ITEM 1.  BUSINESS

THE COMPANY

PNM Resources, Inc., the Holding Company, was incorporated in the State of New Mexico on March 3, 2000.  The Holding Company's principal subsidiary, PNM, was incorporated in the State of New Mexico on May 9, 1917.  Upon the completion on December 31, 2001 of a one-for-one share exchange between PNM and the Holding Company, the Holding Company became the parent company of PNM.  Prior to the share exchange, the Holding Company had existed as a subsidiary of PNM.  The new parent company began trading on the New York Stock Exchange under the same PNM symbol beginning on December 31, 2001.

This filing for PNM Resources, Inc. and Subsidiaries and PNM is presented on a combined basis.  The Holding Company and PNM and Subsidiaries have their principal offices at Alvarado Square, Albuquerque , New Mexico 87158 (telephone number 505‑241‑2700).  The Holding Company is an investor-owned holding company of energy and energy-related companies.  PNM is a public utility primarily engaged in the generation, transmission, distribution, sale and marketing of electricity, and in the transmission, distribution and sale of natural gas within the State of New Mexico.  Currently, the business of PNM constitutes substantially all of the business of the Holding Company and its subsidiaries.  Therefore, the historical financial results and results of operations of PNM are virtually identical to the consolidated results of the Holding Company and all its subsidiaries.  For ease of discussion, this report may use the term "Company" when referring to PNM or when discussing matters of common applicability to the Holding Company and PNM. 

Effective December 30, 2004, the Holding Company became a registered holding company under PUHCA.  The Holding Company also created a subsidiary called PNMR Services Company, which began operating on January 1, 2005, subject to final approval by the SEC.  A registered holding company typically provides shared services to itself and its subsidiaries through a services company.  The Holding Company's status as a registered holding company will not change the utility operations of the Company.

As it currently operates, the Company's principal business segments, whose operating results are regularly reviewed by the Company's management, are Utility Operations and Wholesale Operations ("Wholesale").  Utility Operations include Electric Services ("Electric"), Gas Services ("Gas") and Transmission Services ("Transmission").  The Company allocates its business and results between the Electric and Wholesale segments for financial reporting purposes based on the asset allocations mandated in the Global Electric Agreement (see Note 14 - "Commitments and Contingencies - Global Electric Agreement" in the Notes to Consolidated Financial Statements).  Electric consists of the generation and distribution of electricity for retail electric customers in New Mexico.  Gas consists of the transportation and distribution of natural gas to end-users.  Transmission consists of the transmission of electricity for third parties as well as for Electric and Wholesale.  Wholesale consists of the generation and sale of electricity into the wholesale market based on three product lines: long-term contracts, forward sales and short-term sales.  The Company has sources of power from property it owns or leases and power purchased by the Company through various long-term PPAs.  For the year ended December 31, 2004, the Company had a 2,529 MW generation capacity from these sources.  The plants owned by the Company are available through joint dispatch to support service to the retail customers of PNM. 

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Financial information relating to amounts of sales, revenue, net income and total assets of the Company's reportable segments is contained in "Part II, Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2  - "Segment Information" in the Notes to Consolidated Financial Statements.

On July 25, 2004, the Company announced the proposed $1.024 billion acquisition of TNP, including its principal subsidiaries, TNMP and First Choice Power.  The Company expects the proposed TNP acquisition to be accretive to its earnings and free cash flow in the first full year after closing, which is expected in the second quarter of 2005.  (See "Acquisitions - Proposed TNP Acquisition" in "Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations" and Note 20 - "Proposed TNP Acquisition" in the Notes to Consolidated Financial Statements.)

COMPANY WEBSITE

The Company's internet address is http://www.pnm.com.  The contents of this website address are not a part of this Form 10-K.  The Company's filings with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, are accessible free of charge at http://www.pnm.com as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC, and, upon request, are available in print from the Company free of charge.  Additionally, the Company's Corporate Governance Principles, code of ethics ( Do the Right Thing-Principles of Business Conduct ) and charters of the Company's Audit and Ethics Committee, Governance and Public Policy Committee, Human Resources and Compensation Committee and Finance Committee are available on the Company's website at http://www.pnm.com/governance and such information is available in print, without charge, to any shareholder who requests it.

