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                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, 2000     Commission File Number 1-6986

                      PUBLIC SERVICE COMPANY OF NEW MEXICO
             (Exact name of Registrant as specified in its charter)

                  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. |X|

   The total number of shares of the Company's  Common Stock  outstanding  as of
January 31, 2001 was 39,117,799. 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 $24.70 per
share reported by The Wall Street Journal, was $966,209,635.

                       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 July 3, 2001 - PART III.

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<PAGE>


                                TABLE OF CONTENTS

                                                                           Page
                                                                           ----

GLOSSARY................................................................... iv

                                     PART I

ITEM  1. BUSINESS..........................................................  1
           THE COMPANY.....................................................  1
           UTILITY OPERATIONS..............................................  1
               Electric Product Offering...................................  1
               Natural Gas Product Offering................................  2
           GENERATION AND TRADING OPERATIONS...............................  4
               Sources of Power............................................  7
               Fuel and Water Supply.......................................  8
           UNREGULATED OPERATIONS.......................................... 10
           DEREGULATION AND FORMATION OF HOLDING COMPANY................... 11
           PROPOSED RULEMAKINGS RELATED TO DEREGULATION.................... 12
           COMPETITION UNDER DEREGULATION.................................. 12
           RATES AND REGULATION............................................ 13
               Electric Rates and Regulation............................... 13
               Federal Electric Initiatives................................ 14
               Gas Rates and Regulation.................................... 15
           ENVIRONMENTAL MATTERS........................................... 16

ITEM  2. PROPERTIES........................................................ 19
           ELECTRIC........................................................ 19
               Fossil-Fueled Plants........................................ 19
               Nuclear Plant............................................... 20
               Other Electric Properties................................... 24
           NATURAL GAS..................................................... 25
           OTHER INFORMATION............................................... 25

ITEM  3. LEGAL PROCEEDINGS................................................. 25
           PVNGS Water Supply Litigation................................... 25
           San Juan River Adjudication..................................... 25
           Republic Savings Bank Litigation................................ 26
           Purported Navajo Environmental Regulation....................... 26
           Royalty Claims.................................................. 27
           KAFB Contract................................................... 28

ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 29

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY....................... 30


                                       ii
<PAGE>

                                     PART II

ITEM  5.   MARKET FOR THE COMPANY'S COMMON EQUITY AND
                 RELATED STOCKHOLDER MATTERS...............................  32

ITEM  6.   SELECTED FINANCIAL DATA.........................................  33

ITEM  7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
             CONDITION AND RESULTS OF OPERATIONS...........................  34

ITEM  7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
             MARKET RISK ..................................................  73

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-24


                                      iii
<PAGE>


                                 GLOSSARY

Act..........................   The Clean Air Act - Amendments of 1990
Avistar......................   Avistar, Inc., an unregulated subsidiary of
                                   Public Service Company of New Mexico
AG...........................   New Mexico Attorney General
AMDAX........................   AMDAX.com, an equity investee of Avistar
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
COA..........................   City of Albuquerque, New Mexico
Decatherm....................   1,000,000 BTUs
Delta........................   Delta-Person Limited Partnership, a New Mexico
                                   limited partnership
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
FERC.........................   Federal Energy Regulatory Commission
FASB.........................   Financial Accounting Standards Board
Farmington...................   City of Farmington, New Mexico
FIP..........................   Federal Implementation Plan
Four Corners.................   Four Corners Power Plant
FPPCAC.......................   Fuel and Purchased Power Cost Adjustment Clause
Gallup.......................   City of Gallup, New Mexico
Gathering Company............   Sunterra Gas Gathering Company, a wholly-owned
                                  subsidiary of Public Service Company of
                                  New Mexico
ISO..........................   Independent System Operator
KAFB.........................   Kirtland Air Force Base
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 Public Service Company of
                                  New Mexico
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

                                    iv
<PAGE>

NSPS.........................   New Source Performance Standards
NSR..........................   New Source Review
OCD..........................   New Mexico Oil Conservation Division
PGAC.........................   The Company's Purchased Gas Adjustment Clause
PG&E.........................   Pacific Gas and Electric Company
PLP..........................   Cobisa-Person Limited Partnership
PPA..........................   Power Purchase Agreement
PRC..........................   New Mexico Public Regulation Commission,
                                  successor of the NMPUC
Processing Company...........   Sunterra Gas Processing Company, a wholly-owned
                                  subsidiary of Public Service Company of
                                  New Mexico
PSD..........................   Prevention of Significance Determination
PVNGS........................   Palo Verde Nuclear Generating Station
RCRA.........................   Resource Conservation and Recovery Act
RHC..........................   Republic Holding Company
RSB..........................   Republic Savings Bank
RTO..........................   Regional Transmission Organization
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
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 the Company
Tri-State....................   Tri-State Generation and Transmission
                                  Association, Inc.
Tucson.......................   Tucson Electric Power Company
UAMPS........................   Utah Associated Municipal Power Systems
USBR.........................   United States Bureau of Reclamation
USEC.........................   United States Enrichment Corporation
WGA..........................   Western Governors Association
WRAP.........................   Western Regional Air Partnership
Waste Act....................   Nuclear Waste Policy Act of 1982, as amended
                                  in 1987
WAPA.........................   Western Area Power Administration
Williams.....................   Williams Gas Processing-Blanco, Inc., a
                                  subsidiary of the Williams Field Services
                                  Group, Inc., of Tulsa, Oklahoma

                                       v
<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,   sale  and  trading  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 services under Avistar, its wholly-owned  unregulated
subsidiary.

       On November 9, 2000, the Company and Western  Resources,  Inc.  ("Western
Resources")  announced  that both  companies'  boards of  directors  approved an
agreement  under which the Company will acquire the Western  Resources  electric
utility operations in a tax-free,  stock-for-stock  transaction. The transaction
is expected to close promptly  after all of the  conditions to its  consummation
are  fulfilled,  including the spin off to Western  Resources'  shareholders  of
Western   Resources'   non-utility   assets,   approval  from  both   companies'
shareholders  and  customary  regulatory  approvals.  (See  Part  II,  Item 7. -
"Management's  Discussion  And  Analysis Of Financial  Condition  and Results Of
Operations - Acquisition Of Western Resources Electric Operations").

       As of December 31, 2000, the Company employed 2,667 persons.

       In  response  to the  changes in the  utility  industry,  the Company has
reorganized  its management  structure.  In 2000, the Company began operating as
three  distinct  business  units:  (1) Utility  Operations,  (2)  Generation and
Trading Operations and (3) Unregulated  Operations.  Utility  Operations include
the Electric Product Offering  ("Electric") and the Natural Gas Product Offering
("Gas").  Electric  consists of the distribution of electricity,  as well as all
activities  related  to the  Company's  electric  transmission  operations.  Gas
includes the transportation  and distribution of natural gas to end-users.  Both
offerings include related activities such as marketing and customer service. The
Generation and Trading Operations include all production and purchase of energy,
the sale of wholesale energy to Utility  Operations and third parties as well as
energy  trading  activities.   Unregulated  Operations  provide  energy  related
services.

        Financial  information  relating to amounts of  revenue,  net income and
total assets of the Company's business units or reportable segments is contained
in note 1 of the notes to consolidated financial statements.

                               UTILITY OPERATIONS

Electric

        The Company provides  jurisdictional  retail electric service to a large
area of north  central New Mexico,  including  the COA and the City of Santa Fe,
and certain other areas of New Mexico.  For the twelve months ended December 31,
2000,  1999,  1998,  1997  and  1996,  retail  sales  revenues,   which  include
distribution and transmission sales, were $518.7 million, $522.5 million, $536.4
million,  $519.5 million and $507.8  million,  respectively,  and  approximately


                                       1
<PAGE>

369,000,  361,000,  358,000,  349,000 and  342,000  retail  electric  customers,
respectively,  were served by the Company.  The largest retail electric customer
served by the Company  accounted for  approximately  4.1% of the Company's total
retail electric revenues for the year ended December 31, 2000.

       For the  years  1996  through  2000,  retail  KWh sales  have  grown at a
compound annual rate of approximately 2.87%. The Albuquerque Chamber of Commerce
forecasts  that the COA's  population  growth  will be 5.95%  over the next five
years.  The Company's  system peak demands in summer and winter are shown in the
following table:

                               SYSTEM PEAK DEMAND
                                   (Megawatts)

                           2000        1999        1998        1997        1996
                           ----        ----        ----        ----        ----

Summer ...............     1,368       1,291       1,313       1,209       1,217
Winter ...............     1,211       1,161       1,135       1,142       1,111

        The Company holds long-term,  non-exclusive franchise agreements for its
electric retail operations, expiring between July 2001, and November 2028. These
franchise  agreements  provide the Company  access to public  rights-of-way  for
placement of the Company's electric facilities.  The COA, City of Santa Fe, Town
of Cochiti Lake, Bernalillo County, Luna County,  Sandoval County and San Miguel
County  franchises  have expired.  Customers in the areas covered by the expired
franchises represent in the aggregate approximately 73.13% of the Company's 2000
total electric operating  revenues,  and no other franchise area represents more
than 8.35%. The Company  continues to collect and pay franchise fees to the COA,
City of Santa Fe and the Town of Cochiti Lake.  The Company  currently  does not
pay franchise fees to Bernalillo  County,  Luna County,  Sandoval County and San
Miguel 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.

        Electric  procures  all of its electric  power needs from the  Company's
Generation and Trading  Operations.  These  intersegment  sales are priced using
internally  developed  transfer  pricing  and are not  based  on  market  rates.
Customer  electric rates are regulated by the PRC and determined on a basis that
includes  the  recovery  of the  cost  of  power  production  by  the  Company's
Generation  and Trading  Operations  and a return on the related  assets,  among
other things.

        The Company owns or leases 2,781  circuit miles of  transmission  lines,
interconnected  with other  utilities  east into Texas,  west into Arizona,  and
north into Colorado and Utah. Due to rapid load growth in the Company's  service
territory in recent years, most of the capacity on this  transmission  system is
fully committed and there is no additional access available on a firm commitment
basis.  These factors,  together with  significant  physical  constraints in the
system,  limit the ability to wheel power into the  Company's  service area from
outside the state.

Gas

Service Area and Customers

        The Company's Gas operations distribute natural gas to most of the major
communities  in New Mexico,  including the COA and the city of Santa Fe, serving



                                       2
<PAGE>

approximately  435,000,  426,000,  419,000,  410,000 and 401,000 customers as of
December 31, 2000, 1999, 1998, 1997 and 1996, respectively. The COA metropolitan
area accounts for approximately 52% of the total  sales-service  customers.  The
Company holds long-term,  non-exclusive franchises with varying expiration dates
in all incorporated  communities  requiring franchise  agreements except for the
COA,  the  franchise  agreement  for which  expired on  January  28,  1998.  The
Company's   customer   base   includes   both   sales-service    customers   and
transportation-service customers.

       Sales-service  customers purchase natural gas and receive  transportation
and  delivery  services  from the Company for which the  Company  receives  both
cost-of-gas and cost-of-service  revenues.  Cost-of-gas  revenues collected from
on-system sales-service customers are recovered in accordance with PRC rules and
regulations and represent a pass-through of the Company's cost of natural gas to
the  customer.  Since the  Company  obtains  its  natural gas supply on the open
market  from  non-affiliated  third-party  producers,  the  Company's  operating
results  are not  affected  by an  increase  or  decrease in natural gas prices.
Additionally,  the Company makes  occasional gas sales to off-system  customers.
Off-system sales deliveries generally occur at interstate pipeline interconnects
with the Company's system.

       Transportation-service  customers,  who procure gas  independently of the
Company and contract with the Company for  transportation  and related services,
provide the Company with cost-of-service revenues only.  Transportation services
are provided to gas marketers, producers and end users for delivery to locations
throughout  the  Company's  distribution  systems,  as well as for  delivery  to
interstate  pipelines.  The Company  provided gas  transportation  deliveries to
approximately 1,251 gas marketers, producers and end users during 2000.

       For the  twelve  months  ended  December  31,  2000,  the  Company's  Gas
operations had throughput of approximately  95.0 million  decatherms,  including
sales of 50.1 million decatherms to both sales-service  customers and off-system
customers.  No single sales-service customer accounted for more than 5.8% of the
Company's therm sales in 2000.  During 2000,  approximately 47% of the Company's
total gas throughput was related to transportation gas deliveries. The Company's
transportation  rates are unbundled,  and transportation  customers only pay for
the service they  receive.  The Company's  total gas operating  revenues for the
year ended  December 31, 2000,  were  approximately  $320  million.  Cost-of-gas
revenues,  received from sales-service and off-system customers,  and other PGAC
related revenues  accounted for  approximately  59.9% of the Company's total gas
operating  revenues.  Since a major portion of the Company's  load is related to
heating, levels of therm sales are affected by weather. Approximately 52% of the
Company's total therm sales in 2000 occurred in the months of January, February,
November and December.

Natural Gas Supply

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

                                       3
<PAGE>

Natural Gas Sales

        The following table shows gas throughput by customer class:

                                 GAS THROUGHPUT
                            (Millions of decatherms)

                                  2000      1999     1998       1997       1996
                                  ----      ----     ----       ----       ----

Residential ..................    29.1      29.3     30.3       30.7       27.4
Commercial ...................    10.0      10.1     10.4       10.6        9.3
Industrial ...................     5.0       2.3      1.5        1.3        2.1
Public authorities ...........     3.0       2.9      3.4        4.2        2.6
Irrigation ...................     1.8       1.4      1.9        1.6        1.4
Sales for resale .............     0.1       1.2      1.2        1.2        0.8
Unbilled .....................    (0.5)      3.8     (1.3)      (0.2)       1.4
Transportation* ..............    45.0      40.2     36.4       34.0       47.1
Off-system sales .............     1.5       1.1      1.9        1.2        8.0
                                  ----      ----     ----       ----      -----
                                  95.0      92.3     85.7       84.6      100.1
                                  ====      ====     ====       ====      =====

        The following table shows gas revenues by customer class:

                                  GAS REVENUES
                             (Thousands of dollars)

                           2000       1999       1998        1997        1996
                           ----       ----       ----        ----        ----

Residential ...........  $191,095   $148,968   $161,153    $187,563    $129,911
Commercial ............    52,926     36,528     42,680      50,502      33,022
Industrial ............    24,208      8,550      4,887       4,536       5,179
Public authorities ....    13,704      9,782     12,610      17,577       8,018
Irrigation ............     8,016      4,229      5,780       5,041       3,252
Sales for resale ......       381      2,530      3,596       4,465       2,106
Unbilled ..............       174      4,107       (955)     (2,172)      2,678
Transportation* .......    14,163     12,390     13,464      14,172      17,215
Liquids ...............     4,513      1,867      1,463       4,451       7,608
Off-system sales ......     5,291      2,357      3,816       1,926      14,352
Other .................     5,453      5,403      7,481       6,708       3,960
                         --------   --------   --------    --------    --------
                         $319,924   $236,711   $255,975    $294,769    $227,301
                         ========   ========   ========    ========    ========

* Customer owned gas

                        GENERATION AND TRADING OPERATIONS

       The Company's  Generation  and Trading  Operations  serve four  principal
markets.  Sales to the  Company's  Utility  Operations  to cover  jurisdictional
electric demand and sales to firm-requirements  wholesale  customers,  sometimes
referred to  collectively  as "system"  sales,  comprise  two of these  markets.
Intersegment  sales  to the  Utility  Operations  are  priced  using  internally
developed  transfer  pricing and are not based on market rates. The third market



                                       4
<PAGE>

consists of other contracted sales to third parties for which the Generation and
Trading Operations commit to deliver a specified amount of capacity (measured in
megawatts-MW) or energy (measured in megawatt  hours-MWh) over a given period of
time. The fourth market consists of energy sales from excess capacity made on an
hourly basis at fluctuating,  spot-market  rates.  Sales to the third and fourth
markets are sometimes  referred to  collectively as  "off-system"  sales.  These
sales include the Company's wholesale power trading  activities.  The Company is
connected  to the Western area power grid,  which  includes  California  and the
surrounding  states,  and  therefore  its  wholesale  power  sales are into this
market.  The  Western  United  States  power  market  in 2000  and 2001 has been
extremely  volatile  due  to a  power  supply  shortage  and  other  constraints
associated with the Western United States electricity market. (See Part II, Item
7 - Management's  Discussion and Analysis of Financial  Condition and Results of
Operations - Other issues facing the Company - Western  United States  Wholesale
Power Market.)

Power Sales

        A  significant  portion of the  Company's  earnings is derived  from its
off-system  sales.  The  Company  has been very  successful  in  developing  its
wholesale  power trading  activities in the Western  United  States.  Management
believes  this  success is due to its business  strategy of  providing  electric
power  customized  to meet the needs of large  customers  who by their  size are
unable to develop special products to meet unique size,  timing, or transmission
needs.  This  niche  marketing  strategy  is  based on the  Company's  strategic
transmission  capabilities and an asset-backed  trading  methodology whereby the
Company's  net open  position is always  supported  by its  generation  capacity
excluded  from  its  jurisdictional  rates  or  by  its  excess  capacity.  This
asset-backed  trading  methodology  helps to mitigate the risks  inherent in the
Company's trading activities.  The Company also utilizes long-term  transactions
to enhance its product offering.

       A significant portion of the Company's growth strategy is based on growth
in off-system sales. The Company's  business plan calls for the expansion of its
wholesale  power  trading  operation  and  the  acquisition  or  development  of
additional  generating  capacity  to support  this  growth  under the  Company's
asset-backed  trading  methodology.  This growth strategy provided the basis for
the proposed acquisition of Western's utility assets.

       The following table shows electric sales by customer class:
<TABLE>
<CAPTION>
                     GENERATION AND TRADING SALES BY MARKET
                                (Megawatt hours)

                                         2000         1999         1998         1997         1996
                                         ----         ----         ----         ----         ----

<S>                                    <C>          <C>          <C>          <C>          <C>
Intersegment sales .................   7,088,943    6,803,583    6,739,874    6,534,899    6,406,296
Firm-requirements wholesale ........     193,853      179,249      278,615      278,727      282,534
Other contracted off-system sales ..   7,385,266    6,196,499    4,033,931    3,790,081    2,928,321
Hourly energy sales ................   4,773,009    4,795,873    4,469,769    2,716,835    1,364,365
                                      ----------   ----------   ----------   ----------   ----------
                                      19,441,071   17,975,204   15,522,189   13,320,542   10,981,516
                                      ==========   ==========   ==========   ==========   ==========

</TABLE>

                                       5
<PAGE>


       The following table shows revenues by customer class:
<TABLE>
<CAPTION>

                    GENERATION AND TRADING REVENUES BY MARKET
                             (Thousands of dollars)

                                         2000         1999         1998         1997         1996
                                         ----         ----         ----         ----         ----

<S>                                   <C>          <C>          <C>          <C>          <C>
Intersegment sales .................  $  324,744   $  318,872   $  362,722   $  370,019   $  380,000
Firm-requirements wholesale ........       6,568        7,046       10,708       10,690       12,359
Other contracted off-system sales ..     371,900      226,773      142,115      118,876       86,689
Hourly energy sales ................     369,724      131,549      122,156       55,768       22,281
Other ..............................       2,242        5,741        4,657       14,269       13,374
                                      ----------   ----------   ----------   ----------   ----------
                                      $1,075,178   $  689,981   $  642,358   $  569,622   $  514,703
                                      ==========   ==========   ==========   ==========   ==========
</TABLE>

       Certain  of  the   Company's   generation   assets  are   excluded   from
jurisdictional  electric  rates.  In 1988,  the NMPUC excluded 130MW of San Juan
Unit 4, all of PVNGS  Unit 3 and a power  purchase  contract,  which  expired in
1995.  As a result,  the Company  developed a bulk power  marketing  and trading
operation  to sell  the  generation  from its  excluded  assets  that no  longer
generated a return in rate base. These  activities  include the forward purchase
and sale of electricity to take advantage of market price  opportunities  in the
electric  wholesale  market.  The  Company's   wholesale  power  marketing  area
continues to increase  its scope of trading  activities.  During 2000,  1999 and
1998, the Company's sales in the off-system  markets accounted for approximately
63%, 61% and 55%,  respectively,  of its total KWh sales and approximately  69%,
52% and 41%,  respectively,  of its total  revenues from  Generation and Trading
sales. Of the total  off-system sales made in 2000 and 1999, 78% were transacted
through purchases for resale.

       In 1990,  the NMPUC  established  an off-system  sales  methodology  that
provided for a sharing  mechanism  between the included and excluded  generation
assets  and power  purchase  contracts.  Subsequent  rate  cases to the  present
continued  to  utilize  this  methodology.  As a  result,  since  1990  electric
customers  have  received  over $300 million in rate benefits from the Company's
wholesale  power  marketing  activities.  This is without  consideration  of the
benefits  inherent in the  jurisdictional  load growth. As of December 31, 1998,
the assets included in the electric  customer rate base no longer had any excess
capacity for  purposes of certain  portions of the sharing  mechanism.  The last
rate case (see Rates and  Regulation - Electric  Rates and Regulation - Electric
Rate Case) froze rates,  without possibility of change in rates prior to January
1, 2003.

        The Company has entered into various firm  off-system  sales  contracts.
These  contracts  contain fixed capacity  charges in addition to energy charges.
The SDG&E contract  requires  SDG&E to purchase 100 MW from the Company  through
April 2001. 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 invoked its option
to  reduce  its peak  demand in 2000  from 74 MW to 68 MW.  For  2001,  APPA has
invoked its option to increase  its peak demand to 92 MW. The Company  furnished
firm-requirements  wholesale  power in New Mexico in 2000 to the City of Gallup.
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 2000 were
approximately  27 MW.  Beginning July 2000, the Company began serving  Navopache
Electric Cooperative firm requirements service under the provisions of a 10 year
contract.  Average monthly demand for Navopache is expected to be 50 MW. No firm
requirements  wholesale  customer  accounted for more than 0.9% of the Company's
total electric sales for resale revenues for the year ended December 31, 2000.

                                       6
<PAGE>

       Sources of Power

        As of December 31, 2000, the total net generation capacity of facilities
owned or leased by the Company was 1,521 MW,  excluding the PPA discussed  below
which would bring the total to 1,653 MW. The Company is committed to  increasing
its  utilization  of its major  generation  capacity at SJGS,  Four  Corners and
PVNGS. SJGS is directly operated by the Company. In 2000, the plant's equivalent
availability  and capacity factor  performance  ranked in the 95th percentile of
the 403 coal-fired power plants in the nation.  SJGS's  equivalent  availability
and capacity  factor were 88.9% and 85.6%,  respectively,  for the twelve months
ended  December 31, 2000 and 95.1% and 92.6% for the third  quarter of 2000 when
demand in the Western  United  States was at its highest.  Capacity  factors for
Four Corners and PVNGS were 84.2% and 92.7%, respectively,  in 2000, as compared
to 86.9% and 93.2%,  respectively,  in 1999. Four Corners and PVNGS are operated
by APS. (See Item 2. Properties).

        In addition to generation  capacity,  the Company purchases power in the
market.  The Company has a power  purchase  contract  with SPS which  originally
provided for the  purchase of up to 200 MW and expires 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 its 1999 and 2000 purchases by 25 MW. The
Company  has  70 MW of  contingent  capacity  obtained  from  El  Paso  under  a
transmission  capacity for  generation  capacity trade  arrangement  through May
2004.  Beginning June 2004 and continuing  through June 2005 the capacity amount
is 39 MW. In addition,  the Company is interconnected with various utilities for
economy interchanges and mutual assistance in emergencies.  The Company actively
trades in the wholesale power market and has entered into and  anticipates  that
it will  continue  to enter into power  purchases  to  accommodate  its  trading
activity.

        In 1996, the Company  entered into a long-term PPA for the rights to all
the output of a new  gas-fired  generating  plant.  The plant has received  FERC
approval for "exempt wholesale generator" status with respect to the gas turbine
generating unit. The PPA's maximum dependable  capacity is 132 MW. In July 2000,
the plant went into  operation.  The gas turbine  generating unit is operated by
Delta and is located on the Company's retired Person Generating  Station site in
COA. The site for the  generating  unit was chosen,  in part, to provide  needed
benefits to the Company's constrained  transmission system. Primary fuel for the
gas turbine generating unit is natural gas, which is provided by the Company. In
addition,  the unit has the  capability  to utilize  low sulfur  fuel oil in the
event natural gas is not available or cost effective.  For accounting  purposes,
the PPA is treated  as an  operating  lease.


                                       7
<PAGE>

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

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
1998.........   68.2        155.3       30.8       46.5         1.0       324.6
1999.........   67.6        165.3       31.0       47.4         1.4       331.9
2000.........   68.0        165.3       29.8       45.4         2.2       482.6

       The estimated  generation  mix for 2001 is 67.3% coal,  29.6% nuclear and
3.1% gas and oil. Due to locally  available  natural gas and oil  supplies,  the
utilization of locally available coal deposits and the generally abundant supply
of  nuclear  fuel,  the  Company  believes  that  adequate  sources  of fuel are
available for its generating stations into the foreseeable future.

Coal

       The coal  requirements  for the  SJGS  are  being  supplied  by  SJCC,  a
wholly-owned  subsidiary  of BHP, who holds certain  Federal,  state and private
coal  leases  under a Coal Sales  Agreement,  pursuant to which SJCC will supply
processed  coal for  operation  of the  SJGS  until  2017.  BHP  guaranteed  the
obligations  of SJCC under the  agreement,  which  contemplates  the delivery of
approximately  87 million tons of coal during its  remaining  term.  That amount
would  supply   substantially   all  the   requirements   of  the  SJGS  through
approximately 2017.

        The revised coal  contract is expected to save the Company  between $400
million and $500 million in fuel costs over the next 17 years. Besides saving on
fuel costs,  the  cleaner-burning,  less abrasive coal is expected to reduce the
Company's  share  of  the  plant's   maintenance   and  operating   expenses  by
approximately  $2 million per year. The plant is expected to realize some of the
benefits of the higher quality coal next year, as the existing surface mines are
phased  out and the  underground  mine is  developed.  The  underground  mine is
scheduled to be in full production by November 2002.

       The  Company  has  reached an  agreement  with SJCC and Tucson to replace
these two surface  mining  operations  with a single  underground  mine  located
adjacent  to the  plant.  Underground  mining is  expected  to  provide a higher
quality coal at a lower cost per ton. The new mine will use the longwall  mining
technique and is expected to ramp to full station supply by the end of 2002.

       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. The current fuel agreement  expires December 31, 2004. It
is anticipated that  negotiations for an extension will be initiated in the near
future. 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.

                                       8
<PAGE>

Natural Gas

        The natural gas used as fuel for the Company's  COA electric  generating
plant  (Reeves  Station and the PPA) is delivered by the  Company's  Natural Gas
Product  Offering.  (See  "Natural Gas Product  Offering").  In addition to rate
changes under filed  tariffs,  the Company's  cost of gas increases or decreases
according  to the  average  cost of the  available  gas  supply.  The  Company's
Generation and Trading operations  commenced a program to reduce its exposure to
fluctuations in prices for natural gas as a fuel source for its generation.  The
2000 fuel hedge program  ended in October  2000. In 2001,  the fuel hedge season
will begin in April for 9 of 12  months.  (See  Footnote  5 to the  Consolidated
Financial Statements).

Nuclear Fuel

        The fuel cycle for PVNGS is comprised  of the  following  stages:
           o    the  mining  and  milling  of  uranium  ore to  produce  uranium
                concentrates,
           o    the conversion of uranium concentrates to uranium hexafluoride,
           o    the enrichment of uranium hexafluoride,
           o    the fabrication of fuel assemblies,
           o    the utilization of fuel assemblies in reactors, and
           o    the storage and disposal of spent fuel.

        The PVNGS  participants  have made  contractual  arrangements  to obtain
quantities  of  uranium  concentrates  anticipated  to  be  sufficient  to  meet
operational  requirements  through 2002. Existing contracts and options could be
utilized to meet  approximately 88% of requirements in 2003, 88% of requirements
in 2004,  49% of  requirements  in 2005, and 16% of  requirements  from 2006 and
beyond.  Spot purchases on the uranium market will be made, as  appropriate,  in
lieu of any uranium that might be obtained through contractual options.

        The PVNGS participants have contracted for uranium conversion  services.
Existing  contracts and options could be utilized to meet  approximately  70% of
requirements  in 2000, 75% of  requirements in 2001, 80% of requirements in 2002
and zero percent of  requirements  thereafter.  The PVNGS  participants  have an
enrichment  services  contract and an enriched  uranium  product  contract  that
furnish enrichment  services required for the operation of the three PVNGS units
through  2003.  In addition,  existing  contracts  will  provide  fuel  assembly
fabrication services through 2015 for each Palo Verde unit.

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  committed a portion of those  rights to Four
Corners  through  the life of the plant.  The Company and Tucson have a contract
with the USBR ("USBR Contract") for consumption of 16,200 acre feet of water per
year for the SJGS.  The contract  expires in 2005. 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 the SJGS through 2005.

        In January 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


                                       9
<PAGE>

actions.  Renewal of the SJGS water  contract  would be considered a significant
Federal action for these purposes.

        In June 1996, the Navajo Nation requested that the USBR withhold renewal
of the USBR  Contract  due to water  shortages of the Navajo  Indian  Irrigation
Project.  Other tribes in the Four Corners area also voiced  concern to the USBR
about  the  renewal  by the  Company  of the USBR  Contract.  Due to the  tribal
concerns  expressed,  the Company began four-way  discussions with the Jicarilla
Apache Nation ("Jicarilla"),  the Navajo Nation and USBR in July 1999 to resolve
any  outstanding  issues related to the Company's  proposed  renewal of the USBR
Contract.  Those  discussions  are  ongoing  but have  resulted  in the  Company
pursuing  an  alternative  water  supply to replace  the USBR  Contract  when it
expires in 2005.

        In 2000, the Company signed a twenty-two  year contract with  Jicarilla,
beginning  in 2006,  for the full 16,200  acre feet of water from the  Jicarilla
supply in Navajo Reservoir  ("Jicarilla  Contract").  The Jicarilla  Contract is
essentially  equivalent to a renewed USBR Contract, the only material difference
being  that  Jicarilla  as  opposed  to USBR  would  be the  contract  supplier.
Jicarilla  has  contract  water in Navajo  Reservoir  pursuant to a water rights
settlement  approved by Congress in 1992 and a judicial  decree that was entered
February 24, 1999.  The contract  must still be approved by the USBR and is also
subject to environmental approvals.  Unlike a renewed USBR Contract, the Company
would not be required to seek Congressional approval of a Jicarilla Contract.

       Additionally,  the Company is in  discussions  with the Navajo  Nation to
settle  claims  the  tribe  may  assert  in  connection  with any  environmental
approvals that may be required for a Jicarilla Contract.  The Jicarilla Contract
is considered a Federal action that will require National  Environmental  Policy
Act compliance as well as a Section 7 consultation  under the Endangered Species
Act.  At this time,  although  the Company  cannot  predict the outcome of these
discussions,  it does not believe that a settlement  with the Navajo Nation will
have a  material  adverse  effect on the  Company's  financial  position  or its
results of operations.

       The  Company  is  actively  involved  in  the  San  Juan  River  Recovery
Implementation  Program  ("Recovery  Program") to mitigate any concerns with the
taking of the USBR Contract or proposed  Jicarilla  Contract water supply from a
river that contains endangered fish species and their critical habitat. In April
of 1999, the Recovery Program voted to fund  modifications to the Company's weir
to accommodate fish travel in that area of the river.  Funding is expected to be
supplied  by USBR.  Design  studies  are  ongoing and the project is expected to
commence in 2001.

        Sewage effluent used for cooling  purposes in the operation of the PVNGS
units is 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  court.   (See  Item  3.  -  "Legal   Proceedings  -  PVNGS  Water  Supply
Litigation".)

                             UNREGULATED OPERATIONS

        The Company,  through its wholly-owned subsidiary Avistar, has initiated
several  unregulated  service and  information  related  business lines to serve
energy  intensive  customers.  The  business  lines  focus on energy  efficient,
advanced metering solutions and emerging  technology  platforms that are related

                                       10
<PAGE>

to the Company's core energy businesses.  In June 1999, the NMPUC issued a final
order  approving  the  Company's  request to form and  invest in a  wholly-owned
subsidiary, Avistar. Under the final order, the Company is permitted to invest a
maximum of $50 million in the  subsidiary,  subject to the  availability  of the
Company's  retained  earnings and to enter into reciprocal loan agreement for up
to $30 million.  To date,  the Company has  invested $35 million into  Avistar's
operations.

       Avistar acquired  approximately a  25% ownership interest in AMDAX.com in
January 2000.  AMDAX has developed a proprietary  auction  platform  designed to
efficiently  bring together  electricity  buyers and sellers in the  deregulated
natural gas and  electricity  markets.  The rapidly  evolving  energy  crisis in
California  has  adversely  affected  AMDAX's  business  prospects  and expected
performance. Accordingly, the Company has recognized a valuation loss in 2000 to
reflect  the  change in  business  prospects  and  market  values of  e-business
entities.

       In the second quarter of 2000,  Avistar  invested $1 million in Nth Power
Technologies  ("Nth  Power"),  a venture  capital  firm  focused on  high-growth
opportunities  arising from the restructuring of the global energy  marketplace.
Avistar has a  commitment  to invest an  additional  $4  million.  Nth Power has
invested in a broad range of companies  that are well  positioned to lead in the
emerging energy markets. The areas of investment include: distributed generation
and  storage;  communications,   control  and  information  technology;  end-use
products;  power  quality;   transmission  and  distribution   automation;   and
outsourcing and business services.

       In  December  2000,  Avistar  invested  $10  million  for a 5%  ownership
interest in MainStreet Networks, an Internet Gateway Service Provider.  Together
with  local   utilities,   MainStreet   Networks  plans  to  provide   low-cost,
Internet-based  services to homes  through an Internet  gateway  attached at the
customer's electric meter. The gateway captures meter reading data for the local
utility.  The gateway,  in connection  with an internet  appliance  developed by
Mainstreet,  allows customers to send and receive e-mail  messages,  shop online
and access national news and customized community news and content.

                  DEREGULATION AND FORMATION OF HOLDING COMPANY

       Introduction  of  competitive  market  forces  and  restructuring  of the
electric  utility  industry in New Mexico  continue to be key issues  facing the
Company.  New Mexico's Electric Utility Industry  Restructuring Act of 1999 (the
"Restructuring  Act"),  which was enacted into law in April 1999, would begin to
open the state's electric power market to customer choice beginning in 2002. The
Restructuring Act would give schools,  residential and small business  customers
the opportunity to choose among  competing power suppliers  beginning in January
2002.  Competition  would be expanded to include all customers  starting in July
2002. Rural electric cooperatives and municipal electric systems have the option
not to participate in the competitive market.

       Under the Restructuring Act, residential and small business customers who
do not select a power  supplier in the open market  would buy their  electricity
through their local utility through  "standard offer service"  whereby the local
distribution  utility would procure power supplies through a process approved by
the PRC. The local  distribution  utility  system and related  services  such as
billing  and  metering  would  continue  to  be  regulated  by  the  PRC,  while
transmission  services and wholesale power sales would remain subject to Federal
regulation.

                                       11
<PAGE>

       The  Restructuring  Act  does  not  require  utilities  to  divest  their
generating plants, but requires certain  deregulated  activities to be separated
from activities  regulated by the PRC through  creation of at least two separate
corporations.  The  Company  plans to  reorganize  its  operations  by forming a
holding  company  structure  as a means of  achieving  the  corporate  and asset
separation  required by the Restructuring  Act. The Company's plan for a holding
company  structure  would  separate the Company into two  subsidiaries.  In June
2000,  shareholders approved the mandatory share exchange necessary to implement
the holding company structure.  If the Company receives all necessary regulatory
and other  approvals,  all of the Company's  electric and gas  distribution  and
transmission  assets and certain related  liabilities  would be transferred to a
newly  created  subsidiary.  After this asset  transfer,  this  subsidiary  will
acquire the name "Public  Service  Company of New Mexico" (for  purposes of this
discussion,  the subsidiary is referred to as  "UtilityCo")  and the corporation
formerly  named  Public  Service  Company of New Mexico will be renamed  Manzano
Energy Corporation (for purposes of this discussion,  the subsidiary is referred
to as "PowerCo").  PowerCo would continue to own the Company's existing electric
generation and certain other unregulated, competitive assets after completion of
the transfer of the regulated business to the newly created utility  subsidiary.
UtilityCo, PowerCo and Avistar would be wholly-owned subsidiaries of the holding
company.

       The New Mexico Legislature is currently  considering  various legislation
that could delay open access for "customer  choice" and other  activities  under
the Restructuring Act, including corporate  separation.  For a discussion on the
status of the  formation of the holding  company and corporate  separation,  see
Part II, Item 7. - "Management's  Discussion and Analysis of Financial Condition
and Results of Operations - Other Issues Facing the Company - The  Restructuring
Act, The Formation of the Holding Company and Corporate Separation".

                  PROPOSED RULEMAKINGS RELATED TO DEREGULATION

        In  1999,  the PRC  proposed  certain  rules  that  would  apply  to all
utilities  in  implementing  the  Restructuring  Act.  These  included a Code of
Conduct  that would  govern  relationships  between a utility and its  affiliate
providing  competitive  power  supply  service,  a Standard  Offer  Service rule
governing  utility  procurement of generation  service for certain customers who
choose  not to shop for power  supply,  a  Customer  Protection  rule to address
certain customer service procedures and potential problems  associated with open
access and a Competitive Power Supplier  Licensing rule to provide PRC licensure
of power supply merchants and brokers in the state. The Code of Conduct rule and
the Standard  Offer Service rule have been  approved by the PRC,  although it is
considering  whether  to modify  them due to turmoil  in the  California  energy
market.  The Customer  Protection and Competitive Power Supplier Licensing rules
are awaiting final PRC action finalization.

