further questions about voting your shares or attending the Meeting, please call our Investor Relations Department at 1-800-545-4425.

4

INTRODUCTION

PNM Resources is an investor-owned holding company of energy and energy-related businesses.  Its headquarters are in Albuquerque, New Mexico and it trades on the NYSE under the symbol “PNM.”

GOVERNANCE

In recognition of the importance of corporate governance to the proper management of the Company, 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 it believes 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 (more often if necessary) and recommending any necessary changes to the Board.

The Corporate Governance Principles document is attached as Appendix A, and can also be found on PNM Resources’ website at www.pnmresources.com.  The principles document sets forth key practices and addresses the following:

CODE OF ETHICS

The Company has adopted a code of ethics, Do the Right Thing-Principles of Business Conduct, which 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 Governance Department, PNM Resources, Inc., Alvarado Square, MS-2850, Albuquerque New Mexico 87158.  Do the Right Thing is also available on our website at www.pnmresources.com.  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 and Ethics Committee that are posted on the Company’s website at www.pnmresources.com. The Company also established an anonymous/confidential hotline through which employees and others may report concerns about the Company’s business practices.

OTHER GOVERNANCE POLICIES

Stock Option Grant Policy

The Board adopted the Stock Option Grant Policy on December 4, 2006 to govern the granting of all forms of equity compensation.  The policy was amended in February 2007 to set forth additional good governance procedures for making equity awards when the regular schedule for the grant of equity compensation falls within a black-out period for trading in the Company’s securities under PNM Resources’ Insider Trading Policy.  The Stock Option Grant Policy, as amended to date, is attached as Appendix B, and can also be found on our website at www.pnmresources.com.

The Company also took a proactive approach in conducting an internal audit review of past stock grant practices, and no issues relating to backdating or any other irregularities were identified in the audit review.

Related Person Transactions Policy

On February 13, 2007, the Board approved the “Policy and Procedures Governing Related Party Transactions,” attached as Appendix C to this proxy statement, and posted on our website at www.pnmresources.com.  The policy provides that all transactions with executive officers, directors or greater than 5% shareholders or any immediate

5

family member of any of the foregoing where the aggregate amount involved is expected to exceed $120,000 per year, are subject to pre-approval or ratification by the GPPC, or by the Board or another committee in the normal fulfillment of their respective charters and responsibilities. In determining whether to approve such transactions, the GPCC will consider, among other factors, the extent of the related person’s interest in the transaction; the availability of other sources of comparable products or services; whether the terms are no less favorable than terms generally available in unaffiliated transactions under like circumstances; the benefit to the Company; and the aggregate value of the transaction at issue.

PROPOSAL 1:  ELECT NINE DIRECTORS (PROPOSAL 1 ON YOUR PROXY CARD)

General Information

All nine members of the Board are seeking election for one-year terms at this year’s Annual Meeting.  There are no vacancies as the Board fixed the number of directors at nine, effective May 16, 2006.

The Director Service Policy provides that ordinarily a director will not serve for more than 12 years on the Board.  Robert M. Price has served as a director for 16 years.  The Board is recommending that Mr. Price be elected to serve an additional one-year term because Mr. Price’s continued service is in the best interests of the Company.   His extensive qualifications and experience are invaluable as the Company pursues its business plan.  In accordance with the Director Service Policy, referenced in this proxy on page 10, 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.

Charles E. McMahen resigned as a member of the Board effective August 21, 2007.  His board service has been sincerely appreciated.  Jeffry Sterba, our CEO, recommended Robert R. Nordhaus for Board consideration as a director candidate. The GPPC interviewed Mr. Nordhaus and subsequently approved his nomination for recommendation to the full Board. On September 18, 2007, the Board approved his nomination for election to the Board to fill the vacancy created by Mr. McMahen’s resignation.  There were no fees paid for any candidate recommendations.

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 GPPC, the nominating committee of the Board.  Alternatively, the seat will remain vacant if a substitute nominee is not selected prior to the Annual Meeting.

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

DIRECTORS NOMINATED THIS YEAR – TERM EXPIRING IN 2009

6

7

8

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

DIRECTOR INDEPENDENCE

In accordance with the Company’s Corporate Governance Principles, 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.    The Board examined all direct and indirect relationships of the non-employee directors with the Company and determined that all such relationships complied with the specific independence criteria under applicable law, including the NYSE listing standards.  In addition, other than service on the Board or Board committee, all other relationships were considered to be immaterial in amount and significance.

9

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 independent directors annually.  Dr. Joan B. Woodard currently serves as the presiding director.  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 2007, the full Board met eight times.  The independent directors held two regularly scheduled meetings in 2007.  Attendance in 2007 at full Board and committee meetings was 99.58%.

Directors are expected 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 2007 Annual Meeting held on May 22, 2007.

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-2822, 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 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-2822, Albuquerque, New Mexico 87158.

DIRECTOR SERVICE POLICY

On February 19, 2002, the Board adopted a revised Director Service Policy addressing various aspects of board service, retirement practices, terms of office and inside directors.  The current Director 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.

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, all comprised solely of independent directors.  Each committee has a written charter that addresses the committee’s purpose and responsibilities.  All charters attached to this proxy statement can be found at www.pnmresources.com, and are available in print to any shareholder who requests it.  The charters are in compliance with applicable NYSE Listing Standards.

A summary of the committee responsibilities is included on the following pages:

10

Audit and Ethics Committee

Finance Committee

11

Governance and Public Policy Committee

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 description 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:

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

12

Human Resources and Compensation Committee

*Charles E. McMahen served on the HRCC in 2007 until his resignation from the Board on August 21, 2007.

13

PNM Resources Common Stock Owned by Executive Officers and Directors

(As of March 31, 2008)

14

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

Except for the information related to the number of shares that Cascade may have the right to acquire in footnote (2) 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 April 15, 2008.

RELATED PERSON TRANSACTIONS

Since January 1, 2007, PNM Resources has not participated, and has no current plans to participate, in any transactions in which its directors or executive officers or any of their immediate family members have a material interest that is reportable under applicable SEC rules.  PNM Resources has participated in the following transactions with Cascade, a shareholder which owns more than 5% of our common stock as indicated in the table above.