UTILITY OPERATIONS

Electric

The Company provides jurisdictional retail electric service to a large area of north central New Mexico, including the Cities of Albuquerque and Santa Fe, and certain other areas of New Mexico. The largest retail electric customer served by the Company accounted for approximately 8.6% of the Company's total retail electric revenues for the year ended December 31, 2004.

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Weather-normalized retail electric load growth was 3.3% in 2004.  The Company's system peak demands for its retail customers and firm requirements customers in the summer and the winter for the last three years are shown in the following table:

Electric holds long-term, non-exclusive franchise agreements for its electric retail operations, with varying expiration dates.  These franchise agreements allow the Company to access public rights-of-way for placement of the Company's electric facilities.  Franchise agreements have expired in Albuquerque, Santa Fe, Bernalillo County, Sandoval County, San Miguel County, Village of Bosque Farms, Pueblo de Cochiti, Village of Tijeras, McKinley County and the City of Las Vegas.  The Company remains obligated under New Mexico state law to provide service to customers in these franchise areas despite the absence of an effective franchise agreement.  The Albuquerque metropolitan area accounted for approximately 53% of the Company's 2004 total electric utility operating revenues, and no other franchise area represents more than approximately 9%.  The Company continues to collect and pay franchise fees to Albuquerque and Santa Fe, Village of Bosque Farms, Village of Tijeras and the City of Las Vegas. The Company currently does not pay franchise fees to Bernalillo County, Luna County, Sandoval County, McKinley County, Pueblo de Cochiti or San Miguel County. 

Gas

Gas distributes natural gas to most of the major communities in New Mexico, including Albuquerque and Santa Fe.  The Albuquerque metropolitan area accounted for approximately 50% of the total gas revenues in 2004.  No single sales-service customer accounted for more than 0.8% of the Company's therm sales in 2004.  Gas holds long-term non-exclusive franchises with varying expiration dates in all incorporated communities requiring franchise agreements except for municipalities of Aztec, Bosque Farms, Clayton, Eunice, Gallup, Grants, Hurley, Milan, Santa Clara, Santa Fe County, and Tatum.  The Company remains obligated to serve these franchise areas pursuant to state law despite the absence of an effective franchise agreement.

The Company's customer base includes both sales-service customers and transportation-service customers.  Sales-service customers purchase natural gas and receive transportation and delivery services from the Company for which the Company receives both cost-of-gas and cost-of-service revenues.  Cost-of-gas revenues collected from sales-service customers are recovered in accordance with NMPRC regulations through the Company's PGAC and represent a pass-through of the Company's cost of natural gas to the customer.  Therefore, the Company's operating results are not affected by an increase or decrease in natural gas prices.  An order was issued by the NMPRC in 2001 that approved an agreement regarding PNM's hedging strategy and the implementation of a price management fund program which includes a continuous monthly balancing account with a carrying charge.  This carrying charge has the effect of keeping PNM whole on purchases of gas since it is compensated for the time value of money that exists due to any delay in collecting.  Additionally, the Company makes occasional gas sales to off-system sales customers.  Off-system sales deliveries generally occur at pipeline interconnects with the Company's system and profits are shared between the Company and its customers on a 30%/70% basis. 

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The Company had 23 transportation-service customers in 2004, which procure gas for their end users independently of the Company's end users.  Transportation-service customers are gas marketers and producers contracting with the Company for transportation services to their end users and for other related services that provide the Company with cost-of-service revenues only.  Transportation services are provided to transportation-service customers at locations throughout the Company's distribution systems, as well as points on and off the Company's transmission pipelines.  The Company provided gas transportation deliveries to 1,474 transportation end users during 2004.

In 2004, 48% of the Company's total gas throughput was related to transportation gas deliveries.  The Company's transportation rates are unbundled, and transportation customers only pay for the service they receive.  In 2004, revenues from transportation customers accounted for 4% of the Company's total gas revenue.  Revenues from sales-service customers accounted for the remaining 96%.  Of this percentage, 67% was related to the cost of gas on which the Company makes no margin.  Because a major portion of the Company's load is related to heating, sales levels are affected by the weather.  In 2004, 63% of the Company's total gas sales occurred in the months of January, February, March and December.

