UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ----------------------

                                    FORM 10-K

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

For the Fiscal Year Ended December 31, 1997      Commission File Number 1-6986



                   New Mexico                                   85-0019030
         (State or other jurisdiction of                     (I.R.S. Employer
         incorporation or organization)                     Identification No.)

                 Alvarado Square                                   87158
             Albuquerque, New Mexico                            (Zip Code)
    (Address of principal executive offices)

       Registrant's telephone number, including area code: (505) 241-2700

           Securities registered pursuant to Section 12(b) of the Act:


         Title of each class          Name of each exchange on which registered
         -------------------          -----------------------------------------

    Common Stock, $5.00 Par Value             New York Stock Exchange

           Securities registered pursuant to Section 12(g) of the Act:

                                (Title of Class)
                                ----------------

  1965 Series, 4.58% Cumulative Preferred Stock ($100 stated value and without
                                 sinking fund)

   Indicate  by check mark  whether  the  registrant  (1) has 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 and (2) has been  subject to such  filing
requirements for the past 90 days. YES x/ NO

   Indicate by check mark if disclosure of  delinquent  filers  pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |

   The total number of shares of the Company's  Common Stock  outstanding  as of
January 31, 1997 was 41,774,083. On such date, the aggregate market value of the
voting stock held by non-affiliates of the Company,  as computed by reference to
the New York Stock Exchange  composite  transaction closing price of $22 5/8 per
share reported by the Wall Street Journal, was $945,138,628.

                       DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the following  document are  incorporated  by reference  into the
indicated part of this report:

      Proxy  Statement to be filed with the Securities  and Exchange  Commission
      pursuant to Regulation 14A relating to the annual meeting of  stockholders
      to be held on April 28, 1998--PART III.
<PAGE>
================================================================================


                                TABLE OF CONTENTS

                                                                           Page
                                                                           ----
GLOSSARY...............................................................     iv

                                     PART I
ITEM 1. BUSINESS.......................................................      1
          THE COMPANY..................................................      1
          ELECTRIC OPERATIONS..........................................      1
            Service Area and Customers.................................      1
            Power Sales................................................      2
            Sources of Power...........................................      3
            Fuel and Water Supply......................................      4
          NATURAL GAS OPERATIONS
            Service Area and Customers.................................      7
            Natural Gas Supply.........................................      8
            Natural Gas Sales..........................................      9
          ENERGY SERVICES BUSINESS UNIT OPERATIONS.....................     10
          RATES AND REGULATION.........................................     10
            Gas Rates and Regulation...................................     10
            Electric Rates and Regulation -NMPUC.......................     12
            Electric Rates and Regulation-FERC.........................     13
            Proposed Rulemakings.......................................     15
            PRC .......................................................     15
          ENVIRONMENTAL FACTORS........................................     16

ITEM  2. PROPERTIES....................................................     17
           ELECTRIC....................................................     17
             Fossil-Fueled Plants......................................     18
             Nuclear Plant.............................................     18
             Other Electric Properties.................................     21
            NATURAL GAS................................................     21
            OTHER INFORMATION..........................................     21

ITEM  3. LEGAL PROCEEDINGS.............................................     21
           PVNGS WATER SUPPLY LITIGATION...............................     21
           SAN JUAN RIVER ADJUDICATION.................................     22
           OTHER PROCEEDINGS...........................................     22
             Republic Savings Bank ("RSB") Litigation..................     22
             Four Corners..............................................     23

ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........     23

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY...................     24

                                       ii
<PAGE>


                                     PART II

ITEM  5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
           STOCKHOLDER MATTERS........................................      26

ITEM  6. SELECTED FINANCIAL DATA......................................      27

ITEM  7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS........................      28

ITEM  8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................     F-1

ITEM  9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
           ACCOUNTING AND FINANCIAL DISCLOSURE........................     E-1

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY..............     E-1

ITEM 11. EXECUTIVE COMPENSATION.......................................     E-1

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
           MANAGEMENT.................................................     E-1

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............     E-1

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
           ON FORM 8-K................................................     E-1

SIGNATURES............................................................    E-21



                                       iii
<PAGE>


                                  GLOSSARY


AG................................   New Mexico Attorney General
Anaheim...........................   City of Anaheim, California
APPA..............................   Arizona Power Pooling Association
APS...............................   Arizona Public Service Company
BHP...............................   BHP Minerals International, Inc.
BLM...............................   Bureau of Land Management
BTU...............................   British Thermal Unit
decatherm.........................   1,000,000 BTUs
DOE...............................   United States Department of Energy
EIP...............................   Eastern Interconnection Project
El Paso...........................   El Paso Electric Company
EPA...............................   United States Environmental Protection
                                       Agency
EPNG..............................   El Paso Natural Gas Company
FASB..............................   Financial Accounting Standards Board
Farmington........................   City of Farmington, New Mexico
FERC..............................   Federal Energy Regulatory Commission
Four Corners......................   Four Corners Power Plant
FPPCAC............................   Fuel and Purchased Power Cost 
                                       Adjustment Clause
Gathering Company.................   Sunterra Gas Gathering Company, a
                                       wholly-owned  subsidiary  of the
                                       Company
Kv................................   Kilovolt
KW................................   Kilowatt
KWh...............................   Kilowatt Hour
Los Alamos........................   The County of Los Alamos, New Mexico
mcf...............................   Thousand cubic feet
Meadows...........................   Meadows Resources, Inc., a wholly-owned
                                       subsidiary of the Company
M-S-R.............................   M-S-R Public Power Agency, a California
                                       public power agency
MW................................   Megawatt
MWh...............................   Megawatt Hour
NMED..............................   New Mexico Environment Department
NMPUC.............................   New Mexico Public Utility Commission
NRC...............................   United States Nuclear Regulatory Commission
OCD...............................   New Mexico Oil Conservation Division
PGAC..............................   PNMGS' Purchased Gas Adjustment Clause
PNMGS.............................   Public Service Company of New Mexico Gas 
                                        Services, a division of the Company
PRC...............................   Public Regulation Commission
Processing Company................   Sunterra Gas Processing Company, a 
                                        wholly-owned   subsidiary   of  the
                                        Company
PVNGS.............................   Palo Verde Nuclear Generating Station
RCRA..............................   Resource Conservation and Recovery Act
Reeves Station....................   Reeves Generating Station
Salt River Project................   Salt River Project Agricultural Improvement
                                        and Power District
SCE...............................   Southern California Edison Company
SCPPA.............................   Southern California Public Power Authority
SDG&E.............................   San Diego Gas and Electric Company

                                       iv
<PAGE>

SEC...............................   Securities and Exchange Commission
SJCC..............................   San Juan Coal Company
SJGS..............................   San Juan Generating Station
SPS...............................   Southwestern Public Service Company
TNP...............................   Texas-New Mexico Power Company
throughput........................   Volumes of gas delivered, whether or not 
                                       owned by PNMGS
Tucson............................   Tucson Electric Power Company
UAMPS.............................   Utah Associated Municipal Power Systems
USBR..............................   United States Bureau of Reclamation
USEC..............................   United States Enrichment Corporation
Williams..........................   Williams Gas Processing-Blanco, Inc., a
                                       subsidiary   of   the   Williams   Field
                                       Services Group, Inc., of Tulsa, Oklahoma


<PAGE>


                                     PART I

ITEM 1.  BUSINESS
                                   THE COMPANY

        Public Service Company of New Mexico (the "Company") was incorporated in
the  State of New  Mexico  in 1917 and has its  principal  offices  at  Alvarado
Square,  Albuquerque,  New Mexico 87158  (telephone  number  505-241-2700).  The
Company is a public utility primarily  engaged in the generation,  transmission,
distribution and sale of electricity and in the  transmission,  distribution and
sale of natural gas within the State of New Mexico. In addition, in pursuing new
business  opportunities,  the Company is focusing on energy and utility  related
activities  under  its  Energy  Services  Business  Unit.  The  Company  is also
operating  the  City of  Santa  Fe's  water  system.  (See  PART  II,  ITEM 7. -
"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS - OVERVIEW - Competitive Strategy".)

        The total  population of the area served by one or more of the Company's
utility  services is estimated to be approximately  1.3 million,  of which 52.1%
live in the greater Albuquerque area.

        For the year ended December 31, 1997,  the Company  derived 63.6% of its
operating revenues from electric  operations,  26.0% from natural gas operations
and 10.4% from energy services operations.

        As of December 31, 1997, the Company employed 2,789 persons.

        Financial  information  relating  to amounts of  revenue  and  operating
income and identifiable  assets  attributable to the Company's industry segments
is contained in note 13 of the notes to consolidated financial statements.

                               ELECTRIC OPERATIONS

Service Area and Customers

        The Company's electric operations serve four principal markets. Sales to
retail customers and sales to firm-requirements  wholesale customers,  sometimes
referred to collectively as "system" sales,  comprise two of these markets.  The
third  market  consists of other  contracted  sales to  utilities  for which the
Company  commits to deliver a specified  amount of capacity  (measured in MW) or
energy (measured in MWh) over a given period of time. The fourth market consists
of economy  energy sales made on an hourly  basis to  utilities at  fluctuating,
spot-market  rates. Sales to the third and fourth markets are sometimes referred
to collectively as "off-system" sales.

        The Company  provides retail  electric  service to a large area of north
central New Mexico,  including the cities of Albuquerque,  Santa Fe, Rio Rancho,
Las Vegas,  Belen and  Bernalillo.  The Company also  provides  retail  electric
service to Deming in southwestern  New Mexico and to Clayton in northeastern New
Mexico. As of December 31, 1997, approximately 349,000 retail electric customers
were served by the Company,  the largest of which  accounted  for  approximately
3.8% of the Company's  total  electric  revenues for the year ended December 31,
1997.

        The Company holds 20 long-term,  non-exclusive  franchise agreements for
its electric retail operations,  expiring between August 1998 and November 2028.
These  franchises  are  agreements  that  provide the  Company  access to public
rights-of-way for placement of the Company's  electric  facilities.  The City of
Albuquerque (the "COA"),  Bernalillo County and the City of Las Vegas franchises
expired in 1992, 1997 and 1996,  respectively.  Customers in the area covered by
the  expired   franchises   represent   approximately   40.2%,  8.6%  and  1.2%,
respectively,  of the Company's 1997 total electric operating  revenues,  and no
other franchise area represents more than 6.1%. The Company continues to collect
and pay  franchise  fees to both the COA and the City of Las Vegas.  The Company
currently does not pay franchise fees to Bernalillo  County. The Company remains
obligated  under state law to provide service to customers in the franchise area
even in the absence of a franchise agreement.


                                       1
<PAGE>


Power Sales

        For the years  1993  through  1997,  retail  KWh sales  have  grown at a
compound annual rate of approximately  4.7%. The Company's system and off-system
sales  (revenues and energy  consumption)  and system peak demands in summer and
winter are shown in the following tables:

                            ELECTRIC SALES BY MARKET
                             (Thousands of dollars)
<TABLE>
<CAPTION>

                                        1997       1996       1995       1994       1993
                                        ----       ----       ----       ----       ----

<S>                                   <C>        <C>        <C>        <C>        <C>     
Retail ............................   $519,504   $507,821   $485,568   $506,286   $471,099
Firm-requirements wholesale .......   $ 10,690   $ 12,359   $ 20,282   $ 22,296   $ 18,468
Other contracted off-system sales..   $118,876   $ 86,689   $ 43,158*  $ 54,862*  $ 56,214*
Economy energy sales ..............   $ 55,768   $ 22,281   $ 17,509*  $ 19,663*  $ 25,213*
</TABLE>

*    Due to the  provision  for the loss  associated  with the M-S-R  contingent
     power purchase contract  recognized in 1992, revenues from other contracted
     off-system  sales and economy  energy sales were reduced by a total of $7.3
     million,   $25.0  million  and  $20.5  million  in  1995,  1994  and  1993,
     respectively.


                            ELECTRIC SALES BY MARKET
                                (Megawatt hours)
<TABLE>
<CAPTION>

                                        1997        1996        1995        1994        1993
                                        ----        ----        ----        ----        ----

<S>                                   <C>         <C>         <C>         <C>         <C>      
Retail ............................   6,534,899   6,406,296   6,029,365   5,953,151   5,446,788
Firm-requirements wholesale .......     278,727     282,534     447,629     489,182     342,137
Other contracted off-system sales..   3,790,081   2,928,321     594,367   1,403,480   1,450,966
Economy energy sales ..............   2,716,835   1,364,365   1,548,517   1,469,271   1,582,113

</TABLE>

                               SYSTEM PEAK DEMAND*
                                   (Megawatts)

                           1997        1996        1995        1994      1993
                           ----        ----        ----        ----      ----

Summer...................  1,209       1,217       1,247       1,189     1,104
Winter...................  1,142       1,111       1,076       1,040       982

*System peak demand relates to retail and firm-requirements wholesale customers
 only.

        The Company's  wholesale  power marketing area continues to increase its
trading activities.  During 1997 and 1996, the Company's sales in the off-system
markets accounted for approximately 48.9% and 39.1%, respectively,  of its total
KWh sales and approximately 24.8% and 17.3%, respectively, of its total revenues
from  energy  sales.  Of the  total  off-system  sales  made in  1997,  47% were
transacted through purchases for resale as compared to 37% in 1996. However, the
Company  continues to be committed to increasing  its  utilization  of its major
generation capacity at SJGS, Four Corners and PVNGS.  Capacity factors for these
generating  stations  were 81.4%,  74.8% and 90.6%,  respectively,  in 1997,  as
compared to 80.2%,  75.9% and 89.1%,  respectively,  in 1996.  During 1997,  the
Company's major off-system sales contracts in effect were with SDG&E and APPA.


                                       2
<PAGE>

        The SDG&E  contract  requires  SDG&E to purchase 100 MW from the Company
through  April 2001.  SDG&E has filed three  separate  complaints  with the FERC
against the Company, alleging that certain charges under the 1985 power purchase
agreement were unjust, unreasonable and unduly discriminatory. See PART II, ITEM
7. - "MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS  - OTHER  ISSUES  FACING  THE  COMPANY  REGULATORY  ISSUES -  SDG&E's
Complaints".

        The APPA  contract  requires APPA to purchase  varying  amounts of power
from the Company  through May 2008 and allows  APPA to make  adjustments  to the
purchase amounts subject to certain notice provisions. APPA provided notice that
it was invoking its option to reduce its power demand in 1997.  This resulted in
a peak demand in 1997 of 89 MW. APPA invoked the same option to reduce its power
demand in 1998 to 89 MW.

        The Company furnished firm-requirements wholesale power in New Mexico in
1997 to the cities of Farmington  and Gallup,  and TNP. The Company is committed
to provide  service to the City of Gallup  through April 2003.  Average  monthly
demands under the City of Gallup contract for 1997 were approximately 26 MW. TNP
may adjust its annual demand  between 15 MW and 40 MW with one year's notice and
may terminate  service with two years' notice.  During 1997, TNP purchased 15 MW
and gave  notice that it will  continue to purchase 15 MW in 1998.  TNP has also
provided   notice  of  its  intent  to   terminate   service   after  1998.   No
firm-requirements  wholesale  customer  accounted  for  more  than  1.1%  of the
Company's  total  electric  operating  revenues for the year ended  December 31,
1997.

Sources of Power

        As of December 31, 1997, the total net generation capacity of facilities
owned or leased by the Company was 1,506 MW.

        In addition,  the Company has a power purchase  contract with SPS for up
to 200 MW,  expiring in May 2011.  The Company may reduce its purchases from SPS
by 25 MW annually upon three years' notice.  The Company provided such notice to
reduce the purchase by 25 MW in 1999 and by an additional  25 MW in 2000.  Also,
the  Company  has 39 MW of  contingent  capacity  obtained  from El Paso under a
transmission  capacity for generation  capacity trade arrangement that increases
up to 70 MW from 1998 through 2003. In addition,  the Company is  interconnected
with  various  utilities  for  economy  interchanges  and mutual  assistance  in
emergencies.  Additionally,  the  Company  has  been  actively  trading  in  the
wholesale  power  market  and has  entered  into  and  anticipates  that it will
continue to enter into  short-term  power  purchases to accommodate  the trading
activity.

        The  Company  anticipates  the need for  approximately  100 to 200 MW of
additional  capacity in the 1998 through 2000  timeframe.  To meet this need, in
1996,  the Company  entered into a long-term  power  purchase  contract with the
Cobisa-Person  Limited Partnership  ("PLP") to purchase  approximately 100 MW of
unit contingent peaking capacity from a gas turbine generating unit for a period
of 20  years,  with an option to renew for an  additional  five  years.  The gas
turbine  generating unit will be constructed and operated by the PLP and will be
located on the  Company's  retired  Person  Generating  Station  site located in
Albuquerque,  New Mexico.  The site for the generating unit was chosen, in part,
to provide needed benefits to the Company's constrained  transmission system. In
October 1996, the Company filed a request for approval from the NMPUC. The NMPUC
issued a final order  approving the  application  in September  1997.  The final
order   also   included   approval   of  a   stipulated   settlement   agreement
("Stipulation")  which had earlier been entered into among the Company,  the PLP
and the NMPUC staff to resolve  certain  issues raised in this  proceeding.  The
Stipulation  included,  among  other  things,  a  provision  wherein the Company
committed,  in  cooperation  with  the  NMPUC  staff,  to  the  development  and
evaluation of a request for proposal  ("RFP") for purchase of approximately 5 MW
of capacity from solar generation resources.  The Company would not be obligated
to build such a unit or commit to such a power purchase agreement prior to NMPUC
approval  of a  full-recovery  mechanism  that  would not put the  Company  at a
competitive disadvantage.


                                       3
<PAGE>

        The NMPUC  docketed  a new case to follow  the  progress  of the RFP and
address the issue of full-cost recovery. The RFP was issued on January 16, 1998.
Proposals  are due on  March  24,  1998.  It is  expected  that  contracts  with
successful  bidders  will be signed by June 6, 1998, in order to facilitate  the
NMPUC hearing on full-cost recovery, which has been scheduled for June 15, 1998.

        On  December  23,  1997,  the PLP  received  FERC  approval  for "exempt
wholesale  generator" status with respect to the gas turbine generating unit, as
defined in Section 32 of the Public Utility Holding Company Act. Under the power
purchase  agreement,  construction  of  the  gas  turbine  generating  unit  was
scheduled to begin in August 1998, with commercial  operation and power delivery
scheduled in May 1999. The operation date was originally  chosen to satisfy both
resource and  transmission  needs  anticipated for the Company's  jurisdictional
load. However, a reduction in the Company's load forecast for 1999 combined with
technical  issues  concerning  one of the  candidate  gas  turbines has lead the
Company and PLP to consider a nine to twelve month delay in the operation date.

        In addition to the long-term  power purchase  contract with the PLP, the
Company is pursuing  other options to ensure its  additional  capacity needs are
met.

Fuel and Water Supply

        The percentages of the Company's generation of electricity (on the basis
of KWh) fueled by coal,  nuclear fuel and gas and oil, and the average  costs to
the  Company of those  fuels (in cents per  million  BTU),  during the past five
years were as follows:

                       Coal                Nuclear              Gas and Oil
                -------------------  --------------------  --------------------
                Percent of  Average  Percent of   Average  Percent of   Average
                ----------  -------  ----------   -------  ----------   -------

 1993..........    72.9      164.7      26.7       58.1       0.4        331.7
 1994..........    72.0      162.9      27.8       58.5       0.2        321.7
 1995..........    67.9      168.3      31.9       49.1       0.2        242.2
 1996..........    68.9      159.3      30.4       49.7       0.7        238.2
 1997..........    68.1      152.7      31.1       48.3       0.8        326.6

        The estimated  generation mix for 1998 is 69.4% coal,  29.7% nuclear and
 .9% gas and oil.  Due to locally  available  natural gas and oil  supplies,  the
utilization of locally available coal deposits and the generally abundant supply
of  nuclear  fuel,  the  Company  believes  that  adequate  sources  of fuel are
available for its generating stations.

Coal
        The  coal   requirements   for  SJGS  are  being  supplied  by  SJCC,  a
wholly-owned  subsidiary  of BHP, from certain  Federal,  state and private coal
leases  under a Coal  Sales  Agreement,  pursuant  to  which  SJCC  will  supply
processed coal for operation of SJGS until 2017. BHP guaranteed the  obligations
of SJCC under the agreement,  which  contemplates  the delivery of approximately
107 million  tons of coal during its  remaining  term.  Such amount would supply
substantially  all the  requirements  of SJGS through  approximately  2017.  The
primary  sources  of  coal  are a mine  adjacent  to  SJGS  and a  mine  located
approximately  25 miles  northeast of SJGS in the La Plata area of  northwestern
New Mexico.  On September 1, 1995, the parties executed an amendment to the Coal
Sales Agreement. The amendment provides for flexibility in coal sourcing. Mining


                                       4
<PAGE>

operations  are being  shifted over time to the La Plata Mine and several  other
sources including the expanded La Plata reserves and a new lease contiguous with
the existing San Juan Mine.  While the savings in fuel cost over the life of the
contract are  continuing to be  developed,  it is currently  estimated  that the
Company  will save  approximately  $186  million of coal fuel  costs  during the
period 1998 through 2005.  The average cost of fuel,  including ash disposal and
land  reclamation  costs,  for SJGS for the years 1995,  1996 and 1997 was 184.6
cents,  167.0 cents and 164.2  cents,  respectively,  per  million BTU  ($35.75,
$32.18 and $31.59 per ton, respectively).  For other information related to coal
requirements,  see PART II, ITEM 7. -  "MANAGEMENT'S  DISCUSSION AND ANALYSIS OF
FINANCIAL  CONDITION AND RESULTS OF OPERATIONS - OTHER ISSUES FACING THE COMPANY
- COAL FUEL SUPPLY".

        Four Corners is supplied  with coal under a fuel  agreement  between the
owners and BHP, under which BHP agreed to supply all the coal  requirements  for
the life of the plant. BHP holds a long-term coal mining lease, with options for
renewal,  from the Navajo  Nation and operates a surface  mine  adjacent to Four
Corners with the coal supply  expected to be  sufficient to supply the units for
their estimated useful lives.  The average cost of fuel,  including ash disposal
and land  reclamation  costs,  for the years 1995, 1996 and 1997 at Four Corners
was 113.4  cents,  125.9 cents and 100.1  cents,  respectively,  per million BTU
($20.04,  $22.90 and $17.77 per ton,  respectively).  The 1997  reduction in the
average cost of fuel reflects the  settlement of certain issues between APS, the
operating  agent,  and the Navajo Nation  regarding the computation of royalties
due on the sales of coal and possessory  interest taxes paid by the Four Corners
coal supplier.

Natural Gas

        The  natural  gas used as fuel for the  Company's  Albuquerque  electric
generating  plant  (Reeves  Station) is  delivered by PNMGS.  (See  "NATURAL GAS
OPERATIONS".)  In addition to rate changes  under filed  tariffs,  the Company's
cost of gas  increases  or  decreases  according  to the average cost of the gas
supply.

Nuclear Fuel

        The fuel cycle for PVNGS is comprised of the following  stages:  (1) the
mining and  milling of uranium  ore to  produce  uranium  concentrates;  (2) the
conversion of uranium concentrates to uranium  hexafluoride;  (3) the enrichment
of  uranium  hexafluoride;  (4)  the  fabrication  of fuel  assemblies;  (5) the
utilization  of fuel  assemblies in reactors;  and (6) the storage of spent fuel
and the disposal  thereof.  The Company has made  arrangements  through contract
flexibilities  to obtain  quantities of uranium  concentrates  anticipated to be
sufficient to meet its share of uranium concentrates  requirements through 2000.
Existing   contracts  and  options  could  be  utilized  to  meet  80%  of  such
requirements  in 2001 and 2002 and 50% of  requirements  from 2003 through 2007.
Spot  purchases in the uranium market will be made, as  appropriate,  in lieu of
any uranium that might be obtained through contract  flexibilities  and options.
The Company  understands that the other PVNGS  participants have made comparable
arrangements   for   their   uranium   concentrates   requirements.   The  PVNGS
participants,  including the Company,  contracted  for all  conversion  services
required  with options  through 1998 and for up to 60% through  2002.  The PVNGS
participants,  including the Company,  also have an enrichment services contract
with USEC which obligates USEC to furnish  enrichment  services required for the
operation of the three PVNGS units over a term expiring in September  2002, with
options to continue through September 2007. In addition, existing contracts will
provide fuel assembly  fabrication  services  until at least 2003 for each PVNGS
unit, and through contract options,  approximately  fifteen additional years are
available.

        Existing  spent fuel pool storage  facilities  at PVNGS have  sufficient
capacity with certain  modifications to store all fuel expected to be discharged
from normal  operation of all of the PVNGS units through at least the year 2002.
Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the "Waste
Act"),  DOE is  obligated  to accept and dispose of all spent  nuclear  fuel and
other  high-level  radioactive  wastes generated by all domestic power reactors.
The NRC,  pursuant to the Waste Act,  also  requires  operators of nuclear power
reactors to enter into spent fuel disposal  contracts  with DOE. APS, on its own


                                       5
<PAGE>

behalf  and on behalf of the other  PVNGS  participants,  executed  a spent fuel
disposal  contract  with DOE.  Under  the  Waste  Act,  DOE was to  develop  the
facilities  necessary  for the storage and disposal of spent nuclear fuel and to
have the first such  facility in  operation  by 1998.  The  facility was to be a
permanent repository, but DOE has announced that such a repository now cannot be
completed  before 2010. In July 1996, the United States Court of Appeals for the
District  of  Columbia  Circuit  ("D.C.  Circuit")  ruled  that  the  DOE had an
obligation  to start  disposing of spent  nuclear fuel no later than January 31,
1998. By way of letter dated December 17, 1996, DOE informed  contract  holders,
including APS, that it would be unable to begin acceptance of spent nuclear fuel
for disposal in a repository or interim storage facility by January 31, 1998. In
November  1997, the D.C.  Circuit issued a writ of mandamus  precluding DOE from
excusing  its own delay on the grounds that DOE has not yet prepared a permanent
repository or interim  storage  facility.  Several bills have been introduced in
Congress  contemplating  the  construction of a central interim storage facility
which could be  available  in the latter part of the  current  decade;  however,
there is resistance to certain  features of these bills both in Congress and the
Administration.

        Facility funding is a further complication.  While all nuclear utilities
pay into a nuclear waste fund an amount calculated on the basis of the output of
their  respective  plants,  the  annual  Congressional  appropriations  for  the
permanent  repository  have been for amounts less than the amounts paid into the
waste  fund  (the  balance  of which is being  used  for  other  purposes)  and,
according  to DOE  spokespersons,  may now be at a level  less  than  needed  to
achieve a 2010 operational date for a permanent  repository.  No funding will be
available for a central interim facility until one is authorized by Congress.

         APS  indicated  that it has storage  capacity in existing  fuel storage
pools at PVNGS which,  with certain  modifications,  could  accommodate all fuel
expected to be discharged from normal operation of PVNGS through about 2002, and
believes it could augment that wet storage with new  facilities  for on-site dry
storage of spent fuel for an  indeterminate  period of  operation  beyond  2002,
subject to obtaining any required governmental approvals. APS currently believes
that spent fuel storage or disposal  methods will be available  for use by PVNGS
to allow its continued operation beyond 2002.

        A low-level  radioactive  waste facility built in 1995 at the PVNGS site
could store an amount of waste  equivalent  to 10 years of normal  operation  of
PVNGS.  Although some low-level waste has been stored on-site,  APS is currently
shipping  low-level waste to off-site  facilities.  APS currently  believes that
interim  low-level  waste  storage  methods are or will be available  for use by
PVNGS to allow its continued operation and to safely store low-level waste until
a permanent facility is available.

        While believing that  scientific and financial  aspects of the issues of
spent  fuel  and   low-level   waste   storage  and  disposal  can  be  resolved
satisfactorily,  the Company  acknowledges  that their ultimate  resolution in a
timely  fashion will  require  political  resolution  and action on national and
regional scales which it is less able to predict.

Water Supply

        Water for Four  Corners  and SJGS is  obtained  from the San Juan River.
(See ITEM 3. - "LEGAL  PROCEEDINGS  - SAN JUAN RIVER  ADJUDICATION".)  BHP holds
rights to San Juan River  water and has  committed  a portion of such  rights to
Four  Corners  through  the life of the  project.  The Company and Tucson have a
contract with the USBR ("USBR  Contract") for consumption of 16,200 acre feet of
water per year for SJGS,  which contract  expires in 2005, and in addition,  the
Company was granted the  authority to consume  8,000 acre feet of water per year
under a state  permit that is held by BHP.  The  Company is of the opinion  that
sufficient water is under contract for SJGS through 2005.


                                       6
<PAGE>



        On January 29,  1993,  the U.S.  Fish and  Wildlife  Service  proposed a
portion of the San Juan River as  critical  habitat for two fish  species.  This
designation  may impact uses of the river and its flood  plains and will require
certain  analysis  under the Endangered  Species Act of 1973 of all  significant
Federal actions.  Renewal of the SJGS water contract is considered a significant
Federal action.

        Due to extensive lead times required to renew the water rights contract,
the Company formally  initiated the renewal and extension process for requesting
rights   through  the  year  2025.   The  Company  is  actively   conducting  an
environmental assessment with the USBR and a biological assessment with the U.S.
Fish and Wildlife  Service.  These studies are required by the Federal  agencies
before the  existing  water  contract can be renewed.  In June 1996,  the Navajo
Nation  requested the USBR to withhold renewal of the USBR Contract due to water
shortages  of the Navajo  Indian  Irrigation  Project.  Other tribes in the Four
Corners  area have also  voiced  concern  to the USBR  about the  renewal by the
Company of the USBR Contract.

        The Company has  continued  its  discussions  with the Navajo  Nation to
resolve their concerns  relating to the Company's  proposed renewal of the water
contract  with the USBR for SJGS. On March 27, 1997,  the Resource  Committee of
the Navajo  Nation  Tribal  Council  approved an agreement  that  committed  the
parties to good faith  negotiations on the water supply for SJGS for a period of
ninety days. The agreement also  acknowledged  that the water supply issues must
be resolved in connection  with the Company's  support of the  resolution of the
issues  raised by BHP  concerning  the Navajo  Nation's  proposed  selection  of
certain  mining  properties  within San Juan and La Plata mines  pursuant to the
Navajo-Hopi  Land  Settlement Act of 1974. (See PART II, ITEM 7. - "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - OTHER
ISSUES FACING THE COMPANY - COAL FUEL  SUPPLY".) The Company and counsel for the
Navajo Nation have recently agreed to continue negotiations until April 1, 1998.
The Company is currently unable to predict the outcome of these discussions.

        On July 15, 1997, the Company was notified by the USBR that the USBR had
received  from the  Solicitor  of the U.S.  Department  of Interior a Memorandum
Opinion  concluding  that the Company's  contract  extension with the USBR would
require  Congressional  approval  pursuant  to Section  11 of the Navajo  Indian
Irrigation  Project and San Juan-Chama  Project  Authorization  Act of 1962. The
Company  intends to pursue such an approval once the contract is negotiated with
the USBR.

        Sewage effluent used for cooling  purposes in the operation of the PVNGS
units has been obtained under contracts with certain municipalities in the area.
The contracted  quantity of effluent  exceeds the amount  required for the three
PVNGS  units.  The  validity  of these  effluent  contracts  is the  subject  of
litigation  in state and Federal  courts.  (See ITEM 3. - "LEGAL  PROCEEDINGS  -
PVNGS WATER SUPPLY LITIGATION".)

                             NATURAL GAS OPERATIONS

Service Area and Customers

        The Company's gas operating division,  PNMGS, distributes natural gas to
most of the major communities in New Mexico, including Albuquerque and Santa Fe,
serving approximately 410,000 customers as of December 31, 1997. The Albuquerque
metropolitan  area accounts for approximately  55.2% of the total  sales-service
customers.   PNMGS  holds  long-term,   non-exclusive  franchises  with  varying
expiration dates in all incorporated communities requiring franchise agreements.
The  Company  is  currently  negotiating  with the COA to extend  the  franchise
agreement  which is scheduled to expire on February  28, 1998.  PNMGS'  customer
base  includes  both  "sales-service"  customers  and   "transportation-service"
customers.   Sales-service   customers   purchase   natural   gas  and   receive
transportation  and delivery  services from PNMGS for which PNMGS  receives both
cost-of-gas and cost-of-service  revenues.  Cost-of-gas  revenues collected from
on-system sales-service customers are a recovery of the cost of purchased gas in
accordance  with NMPUC rules and  regulations and do not affect the net earnings
of the Company.  Additionally,  PNMGS makes  occasional  gas sales to off-system
customers.  Off-system sales deliveries  generally occur at interstate  pipeline


                                       7
<PAGE>

interconnects with PNMGS' system.  Transportation-service customers, who procure
gas  independently  of PNMGS and  contract  with  PNMGS for  transportation  and
related   services,   provide   PNMGS  with   cost-of-service   revenues   only.
Transportation  services are provided to gas marketers,  producers and end users
for delivery to locations throughout the PNMGS distribution  systems, as well as
for  delivery  to  interstate  pipelines.   PNMGS  provided  gas  transportation
deliveries to approximately 1,000 gas marketers,  producers and end users during
1997.

        For the twelve months ended  December 31, 1997,  PNMGS had throughput of
approximately  84.6  million   decatherms,   including  sales  of  50.6  million
decatherms to both sales-service  customers and off-system customers.  No single
"sales-service"  customer  accounted for more than 2.4% of PNMGS' therm sales in
1997.  During 1997,  approximately  40.2% of the PNMGS' total gas throughput was
related  to  transportation  gas  deliveries.  PNMGS'  transportation  rates are
unbundled,  and transportation  customers only pay for the service they receive.
PNMGS'  total  operating  revenues for the year ended  December  31, 1997,  were
approximately $294.8 million.  Cost-of-gas revenues, received from sales-service
and  off-system  customers,  accounted for  approximately  57.6% of PNMGS' total
operating revenues.  Since a major portion of PNMGS' load is related to heating,
levels of therm sales are affected by the weather. Approximately 50.5% of PNMGS'
total therm sales in 1997 occurred in the months of January, February,  November
and December.

Natural Gas Supply

        During the late 1980's,  there were  significant  changes in the natural
gas industry brought about by Federal and state regulations  which  dramatically
altered the way gas is bought,  transported and sold  nationwide.  These changes
required  PNMGS to reform or terminate  certain  natural gas purchase  contracts
which required PNMGS to take gas in excess of demand.  This process  resulted in
breach  of  contract  claims  from some  producers.  PNMGS  resolved  all of the
producer  litigation and reformed its supply portfolio so that it better matches
the demands of PNMGS' sales-service customers. These reformations allow PNMGS to
seek new  sources of gas  supplies  through  pipeline  interconnects  which have
created a more flexible and reliable supply portfolio.  PNMGS obtains its supply
of natural gas primarily  from sources  within New Mexico  pursuant to contracts
with producers and marketers.  These contracts are generally  sufficient to meet
PNMGS peak-day demand.

        PNMGS  serves  certain  cities  which  depend  on EPNG  or  Transwestern
Pipeline Company for  transportation  of gas supplies.  Because these cities are
not directly  connected to PNMGS  transmission  facilities,  gas  transported by
these companies is the sole supply source for those cities.  Such transportation
is  regulated  by FERC.  As a result  of FERC  Order  636,  PNMGS'  options  for
transporting  gas to such cities and other portions of its  distribution  system
have increased.


                                       8
<PAGE>

Natural Gas Sales

        The following table shows gas throughput by customer class*:

                                 GAS THROUGHPUT
                            (Millions of decatherms)

                                    1997     1996      1995      1994      1993
                                    ----     ----      ----      ----      ----

Residential.....................    30.7     27.4      25.9      27.1      28.0
Commercial......................    10.6      9.3       8.9       9.8      10.4
Industrial......................     1.3      2.1       0.7       0.8       0.9
Public authorities..............     4.2      2.6       2.4       2.5       2.5
Irrigation......................     1.6      1.4       1.2       1.3       1.3
Sales for resale................     1.2      0.8       1.3       0.7       1.0
Unbilled........................    (0.2)     1.4      (1.8)     (0.3)     (0.6)
Transportation**................    34.0     47.1      69.8      90.2      91.8
Off-system sales................     1.2      8.0       1.2         -         -
                                    ----    -----     -----     -----     ----- 
                                    84.6    100.1     109.6     132.1     135.3
                                    ====    =====     =====     =====     =====


        The following table shows gas revenues by customer class*:

                                  GAS REVENUES
                             (Thousands of dollars)

                          1997        1996        1995       1994        1993
                          ----        ----        ----       ----        ----

Residential............ $187,563    $129,911    $125,290   $149,439    $149,796
Commercial.............   50,502      33,022      32,328     42,725      44,575
Industrial.............    4,536       5,179       1,873      2,905       3,369
Public authorities.....   17,577       8,018       7,939      9,969       9,694
Irrigation.............    5,041       3,252       3,077      4,061       4,418
Sales for resale.......    4,465       2,106       3,114      2,462       3,137
Unbilled...............   (2,172)      2,678      (2,430)       267      (1,573)
Transportation**.......   14,172      17,215      22,172     27,592      26,729
Liquids................    4,451       7,608      13,414     16,090      18,724
Processing fees........        -           -       5,180     10,638       9,761
Off-system sales.......    1,926      14,352       1,927          -           4
Other..................    6,708       3,960       4,101      3,362       2,453
                        --------    --------    --------   --------    --------
                        $294,769    $227,301    $217,985   $269,510    $271,087
                        ========    ========    ========   ========    ========


*   On June 30, 1995,  the Company sold  substantially  all of the gas gathering
    and  processing  assets of the Company and its gas  subsidiaries.  The above
    information  reflects the revenues and  throughput of the gathering  company
    and processing company through this date.
**  Customer-owned gas.