15

Sale of Equity-Linked Units.  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 second largest holder of our common stock.  This investment and securities issuance was a key element in the financing assembled to fund the purchase of TNP Enterprises, Inc. and its subsidiaries, including Texas-New Mexico Power Company (“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 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.

EnergyCo.  In January 2007, PNM Resources and ECJV, a wholly owned subsidiary of Cascade, created EnergyCo, LLC to serve expanding U.S. markets throughout the Southwest, Texas and the West.  PNM Resources and ECJV each have a 50 percent ownership interest in EnergyCo, a limited liability company.  To fund startup expenses of EnergyCo, both members contributed $2.5 million to EnergyCo in the three months ended March 31, 2007.

On June 1, 2007, PNM Resources contributed its ownership of Altura to EnergyCo at fair value of $549.6 million (after the working capital adjustment described below). ECJV made a cash contribution to EnergyCo equal to 50% of the fair value amount, and EnergyCo distributed that cash to PNM Resources.  As provided under the contribution agreement, subsequent to June 1, 2007, an adjustment to the contribution amounts was made for changes in components of working capital between the date for which fair value was determined and closing.  The result of this adjustment was a payment by PNM Resources of $2.1 million.

EnergyCo has entered into a bank financing arrangement with a term of five years, which includes a revolving line of credit.  This facility also provides for bank letters of credit to be issued as credit support for certain contractual arrangements entered into by EnergyCo.  Cascade and ECJV have guaranteed EnergyCo’s obligations on this facility and, to secure EnergyCo’s obligation to reimburse Cascade and ECJV for any payments made under the guaranty, have a first lien on all assets of EnergyCo and its subsidiaries.  In June 2007, EnergyCo distributed $87.5 million to each of PNM Resources and ECJV from a long-term borrowing under this facility.

Effective August 1, 2007, EnergyCo completed the acquisition of the CoGen Lyondell Power Generation Facility (now known as Altura Cogen, LLC), a 614 MW natural gas-fired cogeneration electric and steam plant, located near Houston, Texas.  The purchase price of $477.9 million, after working capital adjustments, was funded through cash contributions of $42.5 million from each of PNM Resources and ECJV and the remaining amount was financed through borrowings under EnergyCo’s credit facility.

On August 2, 2007, PNM Resources announced that EnergyCo has agreed with NRG Energy, Inc. to jointly develop a 550 MW combined-cycle natural gas unit at the existing NRG Cedar Bayou Generating Station near Houston.  EnergyCo anticipates the construction of the project will be completed in the summer of 2009, at which time 275 MW of electricity will be available for sale by EnergyCo.  EnergyCo expects to fund its portion of the Cedar Bayou construction with borrowings under its existing credit facility. Once the project is complete, EnergyCo expects to arrange permanent financing of an appropriate mix of debt and equity.  PNM Resources does not anticipate making significant capital contributions to EnergyCo in connection with this project.

16

In addition to purchasing energy-related assets, EnergyCo could continue to grow by PNM Resources contributing existing unregulated assets and ECJV, in turn, matching those contributions with cash contributions, but any such contributions would be at the option of PNM Resources and ECJV.  PNM Resources and ECJV are evaluating the potential contribution to EnergyCo of PNM Resources’ ownership of the subsidiaries that hold the First Choice Power unregulated operations (“First Choice”) in Texas.

All of the above-described equity-linked units and EnergyCo transactions with Cascade were pre-approved by the full Board pursuant to the Policy and Procedures Governing Related Party Transactions discussed above on page 5.

DIRECTOR COMPENSATION

The Governance and Public Policy Committee recommends non-employee director compensation levels and stock ownership guidelines for review and approval by the full Board.  Of PNM Resources’ current directors, only Jeffry E. Sterba, the Chairman, President and CEO, is a salaried employee who receives no compensation for serving on the Board.

The GPPC seeks to recommend a reasonable compensation package that will attract and retain highly qualified non-employee directors.  The GPPC selects, weighs and reviews each element of director compensation on an annual basis to recommend a total compensation amount that approximate the 50^th percentile of non-employee director compensation in the similarly situated utility and energy companies comprising the S&P Mid-Cap Utilities Index, or Index.  The GPPC believes that the Companies comprising the Index are an appropriate peer group for director compensation because these utility and energy companies have revenues ranging from $0.5B to $12B with a median of $2.7B.  In addition, the GPPC believes that the median of director compensation awarded by the companies in the Index represents a reasonable comparative compensation level.  The composition of the Index, maintained and selected by Standard & Poors, varies from time-to-time.

On an annual basis, the GPPC directs the Corporate Governance Department of the Company to prepare a compensation benchmark analysis based upon:

The Corporate Secretary reviews the compensation benchmark analysis and also confers with PRM Consulting to assess the significance of various trend indicators.  The Corporate Secretary then provides the analysis to the GPCC together with a recommendation on any action to be taken on director compensation.

The only change made for the 2007 compensation (from the 2006 annual retainer) was to increase the annual Audit Committee Chair Fee from $4,000 to $10,000, in recognition of the significant additional time needed to fulfill these duties and responsibilities.  In December 2007, following another analysis of competitive director compensation using the sources mentioned above, the GPPC recommended and the Board approved increasing the amount of restricted stock rights awarded from 1,050 to 1,750 effective May 2008.  No other changes were made to the annual retainer for 2008.  The amount of restricted stock rights were increased, to bring equity compensation for our non-employee directors closer to the 50th percentile of the following companies comprising the Index as of early November 2007.

17

Non-employee directors receive their annual retainer in the form of cash and stock-based compensation as determined by the Board.  The annual retainer for 2007 was as follows:

In addition, 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.