The Company obtains its supply of natural gas primarily from sources within New Mexico by contracting with third party producers and marketers. These contracts are generally sufficient to meet the Company's peak-day demand.  The Company serves certain cities, which depend on El Paso Natural Gas Company or Transwestern Pipeline Company, for transportation of gas supplies. Because these cities are not directly connected to the Company's transmission facilities, gas transported by these companies is the sole supply source for those cities. Such transportation is regulated by the FERC.  As a result of FERC Order 636, the Company's options for transporting gas to these cities and other portions of its distribution system have increased.

Transmission

The Company owns or leases 2,856 circuit miles of electric transmission lines, interconnected with other utilities in New Mexico, east and south into Texas, west into Arizona, and north into Colorado and Utah.  Due to rapid load growth in the Company's service territory in recent years and the lack of transmission development, most of the capacity on this transmission system is fully committed and there is very little or no additional access available on a firm commitment basis.  These factors result in physical constraints on the system and limit the ability to wheel power into the Company's service area from outside of New Mexico.

WHOLESALE OPERATIONS

Wholesale consists of the generation and sale of electricity into the wholesale market based on three product lines, which are long-term contracts, forward sales and short-term sales. Long-term contracts include sales to firm-requirements and other wholesale customers with multi-year arrangements.  At December 31, 2004, these contracts ranged from 1 to 16 year terms with an average term of 7.1 years.  Forward sales include sales in the forward market that range from 1 month to 3 years that are supplied by third-party purchases.  These transactions do not qualify as normal sales and purchases as defined in SFAS No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") and, as a result, are marked to market.  Short-term sales generally include spot market, hour ahead, day ahead and week ahead contracts with terms of 30 days or less.  Also included are sales of any excess generation not required to fulfill PNM's retail load and contractual commitments.  Short-term sales also cover the revenue credit to retail customers as specified in the Global Electric Agreement (see Note 14 - "Commitments and Contingencies - Global Electric Agreement" in the Notes to Consolidated Financial Statements).

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The Wholesale strategy calls for increased net asset-backed energy sales supported by long-term contracts in the wholesale market, where the Company's aggregate net open forward electric sales position, including short term sales, forward sales and long-term contracts, is covered by its forecasted excess generation capacity.  Management actively monitors the net asset-backed sales by the use of stringent risk management policies.  The Company's future growth plans call for approximately 75% of its new generation portfolio to be committed through long-term contracts.  The 75% threshold is in compliance with the Global Electric Agreement.  Growth will be dependent on market development and on the Company's ability to generate funds for the Company's future expansion.  The Company continues to operate in the wholesale market and seek appropriately priced asset additions.  Expansion of the Company's generating portfolio will depend on the Company's ability to acquire favorably priced assets at strategic locations and to secure long-term commitments for the purchase of power from the acquired plants.

Power Sales

In 2004, the Company's revenues from the wholesale marketplace stabilized following the preceding years when volatility was high.  During 2002, power prices declined significantly due to lower natural gas prices, an average Pacific Northwest hydro generation year, an increase in new generation coming on-line, and a shift by various large California utilities to long-term contracts rather than spot market purchases.  In 2003, the trend experienced in 2002 continued, except that power prices were generally higher due primarily to higher natural gas prices and abnormally hot summer temperatures in the Southwestern United States.  The Company has been successful in developing its wholesale power marketing activities in the Western United States, even in times of market volatility.  Management believes this success is due to its niche business strategy of providing electric power customized to meet the special needs of its customers.  This niche marketing strategy is based on the Company's net asset-backed methodology, which can help to mitigate the risks inherent in the Company's wholesale power marketing activities.  The Company also utilizes long-term transactions to enhance its product offerings. 

Certain Company generation resources are excluded from retail electric rates.  As a result, the Company developed a wholesale power marketing strategy to sell the generation from its resources that are excluded from retail rates.  This strategy also includes the forward purchase and sale of electricity to take advantage of market price opportunities in the electric wholesale market.  During 2004, 2003 and 2002, the Company's sales in the wholesale electric markets accounted for approximately 62%, 62% and 56%, respectively, of its total MWh sales.  Of the total wholesale electric sales made in 2004, 2003 and 2002, 80%, 82% and 77%, respectively, were transacted through purchases for resale.  (See "Item 2. Properties".)