                                       9
<PAGE>


                    ENERGY SERVICES BUSINESS UNIT OPERATIONS

        The  Company  has been  conducting  non-regulated  activities  under its
Energy Services Business Unit. This business unit has initiated several business
lines to position the Company for an increasingly competitive market. The Energy
Services  Business Unit consists of Energy  Marketing,  Energy  Partners,  Water
Services and Phaser Advanced Metering Services.  Energy Marketing focuses on the
marketing of natural gas outside of New Mexico.  Energy Partners provides energy
management  solutions  that assist  customers  in  implementing  cost  effective
procurement,  distribution and consumption of energy.  Water Services is seeking
opportunities  in  infrastructure  management  with  a  specific  focus  on  the
municipal and Native American markets. The Company currently has a contract with
the City of Santa Fe to operate the Santa Fe water system through the year 2001.
Phaser Advanced Metering Services provides electric meter installation, testing,
service  and  consulting  expertise  to  energy  service  providers  as  well as
commercial and industrial  customers.  The Energy Services Business Unit is also
pursuing utility related business opportunities in Mexico.

        In  1995,  the  Company  filed  an   application   with  the  NMPUC  for
authorization for the creation of three wholly-owned non-utility subsidiaries as
part of the Energy Services Business Unit. The Company sought approval to invest
a maximum of $50 million in the three  subsidiaries  over time and to enter into
reciprocal  loan  agreements for up to $30 million with these  subsidiaries.  In
June  1997,  the  hearing  examiner  in this case  recommended  approval  of the
proposed subsidiaries with certain conditions. The Company is currently awaiting
a final order from the NMPUC.  (See PART II, ITEM 7, - "MANAGEMENT'S  DISCUSSION
AND ANALYSIS OF THE  COMPANY'S  FINANCIAL  CONDITION AND RESULTS OF OPERATIONS -
OVERVIEW - Competitive Strategy".)

                              RATES AND REGULATION

        The Company is subject to the  jurisdiction of the NMPUC with respect to
its retail electric and gas rates, service, accounting,  issuance of securities,
construction  of major new  generation  and  transmission  facilities  and other
matters.  The FERC has  jurisdiction  over  rates and other  matters  related to
wholesale electric sales.

Gas Rates and Regulation

Gas Rate Case

       The NMPUC issued an order in February 1997  requiring the Company to file
a gas rate case. On October 15, 1997,  the Company  filed its case  requesting a
rate increase of $12.6 million.  (See PART II, ITEM 7. "MANAGEMENT'S  DISCUSSION
AND ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF  OPERATIONS - OTHER ISSUES
FACING THE COMPANY - REGULATORY ISSUES - The 1997 Gas Rate Case".)

PGAC Continuation Filing

        Retail  gas rate  schedules  contain a PGAC  which  provides  for timely
recovery of the cost of gas purchased for resale to its sales-service customers.
On  November  24,  1997,  in a  proceeding  related to the  Company's  1993 PGAC
Continuation  Filing, the NMPUC issued a final order approving  continued use of
the Company's PGAC. As part of its order,  the NMPUC ordered the Company to make
its next PGAC  continuation  filing no later than two years from the date of the
issuance of its order.

Levelized PGAC

        On July 3, 1997,  the Company  submitted a filing with the NMPUC seeking
approval to modify the method pursuant to which it recovers its gas cost through
the PGAC that would  enable the  Company  to better  levelize  the price that it


                                       10
<PAGE>

charges its customers during the winter heating season. On November 3, 1997, the
NMPUC issued an order approving the proposed  levelized PGAC. This order allowed
the Company to implement  its levelized  PGAC  mechanism  effective  December 1,
1997, and granted the Company the necessary authorization to include the cost of
hedging  transactions for recovery through its PGAC. The Company had also sought
authority  to offer a fixed  price  option  for up to 20,000  customers.  At the
hearings,  the parties  agreed to bifurcate the issue of the fixed price option.
The NMPUC has not yet  scheduled a hearing to address the  proposed  fixed price
option.

NMPUC Order on the Cost of Gas Case

        In  December  1996,  due to  rapidly  rising  gas  supply  costs,  PNMGS
requested a variance from the NMPUC to increase its gas cost factor by more than
10%  without  a  prior  mandatory  hearing.   Pursuant  to  NMPUC  rules,  PNMGS
implemented  the new gas cost factor with its January 1997 billing  cycle.  This
increase in gas cost,  along with increased gas  consumption  and longer billing
periods for some  customers,  resulted in a  substantial  increase to customers'
bills.  The NMPUC  denied  PNMGS'  variance to increase the factor more than 10%
without a hearing  and held  public  hearings  to  receive  public  comment  and
testimony. The hearings began and concluded in January 1997.
The Company provided testimony regarding the higher gas cost.

        The NMPUC issued a final order in this  proceeding on February 13, 1997.
In the order,  the NMPUC imposed,  but suspended,  a fine of $2.2 million on the
Company due to an allegedly  incorrect  gas cost factor (too low) that was filed
in November 1996. In the order,  the NMPUC accused the Company of  intentionally
filing an  inaccurate  factor to avoid a hearing,  thus  impairing  the  NMPUC's
ability to  investigate  rising gas prices.  In addition,  the NMPUC  disallowed
collection of $1.6 million of gas costs and ordered an  independent  audit to be
conducted to review the  Company's  PGAC factor  calculations  for the period of
December 1995 through  January 1997. The NMPUC also ordered the docketing of two
investigations.  The first  would be to  investigate  whether or not the Company
should exit the merchant  function of providing gas supplies to  customers.  The
second  would  be  to  investigate  the  prudence  of  the  Company's  portfolio
strategies and purchase practices. In addition, the NMPUC ordered the Company to
file a gas rate case and also  ordered the  Company to file an  electric  retail
rate case.

        Subsequently,  the NMPUC  issued an order,  partially  granting a motion
filed  by the  Company  requesting  a  rehearing.  In  the  order  granting  the
rehearing, the NMPUC: (1) withdrew the finding that, because the veracity of the
Company's  filings had been brought into  question,  rate cases for both gas and
electric operations were necessary;  however, the requirement for the rate cases
was continued for other reasons;  (2) withdrew the requirement  that the Company
must  pay for  NMPUC  staff  to  conduct  an  independent  audit of its gas cost
filings;  (3) suspended the imposition of the $2.2 million civil penalty and the
order prohibiting the Company from recovering $1.6 million in gas costs incurred
in  December  1996  and (4) left the case  open for  additional  testimony.  The
rehearing  was held before the NMPUC.  The Company  believes  that it  presented
unrebutted evidence that the November 1996 gas cost filing contained no false or
misleading  information.  The  NMPUC  has not yet  issued  a final  order in the
proceeding.

Filing Relating to Termination of Gas Merchant Function

        As noted  above,  included  in the  February 13 order in the cost of gas
case,  the NMPUC ordered the Company to make a separate  filing  addressing  the
terms and conditions under which the Company would consider exiting the merchant
function and to identify any related compelling issues.

        In March  1997,  the Company  filed its  response.  In the  filing,  the
Company  asserted  that all  customers  should  have the option to choose  their
natural gas  supplier,  advocating  that,  ultimately,  customer  choice  should
dictate  whether the  Company's  gas  operation  retains its merchant  function.
Currently,  all customers may choose to purchase their gas supplies from a third
party and receive transportation service from the Company.


                                       11
<PAGE>


        In June  1997,  the  Company  formed  a  working  group,  consisting  of
customers,  the AG, the NMPUC staff, the Company and gas marketers, to determine
what is needed to increase  competition  and more fully develop  supplier choice
for sales customers.  As a result, the Company filed a stipulation that outlined
interim measures,  known as the Gas Choice Program,  to facilitate the choice of
transportation  service by small  commercial and  residential  customers for the
winter of 1997-98. The AG opposed the implementation of the stipulation.

        In August 1997, the NMPUC entered an order approving the stipulation but
left the  docket  open so that it could  review  the  implementation  of the Gas
Choice Program. The program commenced operations in December 1997. Thus far, the
response has been  minimal.  In January 1998,  the NMPUC  convened a workshop to
address the initial  results of the Gas Choice Program and to present  proposals
to improve customer  participation and customer  satisfaction.  At the workshop,
the  NMPUC   decided  to   schedule   formal   hearings   concerning   permanent
implementation of a gas choice program during 1998.

Investigation of Gas Supply Procurement Practices

        As noted  above,  included in the February 13 NMPUC order in the cost of
gas case,  the NMPUC  established  a new  docket to  review  the  Company's  gas
procurement  practices  and  policies.  Hearings  were held in June 1997. At the
conclusion of the hearing,  the NMPUC issued an oral ruling that the Company was
not imprudent in its gas  procurement  practices for the 1996-97  winter season.
For the current winter  heating  season,  the NMPUC  expressed its view that the
Company  should  utilize  appropriate  contracting  and hedging tools to reach a
reasonable  balance  between low cost and mitigation of price  volatility in its
gas procurement  practices.  The Company  requested that the NMPUC issue a final
written order, but such an order has not yet been entered.

Electric Rates and Regulation - NMPUC

Electric Rate Case

        The NMPUC issued an order in May 1997  requiring  the Company to file an
electric  rate case.  On November 3, 1997,  the Company  filed its electric rate
case. In the filing,  the Company stated that although the Company could justify
a $5.0 million rate increase,  it would not seek to increase rates, stating that
rate stability is important in preparing for industry  restructuring.  (See PART
II, ITEM 7. - "MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND
RESULTS OF  OPERATIONS - OTHER ISSUES  FACING THE COMPANY - REGULATORY  ISSUES -
Electric Rate Case".)

Fossil-Fueled Plant Decommissioning Costs

        The  Company's  six owned or  partially  owned,  in service and retired,
fossil-fueled   generating  stations  are  expected  to  incur  dismantling  and
reclamation   costs  as  they  are   decommissioned.   The  Company's  share  of
decommissioning  costs  for  all of its  fossil-fueled  generating  stations  is
projected to be approximately  $149.0 million stated in 1997 dollars,  including
approximately  $24.0 million (of which $14.4 million has already been  expended)
for Person, Prager and Station Fe Stations which have been retired.

        The Company is currently recovering estimated  decommissioning costs for
its in-service  fossil-fueled generating facilities through rates charged to its
NMPUC retail customers.

New Mexico Industrial Energy Consumers ("NMIEC")

        On April 22, 1997, NMIEC filed a petition for declaratory order with the
NMPUC. In its petition, NMIEC states that the Company has interrupted service to
NMIEC members taking service under the  Experimental  Incremental  Interruptible
Power Rate ("EIIPR") during off-peak periods and such interruptions  violate the
terms of the EIIPR. The interruptions  resulted from a scheduled maintenance for
the Company's 345 Kv line connected to the Four Corners.  NMIEC alleges that its
members  have  suffered  economic  harm from  losses in  production  due to such


                                       12
<PAGE>

interruptions.  The petition requests,  among other things: (i) clarification of
the EIIPR to determine that EIIPR  customers are entitled to be treated the same
as  all  other  customers  with  similar   consumption   when  system  emergency
curtailments  occur  during the  off-peak  hours;  (ii)  determination  that the
Company's  practice of  interrupting  EIIPR  customers  during off-peak hours is
discriminatory   and  (iii)  the  Company  to   discontinue   such  practice  of
interrupting EIIPR customers.  The Company,  in a filing with the NMPUC,  stated
that  it  unintentionally  misapplied  the  tariff  and as a  result,  filed  an
amendment  to its EIIPR  tariff  to  clarify  the  language  regarding  off-peak
interruptions. The NMPUC has not issued a ruling on NMIEC's petition.

City of Gallup ("Gallup") Complaint

       On January 7, 1998,  Gallup,  Gallup Joint  Utilities and the Pittsburg &
Midway Coal Mining Co.  ("Pitt-Midway")  filed a joint  complaint  and  petition
("Complaint")  for declaratory order regarding service status and abandonment of
facilities with the NMPUC. The Complaint asserts,  among other things,  that the
Company has wrongfully kept Pitt-Midway as an obligated  customer of the Company
and will not allow  Gallup to serve  Pitt-Midway,  and that the  Company has not
promptly  pursued the sale of a  transmission  line to  Pitt-Midway  pursuant to
contractual  obligations.  The Complaint  seeks interim relief in the form of an
interim  declaratory  order stating:  (i)  Pitt-Midway is no longer an obligated
customer  of the Company for  services at the mine and that  Pitt-Midway  is not
obligated to continue  payment of the Company's  industrial  service rate;  (ii)
Gallup is entitled to serve  Pitt-Midway  with electric power or  alternatively,
that Gallup can serve the mine at rates approved by the NMPUC; (iii) abandonment
of the power line and related facilities by the NMPUC is not necessary; (iv) the
Company  allows the  wheeling  of power  purchased  by Gallup  from APS over its
transmission system and (v) the Company enters into an interconnection agreement
with Gallup.

       As ordered by the NMPUC,  the  Company  filed its brief on  February  23,
1998.  The Company  believes  that it continues  to maintain the  jurisdictional
rights to serve Pitt-Midway until the advent of retail open access and beyond if
the Company can supply energy at the lowest cost.

Electric Rates and Regulation - FERC

FERC Order

        FERC Order 889, effective January 3, 1997,  requires public utilities to
install and operate an Open Access Same-time  Information System and comply with
certain  standards of conduct among  employees in  transmission  operations  and
wholesale power marketing,  designed to prevent employees of a public utility or
its  affiliates  engaged  in  wholesale   marketing   functions  from  obtaining
preferential  access to  transmission-related  information  or from  engaging in
unduly  discriminatory  business  practices  regarding  access  to  transmission
service.  In January  1997,  the Company  filed with the FERC its  Standards  of
Conduct  report in  compliance  with  provisions  of Order 889,  and amended its
filing in September  1997 in  compliance  with Order 889-A.  The amended  filing
updates  the status of the  Company's  efforts to  separate  wholesale  merchant
functions from  transmission  operation and reliability  functions.  In December
1997,  FERC  approved a series of orders aimed at further  clarification  of the
functional   separation  of  utilities'   transmission  and  wholesale  merchant
functions, and to neutralize utilities' incentive to favor their own generation.

        FERC is now  focusing  on what  procedures  should be  followed,  in the
absence of Federal  legislation on reliability  issues, to address the effect of
new reliability standards on jurisdictional electric transmission service.



                                       13
<PAGE>


FPPCAC

        The Company's  firm-requirements wholesale customers have a FPPCAC which
has an approximate 30-day time lag in implementation  for billing purposes.  The
Company's  FPPCAC  for its  firm-requirement  wholesale  customers  had  been at
variance with the filed FERC tariffs.  As a result, the Company filed a petition
with FERC on October 28, 1993, to permit  deviation  from the filed FERC tariffs
for the period of July 1985 through January 1993. The Company's filing indicated
that the four  firm-requirements  wholesale customers benefited during that time
period  relative  to the energy  costs they  would  have been  billed  under the
application of the filed FERC tariffs.  The four affected  customers concur with
the Company's  position and have filed a certificate of  concurrence  with FERC.
Discussions regarding the Company's filing with FERC staff have occurred, but at
this time no formal  response has been given to the Company.  The Company has no
indication  when a formal response will be received;  however,  the Company does
not anticipate any material adverse impact on the Company's  financial condition
or results of operations as a result of this issue.

Transmission Rate Case Settlement

        In April 1996,  the Company filed a  transmission  rate case at the FERC
which  requested  a change  in rates  for its  firm  and  non-firm  transmission
customers. Prior to the scheduled hearings in the case, the Company and the firm
transmission customers were able to reach a negotiated settlement. A stipulation
on the settlement reached by the parties was filed with the FERC on December 16,
1996.  In  accordance  with the  stipulated  agreement,  the Company will refund
approximately  $3.7 million of revenues it collected from its firm  transmission
customers.  In addition,  the  Company's  firm  wholesale  transmission  service
revenues  were  reduced by  approximately  $1.6 million  beginning in 1997.  The
stipulation was certified by the Administrative Law Judge to the FERC on January
22,  1997.  The  Company  anticipates  that the FERC  will  take  action  on the
stipulation  but cannot  currently  predict a  timeframe  for such  action.  The
Company  does not  anticipate  any  material  adverse  impact  on the  Company's
financial condition or results of operations from the settlement agreement.

Independent System Operator ("ISO")

        In January 1998, the Company  entered into a Development  Agreement with
other transmission  service providers and users to form an ISO in the Southwest.
The Development  Agreement has a one year term and is separated into two phases.
The  first  phase  will  define  the  operating,  pricing,  planning  and  legal
parameters of the ISO by July 31, 1998.  The second phase,  which is expected to
be  completed  by December  31,  1998,  will  develop the  By-laws,  Articles of
Incorporation and various tariffs and agreements required.  Over thirty entities
are participating in the development process including investor owned utilities,
generation  and  transmission   cooperatives,   government   entities,   private
corporations  and other  interested  groups.  FERC  Order  888,  issued in 1996,
encourages  utilities  to  investigate  the  formation of such ISOs and provides
criteria  under which the  formation,  operation and governance of ISOs would be
reviewed.

        The  proposed  ISO,  named  the  Desert   Southwest   Transmission   and
Reliability  operator  ("Desert  STAR"),  would  be  empowered  to  serve  as  a
transmission   security  monitor,   handle  transmission  service  reservations,
transmission  service scheduling and accounting,  manage relief of congestion of
the transmission  grid,  procure  ancillary  services  required for transmission
system  operation  and operate a grid-wide  Open  Access  Same-time  Information
System. Desert STAR would be governed by an independent board.

         The Company is currently  unable to predict the ultimate  timing of the
formation or the ultimate outcome of the proposed ISO.


                                       14
<PAGE>

Proposed Rulemakings

        On June 5, 1995,  the NMPUC issued a Notice of Inquiry  ("NOI")  seeking
comments  on  whether  and  how  NMPUC  Rule  450,   which   governs   affiliate
transactions, should be revised. On June 3, 1996, the NMPUC issued its Notice of
Proposed  Rulemaking and Order on the NOI proposing certain  amendments to NMPUC
Rule 450 and seeking  comments and  suggested  language  changes to its proposed
amendments by August 5, 1996. The proposed  amendments  would, in effect,  limit
the Company's  non-utility  business  ventures.  The Company  vigorously opposed
these limitations and filed its comments and suggested language changes with the
NMPUC. The Company contends that many of the proposed amendments are unwarranted
or prohibited  under the New Mexico Public  Utility Act. To date,  the NMPUC has
not acted on the  comments or suggested  language  changes the Company and other
commentors requested.

        On February 16, 1998,  the NMPUC issued a Notice of Proposed  Rulemaking
(the  "Notice")  which,  if adopted would require  additional  information to be
disclosed  on  customer  bills.  The Notice  proposes  the  following:  (i) each
electric  utility shall  separately state in its bills to customers the portions
of its rates which are attributable to generation, transmission and distribution
functions;  (ii) if a rate case is pending on the  effective  date of this rule,
the NMPUC shall order the utility to propose this  information  consistent  with
its rate  filing or as the NMPUC may  otherwise  direct;  (iii) the NMPUC  staff
shall  determine  the portions of a utility's  rates which are  attributable  to
generation,  transmission and distribution functions;  this information shall be
included in customer bills within 60 days of service by the utility,  unless the
utility  files  proposed  revisions;  (iv)  a bill  insert  shall  describe  the
different  functional  components of electric  service;  thereafter,  the insert
shall be  included  in  customer  bills no less than every six  months;  (v) the
proposed rule applies to every investor-owned,  rural electric  cooperative,  or
municipal  electric  utility  operating  in New  Mexico  that is  subject to the
jurisdiction  of the NMPUC and (vi) the rule,  either  proposed or as  modified,
shall  not be  adopted  prior  to April  20,  1998.  The  Company  is  currently
evaluating the Notice. Comments are due March 20, 1998.

PRC

        In  1996,  New  Mexico  voters   approved  an  amendment  to  the  state
constitution which will replace the present State Corporation Commission ("SCC")
and the NMPUC with a single,  elected five member regulatory authority.  The new
PRC  will  be  responsible  for  overseeing   registration  of  all  New  Mexico
corporations,    as   well   as   regulating   insurers,    transportation   and
telecommunications  companies,  oil and gas pipelines,  and gas, electric, water
and sewer public utilities  operating in the state.  During the 1998 legislative
session, House Bill 74, which combines the regulatory authority of the NMPUC and
the SCC into the five member elected PRC effective  January 1, 1999, passed both
houses and is awaiting  signature  by the  Governor.  The bill  establishes  the
organizational  structure of the PRC, prescribes appropriate campaign practices,
and establishes a code of conduct for  commissioners,  but otherwise  leaves the
existing regulatory framework for utilities,  telecommunications,  insurance and
motor carriers in place.  Incumbent NMPUC  commissioners are not eligible to run
unless they resign,  although  incumbent SCC  commissioners  may run for the PRC
without  resigning.  The new  commissioners  will be elected by  district in the
November 1998 general election.

        For other rates and regulation  issues facing the Company,  see PART II,
ITEM 7. -  "MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND
RESULTS OF  OPERATIONS - OVERVIEW - OTHER ISSUES  FACING THE COMPANY  REGULATORY
ISSUES".


                                       15
<PAGE>


                              ENVIRONMENTAL FACTORS

        The Company, in common with other electric and gas utilities, is subject
to stringent regulations for protection of the environment by state, Federal and
tribal  authorities.  In addition,  PVNGS is subject to the  jurisdiction of the
NRC,  which has authority to issue permits and licenses and to regulate  nuclear
facilities  in order to  protect  the  health  and  safety  of the  public  from
radioactive  hazards  and  to  conduct  environmental  reviews  pursuant  to the
National   Environmental  Policy  Act.  The  Company  believes  that  it  is  in
compliance,  in all material respects,  with the environmental laws. The Company
does not currently expect that material  expenditures for environmental  control
facilities will be required to meet environmental  regulations in 1998 and 1999.
However,  in order to achieve  operational  efficiencies,  the  Company  began a
retrofit  environmental  project at SJGS in 1997,  which  will cost the  Company
approximately $40 million.  This project is scheduled to be completed in January
1999.

The Clean Air Act

        The Clean Air Act Amendments of 1990 (the "Act") impose stringent limits
on emissions of sulfur dioxide and nitrogen oxides from  fossil-fueled  electric
generating  plants.  The Act is intended to reduce air contamination  from every
sizeable  source  of  air  pollution  in the  nation.  Electric  utilities  with
fossil-fueled  generating units will be affected  particularly by the section of
the Act which  deals  with acid rain.  To be in  compliance  with the Act,  many
utilities  will be  faced  with  installing  expensive  sulfur  dioxide  removal
equipment,  securing low sulfur coal, buying sulfur dioxide emission allowances,
or a combination of these. Due to the existing air pollution  control  equipment
on the coal-fired SJGS and Four Corners,  the Company  believes that it will not
be faced with any material  capital  expenditures  in order to be in  compliance
with the acid rain provisions (both sulfur dioxide and nitrogen  dioxide) of the
Act. SJGS and Four Corners have  installed  flow  monitoring  equipment and have
completed   certification   testing  of  their  continuous  emission  monitoring
equipment.  Certification  testing  data was  submitted  to the EPA in 1995,  as
required.  Under other  provisions  of the Act,  the Company will be required to
obtain operating permits for its coal- and gas-fired generating units and to pay
annual  fees  associated  with the  operating  permit  program.  The New  Mexico
operating  permit  program was approved by the EPA in November  1994.  Operating
permit  applications  were  submitted to the state in 1995. As of this date, the
Company has not received operating permits for its coal- or gas-fired generating
units.  The Company has been negotiating the terms and conditions of the permits
with the regulatory agencies and expects to have operating permits issued by the
second quarter of 1998.

        The Act established  the Grand Canyon  Visibility  Transport  Commission
("Commission")  and charged it with assessing  adverse  impacts on visibility at
the Grand  Canyon.  The  Commission  broadened  its  scope to assess  visibility
impairment in mandatory  Class I areas (parks and  wilderness  areas) located in
the Colorado Plateau.  The Commission submitted its findings and recommendations
to the EPA in June 1996.

        The Commission's  recommendations  regarding  stationary sources are to:
(i) implement  existing Clean Air Act  requirements  through the year 2000; (ii)
establish  stationary  source  emission  targets as regulatory  triggers;  (iii)
develop  a plan  for  allocating  trading  credits  under a  regulatory  program
emissions cap; (iv) review compliance with targets and establish incentives; (v)
complete source attribution  studies and (vi) develop an improved monitoring and
accounting system.

        The Commission did not recommend any additional  emission reductions for
point sources.  The  recommendations  include  monitoring the impact of existing
Clean Air Act  requirements on emission  reductions and the resulting  effect on
visibility,  setting regional targets for SO2 emissions from stationary  sources
for the year 2000 and  developing  a  regulatory  program  to  implement  if the
targets  are  exceeded.  The  regulatory  program  will  most  likely  include a
market-based  trading of emissions  allowances.  The targets and the  regulatory
program  have not yet been  developed;  however,  the Company  does not expect a
material  adverse  effect on the  Company's  financial  condition  or results of
operations.


                                       16
<PAGE>


        In a related matter, the EPA proposed regional haze regulations in 1997.
These proposed  regulations address visibility  impairment in Class I areas. The
EPA has  stated  that it  considered  the  Commission's  recommendations  in the
formulation  of the proposed  regulations.  The  inclusion  of the  Commission's
recommendations  in the  proposed  regulations  is not  obvious.  The Company is
attempting  to have  the  Commission's  recommendations  included  in the  final
regional haze regulations.

        In July 1997,  the EPA  issued its final  rules  revising  the  National
Ambient Air Quality Standards for ozone and particulate  matter.  The EPA is now
involved in developing  implementation  plans for these revised  standards.  The
nature of and cost of the impacts of these  revisions to the standards,  if any,
to the Company's  operations  cannot be determined  at this time;  however,  the
Company  does not  anticipate  any  material  adverse  impact  on the  Company's
financial condition or results of operations.

        For other environmental  issues facing the Company, see PART II, ITEM 7.
-  "MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF
OPERATIONS - OTHER ISSUES FACING THE COMPANY -  ENVIRONMENTAL  ISSUES - Electric
Operations and ENVIRONMENTAL ISSUES - Gas Operations".

ITEM 2.  PROPERTIES

        Substantially  all of the Company's utility plant is mortgaged to secure
its first mortgage bonds.  (See PART II, ITEM 7. - "MANAGEMENT'S  DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  LIQUIDITY AND CAPITAL
RESOURCES - Capital Requirements and Liquidity and Financing Capability".)

                                    ELECTRIC

        The Company's  ownership and capacity in electric generating stations in
commercial service as of December 31, 1997, were as follows:
                                                                    Total Net
                                                                    Generation
   Type             Name                  Location                 Capacity (MW)
   ----             ----                  --------                 -------------

Nuclear.......  PVNGS (a)            Wintersburg, Arizona                390 *
Coal..........  SJGS (b)             Waterflow, New Mexico               750
Coal..........  Four Corners (c)     Fruitland, New Mexico               192
Gas/Oil.......  Reeves               Albuquerque, New Mexico             154
Gas/Oil.......  Las Vegas            Las Vegas, New Mexico                20
                                                                       -----
                                                                       1,506
                                                                       =====

    * For load and resource purposes, the Company has notified the NMPUC that it
      recognizes the maximum dependable capacity rating for PVNGS to be 381 MW.

-----------------

         (a)  The Company is entitled to 10.2% of the power and energy generated
              by PVNGS. The Company has a 10.2% ownership interest in Unit 3 and
              has leasehold interests in Units 1 and 2.
         (b)  SJGS Units 1, 2 and 3 are 50% owned by the Company; SJGS Unit 4 is
              38.457%  owned by the Company.
         (c)  Four Corners Units 4 and 5 are 13% owned by the Company.

                                       17
<PAGE>

Fossil-Fueled Plants

        SJGS is located in northwestern  New Mexico,  and consists of four units
operated by the Company.  Units 1, 2, 3 and 4 at SJGS have net rated  capacities
of 316 MW, 312 MW, 488 MW and 498 MW, respectively. SJGS Units 1 and 2 are owned
on a 50% shared basis with Tucson. Unit 3 is owned 50% by the Company,  41.8% by
SCPPA and 8.2% by Tri-State Generation and Transmission Association, Inc. Unit 4
is owned 38.457% by the Company,  28.8% by M-S-R,  10.04% by Anaheim,  8.475% by
Farmington,  7.2% by Los Alamos and 7.028% by UAMPS. The Company's net aggregate
ownership in SJGS is 750 MW.

        In July  1996,  the  Company  and  other  SJGS  participants  signed  an
agreement to convert the existing flue gas desulfurization  (SO2 removal) system
at the  SJGS  into a much  simpler  and cost  effective  limestone  system.  The
conversion  project  will cost the  Company  approximately  $40  million  and is
scheduled to be completed in January 1999.

        The Company also owns 192 MW of net rated capacity  derived from its 13%
interest in Units 4 and 5 of Four Corners located in northwestern  New Mexico on
land leased from the Navajo  Nation and  adjacent to  available  coal  deposits.
Units 4 and 5 at Four  Corners  are  jointly  owned  with SCE,  APS,  Salt River
Project, Tucson and El Paso and are operated by APS.

         Four  Corners  and a portion  of the  facilities  adjacent  to SJGS are
located  on land held  under  easements  from the  United  States and also under
leases from the Navajo  Nation,  the  enforcement  of which leases might require
Congressional  consent.  The  risk  with  respect  to the  enforcement  of these
easements and leases is not deemed by the Company to be material.  However,  the
Company is dependent in some  measure  upon the  willingness  and ability of the
Navajo Nation to protect these properties.

        The Company  owns 154 MW of  generation  capacity  at Reeves  Station in
Albuquerque,  New Mexico, and 20 MW of generation  capacity at Las Vegas Station
in Las Vegas,  New Mexico.  These  stations are used  primarily  for peaking and
transmission support.

Nuclear Plant

The Company's Interest in PVNGS

        The Company is participating in the three 1,270 MW units of PVNGS,  also
known as the Arizona Nuclear Power Project, with APS (the operating agent), Salt
River Project,  El Paso, SCE, SCPPA and The Department of Water and Power of the
City of Los Angeles.  The Company has a 10.2% undivided  interest in PVNGS, with
its interests in Units 1 and 2 held under leases. In September 1992, the Company
purchased approximately 22% of the beneficial interests in the PVNGS Units 1 and
2 leases for approximately $17.5 million.  The Company's ownership and leasehold
interests in PVNGS amount to 130 MW per unit,  or a total of 390 MW. PVNGS Units
1, 2 and 3 were declared in  commercial  service by the Company in January 1986,
September  1986 and January 1988,  respectively.  Commercial  operation of PVNGS
requires  full  power  operating   licenses  which  were  granted  by  the  NRC.
Maintenance of these licenses is subject to NRC regulation.

        During 1997,  PVNGS was operated at a capacity factor of 90.6% which was
the highest yearly capacity  factor attained at the plant.  This capacity factor
was primarily attributable to record setting low refueling outage days.



                                       18
<PAGE>

Steam Generator Tubes

        APS, as the operating agent of PVNGS,  has encountered  tube cracking in
the steam generators. In March 1993, PVNGS Unit 2 steam generators experienced a
tube  rupture.  APS's recent  analysis  indicates  that it will be  economically
desirable  for the owners of PVNGS to  replace  the Unit 2 steam  generators  in
approximately  ten years.  The recent  analysis  indicates that around 2003, the
steam  generators  will not be able to maintain full power output because of the
number of tubes that will have been plugged.  Tube plugging,  which  effectively
removes  the tube  from  service,  is the  normal  course  of action to handle a
cracked tube.  The PVNGS  participants,  including the Company,  would face lost
revenue  and  increased  expense  due to  reduced  power  output  from the steam
generator and longer inspections of the steam generators during outages. After a
detailed analysis and assessment, the PVNGS participants, including the Company,
made the  decision  during the last  quarter of 1997 to fabricate a spare set of
steam generators. The cost of the new steam generators to the Company, including
installation  costs,  will be approximately  $18.7 million in 1997 dollars.  APS
expects that the  replacement  will be performed  in  conjunction  with a normal
refueling  outage  in order  to  limit  additional  incremental  outage  time to
approximately 70 days.

        APS has taken,  and will  continue  to take,  remedial  actions  that it
believes have slowed further tube degradation. The steam generator tubes in each
unit continue to be inspected in conjunction with their respective outages.  APS
currently  believes that the PVNGS steam generators in Units 1 and 3 are capable
of operating for their  designed life of forty years;  although,  at some point,
long-term  economic  considerations  may warrant  examination  of possible steam
generator replacement.

Sale and Leaseback Transactions of PVNGS Units 1 and 2

        In eleven  transactions  consummated  in 1985 and 1986, the Company sold
and leased back its entire 10.2%  interest in PVNGS Units 1 and 2, together with
portions of the Company's undivided interest in certain PVNGS common facilities.
In each  transaction,  the Company sold  interests to an owner  trustee under an
owner trust agreement with an institutional equity investor. The owner trustees,
as lessors,  leased the interests to the Company under lease  agreements  having
initial terms  expiring  January 15, 2015 (with respect to the Unit 1 leases) or
January 15,  2016 (with  respect to the Unit 2 leases).  Each lease  provides an
option to the  Company to extend  the term of the lease as well as a  repurchase
option. The lease expense for the Company's PVNGS leases is approximately  $66.3
million per year.  Throughout the terms of the leases,  the Company continues to
have full and exclusive authority and responsibility to exercise and perform all
of the rights and duties of a  participant  in PVNGS under the  Arizona  Nuclear
Power Project  Participation  Agreement and retains the exclusive  right to sell
and dispose of its 10.2% share of the power and energy  generated by PVNGS Units
1 and 2. The Company also retains responsibility for payment of its share of all
taxes,  insurance  premiums,  operating and maintenance  costs, costs related to
capital  improvements  and  decommissioning  and all  other  similar  costs  and
expenses  associated with the leased facilities.  In 1992, the Company purchased
approximately 22% of the beneficial  interests in the PVNGS Units 1 and 2 leases
for $17.5 million.  For accounting  purposes,  this  transaction  was originally
recorded as a purchase with the Company recording  approximately  $158.3 million
as  utility  plant  and  $140.8  million  as  long-term  debt  on the  Company's
consolidated  balance  sheet.  In  connection  with the $30 million  retail rate
reduction  stipulated  with the  NMPUC  in  1994,  the  Company  wrote  down the
purchased  beneficial  interests in PVNGS Units 1 and 2 leases to $46.7 million.
In March 1995,  the Company  retired  approximately  $130 million of PVNGS lease
obligation bonds ("LOBs").

        In October 1996,  the Company  purchased  $200 million of the PVNGS LOBs
and another $28.9 million in December  1997. The bonds are held as an investment
on the Company's books. For rating agency purposes,  the PVNGS LOBs are included
in the  calculation of the debt to equity ratio and various  financial  coverage
ratios.  The  purchase  of the  $228.9  million  of PVNGS LOBs is treated by the
rating  agencies  as  a  defeasance  of  the  bonds,  thereby  resulting  in  an
improvement to certain financial coverage ratios.



                                       19
<PAGE>


        Each lease describes  certain  events,  "Events of Loss" or "Deemed Loss
Events",  the  occurrence  of which could  require  the Company to,  among other
things,  (i)  pay the  lessor  and the  equity  investor,  in  return  for  such
investor's  interest in PVNGS, cash in the amount provided in the lease and (ii)
assume  debt  obligations  relating  to the PVNGS  lease.  The  "Events of Loss"
generally relate to casualties, accidents and other events at PVNGS, which would
severely  adversely affect the ability of the operating agent,  APS, to operate,
and the ability of the Company to earn a return on its interests in, PVNGS.  The
"Deemed Loss Events"  consist  mostly of legal and  regulatory  changes (such as
changes in law making the sale and leaseback transactions illegal, or changes in
law making the lessors  liable for  nuclear  decommissioning  obligations).  The
Company  believes  the  probability  of such  "Events of Loss" or  "Deemed  Loss
Events" occurring is remote. Such belief is based on the following reasons:  (i)
to a large extent,  prevention of "Events of Loss" and some "Deemed Loss Events"
is within the control of the PVNGS participants,  including the Company, and the
PVNGS  operating  agent,  through  the  general  PVNGS  operational  and  safety
oversight  process and (ii) with respect to other  "Deemed Loss  Events",  which
would  involve a  significant  change in current law and policy,  the Company is
unaware of any pending  proposals or proposals being considered for introduction
in Congress or any state legislative or regulatory body that, if adopted,  would
cause any such events.