(1)    Stock options and restricted stock rights granted under the PEP each vest in three equal annual installments beginning on the first anniversary of the grant date.  These awards are typically made at the annual meeting of directors, unless the meeting occurs during a black-out period for trading in the Company’s securities as specified in the Company’s Insider Trading Policy.  As set forth under the Stock Option Grant Policy, under those circumstances, the Board will either (a) schedule a special meeting after the expiration of the black-out period, (b) make awards pursuant to a unanimous written consent executed after the expiration of the black-out period, or (c) pre-approve the equity awards with an effective date after the expiration of the black-out period.  The date of the awards is the date on which the Board approves the awards, unless (i) the approval date is a non-trading day, in which case the date is the immediately preceding trading date or (ii) in the case of pre-approval during a black-out period, in which case the grant date is the first trading date after the expiration of the black-out period.  The exercise price of the stock option is equal to the closing price of the common stock on the New York Stock Exchange, or NYSE, on the date of the grant.   The PEP prohibits option re-pricing.

18

SUMMARY OF NON-EMPLOYEE DIRECTOR COMPENSATION IN 2007

The following table summarizes the total compensation paid or earned by each of the non-employee directors for the year ended December 31, 2007.

Director Compensation

1Jeffry E. Sterba, Chairman, President and Chief Executive Officer, is not included in this table, as he is an employee of PNM Resources and receives no compensation for serving on the Board.

2Represents the dollar amount of equity compensation expense recognized for financial statement reporting purposes for the fiscal year ended December 31, 2007 in accordance with SFAS 123R and thus includes amounts from awards granted in and prior to 2007. See Note 13 of the consolidated financial statements in PNMR’s Annual Report on Form 10-K for the year ended December 31, 2007 regarding assumptions underlying the value of equity awards. As of December 31, 2007, each non-employee director has the following number of restricted stock rights outstanding: A. E. Archuleta – 2,100; J. A. Dobson – 2,100; W. L. Hunt – 1,750; R. R. Nordhaus - 0; M. T. Pacheco – 2,100; R. M. Price – 2,100; B. S. Reitz – 2,100; J. B. Woodard – 2,100. The grant date fair value calculated in accordance with SFAS 123R of the 1,050 restricted stock rights awarded under the PEP to each director in May 2007 is $30,485.

3Represents the dollar amount of equity compensation expense recognized for financial statement reporting purposes for the fiscal year ended December 31, 2007 in accordance with SFAS 123R and thus includes amounts from awards granted in and prior to 2007. See Note 13 of the consolidated financial statements in PNMR’s Annual Report on Form 10-K for the year ended December 31, 2007 regarding assumptions underlying the value of equity awards. As of December 31, 2007, each non-employee director has the following number of options outstanding: A. E. Archuleta – 18,150; J. A. Dobson – 20,400; W. L. Hunt – 2,100; R. R. Nordhaus - 0; M. T. Pacheco – 18,150; R. M. Price – 14,650; B. S. Reitz – 24,150; J. B. Woodard – 18,150. The grant date fair value calculated in accordance with SFAS 123R of the 1,050 stock options awarded under the PEP to each director in May 2007 is $4,977.

4The options and restricted stock rights granted under the PEP 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 closing price of the common stock on the NYSE on the date of grant or immediately preceding trading day if the stock was not traded on the grant date. The Stock Option Grant Policy provides that for awards made on and after 2007, the grant date for awards approved on a non-trading date will be the immediately preceding trading day. As discussed below in “Stock Ownership Guidelines”, directors will hold seventy-five percent of the annual restricted stock award until they hold stock equal to the required multiple of annual cash retainer. This amount of restricted stock is held until six months after termination of board service.

5R. R. Nordhaus was not a member of the Board in May 2007 when the stock option and restricted stock rights were awarded. Mr. Nordhaus began Board service on September 18, 2007.

19

Additional Information About Fees Earned or Paid in Cash in 2007

1 The $6,333 paid to Ms. Dobson reflects her duties as Finance Committee Chair from January 1, 2007 to August 23, 2007. The amount also includes a prorated share for her election as Chair of the Audit Committee on August 23, 2007 (a position she currently holds).

2 The $1,333 paid to Mr. Hunt is the prorated Chair fee to reflect his duties as Finance Committee Chair from August 23, 2007 to December 31, 2007 (a position he currently holds).

3 Mr. Nordhaus was elected to the Board on September 18, 2007 and he received ¼ of the annual retainer.

STOCK OWNERSHIP GUIDELINES

The Board believes that directors should be shareholders and have a financial stake in the Company, to help ensure that director financial interests are aligned with the financial interests of the Company’s longer term shareholders. Accordingly, the Board requires that newly elected directors, before commencing board service, become shareholders in the Company, and that over time, directors attain a significant level of Company stock ownership.

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

According to the guidelines, within three years, directors should hold stock equal to two times the annual cash retainer.  Within five years, the amount of ownership should be five times the annual cash retainer.  Directors will hold seventy-five percent of the annual restricted stock award until the required multiple of the annual cash retainer is achieved.  This amount of restricted stock is held until six months after termination of board service. We believe these holding requirements are appropriate because they approximate the median of holding requirements found in the NACD survey and would require a reasonable amount of share acquisition in addition to the annual equity awards received by the directors. Similar stock ownership guidelines have been developed for executives and are discussed further below under “Executive Compensation Discussion and Analysis – Stock Ownership Guidelines.”

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.

20

PROPOSAL 2:  APPROVE AN AMENDMENT TO THE PNM RESOURCES, INC. EMPLOYEE STOCK PURCHASE PLAN  (PROPOSAL 2 ON YOUR PROXY CARD)

General Information

The Board is seeking shareholder approval to amend the PNM Resources Employee Stock Purchase Plan to increase the number of authorized shares available for employee purchases under the plan by 180,000 for a total of 555,000 authorized shares.

In 2003, the Company’s shareholders approved the original plan, which authorized the issuance of 250,000 shares (375,000 shares following the 3 for 2 stock split that occurred on June 11, 2004).  We anticipate that the requested additional 180,000 shares should cover employee purchases and dividend reinvestments under the plan for the next 3 years (i.e. through 2010).

