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 September 30, 2004
- 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) has been subject to such filing requirements for the past 90 days.  Yes        X    No
Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Exchange Act).  Yes         X       No
As of November 1, 2004, 60,441,459 shares of common stock, no par value per share, of PNM Resources, Inc. were outstanding.

PNM RESOURCES, INC. AND SUBSIDIARIES

INDEX

	Page No.
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 and Nine Months Ended September 30, 2004 and 2003	5
Consolidated Balance Sheets
September 30, 2004 and December 31, 2003	6
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2004 and 2003	8
Consolidated Statements of Comprehensive Income
Three and Nine Months Ended September 30, 2004 and 2003	10
Public Service Company of New Mexico and Subsidiaries
Consolidated Statements of Earnings
Three and Nine Months Ended September 30, 2004 and 2003	11
Consolidated Balance Sheets
September 30, 2004 and December 31, 2003	12
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2004 and 2003	14
Consolidated Statements of Comprehensive Income
Three and Nine Months Ended September 30, 2004 and 2003	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	87
ITEM 4.  CONTROLS AND PROCEDURES	88
PART II.  OTHER INFORMATION:
ITEM 1.  LEGAL PROCEEDINGS	88
ITEM 6.  EXHIBITS	89
Signature	90

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of PNM Resources, Inc.

Albuquerque, New Mexico

We have reviewed the accompanying consolidated balance sheet of PNM Resources, Inc. and subsidiaries (the "Company") as of September 30, 2004, and the related consolidated statements of earnings, and comprehensive income for the three-month and nine-month periods ended September 30, 2004 and 2003, and of cash flows for the nine-month periods ended September 30, 2004 and 2003. These interim consolidated financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such interim consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated interim financial statements, the Company adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, effective January 1, 2003.  Also, as discussed in Note 1 to the consolidated interim financial statements, during 2003, the Company changed the actuarial valuation measurement date for the pension plan and other post-retirement benefit plans from September 30 to December 31.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet and consolidated statement of capitalization (not presented herein) of PNM Resources, Inc. and subsidiaries as of December 31, 2003, and the related consolidated statements of earnings, retained earnings, comprehensive income (loss), and cash flows for the year then ended (not presented herein); and in our report dated March 8, 2004 (which report includes explanatory paragraphs referring to the adoption of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, effective January 1, 2003 and the change in actuarial valuation measurement date for the pension plan and other post-retirement benefit plans from September 30 to December 31)  we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Deloitte & Touche LLP

San Francisco, California

November 3, 2004

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder of Public Service Company of New Mexico
Albuquerque, New Mexico

We have reviewed the accompanying consolidated balance sheet of Public Service Company of New Mexico and subsidiaries (the "Company") as of September 30, 2004, and the related consolidated statements of earnings, and comprehensive income for the three-month and nine-month periods ended September 30, 2004 and 2003, and of cash flows for the nine-month periods ended September 30, 2004 and 2003. These interim consolidated financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such interim consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated interim financial statements, the Company adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, effective January 1, 2003.  Also, as discussed in Note 1 to the consolidated interim financial statements, during 2003, the Company changed the actuarial valuation measurement date for the pension plan and other post-retirement benefit plans from September 30 to December 31.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet and consolidated statement of capitalization (not presented herein) of Public Service Company of New Mexico and subsidiaries as of December 31, 2003, and the related consolidated statements of earnings, retained earnings, comprehensive income (loss), and cash flows for the year then ended (not presented herein); and in our report dated March 8, 2004, (which report includes explanatory paragraphs referring to the adoption of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, effective January 1, 2003 and the change in actuarial valuation measurement date for the pension plan and other post-retirement benefit plans from September 30 to December 31) we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Deloitte & Touche LLP

San Francisco, California

November 3, 2004

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

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

(1)     Accounting Policies and Responsibility for Financial Statements

In the opinion of the management of PNM Resources, Inc. (the "Holding Company") and Subsidiaries and Public Service Company of New Mexico and Subsidiaries ("PNM") (collectively, the "Company"), the accompanying unaudited interim consolidated financial statements reflect all normal and recurring accruals and adjustments which are necessary to present fairly the Company's financial position at September 30, 2004 and December 31, 2003, the consolidated results of its operations and comprehensive income for the three and nine months ended September 30, 2004 and 2003 and the consolidated statements of cash flows for the nine months ended September 30, 2004 and 2003.  These consolidated financial statements are unaudited, and certain information and note disclosures normally included in the Company's annual consolidated financial statements have been condensed or omitted, as permitted under the applicable rules and regulations.  Readers of these financial statements should refer to the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2003, that are included in the Company's Annual Reports on Form 10-K for the year ended December 31, 2003.  The results of operations presented in the accompanying financial statements are not necessarily representative of operations for an entire year.

Presentation

The Notes to Consolidated Financial Statements of the Company are presented on a combined basis.  The business of PNM constitutes substantially all of the business of the Holding Company and Subsidiaries.  Therefore, the financial results and 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 PNM.  Readers of the Notes to Consolidated Financial Statements should assume that the information presented applies to the consolidated results of operations and financial position of both the Holding Company and its subsidiaries and 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 generally accepted accounting principles ("GAAP").  Broader operational discussions refer to the Company.

Certain amounts in the 2003 consolidated financial statements and notes have been reclassified to conform to the 2004 financial statement presentation.

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Decommissioning Costs

        Accounting for decommissioning costs for nuclear and fossil-fuel generation involves estimates related to costs to be incurred many years in the future after plant closure.  Changes in these estimates could impact the Company's financial position, results of operation and cash flows.  The Company owns and leases nuclear and fossil-fuel facilities that are within and outside of its retail service areas.  The Company adopted the accounting requirements of Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143") on January 1, 2003.  Under SFAS 143, the Company is only required to recognize and measure decommissioning liabilities for tangible long-lived assets for which a legal obligation exists.  Adoption of the statement changed the Company's method of accounting for both nuclear generation decommissioning and fossil fuel generation decommissioning.  Nuclear decommissioning costs are based on site-specific estimates of the costs for removing all radioactive and other structures at the site.  PVNGS Unit 3 is currently excluded from the Company's retail rates while Units 1 and 2 are included in the Company's retail rates.  The Company collects a provision for ultimate decommissioning of Units 1 and 2 in its rates based on the results of a decommissioning study and recognizes a corresponding expense and liability for these amounts.  The Company collects a provision for ultimate decommissioning of its fossil fuel generation in its rates based on its legal asset retirement obligations ("ARO").  The Company believes that it will continue to be able to collect for nuclear and fossil-fuel generation decommissioning costs through the ratemaking process.

Upon implementation of SFAS 143 in 2003, the net difference between the amounts determined to represent legal ARO under SFAS 143 and the Company's previous method of accounting for decommissioning costs was recognized as a cumulative effect of a change in accounting principle, increasing earnings by $37.4 million, net of related income tax expense of $24.5 million.

Pension and Other Post-retirement Benefits

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 introduced a prescription drug benefit under Medicare ("Medicare Part D") as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D.   On July 19, 2004, the Company's Board of Directors approved a resolution adopting Medicare Part D for its retiree healthcare plan.  The effect of this change was to reduce expenses by $0.7 million for the third quarter of 2004, and the Company expects it to reduce expenses by $0.9 million during the fourth quarter of 2004.

In 2003, the Company changed the actuarial valuation measurement date for the pension plan and other post-retirement benefits from September 30 to December 31 to better reflect the actual pension balances as of the Company's balance sheet dates and recognized a cumulative effect of a change in accounting principle decreasing earnings by $0.8 million, net of income tax benefit of $0.5 million.

Stock Options

The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."  Compensation cost for stock options, if any, is measured as the excess of the quoted market price of the Company's stock at the date of grant over the exercise price of the granted stock option.  Restricted stock is recorded as compensation cost over the requisite vesting periods based on the market value on the date of grant.

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PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans.  The Company has elected to retain the intrinsic value method of accounting as described above, and has adopted the disclosure requirements of SFAS 123 only.

        At September 30, 2004, the Company had three stock-based employee compensation plans.  Options continue to be granted under only two of these plans.  Had compensation expense for the Company's stock options been recognized based on the fair value on the grant date under the methodology prescribed by SFAS 123, the effect on the Company's pro forma net earnings and pro forma earnings per share would have been as follows:

(2)     Segment Information

The Holding Company is an investor-owned holding company of energy and energy related businesses.  Its principal subsidiary, PNM, is an integrated public utility primarily engaged in the generation, transmission and distribution of electricity; transmission, distribution and sale of natural gas within the State of New Mexico; and the sale and marketing of electricity in the Western United States.  In addition, the Holding Company provides energy and technology related services through its wholly-owned subsidiary, Avistar Inc. ("Avistar").