                         COMPETITION UNDER DEREGULATION

        Under current law, the Company is not in any direct  retail  competition
with any other regulated electric and gas utility.  Nevertheless, the Company is
subject to varying degrees of competition in certain territories  adjacent by or
within areas it serves that are also currently  served by other utilities in its
region as well as cooperatives,  municipalities,  electric districts and similar
types of government organizations.

                                       12
<PAGE>

       As a result of the Restructuring Act in New Mexico,  the Company may face
competition  from companies with greater  financial and other resources in 2002.
There can be no  assurance  that the Company  will not face  competition  in the
future that would adversely affect its results.

        The New Mexico  Legislature is currently  considering  legislation  that
could  delay  open  access and other  activities  under the  Restructuring  Act,
including corporate  separation.  A delay without providing business flexibility
could  have a  negative  effect  on the  Company's  ability  to  compete  in the
wholesale power market. Under the current regulatory  environment in New Mexico,
the Company  may be unable to achieve  the  necessary  business  flexibility  it
requires  to take  advantage  of  business  opportunities  to execute its growth
strategy. There can be no assurance that the Company can successfully compete in
the wholesale  power  marketplace and continue to execute its growth strategy if
implementation of the Restructuring Act is rolled back. This legislation; Senate
Bill 266, as originally introduced, simply delayed restructuring for five years.
However,  during the course of committee hearings and floor debate, the bill was
amended so as to provide significant  business  flexibility to utilities despite
the delay. As amended, Senate Bill 266 passed the Senate 39-0 and is now pending
in the House of Representatives. The final outcome of the legislative process is
currently  unknown,  however,  a final  resolution  is expected in the spring of
2001.

                              RATES AND REGULATION

        The Company is subject to the  jurisdiction of the PRC, the successor of
the NMPUC effective January 1, 1999, 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
and cost recovery of its transmission network.

Electric Rates and Regulation

Electric Rate Case

        In  November  1998,  the  NMPUC  issued a final  order in the  Company's
electric  rate case,  requiring  the  Company  to reduce  rates in 1999 by $60.2
million,  by $25.6 million in 2000 and by an  additional  $25.6 million in 2001.
The rate reduction order reflected,  among other things,  the revaluation of the
Company's generation resources based on a so-called "market-based price" and the
finding by the NMPUC that  recovery  of stranded  costs is illegal.  In December
1998,  the Company  appealed the rate case order to the New Mexico Supreme Court
("Supreme Court").

        On March 15, 1999, the Supreme Court issued a ruling, vacating the NMPUC
order on the Company's  electric rate case and remanding the case to the PRC for
further proceedings.

        On August 25, 1999, the PRC issued an order approving a settlement.  The
PRC  ordered  the  Company  to  reduce  its  electric  rates  by  $34.0  million
retroactive  to July 30,  1999.  In addition,  the order  included a rate freeze
until retail  electric  competition is fully  implemented in New Mexico or until
January 1, 2003 whichever comes first. The settlement reduced operating revenues
in the  years  2000 and  1999 by  approximately  $39  million  and $19  million,
respectively.

        As part of the  settlement,  the Company agreed that certain  changes to
the language of the retail  tariff under which  Kirtland Air Force Base ("KAFB")
currently takes service would be considered in a separate  proceeding before the

                                       13
<PAGE>

PRC. Hearings on this issue have not yet been scheduled.  The PRC is considering
briefs submitted by the parties addressing the scope of the proceeding. KAFB has
not renewed its  electric  service  contract  with the Company  that  expired in
December 1999 but continues to purchase  retail  service from the Company.  (See
Item 3 - Legal Proceedings "KAFB Contract".)

Federal Electric Initiatives

       Beginning with the passage of the Public Utilities  Regulatory Policy Act
of 1978 and,  subsequently,  the Energy Policy Act, there has been a significant
increase in the level of  competition  in the market for the generation and sale
of  electricity.  The Energy  Policy Act reduced  barriers  to market  entry for
companies wishing to build, own and operate electric generating facilities,  and
it also promoted  competition  by authorizing  the FERC to require  transmission
service for wholesale  power  transactions.  In this regard,  in 1996,  the FERC
issued Order 888.  Among other  things,  Order 888 required  electric  utilities
controlling  transmission  facilities to file open access  transmission  tariffs
that would make the utility  transmission systems available to wholesale sellers
and buyers of electric energy on a non-discriminatory basis.

       Order  888  encouraged   utilities  to   investigate   the  formation  of
independent  system  operators,  or ISOs,  to  operate  transmission  assets and
provided  criteria under which the  formation,  operation and governance of ISOs
would be  reviewed.  On  December  20,  1999,  the FERC issued its Order 2000 on
Regional  Transmission   Organizations,   or  RTOs.  In  this  order,  the  FERC
established  timelines  for  transmission  owning  entities  to  join an RTO and
defined the minimum characteristics and functions that an RTO must satisfy.

       In January 1998,  the Company  entered into a development  agreement with
other transmission  service providers and users to form an ISO in the southwest.
As a result, Desert STAR, Inc. was incorporated as a non-profit  organization in
the State of Arizona on September 21, 1999. Desert STAR, Inc. is being developed
to satisfy the FERC  functions  and  characteristics  for an approved  RTO.  The
functions of Desert STAR RTO are envisioned to include the following: (1) tariff
administration  and  design;  (2)  congestion  management;   (3)  parallel  flow
internalization;  (4) ancillary services; (5) total transmission  capability and
available  transmission  capability  estimation;   (6)  market  monitoring;  (7)
planning and expansion; and (8) inter-regional coordination.

       Desert  STAR  and the FERC  jurisdictional  transmission  owners  made an
October 16, 2000 progress  report filing with the FERC in compliance  with Order
2000. At the time of the progress filing it was anticipated  that a complete RTO
filing would be made by Desert STAR on December 29, 2000.  On December 28, 2000,
Desert  STAR made an  additional  filing with the FERC  stating  that a complete
December 29, 2000 filing was no longer possible and that March 31, 2001 would be
a more realistic deadline.  The FERC was also informed that operations would not
commence until late 2002.

       A significant  number of  stakeholder,  advisory and Desert STAR Board of
Director  meetings are on-going with the goal of resolving  remaining issues and
preparing a complete FERC filing at the earliest possible date.


                                       14
<PAGE>

Gas Rates and Regulation

Gas Rate Case Appeals

       In 1995, the Company filed a request for a $13.3 million  increase in its
retail natural gas sales and  transportation  rates. In 1997, the NMPUC issued a
final order in the gas rate case, ordering a rate decrease. The Company filed an
appeal to the Supreme Court,  which  ultimately ruled in favor of the Company on
some of these  issues.  In October  1997,  the Company  filed a gas rate case in
compliance  with an NMPUC order which resulted in a settlement.  After a hearing
on the  settlement  held in May 1998,  the NMPUC  issued a final order in August
1998, accepting the settlement with certain  modifications.  The AG appealed the
order to the Supreme  Court in October  1998.  In March 2000,  the Supreme Court
specifically rejected portions of the final order requiring the Company to offer
residential customers a choice of utility access fees.

        On  October  24,  2000,  the PRC  issued  a final  order  approving  the
stipulation  negotiated  in the third  quarter  between  the Company and the PRC
staff which  resolved  all issues  raised by the two gas rate  cases.  The final
order added  approximately  $1.2 million to the Company's  revenues in the final
quarter of 2000 and is expected to add  approximately  $4.7  million in 2001 and
$3.9 million in 2002. The Company has reversed  certain  reserves  against costs
recovered in the settlement that were recorded  against  earnings at the time of
the original  regulatory  orders,  resulting in a one-time  pre-tax gain of $4.6
million.  This amount will be collected from customers in rates over the next 12
years.

PGAC Continuation Filing

        The  Company's  retail  gas rate  tariffs  contain a PGAC that  provides
timely  recovery for the cost of gas purchased  for resale to its  sales-service
customers. In a NMPUC order issued in November 1997, the Company was required to
file its next PGAC  continuation  filing no later than  November  23,  1999.  In
November 1999, the Company requested a variance to the filing requirement, which
was granted by the PRC that  deferred  the filing  until the issuance of a final
order in the two related cases  concerning an  investigation  into the Company's
gas hedging  practices (see "Gas Hedging  Investigation"  below) and a notice of
proposed rulemaking issued by the PRC that would rewrite the PGAC rule (see "PRC
PGAC Rule Rewrite" below).

Gas Hedging Investigation

       In May  1999,  the PRC staff and the AG filed a  petition,  requesting  a
review by the PRC of the Company's gas hedging program for the 1998-1999 heating
season and  consideration of whether specific  guidelines should be established.
For the winter of  1998-1999,  the Company had entered into both  financial  and
physical  hedges for a cost of $7.6 million,  or 7.5% of total annual  purchased
gas costs, to levelize gas costs and protect against spikes. The review centered
on an order from the former NMPUC,  in the 1997 PGAC prudence case, in which the
Company was  ordered to engage in gas  hedging in an effort to  levelize  and/or
stabilize gas prices without detailed guidelines as to how to do so. A series of
hearings and public  workshops was held  throughout 1999 and 2000 regarding this
matter.

      As a result, the PRC issued an order on November 7, 2000, allowing but not
requiring  the Company to implement a financial  hedging  strategy.  The Company
contracted  for gas price  caps,  a type of hedge,  to protect  its  natural gas
customers  from price risk  during the  2000-2001  heating  season.  The Company


                                       15
<PAGE>

recovered its cost of $5 million  during the months of October and November 2000
in equal  $2.5  million  allotments  as a  component  of the PGAC.  The  Company
estimates  that its  hedging  strategy  has  saved its  sales-service  customers
approximately  $27 million for the cost of natural  gas,  net of the cost of the
price caps.

PRC PGAC Rule Rewrite

       Throughout  1999 and  continuing  through  the  present,  the Company has
worked in a cooperative  effort with the Commission  staff,  the AG, Zia Natural
Gas and Raton  Natural Gas to develop a proposed  revision to the PRC PGAC rule.
After  considerable  debate over the  proposed new PGAC rule, a revised rule was
proposed in which all parties, including the AG, are in agreement to include the
phrase "lowest  reasonable  cost" in the proposed rule so long as that phrase is
adequately defined,  providing clear direction to the gas utilities in their gas
cost recovery efforts.  Should this rule be adopted as proposed, the requirement
that gas utilities  make a biannual PGAC  continuation  filing would be replaced
with a more timely and informative annual supply and demand forecast,  planning,
true-up reporting process,  and a simplified PGAC continuation filing every four
years. After a hearing and a workshop to discuss minor revisions,  a recommended
decision was issued May 15, 2000 by a hearing  examiner that  supported the rule
as revised.  The PRC has not yet rendered a decision  accepting the  recommended
decision.

                              ENVIRONMENTAL MATTERS

        The Company, in common with other electric and gas utilities, is subject
to stringent laws and  regulations  for protection of the  environment by local,
state,  Federal and tribal  authorities.  In  addition,  PVNGS is subject to the
jurisdiction  of the NRC,  which has 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.  Liabilities  under  these  laws  and
regulations  can be material  and,  in some  instances,  may be imposed  without
regard to fault, or may be imposed for past acts, even though such acts may have
been lawful at the time they occurred.

The Clean Air Act

       On July 1, 1999, the EPA published its final  regional haze  regulations.
The  purpose  of the  regional  haze  regulations  is to address  regional  haze
visibility  impairment in the 156 Class 1 areas in the nation,  which consist of
National Parks,  wilderness  areas and other similar areas. The final rule calls
for all  states  to  establish  goals  and  emission  reduction  strategies  for
improving  visibility in all the Class 1 areas.  The Company  cannot  predict at
this time what the impact of the  implementation  of the regional haze rule will
be on the Company's coal-fired power plant operations.  Potentially,  additional
SO2 emission reductions could be required in the 2013-2018 timeframe. The nature
and cost of the impacts of these requirements 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.

New Source Review Rules

        The EPA has proposed changes to its New Source Review ("NSR") rules that
could  result  in many  actions  at  power  plants  that  have  previously  been
considered  routine repair and maintenance  activities (and hence not subject to
the  application of NSR  requirements)  as now being subject to NSR. In November


                                       16
<PAGE>

1999,  the Department of Justice,  at the request of the EPA,  filed  complaints
against seven  companies  alleging the companies over the past 25 years had made
modifications to their plants in violation of the NSR requirements,  and in some
cases the New Source Performance Standards ("NSPS") regulations.  Whether or not
the EPA will  prevail is unclear at this time.  The EPA has reached a settlement
with one of the companies  sued by the Justice  Department and is in the process
of  attempting  to negotiate  settlements  with another of those  companies.  No
complaint has been filed against the Company,  and the Company believes that all
of the routine maintenance, repair, and replacement work undertaken at its power
plants was and continues to be in accordance  with the  requirements  of NSR and
NSPS.  However,  by letter dated October 23, 2000,  the NMED made an information
request of the Company, advising the Company that the NMED was in the process of
assisting the EPA in the EPA's nationwide effort "of verifying that changes made
at the country's utilities have not inadvertently triggered a modification under
the Clean Air Act's Prevention of Significant  Determination  ("PSD") policies."
The Company has responded to the NMED information request.

        The nature and cost of the impacts of EPA's  changed  interpretation  of
the  application  of the NSR and NSPS,  together with proposed  changes to these
regulations,  may be significant to the power production industry.  However, the
Company  cannot  quantify  these impacts with regard to its power plants.  It is
also unknown what changes in EPA policy,  if any, may occur in the NSR area as a
result of the change in administrations in Washington. If the EPA should prevail
with its current  interpretation  of the NSR and NSPS rules,  the Company may be
required to make significant  capital  expenditures  which could have a material
adverse effect on the Company's financial position and results of operations.

Santa Fe Generating Station ("Santa Fe Station")

        The Company and the NMED  conducted  investigations  of the gasoline and
chlorinated  solvent  groundwater  contamination  detected beneath the Company's
former  Santa Fe  Station  site to  determine  the  source of the  contamination
pursuant to a 1992 Settlement  Agreement  ("Settlement  Agreement")  between the
Company and the NMED. No source of groundwater  contamination  was identified as
originating from the site.  However, in June 1996, the Company received a letter
from the NMED,  indicating  that the NMED  believed the Company is the source of
gasoline  contamination  in a City of  Santa  Fe  municipal  supply  well and of
groundwater  underlying  the Santa Fe Station  site.  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
regulations.

        In October  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 for certain costs related to sampling,  monitoring  and the  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's


                                       17
<PAGE>

aquifer  characterization  and groundwater  quality  reports  compiled from 1996
through 2000 strongly suggest groundwater contamination has been drawn under the
site by the pumping of the Santa Fe supply well.

       The Company and the NMED,  with the  cooperation of the City of Santa Fe,
jointly  selected  a 3 to 4 year  remediation  plan  proposed  by a  remediation
contractor.  The City of Santa  Fe,  the  Company  and the NMED  entered  into a
memorandum of  understanding  concerning the selected  remediation  plan and the
operation  of the  municipal  well  adjacent  to the  Santa Fe  Station  site in
connection  with  carrying out the plan.  On October 5, 1998, a new system began
operation to treat  groundwater  produced by the Santa Fe well to drinking water
standards  for  municipal   distribution  and   bioremediation   of  groundwater
contamination  beneath the Santa Fe Station site.  Since the reactivation of the
Santa Fe  well,  the  groundwater  treatment  and  bioremediation  systems  have
resulted in a marked  reduction in contaminant  concentrations  at the wellhead.
However, contaminant concentrations at the property boundary remain high.

Person Station

        The Company,  in compliance with a Corrective Action Directive issued by
the  NMED,  determined  that  groundwater  contamination  exists in the deep and
shallow  groundwater  at the  Company's  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
shallow and deep  groundwater  contamination  was  assessed and the results were
reported  to the  NMED.  The  Company  has  received  the  renewal  of the  RCRA
post-closure care permit for the facility.  Remedial actions for the shallow and
deep  groundwater  were  incorporated  into  the new  permit.  The  Company  has
installed and is operating a pump and treat system for the shallow  groundwater.
The  renewed  RCRA  post-closure  care  permit  allows  remediation  of the deep
groundwater  contamination  through natural  attenuation.  The Company's current
estimate to decommission  its retired  fossil-fueled  plants  (discussed  below)
includes  approximately  $4.6  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,
2000, was  approximately  $4.8 million.  The  remediation  program  continues on
schedule.

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  $144.6 million stated in 2000 dollars,  including
approximately  $24.0 million (of which $16.8 million has already been  expended)
for Person, Prager and Santa 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  retail
customers.

                                       18
<PAGE>

ITEM 2. PROPERTIES

                                    ELECTRIC

        The Company's  ownership and capacity in electric generating stations in
commercial service as of December 31, 2000, were as follows:

                                                                  Total Net
                                                                  Generation
                                                                   Capacity
     Type                Name                Location                (MW)
---------------    -----------------  -------------------------  -----------

  Coal...........    SJGS (b)           Waterflow, New Mexico          765
  Coal...........    Four Corners (c)   Fruitland, New Mexico          192
  Gas/Oil........    Reeves             Albuquerque, New Mexico        154
  Gas/Oil........    Las Vegas          Las Vegas, New Mexico           20
  Nuclear........    PVNGS (a)          Wintersburg, Arizona           390 *
                                                                     -----
                                                                     1,521
  PPA**                                                                132
                                                                     -----
                                                                     1,653
                                                                     =====
----------

   *   For load and resource purposes,  the Company has notified the PRC that it
       recognizes the maximum dependable capacity rating for PVNGS to be 381 MW.
   **  The Company  entered into a long term PPA for the rights to all output of
       a new gas fired generating plant with maximum dependable  capacity of 132
       MW.

       (a)  SJGS Units 1, 2 and 3 are 50% owned by the  Company;  SJGS Unit 4 is
            38.5% owned by the Company.
       (b)  Four Corners Units 4 and 5 are 13% owned by the Company.
       (c)  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 approximately  7.9% of Units 1 and 2 and
            an ownership interest in approximately 2.3% of Units 1 and 2.

        The  Company's  owned  interests  in PVNGS are  mortgaged  to secure its
remaining first mortgage bonds.

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 327 MW, 316 MW, 497 MW and 507 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.  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.

        In July  1996,  the  Company  and  other  SJGS  participants  signed  an
agreement to convert the flue gas  desulfurization  (SO2 removal)  system at the
SJGS into a much simpler and cost  effective  limestone  system.  The conversion
project was  completed  in January 1999 and cost the Company  approximately  $35
million.

                                       19
<PAGE>

        In  March  2000,   SJGS   received   ISO14001   certification   for  its
environmental management system by the International Standards Organization.  In
addition,  in December  2000,  SJGS was selected for charter  membership  in the
EPA's national  environmental  achievement track program.  SJGS is the only coal
fired  electric   generation   plant  to  be  recognized  by  this  program  for
environmental excellence.

        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 these leases could require  Congressional
consent.  The Company does not deem the risk with respect to the  enforcement of
these easements and leases 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 COA,
New Mexico, and 20 MW of generation  capacity at Las Vegas Station in Las Vegas,
New Mexico. In addition,  the Company has 132 MW of generation  capacity in COA,
New Mexico under a PPA.  These  stations and PPA are used primarily for peaking,
transmission  support and during times of excess  capacity,  augmentation of the
Company's power trading activities.

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
portions of its interests in Units 1 and 2 held under leases.

Nuclear Safety Performance Rating on PVNGS

        In 2000, the NRC began using a new, objective  oversight process that is
more  focused  on  safety.  The  new  process  includes  objective   performance
thresholds based on insights from safety studies and 30 years of plant operating
experience  in the United  States.  It is more timely,  moving from the 18 to 24
month time lag of the previous oversight process for assessing plant performance
to a quarterly  review.  The NRC also hopes the process will be more  accessible
to, and readily  understood by, the public.  PVNGS has 37 of 38 indicators green
(the best possible) with the remaining indicator being white (the second best of
the four indicator levels).

Steam Generator Tubes

        APS, as the operating agent of PVNGS,  has encountered  tube cracking in
the steam generators and has taken, and will continue to take,  remedial actions
that it believes have slowed the rate of tube degradation. The projected service


                                       20
<PAGE>

life of steam generators is reassessed  periodically and these analyses indicate
that it will be economically desirable to replace the Unit 2 steam generators in
2003. In 1997,  the PVNGS  participants,  including the Company,  entered into a
contract for the fabrication of two replacement steam generators for delivery in
2002.  The cost of the new  steam  generators  was  updated  in late  1999.  The
Company's share of the fabrication and installation  costs will be approximately
$23 million.  In December  1999,  the PVNGS  participants  unanimously  approved
installation of the new steam generators in Unit 2.

       Based on the latest  available  data,  APS estimates  that the Unit 1 and
Unit 3 steam  generators  could operate for the license  periods (until 2025 and
2027,  respectively),  although APS will continue its normal periodic assessment
of these  generators.  The Company expects that some tube degradation will occur
through the  licensed  period.  APS is  reassessing  whether it is  economically
desirable  to replace the steam  generators  in Units 1 and 3. Such  replacement
would require the unanimous approval of the PVNGS participants.

Sale and Leaseback Transactions of PVNGS Units 1 and 2

       In 1985 and 1986,  the Company  entered  into a total of  eleven sale and
lease back  transactions with a owner trust under which  it 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.  The leases
under each of the sale and  leaseback  transactions  have  initial  lease  terms
expiring  January  15,  2015 (with  respect to the Unit 1 leases) or January 15,
2016 (with respect to the Unit 2 leases).  Each of the leases allows the Company
to extend the term of the lease as well as containing 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
through  the  purchase  of an  ownership  interest  in the trust  which held the
leases.  The related  ownership  interests were  subsequently  reacquired by the
Company when the Company's trust ownership was collapsed and the Company assumed
direct  ownership.  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.

       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


                                       21
<PAGE>

Events"  occurring is remote for the following  reasons:  (i) to a large extent,
prevention  of  "Events  of Loss" and some  "Deemed  Loss  Events" is within the
control  of the  PVNGS  participants,  including  the  Company,  and  the  PVNGS
operating  agent,  through the general PVNGS  operational  and safety  oversight
process and (ii) with respect to other "Deemed Loss Events", which would involve
a  significant  change in current law and policy,  the Company is unaware of any
pending  proposals or proposals being  considered for  introduction in Congress,
except as described below under "PVNGS Liability and Insurance Matters",  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. (See Item 3 - "Legal Proceedings - Nuclear  Decommissioning  Trust".)
The nuclear  decommissioning  funding  program is invested in equities and fixed
income  investments in qualified and  non-qualified  trusts.  The results of the
1998 triannual  decommissioning cost study indicated that the Company's share of
the  PVNGS   decommissioning   costs  excluding  spent  fuel  disposal  will  be
approximately $171.3 million (in 2000 dollars).

        The Company  funded an additional  $3.9  million,  $3.1 million and $3.0
million  in  2000,  1999  and  1998,   respectively,   into  the  qualified  and
non-qualified  trust funds.  The estimated market value of the trusts at the end
of 2000 was approximately $55 million.

        The NRC amended its rules on financial  assurance  requirements  for the
decommissioning  of nuclear power plants.  The amended rules became effective on
November 23, 1998.  The NRC has  indicated  that the  amendments  respond to the
potential rate  deregulation in the power  generating  industry and NRC concerns
regarding whether decommissioning funding assurance requirements will need to be
modified.  The amended rules provide that a licensee may use an external sinking
fund as the exclusive  financial  assurance  mechanism if the licensee  recovers
amounts equal to estimated total  decommissioning  costs through cost of service
rates or through a  "non-bypassable  charge".  Other  mechanisms are prescribed,
such as  prepayment,  surety  methods,  insurance and other  guarantees,  if the
requirements  for exclusive  reliance on the external sinking fund mechanism are
not met. The Company  currently relies on the external sinking fund mechanism to
meet the NRC financial  assurance  requirements for its interests in PVNGS Units
1, 2 and 3. The  costs  of PVNGS  Units 1 and 2 are  currently  included  in PRC
jurisdictional  rates,  but the  costs of  PVNGS  Unit 3 are  excluded  from PRC
jurisdictional  rates.  The Company will file a report with the NRC through APS,
the operating agent of PVNGS, in March 2001, concerning  decommissioning funding
assurance, and will continue to use the external sinking fund method as the sole
financial assurance method for Unit 3 (see Item 7. "Management's  Discussion And
Analysis Of Financial  Condition And Results Of  Operations - The  Restructuring
Act and the Formation of a Holding Company - NRC Prefunding").

Nuclear Spent Fuel and Waste Disposal

        Pursuant to the Waste Act, the DOE is obligated to accept and dispose of
all spent  nuclear fuel and other  high-level  radioactive  wastes  generated by
domestic power reactors.  The NRC, pursuant to the Waste Act, requires operators
of nuclear power reactors to enter into spent fuel disposal  contracts 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  facility in operation
by 1998. That facility was to be a permanent  repository.  The 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 has an  obligation  to start  disposing  of spent
nuclear fuel no later than January 31, 1998. By way of letter dated December 17,
1996,  the DOE  informed  the Company and other  contract  holders  that the DOE
anticipates  that it would be unable to begin  acceptance  of nuclear spent fuel


                                       22
<PAGE>

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 the DOE
from  excusing  its own delay on the grounds that the DOE has not yet prepared a
permanent  repository or interim  storage  facility.  On May 5, 1998,  the D. C.
Circuit issued a ruling  refusing to order the DOE to begin moving spent nuclear
fuel. See note 12 of Notes to the  Consolidated  Financial  Statements in Item 8
for a discussion of interim spent fuel storage costs.

        Facility funding is a further complication.  While all nuclear utilities
pay into a so-called  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). The
DOE has stated the fund 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 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.  Construction  of a new
facility for on-site dry storage of spent fuel is underway.  Once this  facility
is completed and approvals are granted,  APS believes that spent fuel storage or
disposal  methods  will be  available  for use by PVNGS to allow  its  continued
operation beyond 2002.

        A new low-level  waste  facility was built in 1995 on site,  which could
store an amount of waste  equivalent to ten years of normal  operation at 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 disposal facility is available.

        The Company believes that scientific and financial aspects of the issues
of  spent  fuel  and  low-level  waste  storage  and  disposal  can be  resolved
satisfactorily.  However,  the Company  also  acknowledges  that their  ultimate
resolution  in a timely  fashion  will require  political  resolve and action on
national  and  regional  scales  which the  Company is unable to predict at this
time.

PVNGS Liability and Insurance Matters

        The PVNGS  participants  have insurance for public  liability  resulting
from nuclear  energy  hazards to the full limit of liability  under Federal law.
This potential  liability is covered by primary liability  insurance provided by
commercial  insurance  carriers in the amount of $200 million and the balance by
an  industry-wide  retrospective  assessment  program.  If losses at any nuclear
power plant covered by the program exceed the primary liability insurance limit,
the Company could be assessed retrospective adjustments.  The maximum assessment
per reactor  under the program for each nuclear  incident is  approximately  $88
million,  subject to an annual  limit of $10 million  per reactor per  incident.
Based upon the Company's 10.2% interest in the three PVNGS units,  the Company's
maximum  potential  assessment per incident for all three units is approximately
$27 million,  with an annual payment limitation of $3 million per incident.  The
insureds under this liability  insurance include the PVNGS participants and "any


                                       23
<PAGE>

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 NRC  announced  that it had  provided a report to  Congress,  making
certain  recommendations,  with  respect to the Federal  law  referred to above,
which provides for payment of public  liability claims in case of a catastrophic
accident involving a nuclear power plant. One of the  recommendations by the NRC
would be that Congress  consider  amending the law to provide that the maximum a
nuclear  utility can be assessed per reactor per incident per year be doubled to
$20 million.  The $88 million maximum  retrospective  assessment per reactor per
incident  would be unchanged  under the NRC proposal.  The NRC also  recommended
that  Congress  investigate  whether  the $200  million now  available  from the
private  insurance  market for liability  claims per reactor can be increased to
keep pace with  inflation.  The Company cannot  predict  whether or not Congress
will act on the NRC's  recommendations.  However,  if  adopted,  certain  of the
recommendations  could possibly trigger "Deemed Loss Events" under the Company's
PVNGS leases, absent waiver by the lessors.

       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 $2.75  billion  as of  January  1,  2001,  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  units if the
outages  exceed 12 weeks.  The insurance  coverage  discussed in this section is
subject to certain policy conditions and exclusions.  The Company is a member of
an industry mutual insurer. This mutual insurer provides both the "all-risk" and
increased cost of generation  insurance to the Company.  In the event of adverse
losses experienced by this insurer, the Company is subject to an assessment. The
Company's  maximum  share of any  assessment is  approximately  $2.3 million per
year.

Other Electric Properties

        As of December  31, 2000,  the Company  owned,  jointly  owned or leased
2,552 circuit miles of electric  transmission lines, 4,205 miles of distribution
overhead lines,  3,389 cable miles of underground  distribution lines (excluding
street lighting) and 210 substations.

       The Company and Tri-State Generation and Transmission  Association,  Inc.
("Tri-State")  entered  into an asset sale  agreement  dated  September 9, 1999,
pursuant to which  Tri-State  agreed to sell the Company certain assets acquired
by  Tri-State's   merger  with  Plains  Electric   Generation  and  Transmission
Cooperative,  Inc., consisting primarily of transmission assets, a fifty percent
interest in an inactive  power plant  located  near  Albuquerque,  and an office
building  in  Albuquerque.  The  purchase  price is $13.2  million,  subject  to
adjustment at the time of closing with the  transaction  to close in two phases.
The asset sale  agreement  contains  standard  covenants and conditions for this
type of  agreement.  On July 1, 2000,  the first  phase was  completed,  and the
Company  acquired the 50 percent  ownership in the inactive  power plant and the
office  building.  The  second  phase  relating  to the  transmission  assets is
expected to close in the first quarter of 2001.


                                       24
<PAGE>

NATURAL GAS

        The natural gas properties as of December 31, 2000,  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  1,464 miles of pipe with  appurtenant  compression
facilities.  The distribution systems consisted of approximately 10,693 miles of
pipe.

                                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.  In November 1999, the Arizona Supreme Court
issued a decision confirming that certain groundwater rights may be available to
the federal  government and Indian tribes. APS and other parties have petitioned
the United  States  Supreme  Court for review of this  decision.  The Company is
unable to predict the outcome of this case.

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 is
expected to adjudicate  water rights used at Four Corners and at SJGS. (See Item
1. "Business - Generation and Trading 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.  The  Company is unable to predict the
ultimate outcome.

                                       25
<PAGE>

Republic Savings Bank Litigation

        In 1992,  Meadows and its  subsidiary RHC filed suit against the Federal
government  in the United  States Court of Claims,  alleging  breach of contract
arising  from the  seizure of RSB, a  wholly-owned  subsidiary  of RHC.  RSB was
seized and  liquidated  after the Financial  Institutions  Reform,  Recovery and
Enforcement Act prohibited certain accounting  practices authorized by contracts
with  the  Federal  government.  The  Federal  government  filed a  counterclaim
alleging  breach by RHC of its  obligation to maintain RSB's net worth and moved
to dismiss Meadows' claims for lack of standing.

        RSB  filed a  motion  for  partial  summary  judgment  on the  issue  of
liability based on the United States Supreme  Court's  decision in United States
v. Winstar  Corporation,  decided in 1996. The Federal  government filed a cross
motion for summary judgment and opposed RSB's motion.  Decision on those motions
is still pending.  The parties completed fact based discovery in 1999. Discovery
of expert witnesses has not been completed.  No trial date has been established.
RSB amended its  summary  judgment  motion in  December  1999,  to seek  summary
judgment on the issue of damages.  The Federal  government opposes RSB's amended
motion.  Oral argument on this motion was conducted in September 2000. The judge
requested additional briefing, which has been submitted. Decision on this motion
is still pending. It is premature to estimate the amount of recovery, if any, by
Meadows and RHC.

Purported Navajo Environmental Regulation

        Four  Corners is located  on the  Navajo  Reservation  and is held under
easement  granted by the  Federal  government  as well as leases from the Navajo
Nation. APS is the operating agent and the Company owns a 13% ownership interest
in Units 4 and 5 of Four Corners.  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"). Pursuant to the Acts, the Navajo Nation Environmental Protection Agency
is authorized to promulgate regulations covering air quality, drinking water and
pesticide  activities,  including  those that occur at Four  Corners.  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
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.  In October
1995, the Navajo Nation and the Four Corners participants agreed to indefinitely
stay the  proceedings  so that the  parties  may  attempt to resolve the dispute
without  litigation,  and the Secretary  and the Court stayed these  proceedings
pursuant to a request by the parties. During the pendency of the stay, APS filed
an additional declaratory judgment action in the Court to challenge implementing
regulations  under the Navajo Nation Air Pollution  Prevention  and Control Act.
The Company is unable to predict the outcome of these matters.

       In February 1998, the EPA issued regulations specifying provisions of the
Clean Air Act for which it is  appropriate  to treat  Indian  tribes in the same
manner as states.  The EPA  indicated  that it  believes  that the Clean Air Act
generally would  supersede  pre-existing  binding  agreements that may limit the


                                       26
<PAGE>

scope of tribal  authority  over  reservations.  APS and the Company  have filed
appeals,  which have been  consolidated,  in the United States  Circuit Court of
Appeals  for the  District  of  Columbia  ("D.  C.  Circuit")  to contest  EPA's
authority  under the  regulations.  The  Navajo  Nation  has  intervened  in the
consolidated appeal. The Navajo Nation is a tribe which could potentially assert
its status as a state under the Act  pursuant to the EPA rule in  question.  The
consolidated appeal involves the Company's interests as operator and joint owner
of the SJGS, as owner of other facilities located on reservations located in New
Mexico, and as joint owner of Four Corners.

       In  February  1999,  the  EPA  issued  regulations  under  which  Federal
operating  permits  for  stationary  sources  in  Indian  country  can be issued
pursuant  to Title V of the Clean Air Act.  The  regulations  rely on  authority
contained in an earlier  rule in which the EPA  outlined  treatment of tribes as
states  under  the  Clean  Air Act.  That  rule is the  subject  of an appeal as
described  above.  APS and the Company have filed appeals,  which have also been
consolidated  in the D. C.  Circuit to  contest  the EPA's  authority  under the
regulations.  The consolidated  appeal also involves the Company's  interests as
operator and as joint owner of the SJGS,  owner of other  facilities  located on
reservations  located  in New  Mexico,  and  joint  owner  of Four  Corners  are
involved. This appeal is pending.

       On July 14, 2000, the DC Circuit issued its opinion denying the Company's
motion  for   rehearing  of  the  decision   denying   claims   concerning   the
interpretation  by EPA of tribal  authority under the Clean Air Act. The Company
has a petition for writ of certiorari  to the United States  Supreme Court filed
by the State of Michigan and other parties.

       The  Company  cannot  predict  the  outcome of these  proceedings  or any
subsequent determinations by the EPA. There can be no assurance that the outcome
of these  matters will not have a material  impact on the results of  operations
and financial position of the Company.

Royalty Claims

Natural Gas Royalties Qui Tam Litigation

        On June 28,  1999,  a  complaint  was  served  on the  Company  alleging
violations  of the  False  Claims  Act  by the  Company  and  its  subsidiaries,
Gathering  Company and Processing  Company  (collectively  called  Company,  for
purposes of this discussion), by purportedly failing to properly measure natural
gas  from  Federal  and  tribal  properties  in New  Mexico,  and  consequently,
underpaid  royalties  owed to the  Federal  government.  A  private  relator  is
pursuing  the  lawsuit.  The  complaint  was  served  after  the  United  States
Department of Justice declined to intervene to pursue the lawsuit. The complaint
seeks actual  damages,  treble damages,  costs and attorneys  fees,  among other
relief.

        This case was  consolidated  with  approximately  70  others,  asserting
similar claims against other defendants in other jurisdictions,  and transferred
to  Federal   District  Court  for  the  District  of  Wyoming  by  the  Federal
Multi-District  Litigation panel (MDL Panel),  recaptioned as In re: Natural Gas
Royalties Qui Tam Litigation,  MDL Docket No. 1293. The Company joined 250 other
defendants in a motion to dismiss the complaint for failure to plead properly in
November 1999. Oral argument on the motion was held on March 17, 2000.  Decision
on the motion is still pending.

        The  Company  is  vigorously  defending  this  lawsuit  and is unable to
estimate the potential liability,  if any, or to predict the ultimate outcome of
this lawsuit.

                                       27
<PAGE>

Quinque Operating Co. et al. v. Gas Pipelines, et al

       A class action  lawsuit  against 233  defendants,  including the Company,
captioned  Quinque  Operating  Co. et al. v. Gas  Pipelines,  et al.,  C.A.  No.
99-CV-30,  was filed in the state district court for Stevens  County,  Kansas by
representatives of classes of gas producers,  royalty owners, overriding royalty
owners and working interest owners, alleging that the defendants, all engaged in
various  aspects  of the  natural  gas  industry,  mismeasured  natural  gas and
underpaid  royalties for gas produced on non-federal and non-tribal  lands.  The
claims for relief are based on Kansas state law,  including a breach of contract
claim. They are factually similar, however, to the allegations of In re: Natural
Gas Royalties Qui Tam Litigation,  described above. The Quinque  complaint seeks
actual damages, treble damages, costs and attorneys fees, among other relief.