In order to qualify the plan as  “noncompensatory” under SFAS 123R, the Board amended the original plan in May 2006 to provide that the purchase price is 95% of the fair market value on the purchase dates under the plan,  instead of 85% of the lesser of the fair market value at (1) the beginning of the offering periods or (2) the purchase dates.  The plan has been restated to incorporate the proposed amendment and the May 2006 amendment.

A copy of the proposed ESPP is attached to this proxy statement as Appendix H and is considered part of this proxy statement.  The following description of the ESPP is a summary.  Please refer to the Appendix H for a complete description of the ESPP and its terms.

Purpose

The ESPP currently allows employee participants to purchase our common stock on an after-tax basis at 95 % of its fair market value through payroll deductions.  We believe that employee ownership of our common stock is desirable for both our shareholders and our employees.  The ESPP provides a convenient and advantageous way for employees of the Company and its designated subsidiaries to purchase shares of common stock through payroll deductions pursuant to a plan that qualifies for beneficial tax treatment under Section 423 of the Tax Code.

Stock Subject to the ESPP

Under the ESPP, qualified employees may purchase shares of common stock through payroll deductions at a discount from market price, without incurring trading fees.  If approved, a maximum of 555,000 shares of common stock, subject to adjustments for stock splits and similar adjustments will be available for purchase under the ESPP.  Ordinarily, the common stock issued under the ESPP will be from newly-issued shares of PNM Resources common stock, except that shares acquired with reinvested cash dividends are ordinarily purchased on the open market and are acquired at no discount from the market price.

Plan Administration

The ESPP is administered under the direction of the Human Resources and Compensation Committee of the Board, which may delegate some of its duties and authority to one or more employees of PNM Resources.  PNM Resources pays all expenses incident to the operation of the ESPP, but does not pay expenses, commissions or taxes incurred in connection with an employee’s request to sell shares held in his or her ESPP account.

Eligibility

Participation in the ESPP is voluntary.  To be eligible to participate in the ESPP an employee must (i) have been employed by PNMR or a designated subsidiary for a minimum of 6 months, (ii) customarily work at least 20 hours per week and 5 months per calendar year, and (iii) not own 5% or more of the total combined voting power or value of all classes of stock of PNMR or a parent or subsidiary of PNMR.  Currently, there are approximately 2,900 eligible participants.

21

Offerings and Purchase Dates

Separate six-month offering periods begin on January 1 and July 1 of each year and end, respectively, on June 30, and December 31. The first offering period began on July 1, 2003.

During the offering periods, participating employees accumulate funds in an account used to buy PNM Resources common stock through payroll deductions. Payroll deductions accrue at a rate of not less than 1% and not more then 10% of the employee’s compensation during each payroll period in an offering period. An employee’s compensation under the ESPP includes pre- tax contributions to employee benefit plans but excludes bonuses and other miscellaneous payments to the employee.

Each offering period will include two purchase dates, one every three months, at which time the purchase price is determined and the participating employee’s accumulated funds are used to purchase the appropriate number of shares of common stock including fractional shares. The purchase dates are March 31 and June 30 for each offering beginning on January 1, and September 30 and December 31 for each offering beginning on July 1.

Purchase Price

The purchase price per share of common stock acquired with accumulated payroll deductions is 95% of the fair market value of the common stock on the purchase date.

Effect of Termination

Employees have no right to acquire shares under the ESPP upon termination of their employment for any reason, including death or retirement. All accumulated payroll deductions not previously used to purchase shares under the ESPP will be paid without interest to the employee or to his or her estate.

Amendment and Termination of the ESPP

The Human Resources and Compensation Committee may amend or terminate the ESPP, except that the committee may not take any action without shareholder approval if approval is required by Section 423 of the Tax Code or by applicable law or New York Stock Exchange rules.

Federal Income Tax Consequences

PNM Resources intends that the ESPP qualify as an “employee stock purchase plan” under Tax Code Section 423. The following discussion summarizes the material federal income tax consequences to PNM Resources and participating employees in connection with the ESPP under existing applicable provisions of the Tax Code and the accompanying Treasury Regulations. The discussion is general in nature and does not address issues relating to the income tax circumstances of any individual employee. The discussion is based on federal income tax laws in effect on the date of this proxy statement and is, therefore, subject to future changes in the law, possibly with retroactive effect. The discussion does not address the consequences of state, local or foreign tax laws.

Under the Tax Code, PNM Resources is deemed to grant employee participants in the ESPP an “option” on the first business day of each offering period to purchase as many shares of common stock as the employee will be able to purchase with the payroll deductions credited to his or her account during the offering period. On the last day of each three-month purchase period, the purchase price is determined and the employee is deemed to have exercised the “option” to purchase shares of common stock with his or her accumulated payroll deductions.

The required holding period for favorable federal income tax treatment upon disposition of common stock acquired under the ESPP is two years after the first business day of an offering period. When the common stock is disposed of after this period (a “qualifying disposition”), the employee realizes ordinary income to the extent of the lesser of (a) 5% of fair market value of the common stock on the first business day of the offering period or (b) the actual gain realized. All additional gain recognized on a qualifying disposition will be taxed as long-term capital gain. If the shares are sold and the price is less than the purchase price, there will be no ordinary income. Instead, the employee will have a long-term capital loss for the difference between the sale price and the purchase price.

22

When an employee sells the common stock before the expiration of the required two-year holding period (a “disqualifying disposition”), the employee recognizes ordinary income to the extent of the difference between the price actually paid for the common stock and the fair market value of the common stock at the purchase date, regardless of the price at which the common stock is sold. The difference, if any, between the proceeds of sale and the fair market value of the stock at the date of purchase is treated as a capital gain or loss (long-term if shares are held for more than the applicable holding period).

Even though an employee must treat part of his or her gain on a qualifying disposition of the common stock as ordinary income, PNM Resources may not take a tax deduction for the amount. However, if an employee makes a disqualifying disposition, the amount of income that the employee must report as ordinary income qualifies as a tax deduction for PNM Resources for the year of the disposition.