PVNGS Decommissioning Funding

        The Company has a program for funding its share of decommissioning costs
for PVNGS. Under a portion of this program, the Company makes a series of annual
deposits  under  agreements  approved by the NMPUC to an external  non-qualified
trust which are applied  towards an  investment  in life  insurance  policies on
certain  current  and former  employees.  The  remaining  portion of the nuclear
decommissioning  funding  program is  invested  in  equities  in  qualified  and
non-qualified  trusts.  The  results  of the  1995  decommissioning  cost  study
indicated that the Company's  share of the PVNGS  decommissioning  costs will be
approximately $162.6 million (in 1997 dollars).

        Pursuant  to NMPUC  approval,  the  Company  funded an  additional  $2.1
million and $12.5 million in 1997 and 1996, respectively, into the qualified and
non-qualified  trust funds. The estimated market value of the trusts,  including
the net cash value of the current life  insurance  policies,  at the end of 1997
was approximately $30.9 million.

PVNGS Liability and Insurance Matters

        The PVNGS  participants  have  insurance for public  liability  payments
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 $200 million and the
balance  by an  industry-wide  retrospective  assessment  program.  The  maximum
assessment per reactor under the  retrospective  rating program for each nuclear
incident  occurring  at  any  nuclear  power  plant  in  the  United  States  is
approximately  $79.3  million,  subject to an annual  limit of $10  million  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 $24.3 million, with an annual payment limitation of $3 million per
incident.  The  insureds  under  this  liability  insurance  include  the  PVNGS
participants  and "any other  person or  organization  with respect to his legal
responsibility  for damage caused by the nuclear  energy  hazard".  If the funds
provided by this  retrospective  assessment  program  prove to be  insufficient,
Congress could impose revenue  raising  measures on the nuclear  industry to pay
claims.

        The PVNGS participants  maintain "all-risk"  (including nuclear hazards)
insurance for nuclear  property damage to, and  decontamination  of, property at
PVNGS in the aggregate  amount of  approximately  $2.75 billion as of January 1,
1998,  a  substantial  portion of which must be  applied  to  stabilization  and
decontamination.  The Company has also secured insurance against portions of the
increased  cost of  generation  or  purchased  power and  business  interruption
resulting from certain accidental outages of any of the three PVNGS units if the


                                       20
<PAGE>


outage  exceeds  17  weeks.  The  Company  is a member  of two  industry  mutual
insurers.  These mutual insurers  provide both the "all-risk" and increased cost
of  generation  insurance  to  the  Company.  In the  event  of  adverse  losses
experienced  by these  insurers,  the Company is subject to an  assessment.  The
Company's  maximum  share of any  assessment is  approximately  $4.3 million per
year.

Other Electric Properties

        As of December  31, 1997,  the Company  owned,  jointly  owned or leased
2,803 circuit miles of electric  transmission lines, 5,352 miles of distribution
overhead lines,  3,392 cable miles of underground  distribution lines (excluding
street lighting) and 227 substations.

                                   NATURAL GAS

        The natural gas property as of December 31, 1997, consisted primarily of
natural gas storage,  transmission  and  distribution  systems.  Provisions  for
storage made by the Company  include  ownership and operation of an  underground
storage facility located near Albuquerque,  New Mexico. The transmission systems
consisted  of  approximately  1,277 miles of pipe with  appurtenant  compression
facilities.  The distribution systems consisted of approximately 10,332 miles of
pipe.

        On June 21, 1996, the Company entered into a purchase agreement with the
DOE for the purchase of  approximately  130 miles of transmission  pipe for $3.1
million for the  transmission  of natural gas to Los Alamos and to certain other
communities in northern New Mexico. The purchase is subject to the DOE providing
right-of-way  satisfactory  to the Company.  The  acquisition by the Company was
approved by the NMPUC in December 1996.  Right-of-way  resolution is expected to
be completed sometime in 1998.

                                OTHER INFORMATION

        The electric and gas transmission  and distribution  lines are generally
located within easements and rights-of-way on public,  private and Indian lands.
The Company leases  interests in PVNGS Units 1 and 2 and related  property,  EIP
and  associated  equipment,  data  processing,  communication,  office and other
equipment,  office space,  utility poles (joint use),  vehicles and real estate.
The Company also owns and leases  service and office  facilities in  Albuquerque
and in other operating divisions throughout its service territory.

ITEM 3. LEGAL PROCEEDINGS

                          PVNGS WATER SUPPLY LITIGATION

        The Company  understands  that a summons  served on APS in 1986 required
all water  claimants in the Lower Gila River  Watershed of Arizona to assert any
claims to water on or before  January  20,  1987,  in an action  pending  in the
Maricopa  County  Superior  Court.  PVNGS is located within the geographic  area
subject to the summons and the rights of the PVNGS  participants,  including the
Company,  to the use of  groundwater  and effluent at PVNGS are  potentially  at
issue in this  action.  APS, as the PVNGS  project  manager,  filed  claims that
dispute the court's jurisdiction over the PVNGS participants' groundwater rights
and their contractual  rights to effluent relating to PVNGS and,  alternatively,
seek confirmation of such rights.  APS's claims dispute the court's jurisdiction
over APS's  groundwater  rights with respect to PVNGS, and  alternatively,  seek
confirmation  of such  rights.  In 1992,  the Arizona  Supreme  Court heard oral
argument  on certain  issues in this matter  which are pending on  interlocutory
appeal.  Issues  important to APS's claims were  remanded to the trial court for
further  action and the trial court  certified  its decision  for  interlocutory
appeal to the Arizona  Supreme Court.  In September  1994,  the Arizona  Supreme
Court granted review of the trial court  decision.  No trial date concerning the
water rights claims of APS has been set in this matter.


                                       21
<PAGE>


        Although the foregoing matters remain subject to further evaluation, APS
expects that the described litigation will not have a material adverse impact on
the  operation of PVNGS.  In addition,  the Company  believes  that the ultimate
outcome of this matter will not have a material  adverse effect on the Company's
financial condition or results of operation.

                           SAN JUAN RIVER ADJUDICATION

        In 1975,  the State of New Mexico filed an action  entitled State of New
Mexico v. United States,  et al., in the District Court of San Juan County,  New
Mexico,  to adjudicate  all water rights in the "San Juan River Stream  System".
The Company  was made a  defendant  in the  litigation  in 1976.  The action was
expected to adjudicate  water rights used at Four Corners and at SJGS. (See ITEM
1. "BUSINESS - ELECTRIC OPERATIONS - Fuel and Water Supply - Water Supply".) The
Company cannot at this time  anticipate the effect,  if any, of any water rights
adjudication on the present  arrangements for water at SJGS and Four Corners. It
is the  Company's  understanding  that final  resolution  of the case  cannot be
expected for several years.

                                OTHER PROCEEDINGS

Republic Savings Bank ("RSB") Litigation

        On July 1,  1996,  in a 7-2  decision  in the case of  United  States v.
Winstar  Corporation,  the United  States  Supreme  Court ruled that the Federal
government  had breached its  contractual  obligations  with certain  thrifts in
refusing to  recognize  the  accounting  practices of  supervisory  goodwill and
capital  credits.  Contracts had been negotiated  with certain Federal  agencies
providing for the purchase of failing thrifts on the condition that  supervisory
goodwill  and  capital   credits  be  recognized  for  purposes  of  determining
compliance  with  regulatory  capital  requirements.  When Congress  enacted the
Financial  Institutions  Reform,  Recovery and  Enforcement  Act in 1989,  these
accounting practices were prohibited, thus driving otherwise healthy thrifts out
of compliance  with the capital  requirements.  Many,  including RSB, were taken
over and liquidated as a result.

        Meadows  owns  directly a 100%  ownership  interest in Republic  Holding
Company ("RHC"),  and RSB was a wholly-owned  subsidiary of RHC. Meadows and RHC
have pending before the United States Court of Federal Claims a lawsuit filed in
1992, alleging similar contractual arrangements to those at issue in the Winstar
case. The Federal government has filed a counterclaim  alleging breach by RHC of
its  obligation  to maintain  RSB's net worth and has moved to dismiss  Meadows'
claim for lack of standing.

        RSB was the thrift  organized upon the  acquisition of Citizens  Federal
Savings and Loan Association and Fireside Federal Savings and Loan  Association,
both Illinois corporations,  in 1985. The plaintiffs invested $17 million of new
capital in the failing  institutions.  The Federal regulators expressly promised
that   approximately  $23  million  of  supervisory   goodwill  created  by  the
transaction  could be accounted for as an intangible  asset to be counted toward
regulatory capital.  Additionally, the regulators promised to allow a $3 million
cash  contribution by the Federal  Savings and Loan Insurance  Corporation to be
recorded as a direct credit to regulatory capital. In 1992, the Office of Thrift
Supervision  placed RSB in  receivership  and appointed the RTC as receiver.  In
November  1992,  RTC sold RSB as a going  concern  for a  premium  of  nearly $1
million,  with  approximately  $215.5  million in assets  and $203.9  million in
liabilities.

        The RSB case has been held in abeyance pending the ruling by the Supreme
Court. The Company  believes that the Winstar  decision  establishes the Federal
government's  liability to Meadows and RHC in the RSB  litigation and the amount
of damages  owed as a result will be  vigorously  litigated.  It is premature to
estimate the amount of recovery, if any, by Meadows and RHC.


                                       22
<PAGE>


Four Corners

        The  Company  owns a 13%  ownership  interest  in  Units 4 and 5 of Four
Corners  located  in  northwestern  New  Mexico on land  leased  from the Navajo
Nation.  In July 1995, the Navajo Nation enacted the Navajo Nation Air Pollution
Prevention  and Control Act, the Navajo Nation Safe  Drinking  Water Act and the
Navajo Nation Pesticide Act (collectively,  the "Acts"). By letter dated October
12, 1995, the Four Corners participants requested the United States Secretary of
the Interior (the  "Secretary")  to resolve their dispute with the Navajo Nation
regarding  whether or not the Acts apply to operation of Four Corners.  The Four
Corners  participants  subsequently filed a lawsuit in the District Court of the
Navajo Nation (the "Court"), Window Rock District,  seeking, among other things,
a declaratory  judgment that: (i) the Four Corners leases and Federal  easements
preclude the  application  of the Acts to the operation of Four Corners and (ii)
the Navajo Nation and its agencies and courts lack adjudicatory  jurisdiction to
determine the enforceability of the Acts as applied to Four Corners.  On October
18,  1995,  the  Navajo  Nation  and the Four  Corners  participants  agreed  to
indefinitely  stay the  proceedings  referenced  above so that the  parties  may
attempt to resolve the dispute without  litigation,  and have requested that the
Secretary and the Court stay these proceedings. The Company is unable to predict
the outcome of this matter but does not anticipate  any material  adverse impact
on the Company's financial condition or results of operation.

        For a  discussion  of other  legal  proceedings,  see PART II, ITEM 7. -
"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS - OTHER ISSUES FACING THE COMPANY - REGULATORY ISSUES - Electric Rate
Case and The 1995 Gas Rate Case Appeal".

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

       None.

                                       23
<PAGE>


SUPPLEMENTAL ITEM.  EXECUTIVE OFFICERS OF THE COMPANY

       Executive officers, their ages, offices held with the Company in the past
five years and initial effective dates thereof,  were as follows on December 31,
1997, except as otherwise noted:
<TABLE>
<CAPTION>

        Name        Age                     Office                              Initial Effective Date
        ----        ---                     ------                              ----------------------

<S>                  <C> <C>                                                    <C>    
B. F. Montoya....... 62  President and Chief Executive Officer                  August 1, 1993

J. E. Sterba........ 42  Executive Vice President and Chief Operating Officer   March 11, 1997
                         Senior Vice President, Bulk Power Services             December 6, 1994
                         Senior Vice President, Corporate Development           December 7, 1993
                         Senior Vice President, Asset Restructuring             April 6, 1993
                         Senior Vice President, Retail Electric and Water       January 29, 1991
                         Services

M. D. Christensen... 49  Senior Vice President, New Mexico Retail Services      November 3, 1997
                         Senior Vice President, Customer Service and Public     January 9, 1996
                         Affairs
                         Vice President, Public Affairs                         December 7, 1993
                         Vice President, Communications                         July 22, 1991

R. J. Flynn......... 55  Senior Vice President, Electric Services               December 1, 1994

M. H. Maerki........ 57  Senior Vice President and Chief Financial Officer      December 7, 1993
                         Senior Vice President, Administration and Chief        March 2, 1993
                         Financial Officer  
                         Senior Vice President and Chief Financial Officer      June 1, 1988

P. T. Ortiz......... 47  Senior Vice President, General Counsel and Secretary   December 6, 1994
                         Senior Vice President, Regulatory Policy, General      December 7, 1993
                         Counsel and Secretary
                         Senior Vice President, Public Policy, General          March 2, 1993
                         Counsel and Secretary
                         Senior Vice President, General Counsel and Corporate   February 4, 1992
                         Secretary

W. J. Real.......... 49  Senior Vice President, Gas Services                    December 6, 1994
                         Senior Vice President, Utility Operations              December 7, 1993
                         Senior Vice President, Customer Service and            March 2, 1993
                           Operations
                         Executive Vice President, Gas Operations               June 19, 1990

R. B. Ridgeway...... 39  Senior Vice President, Energy Services                 December 14, 1996
                         Vice President, Corporate Planning                     August 10, 1996
                         Director, Corporate Strategy                           July 2, 1994
                         Consultant, Competitive Analysis                       October 5, 1992

</TABLE>


                                       24
<PAGE>

<TABLE>
<CAPTION>

        Name        Age                     Office                              Initial Effective Date
        ----        ---                     ------                              ----------------------

<S>                  <C> <C>                                                    <C>    
J. A. Zanotti....... 58  Senior Vice President, Human Resources                 January 9, 1996
                         Vice President, Human Resources                        March 2, 1993
                         Senior Vice President, Human Resources and             July 26, 1990
                           Communications
</TABLE>

        All  officers  are  elected  annually by the board of  directors  of the
Company.

        All of the above  executive  officers  have been employed by the Company
and/or its  subsidiaries  for more than five years in  executive  or  management
positions,  with  the  exception  of B. F.  Montoya  and R. J.  Flynn.  Prior to
employment  with the Company,  B. F.  Montoya was employed  with Pacific Gas and
Electric  Company  ("PG&E")  since 1989. In 1991, he was promoted to Senior Vice
President and General Manager of the Gas Supply Business Unit of PG&E.  Prior to
his  employment  with PG&E, B. F. Montoya  spent 31 years in the Civil  Engineer
Corps  of  the  U.S.   Navy,   performing  a  wide  range  of   management   and
utility-related  assignments.  B. F.  Montoya  achieved the rank of Rear Admiral
when he became  Commander,  Naval  Facilities  Engineering  Command and Chief of
Civil  Engineers.  R. J.  Flynn has a 30-year  history in the  utility  industry
working with PG&E.  Since 1989,  R. J. Flynn held the position of Regional  Vice
President,  responsible for all gas and electric  utility  operations in the San
Joaquin Valley.



                                       25
<PAGE>


                                     PART II

ITEM 5.       MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
                  STOCKHOLDER MATTERS

       The  Company's  common  stock is traded on the New York  Stock  Exchange.
Ranges of sales  prices of the  Company's  common  stock,  reported as composite
transactions (Symbol:  PNM), and dividends declared on common stock for 1997 and
1996, by quarters, are as follows:

                                                     Range of
  Quarter Ended                                     Sales Prices     Dividends
  -------------                                  ----------------
                                                 High         Low    per Share
                                                 ----         ---    ---------
  1997:
     December 31 .........................     23 15/16    18 7/8      $0.17
     September 30 ........................     19  9/16    17 3/4      $0.17
     June 30 .............................     18   5/8    15 3/4      $0.17
     March 31 ............................     20   1/2    17 1/4      $0.17
                                                                       -----
        Fiscal Year ......................     23 15/16    15 3/4      $0.68
                                                                       =====

  1996:
     December 31 .........................     19   7/8    18 1/8      $0.12
     September 30 ........................     20   3/8    19          $0.12
     June 30 .............................     20   1/2    17 1/4      $0.12
     March 31 ............................     18   3/4    17 3/8      $0.12
                                                                       -----
        Fiscal Year ......................     20   1/2    17 1/4      $0.48
                                                                       =====

       On January 31, 1998, there were 17,512 holders of record of the Company's
common stock.

       On December 9, 1997, the Company's Board of Directors  ("Board") declared
a quarterly cash dividend of 17 cents per share of common stock payable February
20,  1998 to  shareholders  of  record  as of  February  2,  1998.  The  Company
reinstated its common stock dividend in May 1996.

       The Board set the dividend  payout  ratio below the  industry  average to
allow for dividend growth in the future and to sustain financial flexibility for
the  Company  to respond  to  potential  opportunities  in the  evolving  energy
marketplace.  The Board had not  declared  cash  dividends on common stock since
1989. In establishing its new dividend  policy,  the Board weighed the Company's
current  financial  position  and  its  future  business  plan,  as  well as the
regulatory and business climate in New Mexico.  Future dividend declaration will
be reviewed for action by the Board. The payment of future dividends will depend
on earnings, the financial condition of the Company, market conditions and other
factors.

Cumulative Preferred Stock

       While isolated  sales of the Company's  cumulative  preferred  stock have
occurred in the past,  the Company is not aware of any active trading market for
its  cumulative  preferred  stock.  Quarterly  cash  dividends were paid on each
series of the Company's  cumulative preferred stock at their stated rates during
1997 and 1996.



                                       26
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
                                               1997          1996         1995          1994         1993
                                               ----          ----         ----          ----         ----
                                                  (In thousands except per share amounts and ratios)

<S>                                         <C>           <C>          <C>           <C>          <C>       
Total Operating Revenues ..............     $1,135,267    $  883,386   $  808,465    $  904,711   $  873,878
Net Earnings (Loss) ...................     $   80,995    $   72,580   $   75,562    $   80,318   $  (61,486)*
Earnings (Loss) per Common Share:
   Basic...............................     $     1.92    $     1.72   $     1.72    $     1.77   $    (1.64)*
   Diluted.............................     $     1.91    $     1.71   $     1.72    $     1.77   $    (1.64)*
Total Assets ..........................     $2,313,732    $2,230,314   $2,035,669    $2,203,265   $2,212,189
Preferred Stock with Mandatory Redemption
   Requirements .......................              -             -            -    $   17,975   $   24,386
Long-Term Debt, including Current
    Maturities ........................     $  714,345    $  728,889   $  728,989    $  900,595   $  976,525
Common Stock Data:
   Market price per common share at
       year end .......................     $   23.688    $   19.625   $   17.625    $    13.00   $    11.25
   Book value per common share at
      year end ........................     $    19.26    $    18.06   $    16.82    $    15.11   $    13.29
   Average number of common shares
      outstanding .....................         41,774        41,774       41,774        41,774       41,774
   Cash dividend declared per
      common share ....................     $     0.68    $     0.48            -             -            -
Return on Average Common Equity........           10.2 %         9.8 %       10.7 %        12.4 %      (10.7)%
Capitalization:
   Common stock equity ................           52.5 %        50.4 %       48.6 %        39.2 %       34.4 %
   Preferred stock:
      Without mandatory redemption
        requirements ..................            0.8           0.9          0.9           3.7          3.6
      With mandatory redemption
        requirements ..................              -             -            -           1.1          1.5
   Long-term debt, including current
       maturities .....................           46.7          48.7         50.5          56.0         60.5
                                                  -----         -----        -----         -----       -----
                                                   100%          100%         100%          100%        100%
                                                  =====         =====        =====         =====       =====  
</TABLE>

-----------

         *    Includes the  write-down  of the 22%  beneficial  interests in the
              PVNGS Units 1 and 2 leases purchased by the Company, the write-off
              of  certain  regulatory  assets and other  deferred  costs and the
              write-off of certain PVNGS Units 1 and 2 common costs, aggregating
              $108.2 million, net of taxes ($2.59 per share).

        The  selected  financial  data  should be read in  conjunction  with the
consolidated   financial  statements,   the  notes  to  consolidated   financial
statements and Management's  Discussion and Analysis of Financial  Condition and
Results of Operations.


                                       27
<PAGE>

ITEM 7.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND
           RESULTS OF OPERATIONS

        The following is  management's  assessment  of the  Company's  financial
condition and the significant factors affecting the results of operations.  This
discussion  should  be read  in  conjunction  with  the  Company's  consolidated
financial statements.
                                    OVERVIEW

Restructuring the Electric Utility Industry

        Competition and  restructuring of the electric utility industry continue
to be key issues  facing the  Company.  Efforts to  advance  and  determine  the
eventual form of industry restructuring continued during 1997.

        At the state  level,  the Company  proposed in April 1997 that the NMPUC
reconvene  the  proceedings  involving  the NMPUC's  Notice of Inquiry  into the
restructuring  of the  electric  industry,  in an attempt to arrive at consensus
legislation  to be presented to the 1998 session of the New Mexico  Legislature.
In May 1997,  the NMPUC issued an order  accepting the Company's  proposal for a
collaborative effort, and the proposal for a series of meetings to be held among
all interested  parties.  The parties held several meetings in which the Company
actively participated.  However, in September 1997, the collaborative process to
draft  legislation  was  declared  at an impasse due to  disagreement  on issues
regarding the  divestiture  of generation and energy service units from electric
distribution and transmission systems, and the recoverability of stranded costs.

        Although the parties  could not reach  agreement,  the Company filed its
own proposal for industry  restructuring  in September 1997 with both the NMPUC,
and the Water,  Utilities and Natural  Resources  Committee  ("WUNR") of the New
Mexico Legislature.

        The Company's  proposal  called for an immediate  rate  reduction of $10
million per year for  residential  customers from the effective date of proposed
legislation  until open access  without the need for a rate case.  The  proposal
also called for full retail  competition  no later than  January 1, 2001.  Other
parts  of the  Company's  proposal  included  an offer  to  create  a  regulated
distribution  "wires  and  pipes"  company  dedicated  only to the  delivery  of
electricity   and  natural  gas.  Other   services,   usually   associated  with
distribution,  such as meter  reading,  billing and customer  services  would be
provided through competitive  markets. The Company offered to assume the risk of
stranded cost recovery on all fossil fuel  generation and for PVNGS Unit 3 which
was  previously  excluded from New Mexico  jurisdictional  rates.  However,  the
Company  would  recover  all fixed  costs  associated  with PVNGS  Units 1 and 2
through a  non-bypassable  "wires  charge" from 2001 to 2016.  The proposal also
called for certain credits to stranded costs which would effectively shorten the
time period for recovery.  The Company  currently  estimates  that if the market
clearing price for power,  which represents the cost of generation at the plant,
fell to 3.0 cents/KWh, it may incur an after-tax write-off of approximately $176
million  related to its fossil fuel generation if the Company assumes this risk.
The  Company's  proposal was supported by various  parties to the  collaborative
process,  including Enron Corporation,  the New Mexico Retail Association,  SPS,
the United  States  Executive  Agencies  and the  International  Brotherhood  of
Electrical Workers.  However, the Company's proposal was not adopted by the WUNR
and not introduced  during  the1998  legislative  session.  The WUNR declined to
recommend  any  restructuring  legislation  as a committee  bill during the 1998
legislative session.

        On  January  22,  1998,  the NMPUC  submitted  its own report to the New
Mexico  Legislature  related to restructuring of the electric utility  industry.
The  following  key points were  included  in the  report:  (i) PVNGS and Plains
Escalante Generating Station are the most debated issues in deregulation because
of their  potential  stranded  costs;  (ii) stranded  costs, if determined to be
lawful, should be verified by the NMPUC or its successor,  the PRC; (iii) market
power  issues  may be  addressed  through  functional  separation  or partial or
complete  divestiture  of  generation,   transmission  and  distribution;   (iv)
unbundling is necessary to understand the disparities among various  electricity
providers;  (v) despite an  abundance of natural  resources  to fuel  generation
facilities,  New  Mexico  customers  pay more for  electricity  because of costs



                                       28
<PAGE>

associated  with  generation  plants;  (vi) on average,  New Mexico  residential
customers  pay more for  electricity  than  regional  and  national  residential
customers  and (vii) system  reliability  must be  maintained  or enhanced,  and
customers must be educated and environmental  protections should be promoted. In
addition, sample legislation was attached to the report, giving either the NMPUC
or  the  PRC  authority  to  conclude  matters  relating  to  electric  industry
restructuring.  The report was issued as a result of a NMPUC case and,  with the
issuance of the report,  the case was closed.  The NMPUC's draft legislation was
not introduced during the 1998 legislative session.  House Memorial 27, the only
measure  dealing with  restructuring,  passed the House.  Memorial 27 stated the
intent  of  the   legislature   to  address  the  issue  of  electric   industry
restructuring  in the 1999  session  and  declared  that the NMPUC does not have
statutory authority to implement restructuring at this time. The Memorial 27 did
not require concurrence by the Senate; however, an identical Senate Memorial was
not acted upon by the full Senate prior to adjournment.

        In a related matter,  in 1996, the NMPUC ordered all utilities under its
jurisdiction  to file their  estimates  of stranded  costs,  absent any recovery
method being adopted, based on the Texas Public Utility Commission Economic Cost
Over  Market  ("ECOM")  model.  The  Company,  in  its  filing,   presented  two
methodologies:  (i) using the ECOM model, the Company's  stranded cost estimates
run from $657  million for a 1998 full retail  access case to $119 million for a
2002 full retail access case and (ii) using a second methodology, based upon the
difference  between the Company's costs of existing  generation and the costs of
new combined  cycle and  combustion  turbine  units to serve the same load,  the
Company's  costs  above  the  level  of new gas  units,  in 1997  dollars,  were
estimated at $748 million for a 1998 full retail access case to $327 million for
a 2002 full retail access case.  The Company  advised the NMPUC that the results
of the ECOM  model  are  highly  sensitive  to  various  assumptions,  primarily
projections of future gas prices.  This information was addressed in the NMPUC's
report submitted to the New Mexico Legislature.

        At the Federal  level,  legislation  was introduced in the United States
Congress in 1996 to allow  retail  competition  by the year 2000.  Since then, a
number of bills have been drafted for potential  introduction in Congress. It is
anticipated that these bills will be heavily lobbied by utilities,  industrials,
power marketers,  generators,  environmental  groups,  consumer groups and state
regulators.

        The  FERC  issued  Order  888 in  1996,  requiring  utilities  that  own
transmission   facilities  to  file  open  access   tariffs  to  make  available
transmission   services   to   affiliates   and   non-affiliates   at  fair  and
nondiscriminatory  rates.  Order 888 also states that public  utilities  will be
allowed to seek  recovery  of  legitimate  and  verifiable  stranded  costs from
departing  customers as a result of wholesale  competition.  The FERC  indicated
that it will  provide for the  recovery of retail  stranded  costs only if state
regulators  lack the legal  authority to address  those costs at the time retail
wheeling is required.  The FERC also stated that it would permit  stranded  cost
recovery   under   wholesale   all-requirements    contracts.    However,   upon
reconsideration,  FERC  determined  that it will serve as the primary  forum for
deciding stranded cost recovery cases if a non-jurisdictional  municipal utility
annexes territory currently served by a local retail utility.  This move by FERC
filled a jurisdictional gap that could have arisen since municipal utilities are
not necessarily subject to state commission jurisdiction.

        Although  it is  currently  unable to predict  the  ultimate  outcome of
possible retail competition initiatives,  the Company has been and will continue
to be active at both the state and Federal  levels in the public policy  debates
on the restructuring of the electric utility industry. The Company will continue
to work with customers, regulators,  legislators and other interested parties to
find solutions  that bring  benefits from  competition  while  recognizing  past
commitments.

Competitive Strategy

        The Company's  strategy for dealing with  competition  includes  ongoing
cost  reductions,  increased  productivity,  pursuit  of  growth  opportunities,
seeking to improve  credit  ratings to  investment  grade and  strengthening  of
customer  relations.  To accomplish these  objectives,  the Company continues to
maintain the focus on its core business and is aggressively pursuing its efforts
to expand  its energy and  utility  related  business  into  carefully  targeted
markets for new businesses opportunities.



                                       29
<PAGE>


        The restructuring of the utility industry,  coupled with today's renewed
emphasis  on energy  conservation  and  environmental  protection,  is fueling a
growing demand for energy, water and wastewater management services. In pursuing
new  business  opportunities,  the  Company is  focusing  on energy and  utility
related  activities  under its Energy Services  Business Unit.  These activities
will provide energy marketing and energy management  services,  the marketing of
natural gas outside of New Mexico,  management services for water and wastewater
systems and utility  related  management  and  operations  services  for Federal
installations and other large commercial institutions.  The Company is currently
operating the City of Santa Fe's water system. The Energy Services Business Unit
is also pursuing utility related business opportunities in Mexico.

        In June  1995,  the  Company  filed an  application  with the  NMPUC for
authorization for the creation of three wholly-owned non-utility subsidiaries as
part of the Energy Services Business Unit. The Company sought approval to invest
a maximum of $50 million in the three  subsidiaries  over time and to enter into
reciprocal  loan  agreements for up to $30 million with these  subsidiaries.  In
June  1997,  the  NMPUC  hearing  examiner  issued a  recommended  decision  for
approval,  with a number of conditions.  The  recommendation  indicated that any
capital infusion or financial assistance to its proposed subsidiaries beyond the
requested $50 million and reciprocal  loans exceeding more than $30 million with
these   subsidiaries   will  require  prior   approval   from  the  NMPUC.   The
recommendation  also directed that all investments  made in the subsidiaries and
their  operations  should not  adversely  affect the Company's  ratepayers.  The
Company is currently awaiting the NMPUC's final order in this case.

        The Company does not anticipate an earnings contribution from the Energy
Services  Business Unit over the next few years.  However,  the Company believes
that successful  operation of the Energy Services  Business Unit activities will
better position the Company in an increasingly competitive utility environment.

                         LIQUIDITY AND CAPITAL RESOURCES

Capital Requirements and Liquidity

        Total capital requirements include construction  expenditures as well as
other major  capital  requirements,  including  retirement  of  long-term  debt,
long-term debt sinking funds and cash dividend  requirements for both common and
preferred  stock.  The  main  focus of the  Company's  construction  program  is
upgrading  generating  systems,  upgrading  and  expanding  the electric and gas
transmission and distribution systems and purchasing nuclear fuel. Total capital
requirements  and  construction  expenditures  for 1997 were $173.9  million and
$128.2 million,  respectively.  Projections for total capital  requirements  and
construction  expenditures  for 1998 are  $218.9  million  and  $141.3  million,
respectively.  Such  projections  for the years  1998  through  2002 are  $940.3
million and $563.2 million,  respectively. The projected capital requirements do
not include the planned  refinancing  of $140 million of taxable first  mortgage
bonds or the  planned  refinancing  of PVNGS  Lease  Obligation  Bonds  ("LOBs")
discussed  below.  These  estimates are under  continuing  review and subject to
on-going  adjustment.  In conjunction with the upgrading of generating  systems,
the Company began a retrofit environmental project at SJGS which is scheduled to
be completed in January  1999.  The project will cost the Company  approximately
$40 million. The Company's anticipated savings in fuel and operating expense are
estimated to be approximately $10 million per year over the life of the plant.

        The Company's  construction  expenditures  for 1997 were entirely funded
through cash generated from operations.  The Company currently  anticipates that
internal cash generation will be sufficient to meet capital requirements for the
years 1998 through  2002.  To cover the  difference in the amounts and timing of
cash  generation and cash  requirements,  the Company  intends to use short-term
borrowings under its liquidity arrangements.

        At the  end of  1997,  the  Company  had  $130.0  million  of  available
liquidity  arrangements,  consisting of $100.0 million from a secured  revolving
credit  facility  ("Facility"),   $15.0  million  from  an  accounts  receivable
securitization  and $15.0  million in local lines of credit.  The Facility  will
expire in June 1998 and the  Company  intends to  replace  the  facility  with a
five-year $300 million senior unsecured revolving credit facility ("Revolver").


                                       30
<PAGE>

        In November 1997, the Company requested NMPUC approval to enter into the
Revolver.  In  addition,  the Company  intends to borrow $140  million  from the
Revolver to retire all of its  outstanding  taxable first  mortgage  bonds.  The
Company also requested  authority to exchange the first mortgage bonds currently
collateralizing  the outstanding  $575 million of tax-exempt  pollution  control
revenue bonds with senior  unsecured notes ("SUNs").  After  completion of these
transactions,  the  1947  Indenture  of  Mortgage  and  Deed of  Trust  would be
extinguished,   resulting  in  more  administrative,   financial  and  strategic
flexibility for the Company.  The  extinguishment  of the mortgage  requires the
consent of one party which has not yet  consented  and may not  consent.  Due to
concern about the consent,  the Company also requested  NMPUC authority to leave
an amended mortgage in place. Among other  modifications,  the mortgage would be
amended  such that only $111 million of  tax-exempt  pollution  control  revenue
bonds would have the benefit of the lien.  The property  under the lien would be
reduced and no future  bonds could be issued  under the  mortgage.  The SUNs are
planned  to be issued  under an  indenture  containing  a  restriction  on liens
(except in certain  limited  circumstances)  and  certain  other  covenants  and
restrictions.  With the  exception of the $111  million of tax-exempt  pollution
control  revenue bonds  secured by first  mortgage  bonds,  the SUNs will be the
senior debt of the  Company.  On February  16,  1998,  the NMPUC issued an order
approving these  transactions.  The Company is anticipating  completion of these
transactions in mid-March 1998.

        As of December 31, 1997, the Company had approximately  $18.2 million in
cash and temporary investments.

Financing Capability

        The  Company's  ability  to  finance  its  construction   program  at  a
reasonable cost and to provide for other capital needs is largely dependent upon
its  ability to earn a fair  return on equity,  results  of  operations,  credit
ratings,  regulatory  approvals  and  financial  market  conditions.   Financing
flexibility  is  enhanced  by  providing  a high  percentage  of  total  capital
requirements  from internal  sources and having the ability,  if  necessary,  to
issue long-term securities,  and to obtain short-term credit.  Standard & Poor's
Corp. and Moody's  Investors  Services,  Inc.  currently  maintain the Company's
credit ratings at one level below investment  grade. Duff & Phelps Credit Rating
Co.  currently  maintains an  investment  grade rating for the  Company's  first
mortgage bonds,  but continues to rate all other securities of the Company below
investment  grade.  The  Company  may face  limited  credit  markets  and higher
financing  costs as a result of its  securities  being  rated  below  investment
grade.

        One impact of the Company's current ratings,  together with covenants in
the  Company's  PVNGS  Units 1 and 2 lease  agreements  (see  PART I,  ITEM 2. -
"PROPERTIES  - Nuclear  Plant"),  is to limit  the  Company's  ability,  without
consent of the owner participants and bondholders in the lease transactions: (i)
to enter into any merger or  consolidation,  or (ii) except in  connection  with
normal dividend policy, to convey,  transfer,  lease or dividend more than 5% of
its assets in any single  transaction  or series of  related  transactions.  The
Facility imposes similar restrictions regardless of credit ratings.

        The  issuance  of first  mortgage  bonds by the  Company  is  subject to
earnings and bondable  property  provisions of the Company's first mortgage bond
indenture.  The Company also has the  capability  under the mortgage  indenture,
without  regard to the earnings test but subject to other  conditions,  to issue
first  mortgage  bonds on the basis of  certain  previously  retired  bonds.  At
December 31, 1997,  based on the earnings  test,  the Company  could have issued
approximately  $463 million of  additional  first  mortgage  bonds,  assuming an
annual  interest  rate of 7.34  percent.  The  Company's  restated  articles  of
incorporation limit the amount of preferred stock which may be issued.  Assuming
a preferred  stock dividend rate of 7.24 percent,  the Company could have issued
$525 million of preferred stock as of year-end.

Financing Activities

        In February  1997,  the Company  refinanced  $190  million of  pollution
control  revenue bonds issued by the City of  Farmington,  all maturing in April
2022. The effect of the refinancing  resulted in a decrease in interest  charges
of  approximately  $1.1  million  in 1997.  On  December  1, 1997,  the  Company
converted  $137.3  million of variable rate pollution  control  revenue bonds to


                                       31
<PAGE>

fixed  rates.  Of the  total,  $100  million  of City of  Farmington  bonds were
converted to a fixed rate of 5.80% and $37.3 million of Maricopa County, Arizona
Pollution Control Corporation bonds were converted to a fixed rate of 5.75%. The
City of  Farmington  bonds  mature on April 1, 2022,  and the  Maricopa  County,
Arizona Pollution Control Corporation bonds mature on November 1, 2022.

