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COMPANY WEBSITE

AWARD DETERMINATION

DISTRIBUTION, ASSIGNMENT AND ASSUMPTION AGREEMENT

RECITALS

Exhibit 10.138

Change in Director Compensation

Award Eligibility Level

EPS Threshold Target = $1.40

EPS = $1.41 to $1.59

EPS Optimal Target = $1.60

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following Management's Discussion and Analysis of Financial Condition and Results of Operations for the Holding Company and Subsidiaries and PNM and Subsidiaries is presented on a combined basis. Currently, the business of PNM constitutes substantially all of the business of the Holding Company. Therefore, the historical results of operations of PNM are virtually identical to the consolidated results of the Holding Company and all its subsidiaries. For discussion purposes, this report will use the term "Company" when discussing matters of common applicability to the Holding Company and Subsidiaries and PNM. Readers of this Management's Discussion and Analysis of Financial Condition and Results of Operations should assume that the information presented applies to consolidated results of operations of both the Holding Company and its subsidiaries, including PNM, except where the context or references clearly indicate otherwise. Discussions regarding specific contractual obligations generally reference the company that is legally obligated. In the case of contractual obligations of PNM, these obligations are consolidated with the Holding Company and its subsidiaries under GAAP. Broader operational discussions refer to the Company.

The Holding Company was established as the holding company in 2001. On December 30, 2004, the Holding Company became a registered holding company under PUHCA. The Holding Company also created a new subsidiary called PNMR Services Company, which began operating on January 1, 2005, subject to final approval by the SEC.

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 were assumed by PNMR Services Company effective January 1, 2005.

The Holding Company is an investor-owned holding company of energy and energy related companies. Its principal subsidiary, PNM, is an integrated public utility primarily engaged, within the State of New Mexico, in the generation, transmission and distribution of electricity; transmission, distribution and sale of natural gas; and the sale and marketing of electricity in the Western United States. The Company views a merchant utility as the balanced combination of a strong regulated utility with growth-oriented electric sales in competitive markets.

The Company is positioned as a merchant utility, primarily operating as a regulated energy service provider. The Company is also engaged in the sale and marketing of electricity in the competitive wholesale energy marketplace. As a utility, PNM has an obligation to serve its customers under the jurisdiction of the NMPRC. As a wholesale electricity provider, PNM markets excess production from the utility, as well as unregulated generation, into a competitive marketplace. As part of its electric wholesale power operation, it purchases wholesale electricity in the open market for future resale or to provide energy to retail customers in New Mexico when the Company's generation assets cannot satisfy demand. The wholesale operations primarily utilize a net asset-backed strategy, whereby the Company's aggregate net open position for the sale of electricity is covered by the Company's forecasted excess generation capabilities.

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. Utility Operations include Electric, Gas and Transmission. These segments model the resource allocations as mandated in the Global Electric Agreement (see Note 7 - "Commitments and Contingencies - Global Electric Agreement", in the Notes to Consolidated Financial Statements). Electric consists of the distribution and generation of electricity for retail electric customers in New Mexico. Gas includes the transportation and distribution of natural gas to end-users. Transmission consists of the transmission of electricity to third parties as well as to Electric and Wholesale. Wholesale consists of the generation and sale of electricity into the wholesale market based on three product lines that include long-term contracts, forward sales and short-term sales.

The Utility Operations strategy is directed at supplying reasonably priced and reliable energy to retail customers through customer-driven operational excellence, high quality customer service, cost efficient processes, and improved overall organizational performance.

The Wholesale Operations strategy calls primarily for increased net asset-backed energy sales supported by long-term contracts into the wholesale market, whereby 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 as required by 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 will continue to operate in the wholesale market and seek reasonably 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.

The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and related notes. Trends and contingencies of a material nature are discussed to the extent known. Refer to "Disclosure Regarding Forward Looking Statements" and "Risk Factors" at the end of this Item 2.

COMPETITIVE STRATEGY

The Company's vision is to "Build America's Best Merchant Utility." To achieve this objective, management intends to:

Grow Regulated and Unregulated Operations . The Company intends to grow both its retail and wholesale business by expanding its current operations and by acquiring additional value-enhancing assets. As evidenced by the Luna acquisition and the proposed TNP acquisition, the Company intends to continue to grow its revenues by expanding its geographic coverage in the Southwest, a region which not only exhibits rapid customer and load growth, but which the Company knows well. The Company plans to focus on best practices in integrating its acquisitions to create a stronger presence in the Southwest market. The Company also intends

to increase its presence in the Southwest market by buying additional generating resources and selling power from those resources through long-term contracts. In addition, the Company expects that the acquisition of First Choice Power as part of the proposed TNP acquisition, as discussed below, will provide a solid foundation for entry into the competitive retail market in Texas.

Acquire Additional Generating Assets in the Southwest Region . The Company intends to enhance and diversify its presence in the Southwest region through the acquisition of quality generation assets to serve the Company's retail and wholesale load while maintaining diversity of fuel mix. The Company plans to increase long-term sales contracts in tandem with increases in its generation capacity. The Company expects to do this through the addition of gas-fired generation plants and the acquisition of coal-fired facilities, the acquisition or development of renewable or clean technology resources and/or the use of long-term purchase contracts for power. As in the past, the Company intends to continue a disciplined approach to any acquisition, to match acquisitions to demand and to hedge capacity with long-term contracts.

Maintain Prudent Cost Controls . Management continues to maintain cost control procedures and expects to implement similar control procedures at TNP once the acquisition is complete. As a result of PNM's coal contract, the Company's fuels group has also been able to mitigate the Company's exposure to coal prices at the SJCC through December 2017, which the Company believes will help it improve or maintain gross margins if coal costs rise.

Continue to Improve Credit Strength and Reduce Cost of Capital . A high priority and long term commitment is to maintain the Company's investment grade rating in any type of regulatory or commodity price scenario. The Company believes TNP offers an opportunity to derive additional value through the stronger credit profile of the combined entity. Since December 31, 2002, the Company has reduced its weighted average cost of long-term debt from 6.56% at December 31, 2002 to 4.77% at December 31, 2004. In addition, as discussed below, the Company expects to reduce TNP's current financing costs by at least $40.0 million annually, on a pre-tax basis, through the refinancing of TNP's relatively high-cost capital.

Commitment to Corporate Citizenship . The Company is committed to its guiding principle, "Do the Right Thing." This commitment serves as the cornerstone of the Company's ethics and compliance efforts and underscores its effort to ensure that dealings with customers, employees, shareholders and business partners are above reproach. This is evidenced by the Company's environmental sustainability program with aggressive five-year goals for reducing water usage, improving air quality, reducing waste streams and becoming a leader in the development of renewable energy.

ACQUISITIONS

Proposed Acquisition of TNP. In July 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, subject to certain assumptions as described below.

TNP is the privately owned holding company of TNMP and First Choice Power. TNMP provides transmission and distribution services to retail electric providers in Texas' competitive electricity market, composed of approximately 207,000 retail customers in Texas and approximately 49,000 in New Mexico. First Choice Power is one of the state's retail electric providers with approximately 58,000 retail customers in Texas.

The transaction is subject to customary closing conditions and regulatory approvals, including approvals by the NMPRC, the PUCT, the SEC under the PUHCA and the FERC. No shareholder approval is required for the acquisition. The Company believes at this time that all conditions precedent to closing, including final resolution of regulatory proceedings, can be satisfied so that closing can occur in the second quarter of 2005. The Company will lead the integration efforts and implementation of the transition plan that will be executed upon receiving regulatory approvals.

The Company believes that the proposed TNP acquisition is consistent with its strategic plan of balancing stable and predictable revenue streams with prudent and measured growth opportunities. Upon the consummation of the proposed TNP acquisition, the Company will serve approximately 1.2 million customers, with 727,000 electric customers and 471,000 gas customers. Of the electric customers, approximately 159,000 will be "price-to-beat" customers in Texas and 58,000 will be retail customers in Texas. The Company believes TNMP's utility operations will provide an additional stable source of revenue and cash flow.

The proposed TNP acquisition will strengthen the Company's position as a leading energy provider in the growing Southwest region, providing market, customer and regulatory diversity. In addition, the Company expects First Choice Power's established retail customer base and operations, when combined with the Company's generation source hedging, financial strength and power-marketing expertise, to present additional potential to improve margins and increase market penetration in Texas.

The combined company is expected to have consolidated annual revenues of over $2.3 billion and would serve a number of growing communities, including Albuquerque, Santa Fe, and Alamogordo in New Mexico, as well as suburban areas around Dallas-Fort Worth, Houston, and Galveston in Texas. Through First Choice Power, the Holding Company will also serve customers in communities throughout the ERCOT region.

Under the terms of the TNP stock purchase agreement TNP's common shareholders will receive approximately $189.0 million in consideration, subject to a purchase price adjustment at the acquisition closing, consisting of equal amounts of newly issued Holding Company common shares and cash. The existing indebtedness and preferred securities at TNP are expected to be retired on or shortly following the closing. All debt at TNMP will remain outstanding.

Based on the number of common shares outstanding on a fully diluted basis and taking into account additional equity issuances, following the transaction, the Holding Company's shareholders would own 94% of the combined company's common equity, and TNP's shareholders would own 6%.

As discussed previously, the Holding Company issued common equity and equity linked securities in March 2005, completing all of the financing for the TNP acquisition. As a result of discussions with the rating agencies pursuant to their ratings evaluation services, the Company believes that the acquisition financing will not result in any credit rating changes for the Holding Company or PNM. Around the closing date of the acquisition, the Holding

Company plans to issue an additional $100.0 million of equity linked securities in a private-placement to Cascade and borrow $100.0 million on its revolving credit facility. The Holding Company has entered into a $100.0 million notional floating-to-fixed interest rate swap that effectively locks the interest rate for the related revolving credit facility debt at 4.97% through November 2009. See "Equity Unit Offering" and "Common Stock Offering" in the "Liquidity and Capital Resources" section below for additional details about financing arrangements related to the proposed TNP acquisition.

In September 2004, the Board adopted a resolution approving the terms of the Holding Company's agreement with Cascade, which calls for the Holding Company, upon the request of Cascade and subject to the receipt of any necessary approvals from the SEC, to propose to its shareholders at the 2005 annual meeting an amendment to the Holding Company's Restated Articles of Incorporation. The amendment would enable the Holding Company to confer upon holders of preferred stock issued under the Agreement, voting as a single class with holders of common stock, the same number of votes to which the number of shares of common stock into which the preferred stock is convertible on all matters other than the election of directors of the Holding Company. Under the amended terms, the aggregate amount of preferred stock outstanding with such voting rights would be convertible into no more than 12 million shares of common stock. Shareholder approval is not a condition of the acquisition transaction.

On February 3, 2005, the Holding Company announced that it had reached a settlement agreement in Texas for its acquisition of TNP. The settlement agreement is between the Holding Company and TNMP, the cities of Dickinson, Lewisville, La Marque, Ft. Stockton and Friendswood, Texas, the Legal and Enforcement Division of the PUCT, the Office of Public Utility Counsel, the Texas Industrial Energy Consumers and the Alliance for Retail Markets. The settlement agreement outlines terms and conditions necessary for the PUCT to find the acquisition of TNP and its subsidiaries, TNMP and First Choice Power, to be in the public interest. Among other issues, the settlement agreement calls for:

A two-year electric rate freeze that includes a $13.0 million annual rate reduction in TNMP's retail delivery rates effective May 1, 2005,
An authorized return on equity of 10.25% on an implied capital structure of 60% debt and 40% equity for certain reporting purposes,
The use of a 60/40% debt/equity capital structure in TNMP's next base rate case if filed before January 1, 2009, and
A $6.0 million synergy savings credit amortized over 24 months effective after the closing of the transaction.

On March 31, 2005, the PUCT approved an order finding the acquisition of TNP by the Holding Company to be in the public interest.

On February 28, 2005, the Holding Company announced that it reached a settlement agreement in New Mexico for its acquisition of TNP. The Holding Company, TNMP, the NMPRC staff, the New Mexico State Attorney General's Office and the New Mexico Industrial Energy Consumers, signed the unopposed stipulation. The stipulation must be approved by the NMPRC. Among other issues, the stipulation:

Provides TNMP's 49,000 electric customers in southern New Mexico with a three-phase rate reduction totaling 15%, beginning January 2006 and ending December 2010. The rate reduction, which includes TNMP's annual synergy-savings allocation of $380,000, will lower TNMP electric rates by $9.6 million in the first year.
Allows TNMP an imputed 55/45% debt/equity structure with an assumed rate of return on equity of 10.5%.
Maintains PNM as the power supplier for TNMP's New Mexico needs through 2010.
Calls for the integration of TNMP's New Mexico assets into PNM effective January 1, 2007. The companies, however, will maintain separate rates through 2010.

The stipulation also provides resolution on how consolidation savings, or synergy savings, will be allocated among PNM gas and electric customers. According to the stipulation:

PNM's 413,000 electric customers will receive rate credits totaling $4.6 million or nearly $1.84 million annually over a 30-month period beginning January 2008.
PNM's 471,000 gas customers will receive $4.3 million in rate credits over five years, or $860,000 annually, beginning at the close of the acquisition.

A hearing regarding the Holding Company's stipulation and the proposed acquisition of TNP was held April 11, 2005 before a NMPRC hearing examiner. A decision from the NMPRC is pending.

On March 2, 2005, the FERC voted to approve the planned acquisition by the Holding Company of the securities of TNP. The FERC reviewed the proposed transaction under the FERC's Merger Policy Statement, to determine whether it is consistent with the public interest by applying a three-part test. Specifically, the FERC examined the effect of the proposed transaction on: (1) competition, (2) rates, and (3) regulation. Based on its review, the FERC determined that the proposed transaction is consistent with the public interest.

On February 2, 2005, the Holding Company was notified that the proposed acquisition of TNP had received anti-trust clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 from the Federal Trade Commission.

The transaction may be terminated under certain circumstances described in the TNP stock purchase agreement, including the failure to close by December 31, 2005.

OVERALL OUTLOOK

Earnings growth in the first quarter of 2005 was primarily due to strong growth in the Company's electric and gas utility, and the positive effect of the gas rate increase, which went into full effect in April 2004. Other factors that contributed to the increase in earnings during the first quarter of 2005 included lower purchased power contract prices, improved plant performance, and continued cost-control measures throughout the Company.

Wholesale margin increased $4.4 million, or 18.0%, in the first quarter of 2005 over the prior year quarter. Increased market prices, plant availability and reductions in purchase power contract prices provided less expensive excess energy for sale in the wholesale market.

Electric margin decreased $1.2 million, or 1.3%, in 2005 from the prior year quarter. An unusually warm January in 2005 coupled with increased generation costs offset a steady increase in jurisdiction load growth.

Gas margin increased $4.1 million, or 8.8%, over the prior year quarter primarily due to the residential cost-of-service rate increase. This increase was partially offset by the relatively warmer weather in 2005.

The Company has previously utilized and reported, including on previously filed Forms 8-K, the historical heating degree-day values (HDD) and cooling degree-day values (CDD), which represent the accumulation in degrees that the daily mean temperature was below or above, respectively, 65 degrees Fahrenheit during a period of time, typically corresponding to a calendar month. In order to provide a greater correlation between energy consumption and weather, the Company has recently decided to utilize and report HDD and CDD that have been weighted based on the Company's billing cycle days. The HDD reported in the "Results of Operations" that follows have been so weighted. The Company believes that this approach provides a better means of assessing the impact of weather on revenues.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2005
Compared to Three Months Ended March 31, 2004

Consolidated

The Company's net earnings for the three months ended March 31, 2005 were $30.5 million or $0.50 per diluted share of common stock, a 23.1% increase in net earnings compared to $24.8 million or $0.41 per diluted share of common stock in the three months ended March 31, 2004. The increase in earnings was driven primarily by strong wholesale electric market performance, load growth, and an increase in cost of service gas rates.

The following discussion is based on the methodology that the Company's management uses for making operating decisions and assessing performance of its various business activities. As such, these segments report operating results with regard to the effect of accounting or regulatory changes, and similar one-time items not related to normal operations within the Corporate and Other segment. See Note 2 - "Segment Information" in the Notes to Consolidated Financial Statements for additional information regarding these results and the consolidated financial statements.

In addition, adjustments related to EITF Issue 03-11, " Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not Held for Trading Purposes ", are excluded. This accounting pronouncement requires a net presentation of realized gains and losses for certain non-trading derivatives. Management evaluates wholesale operations on a gross presentation basis due to its primarily net-asset-backed marketing strategy and the importance it places on the Company's ability to repurchase and remarket previously sold capacity.

Income taxes and non-operating items are discussed only on a consolidated basis and are in conformity with the presentation in the consolidated financial statements.

Utility Operations

Electric Retail

The table below sets forth the operating results for Electric.

	Three Months Ended
	March 31,
	2005		2004		Variance
	(In thousands)
Operating revenues:		$ 129,718		$ 130,036		$ (318)
Less: Cost of energy		53,251		51,637		1,614
Intersegment energy transfer		(14,123)		(13,413)		(710)
Gross margin		90,590		91,812		(1,222)
Energy production costs		28,193		29,521		(1,328)
Transmission and distribution O&M		4,598		5,202		(604)
Customer related expense		4,015		4,103		(88)
Administrative and general		1,789		65		1,724
Total non-fuel O&M		38,595		38,891		(296)
Corporate allocation		14,183		15,901		(1,718)
Depreciation and amortization		14,770		13,970		800
Taxes other than income taxes		4,743		4,826		(83)
Income taxes		4,425		4,353		72
Total non-fuel operating expenses		76,716		77,941		(1,225)
Operating income		$ 13,874		$ 13,871		$ 3

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

Electric Retail Revenues

	Three Months Ended
	March 31,
	2005	2004	Variance
	(In thousands except customers)
Residential	$ 54,014	$ 54,132	$ (118)
Commercial	56,166	56,751	(585)
Industrial	15,203	14,887	316
Other	4,335	4,266	69
	$ 129,718	$ 130,036	$ (318)

Average customers	413,825	403,245	10,580

The following table shows electric sales by customer class:

Electric Retail Sales

	Three Months Ended
	March 31,
	2005	2004	Variance
	(Megawatt hours)
Residential	654,093	655,484	(1,391)
Commercial	767,376	776,842	(9,466)
Industrial	315,816	310,675	5,141
Other	51,869	50,689	1,180
	1,789,154	1,793,690	(4,536)

Operating revenues decreased $0.3 million, or 0.2%, from the prior year quarter. Retail electricity sales decreased 0.3%, to 1.789 million MWh in the first quarter of 2005 compared to 1.794 million MWh in the first quarter of 2004. Warmer winter weather in the first quarter of 2005 compared to the first quarter of 2004 caused a $1.2 million decrease in revenues. Heating Degree Days, (weighted based on the Company's billing cycle, see "Overall Outlook" above), for Albuquerque declined approximately 8.4% to 2,084 during the quarter ended March 31, 2005 compared to 2,274 during the quarter ended March 31, 2004. In addition, a decrease of $1.3 million was attributable to the 2004 leap year, with 2005 including one less day of revenues. Customer growth was 2.6% and weather-normalized retail electric load growth was 1.9% in the first quarter of 2005. Average customer growth, when normalized for the impact of weather and the leap year, increased revenues by $2.2 million.

The gross margin, or operating revenues minus cost of energy sold and intersegment energy transfer, decreased $1.2 million, or 1.3%, over the prior year quarter due to higher generation costs, driven primarily by increased fuel costs.

Total non-fuel O&M expenses decreased $0.3 million, or 0.8%, over the prior year quarter. Energy production costs decreased $1.3 million, or 4.5%, due to lower plant maintenance costs in the first quarter of 2005 compared to the same period in 2004. A planned outage at Four Corners in the first quarter of 2004 that did not occur in 2005 caused energy production costs to decrease $1.7 million. This was partially offset by a planned outage at Reeves in the first quarter of 2005 that increased costs $1.0 million and by $0.4 million of costs incurred in anticipation of a 2005 outage at SJGS Unit 4. On March 26, 2005, a circulating water pipe ruptured and forced SJGS Unit Four to be taken offline. This unexpected three-week outage was combined with a planned minor overhaul of the same unit as the Company then accelerated the planned outage to minimize the economic impact of the shutdown. SJGS Unit Four was back online on April 17, 2005. The Company expects the SJGS Unit Four shutdown to reduce its second quarter electric retail pre-tax earnings by approximately $3.2 million and consolidated pre-tax earnings by $5.0 million, with the remainder of the impact in the wholesale segment. However, the Company expects to have lower operating costs and recover the lost revenue in the fourth quarter of 2005 when the Unit Four planned outage would otherwise have occurred.

Transmission and distribution O&M expense decreased $0.6 million, or 11.6%, primarily due to lower meter-related expenses and labor costs in the first quarter of 2005. Administrative and general expense increased $1.7 million from the prior year quarter primarily due to increased labor costs of $1.0 million, which were partially offset by the decrease in labor costs in transmission and distribution O&M, and by increased benefit costs.

Depreciation and amortization increased $0.8 million, or 5.7%, over the prior year quarter due to asset and software additions placed in service in December 2004. The Company expects to see depreciation continue to increase in the future as a result of increased investment in new information technology platforms and other capital investment.

Gas

The table below sets forth the operating results for Gas.

	Three Months Ended
	March 31,
	2005	2004	Variance
	(In thousands)
Operating revenues :	$ 165,286	$ 175,874	$ (10,588)
Less: Cost of energy	114,435	129,148	(14,713)
Gross margin	50,851	46,726	4,125
Energy production costs	628	533	95
Transmission and distribution O&M	6,695	7,585	(890)
Customer related expense	4,275	4,136	139
Administrative and general	1,179	569	610
Total non-fuel O&M	12,777	12,823	(46)
Corporate allocation	9,369	9,598	(229)
Depreciation and amortization	5,576	4,729	847
Taxes other than income taxes	1,948	2,158	(210)
Income taxes	7,228	5,812	1,416
Total non-fuel operating expenses	36,898	35,120	1,778
Operating income	$ 13,953	$ 11,606	$ 2,347

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

Gas Revenues

	Three Months Ended
	March 31,
	2005	2004	Variance
	(In thousands except customers)
Residential	$ 108,269	$ 115,738	$ (7,469)
Commercial	31,931	36,156	(4,225)
Industrial	643	668	(25)
Transportation*	3,988	4,304	(316)
Other	20,455	19,008	1,447
	$ 165,286	$ 175,874	$ (10,588)

Average customers	470,336	461,128	9,208

* Customer owned gas.

The following table shows gas throughput by customer class:

Gas Throughput

	Three Months Ended
	March 31,
	2005	2004	Variance
	(Thousands of decatherms)
Residential	12,758	14,014	(1,256)
Commercial	4,309	4,818	(509)
Industrial	85	104	(19)
Transportation*	8,150	7,720	430
Other	2,791	3,058	(267)
	28,093	29,714	(1,621)

*Customer-owned gas

Operating revenues decreased $10.6 million, or 6.0%, over the prior year quarter. Residential and commercial revenues decreased $7.5 million and $4.2 million, respectively and total gas sales volumes decreased 5.5%. Management of gas cost billing rates through the PGAC decreased revenues $10.2 million. Warmer winter weather in the first quarter of 2005 compared to the first quarter of 2004 caused a $9.5 million decrease in revenues. As noted above in "Electric Retail", Heating Degree Days for Albuquerque declined approximately 8.4% in the first quarter of 2005 compared to the same period of 2004. These decreases were offset somewhat by average customer growth of 2.0%, which increased gas revenues $0.7 million and by an increase of $6.7 million due to a cost of service rate increase granted by the NMPRC in January 2004.

The gross margin, or operating revenues minus cost of energy sold, increased $4.1 million, or 8.8%, over the prior year quarter. This increase was due mainly to customer growth and the NMPRC-approved rate increase, partially offset by the impact of warmer weather in the first quarter of 2005 compared to the same period of 2004 described above.

Total non-fuel O&M expenses were largely unchanged over the prior year quarter. Transmission and distribution O&M expense decreased $0.9 million, or 11.7%, primarily due to reduced labor costs. This decrease was mostly offset by a $0.6 million increase in administrative and general expense, which was also primarily attributable to labor costs.

Depreciation and amortization increased $0.8 million, or 17.9%, over the prior year quarter primarily due to asset and software additions placed in service in December 2004. The Company expects to see depreciation continue to increase in the future as a result of increased investment in new information technology platforms.

Transmission

The table below sets forth the operating results for Transmission.

	Three Months Ended
	March 31,
	2005		2004		Variance
	(In thousands)
Operating revenues :
External customers		$ 4,464		$ 4,414		$ 50
Intersegment revenues		7,877		7,896		(19)
Total revenues		12,341		12,310		31
Less: Cost of energy		2,029		1,356		673
Gross margin		10,312		10,954		(642)
Energy production costs		288		302		(14)
Transmission and distribution O&M		2,787		2,691		96
Customer related expense		6		7		(1)
Administrative and general		541		113		428
Total non-fuel O&M		3,622		3,113		509
Corporate allocation		1,275		1,400		(125)
Depreciation and amortization		2,788		2,708		80
Taxes other than income taxes		685		656		29
Income taxes		167		634		(467)
Total non-fuel operating expenses		8,537		8,511		26
Operating income		$ 1,775		$ 2,443		$ (668)

Transmission gross margin, or operating revenues minus cost of energy sold, decreased $0.6 million, or 5.9%, compared to the prior year quarter primarily due to additional costs for the EPE wheeling contract acquired for the transmission of Afton which occurred in April 2004. Cost of energy represents purchased transmission to support transmission offerings.

Total non-fuel O&M expenses increased $0.5 million, or 16.4%, from the prior year quarter primarily due to increased administrative and general costs, which increased $0.4 million mainly due to increased labor costs.

In March 2005, PNM filed a notice with the FERC to increase its wholesale electric transmission revenues by $7.8 million annually. If approved, the rate increase would apply to all of PNM's wholesale electric transmission service customers, which includes other utilities, electric co-operatives and entities that use PNM's transmission system to transmit power at the wholesale level. The proposed rate increase would not impact PNM's retail customers.

Wholesale

The table below sets forth the operating results for Wholesale.

	Three Months Ended
	March 31,
	2005		2004		Variance
	(In thousands)

Operating revenues :		$ 132,004		$ 127,491		$ 4,513
Less: Cost of energy		89,312		89,866		(554)
Intersegment energy transfer		14,123		13,413		710
Gross margin		28,569		24,212		4,357
Energy production costs		6,955		7,198		(243)
Transmission and distribution O&M		8		13		(5)
Customer related expense		278		419		(141)
Administrative and general		1,694		1,563		131
Total non-fuel O&M		8,935		9,193		(258)
Corporate allocation		1,037		1,132		(95)
Depreciation and amortization		3,987		3,754		233
Taxes other than income taxes		916		923		(7)
Income taxes		3,831		2,302		1,529
Total non-fuel operating expenses		18,706		17,304		1,402
Operating income		$ 9,863		$ 6,908		$ 2,955

The following table shows revenues by customer class:

Wholesale Revenues

	Three Months Ended
	March 31,
	2005	2004	Variance
	(In thousands)
Long-term contracts*	$ 37,475	$ 36,582	$ 893
Forward sales*	30,579	22,643	7,936
Short-term sales	63,950	68,266	(4,316)
	$ 132,004	$ 127,491	$ 4,513

*Includes mark-to-market gains/(losses).

The following table shows sales by customer class:

Wholesale Sales

	Three Months Ended
	March 31,
	2005	2004	Variance
	(Megawatt hours)
Long-term contracts	725,403	714,421	10,982
Forward sales	765,760	623,160	142,600
Short-term sales	1,359,263	1,643,685	(284,422)
	2,850,426	2,981,266	(130,840)

Operating revenues increased $4.5 million, or 3.5%, over the prior year quarter. This increase in wholesale electric sales primarily reflects higher wholesale prices. Average wholesale sales prices increased 13.8% over the prior year quarter. Long-term contracts revenues increased $0.9 million, or 2.4%, over 2004 due primarily to steady load growth and higher index prices as higher volumes and prices were only partially offset by a slight increase of gas-fired assets in the quarter. Forward sales increased $7.9 million, or 35.0%, compared to the first quarter of 2004, due to increased volumes caused by strong forward sales prices. Short-term sales decreased $4.3 million due to lower volumes as the Company shifted sales from short-term to forward sales. The Company sold wholesale (bulk) power of 2.850 million MWh of electricity for the three months ended March 31, 2005 compared to 2.981 million MWh for the same period in 2004, a decrease of 4.4%.

The gross margin, or operating revenues minus cost of energy sold and intersegment energy transfer, increased $4.4 million, or 18.0%, over the prior year quarter. Increased plant availability and reductions in purchase power contract prices increased the availability of less expensive excess energy for sale in the wholesale market. While short-term sales decreased, short-term sales margin increased $3.7 million due to this increase in low-cost, excess energy. Long-term sales margin increased $0.1 million due to higher volumes and prices, which were slightly offset by, increased use of gas-fired generation in the first quarter of 2005. Forward contracts margin increased $0.6 million, as forward contracts also benefited from higher prices and volumes. The Company had an unfavorable change in the unrealized mark-to-market position of $0.5 million ($0.9 million loss in 2005 versus $0.4 million loss in 2004).

Total non-fuel O&M decreased $0.3 million, or 2.8%, from the prior year quarter. Energy production costs decreased $0.2 million due to a 2004 planned outage at Four Corners that did not recur in 2005. Depreciation and amortization expenses increased $0.2 million due to the addition of new technology platforms that were placed in service in December 2004. The Company expects to see depreciation increase in the future as a result of this increased investment in new technology platforms. Additionally, the Company expects the SJGS Unit Four shutdown to reduce its second quarter electric retail pre-tax earnings by approximately $1.8 million. However, the Company expects to have lower operating costs and recover the lost revenue in the fourth quarter of 2005 when the Unit Four planned outage would have occurred.

Consolidated

Other Income and Deductions

Other income increased by $1.4 million or 12.3% due to favorable investment performance in the Company's cash management program. Other deductions decreased $0.3 million due to lower short-term interest costs.

Income Taxes

The Company's consolidated income tax expense was $17.3 million for the three months ended March 31, 2005, compared to $14.3 million for the three months ended March 31, 2004. The increase was due to the impact of higher pre-tax earnings. The Company's effective income tax rates for the three months ended March 31, 2005 and 2004 were 36.05% and 36.47%, respectively.

CRITICAL ACCOUNTING POLICIES

As of March 31, 2005, there have been no significant changes with regard to the critical accounting policies disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. The policies disclosed included the accounting for: revenue recognition; regulatory assets and liabilities; asset impairment; pension plan; self-insurance; contingent liabilities and environmental issues.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2005, the Company had cash and short-term investments of $328.8 million compared to $17.2 million in cash and short-term investments at December 31, 2004.

Cash provided by operating activities for the three months ended March 31, 2005 was $81.1 million compared to $64.2 million for the three months ended March 31, 2004. This increase in cash flows was due primarily to increased revenues from steady load growth and the gas rate increase. Changes in working capital, including greater efficiency in the management of accounts receivables including the PGAC further increased cash from operations, and were partially offset by a decrease in accounts payable due to higher gas costs in the fourth quarter of 2004.

Cash used for investing activities was $20.9 million for the first three months of 2005 compared to $23.4 million for the first three months of 2004. Utility plant additions, including nuclear fuel, were relatively constant for the comparable periods.

Cash generated by financing activities was $251.4 million for the first three months of 2005 compared to cash used for financing activities of $51.0 million for the first three months of 2004. Cash generated from financing activities in 2005 was due to the issuance of the Equity Units for $239.8 million and the issuance of common stock for $101.2 million, partially offset by repayments of short-term debt. Financing activities in 2004 consisted primarily of short-term debt repayments.

Capital Requirements

Total capital requirements include construction expenditures as well as other major capital requirements and cash dividend requirements for both common and preferred stock. The main focus of the Company's current construction program is upgrading generation resources, upgrading and expanding the electric and gas transmission and distribution systems and purchasing nuclear fuel. Projections for total capital requirements for 2005 are $241.0 million with projections for construction expenditures for 2005 constituting $216.0 million of that total. Total capital requirements are projected to be $971.0 million and construction expenditures are projected to be $819.0 million for 2005-2009. These estimates are under continuing review and subject to on-going adjustment. This projection includes $49.0 million for the acquisition and construction of Luna announced on November 12, 2004 and $49.0 million for PNM's estimated share of capital costs for new pollution control technology at SJGS. See "Citizen Suit Under the Clean Air Act" in Note 7, "Commitments and Contingencies" in the Notes to Consolidated Financial Statements for further details regarding the pollution control technology at SJGS. This projection excludes any other generation fleet expansion capital and also excludes any capital requirements that may be required after closing of the proposed TNP acquisition (see "Acquisitions" above). The Company continues to look for appropriately priced generation acquisition and expansion opportunities to support retail electric load growth, the continued expansion of its long-term contract business and to supplement its natural transmission position in the Southwest and West.