ADDITIONAL AMENDED PLAN BENEFITS INFORMATION

The following table provides information with respect to benefits received by or allocated to the following individuals and groups under the proposal to amend the Employee Stock Purchase Plan to increase the number of authorized shares of our common stock available for use under the plan by 180,000.

* The ultimate dollar value of benefits under the proposed Amended and Restated Employee Stock Purchase Plan cannot be determined at this time, since the ultimate value will depend upon whether an individual enrolls in the plan and if so: (1) the amount of payroll deduction selected by the participant and (2) market conditions existing from time to time. As described above, participants receive a discount of 5% off the fair market value purchase price for shares acquired under the plan.

The Board of Directors unanimously recommends a vote FOR approval of the amendment
to the PNM Resources Inc. Employee Stock Purchase Plan.

23

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 four non-employee directors: Adelmo E. Archuleta, Julie A. Dobson, Woody L. Hunt and Robert M. Price.  Former director Mr. Charles E. McMahen chaired the Audit Committee through August 21, 2007.  Upon his resignation, Ms. Dobson was elected and currently serves as chair.  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 and Mr. Hunt 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 D 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 principles 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 service.

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

Audit Committee Report.  The Audit Committee Report is included in this proxy statement to comply with Item 407 (d)(3) of the 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 twelve times during 2007.  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), the Company’s internal auditors and the Company’s internal General Counsel, 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 accountants all consolidated annual and quarterly financial statements prior to their issuance.  During 2007, 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. 114 (The Auditor’s Communication With Those Charged With Governance) 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.

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 issuing a report.  The Audit Committee’s responsibility is to monitor and oversee these processes.

24

The Audit Committee monitors the performance of the Company’s internal audit function, reviews 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 LLP (“Deloitte & Touche”) to serve as independent accountants for fiscal year 2007, subject to shareholder approval.  Shareholder approval was obtained at the May 2007 Annual Shareholders meeting.  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, including considering the issuance of a request for proposals from independent accountants.  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 pre-approved budget 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.  The types of services approved by the Committee for non-audit fees are as follows:  employee benefit plans; consultations related to adoption of new accounting or auditing pronouncements, disclosure requirements, or other regulations; and SEC and regulatory compliance.

The Audit Committee 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.

Based on the Audit Committee’s discussions with management and the independent accountants referred to above, 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, 2007 for filing with the SEC.

25

INDEPENDENT AUDITOR FEES

Audit Fees for 2007 and 2006

The following table represents aggregate fees billed to the Company for fiscal year ended December 31, 2007 and 2006 by Deloitte & Touche, the Company’s principal accounting firm.

The Audit 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 3:  RATIFY APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS (PROPOSAL 3 ON YOUR PROXY CARD)

The Board is recommending that the shareholders ratify the selection of Deloitte & Touche as independent public accountants for 2008.

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 2008.  The Board agrees with the Audit Committee’s recommendations, as described in the Audit Committee report contained in this proxy statement.

Representatives of Deloitte & Touche will be available at the Annual Meeting where they will have the opportunity to make statements and answer questions.

The Board of Directors unanimously recommends a vote FOR the appointment of Deloitte
& Touche LLP as independent public accountants for fiscal year 2008.

26

EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

Objectives of Our Executive Compensation Programs

Our executive compensation program’s fundamental objective is to attract, motivate and retain qualified and talented executives to help ensure that we achieve our financial and non-financial objectives.  In so doing, we must balance the interests of all of our stakeholders (shareholders, customers, employees and our broader community, which includes those with a stake in our environment and the actions we can take to improve the environment).  Although we provide each element of total compensation for different reasons, our philosophy is that total direct compensation (the sum of base salary, annual cash incentive awards and long term cash and equity incentive awards) should vary based on the scope and impact of each executive’s responsibilities and should be based on that executive’s performance, as determined by multiple individual, business unit, and corporate performance measures.

Among the factors considered by the Compensation Committee in setting compensation are market competitiveness, company financial and operating results, including the operating performance of our electric generation plants and the delivery of reliable and efficient utility service, internal equity, past practice, experience and individual performance.  The weight given each factor may differ from year to year, and may differ among individual named executive officers in any given year.  For example, when recruiting Ms. Patricia Collawn to be Utilities President in June 2007, market competitiveness, experience and providing compensation designed to replace retirement and equity benefits that she gave up to join us weighed more heavily in determining her starting compensation.  In contrast, when considering yearly adjustment decisions, competitive benchmark analysis, financial and operating results and internal equity generally factor more heavily into the analysis.

In addition, we design the different elements of long-term incentive compensation to better align the executive’s interests with our longer-term shareholder interests.  This philosophy applies to all of our employees such that an employee’s compensation variability (potential at-risk compensation and reward) increases as the employee’s level of responsibility and ability to have an impact on our results increases.  Under this philosophy, executive officers tend to have a higher percentage of at-risk compensation (as a percent of their total direct compensation as well as in gross dollars) and the greatest potential for reward.

Our named executive officers consist of our Chairman, President and Chief Executive Officer (CEO), our Executive Vice President and Chief Financial Officer (CFO) and the three other highest paid current executive officers and two former executive officers who would have been among the three most highly compensated employees had they been employed by us at the end of 2007.

Governance of Our Executive Compensation Programs

The primary responsibility and authority for our executive compensation programs rests with the Human Resources and Compensation Committee of the Board, which we refer to as our Compensation Committee or HRCC. The Compensation Committee sets and reviews at least annually the objectives of our executive compensation programs and our underlying compensation philosophy.  This determination and oversight includes reviewing the design of compensation programs to ensure that the programs function as intended and that compensation is competitive, fair, and an accurate reflection of the executive’s performance. Underlying the programs’ design is the Compensation Committee’s philosophy that it should manage our executive compensation costs to ensure that we continue to attract and retain valuable executive talent, and that substantial portions of those costs are incurred only when we prosper and the interests of shareholders, customers, and other stakeholders are met.