        In December  1997,  the Company  purchased  $28.9 million of PVNGS LOBs,
10.15% Series.  Although the LOBs are off-balance  sheet debt, these outstanding
bonds  have  been  included  in  the   calculation  of  the  Company's  debt  to
capitalization  ratio as well as various financial  coverage ratios by the major
rating  agencies.  The purchase of the LOBs will not only improve  these ratios,
but will also increase earnings in the form of interest income.

        The Company is currently preparing to request NMPUC approval to issue up
to $443 million in fixed income securities to refinance the $208 million in LOBs
remaining in the public markets and the $219 million in LOBs held by the Company
as an  investment.  Under a  stipulated  agreement  with the NMPUC,  any savings
generated from the refinancing will be split 40% to the Company's  customers and
60% to  shareholders.  The Company hopes to complete the transaction  during the
second quarter of 1998.

        Other  than  the  financing  activities  discussed  above,  the  Company
currently has no requirements for long-term  financing during the period of 1998
through 2002. However,  during this period, the Company could enter into further
long-term  financings  for the purpose of  strengthening  its balance  sheet and
reducing its cost of capital.  The Company's  continuing  program of retiring or
repurchasing long-term debt provided a net increase in earnings of approximately
$9.7 million, before taxes, during 1997.

        The Company  continues to evaluate its  investment  and debt  retirement
options to optimize its financing strategy and earnings potential.

Dividends
        The Company resumed the payment of cash dividends on common stock in May
1996. The Company's board of directors  ("Board") reviews the Company's dividend
policy on a continuing  basis.  The declaration of common dividends is dependent
upon a number of factors  including  earnings  and  financial  condition  of the
Company and market conditions.

Capital Structure

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

                                                  1997      1996      1995
                                                  ----      ----      ----

    Common Equity...........................      52.5%     50.4%     48.6%
    Preferred Stock.........................       0.8       0.9       0.9
    Long-term Debt..........................      46.7      48.7      50.5
                                                 -----     -----     -----
       Total Capitalization*................     100.0%    100.0%    100.0%
                                                 =====     =====     ===== 

  *   Total  capitalization  does not  include  as debt the  present
      value of the Company's lease obligations for PVNGS Units 1 and
      2 and EIP.


                              RESULTS OF OPERATIONS

        Basic earnings per share of common stock were $1.92, $1.72 and $1.72 for
1997,  1996 and 1995,  respectively.  Earnings in 1997  increased  substantially
above the 1996 level due to increased electric gross margin and interest income.
The sales of the gas gathering  and  processing  assets and the Company's  water
division in 1995 had a significant positive earnings effect in 1995 and impacted
1996  earnings  by  reducing  operating  margin,  reducing  operating  expenses,
reducing interest charges and increasing investment income.


                                       32
<PAGE>

        Electric gross margin (operating  revenues less fuel and purchased power
expense)  increased  $20.1  million in 1997 from 1996 as a result of retail load
growth  and  increased   off-system  sales  margin  as  a  result  of  continued
improvement in wholesale power market conditions.

        Electric  gross margin  increased  $23.3  million in 1996 from 1995 as a
result of retail  load  growth and warmer  than  normal  weather  and  increased
off-system  sales  margin  as  a  result  of  improved  wholesale  power  market
conditions.

        Gas gross margin  (operating  revenues  less gas  purchased  for resale)
increased $1.3 million in 1997 over 1996 resulting from the  implementation of a
higher fixed  monthly  customer  charge  (access  fee)  starting  February  1997
pursuant to the NMPUC's  final order in the gas rate case.  This was offset by a
reduced per therm rate per the NMPUC's  final order and lower  off-system  sales
margin.

        Gas gross  margin in 1996 was  unchanged  from 1995.  Higher  off-system
sales  margin and higher  retail  sales margin as a result of cooler than normal
weather in 1996 were offset by the absence of the gas gathering  and  processing
margin in 1996 due to the sale of the gas  gathering  and  processing  assets in
1995.

        The increase in the Energy Services Business Unit operating revenues and
gas  purchased  for resale in 1997 was due to the  Company's  first full year of
natural gas marketing  operations outside of New Mexico.  Gross margin decreased
$4.6  million  in 1997 from 1996 due mainly to a  negative  margin  from the gas
marketing operations as a result of unusual weather conditions on the West Coast
and elsewhere  around the country  contributing to the volatility in natural gas
prices  during the fourth  quarter of 1997.  The Company does not  anticipate an
earnings  contribution  from the Energy Services Business Unit over the next few
years.

        Other operation and maintenance expenses ("O&M") increased $13.2 million
in 1997 from 1996 due to the following:  (i) higher  operating  expenses of $4.3
million related to the Energy Services Business Unit's  operations;  (ii) higher
distribution  expense of $4.2 million as a result of increased  maintenance  and
service  enhancement  efforts;  (iii) higher production expenses of $4.3 million
resulting  from the  write-off of obsolete  inventory and  undistributed  stores
expense at PVNGS and a  severance  pay  accrual at SJGS;  (iv)  higher  customer
related service expenses of $2.9 million  resulting from the Company's  customer
enhancement  program;  (v) higher sales  expense of $2.0 million and (vi) higher
transmission  expense of $1.1 million.  Offsetting  these  increases  were lower
maintenance  expense at Four  Corners due to a scheduled  maintenance  outage in
1996, lower gas and oil production expense, and lower administrative and general
("A&G") labor and benefit expense.

        Other O&M decreased $.3 million in 1996 from 1995 due to the  following:
(i) lower production  expenses of $7.9 million as a result of reduced  scheduled
maintenance  outages in 1996,  decreased down time in 1996 for refueling outages
and  lower  property  taxes in 1996;  (ii) a  decrease  of $6.3  million  in gas
production and products extraction expense resulting from the gas assets sale in
June 1995;  (iii) lower pension and benefit costs of $4.2 million as a result of
an adjustment  to the  retirees'  health care costs and (iv) a decrease in water
division expense of $3.0 million  resulting from the sale of the Company's water
division  in July 1995.  These  decreases  were  offset by higher A&G expense of
$21.0 million due to increased labor,  increased office supplies and expense and
higher outside services expenses.

        Depreciation and amortization expenses increased $4.6 million in 1997 as
a result of additional utility plant and an adjustment  recorded in 1996 for the
over amortization of certain intangible utility plant.

        Depreciation  and amortization  expenses  decreased $2.7 million in 1996
from 1995 as a result of the sale of the Company's water division and gas assets
in 1995 and an adjustment  recorded in 1996 for the over amortization of certain
intangible utility plant.



                                       33
<PAGE>


        Net other income and deductions  increased $11.9 million from a year ago
and decreased $18.8 million in 1996 from 1995.  Significant  1997 items,  net of
taxes,  included  interest income of $14.3 million resulting from the investment
in the PVNGS LOBs and settlement of litigation.  Significant  1996 items, net of
taxes, included the following: (i) a regulatory liability of $10.1 million; (ii)
a $1.7 million write-down of certain assets related to the Company's natural gas
vehicle   program  and  (iii)  an   additional   accrual  of  $1.0  million  for
environmental  liabilities  associated with the 1995 gas assets sale. Offsetting
these decreases were a curtailment gain of $8.0 million related to the change of
the Company's  defined  benefit  pension plan and higher interest income of $7.6
million as a result of increased temporary  investments in 1996 and the purchase
of the PVNGS LOBs.

        Significant 1995 items, net of taxes, included the following: (i) a gain
of $12.8  million  recognized  from  the gas  assets  sale;  (ii) a gain of $6.4
million  recognized from the sale of the Company's water division;  (iii) a $2.6
million  adjustment to the carrying costs related to gas take-or-pay  settlement
amounts;  (iv)  a  $1.9  million  insurance  recovery  and  (v) a  $1.4  million
adjustment to  reclamation  reserves for certain mining  operations.  Offsetting
these  increases  were: (i) additional  regulatory  reserves of $4.8 million and
(ii) write-downs of $1.8 million for various non-utility properties.

        Net  interest  charges  increased  $1.5 million in 1997 due to increased
short-term  borrowings  for the  purchase  of the $200  million of PVNGS LOBs in
October 1996 and interest  accruals on the balance due customers  related to the
gain associated with the 1995 gas asset sale.

        Net  interest  charges  decreased  $3.2  million  in 1996 from 1995 as a
result of the retirement of $132.7 million of PVNGS LOBs in March 1995.  Offsets
to the 1996 decrease were higher  short-term  interest  charges  resulting  from
short-term  borrowings  for the  purchase  of the  PVNGS  LOBs  and an  interest
assessment from the Internal Revenue Service.

        Preferred stock dividend requirements  decreased $3.1 million in 1996 as
a result of the retirement of $64 million of preferred stock in August 1995.

                         OTHER ISSUES FACING THE COMPANY

REGULATORY ISSUES

Electric Rate Case

        The NMPUC issued an order in May 1997,  requiring the Company to file an
electric rate case by September 1, 1997, if the collaborative  process failed to
reach  consensus  on an  industry  restructuring  plan by  August  1,  1997.  In
September 1997, the collaborative process was declared at an impasse. On October
21, 1997, the collaborative  process was formally ended without a consensus (see
"Restructuring the Electric Utility Industry"  discussed above). As a result, on
November 3, 1997,  the Company filed its electric rate case. In the filing,  the
Company  stated that  although  the Company  could  justify a $5.0  million rate
increase,  it would not seek to increase  rates,  stating that rate stability is
important in preparing for industry restructuring.

        In the Company's proposal for restructuring filed with the NMPUC and the
WUNR,  the  Company  had  offered  to reduce  residential  and small  commercial
customers  rates by $10.0 million per year during the  transition  period,  with
another  $5.0 million rate  reduction  upon the advent of full open access.  The
Company stated that these substantial rate reduction  commitments in the context
of  industry  restructuring  may  need  to be  modified  if an  additional  rate
reduction results from this rate case.

        The NMPUC has  scheduled  public  hearings for the rate case to begin on
April 15,  1998.  The Company  anticipates  a final order from the NMPUC  during
1998.  The Company is currently  unable to predict the ultimate  outcome of this
case.



                                       34
<PAGE>


        In conjunction with the Company's electric rate case filing, the Company
requested  the New  Mexico  Supreme  Court  ("Supreme  Court") to issue an order
disqualifying and removing the Chairman of the NMPUC from  participating in this
case. This request was based on his prior  involvement in Company cases while he
was with the AG's  office and in  private  practice.  The  Company  stated  that
because of positions  taken by the  Chairman in past cases,  the  Company's  due
process  rights for a fair  hearing  would be  violated.  The Supreme  Court has
established a briefing  schedule and will hear oral arguments on April 13, 1998.
Pending  the  decision,  the  Supreme  Court has issued a stay  prohibiting  the
Chairman from participating in the electric rate case.

The 1995 Gas Rate Case Appeal

        In 1995, the Company filed a request for a $13.3 million increase in its
retail  natural gas sales and  transportation  rates.  On February 13, 1997, the
NMPUC  issued a final  order in the gas rate case,  ordering a rate  decrease of
approximately  $6.9 million.  In the order,  the NMPUC  disallowed,  among other
things,  the  recovery  of  certain  regulatory  assets.  The  Company  strongly
disagrees  with the NMPUC's  final order.  The Company and the AG filed  appeals
with the Supreme Court. The Company is awaiting a decision by the Supreme Court,
but is unable to predict the timing or the ultimate outcome. While the appeal is
pending, the NMPUC's final order remains in effect.

The 1997  Gas Rate Case

        By order  issued in February  1997,  as  subsequently  modified in April
1997, in a proceeding  related to the cost of gas, the NMPUC ordered the Company
to file a new gas rate case.  On October 15,  1997,  the Company  completed  the
filing of the case,  requesting  a rate  increase of $12.6  million.  Also,  the
Company filed a motion for  clarification  and request for variance  voluntarily
disclosing  that it had not performed and filed a study of fuel and  unaccounted
for gas  usage in its  system as  required  by the  NMPUC in a 1990  order.  The
Company explained that it is currently  performing such a study and only seeks a
variance  until the current study is completed.  The NMPUC has scheduled  public
hearings for this case to begin on March 23, 1998.

        The NMPUC staff and  intervenors in the rate case filed their  testimony
on February 16, 1998. The NMPUC staff recommended an increase of $2.5 million to
current  rates  while  the AG  recommended  a  decrease  of $4.9  million.  Both
recommendations  are significantly  lower than the Company's request for a $12.6
million rate increase. Other parties to the case recommended certain adjustments
to the Company's proposed rate increase.  The Company is currently reviewing all
testimony  and will file its rebuttal  testimony on March 13, 1998.  The Company
anticipates  a final order from the NMPUC during 1998.  The Company is currently
unable to predict the ultimate outcome of this case.

Investigation Relating to Amount of Fuel and Unaccounted for Gas Costs Passed
  through the PGAC

        In connection  with the motion for  clarification  filed in the 1997 gas
rate case  concerning the study of fuel and unaccounted for gas, the NMPUC staff
requested  that the NMPUC  docket an  investigation  into the amount of fuel and
unaccounted for gas costs that have passed through the Company's PGAC. The NMPUC
staff is concerned  that a 1995  reduction in the rate for fuel and  unaccounted
for gas collected from transportation  customers may have unfairly shifted costs
to sales  customers.  The NMPUC staff's motion seeks an  investigation  into the
amount  of  fuel  and   unaccounted   for  gas  associated  with  the  Company's
transmission and distribution systems, the actual amount of fuel and unaccounted
for gas that should have been  allocated  to sales  customers  beginning in July
1995 and the amount, if any, of improper cost shifting that may have occurred as
the result of the 1995  reduction.  The  Company  has  responded  that it is not
opposed to the  requested  investigation  and  believes  that the results of the
investigation  will demonstrate that there has been no significant cost shifting
resulting from the reduction in the factor charged to transportation customers.



                                       35
<PAGE>


City of Albuquerque Retail Pilot Load Aggregation Program

        In September  1997, the COA filed a petition with the NMPUC to institute
a Retail  Pilot Load  Aggregation  Program  that would run from  January 1, 1998
through December 31, 1998. The petition requests that the NMPUC provide:  (i) an
expedited  registration/certification  process;  (ii) an NMPUC order  compelling
transmission (by the Company) on behalf of COA; (iii) derivation of retail rates
exclusive of the Company's  production  costs;  (iv)  arbitration  assistance to
facilitate a "true-up" or  reconciliation  of any over or under  recovered costs
and (v) arbitration assistance to accommodate metering,  billing, and collection
processes.

        In January 1998, hearings on this case were conducted.  At the hearings,
the Company stated its position as follows:  (i) the Company  believes that only
the New Mexico  Legislature  has the authority to order retail  competition or a
pilot on retail access; (ii) several pilots have already been conducted in other
states and the key  implementation  issues to be addressed in a transition  to a
competitive  environment  have  already  been  identified  and  (iii)  if  state
legislation were passed regarding electric industry restructuring,  a pilot as a
component of that  legislation  could be useful to test the enabling systems and
infrastructure necessary to implement that legislation on a small scale prior to
implementation of full scale open access.  The Company also identified  numerous
problems with the COA proposed pilot program, as it is not structured to provide
benefits to anyone other than COA.

        The NMPUC  staff  presented  an  alternative  proposal  to the COA pilot
proposal,  which was for a larger pilot that  included a broader mix of customer
classes.  At the hearing,  the COA was  receptive to the proposal and  suggested
that it be run  coincidentally  with COA's pilot.  The NMPUC staff also proposed
that the NMPUC order a separate  proceeding  to identify  what  stranded  costs,
transition  costs and  administrative  costs would be incurred by the Company in
connection  with  a  pilot  and  the  proper  methodology  for  quantifying  any
appropriate recovery.

        The Company  believes  it is entitled to recover all of its costs,  less
avoided  production costs, if a pilot is pursued,  but has moved to dismiss this
case for lack of jurisdiction by the NMPUC and lack of standing to file the case
by the COA.  The NMPUC has not ruled on the motion.  The NMPUC has not issued an
order on this  case.  Once an order is  issued,  the  Company  will  review  the
findings and will evaluate its options at that time.

SDG&E's Complaints

        The Company has a contract with SDG&E which  requires  SDG&E to purchase
100 MW from the Company  through  April 2001.  In 1993,  SDG&E filed a complaint
with the FERC against the Company,  alleging that certain charges under the 1985
power purchase agreement were unjust, unreasonable and unduly discriminatory. In
1996,  SDG&E filed a second  complaint with the FERC against the Company,  again
alleging that charges under the agreement were unjust,  unreasonable  and unduly
discriminatory. SDG&E has requested the FERC, in both complaints, to investigate
charges under the agreement.

        On August 22, 1997,  SDG&E filed a third complaint with the FERC against
the Company,  again  alleging  that  charges  under the  agreement  were unjust,
unreasonable and unduly discriminatory.  SDG&E is again requesting that the FERC
investigate  charges  under the  agreement.  The Company  responded to the third
complaint on  September  29,  1997.  The relief  sought by SDG&E under the third
complaint is similar to that  requested  under the first and second  complaints.
The refund period requested in the third complaint, if granted, would extend for
a fifteen  month period  beginning  October 21, 1997.  The FERC has not issued a
ruling on any of the three  complaints  and has not indicated  when or if any of
these  complaints  will be  considered.  The  relief,  as a result  of all three
complaints,  if granted,  would reduce  annual  demand  charges paid by SDG&E by
approximately  $11  million per year from the date of the ruling  through  April
2001,  and could  result in a refund of  approximately  $27 to $31 million as of
December 31, 1997.  The Company  believes that all three of the  complaints  are
without merit and intends to vigorously resist all three complaints.



                                       36
<PAGE>


NATURAL GAS MARKETING ACTIVITIES

        The Company is  currently  marketing  natural gas in  wholesale  markets
outside of New Mexico in its Energy  Services  Business Unit. As of December 31,
1997, the Company served over 120 end-user facilities in California and has many
industrial and utility customer  commitments  throughout the Pacific  Northwest,
Rocky Mountain and Mid-continent  regions.  The gas contract portfolio currently
extends through June 1999.

        In 1997, the Company relied on physical commodity  contracts to mitigate
its price risk exposure.  Reliance on physical commodity  contracts subjects the
Company to market, liquidity, performance and other risks that can have negative
impacts on margins.  In 1997,  the  Company  experienced  margin  losses of $4.4
million on sales of  approximately  $115  million  related to its gas  marketing
activities.  Although the Company  attempts to manage the risks  associated with
its fixed price physical  contracts in terms of contract volumes and prices, net
open positions  exist. To the extent these net open positions exist, the Company
is exposed to the risk of  fluctuating  market prices which may result in future
losses to the Company.

        During 1997, the Company did not use derivative financial instruments to
manage its price risk  exposure in the  marketing of natural gas.  However,  the
Company anticipates using derivative financial instruments beginning in 1998.

        The Company  measures the risk in the Company's  commodity  portfolio in
accordance with the "value-at-risk"  methodology.  This methodology uses forward
price  curves in the energy  markets to  estimate  the size and  probability  of
future gains and losses.  The Company also  monitors  compliance  with  policies
approved by the Board relating to its trading activities.

THE IMPACT OF THE YEAR 2000 ISSUE

        The Company is continuing to assess the impact of the Year 2000 issue on
its  reporting  systems,  equipment and  operations.  The Year 2000 issue is the
result of computer  programs  being written using two digits rather than four to
define the applicable  year. As a result,  the computer  systems could recognize
the year  2000 as the year  1900.  This  could  result  in a system  failure  or
miscalculations  causing  disruptions  of  operations.  Equipment  that contains
embedded chips may also be affected by the Year 2000 issue.  Equipment  affected
may range  from hand held  calculators,  elevators,  routers,  transformers  and
generators.

        The Company  plans to use both  internal and external  resources to have
its critical  systems Year 2000 compliant by mid-1999.  The Company is currently
replacing two major software  systems which are projected to be completed during
1998 and will be Year 2000 compliant.  However, the Company anticipates that the
conversion of certain non-critical systems may not be completed until late 1999.
In addition, certain portions of the project could be delayed if new hardware or
software  upgrades are not  available on time. As part of the Year 2000 project,
the Company  also plans to inquire of other  companies  with which it  transacts
business  regarding their Year 2000  compliance  issues in order to identify any
potential adverse impact to the Company.

        The  Company is in the  process  of  assessing  the cost to resolve  the
impact of the Year 2000 issue on its operations, and anticipates to complete its
assessment  by the end of 1998.  The  Company  believes  that if  modifications,
conversions and replacements are not completed timely, the Year 2000 issue could
have a material adverse impact on the Company's operations.

ENVIRONMENTAL ISSUES

        The Company is committed to complying with all applicable  environmental
regulations.  Environmental issues have presented and will continue to present a
challenge to the Company. The Company has evaluated the potential impacts of the
following environmental issues and believes,  after consideration of established
reserves,  that the ultimate outcome of these environmental issues will not have
a material  adverse  effect on the Company's  financial  condition or results of
operations.


                                       37
<PAGE>

Electric Operations

Santa Fe Station

        The  Company  and  the  NMED  have  conducted   investigations   of  the
groundwater  contamination  detected  beneath  the  former  Santa Fe  Generating
Station site to determine the source of the contamination.  The Company has been
and is continuing to cooperate with the NMED regarding site  investigations  and
remedial planning pursuant to a Settlement Agreement between the Company and the
NMED. In June 1996, the Company received a letter from the NMED, indicating that
the NMED  believes  the  Company is the source of  gasoline  contamination  in a
municipal  well  supplying the City of Santa Fe and  groundwater  underlying the
Santa Fe Station.  Further, the NMED letter stated that the Company was required
to proceed with interim  remediation  of the  contamination  pursuant to the New
Mexico Water Quality Control Commission  ("NMWQCC")  regulations.  In July 1996,
the Company filed an appeal with the NMWQCC  protesting  the  determination  and
directives contained in the NMED's June 1996 letter.  Subsequently,  negotiation
meetings were conducted between the Company and the NMED for a resolution of the
groundwater contamination issue.

        On October 3, 1996,  the Company and the NMED signed an Amendment to the
Settlement  Agreement  concerning the groundwater  contamination  underlying the
site. As part of the Amendment,  the Company agreed to spend  approximately $1.2
million ("Settlement Amount") for certain costs related to sampling, monitoring,
and development and implementation of a remediation plan.

        The amended Settlement Agreement does not, however,  provide the Company
with  a  full  and  complete  release  from  potential   further  liability  for
remediation of the groundwater contamination. After the Company has expended the
Settlement  Amount, if the NMED can establish  through binding  arbitration that
the Santa Fe Station is the source of the  contamination,  the Company  could be
required to perform further remediation that is determined to be necessary.  The
Company  continues  to dispute any  contention  that the Santa Fe Station is the
source of the  groundwater  contamination  and believes that  insufficient  data
exists to identify  the sources of  groundwater  contamination.  The Company has
completed an aquifer  characterization  report and a groundwater  quality report
associated with the 40 day  reactivation of the adjacent Santa Fe supply well in
July  and  August  of 1996.  These  reports  strongly  suggest  the  groundwater
contamination  does not  originate  from the Santa Fe Station  site and has been
drawn under the site by the pumping of the Santa Fe supply  well.  In  addition,
other urban wells in Santa Fe are likely to be vulnerable to contamination  from
off-site sources.

        The Company and the NMED,  with the cooperation of the City of Santa Fe,
have chosen a remediation plan proposed by a remediation contractor. The City of
Santa  Fe,  the  Company  and  the  NMED  have  entered  into  a  Memorandum  of
Understanding  concerning the chosen  remediation  plan and the operation of the
municipal well adjacent to the Santa Fe Station site in connection with carrying
out that plan. Construction of the remediation system under the plan is expected
to  commence  in the second  quarter of 1998.  The system is  expected  to be in
operation early in the third quarter of 1998.

Person Station

        The Company,  in compliance with the NMED's Corrective Action Directive,
determined  that  groundwater  contamination  exists  in the  deep  and  shallow
groundwater at the Person Station site. The Company is required to delineate the
extent of the contamination and remediate the contaminants in the groundwater at
the  Person  Station  site.  The  extent  of the  contaminant  plume in the deep
groundwater  was  assessed and results  were  reported to the NMED.  The Company
currently  is  involved  with the  process to renew the RCRA  post-closure  care
permit for the  facility.  Remedial  actions  for the deep  groundwater  will be
incorporated into the new permit.  The Company has proposed a monitoring program
in  conjunction  with natural  attenuation  processes as the most cost effective
approach for the deep groundwater remediation. The Company's current estimate to
decommission  its  retired  fossil-fueled  plants  includes  approximately  $6.3
million in additional  expenses to complete the groundwater  remediation program
at Person Station. As part of the financial assurance  requirement of the Person
Station  Hazardous  Waste  Permit,  the Company  established  a trust fund.  The
current  value of the trust fund at December 31,  1997,  was $7.3  million.  The
remediation program continues on schedule.


                                       38
<PAGE>

Gas Operations

Gas Wellhead Pit Remediation

        The New Mexico Oil Conservation Commission issued an order, effective on
January 14, 1993, that affects the gas gathering  facilities  located in the San
Juan Basin in northwestern  New Mexico.  The BLM has issued a similar order. The
order prohibits the further  discharge of fluids  associated with the production
of natural gas into  unlined  earthen  pits in specified  areas  (designated  as
"vulnerable  areas")  in the  San  Juan  Basin.  The  order  also  required  the
submission of closure plans for the pits where further discharge was prohibited.
The Company has complied with the orders and has submitted and received approval
for pit closures from the OCD and the BLM.

        These gas gathering  facilities  were sold to Williams on June 30, 1995.
As a part of the  purchase  and sale  agreement,  the  Company  agreed  to cease
discharge to unlined earthen pits in designated  vulnerable  areas and to retain
the  responsibility for pit closures for a stated period of time and to a stated
dollar  amount.  The Company has  assessed the pits in  accordance  with OCD/BLM
directives,  and is now in the process of closing pits and remediating  them, if
necessary,  at wellhead  locations within the designated  vulnerable  areas. The
Company has submitted a groundwater  management plan to the OCD and has received
approval  of the  plan,  and  is  proceeding  with  delineation  of  groundwater
contamination and, as necessary,  cleanup, in accordance with the approved plan.
The Company will address soil and  groundwater  contamination  within the dollar
and time  limitations  imposed by the purchase and sale agreement with Williams,
and in accordance with the requirements of the OCD.

        In March 1995,  the  Jicarilla  Apache  Tribe  ("Jicarilla")  enacted an
ordinance   directing   that  unlined   surface   impoundments   located  within
environmentally  sensitive  areas be remediated and closed by December 1996, and
that all other unlined surface impoundments on Jicarilla lands be remediated and
closed  by  December   1998.  In  1995,   the  Company   received  a  claim  for
indemnification  by Williams,  the  purchaser of the Company's gas gathering and
processing  assets,  for the  environmental  work  required  to comply  with the
Jicarilla  ordinance.  The Company submitted a  closure/remediation  plan to the
Jicarillas,  which was approved.  The Company's remediation work pursuant to the
plan  commenced  in mid-1996,  and the costs of  remediation  are being  charged
against the $10.6 million indemnification cap contained in the purchase and sale
agreement between the Company and Williams.  The Company met the requirement for
closing  and  remediating  pits  within the  environmentally  sensitive  area by
December 1996, and anticipates closing and remediating all other pits associated
with the gas  gathering  and  processing  assets by the December  1998  deadline
specified in the ordinance.

COAL FUEL SUPPLY

        The coal  requirements  for SJGS are being  supplied  by SJCC,  a wholly
owned  subsidiary  of BHP, from certain  Federal,  state and private coal leases
under a Coal Sales Agreement,  pursuant to which SJCC will supply processed coal
for  operation  of SJGS  until  2017.  The  primary  sources  of coal are a mine
adjacent to SJGS and a mine located  approximately 25 miles northeast of SJGS in
the La Plata area of northwestern New Mexico.

        During the third  quarter of 1997,  the Company was  notified by SJCC of
certain audit exceptions  identified by the Federal Minerals  Management Service
for the period 1986 through 1997. These  exceptions  pertain to the valuation of
coal for  purposes of  calculating  the Federal  coal  royalty.  Primary  issues
include whether coal processing and  transportation  costs should be included in
the base value of La Plata coal for  royalty  determination.  In  addition,  the
Company was  notified  of claims by a private  royaltyholder  involving  royalty
valuation at the La Plata Mine. The Company is currently assessing the potential
impact to the Company and the validity of the audit exceptions and claims.

        In 1996,  the Company was notified by BHP, fuel  supplier to SJGS,  that
the Navajo Nation has proposed to select certain  properties within the San Juan
and La Plata Mines (the "mining  properties")  pursuant to the Navajo-Hopi  Land
Settlement  Act of 1974 (the "Act").  The mining  properties are operated by BHP
under leases from the BLM and comprise a portion of the fuel supply for SJGS. An


                                       39
<PAGE>

administrative  appeal by BHP is pending.  In the appeal,  BHP expressed concern
that  transfer  of the mining  properties  to the Navajo  Nation may subject the
mining  operations to taxation and  additional  regulation by the Navajo Nation,
both of which could increase the price of coal that might  potentially be passed
on to SJGS through the existing Coal Sales  Agreement.  A stay of all actions by
the  BLM has  been  ordered  by the  Interior  Board  of  Land  Appeals  pending
resolution of the issues on appeal. The Company is monitoring closely the appeal
and other  developments  on this  issue and will  continue  to assess  potential
impacts to SJGS and the Company's operations.  Currently,  the Company is unable
to predict the ultimate outcome of this matter but does not believe it will have
a material  adverse  effect on the Company's  financial  condition or results of
operations.

ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION

        As described in note 3 to the  consolidated  financial  statements,  the
Company  is subject to the  provisions  of  Statement  of  Financial  Accounting
Standards  ("SFAS")  No. 71,  Accounting  for the  Effects  of Certain  Types of
Regulation.  In the event the  Company  determines  that it no longer  meets the
criteria  for  following  SFAS  No.  71,  the  accounting  impact  would  be  an
extraordinary,  non-cash  charge  to  operations  of an  amount  that  could  be
material.  Criteria  that may give  rise to the  discontinuance  of SFAS No.  71
include:  (1) increasing  competition  that  restricts the Company's  ability to
establish prices to recover  specific costs and (2) a significant  change in the
manner in which  rates  are set by  regulators  from  cost-based  regulation  to
another form of regulation.  The Company  periodically reviews these criteria to
ensure that the continuing application of SFAS No. 71 is appropriate. Based on a
current  evaluation of the various  factors and conditions  that are expected to
impact future cost recovery,  the Company  believes that its  regulatory  assets
(net of related regulatory liabilities),  including those related to generation,
are probable of future recovery.

ACCOUNTING STANDARDS

        Environmental  Remediation  Liabilities.  Effective January 1, 1997, the
Company  adopted the  provisions of the American  Institute of Certified  Public
Accountants'  Statement  of Position  ("SOP")  96-1,  Environmental  Remediation
Liabilities.  This Statement  provides  authoritative  guidance for recognition,
measurement,  display and disclosure of environmental remediation liabilities in
financial statements.  The Company previously recorded environmental liabilities
of $24.0  million  for its retired  fossil-fueled  plants.  Approximately  $14.4
million of the $24.0 million has been expended  through  December 31, 1997.  The
adoption of SOP 96-1 did not have a material  impact on the Company's  financial
position or results of operations.

        Nuclear  Plant  Decommissioning.  The  staff  of the SEC has  questioned
certain of the current  accounting  practices of the electric  utility  industry
regarding the recognition,  measurement and  classification  of  decommissioning
costs for  nuclear  generating  stations  in  financial  statements  of electric
utilities.  In response to these questions,  the FASB has added a project to its
agenda to review  the  accounting  for  closure  and  removal  costs,  including
decommissioning  of nuclear power plants.  If current  electric utility industry
accounting  practices for nuclear power plant  decommissioning are changed,  the
annual provision for  decommissioning  could increase  relative to 1996, and the
estimated cost for decommissioning could be recorded as a liability (rather than
as accumulated depreciation), with recognition of an increase in the cost of the
related nuclear power plant. The Company does not believe that such changes,  if
required, would have a material adverse effect on results of operations.

        Reporting  Comprehensive  Income and  Disclosure  about  Segments  of an
Enterprise  and  Related  Information.  During  1997,  FASB issued SFAS No. 130,
Reporting Comprehensive Income and SFAS No. 131, Disclosure about Segments of an
Enterprise and Related  Information.  These  statements are not effective  until
1998.  SFAS No. 130 requires the reporting and display of  comprehensive  income
and its components in financial  statements.  The objective of this statement is
to report a measure of all changes in equity that resulted from transactions and
other  economic  events of the  period  other  than  transactions  with  owners.
Comprehensive  income is the total of net income and all other nonowner  changes
in equity. SFAS No. 131 requires a public company to report selected information
about  its  reportable  operating  segments  in  annual  and  interim  condensed
financial  statements.  This  statement  introduces  a  new  model  for  segment
reporting,  called the "management approach" for identifying operating segments.
Operating  segments are components of an enterprise for which discrete financial
information  is available,  that is evaluated  regularly by the chief  operating
decision-maker  within a company in order to make operating decisions and assess
performance.


                                       40
<PAGE>

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

        The  Private  Securities  Litigation  Reform  Act of  1995  (the  "Act")
provides a "safe harbor" for  forward-looking  statements to encourage companies
to  provide  prospective  information  about  their  companies  without  fear of
litigation so long as those statements are identified as forward-looking and are
accompanied by meaningful,  cautionary statements  identifying important factors
that could cause actual results to differ materially from those projected in the
statement.  Accordingly,  the Company hereby identifies the following  important
factors  which  could cause the  Company's  actual  financial  results to differ
materially from any such results which might be projected, forecasted, estimated
or budgeted by the Company in forward-looking statements: (i) adverse actions of
utility  regulatory  commissions;  (ii) utility  industry  restructuring;  (iii)
failure to recover  stranded  assets;  (iv)  failure to obtain new  customers or
retain existing customers; (v) inability to carry out marketing and sales plans;
(vi) adverse impacts  resulting from  environmental  regulations;  (vii) loss of
favorable  fuel supply  contracts;  (viii)  failure to obtain  water  rights and
rights-of-way;   (ix)  operational  and  environmental  problems  at  generating
stations;   (x)  weather  conditions  and  (xi)  failure  to  maintain  adequate
transmission capacity.

        Many of the  foregoing  factors  discussed  have been  addressed  in the
Company's previous filings with the SEC pursuant to the Securities  Exchange Act
of 1934.  The  foregoing  review of  factors  pursuant  to the Act should not be
construed  as  exhaustive  or  as  any  admission   regarding  the  adequacy  of
disclosures made by the Company prior to the effective date of the Act.



                                       41
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                      INDEX

                                                                            Page
                                                                            ----

Management's Responsibility for Financial Statements ...................     F-1
Report of Independent Public Accountants ...............................     F-2
Financial Statements:
  Consolidated Statements of Earnings ..................................     F-3
  Consolidated Statements of Retained Earnings (Deficit) ...............     F-4
  Consolidated Balance Sheets ..........................................     F-5
  Consolidated Statements of Cash Flows ................................     F-6
  Consolidated Statements of Capitalization ............................     F-7
  Notes to Consolidated Financial Statements ...........................     F-8
Supplementary Data:
  Quarterly Operating Results ..........................................    F-36
  Comparative Operating Statistics .....................................    F-37

              MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS

         The management of Public Service  Company of New Mexico (the "Company")
is  responsible  for  the  preparation  and  presentation  of  the  accompanying
consolidated  financial statements.  The consolidated  financial statements have
been prepared in conformity with generally  accepted  accounting  principles and
include  amounts  that  are  based  on  informed   estimates  and  judgments  of
management.  Management maintains a system of internal accounting controls which
it  believes  is  adequate  to  provide  reasonable  assurance  that  assets are
safeguarded,   transactions   are  executed  in   accordance   with   management
authorization   and  the  financial  records  are  reliable  for  preparing  the
consolidated financial statements. The system of internal accounting controls is
supported by written  policies and procedures,  by a staff of internal  auditors
who conduct  comprehensive  internal audits and by the selection and training of
qualified  personnel.  The  board of  directors,  through  its  audit  committee
comprised  entirely of outside  directors,  meets  periodically with management,
internal  auditors and the Company's  independent  auditors to discuss auditing,
internal control and financial  reporting matters. To ensure their independence,
both the internal auditors and independent auditors have full and free access to
the audit committee. The independent auditors,  Arthur Andersen LLP, are engaged
to audit the Company's  consolidated  financial  statements  in accordance  with
generally accepted auditing standards.