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In 1990, the NMPRC established an off-system sales methodology that provided for a sharing mechanism whereby a certain amount of revenues from off-system sales were credited to reduce retail cost of service.  Off-system sales above the amounts credited to retail customers accrue to the benefit of shareholders.  Subsequent rate cases have continued to utilize this methodology. 

In 2003, the NMPRC approved the Global Electric Agreement that set a rate path through 2007.  PNM agreed to decrease retail electric rates by 6.5% in two phases over three years.  The first phase of the rate reductions became effective in September 2003.  The second phase will become effective September 1, 2005.  (See Note 14 - "Commitments and Contingencies - Global Electric Agreement" in the Notes to Consolidated Financial Statements.)

The Company has entered into various firm wholesale electric sales contracts.  These contracts contain fixed capacity charges in addition to energy charges.  Capacity charges are fixed monthly payments for a commitment of resources to service the contract requirements.  Energy charges are payments based on the amount of electricity delivered to the customer intended to compensate the Company for its variable costs incurred to provide the energy.  The Company's firm-requirements demand was 239 MW in 2004, and is expected, based solely on existing contracts, to be 256 MW in 2005, 266 MW in 2006, 157 MW in 2007 and 159 MW in 2008.  No firm-requirements wholesale customer accounted for more than 6.6% of the Company's total electric sales for resale revenues for the year ended December 31, 2004.

CORPORATE AND OTHER

On December 30, 2004, the Holding Company became a registered holding company under PUHCA.  As a result of the requirement to register as a holding company, the Holding Company created PNMR Services Company, a services company, which began operation on January 1, 2005, subject to final approval of a services company application filed with the SEC in January 2005.

The Holding Company performed substantially all of the corporate activities of PNM from 2001 to 2004.  These activities were billed to PNM on a cost basis to the extent they were for the corporate management of PNM and were allocated to the operating segments.  The services functions previously performed by the Holding Company have been assumed by PNMR Services Company effective January 1, 2005.

Sources of Power

The Company has sources of power from property it owns or leases and power purchased by the Company through various long-term PPAs.  For the year ended December 31, 2004, the Company had a 2,417 MW generation capacity from these sources.

Sources of Power - Owned

  As of December 31, 2004, the total net generation capacity of facilities owned by the Company was 1,729 MW, which includes all of PVNGS, portions of which are leased.  (See "Item 2. Properties".)

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The Company is committed to increasing the utilization of its generation capacity at SJGS, Four Corners and PVNGS.  SJGS is operated by the Company.  SJGS's equivalent availability and capacity factors were 89.8% and 86.3%, respectively, for the twelve months ended December 31, 2004, as compared to 82.1% and 77.8%, respectively, for 2003.  Capacity factors for Four Corners and PVNGS were 81.8% and 83.5%, respectively, in 2004, as compared to 89.8% and 87.3%, respectively, in 2003.  Four Corners and PVNGS are operated by APS. 

The Company's Lordsburg and Afton plants were built to serve wholesale customers and other sales rather than New Mexico retail customers and, therefore, are not currently included in the retail rates.  However, it is possible that these plants may be needed in the future to serve the growing retail load.  If so, these plants would have to be certified by the NMPRC and would then be subject to inclusion in the Company's retail rates in a future rate case.  These plants were built in furtherance of the Company's ongoing strategy of increasing generation capacity over time to serve increasing retail load, sales under long-term contracts and other sales.  The plants owned by the Company are available through joint dispatch to support service to the retail customers of PNM. 

In November 2004, the Company purchased a one-third interest in a partially constructed, combined-cycle power plant near Deming, New Mexico, called Luna.  The facility is expected to be completed in summer 2006 and is designed to be capable of producing 570 MW (of which the Company will be entitled to 190 MW).

Sources of Power - Leased

In 1996, the Company entered into an operating lease agreement for the rights to all the output of the Delta gas-fired generating plant for 20 years.  The plant received FERC approval for "exempt wholesale generator" status.  The maximum dependable capacity under the lease is 132 MW.  The gas turbine generating unit is operated by Delta and is located on the Company's retired Person Generating Station site in Albuquerque.  Primary fuel for the gas turbine generating unit is natural gas provided by wholesale gas purchases.  In addition, the unit has the capability to utilize low sulfur fuel oil if natural gas is neither available nor cost effective. 