The Compensation Committee considers and recommends equity compensation plans for eligible participants to the full Board for approval and compensation for the CEO to the independent directors for their approval.  The Compensation Committee oversees and approves the annual compensation levels and compensation procedures and programs for all other officers and other highly compensated employees.  The Compensation Committee also oversees and approves guidelines for all other employee compensation programs.

In 2007, the Compensation Committee reviewed and approved our executive compensation program objectives and philosophy, each element of total direct and indirect compensation payable to our executives under the guidelines and mechanics of the various compensation plans, and established the short-term and long-term compensation guidelines and compensation targets for our executives for 2008 consistent with the Compensation Committee’s compensation philosophy and business objectives.  In the course of this review, the Compensation Committee reaffirmed the following principles:

27

·                  compensation will be both competitive, cost effective and internally equitable;

·                  compensation will be related to performance;

·                  compensation will align executives’ interests with our customers, shareholders and other stakeholders’ interests; and

·                  compensation will be subject to review and evaluation by an independent compensation consultant.

Role of Independent Compensation Consultant.  To ensure that executive compensation will be subject to independent review and evaluation, the Compensation Committee retains the services of an outside consulting firm.  The outside consulting firm assists the Compensation Committee with its annual review of its compensation philosophy and determination of each of the elements of total compensation.  Under its Charter, the Compensation Committee has the authority to retain directly a compensation consultant on its own terms and receives sufficient Company funds to do so.  Accordingly, since 2003, the Compensation Committee has engaged its own outside compensation consultant.  Initially, the Compensation Committee retained Aon Employee Benefits and Compensation Consulting. In 2005, when our primary contact at Aon, Mr. Peter Kennedy, formed his own firm, PRM Consulting Group, which we refer to as PRM Consulting, the Compensation Committee decided to retain it to advise the Compensation Committee on all matters related to executive compensation.  PRM Consulting provides the Compensation Committee with relevant market data and alternatives to consider when making executive compensation decisions.  PRM Consulting attended all Compensation Committee meetings held in 2007 at which executive compensation was determined.  PRM Consulting’s services are subject to the Compensation Committee’s Policy Governing Fees and Services for Executive Compensation Consultants.  The Compensation Committee annually reviews the performance of PRM Consulting to ensure compliance with this policy.  PRM Consulting does not provide services to PNM Resources without the prior consent of the Compensation Committee.

Role of Executive Officers in Determining Executive Compensation.  The Compensation Committee considers and recommends, and all of the independent members of the Board approve, all elements of CEO compensation.  Other than reviewing the CEO’s self-evaluation of his own performance, the Compensation Committee does not receive any input from any executive officer with respect to the CEO’s compensation.  In addition, the Compensation Committee approves all compensation decisions for our executives after receiving evaluations from the CEO.  The CEO evaluates the performance of all executive officers (except Thomas G. Sategna and E. James Ferland) and provides recommendations to the Compensation Committee for the base salaries of the executive officers.  In addition to the CEO’s evaluation, the Utilities President evaluates the performance of and provides recommendations for the base salary of Mr. Ferland, SVP Utility Operations.  The CFO evaluates the performance of and provides recommendations for the base salary of Mr. Sategna, the Vice President and Corporate Controller and the CEO uses the input of the Utilities President and the CFO in making his recommendations to the Compensation Committee regarding Messrs. Ferland and Sategna’s base salary.  In determining how to allocate the pool of available equity incentive awards in 2008 for vice presidents, the Compensation Committee also considered the collective recommendations of all senior officers, who evaluated each vice president’s performance and ability to have a positive impact on our performance during a round table session held in January 2008.

Employees of our People Services department (who are managed by the Senior Vice President and Chief Administrative Officer) provide information and make recommendations to the Compensation Committee on the implementation and design of compensation and benefit programs.  Such information and recommendations are based in part upon information and advice received from management’s compensation consultants, Hewitt Associates and Towers Perrin, who the Company retains to provide advice and analysis on a broad range of compensation issues. PRM Consulting also provides the Compensation Committee with recommendations and analyses for executive compensation that are duly considered by the Compensation Committee in making its executive compensation decisions.

Compensation Committee Reference Points for Assessing Executive Compensation Annually

In addition to its review of executive and overall company performance, the Compensation Committee avails itself of a number of annual processes and tools to further analyze and evaluate executive compensation.  These include:

·                  Tally Sheets,

·                  Internal Compensation Equity Ratios, and

·                  External Compensation Comparison Sources and Peer Groups.

28

Tally Sheets.  Before making any adjustments to any element of executive compensation for any of our executives, the Compensation Committee analyzes tally sheets for the last two fiscal years showing each element of compensation, including base salary, short-term annual cash incentive awards and long term cash and equity awards (including threshold, target and optimal levels and, as applicable, actual levels), perquisites, retirement, health and welfare, severance and change-in-control benefits, for each executive officer.  Our People Services Department prepare these tally sheets to assist the Compensation Committee in determining whether annual compensation levels for executives continue to be within the appropriate median levels of our peers and are internally consistent and equitable.  In addition, we use tally sheets to determine the effect of adjusting one or more components of compensation on total compensation.

The Compensation Committee made its compensation decisions for 2007 and 2008 after fully considering all elements of compensation.  Since each element of compensation has a specific purpose, the Compensation Committee generally evaluates each element against that purpose, in relation to competitive practices, internal equity and performance.  The Compensation Committee endeavors to review each element of total compensation independently from the other elements.  For example, the Compensation Committee would not reduce an incentive payment based on an officers’ performance if it determined that a retirement benefit was too high.  Instead, the Compensation Committee would take steps to bring the retirement benefit in line with competitive and equitable guidelines.

As discussed in detail below, for 2007, even though officers met their individual goals under the 2007 Officer Incentive Plan, or OIP, the Compensation Committee determined not to make any awards under the OIP.  The Compensation Committee did not base this decision on a determination that such awards were too high.  Rather, the Compensation Committee exercised negative discretion not to award any incentive compensation under the OIP because our overall performance and financial goals were not met and we had to make reductions in our workforce.