                                      F-1
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
  Public Service Company of New Mexico:

We have audited the accompanying  consolidated  balance sheets and statements of
capitalization   of  Public  Service   Company  of  New  Mexico  (a  New  Mexico
corporation)  and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of earnings, retained earnings (deficit), and cash flows
for each of the  three  years in the  period  ended  December  31,  1997.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of Public Service Company of New
Mexico and  subsidiaries  as of December  31, 1997 and 1996,  and the results of
their  operations and their cash flows for each of the three years in the period
ended  December  31,  1997 in  conformity  with  generally  accepted  accounting
principles.


                                        ARTHUR ANDERSEN LLP

Albuquerque, New Mexico
  February 10, 1998


                                      F-2
<PAGE>
<TABLE>
<CAPTION>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF EARNINGS

                                                                   Year Ended December 31,
                                                            ------------------------------------
                                                               1997         1996         1995
                                                            ----------    ---------    ---------
                                                          (In thousands except per share amounts)
<S>                                                         <C>           <C>          <C>      
Operating Revenues:
  Electric                                                  $  722,438    $ 645,639    $ 584,284
  Gas                                                          294,769      227,301      217,985
  Energy Services                                              118,060       10,446        -
  Water                                                           -           -            6,196
                                                            -----------   ----------   ----------
     Total operating revenues                                1,135,267      883,386      808,465
                                                            -----------   ----------   ----------

Operating Expenses:
  Fuel and purchased power                                     235,508      178,807      140,752
  Gas purchased for resale                                     169,758      103,574       94,299
  Gas purchased for resale and other - Energy Services         121,728        9,485        -
  Other operation expenses                                     273,692      263,432      257,627
  Maintenance and repairs                                       52,629       49,694       55,809
  Depreciation and amortization                                 82,702       78,116       80,865
  Taxes, other than income taxes                                36,871       34,864       35,531
  Income taxes                                                  38,334       39,395       30,194
                                                            -----------   ----------   ----------
     Total operating expenses                                1,011,222      757,367      695,077
                                                            -----------   ----------   ----------
     Operating income                                          124,045      126,019      113,388
                                                            -----------   ----------   ----------

Other Income and Deductions:
  Other                                                         21,548        2,367       40,707
  Income tax expense                                            (8,384)      (1,099)     (20,599)
                                                            -----------   ----------   ----------
     Net other income and deductions                            13,164        1,268       20,108
                                                            -----------   ----------   ----------
     Income before interest charges                            137,209      127,287      133,496
                                                            -----------   ----------   ----------

Interest Charges:
  Interest on long-term debt                                    46,670       49,009       52,637
  Other interest charges                                         9,544        5,698        5,297
                                                            -----------   ----------   ----------
     Net interest charges                                       56,214       54,707       57,934
                                                            -----------   ----------   ----------

Net Earnings                                                    80,995       72,580       75,562
Preferred Stock Dividend Requirements                              586          586        3,714
                                                            -----------   ----------   ----------

Net Earnings Available for Common Stock                       $ 80,409     $ 71,994     $ 71,848
                                                            ===========   ==========   ==========

Average Number of Common Shares Outstanding                     41,774       41,774       41,774
                                                            ===========   ==========   ==========

Net Earnings per Common Share (Basic)                         $   1.92     $   1.72     $   1.72
                                                            ===========   ==========   ==========

Net Earnings per Common Share (Diluted)                       $   1.91     $   1.71     $   1.72
                                                            ===========   ==========   ==========

Dividends Paid per Share of Common Stock                      $   0.63     $   0.36     $      -
                                                            ===========   ==========   ==========
</TABLE>


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


                                      F-3
<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)

                                                 Year Ended December 31,
                                         -------------------------------------
                                            1997          1996         1995
                                         ----------    ----------   ----------
                                                     (In thousands)

Balance at Beginning of Year               $ 77,185     $ 25,243    $ (46,006)
Net earnings                                 80,995       72,580       75,562
Redemption of cumulative preferred stock      -            -             (599)
Dividends:
   Cumulative preferred stock                  (586)        (586)      (3,714)
   Common stock                             (28,406)     (20,052)      -
                                         -----------   ----------   ----------
Balance at End of Year                    $ 129,188     $ 77,185     $ 25,243
                                         ===========   ==========   ==========

























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



                                      F-4
<PAGE>
<TABLE>
<CAPTION>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
                                                                 As of December 31,
                                                              -----------------------
                                                                 1997         1996
                                                              ----------   ----------
                                                                    (In thousands)
<S>                                                           <C>          <C>       
Utility Plant, at original cost except PVNGS:
  Electric plant in service                                   $1,958,912   $1,918,238
  Gas plant in service                                           441,045      424,827
  Energy services plant in service                                  -           1,241
  Common plant in service                                         43,415       40,005
  Plant held for future use                                          551          639
                                                              -----------  -----------
                                                               2,443,923    2,384,950
  Less accumulated depreciation and amortization               1,003,086      937,228
                                                              -----------  -----------
                                                               1,440,837    1,447,722
  Construction work in progress                                  104,497       76,038
  Nuclear fuel, net of accumulated amortization of
    $21,263 and $20,413                                           27,816       28,933
                                                              -----------  -----------

     Net utility plant                                         1,573,150    1,552,693
                                                              -----------  -----------

Other Property and Investments:
  Non-utility property, net of accumulated depreciation
    of $2,146 and $1,774                                           4,502        3,434
  Other investments, at cost                                     300,438      250,834
                                                              -----------  -----------

     Total other property and investments                        304,940      254,268
                                                              -----------  -----------

Current Assets:
  Cash                                                             8,705       11,125
  Temporary investments, at cost                                   9,490        9,128
  Receivables, net of allowance for uncollectible 
    accounts of $783 and $709                                    216,305      197,025
  Income taxes receivable                                           -          18,825
  Fuel, materials and supplies, at average cost                   33,664       41,260
  Gas in underground storage, at average cost                     13,158        2,679
  Other current assets                                             4,509        6,632
                                                              -----------  -----------

     Total current assets                                        285,831      286,674
                                                              -----------  -----------

Deferred charges                                                 149,811      136,679
                                                              -----------  -----------
                                                              $2,313,732   $2,230,314
                                                              ===========  ===========

                         CAPITALIZATION AND LIABILITIES

Capitalization:
  Common stock equity:
    Common stock outstanding--41,774 shares                    $ 208,870    $ 208,870
    Additional paid-in capital                                   469,073      470,358
    Excess pension liability, net of tax                          (2,727)      (2,102)
    Retained earnings since January 1, 1989                      129,188       77,185
                                                              -----------  -----------

       Total common stock equity                                 804,404      754,311
  Cumulative preferred stock without mandatory 
    redemption requirements                                       12,800       12,800
  Long-term debt, less current maturities                        713,995      713,919
                                                              -----------  -----------

     Total capitalization                                      1,531,199    1,481,030
                                                              -----------  -----------

Current Liabilities:
  Short-term debt                                                114,100      100,400
  Accounts payable                                               154,501      130,661
  Dividends payable                                                7,248        5,159
  Current maturities of long-term debt                               350       14,970
  Accrued interest and taxes                                      24,161       23,356
  Other current liabilities                                       26,102       25,477
                                                              -----------  -----------

     Total current liabilities                                   326,462      300,023
                                                              -----------  -----------

Deferred Credits:
  Accumulated deferred investment tax credits                     57,823       62,258
  Accumulated deferred income taxes                              121,353      110,266
  Other deferred credits                                         276,895      276,737
                                                              -----------  -----------

     Total deferred credits                                      456,071      449,261
                                                              -----------  -----------

Commitments and Contingencies
                                                              $2,313,732   $2,230,314
                                                              ===========  ===========
</TABLE>

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



                                      F-5
<PAGE>

<TABLE>
<CAPTION>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                       Year Ended December 31,
                                                                  ---------------------------------
                                                                    1997        1996         1995
                                                                  ---------  ----------   ---------
                                                                               (In thousands)
<S>                                                               <C>        <C>          <C>     
Cash Flows From Operating Activities:
  Net earnings                                                    $ 80,995   $  72,580    $ 75,562
  Adjustments to reconcile net earnings to net cash flows
    from operating activities:
      Depreciation and amortization                                 94,924      90,458      92,588
      Accumulated deferred investment tax credit                    (4,436)     (4,476)     (4,830)
      Accumulated deferred income taxes                             11,080      31,436       1,622
      Gain on sale of utility property                                 -          (309)    (39,050)
      Write-down of natural gas vehicle program                        -         2,810       1,445
      Curtailment gain on defined benefit pension plan                 -       (13,316)         -
      Changes in certain assets and liabilities:
        Receivables                                                  4,554     (83,416)        795
        Fuel, materials and supplies                                (2,883)      5,795     (26,505)
        Deferred charges                                           (11,190)      5,190       6,731
        Accounts payable                                            23,808      36,930     (11,527)
        Accrued interest and taxes                                     805      (3,500)     (1,218)
        Deferred credits                                             2,455      12,655      29,185
        Other                                                         (371)     (9,279)      5,645
      Other, net                                                    13,381      22,343      17,671
                                                                  ---------  ----------   ---------
              Net cash flows from operating activities             213,122     165,901     148,114
                                                                  ---------  ----------   ---------
Cash Flows From Investing Activities:
  Utility plant additions                                         (128,371)   (103,087)   (107,666)
  Increase in nuclear decommissioning trust                        (23,000)        -            -
  Return of principal of PVNGS lease obligation bonds                5,018         -            -
  Utility plant sales                                                  -           333     206,482
  Other property sales                                                 -           702        (801)
  Net increase in other property and investments                    (6,814)    (14,706)         -
  Escrow for purchase of PVNGS lease obligation bonds              (28,900)   (208,446)         -
  Decrease (increase) in temporary investments, net                   (363)     86,844     (21,451)
                                                                  ---------  ----------   ---------
              Net cash flows from investing activities            (182,430)   (238,360)     76,564
                                                                 ---------  ----------   ---------
Cash Flows From Financing Activities:
  Redemption of PVNGS lease obligation bonds                           -           -      (132,663)
  Redemptions and repurchases of preferred stock                       -           -       (64,175)
  Bond redemption premium and costs                                 (3,693)     (5,158)       (505)
  Proceeds from (repayments of) asset securitization               (13,900)    100,400      18,758
  Repayments of long-term debt                                     (14,970)       (326)    (57,768)
  Trust borrowing for nuclear decommissioning                       23,000         -            -
  Increase in short-term debt                                        4,600         -            -
  Exercise of employee stock options                                (1,285)        -            -
  Dividends paid                                                   (26,864)    (15,560)     (5,126)
                                                                 ---------  ----------   ---------
              Net cash flows from financing activities             (33,112)     79,356    (241,479)
                                                                  ---------  ----------   ---------
Increase (Decrease) in Cash                                         (2,420)      6,897     (16,801)
Cash at Beginning of Year                                           11,125       4,228      21,029
                                                                  ---------  ----------   ---------
Cash at End of Year                                                $ 8,705   $  11,125     $ 4,228
                                                                  =========  ==========   =========
Supplemental cash flow disclosures:
  Interest paid                                                   $ 57,302   $  55,480    $ 63,366
                                                                  =========  ==========   =========
  Income taxes paid, net of refunds                               $ 20,175   $  31,617    $ 52,405
                                                                  =========  ==========   =========


</TABLE>

Cash consists of currency on hand and demand deposits.

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


                                      F-6
<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
                                                                                                       December 31,
                                                                                                ------------------------
                                                                                                   1997         1996
                                                                                                -----------  -----------
                                                                                                          (In thousands)
Common Stock Equity:
<S>                                                                                              <C>          <C>      
    Common Stock, par value $5 per share                                                         $ 208,870    $ 208,870
    Additional paid-in capital                                                                     469,073      470,358
    Excess pension liability, net of tax                                                            (2,727)      (2,102)
    Retained earnings since January 1, 1989                                                        129,188       77,185
                                                                                                -----------  -----------
        Total common stock equity                                                                  804,404      754,311
                                                                                                -----------  -----------

</TABLE>
<TABLE>
<CAPTION>
                                                                  Shares
                                                                Outstanding at      Current
                                                Stated           December 31,     Redemption
                                                 Value             1997              Price
                                              ------------   ------------------   ------------
<S>                                             <C>               <C>               <C>             <C>          <C>   
Cumulative Preferred Stock:
    Without mandatory redemption requirements:
        1965 Series, 4.58%                      $100.00           128,000           $102.00         12,800       12,800
                                                             ==================                 -----------  -----------
</TABLE>
<TABLE>
<CAPTION>

<S>                                                          <C>                                    <C>          <C>
Long-Term Debt:
Issue and Final Maturity                                       Interest Rates
                                                               ---------------
    First mortgage bonds:
        1997                                                             5 7/8%                          -       14,650
        1999 through 2002                                    7 1/4% to   8 1/8%                     42,556       42,876
        2005 through 2007                                    8 1/8% to   9 1/8%                     43,276       43,276
        2008                                                                 9%                     54,374       54,374
        Pollution control revenue bonds:
            2007 through 2026                                5.7%    to  6 1/2%                    574,345      537,045
            2022                                               Variable rate                             -       37,300
                                                                                                -----------  -----------
                Total first mortgage bonds                                                         714,551      729,521

    Other, including unamortized premium
      and (discount), net                                                                             (206)        (632)
                                                                                                -----------  -----------
            Total long-term debt                                                                   714,345      728,889
    Less current maturities                                                                            350       14,970
                                                                                                -----------  -----------
            Long-term debt, less current maturities                                                713,995      713,919
                                                                                                -----------  -----------
Total Capitalization                                                                            $1,531,199   $1,481,030
                                                                                                ===========  ===========

</TABLE>


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



                                      F-7

<PAGE>



              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 1997, 1996 and 1995

(1)  Summary of Significant Accounting Policies

Organization

        Public   Service   Company  of  New  Mexico   (the   "Company")   is  an
investor-owned   utility  company  engaged  in  the  generation,   transmission,
distribution  and sale of  electricity.  The Company  provides  retail  electric
service to a large area of north  central  New Mexico,  including  the cities of
Albuquerque,  Santa Fe, Rio Rancho, Las Vegas, Belen and Bernalillo. The City of
Albuquerque (the "COA"),  Bernalillo County and the City of Las Vegas franchises
expired in 1992, 1997 and 1996,  respectively.  Customers in the area covered by
the  expired   franchises   represent   approximately   40.2%,  8.6%  and  1.2%,
respectively,  of the Company's 1997 total electric operating  revenues,  and no
other franchise area represents more than 6.1%. The Company continues to collect
and pay  franchise  fees to both the COA and the City of Las Vegas.  The Company
currently does not pay franchise fees to Bernalillo  County. The Company remains
obligated  under state law to provide service to customers in the franchise area
even in the absence of a franchise  agreement.  The Company also provides retail
electric  service  to  Deming in  southwestern  New  Mexico  and to  Clayton  in
northeastern  New  Mexico.  The  Company is also  engaged  in the  transmission,
distribution and sale of natural gas within the State of New Mexico. The Company
distributes  natural  gas  to  most  of the  major  communities  in New  Mexico,
including  Albuquerque  and Santa Fe. In  addition,  in  pursuing  new  business
opportunities,  the Company is focusing on energy and utility related activities
under its Energy Services  Business Unit.  These  activities will provide energy
marketing and energy management  services,  the marketing of natural gas outside
of New Mexico,  management services for water and wastewater systems and utility
related  management and operation  services for Federal  installations and other
large commercial  institutions.  The Company is also operating the City of Santa
Fe's water system.

Systems of Accounts

        The Company maintains its accounts for utility  operations  primarily in
accordance with the uniform systems of accounts prescribed by the Federal Energy
Regulatory  Commission  ("FERC")  and the  National  Association  of  Regulatory
Utility  Commissioners,  and adopted by the New Mexico Public Utility Commission
("NMPUC").

Principles of Consolidation

         The  consolidated  financial  statements  include  the  accounts of the
Company  and  subsidiaries  in which it owns a  majority  voting  interest.  All
significant intercompany transactions and balances have been eliminated.

Use of Estimates

        The  preparation  of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual recorded amounts could differ from those estimated.

Utility Plant

        Utility  plant,  with the  exception  of Palo Verde  Nuclear  Generating
Station ("PVNGS") Unit 3 and the Company's purchased 22% beneficial interests in
the PVNGS  Units 1 and 2 leases,  is stated at  original  cost,  which  includes
capitalized  payroll-related  costs  such as taxes,  pension  and  other  fringe
benefits,   administrative   costs  and  an  allowance  for  funds  used  during
construction.  Utility plant  includes  certain  electric  assets not subject to
regulation.  The results of operations  of such electric  assets are included in
operating income.


                                      F-8
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995

(1)  Summary of Significant Accounting Policies (Continued)

        It is  Company  policy  to charge  repairs  and  minor  replacements  of
property to  maintenance  expense and to charge  major  replacements  to utility
plant.  Gains or losses  resulting  from  retirements or other  dispositions  of
operating  property in the normal  course of business are credited or charged to
the accumulated provision for depreciation.

Depreciation and Amortization

        Provision for  depreciation and amortization of utility plant is made at
annual  straight-line rates approved by the NMPUC. The average rates used are as
follows:

                                               1997        1996        1995
                                               ----        ----        ----

        Electric plant ................        3.33%       3.32%       3.32%
        Gas plant .....................        3.23%       3.27%       3.21%
        Common plant ..................        7.60%       7.00%       9.61%

       Effective January 1, 1995, electric plant depreciation rates were revised
and include a provision for the recovery of fossil-fueled plant  decommissioning
costs approved by the NMPUC in 1994. Gas plant  depreciation rates were approved
by the NMPUC and revised in March 1997.

        The  provision  for  depreciation  of  certain  equipment  is charged to
clearing   accounts  and  subsequently   allocated  to  operating   expenses  or
construction  projects  based  on  the  use of the  equipment.  Depreciation  of
non-utility  property is computed on the straight-line  method.  Amortization of
nuclear fuel is computed based on the units of production method.

Nuclear Decommissioning

        The   Company   accounts   for  nuclear   decommissioning   costs  on  a
straight-line  basis over the  estimated  useful  life of the  facilities.  Such
amounts  are based on the net  present  value of  expenditures  estimated  to be
required to decommission the plant.

Fuel and Purchased Power Cost Adjustment Clause ("FPPCAC")

        The  Company  uses  the  deferral  method  of  accounting  for  fuel and
purchased  power  costs  for its  firm-requirements  wholesale  customers.  Such
amounts are reflected in subsequent periods under a FPPCAC approved by the FERC.

Purchased Gas Adjustment Clause ("PGAC")

        The Company  uses the  deferral  method of  accounting  for gas purchase
costs which are settled in  subsequent  periods  under gas  adjustment  clauses.
Future recovery of these costs is subject to approval by the NMPUC.




                                      F-9
<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(1)  Summary of Significant Accounting Policies (Continued)

Amortization of Debt Discount, Premium and Expense

        Discount,  premium and expense related to the issuance of long-term debt
are amortized over the lives of the respective  issues.  In connection  with the
retirement of long-term debt, such amounts  associated with resources subject to
NMPUC regulation are amortized over the lives of the respective issues.  Amounts
associated  with the  Company's  firm-requirements  wholesale  customers and its
resources excluded from NMPUC retail rates are recognized immediately as expense
or income as they are incurred.

Income Taxes

        The Company  reports income tax expense in accordance  with Statement of
Financial  Accounting  Standards ("SFAS") No. 109,  Accounting for Income Taxes.
SFAS No. 109 requires  deferred income taxes for temporary  differences  between
financial  and income tax reporting to be recorded  using the liability  method.
Deferred income taxes are computed using the statutory tax rates scheduled to be
in effect when the temporary  differences reverse.  Current NMPUC jurisdictional
rates  include the tax effects of the  majority of these  temporary  differences
(normalization).   Recovery  of  reversing  temporary   differences   previously
accounted for under the flow-through method is also included in rates charged to
customers.  For  regulated  operations,  any  changes  in tax rates  applied  to
accumulated  deferred income taxes may not be immediately  recognized because of
ratemaking  and tax  accounting  provisions  contained  in the Tax Reform Act of
1986. Items accorded flow-through treatment under NMPUC orders,  deferred income
taxes and the future ratemaking  effects of such taxes, as well as corresponding
regulatory assets and liabilities, are recorded in the financial statements.

Accounting Standards

        Environmental  Remediation  Liabilities.  Effective January 1, 1997, the
Company  adopted the  provisions of The American  Institute of Certified  Public
Accountants  Statement  of  Position  ("SOP")  96-1,  Environmental  Remediation
Liabilities.  This Statement  provides  authoritative  guidance for recognition,
measurement,  display and disclosure of environmental remediation liabilities in
financial statements.  The Company previously recorded environmental liabilities
of $24.0  million  for its retired  fossil-fueled  plants.  Approximately  $14.4
million of the $24.0  million has been  expended as of December  31,  1997.  The
adoption of SOP 96-1 did not have a material  impact on the Company's  financial
position or results of operations.

        Accounting   for  Transfers  and  Servicing  of  Financial   Assets  and
Extinguishment of Liabilities.  In June 1996, the Financial Accounting Standards
Board  ("FASB")  issued SFAS No. 125,  Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities.  This Statement establishes,
among other things, new criteria for determining whether a transfer of financial
assets  should  be  accounted  for as a sale or as a pledge of  collateral  in a
secured borrowing. SFAS No. 125 also establishes new accounting requirements for
pledged collateral. SFAS No. 125 is effective for all transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, is to be applied prospectively,  and earlier or retroactive application is
not permitted.



                                      F-10
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995

(1) Summary of Significant Accounting Policies (Continued)

         Nuclear Plant Decommissioning. The staff of the Securities and Exchange
Commission has  questioned  certain of the current  accounting  practices of the
electric   utility   industry   regarding  the   recognition,   measurement  and
classification  of  decommissioning  costs for  nuclear  generating  stations in
financial statements of electric utilities. In response to these questions,  the
FASB has added a project to its agenda to review the  accounting for closure and
removal costs,  including  decommissioning  of nuclear power plants.  If current
electric  utility  industry   accounting   practices  for  nuclear  power  plant
decommissioning  are changed,  the annual  provision for  decommissioning  could
increase relative to 1997, and the estimated cost for  decommissioning  could be
recorded  as  a  liability  (rather  than  as  accumulated  depreciation),  with
recognition of an increase in the cost of the related  nuclear power plant.  The
Company does not believe that such changes,  if required,  would have a material
adverse effect on results of operations.

Risk Management Activities

        The Company's Board of Directors  ("Board")  approved a Corporate policy
statement regarding risk management activities. The Company is exposed to market
risk from  changes in certain  energy  related  commodity  prices.  Although the
Company is allowed to enter into certain  derivative  transactions to manage the
volatility  relating to the price  exposure,  the Company did not use derivative
financial  instruments  to hedge this price risk exposure  during 1997.  Because
market prices of certain energy  commodities depend on a number of unpredictable
factors,  such as  weather,  the Company is  currently  managing  the  resulting
volatility  using  commodities  contracts.  Beginning  in 1998,  the  Company is
planning to use  derivative  financial  instruments,  including  exchange-traded
financial futures,  options, swaps and other derivative financial instruments as
part of an overall  risk-management  strategy.  These instruments are to be used
only as a means of hedging exposure to price and interest-rate risk connected to
anticipated  transactions or existing assets and  liabilities.  The Company does
not intend to open a derivative position for speculative purposes.

        Once the Company enters into derivative  transactions,  deferral (hedge)
accounting will be applied only if the derivative  financial  instrument reduces
the risk of the underlying hedged item and is designated at inception as a hedge
with respect to the hedged item.  Additionally,  the  derivative  must result in
payoffs  that are  expected to be  inversely  correlated  to those of the hedged
item. Correlation will be assessed monthly and measured on a rolling three month
average. If a derivative  instrument ceases to meet the criteria for deferral or
settlement  accounting,  any  subsequent  gains and losses will be recognized in
income. If a hedging  instrument is sold or terminated prior to maturity,  gains
and losses will  continue to be deferred  until the hedged item is recognized in
income.

Performance Stock Plan

        The Company  continues  to apply  Accounting  Principles  Board  ("APB")
Opinion  No.  25,  Accounting  for  Stock  Issued  to  Employees,   and  related
interpretations  in accounting for its plan.  Accordingly,  no compensation cost
has been recognized for this plan.



                                      F-11
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(2)   Risks and Uncertainties

        Competition and  restructuring of the electric utility industry continue
to be key issues  facing the  Company.  Efforts to  advance  and  determine  the
eventual form of industry restructuring continued during 1997.

        At the state  level,  the Company  proposed in April 1997 that the NMPUC
reconvene  the  proceedings  involving  the NMPUC's  Notice of Inquiry  into the
restructuring  of the  electric  industry,  in an attempt to arrive at consensus
legislation  to be presented to the 1998 session of the New Mexico  Legislature.
In May 1997,  the NMPUC issued an order  accepting the Company's  proposal for a
collaborative effort, and the proposal for a series of meetings to be held among
all interested  parties.  The parties held several meetings in which the Company
actively participated.  However, in September 1997, the collaborative process to
draft  legislation  was  declared  at an impasse due to  disagreement  on issues
regarding the  divestiture  of generation and energy service units from electric
distribution and transmission systems, and the recoverability of stranded costs.

        Although the parties  could not reach  agreement,  the Company filed its
own proposal for industry  restructuring  in September 1997 with both the NMPUC,
and the Water,  Utilities and Natural  Resources  Committee  ("WUNR") of the New
Mexico Legislature.

        The Company's  proposal  called for an immediate  rate  reduction of $10
million per year for  residential  customers from the effective date of proposed
legislation  until open access  without the need for a rate case.  The  proposal
also called for full retail  competition  no later than  January 1, 2001.  Other
parts  of the  Company's  proposal  included  an offer  to  create  a  regulated
distribution  "wires  and  pipes"  company  dedicated  only to the  delivery  of
electricity   and  natural  gas.  Other   services,   usually   associated  with
distribution,  such as meter  reading,  billing and customer  services  would be
provided through competitive  markets. The Company offered to assume the risk of
stranded cost recovery on all fossil fuel  generation and for PVNGS Unit 3 which
was  previously  excluded from New Mexico  jurisdictional  rates.  However,  the
Company  would  recover  all fixed  costs  associated  with PVNGS  Units 1 and 2
through a  non-bypassable  "wires  charge" from 2001 to 2016.  The proposal also
called for certain credits to stranded costs which would effectively shorten the
time period for recovery.  The Company  currently  estimates  that if the market
clearing price for power,  which represents the cost of generation at the plant,
fell to 3.0 cents/KWh, it may incur an after-tax write-off of approximately $176
million  related to its fossil fuel generation if the Company assumes this risk.
The  Company's  proposal was supported by various  parties to the  collaborative
process,  including  Enron  Corporation,  the  New  Mexico  Retail  Association,
Southwestern  Public  Service  Company  ("SPS"),  the  United  States  Executive
Agencies and the International  Brotherhood of Electrical Workers.  However, the
Company's  proposal  was not adopted by the WUNR and not  introduced  during the
1998  legislative  session.  The WUNR  declined to recommend  any  restructuring
legislation as a committee bill during the 1998 legislative session.

      On January 22, 1998, the NMPUC  submitted its own report to the New Mexico
Legislature  related to  restructuring  of the electric  utility  industry.  The
following key points were included in the report: (i) PVNGS and Plains Escalante
Generating Station are the most debated issues in deregulation  because of their
potential  stranded  costs;  (ii)  stranded  costs,  if determined to be lawful,
should  be  verified  by the  NMPUC  or its  successor,  the  Public  Regulation
Commission  ("PRC");   (iii)  market  power  issues  may  be  addressed  through
functional   separation  or  partial  or  complete  divestiture  of  generation,
transmission  and  distribution;  (iv) unbundling is necessary to understand the
disparities  among various  electricity  providers;  (v) despite an abundance of
natural resources to fuel generation  facilities,  New Mexico customers pay more
for electricity  because of costs  associated with  generation  plants;  (vi) on
average, New Mexico residential customers pay more for electricity than regional
and national


                                      F-12
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(2)   Risks and Uncertainties (Continued)

residential  customers  and  (vii)  system  reliability  must be  maintained  or
enhanced, and customers must be educated and environmental protections should be
promoted.  In addition,  sample  legislation was attached to the report,  giving
either the NMPUC or the PRC authority to conclude  matters  relating to electric
industry  restructuring.  The report was issued as a result of a NMPUC case and,
with the issuance of the report, the case was closed.

        The  NMPUC's  draft  legislation  was not  introduced  during  the  1998
legislative   session.   House  Memorial  27,  the  only  measure  dealing  with
restructuring,   passed  the  House.  Memorial  27  stated  the  intent  of  the
legislature to address the issue of electric industry  restructuring in the 1999
session  and  declared  that the  NMPUC  does not have  statutory  authority  to
implement   restructuring  at  this  time.  The  Memorial  27  did  not  require
concurrence by the Senate;  however,  an identical Senate Memorial was not acted
upon by the full Senate prior to adjournment.

        In a related matter,  in 1996, the NMPUC ordered all utilities under its
jurisdiction  to file their  estimates  of stranded  costs,  absent any recovery
method being adopted, based on the Texas Public Utility Commission Economic Cost
Over  Market  ("ECOM")  model.  The  Company,  in  its  filing,   presented  two
methodologies:  (i) using the ECOM model, the Company's  stranded cost estimates
run from $657  million for a 1998 full retail  access case to $119 million for a
2002 full retail access case and (ii) using a second methodology, based upon the
difference  between the Company's costs of existing  generation and the costs of
new combined  cycle and  combustion  turbine  units to serve the same load,  the
Company's  costs  above  the  level  of new gas  units,  in 1997  dollars,  were
estimated at $748 million for a 1998 full retail access case to $327 million for
a 2002 full retail access case.  The Company  advised the NMPUC that the results
of the ECOM  model  are  highly  sensitive  to  various  assumptions,  primarily
projections of future gas prices.  This information was addressed in the NMPUC's
report submitted to the New Mexico Legislature.



                                      F-13
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(3)  Regulatory Assets and Liabilities

         The Company is subject to the provisions of SFAS No. 71, Accounting for
the Effects of Certain  Types of  Regulation,  on  operations  regulated  by the
NMPUC.  Regulatory  assets  represent  probable  future  revenue to the  Company
associated with certain costs which will be recovered from customers through the
ratemaking process.  Regulatory liabilities represent probable future reductions
in revenues associated with amounts that are to be credited to customers through
the  ratemaking  process.  Regulatory  assets and  liabilities  reflected in the
Consolidated Balance Sheets as of December 31 relate to the following:


                                                          1997         1996
                                                          ----         ----
                                                           (In thousands)

     Deferred Income Taxes ............................$  70,968    $  71,682
     Gas Take-or-Pay Costs ............................   19,953       36,335
     PGAC .............................................   16,006       28,873
     Gas Imputed Revenues .............................   12,823       10,362
     Loss on Reacquired Debt ..........................    8,869        7,850
     Gas Reservation Fees .............................    7,029        7,029
     Gas Retirees' Health Care Costs ..................    6,345        4,437
     Deferred Customer Expense on Gas Assets Sale .....    5,260        5,260
     Proposed Transmission Line Costs .................    2,903        3,111
     EPNG Risk Sharing Surcharge ......................    2,196            -
     Gas Rate Case Costs ..............................    1,571        1,571
     Other ............................................      118          598
                                                       ---------    ---------
          Subtotal ....................................  154,041      177,108
                                                       ---------    ---------

     Deferred Income Taxes ............................  (53,132)     (56,961)
     Gas Regulatory Reserve ...........................  (27,881)     (24,614)
     Customer Gain on Gas Assets Sale .................  (11,856)     (22,230)
     PVNGS Prudence Audit .............................   (6,561)      (6,937)
     Revenue Subject to Refund ........................   (3,896)      (3,594)
     Settlement Due Customers .........................   (3,743)      (4,072)
     EPNG Risk Sharing Surcharge ......................   (2,196)           -
     Other ............................................     (723)           -
     Gain on Reacquired Debt ..........................     (546)        (559)
                                                       ---------    ---------
          Subtotal                                      (110,534)    (118,967)
                                                       ---------    ---------
          Net Regulatory Assets .......................$  43,507    $  58,141
                                                       =========    =========

        As of December 31, 1997,  substantially all of the Company's  regulatory
assets  and  regulatory  liabilities  are being  recovered  in rates  charged to
customers or have been addressed in a regulatory proceeding. If a portion of the
Company's  operations under the NMPUC jurisdiction  becomes no longer subject to
the  provisions  of SFAS No.  71, a write off of related  regulatory  assets and
liabilities  would be required,  unless some form of  transition  cost  recovery
(refund)  continues  through rates  established  and collected for the Company's
remaining  regulated  operations.  Based on a current  evaluation of the various
factors and  conditions  that are expected to impact future cost  recovery,  the
Company believes that its regulatory assets are probable of future recovery.


                                      F-14
<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(3)   Regulatory Assets and Liabilities (Continued)

        Effective January 1, 1996, the Company adopted SFAS No. 121,  Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of.
This statement  imposes a stricter  criterion for regulatory assets by requiring
that such  assets be probable of future  recovery  at each  balance  sheet date.
Based on the  current  regulatory  structure  in  which  the  Company  operates,
adoption  of this  standard  did not have a  material  impact  on the  Company's
financial position or results of operations.  However,  the Company's ability to
meet the criterion  may change in the future as  competitive  factors  influence
wholesale and retail pricing in this industry.

(4)  Capitalization

     Changes  in  common  stock,   additional  paid-in  capital  and  cumulative
preferred stock are as follows:
<TABLE>
<CAPTION>
                                                                                  Cumulative
                                                                                Preferred Stock
                                                                            ----------------------
                                                                               Without Mandatory
                                                                                  Redemption
                                        Common Stock                             Requirements
                                 -------------------------                  ----------------------
                                                               Additional                Aggregate
                                    Number       Aggregate       Paid-In      Number      Stated
                                  of Shares      Par Value       Capital    of Shares      Value
                                  ---------      ---------       -------    ---------      -----
                                                             (Dollars in thousands)
<S>                              <C>             <C>           <C>           <C>         <C>     

Balance at December 31, 1995
    and 1996                     41,774,083      $ 208,870     $ 470,358     128,000     $ 12,800
Exercise of stock options                                         (1,285)
                                ------------    -----------   -----------   ---------   ----------

Balance at December 31, 1997     41,774,083      $ 208,870     $ 469,073     128,000     $ 12,800
                                ============    ===========   ===========   =========   ==========
</TABLE>


Common Stock


       The number of authorized  shares of common stock with par value of $5 per
share is 80 million shares.

        On December  9, 1997,  the  Company's  Board  declared a quarterly  cash
dividend  of 17 cents per share of common  stock  payable  February  20, 1998 to
shareholders  of record as of February 2, 1998. The Company  resumed the payment
of cash  dividends on common stock  starting in May 1996.  The  Company's  Board
reviews the Company's  dividend policy on a continuing basis. The declaration of
common  dividends is dependent upon a number of factors  including  earnings and
financial condition of the Company and market conditions.

        On September 16, 1996, the Company  implemented a dividend  reinvestment
and stock purchase plan for investors,  including  customers and employees.  The
plan,  called PNM Direct,  also  includes  safekeeping  services  and  automatic
investment features. The Company's stock is purchased in the open market to meet
plan requirements.



                                      F-15
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(4)  Capitalization (Continued)

Cumulative Preferred Stock

        The number of  authorized  shares of  cumulative  preferred  stock is 10
million shares. The Company has 128,000 shares, 1965 Series, 4.58%, stated value
of $100 per share, of cumulative  preferred stock  outstanding.  The 1965 Series
does not have a mandatory  redemption  requirement but may be redeemable at 102%
of the par value with  accrued  dividends.  The  holders of the 1965  Series are
entitled  to  payment  before  holders  of  common  stock  in the  event  of any
liquidation  or  dissolution  or  distribution  of  assets  of the  Company.  In
addition,  the 1965  Series  is not  entitled  to a sinking  fund and  cannot be
converted into any other class of stock of the Company.  The Company's  restated
articles  of  incorporation  limit the amount of  preferred  stock  which may be
issued.  The earnings test in the Company's  restated  articles of incorporation
currently allows for the issuance of preferred stock.

Long-Term Debt

        Substantially all utility plant is pledged to secure the Company's first
mortgage  bonds.  A portion of certain series of long-term debt will be redeemed
serially  prior to their due dates.  The issuance of first mortgage bonds by the
Company is subject to earnings coverage and bondable property  provisions of the
Company's  first  mortgage bond  indenture.  The Company also has the capability
under the  mortgage  indenture  to issue  first  mortgage  bonds on the basis of
certain previously retired bonds and earnings.