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PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

As it currently operates, the Company's principal business segments, whose operating results are regularly reviewed by the Company's management, are Utility Operations and Wholesale Operations ("Wholesale").  Utility Operations includes Electric Services ("Electric"), Gas Services ("Gas") and Transmission Services ("Transmission"). 

The following segment presentation is based on the methodology that the Company's management uses for making operating decisions and assessing performance of its various business activities.  As such, the following presentation reports operating results with regard to the effect of accounting or regulatory changes and similar one-time items not related to normal operations in the Corporate and Other segment.

In addition, adjustments related to Emerging Issues Task Force Issue 03-11 "Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not Held for Trading Purposes" ("EITF 03-11") are included in Corporate and Other.  These accounting pronouncements require 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 net asset-backed marketing strategy and the importance the strategy places on the Company's ability to repurchase and remarket previously sold capacity.

UTILITY OPERATIONS

Electric

Electric consists of the distribution and generation of electricity for retail electric customers in New Mexico.  The Company provides retail electric service to a large area of north central New Mexico, including the cities of Albuquerque and Santa Fe, and certain other areas of New Mexico.  Current customer rates for retail electric service are set by the New Mexico Public Regulation Commission ("PRC") based on the provisions of an electric rate agreement approved in January 2003.

Gas

Gas distributes natural gas to most of the major communities in New Mexico, including two of New Mexico's three largest metropolitan areas, Albuquerque and Santa Fe.  The Company's customer base includes both sales-service customers and transportation-service customers.  PNM purchases natural gas in the open market and resells it at cost to its sales- service customers.  As a result, increases or decreases in gas revenues resulting from wholesale gas price fluctuations do not impact the Company's consolidated gross margin or earnings.

Transmission

The Company owns or leases transmission lines, interconnected with other utilities in New Mexico and south and east into Texas, west into Arizona, and north into Colorado and Utah.  Transmission revenues consist of sales to third parties as well as to Electric and Wholesale.

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PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

WHOLESALE OPERATIONS

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 source of these sales is supply created by selling the unused capacity and energy of jurisdictional assets, the capacity and energy of the Company's plants excluded from retail rates, and purchased power.  Both regulated and unregulated generation is jointly dispatched in order to improve reliability, provide the most economical power to retail customers and maximize profits on any wholesale transactions.

Long-term contracts include sales to wholesale customers with multi-year arrangements.  These contracts range from 1 to 17 years with an average maturity of 6.5 years as of September 30, 2004.  Forward sales include third party purchases in the forward market that range from 1 month to 3 years.  These transactions do not typically qualify as normal sales and purchases as defined in SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, and thus are generally marked to market.  Short-term sales generally include spot market, hour ahead, day ahead and week ahead contracts with terms of 30 days or less.  Also included in short-term sales are sales of any excess generation not required to fulfill PNM's retail load and contractual commitments.  Short-term sales also cover the revenue credit to retail customers as specified in the most recent electric rate agreement. 

CORPORATE AND OTHER

The Holding Company performs substantially all of the corporate activities of PNM.  These activities are billed to PNM on a cost basis to the extent they are for the corporate management of PNM and are allocated to the operating segments.  As previously reported, the Holding Company has been advised by the SEC Staff that it should register under the Public Utility Holding Company Act of 1935 ("PUHCA").  Under PUHCA, a registered holding company may not provide services to a public utility.  As a result, the Holding Company is establishing a services company to provide these services to the Holding Company and its affiliates as part of the overall process of registering under PUHCA.  The Holding Company's wholly-owned subsidiary, Avistar, was formed in August 1999 as a New Mexico corporation and is currently engaged in certain unregulated and non-utility businesses.  This segment also includes the reconciling items discussed for EITF 03-11 and certain one-time items.

(Intentionally left blank)

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PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Summarized financial information by business segment for the three months ended September 30, 2004 is as follows:

(a)   Includes EITF 03-11 impact, under which wholesale revenues and the associated cost of energy of $23.5 million are reclassified to a net margin basis in accordance with GAAP.

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PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Summarized financial information by business segment for the three months ended September 30, 2003 is as follows:

(a)   Includes $10.0 million write-off related to refinancing of long-term debt, net of tax benefit of $6.6 million.

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PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Summarized financial information by business segment for the nine months ended September 30, 2004 is as follows:

(a)   Includes EITF 03-11 impact, under which wholesale revenues and the associated cost of energy of $33.6 million are reclassified to a net margin basis in accordance with GAAP.

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PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Summarized financial information by business segment for the nine months ended September 30, 2003 is as follows:

(a)   Includes $10.1 million write-off of transition costs, net of tax benefit of $6.6 million, due to the repeal of deregulation in New Mexico, and the $10.0 million write-off related to refinancing of long-term debt, net of tax benefit of $6.6 million.

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PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(3)     Fair Value of Financial Instruments

Retail Natural Gas Contracts

Pursuant to a 1997 order issued by the New Mexico Public Utility Commission, the predecessor to the PRC, the Company is authorized to hedge certain portions of natural gas supply contracts to protect the Company's natural gas customers from the risk of adverse price fluctuations in the natural gas market.  Hedge gains and losses are recoverable through the Company's purchased gas adjustment clause ("PGAC") if deemed prudently incurred by the PRC.  As a result, earnings are not affected by gains or losses generated by these instruments.

         PNM purchased $7.8 million of natural gas options in the first nine months of 2004 to protect its natural gas customers from the risk of rising prices during the 2004-2005 heating season.  In total, PNM plans to expend approximately $10.0 million in 2004 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 2004 through February 2005.

Wholesale Electricity Contracts

The Company's Wholesale Operations have entered into various forward physical contracts for the purchase and sale of electricity with the intent to optimize its net generation position.  These contracts, which are derivatives, do not qualify for normal purchase and sale designation pursuant to GAAP, and are marked to market.

For the three months ended September 30, 2004, the Company's Wholesale Operations settled derivative forward contracts for the sale of electricity that generated $76.1 million of electric revenues by delivering 1.3 million megawatt hours ("MWh").  The Company settled derivative forward contracts for the purchase of electricity of $64.8 million or 1.1 million MWh to support these contractual sales and other open market sales opportunities.  For the three months ended September 30, 2003, the Company's Wholesale Operations settled derivative forward contracts for the sale of electricity that generated $65.5 million of electric revenues by delivering 1.1 million MWh.  The Company settled derivative forward contracts for the purchase of electricity of $59.8 million or 1.0 million MWh to support these contractual sales.

For the nine months ended September 30, 2004, the Company's Wholesale Operations settled derivative forward contracts for the sale of electricity that generated $148.7 million of electric revenues by delivering 2.8 million MWh.  The Company settled derivative forward contracts for the purchase of electricity of $133.1 million or 2.6 million MWh to support these contractual sales and other open market sales opportunities.  For the nine months ended September 30, 2003, the Company's Wholesale Operations settled derivative forward contracts for the sale of electricity that generated $125.3 million of electric revenues by delivering 2.5 million MWh.  The Company settled derivative forward contracts for the purchase of electricity of $120.8 million or 2.5 million MWh to support these contractual sales.

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PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

As of September 30, 2004, the Company had open derivative forward contract positions to buy $11.0 million and to sell $13.2 million of electricity.  At September 30, 2004, the Company had a gross mark-to-market gain (asset position) on these derivative forward contracts of $4.9 million and a gross mark-to-market loss (liability position) of $4.2 million, recorded in other assets and liabilities, respectively.  The change in mark-to-market valuation is recognized in earnings each period and is recorded in operating revenues and cost of energy.

The Company's Wholesale Operations also entered into forward physical contracts for the sale of the Company's electric capacity in excess of its retail and wholesale firm requirement needs, including reserves.  In addition, the Company entered into forward physical contracts for the purchase of retail needs, including reserves, when resource shortfalls exist.  The Company generally accounts for these as normal sales and purchases as defined by SFAS 133, as amended.  From time to time the Company makes forward purchases to serve its retail needs when the cost of purchased power is less than the incremental cost of its generation.  At September 30, 2004, the Company had open forward positions classified as normal sales of electricity of $157.2 million and normal purchases of electricity of $75.4 million, which will be reflected in the financial statements upon physical delivery.

The Company's Wholesale Operations, including both firm commitments and other wholesale sale activities, are managed through a net asset-backed strategy, whereby the Company's aggregate net open position is covered by its own excess generation capabilities. The Company is exposed to market risk if its generation capabilities were disrupted or if its retail load requirements were greater than anticipated. If the Company were required to cover all or a portion of its net open contract position, it would have to meet its commitments through market purchases.

The Company is exposed to credit risk in the event of non-performance or non-payment by counterparties of its financial and physical derivative instruments. The Company uses a credit management process to assess and monitor the financial conditions of counterparties.  The Company's credit risk with its largest counterparty as of September 30, 2004 and December 31, 2003 was $29.6 million and $23.5 million, respectively.

Wholesale Gas Contracts

Beginning in the second quarter of 2004, the Company's Wholesale Operations entered into various forward contracts for the purchase of gas with the intent to optimize its net generation position.  These contracts, which are derivatives, do not qualify for normal purchase and sale designation pursuant to GAAP, and are marked to market.  For the three months ended September 30, 2004, the Company's Wholesale Operations settled derivative forward contracts for the sale of gas that generated $18.1 million of revenues and settled derivative forward contracts for the purchase of gas of $17.1 million.

For the nine months ended September 30, 2004, the Company's Wholesale Operations settled derivative forward contracts for the sale of gas that generated $24.2 million of revenues and settled derivative forward contracts for the purchase of gas of $22.6 million.

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PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

As of September 30, 2004, the Company had open derivative forward contract positions to buy $13.5 million and to sell $13.6 million of gas.  At September 30, 2004, the Company had a gross mark-to-market gain (asset position) on these derivative forward contracts of $1.0 million and a gross mark-to-market loss (liability position) of $0.2 million, recorded in other current assets and liabilities, respectively.  The change in mark-to-market valuation is recognized in earnings each period and is recorded in operating revenues and cost of energy as applicable.

(4)     Earnings Per Share

In accordance with SFAS No. 128, "Earnings per Share" ("SFAS 128"), dual presentation of basic and diluted earnings per share has been presented in the Consolidated Statements of Earnings.  The following reconciliation illustrates the impact on the share amounts of potential common shares and the earnings per share amounts:

 

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PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(a)     Excludes the effect of average anti-dilutive common stock equivalents related to out-of-the-money options of 6,725 and 75,000 for the three months ended and 707,734 and 1,314,092 for the nine months ended September 30, 2004 and 2003, respectively.

 (5)    Capitalization

Stock Split

On May 18, 2004, the Company's Board of Directors approved a 3-for-2 stock split that took place on June 11, 2004 for shareholders of record on June 1, 2004.  The split increased the number of outstanding common shares by 20,134,648 shares, from 40,269,296 to 60,403,944.  All references in the accompanying consolidated financial statements to numbers of shares outstanding and per share amounts have been restated to reflect the stock split.

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PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Debt

PNM's debt facilities consist of $300.0 million from an unsecured revolving credit facility ("Credit Facility"), $90.0 million from an accounts receivable securitization program and $23.5 million in local lines of credit.

On April 1, 2004, PNM repriced $146.0 million of tax exempt pollution control bonds, with a previous interest rate of 2.75%.  The new interest rate is 2.10% for a term of 2 years.  These bonds will reprice next on April 1, 2006.

On April 23, 2004, PNM entered into a rated commercial paper program.  PNM may issue up to $300.0 million in commercial paper for up to 365 days.  The commercial paper is unsecured and the proceeds were used to retire borrowings under the previous unrated commercial paper program, to retire other short-term borrowings and for other short-term cash management needs.  PNM's Credit Facility serves as a backstop for the outstanding commercial paper.

On April 29, 2004, the Holding Company 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 London Interbank Offered Rate ("LIBOR") plus 58.15 basis points (0.58%) 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 September 15, 2004, to approximately 2.64%.  The swap is accounted for as a fair-value hedge with a fair-market value (asset position) of approximately $1.4 million as of September 30, 2004.

On July 1, 2004, PNM repriced $36.0 million of tax-exempt pollution control bonds, with a previous term and interest rate of 1 year and 2.75%, respectively.  The new interest rate is 4.0% for a term of 5 years.  These bonds will reprice next on July 1, 2009.

(Intentionally left blank)

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PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 (6)    Pension and Other Post-Retirement Benefit Plans

The Company and its subsidiaries maintain a qualified defined benefit pension plan ("Pension Plan"), medical and dental benefits to eligible retirees ("Other Post-Retirement Benefits"), and an Executive Retirement Plan.  The following table shows the net periodic benefit cost or income of the Company's Pension Plan, Other Post-Retirement Benefit Plans, and the Executive Retirement Plan:

For the nine months ended September 30, 2004, the Company contributed $4.6 million to trusts for the Other Post-Retirement Benefits.  The Company expects to contribute an additional $1.6 million in the fourth quarter of 2004.

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PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(7)     Commitments and Contingencies

Palo Verde Nuclear Generating Station ("PVNGS") Liability and Insurance Matters

The PVNGS participants have financial protection for public liability resulting from nuclear energy hazards to the full limit of liability under federal law.  This potential liability is covered by primary liability insurance provided by commercial insurance carriers in the amount of $300.0 million and the balance by an industry‑wide retrospective assessment program. If losses at any nuclear power plant covered by the programs exceed the primary liability insurance limit, the Company could be assessed retrospective adjustments.  The maximum assessment per reactor under the program for each nuclear incident is approximately $101.0 million.  The retrospective assessment is subject to an annual limit of $10.0 million per reactor per incident.  Based upon the Company's 10.2% interest in the three PVNGS units, the Company's maximum potential assessment per incident for all three units is approximately $31.0 million, with an annual payment limitation of approximately $3.0 million per incident.  If the funds provided by this retrospective assessment program prove to be insufficient, the United States Congress ("Congress") could impose revenue-raising measures on the nuclear industry to pay claims.

Possible Price-Anderson Act Changes

Versions of comprehensive energy bills proposed for adoption by Congress contain provisions that would amend Federal Law (the "Price-Anderson Act") addressing public liability from nuclear energy hazards in ways that would increase the annual limit on retrospective assessments (see "PVNGS Liability and Insurance Matters" above) from $10.0 million to $15.0 million per reactor per incident with the Company's annual exposure per incident increasing from $3.0 million to $4.5 million.

The Company believes that such changes in applicable law, if enacted, would not result in a "deemed loss event" being declared by the equity investors in respect of the Company's sale and leaseback transactions of PVNGS Units 1 and 2.

Water Supply

Because of New Mexico's arid climate and current drought conditions, there is a growing concern in New Mexico about the use of water for power plants.  The availability of sufficient water supplies to meet all the needs of the state, including growth, is a major issue.  The Company has secured water rights in connection with the Afton and Lordsburg plants and water availability does not appear to be an issue for these plants at this time.

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The Four Corners region, in which San Juan Generating Station ("SJGS") and Four Corners Power Plant ("Four Corners") are located, has been experiencing drought conditions that may affect the water supply for the Company's generation plants.  If adequate precipitation is not received in the watershed that supplies the Four Corners region, the plants could be affected in 2005 and beyond.  The United States Bureau of Reclamation ("USBR") has approved a supplemental contract for 8,300 acre-feetper year for a one-year term ending December 31, 2004.  Environmental approvals have been obtained for the supplemental contract.  PNM has also signed a voluntary shortage sharing agreement with tribes and other water users in the San Juan Basin for a one-year term ending December 31, 2004.  Environmental approvals for that agreement have been obtained.  A similar agreement was entered into in 2003.  Discussions for a 2005 shortage sharing agreement are underway.  Although the Company does not believe that its operations will be materially affected by the drought conditions at this time, it cannot forecast the weather situation or its ramifications, or how regulations and legislation may impact the Company's situation in the future, should the drought continue.

Conflicts at San Juan Mine involving Oil and Gas Leaseholders

The San Juan Coal Company ("SJCC"), through leases with the federal government and the State of New Mexico, owns coal interests with respect to an underground mine.  Richardson Operating Company ("Richardson"), and other related gas producers have leases in the area of the underground coal mine and have asserted claims against SJCC that its coal mining activities are interfering with gas production in the San Juan area.  The Company understands that discussions with Richardson and related interests are ongoing, although no formal litigation has been filed.  The Company is unable to predict the outcome of this matter.

Western United States Wholesale Power Market

Various circumstances, including electric power supply shortages, weather conditions, gas supply costs, transmission constraints, and alleged market manipulation by certain sellers, resulted in the well-publicized "California energy crisis" and in the bankruptcy filings of the California Power Exchange ("Cal PX") and of Pacific Gas and Electric Company ("PG&E").  However, since the third quarter of 2001, conditions in the Western wholesale power market have changed substantially because of regulatory actions, conservation measures, the construction of additional generation, a decline in daily natural gas prices relative to levels reached during the California energy crisis and regional economic conditions. 

As a result of the foregoing conditions in the Western market, the Federal Energy Regulatory Commission ("FERC") and other federal and state governmental authorities initiated investigations, litigation and other proceedings relevant to the Company and other sellers.  The more significant of these in relation to the Company are summarized below.

California Refund Proceeding

San Diego Gas and Electric Company ("SDG&E") and other California buyers have filed a complaint with the FERC against sellers into the California wholesale electric market.  Hearings were held in September 2002, and the administrative law judge ("ALJ") issued the "Proposed Findings on California Refund Liability" in December 2002, in which it was determined that theCalifornia Independent System Operator ("Cal ISO") had, for the most part, correctly calculated the amounts of the potential refunds owed by sellers.  The ALJ identified what were termed "ballpark" figures for the amount of refunds due under the order in an appendix to the proposed findings document.  Pursuant to the FERC's order, PNM filed, in conjunction with the competitive supplier group, initial comments in January 2003 to the ALJ's preliminary findings addressing errors the Company believes the ALJ made in the proposed findings, and filed reply comments in February 2003. 

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Prior to the December 2002 ALJ decision, the United States Court of Appeals for the Ninth Circuit ("Ninth Circuit") ordered the FERC to allow the parties in the case to provide additional evidence regarding alleged market manipulation by sellers.  Several California parties submitted additional evidence in March 2003 to support their position that virtually all market participants, including PNM, either engaged in specific market manipulation strategies or facilitated such strategies.  PNM maintains that it did not engage in improper wholesale activities, and filed reply evidence in March 2003, denying the allegations against it. 

In March 2003, the FERC issued an order substantially adopting the ALJ's findings in the December 2002 decision, but requiring a change to the formula used to calculate refunds.  The FERC raised concerns that the indices for California gas prices, a major element in the formula, had been subject to potential manipulation and were unverifiable.  The effect of this change, which is not yet final, would be to increase PNM's refund liability.  In October 2003, the FERC issued its order on rehearing in which it affirmed its decision to change the gas price indices used to calculate the refund amounts.  This has the effect of increasing the Company's amount of refund.  The precise amounts, however, will not be certain until the Cal ISO and Cal PX recalculate the refund amounts.  The Cal ISO has advised that it estimates it will not complete recalculation analysis prior to December 2004.  In June 2004, the FERC hosted a settlement conference in which the California parties proposed a settlement template for the California refund proceedings.  The Company has engaged in discussions with California parties based upon the template provided in the settlement conference, but is unable to predict whether settlement will be reached.

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.  A petition for rehearing has been filed.  The Company cannot predict the ultimate outcome of any FERC proceeding that may result from the final decision, or whether PNM will be ultimately directed to make any additional future refunds as the result of the decision; however, at September 30, 2004, the Company has recorded a reserve for this contingency.

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Pacific Northwest Refund Proceeding

In addition to the California refund proceedings, Puget Sound Energy, Inc. filed a complaint at the FERC alleging that spot market prices in the Pacific Northwest wholesale electric market were unjust and unreasonable.  In September 2001, the ALJ issued a recommended decision and declined to order refunds associated with wholesale electric sales in the Pacific Northwest.  In a ruling similar to the one issued in the California refund proceeding, the FERC allowed additional discovery to take place and the submission of additional evidence in the case in March 2003.  In June 2003, the FERC issued an order terminating the proceeding and adopting the ALJ's recommendation that no refunds should be ordered.  Several parties in the proceeding filed requests for rehearing and in November 2003, the FERC denied rehearing and reaffirmed its prior ruling that refunds were not appropriate for spot market sales in the Pacific Northwest during the first half of 2001.  In November 2003, the Port of Seattle filed an appeal of the FERC's order denying rehearing in the Ninth Circuit.  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.

FERC Show Cause Orders

The FERC initiated a market manipulation investigation, partially in response to the bankruptcy filing of the Enron Corporation ("Enron") and to allegations that Enron may have engaged in manipulation of portions of the Western wholesale power market.  In connection with that investigation, all sellers into Western electric and gas markets were required to submit data regarding short-term transactions in 2000-2001.  In March 2003, the FERC staff issued its final report, which addressed various types of conduct that the FERC staff believed may have violated market monitoring protocols in the Cal ISO and Cal PX tariffs.  Based on the final report, the FERC issued orders to certain companies, including Enron, requiring them to show cause why the FERC should not revoke their authorizations to sell electricity at market-based rates.  In addition, the FERC staff recommended that the FERC issue orders requiring certain entities to show cause why they should not be required to disgorge profits associated with conduct deemed to violate the Cal ISO and Cal PX tariffs, or be subject to other remedial action. 

In June 2003, the FERC issued two separate orders to show cause against PNM and over sixty other companies.  In the first order (the "Gaming Practices Order"), the FERC asserted that certain entities, including PNM, appeared to have participated in activities that constitute gaming and/or anomalous market behavior in violation of the Cal ISO and Cal PX tariffs during the period January 1, 2000 to June 20, 2001.  Specifically, PNM is alleged to have engaged in a practice termed "False Import," which the FERC defined as the practice of exporting power generated by California and then reimporting it into California in order to avoid price caps on in-California generation.  These allegations are based primarily on an initial Cal ISO report and the additional evidentiary submission by California parties.  The Cal ISO was ordered to submit additional information on which the entities subject to the Show Cause Order should respond.  For PNM, the potential disgorgement for alleged "False Import" transactions covers the period May 1, 2000 to October 1, 2000.  After review of the additional Cal ISO data and consultation with PNM, the FERC trial staff filed a motion to dismiss PNM from the case in August 2003.  In September 2003, the California parties filed their objection to the dismissal of PNM from the case.  In January 2004, the FERC issued an order granting trial staff's motion to dismiss PNM from the Gaming Practices docket on grounds that the FERC staff's investigation did not reveal that PNM engaged in the practice of "False Import."  As a result, the Company has been dismissed from the Gaming Practices proceedings.

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In the second order to show cause (the "Gaming Partnerships Order"), the FERC asserted that certain entities, including PNM, acted in concert with Enron and other market participants to engage in activities that constitute gaming and/or anomalous market behavior in violation of the Cal ISO and Cal PX tariffs during the period January 1, 2000 to June 20, 2001.  Specifically, PNM is alleged to have entered into "partnerships, alliances or other arrangements" with thirteen of its customers that allegedly may have been used as market manipulation schemes.  The precise basis for certain of the FERC's allegations is not clear from the Gaming Partnerships Order, although it appears that most arise out of PNM's provision of "parking and lending" services to the identified companies.  The potential remedies include disgorgement of unjust profits, as well as non-monetary remedies such as revocation of a seller's market-based rate authority. 

In September 2003, PNM filed its responses to the Gaming Partnerships Order indicating that it did not engage in the alleged "partnerships, alliances or other arrangements" with the alleged parties.  In October 2003, PNM filed testimony and exhibits in the case reasserting its response previously filed.  In January 2004, the FERC issued an order granting the FERC staff's motion to dismiss seven of the thirteen PNM customers on grounds that there was no evidence to conclude that these companies used their commercial relationship with PNM to game the Cal ISO and Cal PX markets.  On February 27, 2004, the FERC staff and the California parties filed their testimony.  The FERC staff did not identify any improper conduct by PNM.  In March 2004, the FERC approved the settlements entered into by two of the thirteen PNM customers and dismissed another of PNM's customers from the proceeding.  Of the three remaining PNM customers in the docket, the FERC staff has entered into settlement agreements with two of them.  The California parties allege that PNM provided false information regarding parking transactions that allowed other parties to game the California market.  PNM believes that it has not engaged in improper conduct and has defended itself vigorously against these allegations.  In May 2004, the Chief ALJ issued an order suspending the procedural schedule in the docket pursuant to the California parties' request to enable the parties to engage in settlement discussions of all matters related to the "California energy crisis."  In September 2004, the FERC staff filed a motion to dismiss PNM from the docket and to uphold a settlement of certain parking and lending transactions.  The staff's motion states that after investigation and review there is no evidence that the Company either engaged in a gaming practice that violated the Cal ISO or Cal PX tariffs by directly transacting through the Cal ISO or Cal PX markets, or shared any unjust profits earned by PNM's customers that may have engaged in gaming practices.  Additionally, the Company entered into a settlement of certain matters outside the scope of the docket related to historic parking and lending transactions, under which PNM agreed not to provide parking and lending services prospectively without first meeting certain requirements prior to engaging in such transactions.  Additionally, the Company agreed to pay $1.0 million in settlement to the FERC to obtain satisfaction of all issues related to any potential liability stemming from the provision of such services historically.  In October 2004, the California parties filed their opposition to the motion to dismiss and settlement.  Both the Company and the FERC staff have made filings in which they vigorously support the motion to dismiss PNM from the docket and the settlement reached with the FERC staff.  The Company is unable to predict whether the motion to dismiss PNM will be granted by the FERC, whether the settlement will be approved by the FERC, or the final outcome of this matter.

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Investigation of Anomalous Bidding Behavior and Practices in the Western Markets

In June 2003, the FERC issued an order finding that certain bids into the Cal ISO and Cal PX markets during the period May 1 through October 1, 2000 appear to have been excessive, in violation of the prohibitions against anomalous market behavior in the market monitoring protocols of the Cal ISO and Cal PX tariffs.  The order directed the FERC's Office of Market Oversight and Investigation ("OMOI") to conduct a further investigation into bids in excess of $250 per MW during that period.  In July 2003, PNM received a data request from OMOI to all sellers into the Cal ISO and Cal PX markets that submitted bids in excess of $250 per MW to the Cal ISO and Cal PX during the period covered by the investigation.  In July 2003, PNM submitted its response to OMOI's data request, in which PNM provided justification of its bidding strategies during that period.  In July 2003, PNM joined with other sellers in filing a request for rehearing of the June 2003 order, challenging the FERC's determination that bids above $250 per MW into the Cal ISO and Cal PX markets during the period May 1 through October 1, 2000 were prima facie excessive or in violation of the Cal ISO and Cal PX tariffs.  The request for hearing is currently pending before the FERC.  PNM received supplemental requests for information and data from OMOI, to which PNM responded.  In May 2004, PNM received a letter from the director of OMOI indicating that, pursuant to OMOI's review of the information PNM provided during the investigation, the investigation into PNM's bidding practices was terminated.  The Company does not anticipate any additional action by the FERC OMOI related to this investigation into PNM's bidding practices.

California Power Exchange and Pacific Gas and Electric Bankruptcies

In January and February 2001, Southern California Edison ("SCE") and the major purchasers of power from the Cal ISO and Cal PX, defaulted on payments due to the Cal ISO for power purchased from the Cal PX in 2000.  These defaults caused the Cal PX to seek bankruptcy protection.  PG&E subsequently also sought bankruptcy protection.  PNM has filed its proofs of claims in the Cal PX and PG&E bankruptcy proceedings.  Amounts due to PNM from the Cal ISO or Cal PX for power sold to them in 2000 and 2001 total approximately $7.9 million.  At December 31, 2003, the Company provided an allowance for amounts due from the Cal ISO and Cal PX.  The allowance was substantially reduced at September 30, 2004 due to additional information related to the recoverability of the total amounts due.  Both the PG&E and Cal PX bankruptcy cases have confirmed plans of reorganization in which the claims of various creditors have been specially classified and are waiting a final determination by the FERC before the claims are actually paid.  The PG&E bankruptcy case has an escrow account and the Cal PX bankruptcy has established a settlement account, both of which are awaiting a determination by the FERC setting the level of claims and allocating the funds.

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PNM RESOURCES, INC. AND SUBSIDIARIES
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California Attorney General Complaint

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.  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. 

California Attorney General Threatened Litigation

The California Attorney General has filed several lawsuits in California state court against certain power marketers for alleged unfair trade practices involving overcharges for electricity.  In April 2002, the California Attorney General notified PNM of intent to file a complaint in California state court against PNM concerning PNM's alleged failure to file rates for wholesale electricity sold in California and for allegedly charging unjust and unreasonable rates in the California markets.  The letter invited PNM to contact the California Attorney General's office before the complaint was filed, and PNM has met several times with representatives of the California Attorney General's office. Further discussions are contemplated.  To date, a lawsuit has not been filed by the California Attorney General and the Company cannot predict if a lawsuit will be filed or the outcome of any such lawsuit.

California Antitrust Litigation

Several class action lawsuits have been filed in California state courts against electric generators and marketers, alleging that the defendants violated the law by manipulating the market to grossly inflate electricity prices.  Named defendants in these lawsuits include Duke Energy Corporation ("Duke") and related entities along with other named sellers into the California market and numerous other "unidentified defendants."  Certain of these lawsuits were consolidated for hearing in state court in San Diego, California.  In May 2002, the Duke defendants served a cross-claim on PNM.  Duke also cross-claimed against many of the other sellers into California.  Duke asked for declaratory relief and for indemnification for any damages that might ultimately be imposed on Duke.  Several defendants removed the case to federal court in California.  The federal judge has entered an order remanding the matter to state court, but the effect of that ruling has been stayed pending appeal.  PNM has joined with other cross-defendants in motions to dismiss the cross-claim.  The Company believes it has meritorious defenses but cannot predict the outcome of this matter.

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Block Forward Agreement Litigation

In February 2002, PNM was served with a declaratory relief complaint filed by the State of California in California state court.  The state's declaratory relief complaint seeks a determination that the state is not liable for its commandeering of certain energy contracts known as "Block Forward Agreements".  The Block Forward Agreements were a form of futures contracts for the purchase of electricity at below-market prices and served as security for payment by PG&E and SCE for their electricity purchases through the Cal PX.  When PG&E and SCE defaulted on payment obligations incurred through the Cal PX, the Cal PX moved to liquidate the Block Forward Agreements to satisfy in part the obligations owed by PG&E and SCE.  Before the Cal PX could liquidate the Block Forward Agreements, California commandeered them for its own purposes.  In March 2001, PNM and other similarly situated sellers of electricity through the Cal PX filed claims for damages with the California Victims Compensation and Government Claims Board ("Victims Claims Board") on the theory that the state, by commandeering the Block Forward Agreements, had deprived them of security to which they were entitled under the terms of the Cal PX's tariff.  The Victims Claims Board denied PNM's claim in March 2002.  PNM filed a complaint against the State of California in California state court in September 2002, seeking damages for the state's commandeering of the Block Forward Agreements and requesting judicial coordination with the state's declaratory relief action filed in February 2002 on the basis that the two actions raise essentially the same issues.  The California state court judge delayed establishing a procedural schedule for the case pending a determination of the Cal PX's status in the litigation.  The judge has since held that the Cal PX could represent the interests of Cal PX participants in the litigation.  In March 2004, both the Cal PX and the State of California filed demurrers against each other's actions, alleging each other's actions failed to state a cause of action and that the issues raised in the other's case were identical to the issues raised in their own cases.  In a hearing held in April 2004, the judge determined not to rule on the demurrers until the specific market participants named in the declaratory action proceeding affirmatively determined whether they would agree to be bound by any judgment reached in the Cal PX complaint action.  As a result of the judge's order issued in May 2004, the various parties in the case were presented with a proposed stipulation under which the sellers would agree that the Cal PX would represent their interest in the proceedings, the sellers would agree to be bound by any judgment in the case, the sellers would dismiss their complaints against the State of California, and in turn, the State of California would dismiss its cross-complaints against the sellers, and the Cal PX would amend its complaint to indicate that it is bringing the lawsuit on behalf of the sellers.  The Company agreed with the stipulation and executed the stipulation agreement.  The Company cannot predict the outcome of the litigation involving the Cal PX and the State of California, or whether the Company will be awarded any damages as a result of the litigation.

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Wholesale Power Marketing Antitrust Suit

          On June 14, 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 ("Tacoma") 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.  There have been three recent Ninth Circuit decisions that, collectively, appear to make Plaintiffs' case more difficult to prevail.  The Company cannot predict the outcome of this litigation but intends to vigorously defend itself.

New Source Review Rules

In November 1999, the United States Department of Justice ("DOJ"), at the request of the United States Environmental Protection Agency ("EPA"), filed complaints against seven companies, alleging that the companies over the past 25 years had made modifications to their plants in violation of the New Source Review ("NSR") requirements and in some cases the New Source Performance Standard ("NSPS") regulations, which could result in the requirement to make costly environmental additions to older power plants. Whether or not the EPA will ultimately prevail is uncertain at this time.  In August 2003, in one of the pending enforcement cases against Ohio Edison Company, a federal district judge in Ohio ruled in favor of the EPA and against Ohio Edison.  The judge accepted the legal theories advanced by the government and in particular found that eleven construction projects undertaken by the utility in that case between 1984 and 1998 were "modifications" of the plants within the meaning of the Clean Air Act, not "routine maintenance, repair or replacement" ("RMRR").  By contrast, in a separate federal district court proceeding against Duke, the court has made certain rulings in summary judgment motions that appeared to potentially validate elements of the industry position.  If the EPA prevails in the position advanced in the pending litigation, PNM may be required to make significant capital expenditures, which could have a material adverse effect on the Company's financial position and results of operations.

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PNM RESOURCES, INC. AND SUBSIDIARIES
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No complaint has been filed against PNM by the EPA, and the Company believes that all of the routine maintenance, repair, and replacement work undertaken at its power plants was and continues to be in accordance with the requirements of NSR and NSPS.  However, in October 2000, the New Mexico Environmental Department ("NMED") made an information request of PNM, advising PNM that the NMED was in the process of assisting the EPA in the EPA's nationwide effort "of verifying that changes made at the country's utilities have not inadvertently triggered a modification under the Clean Air Act's Prevention of Significant Deterioration ("PSD") policies."  PNM has responded to the NMED information request.  In lateJune 2002, PNM received another information request from the NMED for a list of capital projects budgeted or completed in 2001 or 2002.  PNM has responded to the additional NMED information request.

In December 2002, the EPA promulgated certain long-awaited revisions to the NSR rules, along with proposals to revise the RMRR exclusion contained in the regulations.  In August 2003, the EPA issued its rule regarding RMRR, clarifying what constitutes RMRR of damaged or worn equipment, subject to safeguards to assure consistency with the Clean Air Act.  It provides that replacements of equipment are routine only if the new equipment is (i) identical or functionally equivalent to the equipment being replaced; (ii) does not cost more than 20% of the replacement value of the unit of which the equipment is a part; (iii) does not change the basic design parameters of the unit; and (iv) does not cause the unit to exceed any of its permitted emissions limits.  Legal challenges to the RMRR rule have been filed by several states; other states have intervened in support of the rule. How such challenges will ultimately be resolved cannot be predicted but an appellate court order has stayed the effect of the RMRR rule pending the outcome of the litigation.  The Company is unable to determine the impact of this matter.

Citizen Suit Under the Clean Air Act

Following required notification, the Grand Canyon Trust and the Sierra Club (collectively "GCT") filed a so-called "citizen suit" in federal district court in New Mexico against PNM (but not against the other SJGS co-owners) in May 2002.  The suit alleged two violations of the Clean Air Act and related regulations and permits.  First, GCT argued that the plant has violated, and is currently in violation of, the federal PSD rules, as well as the corresponding provisions of the New Mexico Administrative Code, at SJGS Units 3 and 4.  Second, GCT alleged that the plant has "regularly violated" the 20% opacity limit contained in SJGS's operating permit and set forth in federal and state regulations at Units 1, 3 and 4.  The lawsuit seeks penalties as well as injunctive and declaratory relief.  PNM denied the material allegations in the complaint.

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PNM RESOURCES, INC. AND SUBSIDIARIES
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Both sides in the litigation filed motions for partial summary judgment and the court entered an order granting PNM's motion for summary judgment on the PSD issues, dismissing that portion of the case against PNM.  A trial on certain preliminary liability issues on the opacity claims was held in November 2003.  At this trial, the plaintiffs presented their case and PNM presented certain defenses, including that the measurement methods relied on by GCT are contradicted by other measurement methods or by other qualified scientific data.  On February 2, 2004 the court entered a Memorandum Opinion on PNM's general defenses.  The Memorandum Opinion rejected PNM's arguments concerning the proper method for determining opacity compliance, but allowed PNM to present evidence in the next part of the liability trial addressing and defending against liability for specific alleged opacity violations.  A status conference was held on March 5, 2004.  Pursuant to court order, PNM submitted a settlement offer to plaintiffs on May 28, 2004 to which the plaintiffs responded on June 11, 2004.  A settlement conference mediated by a federal magistrate judge was held on July 1, 2004 but did not result in settlement.  A further settlement conference will likely take place in November 2004. At the direction of the court, the parties conferred about streamlining the next phase of the trial.  The parties agreed to a stipulation which was adopted by the court on May 26, 2004.  Under the terms of the stipulation, the parties agreed to forego a subsequent liability phase of trial on approximately 42,000 opacity exceedances which were therefore found to be violations.  Of those 42,000 violations, approximately 30,000 are attributed to condensed water vapor. The litigation will now proceed to the remedy phase where the Company will present its case that the violations were not of such a nature as to require large penalties or injunctive relief.  The Company is unable to predict the ultimate outcome of the matter.

On April 29, 2004, the Company received notice from GCT of intent to file another suit against SJGS for violations of the Clean Air Act and related regulations and permits.  The notice alleges continuing violations of the opacity limit in the operating permit since May 16, 2002, the date of filing the original suit and the last day allowed by the New Mexico federal court for determining violations in the original suit.   In addition the notice alleges failure to operate consistent with good air pollution control practices by burning coal with ash content in excess of boiler and emission control equipment design capacity and operating SJGS as a "load following" facility when it was designed as a "base load" power plant.  Further, the notice alleges continuing violations for failure to submit true, accurate and complete compliance certifications since at least 1998 by not disclosing opacity and particulate matter violations.  The notice alleges that PNM claimed water vapor as the cause of many violations of the opacity limit when it had no evidence to support the claim and that its Excess Emission Forms and quarterly reports for the last five years also assert excuses for opacity violations that are invalid.  Finally, the notice alleges that PNM has not timely filed Excess Emission Forms for many deviations.  The Company believes that it has meritorious defenses and will vigorously dispute the allegations.  The Company cannot predict the ultimate outcome of the matter.

On September 27, 2004, the Federal Magistrate issued an order granting a joint motion filed by all the parties seeking a sixty-day stay of all proceedings in the litigation to facilitate ongoing settlement discussions among the litigants and the NMED to resolve the litigation, threatened litigation and the excess emissions violations alleged by NMED.

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PNM RESOURCES, INC. AND SUBSIDIARIES
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Archeological Site Disturbance

The Company hired Great Southwestern Construction, Inc. ("Great Southwestern") to conduct certain "climb and tighten" activities on a number of electric transmission lines in New Mexico between July 2001 and December 2001.  Those lines traverse a combination of federal, state, tribal and private properties in New Mexico.  In late May 2002, the United States Forest Service ("USFS") notified PNM that apparent disturbances to archeological sites had been discovered in and around the rights-of-way for PNM's transmission lines in the Carson National Forest in New Mexico.  Great Southwestern had performed "climb and tighten" activities on those transmission lines. 

PNM confirmed the existence of the disturbances, as well as disturbances associated with certain arroyos that may raise issues under section 404 of the Clean Water Act.  PNM contracted for an archeological assessment and a proposed remediation plan with respect to the disturbances and has provided the assessment to the USFS and the federal Bureau of Land Management ("BLM").  The Santa Fe National Forest issued a notice of non-compliance to PNM for alleged non-compliance with the terms and conditions of PNM's special use authorization relating to maintenance of PNM's power lines on USFS land. 

By letter dated March 22, 2004, the Navajo Nation Historic Preservation Department ("NNHPD") indicated that it would not pursue either criminal or civil damages under the Archeological Resources Protection Act and proposed a stipulation to address disturbances on Navajo Nation Land.  PNM and Great Southwestern entered into a letter agreement, dated June 7, 2004, with the NNHPD for a survey of potential impacts on Navajo Nation land.  If disturbed cultural resources are encountered, appropriate treatment plans will be implemented.  Under the terms of the June 7, 2004 letter agreement, the NNHPD agreed to release all claims against PNM and Great Southwestern for any impacts on Navajo Nation land arising from the "climb and tighten" project.  The Company is unable to predict the outcome of this matter and cannot predict the potential impact on the Company's operations.

Excess Emissions Reports

As required by law, whenever there are excess emissions from SJGS, due to such causes as start-up, shutdown, upset, breakdown or certain other conditions, PNM makes filings with the NMED.  For three years, PNM has been in discussions with NMED concerning excess emissions reports for the period after January 1997.  PNM and NMED have entered into several agreements tolling the running of the statute of limitations in order to allow NMED to complete its review of these filings.  The present tolling agreement expired October 1, 2004.  By letter dated September 12, 2003, the NMED advised PNM that it would not excuse certain of the emissions exceeding the operating permit, that PNM had violated the opacity limits in the operating permit and set out a construction of the standards that NMED would apply in evaluating opacity exceedances.  PNM and NMED have entered into discussions concerning these matters and a draft compliance order.  PNM has responded to a number of requests by the NMED for additional information.  The compliance order has not been finalized and no proceeding against PNM has yet been commenced by NMED.  PNM disagrees with NMED's construction of its operating permit, which is a construction never previously advanced by NMED.  PNM has entered into settlement discussions with NMED to resolve the matter.  The talks include plaintiffs discussed in the "Citizen Suit Under the Clean Air Act" litigation, in an attempt to reach full agreement on resolving outstanding issues regarding emissions at SJGS.  PNM is unable to predict the outcome of this matter and cannot estimate the potential impact on the Company's operations.

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Santa Fe Generating Station

PNM and the NMED conducted investigations of gasoline and chlorinated solvent groundwater contamination detected beneath PNM's former Santa Fe Generating Station ("Santa Fe Station") site to determine the source of the contamination pursuant to a 1992 Settlement Agreement ("Settlement Agreement") between PNM and the NMED.

PNM is of the opinion that the data compiled indicates observed groundwater contamination originated from off-site sources.  However, in August 2003, PNM elected to enter into a fifth amendment to the Settlement Agreement with the NMED to avoid a prolonged legal dispute whereby PNM agreed to install additional remediation facilities consisting of an additional extraction well and two additional monitoring wells to address remaining gasoline contamination in the groundwater at and in the vicinity of the site.  PNM will continue to operate the remediation facilities until the groundwater is cleaned up to applicable federal standards or until such time as the NMED determines that additional remediation is not required, whichever is earlier.  The City of Santa Fe, the NMED and PNM entered into an amended Memorandum of Understanding relating to the continued operation of the Santa Fe Well and the remediation facilities called for under the latest Amended Settlement Agreement.

In September 2003, PNM was verbally informed that the Superfund Oversight Section of the NMED is conducting an investigation into the chlorinated solvent contamination at the former Santa Fe Station site, including other possible sources for the chlorinated solvents in the groundwater.

Natural Gas Royalties Qui Tam Litigation

        In 1999, a complaint was served on the Company alleging violations of the False Claims Act by PNM and its subsidiaries, Gathering Company and Processing Company (collectively, the "Company" for purposes of this discussion), by purportedly failing to properly measure natural gas from Federal and tribal properties in New Mexico, and consequently, underpaying royalties owed to the Federal government.  A private relator is pursuing the lawsuit.  The complaint was served after the DOJ declined to intervene to pursue the lawsuit. The complaint seeks actual damages, treble damages, costs and attorneys fees, among other relief.

Currently the parties are engaged in discovery on the issue of whether the relator meets the requirements for bringing a claim under the False Claims Act.  The Company expects to participate with other defendants in a motion to dismiss on the ground that the relator does not meet those requirements.  The Company is vigorously defending this lawsuit and is unable to estimate the potential liability, if any, or to predict the ultimate outcome of this lawsuit.

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PNM RESOURCES, INC. AND SUBSIDIARIES
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Asbestos Cases

The Company was named in 2003 as one of a number of defendants in 21 personal injury lawsuits relating to alleged exposure to asbestos.  All of these cases involve claims of individuals, or their descendents, who worked for contractors building, or working at, Company power plants.  Some of the claims relate to construction activities during the 1950's and 1960's, while other claims generally allege exposure during the last 30 years. The Company has never manufactured, sold or distributed products containing asbestos.   All but three of the cases against PNM have been resolved and dismissed.  The Company was insured by a number of different insurance policies during the time period at issue in these cases.  The Company intends to vigorously defend against the remaining lawsuits.  Although the Company is unable to fully predict the outcome of this litigation, the Company believes that these legal proceedings will not have a material impact on the financial condition of the Company.

San Angelo Electric Service Company ("SESCO") Matter

In October 2003, the Texas Commission on Environmental Quality ("TCEQ") requested information from PNM concerning any involvement that PNM had with the SESCO of San Angelo, Texas.  PNM is informed that the TCEQ is conducting a site investigation of a SESCO facility in San Angelo, Texas pursuant to the Texas Solid Waste Act and that the SESCO site has been referred to the Superfund Site Discovery and Assessment Program.  The primary concern appears to be polychlorinated biphenyls ("PCBs").  The TCEQ is conducting the site investigation to determine what remediation activities are required at the SESCO site and to identify potentially responsible parties ("PRPs").  In January 2004, PNM submitted its preliminary response to the TCEQ request for information.  The response states that PNM previously had a "requirements" contract with SESCO for the repair of electric transformers.  It appears that a number of transformers were sent to SESCO for repair.  In addition, it appears that PNM sold a number of retired transformers to SESCO.  An informational meeting took place in Austin, Texas on April 8, 2004 where the status of the SESCO site and the possible establishment of a PRP Committee was discussed.  PNM is still investigating its role in the matter, and is unable to predict the outcome at this time.

Public Utility Holding Company Act of 1935

Since its formation as a holding company, the Holding Company has claimed the intrastate exemption from registration under PUHCA, including its most recent filing in February 2004.  As the Holding Company disclosed in its most recent Annual Report on Form 10-K, an order issued by the United States Securities and Exchange Commission ("SEC") late last year denied the exemption to Enron based on the interstate activities of its utility subsidiary, Portland General Electric.  This order called into question the continuing availability of the intrastate exemption for companies with a certain level of interstate utility activities.  In discussions with the Office of Public Utility Regulation of the SEC regarding its filing earlier this year, the Holding Company was informed that the SEC views the existing interstate activities of PNM to be significant enough to require registration based on the Enron decision.  The Company is preparing to register, seeking the appropriate authorizations under PUHCA coincident with registration.  In September 2004, the Company filed an application with the SEC for financing and services authorization.  This process will likely take several months and the Company expects completion near year end.  The Company intends to maintain its current claim of exemption in the interim.  Other than some reorganizing of its corporate service functions the Company does not anticipate that registration will affect its operations.  One utility subsidiary of a registered holding company successfully operates in New Mexico subject to the regulatory requirements of both PUHCA and the PRC.  The regulatory conditions imposed upon the formation of the Holding Company are equivalent to those imposed by the PRC on utilities of registered companies.

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PNM RESOURCES, INC. AND SUBSIDIARIES
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In June 2004, the New Mexico Attorney General ("Attorney General") filed a petition for Investigation with the PRC seeking an investigation into the circumstances involving PNM that led to the decision of the SEC Staff to require the Holding Company to become a registered holding company.  The Attorney General sought to determine the impact of registration on PNM and its customers and whether any of the conditions in the order authorizing the formation of the holding company need to be changed or the order otherwise reconsidered.  In previous correspondence with the PRC, PNM suggested that this issue be placed as an item on the PRC's working session agenda so that PNM could provide further explanations and information as needed.  PNM filed a response to the Attorney General's petition in which PNM indicated that the PRC's jurisdiction over PNM will not be diminished as a result of the Holding Company's registration as a holding company under PUHCA, and that previous conditions placed on PNM will continue to apply.  PNM expressed its willingness to respond to any questions or issues surrounding the Holding Company's registration under PUHCA, and expressed its belief that this could best be done in a collaborative process, once again offering to make a presentation at one of the PRC's working sessions to address any questions or concerns.  In August 2004, the Company made a presentation at the PRC's public working session addressing the issues and concerns identified in the Attorney General's petition.  The PRC subsequently voted to deny the Attorney General's petition, but requested that PNM continue its collaborative efforts to address any questions or issues raised by the various parties in the case.  PNM is continuing to work with the parties to address any lingering concerns they may have.

Coal Combustion Waste Disposal

SJCC currently disposes of fly ash from SJGS in the surface mine pits adjacent to the plant.  PNM and SJCC have been participating in various sessions sponsored by EPA to consider rulemaking for the disposal of coal combustion products, including disposal of fly ash from SJGS. The rulemaking would be pursuant to the Bevill Amendment of the Resource Conservation and Recovery Act.  Pursuant to that Act, the EPA has also listed SJGS as a potential damage case for review within the rulemaking process due to claims by third parties that the plant and mine have contaminated water resources in the region. PNM and SJCC vigorously deny these allegations.  The EPA apparently is in the process of investigating the claims.  PNM cannot predict the outcome of this matter but does not believe currently that it will have a material adverse impact on the Company or its operations.

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PNM RESOURCES, INC. AND SUBSIDIARIES
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(Unaudited)

Other

There are various claims and lawsuits pending against the Company.  The Company is also subject to federal, state and local environmental laws and regulations, and is currently participating in the investigation and remediation of numerous sites.  In addition, the Company periodically enters into financial commitments in connection with its business operations.  It is not possible at this time for the Company to determine fully the effect of all litigation and other legal proceedings on its consolidated financial statements.  However, the Company has recorded a liability where the litigation effects can be estimated and where an outcome is considered probable.  The Company does not expect that any known lawsuits, environmental costs and commitments will have a material adverse effect on its financial condition or results of operations, although the outcome of litigation, investigations and other legal proceedings is inherently uncertain.

          The Company is involved in various legal proceedings in the normal course of its business.  The associated legal costs for these legal matters are accrued when incurred.  It is also the Company's policy to accrue for legal costs expected to be incurred in connection with Statement of Financial Accounting Standards No. 5 "Accounting for Contingencies" ("SFAS 5") legal matters when it is probable that a SFAS 5 liability has been incurred and the amount of expected legal costs to be incurred is reasonably estimable.  These estimates include costs for external counsel professional fees.

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Risks and Uncertainties

The Company's future results may be affected by various factors outside of its control, including:  changes in regional economic conditions; the outcome of labor negotiations with unionized employees; fluctuations in fuel, purchased power and gas prices; the actions of utility regulatory commissions; changes in law and environmental regulations; the success of its planned generation expansion; the cost and outcome of litigation and other legal proceedings and investigations; the performance of generation facilities and transmission systems; changes in accounting rules and standards; and external factors such as weather and water supply; and risks and uncertainties associated with the Holding Company's pending acquisition of TNP Enterprises, Inc. ("TNP"), such as risks and uncertainties relating to the receipt of regulatory approvals for the proposed acquisition, the risks that the businesses will not be integrated successfully, the risk that the benefits of the transaction will not be fully realized or will take longer to realize than expected, disruption from the transaction making it more difficult to maintain relationships with customers, employees, suppliers or other third parties, and conditions in the financial markets relevant to the proposed acquisition.  Because of pending federal regulatory reforms, the public utility industry is undergoing a fundamental change.  New Mexico has repealed the Electric Utility Industry Restructuring Act of 1999 and therefore has 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" ("SMD") 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, because of concern that the SMD 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 an attempt to ease concerns with its SMD proposal, on April 28, 2003, the FERC issued a White Paper defining a "Wholesale Power Market Platform" which would replace the SMD.  Both the SMD and Wholesale 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.  In addition, the Company is subject to a 2.5% retail electric rate reduction effective September 2005 and a retail electric rate freeze through 2007 so that the Company's financial results will depend on its ability to control costs and increase revenues, and the implications of uncontrollable factors such as weather, water supply, litigation, economic conditions and the other factors described above.

(8)     Other Income and Deductions

          The following table details the components of other income and deductions for PNM Resources, Inc. and Subsidiaries:

 

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PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table details the components of other income and deductions for PNM and Subsidiaries:

(9)     Variable Interest Entities

          FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (Revised December 2003) ("FIN 46R") became effective January 1, 2004 for those entities considered to be special purpose entities, and March 31, 2004 for others.  FIN 46R expands the requirement of a business enterprise to consolidate an entity beyond the concept of a controlling interest.  Under FIN 46R, a business enterprise will consolidate an entity if that entity is a variable interest entity, the business enterprise is the primary beneficiary of the entity and the entity's risks are not effectively dispersed among all parties involved.  A variable interest entity has certain characteristics that effectively demonstrate that the equity investor does not have economic substance, bear the risks and receive the rewards of the entity or direct the entity's activities.  The interpretation requires that an enterprise review its variable interests and determine if consolidation is appropriate.

           Under the model for consolidation promulgated by FIN 46R, a power purchase agreement ("PPA") may qualify as a variable interest if its terms expose the purchaser to variability in supply or operating costs and the contract is for a significant portion of the entity's generating capacity.  The Company evaluated its PPAs under the provisions of FIN 46R and determined that one purchase contract entered into prior to December 31, 2003 qualifies as a variable interest.  The Company was unable to obtain the necessary information to determine if the Company was the primary beneficiary if consolidation was necessary despite efforts including a formal written request to the operator of the entity supplying power under the PPA.  The operator cited legal and competitive reasons for refusing to provide the information. 

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PNM RESOURCES, INC. AND SUBSIDIARIES
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           This variable interest PPA is a contract to purchase 132 MW of capacity and energy for 25 years expiring in June 2020.  The contract contains a fixed capacity charge and operations and maintenance ("O&M") charge and a variable energy charge that subjects the Company to the changes in the cost of fuel and O&M.  For the nine months ended September 30, 2004, the capacity and O&M charge was $4.4 million and the energy charges were $0.8 million.  For the nine months ended September 30, 2003, the capacity and O&M charge was $4.2 million and the energy charges were $1.0 million.  The contract is for the full output of a specific gas generating plant and is currently accounted for as an operating lease by the Company.  Under this contract the Company is exposed to changes in the costs to produce energy and operate the plant. 

           The Company also has interests in other variable interest entities created before January 31, 2003, for which the Company is not the primary beneficiary.  These arrangements include the Holding Company's investment in a limited partnership and certain PNM leases.  The aggregate maximum loss exposure at September 30, 2004, that the Company could be required to record in its income statement as a result of these arrangements totals approximately $6.0 million.  The creditors of these variable interest entities do not have recourse to the general credit of the Company in excess of the aggregate maximum loss exposure.

(10)   Proposed TNP Acquisition

On July 24, 2004, the Holding Company executed a definitive agreement to acquire all the outstanding common shares of TNP for approximately $189.0 million, comprised of equal amounts of the Holding Company's common stock and cash. Under the agreement, approximately $835.0 million of TNP's net debt and senior redeemable cumulative preferred stock is retained.  However, the Holding Company has developed plans to refinance these obligations at lower costs.

TNP is a privately owned holding company for Texas-New Mexico Power Company ("TNMP") and First Choice Power ("First Choice").  TNMP provides electric service to 85 cities and more than 252,000 customers in Texas and New Mexico. Its affiliate, First Choice, is a retail electric provider with more than 230,000 customers in Texas.

The combined company is expected to have consolidated 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, the Holding Company will also serve customers in communities throughout the Electric Reliability Council of Texas ("ERCOT") region.

Under the terms of the agreement, TNP's common shareholders will receive approximately $189 million in consideration, consisting of approximately 4.7 million newly issued Holding Company common shares and the remainder being paid in cash, subject to closing adjustments. The existing indebtedness and preferred securities at TNP will be retired. 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 approximately 6%.

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PNM RESOURCES, INC. AND SUBSIDIARIES
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In order to fund the acquisition and to deleverage TNP, the Holding Company expects to issue approximately $250.0 million of common equity, approximately $200.0 million of equity linked securities, and approximately $100.0 million of long-term debt.  Of the total of $450.0 million of common equity and equity linked securities, approximately $95.0 million of common stock will be issued to TNP's shareholders, and the Holding Company has executed a Unit Purchase Agreement (the "Agreement") with an existing shareholder, Cascade Investment LLC ("Cascade"), to purchase $100.0 million in equity linked securities. The remainder of the financing will be placed in the public markets at or near closing.

In September 2004, the Board of Directors of the Holding Company 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.  Shareholder approval is not a condition of the acquisition transaction.

On September 9, 2004, the Holding Company and TNMP filed joint applications with the PRC and the Public Utility Commission of Texas ("PUCT").  The application filed with the PRC seeks approval of the acquisition of the stock of TNP by the Holding Company pursuant to the New Mexico Public Utility Act.  The application filed with the PUCT seeks a determination that the acquisition is in the public interest pursuant to the Texas Public Utility Regulatory Act.  A Hearing Examiner has been assigned by the PRC and an initial prehearing conference was conducted on October 6, 2004.  The Hearing Examiner has scheduled hearings to commence on March 28, 2005, regarding the merits of the joint application.  The PUCT has referred the case to the Texas State Office of Administrative Hearings which has assigned an ALJ.  The ALJ conducted an initial prehearing conference on October 4, 2004.  The ALJ has scheduled hearings on January 26-28, 2005, regarding the merits of the joint application.  The PUCT has ruled that the case does not constitute a rate case under Texas law.

The transaction is subject to customary closing conditions and regulatory approvals, including the PRC, the PUCT, the SEC under the PUHCA, the FERC, and antitrust review under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.  No shareholder approval is required for the acquisition.  The Holding Company believes at this time that all conditions precedent to closing, including final resolution of regulatory proceedings, can be met so that closing can occur in the second quarter of 2005.

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

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(Unaudited)

(11)   Subsequent Events

Forward Starting Swaps

The Holding Company will issue $100.0 million of debt associated with the acquisition of TNP Enterprises.  The Holding Company entered into two forward starting floating to fixed rate interest rate swaps on October 19, 2004 that become effective August 1, 2005 and terminate November 15, 2009.  The hedged risk associated with these instruments is the changes in cash flows related to the benchmark interest rate.  The Holding Company will pay a 3.97% fixed quarterly rate plus a credit spread of 1.00% and receive three month LIBOR reset quarterly each August 1, November 1, February 1 and May 1.  This hedge allows the Holding Company to lock the interest rate on this component of the TNP financing plan at 4.97% for five years, assuming a closing date for the transaction no later than August 1, 2005.

(Intentionally left blank)