Internal Pay Equity Analysis.  The Compensation Committee believes that executive compensation should be internally consistent and equitable.  Thus, PRM Consulting provides the Compensation Committee with an annual internal pay equity analysis that compares the compensation of the CEO relative to other named executive officers, executive officers, officers and employees.

The Compensation Committee considered ratios summarizing these various group compensation comparisons and determined that compensation levels were internally equitable.  The ratios helped to demonstrate to the Committee the underlying logic and symmetry of our salary structure, which defines for different levels of equally valued positions a series of salary ranges with set minimum and maximum salaries.  The ratios are consistent with the incremental percentage progressions between adjacent salary ranges.  Each salary range also reflects, at its midpoint, the median competitive market rates for all positions assigned to the range. The Compensation Committee also asked PRM Consulting to draft a white paper on executive compensation philosophy and principles for decision-making, which was discussed by the Compensation Committee during two separate teleconferences with PRM Consulting.  The compensation white paper was also discussed and reviewed by all of our directors at our annual director education session, a session held annually to review compensation philosophy, regulatory development, trends and other critical compensation topics.  The Compensation Committee considered the relative importance of internal equity in the determination and delivery of executive compensation.  The Compensation Committee concluded that an executive’s compensation should be internally equitable as long as this level of compensation was also supported by good performance.  The Compensation Committee also considers compensation adjustments appropriate to achieve internal equity, provided that these adjustments are also consistent with levels of responsibility, competitive benchmarks, and with performance.  For example, the only executive who received a salary increase in 2008 was an officer promoted to the SVP level in 2007 because otherwise her 2008 base salary would have been below the competitive benchmark and below the salary level of several vice presidents.

Compensation Comparison Sources.  PRM Consulting provides the Compensation Committee with an annual benchmark analysis of total direct compensation (base salary, annual cash incentive awards and long-term cash and equity incentive awards) based on:

·                  the Towers Perrin Compensation Database, which reports data on approximately 100 utility and energy companies;

·                  the Watson Wyatt’s Executive Compensation Service Top Management Report’s utility sector data, which PRM Consulting uses to supplement the Towers Perrin Compensation Database for the purpose of creating a trend line comparative analysis of pay and performance over a multi-year period; and

29

·                  compensation data in individual proxy statements filed by similarly situated companies in the peer groups discussed below.

Peer Groups:  The Compensation Committee’s peer group selection criteria are publicly traded utility and energy companies considered logical competitors for executive talent, generally between one-half and three times our size or otherwise within a similar scope and range in terms of revenues, the number of employees and similar criteria. In 2007, the Compensation Committee considered compensation and performance data from the following two peer groups: a Peer Group of the 23 companies listed below used consistently between 2003 and 2007 and the group of  companies comprising the S&P Midcap 400 Utilities Index, or Index, which is used for total shareholder return, or TSR, comparisons under the performance cash long-term incentive plan.  The Compensation Committee periodically evaluates the composition of the peer groups to ensure that each company within a peer group, and each peer group, continues to satisfy the above peer group selection criteria.  For example, in 2006, the Compensation Committee also compared our executive compensation amounts to a third peer group consisting of a high-performing group of eleven utilities that achieved total shareholder return amounts in excess of 10% over a three year period.  Two of these eleven utilities were also in the Index and the Peer Group listed below.

The Compensation Committee also discussed whether either one of the two main peer groups (Peer Group and Index) should be abandoned in favor of the other so that only one peer group was being used for multiple purposes.  The Compensation Committee decided to continue using two peer groups because each addressed a specific requirement for which year-to-year consistency was important, and because there is already substantial overlap between the two peer groups.  The Committee reasoned that it has used the 23 company Peer Group consistently since 2003 as one reference point for reviewing competitive executive compensation market rate levels in a given year and for year-to-year changes in levels relative to company performance. Abandoning that peer group for another would make it more difficult to draw conclusions about year-to-year trends relative to performance and require several years with the new peer group to establish a methodologically viable trend. The Committee further reasoned that the Company uses the Index peer group for the specific purpose of having an independently derived index of TSR with which to compare the Company’s TSR for the purpose of determining awards, if any, under the long term performance cash plan.  To abandon this Index for that purpose would simply raise questions about motives, disrupt the consistency of having the same peer group used to measure annual outcomes from rolling three-year performance cycles, and undermine the arms length nature of having an independent third party, Standard & Poors, determine the exact composition of the Index.

The main Peer Group used for compensation and performance comparison purposes between 2003 and 2007 consists of the following 23 companies:

Fourteen of these Peer Group companies (61%) are also in the Index.

The composition of the Index varies from time-to-time. We receive Index updates from Standard & Poors, including calculations of TSR for the Index peer group.  For the 2005-2007 performance period under the long term performance cash program, our TSR was compared to the TSR of the following companies comprising the Index as of January 1, 2005:

30

Indirect compensation is more difficult to benchmark because of the variety and complexity of benefit plans among companies.  The Compensation Committee’s goal is to be in the middle of the range of possibilities based upon PRM Consulting’s analysis of information from the following comparison sources:

·                  the Towers Perrin Compensation Database,

·                  the U.S. Chamber of Commerce Employee Benefits Survey,

·                  Watson Wyatt’s Survey of Perquisites and Supplemental Benefits, and

·                  the proxy filings for the companies in the Peer Group and any other peer group selected, from time-to-time, by the Compensation Committee for additional comparison.

For example, the Compensation Committee designs the change-in-control benefits to be consistent with what it believes is most prevalent among the above comparison sources.

Instances where any element of compensation exceeds or falls short of the 50th percentile by more than an expected range to account for typical survey sample variability (approximately plus or minus 15% of the 50th percentile) are identified by the Compensation Committee for further analysis.  For example, when the Compensation Committee discovered that retirement benefits for executives fell substantially below the 50th percentile, the Compensation Committee increased the ESP II supplemental target contributions designed to achieve competitive replacement ratios as discussed below on page 37.

Analysis of Elements of Compensation

The basic elements of total executive compensation include total direct compensation for continuing employment as well as total indirect compensation, which may be payable following termination of employment.  Total direct compensation consists of the following elements:

·                  base salary,

·                  short-term annual cash  incentive awards; and

·                  long-term cash and equity incentive awards.