       The Quinque case was removed to the United States  District Court for the
District  of Kansas and  transferred  to the United  States  District  Court for
Wyoming  ("Wyoming  Court")  to  consolidate  it  with  the In re:  Natural  Gas
Royalties Qui Tam Litigation. Plaintiffs have filed objections to the motions to
consolidate  and transfer  and have moved to remand the case to state court.  On
January 12, 2001, the Wyoming Court granted Plaintiffs motion to remand the case
back to Kansas  State Court.  Subsequently,  some  defendants  filed a motion to
reconsider  that  decision.  The Wyoming Court has not yet decided the motion to
reconsider.

       The  Company  is  vigorously  defending  this  lawsuit  and is  unable to
estimate the potential liability,  if any, or to predict the ultimate outcome of
this lawsuit.

KAFB Contract

       The  Company  was  informed  that  the DOE  had  entered  into an  agency
agreement  with WAPA on  behalf of KAFB,  one of the  Company's  largest  retail
electric customers,  by which WAPA would  competitively  procure power for KAFB.
The proposed  wholesale  power  procurement  was to begin at the  expiration  of
KAFB's power service contract with the Company in December 1999. On May 4, 1999,
the  Company  received a request  for  network  transmission  service  from WAPA
pursuant to Section 211 of the Federal Power Act to  facilitate  the delivery of
wholesale  power to KAFB over the  Company's  transmission  system.  The Company
denied WAPA's request,  by letter dated June 30, 1999, citing the fact that KAFB
is and will continue to be a retail  customer  until the effective date KAFB can
elect customer choice service under the provisions of the  Restructuring  Act of
1999. The Company also cited several provisions of Federal law that prohibit the
provision of such  service to WAPA.  On September  30,  1999,  DOE/WAPA  filed a
petition at the FERC  requesting  the FERC to consider,  on an expedited  basis,
ordering the Company to provide network  transmission  service to WAPA under the
Company's  Open Access  Transmission  Tariff on behalf of DOE and several  other
entities located on KAFB. The petition  claimed KAFB is a wholesale  customer of
the Company,  not a retail customer.  In a separate but related proceeding,  the
Company and the United States Executive  Agencies on behalf of KAFB are involved
in a PRC case  regarding a dispute over the  specific  Company  tariff  language
under which the Company  provides  retail service to KAFB. The Company agreed to
continue to provide  service to KAFB after  expiration of the contract,  pending
resolution  of all  relevant  issues.  The  Company  has  attempted  to pursue a
negotiated  resolution of the issues regarding the provision of electric service
to KAFB, but has been  unsuccessful.  The Company is currently unable to predict
the ultimate  outcome of these  matters,  and intends to continue to  vigorously
defend its position.

                                       28
<PAGE>

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

       None.


                                       29
<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,
2000, except as otherwise noted:
<TABLE>
<CAPTION>

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

<S>                         <C><C>                                                       <C>
J. E. Sterba............... 45 Chairman, President and Chief Executive
                                  Officer                                                  October 1, 2000
                               President and Chief Executive Officer                          June 6, 2000
                               President                                                     March 1, 2000
                               Executive Vice President, USEC, Inc.                      December 31, 1998
                               Executive Vice President and Chief
                                  Operating Officer (of the Company)                        March 11, 1997
                               Senior Vice President, Bulk Power Services
                                  (of the Company)                                        December 6, 1994

R. J. Flynn................ 58 Executive Vice President, Electric and Gas
                                  Services                                                January 18, 1999
                               Senior Vice President, Electric Services                   December 1, 1994

W. J. Real................. 52 Executive Vice President, Energy Services and
                               Power Production                                           January 18, 1999
                               Senior Vice President, Gas Services                        December 6, 1994
                               Senior Vice President, Utility Operations                   December 7,1993
                               Senior Vice President, Customer Service and
                                  Operations                                                 March 2, 1993
                               Executive Vice President, Gas Operations                      June 19, 1990

B. L. Barsky............... 56 Senior Vice President, Corporate Strategy and
                               Investor Relations                                        February 19, 2000
                               Senior Vice President, Planning and
                                  Investor Services                                        August 10, 1999
                               Senior Vice President and Corporate Secretary              January 18, 1999
                               Vice President, Strategy, Analysis and Investor
                               Relations                                                 December 10, 1996
                               Director, Investor Relations and Financial Analysis           July 19, 1993

M. D. Christensen.......... 52 Senior Vice President, Enterprise Solutions                   March 7, 2000
                               Senior Vice President, Shared Services                      October 1, 1999
                               Senior Vice President, New Mexico Retail Services          November 3, 1997
                               Senior Vice President, Customer Service and
                               Public Affairs                                              January 9, 1996
                               Vice President, Public Affairs                             December 7, 1993
                               Vice President, Communications                                July 22, 1991
</TABLE>

                                       30
<PAGE>

<TABLE>
<CAPTION>

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

<S>                         <C><C>                                                       <C>
M. H. Maerki............... 60 Senior Vice President and Chief Financial Officer          December 7, 1993
                               Senior Vice President, Administration and Chief
                               Financial Officer                                             March 2, 1993
                               Senior Vice President and Chief Financial
                               Officer                                                        June 1, 1988

P. T. Ortiz................ 50 Senior Vice President, General Counsel and Secretary        August 10, 1999
                               Senior Vice President and General Counsel                  January 18, 1999
                               Senior Vice President, Regulatory Policy, General
                               Counsel and Secretary                                      December 7, 1993
                               Senior Vice President, Public Policy, General
                                  Counsel and Secretary                                      March 2, 1993
                               Senior Vice President, General Counsel and
                                  Corporate Secretary                                     February 4, 1992

E. Padilla, Jr............. 47 Senior Vice President, Bulk Power Marketing and
                               Development                                                February 8, 2000
                               Vice President, Bulk Power Marketing and
                               Development                                               December 14, 1996
                               Director, Marketing and Power Contracts                    January 14, 1991

R. B. Ridgeway............. 42 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>

        All  officers  are  elected  annually by the Board of  Directors  of the
Company.


                                       31
<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 2000 and
1999, by quarters, are as follows:
                                                  Range of
                                                Sales Prices
                                             ------------------       Dividends
     Quarter Ended                           High           Low       Per Share
     -------------                           ----           ---       ---------

      2000
         December 31 ....................     28 5/16      20 3/4        $0.20
         September 30 ...................     26 11/25     15 3/8         0.20
         June 30 ........................     18           15 5/16        0.20
         March 31 .......................     16 11/16     14 5/8         0.20
                                                                         -----

           Fiscal Year ..................     28 5/16      14 5/8        $0.80
                                                                         =====
      1999
         December 31 ....................     18 7/8       15 7/16       $0.20
         September 30 ...................     21 1/2       16 3/4         0.20
         June 30 ........................     21 1/8       16 7/8         0.40
         March 31 .......................     20 5/8       14 27/32       0.20
                                                                         -----
           Fiscal Year ..................     21 1/2       14 27/32      $1.00
                                                                         =====

         On December  31,  2000,  the  Company's  Board of  Directors  ("Board")
         declared  a  quarterly  cash  dividend  of 20 cents per share of common
         stock  payable  February  16,  2001,  to  shareholders  of record as of
         February 2, 2001.

       On January 31, 2001, there were 15,654 holders of record of the Company's
common stock.

       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.  In  establishing  its  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 a number of  factors,  including  the  extent to which cash flows will
support  dividends,   the  availability  of  retained  earnings,  the  financial
circumstances  and  performance  of the  Company,  the  PRC's  decisions  on the
Company's various regulatory cases currently pending, the effect of deregulating
generation markets and market economic conditions in general.  In addition,  the
ability to recover stranded costs in  deregulation,  future growth plans and the
related capital  requirements  and standard  business  considerations  will also
affect the Company's ability to pay dividends.


                                       32
<PAGE>

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 the
Company's cumulative preferred stock at the stated rates during 2000 and 1999.

ITEM 6.  SELECTED FINANCIAL DATA

       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.
<TABLE>
<CAPTION>

                                                       2000         1999         1998         1997         1996
                                                    ----------   ----------   ----------   ----------   ----------
                                                              (In thousands except per share amounts and ratios)

<S>                                                 <C>          <C>          <C>          <C>          <C>
Total Operating Revenues..........................  $1,611,274   $1,157,543   $1,092,445   $1,020,521   $  873,778
Earnings from Continuing Operations...............  $  100,946   $   79,614   $   95,119   $   86,497   $   72,969
Net Earnings......................................  $  100,946   $   83,155   $   82,682   $   80,995   $   72,580
Earnings per Common Share:
  Continuing Operations...........................  $     2.54   $     1.93   $     2.27   $     2.05   $     1.73
  Basic...........................................  $     2.54   $     2.01   $     1.97   $     1.92   $     1.72
  Diluted.........................................  $     2.53   $     2.01   $     1.95   $     1.91   $     1.71
Total Assets......................................  $2,894,233   $2,723,268   $2,668,603   $2,407,410   $2,313,334

Long-Term Debt, including Current Maturities......  $  953,823   $  988,489   $1,008,614   $  714,345   $  728,889

Common Stock Data:
  Market price per common share at year end.......  $   26.813   $   16.250   $   20.438   $   23.688   $   19.625
  Book value per common share at year end.........  $    23.64   $    21.79   $    20.63   $    19.26   $    18.06
  Average number of common shares outstanding.....      39,487       41,038       41,774       41,774       41,774
  Cash dividend declared per common share.........  $     0.80   $     1.00   $     0.60   $     0.68   $     0.48
Return on Average Common Equity...................        11.1%         9.5%         9.9%        10.2%         9.8%
Capitalization:
  Common stock equity.............................        48.6%        46.7%        45.4%        52.6%        50.4%
  Preferred stock without mandatory redemption
    Requirements..................................         0.7          0.7          0.7          0.8          0.9
  Long-term debt, less current maturities.........        50.7         52.6         53.9         46.6         48.7
                                                    -----------  -----------  -----------  -----------  -----------
                                                        100.00%       100.0%       100.0%       100.0%       100.0%
                                                    ===========  ===========  ===========  ===========  ===========
</TABLE>


       (See Comparative Operating Statistics which appear immediately following
the  Consolidated  Financial  Statements  for additional  information  regarding
operations.)

         Due to the  discontinuance of the natural gas trading operations of its
Energy Services Business Unit in 1998 (see Note 13 to the Consolidated Financial
Statements),  certain prior year amounts have been  reclassified as discontinued
operations.


                                       33
<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  and  Part  I,  Item 3. - Legal  Proceedings.  Trends  and
contingencies  of a  material  nature  are  discussed  to the  extent  known and
considered relevant.

                                    OVERVIEW

        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 provides energy
and utility  related  product  offerings  through its  wholly-owned  subsidiary,
Avistar. As it currently operates, the Company's principal business segments are
Utility Operations, which include the Electric Product Offering ("Electric") and
the Natural Gas Product Offering ("Gas"),  and Generation and Trading Operations
("Generation and Trading").  The Electric Product Offering consists of two major
business lines that include  distribution  and  transmission.  The  transmission
product  offering  does not meet the  definition  of  a segment  for  accounting
purposes  due to its immateriality,  and for purposes of this discussion,  it is
combined with the distribution product offering.

                               UTILITY OPERATIONS

Electric

        The Company provides  jurisdictional  retail electric service to a large
area of north  central New Mexico,  including  the COA and the City of Santa Fe,
and certain  other areas of New Mexico.  Retail  sale  revenues,  which  include
distribution and  transmission,  were $518.7 million,  $522.5 million and $536.4
million for the year ended December 31, 2000, 1999 and 1998,  respectively,  and
approximately  369,000,  361,000  and  358,000,  respectively,  retail  electric
customers were served by the Company.

        The Company owns or leases 2,781  circuit miles of  transmission  lines,
interconnected  with other  utilities  east into Texas,  west into Arizona,  and
north into Colorado and Utah. Due to rapid load growth in recent years,  most of
the  capacity on this  transmission  system is fully  committed  and there is no
additional access available on a firm commitment basis. These factors,  together
with significant  physical constraints in the system, limit the ability to wheel
power into the Company's service area from outside the state.

Gas

       The Company's Gas operations  distribute natural gas to most of the major
communities  in  New  Mexico,   including  Albuquerque  and  Santa  Fe,  serving
approximately  435,000,  426,000 and 419,000  customers as of December 31, 2000,
1999 and 1998,  respectively.  The  Company's  gas customer  base  includes both
sales-service  customers  and  transportation-service  customers.  Sales-service
customers purchase natural gas and receive  transportation and delivery services
from  the  Company  for  which  the  Company   receives  both   cost-of-gas  and
cost-of-service revenues.  Additionally,  the Company makes occasional gas sales


                                       34
<PAGE>

to  off-system  customers.   Off-system  sales  deliveries  generally  occur  at
interstate     pipeline     interconnects    with    the    Company's    system.
Transportation-service  customers,  who procure gas independently of the Company
and contract with the Company for transportation  and related services,  provide
the Company with cost-of-service revenues only.

       The  Company  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 the Company peak-day demand.

       The following table shows gas throughput by customer class:

                                 GAS THROUGHPUT
                            (Millions of decatherms)

                                                    2000      1999     1998
                                                   ------    ------   ------

       Residential..............................     28.8      32.1     29.3
       Commercial...............................      9.9      10.8     10.1
       Industrial...............................      5.0       2.4      1.5
       Transportation*..........................     44.9      40.2     36.5
       Other....................................      6.4       6.8      8.3
                                                   ------    ------   ------
                                                     95.0      92.3     85.7
                                                   ======    ======   ======

       The following table shows gas revenues by customer:

                                  GAS REVENUES
                             (Thousands of dollars)

                                                   2000     1999       1998
                                                 --------  --------  --------

       Residential.............................. $191,221  $151,954  $160,459
       Commercial...............................   52,959    37,300    42,500
       Industrial...............................   24,208     8,595     4,876
       Transportation*..........................   14,163    12,390    13,464
       Other....................................   37,373    26,472    34,676
                                                 --------  --------  --------
                                                 $319,924  $236,711  $255,975
                                                 ========  ========  ========

       *Customer-owned gas.

                        GENERATION AND TRADING OPERATIONS

       The Company's  Generation  and Trading  Operations  serve four  principal
markets.  Sales to the  Company's  Utility  Operations  to cover  jurisdictional
electric demand 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 third parties for which the
Generation  and  Trading  Operations  commit to  deliver a  specified  amount of
capacity  (measured in megawatts-MW) or energy (measured in megawatt  hours-MWh)


                                       35
<PAGE>

over a given period of time. The fourth market  consists of economy energy sales
made on an hourly basis at fluctuating,  spot-market  rates.  Sales to the third
and fourth markets are sometimes referred to collectively as "off-system" sales.
Off-system sales include the Company's energy trading activities.

       The following table shows sales by customer class:

                     GENERATION AND TRADING SALES BY MARKET
                                (Megawatt hours)

                                                2000        1999        1998
                                             ----------  ----------  ----------

   Intersegment sales.......................  7,088,943   6,803,583   6,739,874
   Firm-requirements wholesale..............    193,853     179,249     278,615
   Other contracted off-system sales........  7,385,266   6,196,499   4,033,931
   Economy energy sales.....................  4,773,009   4,795,873   4,469,769
                                             ----------  ----------  ----------
                                             19,441,071  17,975,204  15,522,189
                                             ==========  ==========  ==========

       The following table shows revenues by customer class:

                    GENERATION AND TRADING REVENUES BY MARKET
                             (Thousands of dollars)

                                                2000        1999        1998
                                             ----------  ----------  ----------

   Intersegment sales......................  $  324,744  $  318,872  $  362,722
   Firm-requirements wholesale.............       6,568       7,046      10,708
   Other contracted off-system sales.......     371,900     226,773     142,115
   Economy energy sales....................     369,724     131,549     122,156
   Other   ................................       2,242       5,741       4,657
                                             ----------  ----------  ----------
                                             $1,075,178  $  689,981  $  642,358
                                             ==========  ==========  ==========

       The Generation and Trading Operations have ownership interest in certain
generating  facilities located in New Mexico,  including the San Juan Generating
Station, a coal fired unit, and the Four Corners Power Plant, a coal fired unit.
In addition,  the Company has ownership  and  leasehold  interests in Palo Verde
Nuclear Generating Station ("PVNGS") located in Arizona. These generation assets
are used to supply retail and wholesale  customers.  The  Generation and Trading
Operations also own Reeves Generating  Station, a gas and oil fired unit and Las
Vegas  Generating  Station,  a gas and oil fired unit,  that are used solely for
reliability  purposes or to generate electricity for the wholesale market during
peak demand periods in the Generation and Trading  Operations'  wholesale  power
markets.

       As of December 31, 2000, the total net generation  capacity of facilities
owned or leased by the Generation  and Trading  Operations was 1,521 MW. On July
13,  2000,  the Company  commenced  a 20 year power  purchase  agreement  for an
additional  132 MW for the  rights to all  output of a new gas fired  generating
plant.  In addition  to its  generation  capacity,  the  Generation  and Trading
Operations purchase power in the open market.


                                       36
<PAGE>


                                     AVISTAR

       The Company's wholly-owned subsidiary, Avistar, was formed in August 1999
as a New Mexico  corporation  and is currently  engaged in certain  unregulated,
non-utility businesses, including energy and utility-related services previously
operated by the Company. The PRC authorized the Company to invest $50 million in
equity in Avistar and to enter into a reciprocal  loan  agreement  for up to $30
million.  The Company has currently invested $35 million in Avistar. In February
2000, Avistar invested $3 million for a 25% ownership  interest in AMDAX.com,  a
start-up  company which  developed a proprietary  auction  platform  designed to
efficiently  bring together  electricity  buyers and sellers in the  deregulated
natural  gas and  electricity  markets.  In the  second  quarter  2000,  Avistar
invested $1 million in Nth Power,  a venture  capital  fund.  In December  2000,
Avistar invested $10 million for a 5% ownership interest in Mainstreet Networks,
an Internet Gateway Service Provider. Together with local utilities,  Mainstreet
Networks plans to provide low-cost  Internet-based  services to homes through an
Internet gateway attached at the customer's electric meter.

              ACQUISITION OF WESTERN RESOURCES ELECTRIC OPERATIONS

       On November 9, 2000 the Company  and Western  Resources,  Inc.  ("Western
Resources")  announced  that both  companies'  boards of  directors  approved an
agreement under which the Company will acquire the Western  Resources'  electric
utility operations in a tax-free, stock-for-stock transaction.

       The new  combined  company  will serve over one million  retail  electric
customers  and 435,000  retail gas  customers  in New Mexico and Kansas and will
have  generating  capacity  of more than 7,000 MW. The  transaction  exceeds the
Company's stated goal of doubling its generation capacity and tripling its power
sales more than three years ahead of schedule.  The  transaction  will also make
the new  company  a  leading  energy  supplier  in the  Western  and  Midwestern
wholesale markets.

       The  transaction  will  provide  the  Company  with  the  opportunity  to
accelerate  its proven growth  strategy by  developing a similar niche  product,
asset-backed  wholesale  power  marketing  strategy  at Western  Resources.  The
Company  expects  this  transaction  to  contribute  significantly  towards  its
targeted 10 percent annual average earnings growth over the next five years. The
strategic nature of the acquisition is based upon  revenue-growth.  As a result,
the Company  expects  modest cost savings  although cost  reduction  will be one
aspect of the  integration  effort.  At present the  Company  does not intend on
significant cost savings associated with involuntary workforce  reductions.  The
new holding company will seek to minimize any workforce  effects through reduced
hiring, attrition, and other appropriate measures. All existing labor agreements
will be honored.

       The transaction is expected to close promptly after all of the conditions
to its consummation are fulfilled,  including the spin off to Western Resources'
shareholders  of  Western  Resources'  non-utility  assets,  approval  from both
companies'  shareholders and customary regulatory approvals.  (See "Other Issues
Facing The  Company -  Acquisition  of Western  Resources  Electric  Operations"
below).

                                       37
<PAGE>

                   RESTRUCTURING THE ELECTRIC UTILITY INDUSTRY

       Introduction  of  competitive  market  forces  and  restructuring  of the
electric  utility  industry in New Mexico  continue to be key issues  facing the
Company.  New Mexico's Electric Utility Industry  Restructuring Act of 1999 (the
"Restructuring  Act"),  which was enacted into law in April 1999, would begin to
open the state's electric power market to customer choice beginning in 2002. The
Restructuring Act would give schools,  residential and small business  customers
the opportunity to choose among  competing power suppliers  beginning in January
2002.  Competition  would be expanded to include all customers  starting in July
2002. Rural electric cooperatives and municipal electric systems have the option
not to participate in the competitive market.

       Under the Restructuring Act, residential and small business customers who
do not select a power  supplier in the open market  would buy their  electricity
through their local utility through  "standard offer service"  whereby the local
distribution  utility would procure power supplies through a process approved by
the PRC. The local  distribution  utility  system and related  services  such as
billing  and  metering  would  continue  to  be  regulated  by  the  PRC,  while
transmission  services and wholesale power sales would remain subject to Federal
regulation.

       The  Restructuring  Act  does  not  require  utilities  to  divest  their
generating plants, but requires certain  deregulated  activities to be separated
from activities  regulated by the PRC through  creation of at least two separate
corporations.

       The  Company  plans to  reorganize  its  operations  by forming a holding
company  structure as a means of achieving the  corporate  and asset  separation
required by the  Restructuring  Act. The  Company's  plan for a holding  company
structure  would  separate  the  Company  into two  subsidiaries.  In June 2000,
shareholders  approved the mandatory  share exchange  necessary to implement the
holding company structure.  If the Company receives all necessary regulatory and
other  approvals,  all  of the  Company's  electric  and  gas  distribution  and
transmission  assets and certain related  liabilities  would be transferred to a
newly created subsidiary  ("Asset  Transfer").  After this asset transfer,  this
subsidiary  will  acquire the name "Public  Service  Company of New Mexico" (for
purposes of this  discussion,  the subsidiary is referred to as "UtilityCo") and
the  corporation  formerly  named Public  Service  Company of New Mexico will be
renamed  Manzano  Energy  Corporation  (for  purposes  of this  discussion,  the
subsidiary  is  referred to as  "PowerCo").  PowerCo  would  continue to own the
Company's   existing   electric   generation  and  certain  other   unregulated,
competitive assets after completion of the transfer of the regulated business to
the newly created utility  subsidiary.  UtilityCo,  PowerCo and Avistar would be
wholly-owned subsidiaries of the proposed holding company.

       For a discussion  on the status of the  formation of the holding  company
and  corporate   separation,   see  "Other  Issues  Facing  The  Company  -  The
Restructuring   Act,  The  Formation  of  the  Holding   Company  and  Corporate
Separation" below.

                              COMPETITIVE STRATEGY

       The restructuring of the electric utility industry is expected to provide
new  opportunities;  however,  the Company  anticipates  that it will experience
downward  pressure on the Company's  utility earnings from their current levels.


                                       38
<PAGE>

The reasons  for the  downward  pressure  include  possible  limits on return on
equity,  disallowance  of some stranded  costs and the potential loss of certain
customers in a competitive environment.

       Under  the  holding  company  structure   proposed  to  comply  with  the
Restructuring   Act,  the  regulated   businesses   (natural  gas  and  electric
transmission  and  distribution)  will be grouped  under a separate  company and
would  focus  on the  core  utility  business  in New  Mexico.  The  unregulated
businesses under the Restructuring Act (power production,  bulk power marketing,
including  energy trading  activities and energy  services)  would  aggressively
pursue efforts to expand energy  marketing and utility  related  businesses into
carefully  targeted  markets in an effort to  increase  shareholder  value.  The
Company believes that successful operations of its proposed unregulated business
activities  under a holding company  structure would better position the Company
in an increasingly competitive utility environment.

       The  Company's   Generation  and  Trading   Operations  have  contributed
significant  earnings  to the Company in recent  years as a result of  increased
off-system sales including its energy trading  activities.  The Company plans to
expand its wholesale  energy trading  functions which could include an expansion
of its generation  portfolio.  The Company  continuously  evaluates its physical
asset acquisition  strategies to ensure an optimal mix of base-load  generation,
peaking  generation and purchased power in its power  portfolio.  In addition to
the  continued  energy  trading  activities,  the Company will further  focus on
opportunities in the market place where excess capacity is disappearing and mid-
to long-term market demands are growing.

       The Company's current business plan includes a 300% increase in sales and
a doubling of its generating capacity through the construction or acquisition of
additional power generation assets in its surrounding  region of operations over
the next five to seven years.  The  proposed  acquisition  of Western  Resources
electric  utility  businesses  announced  on  November  9, 2000,  will allow the
Company to meet this goal well ahead of schedule by adding  approximately  5,600
MW to the Company's  generation  portfolio growth.  The Company will continue to
pursue  growth in its  generation  portfolio  and  intends to spend $400 to $800
million over the next five years to achieve  generation  portfolio growth.  Such
growth will be dependent  upon the Company's  ability to generate  funds for the
Company's   expansion.   There  can  be  no  assurance  that  these  competitive
businesses,  particularly  the  generation  business,  will be successful or, if
unsuccessful, that they will not have a direct or indirect adverse effect on the
Company.

       At the Federal  level,  there have been a number of proposals on electric
restructuring  being considered with no concrete timing for definitive  actions.
None of these  proposals  have  been  acted  upon by  Congress.  Issues  such as
stranded cost recovery,  market power,  utility  regulation  reform, the role of
states, subsidies,  consumer protections and environmental concerns are expected
to be reintroduced if not acted upon in the current  Congressional  session.  In
addition,  the FERC has stated that if Congress mandates electric retail access,
it should  leave the  details of the  program to the states with the FERC having
the  authority to order the  necessary  transmission  access for the delivery of
power for the states' retail access programs.

       Although  it  is  unable  to  predict  the  ultimate  outcome  of  retail
competition  in New Mexico,  the Company has been and will continue to be active
at both the state  and  Federal  levels  in the  public  policy  debates  on the


                                       39
<PAGE>

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  the
importance of reimbursing utilities for past commitments.

                              RESULTS OF OPERATIONS

        The following discussion is based on the financial information presented
in Footnote 1 of the Consolidated  Financial Statements - Nature of Business and
Segment  Information.  The table  below  sets  forth the  operating  results  as
percentages of total operating revenues for each business segment.

<TABLE>
<CAPTION>
                          Year Ended December 31, 2000

                                                      Utility
                                      ----------------------------------------       Generation
                                            Electric               Gas               and Trading
                                      -------------------    -----------------   -------------------

Operating revenues:
<S>                                   <C>           <C>      <C>        <C>      <C>           <C>
  External customers ................ $  538,758    99.87%   $319,924   100.00%  $  750,434    69.80%
  Intersegment revenues .............        707     0.13          --       --      324,744    30.20
                                      ----------   ------    --------   ------   ----------   ------
  Total revenues ....................    539,465   100.00     319,924   100.00    1,075,178   100.00
                                      ----------   ------    --------   ------   ----------   ------
Cost of energy sold .................      5,048     0.94     195,333    61.06      749,499    69.71
Intersegment purchases ..............    324,744    60.20          --       --          707     0.07
                                      ----------   ------    --------   ------   ----------   ------
  Total fuel costs ..................    329,792    61.13     195,333    61.06      750,206    69.78
                                      ----------   ------    --------   ------   ----------   ------
Gross margin ........................    209,673    38.87     124,591    38.94      324,972    30.22
                                      ----------   ------    --------   ------   ----------   ------
Administrative and other costs ......     43,874     8.13      43,241    13.52       30,009     2.79
Energy production costs .............      1,208     0.22       1,485     0.46      137,201    12.76
Depreciation and amortization .......     32,410     6.01      19,994     6.25       40,628     3.78
Transmission and distribution costs .     33,091     6.13      27,206     8.50           25       --
Taxes other than income taxes .......     14,210     2.63       8,716     2.72       11,430     1.06
Income taxes ........................     28,053     5.20       5,349     1.67       25,320     2.35
                                      ----------   ------    --------   ------   ----------   ------
  Total non-fuel operating expenses..    152,846    28.33     105,991    33.13      244,613    22.75
                                      ----------   ------    --------   ------   ----------   ------
Operating income .................... $   56,827    10.53%   $ 18,600     5.81%  $   80,359     7.47%
                                      ----------   ------    --------   ------   ----------   ------

</TABLE>

                                       40
<PAGE>

<TABLE>
<CAPTION>
                          Year Ended December 31, 1999

                                                      Utility
                                      --------------------------------------       Generation
                                            Electric              Gas              and Trading
                                      -------------------  -----------------   ------------------

Operating revenues:
<S>                                   <C>         <C>      <C>        <C>      <C>        <C>
  External customers................. $ 540,868    99.87%  $ 236,711  100.00%  $ 371,109   53.79%
  Intersegment revenues..............       707     0.13          --      --     318,872   46.21
                                      ---------   -------  ---------  -------  ---------  -------
  Total revenues.....................   541,575   100.00     236,711  100.00     689,981  100.00
                                      ---------   -------  ---------  -------  ---------  -------
Cost of energy sold..................     4,493     0.83     112,925   47.71     414,534   60.08
Intersegment purchases...............   318,872    58.88          --      --         707    0.10
                                      ---------   -------  ---------  -------  ---------  -------
  Total fuel costs...................   323,365    59.71     112,925   47.71     415,241   60.18
                                      ---------   -------  ---------  -------  ---------  -------
Gross margin.........................   218,210    40.29     123,786   52.29     274,740   39.82
                                      ---------   -------  ---------  -------  ---------  -------
Administrative and other costs.......    52,586     9.71      49,716   21.00      26,791    3.88
Energy production costs..............     2,632     0.49       1,504    0.64     132,787   19.25
Depreciation and amortization........    31,113     5.74      19,210    8.12      40,253    5.83
Transmission and distribution costs..    31,013     5.73      28,227   11.92          23      --
Taxes other than income taxes........    19,014     3.51       6,915    2.92       9,006    1.31
Income taxes.........................    24,082     4.45       2,112    0.89       7,319    1.06
                                      ---------   -------  ---------  -------  ---------  -------
  Total non-fuel operating expenses..   160,440    29.62     107,684   45.49     216,179   31.33
                                      ---------   -------  ---------  -------  ---------  -------
Operating income..................... $  57,770    10.67%   $ 16,102    6.80%  $  58,561    8.49%
                                      ---------   -------  ---------  -------  ---------  -------
</TABLE>

<TABLE>
<CAPTION>
                          Year Ended December 31, 1998

                                                      Utility
                                      --------------------------------------       Generation
                                            Electric              Gas              and Trading
                                      -------------------  -----------------   ------------------

Operating revenues:
<S>                                   <C>          <C>      <C>        <C>      <C>         <C>
  External customers.................  $ 555,568    99.87%  $ 255,975  100.00%  $ 279,636    43.53%
  Intersegment revenues..............        707     0.13          --      --     362,722    56.47
                                       ---------  -------   ---------  -------  ---------  -------
  Total revenues.....................    556,275   100.00     255,975   100.00    642,358   100.00
                                       ---------  --------  ---------  -------  ---------  -------
Cost of energy sold..................      4,572     0.82     134,755    52.64    305,525    47.56
Intersegment purchases...............    362,722    65.21          --       --        707     0.11
                                       ---------  --------  ---------  -------  ---------  -------
  Total fuel costs...................    367,294    66.03     134,755    52.64    306,232    47.67
                                       ---------  -------   ---------  -------  ---------  -------
Gross Margin.........................    188,981    33.97     121,220    47.36    336,126    52.33
                                       ---------  -------   ---------  -------  ---------  -------
Administrative and other costs.......     44,632     8.02      46,941    18.34     25,739     4.01
Energy production costs..............        846     0.15         233     0.09    148,667    23.14
Depreciation and amortization........     30,586     5.50      14,961     5.84     37,114     5.78
Transmission and distribution costs..     31,985     5.75      24,341     9.51        130     0.02
Taxes other than income taxes........     20,592     3.70       7,007     2.74      9,752     1.52
Income taxes.........................     19,954     3.59       8,685     3.39     23,262     3.62
                                       ---------  -------   ---------  -------  ---------  -------
  Total non-fuel operating expenses..    148,595    26.71     102,168    39.91    244,664    38.09
                                       ---------  -------   ---------  -------  ---------  -------
Operating income.....................  $  40,386     7.26%  $  19,052     7.44% $  91,462    14.24%
                                       ---------  -------   ---------  -------  ---------  -------

</TABLE>


                                       41
<PAGE>


      Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

UTILITY OPERATIONS

       Electric - Operating  revenues  declined $2.1 million (0.4%) for the year
to $539.5 million due to the  implementation in late July 1999 of the rate order
lowering  rates by $22.2  million  year-over-year.  This was  mostly  offset  by
increased retail electricity delivery of 7.1 million MWh compared to 6.8 million
MWh  delivered  in the prior year period,  a 4.2%  improvement  which  increased
revenues $21.8 million  year-over-year.  This increased volume was the result of
weather-related consumption and load growth.

        The gross  margin,  or  operating  revenues  minus cost of energy  sold,
decreased $8.5 million  reflecting a decrease in gross margin as a percentage of
revenues of 1.4%. This decline reflects the rate reduction  discussed above, and
an increase in  intersegment  transfer  pricing.  The Company's  Generation  and
Trading Operations  exclusively  provide power to the Company's Electric Product
Offering.  Intersegment  purchases for the Generation and Trading Operations are
priced using internally  developed  transfer pricing and are not based on market
rates.  Customer  rates  for  electric  service  are set by the PRC based on the
recovery  of the cost of power  production  and a rate of return  that  includes
certain  generation  assets that are part of Generation and Trading  Operations,
among other things.

       Administrative  and general costs decreased  $8.7 million (16.6%) for the
year. This decrease is due to non-recurring  Year 2000 ("Y2K")  compliance costs
and  non-recurring  costs  related to the  Company's  implementation  of its new
customer  billing  system  in  1999.  In  addition,  in 1999,  as a result  of a
significant  increase  in  delinquent  accounts  due  to  system  implementation
problems,  the Company incurred  additional bad debt costs of $5.5 million above
its normal  experience rate. Bad debt expense in 2000 was $4.9 million,  a 29.9%
decline  for the year (see  "Implementation  of New  Billing  System"  below for
additional  discussion).  As a percentage of revenues,  administrative and other
costs decreased to 8.1% from 9.7% for the year ended December 31, 2000 and 1999,
respectively, primarily as a result of reduced costs.

       Energy  production  costs  decreased  $1.4  million  (54.1%) for the year
primarily due to non-recurring  Y2K compliance costs in 2000. As a percentage of
revenues, energy production costs decreased from 0.5% to 0.2%.

       Depreciation and amortization increased $1.3 million (4.2%) for the year.
The  increase is due to the impact of  amortizing  the costs of the new customer
billing system,  which has a five-year  amortization  life, and depreciating the
expansion of the electric distribution system.  Depreciation and amortization as
a percentage of revenues increased from 5.7% to 6.0%.

       Transmission and distribution costs increased $2.1 million (6.7%) for the
year primarily due to increased scheduled  maintenance of transmission lines and
the  addition  of station  related  equipment  for  reliability  purposes.  This
increase  in  scheduled  maintenance  is  expected  to  continue  in 2001.  As a
percentage of revenues,  transmission and distribution costs increased from 5.7%
to 6.1%.

        Taxes other than income  decreased $4.8 million  (25.3%) due to a change
in the  recognition of electric  franchise fees collected from customers and due
to  municipalities,  partially offset by the impact of the implementation of the
new customer  billing  system on the collection of certain taxes and an increase


                                       42
<PAGE>

in expected tax  liabilities.  Franchise  fees were a part of the Company's rate
structure in the prior year. In the current year,  they have been unbundled from
the rate structure.  As a result,  the Company is now a collection agent for the
municipalities taxes and does not incur expense or generate revenues as a result
of  collecting  the fees.  Taxes other than income as a  percentage  of revenues
decreased to 2.6% from 3.5%.

       Gas - Operating  revenues increased $83.2 million (35.2%) for the year to
$319.9 million. This increase was driven by a 31.3% increase in the average rate
charges per  decatherm  due to high gas prices in the later  months of 2000 as a
result  of  increased  market  demand,  a 3.0%  volume  increase  and a gas rate
increase which became  effective  October 30, 2000.  Residential  and commercial
customers  volume  decreased 10.5% due to  unseasonably  warm weather during the
early part of 2000.  Customer  volume,  other than  residential  and commercial,
increased  14.9%.  This  growth  was  primarily  attributed  to  industrial  and
transportation customers such as the Company's Generation and Trading Operations
whose  increased  demand was driven by the strong  power  market in the  Western
United States. Such growth is unlikely to recur in 2001.

       The gross  margin,  or  operating  revenues  minus  cost of energy  sold,
increased  $0.8  million  (0.7%).  This  increase is due to higher  distribution
volumes  on which the  Company  earns  cost of  service  revenues.  The  Company
purchases  natural  gas in  the  open  market  and  resells  it at  cost  to its
distribution  customers.  As a  result,  the  increase  in  gas  prices  driving
increased cost of sales revenues does not have an impact on the Company's  gross
margin or earnings. In addition,  the rate increase partially contributed to the
increase in gross margin.

       Administrative  and general costs  decreased $6.5 million  (13.0%).  This
decrease is mainly due to non-recurring Y2K compliance  costs,  customer billing
system costs and lower  associated bad debt costs.  The Electric and Gas Product
Offerings  share  the  same  billing  system,   and  the  Gas  Product  Offering
experienced  the same  delinquency  problems  discussed  above in the  "Electric
Product  Offering"  results  of  operations.  As a result in 1999,  the  Company
incurred  additional bad debt costs of $2.7 million above its normal  experience
rate.  However,  bad debt expense did not  significantly  decline in 2000 as the
Company increased its bad debt costs by approximately $2 million in anticipation
of a higher than normal  delinquency  rate  driven by the  significantly  higher
natural gas prices  experienced  in November  and December  2000.  This trend is
similar to historic collection trends associated with past gas price spikes.