         The aggregate  amounts (in  thousands)  of maturities  for 1998 through
2002 on long-term debt outstanding at December 31, 1997 are as follows:

         1998 ................................................  $      350
         1999 ................................................  $   12,030
         2000 ................................................  $    1,050
         2001 ................................................  $   16,038
         2002 ................................................  $   15,900

         On February 21, 1997,  the Company  completed the  refinancing  of $190
million of pollution control revenue bonds issued by the City of Farmington, all
maturing in April 2022. The $60 million 1978 Series A Pollution  Control Revenue
Bonds and the $40 million  1979 Series A Pollution  Control  Revenue  Bonds were
refinanced as variable rate bonds  (Pollution  Control Revenue  Refunding Bonds,
$40 million 1997 Series A, $37 million 1997 Series B and $23 million 1997 Series
C). The initial  variable rates were 3.35% for $40 million 1997 Series A and $37
million  1997 Series B, and 3.30% for $23 million  1997 Series C. The  remaining
$90 million 1979 Series A Pollution Control Revenue Bonds were refinanced with a
fixed rate of 6.375% (Pollution Control Revenue Refunding Bonds, 1997 Series D).
The effect of the  refinancing  resulted in a decrease  in  interest  charges of
approximately $1.1 million in 1997.



                                      F-16
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(4)  Capitalization (Continued)

        On December 1, 1997, the Company  converted  $137.3 million of pollution
control  revenue  bonds from variable  rate to fixed rates.  Of the total,  $100
million of City of Farmington bonds (Pollution  Control Revenue Refunding Bonds,
$40  million  1997 Series A, $37  million  1997  Series B, and $23 million  1997
Series C) were  converted to a fixed rate of 5.80% and $37.3 million of Maricopa
County,  Arizona Pollution Control  Corporation bonds (Pollution Control Revenue
Refunding Bonds,  $37.3 million 1992 Series A) were converted to a fixed rate of
5.75%.  The City of Farmington  bonds mature on April 1, 2022,  and the Maricopa
County, Arizona Pollution Control Corporation bonds mature on November 1, 2022.

Revolving Credit Facility and Other Credit Facilities

        At December 31, 1997,  the Company has a $100 million  revolving  credit
facility (the  "Facility") with an expiration date of June 30, 1998. The Company
must pay commitment  fees of 3/10% per year on the total amount of the Facility.
The Company  expects to renew the  Facility  before its  expiration  date with a
five-year $300 million senior unsecured revolving credit facility  ("Revolver").
The Company also has a $100 million  credit  facility,  which expires on May 20,
2001, and is collateralized by the Company's  electric and gas customer accounts
receivable and certain  amounts being  recovered from gas customers  relating to
certain gas contract settlements.  As of December 31, 1997, the Company had $130
million of available liquidity arrangements, consisting of $100 million from the
Facility,  $15 million  from the  accounts  receivable  securitization,  and $15
million from local lines of credit.

         In November  1997, the Company  requested  NMPUC approval to enter into
the Revolver.  In addition,  the Company intends to borrow $140 million from the
Revolver to retire all of its  outstanding  taxable first  mortgage  bonds.  The
Company also requested  authority to exchange the first mortgage bonds currently
collateralizing  the outstanding  $575 million of tax-exempt  pollution  control
revenue bonds with senior unsecured notes ("SUNs").

        After completion of these  transactions,  the 1947 Indenture of Mortgage
and  Deed of Trust  would be  extinguished,  resulting  in more  administrative,
financial and strategic  flexibility for the Company.  The extinguishment of the
mortgage  requires the consent of one party which has not yet  consented and may
not consent.  Due to concern about the consent, the Company also requested NMPUC
authority to leave an amended mortgage in place. Among other modifications,  the
mortgage  would be amended such that only $111 million of  tax-exempt  pollution
control revenue bonds would have the benefit of the lien. The property under the
lien would be reduced and no future  bonds could be issued  under the  mortgage.
The SUNs are planned to be issued under an indenture containing a restriction on
liens (except in certain limited  circumstances) and certain other covenants and
restrictions.  With the  exception of the $111  million of tax-exempt  pollution
control  revenue bonds  secured by first  mortgage  bonds,  the SUNs will be the
senior debt of the  Company.  On February  16,  1998,  the NMPUC issued an order
approving these  transactions.  The Company is anticipating  completion of these
transactions in mid-March 1998.



                                      F-17
<PAGE>




              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(4)  Capitalization (Continued)


Off-Balance Sheet Items

        In October 1996,  the Company  purchased $200 million of the PVNGS Lease
Obligation Bonds ("LOBs") at a premium with accrued interest and on December 30,
1997,  the Company  purchased  $28.9  million of 10.15%  Series  PVNGS LOBs at a
premium with accrued interest.

        Although  the PVNGS LOBs are  off-balance  sheet  debt,  these bonds are
included in the  calculation  of the Company's debt to  capitalization  ratio as
well as various  financial  coverage  ratios by the major rating  agencies.  The
purchase of the PVNGS LOBs is treated by the rating  agencies as a defeasance of
the bonds thereby  resulting in an improvement to these ratios.  The purchase of
the PVNGS LOBs has also increased earnings in the form of interest income.

Fair Value of Financial Instruments

       The  estimated  fair  value  of  the  Company's   financial   instruments
(including current maturities) at December 31, is as follows:
<TABLE>
<CAPTION>

                                                         1997                   1996
                                                 --------------------  --------------------
                                                  Carrying     Fair     Carrying     Fair
                                                   Amount     Value      Amount     Value
                                                 ---------  ---------  ---------  ---------
                                                               (In thousands)

<S>                                              <C>        <C>        <C>        <C>      
  Long-Term Debt ............................... $ 714,345  $ 743,524  $ 728,889  $ 731,358
  Decommissioning Trust Debt.................... $  23,000  $  23,000  $       -  $       -

  Investment in PVNGS LOBs ..................... $ 237,774  $ 236,049  $ 212,979  $ 211,327
  Decommissioning Trust......................... $  51,857  $  53,900  $  25,641  $  25,600
  Fossil-Fueled Plant Decommissioning Trust..... $   7,245  $   7,273  $   6,785  $   6,785
  Rabbi Trust................................... $  10,080  $  15,218  $  10,087  $  13,991

</TABLE>

       Fair value is based on market quotes provided by the Company's investment
bankers.

        The  carrying  amounts  reflected  on the  consolidated  balance  sheets
approximate  fair value for cash,  temporary  investments,  and  receivables and
payables due to the short period of maturity.


                                      F-18
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(5)  Earnings Per Share

        In 1997,  the Company  adopted SFAS No. 128,  Earnings  per Share.  As a
result,  dual  presentation  of basic and  diluted  earnings  per share has been
presented   in  the   Consolidated   Statement  of   Earnings.   The   following
reconciliation  illustrates the impact on the share amounts of potential  common
shares and the earnings per share amounts:
                                                                    Per-Share
                                                Income    Shares      Amount
                                               --------   ------    ---------
                                                  (In thousands except per
                                                       share amounts)
    December 31, 1997
    Net Earnings                               $80,995
    Less: Preferred stock dividends               (586                          
                                               -------
    Basic Earnings per Share
    Net earnings available for common stock     80,409    41,774      $1.92
    Options issued                                           217
                                               -------    ------
    Diluted Earnings per Share
    Net earnings available for common stock    $80,409    41,991      $1.91
                                               =======    ======      =====

    December 31, 1996
    Net Earnings                               $72,580
    Less: Preferred stock dividends               (586                          
                                               -------
    Basic Earnings per Share
    Net earnings available for common stock     71,994    41,774      $1.72
    Options issued                                           332
                                               -------    ------
    Diluted Earnings per Share
    Net earnings available for common stock    $71,994    42,106      $1.71
                                               =======    ======      =====

    December 31, 1995
    Net Earnings                               $75,562
    Less:  Preferred stock dividends            (3,714)
                                               -------
    Basic earnings per share
    Net earnings available for common stock     71,848    41,774      $1.72
    Options issued                                   -       103
                                               -------    ------
    Diluted earnings per share
    Net earnings available for common stock    $71,848    41,877      $1.72
                                               =======    ======      =====

         The  adoption  of SFAS No.  128 did not have an  impact  on  previously
reported earnings per share (basic).


                                      F-19
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995

(6)  Income Taxes

       Income taxes consist of the following components:
<TABLE>
<CAPTION>

                                                                         1997        1996       1995
                                                                         ----        ----       ----
                                                                                (In thousands)
 
<S>                                                                    <C>        <C>        <C>      
       Current Federal income tax ..................................   $ 32,911   $  14,815  $  45,940
        Current state income tax ....................................      9,859       2,847      5,864
        Deferred Federal income tax .................................      8,781      22,372     (3,212)
        Deferred state income tax ...................................       (397)      4,936      7,031
        Amortization of accumulated investment tax credits ..........     (4,436)     (4,476)    (4,442)
        Recognition of accumulated deferred investment tax credits
          relating to sales of utility property .....................          -           -       (388)
                                                                       ---------   ---------  ---------
           Total income taxes .......................................  $  46,718   $  40,494  $  50,793
                                                                       =========   =========  =========

        Charged to operating expenses ...............................  $  38,334   $  39,395  $  30,194
        Charged  to other income and deductions .....................      8,384       1,099     20,599
                                                                       ---------   ---------  ---------
           Total income taxes.......................................   $  46,718   $  40,494  $  50,793
                                                                       =========   =========  =========
</TABLE>

        The  Company's  provision  for income  taxes  differed  from the Federal
income tax  computed  at the  statutory  rate for each of the years  shown.  The
differences are attributable to the following factors:
<TABLE>
<CAPTION>
                                                                          1997        1996       1995
                                                                          ----        ----       ----
                                                                                (In thousands)

<S>                                                                    <C>         <C>         <C>      
        Federal income tax at statutory rates ........................ $   44,700  $   39,576  $  44,224
        Investment tax credits .......................................     (4,436)     (4,476)    (4,442)
        Depreciation of flow-through items ...........................        519         519        723
        Gains on the sale and leaseback of PVNGS
           Units 1 and 2 .............................................       (527)       (527)      (527)
        State income tax .............................................      5,963       5,192      7,146
        Gains on sale of utility property ............................          -           -      3,090
        Other ........................................................        499         210        579
                                                                       ----------  ----------  ---------
           Total income taxes ........................................ $   46,718  $   40,494  $  50,793
                                                                       ==========  ==========  =========
</TABLE>

                                      F-20
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(6)  Income Taxes (Continued)

        Deferred income taxes result from certain temporary  differences between
the recognition of income and expense for tax and financial  reporting purposes,
as  described  in note 1. The  major  sources  of these  differences  for  which
deferred taxes have been provided and the tax effects of each are as follows:
<TABLE>
<CAPTION>
                                                                  1997        1996         1995
                                                                  ----        ----         ----
                                                                           (In thousands)

<S>                                                             <C>         <C>         <C>      
    Deferred fuel costs .....................................   $(9,133)    $ 8,234     $ (3,990)
    Depreciation and cost recovery ..........................     6,390      18,048       12,730
    Loss provision for the M-S-R power purchase contract ....         -           -        3,497
    Contributions in aid of construction ....................    (3,185)     (4,053)      (4,308)
    Alternative minimum tax in excess of regular tax .......     12,482      (1,052)     (26,002)
    Net operating losses utilized ...........................         -           -       55,217
    PVNGS decommissioning ...................................    (1,512)        537       (2,321)
    Gains on sale of utility property .......................         -           -      (29,868)
    Contribution to 401(h) plan .............................     3,181        (510)        (885)
    Regulatory liability ....................................         -      (6,651)          -
    Curtailment gain  .......................................         -       5,272            -
    Transmission project cost ...............................         -       4,898       (3,177)
    Other ...................................................       161       2,585        2,926
                                                                -------     -------     --------
       Net deferred taxes provided ..........................   $ 8,384     $27,308     $  3,819
                                                                =======     =======     ========
</TABLE>

         The  components of the net  accumulated  deferred  income tax liability
were:

                                                             1997        1996
                                                             ----        ----
                                                              (In thousands)
   Deferred Tax Assets:
     Alternative minimum tax credit carryforward  ........  $ 55,198  $ 67,681
     Nuclear decommissioning .............................    18,226    16,303
     Regulatory liabilities ..............................    50,689    54,430
     Other ...............................................    46,079    48,944
                                                            --------  --------
        Total deferred tax assets ........................  $170,192  $187,358
                                                            ========  ========

   Deferred Tax Liabilities:
     Depreciation ........................................  $182,641  $179,430
     Investment tax credit ...............................    57,823    62,258
     Fuel costs ..........................................    23,905    33,038
     Regulatory assets ...................................    68,524    69,151
     Other ...............................................    16,475    16,005

        Total deferred tax liabilities ...................   349,368   359,882
                                                            --------  --------
   Accumulated deferred income taxes, net ................  $179,176  $172,524
                                                            ========  ========

                                      F-21
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(6)   Income Taxes (Continued)

        The  following  table  reconciles  the  change  in the  net  accumulated
deferred income tax liability to the deferred income tax expense included in the
consolidated statement of earnings for the period:


Net change in deferred income tax liability per above table .....    $  6,652

Change in tax effects of income tax related regulatory
   assets and liabilities .......................................      (3,114)
    
Tax effect of excess pension liability ..........................         410
                                                                     --------
Deferred income tax expense for the period ......................    $  3,948
                                                                     ========

       The Company has no net operating  loss  carryforwards  as of December 31,
1997.

(7)   Employee and Post-Retirement Benefits

Pension Plan

        The  Company  and  its   subsidiaries   have  a  pension  plan  covering
substantially  all  of  their  employees,   including  officers.   The  plan  is
non-contributory  and provides for benefits to be paid to eligible  employees at
retirement  based  primarily  upon years of  service  with the  Company  and the
average of their highest  annual base salary for three  consecutive  years.  The
Company's policy is to fund actuarially-determined contributions.  Contributions
to the plan reflect  benefits  attributed to employees' years of service to date
and also for  services  expected  to be  provided  in the  future.  Plan  assets
primarily consist of common stock, fixed income securities, cash equivalents and
real estate. The components of pension cost (in thousands) are as follows:

                                                 1997        1996         1995
                                                 ----        ----         ----

   Service cost ...........................    $  6,535   $   8,540    $  6,770
   Interest cost ..........................      19,592      20,546      18,332
   Actual return on plan assets ...........     (69,069)    (31,211)    (42,148)
   Net amortization and deferral ..........      44,513       9,577      23,295
                                               --------   ---------    --------
   Net periodic pension cost ..............       1,571       7,452       6,249
   Curtailment gain .......................           -     (13,317)         -
                                               --------   ---------    --------
   Total pension expense (income) .........    $  1,571   $  (5,865)   $  6,249
                                               ========   =========    ========

        In December 1996, the Company's Board approved  changes to the Company's
defined benefit pension plan and  implementation of a defined  contribution plan
no later than January 1, 1998. As a result,  the Company  recorded a curtailment
gain of approximately $13.3 million in the consolidated financial statements for
the year ended December 31, 1996.



                                      F-22
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(7)  Employee and Post-Retirement Benefits (Continued)

        The  following  sets forth the plan's  funded  status  and  amounts  (in
thousands) at December 31:
<TABLE>
<CAPTION>

                                                                                 1997        1996
                                                                                 ----        ----

<S>                                                                           <C>         <C>        
   Vested benefits .........................................................  $  267,021  $   233,687
   Non-vested benefits .....................................................      30,658       13,470
                                                                              ----------   ----------
   Accumulated benefit obligation ..........................................     297,679      247,157
   Effect of future compensation levels ....................................           -       11,894
   Projected benefit obligation ............................................     297,679      259,051
   Fair value of plan assets ...............................................     330,550      273,981
                                                                              ----------   ----------
   Projected benefit obligation less than plan assets ......................     (32,871)     (14,930)
   Unrecognized prior service cost .........................................        (146)        (180)
   Net unrecognized loss from past experience different from assumed and          14,828       (5,814)
      the effects of changes in assumptions ................................
   Unamortized asset at transition, being amortized through the year 2002...       4,650        5,814
                                                                              ----------   ----------
   Accrued pension asset ...................................................  $  (13,539)  $  (15,110)
                                                                              ==========   ========== 
</TABLE>

         The  weighted  average  discount  rate used to  measure  the  projected
benefit  obligation was 7.75% for 1997 and 1996, and the expected long-term rate
of return on plan  assets was 8.75% for 1997 and 1996.  The rate of  increase in
future  compensation  levels based on age-related  scales was not applicable for
1997 and 4.1% for 1996.

Other Postretirement Benefits

         The Company provides medical and dental benefits to eligible  retirees.
Currently,  retirees  are offered the same  benefits as active  employees  after
reflecting Medicare coordination.  The components of postretirement benefit cost
(in thousands) are as follows:
                                                   1997      1996     1995
                                                   ----      ----     ----

   Service cost ................................  $1,300   $1,449    $1,869
   Interest cost ...............................   4,452    4,478     4,962
   Actual return on plan assets ................  (6,076)  (1,208)   (2,726)
   Transition obligation amortization ..........   1,817    1,817     1,817
   Net amortization and deferral ...............   4,192     (159)    2,498
                                                  ------   ------    ------
   Total postretirement benefit expense ........  $5,685   $6,377    $8,420
                                                  ======   ======    ======

                                      F-23
<PAGE>

(7)  Employee and Post-Retirement Benefits (Continued)

       The  following  sets  forth the plan's  funded  status  and  amounts  (in
thousands) at December 31:
                                                               1997      1996
                                                               ----      ----
   Accumulated benefit obligations for:
      Retirees ............................................. $ 26,664  $ 25,237
      Fully eligible employees .............................   16,079    15,375
      Active employees .....................................   16,341    17,787
                                                             --------  --------
   Accumulated benefit obligation ..........................   59,084    58,399
   Fair value of plan assets ...............................   33,159    20,930
                                                             --------  --------
   Funded status ...........................................  (25,925)  (37,469)
   Net unrecognized (gain) loss.............................   (4,033)    2,416
   Unrecognized transition obligation (being amortized
       through the year 2012) ..............................   27,256    29,074
                                                             --------  --------
   Accrued postretirement liability ........................ $ (2,702) $ (5,979)
                                                             ========  ======== 

       Plan assets  consist  primarily of domestic  common  stock,  fixed income
securities and cash equivalents.

       The weighted average discount rate used to measure the projected  benefit
obligation was 7.25% and 7.75% for 1997 and 1996, respectively, and the expected
long-term  rate of return on plan assets was 8.75% for 1997 and 1996. The health
care cost  trend  rate was 8.0% for  1997,  1996 and  1995.  The  effect of a 1%
increase in the health care trend rate assumption would increase the accumulated
postretirement benefit obligation as of December 31, 1997 by approximately $10.5
million and the aggregate  service and interest cost  components of net periodic
postretirement  benefit cost for 1997 by approximately $1.2 million.  The health
care cost trend rate was  expected  to decrease to 5.0% by 2010 and to remain at
that level thereafter.

Executive Retirement Program

        The  Company  has  an  executive  retirement  program  for  a  group  of
management employees.  The program was intended to attract,  motivate and retain
key management  employees.  The Company's  projected benefit obligation for this
program,  as of December 31, 1997, was $19.2 million,  of which the  accumulated
and vested benefit  obligation  was $19.2 million.  As of December 31, 1997, the
Company has recognized an additional liability of $2.7 million for the amount of
unfunded  accumulated  benefits  in excess of  accrued  pension  costs.  The net
periodic pension cost for 1997, 1996 and 1995 was $2.2 million, $2.1 million and
$2.0 million,  respectively.  In 1989,  the Company  established  an irrevocable
grantor trust in connection  with the executive  retirement  program.  Under the
terms of the trust,  the Company may, but is not obligated to,  provide funds to
the trust,  which was  established  with an  independent  trustee,  to aid it in
meeting its obligations under such program.  Marketable securities in the amount
of  approximately  $10.1  million  (fair  market  value  of $15.2  million)  are
presently in trust.  No  additional  funds have been provided to the trust since
1989.

                                      F-24
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(7)  Employee and Post-Retirement Benefits (Continued)

Stock Option Plans

        The Company's  Performance  Stock Plan is a  non-qualified  stock option
plan, covering a group of management employees.  Options are granted at the fair
market  value of the shares on the date of the grant.  Options  granted  through
December 31, 1995,  vested on June 30, 1996,  have an exercise  term of up to 10
years.  All subsequent  awards granted after December 31, 1995, vest three years
from the grant date of the awards.  The maximum number of options authorized are
five million shares through December 31, 2000.

        In addition, the Company has a Director Retainer Plan which provides for
payment of the Directors' annual retainer in the form of cash,  restricted stock
or stock  options.  The  number of options  granted  in 1997 under the  Director
Retainer  Plan was 12,000  shares with an exercise  price of $6.625.  No options
under the Director Retainer Plan were exercised during 1997.
The number of option shares outstanding as of December 31, 1997 was 16,000.

        The fair value of each option grant is  determined  on the date of grant
using  the  Black-Scholes   option-pricing  model  with  the  following  average
assumptions used for grants in 1995, 1996 and 1997, respectively: dividend yield
of 2.7%,  2.4% and 3.0%;  expected  volatility  of 20%,  18% and 20%,  risk-free
interest rates of 5.5%, 5.59% and 5.69%; and expected lives of four years.

        A summary of the status of the Company's  stock option plans at December
31, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>

                                           1997               1996                  1995
                                     ----------------   ------------------   -------------------
                                             Weighted             Weighted              Weighted
                                              Average              Average               Average
                                             Exercise             Exercise              Exercise
          Fixed Options              Shares   Price     Shares     Price     Shares        Price
          -------------              ------   -----     ------     -----     ------        -----

<S>                                  <C>       <C>      <C>       <C>        <C>          <C>          
Outstanding at beginning of year     846,787   $18.48   508,986   $17.625         --           --

Granted                              312,707   $23.03   390,228   $19.48     508,986      $17.625

Exercised                             98,211   $17.62    51,286   $17.625         --           --
 
Forfeited                             13,998   $19.62     1,141   $17.625         --           --
                                   ---------            -------              -------
Outstanding at end of year         1,047,285   $19.85   846,787   $18.48     508,986      $17.625
                                   =========            =======              ======= 
Options exercisable at year-end      362,348                                 456,559           --

Weighted-average fair value of
options granted during the year        $4.71              $3.56                $3.49

</TABLE>

                                      F-25
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(7)  Employee and Post-Retirement Benefits (Continued)

        The  following  table   summarizes   information   about  stock  options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>



                              Options Outstanding                      Options Exercisable
                  ------------------------------------------      ---------------------------
                                    Weighted-
                                     Average
                                    Remaining                                        Weighted
   Range of          Number          Weighted       Average           Number          Average
   Exercise       Outstanding      Contractual      Exercise      Exercisable at      Exercise
    Prices        at 12/31/97         Life          Prices           12/31/97          Prices
   --------       -----------      -----------      --------      --------------     ---------
   <S>             <C>               <C>            <C>               <C>             <C>
   $  5.50 -
     $6.625           16,000         9.75 years     $ 6.344             4,000         $ 5.50
 
   $ 17.625
   $ 23.6875       1,031,285         8.93 years     $20.06            358,348         $17.625
   ---------       ---------         ----------     -------           -------         -------         
   $  5.50 -
   $ 23.6875       1,047,285         8.95 years     $19.858           362,348         $17.491
                   =========                                          =======
</TABLE>

       Had  compensation  cost for the  Company's  performance  stock  plan been
determined   consistent   with  SFAS  No.  123,   Accounting   for   Stock-Based
Compensation,  the effect on the  Company's pro forma net earnings and pro forma
earnings per share would be as follows:


                                            1997       1996       1995
                                            ----       ----       ----
                                      (In thousands except per share amounts)
 
  Net Earnings:
  (Available for common)  As Reported      $80,409    $71,994    $71,848
                          Pro Forma        $80,018    $70,952    $71,848

  Basic EPS:              As Reported      $  1.92    $  1.72    $  1.72
                          Pro Forma        $  1.92    $  1.70    $  1.72

  Diluted EPS:            As Reported      $  1.91    $  1.71    $  1.72
                          Pro Forma        $  1.90    $  1.70    $  1.72


                                      F-26
<PAGE>

            PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(8)   Construction Program and Jointly-Owned Plants

        It is estimated that the Company's  construction  expenditures  for 1998
will be approximately  $141.3 million,  including  expenditures on jointly-owned
projects.  The Company's  proportionate  share of expenses for the jointly-owned
plants is  included in  operating  expenses in the  consolidated  statements  of
earnings.

        At December  31,  1997,  the  Company's  interests  and  investments  in
jointly-owned generating facilities are:
<TABLE>
<CAPTION>

                                                                                Construction
                                                     Plant in    Accumulated      Work in     Composite
     Station (Fuel Type)                             Service     Depreciation     Progress     Interest
     -------------------                             -------     ------------     --------     --------
                                                                          (In thousands)

<S>                                                <C>            <C>            <C>            <C>  
     San Juan Generating Station (Coal)..........  $   725,308    $ 341,237      $ 21,679       46.3%
     Palo Verde Nuclear Generating
       Station (Nuclear)*........................  $   190,649    $  40,434      $ 16,537       10.2%
     Four Corners Power Plant Units 4 and 5        
        (Coal) ..................................  $   118,305    $  55,703      $  3,812       13.0%
                                                                 
</TABLE>
 
     *  Includes the Company's  interest in PVNGS Unit 3, the Company's interest
        in  common  facilities  for all  PVNGS  units  and  the  22%  beneficial
        interests in the PVNGS Units 1 and 2 leases.

San Juan Generating Station ("SJGS")

        The Company  operates and jointly owns SJGS. At December 31, 1997,  SJGS
Units 1 and 2 are  owned  on a 50%  shared  basis  with  Tucson  Electric  Power
Company, Unit 3 is owned 50% by the Company, 41.8% by Southern California Public
Power Authority and 8.2% by Tri-State  Generation and Transmission  Association,
Inc. Unit 4 is owned 38.457% by the Company, 28.8% by M-S-R Public Power Agency,
California  public  power  agency  ("M-S-R"),  10.04%  by the  City of  Anaheim,
California,  8.475% by the City of Farmington, 7.2% by the County of Los Alamos,
and 7.028% by Utah Associated Municipal Power Systems.

Palo Verde Nuclear Generating Station

        The  Company  has  a  10.2%  undivided  interest  in  PVNGS.  Commercial
operation  commenced  in 1986 for Unit 1 and Unit 2 and 1988 for Unit 3. In 1985
and  1986,  the  Company  completed  sale  and  leaseback  transactions  for its
undivided interests in Units 1 and 2 and certain related common facilities.

     In  1992,  the  Company  purchased  approximately  22%  of  the  beneficial
interests  in the PVNGS Units 1 and 2 leases for  approximately  $17.5  million,
recording  $158.3 million as utility plant and $140.8 million as long-term debt.
In 1993,  such utility  plant was written down to $46.7  million in  conjunction
with an electric retail rate reduction.


                                      F-27
<PAGE>
            PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(8) Construction Program and Jointly-Owned Plants (Continued)

        The PVNGS  participants  have  insurance for public  liability  payments
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 $200 million and the
balance  by an  industry-wide  retrospective  assessment  program.  The  maximum
assessment per reactor under the  retrospective  rating program for each nuclear
incident  occurring  at  any  nuclear  power  plant  in  the  United  States  is
approximately  $79.3  million,  subject to an annual  limit of $10  million  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 $24.3 million, with an annual payment limitation of $3 million per
incident.  The  insureds  under  this  liability  insurance  include  the  PVNGS
participants  and "any other  person or  organization  with respect to his legal
responsibility  for damage caused by the nuclear  energy  hazard".  If the funds
provided by this  retrospective  assessment  program  prove to be  insufficient,
Congress could impose revenue  raising  measures on the nuclear  industry to pay
claims.

        The PVNGS participants  maintain "all-risk"  (including nuclear hazards)
insurance for nuclear  property damage to, and  decontamination  of, property at
PVNGS in the aggregate  amount of  approximately  $2.75 billion as of January 1,
1998,  a  substantial  portion of which must be  applied  to  stabilization  and
decontamination.  The Company has also secured insurance against portions of the
increased  cost of  generation  or  purchased  power and  business  interruption
resulting from certain accidental outages of any of the three PVNGS units if the
outage  exceeds  17  weeks.  The  Company  is a member  of two  industry  mutual
insurers.  These mutual insurers  provide both the "all-risk" and increased cost
of  generation  insurance  to  the  Company.  In the  event  of  adverse  losses
experienced  by these  insurers,  the Company is subject to an  assessment.  The
Company's  maximum  share of any  assessment is  approximately  $4.3 million per
year.

        The Company has a program for funding its share of decommissioning costs
for PVNGS. Under a portion of this program, the Company makes a series of annual
deposits  under  agreements  approved by the NMPUC to an external  non-qualified
trust which are applied  towards an  investment  in life  insurance  policies on
certain  current  and former  employees.  The  remaining  portion of the nuclear
decommissioning  funding  program is  invested  in  equities  in  qualified  and
non-qualified  trusts.  The  results  of the  1995  decommissioning  cost  study
indicated that the Company's  share of the PVNGS  decommissioning  costs will be
approximately $162.6 million (in 1997 dollars).

        Pursuant  to NMPUC  approval,  the  Company  funded an  additional  $2.1
million and $12.5 million in 1997 and 1996, respectively, into the qualified and
non-qualified  trust funds. The estimated market value of the trusts,  including
the net cash value of the current life  insurance  policies,  at the end of 1997
was approximately $30.9 million.

(9)  Long-Term Power Contracts

        The Company had two  long-term  contracts  for the  purchase of electric
power. Under a contract with M-S-R, which expired in early 1995, the Company was
obligated to pay certain minimum amounts and a variable  component  representing
the  expenses  associated  with the  energy  purchased  and debt  service  costs
associated  with  capital  improvements.  Total  payments  under  this  contract
amounted to approximately $14 million for 1995.


                                      F-28
<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(9)  Long-Term Power Contracts (Continued)

        The Company  has a power  purchase  contract  with SPS for up to 200 MW,
expiring in May 2011.  The Company  may reduce its  purchases  from SPS by 25 MW
annually upon three years'  notice.  The Company  provided such notice to reduce
the  purchase by 25 MW in 1999 and by an  additional  25 MW in 2000.  Also,  the
Company has 39 MW of contingent  capacity obtained from El Paso Electric Company
under a transmission  capacity for generation  capacity trade  arrangement  that
increases  to 70 MW  from  1998  through  2003.  In  addition,  the  Company  is
interconnected  with  various  utilities  for  economy  interchanges  and mutual
assistance in emergencies.

        The  Company  anticipates  the need for  approximately  100 to 200 MW of
additional  capacity in the 1998 through 2000  timeframe.  To meet this need, in
1996,  the Company  entered into a long-term  power  purchase  contract with the
Cobisa-Person  Limited Partnership  ("PLP") to purchase  approximately 100 MW of
unit contingent peaking capacity from a gas turbine generating unit for a period
of 20  years,  with an option to renew for an  additional  five  years.  The gas
turbine  generating unit will be constructed and operated by the PLP and will be
located on the  Company's  retired  Person  Generating  Station  site located in
Albuquerque,  New Mexico.  The site for the generating unit was chosen, in part,
to provide needed benefits to the Company's constrained  transmission system. In
October 1996, the Company filed a request for approval from the NMPUC. The NMPUC
issued a final order  approving the  application  in September  1997.  The final
order   also   included   approval   of  a   stipulated   settlement   agreement
("Stipulation")  which had earlier been entered into among the Company,  the PLP
and the NMPUC staff to resolve  certain  issues raised in this  proceeding.  The
Stipulation  included,  among  other  things,  a  provision  wherein the Company
committed,  in  cooperation  with  the  NMPUC  staff,  to  the  development  and
evaluation of a request for proposal  ("RFP") for purchase of approximately 5 MW
of capacity from solar generation resources.  The Company would not be obligated
to build such a unit or commit to such a power purchase agreement prior to NMPUC
approval  of a  full-recovery  mechanism  that  would not put the  Company  at a
competitive disadvantage.

        The NMPUC  docketed  a new case to follow  the  progress  of the RFP and
address the issue of full-cost recovery. The RFP was issued on January 16, 1998.
Proposals  are due on  March  24,  1998.  It is  expected  that  contracts  with
successful  bidders  will be signed by June 6, 1998 in order to  facilitate  the
NMPUC hearing on full-cost recovery, which has been scheduled for June 15, 1998.

        On  December  23,  1997,  the PLP  received  FERC  approval  for "exempt
wholesale  generator" status with respect to the gas turbine generating unit, as
defined in Section 32 of the Public Utility Holding Company Act. Under the power
purchase agreement,  construction of the gas turbine generating unit is expected
to begin in August 1998, with commercial  operation and power delivery scheduled
in May 1999. The operation  date was originally  chosen to satisfy both resource
and  transmission  needs  anticipated  for the  Company's  jurisdictional  load.
However,  a reduction in the  Company's  load  forecast for 1999  combined  with
technical  issues  concerning  one of the  candidate  gas  turbines has lead the
Company and PLP to consider a nine to twelve month delay in the operation date.

        In addition to the long-term  power purchase  contract with the PLP, the
Company is pursuing  other options to ensure its  additional  capacity needs are
met.

                                      F-29
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(10)  Lease Commitments

        The  Company  leases  Units  1  and  2 of  PVNGS,  certain  transmission
facilities,  office  buildings and other equipment under operating  leases.  The
lease expense for PVNGS is $66.3 million per year over base lease terms expiring
in 2015 and 2016.  Prior to 1992,  the  aggregate  lease  expense  for the PVNGS
leases was $84.6  million  per year over the base  lease  terms;  however,  this
amount was  reduced  by the  purchase  of  approximately  22% of the  beneficial
interests  in the PVNGS  Units 1 and 2 leases  (see note 8).  Each  PVNGS  lease
contains  renewal and fair market value purchase  options at the end of the base
lease term.  Covenants  in the  Company's  PVNGS Units 1 and 2 lease  agreements
limit the  Company's  ability,  without  consent of the owner  participants  and
bondholders  in the  lease  transactions,  (i)  to  enter  into  any  merger  or
consolidation,  or (ii) except in connection  with normal  dividend  policy,  to
convey,  transfer,  lease or  dividend  more than 5% of its assets in any single
transaction or series of related transactions.

     Future minimum operating lease payments (in thousands) at December 31, 1997
are:

    1998 ....................................................$   79,436
    1999 ....................................................    79,068
    2000 ....................................................    78,711
    2001 ....................................................    78,528
    2002 ....................................................    78,425
    Later years .............................................   950,979
                                                             ----------
      Total minimum lease payments ......................... $1,345,147
                                                             ==========

        Operating lease expense,  inclusive of PVNGS leases,  was  approximately
$80.8  million  in 1997,  $80.3  million  in 1996  and  $80.0  million  in 1995.
Aggregate minimum payments to be received in future periods under  noncancelable
subleases are approximately $5.9 million.

(11)  Environmental Issues and Retired Fossil-Fueled Plant Decommissioning Costs

        The Company is committed to complying with all applicable  environmental
regulations.  Environmental issues have presented and will continue to present a
challenge to the Company. The Company has evaluated the potential impacts of the
following environmental issues and believes,  after consideration of established
reserves,  that the ultimate outcome of these environmental issues will not have
a material  adverse  effect on the Company's  financial  condition or results of
operations.

Electric Operations

Santa Fe Station

        The  Company and the New Mexico  Environment  Department  ("NMED")  have
conducted  investigations of the groundwater  contamination detected beneath the
former  Santa  Fe  Generating  Station  site  to  determine  the  source  of the
contamination. The Company has been and is continuing to cooperate with the NMED
regarding site  investigations  and remedial  planning  pursuant to a Settlement
Agreement between the Company and the NMED. In June 1996, the Company received a
letter  from the NMED,  indicating  that the NMED  believes  the  Company is the
source of gasoline contamination in a municipal well supplying the City of Santa
Fe and  groundwater  underlying the Santa Fe Station.  Further,  the NMED letter


                                      F-30
<PAGE>

(11)  Environmental  Issues and Retired Fossil-Fueled Plant Decommissioning
        Costs (Continued)

stated that the Company was required to proceed with interim  remediation of the
contamination  pursuant  to the New  Mexico  Water  Quality  Control  Commission
("NMWQCC")  regulations.  In July 1996,  the  Company  filed an appeal  with the
NMWQCC protesting the determination and directives  contained in the NMED's June
1996 letter.  Subsequently,  negotiation  meetings  were  conducted  between the
Company and the NMED for a resolution of the groundwater contamination issue.

        On October 3, 1996,  the Company and the NMED signed an Amendment to the
Settlement  Agreement  concerning the groundwater  contamination  underlying the
site. As part of the Amendment,  the Company agreed to spend  approximately $1.2
million ("Settlement Amount") for certain costs related to sampling, monitoring,
and development and implementation of a remediation plan.

        The amended Settlement Agreement does not, however,  provide the Company
with  a  full  and  complete  release  from  potential   further  liability  for
remediation of the groundwater contamination. After the Company has expended the
Settlement  Amount, if the NMED can establish  through binding  arbitration that
the Santa Fe Station is the source of the  contamination,  the Company  could be
required to perform further remediation that is determined to be necessary.  The
Company  continues  to dispute any  contention  that the Santa Fe Station is the
source of the  groundwater  contamination  and believes that  insufficient  data
exists to identify  the sources of  groundwater  contamination.  The Company has
completed an aquifer  characterization  report and a groundwater  quality report
associated with the 40 day  reactivation of the adjacent Santa Fe supply well in
July  and  August  of 1996.  These  reports  strongly  suggest  the  groundwater
contamination  does not  originate  from the Santa Fe Station  site and has been
drawn under the site by the pumping of the Santa Fe supply  well.  In  addition,
other urban wells in Santa Fe are likely to be vulnerable to contamination  from
off-site sources.

        The Company and the NMED,  with the cooperation of the City of Santa Fe,
have chosen a remediation plan proposed by a remediation contractor. The City of
Santa  Fe,  the  Company  and  the  NMED  have  entered  into  a  Memorandum  of
Understanding  concerning the chosen  remediation  plan and the operation of the
municipal well adjacent to the Santa Fe Station site in connection with carrying
out that plan. Construction of the remediation system under the plan is expected
to  commence  in the second  quarter of 1998.  The system is  expected  to be in
operation early in the third quarter of 1998.

Person Station

        The Company,  in compliance with the NMED's Corrective Action Directive,
determined  that  groundwater  contamination  exists  in the  deep  and  shallow
groundwater at the Person Station site. The Company is required to delineate the
extent of the contamination and remediate the contaminants in the groundwater at
the  Person  Station  site.  The  extent  of the  contaminant  plume in the deep
groundwater  was  assessed and results  were  reported to the NMED.  The Company
currently is involved  with the process to renew the Resource  Conservation  and
Recovery Act post-closure care permit for the facility. Remedial actions for the
deep  groundwater  will be  incorporated  into the new  permit.  The Company has
proposed a monitoring program in conjunction with natural attenuation  processes
as the most cost effective  approach for the deep groundwater  remediation.  The
Company's  current  estimate to decommission  its retired  fossil-fueled  plants
includes  approximately  $6.3  million in  additional  expenses to complete  the
groundwater  remediation  program at Person  Station.  As part of the  financial
assurance  requirement of the Person Station Hazardous Waste Permit, the Company
established  a trust fund.  The current  value of the trust fund at December 31,
1997, was $7.3 million. The remediation program continues on schedule.

                                      F-31
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(11)   Environmental Issues and Retired Fossil-Fueled Plant Decommissioning
         Costs (Continued)

Gas Operations

Gas Wellhead Pit Remediation

        The New Mexico Oil Conservation Commission issued an order, effective on
January 14, 1993, that affects the gas gathering  facilities  located in the San
Juan Basin in northwestern New Mexico. The Bureau of Land Management ("BLM") has
issued a similar  order.  The order  prohibits  the further  discharge of fluids
associated  with the  production  of natural gas into  unlined  earthen  pits in
specified areas  (designated as "vulnerable  areas") in the San Juan Basin.  The
order also  required the  submission of closure plans for the pits where further
discharge  was  prohibited.  The  Company has  complied  with the orders and has
submitted  and  received  approval  for pit  closures  from the New  Mexico  Oil
Conservation Division ("OCD") and the BLM.

        These   gas   gathering   facilities   were   sold   to   Williams   Gas
Processing-Blanco,  Inc., a subsidiary  of the Williams  Field  Services  Group,
Inc.,  of  Tulsa,  Oklahoma  ("Williams")  on June  30,  1995.  As a part of the
purchase and sale  agreement,  the Company agreed to cease  discharge to unlined
earthen pits in designated vulnerable areas and to retain the responsibility for
pit  closures for a stated  period of time and to a stated  dollar  amount.  The
Company has assessed the pits in accordance with OCD/BLM directives,  and is now
in the process of closing pits and remediating  them, if necessary,  at wellhead
locations  within the designated  vulnerable  areas. The Company has submitted a
groundwater  management  plan to the OCD and has received  approval of the plan,
and  is  proceeding  with  delineation  of  groundwater  contamination  and,  as
necessary,  cleanup,  in  accordance  with the approved  plan.  The Company will
address  soil  and  groundwater   contamination   within  the  dollar  and  time
limitations  imposed by the purchase and sale agreement  with  Williams,  and in
accordance with the requirements of the OCD.

         In March 1995,  the  Jicarilla  Apache Tribe  ("Jicarilla")  enacted an
ordinance   directing   that  unlined   surface   impoundments   located  within
environmentally  sensitive  areas be remediated and closed by December 1996, and
that all other unlined surface impoundments on Jicarilla lands be remediated and
closed  by  December   1998.  In  1995,   the  Company   received  a  claim  for
indemnification  by Williams,  the  purchaser of the Company's gas gathering and
processing  assets,  for the  environmental  work  required  to comply  with the
Jicarilla  ordinance.  The Company submitted a  closure/remediation  plan to the
Jicarillas,  which was approved.  The Company's remediation work pursuant to the
plan  commenced  in mid-1996,  and the costs of  remediation  are being  charged
against the $10.6 million indemnification cap contained in the purchase and sale
agreement between the Company and Williams.  The Company met the requirement for
closing  and  remediating  pits  within the  environmentally  sensitive  area by
December 1996, and anticipates closing and remediating all other pits associated
with the gas  gathering  and  processing  assets by the December  1998  deadline
specified in the ordinance.


                                      F-32
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(12)  Asset Sales

        In 1995, the Company and its subsidiaries sold certain non-strategic gas
assets for approximately $154 million to Williams, recognizing an after-tax gain
of $12.8  million.  This gain was  adjusted  to $11.8  million in 1996 due to an
accrual for additional gas environmental  costs. Under the NMPUC order approving
the sale,  the Company is required to share  approximately  $35 million from the
sale with customers,  which is being credited to the customer's  bills over five
years.  After  completion  of the  fifth  year,  the  amount  of  gain  will  be
recalculated to include actual expenses  specified in the agreement,  subject to
NMPUC review.  As of December 31, 1997,  the Company has a remaining  balance of
$11.9 million for future years credit to its customers.  However, as a result of
the increase in estimated sales expense,  the Company  proposed in another NMPUC
case to retain $7.2 million of the $11.9 million until all actual  expenses have
been accumulated.  The NMPUC has not issued an order on the Company's  proposal.
In addition,  the Company, in 1995, sold its water division to the City of Santa
Fe for $51.2  million  (exclusive  of  current  assets  netted  against  current
liabilities),  recognizing  an  after-tax  gain of $6.4  million.  The  Company,
through its Energy Services Business Unit, has a contract with the City of Santa
Fe to operate the Santa Fe water systems through the year 2001.


                                      F-33
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995


(13)   Segment Information

        The Company primarily operates in three business segments,  as indicated
below. A description of each of the Company's three segments and their products,
services and markets  served is included in Part I of this Annual Report on Form
10-K. Corporate administrative expenses are allocated to segments based upon the
nature of the expense.

       Summarized  financial  information by business segment for 1997, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>

                                                                            Energy
                                                  Electric*      Gas       Services**   Other       Total
                                                  ----------   --------    --------   --------   ----------
                                                                        (In thousands)
<S>                                               <C>          <C>         <C>        <C>        <C>       
1997:
   Operating revenues                             $  722,438   $294,769    $118,060   $      -   $1,135,267
   Operating expenses excluding income taxes         576,521    263,738     132,629          -      972,888
                                                  ----------   --------    --------   --------   ----------
   Pre-tax operating income (loss)                   145,917     31,031     (14,569)         -      162,379
   Operating income tax (benefit)                     36,446      7,587      (5,732)        33       38,334
                                                  ----------   --------    --------   --------   ----------
   Operating income (loss)                        $  109,471   $ 23,444    $ (8,837)  $    (33)  $  124,045
                                                  ==========   ========    ========   ========   ==========
   Depreciation and amortization expense          $   68,089   $ 14,587    $     26   $      -   $   82,702
                                                  ==========   ========    ========   ========   ==========
   Construction expenditures                      $   96,963   $ 31,408    $      -   $      -   $  128,371
                                                  ==========   ========    ========   ========   ==========

   Identifiable assets:
   Net utility plant                              $1,276,927   $296,223    $      -   $      -   $1,573,150
   Other                                             509,007    183,097      40,479      7,999      740,582
                                                  ----------   --------    --------   --------   ----------
      Total assets                                $1,785,934   $479,320    $ 40,479   $  7,999   $2,313,732
                                                  ==========   ========    ========   ========   ==========

1996:
   Operating revenues                             $  645,639   $227,301    $ 10,446   $      -   $  883,386
   Operating expenses excluding income taxes         509,804    191,922      16,246          -      717,972
                                                  ----------   --------    --------   --------   ----------
   Pre-tax operating income (loss)                   135,835     35,379      (5,800)         -      165,414
   Operating income tax (benefit)                     32,422      8,927      (2,296)       342       39,395
                                                  ----------   --------    --------   --------   ----------
   Operating income (loss)                        $  103,413   $ 26,452    $ (3,504)  $   (342)  $  126,019
                                                  ==========   ========    ========   ========   ==========
   Depreciation and amortization expense          $   64,817   $ 13,122    $    177   $      -   $   78,116
                                                  ==========   ========    ========   ========   ==========
   Construction expenditures                      $   76,572   $ 26,497    $     18   $      -   $  103,087
                                                  ==========   ========    ========   ========   ==========

   Identifiable assets:
   Net utility plant                              $1,270,141   $281,348    $  1,204   $      -   $1,552,693
   Other                                             449,478    202,725      13,618     11,800      677,621
                                                  ----------   --------    --------   --------   ----------
      Total assets                                $1,719,619   $484,073    $ 14,822   $ 11,800   $2,230,314
                                                  ==========   ========    ========   ========   ==========
</TABLE>


                                      F-34
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1997, 1996 and 1995

(13)  Segment Information (Continued)
<TABLE>
<CAPTION>

                                                     Electric*      Gas         Other       Total
                                                    ----------    --------     -------    ----------
                                                                   (In thousands)
<S>                                                 <C>           <C>          <C>        <C>       
1995:
    Operating revenues                              $  584,284    $217,985     $ 6,196    $  808,465
    Operating expenses excluding income taxes          470,824     190,128       3,931       664,883
                                                    ----------    --------     -------    ----------
    Pre-tax operating income                           113,460      27,857       2,265       143,582
    Operating income tax                                24,884       4,313         997        30,194
                                                    ----------    --------     -------    ----------
    Operating income                                $   88,576    $ 23,544     $ 1,268    $  113,388
                                                    ==========    ========     =======    ==========
    Depreciation and amortization expense           $   63,047    $ 17,248     $   570    $   80,865
                                                    ==========    ========     =======    ==========
    Construction expenditures                       $   76,610    $ 26,315     $ 4,741    $  107,666
                                                    ==========    ========     =======    ==========

    Identifiable assets:
    Net utility plant                               $1,298,103    $276,218     $   113    $1,574,434
    Other                                              327,547     125,387       8,301       461,235
                                                    ----------    --------     -------    ----------
       Total assets                                 $ 1,625,60    $401,605     $ 8,414    $2,035,669
                                                    ==========    ========     =======    ==========
</TABLE>

  *Includes the resources excluded from NMPUC retail rates regulation.
 **Energy Services began operations in 1996.

        On  June  30,  1995,  the  Company  sold  substantially  all of the  gas
gathering and processing  assets of the Company and its gas  subsidiaries and on
July 3, 1995, the Company sold its water division (see note 12).


                                      F-35
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
                           QUARTERLY OPERATING RESULTS


   The unaudited operating results by quarters for 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
                                                                    Quarter Ended
                                                     ----------------------------------------------
                                                     March 31   June 30   September 30  December 31
                                                     --------   --------  ------------  -----------
                                                        (In thousands except per share amounts)
   
<S>                                                  <C>         <C>         <C>          <C>     
    1997:
       Operating Revenues ...........................$ 298,822   $238,742    $285,971     $311,732
       Operating Income .............................$  36,693   $ 25,994    $ 34,885     $ 26,473
       Net Earnings  ................................$  24,896   $ 15,567    $ 24,319     $ 16,213
       Net Earnings per Share (basic)................$    0.59   $   0.37    $   0.58     $   0.38
       Net Earnings per share (diluted)..............$    0.59   $   0.37    $   0.57     $   0.38
   
    1996:
       Operating Revenues ...........................$ 241,904   $197,597    $210,757     $233,128
       Operating Income .............................$  38,475   $ 25,346    $ 32,412     $ 29,786
       Net Earnings (1)..............................$  26,448   $ 13,542    $ 19,940     $ 12,650

       Net Earnings per Share (basic) (1)............$    0.63   $   0.32    $   0.47     $   0.30
       Net Earnings per Share (diluted) (1)..........$    0.62   $   0.32    $   0.47     $   0.30
</TABLE>
   
      In the opinion of management of the Company,  all adjustments  (consisting
of normal recurring  accruals)  necessary for a fair statement of the results of
operations for such periods have been included.

-------------

(1)   During the quarter ended  December 31, 1996,  the Company made a provision
      for loss of $10.0 million, net of tax ($.24 per common share), as a result
      of the gas rate order, pending the outcome of the appeal. In addition, the
      Company  recorded an after-tax  curtailment gain of $8.0 million ($.19 per
      common  share)  related to the  change of the  Company's  defined  benefit
      pension plan.


                                      F-36
<PAGE>

<TABLE>
<CAPTION>
                                  PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                                            COMPARATIVE OPERATING STATISTICS

                                                         1997          1996          1995         1994         1993
                                                      ----------    ----------    ----------    ---------    ---------
<S>                                                    <C>           <C>           <C>          <C>          <C>      
Electric Service 
Energy Sales--KWh (in thousands):
  Residential                                          1,976,434     1,892,290     1,795,371    1,786,292    1,683,213
  Commercial                                           2,841,831     2,698,087     2,578,243    2,534,507    2,398,725
  Industrial                                           1,556,264     1,505,801     1,434,974    1,268,208    1,145,369
  Other ultimate customers                               160,370       310,118       220,777      364,144      219,481
                                                      ----------    ----------    ----------    ---------    ---------
    Total sales to ultimate customers                  6,534,899     6,406,296     6,029,365    5,953,151    5,446,788
  Sales for resale                                     6,785,643     4,575,220     2,590,513    3,361,933    3,375,216
                                                      ----------    ----------    ----------    ---------    ---------
    Total KWh sales                                   13,320,542    10,981,516     8,619,878    9,315,084    8,822,004
                                                      ==========    ==========    ==========    =========    =========

Electric Revenues (in thousands):
  Residential                                          $ 184,813     $ 177,220     $ 168,633    $ 172,559    $ 163,131
  Commercial                                             237,629       226,146       218,222      229,851      218,263
  Industrial                                              86,927        83,651        79,964       79,729       74,157
  Other ultimate customers                                10,135        20,804        18,749       24,147       15,548
                                                      ----------    ----------    ----------    ---------    ---------
    Total revenues to ultimate customers                 519,504       507,821       485,568      506,286      471,099
  Sales for resale                                       185,334       121,329        80,949*      96,821*      99,895*
                                                      ----------    ----------    ----------    ---------    ---------
    Total revenues from energy sales                     704,838       629,150       566,517      603,107      570,994
  Miscellaneous electric revenues                         17,600        16,489        17,767       18,687       18,734
                                                      ----------    ----------    ----------    ---------    ---------
    Total electric revenues                            $ 722,438     $ 645,639     $ 584,284    $ 621,794    $ 589,728
                                                      ==========    ==========    ==========    =========    =========

Customers at Year End:
  Residential                                            311,314       304,900       296,821      287,369      278,357
  Commercial                                              36,942        36,292        35,390       34,336       33,568
  Industrial                                                 363           375           374          384          381
  Other ultimate customers                                   637           632           598          599          576
                                                      ----------    ----------    ----------    ---------    ---------
    Total ultimate customers                             349,256       342,199       333,183      322,688      312,882
  Sales for Resale                                            66            56            37           42           37
                                                      ----------    ----------    ----------    ---------    ---------
    Total customers                                      349,322       342,255       333,220      322,730      312,919
                                                      ==========    ==========    ==========    =========    =========

Reliable Net Capability--KW                            1,506,000     1,506,000     1,506,000    1,506,000    1,541,000
Coincidental Peak Demand--KW                           1,209,000     1,217,000     1,247,000    1,189,000    1,104,000
Average Fuel Cost per Million BTU                     $   1.2319    $   1.2735    $   1.3177    $  1.3488    $  1.3844
BTU per KWh of Net Generation                             10,927        10,768        10,811       10,817       11,036

Water Service  **
  Water Sales--Gallon (in thousands)                       -            -          1,616,544    3,366,388    3,414,950
  Revenues (in thousands)                                  -            -         $    6,196    $  13,407    $  13,063
  Customers at Year End                                    -            -             23,752       23,452       22,743

------------------------
</TABLE>

*      Due to the provision for the loss  associated  with the M-S-R  contingent
       power  purchase  contract  recognized  in 1992,  operating  revenues were
       reduced by $7.3 million,  $25.0 million and $20.5 million for 1995,  1994
       and and 1993, respectively.

**      On July 3, 1995,  the Company sold its water utility  division (see note
        12  to  the   consolidated   financial   statements).   Water  Service's
        comparative operating statistics for 1995 are through this date.


                                      F-37
<PAGE>
<TABLE>
<CAPTION>

                                  PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                                            COMPARATIVE OPERATING STATISTICS

                                                  1997          1996         1995         1994         1993
                                               ----------    ---------     ---------    ---------    ---------
<S>                                                <C>          <C>           <C>          <C>          <C>   
Gas Throughput--Decatherms (in thousands)
PNMGS:
    Residential                                    30,755       27,387        25,865       27,139       28,031
    Commercial                                     10,644        9,310         8,864        9,767       10,428
    Industrial                                      1,280        2,136           661          831          923
    Public authorities                              4,153        2,591         2,411        2,465        2,473
    Irrigation                                      1,593        1,418         1,245        1,272        1,259
    Sales for resale                                1,233        3,094         1,266          680        1,041
    Off-system sales                                1,179        5,745         1,176            -            -
    Unbilled                                         (202)       1,405        (1,764)        (309)        (636)
                                               ----------    ---------     ---------    ---------    ---------
    PNMGS sales                                    50,635       53,086        39,724       41,845       43,519
    Transportation throughput                      33,975       47,010        49,136       43,135       46,059
                                               ----------    ---------     ---------    ---------    ---------
   PNMGS throughput                                84,610      100,096        88,860       84,980       89,578
Gathering Company:
    Spot market sales                             -            -                  39      -            -
    Transportation throughput                     -            -              20,695       47,091       45,754
                                               ----------    ---------     ---------    ---------    ---------
         Total throughput                          84,610      100,096       109,594      132,071      135,332
                                               ==========    =========     =========    =========    =========

Gas Revenues (in thousands)
PNMGS:
    Residential                                 $ 187,563    $ 129,911     $ 125,290    $ 149,439    $ 149,796
    Commercial                                     50,502       33,022        32,328       42,725       44,575
    Industrial                                      4,536        5,179         1,873        2,905        3,369
    Public authorities                             17,577        8,018         7,939        9,969        9,694
    Irrigation                                      5,041        3,252         3,077        4,061        4,418
    Sales for resale                                4,465        2,106         3,114        2,462        3,137
    Off-system sales                                1,926       14,352         1,885      -            -
    Imbalance penalties                             1,273        1,231         1,786          944      -
    Unbilled                                       (2,172)       2,678        (2,430)         267       (1,573)
                                               ----------    ---------     ---------    ---------    ---------
    Revenues from gas sales                       270,711      199,749       174,862      212,772      213,416
    Transportation                                 14,172       17,215        18,532       19,742       19,376
    Liquids                                         4,451        7,608        12,782       14,551       18,214
    Other                                           5,435        2,729         3,606        4,705        3,576
                                               ----------    ---------     ---------    ---------    ---------
    PNMGS operating revenues                      294,769      227,301       209,782      251,770      254,582
Gathering Company:
    Spot market sales                             -            -                  42      -                  4
    Transportation                                -            -               3,640        7,850        7,353
    Imbalance penalties                           -            -                 418           26       -
Processing Company:
    Liquids revenue                               -            -                 632         (621)        (311)
    Processing fees                               -            -               3,471       10,485        9,459
                                               ----------    ---------     ---------    ---------    ---------
         Total operating revenues               $ 294,769    $ 227,301     $ 217,985    $ 269,510    $ 271,087
                                               ==========    =========     =========    =========    =========

Customers at Year End
PNMGS:
    Residential                                   375,032      367,025       358,822      348,715      337,768
    Commercial                                     31,560       30,757        30,493       30,139       30,151
    Industrial                                         50           54            59           57           72
    Public authorities                              2,735        2,462         2,444        2,463        1,958
    Irrigation                                      1,027        1,076           886          899          951
    Sales for resale                                    3            3             2            3            3
    Transportation                                     31           36            38           43           37
                                               -----------   ----------    ----------   ---------    ---------
    PNMGS customers                               410,438      401,413       392,744      382,319      370,940
Gathering Company:
    Off-system sales                              -            -             -            -                  1
    Transportation                                -            -             -                 21           21
Processing Company                                -            -             -                 32           25
                                               -----------   ----------    ----------   ---------    ---------
         Total customers                          410,438      401,413       392,744      382,372      370,987
                                               ===========   ==========    ==========   =========    =========
</TABLE>

On June 30, 1995,  the Company sold substant the gas  gathering  and  processing
assets  of the  Company  and its gas  subsidiaries  (see note 12 to the notes to
consolidated  financial   statements).   Comparative  operating  statistics  for
Gathering Company and Processing Company are through this date.



                                      F-38
<PAGE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

       None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

       Reference  is hereby made to  "Election of  Directors"  in the  Company's
Proxy  Statement  relating to the annual meeting of  stockholders  to be held on
April 28,  1998 (the "1998 Proxy  Statement"),  to PART I,  SUPPLEMENTAL  ITEM -
"EXECUTIVE  OFFICERS  OF THE  COMPANY"  and "Other  Matters"  -  "Section  16(a)
Beneficial Ownership Reporting Compliance" in the 1998 Proxy Statement.

ITEM 11.  EXECUTIVE COMPENSATION

       Reference is hereby made to  "Executive  Compensation"  in the 1998 Proxy
Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       Reference is hereby made to "Voting Information", "Election of Directors"
and "Stock Ownership of Certain Executive Officers" in the 1998 Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       Reference  is  hereby  made  to  the  1998  Proxy   Statement  for  such
disclosure, if any, as may be required by this item.

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
            ON FORM 8-K

       (a) - 1.    See Index to Financial Statements under Item 8.

       (a) - 2.    Financial  Statement Schedules for the years 1997, 1996,
                   and  1995  are  omitted  for the  reason  that  they  are not
                   required or the information is otherwise supplied.

       (a) - 3-A.  Exhibits Filed:

 Exhibit
   No.                                  Description
 -------                                -----------
 
  10.11.1   Amendment No. 1 to the Early  Purchase and  Participation  Agreement
            between Public Service  Company of New Mexico and M-S-R Public Power
            Agency,  executed  as of  December  16,  1987,  for San Juan  Unit 4
            (refiled).


                                      E-1




 Exhibit
   No.                                  Description
 -------                                -----------

 10.25.1**   Second  Restated and Amended Public  Service  Company of New Mexico
             Executive Medical Plan as amended on December 28, 1995.

 10.67       New Mexico Public Service Commission Order dated July 30, 1987, and
             Exhibit 1 thereto,  in NMPUC  Case No.  2004,  regarding  the PVNGS
             decommissioning trust fund (refiled).

 10.68.1     Amendment Number One to the Master  Decommissioning Trust Agreement
             for Palo Verde Nuclear  Generating  Station dated January 27, 1997,
             between Public Service Company of New Mexico and Mellon Bank, N.A.

 23.1        Consent of Arthur Andersen LLP.

 27          Financial Data Schedule.
-----------

         **    Designates  each  management  contract  or  compensatory  plan or
               arrangement  required to be identified pursuant to paragraph 3 of
               Item 14(a) of Form 10-K.

         (a) - 3-B.  Exhibits Incorporated By Reference:

         In  addition  to  those  Exhibits  shown  above,   the  Company  hereby
incorporates  the  following  Exhibits  pursuant to Exchange Act Rule 12b-32 and
Regulation  S-K section 10,  paragraph (d) by reference to the filings set forth
below:

<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession

<S>     <C>                                              <C>                                   <C>    
 2.1    Purchase and Sale Agreement By and Among Public  4-(b) to Registration Statement       2-99990
        Service Company of New Mexico, Sunterra Gas      No. 2-99990 of the Company.
        Gathering Company, Sunterra Gas Processing
        (Sellers) and Williams Gas Processing - Blanco,
        Inc. (Buyer).
2.1.1   First Amendment to Purchase and Sale Agreement   2.1.1 to Annual Report of the          1-6986
        By and Among Public  Service  Company of New     Registrant on Form 10-K
        Mexico,  Sunterra Gas  Gathering  Company,       for fiscal year
        Sunterra Gas Processing Company (Sellers) and    ended December 31, 1994.
        Williams Gas Processing - Blanco, Inc. (Buyer)

</TABLE>


                                                 E-2

<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------
<S>     <C>                                              <C>                                    <C>    
2.1.2   Second Amendment to Purchase and Sale Agreement  2.1.2 to Annual Report of the          1-6986
        By and Among Public  Service  Company of New     Registrant on Form 10-K
        Mexico,  Sunterra Gas  Gathering  Company,       for fiscal year
        Sunterra Gas Processing Company (Sellers) and    ended December 31, 1994. 
        Williams Gas Processing-Blanco, Inc. (Buyer)

2.2     Agreement to Purchase and Sell Between City of   4-(b) to Registration Statement        2-99990 
        Santa Fe, New Mexico and Public                  No. 2-9990 of the Company.                 
        Service Company of New Mexico.

2.2.1   First Amendment to Agreement to Purchase and     2.2.1 to Annual Report of the          1-6986
        Sell Between the City of Santa Fe, New Mexico    Registrant on Form 10-K for
        and Public Service Company of New Mexico.        fiscal year ended December 31,
                                                         1994.

2.2.2   Second Amendment to Agreement to Purchase and    2.2.2 to Annual Report of the          1-6986
        Sell Between the City of Santa Fe, New Mexico    Registrant on Form 10-K for
        and Public Service Company of New Mexico.        fiscal year ended December 31,
                                                         1994.

2.2.3   Third Amendment to Agreement to Purchase and     2.2.3 to Annual Report of the          1-6986
        Sell Between the City of Santa Fe, New Mexico    Registrant on Form 10-K for
        and Public Service Company of New Mexico.        fiscal year ended December 31,
                                                         1994.

2.2.4   Fourth Amendment to Agreement to Purchase and    2.2.4 to Annual Report of the          1-6986
        Sell Between the City of Santa Fe, New Mexico    Registrant on Form 10-K for
        and Public Service Company of New Mexico.        fiscal year ended December 31,
                                                         1994.

2.2.5   Fifth Amendment to Agreement to Purchase and     2.2.5 to Annual Report of the          1-6986
        Sell Between the City of Santa Fe, New Mexico    Registrant on Form 10-K for
        and Public Service Company of New Mexico.        fiscal year ended December 31,
                                                         1994.

2.2.6   Sixth Amendment to Agreement to Purchase and     2.2.6 to Annual Report of the          1-6986
        Sell Between the City of Santa Fe, New Mexico    Registrant on Form 10-K for
        and Public Service Company of New Mexico.        fiscal year ended December 31,
                                                         1994.

2.2.7   Seventh  Amendment  to  Agreement  to Purchase   2.2.7 to the Company's Quarterly       1-6986 
        and Sell  Between the City of Santa Fe,          Report  on Form  10-Q
        New  Mexico and  Public  Service                 for the quarter ended June 30,
        Company of New Mexico.                           1995.

Articles of Incorporation and By-laws

 3.1    Restated Articles of Incorporation of the        4-(b) to Registration Statement       2-99990
        Company, as amended through May 10, 1985.        No. 2-99990 of the Company.
</TABLE>

                                                 E-3


<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

<S>     <C>                                              <C>                                    <C>    
3.2     By-laws of Public Service Company of New Mexico  3.2 to Annual Report of the            1-6986
        With All Amendments to and including December    Registrant on Form 10-K for the
        5, 1994.                                         fiscal year ended December 31,
                                                                 1994.

Instruments Defining the Rights of Security Holders, Including Indentures

4.1     Indenture   of  Mortgage  and  Deed  of  Trust   4-(d) to Registration Statement        2-99990
        dated  as of June 1, 1947,  between the          No. 2-99990 of the Company.       
        Company and The Bank of New York (formerly
        Irving Trust  Company),  as Trustee,
        together  with  the  Ninth  Supplemental
        Indenture  dated as of January 1, 1967, the
        Twelfth Supplemental  Indenture dated as of
        September 15, 1971, the Fourteenth 
        Supplemental Indenture dated as of  December 1,
        1974  and  the  Twenty-second  Supplemental
        Indenture dated as of October 1, 1979 thereto
        relating to First Mortgage Bonds of the Company.

4.2     Portions of sixteen supplemental indentures to   4-(e) to Registration Statement       2-99990
        the Indenture of Mortgage and Deed of Trust      No. 2-99990 of the Company.
        dated as of June 1, 1947, between the Company
        and The Bank of New York (formerly Irving Trust
        Company), as Trustee, relevant to the
        declaration or payment of dividends or the
        making of other distributions on or the
        purchase by the Company of shares of the
        Company's Common Stock.

Material Contracts

10.1    Supplemental Indenture of Lease dated as of      4-D to Registration Statement         2-26116
        July 19, 1966 between the Company and other      No. 2-26116 of the Company.
        participants in the Four Corners Project and
        the Navajo Indian Tribal Council.

10.1.1  Amendment and Supplement No. 1 to Supplemental   10.1.1 to Annual Report of the         1-6986
        and Additional Indenture of Lease dated          Registrant on Form 10-K for
        April 25, 1985 between the Navajo Tribe of       fiscal year ended December 31,
        Indians and Arizona Public Service Company, El   1995.
        Paso Electric Company, Public Service Company
        of New Mexico, Salt River Project Agricultural
        Improvement and Power District, Southern
        California Edison Company, and Tucson Electric
        Power Company (refiled).

</TABLE>

                                                 E-4

<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

<S>     <C>                                              <C>                                   <C>    
10.2    Fuel Agreement, as supplemented, dated as of     4-H to Registration Statement         2-35042
        September 1, 1966 between Utah Construction &    No. 2-35042 of the Company.
        Mining Co. and the participants in the Four
        Corners Project including the Company.

10.3    Fourth Supplement to Four Corners Fuel           10.3 to Annual Report of the          1-6986
        Agreement  No. 2 effective as of January 1,      Registrant on Form 10-K for
        1981, between Utah International Inc. and        fiscal year ended  December 31,
        participants  in  the  Four  Corners             1991.     
        Project, including the Company.

10.4    Contract between the United States and the       5-L to Registration Statement         2-41010
        Company dated April 11, 1968, for furnishing     No. 2-41010 of the Company.
        water.

10.4.1  Amendatory  Contract between the United          5-R to Registration Statement         2-60021
        States  and the Company dated September          for No. 2-60021 of the Company.
        29, 1977, for furnishing water.

10.5    Co-Tenancy Agreement between the Company and     5-O to Registration Statement         2-44425
        Tucson Gas & Electric Company dated              No. 2-44425 of the Company.
        February 15, 1972, pertaining to the San Juan
        generating plant.

10.5.3  Modification No. 4  dated October 25, 1984  and  10.5.3 to Annual Report of             1-6986
        Modification No. 5 dated July 1, 1985 to         Registrant on Form 10-K for
        Co-Tenancy Agreement between the Company and     fiscal year ended December 31,
        Tucson Electric Power Company (refiled).         1995.

10.5.5  Modification No. 8 to San Juan Project           10.5.5 to the Company's                1-6986
        Co-Tenancy Agreement between Public Service      Quarterly Report on Form 10-Q
        Company of New Mexico and Tucson Electric Power  for the quarter ended March 31,
        Company dated September 15, 1993.                1994.

10.5.6  Modification No. 9  to San Juan Project          10.5.6 to the Company's                1-6986
        Co-Tenancy Agreement between Public Service      Quarterly Report on Form 10-Q
        Company of New Mexico and Tucson Electric Power  for the quarter ended March 31,
        Company dated January 12, 1994.                  1994.

10.5.7  Modification No. 10 to San Juan Project          10.5.7 to Annual Report of the         1-6986
        Co-Tenancy Agreement between Public Service      Registrant on Form 10-K for
        Company of New Mexico and Tucson Electric Power  fiscal year ended December 31,
        Company dated November 30, 1995.                 1995.

10.7    San Juan Project Operating Agreement between     5-S to Registration Statement         2-50338
        the Company and Tucson                           No. 2-50338 of the Company.
        Gas & Electric Company, executed
        December 21, 1973.
</TABLE>


                                                 E-5

<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

<S>     <C>                                              <C>                                   <C>    

10.7.1  Modification No. 4 dated October 25, 1984 and    10.7.1 to Annual Report of             1-6986
        Modification No. 5 dated July 1, 1985 to San     Registrant on Form 10-K for
        Juan Project Operating Agreement between the     fiscal year ended December 31,
        Company and Tucson Electric Power Company        1995.
        (refiled).

10.7.3  Modification No. 8 to San Juan Project           10.7.3 to the Company's                1-6986
        Operating Agreement between Public Service       Quarterly Report on Form 10-Q
        Company of New Mexico and Tucson Electric Power  for the quarter ended March 31,
        Company dated September 15, 1993.                1994.

10.7.4  Modification No. 9 to San Juan Project           10.7.4 to the Company's                1-6986
        Operating Agreement between Public Service       Quarterly Report on Form 10-Q
        Company of New Mexico and Tucson Electric Power  for the quarter ended March 31,
        Company dated January 12, 1994.                  1994.

10.7.5  Modification No. 10 dated November 30, 1995  to  10.7.5 to Annual Report of the         1-6986
        San Juan Project Operating Agreement between     Registrant on Form 10-K for
        Public Service Company of New Mexico and Tucson  fiscal year ended December 31,
        Electric Power Company.                          1995.

10.8    Arizona Nuclear Power Project Participation      5-T to Registration Statement         2-50338
        Agreemen among the Company and Arizona  Public   No.  2-50338 of the Company.
        Service Company, Salt River Project Agricultural
        Improvement and Power District, Tucson Gas & 
        Electric Company and El Paso Electric Company, 
        dated August 23, 1973.

10.8.1  Amendments No. 1 through No. 6 to Arizona        10.8.1 to Annual Report of the         1-6986
        Nuclear Power Project Participation Agreement.   Registrant on Form 10-K for
                                                         fiscal year ended December 31,
                                                         1991.
10.8.2  Amendment No. 7 effective April 1, 1982, to the  10.8.2 to Annual Report of the         1-6986
        Arizona Nuclear Power Project Participation      Registrant on Form 10-K for
        Agreement (refiled).                             fiscal year ended December 31,
                                                         1991.

10.8.3  Amendment No. 8 effective September 12, 1983,    10.58 to Annual Report of the          1-6986
        to the Arizona Nuclear Power Project             Registrant on Form 10-K for
        Participation Agreement. (refiled)               fiscal year ended December 31,
                                                         1993.

10.8.4  Amendment No. 9 to Arizona Nuclear Power         10.8.4 to Annual Report of the         1-6986
        Project Participation Agreement dated as of      Registrant on Form 10-K for
        June 12, 1984 (refiled).                         fiscal year ended December 31,
                                                         1994.

10.8.5  Amendment No. 10  dated as of November 21, 1985  10.8.5 to Annual Report of the         1-6986
        and Amendment No. 11 dated as of June 13, 1986   Registrant on Form 10-K for
        and effective January 10, 1987 to Arizona        fiscal year ended December 31,
        Nuclear Power Project Participation Agreement    1994.
        (refiled).

</TABLE>

                                                 E-6


<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

<S>     <C>                                              <C>                                   <C>    
10.8.7  Amendment No. 12 to Arizona  Nuclear Power       19.1 to the Company's Quarterly        1-6986
        Project Participation Agreement dated June 14,   Report on Form 10-Q for the
        1988, and effective August 5, 1988.              quarter ended September 30, 1990.
        
10.8.8  Amendment No. 13 to the Arizona  Nuclear Power   10.8.10 to Annual Report of            1-6986 
        Project Participation  Agreement dated April 4,  Registrant  on Form 10-K for the
        1990,  and  effective  June 15, 1991             fiscal year ended December 31,
                                                         1990. 
                                                         
10.9    Coal Sales Agreement executed August 18, 1980    10.9 to Annual Report of the           1-6986
        among San Juan Coal Company, the Company and     Registrant on Form 10-K for
        Tucson Electric Power Company, together with     fiscal year ended December 31,
        Amendments No. One, Two, Four, and Six thereto.  1991.

10.9.1  Amendment No. Three to Coal Sales Agreement      10.9.1 to Annual Report of the         1-6986
        dated April 30, 1984 among San Juan Coal         Registrant on Form 10-K for
        Company, the Company and Tucson Electric Power   fiscal year ended December 31,
        Company.                                         1994 (confidentiality treatment
                                                         was  requested  at  the  time  of
                                                         filing the  Annual  Report of the
                                                         Registrant   on  Form   10-K  for
                                                         fiscal  year ended  December  31,
                                                         1984;   exhibit   was  not  filed
                                                         therewith   based   on  the  same
                                                         confidentiality request).

10.9.2  Amendment  No.  Five to Coal  Sales  Agreement   10.9.2 to Annual Report of the         1-6986  
        dated May 29,  1990  among San Juan Coal         Registrant  on Form 10-K for
        Company,   the  Company  and  Tucson             fiscal year ended December 31,
        Electric Power Company.                          1991 (confidentiality
                                                         treatment  was  requested  as  to
                                                         portions  of  this  exhibit,  and
                                                         such  portions  were omitted from
                                                         the exhibit  filed and were filed
                                                         separately  with  the  Securities
                                                         and Exchange Commission).

10.9.3  Amendment No. Seven to Coal Sales Agreement,     19.3 to the Company's Quarterly        1-6986
        dated as of July 27, 1992 among San Juan Coal    Report on Form 10-Q for the
        Company, the Company and Tucson Electric Power   quarter ended September 30, 1992
        Company.                                         (confidentiality treatment was
                                                         requested  as to portions of this
                                                         exhibit,  and such  portions were
                                                         omitted  from the  exhibit  filed
                                                         and were  filed  separately  with
                                                         the   Securities   and   Exchange
                                                         Commission).
</TABLE>



                                                 E-7

<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

<S>       <C>                                              <C>                                 <C>    
10.9.4    First  Supplement  to Coal  Sales  Agreement,    19.4 to the Company's  Quarterly    1-6986  
          dated July 27, 1992 among San Juan Coal          Report on Form 10-Q for the  
          Company,  the  Company  and  Tucson              quarter ended September 30, 1992
          Electric Power Company.                          (confidentiality  treatment was
                                                           requested  as  to  portions  of
                                                           this exhibit, and such portions
                                                           were  omitted  from the exhibit
                                                           as  of  filed  and  were  filed
                                                           separately  with the Securities
                                                           and Exchange Commission).

10.9.5    Amendment No. Eight to Coal Sales Agreement,     10.9.5 to Annual Report of the      1-6986
          dated as of September 1, 1995, among San Juan    Registrant on Form 10-K for 
          Coal Company, the Company and Tucson Electric    fiscal year ended December 31, 
          Power Company.                                   1995.

10.9.6    Amendment No. Nine to Coal Sales Agreement,      10.9.6 to Annual Report of the      1-6986
          dated as of December 31, 1995, among San Juan    Registrant on Form 10-K for
          Coal Company,  the Company and Tucson Electric   fiscal year ended December 31,
          Power Company.                                   1997.

10.11     San Juan Unit 4 Early Purchase and               10.11 to the Company's Quarterly    1-6986
          Participation Agreement dated as of              Report on Form 10-Q for the
          September 26, 1983 between the Company and       quarter ended March 31, 1994.
          M-S-R Public Power Agency, and Modification
          No. 2 to the San Juan Project Agreements dated
          December 31, 1983. (refiled)

10.12     Amended and Restated San Juan Unit 4 Purchase    10.12 to Annual Report of the       1-6986
          and Participation Agreement dated as of          Registrant on Form 10-K for
          December 28, 1984 between the Company and the    fiscal year ended December 31,
          Incorporated County of Los Alamos (refiled).     1994.

10.14     Participation Agreement among the Company,       10.14 to Annual Report of the       1-6986
          Tucson  Electric  Power  Company and certain     Registrant on Form 10-K for 
          financial institutions relating to the San Juan  fiscal year ended December 31,   
          Coal Trust dated as of December 31, 1981         1992.
          (refiled).

10.16     Interconnection Agreement dated November 23,     10.16 to Annual Report of the          1-6986
          1982, between the Company and Southwestern       Registrant on Form 10-K for
          Public Service Company (refiled).                fiscal year ended December 31,
                                                           1992.
10.18*    Facility Lease dated as of December 16, 1985     10.18 to Annual Report of the          1-6986
          between The First National Bank of Boston, as    Registrant on Form 10-K for
          Owner Trustee, and Public Service Company of     fiscal year ended December 31,
          New Mexico together with Amendments No. 1, 2     1995.
          and 3 thereto. (refiled).
</TABLE>


                                                 E-8

<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

<S>       <C>                                               <C>                                 <C>    

10.18.4*  Amendment No. 4 dated as of March 8, 1995, to     10.18.4 to the Company's Quarter    1-6986  
          Facility Lease between Public Service             Report on Form 10-Q for the  
          Company  of New Mexico and the First              quarter ended March 31, 1995.
          National Bank of Boston, dated as of
          December 16, 1985.

10.19     Facility Lease dated as of July 31, 1986,         10.19 to Annual Report of the       1-6986
          between the First National Bank of Boston, as     Registrant on Form 10-K for
          Owner Trustee, and Public Service Company of      fiscal year ended December 31,
          New Mexico together with Amendments No. 1, 2      1997.
          and 3 thereto (refiled).

10.20*    Facility Lease dated as of August 12, 1986,       10.20 to Annual Report of th        1-6986
          between The First National Bank of Boston, as     Registrant on Form 10-K for
          Owner Trustee, and Public Service Company of      fiscal year ended December 31,
          New Mexico together with Amendments No. 1 and 2   1997.
          thereto (refiled).

10.20.3   Amendment No. 3 dated as of March 8, 1995, to     10.20.3 to the Company's            1-6986
          Facility Lease between Public Service Company     Quarterly Report on Form 10-Q 
          of New  Mexico and the First National Bank of     for the quarter ended March 31,
          Boston, dated as of August 12, 1986.              1995.
                                                          
10.21     Facility Lease dated as of December 15, 1986,     10.21 to Annual Report of the       1-6986
          between The First National Bank of Boston, as     Registrant on Form 10-K for 
          Owner Trustee, and Public Service Company of      fiscal year ended December 31,
          New Mexico (Unit 1 Transaction) together          1997.
          with Amendment No. 1 thereto (refiled).

10.22     Facility Lease dated as of December 15, 1986,     10.22 to Annual Report of the       1-6986
          between The First National Bank of Boston, as     Registrant on Form 10-K for 
          Owner Trustee, and Public Service Company of      fiscal year ended December 31,
          New Mexico (Unit 2 Transaction) together          1997.
          with Amendment No. 1 thereto (refiled).

10.23**   Restated and Amended Public Service Company of   19.5 to the Company's Quarterly      1-6986
          New Mexico Accelerated Management Performance    Report on Form 10-Q for the
          Plan (1988). (August 16, 1988.)                  quarter ended September 30, 1988.

10.23.1** First Amendment to Restated and Amended Public   19.6 to the Company's Quarterly      1-6986  
          Service Company of New Mexico Accelerated        Report on Form 10-Q for the 
          Management  Performance Plan (1988).(August 30,  quarter ended September 30, 1988.
          1988.)

10.23.2** Second Amendment to Restated and Amended Public  10.26.2 to Annual Report of the      1-6986
          Service Company of New Mexico Accelerated        Registrant on Form 10-K for
          Management Performance Plan (1988).              fiscal year ended December 31,
          (December 29, 1989).                             1989.
</TABLE>


                                                 E-9

<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

<S>       <C>                                               <C>                                 <C>    
10.24**   Management Life Insurance Plan (July 1985) of     10.24 to Annual Report of the       1-6986
          the Company (refiled).                            Registrant on Form 10-K for
                                                            fiscal year ended December 31,
                                                            1995.

10.27     Amendment No. 2 dated as of April 10, 1987, to    10.53 to Annual Report of the       1-6986
          the Facility  Lease dated as of August 12, 1986,  Registrant on Form10-K  for 
          between The First National Bank of Boston,        as fiscal year ended December 31,
          Owner Trustee, and Public Service Company of      1987.
          New Mexico.  (Unit 2 Transaction.) (This is an
          amendment to a Facility Lease which is
          substantially similar to the Facility Lease
          filed as Exhibit 28.1 to the Company's Current
          Report on Form 8-K dated August 18, 1986.)

10.31**   Executive Retention Agreements.                   10.42 to Annual Report of the       1-6986
                                                            Registrant on Form 10-K for
                                                            fiscal year ended December 31,
                                                            1990.

10.32**   Supplemental Employee Retirement Agreements       19.4 to the Company's Quarterly     1-6986
          dated August 4, 1989.                             Report on Form 10-Q for the
                                                            quarter ended September 30, 1989.

10.33**   Supplemental Employee Retirement Agreement        10.47 to Annual Report of the       1-6986
          dated March 6, 1990.                              Registrant on Form 10-K for
                                                            fiscal year ended December 31,

10.34     Settlement Agreement between Public Service       10.48 to Annual Report of the       1-6986
          Company of New Mexico and Creditors of Meadows    Registrant on Form 10-K for
          Resources, Inc. dated November 2, 1989.           fiscal year ended December 31,
                                                            1989.

10.34.1   First amendment dated April 24, 1992 to the       19.1 to the Company's Quarterly     1-6986 
          Settlement  Agreement dated November              Report on Form 10-Q for the 
          2, 1989 among Public Service Company              quarter ended September 30, 1992.
          of New Mexico, the lender parties thereto
          and collateral agent.

10.35     Amendment dated April 11, 1991 among Public       19.1 to the Company's Quarterly     1-6986
          Service Company of New Mexico, certain banks      Report on Form 10-Q for the
          and Chemical Bank and Citibank, N.A., as agents   quarter ended September 30, 1991.
          for the banks.

10.36     San Juan Unit 4 Purchase and Participation        19.2 to the Company's Quarterly     1-6986
          Agreement Public Service Company of New Mexico    Report on Form 10-Q for the
          and the City of Anaheim, California dated         quarter ended March 31, 1991.
          April 26, 1991.

</TABLE>

                                                E-10

<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

<S>       <C>                                                <C>                               <C>    

10.36.1   Second stipulation in the matter of application    10.38 to Annual Report of the     1-6986                 
          of Public  Service  Company of New Mexico for      Registrant on Form 10-K for
          NMPSC approval to sell a 10.04% undivided          fiscal year ended December 31, 
          interest in San Juan Generating  Station Unit      1992. 
          4 to the City of Anaheim, California, and                           
          for related orders and approvals.

10.37**   Executive Retention Plan.                          10.37 to Annual Report of the     1-6986
                                                             Registrant on Form 10-K for
                                                             fiscal year ended December 31,
                                                             1991.

10.38     Restated and Amended San Juan Unit 4 Purchase      10.2.1 to the Company's           1-6986
          and Participation Agreement between Public         Quarterly Report on Form 10-Q
          Service Company of New Mexico and Utah             for the quarter ended
          Associated Municipal Power Systems.                September 30, 1993.

10.39     Purchase agreement dated February 7, 1992          10.39 to Annual Report of the     1-6986
          between Burnham Leasing Corporation and Public     Registrant on Form 10-K for
          Service Company of New Mexico.                     fiscal year ended December 31,
                                                             1991.

10.40**   First Restated and Amended Public Service          99.1 to Registration Statement    333-03303
          Company of New Mexico Director  Retainer Plan.     No. 333-03303 filed May 8, 1996.

10.41     Waste Disposal Agreement, dated as of July 27,     19.5 to the Company's Quarterly   1-6986
          1992 among San Juan Coal Company, the Company      Report on Form 10-Q for the
          and Tucson Electric Power Company.                 quarter ended September 30, 1992
                                                             (confidentiality    treatment
                                                             was  requested as to portions
                                                             of  this  exhibit,  and  such
                                                             portions  were  omitted  from
                                                             the  exhibit  and were  filed
                                                             separately      with      the
                                                             Securities    and    Exchange
                                                             Commission).

10.42     Stipulation in the matter of the application of    10.42 to Annual Report of the     1-6986
          Gas Company of New Mexico for an order             Registrant on Form 10-K for 
          authorizing recovery of MDL costs through Rate     fiscal year ended December 31, 
          Rider Number 8.                                    1992.

10.43**   Description of certain Plans which include         10.43 to Annual Report of the     1-6986
          executive officers as participants.                Registrant on Form 10-K for
                                                             fiscal year ended December 31,
                                                             1992.

10.44**   Public Service Company of New Mexico-Non-Union     10.44 to Annual Report of the     1-6986
          Voluntary Separation Program.                      Registrant on Form 10-K for
                                                             fiscal year ended December 31,
                                                             1992.
</TABLE>


                                                E-11

<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

<S>        <C>                                                <C>                               <C>    
10.44.1**  First Amendment dated April 6, 1993 to the         19.2 to the Company's Quarterly   1-6986
           First  Restated  and Amended  Public  Service      Report on Form 10-Q for the    
           Company  of New  Mexico Non-Union                  quarter ended March 31, 1993.
           Severance Pay Plan dated August 1, 1992.

10.45**    First Restated and Amended Public Service          99.1 to Registration Statement    333-03289
           Company of New Mexico Performance Stock Plan.      No. 333-03289 filed May 8, 1996.

10.45.1**  First Amendment to the First Restated and          10.45.1 to the Company's          1-6986
           Amended Public Service Company of New Mexico       Quarterly Report on Form 10-Q
           Performance Stock Plan dated August 12, 1997.      for the quarter ended September

10.46**    Public Service Company of New Mexico Asset         10.1 to the Company's Quarterly   1-6986
           Sales Incentive Plan.                              Report on Form 10-Q for the
                                                              quarter ended June 30, 1993.

10.46.1**  Amendment No. 1 to the Public Service Company      10.46.1 to the Company's          1-6986
           of New Mexico Asset Sales Incentive Plan dated     Quarterly Report on Form 10-Q
           August 1, 1994.                                    for the quarter ended June 30,
                                                              1994.

10.47**    Compensation Arrangement with Chief Executive      10.3 to the Company's Quarterly   1-6986
           Officer.                                           Report on Form 10-Q for the
                                                              quarter ended June 30, 1993.

10.47.1**  Pension Service Adjustment Agreement for           10.3.1 to the Company's           1-6986
           Benjamin F. Montoya.                               Quarterly Report on Form 10-Q
                                                              for the quarter ended
                                                              September 30, 1993.

10.47.2**  Severance Agreement for Benjamin F. Montoya.       10.3.2 to the Company's           1-6986
                                                              Quarterly Report on Form 10-Q
                                                              for the quarter ended
                                                              September 30, 1993.

10.47.3**  Executive Retention Agreement for Benjamin F.      10.3.3 to the Company's           1-6986
           Montoya.                                           Quarterly Report on Form 10-Q
                                                              for the quarter ended
                                                              September 30, 1993.

10.48**    Public Service Company of New Mexico OBRA `93      10.4 to the Company's Quarterly   1-6986
           Retirement Plan.                                   Report on Form 10-Q for the
                                                              quarter ended September 30,
                                                              1993

10.49**    Employment Contract By and Between the Public      10.49 to Annual Report of the     1-6986
           Service Company of New Mexico and Roger J.         Registrant on Form 10-K for
           Flynn.                                             fiscal year ended December 31,
                                                              1994.

</TABLE>

                                                E-12

<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

<S>        <C>                                                <C>                               <C>    
10.50**    Public Service Company of New Mexico               10.50 to Annual Report of the     1-6986
           Section 415 Plan.                                  Registrant on Form 10-K for
                                                              fiscal year ended December 31,
                                                              1993.

10.51**    First Amendment to the Public Service Company      10.51 to Annual Report of the     1-6986
           of New Mexico Executive Retention Plan.            Registrant on Form 10-K for
                                                              fiscal year ended December 31,
                                                              1993.

10.51.1**  Second Amendment to the Public Service Company     10.51.1 to the Company's          1-6986
           of New Mexico Executive Retention Plan.            Quarterly Report on Form 10-Q
                                                              for the quarter ended June 30,
10.52      Memorandum of Agreement between the Navajo         10.52 to the Company's Quarterly  1-6986
           Nation and Public Service Company                  Report on Form 10-Q for the
           of New Mexico (Nine-Mile Transmission              quarter ended June 30, 1997.
           R-O-W)

10.53      January 12, 1994 Stipulation.                      10.53 to Annual Report of the     1-6986
                                                              Registrant on Form 10-K for
                                                              fiscal year ended December 31,
                                                              1993.

10.54**    Employment, Retirement and Release Agreement By    10.54 to Annual Report of the     1-6986
           and Between the Public Service Company of New      Registrant on Form 10-K for
           Mexico and William M. Eglinton.                    fiscal year ended December 31,
                                                              1993.

10.54.1**  Health Care and Retirement Benefit Agreement By    10.54.1 to the Company's          1-6986
           and Between the Public Service Company of New      Quarterly Report on Form 10-Q
           Mexico and John T. Ackerman dated February 1,      for the quarter ended March 31,
           1994.                                              1994.

10.57      U.S. $100,000,000 Revolving Credit Agreement       10.57 to Annual Report of the     1-6986
           Dated as of December  14, 1993 Among Public        Registrant on Form 10-K for 
           Service  Company of New Mexico and certain Banks   fiscal year ended December 31, 
           Herein  (Banks) and Chemical  Bank and             1993.
           Citibank, N.A. (Co-Agents)

10.56.1    Amended and Restated Receivables Purchase          10.56.1 to the Company's          1-6986
           Agreement dated May 20, 1996, between Public       Quarterly Report on Form 10-Q
           Service Company of New Mexico, Citibank and        for the quarter ended June 30,
           Citicorp North America, Inc. and Amended           1996.
           Restated Collection Agent Agreement dated May
           20, 1996, between Public Service Company of New
           Mexico, Corporate Receivables Corporation and
           Citibank, N.A.


</TABLE>
                                                E-13

<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

<S>        <C>                                                <C>                               <C>    

10.57.1    Amendment No. 1, dated June 7, 1995 to the U.S.    10.57.1 to the Company's          1-6986
           $100,000,000  Revolving  Credit Agreement Dated    Quarterly Report on Form 10-Q
           as of December  14, 1993 Among  Public  Service    for the quarter ended June 30,         
           Company of New Mexico and  certain Banks           1995.
           Herein (Banks) and Chemical Bank and Citibank,
           N.A.(Co-Agents)

10.59*     Amended and Restated Lease dated as of             10.59 to Annual Report of the     1-6986
           September 1, 1993, between The First National      Registrant on Form 10-K for
           Bank of Boston,  Lessor,  and the Company,         fiscal year nded December 31,
           Lessee. (EIP Lease)                                1993.

10.60      Reimbursement Agreement, dated as of               4.5 to Registration Statement     33-65418
           November 1, 1992 between Public Service Company    No. 33-65418 of the Company.
           of New Mexico and Canadian Imperial Bank of
           Commerce, New York Agency.

10.60.1    Amendment No. 1 dated as of July 1, 1994, to       10.60.1 to the Company's          1-6986
           the Reimbursement Agreement dated as of            Quarterly Report on Form 10-Q
           November 1, 1992 between Public Service Company    for the quarter ended June 30, 
           of New Mexico and Canadian  Imperial Bank          1994.
           of Commerce, New York Agency.

10.60.2    Amendment No. 2 dated as of October 1, 1995, to    10.60.2 to the Company's          1-6986
           the Reimbursement Agreement dated as of            Quarterly Report on Form 10-Q
           November 1, 1992 between Public Service Company    for the quarter ended September
           of New Mexico and Canadian Imperial Bank           30, 1995.
           of Commerce, New York Agency.

10.61      Participation Agreement dated as of June 30,       10.61 to Annual Report of the     1-6986
           1983 among Security Trust Company, as Trustee,     Registrant on Form 10-K for the 
           Company, Tucson Electric Power Company and         fiscal year ended  December 31, 
           certain  financial  institutions relating          1993.
           to the San Juan Coal Trust. (refiled)

10.62      Agreement of the Company pursuant to               10.62 to Annual Report of the     1-6986
           Item 601(b)(4)(iii) of Regulation SK. (refiled)    Registrant on Form 10-K for
                                                              fiscal year ended December 31,
                                                              1993.

10.63      A Stipulation regarding sale of certain natural    10.63 to Current Report on        1-6986
           gas gathering and processing assets.               Form 8-K dated January 26, 1995.

10.64**    Results Pay                                        10.64 to the Company's Quarterly  1-6986
                                                              Report on Form 10-Q for the
                                                              quarter ended March 31, 1995.
</TABLE>


                                                E-14


<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

<S>        <C>                                              <C>                                 <C>    
10.65      Agreement for Contract Operation and             10.64 to the Company's Quarterly    1-6986
           Maintenance of the City of Santa Fe Water        Report on Form 10-Q for the
           Supply Utility System, dated July 3, 1995.       quarter ended June 30, 1995.

10.66      Stipulation regarding negotiated agreement with  10.50 to Annual Report of the       1-6986
           intervenors to settle all outstanding issues     Registrant on Form 10-K for 
           regarding recovery of payments GCNM made to      fiscal year ended December 31, 
           settle gas take-or-pay  contracts and pricing    1994. 
           disputes.

10.68      Master Decommissioning Trust Agreement for Palo  10.68 to the Company's Quarterly    1-6986
           Verde Nuclear Generating Station dated March     Report on Form 10-Q for the
           15, 1996, between Public Service Company  of     quarter ended March 31, 1996.
           New Mexico and Mellon Bank, N.A.

10.69*     Refunding Agreement No. 3 dated as               10.69 to the Company's              1-6986
           of September 27, 1996 between Public             Quarterly Report on Form
           Service Company of New Mexico, The               10-Q for the quarter ended
           Owner Participant named therein,                 September 30, 1996.
           State Street Bank and Trust Company,
           as Owner Trustee, The Chase Manhattan,
           Bank, as Indenture Trustee, and First PV
           Funding Corporation.

10.70**    Employment Termination and Release Agreement     10.70 to Annual Report of the       1-6986
           for M. Phyllis Bourque.                          Registrant on Form 10-K for the
                                                            fiscal year ended December 31,
                                                            1997.

10.71***   Reimbursement  Agreement, dated as of February   10.71  to the Company's Quarterly   1-6986 
           1,  1997,  between  Public  Service              Report on Form 10-Q for the
           Company  of New   Mexico and the Bank            quarter ended March 31, 1997.
           named therein. 

Additional Exhibits

22         Certain subsidiaries of the registrant.          22 to Annual Report of the          1-6986
                                                            Registrant on Form  10-K  for
                                                            fiscal year ended December
                                                            31, 1992.
</TABLE>


                                                E-15
<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

<S>        <C>                                              <C>                                 <C>    
99.1       Collateral Trust Indenture dated as of December  99.1 to Annual Report of the        1-6986
           16, 1985 among First PV Funding Corporation,     Registrant on Form 10-K for
           Public Service Company of New Mexico and         fiscal year ended December 31,
           Chemical Bank, as Trustee together with          1995.
           Series 1986A Bond Supplemental, Series 1986B
           Bond Supplemental, Unit 1Supplemental and
           Unit 2 Supplemental thereto (refiled).

99.1.5     1994 Supplemental Indenture dated as of June 8,  99.1.5 to the Company's             1-6986
           1994 among First PV Funding Corporation, Public  Quarterly Report on Form 10-Q 
           Service Company of New Mexico, and Chemical      for the quarter ended June 30, 
           Bank, as Trustee.                                1994.

99.1.6     1995 Supplemental Indenture among First PV       99.1.6 to the Company's             1-6986
           Funding Corporation, Public Service Company of   Quarterly Report on Form 10-Q
           New Mexico and Chemical Bank, as Trustee dated   for the quarter ended March 31,
           as of February 14, 1995.                         1995.

99.2*      Participation Agreement dated as of              99.2 to Annual Report of the        1-6986
           December 16, 1985, among the Owner Participant   Registrant  on Form  10-K for 
           named  therein, First PV  Funding  Corporation.  fiscal year ended December 31, 
           The First  National  Bank of Boston, in its      1995.
           individual capacity and as Owner Trustee (under
           a Trust Agreement dated as of December 16, 1985
           with the Owner Participant), Chemical Bank, in
           its individual capacity and as Indenture
           Trustee (under a Trust Indenture, Mortgage,
           Security Agreement and Assignment of Rents
           dated as of December 16, 1985 with the Owner
           Trustee), and Public Service Company of New
           Mexico, including Appendix A definitions
           together with Amendment No. 1 dated July 15,
           1986 and Amendment No. 2 dated November 18,
           1986 (refiled).

99.3       Trust Indenture, Mortgage, Security Agreement    99.3 to the Company's Quarterly    1-6986
           and Assignment of Rents dated as of December     Report on Form 10-Q for the
           16, 1985, between the First National Bank of     quarter ended March 31, 1996.
           Boston, as Owner Trustee, and Chemical Bank, as
           Indenture Trustee together with Supplemental
           Indentures Nos. 1 and 2 (refiled).

99.3.3     Supplemental Indenture No. 3 dated as of March   99.3.3 to the Company's            1-6986
           8, 1995, to Trust Indenture Mortgage,  Security  Quarterly Report on Form 10-Q
           Agreement and  Assignment of Rents between The   for the quarter ended March 31,
           First National Bank of Boston and Chemical Bank  1995.
           dated as of December 16, 1985.
</TABLE>

                                                E-16

<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

<S>        <C>                                              <C>                                <C>    
99.4*      Assignment, Assumption and Further Agreement     99.4 to Annual Report of the       1-6986
           dated as of December 16, 1985, between Public    Registrant on Form 10-K for
           Service Company of New Mexico and The First      fiscal year ended December 31,
           National Bank of Boston, as Owner Trustee        1995.
           (refiled).

99.5       Participation Agreement dated as of July 31,     99.5 to Annual Report of the       1-6986
           1986, among the Owner Participant named herein,  Registrant on Form 10-K for
           First PV Funding Corporation, The First          fiscal year ended December 31,
           National Bank of Boston, in its individual       1997.
           capacity and as Owner Trustee (under a Trust
           Agreement dated as of July 31, 1986, with the
           Owner Participant), Chemical Bank, in its
           individual capacity and as Indenture Trustee
           (under  a Trust  Indenture,  Mortgage,  Security 
           Agreement  and Assignment of Rents dated as of
           July 31, 1986, with the Owner Trustee), and
           Public Service Company of New Mexico, including
           Appendix A definitions together with Amendment
           No. 1 thereto (refiled).

99.6       Trust Indenture, Mortgage, Security Agreement    99.6 to Annual Report of the       1-6986
           and Assignment of Rents dated as of July 31,     Registrant on Form 10-K for
           1986, between The First National Bank of         fiscal year ended December 31,
           Boston, as Owner Trustee, and Chemical Bank, as  1997.
           Indenture Trustee together with Supplemental
           Indenture No. 1 thereto (refiled).

99.7       Assignment, Assumption, and Further Agreement    99.7 to Annual Report of the       1-6986
           dated as of July 31, 1986, between Public        Registrant on Form 10-K for 
           Service Company of New Mexico and The First      fiscal year ended December 31,
           National Bank of Boston, as Owner Trustee        1997.
           (refiled).

99.8       Participation Agreement dated as of August 12,   99.8 to the Company's Quarterly    1-6986
           1986, among the Owner Participant named          Report on Form 10-Q for the
           therein, First PV Funding Corporation. The       quarter ended March 31, 1997.
           First National Bank of Boston, in its
           individual capacity and as Owner Trustee (under
           a Trust Agreement dated as of August 12, 1986,
           with the Owner Participant), Chemical Bank, in
           its individual capacity and as Indenture
           Trustee (under a Trust Indenture,  Mortgage,
           Security Agreement and Assignment of Rents 
           dated as of August 12, 1986,  with the
           Owner  Trustee),  and  Public  Service 
           Company  of New  Mexico, including Appendix A
           definitions (refiled).

</TABLE>

                                                E-17

<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

<S>        <C>                                              <C>                                <C>    
99.8.1*    Amendment No. 1 dated as of November 18, 1986,   99.8.1 to the Company's            1-6986
           to Participation Agreement dated as of August    Quarterly Report on Form 10-Q
           12, 1986 (refiled).                              for the quarter ended March 31,
                                                            1997.

99.9*      Trust Indenture, Mortgage, Security Agreement    99.9 to Annual Report of the       1-6986
           and Assignment of Rents dated as of August 12,   Registrant on Form 10-K for
           1986, between the First National Bank of         fiscal year ended December 31,
           Boston, as Owner Trustee, and Chemical Bank, as  1997.
           Indenture Trustee together with Supplemental
           Indenture No. 1 thereto (refiled).

99.9.2     Supplemental Indenture No. 2 dated as of March   99.9.1 to the Company's            1-6986
           8, 1995, to Trust Indenture, Mortgage, Security  Quarterly Report on Form 10-Q
           Agreement and  Assignment of Rents between The   for the quarter ended March 31,
           First National Bank of Boston and Chemical Bank  1995.
           dated as of August 12, 1986.

99.10*     Assignment, Assumption, and Further Agreement    99.10 to the Company's Quarterly   1-6986
           dated as of August 12, 1986, between Public      Report on Form 10-Q for the
           Service Company of New Mexico and The First      quarter ended March 31, 1997.
           National Bank of Boston, as Owner Trustee
           (refiled).

99.11*     Participation Agreement dated as of December     99.1 to the Company's Quarterly    1-6986
           15, 1986, among the Owner Participant named      Report on Form 10-Q for the
           therein, First PV Funding Corporation, The       quarter ended March 31, 1997.
           First   National   Bank  of   Boston,   in  its
           individual capacity and as Owner Trustee (under
           a Trust  Agreement  dated  as of  December  15,
           1986,  with the  Owner  Participant),  Chemical
           Bank,  in  its   individual   capacity  and  as
           Indenture  Trustee  (under  a Trust  Indenture,
           Mortgage,  Security Agreement and Assignment of
           Rents dated as of December 15,  1986,  with the
           Owner  Trustee),  and Public Service Company of
           New Mexico,  including  Appendix A  definitions
           (Unit 1 Transaction) (refiled).

99.12      Trust Indenture, Mortgage, Security Agreement    99.12 to the Company's Quarterly   1-6986
           and Assignment of Rents dated as of              Report on Form 10-Q for the
           December 15, 1986, between The First National    quarter ended March 31, 1997.
           Bank of Boston, as Owner Trustee, and Chemical
           Bank, as Indenture Trustee (Unit 1 Transaction)
           (refiled).

</TABLE>

                                                E-18

<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

<S>        <C>                                              <C>                                <C>    
99.13      Assignment, Assumption and Further Agreement     99.13 to the Company's Quarterly   1-6986
           dated as of December 15, 1986, between Public    Report on Form 10-Q for the
           Service Company of New Mexico and The First      quarter ended March 31, 1997.
           National Bank of Boston, as Owner Trustee
           (Unit 1 Transaction) (refiled).

99.14      Participation Agreement dated as of              99.14 to the Company's Quarterly   1-6986
           December 15, 1986, among the Owner Participant   Report on Form 10-Q for the
           named therein, First PV Funding Corporation,     quarter ended March 31, 1997.
           The  First  National  Bank  of  Boston,  in its
           individual capacity and as Owner Trustee (under
           a Trust  Agreement  dated  as of  December  15,
           1986,  with the  Owner  Participant),  Chemical
           Bank,  in  its   individual   capacity  and  as
           Indenture  Trustee  (under  a Trust  Indenture,
           Mortgage,  Security Agreement and Assignment of
           Rents dated as of December 15,  1986,  with the
           Owner  Trustee),  and Public Service Company of
           New Mexico,  including  Appendix A  definitions
           (Unit 2 Transaction) (refiled).

99.15      Trust Indenture, Mortgage, Security Agreement    99.15 to Annual Report of the      1-6986
           and Assignment of Rents dated as of December     Registrant on Form 10-K for
           31,  1986, between the First National Bank of    fiscal year ended December 31,
           Boston, as Owner Trustee, and Chemical Bank, as  1997.
           Indenture Trustee (Unit 2 Transaction)
           (refiled).

99.16      Assignment, Assumption, and Further Agreement    99.16 to the Company's Quarterly   1-6986
           dated as of December 15, 1986, between Public    Report on Form 10-Q for the
           Service Company of New Mexico and The First      quarter ended March 31, 1997.
           National Bank of Boston, as Owner Trustee
           (Unit 2 Transaction) (refiled).

99.17*     Waiver letter with respect to "Deemed Loss       99.17 to Annual Report of the      1-6986
           Event" dated as of August 18, 1986, between the  Registrant on Form 10-K
           for Owner Participant named therein, and Public  fiscal year ended December 31,
           Service Company of New Mexico (refiled).         1997.

99.18*     Waiver letter with respect to Deemed Loss        99.18 to Annual Report of the      1-6986
           Event" dated as of August 18, 1986, between the  Registrant on Form 10-K
           for Owner Participant named therein, and Public  fiscal year ended December 31,
           Service Company of New Mexico (refiled).         1997.

</TABLE>

                                                E-19

<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

<S>        <C>                                              <C>                                <C>    
99.19      Agreement No. 13904 (Option and Purchase of      99.19 to Annual Report of the      1-6986
           Effluent), dated April 23, 1973, among Arizona   Registrant on Form 10-K
           for Public Service Company, Salt River Project   fiscal year  ended December 31,
           Agricultural  Improvement  and Power District,   1997.
           the Cities of Phoenix, Glendale, Mesa,
           Scottsdale, and Tempe, and the Town of
           Youngtown (refiled).

99.20      Agreement for the Sale and Purchase of           99.20 to Annual Report of the      1-6986
           Wastewater Effluent, dated June 12, 1981, among  Registrant on Form 10-K
           for Arizona Public Service Company, Salt River   fiscal year ended December 31,
           Project Agricultural Improvement and Power       1997.
           District and the City of Tolleson, as amended
           (refiled).

99.21*     1996 Supplemental Indenture dated as of          99.21 to the Company's Quarterly   1-6986
           September 27, 1996 to Trust Indenture,           Report on Form 10-Q for the
           Mortgage, Security Agreement and Assignment of   quarter ended September 30, 1996.
           Rents dated as of December 16, 1985 between
           State Street Bank and Trust Company, as Owner
           Trustee, and The Chase Manhattan Bank, as
           Indenture Trustee.
</TABLE>

-----------

 *   One or more additional documents,  substantially  identical in all material
     respects to this exhibit,  have been entered into,  relating to one or more
     additional  sale  and  leaseback  transactions.  Although  such  additional
     documents  may  differ  in other  respects  (such  as  dollar  amounts  and
     percentages),  there  are no  material  details  in which  such  additional
     documents differ from this exhibit.

**   Designates  each management  contract or  compensatory  plan or arrangement
     required to be  identified  pursuant  to  paragraph 3 of Item 14(a) of Form
     10-K.

***  Two additional documents,  substantially identical in all material respects
     to this exhibit, have been entered into, relating to two additional letters
     of credit supporting  pollution  control revenue refunding bonds.  Although
     such  additional  documents  may differ in other  respects  (such as dollar
     amounts  and  percentages),  there are no  material  details  in which such
     additional documents differ from this exhibit.

     (b)  Reports on Form 8-K:

         None.


                                                E-20

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                      PUBLIC SERVICE COMPANY OF NEW MEXICO
                                                        (Registrant)

Date:  February 23, 1998              By   /s/ B. F. Montoya
                                          -------------------------------------
                                                    B. F. Montoya
                                          President and Chief Executive Officer

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
                  Signature                                 Capacity                       Date
                  ---------                                 --------                       ----
<S>   <C>                                         <C>                                <C>                           
                /s/ B. F. MONTOYA                 Principal Executive Officer and    February 23, 1998
-----------------------------------------------   Director
                  B. F. MONTOYA                      
      President and Chief Executive Officer

                /s/ M. H. MAERKI                  Principal Financial Officer        February 23, 1998
-----------------------------------------------
                  M. H. Maerki
            Senior Vice President and
             Chief Financial Officer

                /s/ D. M. BURNETT                 Principal Accounting Officer       February 23, 1998
-----------------------------------------------
                  D. M. Burnett
            Corporate Controller and
            Chief Accounting Officer

               /s/ J. T. ACKERMAN                 Chairman of the Board              February 23, 1998
-----------------------------------------------
                 J. T. Ackerman

               /s/ R. G. ARMSTRONG                Director                           February 23, 1998
-----------------------------------------------
                 R. G. Armstrong

                /s/ J. A. GODWIN                  Director                           February 23, 1998
-----------------------------------------------
                  J. A. Godwin

                /s/ L. H. LATTMAN                 Director                           February 23, 1998
-----------------------------------------------
                  L. H. Lattman

                /s/ M. LUJAN JR.                  Director                           February 23, 1998
-----------------------------------------------
                  M. Lujan Jr.

                 /s/ R. U. ORTIZ                  Director                           February 23, 1998
-----------------------------------------------
                   R. U. Ortiz

                 /s/ R. M. PRICE                  Director                           February 23, 1998
-----------------------------------------------
                   R. M. Price

                 /s/ P. F. ROTH                   Director                           February 23, 1998
-----------------------------------------------
                   P. F. Roth

</TABLE>

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