As discussed above, the Company leases portions of PVNGS. (See "Item 2. Properties" and Note 5 - "Lease Commitments" in the Notes to Consolidated Financial Statements.)

 Sources of Power - PPAs

In addition to generating its own power, the Company purchases power in the open market.  The Company's sales under its long-term PPAs, including the Delta lease and the contract described below, were 688 MW in 2004 and are expected to be 649 MW in 2005, 599 MW in 2006, 532 MW in 2007, and 532 MW in 2008.  This projected capacity assumes that contracts that end during the period are not renewed or extended.  The Company also purchases power in the forward, day-ahead and real-time markets.

In 2002, the Company entered into an agreement with FPL to develop a 200 MW wind generation facility in New Mexico.  The Company began receiving commercial power from the project in June 2003.  FPL owns and operates the New Mexico Wind Energy Center, which consists of 136 wind-powered turbines on a site in eastern New Mexico.  The Company has a contract to purchase all the power generated by the New Mexico Wind Energy Center for 25 years.  In 2003, the Company received approval from the NMPRC for a voluntary tariff that allows PNM retail customers to buy wind-generated electricity for a small monthly premium.  Power from the New Mexico Wind Energy Center is used to service load under the voluntary tariff and as part of the Company's electric supply mix for meeting retail load.  Any wind-generated electricity in excess of these amounts is sold on the wholesale power market, either within New Mexico or outside the state.

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Market Reach

The Company owns firm transmission capacity to the Mead market hub in the amount of 225 MW, which serves various wholesale power markets and loads in the greater Las Vegas, Nevada area, and serves as a delivery point for the California ISO.  In addition, the Company owns transmission capacity to serve major load centers in the Phoenix, Arizona area in the amount of 150 MW.

The generation mix for 2005 is expected to be 68.2% coal, 28.4% nuclear and 3.4% gas and oil.  Due to locally available natural gas and oil supplies, the utilization of locally available coal deposits and the generally abundant supply of nuclear fuel, the Company believes that adequate sources of fuel are available for its generating stations into the foreseeable future.

Coal

  See Note 14 - "Commitments and Contingencies - Coal Supply" in the Notes to Consolidated Financial Statements.

Natural Gas

The natural gas used as fuel for the electric generating plants located in Albuquerque (Reeves Station and the Delta operating lease) is procured on the open market and delivered by Gas through its transportation services.  Wholesale procures its gas supply independently of Gas but obtains gas transportation services from Gas.

 Nuclear Fuel

  The Company is one of several participants in PVNGS.  (See Note 12 - " Construction Program and Jointly-Owned Plants " in the Notes to Consolidated Financial Statements.)  The fuel cycle for PVNGS is comprised of the following stages:

• mining and milling of uranium ore to produce uranium concentrates;

• conversion of uranium concentrates to uranium hexafluoride;

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• enrichment of uranium hexafluoride;

• fabrication of fuel assemblies;

• utilization of fuel assemblies in reactors; and

• storage and disposal of spent nuclear fuel.

The PVNGS participants have contracted for all of PVNGS requirements for uranium, uranium concentrates and conversion services through 2008.  The PVNGS participants have also contracted for all of PVNGS enrichment services through 2010 and fuel assembly fabrication services until at least 2015.

Water Supply

See Note 14 - "Commitments and Contingencies - Water Supply" in the Notes to Consolidated Financial Statements.

RATES AND REGULATION

PNM is subject to the jurisdiction of the NMPRC, with respect to its retail electric and gas rates, service, accounting, issuance of securities, construction of major new generation and transmission facilities and other matters regarding retail utility services provided in New Mexico.  The FERC has jurisdiction over rates and other matters related to wholesale electric sales and cost recovery for a portion of its transmission network.  The Company is also subject to regulation under PUHCA.

Electric Rates and Regulation

FERC

Regional Transmission Organizations

With the passage of the Public Utility Regulatory Policies Act of 1978 and the Energy Policy Act of 1992, there has been a significant increase in the level of competition in the market for the generation and sale of electricity.  Barriers have been reduced for companies wishing to build, own and operate electric generating facilities.  In 1996, the FERC issued Order 888 requiring electric utilities controlling transmission facilities to file open access transmission tariffs, which opened the utility transmission systems to wholesale sellers and buyers of electric energy on a non-discriminatory basis.

Order 888 also encouraged utilities to investigate the formation of ISOs to operate transmission assets and provided guidance for the formation, operation and governance of ISOs.  In 1999, the FERC issued Order 2000 on RTOs, which established timelines for transmission-owning entities to join an RTO and defined the minimum characteristics and functions of an RTO.

In 2001, PNM, together with other FERC jurisdictional utilities in the Southwest, filed a request with the FERC seeking approval of a proposed for-profit transmission company named WestConnect to meet the criteria of Order 2000.  The proposal, recently revised in 2003, remains under review at the FERC.

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In 2002, the FERC issued a NOPR, which if approved, would modify Order 888 by instituting a Standard Market Design for electric wholesale markets.  Prior to any final action on the Standard Market Design proposal, the FERC issued a policy "white paper" in 2003 that modified several provisions of the original Standard Market Design proposal and stated that if it were demonstrated that the costs of implementing any feature of the Standard Market Design outweighed its benefits, the FERC would not require the RTO to implement that feature. 

Acting upon the direction of the "white paper," the WestConnect participants are currently pursuing a phased approach to implementing the wholesale market improvements that would otherwise be performed by an RTO.  The WestConnect participants executed a new Memorandum of Understanding in December 2004, in which participants will continue to explore market enhancement initiatives designed to enhance wholesale market competition in the Southwest. 

Uncertainty continues to exist regarding the FERC's evolving RTO policy.  The FERC has not set a schedule for additional proceedings involving the Standard Market Design issues. PNM, together with the WestConnect participants, is continuing to monitor the various regulatory activities while continuing to explore opportunities for implementing cost-effective enhancements to the wholesale market pursuant to the current WestConnect Memorandum of Understanding.

FERC Rule Making

Over the past several years, the FERC has issued numerous rules that have impacted the wholesale energy business.  The FERC is attempting to remedy what it sees as undue discrimination in the provision of interstate transmission services and to ensure just and reasonable rates for electric energy within and among regional power markets.  A proposed rule would put all transmission customers, including bundled retail customers, under new pro forma transmission rates for new transmission service.  Independent transmission providers, e.g., ISOs and RTOs, would provide all transmission service and congestion would be managed using marginal pricing structures.  See "Regional Transmission Organization" above for further discussion.

In addition, the FERC has issued final rules that have an impact on the wholesale energy business and participants in the wholesale energy markets, including PNM.  In August 2003, the FERC issued Order 2003, which requires electric utilities that own or control electric transmission facilities to set out standard procedures and a standard agreement for interconnecting generators larger than 20 MW, and to make such revisions as necessary to its Open Access Transmission Tariff to comply with the requirements of the new rule.  PNM made its compliance filing in January 2004 and, in September 2004, PNM received notice that its revised tariff filing was accepted by the FERC. In December 2004, the FERC issued Order 2003-B, which provided additional clarification on certain matters.  PNM joined an industry group requesting rehearing of Order 2003-B, and also separately filed its petition for rehearing Order 2003-B.

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The FERC issued its final rule adopting standards of conduct for electric and natural gas transmission providers, known as Order 2004.  The final rule expands on the FERC's prior orders establishing standards of conduct and combines the prior electric and natural gas standards so that there is now one standard for both electric and natural gas transmission providers.  The revised standards of conduct generally continue the requirement of transmission providers, including PNM, to treat all transmission customers, affiliated or non-affiliated, on a non-discriminatory basis, and prohibits transmission providers from operating their system to preferentially benefit an energy or marketing affiliate.  The rule became effective in February 2004, and required compliance by June 1, 2004.  PNM made the required initial compliance filing stating that it is in substantial compliance with Order 2004.  The FERC issued its revised Order 2004-A, which required that the training of employees be completed and compliance with provisions of the revised rule by September 1, 2004.  The FERC issued Order 2004-B, which required compliance with the Standards of Conduct rule, including training of employees, by September 22, 2004.  PNM implemented compliance measures, including completion of the training of employees, by the compliance deadlines.  