During the three months ended March 31, 2005, the Company utilized cash generated from operations and cash on hand, as well as its liquidity arrangements, to cover its capital requirements and construction expenditures. The Company anticipates that internal cash generation and current debt capacity will be sufficient to meet all of its capital requirements and construction expenditures for the years 2005 through 2009. To cover the difference in the amounts and timing of cash generation and cash requirements, the Company intends to use short-term borrowings under its current and future liquidity arrangements.

Liquidity

As of April 29, 2005, the Holding Company had $415.0 million of liquidity arrangements. The liquidity arrangements consist of $400.0 million from an unsecured revolving credit facility, referred to as the Holding Company Facility for purposes of this discussion, and $15.0 million in local lines of credit. As of April 29, 2005, there were no amounts borrowed against the Holding Company Facility or the local lines of credit.

The Holding Company is currently in the process of establishing a commercial paper program under which it may issue up to $400.0 million in commercial paper for up to 270 days. The commercial paper will be unsecured and the proceeds will be used for short-term cash management needs. The Holding Company Facility will serve as a backstop for the outstanding commercial paper.

As of April 29, 2005, PNM had $393.5 million of liquidity arrangements. The liquidity arrangements consist of $300.0 million from an unsecured revolving credit facility, referred to as the PNM Facility for purposes of this discussion, $70.0 million from an AR Securitization program and $23.5 million in local lines of credit. As of April 29, 2005, there were no amounts borrowed against the PNM Facility, the AR Securitization, or the local lines of credit. At April 29, 2005, PNM also had a $20.0 million borrowing arrangement with the Holding Company, which is not included in the $393.5 million of liquidity arrangements noted above. As of April 29, 2005 there were no amounts outstanding under this arrangement.

PNM has a commercial paper program under which PNM may issue up to $300.0 million in commercial paper for up to 365 days. The commercial paper is unsecured and the proceeds are used for short-term cash management needs. The PNM Facility serves as a backstop for the outstanding commercial paper. As of April 29, 2005, PNM had $9.6 million in commercial paper outstanding under this program.

The Company's ability, if required, to access the capital markets at a reasonable cost and to provide for other capital needs is largely dependent upon its ability to earn a fair return on equity, its results of operations, its credit ratings, obtaining required regulatory approvals and financial and wholesale market conditions. Financing flexibility is enhanced by providing a high percentage of total capital requirements from internal sources and having the ability, if necessary, to issue long-term securities and to obtain short-term credit.

The Holding Company's credit outlook was considered stable by Moody's and S&P as of the date of this report. The Company is committed to maintaining or improving its investment grade ratings. In March 2005, S&P and Moody's rated the Holding Company's senior notes issued as part of its equity unit sales (see "Financing Activities" below) "BBB-" and "Baa3", respectively. In April 2005, S&P assigned its "A-2" corporate credit and short-term debt ratings to the Holding Company's planned commercial paper program discussed above.

PNM's credit outlook was considered stable by Moody's and S&P as of the date of this report. Maintaining or improving its investment grade ratings continues to be an important goal of the Company's. As of March 31, 2005, S&P rated PNM's business position as six, its senior unsecured notes as "BBB" with a stable outlook and its preferred stock as "BB+". As of March 31, 2005, Moody's rated PNM's senior unsecured notes as "Baa2" and its preferred stock as "Ba1". In April 2004, S&P assigned its "A-2" corporate credit and short-term debt ratings to PNM's rated commercial paper program. In April 2004, Moody's assigned its "P-2" corporate credit and short-term debt ratings to PNM's rated commercial paper program.

The Company anticipates maintaining its current ratings after the acquisition of TNP is consummated, which is currently anticipated to occur in the second quarter of 2005, although no assurance can be given in this regard.

Investors are cautioned that a security rating is not a recommendation to buy, sell or hold securities, that it is subject to revision or withdrawal at any time by the assigning rating organization, and that each rating should be evaluated independently of any other rating.

It is currently anticipated that the Holding Company's Board will maintain the current dividend policy of paying out 50% to 60% of consolidated earnings until its next annual evaluation of dividend policy. The Holding Company's dividend has increased, on average, more than 4.8% over the last three years, with the current annual common stock dividend at $0.74 per share. The Holding Company's Board generally considers the Company's dividend policy on an annual basis; however the Company plans to reexamine its dividend payout percentage after the close of the proposed TNP acquisition.

See "Acquisitions" above for additional information related to financing and credit ratings impacts from the proposed acquisition of TNP.

Commitments and Contractual Obligations

The Company enters into contracts that require payment of cash over specified periods, based on specified minimum quantities and prices. For an in-depth discussion of the Company's commitments and contractual obligations, see "Commitments and Contractual Obligations" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Form 10-K for the year ended December 31, 2004. See Note 11 - "Proposed TNP Acquisition" in the Notes to Consolidated Financial Statements for a description of the Holding Company's agreement to acquire TNP and related financing matters.

Contingent Provisions of Certain Obligations

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

PNM's standard purchase agreement for the procurement of gas for its retail customers contains a contingent requirement that could require PNM to provide security for its gas purchase obligations if the seller were to reasonably believe that PNM was unable to fulfill its payment obligations under the agreement.

The master agreement for the sale of electricity in the WSPP contains a contingent requirement that could require PNM to provide security if its debt were to fall below investment grade rating. The WSPP agreement also contains a contingent requirement, commonly called a material adverse change provision, which could require PNM to provide security if a material adverse change in its financial condition or operations were to occur.

The committed Holding Company Facility contains a "ratings trigger," for pricing purposes only. If the Holding Company is downgraded or upgraded by the ratings agencies, the result would be an increase or decrease in interest cost, respectively. The Holding Company Facility contains a material adverse change provision, which, if triggered, could prevent the Holding Company from drawing on its unused capacity under the Holding Company Facility except for drawing to repay any outstanding commercial paper. In addition, the Holding Company Facility contains a contingent requirement that requires the Holding Company to maintain a debt-to-capital ratio, inclusive of off-balance sheet debt, of less than 65% as well as maintenance of an earnings before interest, taxes, depreciation and amortization to interest ratio of 2.75 times. If the Holding Company's debt-to-capital ratio, inclusive of off-balance sheet debt, were to exceed 65% or its interest coverage ratio falls below 2.75, it could be required to repay all borrowings under the Holding Company Facility, be prevented from drawing on the unused capacity under the Holding Company Facility, and be required to provide security for all outstanding letters of credit issued under the Holding Company Facility.

The committed PNM Facility contains a "ratings trigger," for pricing purposes only. If PNM is downgraded or upgraded by the ratings agencies, the result would be an increase or decrease in interest cost, respectively. The PNM Facility contains a material adverse charge provision, which, if triggered, could prevent PNM from drawing on its unused capacity under the PNM Facility. The material adverse charge provision does allow drawing to repay outstanding commercial paper. In addition, the PNM Facility contains a contingent provision that requires PNM to maintain a debt-to-capital ratio, inclusive of off-balance sheet debt, of less than 65% as well as maintenance of an earnings before interest, taxes, depreciation and amortization to interest ratio of 3.0 times. If PNM's debt-to-capital ratio, inclusive of off-balance sheet debt, were to exceed 65% or its interest coverage ratio falls below 3.0, PNM could be required to repay all borrowings under the PNM Facility, be prevented from drawing on the unused capacity under the PNM Facility, and be required to provide security for all outstanding letters of credit issued under the PNM Facility.

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

Financing Activities

The Holding Company has two universal shelf registration statements filed with the SEC for the issuance of debt securities and equity securities, preferred stock, purchase contracts, purchase contract units and warrants. As of March 31, 2005, the Holding Company had approximately $400.9 million of remaining unissued securities under these registration statements. In addition, as of March 31, 2005, PNM had approximately $200.0 million of remaining unissued securities registered under its previously filed shelf registration statement.

Effective January 1, 2005, the Holding Company entered into a $50.0 million loan agreement with PNMR Services Company, a wholly-owned subsidiary. In addition, the Holding Company made a $5.0 million equity contribution to PNMR Services Company in January 2005. These steps were taken to provide PNMR Services Company with liquidity for its operations.

The Holding Company has entered into three fixed to floating interest rate swaps with an aggregate notional principal amount of $150.0 million. Under these swaps, the Holding Company receives a 4.40% fixed interest payment on the notional principal amount on a semi-annual basis and pays a floating rate equal to the six month LIBOR plus approximately 58.15 basis points (0.5815%) on the notional amount through September 15, 2008. The initial floating rate was approximately 1.91% and will be reset every six months. The floating rate was reset on March 15, 2005, to approximately 3.84%. The swap is accounted for as a fair-value hedge with a fair-market value (liability position) of approximately $3.1 million as of March 31, 2005.

Common Stock Offering

On March 30, 2005, the Holding Company issued 3,910,000 common stock shares of common stock at $26.76 per share. The Company received net proceeds from this offering, after deducting underwriting discounts and commissions and estimated expenses, of approximately

$101.0 million. The Company plans to use the net proceeds to retire high cost TNP debt and preferred stock (see Note 11 - "Proposed TNP Acquisition"), to complete the construction of Luna, a partially constructed, combined-cycle power plant near Deming, New Mexico and for other general Company purposes. Pending the acquisition and construction activities, the Company invested the net proceeds in investment grade, interest-bearing securities. At March 31, 2005, these net proceeds and the proceeds from the "Equity Unit Offering" discussed below, are included in "Cash and cash equivalents" on the Consolidated Balance Sheet of the Holding Company.

Equity Unit Offering

In March 2005, the Company completed a public offering of 4,945,000 6.75% equity units ("Equity Units"), yielding net proceeds after fees of $239.6 million. The Company plans to use the net proceeds to retire high cost TNP debt and preferred stock in connection with the proposed TNP acquisition, to complete the construction of Luna and for other general corporate purposes. Pending the acquisition and construction activities, the Company invested the net proceeds in investment grade, interest-bearing securities.

Each Equity Unit consists of a purchase contract and a 5.0% individual beneficial ownership interest in one of the Company's senior notes with a stated amount of $1,000, which corresponds to a $50 stated amount of the Company's senior notes. The ownership interest in the senior notes is initially pledged to secure the Corporate Unit holder's obligation to purchase Company common stock under the related purchase contract. The senior notes are scheduled to mature in May 2010 (subject to the remarketing described below) and bear interest at a rate of 4.8% per year. The purchase contracts entitle their holders to contract adjustment payments of 1.95% per year on the stated amount of $50.

Each purchase contract obligates the holder to purchase, and the Company to sell, at a purchase price of $50 in cash, shares of the Company's common stock on or before May 16, 2008 (the "Purchase Contract Settlement Date"). Generally, the number of shares each holder of the Equity Units is obligated to purchase depends on the average closing price per share of Company's 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. If the average closing price for the 20-day trading period is equal to or greater than approximately $32.65 per share, the settlement rate will be 1.5315 shares of common stock. If the average closing price for the trading period is less than approximately $32.65 per share but greater than $26.76 per share, the settlement rate is equal $50 divided by the average closing price of the Company's common stock for the trading period. If the average closing for the trading period price is less than or equal to $26.76 per share, the settlement rate will be 1.8685 shares of common stock. The holders of Equity Units have the option to settle their obligations under the purchase contracts at any time on or prior to the seventh business day immediately preceding the Purchase Contract Settlement Date. Prior to the Purchase Contract Settlement Date, the senior notes will be remarketed. If the remarketing is successful, the interest rate on the senior notes may change to a rate selected by the remarketing agent, and the maturity of the senior notes may be extended to a date selected by the Company, but no later than May 2038. If the remarketing of the senior notes is not successful, the maturity and interest rate of the senior notes will not change and holders of the Equity Units will have the option of putting their senior notes to the Company to satisfy their obligations under the purchase contracts.

The purchase contracts are forward transactions in the Company's common stock. Upon issuance, a liability for the present value of the purchase contract adjustment payments of $13.9 million was recorded as a reduction to stockholders' equity, with an offsetting increase to other long-term liabilities and current liabilities. Subsequent contract adjustment payments will reduce this liability. Upon settlement of each purchase contract, the Company will receive the stated amount of $50 on the purchase contract and will issue the requisite number of shares of common stock, which the Company has reserved. The stated amount received will be recorded as an increase to stockholders' equity.

Before the issuance of common stock upon settlement of the purchase contracts, the Equity Units will be reflected in diluted earnings per share calculations using the treasury stock method as defined by SFAS 128. Under this method, the number of shares of common stock used in calculating diluted earnings per share (based on the settlement formula applied at the end of the reporting period) is deemed to be increased by the excess, if any, of the number of shares that would be issued upon settlement of the purchase contracts less the number of shares that could be purchased by the Company in the market at the average market price during the period using the proceeds to be received upon settlement. Therefore, dilution will occur for periods when the average market price of the Company's common stock for the reporting period is above approximately $32.65, and will potentially occur when the average price of the Company's common stock for the 20-day trading period preceding the end of the reporting period is lower than the average price of the Company's common stock for the full reporting period. There was no dilution in the quarter ended March 31, 2005.

Depending on its future business strategy, capital needs and market conditions, the Company could enter into additional long-term financings for the purpose of strengthening its balance sheet, funding growth and reducing its cost of capital. The Company continues to evaluate its investment and debt retirement options to optimize its financing strategy and earnings potential. No additional first mortgage bonds may be issued under PNM's mortgage. The amount of senior unsecured notes that may be issued is not limited by the senior unsecured notes indenture. However, debt-to-capital requirements in certain of PNM's financial instruments and regulatory agreements would ultimately limit the amount of additional debt PNM would issue.

Capital Structure

The Company's capitalization, including current maturities of long-term debt, at March 31, 2005 and December 31, 2004 is shown below:

	March 31,	December 31,
	2005	2004

Common Equity	49.2%	52.4%
Preferred Stock	0.5%	0.6%
Long‑term Debt	50.3%	47.0%
Total Capitalization*	100.0%	100.0%

* Total capitalization does not include as debt the present value of PNM's operating lease obligations for PVNGS Units 1 and 2, EIP and the Delta operating lease, which was approximately $174.8 million as of March 31, 2005 and $176.0 million as of December 31, 2004.

The change in the Company's capitalization is due to the issuance of common stock and Equity Units. Had these issuances been made at December 31, 2004, common equity would have been approximately 49.1%, preferred stock approximately 0.5%, and long-term debt approximately 50.4%.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company uses derivative financial instruments to manage risk as it relates to changes in natural gas and electric prices, changes in interest rates and, historically, adverse market changes for investments held by the Company's various trusts. Additionally, the Company uses derivative instruments based on certain financial composite indices as part of its enhanced cash management program. The Company also uses certain derivative instruments for wholesale power marketing transactions in order to take advantage of favorable price movements and market timing activities in the wholesale power markets. The following additional information is provided.

Risk Management

The Company controls the scope of its various forms of risk through a comprehensive set of policies and procedures and oversight by senior level management and the Holding Company Board. The Board's Finance Committee sets the risk limit parameters. The RMC, comprised of corporate and business segment officers and other managers, oversees all of the activities, which include commodity price, credit, equity, interest rate and business risks. The RMC has oversight for the ongoing evaluation of the adequacy of the risk control organization and policies. The Company has a risk control organization, headed by a Risk Manager, which is assigned responsibility for establishing and enforcing the policies, procedures and limits and evaluating the risks inherent in proposed transactions, on an enterprise-wide basis.

The RMC's responsibilities specifically include: establishment of a general policy regarding risk exposure levels and activities in each of the business segments; authority to approve the types of instruments traded; authority to establish a general policy regarding counterparty exposure and limits; authorization and delegation of transaction limits; review and approval of controls and procedures; review and approval of models and assumptions used to calculate mark-to-market and risk exposure; authority to approve and open brokerage and counterparty accounts; review of hedging and risk activities; and quarterly reporting to the Finance Committee and the Holding Company Board on these activities.

The RMC also proposes VAR limits to the Finance Committee. The Finance Committee ultimately sets the Company's VAR limits.

It is the responsibility of each business segment to create its own control procedures and policies within the parameters established by the Finance Committee. The RMC reviews and approves these policies, which are created with the assistance of the Corporate Controller, Director of Internal Audit and the Director of Financial Risk Management. Each business segment's policies address the following controls: authorized risk exposure limits; authorized instruments and markets; authorized personnel; policies on segregation of duties; policies on mark-to-market accounting; responsibilities for deal capture; confirmation procedures; responsibilities for reporting results; statement on the role of derivative transactions; and limits on individual transaction size (nominal value).

To the extent an open position exists, fluctuating commodity prices can impact financial results and financial position, either favorably or unfavorably. As a result, the Company cannot predict with certainty the impact that its risk management decisions may have on its businesses, operating results or financial position.

Commodity Risk

Marketing and procurement of energy often involves market risks associated with managing energy commodities and establishing open positions in the energy markets, primarily on a short-term basis. These risks fall into three different categories: price and volume volatility, credit risk of counterparties and adequacy of the control environment. PNM routinely enters into forward contracts, option agreements and price basis swap agreements to hedge price and volume risk on its purchase and sale commitments, fuel requirements and to enhance returns and minimize the risk of market fluctuations on the Wholesale Operations.

The Company's Wholesale Operations, including long-term contracts, forward sales and short-term sales, are managed primarily through a net asset-backed marketing strategy, whereby PNM's aggregate net open forward contract position is covered by its forecasted excess generation capabilities. PNM is exposed to market risk if its generation capabilities were disrupted or if its retail load requirements were greater than anticipated. If PNM were required to cover all or a portion of its net open contract position, it would have to meet its commitments through market purchases.

Under the derivative accounting rules and the related accounting rules for energy contracts, the Company accounts for its various financial derivative instruments for the purchase and sale of energy differently based on management's intent when entering into the contract. Energy contracts that meet the definition of a derivative under SFAS 133 and do not qualify for a normal purchase or sale designation are recorded on the balance sheet at fair market value at each period end. The changes in fair market value are recognized in earnings unless specific hedge accounting criteria are met. Should an energy transaction qualify as a hedge under SFAS 133, fair market value changes from year to year are recognized on the balance sheet with a corresponding charge to other comprehensive income. Gains or losses are recognized when the hedged transaction settles. Derivatives that meet the normal sales and purchases exceptions within SFAS 133 are not marked to market but rather recorded in results of operations when the underlying transaction settles.

The following table shows the net fair value of mark-to-market energy contracts included in the balance sheet:

	March 31,	December 31,
	2005	2004
	(In thousands)
Mark-to-Market Energy Contracts:
Current asset	$ 10,194	$ 6,890
Long-term asset	4,291	316
Total mark-to-market assets	14,485	7,206
Current liability	(8,079)	(5,007)
Long-term liability	(3,410)	(126)
Total mark-to-market liabilities	(11,489)	(5,133)

Net fair value of mark-to-market energy contracts	$ 2,996	$ 2,073

The mark-to-market energy transactions represent net assets at March 31, 2005 and December 31, 2004 after netting all applicable open purchase and sale contracts.

The market prices used to value PNM's mark-to-market energy transactions are based on index prices and broker quotations. Generally, market data to value these transactions is available for the next 18-month period only; the remaining time period, referred to as the illiquid period, is valued using internally developed pricing data. As a result, the Company records liquidity reserves on these contracts for market gains and losses in the illiquid period, effectively limiting the mark-to-market valuation to a rolling 18-month period. The Company regularly assesses the validity and availability of pricing data for the illiquid period of its derivative transactions and adjusts its liquidity reserves, accordingly.

The following table provides detail of changes in the Company's mark-to-market energy transactions' net asset or liability balance sheet position from one period to the next:

	Three Months Ended
	March 31,
	2005	2004
	(In thousands)
Sources of Fair Value Gain/(Loss)
Fair value at beginning of year	$ 2,073	$ 433

Amount realized on contracts delivered
during period	67	411
Changes in fair value	856	1,349

Net fair value at end of period	$ 2,996	$ 2,193

Net change recorded as mark-to-market	$ 923	$ 1,760

The following table provides the maturity of the net assets/(liabilities) of the Company, giving an indication of when these mark-to-market amounts will settle and generate/(use) cash. The following values were determined using broker quotes:

Fair Value at March 31, 2005

As of March 31, 2005, a decrease in market pricing of PNM's mark-to-market energy transactions by 10% would have resulted in a decrease in net earnings of less than 1%. Conversely, an increase in market pricing of these transactions by 10% would have resulted in an increase in net earnings of less than 1%.

The Company measures the market risk of these long-term contracts and wholesale activities using a VAR calculation to maintain the Company's total exposure within management-prescribed limits. The Company's VAR calculation reports the possible market loss for the respective transactions. This calculation is based on the transaction's fair market value on the reporting date. Accordingly, the VAR calculation is not a measure of the potential accounting mark-to-market loss. In 2005, the Company adopted the Monte Carlo simulation model of VAR. The Monte Carlo model utilizes a random generated simulation based on historical volatility to generate portfolio values. The Company continues to utilize the two-tailed confidence level at 99%. VAR models are relatively sophisticated. The quantitative risk information, however, is limited by the parameters established in creating the model. The instruments being evaluated may trigger a potential loss in excess of calculated amounts if changes in commodity prices exceed the confidence level of the model used. The VAR methodology employs the following critical parameters: volatility estimates, market values of open positions, appropriate market-oriented holding periods and seasonally adjusted correlation estimates. The Company's VAR calculation considers the Company's forward position for the next eighteen months. The Company uses a holding period of three days as the estimate of the length of time that will be needed to liquidate the positions. The volatility and the correlation estimates measure the impact of adverse price movements both at an individual position level as well as at the total portfolio level. The two-tailed confidence level established is 99%. For example, if VAR is calculated at $10.0 million, it is estimated at a 99% confidence level that if prices move against PNM's positions, the Company's pre-tax gain or loss in liquidating the portfolio would not exceed $10.0 million in the three days that it would take to liquidate the portfolio.

The Company's VAR is regularly monitored by the Company's RMC. The RMC has put in place procedures to ensure that increases in VAR are reviewed and, if deemed necessary, acted upon to reduce exposures. The VAR represents an estimate of the potential gains or losses that could be recognized on PNM's wholesale power marketing portfolios given current volatility in the market, and is not necessarily indicative of actual results that may occur, since actual future gains and losses will differ from those estimated. Actual gains and losses may differ due to actual fluctuations in market prices, operating exposures, and the timing thereof, as well as changes to PNM's wholesale power marketing portfolios during the year.

In 2005, the Company revised its methodologies for calculating VAR in order to improve its ability to measure and manage risk. As a result, the Company also revised its VAR limits to be consistent with the new methodologies. As previously discussed, the Company adopted the Monte Carlo statistical simulation approach. In addition, the Company redefined the types of transactions on which it measures VAR. The total VAR is now based solely on its merchant activities and excludes all effects from the retail operations and the joint dispatch model employed by the Company. The total VAR limit established is $18.0 million. For the three months ended March 31, 2005, the average total VAR amount was $10.1 million, with high and low VAR amounts for the period of $13.5 million and $4.0 million, respectively. The total VAR amount at March 31, 2005 was $12.3 million. In addition, the Company defined a sub-set of the total VAR that captures all transactions that are not directly asset related and have economic risk. The VAR limit established for these transactions is $5.0 million. For the three months ended March 31, 2005, the average VAR amount for these transactions was $0.3 million, with high and low VAR amounts for the period of $0.7 million and $0.2 million, respectively. The VAR amount for these transactions at March 31, 2005 was $0.4 million.

In 2004, the Company utilized the variance/covariance model of VAR, which is a probabilistic model that measures the risk of loss to earnings in market sensitive instruments. The variance/covariance model relies on statistical relationships to analyze how changes in different markets can affect a portfolio of instruments with different characteristics and market exposure. For the three months ended March 31, 2004 the Company's average total VAR amount as reported was $11.8 million, with high and low VAR amounts for the period of $16.7 million and $9.5 million, respectively. The total VAR amount at March 31, 2004 was $16.7 million. In the prior year the Company also measured VAR for a subset of transactions that were marked-to-market in accordance with SFAS 133. The VAR limit established for these transactions was $2.0 million. For the three months ended March 31, 2004, the average VAR amount for these transactions was $0.1 million, with high and low VAR amounts for the period of $0.2 million and $0, respectively. The total VAR amount at March 31, 2004 was $0.1 million. Because of the nature of the Monte Carlo simulation method now utilized by the Company, reporting of the 2004 VAR amounts using the Company's new approach is neither practical nor representational of the Company's management of risk in 2004.

Credit Risk

PNM is exposed to credit losses in the event of non-performance or non-payment by counterparties. The Company uses a credit management process to assess and monitor the financial conditions of counterparties. Credit exposure is also regularly monitored by the RMC. The Company provides for losses due to market and credit risk. PNM's credit risk with its largest counterparty as of March 31, 2005 and December 31, 2004 was $39.3 million and $26.2 million, respectively.

The following table provides information related to PNM's credit exposure as of March 31, 2005. The Company does not hold any credit collateral as of March 31, 2005. The table further delineates that exposure by the credit worthiness (credit rating) of the counterparties and provides guidance as to the concentration of credit risk to individual counterparties PNM may have. Also provided is an indication of the maturity of a company's credit risk by credit ratings of the counterparties.

Schedule of Wholesale Operations Credit Risk Exposure
March 31, 2005

			Net
	(b)	Number	Exposure
	Net	of	of
	Credit	Counter	Counter-
	Risk	-parties	parties
Rating (a)	Exposure	>10%	>10%
	(Dollars in thousands)

Investment grade	$84,252	2	$51,996
Non-investment grade	1,427	-	-
Internal ratings
Investment grade	67	-	-
Non-investment grade	3,622	-	-
Total	$89,368		$51,996

(a) Rating - Included in "Investment Grade" are counterparties with a minimum S&P rating of BBB- or Moody's rating of Baa3. If the counterparty has provided a guarantee by a higher rated entity (e.g., its parent), determination is based on the rating of its guarantor. The category "Internal Ratings - Investment Grade" includes those counterparties that are internally rated as investment grade in accordance with the guidelines established in the Company's credit policy.

(b) The Net Credit Risk Exposure is the net credit exposure to PNM from its Wholesale Operations. This includes long-term contracts, forward sales and short-term sales. The exposure captures the net amounts due to PNM from receivables/payables for realized transactions, delivered and unbilled revenues, and mark-to-market gains/losses (pursuant to contract terms). Exposures are offset according to legally enforceable netting arrangements and reduced by credit collateral. Credit collateral includes cash deposits, letters of credit and performance bonds received from counterparties. Amounts are presented before those reserves that are determined on a portfolio basis.

Maturity of Credit Risk Exposure
As of March 31, 2005


				Total
	Less than			Net
Rating	2 Years		2-5 Years	Exposure
		(In thousands)

Investment grade	$84,052		$200	$84,252
Non-investment grade	1,427		-	1,427
Internal ratings
Investment grade	67		-	67
Non-investment grade	3,622		-	3,622
Total	$89,168		$200	$89,368

Natural Gas Supply Contracts

PNM hedges certain portions of natural gas supply contracts in order to protect its retail customers from adverse price fluctuations in the natural gas market. The financial impact of all hedge gains and losses, including the related costs of the program, is recoverable through the PGAC. As a result, earnings are not affected by gains and losses generated by these instruments.

In order to protect its natural gas customers from the risk of rising prices during the 2005-2006 heating season, in total, PNM plans to expend approximately $7.2 million in 2005 to purchase gas options that essentially cap the amount the Company would pay for each volume of gas subject to the options during the winter heating season. PNM expects to recover its option premiums as a component of the PGAC during the months of October 2005 through February 2006.

Interest Rate Risk

PNM has long-term debt which subjects it to the risk of loss associated with movements in market interest rates. The majority of the Company's long-term debt is fixed-rate debt, and therefore, does not expose the Company's earnings to a major risk of loss due to adverse changes in market interest rates. However, the fair value of all long-term debt instruments would increase by approximately 4.85%, or $50.2 million, if interest rates were to decline by 50 basis points from their levels at March 31, 2005. As of March 31, 2005, the fair value of PNM's long-term debt was $1.04 billion as compared to a book-value of $987.1 million. In general, an increase in fair value would impact earnings and cash flows to the extent not recoverable in rates if PNM were to re-acquire all or a portion of its debt instruments in the open market prior to their maturity.

During the three months ended March 31, 2005, the Company contributed cash of approximately $1.5 million to other post retirement benefits for plan year 2005. The securities held by the trusts had an estimated fair value of $596.9 million as of March 31, 2005, of which approximately 28% were fixed-rate debt securities that subject the Company to risk of loss of fair value with movements in market interest rates. If rates were to increase by 50 basis points from their levels at March 31, 2005, the decrease in the fair value of the securities would be 2.8% or $4.7 million. PNM does not currently recover or return through rates any losses or gains on these securities. The Company, therefore, is at risk for shortfalls in its funding of its obligations due to investment losses. The Company does not believe that long-term market returns over the period of funding will be less than required for the Company to meet its obligations. However, this belief is based on assumptions about future returns that are inherently uncertain.

Equity Market Risk

PNM contributes to trusts established to fund its share of the decommissioning costs of PVNGS and pension and other postretirement benefits. The trusts hold certain equity securities as of March 31, 2005. These equity securities also expose the Company to losses in fair value. Approximately 60% of the securities held by the various trusts were equity securities as of March 31, 2005. Similar to the debt securities held for funding decommissioning and certain pension and other postretirement costs, PNM does not recover or earn a return through rates on any losses or gains on these equity securities.

The Company has a cash management structure that includes a preferred stock dividend capture strategy and various absolute return strategies that have the objective of achieving returns higher than that associated with cash management plans and with bond like volatility. The Company's initial investment in the enhanced cash management program was $10.0 million and an additional $2.0 million was invested in February 2005. As of March 31, 2005 and December 31, 2004, the balance in this investment, including profits and interest, was $13.1 million and $10.6 million, respectively.

OTHER ISSUES FACING THE COMPANY

See Note 7 - "Commitments and Contingencies", in the Notes to Consolidated Financial Statements.

NEW ACCOUNTING STANDARDS

There have been no new accounting standards that materially affected the Company this period. See Note 12 - "New Accounting Standards", in the Notes to Consolidated Financial Statements. See Note 1 - "Summary of the Business and Significant Accounting Policies - Stock Based Compensation", in the Notes to Consolidated Financial Statements for discussion of SFAS No. 123 (revised 2004), "Share Based Payment" .

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

Statements made in this filing that relate to future events or the Company's expectations, projections, estimates, intentions, goals, targets and strategies, both with respect to the Company and with respect to the proposed acquisition of TNP, are made pursuant to the Private Securities Litigation Reform Act of 1995. Readers are cautioned that all forward-looking statements are based upon current expectations and estimates and the Company assumes no obligation to update this information.

Because actual results may differ materially from those expressed or implied by these forward-looking statements, the Company cautions readers not to place undue reliance on these statements. The Company's business, financial condition, cash flow and operating results are influenced by many factors, which are often beyond the Company's control, that can cause actual results to differ from those expressed or implied by the forward-looking statements. These factors include:

The potential unavailability of cash at TNPE,
Risks and uncertainties relating to the receipt of SEC and NMPRC approvals for the proposed acquisition of TNP,
The risk that the businesses will not be integrated successfully,
The risk that the benefits of the TNP transaction will not be fully realized or will take longer to realize than expected,
Disruption from the TNP transaction making it more difficult to maintain relationships with customers, employees, suppliers or other third parties,
Changing conditions in the financial markets relevant to the proposed TNP acquisition,
Fluctuations in interest rates,
Weather,

Water supply,
Changes in fuel costs,
Availability of fuel supplies,
The effectiveness of risk management and commodity risk transactions,
Seasonality and other changes in supply and demand in the market for electric power,
Variability of wholesale power prices,
Volatility in market liquidity,
Changes in the competitive environment in the electric and natural gas industries,
The performance of generating units and transmission systems,
The ability of the Company to secure long-term power sales,
The risks associated with completion of construction of Luna, including construction delays and unanticipated cost overruns,
State and federal regulatory and legislative decisions and actions,
The outcome of legal proceedings,
Changes in applicable accounting principles,
The performance of state, regional and national economies, and
The other factors described in "Risk Factors" in this report.

See also "Quantitative and Qualitative Disclosure About Market Risk" above for information about the risks associated with the Company's use of derivative financial instruments.

SECURITIES ACT DISCLAIMER

Certain securities to be issued in connection with the TNP acquisition transaction and commercial paper described in this report have not been registered under the Securities Act of 1933, as amended, or any state securities laws and may not be reoffered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act of 1933 and applicable state securities laws. This report does not constitute an offer to sell or the solicitation of an offer to buy any securities.

RISK FACTORS

The Company's business and financial results are subject to a number of risks and uncertainties, including those set forth below and under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report.

The Company may not be able to complete its acquisition of TNP. If the Company does not complete the acquisition, dilution to its earnings per share may result.

In July 2004, the Company announced its proposed $1.024 billion acquisition of TNP. Although the Company has received anti-trust clearance under the Hart-Scott-Rodino Antitrust Improvements Act and PUCT and FERC approval, the proposed TNP acquisition remains subject to approvals of the NMPRC and the SEC, and other customary closing conditions.

In March 2005, the FERC voted to approve the planned acquisition by the Holding Company of the securities of TNP. The FERC reviewed the proposed transaction under the FERC's Merger Policy Statement, to determine whether it is consistent with the public interest by applying a three-part test. Specifically, the FERC examined the effect of the proposed transaction on: (1) competition, (2) rates, and (3) regulation. Based on its review, the FERC determined that the proposed transaction is consistent with the public interest.

Although the Company expects to complete the transaction in the second quarter of 2005, the Company cannot be certain that all of the required approvals will be obtained, or that it will have raised sufficient additional capital or that the other closing conditions will be satisfied, within that time frame, if at all, or without terms and conditions that may have a material adverse effect on its operations. If the Company is unable to complete the proposed TNP acquisition, any issuance of common stock in anticipation of the acquisition will result in dilution to the Company's earnings per share unless the Company is able to avoid or mitigate such dilution.

The Company may fail to successfully integrate acquisitions, including TNP, into its other businesses or otherwise fail to achieve the anticipated benefits of pending and future acquisitions.

As part of the Company's growth strategy, the Company is pursuing, and intends to continue to pursue, a disciplined acquisition strategy. While the Company expects to identify potential synergies, cost savings, and growth opportunities prior to the acquisition and integration of acquired companies or assets, the Company may not be able to achieve these anticipated benefits due to, among other things:

delays or difficulties in completing the integration of acquired companies or assets
higher than expected costs or a need to allocate resources to manage unexpected operating difficulties
diversion of the attention and resources of its management
reliance on inaccurate assumptions in evaluating the expected benefits of a given acquisition

inability to retain key employees or key customers of acquired companies
assumption of liabilities unrecognized in the due diligence process

With respect to the proposed TNP acquisition, the Company cannot assure that it will be able to successfully integrate TNP with the Company's current businesses. The integration of TNP with the Company's other businesses will present significant challenges and, as a result, the Company may not be able to operate the combined company as effectively as expected. Also, even if PNM manages to realize greater than anticipated benefits from the integration of TNP into its business, as a regulated entity, PNM may be required by its regulators to return these benefits to its ratepayers. In connection with the Texas and New Mexico settlements relating to the proposed TNP acquisition, for example, the Company agreed to provide ratepayers in Texas and New Mexico with rate credits over various periods of time resulting from anticipated synergy savings from the acquisition. The Company may also fail to achieve the anticipated benefits of the acquisition as quickly or as cost-effectively as anticipated or may not be able to achieve those benefits at all.

While the Company expects that this acquisition will be accretive to earnings and cash flow in the first full year of operation after the transaction is completed, this expectation is based on important assumptions, including assumptions related to interest rates, market prices for power, its ability to achieve operational benefits from operating the companies as a unified operation and the percentage of TNP's customers that the Company will be able to retain, which may ultimately be incorrect. In addition, the agreement the Company has entered into with the PUCT staff and others relating to the proposed TNP acquisition includes a two-year electric rate freeze and a $13.0 million annual rate reduction in TNMP's retail delivery rates effective May 1, 2005, which could adversely affect profitability if costs at TNMP are not controlled. Additionally, the agreement entered into with the NMPRC staff and others provides TNMP's New Mexico electric customers with a three-phase 15% rate reduction to begin January 2006 and end December 2010. As a result, if the Company is unable to integrate its businesses with TNP effectively or achieve the benefits anticipated, the Company's business, financial position, results of operations and liquidity may be materially adversely affected.

The Company is subject to complex government regulation, which may have a negative impact on its business, financial position and results of operations.

The Company is subject to comprehensive regulation by several federal, state and local regulatory agencies, which significantly influences the Company's operating environment and may affect the Company's ability to recover costs from utility customers. In particular, the NMPRC, the SEC, the FERC, the NRC, the EPA, and the NMED regulate many aspects of its utility operations, including siting and construction of facilities, conditions of service, the issuance of securities, and the rates that the Company can charge customers. The Company is required to have numerous permits, approvals and certificates from these agencies to operate its business. The rates that the Company's principal subsidiary, PNM, is allowed to charge for its retail services are the single most important item influencing the Company's business, financial position, results of operations and liquidity. As discussed below, PNM is subject to a rate freeze providing for no changes in retail electric rates through December 31, 2007, subject to limited exceptions.

As a public utility holding company, the Company is subject to regulation by the SEC under PUHCA. The rules and regulations promulgated under PUHCA impose a number of restrictions on the operations of registered public utility holding companies and their subsidiaries. These restrictions include a requirement that, subject to a number of exceptions, the SEC approve in advance securities issuances, acquisitions and dispositions of utility assets or of securities of utility companies, and acquisitions of other businesses. PUHCA also generally limits the operations of a registered public utility holding company to a single integrated public utility system, plus additional energy-related businesses. PUCHA requires that transactions between affiliated companies in a registered holding company system be performed at cost, with limited exceptions.

The Company is unable to predict the impact on its business and operating results from the future regulatory activities of any of these agencies. Changes in regulations or the imposition of additional regulations may require the Company to incur additional expenses or change business operations, and therefore may have an adverse impact on the Company's results of operations. Because of pending federal regulatory reforms, the public utility industry is undergoing a fundamental change. New Mexico repealed the Electric Utility Industry Restructuring Act of 1999 in 2003 and abandoned its plans to transform the industry from one of vertically integrated monopolies to one with deregulated, competitive generation. However, the FERC has proposed a standard market design, which would establish independently governed regional transmission organizations with common rules for market operations. The FERC's efforts have been opposed by a number of states, primarily in the Southeast and the West, because of concern that the standard market design does not provide for regional differences and does not represent a cost-efficient approach to wholesale markets. Energy legislation, which could affect the FERC's activities, remains under consideration in Congress. In 2003, in an attempt to ease concerns with its standard market design proposal, the FERC issued a white paper defining a wholesale power market platform which would replace the standard market design. Both the standard market design and wholesale power market platform proposals are still pending further action by the FERC. The Company's future results will be impacted by the form of the FERC rules, if adopted, the costs of complying with rules and legislation that may call for regulatory reforms for the industry, and the resulting market prices for electricity and natural gas.

PNM's retail electric rate reduction and retail electric rate freeze could adversely affect its profit margin if it does not control costs.

With NMPRC approval, PNM agreed to decrease its retail electric rates by 6.5% in two phases as follows: 4% effective September 1, 2003, and an additional 2.5% effective September 1, 2005. PNM also agreed to freeze these reduced retail electric rates through December 31, 2007. PNM's costs, however, are not frozen. Thus, PNM's ability to maintain its profit margins depends upon increased demand for electricity and PNM's efforts to control costs incurred in supplying that electricity, including, in particular, its coal costs.

PNM does not have the benefit of a fuel adjustment clause for its retail electric operations that would allow it to recover increased fuel and purchased power costs from customers. In addition, as part of the New Mexico settlement relating to the proposed TNP acquisition, TNMP's current fuel and purchased power adjustment clauses will be eliminated no later than March 31, 2006. Therefore, to the extent that PNM has not hedged its fuel and power costs, it is exposed to changes in fuel and power prices to the extent fuel for its electric generating facilities

and power must be purchased on the open market in order for it to serve its retail electric customers. PNM anticipates being able to reduce base fuel costs as a result of its revised coal contract relating to the new underground mine serving SJGS. However, if the anticipated base fuel cost savings do not occur because of problems at the new mine or if PNM cannot control other operating expenses, the retail electric rate freeze may decrease PNM's profit margin. The retail electric rate freeze will also affect PNM's ability to earn a return or recover from its customers costs associated with investments in generation, transmission and distribution facilities since it will not be able to increase retail electric rates to recover those costs until at least after the end of the rate freeze. For example, in connection with the electric retail rate freeze stipulation, PNM agreed to invest $60.0 million per year through 2007 in gas and electric utility infrastructure, increasing to $64.0 million per year after PNM and TNMP are integrated. If future recovery of these costs ceases to be probable, PNM would be required to record a charge to earnings in the period for the portion of the costs that were determined not to be recoverable. The electric retail rate freeze stipulation does, however, allow PNM to seek a general rate adjustment for certain changes in environmental or tax laws.

The Company is not able to predict what rate treatment PNM will receive following the expiration of the retail electric rate freeze in New Mexico. Some of the factors that influence rates are largely outside the Company's control. In response to competitive, economic, political, legislative and/or regulatory pressures PNM may have to agree to further rate freezes, rate refunds or rate reductions, any or all of which could have a significant adverse effect on the Company's business, financial position, results of operations and liquidity.

The Company is currently the subject of several regulatory proceedings and named in multiple lawsuits with respect to the Company's participation in western energy markets.

The FERC is conducting industry-wide proceedings and investigations related to the alleged dysfunctions of the organized California market and the Pacific Northwest market during 2000 and 2001. In September 2002, an ALJ conducted hearings regarding sales into the California wholesale electric market by PNM and others in 2000 and 2001. The ALJ then issued "Proposed Findings on California Refund Liability" in December 2002, determining that the Cal ISO had, for the most part, correctly calculated the amounts of potential refunds owed by sellers. In March 2003, the FERC issued an order substantially adopting the ALJ's findings, but requiring a change to the formula used to calculate refunds, which would have the effect of increasing PNM's refund liability. In September 2004, the Ninth Circuit issued its decision in one of the lead appellate cases addressing the FERC's refund order. The Ninth Circuit upheld the FERC's authority to establish the market-based rate framework under the Federal Power Act, but held that the FERC violated its administrative discretion by declining to investigate whether it should order refunds from sellers who failed to provide transaction-specific reports to the FERC as required by its rules. The Ninth Circuit determined that the FERC has the authority to order refunds for these transactions if it elects to do so and remanded the case to the FERC for further proceedings, including a determination as to whether additional refunds are appropriate. PNM participated with other competitive sellers requesting rehearing en banc by the Ninth Circuit, which is still pending. Additional appeals are still pending before the Ninth Circuit, including CPUC vs FERC , a case addressing the scope of market transactions subject to refund. PNM has participated in this appeal as one of the members of the competitive sellers group. The Company cannot predict the ultimate outcome of any FERC proceeding that may result from these appeals, or whether PNM will be ultimately directed to make any additional future refunds as the result of the decision; however, the Company has recorded a reserve for this contingency.

For the proceedings related to the Pacific Northwest market, in June 2003, the FERC denied the request of certain parties for retroactive refunds for spot market sales. In November 2003, the Port of Seattle filed an appeal of the FERC's order denying rehearing in the Ninth Circuit, which is still pending. As a participant in the proceedings before the FERC, the Company is also participating in the appeal proceedings. The Company is unable to predict the ultimate outcome of this appeal, or whether PNM will ultimately be directed to make any refunds.

In March 2002, the California Attorney General filed a complaint with the FERC against numerous sellers regarding prices for wholesale electric sales into the Cal ISO and Cal PX markets and to the California Department of Water Resources. PNM was among the sellers identified in this complaint and filed its answer and motion to intervene. In its answer, PNM defended its pricing and challenged the theory of liability underlying the California Attorney General's complaint. In May 2002, the FERC entered an order denying the California Attorney General's request to initiate a refund proceeding, but directed sellers, including PNM, to comply with additional reporting requirements with regard to certain wholesale power transactions. PNM has made filings required by the May 2002 order. The California Attorney General filed a petition for review in the Ninth Circuit. PNM intervened in the Ninth Circuit appeal and participated as a party in that proceeding. As noted above, in September 2004, the Ninth Circuit issued its decision upholding the FERC's authority to establish the market-based rate framework under the Federal Power Act, but held that the FERC violated its administrative discretion by declining to investigate whether it should order refunds from sellers who failed to provide transaction-specific reports to the FERC as required by its rules. The Ninth Circuit determined that the FERC has the authority to order refunds for these transactions if it elects to do so and remanded the case back to the FERC for further proceedings, including a determination as to whether additional refunds are appropriate. PNM participated with other competitive sellers requesting rehearing en banc by the Ninth Circuit, which is still pending. The Company cannot predict the ultimate outcome of the FERC proceeding on remand, or whether PNM will be ultimately directed to make any additional refunds as the result of the decision. As addressed below, the California Attorney General has also threatened litigation against PNM in state court in California based on similar allegations.

In June 2004, PNM received notice that PNM has been included in a list of 56 defendants that have been sued by the City of Tacoma Department of Public Utilities in federal district court in the State of Washington. PNM has been listed in a class of defendants referred to as the "Trading Defendants", who allegedly engaged in buying, selling and marketing power in California and other locations in the Western United States. The complaint alleges the Trading Defendants acted in concert among themselves and with "Non-Defendant Trading Co-Conspirators" that were engaged in conduct that amounted to "market manipulations", which the complaint defines as a pattern of activities that had the purpose and effect of creating the impression that the demand for power was higher, the supply of power was lower, or both, than was in fact the case. The complaint identified specific conduct that allegedly amounted to "market manipulations", including the submission of false information and misrepresentation regarding load schedules, bids, power supply, transmission congestion, source and destination of energy, the supply and provision of energy and ancillary services. The complaint alleged the activities of the Trading Defendants, along with "Generator Defendants", who are defined as

generators who generated power for sale into California and other Western markets, and the co-conspirators, resulted in substantially increased prices for energy in the Pacific Northwest spot market in excess of what otherwise would have been the price absent such unlawful acts, in violation of antitrust laws. The complaint asserted damages in excess of $175.0 million from the multiple defendants. As a result, PNM joined a motion to dismiss the City of Tacoma Department of Public Utilities complaint given Ninth Circuit precedent. In a decision issued in February 2005, the district court judge in the case granted defendants' motion to dismiss. As a result, the antitrust lawsuit against PNM filed by the City of Tacoma Department of Public Utilities was dismissed. In March 2005, the City of Tacoma Department of Public Utilities filed an appeal in the Ninth Circuit contesting the district court's decision to dismiss the complaint. PNM will participate in the appeal in support of the dismissal. The Company cannot predict the outcome of this appeal, or whether the Company will be required to make any refunds or pay damages as a result of this litigation.

There are inherent risks in the operation of nuclear facilities, such as environmental, health and financial risks and the risk of terrorist attack.

PNM has a 10.2% undivided interest in PVNGS, with portions of its interests in Units 1 and 2 held under leases. PVNGS is subject to environmental, health and financial risks such as the ability to dispose of spent nuclear fuel, the ability to maintain adequate reserves for decommissioning, potential liabilities arising out of the operation of these facilities, and the costs of securing the facilities against possible terrorist attacks and unscheduled outages due to equipment and other problems. PNM maintains nuclear decommissioning trust funds and external insurance coverage to minimize its financial exposure to some of these risks; however, it is possible that damages could exceed the amount of insurance coverage. Although the decommissioning trust funds are designed to provide adequate funds for decommissioning at the end of the expected life of the PVNGS units, there is the risk of insufficient decommissioning trust funds in the event of early decommissioning of the units.

The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities. In the event of non-compliance, the NRC has the authority to impose fines or shut down a unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved. In addition, if a serious nuclear incident were to occur at PVNGS, it could materially and adversely affect the Company's business, financial position, results of operations and liquidity. A major incident at a nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or licensing of any domestic nuclear unit. Each PVNGS lease describes certain events, including "Events of Loss" or "Deemed Loss Events", the occurrence of which could require PNM to, among other things, (i) pay the lessor and the equity investor, in return for the investor's interest in PVNGS, cash in the amount provided in the lease and (ii) assume debt obligations relating to the PVNGS lease. The "Events of Loss" generally relate to casualties, accidents and other events at PVNGS, which would severely, adversely affect the ability of the operating agent, APS, to operate, and the ability of PNM to earn a return on its interests in, PVNGS. The "Deemed Loss Events" consist mostly of legal and regulatory changes (such as changes in law making the sale and leaseback transactions illegal, or changes in law making the lessors liable for nuclear decommissioning obligations). The Company believes that the probability of such "Events of Loss" or "Deemed Loss Events" occurring is remote for the following reasons: (i) to a large extent, prevention of "Events of Loss" and some "Deemed Loss Events" is within the control of the PVNGS participants, including the Company, and the PVNGS operating agent,

through the general PVNGS operational and safety oversight process and (ii) with respect to other "Deemed Loss Events," which would involve a significant change in current law and policy, the Company is unaware of any pending proposals or proposals being considered for introduction in Congress, or in any state legislative or regulatory body that, if adopted, would cause any of those events.

The Company's financial performance may be adversely affected if its power plants and transmission and distribution system are not successfully operated.

The Company's financial performance depends on the successful operation of its generation, transmission and distribution assets. Unscheduled or longer than expected maintenance outages, other performance problems with the Company's electric generation assets, severe weather conditions, accidents and other catastrophic events, disruptions in the delivery of fuel and other factors could reduce its excess generation capacity and therefore limit the Company's ability to opportunistically sell excess power in the wholesale market. Diminished generation capacity could also result in the Company's aggregate net open forward electric sales position being larger than its forecasted generation capacity. If this were to occur, The Company would have to make purchases of electricity in the wholesale market under contracts priced at the time of execution or, if in the spot market, at the then-current market price. There can be no assurance that sufficient electricity would be available at reasonable prices, or at all, if such a situation were to occur. Failures of transmission or distribution facilities may also cause interruptions in the services the Company provides. These potential generation, distribution and transmission problems, and any potentially related service interruptions, could result in lost revenues and additional costs.

The Company's counterparties may not meet their obligations to us.

The Company is exposed to risk that counterparties, which owe the Company money, energy or other commodities or services, will not be able to perform their obligations. The possibility that certain counterparties may fail to perform their obligations has increased due to financial difficulties, in some cases brought on by improper or illegal accounting and business practices, affecting some participants in the energy industry. Should the counterparties to these arrangements fail to perform, the Company might be forced to honor the underlying commitment at then-current market prices. In such event, the Company might incur losses in addition to amounts, if any, already paid to the counterparties.

The Company's operations are subject to risks beyond its control that may reduce its revenues.

The Company's revenues are affected by the demand for electricity and natural gas. That demand can vary greatly based upon:

weather conditions, seasonality and temperature extremes,
fluctuations in economic activity and growth in the Company's service area and the Western region of the United States, and
the extent of additional energy available from current or new competitors.

Weather conditions will impact the revenues that the Company obtains from its electric wholesale sales. Very warm and very cold temperatures, especially for prolonged periods, can dramatically increase the demand for electricity for cooling and heating, respectively, as opposed to the effect of more moderate temperatures. Very warm temperatures inside the Company's service territory reduce the amount of power available to sell on the wholesale market.

Drought conditions in New Mexico generally, and especially in the Four Corners region, in which the San Juan Generating Station and the Four Corners Generating Station are located, may affect the water supply for the Company's generating plants. If adequate precipitation is not received in the watershed that supplies the Four Corners areas, the Company may have to decrease generation at these plants, which would reduce the Company's ability to sell excess power on the wholesale market and reduce its revenues. As such, if the drought conditions continue or regulators or legislators take action to limit the Company's supply of water, the Company's business may be adversely impacted. Although the Company has been able to maintain adequate access to water in the past, the Company cannot be certain that it will be able to do so in the future.

An inability to raise capital could limit the Company's ability to execute its growth strategy and finance its capital requirements, which could adversely affect the Company's business, financial position, results of operations and liquidity.

The Company relies on access to both short-term money markets and longer-term capital markets as a source of liquidity for any capital requirements not satisfied by the cash flow from our operations, which could include capital requirements for energy infrastructure investments and funding new projects. If the Company is not able to access capital at competitive rates or at all, the Company's ability to implement its growth strategy and its ability to finance capital requirements, if needed, will be limited. Market disruptions or any downgrade of the Company's credit rating may increase its cost of borrowing or adversely affect the Company's ability to raise capital through the issuance of securities or other borrowing arrangements, which could have a material adverse effect on its business, financial position, results of operations and liquidity. These disruptions could include:

an economic downturn,
changes in capital markets conditions generally,
the bankruptcy of an unrelated energy company,
increased market prices for electricity and gas,
terrorist attacks or threatened attacks on Company facilities or those of unrelated energy companies, and
deterioration in the overall health of the utility industry.

A significant reduction in the Company's credit ratings could materially and adversely affect its business, financial position, results of operations and liquidity.

The Company cannot be sure that any of its current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency. Any downgrade:

could increase the Company's borrowing costs, which would diminish its financial results,
could require the Company to pay a higher interest rate in future financings and the potential pool of investors and funding sources could decrease,
could increase borrowing costs under certain of the Company's existing credit facilities,
could also require the Company to provide additional support in the form of letters of credit or cash or other collateral to various counterparties,
could limit access to the commercial paper market, and
below investment grade credit ratings would also require approvals from the NMPRC for new wholesale plant projects and for continuing to participate in wholesale plant projects of more than a certain dollar value and under certain conditions.

The ratings from rating agencies reflect only the views of such rating agencies and are not recommendations to buy, sell or hold our securities. Each rating should be evaluated independently of any other rating. Any downgrade or withdrawal of the Company's current ratings may have an adverse effect on the market price of its outstanding debt.

Costs of environmental compliance, liabilities and litigation could exceed the Company's estimates which could adversely affect the Company's business, financial position, results of operations and liquidity.

Compliance with federal, state and local environmental laws and regulations may result in increased capital, operating and other costs, including remediation and containment expenses and monitoring obligations. The Company cannot predict how it would be affected if existing environmental laws and regulations were revised, or if new environmental laws and regulations seeking to protect the environment were adopted, but any such changes could increase the Company's financing requirements or otherwise adversely affect the Company's business, financial position, results of operations and liquidity. Revised or additional laws and regulations could also result in additional operating restrictions on the Company's facilities or increased compliance costs which may not be fully recoverable in our rates, thereby reducing the Company's net income. For example, any future changes in the interpretation of the Clean Air Act's new source review provisions could potentially increase the Company's operating and maintenance costs substantially. Similarly, in March 2005, the EPA adopted the Clear Air Act Mercury Rule, which is intended to reduce mercury emissions from coal-fired generation plants. The Company cannot be certain how this rule will affect it.

In addition, the Company may be designated as a responsible party for environmental clean-up at a site identified by a regulatory body. The Company cannot predict with certainty the amount and timing of all future expenditures related to environmental matters because of the difficulty of estimating clean-up and compliance costs, and the possibility that changes will

be made to the current environmental laws and regulations. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties. Failure to comply with environmental laws and regulations, even if caused by factors beyond the Company's control, may result in the assessment of civil or criminal penalties and fines against the Company. For example, in October 2003, the TCEQ requested information from PNM concerning any involvement that PNM had with SESCO, a former electrical equipment repair and sales company located in San Angelo, Texas. PNM was informed that the TCEQ and the EPA claim to have identified contamination of the soil and groundwater at the site. TCEQ is conducting a site investigation of a SESCO facility pursuant to the Texas Solid Waste Act, and the SESCO site has been referred to the Superfund Site Discovery and Assessment Program. The primary concern appears to be polychlorinated biphenyls in soil and groundwater on and adjacent to the site. The TCEQ is conducting the site investigation to determine what remediation activities are required at the SESCO site and to identify potentially responsible parties. In February 2005, PNM agreed to participate in the potentially responsible party committee. PNM will voluntarily participate with the others in the investigation and may participate in any required remediation at the SESCO facility. PNM is still investigating its role in the matter, and is unable to predict the outcome at this time.

The Company's business, results of operations and financial position may be adversely affected if the Company does not successfully compete for wholesale customers and generation plant acquisition opportunities. The Company's wholesale plants will be exposed to price risk to the extent they must compete for the sale of energy and capacity.

The electric utility industry has experienced a substantial increase in competition at the wholesale level, caused by changes in federal law and regulatory policy. As a result of the Public Utility Regulatory Policies Act of 1978 and the Energy Policy Act of 1992, competition in the wholesale electricity market has greatly increased due to a greater participation by traditional electricity suppliers, non-utility generators, independent power producers, wholesale power marketers and brokers, and due to the trading of energy futures contracts on various commodities exchanges. In 1996, the FERC issued new rules on transmission service to facilitate competition in the wholesale market on a nationwide basis. The rules give greater flexibility and more choices to wholesale power customers. Also, in July 2002, the FERC issued a notice of proposed rulemaking (which has not yet been adopted) related to open access transmission service and standard electricity market design.

As a result of the changing regulatory environment and the relatively low barriers to entry (which include, in addition to open access transmission service, relatively low construction costs for new generating facilities), the Company expects competition to steadily increase. This increased competition could affect the Company's load forecasts, acquisition opportunities and wholesale energy sales and related revenues. Given that during 2004, the Company's sales in the wholesale electric market accounted for approximately 62% of our total MWh sales, the impact of these changes on the Company's financial results could be material. The effect on the Company's business, results of operations and financial position could vary depending on the extent to which:

the Company is are able to acquire additional generation to compete in the wholesale market,
new opportunities are created for the Company to expand its wholesale load, and

current wholesale customers elect to purchase from other suppliers after existing contracts expire.

The Company's long-term contracts to supply power expire from 2006 through 2020. The Company's ability to renew these contracts at terms comparable to those currently in place is dependent upon prevailing market conditions at the time of negotiations. Currently, the Company has a long-term firm commitment contract with TNP of 114 MW that expires in 2006. The contract is priced above current market prices. If the TNP acquisition is completed, the Company expects to provide the power supply needs of TNP. However, if the TNP acquisition is not completed, the Company expects to lose the revenue from this above-market contract unless rising short-term and forward markets allow it to mitigate the revenue loss.

To the extent electric capacity generated by the Company's wholesale plants is not under contract to be sold or committed to serving its retail electric load, either now or in the future, the Company's business, results of operations and financial position will generally depend on the prices that can be obtained for energy and capacity in New Mexico and adjacent markets. Among the factors that would influence these prices, all of which are beyond the Company's control to a significant degree, are those described in the next risk factor.

The Company may not be able to mitigate fuel and wholesale electricity pricing risks, which could result in unanticipated liabilities or increased volatility in its earnings.

The Company's business and operations are subject to changes in purchased power prices and fuel costs that may cause increases in the amounts the Company must pay for power supplies on the wholesale market and the cost of producing power in its generation plants. As evidenced by the California energy crisis in 2000-2001, prices for electricity, fuel and natural gas may fluctuate substantially over relatively short periods of time and expose the Company to significant commodity price risks.

Among the factors that could affect market prices for electricity and fuel are:

prevailing market prices for coal, oil, natural gas and other fuels used in the Company's generation plants, including associated transportation costs, and supplies of such commodities,
changes in the regulatory framework for the commodities markets that the Company relies on for purchased power and fuel,
liquidity in the general wholesale electricity market,
the actions of external parties; such as the FERC or independent system operators, that may impose price limitations and other mechanisms to address some of the volatility in the western energy markets,
weather conditions impacting demand for electricity or availability of hydroelectric power or fuel supplies,
the rate of growth in electricity as a result of population changes, regional economic conditions and the implementation of conservation programs,

union and labor relations,
natural disasters, wars, embargoes and other catastrophic events, and
changes in federal and state energy and environmental laws and regulations.

The Company utilizes derivatives such as forward contracts, futures contracts, options and swaps to manage these risks. The Company attempts to manage its exposure from these activities through enforcement of established risk limits and risk management procedures. The Company cannot be certain that these strategies will be successful in managing its pricing risk, or that they will not result in net liabilities to the Company as a result of future volatility in these markets.

In addition, although the Company routinely enters into contracts to offset its positions (i.e. to hedge its exposure to the risks of demand, market effects of weather and changes in commodity prices), the Company does not always hedge the entire exposure of its operations from commodity price volatility. Furthermore, the Company's ability to hedge its exposure to commodity price volatility depends on liquid commodity markets. To the extent the commodity markets are illiquid, the Company may not be able to execute its risk management strategies, which could result in greater open positions than the Company would prefer at a given time. To the extent that open positions exist, fluctuating commodity prices can improve or diminish the Company's business, financial position, results of operations and liquidity.

Impairments of the Company's tangible long-lived assets could adversely affect the Company's business, financial position, liquidity and results of operations.

The Company evaluates its tangible long-lived assets for impairment whenever indicators of impairment exist pursuant to SFAS 144. These potential impairment triggers would include fluctuating market conditions as a result of industry deregulation; planned and scheduled customer purchase commitments; future market penetration; fluctuating market prices resulting from factors including changing fuel costs and other economic conditions; weather patterns; and other market trends. Accounting rules require that if the sum of the undiscounted expected future cash flows from a company's asset (excluding interest charges that will be recognized as expenses when incurred) is less than the carrying value of the asset, then asset impairment must be recognized in the financial statements. The amount of impairment recognized is the difference between the fair value of the asset and the carrying value of the asset. The Company determined that no triggering events occurred during the period for its generation assets.

The Company has three turbines, which are currently in storage, with a combined carrying value of approximately $79.7 million. The Company believes that it will be able to place two of the turbines in service and recover the costs of these two turbines in rates. The Company analyzed the remaining turbine for impairment and concluded no impairment existed based on the Company's plans for its use. The carrying amount of this turbine at March 31, 2005 was $16.6 million. The Company expects to begin construction utilizing this turbine over the next several years. If the Company were unable to realize these plans, the Company would be forced to recognize a loss with respect to the carrying value of the turbine depending on prevailing market conditions. The Company will continue to analyze the turbine for impairment in accordance with SFAS 144.

Actual results could differ from estimates used to prepare the Company's financial statements.

In preparing the financial statements in accordance with GAAP, management must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex, and actual results could differ from those estimates. For more information about these estimates and assumptions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates".

Provisions of the Company's organizational documents, as well as several other statutory and regulatory factors, will limit another party's ability to acquire the Company and could deprive the Company's shareholders of the opportunity to gain a takeover premium for shares of the Company's common stock.

The Company's restated articles of incorporation and by-laws include a number of provisions that may have the effect of discouraging persons from acquiring large blocks of the Company's common stock or delaying or preventing a change in control of the Company. The material provisions that may have such an effect include:

authorization for the Company's Board to issue the Company's preferred stock in series and to fix rights and preferences of the series (including, among other things, whether, and to what extent, the shares of any series will have voting rights, subject to certain limitations, and the extent of the preferences of the shares of any series with respect to dividends and other matters),
provisions classifying the Company's Board into three classes, with the directors being elected for staggered terms,
advance notice procedures with respect to any proposal other than those adopted or recommended by the Company's Board, and
provisions specifying that only a majority of the Board, the chairman of the Board, the president or holders of not less than one-tenth of all of the Holding Company's shares entitled to vote may call a special meeting of stockholders.

Under the New Mexico Public Utility Act, approval of the NMPRC is required for certain transactions that may result in our change in control or exercise of control. Certain acquisitions by any person of our outstanding voting securities would also require approval of the SEC under PUHCA.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

See "Quantitative and Qualitative Disclosure About Market Risk" in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations".

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of the Company's disclosure controls and procedures as of the end of the period covered by this report conducted by the Company's management, with the participation of the Chief Executive and Chief Financial Officers, the Chief Executive and Chief Financial Officers believe that these controls and procedures are effective to ensure that the Company is able to collect, process, and disclose the information it is required to disclose in the reports it files with the SEC within the required time periods.

Changes in Internal Controls

There have been no changes in the Company's internal control over financial reporting for the Company's quarter ended March 31, 2005, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 7 - "Commitments and Contingencies", in the Notes to Consolidated Financial Statements for information related to the following matters, incorporated in this item by reference.

Navajo Nation Environmental Issues
Citizen Suit Under the Clean Air Act
Excess Emissions Reports
Santa Fe Generating Station
Natural Gas Royalties Qui Tam Litigation
Asbestos Cases
SESCO Matter
Legal Proceedings discussed under the caption "Western United States Wholesale Power Market"
Wholesale Power Marketing Antitrust Suit
Tax Refund Litigation

ITEM 5. OTHER EVENTS

DIRECTOR AND OFFICER COMPENSATION

As reported in the Company's 2005 Proxy Statement, the existing Director Retainer Plan will expire on July 1, 2005. If approved by shareholders, the Director Retainer Plan will be replaced by the Amended and Restated Omnibus Performance Equity Plan ("PEP") which will permit non-employee directors to be eligible for awards under the PEP. Upon shareholder approval, director compensation will include the following stock options and restricted stock units issued under the PEP. The following terms were approved by the Board in its February 2005 meeting. A summary sheet containing the terms is filed as Exhibit 10.138 to this Quarterly Report on Form 10-Q. If the PEP is not approved by shareholders, the Directors would be not be able to receive the equity portion of the retainer as proposed for 2005 and, consequently, would need to consider an alternative retainer structure. The Directors have not yet considered an alternative retainer if the PEP is not approved by shareholders. Directors are also reimbursed for any Board-related expenses.

Annual Retainer :		$35,000, 1,050 stock options* and 1,050 restricted stock rights*
Annual Committee Chair Fee :		$ 4,000 (in addition to meeting attendance fees)

Attendance Fees :		$ 0 per Board meeting $ 1,250 per Board Committee meeting

*The options and restricted stock rights will vest in three equal annual installments beginning on the first anniversary of the grant. The exercise price of the stock option is equal to the fair market value of the common stock on the date of grant. Fair market value is determined by the closing price of the New York Stock Exchange on the date of the grant.

The Company's executive officers, including the Chief Executive Officer and the other named executive officers, participate in a short-term "at risk" cash compensation plan, as reported in the Company's 2005 Proxy Statement. The 2004 Officer Incentive Plan was filed with the Company's 2003 Form 10-K. Performance targets are established for three levels of achievement: Threshold, Stretch and Optimal. The plan is designed to pay twenty percent (20%) of the award opportunity on performance targets tied to individual performance goals, company-wide customer satisfaction, cost control, and operations efficiency, and eighty percent (80%) of the award opportunity on the achievement of corporate earnings per share ("EPS") targets. In its February 2005 meeting, the Human Resources and Compensation Committee (the "Committee") approved the 2005 Officer Incentive Plan without material change to the provisions of the previously filed 2004 Officer Incentive Plan and set the EPS target for 2005. The 2005 Officer Incentive Plan is filed as Exhibit 10.30 to this Quarterly Report on Form 10-Q. The Committee also made changes in base salaries for the executive officers for 2005. The changes were consistent with the description of how base salaries are set in the Committee's report in the 2005 Proxy Statement.

The Company's internet address is http://www.pnmresources.com. (This is a new internet address that became effective April 26, 2005.) The contents of this website address are not a part of this Form 10-Q. 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.pnmresources.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.pnmresources.com/ge/index and such information is available in print, without charge, to any shareholder who requests it. On the pnm.com website, a click on any portion of the "Investing" or "Governance" sections will automatically inform the user of the new website and provide a direct link to pnmresources.com.

ITEM 6. EXHIBITS


	3.2.1	Bylaws of PNM with all Amendments to and including May 31, 2002 (incorporated by reference from exhibit 3.1.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).

	10.30**	2005 Officer Incentive Plan.

	10.134	Stipulation dated February 28, 2005 in NMPRC Case No. 04-00315-UT regarding the application of PNM Resources and TNMP for approval of the TNP acquisition.

	10.135	Consent Decree entered into by PNM on March 9, 2005 relating to the citizen suit under the Clean Air Act and the excess emissions report matter for SJGS.

	10.136	Distribution, Assignment and Assumption Agreement dated February 24, 2005 among PNMR Development and Management Corporation, Luna Power, LLC, Tuscon Electric Power Company ("TEP") and Phelps Dodge Energy Services, LLC ("Phelps").

	10.137	Engineering, Procurement and Construction Agreement dated February 24, 2005 dated February 24, 2005 among Fluor Enterprises, Inc., TEP and Phelps.

	10.138	Changes in Director Compensation.

	12.1	Ratio of Earnings to Fixed Charges.

	12.2	Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.

	15.1	Independent Registered Public Accounting Firm Awareness Letter for PNM Resources, Inc. and Subsidiaries..

	15.2	Independent Registered Public Accounting Firm Awareness Letter for Public Service Company of New Mexico.

	31.1	Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2	Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1	Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2	Chief Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

** designates a management contract or compensation plan or arrangement required to be identified pursuant to paragraph 3 of Item 15(a) of Form 10-K.

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.

	PNM RESOURCES, INC. AND PUBLIC SERVICE COMPANY OF NEW MEXICO
	(Registrants)


Date: May 3, 2005	/s/ Thomas G. Sategna
	Thomas G. Sategna
	Vice President and Corporate Controller
	(Officer duly authorized to sign this report)

ENGINEERING, PROCUREMENT AND CONSTRUCTION AGREEMENT

THIS ENGINEERING, PROCUREMENT AND CONSTRUCTION AGREEMENT (this "Agreement") effective the 24th day of February 2005 ("Effective Date"), is by and among FLUOR ENTERPRISES , INC. a California corporation (hereinafter referred to as the "Contractor") and PHELPS DODGE ENERGY SERVICES, LLC, a Delaware limited liability company, PNMR DEVELOPMENT AND MANAGEMENT CORPORATION , a New Mexico corporation, and TUCSON ELECTRIC POWER COMPANY , an Arizona corporation (hereinafter collectively referred to as "Owner"). Contractor and Owner may be referred to collectively as the "Parties" or individually as a "Party".

RECITALS

WHEREAS , Contractor has represented to Owner that it is specifically qualified to perform engineering, procurement, construction, testing, start-up and commissioning services of the nature contemplated by this Agreement; and

WHEREAS , Owner desires to engage Contractor to perform engineering, procurement, construction, testing, start-up, and commissioning services related to the partially-constructed Luna Energy Facility, a nominal 570 MW gas-fired combined cycle power plant to be completed in Deming, New Mexico, and Contractor desires to perform such services for Owner;

NOW THEREFORE , in consideration of the mutual terms, covenants and conditions set forth in this Agreement, Contractor and Owner agree as follows:

ARTICLE 1

DEFINITIONS

In addition to other defined terms contained in this Agreement, the following terms shall have the meaning specified below in this Article .

1.1 "Affiliate" . of a Party means any other entity directly or indirectly controlling or controlled by or under direct or indirect common control with such Party. For the purposes of this definition, control means the power to direct the management or policies directly or indirectly whether through the ownership of voting securities or otherwise.

1.2 " Applicable Codes and Standards " . shall mean the codes, standards or requirements set forth in Exhibit A applicable to the Work.

1.3 "Applicable Law" . shall mean any law, including but not limited to Environmental Laws, statute, code, order, decree, injunction, license, permit, consent, approval, agreement or regulation of any federal, state, tribal or local government, department, court, office, agency, board or commission having jurisdiction over a Party or any portion of the Work

1.4 "Business Day" . means a day other than Saturday, Sunday, or a day on which banks are authorized to close in New Mexico, Texas or Arizona.

1.5 "Change Order" . means a written instrument, in substantially the form attached hereto as Exhibit D , signed by Owner and Contractor in accordance with Article 5.

1.6 "Contamination" . means any Hazardous Material present at the Site or which has been brought to the Site by a party other than Contractor or its Subcontractors.

1.7 "Contract Completion Date" . means May 1, 2006, as may be adjusted pursuant to the Agreement.

1.8 "Contract Documents " . means this Agreement plus all attachments, exhibits, specifications, schedules, and drawings and any Change Orders or amendments thereto.

1.9 "Contract Sum" . is the sum through the applicable True-Up Date of the actual amounts for (a) Reimbursable Costs paid by Owner that are chargeable against the Target Price plus (b) other amounts incurred or paid by Owner in accordance with this Agreement that are chargeable against the Target Price.

1.10 "Contractor's Project Director" or "Project Director" . shall be the person identified in Article 7.2 .

1.11 "D/FD Engineering Services" . shall have the meaning set forth in Article 6.2.

1.12 "Disclosing Party" . shall mean the Party disclosing information in Article 16.2 .

1.13 "Engineering Services" . shall have the meaning set forth in Article 6.2 .

1.14 "Environmental Laws" . mean all federal, state and local laws, rules, regulations and ordinances governing, regulating or relating to public health, pollution, or the protection of the environment, including, but not limited to, the laws and regulations promulgated pursuant to: the Resource Conservation and Recovery Act of 1976, 42 U.S.C. § 6901 et seq., as amended, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. § 9601 et seq., as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. § 9601 et seq., as amended, the Federal Water Pollution Control Act, 33 U.S.C. § 1251, et seq., as amended, the Clean Air Act, 42 U.S.C. § 7401 et seq., as amended, the Toxic Substances Control Act, 15 U.S.C. § 2601 et seq., as amended, the Hazardous Materials Transportation Act, 49 U.S.C. § 5101 et seq., as amended, the Safe Drinking Water Act, 42 U.S.C. § 300f et seq., as amended, the National Environmental Policy Act, 42 U.S.C. § 4321 et seq., as amended, and the Emergency Planning and Community Right-to-Know Act, 42 U.S.C. § 11001 et seq., as amended , the New Mexico Water Quality Act, §74-6-1 et seq., as amended, the New Mexico Air Quality Act, § 74-2-1 et seq., as amended, the New Mexico Hazardous Waste Act, §74-4-1, et seq., as amended, the New Mexico Solid Waste Act, §74-9-1, et seq., as amended, the New Mexico Ground Water Protection Act, § 74-6B-1, et seq., as amended, and the New Mexico Hazardous Chemicals Information Act, §74-4D-1, et seq., as amended, together with all applicable similar and related federal, state and local laws, rules, regulations and ordinances, as may be amended from time to time.

1.15 "Existing Work " . shall mean those portions of the Facility constructed and existing as of the Effective Date together with Owner-Furnished Property.

1.16 " Facility" . means the combined cycle power plant known as Luna Energy Facility, in Deming, New Mexico, including without limitation all equipment, materials, fuel and water supply systems, discharge equipment and all other ancillary equipment located at the Site.

1.17 "Facility CPM Schedule" . shall have the meaning set forth in Article 3.2.2 .

1.18 "Fee" . shall have the meaning set forth in Article 4.3 .

1.19 "Final Completion" . shall have the meaning set forth in Article 10.5.1.

1.20 "Fully Dispatchable Facility" . shall mean a reliable power generation facility capable of starting and operating in accordance with manufacturers' recommendations, Applicable Law and generally accepted operating practices without excessive trips or significant periods of downtime and as further described in Exhibit A .

1.21 " Good Engineering and Construction Practices" or " GECP " . shall mean that degree of skill and judgment and the utilization of practices, methods, and techniques and standards that (a) are generally expected of skilled and experienced engineering and construction firms in the electric power industry in the United States of America and commonly used by such firms to design, engineer, construct, commission, and test power and related facilities similar to the Facility and (b) conform in all material respects to the recommendations and guidelines of the suppliers and manufacturers of the equipment comprising the Facility, taking into account such equipment's size, service and type, so that such equipment may be operated in compliance with any applicable warranty, in compliance with Applicable Laws, and in a manner that consistent with preserving the reliability and availability of the Facility under the operating conditions reasonably expected at the Site.

1.22 "Hazardous Materials" . mean any hazardous, toxic, or polluting substance, material or waste as defined or regulated under any Applicable Law and other substances, materials or wastes that, even if not so defined or regulated, reasonably could be anticipated to pose a hazard to human health and safety or to the environment.

1.23 "Key Personnel" . shall mean those Contractor positions identified in Article 2.21 .

1.24 "Major Subcontracts" . means all of the contracts between Contractor and Major Subcontractors.

1.25 "Major Subcontractors" . means those Subcontracts set forth in Exhibit H and any other Subcontractor with a scope of work, whether through one contract or several contracts, having consideration due to such Subcontractor equal to or greater than $1,000,000.

1.26 "Mechanical Completion" . shall have the meaning set forth in Article 10.1 .

1.27 "Notice to Proceed" . means that notice issued by Owner in accordance with Article 3.1 .

1.28 "Owner Event of Default" . shall have the meaning set forth in Article 11.7 .

1.29 "Owner-Furnished Property " . means that certain property, real and personal, owned, leased or otherwise controlled by the Owner associated with the Existing Work and the Facility and furnished to Contractor pursuant to Article 2.24.2 , including, but not limited to, those items described in Exhibit L, which are intended to be all of the materials and equipment necessary for the Facility except as identified in Attachment 1 to Exhibit L.

1.30 " Owner", " Owner Party" or "Owner Parties" . means , PNMR Development and Management Corporation, Tucson Electric Power Company and Phelps Dodge Energy Services, LLC, individually or collectively, as the context requires, including their respective successors and permitted assigns .

1.31 "Owner's Project Manager " . means the person identified pursuant to Article 7.1 .

1.32 "Overrun" . shall have the meaning set forth in Article 4.4.2.

1.33 "Performance Security" . means a guaranty from Fluor Corporation in the form set forth in Exhibit O and provided by Contractor to Owner pursuant to Article 4.12 .

1.34 "Performance Tests " . means those tests performed in accordance with Exhibit A.

1.35 " Plant Site " . means the location where the generating station is situated as more particularly described on Exhibit M .

1.36 "Punch List" . means a listing of all incomplete or deficient Work, identified by Owner or identified by Contractor as Punch List items.

1.37 "Rate Schedule" . means the schedule set forth in Exhibit C .

1.38 "Receiving Party" . shall have the meaning set forth in Article 16.2 .

1.39 "Reimbursable Cost" or "Reimbursable Costs" . shall have the meaning set forth in Article 4.2 .

1.40 "Services" . shall mean the engineering, procurement, construction, testing, start-up and commissioning services to be performed by Contractor in accordance with the Contract Documents, all as more particularly described in Exhibit A .

1.41 "Site" . means the Plant Site, all easements and rights-of-way, and all other real property associated with the Facility, which is more particularly described in Exhibit M .

1.42 "Subcontractors" . means any person with whom Contractor has entered into any subcontract, purchase order or other agreement for such person to perform any part of the Work or to provide any materials, equipment or supplies, including any person at any tier with whom any Subcontractor has further subcontracted any part of the Work.

1.43 "Substantial Completion" . shall have the meaning set forth in Article 10.3.1 .

1.44 "Target Cash Flow Budget " . means the line item budget, by month, through Final Completion of the projected Reimbursable Costs included in the Target Price and the Fee paid to Contractor, which initial budget is attached as Exhibit N .

1.45 "Target Performance Criteria" . means those Facility characteristics described in Exhibit G .

1.46 "Target Price" . means [*], which includes the Reimbursable Costs required to complete the performance of the Work, including allowances of [*] for the water treatment facility in Deming, [*] for the gas pipeline, [*] for the well water and gathering systems, and [*] for the completion of the Chiller Installation, through the date twelve (12) months following the date of Substantial Completion, as adjusted by a Change Order. These allowances are exclusive of gross receipts tax, escalation and G&A. The Target Price does not include the Fee will shall be paid to Contractor, or gross receipts taxes which shall be reimbursed to Contractor.

1.47 "True-Up Date" . shall mean, as applicable, the date of Final Completion and the date twelve (12) months following the date of Substantial Completion.

1.48 "Uncontrollable Forces" . shall have the meaning set forth in Article 17.1 .

1.49 "Underrun" . shall have the meaning set forth in Article 4.4.1 .

1.50 "Warranty Period" . shall have the meaning set forth in Article 6.1.1 .

1.51 "Work" . means the Services and all things to be designed, engineered, manufactured, furnished, executed, installed, tested, completed, made good or otherwise provided by Contractor in accordance with the Contract Documents, all as more particularly described by the descriptions contained in, Exhibit A. Work excludes Existing Work, but shall include modifications, deletions, replacements and additions to Existing Work performed by Contractor pursuant to the terms and conditions of this Agreement.

1.52 "Work Progress Schedule" . means the timeline for completion of each principal category of the Work for achieving Substantial Completion of the Facility by the Contract Completion Date. The Work Progress Schedule is attached hereto as Exhibit B.

ARTICLE 2

THE WORK AND OBLIGATIONS OF THE PARTIES

2.1 The Work. . Contractor agrees to perform the Work in accordance with the Scope of Work set forth in Exhibit A. Contractor shall fully perform the Work in accordance with GECP, all Applicable Laws, all Applicable Codes and Standards, and all other terms and provisions of this Agreement, with the explicit understanding that the Work will result in a fully integrated and functional combined cycle facility. Contractor shall design and construct the Facility so that it is capable of achieving the Target Performance Criteria; provided, however, such Target Performance Criteria are an estimate of the performance criteria to be achieved and Contractor does not guarantee that the Target Performance Criteria will be achieved. Contractor acknowledges that pursuant to the foregoing obligation it shall carry out all of the supply and

services required or that can be inferred reasonably from this Agreement even though not expressly mentioned herein so that the Work shall include any work that is necessary to satisfy the requirements of the Contract Documents, and to the extent not specifically addressed by the Contract Documents, in accordance with GECP.

2.2 Specific Obligations for the Work. . Without limiting the generality of Article 2.1, or the requirements of any other provision of this Agreement (including, but not limited to, Exhibit A ), Contractor shall:

2.2.1 Protect from damage and properly store all equipment procured by Contractor or accepted by Contractor at the Site (including Owner-Furnished Property and any spare parts);

2.2.2 Provide construction, construction management (including the furnishing of all field supplies, tools, construction equipment, and all Site supervision and craft labor), engineering, procurement, inspection and quality control services required under this Agreement;

2.2.3 Coordinate all delivery schedules and performance obligations of all Subcontractors and other Owner vendors so that performance under such subcontracts and purchase orders, as the case may be, is enforced in accordance with the terms thereof and as required by this Agreement;

2.2.4 Perform shop and other inspections of the Work of Subcontractors as reasonably required to determine conformance with all of the requirements of this Agreement;

2.2.5 Comply with all Applicable Laws, including but not limited to state and federal occupational, safety and health laws and regulations;

2.2.6 Supply all initial lubrication fills for the Facility;

2.2.7 Perform all quality control and quality assurance activities (including witnessing tests) to confirm that the Work complies with this Agreement.

2.2.8 Perform the Work in accordance with the Work Progress Schedule;

2.2.9 Perform commissioning and start-up of the Facility, including the development of a detailed commissioning plan, that includes a commissioning matrix, the commissioning procedures, turnover packages, manpower requirements, technical direction and Owner interfaces; and

2.2.10 Provide a training program for the operations and maintenance personnel, which includes detailed training plan and applicable operating and maintenance procedures for the Facility.

2.3 Spare Parts. . Contractor shall provide Owner with a recommended spare parts list for the Facility within thirty (30) days following the Effective Date. The spare parts list shall identify

those spare parts that are recommended for operations and those that are recommended for testing, start-up and commissioning. With respect to the latter, the spare parts list shall include the dates by which the recommended spare parts need to be purchased and available at the Site to support the Work Progress Schedule. Although Owner shall be responsible for the costs to purchase, secure, and store any spare parts that Owner elects to acquire, Contractor shall purchase, on a timely basis (it being understood that Owner shall designate the spare parts to be purchased on a timely basis consistent with the Work Progress Schedule), such spare parts on behalf of Owner as Owner's agent and shall store and secure such spare parts until care, custody and control of the Facility is transferred to Owner pursuant to Article 2.13 . Subject to Owner's consent, which shall not be withheld unreasonably, Contractor may use any spare parts maintained on the Site by Owner. The replacement cost of Owner supplied spare parts used by Contractor, unless replaced by an equipment supplier as a warranty replacement, shall be included in the Contract Sum and chargeable against the Target Price.

2.4 Contractor's Tools and Equipment. . Contractor shall furnish all tools and equipment necessary and appropriate for the timely and safe performance and completion of the Work.

2.5 Employment of Personnel .

2.5.1 Contractor shall not employ, or permit any Subcontractor to employ, in connection with its performance under this Agreement any unfit person or anyone not skilled in the Work assigned to such person. Contractor agrees to promptly remove (or to require any Subcontractor to remove) from its services in connection with the Work any employee who is unfit or unskilled. If Owner has any objection to the fitness or qualifications of any person retained by Contractor to perform the Work, Owner shall so notify Contractor in writing. Upon receipt of such notice, Contractor shall investigate Owner's concerns and take appropriate action, which may include the reassignment or removal of such person. Notwithstanding any other provisions in this Agreement to the contrary, Contractor shall provide workers skilled and specialized in the Work to which they are assigned.

2.5.2 Contractor, at Owner's request, shall perform security and background checks, as well as drug and alcohol tests, for the purpose of determining a worker's suitability for the assignment.

2.5.3 Owner reserves all rights to deny placement of any of Contractor's workers on Owner premises, property, equipment or projects at its sole discretion. Such denial of placement of subject workers shall be conveyed subject to the provisions of Article 7.3 "Notices" and/or consistent with the normal custom between Owner and Contractor.

2.5.4 No Party shall, during the term of this Agreement or for a period of one hundred eighty (180) days thereafter, directly or indirectly for itself or on behalf of, or in conjunction with, any other person, partnership, corporation, business or organization, actively solicit the employment of an employee of the other with whom that Party or its personnel have had contact during the course of this

Agreement, unless that Party has obtained the written consent of the other Party to such hiring and that Party pays to the other a fee to be mutually agreed upon.

2.6 Clean-up and Non-Interference. . Contractor shall at all times keep the Site free from waste materials or rubbish caused by its activities. As soon as practicable after the completion of all Punch List items, Contractor shall remove all of its equipment and materials not constituting part of the Facility and remove all waste material and rubbish generated by Contractor or that Contractor has brought to the Site, in connection with Contractor's performance of the Work, from the Site to a permitted disposal facility, and restore the Site in accordance with all Applicable Laws and Applicable Codes and Standards and this Agreement. During the period from Substantial Completion until completion of the Punch List, Contractor shall perform its Work so that the performance of the Work does not unreasonably interfere with the operation of the Facility.

2.7 Safety and Security. . Contractor recognizes and agrees that safety is of paramount importance in the performance of the Work and that Contractor is solely responsible for performing the Work in a safe manner. Contractor agrees to perform the Work, and Contractor shall require all Subcontractors to perform their portion of the Work, in accordance with the safety and health rules and standards of Applicable Law and the safety program developed by Contractor and submitted to Owner. Contractor further agrees to provide necessary training to its employees and Subcontractors to inform them of the foregoing safety and health rules and standards. Should Owner at any time observe Contractor, or any of its Subcontractors, performing the Work in an unsafe manner, or in a manner that may, if continued, become unsafe, then Owner shall have the right (but not the obligation) to require Contractor to stop the Work affected by the unsafe practice until such time as the manner of performing the Work has been rendered safe. Contractor shall be responsible for the supervision of the Facility as set forth in Article 2.13 . The Parties recognize that the Facility has already been fenced. The Scope of Work in Exhibit A addresses responsibility for security and guarding of the Facility. Nothing in this Article 2.7 shall affect Contractor's status as an independent contractor.

2.8 Emergencies. . In the event of any emergency endangering life or property, Contractor shall take such action as may be reasonable and necessary to prevent, avoid or mitigate injury, damage, or loss and shall, as soon as possible, report any such incidents, including Contractor's response thereto, to Owner. If Contractor has not taken reasonable precautions for the safety of the public or the protection of the Work, and such failure creates an emergency requiring immediate action, then Owner, with or without advance notice to Contractor may, but shall be under no obligation to, provide reasonable protection as required to address such emergency; provided, however, that Owner shall in any event notify Contractor of any actions taken by Owner within ten (10) Business Days of taking such action. All reasonable direct costs so incurred by Owner as a result of any emergency caused by Contractor shall be included in the Contract Sum and chargeable against the Target Price.

2.9 Approvals, Certificates, Permits and Licenses. . Contractor shall obtain all approvals, certificates, permits and licenses required to be in Contractor's name to perform the Work and as set forth in Exhibit I . Contractor shall promptly, within such time period as may be agreed upon by the Parties, provide Owner with all assistance that Owner may reasonably require to secure

those approvals, certificates, permits and licenses required to be in the name of Owner as set forth in Exhibit I.

2.10 Contractor Taxes. . Contractor shall pay all taxes and contributions for unemployment insurance, old age retirement benefits, pensions, annuities, and similar benefits, as well as taxes measured by or imposed on the income of Contractor, which may now or hereafter be imposed on Contractor by Applicable Law or collective bargaining agreements with respect to persons employed by Contractor for performance of the Work. Contractor shall be liable for and shall pay and shall indemnify, defend, and hold Owner harmless from, all such taxes and contributions, including any interest accrued and penalties imposed thereon (plus reasonable attorney fees), except for those taxes that are reimbursable by Owner in accordance with the immediately succeeding sentence. On all invoices, Contractor shall separately show all New Mexico gross receipts, compensating, sales, excises, assessments, charges, and other similar taxes which are imposed on the Services or the Work, or any part thereof, and such taxes shall be reimbursable by Owner to Contractor. Charges not subject to New Mexico gross receipts tax shall be separately stated, and no New Mexico or other jurisdiction's gross receipts, compensating, use or sales taxes shall be charged to Owner thereon. Contractor shall utilize appropriate New Mexico nontaxable transaction certificates (a form of which shall be provided to Contractor by Owner) or similar certificates from other states, where applicable, to minimize such gross receipts, compensating, sales, and other similar taxes.

2.11 Hazardous Materials. . Contractor shall design, construct, pre-commission, test and start-up the Facility and otherwise perform the Work in compliance with the requirements of all Applicable Laws. If, during the course of the performance of the Work, Contractor or any Subcontractor discovers, or reasonably believes it has discovered in, on or under any part of the Site, any Hazardous Materials (other than Hazardous Materials that Contractor or a Subcontractor has brought onto the Site, produced, created or used), Contractor shall proceed in accordance with Article 14.4.3.

2.12 Progress Meeting and Reports. . Contractor shall hold a monthly progress meeting at the Site, or at an alternate location mutually agreeable to Owner and Contractor, for the purpose of reviewing the monthly progress report for the previous month with Owner. Contractor shall provide Owner with monthly progress reports and the following other information relating to the progress of the Work as may be reasonably requested by Owner:

2.12.1 Minutes for all status and other Facility meetings within four (4) Business Days following such meeting;

2.12.2 Weekly progress reports of construction activities;

2.12.3 Safety incident reports within three (3) Business Days of the occurrence of any such incident (preliminary written notice is to be provided to Owner within 24 hours of a safety incident, provided, however, that verbal notice of critical or fatal injuries shall be provided to Owner within 3 hours);

2.12.4 Monthly progress reports, in a form set forth in Exhibit P , no later than ten (10) days after the end of each month, which shall cover activities up to the end of

the previous month and which shall include five (5) paper copies of such reports that shall be distributed as directed by Owner and which shall include Contractor's representation that the Work through the date of the progress report has, unless otherwise stated by Contractor, been performed in accordance with this Agreement; and

2.12.5 Updates every month to the Facility CPM Schedule pursuant to Article 3.2.

2.13 Care, Custody and Control/Risk of Loss. . Upon the Effective Date, Contractor shall have the full responsibility for care, custody and control and risk of loss of the Facility (including Existing Work) until the earlier of Substantial Completion or the date of termination of this Agreement pursuant to the provisions of Article 11 . Risk of loss and care, custody, and control of the Facility shall transfer from Contractor to Owner upon the earlier of Substantial Completion or the date of termination of this Agreement pursuant to the provisions of Article 11 . In connection with Contractor's risk of loss obligation, Contractor shall be responsible for and obligated to replace, repair, or reconstruct, and to furnish any material, equipment, or supplies furnished by Contractor or Owner-Furnished Property, which are lost, damaged, or destroyed prior to transfer of care, custody, and control of the Facility or the affected portion thereof to Owner, to the extent Contractor receives proceeds of insurance maintained for the Facility pursuant to Article 15 or Contractor otherwise receives reimbursement of its costs pursuant to the terms of this Article 2.13 . Except as otherwise provided herein in this Article 2.13 , Contractor's responsibility and liability for risk of loss and any damage to the Facility shall be limited to the scope and limits of such insurance. Prior to the transfer of care, custody and control of the Facility to Owner, (a) all non-covered losses and deductibles for covered losses which, in either case, are not attributable to the fault of Contractor or its Subcontractors shall be paid by Owner as a Reimbursable Cost that is not included in the Contract Sum and that is not chargeable against the Target Price and (b) all non-covered losses and deductibles for covered losses which, in either case, are attributable to the fault of Contractor or its Subcontractors shall be paid by Owner as a Reimbursable Cost that is included in the Contract Sum and that is chargeable against the Target Price. Owner assumes all responsibility for such loss, damage, or destruction after transfer of care, custody, and control of the Facility from Contractor to Owner.

2.14 [Intentionally Omitted]

2.15 Interpretation. . In the event of any inconsistencies between Applicable Laws and the Contract Documents, Contractor shall comply with Applicable Laws in the manner set forth in this Article 2.15 . Where a conflict exists between parts of the Contract Documents, or between the Contract Documents and Applicable Laws, or among Applicable Laws, the more stringent or higher quality requirements shall control unless otherwise directed by Owner. If Contractor finds a conflict, error, omission, inconsistency or discrepancy in the Contract Documents, then Contractor shall call it to Owner's attention in writing before proceeding with the portion of the Work affected thereby.

2.16 Training and Operational Supervision . . Contractor shall establish and implement a training program for Owner's operations and maintenance personnel. Prior to Substantial Completion, Contractor shall supervise Owner's operations and maintenance personnel.

2.17 Interconnections . . Contractor shall construct the interconnections between the Facility and the interconnection facilities of (a) the electric transmission provider, (b) the gas transporter, (c) the water supplier and (d) the water discharge system, all as set forth in Exhibit A .

2.18 Responsibility for Subcontractors.

2.18.1 Contractor may subcontract portions of the Work to any person without further approval by Owner except for any Major Subcontracts, which are subject to Owner's reasonable review and approval. Contractor may have portions of the Work performed by its Affiliates or their employees, in which event Contractor shall be responsible for such Work and Owner will look solely to Contractor as if the Work were performed by Contractor. Owner understands that Contractor's subsidiary organizations, Fluor Global Sourcing & Supply Inc. and/or Global Sourcing & Supply International LLC (either or both referred to as "GS&S"), have negotiated proprietary and confidential "Supplier Relationship Agreements" (whether entered into by GS&S or any of their respective Affiliates, a "Contractor SRA") with various strategic suppliers of certain materials, equipment, and Work. Such Contractor SRAs contain favorable pricing and terms and conditions. If either Contractor or Owner procures materials, equipment or services using Contractor SRAs, then it is agreed that the quoted prices and terms from such Contractor SRAs are firm and not subject to audit. Notwithstanding any provision herein or in any related agreements to the contrary, neither Contractor nor GS&S shall be subject to audit or adjustment for any volume, cash, trade discounts, refunds, rebates, freight allowances, equalizations, credits, commissions or the like under any Contractor SRAs or other agreements either may have with any vendor outside of this Agreement and unrelated to the Work, and any such items shall accrue exclusively to the benefit of Contractor or GS&S. Contractor and GS&S retain the right to communicate with the vendor to notify the vendor of Contractor's rights relating to SRAs so that the vendor does not have a basis to object to continue to pay SRA volume incentives to GS&S notwithstanding the provisions in the purchase order to the contrary, if any.

2.18.2 The issuance of subcontracts shall not relieve Contractor of any of its obligations under the Contract Documents, including, among other things, the obligation to properly supervise and coordinate the work of Subcontractors. Work performed by Contractor's Affiliates shall be treated as if the Contractor had performed the Work.

2.18.3 Owner's approval of any proposed Major Subcontract shall not constitute an approval of any portion of the Work or a waiver of any of Owner's rights hereunder or reduce Contractor's responsibilities hereunder. Contractor shall provide to Owner, on request, information (other than financial information) concerning the status of the negotiations with, the performance under and any disputes under each Major Subcontract, including information concerning specifications and cancellation terms. Contractor agrees that it will not (a) terminate any Major Subcontract, (b) amend or waive any material provision of

a Major Subcontract, or (c) settle any dispute without Owner's consent under a Major Subcontract that affects Owner's warranty rights.

2.18.4 Notwithstanding any agreement with any Subcontractor(s), Contractor shall be solely responsible for the Work. Contractor has complete and sole responsibility as a principal for its agents and all others it hires to perform or assist in performing the Work. Except as otherwise provided in this Agreement, Owner shall not be deemed to have any contractual obligation to any Subcontractor and nothing contained in any subcontract shall create a contractual relationship between any Subcontractor and Owner.

2.18.5 Contractor shall provide to Owner a summary of bids received for Subcontracts for Owner's review in accordance with the procedures set forth in Section 2.3 of Exhibit A .

2.18.6 Nothing in this Article 2.18 limits Owner's audit rights to review any purchase orders issued in connection with the Work in accordance with Article 4.9 .

2.19 Assurances Regarding Payments . . Upon request from time to time, Contractor shall provide to Owner such information as Owner may reasonably request as to the status of payments from Owner to Contractor and from Contractor to Subcontractors.

2.20 Office Space. . Contractor shall provide Owner with access to Owner's existing offices at the Site for use by representatives of Owner.

2.21 Key Personnel. . Contractor shall appoint a Project Director (as further described in Article 7.2 ), a deputy project director, a quality assurance/quality control director, a site manager, an engineering manager, a chief field engineer, a construction manager, a project safety manager, a start-up manager, the mechanical Subcontractor site manager, and the electrical Subcontractor site manager (together the "Key Personnel"); as set forth in Exhibit Q . The Project Director shall have full responsibility and authority for the Work on behalf of Contractor and shall act as Owner's primary point of contact with Contractor with respect to prosecution of the Work. Contractor shall not change a Key Personnel position or the person appointed to such position without the prior written consent of Owner (with the exception of the Project Director position, which Owner agrees will be replaced with the deputy project director when Contractor deems appropriate but in no event shall Contractor continue to employ both a Project Director and an assistant project director for longer than two (2) months following the Effective Date unless otherwise agreed by the Parties), which shall not be unreasonably withheld or delayed.

2.22 Co-operation and Coordination . . Upon prior reasonable notice by Owner, Contractor shall co-operate with, and grant reasonable access to the Site to, any person whom Owner appoints in writing to provide services with respect to the Facility, including, without limitation any person, whether employed by Owner or not, carrying out interface work in relation to the gas supply system, the electric interconnection facilities and the water supply and discharge system, provided that Owner obtains agreement from such persons to comply with Contractor's health and safety requirements, Applicable Law and Good Engineering and Construction Practices.

2.23 Start-Up, Commissioning and Testing Gas and Raw Water . . Contractor shall only use the natural gas supplied by Owner for the purposes of starting-up, commissioning and initial operation of the Facility and the performance of the Performance Tests. Contractor shall follow the scheduling and nomination procedures for natural gas to be mutually developed by the Parties prior to the commencement of the Performance Tests on a basis consistent with the requirements of Owner's fuel transportation agreement(s). Contractor also shall follow the scheduling and nomination procedures for water to be mutually developed by the Parties prior to the commencement of the Performance Tests on a basis consistent with the requirements of Owner's water supply contract(s). The Parties acknowledge that they anticipate that the scheduling and nomination procedures for natural gas and water will include prior-day notice.

2.24 Owner Obligations.

2.24.1 Site. Owner shall make the Site available to Contractor as of the Effective Date. Owner shall provide suitable access thereto and an adequate area or areas adjoining such site for Contractor's office, warehouse, craft change rooms, shop buildings, welding facilities, materials storage and lay down area, employee parking, and furnish necessary construction utilities.

2.24.2 Owner-Furnished Property. No later than the Effective Date, Owner shall make available to Contractor the Owner-Furnished Property.

2.24.3 Fuel and Water Utilities. Owner shall provide at the relevant interface point, natural gas and all utilities, including water and electricity, as set forth in Exhibit A , to enable construction, testing, start-up, commissioning, initial operation of the Facility, and all Performance Tests in accordance with the Work Progress Schedule.

2.24.4 Operations Personnel. Owner shall provide appropriately qualified, competent, and, where necessary, licensed operators for training when required by Contractor and to support commissioning, initial operation of the Facility and all Performance Tests.

2.24.5 Start-Up Power. Owner shall provide electric energy for the energization, commissioning, operation, and testing of the Facility; provided, however, Contractor shall use reasonable efforts to minimize the demand charges that Owner will incur for such supply of electric energy.

2.24.6 Scheduling and Delivery of Output. Owner shall arrange for the delivery of all electric energy generated by the Facility. Contractor shall comply with the scheduling and nomination procedures for delivery of electric energy to be mutually developed by the Parties prior to the date for such delivery set out in the Work Progress Schedule on a basis consistent with the requirements of Owner's applicable interconnection agreement and transmission service agreement. The Parties acknowledge that they anticipate that the scheduling and nomination procedures for delivery of electric energy will include prior-day notice. Upon receipt of notice from Contractor in accordance with such

scheduling and nomination procedures, Owner shall coordinate delivery of electric energy from the Facility to conduct start-up, operation, or testing; provided that Owner shall only be required to provide for such delivery in accordance with the Work Progress Schedule.

2.24.7 Licenses and Permits. Owner shall obtain any approvals, certificates, permits and other licenses required to be in Owner's name that are required for the Facility and as set forth in Exhibit I , except where such permits or licenses are specifically identified to be the responsibility of Contractor as part of the Work as set forth in Exhibit I .

2.24.8 Taxes. Owner shall pay all property taxes assessed against the Facilities.

2.24.9 Existing Drawings and Specifications. Owner shall provide Contractor with access to and the right to use all drawings and specifications, if any, prepared for the Facility (including the gas pipeline, water treatment and water well systems) for Owner, or for Owner's predecessor in interest, that are in Owner's possession, prior to the Effective Date that are necessary for Contractor's performance of the Work. If Contractor identifies any additional drawings and specifications necessary for the performance of the Work that existed, but were not in Owner's possession, as of the Effective Date, Owner shall use commercially reasonable efforts to obtain such drawings and specifications and the right to access and use, once obtained. To the extent Owner is unable to obtain such drawings and specifications in a reasonable period of time, Contractor shall be entitled to a Change Order in accordance with the provisions of Article 5 for any resultant delay or additional costs for the creation of such drawings and specifications.

2.24.10 Subsurface Conditions. Contractor shall have access to any soil data in Owner's possession as of the Effective Date which is related to the Facility (including the gas pipeline, water treatment and water well systems) and necessary for Contactor's performance of the Work, including the Fugro South, Inc., Geotechnical Investigation, Luna Energy Facility, Prepared for Duke/Fluor Daniel, dated October 20, 2000 and the Terracon, Soils Investigation Report for the Proposed Waste Water Treatment Plant Addition, Project #68025032, dated June 26, 2002. If Contractor identifies any additional soil data necessary for the performance of the Work that existed, but was not in Owner's possession, as of the Effective Date, Owner shall use commercially reasonable efforts to obtain such soil data. To the extent Owner is unable to obtain such soil data in a reasonable period of time, Contractor shall be entitled to a Change Order in accordance with the provisions of Article 5 for any resultant delay or additional costs for the creation of such soil data.

2.24.11 Notice to Suppliers of Existing Equipment. Immediately following the Effective Date, except with respect to the services addressed in Article 2.24.12 , Owner shall notify major equipment suppliers (and others as required) with respect to existing equipment at the Site that Contractor is designated as

Owner's authorized representative in connection with applicable purchase orders.

2.24.12 Coordination with General Electric. Owner will contract directly with General Electric (GE) for technical assistance and technical direction with respect to GE-supplied equipment. Owner will coordinate between GE and Contractor for such technical assistance and technical direction.

2.24.13 Parent Company Guarantee. In the event that Tucson Electric Power elects to assign this Agreement to another party, at least one of the Owners will provide Contractor a Parent Company Guaranty acceptable to the Parties.

2.25 Existing Work. . Contractor shall perform an assessment of the Existing Work in accordance with the scope and procedures set forth in Exhibit K. If at any time Contractor identifies any modifications, changes, replacements or additions thereto to the Existing Work, Contractor shall notify Owner.

2.26 Commercial Activities . . Contractor shall not, and shall ensure that any Subcontractors do not, engage in any commercial activity or permit any third parties to establish commercial activities on the Site that are unrelated to the performance of the Work. Contractor shall not allow its employees to engage in any commercial activity on the Site other than the performance of the Work.

ARTICLE 3

CONSTRUCTION SCHEDULE

3.1 Commencement of the Work and Contract Completion Date. . Contractor shall commence the Work under this Agreement upon the receipt of a notice from Owner to Contractor requesting that Contractor commence the Work (the "Notice to Proceed"), which Notice to Proceed shall be deemed to be issued on the Effective Date. From and after the Effective Date, Contractor shall diligently prosecute the Work continuously and with due diligence in accordance with the Work Progress Schedule set forth in Exhibit B . It is estimated, but not guaranteed, that Substantial Completion will be achieved by the Contract Completion Date. Notwithstanding the foregoing, no damages or other liability shall be imposed solely for Contractor's failure to achieve Substantial Completion on or before the Contract Completion Date.

3.2 Work Progress Schedule and Facility CPM Schedule .

3.2.1 Contractor shall perform the Work in accordance with the Work Progress Schedule set forth in Exhibit B , as may be adjusted from time to time in accordance with this Agreement.

3.2.2 Within ten (10) days after the execution of this Agreement, Contractor shall submit for Owner's review and approval a critical path method schedule (the "Facility CPM Schedule"), which shall use Primavera software, conform to the Work Progress Schedule, and set forth the timing of all elements of the Work

and the interrelationship of such elements. The Facility CPM Schedule shall describe comprehensively, and in a form and to the level of detail agreed to by Owner, the activities required to complete the Work. The Facility CPM Schedule shall include all significant activities divided into specific, identifiable tasks according to their importance, together with a critical path schedule. The Facility CPM Schedule shall highlight selected activities by time period and type of activity showing the sequence in which Contractor proposes to perform the Work and the date by which Contractor reasonably requires that Owner shall have fulfilled its obligations under this Agreement and Contractor intends to rely upon the Facility CPM Schedule in connection therewith. Contractor shall not change the dates set forth in the Facility CPM Schedule for Owner's obligations unless approved by Owner.

3.2.3 The Facility CPM Schedule shall be periodically (but at least monthly) updated and delivered to Owner with the monthly progress report. Contractor shall provide an explanation of any expected delay in achieving a level one milestone date and Contractor's plan to remedy such delay and any additional costs associated with such plan. If at any time the Facility CPM Schedule shows that Substantial Completion will not be achieved by the Contract Completion Date, Contractor shall advise Owner and submit to Owner a recovery plan (including the costs of implementing such plan) for Owner's review and approval. Upon receipt of Owner's approval, Contractor shall implement such plan as approved as a Reimbursable Cost that is included in the Contract Sum, and chargeable against the Target Price if the cause of delay is attributable to Contractor.

3.3 Delays and Time Extensions. . Without limiting the obligations of Contractor set forth in Article 3.2.3 , Contractor shall promptly notify Owner in writing of any actual or anticipated event that is delaying or could delay completion of the Facility in accordance with the Work Progress Schedule. Contractor shall indicate the expected duration and anticipated effect of the delay, and the action being taken to correct the problem and make up for lost time. Contractor shall be entitled to an adjustment to the Contract Completion Date and the Target Price, as appropriate, pursuant to the provisions of Article 5 for any delay that may occur, so long as such delay is not caused by Contractor or any Subcontractor or is not otherwise attributable to Contractor's failure to perform in accordance with this Agreement. Contractor shall take all steps reasonably available to Contractor to mitigate any impacts of the delay on the Work Progress Schedule or Reimbursable Costs, as the case may be. All time extensions shall be incorporated into the Contract Documents through the execution of a Change Order.

ARTICLE 4

COMPENSATION

4.1 Compensation. . Owner shall reimburse Contractor for its costs and pay Contractor a Fee in accordance with this Article 4 .

4.2 Reimbursable Costs . . Contractor's costs related to the Work shall be invoiced as the total of and in accordance with the following applicable categories:

4.2.1 Home Office Employees and Related Costs

4.2.1.1 Employees' Compensation. For straight time and overtime hours, compensation in accordance with Exhibit C and subsequent revisions, for such time as is devoted to the Work by home office employees, including employees of certain affiliates of Contractor, whether such Work is performed in the office or in the field. In addition, members of Contractor's corporate staff who devote direct time to the performance of the Work shall be reimbursed as set forth above if approved by Owner. Members of Contractor's and its affiliates' management team, in lieu of the foregoing commercial basis, will be reimbursed in accordance with the Project Management Principals Rate Schedule set forth in Exhibit C ;

4.2.1.2 Agency personnel. The invoiced cost of agency personnel;

4.2.1.3 Indirect Expense. An amount equal to [*] per hour for home office support services and Houston engineering services (collectively and initially estimated to be [*] hours), to recover a portion of the costs referred to in Article 4.5 below;

4.2.1.4 Miscellaneous Expenses. Miscellaneous expenses, including, but not limited to, custom printed forms, special book bindings, drafting room and office materials and supplies, freight, express mail, duties, and excise taxes, and any other costs incurred in connection with the Work will be invoiced at cost; and

4.2.1.5 Project Support. Miscellaneous administrative and project support services charged in accordance with Contractor's current practices, including but not limited to charges for personnel, safety services, communications services, document storage, client office space, printing and reproduction, automation tools and computer services, which shall be reimbursed in accordance with the Rate Schedule set forth in Exhibit C .

4.2.2 Field Employees and Related Costs

4.2.2.1 Salaried Field Employees. For straight time and overtime hours, compensation in accordance with Exhibit C and subsequent revisions, for such time as is devoted to the Work, including travel time, of Contractor's salaried field employees, including employees of certain affiliates of Contractor, whether such Work is performed in the office or in the field. In addition, members of Contractor's corporate staff who devote direct time to the performance of the Work shall be reimbursed as set forth above if approved by Owner;

4.2.2.2 Agency Personnel. The invoiced cost of agency personnel;

4.2.2.3 Hourly Field Employees - Wages, Benefits and Training Contribution. The wages of hourly field employees and the costs of subsistence, travel time and expenses;

4.2.2.4 Hourly Field Employees - Taxes and Insurances. An amount equal to all payroll taxes, e.g ., FICA, FUI and SUI, levied or assessed by any governmental body, which are measured by the compensation payable pursuant to subparagraph 4.2.2.3 above, plus premiums for workers' compensation and risk management programs;

4.2.2.5 Major Construction Tools and Equipment. For the use of all major construction tools and equipment in accordance with Exhibit C ;

4.2.2.6 Transportation Expenses. The costs of transporting and handling major construction tools and equipment, in accordance with Exhibit C . The cost of transportation, to and from the Site, of Contractor-supplied small tools as set forth in Exhibit C shall be reimbursed at invoiced cost to Contractor;

4.2.2.7 General Expenses. The cost for providing temporary construction facilities at the Site; the cost of operating and maintaining a job office and warehouse and storage facilities, including the cost of the office furnishings, equipment, and supplies; expendable construction items and supplies in accordance with Exhibit C ; communication and utilities expenses and all other field office services and expenses; the cost of maintaining and performing running repairs to construction tools and equipment; and all other direct costs; and

4.2.2.8 Project Support. Miscellaneous administrative and project support services charged in accordance with Contractor's current practices, including but not limited to charges for personnel, safety services, communications services, document storage, client office space, printing and reproduction, automation tools and computer services which shall be reimbursed in accordance with the Rate Schedule set forth in Exhibit C .

4.2.3 Adjustments

4.2.3.1 The allowances in Article 4.2 shall be increased or reduced when Contractor benefit programs or benefit costs change, or when statutory or insurance requirements or costs change.

4.2.4 Other Costs

4.2.4.1 Materials and Equipment. The cost of materials, machinery, equipment, supplies, parts, and miscellaneous services procured for the Work excluding Contractor's major construction tools and equipment which are provided for in Article 4.2.2.6 hereof;

4.2.4.2 Transportation of Materials and Equipment. The cost of all transportation expenses to the Site on materials, machinery, tools and equipment, including the cost of loading, hauling, unloading, and insurance;

4.2.4.3 Travel and Relocation Expenses. The cost of all travel and relocation and other related expenses in accordance with Contractor's established policies. If Owner's or Contractor's employees travel by Contractor's aircraft (owned or leased), Contractor will be reimbursed at commercial airline rates for class or fare authorized for equivalent Contractor employees under Contractor's established policies. For any part of the route for which there is no regularly scheduled commercial air service, reimbursement shall be at the rates established by Contractor from time to time.;

4.2.4.4 Taxes and Bonds. The cost of any duties, taxes, licenses or bonds arising directly out of or that are applicable to the Work, other than taxes that are non-reimbursable pursuant to Articles 2.10 and 4.5 ;

4.2.4.5 Permits and Inspections. The cost of permits required of Contractor by any governmental body in connection with the construction services herein provided for, and the cost of inspections required by law or ordinance of any governmental body;

4.2.4.6 Subcontracts. The cost of any subcontracts;

4.2.4.7 Insurance. The cost of all project specific insurance premiums maintained by Contractor to protect Owner and/or Contractor as set forth in Article 15 and the costs of all insurance deductibles and non-covered losses;

4.2.4.8 Audits, Monitoring and Accounting. The cost of periodic project audits and similar programs monitoring the financial or other aspects of the project, and any project-specific accounting functions, including, but not limited to, preparation of property accounting records;

4.2.4.9 Litigation and Related Costs. The costs of attorney's fees, costs, settlements, and/or judgments incurred in connection with any labor or commercial litigation, claims or disputes arising out of or in connection with the performance of this Agreement other than litigation, claims or disputes (i) solely between Owner and Contractor or (ii) arising in connection with Article 13 ; and

4.2.4.10 General and Administrative Expenses. An amount equal to [*] of all direct Reimbursable Costs (excluding gross receipts tax, and Fee) to cover the cost of Contractor's general and administrative expenses.

4.3 Fee. . Contractor shall be entitled to a fee (the "Fee") based on the date Substantial Completion is achieved.

4.3.1 If Substantial Completion is achieved on or before April 1, 2006, the Fee shall be [*].

4.3.2 If Substantial Completion is achieved after April 1, 2006 but on or before May 1, 2006, the Fee shall be [*] plus 1/30th of the difference between [*] and [*] for each day prior to May 1, 2006 that Substantial Completion is achieved ( e.g. , if Substantial Completion is achieved on April 2, 2006, the Fee would be [*] plus 29/30ths of [*] and if Substantial Completion is achieved on April 30, 2006, the Fee would be [*] plus 1/30th of [*]).

4.3.3 If Substantial Completion is achieved after May 1, 2006 but on or before June 1, 2006, the Fee shall be [*] plus 1/31st of the difference between [*] and [*] for each day prior to June 1, 2006 that Substantial Completion is achieved ( e.g. , if Substantial Completion is achieved on May 2, 2006, the Fee would be [*] plus 30/31sts of [*] and if Substantial Completion is achieved on May 31, 2006, the Fee would be [*] plus 1/31st of [*]).

4.3.4 If Substantial Completion is achieved after June 1, the Fee shall be [*].

4.3.5 Owner shall pay [*] of the Fee in equal monthly installments beginning with the month in which the Effective Date occurs through May 1, 2006. Owner shall pay the balance of any Fee due to Contractor ten (10) Business Days after the date Substantial Completion is achieved.

4.4 Target Price, Underrun and Overrun. . The Parties contemplate that the Work can be completed for the Target Price, which amount is not guaranteed. To provide Contractor with an incentive to so complete the Work for an amount no greater than the Target Price, the Contract Sum shall be compared to the Target Price at each True-Up Date and the Parties shall share responsibility for any resulting Underrun or Overrun in accordance with the provisions of this Article 4.4 .

4.4.1 Underrun. If the Contract Sum is less than the Target Price at a True-Up Date, then the Parties recognize that there is an Underrun (the amount of the Underrun is the Target Price minus the Contract Sum at such True-Up Date). The amount of the Underrun minus [*] shall be shared [*] to Owner and [*] to Contractor.

4.4.2 Overrun. If the Contract Sum is more than the Target Price at a True-Up Date, then the Parties recognize that there is an Overrun (the amount of the Overrun is the Contract Sum minus the Target Price). The amount of the Overrun in excess of [*] shall be charged [*] to Owner and [*] to Contractor.

4.4.3 Billing and Payment of Underruns. If there is an amount due to Contractor for an Underrun after the initial True-Up Date, Contractor shall invoice such amount to Owner and Owner shall pay such amount within twenty (20)

calendar days after the receipt of such invoice. If the amount due to Contractor for an Underrun at the final True-Up Date is greater than the amount previously paid by Owner with respect to the initial True-Up Date, Contractor shall invoice such additional amount to Owner and Owner shall pay such additional amount within twenty (20) calendar days after the receipt of such invoice. If the amount due to Contractor for an Underrun at the final True-Up Date is less than the amount previously paid by Owner with respect to the initial True-Up Date, Contractor shall repay Owner for the excess paid by Owner within twenty (20) calendar days after the final True-Up Date.

4.4.4 Billing and Payment of Overruns. If at any time during the performance of the Work prior to the initial True-Up Date, the Contract Sum exceeds the Target Price by more than [*], Contractor shall thereafter invoice Owner for only [*] of its Reimbursable Costs in its progress invoices delivered pursuant to Article 4.6. If there is an amount due from Contractor for an Overrun after the initial True-Up Date, Contractor shall pay such amount , adjusted to account for any reduced billings from Contractor pursuant to the first sentence of this Article 4.4.4, within twenty (20) calendar days after the True-Up Date. If the amount due from Contractor for an Overrun at the final True-Up Date is greater than the amount previously paid by Contractor with respect to the initial True-Up Date, Contractor shall pay such additional amount within twenty (20) calendar days after such True-Up Date.

4.4.5 Limitation on Contractor Responsibility for Overruns. Notwithstanding the other provisions of this Article 4.4 , in no event shall Contractor be obligated to pay Owner for Overruns or have withheld from payments of Reimbursable Costs to Contractor on account of Overruns more than the sum of [*] plus [*] of the positive difference, if any, between the Fee paid to Contractor pursuant to Article 4.3 and [*].

4.4.6 Exclusive Remedy. Contractor's obligation to share responsibility for any Overrun as set forth in this Article 4.4 shall be Contractor's only obligation and liability and Owner's exclusive remedy for a Contract Sum that exceeds the Target Price.

4.5 Non-Reimbursable Items. . The following costs and expenses are not reimbursable to Contractor as a separate amount, as these costs are included in the hourly rates and the general and administrative percentage allowed as a Reimbursable Cost under Article 4.2:

(a) Contractor's Executive Officers, including the Chairman of the Board, President, Vice Presidents (except as provided for herein), Secretary, Treasurer, and Controller;

(b) Contractor's Sales, Public Relations, Medical, and Advertising personnel, when not directly engaged in the Work, as well as office maintenance personnel, consisting of telephone and teletype operators, guards, receptionists, mail room, janitorial and maintenance employees;

(c) Home office general expenses, consisting of depreciation, rent, and maintenance of home office facilities, furniture, office equipment, light, heat, cafeteria service and parking space;

(d) General overhead expenses, consisting of the development of engineering and construction standards and programs not specific to the project, entertainment and charity contributions;

(e) Property taxes on Contractor's real and personal property at the home office and taxes assessed against net income; and

4.6 Monthly Billing .

4.6.1 On or about the 10th day of each month Contractor shall furnish Owner with a progress invoice for its estimate of the Reimbursable Costs to be incurred that month adjusted for any difference between the estimate for the prior month and the actual Reimbursable Costs incurred in the prior month, which shall be prepared as set forth in Article 4.7 hereof. Owner shall pay the amount set forth in the progress invoice within five (5) Business Days of the receipt by Owner of the progress invoice.

4.6.2 In the event Owner disputes any invoiced item, Owner shall give Contractor written notice of such disputed item within ten (10) days after receipt of the invoice. Owner nevertheless shall pay Contractor the amount set forth in the progress invoice in accordance with the provisions hereof and such dispute shall be resolved pursuant to Article 12 , Dispute Resolution; provided, however, that the Parties shall use their reasonable efforts to resolve any such dispute within sixty (60) days of the date of Owner's payment of the disputed amount. If such dispute is resolved in favor of Owner, Contractor shall repay Owner, with interest, on that portion of the disputed amount for Owner, calculated at the prime rate as reported in The Wall Street Journal plus [*]. The payment of interest shall not excuse or cure any default or delay in payment. To the extent Contractor fails to deliver the monthly progress report and the updated Facility CPM Schedule as required in Articles 2.12.4 and 3.2.3, respectively, Owner's obligation to make payment shall be extended on a day for day basis.

4.7 Contents of Progress Invoices. . Each progress invoice shall set forth the Reimbursable Costs estimated for the prior month, the actual Reimbursable Costs incurred during the prior month, and the Reimbursable Costs estimated to be incurred during the current month, including the current portion of the Fee. Each progress invoice shall be supported by:

(1) one copy of all supporting documentation for Reimbursable Costs under Article 4.2 and an itemized listing of Subcontractor invoices, expense reports and other reimbursable expenses;

(2) a certification as to the accuracy of the billing;

(3) a certification that each Subcontractor or vendor listed was actually paid in the amount set forth in the prior progress invoice;

(4) with respect to amounts paid to Subcontractors in excess of $250,000.00, partial lien waivers on the form attached hereto as Exhibit E-1 ; and

(5) the variance between the aggregate Reimbursable Costs incurred and expected to be incurred through the current month from the Target Cash Flow Budget, as adjusted by any Change Order, together with an explanation of any variance of greater than five percent (5%).

4.8 Final Payment; Liens . . Prior to Final Completion and delivery of any final payment invoice under the Contract Documents, Contractor shall complete all Work, including Punch List Work, and shall execute and deliver to Owner final waivers of liens executed by the Contractor and all Major Subcontractors (in the form attached hereto as Exhibit E-2 ) and Contractor's certification that, to the best of Contractor's knowledge after reasonable inquiry, (1) all indebtedness, including liens, with respect to or in connection with the Work has been paid and (2) all claims for payment for labor and materials for which Contractor is responsible in connection with the construction of the Facility have been paid or satisfied. Owner shall pay the final payment invoice within ten (10) calendar days after Final Completion, provided that Owner receives all of the following: (a) Contractor's certification that all Work, including Punch List Work, has been completed, (b) Contractor's duly certified voucher for payment, and (c) the executed waivers of liens referred to in this paragraph. Contractor shall indemnify, defend and save Owner harmless from all laborer's, materialmen's, and mechanic's liens arising out of the Work and from all reasonable attorney fees relating thereto incurred by Owner so long as Owner has paid Contractor all amounts required by this Agreement.

4.9 Records; Audit . . Contractor shall maintain complete accurate records concerning the Work and all related transactions for at least three (3) years from the date of Final Completion. This includes all records relating to compliance with Applicable Laws, compliance with Owner's drug and alcohol policy attached as Exhibit J , financial records related to the Work, employee qualifications and to the extent applicable US Department of Transportation requirements. At any time but not later than three (3) years after final payment under this Agreement, Owner may audit the records, invoices and substantiating material (including time records) as reasonably requested by Owner and as deemed necessary by Owner. Each payment made shall be subject to reduction and refund to Owner, or offset on future payments due Contractor, to the extent of amounts which are found by Owner not to have been properly payable or to have been overpaid, and shall also be subject to increase and payment to Contractor for underpayments to the extent of any amounts which are found by Owner to have been underpaid. Upon request by Owner, Contractor shall insert a clause containing all the provisions of this Article "Records; Audits" in all subcontracts to permit Owner to make identical Audits and inspections of the Records of all Subcontractors involved in performance of the Work. Notwithstanding any provision in this Agreement to the contrary, however, the purpose of any such audit shall be only for verification of such Reimbursable Costs and Contractor shall not be required to keep records of or provide access to those of its costs covered by the Fee, allowances, fixed rates, or of costs which are expressed in terms of percentages of other costs.

4.10 No Duplication. . Nothing in this Agreement shall allow any duplication of any cost, expense, mark-up, overhead, or other charge.

4.11 Effect of Payment . . No payment, final or otherwise by Owner, shall be considered or deemed to represent that Owners or Owner's Project Manager or any other representative of Owner have inspected the Work, nor shall it constitute or be deemed an acceptance, in whole or in part, of any portion of the Work not, nor subsequently determined not to be, in accordance with the Contract Documents.

4.12 Security of Performance. . Within ninety (90) days following the Effective Date, Contractor shall provide Owner with the Performance Security as set forth in Exhibit O.

4.13 Wire Transfer Instructions. Owner shall make all payments due Contractor via wire transfer to Contractor's account as follows; Wells Fargo Bank, San Francisco, CA, ABA No. 121-000248, For Account: Fluor Enterprises, Account No. 4600-149983.

ARTICLE 5

CHANGES IN THE WORK

5.1 Change Order. . Change Orders may be initiated by either Owner or Contractor in accordance with this Article 5 . The Work, Target Price, Contract Completion Date, Target Cash Flow Budget and any other obligation under this Agreement shall only be adjusted as allowed under this Agreement and any adjustment shall be documented by a Change Order. It is the desire of the Parties to keep changes in the Work, the Contract Completion Date and the Target Cash Flow Budget at a minimum, but the Parties recognize that such changes may become necessary and agree that they shall be handled as follows.

5.2 Individuals Authorized to Make Changes. . All Change Orders must be approved and signed on behalf of Owner by Owner's Project Manager. Contractor's Project Director identified in Article 7.2 may approve and sign any Change Order on behalf of Contractor.

5.3 Change Orders.

5.3.1 To the extent that Contractor demonstrates that a change affects adversely Contractor's (or its Subcontractor's) ability to perform the Work, increases the cost of the Work or its other obligations under this Agreement, or causes a delay in the Work Progress Schedule or the Contract Completion Date, Contractor shall be entitled to an appropriate adjustment to the Target Price, Contract Completion Date, Target Cash Flow Budget, Fee (as mutually agreed by the Parties if the cumulative adjustments to the Target Price exceeds ten million dollars, excluding adjustments arising under Section 5.3.2(5) and the cost of spare parts purchased by Contractor under the fourth sentence of Section 2.3) and any other affected obligation under this Agreement. If any change affects Contractor's ability to achieve Substantial Completion by the Contract Completion Date, Contractor shall at Owner's request prepare a draft Change

Order that, to the extent practical, does not adjust the Contract Completion Date, but compensates Contractor, as the case may be, for the effect of such Change by adjusting other milestones in the Work Progress Schedule or other provisions of this Agreement. Owner shall, in its sole discretion, accept such draft Change Order or direct a change that adjusts the Contract Completion Date.

5.3.2 Contractor shall be entitled to an appropriate adjustment to the Target Price, Contract Completion Date, Target Cash Flow Budget, Fee (as mutually agreed by the Parties if the cumulative adjustments to the Target Price exceeds ten million dollars, excluding adjustments arising under Section 5.3.2(5) and the cost of spare parts purchased by Contractor under the fourth sentence of Section 2.3) and any other affected obligation under this Agreement pursuant to a Change Order in any of the following events, provided Contractor also satisfies the requirements of Article 5.3.1 and 5.3.3 or 5.3.4 , as the case may be: (1) Owner-directed changes pursuant to Article 5.3.3 ; (2) the occurrence of an Uncontrollable Force; (3) an act or omission of Owner in breach of its obligations under this Agreement; (4) modifications to the Existing Work resulting from the assessment thereof pursuant to Article 2.25 ; (5) adjustments to the allowances included in the Target Price as of the Effective Date for the water treatment, gas pipeline and well water systems based on the finalization by Owner and Contractor of the subcontracts and scope of work related thereto, (6) the cost of operational spare parts to be procured under Article 2.3 and Contractor's inability, for reasons beyond its reasonable control, to obtain Spare Parts for testing, start-up and commissioning as contemplated by Article 2.3 , (7) any damage to the Owner-Furnished Property that is identified by Contractor during the performance of the Work, other than damage caused by Contractor or its Subcontractors, (8) any material or equipment not set forth in Attachment 1 of Exhibit L that is not provided by Owner as contemplated by Article 2.24.2 , (9) any increase in wages, benefits or payroll taxes due to governmental action, (10) modifications to the design criteria required during the performance of the Work by Owner or Owner's vendors with respect to the Existing Work or by changes in Applicable Law or Applicable Codes and Standards and (11) as otherwise provided in this Agreement.

5.3.3 Owner may initiate a change by advising Contractor in writing of the change believed to be necessary or desirable. As soon as practicable, Contractor shall prepare and forward to Owner a cost estimate and a schedule impact of the change, which shall include any applicable adjustment to the Target Price, Contract Completion Date, Target Cash Flow Budget, Fee (as mutually agreed by the Parties if the cumulative adjustments to the Target Price exceeds ten million dollars, excluding adjustments arising under Section 5.3.2(5) and the cost of spare parts purchased by Contractor under the fourth sentence of Section 2.3), and any effect on Contractor's ability to comply with any of its obligations under this Agreement, including warranties. Contractor shall also consider any potential adjustments to the Work, the Work Progress Schedule, or the Target Cash Flow Budget that may be undertaken to mitigate the effects of the change.

Contractor shall be reimbursed for the costs incurred to prepare any estimate. Owner shall advise Contractor in writing of its approval or disapproval of the change. If Owner approves the change, Contractor shall perform the Work as changed.

5.3.4 Contractor may propose changes by advising Owner in writing that in Contractor's opinion a change is necessary. If Owner agrees, it shall advise Contractor and, thereafter, the change shall be handled as if initiated by Owner, (except that unless otherwise agreed by Owner, Contractor shall not be reimbursed for the cost of preparing estimates for Contractor proposed changes).

5.4 If No Agreement. . If either Owner or Contractor disputes the existence, extent, validity of a change or is unable to reach agreement on the terms of any change in the Work, including, but not limited to, an adjustment in the Target Price or Contract Completion Date, then either Party may notify the other Party that it desires to meet and resolve the dispute in accordance with Article 12 .

ARTICLE 6

INSPECTION AND WARRANTY

6.1 Warranty.

6.1.1 Contractor warrants it will perform the Work (other than the portions of the Work described in Articles 6.1.2 and 6.2 ), in accordance with GECP and in accordance with Applicable Law, and that such Work shall be free of any defect in equipment, materials, and workmanship performed by Contractor and its Subcontractors. Contractor shall deliver a Fully Dispatchable Facility. If Contractor fails to meet the standards set forth in this Article 6.1.1 and Owner gives Contractor notice of any such failure or defect as promptly as practicable after discovery of such failure, but in no event later than one (1) year after Substantial Completion of the Facility (the "Warranty Period"), Contractor shall remedy such deficiency as a Reimbursable Cost that is included in the Contract Sum and chargeable against the Target Price, so that such Work conforms to those standards.

6.1.2 Contractor shall assign to Owner or facilitate the assignment of warranties from Teton Industrial Company and MMR Group to Owner with regard to their respective portions of the Existing Work and the Work. In addition, Contractor shall, for the protection of Owner, demand from all other Subcontractors from which Contractor procures machinery, equipment or materials or Work, warranties and guarantees with respect to such machinery, equipment, materials or Work, which shall be made available to Owner to the full extent of the terms thereof. Unless otherwise specified in the Contract Documents, all materials and equipment so procured by Contractor shall be new, and both workmanship and material shall be of good quality. Equipment and material which are

procured by Contractor, but fail to comply with the requirements of the Contract Documents, shall be removed and replaced with complying equipment and material as a Reimbursable Cost that is included in the Contract Sum and is chargeable against the Target Price to the extent such removal and replacement are not covered by the warranties or guarantees obtained from a Subcontractor. However, if the progress of Work is such to make such removal impractical, Owner shall have the right to accept it and reduce the Target Price by an amount equivalent to any recovery from the relevant Subcontractor for the difference in its value and the value of complying equipment or material. Owner may perform such factory or field tests as are deemed necessary to verify that equipment meets the Contract Documents. Contractor shall be permitted to witness such tests. Contractor's warranty liability with respect to all machinery, equipment and materials or Work obtained from Subcontractors in connection with the Facility shall be limited to procuring warranties and guarantees from such Subcontractors in the case of machinery, equipment, materials or Work procured as part of the Work, and rendering all reasonable assistance to Owner for the purpose of enforcing applicable warranties and guarantees. All costs incurred by Contractor in performing such Work shall be Reimbursable Costs that are not included in the Contract Sum and that are not chargeable against the Target Price. All Subcontractors', manufacturers', and suppliers' warranties and guaranties, express or implied, respecting any part of the Work and any materials used therein shall be deemed obtained by Contractor for the benefit of Owner without the necessity of separate transfer or assignment thereof. Contractor shall assign such warranties and guaranties to Owner upon Substantial Completion.

6.1.3 All Work repaired or replaced pursuant to this Article 6.1 shall also be subject to the provisions of this Article 6.1 to the same extent as Work originally performed, except that the Warranty Period with respect thereto shall run from the date of completion of the repair or replacement; provided, however, in all cases the Warranty Period shall expire two (2) years following Substantial Completion.

6.1.4 If requested by Owner, Contractor will assist Owner in obtaining and administering any other warranties with respect to the Existing Work and the costs of any such administration will be Reimbursable Costs but will not be included in the Contract Sum and will not be charged against the Target Price.

6.2 Engineering and Design Warranty. . Contractor warrants it will perform its engineering and design Services, as more particularly described in Exhibit A ("Engineering Services") in accordance with the current standards of care and diligence normally practiced by recognized engineering firms in performing services of a similar nature. Further, Contractor warrants that the engineering and design performed by Duke/Fluor Daniel ("D/FD Engineering Services") as part of the Existing Work have been performed in accordance with the then current standards of care and diligence normally practiced by recognized engineering firms in performing services of a similar nature. If within one (1) year after Substantial Completion it is shown that there is an error in the Engineering Services or D/FD Engineering Services as a result of either Contractor's

or Duke/Fluor Daniel's failure to meet those standards and Owner has notified Contractor in writing of any such error within that period, Contractor shall reperform such Engineering Services or D/FD Engineering Services within the original scope of such services, as may be necessary to remedy such error. All costs incurred by Contractor in performing such corrective services shall be to the account of Contractor, subject to an aggregate limit of liability of $1,000,000, and such costs shall not be included in the Reimbursable Costs under this Agreement except to the extent such costs exceed such limit of liability amount. To the extent any Engineering Services or D/FD Engineering Services are reperformed with the result that modifications to the Work are necessary, Contractor shall perform such modifications as a Reimbursable Cost that is included in the Contract Sum and chargeable against the Target Price prior to Final Completion. After Final Completion and up to the final True-Up, Contractor shall remain available to perform such modifications as a Reimbursable Cost that is included in the Contract Sum and chargeable against the Target Price.

6.3 Inspection and Testing.

6.3.1 All Work shall be subject to reasonable inspection by Owner, or its representatives or consultants at all times to determine whether or not the Work conforms to the Contract Documents. Contractor shall provide Owner access to the Work wherever located. Owner may visit and inspect the Work, or any part thereof, at any time, and Contractor shall provide safe and proper access for inspection of the Work. Owner may be present at any test to be performed. Contractor shall furnish promptly, as a Reimbursable Cost, all reasonable facilities, labor, and materials necessary for the safe and convenient inspection and testing that may be required by Owner. All inspections and tests by Owner shall be performed in such manner as not to unnecessarily delay the Work. All such tests and inspections shall not relieve Contractor of its obligations.

6.3.2 If Contractor fails to provide Owner with reasonable opportunity to inspect the Work, and if in the opinion of Owner it is necessary to uncover or dismantle such Work for such inspection, then Contractor shall uncover, dismantle and recover the Work as necessary for such inspection. If such inspection reveals a defect or deficiency in the Work, Contractor's cost of uncovering, dismantling and recovering the Work shall be a Reimbursable Cost that is included in the Contract Sum and chargeable against the Target Price. If such inspection does not reveal a defect or deficiency in the Work, Contractor's cost of uncovering, dismantling and recovering the Work shall be a Reimbursable Cost that is not included in the Contract Sum and that is not chargeable against the Target Price.

6.3.3 Where Owner has a reasonable belief that there is a defect or deficiency, even though Contractor has given Owner reasonable opportunity to inspect the Work and Owner subsequently requires uncovering, having made no comment during the original inspection, Contractor shall nevertheless uncover, dismantle and recover the Work as necessary for such inspection. If such inspection reveals a defect or deficiency in the Work, Contractor's cost of uncovering, dismantling and recovering the Work shall be a Reimbursable Cost that is included in the

Contract Sum and chargeable against the Target Price. If such inspection does not reveal a defect or deficiency in the Work, Contractor's cost of uncovering, dismantling and recovering the Work shall be a Reimbursable Cost that is not included in the Contract Sum and that is not chargeable against the Target Price.

6.4 Correction of Defects . . If Contractor does not take action to correct any defects or deficiencies for which it is responsible under the Contract Documents within a reasonable time after receipt of Owner's written notice thereof, Owner may, as its sole option, (a) terminate or suspend the right of Contractor to proceed with the Work as provided in Article 11.3 "Termination by Owner for Cause " or Article 11.6 "Suspension of the Work", (b) take such corrective action itself or through contract with others (the cost of which shall be included in the Contract Sum), or (c) deduct an equitable amount from the Target Price pursuant to a Change Order for defects or deficiencies in the Work in lieu of correcting Work that was not performed in accordance with the Contract Documents.

6.5 Limitations . . The obligations contained in this Article 6 govern and supersede any other terms in this Agreement which address warranties, guarantees, or the quality of the Work and are Contractor's sole warranty and guarantee obligations and Owner's exclusive remedies with respect thereto. Contractor makes no other warranties or guarantees, express or implied, including but not limited to warranties of merchantability and fitness for a particular purpose which are expressly disclaimed and waived. Contractor shall have no warranty obligation or liability for defects in the Work caused by Owner's improper operation or maintenance of the Facility. Notwithstanding anything herein to the contrary, as between Owner and Contractor, Owner shall be responsible for defects with respect to the Existing Work other than as set forth in Article 6.2.

6.6 Title.

6.6.1 Contractor shall include, as a term of each Subcontract, a warranty that all materials and equipment furnished by its Subcontractors that become part of the Facility or are purchased by Contractor for Owner for the operation, maintenance or repair thereof shall be legally and beneficially owned by the Owner free from any encumbrance whatsoever. Title to all such materials and equipment shall pass to Owner upon the earlier of (a) delivery to the Site, or (b) the passage of title from a Subcontractor to Contractor under the applicable subcontract, purchase order or other agreement. Notwithstanding passage of title, Contractor shall retain sole care, custody and control of such materials and equipment and shall exercise due care with respect thereto in accordance with Article 2.13 .

6.6.2 In order to protect Owner's interest in all materials and equipment with respect to which title has passed to Owner but which remain in the possession of a third party, Contractor shall follow the directions of Owner with respect to the action to be taken by Contractor to maintain Owner's clear title and to protect Owner against claims by other parties with respect thereto, and the costs incurred by Contractor in so doing shall be a Reimbursable Cost.

6.6.3 So long as Owner pays all amounts due Contractor pursuant to this Agreement, Contractor agrees that it shall not establish, and shall not allow its employees, agents or Subcontractors to maintain, any contractor's or laborer's encumbrance on the Work or the Facility or any part thereof.

6.6.4 Contractor shall not file or permit any liens on the Work or the Facility without Owner's prior written consent; provided that this clause shall not prohibit Contractor from filing a lien allowed under Applicable Law to secure amounts due from Owner under this Agreement. Contractor shall follow the directions of Owner with respect to the action to be taken by Contractor regarding any mechanic's or materialmen's liens arising from the Work and Contractor shall if ordered by Owner, as soon as practical discharge any encumbrance filed by any Subcontractor against the Facility based on a claim for payment in connection with the Work, and the costs incurred by Contractor in so doing shall be a Reimbursable Cost.

6.6.5 Contractor shall provide prompt notice to Owner of any encumbrance of which it receives notice.

6.6.6 In the event Contractor fails to discharge any such encumbrance within a reasonable period or otherwise provide Owner with adequate assurances or security with regard to any such encumbrance arising in respect of the Work or the Facility, Owner shall have the right to discharge the same and such costs shall be charged against the Target Price as part of the Contract Sum.

ARTICLE 7

REPRESENTATIVES AND NOTICES

7.1 Owner's Project Manager. . Owner appoints the following individual as its "Owner's Project Manager" :

Name:	Jimmy L. Gonzales
Address:	PNM 2401 Aztec NE MS Z110 Albuquerque, NM 87107
E-mail:	jgonzal3@pnm.com
Telephone:	(505) 855-6326
Cell Phone:	(505) 681-0964
Fax:	(505) 855-6320

The Owner's Project Manager shall be authorized to act on behalf of Owner, with whom Contractor may consult at all reasonable times, and whose instructions, requests, and decisions shall be binding upon Owner as to all matters pertaining to this Agreement and the performance of the Parties hereunder. Without limiting the foregoing, the responsibilities of Owner's Project

Manager shall encompass but not be limited to (1) issuance of instructions, (2) interpretation of plans, (3) review and inspection of Contractor's Work, (4) rejection of nonconforming Work, (5) determination of when the Work is complete, (6) approval of progress payments and final payment, and (7) approval of certain Change Orders as set forth in Article 5 "Changes in the Work" . All communications from Contractor to Owner shall be directed to Owner's Project Manager and all communications from Owner to Contractor shall be directed from the Owner's Project Manager. Owner may appoint another person as Owner's Project Manager at any time by written notice to Contractor from the current Owner's Project Manager. Directions from the Owner's Project Manager shall be deemed to be the direction of each and every Owner, and Contractor shall be entitled to rely upon same.

7.2 Contractor's Project Director. . Contractor appoints the following individual as its "Project Director" in charge of Contractor's performance and execution of the Work:

Name:	Richard Meserole
Address:	Fluor Enterprises, Inc. One Fluor Daniel Drive Sugar Land, TX 77478-3899
E-mail:	richard.meserole@fluor.com
Telephone:	(281) 263-2038
Cell Phone:	(281) 705-9990
Fax:	(281) 263-5567

All instructions, requests for Change Orders and all other communications from Owner to the Contractor shall be directed to the Project Director.

7.3 Notices. . Except as expressly provided otherwise herein, any formal notice, demand, or request provided for in the Contract Documents shall be in writing and shall be deemed properly made if personally delivered, delivered by courier, or sent by first-class mail, postage prepaid, or by facsimile to the facsimile number to the person specified above and shall be deemed received, if personally delivered, or delivered by courier, upon delivery, and if mailed, on the third Business Day following deposit in the U.S. mail, and if sent by facsimile, upon transmission (electronic transmission to the e-mail address specified above may be done in addition to delivery of a paper copy).

7.4 Changes. . Each Party shall provide the other Party with notice when its respective address, contact person, telephone number, e-mail address, or facsimile number changes to which notices are to be sent.

7.5 Ordinary Course. . Nothing contained herein shall preclude the transmission of routine invoices or correspondence, messages and information between the Parties by a representative of a Party in the ordinary course of performing their respective obligations under the Contract Documents.

ARTICLE 8

PRIOR WORK AND WORK SITE

8.1 Prior Work and Site Investigation. . Contractor is familiar with the status of Facility construction, the Plant Site and conditions therein. Contractor accepts, as part of the Work and subject to the warranties of this Agreement, the D/FD Engineering Services previously provided, but not any portion of the Facility that was procured or constructed as of the date of this Agreement. Notwithstanding the fact that Contractor may have received certain Site information from Owner but subject to the assessment contemplated by Article 2.25 , Contractor represents to Owner that Contractor has independently satisfied itself as to the status of completion, nature and location of the Work, the general and local conditions, particularly those bearing upon transportation, disposal, and handling and storage of materials, availability of labor, water, electric power, roads, and uncertainties of weather, river stages, or similar physical conditions at the Site, the conformation and conditions of the ground, the character, quality, and quantity of surface and subsurface materials to be encountered as reflected in the geotechnical reports.

8.2 Lines and Grades. . Contractor shall establish construction base lines and bench marks for the Work. Said base lines and bench marks, and all stakes or other markers established shall be preserved by Contractor until their removal is authorized by Owner. Owner may, from time to time, check the layout of Contractor, but such checking shall in no way relieve Contractor of its responsibility for the accuracy of the Work. Contractor shall provide, at the request of Owner and as a Reimbursable Cost, competent personnel to assist in this checking.

8.3 Specifications and Drawings. . Contractor shall maintain at the Plant Site a copy of the "approved for construction" working specifications and drawings (including "as-built drawings") applicable to the Work with all changes and modifications, and shall at all times, give Owner access thereto. Anything mentioned in the specifications and not shown on the drawings or shown on the drawings and not mentioned in the specifications, shall be of like effect as if shown or mentioned in both.

8.3.1 "As-Built" Drawings. Contractor shall provide and keep at the Plant Site a complete "as-built" record set of drawings (also called "record drawings") that shall be updated periodically. The drawings shall reflect exact and actual "as-built" conditions of construction, installation, and erection as it progresses. Where drawings are not adequate to show "as-built" conditions, Contractor shall prepare sketches which delineate the necessary "as-built" information. Contractor shall furnish two (2) sets of all paper "blue-line" prints "approved" drawings for use in accomplishing specified mark-up. Final "as-built" drawings, and a computerized disk of such drawings, shall be delivered to Owner by Contractor on or before Final Completion. Notwithstanding the foregoing, with respect to the Existing Work, Owner has provided Contractor with certain "as-built" drawings and Contractor's responsibilities with respect to such drawings shall be limited to updates as necessary to reflect modifications to the Existing Work or conditions identified by Contractor through the course of performance of the Work.

8.4 Use of Premises . . Contractor shall confine the storage of materials and construction equipment in connection with the Work in accordance with all applicable ordinances, regulations, and laws and Contractor's safety procedures. Contractor shall provide adequate safety barriers, signs, lanterns, and other warning devices and services to properly protect any person having access to or near the areas where Work is being performed at the Site. Contractor shall follow Owner's instructions concerning the location of signs and posters, the time and location of the burning of debris, and any other similar nuisance items.

8.5 Cleaning Up . . Contractor shall, at all times, keep the Plant Site and other locations on the Site where the Work is performed, including storage areas used by it, in a clean and orderly condition and (free from weeds inside the Plant Site), combustible debris, and waste materials. Upon completion of the Work, Contractor shall remove all rubbish from and about the premises and restore the Plant Site, other locations on the Site where the Work is performed and material storage locations at the Site to their original condition with special respect to ruts, and debris of all kinds. Contractor, unless otherwise directed, shall return all unused material, to an Owner designated storage area at the Plant Site.

8.6 Underground Facilities. . Contractor shall be familiar with the requirements of the respective underground facility laws of the State of New Mexico. Contractor shall identify (through "as-built" drawings, inspection or otherwise) to the extent necessary to perform the Work all underground facilities in the areas on the Site where Work is to be performed, including, but not limited to, gas, electric, telephone, water, drain lines, sewer, and the like. Contractor will take the necessary steps to safeguard these underground facilities. With respect to areas outside of the Plant Site, Contractor may rely on third parties, as necessary and appropriate, and in compliance with Applicable Laws. Contractor shall notify the Owner's Project Manager, who will file a report of accident with the local Owner office at the time of any damage.

8.7 Other Contracts. . Owner may undertake or award other contracts for additional work at or near the Site. Contractor shall fully cooperate with the other contractors and with Owner employees, and carefully coordinate scheduling and performing the Work to accommodate the additional work, heeding any direction that may be provided by Owner. Contractor shall not commit nor permit any act that will interfere with the performance of work by any other contractor or by Owner employees.

ARTICLE 9

[INTENTIONALLY OMITTED]

ARTICLE 10

COMPLETION OF THE WORK

10.1 Mechanical Completion.

10.1.1 Mechanical Completion shall occur with respect to the Facility when the following requirements have been satisfied:

(a) Contractor has constructed and installed all materials, equipment, components and systems constituting the Facility (except for completion of minor portions of the Work such as painting, final grading, final insulation, and any other portion of the Work not affecting the reliability, dependability, operability, safety, and mechanical and electrical integrity of the Facility) in all material respects in accordance with the Agreement;

(b) Contractor has made available for inspection by Owner all Facility systems necessary to begin Performance Tests in accordance with procedures mutually agreed to at the time by Contractor and Owner;

(c) the Work is mechanically and electrically sound, all systems have been flushed, cleaned out and filled as necessary and all required pre-operations checking and testing has been completed satisfactorily and all systems have been started up in accordance with procedures mutually agreed to at the time by Contractor and Owner; and

(d) all systems and subsystems have been installed, the equipment and systems included therein can be operated in a manner that does not void any Subcontractor or system warranty and Contractor has made the Facility available for synchronization.

10.1.2 When Contractor believes that the requirements of Mechanical Completion have been met, Contractor shall issue a notice of Mechanical Completion to Owner. Within five (5) Days after receiving such notice of Mechanical Completion, Owner shall advise Contractor, in writing, with reasonable precision, of any known reason(s) to believe that Contractor has not met the criteria for Mechanical Completion. If Owner advises of any such reason(s), Contractor shall then take appropriate corrective action and again notify Owner, in writing, that the Facility has achieved Mechanical Completion. Owner shall have five (5) Days after receipt of such notification to advise Contractor of any remaining known reason(s) under the preceding paragraph why Contractor has not met the criteria for Mechanical Completion. This process shall be repeated as necessary until Owner agrees that no such reasons remain. If Owner fails to notify Contractor of any such known reasons within the allotted time, the Facility shall be deemed to have achieved Mechanical Completion. Otherwise, Mechanical Completion shall not be achieved until Owner and Contractor agree that all of the criteria for Mechanical Completion have been achieved.

10.2 Performance Testing.

10.2.1 Contractor may commence the Performance Tests any time after achieving Mechanical Completion of the Facility.

10.2.2 Contractor shall provide Owner with its schedule of Performance Tests, and its expected requirements for natural gas for such tests, at least sixty (60) days

prior to the scheduled commencement date of those tests. Contractor shall provide Owner with notice at least twenty (20) days prior to the date on which it intends to commence the Performance Tests and again forty-eight (48) hours in advance of the initial test.

10.2.3 Contractor shall furnish reports of all successful Performance Tests to Owner and to others as may be reasonably requested by Owner. Contractor shall provide access to available data for unsuccessful test and re-tests only upon Owner's request.

10.2.4 Contractor shall maintain qualified personnel on the Site to supervise the activities of operating personnel regarding the operation and maintenance of the Facility until turnover upon Substantial Completion, and to provide technical direction for any Performance Tests including any re-testing periods following Substantial Completion.

10.2.5 At any time during and promptly after completion (whether or not apparently successful) of the Performance Tests (including without limitation any re-run of such tests), Owner shall advise Contractor and Contractor shall advise Owner in writing of any defects and deficiencies in the Facility or in its performance that were discovered or observed during such tests that render any of the Performance Tests results inaccurate and thus make such test unsuccessful. Contractor shall, as a Reimbursable Cost, correct such defects and deficiencies and promptly advise Owner of such correction, specifying the measures taken and, if such defects and deficiencies require re-running of those tests, the date on which the Facility will be ready for the applicable Performance Tests to be re-run. Subject to the further provisions of this Agreement, such tests shall thereafter be re-run promptly and the procedure set forth above in this Article 10.2 shall be repeated until all Performance Tests have been satisfactorily completed and all such defects and deficiencies have been corrected.

10.3 Substantial Completion.

10.3.1 Substantial Completion shall occur on the date on which: (i) Mechanical Completion has occurred, (ii) the Performance Tests required for Substantial Completion in Exhibit A have been completed, (iii) the Facility has achieved 95% or more of the Target Performance Criteria for Facility output and 105% or less of the Target Performance Criteria for Facility heat rate, (iv) a thirty (30) hour continuous operation of the Facility has been demonstrated in accordance with the continuous operation test as described in Exhibit A, and (v) there are no known items of uncompleted Work as of such date that would prevent compliance with the criteria in Article 10.1.1(a), (c) and (d) ;

10.3.2 When Contractor believes it has achieved Substantial Completion of the Facility, Contractor shall tender a certificate of Substantial Completion to Owner in substantially the form attached hereto as Exhibit F-1 , together with documentation sufficient for independent verification. Owner shall accept or

reject Contractor's certification of Substantial Completion in writing within five (5) Business Days after receipt of Contractor's tender. If Owner fails to notify Contractor of any such known reasons within the allotted time, the Facility shall be deemed to have achieved Substantial Completion. If Owner rejects Contractor's certification of Substantial Completion, Owner shall identify its reasons for rejection in detail sufficient for verification and thereafter Contractor shall:

(a) take prompt corrective action, as necessary, to achieve the requirements of Substantial Completion, and then submit a new certification of Substantial Completion to Owner as provided for above; or

(b) disagree with Owner's reasons for such rejection, promptly notify Owner, and the Parties shall attempt to resolve the disagreement without delay. If the disagreement cannot be resolved within five (5) Business Days, then Contractor may cease further Performance Testing and seek a determination whether or not Substantial Completion has been achieved under Article 12 " Dispute Resolution".

10.3.3 Notwithstanding the obligations of Contractor set forth in Articles 10.3.1 and 10.3.2 , if Contractor is unsuccessful in meeting the Target Performance Criteria for the Facility after reasonable efforts to do so within ninety (90) days of the commencement of initial Performance Tests, Contractor shall not be obligated to continue to run Performance Tests. In such case, Owner and Contractor shall discuss alternatives that may be available to Owner that may remedy the problems that Owner and Contractor have encountered during the attempted Performance Tests. Contractor's costs of implementing any such alternative(s) that are agreed upon shall be Reimbursable Costs that are not included in the Contract Sum and not chargeable against the Target Price.

10.4 Punch List . . At the time of submitting a certificate of Substantial Completion, Contractor shall prepare and submit to Owner a Punch List and an estimate of costs necessary to complete the Punch List. Owner shall have five (5) Business Days from receipt of said Punch List to provide any comments to the Punch List. The Parties shall review the Punch List and discuss the items to be included in a mutually agreed Punch List, with an estimate of the cost to complete the Punch List items. Contractor shall diligently pursue completion of the Punch List within sixty (60) days following Substantial Completion as a Reimbursable Cost and shall notify Owner in writing upon Contractor's determination that Punch List Work is complete. Owner shall have five (5) Business Days to accept or reject Contractor's determination that the Punch List Work is complete. If Owner rejects Contractor's determination, then Contractor may seek a determination whether or not the Punch List Work is complete under Article 12 "Dispute Resolution" .

10.5 Final Completion.

10.5.1 Final Completion shall occur on the date on which: (a) Mechanical Completion has occurred for the Facility, (b) Substantial Completion has occurred for the Facility, and (c) all other requirements for final payment under Article 4 have been completed, including completion of all Work remaining on the Punch List.

10.5.2 When Contractor believes it has achieved Final Completion, Contractor shall tender a certificate of Final Completion to Owner substantially in the form attached hereto as Exhibit F-2 , and shall submit a request for final payment pursuant to Article 4 "Compensation". Owner shall accept or reject Contractor's determination of Final Completion in writing within five (5) Business Days after receipt of Contractor's tender. If Owner fails to notify Contractor of any such known reasons within the allotted time, the Facility shall be deemed to have achieved Final Completion. If Owner rejects Contractor's determination of Final Completion, Owner shall identify its reasons for rejection in detail sufficient for verification and thereafter Contractor shall:

(a) take prompt corrective action, as necessary, to achieve the requirements for Final Completion, and then submit a new determination of Final Completion to Owner as provided for above; or

(b) disagree with Owner's reasons for such rejection, promptly notify Owner, and the Parties shall attempt to resolve the disagreement without delay. If the disagreement cannot be resolved within five (5) Business Days, then Contractor may seek a determination whether or not Final Completion has been achieved under Article 12 "Dispute Resolution".

ARTICLE 11

DEFAULT AND TERMINATION

11.1 Contractor Default. . Contractor shall be deemed to be in default if it at any time during the performance of the Work Contractor shall:

(a) Materially fail to prosecute the Work or any portion thereof with sufficient diligence or otherwise commit a substantial breach of any material provision of this Agreement and Contractor does not commence and diligently proceed to cure such failure or breach within fifteen (15) calendar days following delivery of a notice from Owner to Contractor to remedy such failure or breach;

(b) Become insolvent or make a general assignment for the benefit of its creditors;

(c) File a petition in bankruptcy or have a petition in bankruptcy filed against it or an attachment or execution levied upon any of its property used hereunder, or have a receiver for its business appointed on account of the condition of such business or of insolvency;

(d) Have any legal proceeding taken against it that interferes with the diligent and efficient performance and satisfactory completion of the Work and Contractor

does not succeed in having such legal proceeding dismissed or stayed within fifteen (15) calendar days following delivery of a notice from Owner to Contractor requesting Contractor to do so;

(e) Materially disregard or fail to comply with laws, ordinances, rules, regulations, or orders of any public authority having jurisdiction and Contractor does not commence and diligently proceed to cure such failure within fifteen (15) calendar days following delivery of a notice from Owner to Contractor to remedy such failure;

(f) Attempt to assign this Agreement without obtaining Owner's prior consent; or

(g) Failure to make an undisputed payment to Owner when due hereunder and Contractor does not cure such failure within five (5) Business Days following delivery of a notice from Owner to Contractor to remedy such failure;

11.2 Right to Terminate for Cause. . If at any time Contractor shall be deemed in default pursuant to Article 11.1 "Default " , Owner may elect to terminate this Agreement in accordance with Article 11.3 "Termination by Owner for Cause " .

11.3 Termination by Owner for Cause . . If Owner elects to terminate this Agreement due to Contractor's default under the terms of Article 11.1, Owner shall give written notice of termination to Contractor specifying the date of termination, which date shall provide Contractor with a reasonable period during which Contractor is able to demobilize, which period shall be no shorter than ten (10) Business Days. Owner may, at its option, (a) take possession of the Site and take possession of or use all materials, equipment, tools, and construction equipment and machinery owned by Contractor to maintain the orderly progress of, and to finish the Work; or (b) finish the Work by whatever other reasonable method it deems expedient.

11.3.1 Upon any such termination for cause, Contractor shall be compensated for all Reimbursable Costs incurred for Work then performed. In the event that Owner uses any of Contractor's equipment or tools, Owner shall return the same to Contractor in good condition and repair, reasonable wear and tear excepted, and shall pay Contractor for the use thereof as provided in Article 4 . If the difference between the Target Price and the balance of the Contract Sum through the date of such takeover by Owner exceeds the cost of finishing the Work and any other extra costs or damages incurred by Owner in completing the Work, or otherwise as a result of Contractor's default, Contractor shall be compensated for the earned portion of the Fee provided for in Article 4 , prorated for the month based upon when the effective date of the termination occurs in addition to the above Reimbursable Costs. If such costs of finishing the Work and any other extra costs or damages incurred by Owner in completing the Work, or otherwise as a result of Contractor's default, exceed the sum of [*] plus the difference between the Target Price and the balance of the Contract Sum through the date of such takeover by Owner, such excess shall be deemed an Overrun and Contractor shall pay [*] of such excess costs to Owner, subject to the limitation on Contractor's responsibility for Overruns as

set forth in Article 4.4 . These obligations for payment shall survive termination of this Agreement.

11.3.2 Termination of the Work in accordance with this Article shall not relieve Contractor of its responsibilities for Work performed.

11.3.3 If Owner terminates Contractor for default under this Article , and it is later determined that Contractor was not in default, then such termination shall be deemed a termination for convenience pursuant to Article 11.4 .

11.4 Termination by Owner for Convenience . . Owner may, upon thirty (30) calendar days advance written notice to Contractor, suspend, abandon, or terminate the Work, or any portion thereof, and terminate this Agreement, for any reason whatsoever including for the convenience of Owner without regard to whether or not Contractor has defaulted or failed to comply with the provisions of the Contract Documents.

11.4.1 If Owner terminates the Work, or any portion thereof for convenience, Owner shall pay Contractor for all Reimbursable Costs for the parts of the Work done prior to the effective date of termination, including materials provided, plus any Subcontractor or vendor cancellation costs, plus an amount for the Contractor's substantiated, reasonable direct costs necessarily incurred in preparation for the parts of the Work not yet performed and in shutting down its operations; plus an amount for a reasonable part of the Fee which Contractor would otherwise have earned for the percentage of Work performed prior to such termination. Contractor shall not be entitled to any other costs or damages whatsoever arising out of Contractor's performance of the Work and the termination by Owner for convenience.

11.5 Stopping Work. . When Owner terminates the Work in accordance with Article 11.3 "Termination by Owner for Cause" or 11.4 "Termination by Owner for Convenience", Contractor shall take the actions set forth below.

11.5.1 Unless Owner directs otherwise, after receipt of a written notice of termination for either cause or convenience, Contractor shall promptly: (1) stop performing Work on the date and as specified in the notice of termination; (2) place no further orders or subcontracts for materials, equipment, services or facilities, except as may be necessary for completion of such portion of the Work that is not terminated; (3) cancel all orders and subcontracts, upon terms acceptable to Owner, to the extent that they relate to the performance of Work terminated; (4) assign to Owner all of the right, title, and interest of Contractor in all orders and subcontracts; (5) deliver completed Work to Owner and take such action as may be necessary or as directed by Owner to preserve and protect the Work, Site, and any other property related to the Work in the possession of Contractor in which Owner has an interest; and (6) continue performance only to the extent not terminated.

11.5.2 In the case of any termination, Contractor shall proceed with the orderly demobilization and close out of the Work, and the costs for such services shall be Reimbursable Costs.

11.6 Suspension of the Work . . Owner may, for any reason, at any time suspend the carrying out of the Work or any part thereof by ten (10) Business Days advance written notice to Contractor. Any such notice shall specify the date of suspension, the expected duration of the suspension and any other information relevant to the scope of work being suspended. Whereupon Contractor shall suspend the carrying out of the Work or any part thereof for such time or times and in such manner as Owner may require. During any such suspension, Contractor shall properly protect and secure the Work in such manner as Owner may reasonably require. Unless otherwise instructed by Owner, Contractor shall, during any such suspension, maintain its staff and labor on or near the Site and otherwise be ready to proceed with the Work upon receipt of Owner's further instructions. Should the Work be so suspended, Contractor shall be paid for all costs incurred in accordance with the provision of Article 4 and the applicable portion of the Fee earned for Work performed to the date of suspension and through demobilization, including any suspension or cancellation charges by Subcontractors. When a suspension equals or exceeds one hundred eighty (180) Days in the aggregate, Contractor may elect to treat such suspension as a Cancellation for Convenience of Owner pursuant to Article 11.4 . Owner and Contractor shall negotiate a Change Order to address the impact of any suspension by Owner hereunder on the Target Price, the Work Progress Schedule and Contract Completion Date in accordance with Article 5 "Changes in the Work" of the Agreement.

11.7 Owner Default. . Should any Owner Party become insolvent or bankrupt and the other Owner Parties do not provide Contractor with reasonable assurance of their continued willingness and ability to perform the obligations of Owner hereunder or should Owner commit a breach or default of any of the covenants or obligations hereunder and (a) fail to remedy the same within ten (10) calendar days after written notice thereof from Contractor if the breach constitutes a failure to pay money, or (b) fail to commence proceedings to remedy the same within ten (10) calendar days after written notice thereof from Contractor and thereafter to proceed diligently in remedying the same if the breach is other than to pay money, then Contractor may, at its option, suspend performance or terminate this Agreement. Should Contractor so suspend or terminate this Agreement, it shall be paid for all costs incurred and Work performed to the date of suspension/termination in accordance with the provisions of Article 4 , including any cancellation charges by Subcontractors, and the cost of all standby and demobilization/remobilization expenses plus the earned portion of the Fee provided for in Article 4 .

11.8 Delivery of Documents . . Upon the suspension or termination of this Agreement, in whole or in part, pursuant to either Article 11.3 "Termination by Owner for Cause", 11.4 " Termination by Owner for Convenience", 11.6 "Suspension of the Work " or 11.7 "Owner Default", Contractor shall execute and deliver all such instruments and take all such steps, including assignment of its contractual rights with third parties, as may be required to fully vest in Owner all right, title, and interest in all Work, including but not limited to all plans, specifications, deliverables, materials, and equipment procured and all contractual rights, and/or cancel or terminate, at Owner's option, such of those contractual rights including, but not limited to, subcontracts and purchase orders as may be requested in writing by Owner.

ARTICLE 12

DISPUTE RESOLUTION

12.1 Dispute Resolution. . Initially, Owner's Project Manager and Contractor's Project Director shall attempt to resolve any dispute that may arise in connection with this Agreement. If they are unable to resolve the dispute within ten (10) days, either Party may, by notice, refer the dispute to the senior management of the Parties for resolution. If the senior management of the Parties are unable to resolve the dispute within ten (10) days of meeting initially to resolve the dispute, the dispute may be submitted to mediation upon the mutual agreement of the Parties. In the event the Parties do not agree to mediate the dispute or are unable to resolve the dispute through mediation and the aggregate amount of the claim (including counterclaims) is less than One Million Dollars ($1,000,000.00), then the dispute shall be resolved by binding arbitration. Such arbitration shall be governed by the New Mexico Uniform Arbitration Act, NMSA 1978 § 44-7A-1, et seq . as amended. A Party electing to submit a dispute to arbitration shall give the other Party a timely Demand for Arbitration pursuant to Article 7.3 "Notices" and such Demand for Arbitration shall describe the nature of the dispute and the amount in controversy. The Parties shall then jointly select an arbitrator and failing such mutual agreement, the arbitrator shall be appointed by a New Mexico State District Court Judge. The arbitration shall be held in Albuquerque, New Mexico. Discovery shall be by agreement of the Parties or as ordered by the arbitrator, provided that the Parties shall comply with the following minimum discovery requirements: at least thirty (30) calendar days prior to the arbitration, the Parties shall exchange copies of all exhibits to be used at the arbitration, all project documents in any way related to the dispute, a list of witnesses and a summary of the matters as to which each witness is expected to testify. A reasonable number of depositions may be taken. All costs of mediation and arbitration (including the fees of the mediator and arbitrator) shall be split equally by the Parties, except that the Parties shall be responsible for payment of their own attorney fees, expert fees, preparation fees, travel costs, witness fees, photocopying and similar costs. This agreement to arbitrate shall be specifically enforceable under the prevailing arbitration law of the State of New Mexico. Indemnity claims are not subject to mandatory arbitration. If the aggregate amount of the claim in dispute exceeds One Million Dollars ($1,000,000.00), then the Parties may agree to submit the matter to binding arbitration under the New Mexico Uniform Arbitration Act, NMSA 1978 § 44-7A-1, et seq . as amended, and failing such agreement, either Party may bring an action only in the federal or state courts of New Mexico (however, indemnity claims against a Party may also be brought in any court or tribunal in which the other Party is initially sued). Nothing in this Article shall affect a Party's right to terminate this Agreement pursuant to Article 11 "Default and Termination " .

12.2 Waiver of Jury Trial. . To the full extent permitted by law, Owner and Contractor hereby knowingly, voluntarily and intentionally waive any rights they may have to a trial by jury in respect to any litigation based hereon, or arising out of, under, or in connection with, this Agreement, or any course of conduct, course of dealing, statements (whether oral or written) or actions of Owner or Contractor. The Parties acknowledge and agree that they have received full and sufficient consideration for this provision and that this provision is a material inducement for each Party entering into this Agreement.

ARTICLE 13

INDEMNITY AND LIMITATIONS OF LIABILITY

13.1 General Liability; Indemnification . . Contractor shall indemnify and hold harmless Owner, including its officers, employees or agents, for bodily injury to or death or damage to third party property only to the extent that the liability, damages, losses or costs are caused by, or arise out of, the negligence or willful misconduct of Contractor or its officers, employees or agents in the performance of the Work.

13.2 Liability for Owner Property . . Except as provided in Article 2.13, the Parties agree that Owner's property insurance will cover all risks, damage and losses to property owned by or in the custody of Owner prior to Substantial Completion. After Substantial Completion, Owner's property insurance, which is to be provided pursuant to Article 15.4, will cover all risks, damage and losses to property owned by or in the custody of Owner. Deductibles for losses covered under the property coverage and non-covered losses shall be paid by Owner and Owner hereby releases Contractor from any liability for property damage arising from the ownership, use or operation of the Facility or any part thereof, subsequent to the transfer of care, custody and control to Owner. If at any time the Owner Parties are not the sole owners of the Facility or existing property at the Site or operators of the Facility, Owner shall obtain waivers and releases from such other owners or operators sufficient to provide to Contractor the same protection from liability for loss or damage that would be afforded to Contractor under this Agreement as if Owner were the sole owner or operator.

13.3 Trespass . . Contractor shall be solely responsible for any act of trespass or any injury to adjacent third party property, resulting from or in connection with Contractor's performance of the Work. Contractor shall be liable for any claims that may arise from Contractor's deposit of debris of any kind upon adjacent property.

13.4 Intellectual Property Rights Infringement Indemnity . . Contractor warrants that none of the Work performed by Contractor, or the documents, goods or equipment produced, designed, fabricated, or assembled by Contractor pursuant to this Agreement infringe upon or violate any patent, copyright, trade secret, or any other intellectual or proprietary rights of any third party. If any third party makes a claim or commences a proceeding against Owner regarding the Work, alleging such an infringement or violation, then subject to this Article 13.4 , Contractor shall indemnify, defend and save harmless Owner, its directors, officers, employees, agents and affiliates from and against all damages and costs incurred by or awarded against Owner (including court costs and reasonable attorney's fees). Contractor agrees to include, as a term or condition of each purchase order employed by it in the performance of the Work, a patent indemnification provision extending from the Subcontractor under such purchase order to Owner and Contractor and to render such assistance to Owner as may be reasonably required on a Reimbursable Cost basis to enforce the terms of such indemnification by such Subcontractors. Owner will notify Contractor if any such claim is made or proceeding is commenced. Owner may, at its option, be represented by separate legal counsel in any such claim or proceeding, however, Contractor shall not be obligated to reimburse Owner the costs and expenses incurred by Owner in being so represented. If the use of any of the Work, or the results of such Work, or documents, goods, or equipment, or any part thereof, furnished under this Agreement in

connection with the Work is held in any such claim or proceeding to constitute an infringement and/or is enjoined, whether temporarily or permanently, Contractor shall, at its sole cost and expense, do any of the following (the selection of which shall be at the sole discretion of the Contractor):

(a) Procure for Owner the right to use the Work or results of such Work or such documents, goods and equipment; or

(b) Replace the Work or the results of such Work or such documents, goods, or equipment with non-infringing Work, documents, goods or equipment having the equivalent functionality as the infringing or allegedly infringing Work, documents, goods or equipment; or

13.5 Owner's Use of Drawings and Specifications. . Drawings and specifications prepared by Contractor pursuant to this Agreement, which Owner may require Contractor to supply in accordance with the Agreement, shall become the property of Owner, and Owner agrees to use the information contained therein solely for the purpose of facilitating or completing construction, maintenance, operation, modification and repair of the Facility (and not for duplication of the Facility, in whole or part) and agrees not to disclose the same or information contained therein to third parties (other than employees, agents or consultants of Owner) for any other purpose, without written notification to Contractor. In the event Owner uses such information for any other purpose, Owner agrees to release, defend, indemnify and hold Contractor harmless from and against any liability arising out of claims or suits asserted against Contractor even though such claims or suits may be based on allegations of negligence of Contractor. Nothing herein shall be construed as limiting Contractor's ownership of all rights to use its basic know-how, experience and skills, whether or not acquired during performance of the Work or to perform any engineering design or other Work for any other party.

13.6 Consequential Damages . . Contractor shall not be held responsible for consequential, incidental, special or indirect damages, including without limitation, liability for loss of use of the Facility, or Owner's existing property, loss of profits, interest, product or business interruption, increased costs of operations and maintenance or staffing needs, however the same may be caused. The waiver in this Article does not apply to the indemnity obligations of Contractor for any third party claims that may arise under Article 13.1.

13.7 Limitation of Liability . . Except for [*], Contractor's aggregate liability to Owner arising from this Agreement and the Work shall in no event exceed [*], and Owner releases Contractor from any liability and damages in excess of such amount. Contractor shall have no obligation to Owner with respect to any damage or loss to property caused by the perils of war, insurrection, revolution, nuclear reaction, or other like perils as may be excluded under the scope and limits of the insurance coverage provided pursuant to Article 15.2 . To the extent allowed by Applicable Law and except as otherwise specifically provided in this Agreement, indemnities against, releases from, assumptions of and limitations of liability expressed in this Agreement, as well as waivers of subrogation rights, shall apply even in the event of the fault, negligence or strict

liability of the Party indemnified or released or whose liability is limited or assumed or against whom rights of subrogation are waived and shall extend to the officers, directors, employees, licensors, agents, partners and related entitles of such Party and its partners and related entities.

ARTICLE 14

DRUG, ALCOHOL, SAFETY AND HAZARDOUS MATERIALS

14.1 Drug and Alcohol Policy . . During the term of the Agreement, Contractor is required to have in place, and comply with a drug and alcohol policy that meets or exceeds the requirements and procedures contained in Owner's drug and alcohol policy, a copy of which is attached hereto as Exhibit J . Owner's policy description states: "It is the policy of the Owner to provide a work environment that is free from the use, consumption, possession, sale or distribution of illegal drugs or alcohol and from the misuse of legal drugs on the Owner's premises, including vehicles used on Owner business. Accordingly, the Owner requires that employees and contractors alike will be subject to testing to determine the presence of illegal drugs, alcohol or inappropriately used legal drugs while performing Owner business. Consumption of alcohol during employee breaks or lunch is strictly prohibited. Employees must be fit for duty and not be under the influence of alcohol or controlled substances (without a valid prescription for the controlled substances) when employees present for Owner duty and at all times while at work or on duty or when on Company Premises." Contractor's policy shall include: reasonable testing procedures, full compliance with all Department of Transportation requirements for covered functions. Further, Contractor is responsible for testing and other related costs, for providing all required reports to any government agency, and, at Owner's request, Contractor shall make its Policy and drug/alcohol testing statistics available to Owner's drug and alcohol testing program administrators as identified by Owner from time to time.

14.2 Safety Materials . . Contractor agrees and warrants that all materials supplied by Contractor and articles and/or Work provided by Contractor in connection with the Work meet the safety standards established and promulgated under the Federal Occupational Safety and Health Act of 1970 and, if applicable, the Federal Motor Carrier Safety Act, or under any Applicable Law of a state in lieu thereof, for the protection of employees who will be affected by the use or performance of said articles and/or Work. Contractor shall comply with all federal, state, and local rules and regulations governing safety and the safe operation of commercial motor vehicles and the safe performance of the Work.

14.3 Safety Precautions . . Contractor shall be solely responsible for initiating, maintaining and supervising all safety precautions and programs concerning the performance of the Work in accordance with all Applicable Laws. Contractor shall provide and be directly responsible for its own safety program for its employees and for the safe operation of its own vehicles and equipment. Contractor shall furnish Owner with a copy of its Safety Manual which has been compiled and designed for the Facility. Contractor shall comply with its own safety manual.

14.3.1 In carrying out its responsibilities according to the Contract Documents, Contractor shall (a) protect the lives and health of employees performing the Work and other persons who may be affected by the Work; and shall erect and maintain all reasonable safeguards for such safety and protection; (b) prevent

damage to materials, supplies, and equipment whether on-site or stored off-site; (c) prevent damage to other property at the Site or adjacent thereto; and (d) notify Owner's Project Manager when prosecution of the Work may affect owners of adjacent properties and utilities.

14.3.2 Accident Reporting. In case of an accident involving Contractor and the Work, a written notice shall be prepared by Contractor and one copy thereof given to Owner within twenty-four (24) hours of the occurrence of the accident. Verbal notification of any serious or fatal injuries shall be provided within three (3) hours of the injury.

14.3.3 In the event Owner has a reasonable objection to any employee of Contractor, Contractor shall investigate and take appropriate disciplinary action, up to and including removal of the employee from Owner's premises.

14.4 Hazardous Materials

14.4.1 No Hazardous Materials to Be Brought on to Site. Contractor shall not, nor shall it permit or allow any Subcontractor to bring Hazardous Materials on the Site and shall bear all responsibility and liability for such materials; provided, however, that Contractor and its Subcontractors may bring onto the Site such Hazardous Materials as are necessary to perform the Work so long as the same is done in compliance with Applicable Laws and Contractor shall remain responsible and strictly liable for the management, transportation, treatment and disposal of all such Hazardous Materials. Contractor shall notify Owner prior to bringing any Hazardous Materials on to the Site and shall provide Owner's Project Manager (or his designated representative), the following information with respect to any Hazardous Materials: (a) material safety data sheet ("MSDS"), (b) quantity (volume/mass), (c) length of time on Site, (d) container type; and (e) disposal location if disposed or otherwise managed. Contractor shall require all Subcontractors and suppliers to provide the information required under this sub-article to Owner prior to bringing any Hazardous Materials to the Site. Contractor shall exclude the use of lead paint and material containing asbestos and Contractor shall minimize the use of acetone and chlorinated solvents and similar substances at the Site, and shall require all Subcontractors and suppliers to adhere to the same restrictions.

14.4.2 Indemnification . Contractor hereby indemnifies and agrees to defend and hold Owner harmless from any and all loss, liability, claim, cause of action, suit, damage, cost, attorney fee, or expense arising out of the existence, handling, treatment, storage, removal, remediation, avoidance, or other appropriate action (if any), with respect to any Hazardous Materials that (a) were brought or caused to be brought on the Site by Contractor and released to the environment by any act or omission of Contractor or any Subcontractor in the course of performance of the Work or (b) were the result of any willful or unlawful act or omission of Contractor or any Subcontractor.

14.4.3 Discovery of Hazardous Materials at Site.. If, during the course of the performance of the Work, Contractor or any Subcontractor discovers, or reasonably believes it has discovered in, on or under any part of the Site, any Hazardous Materials (other than Hazardous Materials that Contractor or a Subcontractor has brought onto the Site, generated or produced by Contractor (or its Subcontractors) from materials brought to the Site by Contractor (or its Subcontractors), Contractor shall promptly advise Owner and shall follow Owner's direction with respect to such Hazardous Materials. Owner shall undertake the abatement and disposal of any Hazardous Materials existing at the Site which are encountered by Contractor in the performance of the Work, and dispose of waste generated by the Facility during start-up, testing and operation of the Facility.

14.4.3.1 Contractor's costs resulting from its compliance with Owner's direction pursuant to this Article 14.4.3 shall be Reimbursable Costs and, subject to inclusion in a Change Order that adjusts the Target Price, included in the Contract Sum. In general, Owner is responsible for the cost and actions necessary for removing Hazardous Materials not brought onto the Site by Contractor (or its Subcontractors) or not generated or produced by Contractor (or its Subcontractors) from materials brought to the Site by Contractor (or its Subcontractors).

14.4.3.2 To the extent Contractor encounters Hazardous Materials not introduced by Contractor, Contractor shall use reasonable efforts to minimize the consequences to the Work Progress Schedule of dealing with such Hazardous Materials.

14.4.3.3 Owner has disclosed or shall promptly disclose to Contractor as information becomes available (i) any reports, test results, public records and other sources of information known to Owner which show areas of Contamination at the Site and (ii) any other information related to the condition of the Site. Anything herein to the contrary notwithstanding, title to, ownership of, and legal responsibility and liability for any Contamination shall remain with Owner. Owner shall, at Owner's sole expense and risk, arrange for handling, storage, transportation, treatment and delivery for disposal of Contamination. Owner shall be solely responsible for obtaining a disposal site for such material. Contractor shall not have or exert any control over Owner in Owner's obligations or responsibilities as a generator in the storage, transportation, treatment or disposal of any Contamination. Owner shall complete and execute, in accordance with Applicable Law, any required governmental forms relating to regulated activities, including, but not limited to, generation, storage, handling, treatment, transportation, or disposal of Contamination. In the event that Contractor executes or completes any required governmental forms relating to regulated activities, including, but not

limited to, storage, generation, treatment, transportation, handling or disposal of Hazardous Materials (other than in connection with Contractor's responsibilities under Article 14.4.1 ), Contractor shall be and be deemed to have acted as Owner's agent. Owner shall indemnify, release and hold Contractor, its Affiliates, and their respective officers, directors, agents and employees harmless from all costs, liability, damages and penalties assessed against or paid by Owner or Contractor resulting from Contamination.

14.4.4 Contractor's Responsibility . . Contractor shall be responsible for the handling, management, treatment, storage, removal, remediation, avoidance, or other appropriate action (if any), with respect to any Hazardous Materials present at, on, in or under, or migrating and/or emanating to or from the Site, that: (a) were brought or caused to be brought on the Site and released to the environment by any act or omission of Contractor or any Subcontractor in the course of performance of the Work; (b) were brought to the Site or caused to be brought to the Site by Owner for Contractor's use in the performance of the Work and that are released to the environment by any act or omission of Contractor or any Subcontractor in the course of performance of the Work; or (c) were the result of any willful or intentional act of Contractor or any Subcontractor. Notwithstanding the provisions of clause (a) of this Article 14.4.4 , Contractor shall not be liable for any Hazardous Materials brought, or caused to be brought, to the Site by Contractor that are released to the environment by the willful or intentional act or omission of Owner.

ARTICLE 15

INSURANCE

15.1 Contractor's Insurance. . Prior to commencement of the Work, Contractor shall obtain the insurance set forth below and all insurance that may be required under the applicable laws, ordinances and regulations of any governmental authority. Contractor shall furnish to Owner a completed certificate of insurance coverage and which specifically requires thirty (30) calendar days prior notice to Owner of cancellation, termination or any material change of any such insurance policy. Review of the Contractor's insurance by Owner shall not relieve or increase the liability of Contractor.

15.2 Coverage . . Without limiting any of the liabilities or other obligations of Contractor under this Agreement, including but not limited to Article 13 "Liability" , Contractor shall obtain and maintain in effect, with forms and insurers acceptable to Owner, until all the obligations under this Agreement are satisfied, the following insurance policies providing coverage protecting against claims for personal and bodily injury or death, as well as claims for third party property damage which may arise from operations in connection with the Work whether such operations are by Contractor or any Subcontractor:

(a) Worker's Compensation Insurance. To cover obligations imposed by federal and state statutes pertaining to Contractor's employees engaged in the

performance of any Work, and Employer's Liability Insurance with a limit of Two Million Dollars ($2,000,000).

(b) Commercial General Liability Insurance , or the equivalent, with a limit of Two Million Dollars ($2,000,000) per occurrence. This project specific policy shall include coverage for bodily injury liability, broad form property damage liability, blanket contractual, Contractor's protective, products liability and completed operations. The Owner Parties are to be added as additional insureds with respect to this project specific policy.

(c) Business Automobile Liability Insurance , or the equivalent, with limit of Two Million Dollars ($2,000,000) per accident with respect to Contractor's vehicles whether owned, hired, or non-owned, assigned to or used in the performance of any Work required to be performed by Contractor pursuant to the Contract Documents.

(d) Excess Liability. Excess Liability Insurance covering claims in excess of the underlying insurance described in paragraphs (a) (with respect to only Employers Liability Insurance) and (c) (with respect to Business Automobile Liability Insurance) with a limit per occurrence of $13,000,000. The amounts of insurance required in the foregoing paragraphs (a) and (c) and this excess insurance section (d) may be satisfied by purchasing coverage in the amounts specified or by any combination of primary and excess insurance, so long as the total amount of insurance meets the requirements specified above.

(e) Endorsements and Other Requirements.

(1) Waiver of Subrogation . Insurers shall waive all rights of subrogation against Owner, Owner's officers, directors, agents and employees, as well as Owner's parents and affiliated or associated companies and each of their respective officers, directors, agents and employees, the Contractor and, where required by contract, any other party as requested by Owner or Contractor.

(2) Severability of Interest . The liability insurance specified in paragraph (b) of this Article 15.2 shall state that, with respect to coverage of more than one insured, all terms conditions, insuring, agreements and endorsements, with the exception of limits of liability, shall operate in the same manner as if there were a separate policy covering each insured.

(3) Primary and Non-Contributory . The liability insurance specified in paragraph (b) of this Article 15.2 by the Contractor shall be primary insurance. Any other insurance carried by the Owner shall be excess and not contributory with respect to the insurance required hereunder.

15.3 Subcontractors. . Contractor shall require that each Subcontractor maintain normal and customary insurance typically obtained from such Subcontractors by Contractor, and such additional insurance as agreed to by Contractor and Owner.

15.4 Owner's Insurance . .

(a) Builder's Risk. Owner shall provide standard form "All Risk" Builder's Risk or Installation Insurance covering 100% of the replacement value of existing property (or to such other amount to the extent commercially available) and all property built or installed along with any and all materials, equipment and machinery intended for the Site during off-site storage and inland transit. Coverage shall contain an agreed amount endorsement waiving any coinsurance penalty. Such insurance shall be for the benefit of Owner, Contractor, Owner's other contractors and Contractor's Subcontractors, covering physical loss or damage to the Facility and the Work. Coverage shall include fire, explosion, extended coverage, expediting expense, collapse, earthquake, flood, and boiler and machinery (including electrical injury and mechanical breakdown). There shall be no exclusion for resultant damage caused by faulty workmanship, design or materials. Coverage shall contain no exclusions for testing. The coverage shall provide for deductibles that are no greater than $100,000 for general losses, $250,000 for losses resulting from testing; $500,000 for losses resulting from the testing of the steam turbine generator and $1,000,000 for losses resulting from the testing of the combustion turbine generator.

(b) Property Insurance. From and after the date of Substantial Completion, Owner shall maintain appropriate property insurance for the Facility and Owners property at the Site, which shall name Contractor as an additional insured for the period ending twelve (12) months after Substantial Completion and which shall include a waiver of rights of subrogation against Contractor, its Affiliates, and their vendors and Subcontractors. Nothing in this Article 15.4(b), however, shall require Owner to provide insurance covering Contractor's warranty obligations hereunder.

ARTICLE 16

OWNERSHIP OF PLANS AND CONFIDENTIALITY

16.1 Title to plans and specifications. . All models, drawings, specifications, technical data, and other documents and information furnished to Contractor by Owner or prepared by Contractor as a deliverable to Owner (as described in Exhibit A ) are confidential and proprietary to Owner, are and shall remain the property of Owner, cannot be copied or otherwise reproduced or used in any way, except in connection with the Work, and cannot be disclosed by Contractor to any third party (other than Subcontractors for purposes of performing the Work) or used in any manner detrimental to the interests of Owner. The Parties agree that they will use the above described documents and information solely for the purposes of this Facility, including its design, construction, procurement, maintenance, operation, modification and repair. The Parties agree not to use the above referenced documents and information for other projects or for purposes unrelated to the Facility. If either Party misuses the documents and information in breach of this Article 16.1 , then that Party shall indemnify, defend and hold harmless the non-breaching Party from all claims asserted against the non-breaching Party arising out of such misuse. Nothing in the Article shall be construed as limiting Contractor's ownership of all rights

to use its basic know-how, experience and skills, whether or not acquired during performance of the Work or to perform any engineering design or Work for any other party. Also, nothing in this Article shall prohibit Owner from using Owner furnished information on other projects or for other uses.

16.2 Confidentiality . . A Party (the "Disclosing Party") may furnish to the other Party (the "Receiving Party") information marked "Confidential" including but not limited to plans, drawings, specifications and procedures for use as required in the performance of the Work. The Receiving Party agrees to keep confidential and not to disclose to third parties (other than its Subcontractors, employees, agents and consultants who are associated with the Facility) the information so disclosed by the Disclosing Party (as well as all information disclosed by Contractor in connection with its proposal to Owner for the Work) without the prior written consent of the Disclosing Party, provided, such restrictions shall not apply to (1) information in the Receiving Party's possession or known to it prior to its receipt from the Disclosing Party, (2) information that is independently developed by the Receiving Party without the utilization of such confidential information of the Disclosing Party, (3) information that is or becomes public knowledge without the fault of the Receiving Party, (4) information that is or becomes available to the Receiving Party from a source other than the Disclosing Party, so long as the Receiving Party reasonably believes such source is lawfully entitled to disclose such information, and (5) information that is or becomes available on an unrestricted basis to a third party from the Disclosing Party or from someone acting under its control. Such restrictions on use and disclosure shall expire on the fifth year anniversary following the date received by the Receiving Party. Further, such restrictions shall not apply to any information that must be disclosed by the Receiving Party as required by law.

ARTICLE 17

UNCONTROLLABLE FORCES

17.1 Uncontrollable Forces . . Neither Party shall be considered to be in default in respect to any obligation hereunder, if delays in or failure of performance shall be due to Uncontrollable Forces. "Uncontrollable Forces" shall mean any event that adversely affects or prevents any Party (including such Party's subcontractors) from performing any of its obligations in accordance with the terms of this Agreement, other than payment of money, but only if and to the extent that such events and circumstances are not within the affected Party's reasonable control and are not due to its fault or negligence. So long as the foregoing conditions are met, an Uncontrollable Force shall, include, but is not limited to, acts of God, earthquake, storm, fire, flood, explosions, accidents, lightning, epidemic, war, riot, acts of the public enemy; act of war (declared or undeclared), hostilities, acts of terrorism or threats of terrorism; rebellion or sabotage or damage resulting therefrom; expropriation or confiscation of facilities; civil disturbance, sabotage; changes in law; compliance with any order or request of any governmental authority, inability to obtain permits, licenses, and authorizations from any local, state, or federal agency or person for any of the materials, supplies, equipment, or Work required to be provided hereunder, fuel shortages; breakdown or damage to generation and transmission facilities belonging to Owner; failure of facilities; strikes or other labor disturbances (excluding however, strikes or labor actions of Contractor's employees taking place at the Site unless (i) the event at the Site is itself part of a regional or national action that is not directed specifically and

solely at Contractor, (ii) the event is of a political nature or (iii) the strike is in breach or violation of any applicable national, federal, industry or national supplementary labor or union agreement applicable in the construction industry); and restraint by court or public authority. Nothing contained herein, however, shall be construed to require either Party to prevent or settle a strike or other labor dispute against its will. The Party whose performance hereunder is so affected shall immediately notify the other Party of all pertinent facts and take all reasonable steps to promptly and diligently prevent such causes if feasible to do so, or to minimize or eliminate the effect thereof without delay. Contractor's Target Price, Contract Completion Date and other affected obligations shall be adjusted to account for any Uncontrollable Forces and Contractor shall be reimbursed by Owner under Article 4 for all costs incurred in connection with or arising from Uncontrollable Forces, including, but not limited to, those costs incurred in the exercise of reasonable diligence to avoid or mitigate Uncontrollable Forces. To the extent practicable under the circumstances, Contractor and Owner shall confer on any alternative mitigation plans, including the relative costs and benefits of those plans, and Contractor shall implement the mitigation plan authorized by Owner.

ARTICLE 18

OTHER PROVISIONS

18.1 EEO Clauses and Executive Orders. . Owner is an equal opportunity employer. Pursuant to Executive Orders 11246, 11625, 11701, and 11758, as amended or superseded, in whole or in part from time to time, and all regulations issued thereunder, it is agreed that all applicable laws, rules, and regulations are incorporated by reference in this Agreement and bind Contractor as a contractor of Owner. Contractor further agrees to follow all federal, state, and local non-discrimination and other employment laws, regulations, rules and ordinances.

18.2 Assignment. . This Agreement and all provisions hereof shall inure to and be binding upon the respective Parties, their successors, and assigns. Since Contractor was selected to perform the Work covered by this Agreement based on its professional qualifications, among other considerations, Contractor shall not assign this Agreement or any part hereof without the prior written consent of each of the Owner Parties. Each Owner Party shall have the right to assign its interests in this Agreement without Contractor's consent. Each Owner Party shall promptly notify Contractor in writing of any such assignment, unless such assignment is to an affiliate of such Owner Party because of the reorganization of the assets, business function or structure of such Owner Party. In the event an Owner Party assigns any portion of its interests in this Agreement, the assigning Owner Party shall not be relieved of its financial responsibility related to the portion of this Agreement so assigned unless Contractor's consent is obtained, which consent shall not be unreasonably withheld, delayed or conditioned. Notwithstanding the foregoing, this Agreement may be assigned without consent to the successor of either Party, or to a person, firm or corporation acquiring all or substantially all of the business assets of such Party or to a wholly owned subsidiary of either Party.

18.3 Independent Contractor . . In performing the Work, Contractor is acting and shall be deemed for all purposes to be an independent contractor. Owner and Contractor are not partners, agents or joint ventures with each other, and this Agreement is not intended to nor shall it be construed to create a partnership, joint venture, or agency relationship between Owner and

Contractor. Contractor shall complete the Work according to Contractor's own procedures, techniques, sequences, means and methods of work, which shall be in the exclusive charge and control of Contractor, and which shall not be subject to the control and supervision of Owner, except as to the results of the Work. Contractor shall be entirely and solely responsible for its acts and the acts of its employees and agents while engaged in the performance of the Work. Except as allowed by this Agreement, Contractor, its employees and agents shall not hold themselves out as employees or agents of Owner. Contractor and its employees are hereby expressly precluded from and not entitled to any employee benefits from any Owner Party. For the purpose of clarifying the ineligibility of the Contractor under Owner's employee benefits plans or programs, Contractor and its employees are hereby specifically excluded from any eligibility and/or are deemed a "temporary employee" when such term is used to define ineligibility in benefits in any Owner Party's employee benefit plan or program.

18.4 No Waiver . . No term, covenant or condition of the Contract Documents or any breach thereof shall be deemed waived, unless such waiver shall be in writing and executed by the Party claimed to have waived the same. The waiver of any breach by a Party, whether express or implied, shall not constitute a waiver of any subsequent breach.

18.5 Gratuities . . Contractor shall not, under any circumstances, extend any gratuity or special favor to employees of Owner that might be reasonably construed as an attempt to influence the recipients in the conduct of their official duties.

18.6 Severability . . If a court or regulatory agency having jurisdiction over the Parties determines that a condition of this Agreement, or any part thereof, is void, illegal or unenforceable, said condition or part shall be deemed to have been severed from this Agreement, and the remaining conditions, or parts, shall be unaffected and shall be enforced to the fullest extent allowed by law. In the event that any portion or all of this Agreement is held to be void or unenforceable, the Parties agree to negotiate in good faith to amend the commercial and other terms of this Agreement in order to effect the intent of the parties as set forth in this Agreement.

18.7 Governing Law . . This Agreement shall be governed and interpreted in accordance with the laws of the State of New Mexico, without regard to the conflicts of law rules of that State.

18.8 Fair Labor Standards Act . . Contractor warrants that any products purchased pursuant to this Agreement have been produced, and that all Work and all wages, hours and other forms or compensation have been provided, in compliance with the requirements of the Fair Labor Standards Act of 1938, as amended and regulations and orders pursuant thereto issued by the U.S. Department of Labor.

18.9 New Mexico Preference.. Contractor shall strive to perform the Work by using a minimum of fifty percent (50%) New Mexico labor and subcontracts. This is a goal, and not a guaranty or contractual commitment. In its monthly reports to Owner, Contractor shall provide an update on the status of meeting this goal.

18.10 Counterparts . . This Agreement may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. Owner may retain a duplicate copy ( e.g. , electronic imager, photocopy, facsimile) of this Agreement, which shall be considered an equivalent to this original.

18.11 Entire Agreement . . The Contract Documents represent the entire agreement and understanding between the Owner Parties and Contractor with respect to the subject matter hereof and performance of the Work, and supercede any prior understandings, representations or agreements, whether verbal or written, prior to execution of this Agreement. If any Work has been performed by Contractor under verbal agreement or under a limited notice to proceed prior to the execution of this Agreement, then this Agreement shall apply thereto in the same manner as if made before such Work were performed. Headings and titles of Articles , Sections, paragraphs and other subparts of this Agreement are for convenience of reference only and shall not be considered in interpreting the text of this Agreement. Modifications or amendments to this Agreement must be in writing and executed by a duly authorized representative of each Party. Contractor makes no representations, covenants, warranties, or guarantees, express or implied, other than those expressly set forth herein. The Parties' rights, liabilities, responsibilities and remedies with respect to the Work, the Work and this Agreement shall be exclusively those expressly set forth in this Agreement. The Contract Documents set forth the full and complete understanding of the Parties as of the date first above stated, and it supersedes any and all agreements and representations made or dated prior thereto, including the Preliminary Services Agreement, entered into by the Parties on December 3, 2004, as amended. The Parties agree, however, that the amounts paid by Owner pursuant to such Preliminary Services Agreement, as amended, shall be included in the Contract Sum and chargeable against the Target Price under the Agreement. In the event of conflict between the Contract Documents and any of the Exhibits hereto, the terms and provisions of the Contract Documents shall control. In the event of any conflict among the Exhibits, the Exhibit of the latest date shall control.

18.12 Agreement Authors . . This Agreement has been agreed to by the Parties and no ambiguity shall be construed against any Party based on the identity of the author or authors of this Agreement. THE PARTIES ACKNOWLEDGE AND AGREE THE TERMS AND CONDITIONS OF THIS AGREEMENT HAVE BEEN FREELY, FAIRLY AND THOROUGHLY NEGOTIATED. FURTHER, THE PARTIES ACKNOWLEDGE AND AGREE SUCH TERMS AND CONDITIONS, INCLUDING BUT NOT LIMITED TO THOSE RELATING TO WAIVERS, ALLOCATIONS OF, RELEASES FROM, INDEMNITIES AGAINST AND LIMITATIONS OF LIABILITY, WHICH MAY REQUIRE CONSPICUOUS IDENTIFICATION, HAVE NOT BEEN SO IDENTIFIED BY MUTUAL AGREEMENT AND THE PARTIES HAVE ACTUAL KNOWLEDGE OF THE INTENT AND EFFECT OF SUCH TERMS AND CONDITIONS. EACH PARTY ACKNOWLEDGES THAT IN EXECUTING THIS AGREEMENT THEY RELY SOLELY ON THEIR OWN JUDGMENT, BELIEF, AND KNOWLEDGE, AND SUCH ADVICE AS THEY MAY HAVE RECEIVED FROM THEIR OWN COUNSEL, AND THEY HAVE NOT BEEN INFLUENCED BY ANY REPRESENTATION OR STATEMENTS MADE BY ANY OTHER PARTY OR ITS COUNSEL. NO PROVISION IN THIS AGREEMENT IS TO BE INTERPRETED FOR OR AGAINST ANY PARTY BECAUSE THAT PARTY OR ITS COUNSEL DRAFTED SUCH PROVISION.

18.13 Survival of Obligations . . The provisions of this Agreement which by their nature are intended to survive the termination, cancellation, completion or expiration of the Agreement, including but not limited to any expressed limitations of or releases from liability, shall continue as valid and enforceable obligations of the parties notwithstanding any such termination, cancellation, completion or expiration. Specifically, Contractor's warranty obligations under Article 6 "Inspection & Warranty" and indemnity obligations, including those under Articles 4, 13, 14 and 17 "Compensation", "Liability", "Drug, Alcohol Safety and Hazardous Materials" , and "Other Provisions", respectively, of this Agreement, and all other warranty and performance obligations, guaranties, and indemnity obligations in the Contract Documents shall survive any termination of the Agreement, and the suspension, completion and acceptance of the Work, or any part thereof, or final payment to Contractor, it being agreed that said obligations and rights are and shall be of a continuing nature. The terms of Article 12 "Dispute Resolution" shall also survive termination, suspension and completion of this Agreement.

18.14 No Third Party Beneficiaries. . There are no third party beneficiaries to this Agreement and no third person or entity shall claim that any portion of this Agreement creates a duty running to that third person or entity. The parties agree to look solely to each other with respect to the obligations and liability arising in connection with this Agreement and the Work performed hereunder. This Agreement and each and every provision hereof is for the exclusive benefit of Owner and Contractor and not for the benefit of any third party, except to the extent such benefits have been expressly extended pursuant to this Agreement.

18.15 Liability of Owner Parties . . The Owner Parties are Phelps Dodge Energy Services, LLC, PNMR Development and Management Corporation, and Tucson Electric Power Company ("TEP"), each of which shall be jointly and severally liable for the obligations of Owner under this Agreement.

IN WITNESS WHEREOF , Contractor and Owner have caused this Agreement to be executed on their behalves by their duly authorized representatives as of the date first set forth above.

FLUOR ENTERPRISES, INC.	PNMR DEVELOPMENT AND MANAGEMENT CORPORATION
By: /s/ Robert Mickey	By: /s/ Hugh W. Smith
Printed name: Robert Mickey	Printed name: Hugh W. Smith
Its: Senior Vice President	Its: President

TUCSON ELECTRIC POWER COMPANY	PHELPS DODGE ENERGY SERVICES, LLC
By: /s/ Michael J. DeConcini	By: /s/ Choi Lee
Printed name: Michael J. DeConcini	Printed name: Choi Lee
Its: Senior Vice President	Its: Vice President

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31 , 2005

- OR -

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

For the transition period from _______________ to _________________


Commission	Name of Registrants, State of Incorporation,	I.R.S. Employer
File Number	Address and Telephone Number	Identification No.
333-32170	PNM Resources, Inc.	85-0468296
	(A New Mexico Corporation)
	Alvarado Square
	Albuquerque, New Mexico 87158
	(505) 241-2700

1-6986	Public Service Company of New Mexico	85-0019030
	(A New Mexico Corporation)
	Alvarado Square
	Albuquerque, New Mexico 87158
	(505) 241-2700


Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. YES X NO

Indicate by check mark whether PNM Resources, Inc. is an accelerated filer (as defined in Rule 12b-2 of the Act). YES X NO

As of April 29, 2005, 64,392,850 shares of common stock, no par value per share, of PNM Resources, Inc. were outstanding.

Indicate by check mark whether Public Service Company of New Mexico ("PNM") is an accelerated filer (as defined in Rule 12b-2 of the Act). YES NO X

The total number of shares of Common Stock of PNM held by non-affiliates as of April 29, 2005 was zero.

	Page No.
GLOSSARY	1

PART I. FINANCIAL INFORMATION:

Reports of Independent Registered Public Accounting Firm.................................	3

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

PNM Resources, Inc. and Subsidiaries
Consolidated Statements of Earnings
Three Months Ended March 31, 2005 and 2004......................................	5
Consolidated Balance Sheets
March 31, 2005 and December 31, 2004..................................................	6
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2005 and 2004......................................	8
Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2005 and 2004......................................	10
Public Service Company of New Mexico and Subsidiaries
Consolidated Statements of Earnings
Three Months Ended March 31, 2005 and 2004......................................	11
Consolidated Balance Sheets
March 31, 2005 and December 31, 2004..................................................	12
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2005 and 2004......................................	14
Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2005 and 2004......................................	16
Notes to Consolidated Financial Statements......................................................	17

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......	53

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK....................................................................................	96

ITEM 4. CONTROLS AND PROCEDURES......................................................	96

PART II. OTHER INFORMATION:

ITEM 1. LEGAL PROCEEDINGS.......................................................................	96

ITEM 5. OTHER INFORMATION.....................................................................	97

ITEM 6. EXHIBITS...............................................................................................	99

Signature...................................................................................................................	100

Afton.....................................	Afton Generating Station
Albuquerque.........................	City of Albuquerque, New Mexico
ALJ........................................	Administrative Law Judge
APS.......................................	Arizona Public Service Company
AR Securitization.................	Accounts Receivable Securitization
Board.....................................	Board of Directors
BTU.......................................	British Thermal Unit
Cal ISO..................................	California Independent System Operator
Cascade.................................	Cascade Investment, LLC
Clean Air Act.......................	The Clean Air Act Amendments of 1990
Congress...............................	United States Congress
Decatherm............................	1,000,000 BTUs
Delta......................................	Delta-Person Limited Partnership
DOJ.......................................	United States Department of Justice
EIP.........................................	Eastern Interconnection Project
EPE........................................	El Paso Electric Company
EPA.......................................	United States Environmental Protection Agency
ERCOT..................................	Electric Reliability Council of Texas
FASB.....................................	Financial Accounting Standards Board
FERC.....................................	Federal Energy Regulatory Commission
Four Corners.........................	Four Corners Power Plant
GAAP....................................	Generally Accepted Accounting Principles in the United
	States of America
Gathering Company............	Sunterra Gas Gathering Company, a wholly‑owned
	subsidiary of PNM Resources, Inc.
GCT.......................................	Grand Canyon Trust
Global Electric Agreement...	Signed by the Company and other parties in 2002; provided for a five-year rate path for New Mexico jurisdictional customers beginning in September 2003
Great Southwestern.............	Great Southwestern Construction, Inc.
Holding Company................	PNM Resources, Inc.
IRS.........................................	United States Internal Revenue Service
LIBOR...................................	London Interbank Offered Rate
Lordsburg.............................	Lordsburg Generating Station
Luna......................................	Luna Energy Facility
Moody's.................................	Moody's Investor Services, Inc.
MW.......................................	Megawatt
MWh.....................................	Megawatt Hour
Navajo Acts..........................	Navajo Nation Air Pollution Prevention and Control Act, the
	Navajo Nation Safe Drinking Water Act, and the Navajo
	Nation Pesticide Act
Ninth Circuit........................	United States Court of Appeals for the Ninth Circuit
NMED...................................	New Mexico Environment Department
NMPRC.................................	New Mexico Public Regulation Commission, successor to the NMPUC

NMPUC................................	New Mexico Public Utility Commission
NNHPD................................	Navajo Nation Historic Preservation Department
NRC......................................	United States Nuclear Regulatory Commission
NSPS.....................................	New Source Performance Standards
NSR.......................................	New Source Review
O&M.....................................	Operations and Maintenance Expense
PGAC....................................	PNM's Purchased Gas Adjustment Clause
PG&E....................................	Pacific Gas and Electric Co.
PNM......................................	Public Service Company of New Mexico
PPA.......................................	Power Purchase Agreement
PSD.......................................	Prevention of Significant Deterioration
Processing Company............	Sunterra Gas Processing Company, a wholly‑owned
	subsidiary of PNM Resources, Inc.
PUCT....................................	Public Utility Commission of Texas
PUHCA.................................	The Public Utility Holding Company Act of 1935
PVNGS..................................	Palo Verde Nuclear Generating Station
RMRR....................................	Routine Maintenance, Repair or Replacement
RTO.......................................	Regional Transmission Organization
Reeves Station.......................	Reeves Generating Station
Restructuring Act.................	New Mexico Electric Utility Industry Restructuring Act of 1999, as amended
RMC......................................	Risk Management Committee
SCE........................................	Southern California Edison Company
SDG&E..................................	San Diego Gas and Electric Company
SEC........................................	United States Securities and Exchange Commission
SESCO...................................	San Angelo Electric Service Company
SFAS.....................................	Statement of Financial Accounting Standards
SJCC......................................	San Juan Coal Company
SJGS.......................................	San Juan Generating Station
S&P.......................................	Standard and Poor's Ratings Services
TCEQ....................................	Texas Commission on Environmental Quality
TNMP....................................	Texas‑New Mexico Power Company
TNP.......................................	TNP Enterprises, Inc.
Throughput..........................	Volumes of gas delivered, whether or not owned by the Company
USBR.....................................	United States Bureau of Reclamation
USFS......................................	United States Forest Service
VAR......................................	Value at Risk
WSPP....................................	Western Systems Power Pool

ITEM 1. FINANCIAL STATEMENTS

PNM RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

	Three Months Ended
	March 31,
	2005	2004
	(In thousands, except
	per share amounts)
Operating Revenues:
Electric	$ 264,134	$ 261,247
Gas	165,286	175,874
Other	237	251
Total operating revenues	429,657	437,372

Operating Expenses:
Cost of energy sold	249,164	263,486
Administrative and general	41,048	40,374
Energy production costs	36,064	37,554
Depreciation and amortization	28,827	26,137
Transmission and distribution costs	14,089	15,492
Taxes, other than income taxes	8,871	9,484
Income taxes	13,776	11,311
Total operating expenses	391,839	403,838
Operating income	37,818	33,534

Other Income and Deductions:
Other income	13,010	11,588
Other deductions	(3,107)	(3,372)
Income tax expense	(3,499)	(2,996)
Net other income and deductions	6,404	5,220

Interest Charges	13,581	13,829

Preferred Stock Dividend Requirements of Subsidiary	132	147

Net Earnings	$ 30,509	$ 24,778

Net Earnings per Common Share:

Basic	$ 0.50	$ 0.41

Diluted	$ 0.50	$ 0.41

Dividends Paid per Common Share	$ 0.185	$ 0.15


The accompanying notes are an integral part of these financial statements.

Maturities

Less than

1 year

1-3 Years

4+ Years

(In thousands)

PNM RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

	March 31,	December 31,
	2005	2004
	(In thousands)
ASSETS
Utility Plant:
Electric plant in service	$2,522,103	$2,488,961
Gas plant in service	689,297	680,487
Common plant in service and plant held for future use	149,042	140,818
	3,360,442	3,310,266
Less accumulated depreciation and amortization	1,158,442	1,135,510
	2,202,000	2,174,756
Construction work in progress	114,097	124,381
Nuclear fuel, net of accumulated amortization of $19,134 and $16,448	24,066	25,449

Net utility plant	2,340,163	2,324,586

Other Property and Investments:
Investment in lessor notes	298,340	308,680
Other investments	134,783	139,848
Non-utility property, net of accumulated depreciation of $127 and $1,773	1,437	1,437

Total other property and investments	434,560	449,965

Current Assets:
Cash and cash equivalents	328,779	17,195
Accounts receivables, net of allowance for uncollectible accounts
of $1,329 and $1,329	84,005	96,600
Unbilled revenues	86,367	104,708
Other receivables	42,645	48,393
Inventories	39,827	41,352
Regulatory assets	8,614	3,339
Other current assets	54,939	51,967

Total current assets	645,176	363,554

Deferred charges:
Regulatory assets	214,214	217,196
Prepaid pension cost	88,363	87,336
Other deferred charges	53,994	44,998

Total deferred charges	356,571	349,530
	$3,776,470	$3,487,635


The accompanying notes are an integral part of these financial statements.

PNM RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Three Months Ended
	March 31,
	2005	2004
	(In thousands)
Cash Flows From Operating Activities:
Net earnings	$ 30,509	$ 24,778
Adjustments to reconcile net earnings to net cash flows
from operating activities:
Depreciation and amortization	36,275	34,726
Allowance for equity funds used during construction	(470)	(95)
Accumulated deferred income tax	(639)	(2,428)
Net unrealized gains on trading and investment contracts	(923)	(1,760)
Changes in certain assets and liabilities:
Accounts receivable	12,595	(13,508)
Unbilled revenues	18,341	6,195
Accrued post-retirement benefit costs	(2,007)	(566)
Other assets	(652)	28,920
Accounts payable	(22,060)	(12,522)
Accrued interest and taxes	44,129	27,685
Other liabilities	(34,007)	(27,177)
Net cash flows from operating activities	81,091	64,248
Cash Flows From Investing Activities:
Utility plant additions	(28,072)	(26,542)
Nuclear fuel additions	(1,303)	(1,589)
Utility plant additions related to allowance for borrowed funds used
during construction and capitalized interest	(318)	(738)
Return of principal of PVNGS lessor notes	9,998	10,274
Other	(1,163)	(4,828)
Net cash flows from investing activities	(20,858)	(23,423)

PNM RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

	Three Months Ended
		March 31,
		2005	2004
		(In thousands)

Net Earnings		$ 30,509	$ 24,778
Other Comprehensive Income, net of tax:

Unrealized gain (loss) on securities:
Unrealized holding gains (losses) during the period, net of income tax (expense)
benefit of $66 and $(308)		(101)	472
Reclassification adjustment for amounts included in net income, net of income
tax (expense) benefit of $498 and $209		(760)	(320)

Additional minimum pension liability adjustment, net of income tax (expense)
benefit of $(12)		-	19

Mark-to-market adjustment for certain derivative transactions:
Change in fair market value of designated cash flow hedges, net of income tax
(expense) benefit of $(2,070) and $(970)		3,159	1,480
Reclassification for amounts in net income, net of income tax (expense)
benefit of $917 and $274		(1,399)	(418)

Total Other Comprehensive Income (Loss)		899	1,233

Total Comprehensive Income		$ 31,408	$ 26,011

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

	Three Months Ended
	March 31,
	2005	2004
	(In thousands)
Operating Revenues:
Electric	$ 264,134	$ 261,247
Gas	165,286	175,874
Total operating revenues	429,420	437,121

Operating Expenses:
Cost of energy sold	249,098	263,416
Administrative and general	40,249	39,034
Energy production costs	36,064	37,554
Depreciation and amortization	27,945	25,616
Transmission and distribution costs	14,089	15,492
Taxes, other than income taxes	8,292	8,563
Income taxes	14,798	12,315
Total operating expenses	390,535	401,990
Operating income	38,885	35,131

Other Income and Deductions:
Other income	12,482	11,266
Other deductions	(1,554)	(1,317)
Income tax expense	(3,687)	(3,682)
Net other income and deductions	7,241	6,267

Interest Charges	13,640	13,894

Net Earnings	32,486	27,504

Preferred stock dividend requirements	132	147

Net Earnings Available for Common Stock	$ 32,354	$ 27,357


The accompanying notes are an integral part of these financial statements.

					Corporate
	Electric	Gas	Transmission	Wholesale	& Other		Consolidated
2005:
Operating revenues:	$ 129,718	$ 165,286	$ 4,464	$ 132,004	$ (1,815)	(a)	$ 429,657
Intersegment revenues	-	-	7,877	-	(7,877)		-
Total revenues	129,718	165,286	12,341	132,004	(9,692)		429,657
Less: Cost of energy	53,251	114,435	2,029	89,312	(9,863)	(a)	249,164
Intersegment energy transfer	(14,123)	-	-	14,123	-		-
Gross margin	90,590	50,851	10,312	28,569	171		180,493
Operating expenses	57,521	24,094	5,582	10,888	1,987		100,072
Depreciation and amortization	14,770	5,576	2,788	3,987	1,706		28,827
Income taxes	4,425	7,228	167	3,831	(1,875)		13,776
Operating income	13,874	13,953	1,775	9,863	(1,647)		37,818

Interest Income	6,807	756	409	1,344	454		9,770
Other income/(deductions)	254	81	68	933	(1,335)		1
Other income taxes	2,795	332	189	901	(718)		3,499
Net interest charges	7,122	2,924	1,520	4,016	(2,001)		13,581
Segment net income (loss)	$ 11,018	$ 11,534	$ 543	$ 7,223	$ 191		$ 30,509

Total assets	$ 1,473,106	$ 536,588	$296,605	$ 446,645	$1,023,526		$3,776,470
Gross property additions	$ 12,265	$ 8,946	$ 2,359	$ 3,667	$ 2,456		$ 29,693

	Three Months Ended March 31,
	Pension Plan		Other Post-Retirement Benefits		Executive Retirement Program
	2005	2004	2005	2004	2005	2004
			(In thousands)
Components of Net Periodic
Benefit Cost/(Income)
Service cost	$ 477	$ 1,085	$ 645	$ 601	$ 16	$ 26
Interest cost	7,567	7,340	1,648	1,826	295	310
Expected return on assets	(10,042)	(9,843)	(1,318)	(1,232)	-	-
Transition obligation	-	-	-	454	-	-
Prior service cost amortization	79	79	(1,702)	(1,049)	34	37
Net loss amortization	892	1,157	1,490	1,234	43	33
Net Periodic Benefit Cost (Income)	$ (1,027)	$ (182)	$ 763	$ 1,834	$ 388	$ 406

Award Eligibility Level	Individual Goal Set
Award Eligibility Level	Threshold*	Stretch*	Optimal*
Vice-President	4.0%	7.0%	10.0%
Senior Vice-President	4.8%	8.4%	12.0%
Executive Vice-President	5.6%	9.8%	14.0%
Chairman, President, and CEO	11.2%	19.6%	28.0%

CEO
Payout as Percent of Midpoint
Workgroup Goals Only		EPS Multiplier
Level	Payout	Threshold (2x)	Stretch (3.5x)	Optimal (5x)
Threshold	11.2%	22.4%	39.2%	56.0%
Stretch	19.6%	39.2%	68.6%	98.0%
Optimal	28.0%	56.0%	98.0%	140.0%


EVP
Payout as Percent of Midpoint
Workgroup Goals Only		EPS Multiplier
Level	Payout	Threshold (2x)	Stretch (3.5x)	Optimal (5x)
Threshold	5.6%	11.2%	19.6%	28.0%
Stretch	9.8%	19.6%	34.3%	49.0%
Optimal	14.0%	28.0%	49.0%	70.0%


SVP
Payout as Percent of Midpoint
Workgroup Goals Only		EPS Multiplier
Level	Payout	Threshold (2x)	Stretch (3.5x)	Optimal (5x)
Threshold	4.8%	9.6%	16.8%	24.0%
Stretch	8.4%	16.8%	29.4%	42.0%
Optimal	12.0%	24.0%	42.0%	60.0%


VP
Payout as Percent of Midpoint
Workgroup Goals Only		EPS Multiplier
Level	Payout	Threshold (2x)	Stretch (3.5x)	Optimal (5x)
Threshold	4.0%	8.0%	14.0%	20.0%
Stretch	7.0%	14.0%	24.5%	35.0%
Optimal	10.0%	20.0%	35.0%	50.0%

IN THE MATTER OF THE APPLICATION	)
OF PNM RESOURCES INC. AND TEXAS-	)
NEW MEXICO POWER CO. FOR APPROVAL	)
OF PNM RESOURCES' ACQUISITION OF	)
TNP ENTERPRISES INC.; FOR APPROVAL	) CASE NO. 04-00315-UT
OF TEXAS-NEW MEXICO POWER'S	)
PROPOSED REGULATORY PLAN; AND	)
FOR ALL OTHER APPROVALS AND	)
AUTHORIZATIONS REQUIRED TO	)
EFFECTUATE AND IMPLEMENT THE	)
ACQUISITION.	)
	)
PNM RESOURCES INC. AND TEXAS-NEW	)
MEXICO POWER CO.	)
	)
Applicants	)
	)
	)

THE GRAND CANYON TRUST and	)
SIERRA CLUB,	)
	)
Plaintiffs,	)
	)
THE STATE OF NEW MEXICO,	)
	)
Plaintiff-Intervenor,	)
	)
v.	) CV 02-552 BB/ACT (ACE)
	)
PUBLIC SERVICE COMPANY OF	)
NEW MEXICO,	)
	)
Defendant.	)

	George Hays, Esq.
	Attorney at Law
Steven Sugarman, Esq.	236 West Portal Avenue, #110
Belin & Sugarman	San Francisco, CA 94127
618 Paseo de Peralta	Phone: 415-566-5414
Santa Fe, NM 87501	Fax: 415-731-1609
Phone: 505-983-1700	georgehays@mindspring.com
Fax: 505-983-0036
sugarman@bs-law.com	For the Department

Reed Zars, Esq.	Sandra Ely, Chief
Attorney at Law	Air Quality Bureau
910 Kearney St.	New Mexico Environment Department
Laramie, WY 82070	2048 Galisteo Street
Phone: 307-745-7979	Santa Fe, NM 87505
Fax: 307-745-7999	Phone: 505-827-1494
rzars@lariat.org	Fax: 505-827-1523
	sandra_ely@nmenv.state.nm.us

		Page
ARTICLE 1	DEFINITIONS	1
1.1	"Affiliate"	1
1.2	"Applicable Codes and Standards"	1
1.3	"Applicable Law"	1
1.4	"Business Day"	1
1.5	"Change Order"	2
1.6	"Contamination"	2
1.7	"Contract Completion Date"	2
1.8	"Contract Documents"	2
1.9	"Contract Sum"	2
1.10	"Contractor's Project Director" or "Project Director"	2
1.11	"D/FD Engineering Services"	2
1.12	"Disclosing Party"	2
1.13	"Engineering Services"	2
1.14	"Environmental Laws"	2
1.15	"Existing Work"	2
1.16	"Facility"	3
1.17	"Facility CPM Schedule"	3
1.18	"Fee"	3
1.19	"Final Completion"	3
1.20	"Fully Dispatchable Facility"	3
1.21	"Good Engineering and Construction Practices" or "GECP"	3
1.22	"Hazardous Materials"	3
1.23	"Key Personnel"	3
1.24	"Major Subcontracts"	3
1.25	"Major Subcontractors"	3
1.26	"Mechanical Completion"	3
1.27	"Notice to Proceed"	3
1.28	"Owner Event of Default"	3
1.29	"Owner-Furnished Property"	4

		Page
1.30	"Owner", "Owner Party" or "Owner Parties"	4
1.31	"Owner's Project Manager"	4
1.32	"Overrun"	4
1.33	"Performance Security"	4
1.34	"Performance Tests"	4
1.35	"Plant Site"	4
1.36	"Punch List"	4
1.37	"Rate Schedule"	4
1.38	"Receiving Party"	4
1.39	"Reimbursable Cost" or "Reimbursable Costs"	4
1.40	"Services"	4
1.41	"Site"	4
1.42	"Subcontractors"	4
1.43	"Substantial Completion"	4
1.44	"Target Cash Flow Budget"	5
1.45	"Target Performance Criteria"	5
1.46	"Target Price"	5
1.47	"True-Up Date"	5
1.48	"Uncontrollable Forces"	5
1.49	"Underrun"	5
1.50	"Warranty Period"	5
1.51	"Work"	5
1.52	"Work Progress Schedule"	5
ARTICLE 2	THE WORK AND OBLIGATIONS OF THE PARTIES	5
2.1	The Work.	5
2.2	Specific Obligations for the Work.	6
2.3	Spare Parts.	7
2.4	Contractor's Tools and Equipment.	7
2.5	Employment of Personnel	7
2.6	Clean-up and Non-Interference.	8

		Page
2.7	Safety and Security.	8
2.8	Emergencies.	8
2.9	Approvals, Certificates, Permits and Licenses.	8
2.10	Contractor Taxes.	9
2.11	Hazardous Materials.	9
2.12	Progress Meeting and Reports.	9
2.13	Care, Custody and Control/Risk of Loss.	10
2.14	[Intentionally Omitted]	10
2.15	Interpretation.	10
2.16	Training and Operational Supervision.	11
2.17	Interconnections.	11
2.18	Responsibility for Subcontractors.	11
2.19	Assurances Regarding Payments.	12
2.20	Office Space.	12
2.21	Key Personnel.	12
2.22	Co-operation and Coordination.	12
2.23	Start-Up, Commissioning and Testing Gas and Raw Water.	13
2.24	Owner Obligations	13
2.25	Existing Work.	15
2.26	Commercial Activities.	15
ARTICLE 3	CONSTRUCTION SCHEDULE	15
3.1	Commencement of the Work and Contract Completion Date.	15
3.2	Work Progress Schedule and Facility CPM Schedule	15
3.3	Delays and Time Extensions.	16
ARTICLE 4	COMPENSATION	16
4.1	Compensation.	16
4.2	Reimbursable Costs.	16
4.3	Fee.	20
4.4	Target Price, Underrun and Overrun.	20
4.5	Non-Reimbursable Items.	21

		Page
4.6	Monthly Billing	22
4.7	Contents of Progress Invoices.	22
4.8	Final Payment; Liens.	23
4.9	Records; Audit.	23
4.10	No Duplication.	24
4.11	Effect of Payment.	24
4.12	Security of Performance.	24
4.13	Wire Transfer Information.	24
ARTICLE 5	CHANGES IN THE WORK	24
5.1	Change Order.	24
5.2	Individuals Authorized to Make Changes.	24
5.3	Change Orders	24
5.4	If No Agreement.	26
ARTICLE 6	INSPECTION AND WARRANTY	26
6.1	Warranty.	26
6.2	Engineering and Design Warranty.	27
6.3	Inspection and Testing	28
6.4	Correction of Defects.	29
6.5	Limitations.	29
6.6	Title.	29
ARTICLE 7	REPRESENTATIVES AND NOTICES	30
7.1	Owner's Project Manager.	30
7.2	Contractor's Project Director.	31
7.3	Notices.	31
7.4	Changes.	31
7.5	Ordinary Course.	32
ARTICLE 8	PRIOR WORK AND WORK SITE	32
8.1	Prior Work and Site Investigation.	32
8.2	Lines and Grades.	32
8.3	Specifications and Drawings.	32
8.4	Use of Premises.	33

		Page
8.5	Cleaning Up.	33
8.6	Underground Facilities.	33
8.7	Other Contracts.	33
ARTICLE 9	[INTENTIONALLY OMITTED]	34
ARTICLE 10	COMPLETION OF THE WORK	34
10.1	Mechanical Completion	34
10.2	Performance Testing	35
10.3	Substantial Completion	35
10.4	Punch List.	36
10.5	Final Completion	37
ARTICLE 11	DEFAULT AND TERMINATION	37
11.1	Contractor Default.	37
11.2	Right to Terminate for Cause.	38
11.3	Termination by Owner for Cause.	38
11.4	Termination by Owner for Convenience.	39
11.5	Stopping Work.	39
11.6	Suspension of the Work.	40
11.7	Owner Default.	40
11.8	Delivery of Documents.	40
ARTICLE 12	DISPUTE RESOLUTION	41
12.1	Dispute Resolution.	41
12.2	Waiver of Jury Trial.	42
ARTICLE 13	INDEMNITY AND LIMITATIONS OF LIABILITY	42
13.1	General Liability; Indemnification.	42
13.2	Liability for Owner Property.	42
13.3	Trespass.	42
13.4	Intellectual Property Rights Infringement Indemnity.	42
13.5	Owner's Use of Drawings and Specifications.	43
13.6	Consequential Damages.	43
13.7	Limitation of Liability.	44

		Page
ARTICLE 14	DRUG, ALCOHOL, SAFETY AND HAZARDOUS MATERIALS	44
14.1	Drug and Alcohol Policy.	44
14.2	Safety Materials.	44
14.3	Safety Precautions.	45
14.4	Hazardous Materials	45
ARTICLE 15	INSURANCE	47
15.1	Contractor's Insurance.	47
15.2	Coverage.	48
15.3	Subcontractors.	49
15.4	Owner's Insurance.	49
ARTICLE 16	OWNERSHIP OF PLANS AND CONFIDENTIALITY	50
16.1	Title to plans and specifications.	50
16.2	Confidentiality.	51
ARTICLE 17	UNCONTROLLABLE FORCES	51
17.1	Uncontrollable Forces.	51
ARTICLE 18	OTHER PROVISIONS	51
18.1	EEO Clauses and Executive Orders.	51
18.2	Assignment.	52
18.3	Independent Contractor.	52
18.4	No Waiver.	52
18.5	Gratuities.	52
18.6	Severability.	53
18.7	Governing Law.	53
18.8	Fair Labor Standards Act.	53
18.9	New Mexico Preference.	53
18.10	Counterparts.	53
18.11	Entire Agreement.	53
18.12	Agreement Authors.	54
18.13	Survival of Obligations.	54
18.14	No Third Party Beneficiaries.	54

PNM RESOURCES, INC. AND SUBSIDIARIES	Exhibit 12.1
Ratio of Earnings to Fixed Charges
(1,000'S)



Line		YTD		Year Ended December 31,
No.		3/31/05	12/31/04	12/31/03	12/31/02	12/31/01	12/31/00
	Fixed charges, as defined by the Securities and Exchange Commission:

1	Interest on Long-term Debt	$11,765	$46,702	$ 59,429	$ 56,409	$ 62,716	$ 62,823
2	Amortization of Debt Premium, Discount and Expenses	762	2,697	2,838	2,302	2,346	2,037
3	Other Interest	1,360	2,319	5,423	2,859	(42)	752
4	Estimated Interest Factor of Lease Rental Charges	4,919	19,617	20,452	23,233	22,856	19,716
5	Total Fixed Charges	$18,806	$ 71,335	$ 88,142	$ 84,803	$ 87,876	$ 85,328

	Earnings, as defined by the Securities and Exchange Commission:

6	Consolidated Net Earnings from Continuing Operations	$30,641	$ 88,258	$ 59,138	$ 64,272	$ 150,433	$ 100,946
7	Income Taxes	17,275	49,247	27,889	33,032	81,063	74,345
8	Add Fixed Charges as Above	18,806	71,335	88,142	84,803	87,876	85,328
9	Earnings Available for Fixed Charges	$66,722	$208,840	$ 175,169	$ 182,107	$ 319,372	$ 260,619
10	Ratio for Earnings to Fixed Charges	3.55	2.93	1.99	2.15	3.63	3.05

PNM RESOURCES, INC. AND SUBSIDIARIES	Exhibit 12.2
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
(1,000'S)

Date: May 3, 2005	By:	/s/ Jeffry E. Sterba
		Jeffry E. Sterba
		Chairman, President and
		Chief Executive Officer

Date: March 1, 2005	By:	/s/ John R. Loyack
		John R. Loyack
		Senior Vice President and
		Chief Financial Officer