The elements of indirect, post-termination compensation for executives are as follows:

·                  retirement benefits;

·                  severance benefits; and

·                  benefits triggered from loss of employment due to a “Change in Control”.

Each element of direct compensation for executives is generally selected and weighted to provide a targeted total compensation value that approximates the 50th percentile, or median, of executives in comparable positions within other similarly situated companies based upon PRM Consulting’s annual benchmark analysis discussed above under “Compensation Comparison Sources”.  In addition to assuring that our compensation levels are within the median of our peers, the Compensation Committee also ensures that executive compensation is internally consistent and equitable as discussed above under “Internal Pay Equity Analysis”.  In addition, the Compensation Committee does

31

not apply a rigid formula to each of the named executive officers with respect to the apportionment of various components of compensation.

Base Salary.  Base salary is primarily fixed compensation for effectively discharging the duties and responsibilities of each executive’s position and is initially set to approximate the 50th percentile, or median, of base salaries for comparable executive benchmark jobs in similarly situated companies.  The Compensation Committee relates base salary adjustments to individual executive performance through the performance appraisal process.  This process sets forth goals for each executive to achieve each year, and includes factors to evaluate various leadership effectiveness competencies.  Base salary adjustments are also influenced by whether an executive’s salary is determined to be either higher or lower than competitive levels.  The CEO evaluates the performance of direct reports and presents recommendations for base salary adjustments to the Compensation Committee for approval each year.  In addition to considering the results achieved by the executive, comparison compensation survey data, PRM Consulting and CEO recommendations, the Compensation Committee also considers each executive’s scope of responsibilities and degree of experience, and assesses his or her future potential to affect Company performance.  The Compensation Committee recommends any CEO base salary adjustment to the independent directors for approval based on results of the CEO’s performance evaluation (each independent director of the Board evaluates the CEO’s performance based on a number of factors and goals) and the CEO’s current salary in relation to the salaries of the CEOs in the Peer Group.

The Compensation Committee approved the 2007 base salaries for all executives in February 2007.  The Compensation Committee also recommended, and the independent directors approved, the 2007 base salary for the CEO in February 2007.  All of these salaries became effective on April 7, 2007 for the subsequent 12 months.  The Compensation Committee recommended a modest increase of $35,000, or 4.66%, to the CEO’s base salary because his salary trailed his peers and due to the Board’s assessment of CEO performance at the Optimal performance level for 2006.  The salary adjustments approved by the Compensation Committee for 2007 are shown in the table below with accompanying footnotes explaining any increase amounts relating to changes in job duties and responsibilities.

In February 2008, the Compensation Committee determined that, in light of our ongoing efforts to reduce costs, it would not increase any 2008 base salaries for named executive officers and recommended no adjustment to the CEO salary to the independent directors.  The Compensation Committee did increase the base salary of one officer who we promoted to the senior vice president level in 2007.  The Compensation Committee determined that all executive base salaries were within an appropriate range of the 50th percentile of the Peer Group.

The table below shows how the Compensation Committee adjusted the 2007 base salaries and shows the current 2008 base salaries for all of the named executive officers:

(a) Ms. Collawn joined us on June 25, 2007.  The Compensation Committee approved her starting base salary of $440,000 per year in May 2007.

(b) Effective April 7, 2007, Mr. Eldred received a base salary increase of $15,000, or 4.76%, making his base salary $330,000.  On July 20, 2007, the Board promoted Mr. Eldred from “Senior Vice President and Chief Financial Officer” to “Executive Vice

32

President and Chief Financial Officer” and the Compensation Committee increased his 2007 annual base salary from $330,000 to $400,000, effective July 23, 2007, to reflect his increased responsibilities of overseeing our activities as a co-owner of EnergyCo, LLC.

(c) In 2007, Mr. Real received a discretionary lump sum payment of $10,000 in lieu of any adjustment to his 2006 salary.  Mr. Real retired on September 6, 2007.

Short-Term Annual Cash Incentive Awards.  Annual cash incentive awards focus our named executive officers attention on the achievement of annual financial and operating goals, including the provision of reliable and efficient utility service.  The Compensation Committee sets annual cash incentive award targets to approximate the 50th percentile of such incentive opportunities in comparable companies set forth in the Peer Group and ties these opportunities to performance goals that the Compensation Committee believes are challenging to achieve.  Actual payment of annual incentive compensation is generally only made if we achieve our threshold annual financial and operating performance goals (to align the executive interests with the customers and shareholders’ interests), and is further influenced up or down by the achievement of business unit goals, and individual performance.

In December 2006, the Compensation Committee approved the OIP.  The OIP’s purpose was to motivate and reward executives for their contributions to our performance by tying a significant portion of their annual cash compensation to our annual performance.  Although our named executive officers could earn 20% of the OIP award opportunity by achieving certain individual goals regardless of our actual performance, 80% of each participant’s OIP award opportunity was based on achieving adjusted corporate earnings per share targets (“Incentive EPS”).  The Compensation Committee generally adjusts the earnings per share results to determine Incentive EPS by eliminating the effect of certain items on earnings results.  The Compensation Committee believes that Incentive EPS better represents the underlying growth of our core business in the award year.  The Compensation Committee established Incentive EPS targets solely for measuring performance under the OIP and these targets have no effect on, and are not necessarily identical to, any earnings guidance that we may have announced.  The threshold level of individual and Incentive EPS performance was set based on a level of performance that was believed to be achievable. The target level of individual and Incentive EPS performance was set based on a level of performance that was believed to be aggressive, but obtainable. The maximum level of individual and Incentive EPS performance was set based on a level of performance that was believed to be realizable upon the actualization of exceptional performance.  The OIP awards were subject to further modification (minus 20% to plus 10%) based on the actual 2007 debt coverage ratio of cash based earnings to total debt.

The Incentive EPS award enhancement opportunities were as follows:

Thus, the ranges of the potential amounts payable under the OIP were as follows: