**EXHIBIT
      10.4**





August
                30, 2007
            [PNM
                Resources logo]




**PRIVILEGED
      AND CONFIDENTIAL**




Mr.
      Jeffry E. Sterba


Chief
      Executive Officer


PNM
      Resources, Inc.


Alvarado
      Square, MS 2824


Albuquerque,
      NM  87158




Re:           Retention
      Bonus Agreement (the “Agreement”)




Dear
      Jeff:




As
      you
      are aware, we previously entered into a Retention Bonus Agreement with you
      effective as of October 31, 2003.  With this letter, we are offering
      to amend and restate the Agreement in its entirety, effective as of
      January 1, 2007, except as set forth below.




The
      incentive bonus (the “Retention Bonus”) is designed to encourage you to remain a
      part of the PNM Resources, Inc. (the “Company”) for many years to
      come.  The Retention Bonus has the following terms and
      conditions:




1.           **Amount
      of Bonus**




The
      amount of the Retention Bonus will be the sum of $1,600,000.  The
      Retention Bonus will be paid out of the Company’s general assets.  It
      will not be held in trust or in a separate account.  You will not
      receive any interest on this amount.




2.           **Conditions**




You
      will
      be eligible to receive the Retention Bonus if you continuously work for the
      Company as Chief Executive Officer (“CEO”) from the date of this Agreement until
      March 1, 2010, or upon your death or “Disability,” if earlier.




3.           **Early
      Termination**




Although
      your continuous employment is a condition that must be satisfied in order to
      receive the Retention Bonus, the Company also must reserve the right to
      terminate your employment or alter your responsibilities at any time and for
      any
      or no reason, subject to any other contractual commitments of the Company to
      you.  With that in mind, we have decided to provide you with the
      Retention Bonus even if, prior to March 1, 2010, you are terminated by the
      Company without “Cause” or if you terminate under circumstances that constitute
“Constructive Termination.”







Jeffry
      E.
      Sterba


August
      30, 2007


Page
      2






4.           **Definitions**




The
      terms
“Cause,” “Constructive Termination” and “Disability” have the meanings set forth
      in the PNM Resources, Inc. Officer Retention Plan, as amended from time to
      time.  Effective as of January 1, 2008, however, “Constructive
      Termination” means a termination of employment within two years following the
      occurrence of one or more of the following circumstances without your express
      consent:




(a)           a
      material diminution in your base compensation;




(b)           a
      material diminution in your authority, duties or responsibilities;




(c)           a
      material change in the geographic location of your principal office;
      or




(d)           any
      other action or inaction that constitutes a material breach by the Company
      of
      this Agreement.




You
      must
      provide written notice to the Company of the existence of the Constructive
      Termination condition described in paragraphs (a)-(d) above within 90 days
      of
      the initial existence of the condition.




Notwithstanding
      anything to the contrary, an event described in paragraphs (a)-(d) above will
      not constitute Constructive Termination if, within 30 days after you give the
      Company notice of the occurrence or existence of an event that you believe
      constitutes Constructive Termination, the Company has fully corrected such
      event.




5.           **Payment
      of Bonus**




If
      you
      are employed by the Company on March 1, 2010, payment of the Retention
      Bonus will be made to you in two equal installments.  The first
      installment will be paid to you on March 1, 2010.  The second
      installment will be paid to you on March 1, 2011.  If you terminate
      employment prior to December 31, 2007 due to death, Disability, termination
      without Cause or Constructive Termination, the Retention Bonus will be paid
      to
      you in accordance with the terms of the Agreement as in effect prior to this
      amendment and restatement.  If you terminate employment after December
      31, 2007 and prior to March 1, 2010 due to death, Disability, termination
      without Cause or Constructive Termination, the Retention Bonus will be paid
      to
      you within thirty (30) days of your termination and in no event later than
      two
      and one-half (21⁄2) months following the end of the calendar year in which your
      termination of employment occurs.









Jeffry
        E.
        Sterba
 August
        30, 2007
 Page
        3




6.           **Beneficiary
      Designation**




In
      the
      event of your death, payment of the Retention Bonus (or the remaining
      installment if the first installment has been paid) will be made to your
      estate.  If you prefer, you may designate a beneficiary to receive the
      Retention Bonus.  The designation must be signed, notarized and
      delivered to the Company prior to your death.




You
      may
      also change a beneficiary designation.  To do so, simply follow the
      same procedures for submitting the initial designation.




7.           **Applicable
      Law**




The
      laws
      of the state of New Mexico shall govern the validity, interpretation,
      construction and performance of this Agreement.




8.           **Arbitration**




Any
      controversy or claim arising out of or relating to this Agreement shall be
      settled by mediation, and if mediation is unsuccessful binding arbitration,
      by a
      single mediator or arbitrator conducted in accordance with the then current
      rules of the American Arbitration Association, strictly in accordance with
      the
      terms of this Agreement and the substantive law of the State of New
      Mexico.  The mediation and arbitration shall be held at a time and
      place agreed to by you and the Company, or at a time and place determined by
      the
      mediator or arbitrator in the absence of an agreement.  The judgment
      and award rendered by the arbitrator may be entered and enforced in any court
      of
      competent jurisdiction.




9.           **Modification**




No
      provision of this Retention Bonus Agreement may be modified or amended unless
      agreed to in writing by both parties.




10.           **Successors**




The
      Company will require any successor (whether direct or indirect, by purchase,
      merger, consolidation or otherwise) to all or substantially all of the business
      and/or assets of the Company to expressly assume and agree to perform this
      Agreement in the same manner and to the same extent that the Company would
      be
      required to perform it if no succession had taken place.  Failure of
      the Company to obtain such assumption and agreement prior to the effective
      date
      of any such succession shall be a material breach of this
      Agreement.









Jeffry
        E.
        Sterba
 August
        30, 2007
 Page
        4






11.           **Compliance
      with Section 409A**




(a)           **Payment
      Delay**.  Pursuant to Treas. Reg. § 1.409A-3(d), if
      the Company fails to make a payment due pursuant to Section 5, either
      intentionally or unintentionally, within the time period specified above, but
      the payment is made within the same calendar year, such payment will be treated
      as made within the time period specified above.  In addition, if a
      payment is not made due to a dispute with respect to such payment, the payment
      may be delayed in accordance with Treas. Reg. § 1.409A-3(g).




(b)           **Ban
      on Acceleration or Deferral**.  Under no circumstances may
      the time or schedule of any payment made or benefit provided pursuant to this
      Agreement be accelerated or subject to a further deferral except as otherwise
      permitted or required pursuant to regulations and other guidance issued pursuant
      to Section 409A of the Code.




(c)           **No
      Elections**.  You do not have any right to make any
      election regarding the time or form of any payment due under this
      Agreement.




(d)           **Compliant
      Operation and Interpretation**.  This Agreement shall be
      operated in compliance with Section 409A and each provision of this
      Agreement shall be interpreted, to the extent possible, to comply with
      Section 409A.




If
      you
      are in agreement with these terms, please so indicate by signing and returning
      to me the enclosed copy of this letter, which will constitute our binding
      agreement.




Very
      truly yours,




PNM
      RESOURCES, INC.




By: /s/
      Bonnie S.
      Reitz


Bonnie S.
      Reitz, Chair of the Human Resources


and
      Compensation Committee




Agreed:




/s/
      Jeffry E.
      Sterba                                                      September 7,
      2007


Jeffry E.
      Sterba                                                                                                           
Date