In 2001, in a set of cases not involving PNM, the FERC announced a new supply margin assessment screen to determine if applicants for market based rate authority could potentially exercise horizontal generation based market power.  For those applicants that failed the supply margin assessment screen, the FERC would deny the market based rate application or condition its approval with certain mitigation requirements to address the market power concern.  In April 2004, the FERC announced the establishment of a new interim two-pronged market power screen to be applied in market based rate cases.  In May 2004, the FERC issued procedural orders in pending market based rate application/renewal cases, including PNM's case, requiring the use of the new two-pronged interim screen and requiring PNM to make its revised market based rate filing by August 2004.  In July 2004, the FERC issued an order affirming its interim two-pronged market screen test.  PNM filed its triennial market power screen analyses in August 2004 utilizing the new two-pronged interim screen as required by the FERC's order.  In its filing, PNM noted that it continued to face historical transmission constraints in Northern New Mexico and would continue to abide by the cost-based rate limitation on transmission service during times of transmission constraints for the Northern New Mexico market.  PNM also noted that for the EPE control area, PNM's wholesale market share screen was slightly above 20% during two seasons.  In October 2004, PNM made a supplemental filing utilizing more detailed load and generation data contained in EPE's market power screen filing, which resulted in PNM having a revised wholesale market share result below 20% for all seasons.  In December 2004, the FERC issued its order in PNM's market based rate filing finding that the FERC is initiating a proceeding to determine if PNM's mitigation measure in Northern New Mexico is sufficiently adequate to prevent the exercise of market power.  The FERC's order also required additional explanation of PNM's revised wholesale market share calculation.  PNM filed a petition for rehearing contesting the FERC's findings regarding the EPE control area, and arguing that PNM lacks generation market power in Northern New Mexico given the transmission access available to transmission customers in that market and the pre-existing mitigation measure that FERC previously approved in 1996.  The FERC also established that rates reviewed under this proceeding for transactions completed in these two markets would be subject to refund effective March 6, 2005. 

In February 2005, PNM made its revised filing, in which the Company's expert presented various revised screen analyses for the EPE control area and concluded that the FERC should continue to permit PNM to make sales at market-based rates in that control area.  The analyses show that the screen failures disappear when the input data reflect the realities of economic and physical conditions in the Southern New Mexico market.  The evidence presented concluded the screen failure scenarios do not warrant the conclusion that PNM possesses generation market power in EPE's control area.

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The Company's expert further concluded that the FERC should continue to permit PNM to make sales at market-based rates in PNM's Northern New Mexico control area, subject to the existing mitigation provision contained in PNM's market-based sales tariff.  He concluded PNM does not have the potential to exercise generation market power because customers enjoy access to robust markets during the hours that concerned the FERC, and given that the pre-existing mitigation would prevent any exercise of generation market power in the event of transmission constraints.  The Company's expert also concluded that, if the FERC determines that PNM should not be permitted to sell at market-based rates in its Northern New Mexico control area, the FERC nevertheless should permit PNM to sell at market-based rates at San Juan because San Juan is outside the transmission constraint path.  The Company cannot predict the outcome of these proceedings on the Company's financial position or results of operations; however, should FERC determine that PNM has generation market power in these two markets, PNM could continue to make sales at cost-based rates and thus not have revenues subject to refund in this matter.

NMPRC

Global Electric Agreement

 In October 2002, PNM entered into a Global Electric Agreement wherein it committed as part of a five-year plan to reduce retail electric rates by 6.5% in two phases (a 4% reduction, which became effective on September 1, 2003, and a 2.5% reduction, which will become effective on September 1, 2005).  The Global Electric Agreement was approved by the NMPRC in January 2003.  While beneficial to PNM's retail electric customers, PNM also benefits from the rate certainty the Global Electric Agreement provides through the end of 2007 and several other key components.  See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Global Electric Agreement" and Note 14 - "Commitments and Contingencies - Global Electric Agreement" in the Notes to Consolidated Financial Statements.

Renewable Resources Rule Making

The NMPRC issued a renewable resources rule in 2002 to encourage the development of renewable energy in New Mexico.  The rule includes a provision requiring the use of a minimum of 5% renewable energy by January 1, 2006, with the minimum amount to increase 1% per year for each year until a renewable portfolio standard of 10% is reached in the year 2011. 

The 2004 Renewable Energy Act passed by the New Mexico Legislature establishes a mandatory renewable energy portfolio standard similar to the structure established by the NMPRC.  The Renewable Energy Act provides for streamlined proceedings for utilities to obtain approval of procurement plans, provided certainty to utilities and protection for customers and required the NMPRC to establish a reasonable cost threshold for the procurement of renewable energy to prevent excessive costs being added to rates.  Under the Renewable Energy Act, if renewable energy cannot be acquired under the threshold, the mandate would be suspended. 

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In July 2004, PNM made its annual portfolio summary filing as required under the renewable resources rule and the Renewable Energy Act.  In September 2004, PNM made its renewable energy procurement plan filing, outlining its plan to use renewable energy certificates acquired during 2003-2005 to meet the renewable portfolio standard beginning in 2006.  PNM entered into a stipulation with the NMPRC staff and other parties which provided that PNM met the diversity requirements of the Renewable Energy Act, and which provided that expenditures up to $850,000 associated with assessment of biomass projects in 2005 were reasonable and recoverable in the next general electric rate case.  The stipulation also provided that 2005 expenditures up to $500,000 associated with the implementation of a solar photovoltaic program were also reasonable and recoverable.  The NMPRC approved the stipulation in December 2004.

In December 2004, the NMPRC issued an order, subject to NMPRC review in 2007, that established a reasonable cost threshold for renewable energy resources, beyond which a utility is relieved from the requirement to add renewable energy resources to its portfolio.  The order provides that an overall rate increase of no more than 1% in 2006, no more than an additional 0.2% per year until capped at 2% for each year beginning in 2011 and beyond.  Reasonable cost threshold amounts were also set for each resource.

ENVIRONMENTAL MATTERS

PNM, in common with other electric and gas utilities, is subject to stringent laws and regulations for protection of the environment by local, state, Federal and tribal authorities. In addition, PVNGS is subject to the jurisdiction of the NRC, which has the authority to issue permits and licenses and to regulate nuclear facilities in order to protect the health and safety of the public from radioactive hazards and to conduct environmental reviews pursuant to the National Environmental Policy Act.  The liabilities under these laws and regulations can be material and, in some instances, may be imposed without regard to fault, or may be imposed for past acts, whether or not such acts may have been lawful at the time they occurred.  (See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Contingent Liabilities - Environmental Issues" for a discussion of applicable accounting policies.  In addition, see Note 14 - "Commitments and Contingencies" in the Notes to Consolidated Financial Statements for information related to the following matters, incorporated in this item by reference):

• Person Station

• Retired Fossil-Fueled Plant Decommissioning Costs

• New Source Review Rules

• The Clean Air Act

• Citizen Suit Under the Clean Air Act

• Excess Emissions Reports

• Santa Fe Generating Station

• SESCO Matter

COMPETITION

 Under current law, the Company is not in any direct retail competition with any other regulated electric and gas utility, except for sales of natural gas.  Nevertheless, the Company is subject to varying degrees of competition in certain territories adjacent to or within the areas it serves with other utilities in its region as well as with rural electric cooperatives and municipal utilities.

13

The Wholesale segment is involved in the generation and sale of electricity into the wholesale market.  It is subject to competition from regional utilities with similar opportunities to generate and sell energy at market-based prices and larger trading entities that do not own or operate generating assets.  The Company believes that it is well positioned to compete in this market due to its long history in the marketplace, its niche product offerings, and stringent risk management practices.  The Company's energy marketers are operationally trained and maintain effective marketing relationships with competitors and counterparties. Additionally, the Company has maintained an investment-grade rating despite turbulent wholesale markets, which enables the Company to fully participate in the marketplace.

(1)  These employees resided at the Holding Company at December 31, 2004 and effective January 1, 2005, reside at the Services Company.

The number of employees of the Company who are represented by unions or other collective bargaining groups include (i) Electric, 241; (ii) Gas, 57; and (iii) Wholesale, 330.