       Depreciation and amortization increased $0.8 million (4.1%) for the year.
The  increase  is due to the impact of  amortizing  the costs of a new  customer
billing system and depreciating the expansion of the gas transmission system.

       Transmission  and  distribution   costs  decreased  $1.0  million  (3.6%)
primarily due to non-recurring Y2K compliance costs.

       Taxes other than income  increased $1.8 million (25.5%)  primarily due to
higher tax liabilities and the impact of the  implementation of the new customer
billing system on the collection of certain taxes.


                                       43
<PAGE>

GENERATION AND TRADING OPERATIONS

       Operating  revenues  grew  $385.2  million  (55.8%) for the year to $1.08
billion.  This increase in wholesale  electricity sales reflects strong regional
wholesale  electric  prices caused by a warm summer,  limited  power  generation
capacity,  increasing  natural gas prices and the power supply  imbalance in the
Western  United  States.  These factors  contributed to unusually high wholesale
prices which the Company does not believe to be  sustainable  in the  long-term,
but continue to effect  markets in 2001. In addition,  these factors have led to
an extremely volatile wholesale electric power market with significant risk (see
Other Issues Facing the Company - Western United States Wholesale Power Market).
The Company delivered  wholesale (bulk) power of 12.4 million MWh of electricity
this period  compared to 11.2 million MWh  delivered  last year,  an increase of
10.6%. The MWh increase is attributable to increased trading activity during the
year.  Wholesale  revenues  from  third-party  customers  increased  from $371.1
million to $750.4  million,  a 102.2%  increase.  The increase was largely price
driven.

       The gross  margin,  or  operating  revenues  minus  cost of energy  sold,
increased $50.2 million  (18.3%).  Higher margins were partially  offset by $8.5
million  of  losses  associated  with the  Company's  assessment  of risk in the
wholesale  market (see Other Issues  Facing The Company - Western  United States
Wholesale  Power Market) and  unrealized  mark-to-market  losses of $4.8 million
which the Company  recognized  relating to its power trading contracts (see Note
(5) of the  Notes  to  Consolidated  Financial  Statements).  These  items  were
recorded  as revenue  adjustments.  Gross  margin as a  percentage  of  revenues
decreased from 39.8% to 30.2%  reflecting  higher fuel and purchased power costs
due to higher wholesale sales volumes and scheduled outages at the Company's San
Juan  Generating  Station and Four Corners Plant.  The Company  expects  similar
planned outages in 2001.

       Administrative  and general costs increased  $3.2 million (12.0%) for the
year.  This  increase is due to a one-time  charge of $4.5 million in connection
with the acquisition of a new,  long-term  wholesale  customer (see Note (11) of
the Notes to  Consolidated  Financial  Statements)  and an  increase in bad debt
costs,  partially  offset by lower legal costs  related to a lawsuit  settlement
involving the Company's decommissioning trust (which was settled in August 2000;
see  Consolidated  Results  of  Operations  discussion)  and  non-recurring  Y2K
compliance  costs. As a percentage of revenues,  administrative  and other costs
decreased  to 2.8%  from 3.9% for the year  ended  December  31,  2000 and 1999,
respectively as a result of increased revenues.

       Energy production costs increased $4.4 million (3.3%) for the year. These
costs are generation  related.  The increase is due to higher  maintenance costs
resulting  from  scheduled  outages at San Juan Unit 3 and Four  Corners Unit 4,
which  were  partially  offset  by lower  PVNGS  employee  costs as a result  of
additional  employee  incentive and retiree  healthcare  costs in the prior year
that did not  recur  in 2000  and  additional  PVNGS  billings  in 1999 for 1998
expenses  as a result of an audit by the  station  owners.  As a  percentage  of
revenues, energy production costs decreased from 19.3% to 12.8%. The decrease is
primarily due to a significant increase in energy sales.

       Taxes other than income  increased $2.4 million (26.9%) due to higher tax
liabilities.  Taxes other than  income as a  percentage  of  revenues  decreased
slightly from 1.3% to at 1.1% as a result of the increase in energy sales.


                                       44
<PAGE>

UNREGULATED BUSINESSES

       Avistar  contributed  $2.2 million in revenues  for the year  compared to
$8.9 million in the comparable  prior year period due to lower business  volumes
resulting from slow  developing  markets  associated  with Avistar's new product
offerings. Operating losses for Avistar increased from $4.4 million in the prior
year to $6.6 million in the current year.

CONSOLIDATED

       Corporate  administrative  and general costs,  which represent costs that
are driven exclusively by corporate-level activities, increased $8.0 million for
the year.  This increase was due to  additional  administrative  and  consulting
expenses for  strategic  initiatives,  higher  legal costs and  reorganizational
costs  incurred in  anticipation  of  separating  utility  operations  under the
Restructuring Act.

       Other income and deductions, net of taxes, increased $4.2 million for the
year to $34.4 million due to gains, $13.2 million before income taxes related to
the  settlement  of a lawsuit  (see "Other  Issues  Facing the Company - Nuclear
Decommissioning  Trust") and $4.6 million  before  income  taxes  related to the
resolution  of two gas rate cases (see  "Other  Issues  Facing The Company - Gas
Rate Orders").  The current year also had increased  mark-to-market gains on the
corporate hedge (see "Note 5 to the Consolidated Financial  Statements").  These
increases  were  partially  offset by $6.7 million  before income taxes of costs
related to the Company's  proposed  acquisition of Western  Resources'  electric
utility  assets.  The Company expects to continue to incur  acquisition  related
costs in 2001 and  beyond.  While  these  costs were  deductible  for income tax
purposes in 2000,  a  significant  portion of these  future costs may not be tax
deductible.  In addition,  other income and deductions included a valuation loss
recognized  for  Avistar's  AMDAX.com  investment,  and expenses  related to the
transfer  of the  operation  of the  City of  Santa  Fe's  water  system  to the
municipality. In 1999, other income and deductions included gains, net of taxes,
of $4.2 million of equity income from a passive investment and $1.2 million from
closing down certain coal mine reclamation activities in an inactive subsidiary.

       Net  interest  charges  decreased  $4.7  million  for the period to $65.9
million  primarily  as a result of the  retirement  of $31.6  million  of senior
unsecured notes in June and August 1999 and $32.8 million in January 2000.

       The Company's  consolidated  income tax  expense,  before the  cumulative
effect of an accounting change, was $74.3 million,  an increase of $32.0 million
for the  year.  The  Company's  2000  income  tax  effective  rate,  before  the
cumulative effect of the accounting change, was 42.4%. Included in the Company's
2000 income tax expense is the  write-off  of $6.6 million of income tax related
regulatory  assets.  These  assets  relate to  pre-1981  electric  utility  rate
adjustments  for certain tax benefits.  The  write-off of these assets  reflects
management's view of the probable  financial outcome of utility  deregulation in
New Mexico, based on existing  circumstances.  Excluding the write-off of income
tax related regulatory  assets, the Company's  effective tax rate was 38.7%. The
Company's  1999  effective  tax rate was  34.7%.  The  increase  in the rate was
primarily  due to the  favorable  tax  treatment  received  on the  1999  equity
earnings discussed above.
                                       45
<PAGE>

       The Company's net earnings from continuing  operations for the year ended
December 31, 2000 were $100.9  million,  a 26.8%  increase.  These  results were
impacted by certain  special items  comprised of gains from the  settlement of a
lawsuit and the favorable  resolution of two gas rate cases and charges  related
to the  impairment  of certain  regulatory  assets,  the  acquisition  of a  new
long-term  wholesale customer and the proposed  acquisition of Western Resources
("2000 Special  Items").  The Company's net earnings  excluding the 2000 Special
Items were $102.6  million.  Net earnings  for the year ended  December 31, 1999
included  certain special items comprised of gains related to equity income from
a passive  investment and mine closure  activities and bad debt costs associated
with system  implementation  problems ("1999 Special Items").  Net earnings from
continuing  operations  excluding the 1999 and 2000 Special Items increased from
$78.5 million in 1999 to $102.6 million in 2000.

       Earnings per share from  continuing  operations  excluding the cumulative
effect of the  accounting  change on a diluted basis were $2.58  (excluding  the
2000  Special  Items) for the year ended  December  31,  2000  compared to $1.91
(excluding the 1999 Special Items) for the year ended December 31, 1999. Diluted
weighted  average shares  outstanding were 39.7 million and 41.1 million in 2000
and 1999,  respectively.  The  decrease  reflects  the common  stock  repurchase
program in 1999 and 2000.  Net  earnings  per share from  continuing  operations
primarily  increased due to expansion of the Company's  wholesale energy trading
activities and the common stock repurchase program.

      Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

UTILITY OPERATIONS

        Electric - Operating  revenues  decreased  $14.8 million  (2.6%) for the
year to $541.6 million  primarily due to the  implementation of a new rate order
in late July 1999 (which lowered rates by $18 million year over year).  The rate
reduction  was  partially  offset by an increase in volume.  Retail  electricity
delivery was 6.8 million MWh compared to 6.7 million MWh delivered  last year, a
1.5%  improvement.  Sales  volume  growth  was  negatively  impacted  by  cooler
temperatures during the summer months.

       The gross  margin,  or  operating  revenues  minus  cost of energy  sold,
increased  $29.2  million  (15.5%)  reflecting  an increase in gross margin as a
percentage  of  revenues  of  6.3%.   This  increase   reflects  a  decrease  in
intersegment  transfer prices,  partially offset by the rate reduction discussed
above. The Company's Generation and Trading Operations exclusively provide power
to the  Company's  Electric  Product  Offering.  Intersegment  purchases for the
Generation and Trading Operations are priced using internally developed transfer
pricing and are not based on market rates.

        Administrative  and general costs increased $8.0 million (17.8%) for the
year.  This  increase is due to Y2K  compliance  costs and costs  related to the
Company's  implementation of its new customer billing system.  In addition,  the
Company incurred incremental bad debt costs throughout 1999 of $5.5 million as a
result  of  a  significant   increase  in  delinquent  accounts  due  to  system
implementation  problems (see  "Implementation  of New Billing System" below for
additional discussion). As a percentage of revenues,  administrative and general
costs increased from 8.0% to 9.7%.

                                       46
<PAGE>

       Energy production costs increased $1.8 million for the year primarily due
to Y2K compliance costs in 1999. As a percentage of revenues,  energy production
costs increased from 0.2% to 0.5%.

       Depreciation and amortization increased $0.5 million (1.7%) for the year.
The  increase  is due to the impact of the new  customer  billing  system.  As a
result of this, the Company  revised its  depreciation  rates as required by the
PRC.  Depreciation and  amortization as a percentage of revenues  increased from
5.5% to 5.7% largely reflecting the decrease in energy sales.

       Transmission and distribution costs decreased $1.0 million (3.0%) for the
year. This was primarily the result of lower maintenance costs due to the milder
weather.  As a  percentage  of revenues,  transmission  and  distribution  costs
remained  relatively  constant at 5.7% and 5.8% for the years ended December 31,
1999 and 1998, respectively.

       Gas - Operating  revenues  declined  $19.3 million (7.5%) for the year to
$236.7  million.  This decline was driven by a 13.8% decline in the average rate
charges per decatherm due to weak gas prices and a mild winter.  Price  declines
were partially offset by a 7.7% volume  improvement,  as  transportation  volume
posted double-digit growth of 10.3%.

       The gross margin, or operating  revenues minus cost of energy,  increased
$2.6 million  (2.1%).  This increase is due to changes in access fee options and
increased volume sales.

       Administrative  and general increased $2.8 million (5.9%).  This increase
is  mainly  due to Y2K  compliance  costs  and costs  related  to the  Company's
implementation  of its new customer  billing  system.  In addition,  the Company
incurred higher bad debt costs throughout 1999 of $2.7 million, as a result of a
significant  increase  in  delinquent  accounts  due  to  system  implementation
problems  (see  "Implementation  of New  Billing  System"  below for  additional
discussion).

       Depreciation  and  amortization  increased  $4.2 million  (28.4%) for the
year. The increase is due to the impact of the new customer billing system. As a
result of the addition,  the Company revised its depreciation  rates as required
by the PRC.

       Transmission and distribution expenses increased $3.9 million (16.0%) for
the year. The increase is primarily due to Y2K compliance costs.

GENERATION AND TRADING OPERATIONS

        Operating  revenues  grew  $47.6  million  (7.4%) for the year to $690.0
million due to an improvement in wholesale electricity sales volume. The Company
delivered  wholesale  (bulk) power of 11.2 million MWh of electricity  this year
compared to 8.8 million MWh delivered  last year, an increase of 27.2%.  Revenue
growth was negatively  impacted by cooler  temperatures in the southwest  during
the summer months and the  availability  of abundant hydro power that negatively
impacted market prices in the Western United States.

       The gross margin, or operating  revenues minus cost of energy,  decreased
$61.4 million  reflecting a decrease in gross margin as a percentage of revenues
of 23.9%.  This  decline  reflects  higher fuel and  purchased  power costs as a
result of increased sales and higher prices.

                                       47
<PAGE>

       Administrative  and general costs  increased  $1.1 million (4.1%) for the
year.  This  increase  is due to Y2K  compliance  costs and higher  legal  costs
related  to a lawsuit  involving  the  Company's  decommissioning  trust.  These
increases were offset by an additional  allocation of costs for 1998 and 1999 to
the participants in the  jointly-owned  SJGS following an audit by the owners of
the station.  As a  percentage  of revenues,  administrative  and general  costs
decreased from 4.0% to 3.9% primarily due to the increase in sales.

       Energy  production  costs  decreased  $15.9 million (10.7%) for the year.
These costs are  generation  related.  The decrease is primarily  due to reduced
nuclear fuel storage  costs at PVNGS.  In 1998,  the Company  incurred  costs of
$12.1  million  for  spent  nuclear  fuel at  PVNGS  as it was  determined  that
alternatives to the DOE storage and disposal  facilities  would be necessary due
to the DOE's  failure to complete  such  facilities  by 1998 as required by law.
These costs  represent  the cost of storage for spent fuel  through  1998.  As a
percentage of revenues,  energy  production costs decreased from 23.1% to 19.3%.
The decrease is due to cost control and the decreased nuclear fuel storage costs
and the increase in sales.

       Depreciation and amortization increased $3.1 million (8.5%) for the year.
The  increase is due to pollution  control  improvements  at certain  generation
plants. As a result of the additions, the Company revised its depreciation rates
as  required  by the PRC.  Depreciation  and  amortization  as a  percentage  of
revenues  remained  constant at 5.8% reflecting an increase in expense offset by
the increase in energy sales.

UNREGULATED BUSINESSES

       Avistar  contributed  $8.9  million in revenues in 1999  compared to $1.3
million in 1998.  Operating loss for the unregulated  businesses  decreased from
$5.9 million in 1998 to $4.4 million in 1999 reflecting their expanded operating
activities.

CONSOLIDATED

       Corporate  administrative and general costs remained  relatively constant
at $12.7 million for the year.

       Other income and deductions, net of taxes, increased $7.5 million for the
year to $30.2  million due to the  recording  of interest  income from the PVNGS
Capital Trust. In addition,  other income included certain one-time net gains in
1999 and 1998.  In 1999,  the Company  recognized  $4.2 million of equity income
from a passive investment and a gain of $1.2 million as a result of closing down
of coal mining reclamation  activities in an inactive  subsidiary.  In 1998, the
Company  recognized  $1.3 million in a lawsuit  settlement and $1.5 million from
the reversal of a gas rate case reserve.

        Net  interest  charges  increased  $7.5  million  for the  year to $70.7
million as a result of the issuance of $435 million in senior unsecured notes in
August 1998, which replaced first mortgage bonds with a lower interest rate, and
the  issuance of pollution  control  revenue  bonds of $11.5  million in October
1999.  This was  partially  offset by the  retirement of $31.6 million of senior
unsecured  notes in June and  August  1999 and a  decrease  in  short-term  debt
interest charges due to lower short-term borrowings in 1999.

                                       48
<PAGE>

       The  Company's  consolidated  income tax expense,  before the  cumulative
effect of accounting change and discontinued  operations,  was $42.3 million,  a
decrease of $14.0 million for the year. The Company's income tax effective rate,
before the cumulative effect of accounting  change and discontinued  operations,
decreased  from 37.2% to 34.7%.  This decrease is primarily due to the favorable
tax treatment  received on the equity income  discussed  above.  The  investment
income qualifies for the 80% dividends received deduction under Internal Revenue
Service regulations.

       The Company's net earnings from continuing  operations for the year ended
December 31, 1999,  were $78.5 million,  excluding the one-time gains related to
equity  income from a passive  investment  and mine closure  activities  and the
one-time  charge for bad debt  associated  with system  implementation  problems
("1999 Special Items") compared to $99.0 million,  excluding  one-time gains for
proceeds  from a  litigation  settlement  and the  reversal  of a gas rate  case
reserve and the  one-time  charge for spent  nuclear  fuel costs at PVNGS ("1998
Special Items") for the year ended December 31, 1998.

        Earnings  per  share  from  continuing  operations  on a  diluted  basis
excluding the cumulative  effect of the accounting  change were $1.91 (excluding
the 1999 Special  Items) for the year ended  December 31, 2000 compared to $2.35
(excluding the 1998 Special Items) for the year ended December 31, 1998. Diluted
weighted  average shares  outstanding were 41.1 million and 42.1 million in 1999
and 1998,  respectively.  The  decrease  reflects  the common  stock  repurchase
program in 1999. The 1999 results were negatively  impacted by the electric rate
reduction in the third quarter, increased fuel and purchased power costs, a weak
gas market and cooler weather in the West during the summer months. In addition,
Y2K  compliance  and the  implementation  of the  new  customer  billing  system
increased costs. This impact was partially offset by the gains recorded in other
income.

       Discontinued  Operations - In August 1998, the Company  adopted a plan to
discontinue the natural gas trading  operations of its Energy Services  Business
Unit and completely  discontinued  these operations on December 31, 1998. Losses
from  discontinued  operations,  net of taxes,  for the year ended  December 31,
1998, were $12.4 million,  or $0.30 per common share. These losses did not recur
in 1999.

        Cumulative  Effect  of a Change  in  Accounting  Principle  -  Effective
January 1, 1999,  the Company  adopted Energy Issues Task Force Issue No. 98-10.
The effect of the  initial  application  of the new  standard  is  reported as a
cumulative effect of a change in accounting principle.  As a result, the Company
recorded  additional  earnings,  net of taxes, of approximately $3.5 million, or
$0.08 per common share,  to recognize the gain on net open physical  electricity
purchase and sales commitments considered to be trading activities.

                               FUTURE EXPECTATIONS

       On January 27,  2001,  the Company  announced  that it expected  its 2001
earnings  to be  within  the  range of $2.60 to $2.70 per  diluted  share.  This
estimate is based on the Company's strong results in 2000, and management's view
of  developments  in the wholesale  power  marketplace in the beginning of 2001.
Management  believes that the strong  wholesale power market  experienced in the
third and fourth  quarters of 2000 will  continue into the first two quarters of
2001, while the third and fourth quarters of 2001 are not expected to experience


                                       49
<PAGE>

the demand that drove wholesale power prices in the comparable quarters in 2000;
therefore,  management's  expectation is that the third and fourth quarters' net
earnings may be lower than in 2000.  The  Company's  wholesale  power  marketing
operations  are  expected  to  continue  to expand in 2001.  Accordingly,  these
earnings expectations factor in the anticipated continued volatility seen in the
wholesale  marketplace in 2000,  and  appropriate  allowances  have been made in
these  estimates for this market risk,  similar in nature to the $8.5 million of
losses recognized for market risk in 2000.

       Management's  expectations  for 2001  assume  retail  sales  growth  will
continue  at  rates  comparable  to what  was  experienced  in 2000 and the full
realization of the favorable outcome of the two gas rate cases settled in August
of 2000. Expenses are expected to increase due to inflation,  growth initiatives
and regulatory filing costs.  These earnings  estimates do not include any costs
related to the Company's  acquisition of the electric  utility assets of Western
Resources  which  are  expected  to be  approximately  $10 to $15  million.  The
significant  capital  additions  in 2000 are  expected  to result  in  increased
depreciation  and  amortization  expense  in  2000.  In  addition,   because  of
initiatives  undertaken  in 2000,  it is  expected  that  reduced  losses in the
non-regulated businesses will contribute to net earnings.

        This discussion of future  expectations  is forward looking  information
within the  meaning of Section  21E of the  Securities  and  Exchange  Act.  The
achievement of expected  results is dependent upon the assumptions  described in
the  preceding  discussion,  and is  qualified  in its  entirety  by the Private
Securities Litigation Reform Act of 1995 disclosure - (see "Disclosure Regarding
Forward  Looking  Statements"  below) - and the  factors  described  within  the
disclosure which could cause the Company's  actual  financial  results to differ
materially from the expected results enumerated above.

                         LIQUIDITY AND CAPITAL RESOURCES

        At December 31, 2000, the Company had working  capital of $147.8 million
including  cash and cash  equivalents of $107.7  million.  This is a decrease in
working capital of $19.3 million from December 31, 1999. This decrease primarily
reflects the Company's increased activity in the wholesale power market.

        Cash generated from operating activities was $239.5 million, an increase
of $26.5 million from 1999.  This increase was primarily the result of increased
profitability  including  the favorable  settlement  of a lawsuit.  In addition,
accounts payable increased due to increased  wholesale power purchases driven by
the  Company's  expansion of its  wholesale  power  marketing  operations.  This
increase  was  partially  offset by an  increase in the  Company's  receivables.
Unrecovered  purchased  gas  adjustments  and accounts  receivable  from utility
customers  increased  as a result of higher gas prices.  In  addition,  accounts
receivable increased as a result of increased wholesale electricity sales.

                                       50
<PAGE>

        Cash used for investing  activities  was $157.5 million in 2000 compared
to $55.9 million in 1999. This increased spending reflects $13.3 million related
to the  acquisition of transmission  assets (see  "Acquisition of Certain Assets
and Related  Agreements"  below),  combustion  turbine option  payments of $13.0
million,  the expansion of the electric  distribution  system at a cost of $13.7
million and the gas  transmission  and  distribution  systems at a cost of $10.1
million to serve new load and for  reliability  purposes,  an  investment  in an
internet  gateway service  provider of $10.0 million and additional  funding and
realized  gains in the  decommissioning  trust of $9.3  million.  Cash  used for
investing  activities  in 2000 includes the $6.7 million of costs related to the
acquisition of Western Resources  electric utility assets. In addition,  in 1999
the  Company  liquidated  certain  insurance-based  investments  in the  nuclear
decommissioning trust of $26.6 million.

       Cash used for financing  activities was $94.7 million in 2000 compared to
$98.0 million in 1999.  This decrease  reflects $26.6 million of loan repayments
associated  with nuclear  decommissioning  trust  activities in 1999,  partially
offset by the issuance of $11.5 million of 6.60% Pollution Control Revenue Bonds
in 1999 and increased common stock  repurchases in 2000 (see "Stock  Repurchase"
below).

Capital Requirements

       Total capital requirements  include construction  expenditures as well as
other major capital requirements and cash dividend  requirements for both common
and preferred  stock.  The main focus of the Company's  construction  program is
upgrading  generation  systems,  upgrading  and  expanding  the electric and gas
transmission and distribution  systems and purchasing nuclear fuel. In addition,
the  Company  anticipates  significant  expenditures  to expand  its  generation
capabilities.  Projections  for  total  capital  requirements  and  construction
expenditures  for 2001 are $353  million and $347  million,  respectively.  Such
projections for the years 2001 through 2005 are $1.45 billion and $1.42 billion,
respectively.  These  estimates  are under  continuing  review  and  subject  to
on-going adjustment (see "Competitive Strategy" above).

       The Company's  construction  expenditures  for 2000 were entirely  funded
through cash generated from operations.  The Company currently  anticipates that
internal  cash  generation  and current debt capacity will be sufficient to meet
capital  requirements for the years 2001 through 2005, except as provided for in
its proposed plan to separate  pursuant to the  Restructuring Act (see "Proposed
Holding Company Plan" below).  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.



                                       51
<PAGE>

Liquidity

       At February 1, 2001, the Company had $175 million of available  liquidity
arrangements,  consisting  of $150  million  from a senior  unsecured  revolving
credit facility ("Credit  Facility"),  and $25 million in local lines of credit.
The  Credit  Facility  will  expire in March  2003.  There  were no  outstanding
borrowings as of February 1, 2001.

       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.

       In connection with the Company's announcement of its proposed acquisition
of Western Resources' electric utility  operations,  Standard and Poors ("S&P"),
Moody's  Investor  Services  ("Moody's") and Fitch IBCA, Duff & Phelps ("Fitch")
have placed the Company's  securities  ratings on negative  credit watch pending
review  of  the  transaction.  The  Company  is  committed  to  maintaining  its
investment  grade. S&P has rated the Company's senior unsecured debt and its EIP
senior secured debt "BBB-" and its preferred  stock "BB".  Moody's has rated the
Company's senior unsecured notes and senior unsecured  pollution control revenue
bonds "Baa3"; and preferred stock "ba1". The EIP lease obligation bonds are also
rated  "Ba1".  Fitch  rates the  Company's  senior  unsecured  notes and  senior
unsecured  pollution  control  revenue  bonds  "BBB-," the  Company's  EIP lease
obligation  "BB+"  and  the  Company's  preferred  stock  "BB-."  Investors  are
cautioned that a security  rating is not a  recommendation  to buy, sell or hold
securities,  that it may be subject to revision or withdrawal at any time by the
assigning  rating  organization,  and  that  each  rating  should  be  evaluated
independently of any other rating.

       In  addition  to  the  impact  of the  proposed  acquisition  of  Western
Resources' electric utility operations,  future rating actions for the Company's
securities  will  depend in large  part on the  actions of the PRC  relating  to
numerous restructuring issues, including the Company's proposed plan to separate
the utility  into a  generation  business and a  distribution  and  transmission
business as required by the  Restructuring  Act ("Proposed  Plan").  The Company
believes,  based on its  Proposed  Plan (see  "Proposed  Holding  Company  Plan"
below),  that  UtilityCo and PowerCo will both receive  investment  grade credit
ratings,  however,  such ratings will be contingent  upon many factors that have
yet to be  determined.  Fitch  announced  publicly  that  assuming  the  Company
implements its Proposed Plan, it would expect to issue  investment grade ratings
for  UtilityCo,  and PowerCo's  rating would "border  investment  grade".  Fitch
cautioned  that ratings for UtilityCo and PowerCo were highly  conditional  upon
reaching assumptions provided by the Company.

       Covenants in the Company's Palo Verde Nuclear  Generating Station Units 1
and 2 lease agreements limit the Company's ability, without consent of the owner
participants  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 Credit  Facility  imposes
similar restrictions regardless of credit ratings.

                                       52
<PAGE>

Financing Activities

       In January 2000, the Company  reacquired $34.7 million of its 7.5% senior
unsecured notes through open market purchases at a cost of $32.8 million.

       The Company currently has no requirements for long-term financings during
the  period  of 2001  through  2004, except  as part of its  Proposed  Plan (see
"Proposed Holding Company Plan" below). However, during this period, the Company
could  enter into  long-term  financings  for the purpose of  strengthening  its
balance  sheet and  reducing  its cost of  capital.  The  Company  continues  to
evaluate its  investment and debt  retirement  options to optimize its financing
strategy and earnings  potential.  No  additional  first  mortgage  bonds may be
issued under the  Company's  mortgage.  The amount of SUNs that may be issued is
not limited by the SUNs  indenture.  However,  debt to capital  requirements  in
certain of the Company's  financial  instruments  would ultimately  restrict the
Company's ability to issue SUNs.

Proposed Holding Company Plan

       On April 18, 2000, the Company filed as an exhibit on Form 8-K, unaudited
pro forma financial  statements of PowerCo and UtilityCo that give effect to the
Company's  Proposed  Plan.  The structure of the Proposed Plan  presented in the
April 18, 2000 Form 8-K was subsequently revised in October 2000 by the Company.
This  revised  Proposed  Plan  results in a capital  structure  for the  holding
company,  PowerCo and UtilityCo similar to the presentation in the Form 8-K. The
revised  Proposed Plan is subject to regulatory  and other  approvals as well as
market, economic and business conditions. As such, the revised Proposed Plan may
be  subject  to  significant  changes  before  implementation  and the pro forma
financial  statements  as filed in the Form 8-K may require  revision to reflect
the final plan of separation pursuant to the Restructuring Act.

       The revised Proposed Plan assumes that the separation  required under the
Restructuring  Act will be  accomplished  as follows:  PowerCo will transfer its
regulated assets to a wholly owned subsidiary, UtilityCo, in exchange for common
stock,  UtilityCo  preferred  stock,  UtilityCo senior unsecured notes and cash.
UtilityCo will also assume  certain  liabilities  associated  with the regulated
assets.  PowerCo will then dividend the common stock of UtilityCo to the holding
company.

       The  current  holders  of  PowerCo's  public  SUNs  will be  offered  the
opportunity  to exchange their  approximately  $368 million of existing SUNs for
$368 million of SUNs issued by  UtilityCo  with like terms and  conditions.  The
current holders of PowerCo's  preferred stock will be offered the opportunity to
exchange  their  approximately  $12.8  million of preferred  stock for preferred
stock issued by UtilityCo with like terms and conditions.

       Although there are other  alternatives  to finance the acquisition of the
regulated  assets from PowerCo,  based on current market,  economic and business
conditions,  the Company  currently  believes  that the  foregoing  transactions
represent the most advantageous way to effect the Asset Transfer.  However,  the
structure of the revised  Proposed  Plan is subject to change as the  regulatory
approval process  continues and is ultimately  resolved.  Implementation  of the
Proposed Plan in 2001 is dependent on the outcome of certain pending legislation
which if enacted, would delay restructuring for five more years.

                                       53
<PAGE>

       A condition precedent to corporate separation is the obtaining of written
consents  from PVNGS  lessors.  As of December 31, 2000,  two lessors had signed
consents,  one lessor has agreed in principle to the terms of the signed consent
but had not signed,  and two lessors had not agreed to those  terms.  The signed
consents have various financial covenants which limit PowerCo's ability to sell,
transfer  or convey its assets  assuming  certain  coverage  ratios are not met.
Additionally,  the consents require the holding company to guarantee the leases.
The  consents  and the  covenants  will not  become  effective  until  corporate
separation occurs.

Stock Repurchase

       In March  1999,  the  Company's  board of  directors  approved  a plan to
repurchase up to 1,587,000 shares of the Company's outstanding common stock with
maximum  purchase  price of $19.00 per share.  In December  1999,  the Company's
board of directors  authorized  the Company to  repurchase  up to an  additional
$20.0  million of the  Company's  common  stock.  As of December 31,  1999,  the
Company repurchased 1,070,700 shares of its previously  outstanding common stock
at a cost of $18.8  million.  From January 2, 2000 through  March 31, 2000,  the
Company  repurchased an additional  1,167,684  shares of its outstanding  common
stock at a cost of  $18.9  million.  The  Company  has  repurchased  all  shares
authorized in March 1999 and December 1999 by the Board of Directors.

       On August 8, 2000,  the Company's  Board of Directors  approved a plan to
repurchase  up to $35 million of the  Company's  common stock through the end of
the first quarter of 2001. From August 8, 2000 through December 31, 2000 Company
repurchased an additional  417,900 shares of its  outstanding  common stock at a
cost of $9.0 million.  As of February 1, 2001,  the Company does not  anticipate
continuing its repurchase plan given the share price of its common stock.

Acquisition of Certain Assets and Related Agreements

       The Company and Tri-State Generation and Transmission  Association,  Inc.
("Tri-State")  entered  into an asset sale  agreement  dated  September 9, 1999,
pursuant to which  Tri-State  has agreed to sell to the Company  certain  assets
acquired by Tri-State as the result of Tri-State's  merger with Plains  Electric
Generation and Transmission Cooperative, Inc. ("Plains") consisting primarily of
transmission assets, a fifty percent interest in an inactive power plant located
near  Albuquerque,  and an office  building.  The purchase  price was originally
$13.2  million,  subject  to  adjustment  at  the  time  of  closing,  with  the
transaction  to close in two  phases.  On July 1,  2000,  the  first  phase  was
completed,  and the Company  acquired  the 50 percent  ownership in the inactive
power  plant  and  the  office  building.  The  second  phase  relating  to  the
transmission assets is expected to close in the first quarter 2001.

       In addition,  on July 1, 2000,  the Company  advanced  $11.8 million to a
former  Plains  cooperative  member as part of an  agreement  for the Company to
become the  cooperative's  power  supplier.  Approximately  $4.5 million of this
advance  represents  an  inducement  for  entering  into a 10 year  power  sales
agreement. Accordingly, the Company expensed this amount in the third quarter as
a business  development  cost. The remaining $7.5 million will be repaid over 10
years. If the cooperative terminates the contract early, the whole $11.8 million
advance must be repaid to the Company.

                                       54
<PAGE>

Dividends

        The Company's board of directors  reviews the Company's  dividend policy
on a continuing  basis.  The declaration of common dividends is dependent upon a
number  of  factors  including  the  extent to which  cash  flows  will  support
dividends,  the availability of retained earnings,  the financial  circumstances
and  performance of the Company,  the PRC's  decisions on the Company's  various
regulatory  cases  currently  pending,  the  effect of  deregulating  generation
markets and market economic conditions. The ability to recover stranded costs in
deregulation,  future  growth  plans and the related  capital  requirements  and
standard business  considerations  will also affect the Company's ability to pay
dividends.   In  addition,   following   the   separation  as  required  by  the
Restructuring  Act, the ability of the proposed holding company to pay dividends
will depend  initially on the dividends and other  distributions  that UtilityCo
and PowerCo pay to the holding company.

Capital Structure

        The Company's capitalization,  including current maturities of long-term
debt, at December 31 is shown below:
                                                       2000        1999
                                                       ----        ----

         Common Equity............................      48.6%      46.7%
         Preferred Stock..........................       0.7        0.7
         Long-term Debt...........................      50.7       52.6
                                                       -----      -----
            Total Capitalization*.................     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 which
           was $162  million  as of  December  31,  2000 and $165  million as of
           December 31, 1999.

                                       55
<PAGE>
                         OTHER ISSUES FACING THE COMPANY

             THE RESTRUCTURING ACT, THE FORMATION OF HOLDING COMPANY
                            AND CORPORATE SEPARATION

       The Company has filed its  transition  plan with the PRC  pursuant to the
Restructuring  Act in three parts. In November 1999, the Company filed the first
two  parts of the  transition  plan  with  the PRC.  Part  one,  which  has been
approved,  requested  approval to create  Manzano and UtilityCo as  wholly-owned
shell  subsidiaries  of the Company.  Part two of the Company's  transition plan
requested all PRC approvals necessary for the Company to implement the formation
of the holding company  structure,  the share exchange and the separation  plan.
Part Two is  awaiting a  recommended  decision by the  hearing  examiner.  Under
existing deadlines, the Company must separate its assets no later than August 1,
2001. The Company's  management  believes that  implementation of the separation
plan will not occur  prior to August 1,  2001,  and there is no  assurance  that
implementation  of the separation plan will occur by that time. On May 31, 2000,
the  Company  filed with the PRC part three of the  transition  plan  requesting
approval for the recovery of stranded costs and other expenses  associated  with
the  transition  to  a  competitive   market,   UtilityCo's   rates  for  retail
distribution  services,  the  procurement  of  "standard  offer  service"  power
supplies  for  customers  who do not select a power  supplier  and other  issues
required to be considered under the Restructuring  Act. The Hearing Examiner has
tentatively  scheduled hearings on Part three to begin on June 6, 2001. Hearings
are expected to last four to six weeks.

       On August 17, 2000,  the PRC staff and other parties filed a Joint Motion
to Defer  Commission  Decision on Separation of Generation  Assets and to extend
the Standard Offer Update Deadline.  The Joint Motion requested that the PRC not
allow separation to occur until after the 2001 legislative  session to allow the
legislature  to determine if any  amendments to the  Restructuring  Act might be
necessary in light of the high prices  experienced last year in California.  The
2001  legislative  session  began January 16 and ends March 17. On September 11,
2000,  the Company  filed its  response to the Joint  Motion,  pointing  out key
differences  between New Mexico's  Restructuring Act and California's as well as
differing  circumstances  between the two states. On September 26, 2000, the PRC
conducted  a  workshop  where  numerous  interested  parties  commented  on  the
California  experience and its relevance to New Mexico. To date, the PRC has not
formally acted on the Joint Motion.

       The New Mexico Legislature is currently  considering  various legislative
initiatives that could delay open access and activities under the  Restructuring
Act, including corporate separation. Legislators are concerned by the turmoil in
the California  retail energy market.  On February 14, 2001, Senate Bill 266, as
amended,   passed  the  Senate   39-0.   The  bill  delays   implementation   of
restructuring,  including corporate separation, by an additional five years. The
PRC  would  have  the   authority  to  delay  for  another  year  under  certain
circumstances.  The  amended  bill  would  require  the PRC to approve a holding
company,  without asset  separation,  by July 1, 2001. In addition,  the amended
bill  allows  utilities  to  engage in  unregulated  power  generation  business
activities  until  corporate   separation  is  implemented.   The  cost  of  new
unregulated utility generation resources will serve as a cap on the price of new
resources needed to serve retail  customers until  restructuring is implemented.


                                       56
<PAGE>

Although the amended bill passed the Senate  unanimously,  the Company is unable
to predict if it will pass the House of Representatives and in what form, and if
passed by the  House,  if it will be signed by the  Governor.  If enacted in its
current  form,  Senate  Bill 266  will  provide  the  Company  with  significant
flexibility to pursue its growth strategy, despite the delay in restructuring.

       The Company had been in discussions  with the PRC staff and other parties
in an attempt to arrive at a settlement  agreement  which addresses the concerns
of the parties and allows separation to continue without  significant delay. The
discussions have not continued pending  conclusion of the New Mexico Legislative
session in mid March,  2001.  However,  if  Restructuring  is not delayed by the
Legislature, it is likely the discussions will be revived. The potential outcome
of any future  discussions  may be different  from the plan the Company filed on
May  31,  2000  and  could  potentially  affect  the  realizability  of  certain
regulatory  assets recorded by the Company (See "Other Issues Facing the Company
- The Restructuring Act and Formation of the Holding Company - Stranded Costs").

       In addition to the PRC's  approval,  completion  of corporate  separation
will require a number of regulatory  approvals by, among others,  the Securities
and Exchange Commission. Approvals from the Federal Energy Regulatory Commission
and the  Nuclear  Regulatory  Commission  have  been  obtained.  In  June  2000,
shareholders  approved  the share  exchange;  however,  completion  of corporate
separation will also require certain other consents.  Completion may also entail
significant  restructuring  activities  with respect to the  Company's  existing
liquidity arrangements and the Company's publicly-held senior unsecured notes of
which $368 million were  outstanding as of December 31, 2000. Under the Proposed
Plan,  holders of the Company's senior unsecured notes, $100 million at 7.5% and
$268.4  million at 7.1%,  will be offered  the  opportunity  to  exchange  their
securities  for like senior  unsecured  notes to be issued by the newly  created
regulated business (see "Liquidity and Capital Resources - Financing  Activities
and Proposed Holding Company Plan" above).

Stranded Costs

       The  Restructuring  Act  recognizes  that  electric  utilities  should be
permitted a reasonable opportunity to recover an appropriate amount of the costs
previously incurred in providing electric service to their customers  ("stranded
costs").  Stranded costs represent all costs associated with  generation-related
assets,  currently in rates, in excess of the expected  competitive market price
over  the  life  of  those  assets  and  include  plant  decommissioning  costs,
regulatory assets, and lease and lease-related costs.  Utilities will be allowed
to recover no less than 50% of stranded costs through a non-bypassable charge on
all customer bills for five years after  implementation of customer choice.  The
PRC could authorize a utility to recover up to 100% of its stranded costs if the
PRC finds that recovery of more than 50%: (i) is in the public interest; (ii) is
necessary to maintain the financial  integrity of the public  utility;  (iii) is
necessary to continue adequate and reliable service;  and (iv) will not cause an
increase  in rates  to  residential  or  small  business  customers  during  the
transition period. The Restructuring Act also allows for the recovery of nuclear
decommissioning  costs by means of a separate  wires charge over the life of the
underlying generation assets (see "NRC Prefunding" below).

                                       57
<PAGE>

        The  calculation  of  stranded  costs is  subject  to a number of highly
sensitive assumptions,  including the date of open access,  appropriate discount
rates and projected  market prices,  among others.  On May 31, 2000, the Company
filed with the PRC its  proposal to recover its  stranded  costs.  These  costs,
excluding  nuclear  decommissioning  costs,  total a  present  value  of  $691.6
million.  In  addition,  stranded  costs  associated  with  decommissioning  the
Company's  portion of the Palo Verde nuclear  plant total an additional  present
value of $44.4 million. This amount considers the effect of expected earnings on
the Company's qualified nuclear decommissioning trusts.

       Approximately  $141  million  of costs  associated  with the  unregulated
businesses under the  Restructuring  Act were established as regulatory  assets.
Because of the  Company's  belief that  recovery is probable,  these  regulatory
assets continue to be classified as regulatory assets,  although the Company has
discontinued Statement of Financial Accounting Standards No. 71, "Accounting for
the Effects of Certain Types of Regulation"  (SFAS 71) and adopted  Statement of
Financial Accounting Standards No. 101, "Regulated  Enterprises--Accounting  for
the  Discontinuance  of  Application of FASB Statement 71." In 2000, the Company
expensed $6.6 million of these assets based on management's view of the probable
financial outcome of restructuring in New Mexico upon existing circumstances. If
discussions with the PRC staff and other parties result in a settlement in which
the amount the Company  recovers for  stranded  costs is less than the amount it
has  recorded on the balance  sheet as  regulatory  assets,  the Company will be
required to write-off the difference between its recovery of these costs and the
amount it has currently recorded.  Likewise,  if a delay in corporate separation
occurs,  the  Company may be  required  to  write-off  all or a portion of these
assets due to the uncertainty of recovery resulting from enactment of the delay.
However, Senate Bill 266, as amended,  establishes certain regulatory provisions
affecting  these costs,  which if enacted  along with the delay,  will allow the
Company  to  recover  mine  reclamation  costs  (see Note 2 to the  Consolidated
Financial Statements).

       The Company  believes  that the  Restructuring  Act if  properly  applied
provides an opportunity  for recovery of a reasonable  amount of stranded costs.
If regulatory  orders do not provide for a reasonable  recovery,  the Company is
prepared  to  vigorously  pursue  judicial  remedies.  Final  determination  and
quantification  of  stranded  cost  recovery  has not been made by the PRC.  The
determination  will have an impact on the  recoverability  of the related assets
and may have a material effect on the future  financial  results and position of
the Company.

Transition Cost Recovery

       In addition,  the  Restructuring  Act authorizes  utilities to recover in
full any prudent and reasonable costs incurred in implementing  full open access
("transition  costs").  These  transition  costs are  currently  scheduled to be
recovered  through 2007 by means of a separate wires charge.  The PRC may extend
this  date by up to one year.  The  Company  is still  evaluating  its  expected
transition  costs and has not made a final  determination  of those  costs.  The
Company, however, currently estimates that these costs will be approximately $46
million,  including  allowances for certain costs which are  non-deductible  for
income tax  purposes.  To date,  the Company has  capitalized  $19.1  million of
expenditures that meet the Restructuring Act's definition of  transition-related
costs.  Transition  costs for  which the  Company  will  seek  recovery  include
professional fees, financing costs, consents relating to the transfer of assets,
management  information  system  changes  including  billing  system changes and


                                       58
<PAGE>

public and customer education and communications.  Recoverable  transition costs
are currently  being  capitalized and will be amortized over the recovery period
to match related  revenues.  The Company  intends to vigorously  pursue remedies
available to it should the PRC disallow recovery of reasonable transition costs.
Costs not  recoverable  will be expensed  when  incurred  unless these costs are
otherwise permitted to be capitalized under current and future accounting rules.
If the amount of  non-recoverable  transition  costs is material,  the resulting
charge to earnings may have a material  effect on the future  financial  results
and position of the Company.

NRC Prefunding

       Pursuant  to NRC  rules  on  financial  assurance  requirements  for  the
decommissioning  of nuclear power plants,  the Company has a program for funding
its share of  decommissioning  costs for PVNGS through a sinking fund  mechanism
(see "PVNGS  Decommissioning  Funding").  The NRC rules on  financial  assurance
became effective on November 23, 1998. The amended rules provide that a licensee
may use an external sinking fund as the exclusive  financial assurance mechanism
if the licensee recovers estimated decommissioning costs through cost of service
rates or a  "non-bypassable  charge".  Other mechanisms are prescribed,  such as
prepayment,  surety methods,  insurance and other guarantees, to the extent that
the requirements for exclusive reliance on the fund mechanism are not met.

       The Restructuring Act allows for the  recoverability of 50% up to 100% of
stranded costs including nuclear  decommissioning  costs (see "Stranded Costs").
The Restructuring Act specifically  identifies nuclear  decommissioning costs as
eligible for separate  recovery over a longer period of time than other stranded
costs if the PRC  determines a separate  recovery  mechanism to be in the public
interest. In addition, the Restructuring Act states that it is not requiring the
PRC to issue any order which would result in loss of  eligibility to exclusively
use external sinking fund methods for  decommissioning  obligations  pursuant to
Federal  regulations.  If the Company is unable to meet the  requirements of the
NRC rules permitting the use of an external sinking fund because it is unable to
recover all of its  estimated  decommissioning  costs  through a  non-bypassable
charge,  the Company may have to pre-fund or find a similarly  capital intensive
means to meet the NRC rules.  There can be no assurance  that such an event will
not negatively affect the funding of the Company's growth plans.

       In  addition,  as part of the  determination  and  quantification  of the
stranded costs related to the decommissioning,  the Company estimated its future
decommissioning  costs.  If the  Company's  estimate  proves to be less than the
actual  costs of  decommissioning,  any cost in  excess  of the  amount  allowed
through  stranded cost recovery may not be  recoverable.  Such excess costs,  if
any, will also be subject to the pre-funding requirements discussed above.


                                       59
<PAGE>

Competition

       Under current law, the Company is not in direct retail  competition  with
any other  regulated  electric  and gas  utility.  Nevertheless,  the Company is
subject to varying degrees of competition in certain territories  adjacent to or
within areas it serves that are also currently  served by other utilities in its
region as well as cooperatives,  municipalities,  electric districts and similar
types of government organizations.

       As a result of the  Restructuring  Act, the Company may face  competition
from  companies  with greater  financial  and other  resources.  There can be no
assurance  that the Company will not face  competition  in the future that would
adversely affect its results.

       It is the current intention to have the Company's unregulated  businesses
under the Restructuring  Act engage primarily in energy-related  businesses that
will not be  regulated  by state or Federal  agencies  that  currently  regulate
public utilities (other than the FERC and NRC).  These  competitive  businesses,
including the generation business,  will encounter competition and other factors
not previously  experienced by the Company, and may have different,  and perhaps
greater,  investment  risks than those  involved in the regulated  business that
will be engaged in by UtilityCo.  Specifically, the passage of the Restructuring
Act and deregulation in the electric  utility  industry  generally are likely to
have an impact on the price and margins for electric  generation  and thus,  the
return  on  the  investment  in  electric  generation  assets.  In  response  to
competition and the need to gain economies of scale,  electricity producers will
need to control costs to maintain margins, profitability and cash flow that will
be adequate to support  investments in new technology  and  infrastructure.  The
Company will have to compete directly with independent power producers,  many of
whom will be larger in scale,  thus creating a  competitive  advantage for those
producers due to scale efficiencies.

       The New Mexico  Legislature  is currently  considering  legislation  that
could  delay  open  access and other  activities  under the  Restructuring  Act,
including corporate  separation.  A delay without providing business flexibility
could  have a  negative  effect  on the  Company's  ability  to  compete  in the
wholesale power market. Under the current regulatory  environment in New Mexico,
the Company is unable to achieve the necessary business  flexibility it requires
to take  advantage  of business  opportunities  to execute its growth  strategy.
There can be no  assurance  that the  Company  can  successfully  compete in the
wholesale  power  marketplace  and  continue to execute  its growth  strategy if
implementation  of the  Restructuring  Act is rolled  back.  Senate Bill 266, as
originally  introduced,  simply delayed  restructuring for five years.  However,
during the course of committee  hearings and floor debate,  the bill was amended
so as to provide  significant  business  flexibility  to  utilities  despite the
delay. As amended,  Senate Bill 266 passed the Senate 39-0 and is now pending in
the House of Representatives.

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<PAGE>

              ACQUISITION OF WESTERN RESOURCES ELECTRIC OPERATIONS

       Under the terms of an agreement and plan of restructuring and merger, the
Company and Western  Resources,  whose utility  operations consist of its Kansas
Power and Light  division  and Kansas  Gas and  Electric  subsidiary,  will both
become subsidiaries of a new holding company to be named at a future date. Prior
to  and as a  condition  to,  the  consummation  of  this  combination,  Western
Resources will reorganize all of its non-utility assets, including its 85% stake
in Protection One and its 45% investment in ONEOK,  into Westar Industries which
will be spun off to Western Resources'  shareholders prior to the acquisition of
Western's utility assets by the Company.

       The new holding  company will issue 55 million of its shares,  subject to
adjustment,  to Western  Resources'  shareholders  and Westar  Industries and 39
million shares to the Company's  shareholders.  Before any adjustments,  the new
company  will  have  approximately  94  million  shares  outstanding,  of  which
approximately  41% will be owned by former Company  shareholders and 59% will be
owned by former Western Resources shareholders and Westar Industries.

       Based on the Company's average closing price over the last ten days prior
to the  announcement  of the  transaction  of $27.325 per share,  the  indicated
equity  consideration  of the  transaction  is  approximately  $1.5 billion.  In
addition,  approximately $2.9 billion of existing Western Resources debt will be
retained,  giving the transaction an aggregate enterprise value of approximately
$4.4 billion. The new company will undertake to refinance and reduce the debt on
Western  Resources'  books. The new holding company will have a total enterprise
value of  approximately  $6.5 billion ($2.6  billion in equity;  $3.9 billion in
debt and preferred stock).

       The  transaction  will be accounted for as a reverse  acquisition  by the
Company as the former Western  Resources  shareholders will receive the majority
of the voting  interests in the new holding  company.  For accounting  purposes,
Western Resources will be treated as the acquiring entity.  Accordingly,  all of
the assets and  liabilities of the Company will be recorded at fair value in the
business  combination  as  required by the  purchase  method of  accounting.  In
addition,  the  operations of the Company will be reflected in the operations of
the combined company only from the date of acquisition.

       In the transaction, each Company share will be exchanged on a one-for-one
basis  for  shares in the new  holding  company.  The  portion  of each  Western
Resources  share not converted into Westar stock in connection with the spin-off
will be  exchanged  for a  fraction  of a share of the new  holding  company  in
accordance  with an exchange ratio to be finalized at closing,  depending on the
impact of certain adjustments to the transaction consideration.  Under the terms
of the agreement,  Western  Resources and Westar  Industries  have been given an
incentive to reduce Western Resources net debt balance prior to the consummation
of the transaction. The agreement contains a mechanism to adjust the transaction
consideration  based on additional equity  contributions.  Under this mechanism,
Western Resources could undertake  certain  activities not affecting its utility
operations  to reduce the net debt  balance of the  utility.  The effect of such
activities  would be to increase the number of new holding  company shares to be
issued to all Western Resources  shareholders  (including Westar  Industries) in


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<PAGE>

the  transaction.  In  addition,  Westar  Industries  has the  option  of making
additional  equity infusions into Western  Resources that will be used to reduce
the  utility's  net debt  balance  prior to closing.  Up to $407 million of such
equity  infusions may be used to purchase  additional new holding company common
and convertible preferred stock.

       At closing,  Jeffrey E. Sterba,  present  chairman,  president  and chief
executive  officer of the Company,  will become  chairman,  president  and chief
executive  officer of the new  holding  company,  and David C.  Wittig,  present
chairman,  president  and chief  executive  officer of Western  Resources,  will
become chairman, president and chief executive officer of Westar Industries. The
Board of Directors of the new company will consist of six current  Company board
members  and three  additional  directors,  two of whom will be  selected by the
Company from a pool of  candidates  nominated by Western  Resources,  and one of
whom will be nominated  by Westar  Industries.  The new holding  company will be
headquartered  in New Mexico.  Headquarters for the Kansas utilities will remain
in Kansas.

       The Company expects that the shareholders of the new holding company will
receive the Company's  dividend.  The Company's current annual dividend is $0.80
per share. There can be no assurance however that any funds,  property or shares
will be legally  available to pay  dividends at any given time or if  available,
the new holding company's Board of Directors will declare a dividend.

       The companies  expect the transaction to be completed  within the next 12
to 18  months.  The  successful  spin-off  of  Westar  Industries  from  Western
Resources  is  required  prior  to  the  consummation  of the  transaction.  The
transaction is also conditioned  upon,  among other things,  approvals from both
companies'  shareholders  and  customary  regulatory  approvals  from the Kansas
Corporation Commission, the New Mexico Public Regulation Commission, the Federal
Energy  Regulatory  Commission,  the  Nuclear  Regulatory  Commission,  and  the
Department of Justice under the Hart-Scott-Rodino  Antitrust Improvements Act of
1976. The new holding  company expects to register as a holding company with the
Securities and Exchange  Commission under the Public Utility Holding Company Act
of 1935. The Company expects that all of the above  mentioned  approvals will be
obtained; however, such approvals are not assured.

                  WESTERN UNITED STATES WHOLESALE POWER MARKET

       A significant  portion of the Company's earnings in 2000 was derived from
the Company's wholesale power trading operations which benefited from the strong
demand and high  wholesale  prices in the Western  United  States.  These market
conditions were primarily  driven by the electric power supply  shortages in the
Western United States. As a result of the supply imbalance,  the wholesale power
market in the Western  United States has become  extremely  volatile and,  while
providing many marketing  opportunities,  presents significant risk to companies
selling power into this marketplace.

       During 2000,  regional  wholesale  electricity prices reached over $1,000
per  MWh  mainly  due to the  electric  power  shortages  in  the  West.  Two of
California's major utilities,  SCE and PG&E, were unable to pass this cost on to
their ratepayers.  As a result, both utilities are experiencing severe liquidity
constraints and have each stated publicly that they may file for bankruptcy.  In


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<PAGE>

response to the financial difficulties being experienced by SCE and PG&E and the
resulting turmoil in the California market, the U.S. Secretary of Energy imposed
a "soft"  price cap of $150 per MWh  effective  January  1, 2001,  and  expiring
January 23, 2001. This price cap was subsequently  extended to February 7, 2001.
The  price  cap  requires  that  any  wholesale  sales of  electricity  into the
California  market be capped at $150 MWh unless the seller can demonstrate  that
its  costs  exceed  the cap.  In  addition,  the  Governor  and  legislature  of
California are considering a number of proposals which may put downward pressure
on the price of electricity including,  but not limited to, a restructured power
auction system and the purchase of power by the state on a long-term  basis.  It
is unclear what effect these  measures will have on the price of  electricity in
California and the surrounding  states.  Such measures may have an impact on the
sustainability of the high electric power prices experienced in 2000.

     The Company is not a major  participant in the California  market. In 2000,
approximately  seven  percent of all  wholesale  power sales by the Company were
made directly to the California Power Exchange  ("California PX"), which was the
main market for the purchase and sale of electricity  in  the state  during 2000
and the  beginning  of  2001,  or the  California  Independent  System  Operator
("California ISO"), which manages the state's electricity  transmission network.
At December 31, 2000,  amounts due from the  California PX or ISO for power sold
to them totaled $10.5 million. In January and February 2001, SCE and PG&E, major
purchasers of power from the  California  PX and ISO,  defaulted on payments due
the California PX for power  purchased  from the PX in 2000. In addition,  these
companies defaulted on various debt obligations in January and February 2001 due
third  party  creditors.  The  impact  of  these  defaults  on the  Company  was
immaterial.

        However,  under  the  terms  of the  participation  agreement  with  the
California PX, defaults by the PX's debtors are charged-back  proportionally  to
the creditors based on their level of participation in the exchange in the three
months  preceding the respective  default.  Through February 8, 2001, the PX has
had  defaults of $865  million by SCE and PG&E for power  purchased  in November
2000.  Additional  defaults  may occur.  The Company has been  invoiced for $2.3
million as its proportionate share under the participation  agreement.  A number
of power  marketers and generators  have filed a complaint with the FERC to halt
the PX's attempt to collect  these  payments  under the  charge-back  mechanism,
claiming the mechanism was not intended for these  purposes,  and even if it was
so intended,  such an  application  is  unreasonable  and  destabilizing  to the
California power market.  If the FERC does not intercede,  and the participating
creditors do not make payments, the PX may draw upon letters of credit and other
collateral on deposit with the exchange.  The Company has issued the PX a letter
of credit of $3  million.  The  Company  does not  believe  the  charge-back  is
appropriate  and is evaluating its course of action;  however,  the Company does
not believe the situation will have a material  adverse effect on its results of
operations or financial condition.

       In  addition to sales to the  California  PX and ISO,  the Company  sells
power to customers in other  jurisdictions who sell to the California PX and ISO
and whose  ability to pay may be  dependent  on  payment  from  California.  The
Company is unable to determine whether its non-California power sales ultimately
are resold in the California  market.  The Company's credit risk is monitored by
its Risk  Management  Committee,  which  is  comprised  of  senior  finance  and
operations  managers.  The  Company  seeks  to  minimize  its  exposure  through
established  credit limits,  a diversified  customer base and the structuring of
transactions to take advantage of off-setting  positions with its customers.  To
the extent  these  customers  who sell power into  California  are  dependent on
payment from  California to make their payments to the Company,  the Company may
be exposed to credit risk which did not exist prior to the California situation.

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<PAGE>

       In 2000,  in  response  to the  increased  credit  risk and market  price
volatility  described  above,  the Company  recognized $8.5 million of losses to
reflect  management's  estimate of the  increased  risk in the  wholesale  power
market  and its  impact  on 2000  revenues.  This  determination  was based on a
methodology  that  considers  the credit  ratings of its customers and the price
volatility in the marketplace,  among other things. The Company will continue to
monitor the wholesale power marketplace and adjust its estimates accordingly.

       The  California  Public  Utilities  Commission  ("CPUC") has commenced an
investigation into the functioning of the California  wholesale power market and
its  associated  impact on retail  rates.  The  Company,  along with other power
suppliers in California, has been served with a subpoena in connection with this
investigation  and has  responded  to the  subpoena.  The  Company has not heard
further from the CPUC. The Company has been advised that the California Attorney
General  is  conducting  an  investigation  into  possibly  unlawful,  unfair or
anti-competitive  behavior affecting  electricity rates in California,  and that
Company  documents will be subpoenaed in the near future in connection with this
investigation. However, no such subpoena has yet been forthcoming.

       In addition, there are several class action lawsuits that have been filed
in  California  against  generators  and  wholesale  sellers of energy  into the
California market. These actions allege, in essence, that the defendants engaged
in unlawful and unfair  business  practices to manipulate  the wholesale  energy
market, fix prices and restrain supply, and thereby drive up prices. The Company
is not a named defendant in any of these actions, and there has been no claim or
threat of litigation against the Company arising out of the matters addressed in
these actions.

       The Company  does not  believe  that these  matters  will have a material
adverse effect on its results of operations or financial position.

       As discussed  above,  SCE has defaulted on certain of its obligations and
has  publicly  announced  that  it  may  declare  bankruptcy.  SCE  is  a  15.8%
participant  in PVNGS and a 48.0%  participant  in Four Corners.  Pursuant to an
agreement   among  the   participants  in  PVNGS  and  an  agreement  among  the
participants in Four Corners Units 4 and 5, each participant is required to fund
its proportionate share of operation and maintenance, capital, and fuel costs of
PVNGS and Four Corners Units 4 and 5. The Company  estimates SCE's total monthly
share of these costs to be approximately $7.1 million for PVNGS and $8.0 million
for Four Corners. The agreements provide that if a participant fails to meet its
payment obligations, each non-defaulting participant shall pay its proportionate
share of the payments  owed by the  defaulting  participant  for a period of six
months. During this time the defaulting  participant is entitled to its share of
the power  generated by the  respective  station.  After this grace period,  the
defaulting  participant  must make its payments in arrears before it is entitled
to its continuing  share of power. As of February 1, 2001, SCE has not defaulted
on its payment  obligations with respect to PVNGS and Four Corners.  The Company
is unable to predict whether the California  situation will cause SCE to default
on its payment obligations.

                                       64
<PAGE>
                      Implementation of New Billing System

       On November  30, 1998,  the Company  implemented  a new customer  billing
system.   Due  to  a  significant   number  of  problems   associated  with  the
implementation  of the new  billing  system,  the Company was unable to generate
appropriate  bills for all its  customers  through the first quarter of 1999 and
was unable to analyze delinquent accounts until November 1999.

       Under PRC rules and PRC approved  Company rules,  the Company is required
to issue customer bills on a monthly basis.  The Company was granted a temporary
variance, and the PRC began a hearing on whether the Company violated PRC rules,
regulations  or orders or the New Mexico Public  Utility Act. The  investigation
was concluded on November 2, 1999, without the PRC imposing any civil penalty on
the Company and with an approved  stipulation  that the Company be  permitted to
bill an  additional  service  charge  to  customers  who  were  not  billed  the
appropriate  electric  service  charge or gas access fee.  The  stipulation  was
limited to  approximately  $0.7 million in the  November  and  December  billing
cycles.

       Because of the  implementation  issues  associated  with the new  billing
system,  the Company  estimated  retail gas and electric  revenues  through July
1999.  Beginning  with August  1999,  the Company was able to  determine  actual
revenues for all prior periods  affected and began  reconciling  with previously
estimated  revenues.  In December 1999, the Company completed its reconciliation
of system revenues.  As a result,  1999 revenues  represented actual revenues as
determined  by the new billing  system.  The  resulting  reconciliation  did not
materially impact recorded revenues. However, a significant number of individual
accounts required corrections.

       As a result of the delay of normal  collection  activities,  the  Company
incurred a significant increase in delinquent  accounts,  many of which occurred
with  customers  that no longer  have active  accounts  with the  Company.  As a
result,  the  Company  significantly  increased  its  estimate of bad debt costs
throughout 1999.

       The  Company  continued  its  analysis  and  collection  efforts  of  its
delinquent   accounts   resulting   from  the  problems   associated   with  the
implementation of the new customer billing system throughout 2000 and identified
additional  bad debt  exposure.  By the end of 2000,  the Company  completed its
analysis  of  its  delinquent   accounts  and  resumed  its  normal   collection
procedures.  As a result,  the  Company  has  determined  that $13.5  million of
customer receivables will not be collectible.  Based upon information  available
at December 31, 2000, the Company  believes the allowance for doubtful  accounts
of $9.0 million is adequate for management's estimate of potential uncollectible
accounts.

       In  addition,   due  to  the  significantly  higher  natural  gas  prices
experienced in November and December  2000,  the Company  increased its bad debt
expense by  approximately  $2  million in  anticipation  of higher  than  normal
delinquency rates. The Company expects this trend to continue as long as natural
gas prices remain higher than in the past years.

                                       65
<PAGE>

       The following is a summary of the allowance for doubtful  accounts during
2000, 1999 and 1998:

                                                     2000      1999     1998
                                                   --------  --------  -------
                                                             (In thousands)
 Allowance for doubtful accounts, beginning
   of year.......................................  $ 12,504  $    836  $   783
 Bad debt expense................................     9,980    11,496    3,325
 Less:  Write off (adjustments) of uncollectible
        accounts.................................    13,521      (172)   3,272
                                                   --------  --------- -------
 Allowance for doubtful accounts, end of year ...  $  8,963  $ 12,504  $   836
                                                   ========  ========= =======

Electric Rate Case

       In  November  1998,  the  NMPUC  issued a final  order  in the  Company's
electric  rate case,  requiring  the  Company  to reduce  rates in 1999 by $60.2
million,  by $25.6 million in 2000 and by an  additional  $25.6 million in 2001.
The rate reduction order reflected,  among other things,  the revaluation of the
Company's generation resources based on a so-called "market-based price" and the
finding by the NMPUC that  recovery  of stranded  costs is illegal.  In December
1998,  the Company  appealed the rate case order to the New Mexico Supreme Court
("Supreme Court").

       On March 15, 1999, the Supreme Court issued a ruling,  vacating the NMPUC
order on the Company's electric rate case and remanding the case to the PRC, the
successor of the NMPUC, for further proceedings.

       On August 25, 1999, the PRC issued an order  approving a settlement.  The
PRC  ordered  the  Company  to  reduce  its  electric  rates  by  $34.0  million
retroactive  to July 30,  1999.  In addition,  the order  includes a rate freeze
until retail  electric  competition is fully  implemented in New Mexico or until
January  1,  2003  whichever  is  earlier.   The  settlement   reduces  electric
distribution  operating revenues by approximately $39 million and $19 million in
2000 and 1999, respectively.

GAS RATE ORDERS

       In April  2000,  the  Supreme  Court  ruled in  favor of the  Company  in
overturning a $6.9 million rate reduction  imposed on the Company's  natural gas
utility by the state's former NMPUC in 1997 for its 1995 gas rate case. Although
the Supreme Court upheld certain portions of the gas rate case order by the PUC,
the Supreme Court vacated the rate order as "unreasonable  and unlawful" because
certain  disallowances  ordered by the PUC  unreasonably  hindered the Company's
ability  to earn a fair rate of return.  The case was  remanded  to the PRC.  In
addition in March 2000,  the Supreme  Court vacated the PUC's final order in the
Company's  1997 gas rate case and remanded it back to the PRC. The Supreme Court
specifically rejected portions of the final order requiring the Company to offer
residential customers a choice of utility access fees.



                                       66
<PAGE>

Rate Case Settlement

       On October 24, 2000, the PRC issued a final order approving a stipulation
negotiated  in the third  quarter  between  the  Company and the PRC staff which
resolved all issues raised by the two remanded rate cases.  The final order adds
approximately  $1.2 million to the  Company's  revenues in the final  quarter of
2000,  $4.7 million in 2001,  and $3.9 million in 2002. The Company has reversed
certain  reserves  against costs  recovered in the settlement that were recorded
against earnings at the time of the original  regulatory orders,  resulting in a
one-time  pre-tax  gain of $4.6  million.  This  amount will be  collected  from
customers in rates over the next 12 years.

NUCLEAR DECOMMISSIONING TRUST

       In  1998,   the  Company  and  the  trustee  of  the   Company's   master
decommissioning  trust  filed  a  civil  complaint  and  an  amended  complaint,
respectively,    against    several    companies   and   individuals   for   the
under-performance  of a corporate owned life insurance program.  The program was
used to fund a portion of the Company's nuclear decommissioning  obligations for
its 10.2% interest in PVNGS.

       The parties reached a settlement  agreement under which the complaint and
counterclaim  were dismissed with prejudice on September 5, 2000 and the Company
and trustee received $13.8 million in settlement proceeds.

Effects of Certain Events on Future Revenues

       The Company's 100 MW  power sale contract with San Diego Gas and Electric
Company  ("SDG&E") will expire in April of 2001. SDG&E has verbally notified the
Company that it will not renew this contract.  The FERC must ultimately  approve
the termination of the contract.  The Company  currently  estimates that the net
revenue  reduction  resulting  from the expiration of the SDG&E contract will be
approximately  $20  million  annually.  Whether  or not these  revenues  will be
replaced  depends  on  market  conditions.  In  addition,   previously  reported
litigation between the Company and SDG&E regarding prior years' contract pricing
has been resolved in the Company's favor.

       On October 4, 1999,  Western Area Power  Administration  ("WAPA") filed a
petition at the FERC  requesting the FERC, on an expedited  basis,  to order the
Company to provide network  transmission  service to Western under the Company's
Open Access  Transmission  Tariff on behalf of the United  States  Department of
Energy ("DOE") as  contracting  agent for KAFB. The Company is opposing the WAPA
petition  and  intends to  litigate  this  matter  vigorously.  The net  revenue
reduction to the Company if the DOE  replaces the Company as the power  supplier
to KAFB is estimated to be approximately  $7.0 million annually.  Whether or not
these revenues will be replaced depends on market conditions.

       As part of the rate case settlement (discussed above), the Company agreed
that certain  changes to the language of the retail tariff under which  Kirtland
Air Force  Base  ("KAFB")  currently  takes  service  would be  considered  in a
separate  proceeding  before the PRC.  Hearings  on this issue have not yet been
scheduled. The PRC is considering briefs submitted by the parties addressing the
scope of the proceeding. KAFB has not renewed its electric service contract with
the Company  that  expired in December  1999 but  continues  to purchase  retail
service from the Company.  (See Item 3. - "Legal Proceedings - Other Proceedings
- Kirtland Air Force Base ("KAFB") Contract").

                                       67
<PAGE>
COAL FUEL SUPPLY

       In 1997,  the Company was notified by SJCC,  supplier of coal to SJGS, of
certain audit exceptions  identified by the Federal Minerals  Management Service
("MMS")  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.  The
Company  was  notified  during the fourth  quarter of 2000 that SJCC and the MMS
agreed to a settlement  of all claims.  The  Company's  share of the  settlement
including a recalculation of current invoices was approximately $3 million.  The
Company  recorded  the  settlement  as  part of its  cost of coal in the  fourth
quarter of 2000.

       In 1996, the Company was notified by SJCC that the Navajo Nation 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 SJCC under leases from the BLM and
comprise a portion of the fuel supply for the SJGS. An administrative  appeal by
SJCC is  pending.  In the  appeal,  SJCC  argued  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 the SJGS  through  the
existing coal sales  agreement.  The Company is monitoring  the appeal and other
developments on this issue and will continue to assess potential  impacts to the
SJGS and the Company's operations. The Company is unable to predict the ultimate
outcome of this matter.

FUEL, WATER AND GAS NECESSARY FOR GENERATION OF ELECTRICITY

       The Company's  generation mix for 2000 was 68.0% coal,  39.8% nuclear and
2.2% 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 (see "COAL FUEL SUPPLY" above).

       Water for Four Corners and SJGS is obtained from the San Juan River.  BHP
holds rights to San Juan River water and has committed a portion of those rights
to Four Corners  through the life of the project.  The Company and Tucson have a
contract with the USBR for consumption of 16,200 acre feet of water per year for
the SJGS. The contract expires in 2005. 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 the SJGS through  2005.  The Company has signed a contract with the
Jicarilla  Apache Tribe for a  twenty-seven  year term,  beginning in 2006,  for
replacement  of the current  USBR  contract  for 16,200 acre feet of water.  The
contract must still be approved by the USBR and is also subject to environmental
approvals.  The  Company is  actively  involved  in the San Juan River  Recovery
Implementation  Program  to  mitigate  any  concerns  with  the  taking  of  the
negotiated  water  supply  from a river that  contains  endangered  species  and
critical  habitat.  The Company  believes that it will continue to have adequate
sources of water available for its generating stations.

                                       68
<PAGE>

       The  Company  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 the Company's  peak-day demand.  The
Company  serves  certain  cities which depend on EPNG or  Transwestern  Pipeline
Company  for  transportation  of gas  supplies.  Because  these  cities  are not
directly connected to the Company's transmission facilities,  gas transported by
these companies is the sole supply source for those cities. The Company believes
that adequate sources of gas are available for its distribution systems.

NEW SOURCE REVIEW RULES

       The United States  Environmental  Protection  Agency ("EPA") has proposed
changes to its New Source Review ("NSR") rules that could result in many actions
at power  plants  that  have  previously  been  considered  routine  repair  and
maintenance  activities  (and  hence  not  subject  to  the  application  of NSR
requirements)  as now being subject to NSR. In November  1999, the Department of
Justice  at the  request of the EPA filed  complaints  against  seven  companies
alleging the companies  over the past 25 years had made  modifications  to their
plants in  violation of the NSR  requirements,  and in some cases the New Source
Performance Standards ("NSPS") regulations.  Whether or not the EPA will prevail
is  unclear  at this  time.  The EPA has  reached a  settlement  with one of the
companies sued by the Justice  Department and is in the process of attempting to
negotiate settlement agreements with one of those other companies.  No complaint
has been filed  against the Company,  and the Company  believes  that all of the
routine maintenance, repair, and replacement work undertaken at its power plants
was and continues to be in  accordance  with the  requirements  of NSR and NSPS.
However, by letter dated October 23, 2000, the New Mexico Environment Department
("NMED") made an information  request of the Company,  advising the Company that
the NMED was in the process of assisting the EPA in the EPA's nationwide  effort
"of  verifying   that  changes  made  at  the  country's   utilities   have  not
inadvertently  triggered a modification  under the Clean Air Act's Prevention of
Significant  Determination  ("PSD")  policies." The Company has responded to the
NMED information request.

       The nature and cost of the impacts of EPA's changed interpretation of the
application  of the NSR and  NSPS,  together  with  proposed  changes  to  these
regulations,  may be significant to the power production industry.  However, the
Company  cannot  quantify  these impacts with regard to its power plants.  It is
also unknown what changes in EPA policy,  if any, may occur in the NSR area as a
result of the change in administration in Washington.  If the EPA should prevail
with its current  interpretation  of the NSR and NSPS rules,  the Company may be
required to make significant  capital  expenditures  which could have a material
adverse affect on the Company's financial position and results of operations.

COMPLIANCE WITH ENVIRONMENTAL LAWS AND REGULATIONS

       The normal  course of  operations  of the  Company  necessarily  involves
activities and substances that expose the Company to potential liabilities under
laws and regulations  protecting the environment.  Liabilities  under these laws
and  regulations  can be material and in some  instances may be imposed  without
regard to fault, or may be imposed for past acts, even though such past acts may
have been lawful at the time they occurred.  Sources of potential  environmental
liabilities   include   the   Federal   Comprehensive   Environmental   Response
Compensation and Liability Act of 1980 and other similar statutes.

                                       69
<PAGE>

       The Company records its  environmental  liabilities when site assessments
or remedial actions are probable and a range of reasonably  likely cleanup costs
can be  estimated.  The Company  reviews its sites and  measures  the  liability
quarterly,  by assessing a range of reasonably  likely costs for each identified
site using  currently  available  information,  including  existing  technology,
presently enacted laws and regulations,  experience gained at similar sites, and
the probable level of involvement and financial  condition of other  potentially
responsible  parties.  These  estimates  include costs for site  investigations,
remediation,  operations and  maintenance,  monitoring and site closure.  Unless
there is a probable amount, the Company records the lower end of this reasonably
likely range of costs (classified as other long-term liabilities at undiscounted
amounts).

       The  Company's  recorded  estimated  minimum  liability to remediate  its
identified  sites is $8.3  million.  The ultimate cost to clean up the Company's
identified  sites  may  vary  from  its  recorded   liability  due  to  numerous
uncertainties inherent in the estimation process, such as: the extent and nature
of  contamination;  the scarcity of reliable data for identified  sites; and the
time  periods  over which site  remediation  is expected  to occur.  The Company
believes that, due to these uncertainties,  it is remotely possible that cleanup
costs could exceed its  recorded  liability  by up to $21.1  million.  The upper
limit of this range of costs was estimated using  assumptions least favorable to
the Company.

Labor Union Negotiations

       The  collective   bargaining   agreement  between  the  Company  and  the
International  Brotherhood of Electrical Workers Local Union 611 ("IBEW"), which
covers the  approximately  654  bargaining  unit  employees  in the  Utility and
Generation and Trading  Operations expired on May 1, 2000, but continued in full
force and effect  while the parties  negotiated.  The  successor  agreement  was
reached on August 22, 2000 and was  ratified  by IBEW  members on  September  1,
2000.  The IBEW's  charge  with the  National  Labor  Relations  Board  ("NLRB")
alleging  the  Company  has  bargained  in bad  faith,  and by its  actions  has
committed  an unfair  labor  practice is pending.  The Company  will  vigorously
defend against the Union's allegations.

NAVAJO NATION TAX ISSUES

       APS, the operating agent for Four Corners,  has informed the Company that
in March  1999,  APS  initiated  discussions  with the Navajo  Nation  regarding
various tax issues in conjunction  with the expiration of a tax waiver,  in July
2001, which was granted by the Navajo Nation in 1985. The tax waiver pertains to
the possessory  interest tax and the business  activity tax associated  with the
Four  Corners  operations  on the  reservation.  The Company  believes  that the
resolution  of these tax issues  will  require  an  extended  process  and could
potentially   affect  the  cost  of  conducting   business   activities  on  the
reservation.   The  Company  is  unable  to  predict  the  ultimate  outcome  of
discussions with the Navajo Nation regarding these tax issues.



                                       70
<PAGE>

NEW AND PROPOSED ACCOUNTING STANDARDS

       Decommissioning:  The Staff of the  Securities  and  Exchange  Commission
("SEC")  has  questioned  certain of the  current  accounting  practices  of the
electric industry  regarding the recognition,  measurement and classification of
decommissioning costs for nuclear generating stations in financial statements of
electric utilities.  In February 2000, the Financial  Accounting Standards Board
("FASB")  issued  an  exposure  draft   regarding   Accounting  for  Obligations
Associated  with the Retirement of Long-Lived  Assets  ("Exposure  Draft").  The
Exposure Draft requires the  recognition of a liability for an asset  retirement
obligation  at  fair  value.  In  addition,  present  value  techniques  used to
calculate the liability must use a credit adjusted  risk-free  rate.  Subsequent
remeasures of the liability  would be recognized  using an allocation  approach.
The Company has not yet determined the impact of the Exposure Draft.

       Statement of  Financial  Accounting  Standards  No. 133,  Accounting  for
Derivative   Instruments  and  Hedging   Activities,   ("SFAS  133"):  SFAS  133
establishes  accounting and reporting standards requiring derivative instruments
to be recorded in the balance sheet as either an asset or liability  measured at
its fair value.  SFAS 133 also  requires that changes in the  derivatives'  fair
value be  recognized  currently in earnings  unless  specific  hedge  accounting
criteria are met.  Special  accounting for qualifying  hedges allows  derivative
gains and losses to offset  related  results  on the  hedged  item in the income
statement,  and requires that a company must formally document,  designate,  and
assess the effectiveness of transactions that receive hedge accounting.  In June
1999,  FASB issued SFAS 137 to amend the  effective  date for the  compliance of
SFAS 133 to  January  1,  2001.  In June  2000,  the FASB  issued  SFAS 138 that
provides  certain  amendments to SFAS 133. The  amendments,  among other things,
expand the normal sales and purchases  exception to contracts that implicitly or
explicitly  permit net settlement and contracts that have a market  mechanism to
facilitate net settlement. The expanded exception excludes a significant portion
of the Company's  contracts that previously would have required  valuation under
SFAS 133. Effective January 1, 2001, the Company adopted SFAS 133, as amended.

       The  Company  has  identified  all  financial  instruments  that meet the
definition of a derivative under SFAS 133, as amended,  as of January 1, 2001 in
which the Company is a party.  Certain of the  Company's  identified  derivative
instruments are  marked-to-market  under EITF 98-10 as of December 31, 2000. The
related  gains  and  losses  (unrealized  and  realized)  for  these  derivative
instruments are recorded as adjustments to operating revenues. In addition,  the
financial  instruments  underlying  the  Company's  corporate  hedge of  certain
investments in its nuclear,  executive  retirement and retiree medical  benefits
trusts meet the definition of a derivative  under SFAS 133, as amended,  and are
marked-to-market  as of December 31, 2000.  The related  unrealized and realized
losses  are  recorded  as a  component  of other  income and  deductions  on the
Consolidated Statement of Earnings.

       Pursuant to SFAS 133, as amended,  the Company designated certain forward
purchase contracts for electricity as cash flow hedges. The Company's designated
cash flow hedges at January 1, 2001,  were forward  purchase  contracts  for the
purchase of electric  power for  forecasted  jurisdictional  use during  planned
outages in 2001.  The hedged risks  associated  with these  instruments  are the
changes in cash flows associated with the forecasted purchase of electricity due
to changes in the price of electricity  on the spot market.  Assessment of hedge
effectiveness will be based on the changes in the forward price of electricity.

                                       71
<PAGE>

       SFAS 133, as amended,  provides that the effective portion of the gain or
loss on a derivative instrument designated and qualifying as a cash flow hedging
instrument  be  reported  as a component  of other  comprehensive  income and be
reclassified into earnings in the same period or periods during which the hedged
forecasted  transaction affects earnings.  The results of hedge  ineffectiveness
and the  change  in fair  value of a  derivative  that an entity  has  chosen to
exclude  from  hedge  effectiveness  are  required  to be  presented  in current
earnings.

       Because the Company's  derivative  instruments as defined by SFAS 133, as
amended,  are currently  marked-to-market or are classified as cash flow hedges,
the  adoption  of SFAS  133,  as  amended,  will not have an  impact  on the net
earnings of the Company.  However,  the  adoption of SFAS 133, as amended,  will
increase comprehensive income by $6.0 million, net of taxes for the recording of
the Company's  cash flow hedges.  The physical  contracts will  subsequently  be
recognized  as a  component  of the cost of  purchased  power  when  the  actual
physical  delivery  occurs.  At  January  1, 2001,  the  derivative  instruments
designated as cash flow hedges had a gross asset position of $9.9 million on the
hedged   transactions.   See  Note  5  for   financial   instruments   currently
marked-to-market.

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

       Statements  made in this  filing  that  relate to future  events are made
pursuant to the Private  Securities  Litigation Reform Act of 1995.  Readers are
cautioned  that  such  forward-looking  statements  with  respect  to  revenues,
earnings, performance,  strategies, prospects and other aspects of the business
of the Company are based upon current  expectations  and are subject to risk and
uncertainties,  as  are  the  forward-looking  statements  with  respect  to the
benefits of the  Company's  proposed  acquisition  of Western  Resources and the
businesses  of the  Company  and  Western  Resources.  The  Company  assumes  no
obligation to update this information.

       Because  actual  results may differ  materially  from  expectations,  the
Company  cautions  readers not to place undue  reliance on these  statements.  A
number of factors,  including weather,  fuel costs, changes in supply and demand
in the market for electric power,  the  performance of generating  units and the
transmission system, and state and federal regulatory and legislative  decisions
and  actions,  including  rulings  issued by the NMPRC  pursuant to the Electric
Utility  Industry  Restructuring  Act of 1999 and in other  cases now pending or
which may be  brought  before  the  commission  and any action by the New Mexico
Legislature  to  amend  or  repeal  that  Act,  or  other  actions  relating  to
restructuring  or  stranded  cost  recovery,  or  federal  or state  regulatory,
legislative  or legal  action  connected  with the  California  wholesale  power
market,  could cause the Company's results or outcomes to differ materially from
those indicated by such forward-looking statements in this filing.

       In addition,  factors that could cause actual results or outcomes related
to the proposed acquisition of Western Resources to differ materially from those
indicated by such forward looking  statements  include,  but are not limited to,
risks and  uncertainties  relating to: the possibility that  shareholders of the
Company and/or Western  Resources  will not approve the  transaction,  the risks
that the  businesses  will not be  integrated  successfully,  the risk  that the
benefits  of the  transaction  may not be fully  realized  or may take longer to
realize than expected, disruption from the

                                       72
<PAGE>
transaction  making it more  difficult to maintain  relationships  with clients,
employees, suppliers or other third parties, conditions in the financial markets
relevant  to the  proposed  transaction,  the  receipt of  regulatory  and other
approvals of the  transaction,  that future  circumstances  could cause business
decisions or accounting  treatment to be decided  differently than now intended,
changes in laws or regulations,  changing  governmental  policies and regulatory
actions  with  respect  to allowed  rates of return on equity  and equity  ratio
limits,  industry  and rate  structure,  stranded  cost  recovery,  operation of
nuclear power facilities,  acquisition,  disposal, depreciation and amortization
of assets  and  facilities,  operation  and  construction  of plant  facilities,
recovery of fuel and purchased power costs,  decommissioning  costs,  present or
prospective  wholesale and retail  competition  (including  retail  wheeling and
transmission  costs),  political and economic  risks,  changes in and compliance
with environmental and safety laws and policies,  weather conditions  (including
natural  disasters such as tornadoes),  population  growth rates and demographic
patterns, competition for retail and wholesale customers,  availability, pricing
and  transportation  of fuel and other  energy  commodities,  market  demand for
energy from plants or  facilities,  changes in tax rates or policies or in rates
of  inflation or in  accounting  standards,  unanticipated  delays or changes in
costs for capital  projects,  unanticipated  changes in  operating  expenses and
capital  expenditures,  capital market  conditions,  competition  for new energy
development  opportunities  and legal and  administrative  proceedings  (whether
civil,  such as  environmental,  or criminal)  and  settlements,  the outcome of
Protection  One  accounting  issues  reviewed by the SEC staff as  disclosed  in
previous  Western  Resources  SEC filings,  and the impact of  Protection  One's
financial condition on Western Resources' consolidated results.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

       The Company uses  derivative  financial  instruments to manage risk as it
relates to changes in natural gas and electric  prices and also  adverse  market
changes for investments held by the Company's  various trusts.  The Company also
uses certain derivative  instruments for bulk power electricity trading purposes
in order to take  advantage  of  favorable  price  movements  and market  timing
activities in the wholesale power markets.  Information about market risk is set
forth  in Note 5 to the  Notes  to the  Consolidated  Financial  Statements  and
incorporated by reference. The following additional information is provided.

       The Company uses value at risk ("VAR") to quantify the potential exposure
to market movement on its open contracts and excess generating  assets.  The VAR
is calculated  utilizing the  variance/co-variance  methodology over a three day
period within a 99% confidence  level. The Company's VAR as of December 31, 2000
from its electric  trading  contracts was $36.9  million.  In 2000,  the Company
changed  its  methodology  for  calculating  its  VAR.  Previously,  bulk  power
available for sale from the Company's  excess  capacity and assets excluded from
jurisdictional  rates was measured using projected hourly load forecasts.  These
assets are now measured  using average peak load  forecasts  for the  respective
block of power in the forward market. The change in methodology  results in less
available MW's for sale in the VAR  calculation.  Management  believes this more
accurately portrays its capacity from its excess generating assets.

       The Company's wholesale power marketing  operations,  including both firm
commitments  and  trading  activities,  are  managed  through  an  asset  backed
strategy,  whereby the  Company's  aggregate net open position is covered by its
own excess generation capabilities. The Company is exposed to market risk if its
generation   capabilities   were  disrupted  or  if  its   jurisdictional   load
requirements  were greater  than  anticipated.  If the Company were  required to
cover all or a portion of its net open contract position,  it would have to meet
its  commitments  through  market  purchases.   The  Company's  VAR  calculation
considers this exposure.

                                       73
<PAGE>

       The Company's VAR is regularly monitored by the Company's Risk Management
Committee which is comprised of senior finance and operations managers. The Risk
Management Committee has put in place procedures to ensure that increases in VAR
are  reviewed  and,  if deemed  necessary,  acted upon to reduce  exposures.  In
addition,   the   Company  is   exposed  to  credit   losses  in  the  event  of
non-performance  or  non-payment  by  counterparties.  The Company uses a credit
management   process  to  access  and  monitor  the   financial   conditions  of
counterparties.  Credit  exposure is also  regularly  monitored by the Company's
Risk Management committee.

       The VAR  represents  an  estimate of the  potential  gains or losses that
could be recognized on the Company's  wholesale power marketing  portfolio given
current  volatility in the market,  and is not necessarily  indicative of actual
results that may occur,  since  actual  future gains and losses will differ from
those estimated.  Actual gains and losses may differ due to actual  fluctuations
in market rates, operating exposures, and the timing thereof, as well as changes
to the Company's wholesale power marketing portfolio during the year.



                                       74
<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 Balance Sheets ........................................    F-4
   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-45
   Comparative Operating Statistics ...................................   F-46

              MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS

The accompanying financial statements,  which consolidate the accounts of Public
Service  Company of New  Mexico  and its  subsidiaries,  have been  prepared  in
conformity with  accounting principles generally accepted in the United States.

The  integrity  and  objectivity  of  data in  these  financial  statements  and
accompanying  notes,  including  estimates and judgments  related to matters not
concluded by year-end,  are the  responsibility  of  management  as is all other
information  in this Annual  Report.  Management  devotes  ongoing  attention to
review and appraisal of its system of internal controls. This system is designed
to provide  reasonable  assurance,  at an appropriate  cost,  that the Company's
assets are protected,  that  transactions  and events are recorded  properly and
that  financial  reports are  reliable.  The system is  augmented  by a staff of
corporate auditors;  careful attention to selection and development of qualified
financial personnel; and programs to further timely communication and monitoring
of policies, standards and delegated authorities.

The Audit  Committee  of the Board of  Directors,  composed  entirely of outside
directors, meets regularly with financial management, the corporate auditors and
the independent  auditors to review the work of each. The  independent  auditors
and  corporate  auditors  have  free  access  to the  Audit  Committee,  without
management  representatives  present, to discuss the results of their audits and
their comments on the adequacy of internal controls and the quality of financial
reporting.


                                      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, 2000 and 1999, and the related
consolidated  statements of earnings, and cash flows for each of the three years
in the period ended  December  31,  2000.  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 auditing standards generally accepted
in the United States. 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, 2000 and 1999, and the results of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.


                                                     ARTHUR ANDERSEN LLP

Albuquerque, New Mexico
    January 26, 2001

                                      F-2
<PAGE>

<TABLE>
<CAPTION>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF EARNINGS

                                                                            Year Ended December 31,
                                                               -------------------------------------------
                                                                 2000              1999             1998
                                                               ------------   -------------  -------------
                                                                 (In thousands, except per share amounts)
<S>                                                            <C>               <C>            <C>
Operating Revenues: (note 1, 7)
  Utility....................................................  $  859,389        $  778,286     $  812,250
  Generation and Trading.....................................   1,075,178           689,981        642,358
  Unregulated businesses.....................................       2,158             8,855          1,266
  Intersegment elimination...................................    (325,451)         (319,579)      (363,429)
                                                               ------------   -------------    -----------
     Total operating revenues................................   1,611,274         1,157,543      1,092,445
                                                               ------------   -------------    -----------

Operating Expenses:
  Cost of energy sold........................................     949,880           531,952        449,426
  Administrative and general.................................     147,268           153,709        135,727
  Energy production costs....................................     139,894           140,784        149,747
  Depreciation and amortization..............................      93,059            92,661         86,141
  Transmission and distribution costs........................      60,330            59,264         56,457
  Taxes, other than income taxes.............................      34,405            34,084         37,992
  Income taxes (note 7)......................................      53,964            25,010         41,306
                                                               ------------   -------------    -----------
     Total operating expenses................................   1,478,800         1,037,464        956,796
                                                               ------------   -------------    -----------
     Operating income........................................     132,474           120,079        135,649
                                                               ------------   -------------    -----------

Other Income and Deductions:
  Other......................................................      54,296            47,500         37,672
  Income tax expense  (note 7)...............................     (20,382)          (17,298)       (14,985)
                                                               ------------   -------------    -----------
     Net other income and deductions.........................      33,914            30,202         22,687
                                                               ------------   -------------    -----------
     Income before interest charges..........................     166,388           150,281        158,336
                                                               ------------   -------------    -----------

Interest Charges:
  Interest on long-term debt (note 3)........................      62,823            65,899         50,929
  Other interest charges.....................................       2,619             4,768         12,288
                                                               ------------   -------------    -----------
     Net interest charges....................................      65,442            70,667         63,217
                                                               ------------   -------------    -----------

Net Earnings from Continuing Operations......................     100,946            79,614         95,119

Discontinued Operations, Net of Tax (note 13)................           -                 -        (12,437)
Cumulative Effect of a Change in Accounting..................
   Principle, Net of Tax ....................................           -             3,541              -
                                                               ------------   -------------    -----------

Net Earnings.................................................     100,946            83,155         82,682
Preferred Stock Dividend Requirements........................         586               586            586
                                                               ------------   -------------   ------------

Net Earnings Applicable to Common Stock......................  $  100,360         $  82,569       $ 82,096
                                                               ============   =============   ============

Net Earnings per Share of Common Stock (Basic) (note 6)......  $     2.54         $    2.01       $   1.97
                                                               ============   =============   ============

Net Earnings per Share of Common Stock (Diluted) (note 6)....  $     2.53         $    2.01       $   1.95
                                                               ============   =============   ============

Dividends Paid per Share of Common Stock.....................  $     0.80         $    0.80       $   0.77
                                                               ============   =============   ============

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

</TABLE>

                                       F-3
<PAGE>
<TABLE>
<CAPTION>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                                                                                                As of December 31,
                                                                                          -------------------------------
                                                                                              2000             1999
                                                                                          --------------  ---------------
                                                                                                  (In thousands)
<S>                                                                                          <C>              <C>
Utility Plant, at original cost except PVNGS:  (notes 10, 11)
  Electric plant in service..............................................................    $2,030,813       $1,976,009
  Gas plant in service...................................................................       553,755          483,819
  Common plant in service and plant held for future use..................................        36,678           69,273
                                                                                          --------------  ---------------
                                                                                              2,621,246        2,529,101
  Less accumulated depreciation and amortization.........................................     1,153,377        1,077,576
                                                                                          --------------  ---------------
                                                                                              1,467,869        1,451,525
  Construction work in progress..........................................................       123,653          104,934
  Nuclear fuel, net of accumulated amortization of $19,081 and $20,832...................        25,784           25,923
                                                                                          --------------  ---------------

     Net utility plant...................................................................     1,617,306        1,582,382
                                                                                          --------------  ---------------

Other Property and Investments:
  Other investments (notes 5, 12)........................................................       479,821          483,008
  Non-utility property, net of accumulated depreciation of $1,644 and $1,261.............         3,666            4,439
                                                                                          --------------  ---------------

     Total other property and investments................................................       483,487          487,447
                                                                                          --------------  ---------------

Current Assets:
  Cash and cash equivalents..............................................................       107,691          120,399
  Accounts receivables, net of allowance for uncollectible accounts of $8,963 and $12,504       242,742          147,746
  Other receivables......................................................................        64,857           68,911
  Inventories............................................................................        36,091           39,992
  Regulatory assets (note 2).............................................................        47,604           24,056
  Other current assets...................................................................        11,417            4,934
                                                                                          --------------  ---------------

     Total current assets................................................................       510,402          406,038
                                                                                          --------------  ---------------

Deferred charges:
  Regulatory assets (note 2).............................................................       226,849          195,898
  Prepaid pension cost (note 8)..........................................................        18,116           16,126
  Other deferred charges.................................................................        38,073           35,377
                                                                                          --------------  ---------------

     Total deferred charges..............................................................       283,038          247,401
                                                                                          --------------  ---------------
                                                                                             $2,894,233       $2,723,268
                                                                                          ==============  ===============


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

</TABLE>
                                      F-4
<PAGE>


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

                           CONSOLIDATED BALANCE SHEETS
                         CAPITALIZATION AND LIABILIITES

                                                                                    As of December 31,
                                                                             ---------------------------------
                                                                                  2000              1999
                                                                             ----------------  ---------------
                                                                                      (In thousands)
<S>                                                                               <C>               <C>
Capitalization: (note 3)
  Common stock equity:
    Common stock outstanding--39,118 and 40,703 shares......................      $ 195,589         $ 203,517
    Additional paid-in capital..............................................        432,222           453,393
    Accumulated other comprehensive income, net of tax (note 3).............            (27)            2,352
    Retained earnings.......................................................        296,843           227,829
                                                                             ----------------  ---------------

     Total common stock equity..............................................        924,627           887,091
  Minority interest.........................................................         12,211            12,771
  Cumulative preferred stock without mandatory redemption requirements......         12,800            12,800
  Long-term debt, less current maturities (note 3)..........................        953,823           988,489
                                                                             ----------------  ---------------

     Total capitalization...................................................      1,903,461         1,901,151
                                                                             ----------------  ---------------

Current Liabilities:
  Accounts payable..........................................................        257,991           150,645
  Accrued interest and taxes................................................         36,889            34,237
  Other current liabilities.................................................         67,758            54,137
                                                                             ----------------  ---------------

     Total current liabilities..............................................        362,638           239,019
                                                                             ----------------  ---------------

Deferred Credits:
  Accumulated deferred income taxes (note 7)................................        166,249           153,179
  Accumulated deferred investment tax credits (note 7)......................         47,853            50,996
  Regulatory liabilities (note 2)...........................................         65,552            88,497
  Regulatory liabilities related to accumulated deferred income tax (note 2)         20,696            15,091
  Accrued postretirement benefits cost (note 8).............................         11,899             8,945
  Other deferred credits (note 12)..........................................        315,885           266,390
                                                                             ----------------  ---------------

     Total deferred credits.................................................        628,134           583,098
                                                                             ----------------  ---------------

Commitments and Contingencies (note 11).....................................              -                -
                                                                             ----------------  ---------------
                                                                                $ 2,894,233       $ 2,723,268
                                                                             ================  ===============



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

</TABLE>
                                      F-5
<PAGE>

<TABLE>
<CAPTION>

                      PUBLIC SERVICE COMPANY OF NEW MEXICO
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                    Year Ended December 31,
                                                                         ----------------------------------------------
                                                                             2000            1999            1998
                                                                         --------------  --------------  --------------
                                                                                        (In thousands)
<S>                                                                          <C>             <C>             <C>
Cash Flows From Operating Activities:
  Net earnings.........................................................      $100,946        $ 83,155        $ 82,682
  Adjustments to reconcile net earnings to net cash flows..............
    from operating activities:
      Depreciation and amortization....................................       103,829         103,891          98,154
      Gain on cumulative effect of a change in
         Accounting principle .........................................             -          (5,862)              -
      Other,...........................................................        33,268          26,170          27,462
      Changes in certain assets and liabilities:
        Accounts receivables...........................................       (94,996)        (16,937)          1,302
        Other assets...................................................       (32,444)        (20,189)         31,066
        Accounts payable...............................................       107,346          36,670         (40,490)
        Other liabilities..............................................        21,566           6,147          10,812
                                                                         --------------  --------------  --------------

              Net cash flows provided from operating activities........       239,515         213,045         210,988
                                                                         --------------  --------------  --------------

Cash Flows From Investing Activities:
  Utility plant additions..............................................      (146,878)        (95,298)       (128,784)
  Return (purchase) of PVNGS lease obligation bonds....................        16,668          16,903        (204,364)
  Merger acquisition costs.............................................        (6,700)              -               -
  Other investing......................................................       (20,590)         22,509          (7,844)
                                                                         --------------  --------------  --------------

              Net cash flows used in investing activities..............      (157,500)        (55,886)       (340,992)
                                                                         --------------  --------------  --------------

Cash Flows From Financing Activities:
  Borrowings (note 3)..................................................             -          11,500         896,348
  Repayments (note 3)..................................................       (32,800)        (58,200)       (694,651)
  Exercise of employee stock options (note 9)..........................        (1,232)          1,453          (3,687)
  Common stock repurchase (note 3).....................................       (27,867)        (18,799)              -
  Dividends paid.......................................................       (32,265)        (33,359)        (32,789)
  Other Financing......................................................          (559)           (635)          7,868
                                                                         --------------  --------------  --------------

              Net cash flows (used) generated by financing activities..       (94,723)        (98,040)        173,089
                                                                         --------------  --------------  --------------

Increase (Decrease) in Cash and Cash Equivalents.......................       (12,708)         59,119          43,085
Beginning of Year......................................................       120,399          61,280          18,195
                                                                         --------------  --------------  --------------

End of Year............................................................     $ 107,691       $ 120,399        $ 61,280
                                                                         ==============  ==============  ==============

Supplemental cash flow disclosures:
  Interest paid........................................................      $ 64,045        $ 67,770        $ 50,109
                                                                         ==============  ==============  ==============
  Income taxes paid, net of refunds....................................      $ 50,480        $ 36,575        $ 49,048
                                                                         ==============  ==============  ==============
  Acquired DOE pipeline in exchange for transportation services........             -        $  3,100               -
                                                                         ==============  ==============  ==============

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

</TABLE>
                                      F-6
<PAGE>
<TABLE>
<CAPTION>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CAPITALIZATION

                                                                                  As of December 31,
                                                                           -------------------------------
                                                                                 2000              1999
                                                                           ---------------  --------------
                                                                                    (In thousands)
<S>                                                                            <C>              <C>
Common Stock Equity: (note 3)
    Common Stock, par value $5 per share..................................     $ 195,589        $ 203,517
    Additional paid-in capital............................................       432,222          453,393
    Accumulated other comprehensive income, net of tax                               (27)           2,352
    Retained earnings.....................................................       296,843          227,829
                                                                           ---------------  --------------
        Total common stock equity.........................................       924,627          887,091
                                                                           ---------------  --------------

Minority Interest.........................................................        12,211           12,771
                                                                           ---------------  --------------

Cumulative Preferred Stock: (note 3)
    Without mandatory redemption requirements:
        1965 Series, 4.58% with a stated value of $100.00 and a
         current redemption price of $102.00.  Outstanding shares
         at December 31, 2000 were 128,000................................        12,800           12,800
                                                                           ---------------  --------------

Long-Term Debt: (note 3)
Issue and Final Maturity
    First Mortgage Bonds, Pollution Control Revenue Bonds:
          5.7%  due  2016.................................................        65,000           65,000
        6.375%  due  2022.................................................        46,000           46,000
                                                                           ---------------  --------------
        Total First Mortgage Bonds                                               111,000          111,000
                                                                           ---------------  --------------

     Senior Unsecured Notes, Pollution Control Revenue Bonds:
       6.30%    due  2016.................................................        77,045           77,045
       5.75%    due  2022.................................................        37,300           37,300
       5.80%    due  2022.................................................       100,000          100,000
       6.375%   due  2022.................................................        90,000           90,000
       6.375%   due  2023.................................................        36,000           36,000
       6.40%    due  2023.................................................       100,000          100,000
       6.30%    due  2026.................................................        23,000           23,000
       6.60%    due  2029.................................................        11,500           11,500
                                                                           ---------------  --------------
         Total Senior Unsecured Notes, Pollution Control Revenue Bonds....       474,845          474,845
                                                                           ---------------  --------------

       Senior Unsecured Notes:
          7.10%  due  2005................................................       268,420          268,420
          7.50%  due  2018................................................       100,025          135,000
     Other, including unamortized premium and (discounted), net...........         (467)            (776)
                                                                           ---------------  --------------

             Total long-term debt.........................................       953,823          988,489
                                                                           ---------------  --------------
Total Capitalization......................................................   $ 1,903,461      $ 1,901,151
                                                                           ===============  ==============


</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, 2000, 1999 and 1998

Summary of Significant Accounting Policies

Accounting Principles

        The Company  prepares its financial  statements  in accordance  with the
uniform  system  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  Regulation  Commission
("PRC"),  the successor of the New Mexico Public Utility  Commission  ("NMPUC"),
effective January 1, 1999.

       The Company's  accounting policies conform to the provisions of Statement
of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation  ("SFAS 71").  SFAS 71 requires a  rate-regulated  entity to
reflect the effects of  regulatory  decisions in its  financial  statements.  In
accordance  with SFAS 71, the Company has  deferred  certain  costs and recorded
certain  liabilities  pursuant to the rate  actions of the PRC,  NMPUC and FERC.
These  "regulatory  assets" and  "regulatory  liabilities"  are  enumerated  and
discussed in Note 2.

       To  the  extent  that  the  Company  concludes  that  the  recovery  of a
regulatory asset is no longer probable due to regulatory treatment,  the effects
of  competition  or other  factors,  the amount would be recorded as a charge to
earnings as recovery is no longer  probable.  The Company has  discontinued  the
application of SFAS 71 as of December 31, 1999,  for the  generation  portion of
its  business  effective  with the  passage  of the  Electric  Utility  Industry
Restructuring  Act of 1999  ("Restructuring  Act") in accordance  with Financial
Accounting Standards No. 101, "Accounting for the Discontinuation of Application
of FASB  Statement No. 71". The Company  evaluates its  regulatory  assets under
Financial  Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of
Long-Lived  Assets and for Long-Lived  Assets to be Disposed of" ("FAS 121"). In
2000, the Company  determined certain stranded assets would not be recovered and
recorded a charge to earnings for these  amounts.  The Company  believes that it
will recover costs associated with its remaining stranded assets including asset
closure costs through a non-bypassable  charge as permitted by the Restructuring
Act. See Note 2 for additional discussion.

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.

Financial Statement Preparation and Presentation

        The  preparation of financial  statements in conformity  with accounting
principles  generally accepted in the United States 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.

                                      F-8
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

Summary of Significant Accounting Policies (Continued)

Utility Plant

        Utility  plant,  with the  exception  of Palo Verde  Nuclear  Generating
Station  ("PVNGS") Unit 3 and the Company's owned interests in PVNGS Units 1 and
2, 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.  Pursuant to a rate  stipulation
dated  October  1993,  the Company  did not  capitalize  amounts  relating to an
allowance  for funds used during  construction  in 2000,  1999 or 1998.  Utility
plant includes certain electric assets not subject to regulation.

        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.

Revenue Recognition

        The  Company's  Utility  Operations  record  electric and gas  operating
revenues in the period of delivery, which includes estimated amounts for service
rendered but unbilled at the end of each accounting  period.  Utility Operations
gas operating  revenues  exclude an adjustment  for gas purchase  costs that are
above levels included in base rates but are recoverable  under the Purchased Gas
Adjustment Clause ("PGAC")  administered by the PRC. The Company recognizes this
adjustment when it is permitted to bill under PRC guidelines.

        The  Company's   Generation  and  Trading  Operations  record  operating
revenues  to the  Utility  Operations  and to third  parties  in the  period  of
delivery.  Certain sales to firm requirements wholesale customers include a cost
of energy  adjustment for recoverable  fixed costs. The Company  recognizes this
adjustment  when it is permitted to bill under FERC  guidelines.  Generation and
Trading  Operations  transactions  that are net settled,  whereby the  unplanned
netting  of  delivery  and  acceptance  of  electric  power for  convenience  of
transmission and settlement  occurs  (referred to as a "bookout"),  are recorded
gross in operating revenues and fuel and purchased power expense.

        Financial   instruments  utilized  in  connection  with  energy  trading
activities  are accounted for at fair market value under EITF 98-10.  Unrealized
gains and losses  resulting from the impact of price  movements on the Company's
contracts are recognized as  adjustments  to Generation  and Trading  Operations
operating revenues.  The market prices used to value these transactions  reflect
management's  best  estimate   considering  various  factors  including  closing
exchange and over-the  counter  quotations,  time value and  volatility  factors
underlying the commitments.

       The cash flow impact of these financial  instruments is reflected as cash
flows from operating activities in the Consolidated Statement of Cash Flows.


                                      F-9
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

Summary of Significant Accounting Policies (Continued)

Recoverable Fuel Costs

       The Company's  fuel and purchased  power costs for its firm  requirements
wholesale  customers  that are  above  the  levels  included  in base  rates are
recoverable  under a fuel and purchased  power cost  adjustment  approved by the
FERC. Such costs are deferred until the period in which they are

billed or credited to customers. The Company's gas purchase costs that are above
levels  included  in base rates are  recoverable  under  similar  Purchased  Gas
Adjustment Clause administered by the PRC.

Depreciation and Amortization

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


                                               2000     1999     1998
                                              ------   ------   ------

       Electric plant ......................   3.42%    3.38%    3.32%
       Gas plant ...........................   3.28%    3.37%    3.06%
       Common plant ........................   6.75%    7.73%    7.34%


       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 respective license period.  Such amounts are based
on the future value of expenditures estimated to be required to decommission the
plant.

For gas,  the excess or  deficiency  is  accumulated  for refund or surcharge to
customers  on an annual  basis.  Future  recovery  of these  costs is subject to
approval by the PRC.

Amortization of Debt Acquisition Costs

        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
PRC 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 PRC retail rates are recognized  immediately as expense
or income as they are incurred.

                                      F-10
<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

Summary of Significant Accounting Policies (Continued)

Stock Options

       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.

Income Taxes

       The  Company  reports  income tax  expense in  accordance  with SFAS 109,
Accounting  for Income Taxes.  SFAS 109 requires that deferred  income taxes for
temporary  differences  between  financial  and income tax reporting be recorded
using the liability method. Therefore,  deferred income taxes are computed using
the statutory  tax rates  scheduled to be in effect when  temporary  differences
reverse.  Current  PRC  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
required by the Internal  Revenue Code.  Items accorded  flow-through  treatment
under PRC 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.

Asset Impairment

       The Company regularly  evaluates the carrying value of its regulatory and
tangible  long-lived assets in relation to their future  undiscounted cash flows
to  assess  recoverability  in  accordance  with SFAS  121,  Accounting  for the
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of.
Impairment  testing of power  generation  assets is  performed  periodically  in
response to changes in market conditions  resulting from industry  deregulation.
Power generation assets used to supply  jurisdictional and wholesale markets are
evaluated on a group basis using future undiscounted cash flows based on current
open market price  conditions.  The Company also has generation  assets that are
used  for the sole  purpose  of  reliability.  These  assets  are  tested  as an
individual  group.  Power generation  assets held under operating leases are not
currently evaluated for impairment (see note 4).

Financial Instruments

       The Company  enters into energy  trading  contracts to take  advantage of
market opportunities associated with the purchase and sale of electricity.  Such
contracts  are  marked-to-market  each  period  end.  In  addition,  the Company
protected  its  decommissioning  and retiree trust assets  against  market price
volatility by purchasing  financial put and call options.  These instruments are
also  marked-to-market  each period end.  The Company also  periodically  hedges
natural gas purchases to limit commodity price volatility.  Unrealized gains and
losses  from  natural  gas-related  swaps,  futures and  forward  contracts  are
deferred and recognized as the natural gas is sold and is recovered  through gas
rates charged to customers (see Note 5).


                                      F-11
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

Summary of Significant Accounting Policies (Continued)

Accounting for Contracts Involved in Energy Trading and Risk Management
Activities

       In December  1998,  the Emerging  Issues Task Force  ("EITF") of the FASB
reached  consensus on EITF Issue No. 98-10 which  requires  that energy  trading
contracts  should be  marked-to-market  (measured at fair value determined as of
the  balance  sheet  date)  with the  gains and  losses  included  in  earnings.
Effective  January 1, 1999, the Company adopted EITF Issue No. 98-10. The effect
of the initial  application  of the new  standard  is  reported as a  cumulative
effect of a change in accounting principle. (See Note 5)

Change in Presentation

       Certain prior year amounts have been  reclassified to conform to the 2000
financial statement presentation.

(1)    Nature of Business and Segment Information

       The  Company  is an  investor-owned  integrated  utility  engaged  in the
generation, transmission,  distribution and sale and trading of electricity, and
the  transportation,  distribution  and sale of natural  gas. In  addition,  the
Company  provides  energy and utility  related  services under its  wholly-owned
subsidiary, Avistar, Inc. ("Avistar").

       Under  current law, the Company is not in any direct  retail  competition
with any other regulated electric and gas utility.  The Restructuring Act in New
Mexico,  which was enacted into law on April 8, 1999, opens the state's electric
power market to customer  choice for certain  customers  beginning 2002 with the
balance of  customers  obtaining  open access mid 2002.  The  Restructuring  Act
requires that assets and activities  subject to the PRC jurisdiction,  primarily
electric  and  gas   distribution,   and  transmission   assets  and  activities
(collectively,  the "regulated  business"),  be separated from other competitive
business,  primarily  electric  generation  and service and certain other energy
services  operations   (collectively,   "the  unregulated   businesses").   Such
separation is required to be  accomplished  through the creation of at least two
separate  corporations.  The  Company  has decided to  accomplish  the  mandated
separation  by the  formation  of a  holding  company  and the  transfer  of the
regulated businesses to a newly-created, wholly owned subsidiary of such holding
company,  subject to various  regulatory  and other  approvals.  Under  existing
deadlines,  corporate  separation of the regulated business from the competitive
businesses  must be  completed  by  August  1,  2001.  However,  the New  Mexico
Legislature  is currently  considering  various  legislative  actions that could
delay  open  access  and  activities  under  the  Restructuring  Act,  including
corporate separation.

       As it currently  operates,  the Company's principal business segments are
utility operations, which include the Electric Product Offering ("Electric") and
the natural Gas Product Offering ("Gas"),  and Generation and Trading Operations
("Generation").  The Electric  Product  Offering  consists of two major business
lines that include distribution and transmission. The transmission business line
does  not meet the  definition  of a  segment  due to its  immateriality  and is
combined with the distribution business line for disclosure purposes.

                                      F-12
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(1)    Nature of Business and Segment Information (Continued)

       Electric  procures  all of its  electric  power needs from the  Company's
Generation and Trading  Operations.  These  intersegment  sales are priced using
internally  developed  transfer  pricing,  and are not  based on  market  rates.
Customer  electric rates are regulated by the PRC and determined on a basis that
includes  the  recovery  of the  cost  of  power  production  by  the  Company's
Generation  and Trading  Operations  and a return on the related  assets,  among
other things.

                               UTILITY OPERATIONS

Electric

       The Company  provides  jurisdictional  retail electric service to a large
area of north central New Mexico,  including the cities of Albuquerque and Santa
Fe, and certain other areas of New Mexico.  Approximately  369,000,  361,000 and
358,000  retail  electric  customers  were served by the Company at December 31,
2000,  1999 and 1998,  respectively.  The Company owns or leases  2,781  circuit
miles of  transmission  lines,  interconnected  with other  utilities  east into
Texas, west into Arizona, and north into Colorado and Utah.

Gas

       The Company's gas operations distributes natural gas to most of the major
communities  in  New  Mexico,   including  Albuquerque  and  Santa  Fe,  serving
approximately  435,000,  426,000 and 419,000  customers as of December 31, 2000,
1999 and 1998. The Company's customer base includes both sales-service customers
and transportation-service customers.

       The  Company  obtains its supply of natural gas  primarily  from  sources
within New Mexico pursuant to contracts with producers and marketers.

                        GENERATION AND TRADING OPERATIONS

       The Company's  generation  and trading  operations  serve four  principal
markets.  These  include  sales to the  Company's  Utility  Operations  to cover
jurisdictional electric demand, sales to firm-requirements  wholesale customers,
other  contracted  sales to third  parties  for a  specified  amount of capacity
(measured in  megawatts-MW)  or energy  (measured in megawatt  hours-MWh) over a
given period of time and energy  sales made on an hourly  basis at  fluctuating,
spot-market rates. As of December 31, 2000, the total net generation capacity of
facilities owned or leased by the Company was 1,653 MW, including a 132 MW power
purchase contract accounted for as an operating lease. In addition to generation
capacity, the Company purchases power in the open market.

                                   UNREGULATED

       The Company's wholly-owned subsidiary, Avistar, was formed in August 1999
as a New Mexico  corporation  and is currently  engaged in certain  unregulated,
non-utility businesses, including energy and utility-related services previously
operated by the Company. Unregulated also includes certain corporate activities,
which are not material.

                                      F-13
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(1)    Nature of Business and Segment Information (Continued)

RISKS AND UNCERTAINTIES

       The  Company's  future  results  may be  affected  by changes in regional
economic conditions; the outcome of labor negotiations with unionized employees;
fluctuations  in fuel,  purchased  power and gas prices;  the actions of utility
regulatory commissions;  changes in law; environmental  regulations and external
factors  such as the  weather.  As a result  of  state  and  Federal  regulatory
reforms, the public utility industry is undergoing a fundamental change. As this
occurs,  the electric  generation  business is  transforming  into a competitive
marketplace.  The  Company's  future  results will be impacted by its ability to
recover its  stranded  costs,  the market price of  electricity  and natural gas
costs  incurred  previously in providing  power  generation to electric  service
customers, and the costs of transition to an unregulated status. In addition, as
a result of  deregulation,  the Company may face competition from companies with
greater financial and other resources.

       Summarized  financial  information by business segment for 2000, 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
                                                Utility
                                 --------------------------------------
                                     Electric      Gas           Total     Generation  Unregulated   Consolidated
                                     --------      ---           -----     ----------  -----------   ------------
                                                                   (In thousands)
<S>                                   <C>         <C>        <C>           <C>           <C>           <C>
Twelve Months Ended:
--------------------------
2000:
Operating revenues:
   External customers.............    538,758     319,924      858,682       750,434       2,158        1,611,274
   Intersegment revenues..........        707           -          707       324,744           -          325,451
Depreciation and amortization.....     32,410      19,994       52,404        40,628          27           93,059
Interest income (loss)............      1,158         517        1,675        39,439       7,581           48,695
Net interest charges..............     17,771      11,089       28,860        36,065         517           65,442
Income tax expense (benefit)
  From continuing operations......     27,883       7,576       35,459        44,541      (5,656)          74,344
Operating income (loss)...........     56,827      18,600       75,427        80,359     (23,312)         132,474
Segment net income (loss).........     39,711      10,885       50,596        74,095     (23,745)         100,946

Total assets......................    707,837     521,636    1,229,473     1,410,554     254,206        2,894,233
Gross property additions..........     51,815      40,418       92,233        53,025       1,620          146,878


</TABLE>
                                      F-14
<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(1)    Nature of Business and Segment Information (Continued)

       Summarized  financial  information by business segment for 2000, 1999 and
1998 is as follows:

<TABLE>
<CAPTION>
                                                Utility
                                   ------------------------------------
                                      Electric      Gas         Total     Generation  Unregulated   Consolidated
                                     --------      -----        -----     ----------  -----------   ------------
                                                                  (In thousands)
<S>                                   <C>         <C>          <C>           <C>           <C>        <C>
Twelve Months Ended:
--------------------------
1999:
Operating revenues:
   External customers.............    540,867     236,711      777,578       371,109       8,855      1,157,542
   Intersegment revenues..........        707           -          707       318,872           -        319,579
Depreciation and amortization.....     31,113      19,210       50,323        40,253       2,084         92,660
Interest income (loss)............         76       1,066        1,142        39,439       7,581         48,162
Net interest charges..............     19,822      13,585       33,407        36,561         699         70,667
Income tax expense (benefit)
  From continuing operations......     23,806       2,299       26,105        25,454      (9,249)        42,310
Operating income (loss)...........     57,769      16,102       73,871        58,561     (12,352)       120,080
Cumulative effect of a change in
  Accounting Principle, net of tax          -           -            -         3,541           -          3,541
Segment net income (loss).........     37,499       2,780       40,279        57,068     (14,192)        83,155

Total assets......................    734,898     449,790    1,184,688     1,445,145      93,434      2,723,267
Gross property additions..........     42,253      27,150       69,403        23,899       2,334         95,636

1998:
Operating revenues:
   External customers.............    555,568     255,974      811,542       279,636       1,267      1,092,445
   Intersegment revenues..........        707           -          707       362,722           -        363,429
Depreciation and amortization.....     30,586      14,961       45,547        37,114       3,480         86,141
Interest income...................         35         957          992        16,927      17,150         35,069
Net interest charges..............     10,211       6,498       16,709        45,559         949         63,217
Income tax expense (benefit)
  from continuing operations......     21,339       9,526       30,865        36,194     (10,768)        56,291
Operating income (loss)...........     40,386      19,051       59,437        91,462     (15,250)       135,649
  Discontinued Operations
  net of tax......................          -           -            -             -     (12,437)       (12,437)
Segment net income (loss).........     32,219      13,761       45,980        65,610     (28,908)        82,682

Total assets......................    732,609     417,948    1,150,557     1,469,635      48,410      2,668,602
Gross property additions..........     55,566      36,963       92,529        30,557       5,744        128,830

       On August 4, 1998, the Company  adopted a plan to discontinue the natural
  gas trading  operations of its Energy  Services  Business Unit and  completely
  discontinued these operations on December 31, 1998 (see Note 13).

</TABLE>
                                      F-15
<PAGE>


(2)    Regulatory Assets and Liabilities

        The Company is subject to the  provisions  of SFAS 71,  with  respect to
operations  regulated by the PRC.  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:

                                                      2000       1999
                                                   ---------   ---------
                                                       (In thousands)
Assets:
Current:
   PGAC .......................................... $  46,390   $  19,310
   Gas Take-or-Pay Costs .........................     1,214       4,746
                                                   ---------   ---------
      Subtotal ...................................    47,604      24,056
                                                   ---------   ---------
Deferred:
   Deferred Income Taxes .........................    33,848      35,713
   Loss on Reacquired Debt .......................     7,687       8,133
   Gas Imputed Revenues...........................     2,117       7,290
   Gas Reservation Fees ..........................         -       7,029
   Deferred Customer Expense on Gas Assets Sale ..     7,984       6,468
   Gas Retirees' Health Care Costs ...............     1,724       3,264
   Proposed Transmission Line Costs ..............     2,377       2,432
   Gas Rate Case Costs ...........................         -       1,571
   Other .........................................       482         331
                                                   ---------   ---------
      Subtotal  ..................................    56,219      72,731
                                                   ---------   ---------
   Stranded and Transition Assets.................   170,630     123,167
                                                   ---------   ---------
      Total Assets................................   274,453     219,454
                                                   ---------   ---------
Liabilities:
Deferred:
   Deferred Income Taxes .........................   (43,834)    (46,815)
   Gas Regulatory Reserve ........................      (980)    (20,830)
   Customer Gain on Gas Assets Sale ..............    (7,226)     (7,226)
   DOE Line Acquisition...........................    (2,490)     (3,083)
   Gain on Reacquired Debt .......................    (1,791)       (708)
   Other..........................................      (568)       (607)
                                                   ---------   ---------
   Subtotal.......................................   (56,889)    (79,269)
                                                   ---------   ---------
Stranded and Transition Liabilities...............   (29,359)    (24,319)
                                                   ---------   ---------
      Total Liabilities...........................   (86,248)   (103,588)
                                                   ---------   ---------
      Net Regulatory Assets ...................... $ 188,205   $ 115,866
                                                   =========   =========



                                      F-16
<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(2)    Regulatory Assets and Liabilities (Continued)

       Substantially  all of the  Company's  regulatory  assets  and  regulatory
liabilities  are reflected in rates charged to customers or have been  addressed
in a regulatory proceeding.

       In 1999,  the State of New  Mexico  enacted  the  Restructuring  Act that
provides guidelines to deregulate power generation  activities in New Mexico and
opens the state's power markets to customer choice beginning 2002,  according to
the currently effective schedule. The Restructuring Act recognizes that electric
utilities should be permitted a reasonable opportunity to recover an appropriate
amount of the costs previously  incurred in providing  electric service to their
customers ("stranded costs"). Stranded costs represent all costs associated with
generation  related  assets,  currently  in rates,  in  excess  of the  expected
competitive  market price and include plant  decommissioning  costs,  regulatory
assets, and lease and lease-related costs.  Utilities will be allowed to recover
no less  than 50% of  stranded  costs  through  a  non-bypassable  charge on all
customer bills for five years after  implementation of customer choice.  The PRC
could authorize a utility to recover up to 100% of its stranded costs if the PRC
finds that  recovery of more than 50%:  (i) is in the public  interest;  (ii) is
necessary to maintain the financial  integrity of the public  utility;  (iii) is
necessary to continue adequate and reliable service;  and (iv) will not cause an
increase  in rates  to  residential  or  small  business  customers  during  the
transition period. The Restructuring Act also allows for the recovery of nuclear
decommissioning  costs by means of a separate  wires charge over the life of the
underlying generation assets.

        Approximately  $141  million of costs  associated  with the  unregulated
businesses under the  Restructuring  Act were established as regulatory  assets.
Because of the  Company's  belief that  recovery is probable,  these  regulatory
assets continue to be classified as regulatory assets,  although the Company has
discontinued Statement of Financial Accounting Standards No. 71, "Accounting for
the Effects of Certain Types of Regulation"  (SFAS 71) and adopted  Statement of
Financial Accounting Standards No. 101, "Regulated  Enterprises--Accounting  for
the  Discontinuance  of  Application of FASB Statement 71." In 2000, the Company
expensed $6.6 million of these assets based on management's view of the probable
financial outcome of restructuring in New Mexico upon existing circumstances. If
discussions with the PRC staff and other parties result in a settlement in which
the amount the Company  recovers for  stranded  costs is less than the amount it
has  recorded on the balance  sheet as  regulatory  assets,  the Company will be
required to write-off the difference between its recovery of these costs and the
amount it has currently recorded.  Likewise,  if a delay in corporate separation
occurs,  the  Company may be  required  to  write-off  all or a portion of these
assets due to the uncertainty of recovery resulting from enactment of the delay.
However,  Senate Bill 266 as amended establishes  certain regulatory  provisions
affecting  these costs,  which if enacted  along with the delay,  will allow the
Company  to recover  mine  reclamation  costs.

       Pursuant  to the  Restructuring  Act,  utilities  will also be allowed to
recover in full any prudent and reasonable  costs incurred in implementing  full
open access ("transition costs"). The transition costs will be recovered through
2007 under the current schedule by means of a separate wires charge. The Company
estimates  these costs as being in excess of $46 million,  including  allowances
for certain costs which are non-deductible  for income tax purposes.  Transition
costs include  professional fees,  financing costs including  underwriting fees,
consents  relating to the  transfer  to assets,  management  information  system
changes including billing system changes and public and customer


                                      F-17
<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(2)     Regulatory Assets and Liabilities (Continued)

communications.  Recoverable  transition costs will be capitalized and amortized
over the recovery period to match related  revenues.  Costs not recoverable will
be expensed when incurred unless  otherwise  capitalizable  under the accounting
rules.

        Regulatory assets and liabilities  reflected in the Consolidated Balance
Sheets as of  December  31,  related to  stranded  or  transitions  costs are as
follows:

                                               2000            1999
                                           -----------     ------------
                                                  (In thousands)
Assets
Transition Costs.......................... $   19,069      $     4,293
Mine Reclamation Costs....................    113,856           78,856
Deferred Income Taxes.....................     35,726           37,725
Loss on Reacquired Debt...................      1,979            2,293
                                           -----------     ------------
   Subtotal...............................    170,630          123,167
                                           -----------     ------------

Liabilities
Deferred Income Taxes.....................    (20,696)         (15,091)
PVNGS Prudence Audit......................     (5,434)          (5,809)
Settlement Due Customers..................     (3,205)          (3,384)
Gain on Reacquired Debt...................        (24)             (35)
                                           ------------    ------------
   Subtotal...............................    (29,359)         (24,319)
                                           ------------    ------------
   Net Stranded Cost and Transition Cost.. $  141,271      $    98,848
                                           ============    ============

        Based on a current evaluation of the various factors and conditions that
are expected to impact future cost recovery,  the Company  believes that its net
regulatory assets are probable of future recovery.









                           (Intentionally Left Blank)

                                      F-18
<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(3)    Capitalization

       Changes in common stock,  additional  paid-in capital,  retained earnings
and comprehensive income are as follows:
<TABLE>
<CAPTION>

                                                      Common Stock
                                            -----------------------------
                                                                            Additional
                                               Number        Aggregate       Paid-In        Retained
                                              Of Shares      Par Value       Capital        Earnings
                                            --------------  -------------  ------------   -------------
                                                                        (Dollars in thousands)
<S>                                            <C>              <C>           <C>           <C>
Balance at December 31, 1998................   41,774,083       208,870       465,386        186,220
Stock repurchase                               (1,070,700)       (5,353)      (13,446)             -
Tax benefit from exercise of stock options..            -             -         1,453              -
Net earnings................................            -             -             -         83,155
Dividends:
   Cumulative preferred stock...............            -             -             -           (586)
   Common Stock.............................            -             -             -        (40,960)
Other Comprehensive Income, net of tax:
   Unrealized gain (loss) on securities:
     Unrealized holding gains arising
     During the period......................            -             -             -              -
     Less reclassification adjustment for
     Gains included in net income...........            -             -             -              -
Minimum pension liability adjustment........            -             -             -              -

                                             --------------  ------------  ------------  --------------
Balance at December 31, 1999................   40,703,383       203,517       453,393        227,829
Stock Repurchase............................   (1,585,584)       (7,928)      (19,939)             -
   Exercise of stock options................            -             -        (1,232)             -
Net earnings................................            -             -             -        100,946
Dividends:
   Cumulative preferred stock...............            -             -             -           (586)
   Common Stock.............................            -             -             -        (31,346)
Other Comprehensive Income, net of tax:
   Unrealized gain (loss) on securities:
     Unrealized holding gains arising
     During the period......................            -             -             -              -
     Less reclassification adjustment for
     Gains included in net income...........            -             -             -              -

                                             --------------  ------------  ------------  -------------
Balance at December 31, 2000................   39,117,799       195,589       432,222        296,843
                                             ==============  ============  ============  =============

</TABLE>


                                      F-19
<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(3)    Capitalization (Continued)

Comprehensive Income

       The  Company's  investments  held in rabbi trust for  certain  retirement
benefits  are  classified  as  available-for-sale,  and  accordingly  unrealized
holding gains and losses are recognized as a component of comprehensive  income.
Realized  gains and losses are included in earnings.  Net losses  related to the
Company's  pension plans,  not yet recognized as net periodic  pension costs (or
additional  minimum  liability)  are  reported as a component  of  comprehensive
income.  Changes in the liability are adjusted as necessary.  All  components of
comprehensive income are recorded, net of any tax benefit or expense. A deferred
asset or liability is established for the resulting temporary difference.

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                                                      Year Ended December 31,
                                                   ----------------------------
                                                     2000      1999      1998
                                                   --------  --------  --------
                                                           (In thousands)
Net Earnings...................................... $100,946   $83,155   $82,682
  Other Comprehensive Income, net of tax:
    Unrealized gain (loss) on securities:
       Unrealized holding gains arising from
       the period.................................    2,794     4,120     1,519
       Less reclassification adjustment for gains
       included in net income.....................   (5,173)   (4,282)     (673)
    Minimum pension liability adjustment..........        -     1,387      (205)
                                                   --------  --------  --------
Total Other Comprehensive Income..................   (2,379)    1,225       641
                                                   --------- --------  --------
Total Comprehensive Income........................  $98,567   $84,380   $83,323
                                                   ========= ========  ========


Common Stock

       The number of authorized  shares of common stock with par value of $5 per
share is 80 million shares.  The declaration of common dividends is dependent on
a number of  factors,  including  the extent to which  cash  flows will  support
dividends,  the availability of retained earnings,  the financial  circumstances
and performance of the Company and the PRC's decisions on the Company's  various
regulatory cases currently pending. In addition, the ability to recover stranded
costs in deregulation,  future growth plans and the related capital requirements
and standard business  considerations  will also affect the Company's ability to
pay dividends.

       In March  1999,  the  Company's  Board of  Directors  approved  a plan to
repurchase up to 1,587,000 shares of the Company's outstanding common stock with
maximum  purchase  price of $19.00 per share.  In December  1999,  the Company's
Board of Directors authorized the Company to repurchase

                                      F-20
<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(3)    Capitalization (Continued)

up to an additional  $20.0 million of the Company's common stock. As of December
31,  1999,  the  Company  had  repurchased  1,070,700  shares of its  previously
outstanding  common  stock at a cost of $18.8  million.  From  January  2,  2000
through March 31, 2000, the Company  repurchased an additional  1,167,684 shares
of its previously outstanding common stock at a cost of $18.9 million. On August
8, 2000,  the Company's  Board of Directors  approved a plan to repurchase up to
$35 million of the  Company's  common stock through the end of the first quarter
of 2001. From August 8, 2000 through December 31, 2000, the Company  repurchased
an additional  417,900 shares of its outstanding  common stock at a cost of $9.0
million.  The Company may from time-to-time  repurchase  additional common stock
for various corporate purposes.

        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.

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 additional preferred stock.

Long-Term Debt

       The Company has  $268,420,000  of  long-term  debt that matures in August
2005.

       On March 11, 1998,  the Company  modified its 1947  Indenture of Mortgage
and Deed of Trust;  no future bonds can be issued under the mortgage.  The first
mortgage  bonds  continue to serve as collateral  for the  tax-exempt  pollution
control  revenue  bonds  ("PCBs") in the  outstanding  principal  amount of $111
million.

       In  March  1998,   the  Company   replaced  the  first   mortgage   bonds
collateralizing  $463 million of PCBs with senior unsecured notes ("SUNs") which
were issued under a new senior  unsecured note  indenture.  Also, in March 1998,
the Company retired $140 million principal amount of first mortgage bonds. While
first mortgage bonds continue to serve as collateral for PCBs in the outstanding
principal  amount of $111  million,  the lien of the mortgage was  substantially
reduced  to cover  only the  Company's  ownership  interest  in PVNGS.  With the
exception of the $111 million of PCBs secured by first mortgage bonds,  the SUNs
are and will be the senior debt of the Company.

                                      F-21
<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(3)    Capitalization (Continued)

       In August 1998,  the Company  issued and sold $435 million of SUNs in two
series,  the 7.10% Series A due August 1, 2005, in the principal  amount of $300
million,  and the 7.50% Series B due August 1, 2018, in the principal  amount of
$135 million. These SUNs were issued under an indenture similar to the indenture
under which the SUNs were issued in March 1998,  and it is expected  that future
long-term debt financings will be similarly issued.

       On October 28, 1999,  tax-exempt pollution control revenue bonds of $11.5
million with an interest  rate of 6.60% were issued to partially  reimburse  the
Company  for  expenditures  associated  with its share of a  recently  completed
upgrade of the emission control system at SJGS.

       In 1999, the Company retired $31.6 million of its 7.10% senior  unsecured
notes through open market purchases, utilizing the funds from operations and the
funds from temporary  investments.  In January 2000,  the Company  retired $35.0
million  of its 7.5%  senior  unsecured  notes  through  open  market  purchases
utilizing  funds from operations and the funds from temporary  investments.  The
gains recognized on these purchases were immaterial.

Revolving Credit Facility and Other Credit Facilities

        At December 31, 2000, the Company had a $150 million unsecured revolving
credit facility (the  "Facility") with an expiration date of March 11, 2003. The
Company must pay commitment  fees of 0.1875% per year on the total amount of the
Facility. There were no outstanding borrowings under the Facility as of December
31,  2000,  and the  Company  was in  compliance  with all  covenants  under the
Facility.

(4)    Lease Commitments

        The  Company  leases  interests  in  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.  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, 2000
are:

     2000 .....................................  $   78,998
     2001 .....................................      78,884
     2002 .....................................      78,881
     2003 .....................................      78,881
     2004 .....................................      78,881
     Later years ..............................     723,305
                                                 ----------
        Total minimum lease payments ..........  $1,117,830
                                                 ==========

                                      F-22
<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(4)    Lease Commitments (Continued)

       Operating  lease expense,  inclusive of PVNGS leases,  was  approximately
$81.6  million  in 2000,  $81.1  million  in 1999  and  $82.6  million  in 1998.
Aggregate minimum payments to be received in future periods under  noncancelable
subleases are approximately $4.1 million.

(5)    Financial Instruments

       The Company uses  derivative  financial  instruments to manage risk as it
relates to changes in natural gas and electric prices and adverse market changes
for  investments  held by the Company's  various  trusts.  The Company also uses
certain  derivative  instruments for bulk power electricity  trading purposes in
order  to  take  advantage  of  favorable  price  movements  and  market  timing
activities in the wholesale power markets.

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

<TABLE>
<CAPTION>
                                                         2000                  1999
                                                ---------------------  -----------------------
                                                  Carrying     Fair      Carrying      Fair
                                                   Amount     Value       Amount       Value
                                                ----------  ----------  ----------  ----------
                                                              (In thousands)
<S>                                               <C>        <C>       <C>          <C>
Long-Term Debt .................................  953,823    930,359   $(988,489)   $(932,687)
Investment in PVNGS Lessors' Notes..............  405,960    440,079     424,605      455,888
Derivatives.....................................    4,296    194,372         117      (25,921)
Decommissioning Trust...........................   54,977     54,977      51,752       51,752
Fossil-Fueled Plant Decommissioning Trust.......    4,760      4,760       4,591        4,591
Rabbi Trust.....................................   12,284     14,281      16,901       16,931

</TABLE>

        Fair  value  is  based  on  market  quotes  provided  by  the  Company's
investment bankers and trust advisors and the Company's risk management models.

        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.

        The Company is exposed to credit losses in the event of  non-performance
or non-payment by  counterparties.  The Company uses a credit management process
to assess and monitor the financial conditions of counterparties.  The Company's
credit risk with its  largest  counterparty  as of  December  31, 2000 was $16.7
million.

Natural Gas Contracts

       Pursuant to a 1997 order issued by the NMPUC, predecessor to the PRC, the
Company has previously  entered into swaps to hedge certain  portions of natural
gas supply  contracts in order to protect the  Company's  natural gas  customers
from the risk of adverse  price  fluctuations  in the natural  gas  market.  The
financial impact of all hedge gains and losses from swaps is recoverable through
the Company's  purchased gas adjustment  clause as deemed prudently  incurred by
the PRC. As a result,

                                      F-23
<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(5)    Financial Instruments (Continued)

earnings  were not affected by gains or losses  generated by these  instruments.
The  Company  hedged 40% of its  natural  gas  deliveries  during the  1998-1999
heating season.  Less than 15.5% of the 1998-1999  heating season  portfolio was
hedged using financial  hedging  contracts.  The Company hedged a portion of its
1999-2000  heating season gas supply portfolio  through the use of both physical
and financial hedging tools.  Less than 9.1% of the Company's  1999-2000 heating
season portfolio was hedged using financial hedging contracts.

       The Company  contracted  for gas price caps, a type of hedge,  to protect
its natural gas customers  from price risk during the 2000-2001  heating  season
through the use of financial  hedging tools.  The Company expended $5 million to
purchase  price cap options that limit the maximum  amount the Company would pay
for gas during the winter heating season.  The Company  recovered the $5 million
in hedging  costs during the months of October and  November  2000 in equal $2.5
million  allotments as a component of the PGAC.  Results of the winter 2000-2001
hedging  activities  were an estimated $27 million  benefit to system gas supply
customers in the form of lower gas costs, net of the cost of the price caps.

Fuel Hedging

        The Company's  Generation and Trading Operations  commenced a program to
reduce its exposure to  fluctuations in prices for gas and oil purchases used as
a fuel source for some of its generation.  The Generation and Trading Operations
purchased futures  contracts for a portion of its anticipated  natural gas needs
in the third  quarter  and fourth  quarter.  The  futures  contracts  capped the
Company's  natural  gas  purchase  prices  at $3.70 to $3.99 per MMBTU and had a
notional  principal of $4.5 million.  Simultaneously,  a delivery location basis
swap was purchased for  quantities  corresponding  to the futures  quantities to
protect against price  differential  changes at the specific  delivery points. A
portion of financial  instruments settled in the third quarter and the remaining
in the fourth quarter.  The Company accounted for these  transactions as hedges;
accordingly,  gains and losses  related to these  transactions  are deferred and
recognized  in earnings  as an  adjustment  to its cost of fuel.  The fuel hedge
program ended in October 2000.

Electricity Trading Contracts

       To take advantage of market  opportunities  associated  with the purchase
and  sale of  electricity,  the  Company's  Generation  and  Trading  Operations
periodically enters into derivative financial instrument contracts. In addition,
the Company enters into forward  physical  contracts and physical  options.  The
Company generally accounts for these financial instruments as trading activities
under the accounting  guidelines set forth under The Emerging  Issues Task Force
("EITF") Issue No. 98-10, although at times the Company may enter into contracts
that it may designate as hedges.  As a result,  all open contracts are marked to
market  at the end of each  period.  The  physical  contracts  are  subsequently
recognized  as revenues or  purchased  power when the actual  physical  delivery
occurs.  The Company  implemented EITF Issue No. 98-10 as of January 1, 1999 and
recorded as a cumulative  effect of a change in  accounting  principle a gain of
approximately $3.5 million, net of taxes, or $0.09 per common share, on net open
physical  electricity  purchases and sales commitments  considered to be trading
activities.
                                      F-24

<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(5)    Financial Instruments (Continued)

       Through  December 31, 2000,  the  Company's  wholesale  electric  trading
operations  settled trading contracts for the sale of electricity that generated
$88.9 million of electric  revenues by  delivering  2.1 million KWh. The Company
purchased  $78.6  million or 1.9 million  KWh of  electricity  to support  these
contractual sale and other open market sales opportunities.

       As of December 31, 2000, the Company had open trading contract  positions
to buy $10.9  million and to sell $4.3 million of  electricity.  At December 31,
2000,  the Company had a gross  mark-to-market  gain (asset  position)  on these
trading  contracts  of $6.8  million and gross  mark-to-market  loss  (liability
position) of $11.4 million, with net mark-to-market loss (liability position) of
$4.6  million.  The  mark-to-market  valuation is  recognized  in earnings  each
period.

       The Company's wholesale power marketing  operations,  including both firm
commitments  and  trading  activities,  are  managed  through  an  asset  backed
strategy,  whereby the  Company's  aggregate net open position is covered by its
own excess generation capabilities. The Company is exposed to market risk if its
generation   capabilities   were  disrupted  or  if  its   jurisdictional   load
requirements  were greater  than  anticipated.  If the Company were  required to
cover all or a portion of its net open contract position,  it would have to meet
its  commitments   through  market   purchases.   The  Company's   value-at-risk
calculation  considers this exposure (see Item 7A.  Quantitative and Qualitative
Disclosure About Market Risk).

New Accounting Standard

       On January 1, 2001,  the  Company  implemented  Statement  of  Financial
Accounting Standard No. 133,  Accounting for Derivative  Instruments and Hedging
Activities (see Note 15 - New and Proposed Accounting Standards).

Hedge of Trust Assets

       As of December  31, 2000,  the Company had about $33 million  invested in
domestic  stocks  in  various  trusts  for  nuclear  decommissioning,  executive
retirement and retiree medical benefits.  The Company uses financial derivatives
based on the  Standard & Poor's  ("S&P")  500 Index to limit  potential  loss on
these investments due to adverse market fluctuations. The options are structured
as a collar, protecting the portfolio against losses beyond a certain amount and
balancing the cost of that downside protection by forgoing gains above a certain
level.  If the S&P 500 Index is  within  the  specified  range  when the  option
contract expires, the Company will not be obligated to pay, nor will the Company
have the right to  receive  cash.  In  February  2000,  certain  contracts  were
terminated.  These new contracts  increase the downside  protection  and further
limit the upside gain. Subsequently,  the Company entered into similar contracts
which expire on June 15, 2001.  In October and November  2000,  certain of these
contracts were terminated. The Company recognized realized gains of $0.7 million
for the year ended December 31, 2000, and recorded net unrealized  gains of $3.0
million  (pre-tax)  on the market  value of its  options.  The net effect of the
collar  instruments  for the year ended December 31, 2000 were net pre-tax gains
of $3.7 million.

                                      F-25
<PAGE>

<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(6)    Earnings Per Share

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

<TABLE>
<CAPTION>
                                                                           2000         1999          1998
                                                                        -----------  ----------   -----------
<S>                                                                     <C>           <C>          <C>
Basic:
Net Earnings from Continuing Operations...............................   $ 100,946     $ 79,614    $ 95,119
Discontinued Operations, net of tax (note 13):                                  -             -     (12,437)
Cumulative Effect of a Change in Accounting
   Principle, net of tax (note 14)....................................                    3,541           -
                                                                        -----------  -----------  -----------
Net Earnings..........................................................     100,946       83,155      82,682
Preferred Stock Dividend Requirements.................................         586          586         586
                                                                        -----------  -----------  -----------
Net Earnings Applicable to Common Stock...............................   $ 100,360     $ 82,569    $ 82,096
                                                                        ===========  ===========  ===========
Average Number of Common Shares Outstanding...........................      39,487       41,038      41,774
                                                                        ===========  ===========  ===========
Net Earnings (Loss) per Share of Common Stock:
  Earnings from continuing operations.................................    $   2.54     $   1.93    $   2.27
  Discontinued operations (note 13)...................................           -            -       (0.30)
  Cumulative effect of a change in accounting principle (note 14).....           -         0.08           -
                                                                        -----------  -----------  -----------
Net Earnings per Share of Common Stock (Basic)........................    $   2.54     $   2.01    $   1.97
                                                                        ===========  ===========  ===========
Diluted:
Net Earnings from Continuing Operations...............................   $ 100,946     $ 79,614    $ 95,119
Discontinued Operations, net of tax (note 13).........................           -            -     (12,437)
Cumulative Effect of a Change in Accounting
   Principle, net of tax (note 14)....................................           -        3,541           -
                                                                        -----------  -----------  -----------
Net Earnings..........................................................   $ 100,946       83,155      82,682
Preferred Stock Dividend Requirements.................................         586          586         586
                                                                        -----------  -----------  -----------
Net Earnings Applicable to Common Stock...............................   $ 100,360     $ 82,569    $ 82,096
                                                                        ===========  ===========  ===========
Average Number of Common Shares Outstanding...........................      39,487       41,038      41,774
Diluted effect of common stock equivalents (a)........................         223           65         298
                                                                        -----------  -----------  -----------
Average common and common equivalent shares
  Outstanding.........................................................      39,710       41,103      42,072
                                                                        ===========  ===========  ===========

Net Earnings (Loss) per Share of Common Stock:
  Earnings from continuing operations.................................    $   2.53     $   1.93     $  2.25
  Discontinued operations.............................................
                                                                                             -        (0.30)
  Cumulative effect of a change in accounting principle...............           -
                                                                                           0.08           -
                                                                        -----------  -----------  ----------
ngs per Share of Common Stock (Basic).................................    $   2.53     $   2.01     $  1.95
                                                                        ===========  ===========  ==========
</TABLE>
(a)  Excludes  the  effect of average  anti-dilutive  common  stock  equivalents
related to out of-the-money options of 105,336; 66,143; and 23,794 for the years
ended 2000, 1999 and 1998, respectively.

                                      F-26
<PAGE>

           PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(7)    Income Taxes

       Income taxes before  discontinued  operations and cumulative  effect of a
change in accounting principle consist of the following components:

                                                2000        1999        1998
                                            -----------  ----------  -----------
                                                       (In thousands)
Current Federal income tax ................   $ 41,666    $ 23,511     $ 32,785
Current state income tax ..................     13,726       8,502       11,451
Deferred Federal income tax ...............     19,729      13,494       15,797
Deferred state income tax .................      2,368         210         (324)
Amortization of accumulated
investment tax credits ....................     (3,143)     (3,409)      (3,418)
                                            -----------  ----------  -----------
  Total income taxes ......................   $ 74,346    $ 42,308     $ 56,291
                                            ===========  ==========  ===========

Charged to operating expenses .............   $ 53,964    $ 25,010     $ 41,306
Charged  to other income and deductions ...     20,382      17,298       14,985
                                            -----------  ----------  -----------
  Total income taxes.......................   $ 74,346    $ 42,308     $ 56,291
                                            ===========  ==========  ===========

       The Company's provision for income taxes before discontinued  operations
and  cumulative  effect of a change in  accounting  principle  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:

                                                    2000       1999       1998
                                                 ---------  ---------  ---------
                                                          (In thousands)

Federal income tax at statutory rates .......... $ 61,352   $ 42,673   $ 52,993
Investment tax credits .........................   (3,143)    (3,409)    (3,418)
Depreciation of flow-through items .............    2,250        605        531
Gains on the sale and leaseback of PVNGS
   Units 1 and 2 ...............................     (527)      (527)      (527)
Dividends received deduction....................        -     (1,301)         -
Annual reversal of deferred income taxes
  accrued at prior tax rates....................   (2,477)    (2,320)    (1,905)
Income tax related regulatory asset write-off...    6,552          -          -
State income tax ...............................    8,343      5,541      7,074
Other ..........................................    1,996      1,046      1,543
                                                 ---------  ---------  ---------
   Total income taxes .......................... $ 74,346   $ 42,308   $ 56,291
                                                 =========  =========  =========

 Effective tax rate                                 42.41%     34.70%     37.18%


                                      F-27
<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(7)    Income Taxes (Continued)

       The  components of the net  accumulated  deferred  income tax liability
were:
                                                         2000       1999
                                                      ---------  ---------
                                                         (In thousands)
Deferred Tax Assets:
   Alternative minimum tax credit carryforward.......  $      -   $ 18,420
   Nuclear decommissioning costs.....................    23,892     22,073
   Regulatory liabilities related to income taxes ...    41,695     44,547
   Other ............................................    69,469     52,199
                                                      ---------  ---------
       Total deferred tax assets ....................   135,056    137,239
                                                      ---------  ---------
Deferred Tax Liabilities:
   Depreciation .....................................   184,127    184,687
   Investment tax credit ............................    47,853     50,996
   Fuel costs .......................................    24,808     15,984
   Regulatory assets related to income taxes.........    67,435     71,170
   Other ............................................    45,631     33,668
                                                      ---------  ---------
       Total deferred tax liabilities ...............   369,854    356,505
                                                      ---------  ---------
Accumulated deferred income taxes, net ..............  $234,798   $219,266
                                                      =========  =========

       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...........  $15,532
Change in tax effects of income tax related regulatory assets
   and liabilities....................................................      882
Tax effect of mark-to-market on investments available for sale........    2,540
Deferred income tax expense from continuing operations
                                                                       ---------
   for the period.....................................................  $18,954
                                                                       =========

       The Company has no net operating  loss  carryforwards  as of December 31,
2000.

        The Company  defers  investment  tax credits  related to rate  regulated
assets and amortizes them over the estimated  useful lives of those assets.  The
Company  anticipates that this practice will continue when the generation assets
are no longer rate regulated upon full implementation of the Restructuring Act.

(8)   Pension and Other Postretirement Benefits

Pension Plan

       The  Company  and  its   subsidiaries   have  a  pension  plan   covering
substantially all of their union and non-union  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.


                                      F-28
<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(8)    Pension and Other Postretirement Benefits (Continued)

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.

       In  December  1996,  the  Board  of  Directors  approved  changes  to the
Company's  non-contributory  defined  benefit plan  ("Retirement  Plan") and the
implementation of a 401(k) defined  contribution plan effective January 1, 1998.
Salaries used in Retirement Plan benefit calculations were frozen as of December
31, 1997.  Additional  credited service can be accrued under the Retirement Plan
up to a limit determined by age and years of service. The Company  contributions
to the 401(k) plan consist of a 3 percent  non-matching  contribution,  and a 75
percent match on the first 6 percent contributed by the employee on a before-tax
basis. The Company contributed $8.9 and $8.4 million in the years ended December
31, 2000 and 1999.

       The following sets forth the pension plan's funded status,  components of
pension costs and amounts (in thousands) at December 31:

                                                           Pension Benefits
                                                       -------------------------
                                                           2000          1999
                                                       ------------  -----------
Change in Benefit Obligation:
   Benefit obligation at beginning of year...........    $331,061      $330,048
   Service cost......................................       6,491         7,407
   Interest cost.....................................      23,572        21,777
   Actuarial gain....................................     (30,934)      (12,797)
   Benefits paid.....................................     (17,038)      (15,374)
                                                       ------------  -----------
      Benefit obligation at end of period...........      313,152       331,061
                                                       ------------  -----------
Change in Plan Assets:
   Fair value of plan assets at beginning of year....     361,640       330,556
   Actual return on plan assets......................      45,225        46,458
   Employer contribution.............................           -             -
   Benefits paid.....................................     (17,038)      (15,374)
                                                       ------------  -----------
      Fair value of plan assets at end of year......      389,827       361,640
                                                       ------------  -----------
   Funded Status.....................................      76,675        30,579
   Unamortized transition assets.....................      (1,158)       (2,322)
   Unrecognized net actuarial gain...................     (57,445)      (12,209)
   Unrecognized prior service cost...................          44            78
                                                       ------------  -----------
      Prepaid pension cost..........................      $18,116       $16,126
                                                       ============  ===========
Weighted - Average Assumptions as of December 31,
   Discount rate.....................................        8.25%         7.50%
   Expected return on plan assets....................        9.00%         8.75%
   Rate of compensation increase.....................         N/A           N/A


                                      F-29
<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(8)    Pension and Other Postretirement Benefits (Continued)

                                                          Pension Benefits
                                              ---------------------------------
                                                 2000       1999        1998
                                              ---------  ----------  ----------
Components of Net Periodic Benefit Cost:
 Service cost...............................  $  6,491    $  7,407    $  6,660
 Interest cost..............................    23,572      21,777      20,101
 Expected return on plan assets.............   (30,923)    (27,466)    (26,755)
 Amortization of prior service cost.........    (1,130)     (1,130)     (1,130)
                                              ---------  ----------  ----------
   Net periodic pension costs (benefits)....  $ (1,990)   $    588    $ (1,124)
                                              =========  ==========  ==========


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 following  sets forth the plan's funded
status, components of net periodic benefit cost (in thousands) at December 31:

                                                           Other Benefits
                                                      --------------------------
                                                          2000          1999
                                                      -----------  -------------
Change in Benefit Obligation:
  Benefit obligation at beginning of year...........   $ 73,765       $ 74,539
  Service cost......................................      1,053          1,402
  Interest cost.....................................      5,428          4,782
  Actuarial loss (gain).............................      1,465         (6,958)
                                                      -----------  -------------
      Benefit obligation at end of period...........     81,711         73,765
                                                      -----------  -------------
Change in Plan Assets:
  Fair value of plan assets at beginning of year....     41,825         37,602
 Actual return on plan assets.......................      3,661          5,269
  Employer contribution.............................      1,431
                                                                           597
  Benefits paid.....................................     (2,224)        (1,643)
                                                      -----------  -------------
      Fair value of plan assets at end of year......     44,693         41,825
                                                      -----------  -------------
  Funded Status.....................................    (37,018)       (31,940)
  Unamortized transition assets.....................      3,181           (622)
  Unrecognized prior service cost...................     21,805         23,617
                                                      -----------  -------------
       Accrued postretirement benefits (cost).......  $ (12,032)      $ (8,945)
                                                      ===========  =============
Weighted - Average Assumptions as of December 31,
  Discount rate.....................................       8.25%          7.50%
  Expected return on plan assets....................       9.00%          8.75%
  Rate of compensation increase.....................        N/A            N/A


                                      F-30
<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(8)    Pension and Other Postretirement Benefits (Continued)

                                                         Pension Benefits
                                               --------------------------------
                                                  2000       1999        1998
                                               ---------  ----------  ---------
Components of Net Periodic Benefit Cost:
  Service cost..............................   $  1,053    $  1,402    $ 1,292
  Interest cost.............................      5,428       4,782      4,501
  Expected return on plan assets............     (3,572)     (3,135)    (2,943)
  Amortization of prior service cost........      1,817       1,817      1,817
                                               ---------  ----------  ---------
       Net periodic post retirement
         benefit cost.......................   $  4,726    $  4,866    $ 4,667
                                               =========  ==========  =========


       The  effect of a 1%  increase  in the health  care trend rate  assumption
would increase the accumulated  postretirement benefit obligation as of December
31, 2000, by approximately  $12.9 million and the aggregate service and interest
cost  components  of net  periodic  postretirement  benefit  cost  for  2000  by
approximately  $1.6  million.  The health  care cost trend rate is  expected  to
decrease to 5.5% by 2007 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, 2000, was $16.9 million,  of which the  accumulated
and vested benefit  obligation  was $16.9 million.  As of December 31, 2000, the
Company has recognized an additional liability of $2.0 million for the amount of
unfunded  accumulated  benefits  in excess of  accrued  pension  costs.  The net
periodic cost for 2000,  1999 and 1998 was $1.9  million,  $2.3 million and $2.3
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  $12.3 million (fair market value of $14.3  million) are presently
in trust. No additional funds have been provided to the trust since 1989.

(9)    Stock Option Plans

       The Company's  Performance  Stock Plan ("PSP") is a  non-qualified  stock
option  plan,  covering a group of  management  employees.  Options to  purchase
shares of the Company's common stock 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  and  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.  Options  granted or approved on or after  February 9,
1998, can also vest upon  retirement.  The maximum number of options  authorized
are five million shares that could be granted through December 31, 2000.


                                      F-31
<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(9)    Stock Option Plans (Continued)

       On June 6, 2000, the shareholders approved a new employee stock incentive
plan, the Omnibus Performance Equity Plan ("the Omnibus Plan"). The Omnibus Plan
is subject to consummation of the share exchange to form the new holding company
as part of separation under the Restructuring Act. The Omnibus Plan provides for
the granting of Non-Qualified Stock Options, incentive stock options, restricted
stock  rights,  performance  shares,  performance  units and stock  appreciation
rights to officers and key employees. The total number of shares of common stock
subject to awards under the Omnibus Plan may not exceed five million, subject to
adjustment under certain circumstances defined in the Omnibus Plan.

       In  addition,  the Company has a Director  Retainer  Plan  ("DRP")  which
provides  for  payment of the  Directors'  annual  retainer in the form of cash,
restricted  stock or options to purchase  shares of the Company's  common stock.
The  number of options  granted in 2000 and 1999 under the DRP was 6,000  shares
with an  exercise  price of $6.19 and 8,000  shares  with an  exercise  price of
$9.69, respectively. 4,000 options were exercised under the DRP during 2000. The
maximum number of options  authorized are 100,000 shares through April 30, 2002.
The  number  of  options  outstanding  as of  December  31,  2000,  was  31,000.
Restricted  Stock  issuances are based on the fair market value of the Company's
common stock on the date of grant and vest over three years.  As of December 31,
2000, 14,985 shares of restricted stock issued under the DRP were outstanding.

        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 1998, 1999 and 2000, respectively: dividend yield
of 3.75%,  4.9% and 2.98%;  expected  volatility  of 26.78%,  30.29% and 26.43%,
risk-free interest rates of 4.65%, 6.43%; and 5.11%.


                                      F-32
<PAGE>


(9)    Stock Option Plans (Continued)

       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.  Prior periods
have been restated for comparability purposes.

<TABLE>
<CAPTION>
                                               2000                     1999                    1998
                                        --------------------- ------------------------- -------------------
                                                    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....... 1,574,418    $18.187    1,014,242     $18.819   1,536,662   $17.704

Granted................................ 2,078,500    $19.403      608,708     $17.397      10,000   $12.750

Exercised..............................   296,027    $16.290            -         N/A     473,063   $14.663

Forfeited..............................    20,670    $17.320       48,532     $18.649      59,357   $21.194
                                        ----------            -----------               ----------

Outstanding at end of year............. 3,336,221               1,574,418               1,014,242
                                        ==========            ===========               ==========

Options exercisable at year-end .......   916,263                 766,454                 435,409
                                        ==========            ===========               ==========

Options available for future grant ....         -               2,183,624               2,752,806
                                        ==========            ===========               ==========

Weighted-average fair value of
options granted during the year:
     PSP...............................     $7.24                   $3.89                     N/A
                                        ==========            ===========               ==========
     DRP...............................     $6.98                   $5.85                   $7.32
                                        ==========            ===========               ==========

</TABLE>

The following table summarizes  information  about stock options  outstanding at
December 31, 2000:

<TABLE>
<CAPTION>
                                 Options Outstanding                        Options Exercisable
                    --------------------------------------------------  ---------------------------
                                           Weighted-
                                            Average        Weighted                       Weighted
     Range of             Number           Remaining        Average         Number         Average
     Exercise           Outstanding       Contractual      Exercise      Exercisable      Exercise
      Prices            At 12/31/00           Life          Prices       At 12/31/00       Prices
------------------- ------------------ ----------------- -------------  -------------- ------------
<S>                       <C>              <C>              <C>              <C>           <C>
$5.50 - $12.75               31,000        7.63 years       $ 8.605           25,000       $ 9.185

$11.50 - $24.313          3,305,221        8.55 years       $19.220          891,263       $19.109
                        ------------                                      -----------

                          3,336,221        8.54 years       $19.121          916,263       $18.839
                        ============                                      ===========

</TABLE>
                                      F-33

<PAGE>
             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(9)    Stock Option Plans (Continued)

       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 (in thousands, except per share data):

<TABLE>
<CAPTION>
                                           2000                      1999                       1998
                                 -------------------------  ------------------------  -----------------------
                                 As Reported    Pro forma   As Reported   Pro forma   As Reported   Pro forma
                                 -------------  ----------  ------------  ----------  ------------- ---------
<S>                                 <C>           <C>          <C>          <C>          <C>         <C>
Net earnings: (available for
  Common)......................     100,360       96,735       $82,569      $81,573      $82,096     $81,554
Net earnings per share
    Basic......................       $2.54        $2.45         $2.01        $1.99        $1.97       $1.95
    Diluted....................       $2.53        $2.44         $2.01        $1.98        $1.95       $1.95

</TABLE>

(10)   Construction Program and Jointly-Owned Plants

       The  Company's  construction  expenditures  for 2000  were  approximately
$147.0 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,  2000,  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)...  $706,063     $351,618     $    827       46.3%
Palo Verde Nuclear Generating
  Station (Nuclear)*.................  $197,141     $ 54,518     $ 25,291       10.2%
Four Corners Power Plant Units 4
   and 5 (Coal) .....................  $117,797     $ 74,000     $  3,066       13.0%
---------------
 * Includes the Company's  interest in PVNGS Unit 3, the Company's  interest
   in  common  facilities  for  all  PVNGS  units  and the  Company's  owned
   interests in PVNGS Units 1 and 2.

</TABLE>

San Juan Generating Station ("SJGS")

        The Company  operates and jointly owns SJGS. At December 31, 2000,  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  ("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 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.

                                      F-34
<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

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

Palo Verde Nuclear Generating Station

       The Company is a participant  in the three 1,270 MW units of PVNGS,  also
known as the Arizona Nuclear Power Project,  with Arizona Public Service Company
("APS") (the operating agent), Salt River Project, El Paso Electric Company ("El
Paso"),  Southern  California Edison Company,  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  portions of its  interests in Units 1 and 2 held under  leases.
(See Note 11 for additional discussion.)

(11)   Commitments and Contingencies

Long-Term Power Contracts

       The  Company  has a power  purchase  contract  with  Southwestern  Public
Service Company ("SPS") which originally  provided for the purchase of 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.  The Company
has 39 MW of  contingent  capacity  obtained  from El Paso under a  transmission
capacity for generation  capacity trade arrangement that increases to 70 MW from
1999 through  2003.  In  addition,  the Company is  interconnected  with various
utilities for economy interchanges and mutual assistance in emergencies.

       In 1996, the  Company  entered into a long-term PPA for the rights to all
the output of a new gas-fired generating plant. The plant received FERC approval
for  "exempt  wholesale  generator"  status  with  respect  to the  gas  turbine
generating unit. The PPA's maximum dependable  capacity is 132 MW. In July 2000,
the plant went into  operation.  The gas turbine  generating unit is operated by
Delta and is located on the Company's retired Person Generating  Station site in
Albuquerque,  New Mexico.  Primary fuel for the gas turbine  generating  unit is
natural  gas,  which is provided by the Company.  In addition,  the unit has the
capability  to  utilize  low  sulfur  fuel oil in the event  natural  gas is not
available or cost effective.  For accounting purposes,  the PPA is treated as an
operating lease.

       The Company has been actively  trading in the wholesale  power market and
has  entered  into and  anticipates  that it will  continue  to enter into power
purchases to accommodate its trading activity.

Construction Commitment

       The Company has  committed  to  purchase a  combustion  turbine for $36.0
million.  In February  2000,  the Company made a 10% deposit toward the purchase
price.  The turbine is for a planned  power  generation  plant with an estimated
cost of approximately $63.0 million for which a contract has not been finalized.
The  planned  plant is part of the  Company's  ongoing  competitive  strategy of
increasing generation capacity over time.

                                      F-35
<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(11)   Commitments and Contingencies (Continued)

Plains Acquisition

       The Company and Tri-State Generation and Transmission  Association,  Inc.
("Tri-State")  entered  into an asset sale  agreement  dated  September 9, 1999,
pursuant to which  Tri-State  agreed to sell the Company certain assets acquired
by  Tri-State's   merger  with  Plains  Electric   Generation  and  Transmission
Cooperative,  Inc., consisting primarily of transmission assets, a fifty percent
interest in an inactive  power plant  located  near  Albuquerque,  and an office
building  in  Albuquerque.  The  purchase  price is $13.2  million,  subject  to
adjustment at the time of closing with the  transaction  to close in two phases.
The asset sale  agreement  contains  standard  covenants and conditions for this
type of  agreement.  On July 1, 2000,  the first  phase was  completed,  and the
Company  acquired the 50 percent  ownership in the inactive  power plant and the
office  building.  The  second  phase  relating  to the  transmission  assets is
expected to close in the first quarter of 2001.

       In addition,  on July 1, 2000,  the Company  advanced  $11.8 million to a
former  Plains  cooperative  member as part of an  agreement  for the Company to
become the  cooperative's  power  supplier.  Approximately  $4.5 million of this
advance  represents  an  inducement  for  entering  into a 10 year  power  sales
agreement.  Accordingly,  the  Company  has  expensed  this  amount in the third
quarter as a business  development  cost.  The  remaining  $7.5  million will be
repaid over 10 years.  If the  cooperative  terminates the contract  early,  the
whole $11.8 million advance must be repaid to the Company.

New Customer Billing System

       On November  30, 1998,  the Company  implemented  a new customer  billing
system.   Due  to  a  significant   number  of  problems   associated  with  the
implementation  of the new  billing  system,  the Company was unable to generate
appropriate  bills for all its  customers  through the first quarter of 1999 and
was unable to analyze delinquent accounts until November 1999.

       Under PRC rules and PRC approved  Company rules,  the Company is required
to issue customer bills on a monthly basis.  The Company was granted a temporary
variance, and the PRC began a hearing on whether the Company violated PRC rules,
regulations  or orders or the New Mexico Public  Utility Act. The  investigation
was concluded on November 2, 1999, without the PRC imposing any civil penalty on
the Company and with an approved  stipulation  that the Company be  permitted to
bill an  additional  service  charge  to  customers  who  were  not  billed  the
appropriate  electric  service  charge or gas access fee.  The  stipulation  was
limited to approximately  $0.7 million in the November and December 1999 billing
cycles.

       Because of the  implementation  issues  associated  with the new  billing
system,  the Company  estimated  retail gas and electric  revenues  through July
1999.  Beginning  with August  1999,  the Company was able to  determine  actual
revenues for all prior periods  affected and began  reconciling  with previously
estimated  revenues.  In December 1999, the Company completed its reconciliation
of system revenues.  As a result,  1999 revenues  represented actual revenues as
determined  by the new billing  system.  The  resulting  reconciliation  did not
materially impact recorded revenues. However, a significant number of individual
accounts required corrections.

                                      F-36
<PAGE>

             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(11)   Commitments and Contingencies (Continued)

       As a result of the delay of normal  collection  activities,  the  Company
incurred a significant increase in delinquent  accounts,  many of which occurred
with  customers  that no longer  have active  accounts  with the  Company.  As a
result,  the  Company  significantly  increased  its  estimated  bad debt  costs
throughout 1999.

       The  Company  continued  its  analysis  and  collection  efforts  of  its
delinquent   accounts   resulting   from  the  problems   associated   with  the
implementation of the new customer billing system throughout 2000 and identified
additional  bad debt  exposure.  By the end of 2000,  the Company  completed its
analysis  of  its  delinquent   accounts  and  resumed  its  normal   collection
procedures.  As a result,  the  Company  has  determined  that $13.5  million of
customer receivables will not be collectible.  Based upon information  available
at December 31, 2000, the Company  believes the allowance for doubtful  accounts
of $9.0 million is adequate for management's estimate of potential uncollectible
accounts.

       In  addition,   due  to  the  significantly  higher  natural  gas  prices
experienced in November and December  2000,  the Company  increased its bad debt
expense by  approximately  $2  million in  anticipation  of higher  than  normal
delinquency rates. The Company expects this trend to continue as long as natural
gas prices remain higher than in the past years.

       The following is a summary of the allowance for doubtful  accounts during
2000, 1999 and 1998:

                                                    2000       1999      1998
                                                  --------- --------- ----------
                                                          (In thousands)
Allowance for doubtful accounts, beginning
  of year.......................................   $12,504   $   836    $  783
Bad debt accrual................................     9,980    11,496     3,325
Less:  Write off (adjustments) of
  uncollectible accounts........................    13,521      (172)    3,272
                                                 ---------  ---------  --------
Allowance for doubtful accounts, end of year ...   $ 8,963   $12,504    $  836
                                                 =========  =========  ========

Electric Rate Case Settlement

       On August  25,  1999,  the PRC  issued an order  approving  the rate case
settlement  resulting from the NMPUC's final order of November 30, 1998. The PRC
ordered  the  Company to reduce its  electric  rates by $34.0  million  annually
retroactive  to July 30,  1999.  In addition,  the order  includes a rate freeze
until electric  competition is fully  implemented in New Mexico or until January
1, 2003 whichever is earlier.  The settlement  reduced revenues by approximately
$39 million and $19 million in 2000 and 1999, respectively.



                                      F-37
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(11)   Commitments and Contingencies (Continued)

Gas Rate Orders

       On October 24, 2000, the PRC issued a final order approving a stipulation
negotiated  in the third  quarter  between  the  Company and the PRC staff which
resolved all issues  raised by the two remanded gas rate cases.  The final order
adds  approximately  $1.2 million to the Company's revenues in the final quarter
of 2000,  $4.7  million in 2001,  and $3.9  million  in 2002.  The  Company  has
reversed  certain  reserves  against costs recovered in the settlement that were
recorded  against  earnings  at the  time  of the  original  regulatory  orders,
resulting  in a one-time  pre-tax  gain of $4.6  million.  This  amount  will be
collected from customers in rates over the next 12 years.

Nuclear Decommissioning Trust

       In  1998,   the  Company  and  the  trustee  of  the   Company's   master
decommissioning trust sued several companies and individuals,  in State District
Court in Santa Fe County,  for the  under-performance  of a corporate owned life
insurance  program.  The  program  was used to fund a portion  of the  Company's
nuclear decommissioning obligations for its 10.2% interest in PVNGS.

       The parties  reached a settlement  agreement  under which all claims were
dismissed  with  prejudice  on  September  5, 2000 and the  Company  and trustee
received $13.8 million in settlement proceeds.

PVNGS Liability and Insurance Matters

       The PVNGS participants have insurance for public liability resulting from
nuclear  energy  hazards to the full limit of liability  under Federal law. This
potential  liability  is covered  by primary  liability  insurance  provided  by
commercial  insurance  carriers in the amount of $200 million and the balance by
an  industry-wide  retrospective  assessment  program.  If losses at any nuclear
power  plant  covered by the  programs  exceed the primary  liability  insurance
limit,  the Company  could be assessed  retrospective  adjustments.  The maximum
assessment  per  reactor  under  the  program  for  each  nuclear   incident  is
approximately $88 million, subject to an annual limit of $10 million per reactor
per incident.  Based upon the Company's 10.2% interest in the three PVNGS units,
the Company's maximum  potential  assessment per incident for all three units is
approximately $27.0 million, with an annual payment limitation of $3 million per
incident.  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 United States Nuclear Regulatory  Commission
and Congress are reviewing the related laws. The Company cannot predict  whether
or not Congress will change the law.  However,  certain  changes could  possibly
trigger "Deemed Loss Events" under the Company's PVNGS leases,  absent waiver by
the lessors.

                                      F-38
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(11)   Commitments and Contingencies (Continued)

       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 $2.75  billion as of  January  1,  2001.  The
Company  is a member of an  industry  mutual  insurer  which  provides  both the
"all-risk"  and increased  cost of generation  insurance to the Company.  In the
event of adverse losses  experienced by this insurer,  the Company is subject to
an assessment.  The Company's  maximum share of any assessment is  approximately
$2.3 million per year.

PVNGS Decommissioning Funding

       The Company has a program for funding its share of decommissioning  costs
for PVNGS. The nuclear  decommissioning  funding program is invested in equities
and fixed income instruments in qualified and non-qualified  trusts. The results
of the 1998 decommissioning cost study indicated that the Company's share of the
PVNGS  decommissioning costs excluding spent fuel disposal will be approximately
$171.3 million (in 2000 dollars).

       The Company  funded an  additional  $3.9  million,  $3.1 million and $3.0
million  in  2000,  1999  and  1998,   respectively,   into  the  qualified  and
non-qualified  trust funds.  The estimated market value of the trusts at the end
of 2000 was approximately $55 million.

Nuclear Spent Fuel and Waste Disposal

       Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the
"Waste  Act"),  the United States  Department of Energy  ("DOE") is obligated to
accept and dispose of all spent  nuclear fuel and other  high-level  radioactive
wastes generated by all domestic power reactors. 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. DOE has announced
that such a repository now cannot be completed before 2010.

       The  operator of PVNGS has  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 2002, and believes it could
augment that storage  with the 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.  The Company currently  estimates that it
will incur  approximately $41.0 million (in 1998 dollars) over the life of PVNGS
for its share of the fuel costs related to the on-site  interim storage of spent
nuclear fuel during the operating life of the plant.  The Company  accrues these
costs as a  component  of fuel  expense,  meaning the charges are accrued as the
fuel is burned.  In 1998, the Company expensed $12.1 million for on-site interim
nuclear storage costs related to nuclear fuel burned prior to 1998. In 2000, the
Company  expensed  approximately  $1.0 million for on-site  interim nuclear fuel
storage costs related to nuclear fuel burned during 2000.  The operator of PVNGS
currently believes that spent fuel storage or disposal methods will be available
for use by PVNGS to allow its continued operation beyond 2002.


                                      F-39
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(11)   Commitments and Contingencies (Continued)

Other

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

(12)   Environmental Issues

        The normal  course of  operations  of the Company  necessarily  involves
activities and substances that expose the Company to potential liabilities under
laws and regulations  protecting the environment.  Liabilities  under these laws
and  regulations  can be material and in some  instances may be imposed  without
regard to fault,  or may be imposed for past acts, even though the past acts may
have been lawful at the time they occurred.  Sources of potential  environmental
liabilities   include   the   Federal   Comprehensive   Environmental   Response
Compensation and Liability Act of 1980 and other similar statutes.

       The Company records its  environmental  liabilities when site assessments
or remedial actions are probable and a range of reasonably  likely cleanup costs
can be  estimated.  The Company  reviews its sites and  measures  the  liability
quarterly,  by assessing a range of reasonably  likely costs for each identified
site using  currently  available  information,  including  existing  technology,
presently enacted laws and regulations,  experience gained at similar sites, and
the probable level of involvement and financial  condition of other  potentially
responsible  parties.  These  estimates  include costs for site  investigations,
remediation,  operations and  maintenance,  monitoring and site closure.  Unless
there  is a  probable  amount,  the  Company,  records  the  lower  end of  this
reasonably likely range of costs  (classified as other long-term  liabilities at
undiscounted amounts).

       The  Company's  recorded  estimated  minimum  liability to remediate  its
identified  sites is $6.8  million.  The ultimate cost to clean up the Company's
identified  sites  may  vary  from  its  recorded   liability  due  to  numerous
uncertainties inherent in the estimation process, such as: the extent and nature
of  contamination;  the scarcity of reliable data for identified  sites; and the
time  periods  over which site  remediation  is expected  to occur.  The Company
believes that, due to these uncertainties,  it is remotely possible that cleanup
costs could exceed its  recorded  liability  by up to $11.6  million.  The upper
limit of this range of costs was estimated using  assumptions least favorable to
the Company.

                                      F-40
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(12)   Environmental Issues (Continued)

        Remediation of identified sites  previously used in operations,  used by
tenants or contaminated  by former owners  required  spending of $1.6 million in
2000 and $4.4 million in 1999. In 2001,  the Company  anticipates  spending $0.7
million  for  remediation  and $1.4  million for  control  and  prevention.  The
majority of the December 31, 2000 environmental liability is expected to be paid
over the next five  years,  funded by cash  generated  from  operations.  Future
environmental  obligations  are not  expected  to have a material  impact on the
results of operations or financial condition of the Company.

(13)   Discontinued Operations

       On August 4, 1998,  the  Company  adopted a plan to  discontinue  the gas
trading  operations of its Energy Services Business Unit.  Accordingly,  the gas
marketing  operations  of its Energy  Services  Business  Unit are  reported  as
discontinued  operations.  Estimated losses on the disposal of the gas marketing
segment  were $5.1 million  (net of income tax benefit of $3.3  million),  which
includes a provision for anticipated operating losses prior to disposal.

       Operating  losses  of the  discontinued  operations  prior to the date of
discontinuation  were $7.3  million in 1998.  This  amount  includes  income tax
benefits related to the losses from  discontinued  operations of $4.8 million in
1998. Total sales from the  discontinued  operations was $159.2 million in 1998.
Prior to the decision to discontinue  non-utility  operations,  such total sales
and income tax  benefits  were  included in  operating  revenues  and  operating
expenses in the consolidated statement of earnings.

(14)   Proposed Acquisition

       On November 9, 2000 the Company  and  Western  Resources,  Inc.  (Western
Resources)  announced  that both  companies'  boards of  directors  approved  an
agreement  under which the Company will acquire the Western  Resources  electric
utility operations in a tax-free, stock-for-stock transaction.

       Under the terms of the  agreement,  the Company  and  Western  Resources,
whose  utility  operations  consist of its Kansas  Power and Light  division and
Kansas Gas and  Electric  subsidiary,  will both  become  subsidiaries  of a new
holding company to be named at a future date.  Prior to the consummation of this
combination,  Western  Resources will reorganize all of its non-utility  assets,
including its 85 percent stake in Protection  One and its 45 percent  investment
in ONEOK,  into Westar  Industries which will be spun off to Western  Resources'
shareholder,  prior  to the  acquisition  of  Western's  utility  assets  by the
Company.

       The new holding  company will issue 55 million of its shares,  subject to
adjustment, to Western Resources' shareholders and Westar Industries. Before any
adjustments,   the  new  company  will  have  approximately  94  million  shares
outstanding,  of which  approximately 41 percent will be owned by former Company
shareholders  and  59  percent  will  be  owned  by  former  Western   Resources
shareholders and Westar Industries.

                                      F-41
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(14)   Proposed Acquisition (Continued)

       Based on the Company's average closing price over the last ten days prior
to the announcement of $27.325 per share, the indicated equity  consideration of
the  transaction is  approximately  $1.50 billion,  including  conversion of the
Westar Industries  obligation.  Approximately  $2.93 billion of existing Western
Resources  debt,  giving  the  transaction  an  aggregate  enterprise  value  of
approximately $4.44 billion. The Company plans to reduce and refinance a portion
of the  Western  Resources  debt.  The new  holding  company  will  have a total
enterprise  value of  approximately  $6.5 billion ($2.6 billion in equity;  $3.9
billion in debt and preferred stock).

       The  transaction  will be accounted for as a reverse  acquisition  by the
Company as Western  Resources  shareholders  will  receive  the  majority of the
voting  interests in the new holding  company.  For accounting  purposes Western
Resources  will be  treated as the  acquiring  entity.  Accordingly,  all of the
assets and  liabilities  of the  Company  will be  recorded at fair value in the
business  combination  as  required by the  purchase  method of  accounting.  In
addition,  the  operations  of the Company  will be  reflected  in the  reported
results of the combined company only from the date of acquisition.

       In the transaction, each Company share will be exchanged on a one-for-one
basis for shares in the new holding company.  Each Western  Resources share will
be exchanged for a fraction of a share of the new company.  This exchange  ratio
will be finalized at closing,  depending on the impact of certain adjustments to
the transaction  consideration.  Since Western  Resources and Westar  Industries
remain  committed  to reducing  Western  Resources'  net debt  balance  prior to
consummation  of the  transaction,  they  have  agreed  with  the  Company  on a
mechanism to adjust the  transaction  consideration  based on additional  equity
contributions.  Under this mechanism,  Western Resources could undertake certain
activities  not affecting the utility  operations to reduce the net debt balance
of the utility. The effect of such activities would be to increase the number of
new holding  company shares to be issued to all Western  Resources  shareholders
(including Westar Industries) in the transaction. In addition, Westar Industries
has the option of making additional equity infusions into Western Resources that
will be used to reduce the utility's  net debt balance  prior to closing.  Up to
$407 million of such equity  infusions  may be used to purchase  additional  new
holding company common and convertible preferred stock.

       The successful  spin-off of Westar  Industries from Western  Resources is
required prior to the consummation of the  transaction.  The transaction is also
conditioned   upon,   among  other  things,   approvals  from  both   companies'
shareholders  and customary  regulatory  approvals  from the Kansas  Corporation
Commission,  the New Mexico Public  Regulation  Commission,  the Federal  Energy
Regulatory Commission,  the Nuclear Regulatory Commission, and the Department of
Justice under the Hart-Scott-Rodino  Antitrust Improvements Act of 1976. The new
holding company expects to register as a holding company with the Securities and
Exchange  Commission  under the  Public  Utility  Holding  Company  Act of 1935.
Management  believes  that the above  mentioned  approvals  are  expected  to be
obtained over the next 12 to 18 months,  however should such approvals not to be
obtained, final consummation of the proposed acquisition cannot occur.


                                      F-42
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(15)   New and Proposed Accounting Standards

       Decommissioning:  The Staff of the  Securities  and  Exchange  Commission
("SEC")  has  questioned  certain of the  current  accounting  practices  of the
electric industry  regarding the recognition,  measurement and classification of
decommissioning costs for nuclear generating stations in financial statements of
electric utilities.  In February 2000, the Financial  Accounting Standards Board
("FASB")  issued  an  exposure  draft   regarding   Accounting  for  Obligations
Associated  with the Retirement of Long-Lived  Assets  ("Exposure  Draft").  The
Exposure Draft requires the  recognition of a liability for an asset  retirement
obligation  at  fair  value.  In  addition,  present  value  techniques  used to
calculate the liability must use a credit adjusted  risk-free  rate.  Subsequent
remeasures of the liability  would be recognized  using an allocation  approach.
The Company has not yet determined the impact of the Exposure Draft.

       Statement of  Financial  Accounting  Standards  No. 133,  Accounting  for
Derivative   Instruments  and  Hedging   Activities,   ("SFAS  133"):  SFAS  133
establishes  accounting and reporting standards requiring derivative instruments
to be recorded in the balance sheet as either an asset or liability  measured at
its fair value.  SFAS 133 also  requires that changes in the  derivatives'  fair
value be  recognized  currently in earnings  unless  specific  hedge  accounting
criteria are met.  Special  accounting for qualifying  hedges allows  derivative
gains and losses to offset  related  results  on the  hedged  item in the income
statement,  and requires that a company must formally document,  designate,  and
assess the effectiveness of transactions that receive hedge accounting.  In June
1999,  FASB issued SFAS 137 to amend the  effective  date for the  compliance of
SFAS 133 to  January  1,  2001.  In June  2000,  the FASB  issued  SFAS 138 that
provides  certain  amendments to SFAS 133. The  amendments,  among other things,
expand the normal sales and purchases  exception to contracts that implicitly or
explicitly  permit net settlement and contracts that have a market  mechanism to
facilitate net settlement. The expanded exception excludes a significant portion
of the Company's  contracts that previously would have required  valuation under
SFAS 133. Effective January 1, 2001, the Company adopted SFAS 133, as amended.

       The  Company  has  identified  all  financial  instruments  that meet the
definition of a derivative under SFAS 133, as amended, currently existing in the
Company.   Certain  of  the  Company's  identified  derivative  instruments  are
currently  marked-to-market  under  EITF  98-10.  The  related  gains and losses
(unrealized  and  realized)  for these  derivative  instruments  are recorded as
adjustments to operating revenues.

       In addition, the financial instruments underlying the Company's corporate
hedge of certain  investments  in its nuclear  executive  retirement and retiree
medical  benefits trusts meet the definition of a derivative  under SFAS 133, as
amended, and are currently marked to market. The related unrealized and realized
losses  are  recorded  as a  component  of other  income and  deductions  on the
Consolidated  Statement  of Earnings.  The Company  designated  certain  forward
purchase contracts for electricity as cash flow hedges. The Company's designated
cash flow hedges at January 1, 2001,  were forward  purchase  contracts  for the
purchase of electric  power for  forecasted  jurisdictional  use during  planned
outages in 2001.  The hedged risks  associated  with these  instruments  are the
changes in cash flows  related to  forecasted  purchase  of  electricity  due to
changes in the price of  electricity  on the spot  market.  Assessment  of hedge
effectiveness will be based on the changes in the forward price of electricity.

                                      F-43
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2000, 1999 and 1998

(15)   New and Proposed Accounting Standards (Continued)

       SFAS 133, as amended,  provides that the effective portion of the gain or
loss on a derivative instrument designated and qualifying as a cash flow hedging
instrument  be  reported  as a component  of other  comprehensive  income and be
reclassified into earnings in the same period or periods during which the hedged
forecasted  transaction affects earnings.  The results of hedge  ineffectiveness
and the  change  in fair  value of a  derivative  that an entity  has  chosen to
exclude  from  hedge  effectiveness  are  required  to be  presented  in current
earnings.

       Because the Company's  derivative  instruments as defined by SFAS 133, as
amended,  are currently  marked to market or are classified as cash flow hedges,
the  adoption  of SFAS  133,  as  amended,  will not have an  impact  on the net
earnings of the Company.  However,  the  adoption of SFAS 133, as amended,  will
increase  comprehensive  income  by $6.0  million,  net of taxes.  The  physical
contracts  will  subsequently  be  recognized  as a  component  of the  cost  of
purchased power when the actual physical  delivery  occurs.  At January 1, 2001,
the  derivative  instruments  designated  as cash flow  hedges had a gross asset
position of $9.9 million on the hedged  transactions.  See Note 5 for  financial
instruments currently marked-to-market.


                                      F-44
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
                           QUARTERLY OPERATING RESULTS

   The unaudited operating results by quarters for 2000 and 1999 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>
2000:
  Operating Revenues..........................  $ 321,291   $ 329,041      $ 499,477     $ 461,465
  Operating Income............................     30,947      27,654         47,452        26,422
  Earnings from Continuing Operations.........     21,952      17,986         46,913        14,096
  Net Earnings (1)............................     21,952      17,986         46,913        14,096
  Net Earnings per share from Continuing
     Operations...............................       0.55        0.45           1.19          0.36
  Net Earnings per Share (Basic)..............       0.55        0.45           1.19          0.36
  Net Earnings per Share (Diluted)............       0.55        0.45           1.18          0.35

1999:
  Operating Revenues..........................  $ 272,818   $ 261,371      $ 340,604     $ 282,750
  Operating Income............................     35,068      29,247         30,275        25,489
  Earnings from Continuing Operations.........     23,130      18,172         21,401        16,911
  Net Earnings................................     26,671      18,172         21,401        16,911
  Net Earnings per share from Continuing
     Operations...............................       0.55        0.44           0.52          0.41
  Net Earnings per Share (Basic)..............       0.64        0.44           0.52          0.41
  Net Earnings per Share (Diluted)............       0.63        0.44           0.52          0.41

</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)      Effective  January 1, 1999,  the Company  adopted EITF Issue No. 98-10,
         Accounting for Contracts Involved in Energy Trading and Risk Management
         Activities.  The effect of the  initial  application  of EITF Issue No.
         98-10 was  reported as a  cumulative  effect of a change in  accounting
         principle  which  increased  the Company's  consolidated  net income by
         approximately  $3.5  million  (after  related  income  tax  expense  of
         approximately $2.3 million), or $.08 per common share.


                                      F-45
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
                        COMPARATIVE OPERATING STATISTICS
<TABLE>
<CAPTION>
                                                  2000        1999         1998        1997        1996
                                              ----------- -----------  ----------- ----------- -----------
<S>                                            <C>         <C>          <C>         <C>         <C>
Utility Operations Sales:
Energy Sales--KWh (in thousands):
  Residential...............................   2,163,036   2,027,099    2,007,852   1,976,434   1,892,290
  Commercial................................   3,121,141   2,980,935    2,888,539   2,841,831   2,698,087
  Industrial................................   1,544,367   1,559,155    1,571,824   1,556,264   1,505,801
  Other ultimate customers..................     260,399     236,394      271,659     160,370     310,118
                                              ----------- -----------  ----------- ----------- -----------
    Total KWh sales.........................   7,088,943   6,803,583    6,739,874   6,534,899   6,406,296
                                              =========== ===========  =========== =========== ===========
Gas Throughput--Decatherms (in thousands):
  Residential...............................      28,818      32,060       29,282      30,608      28,409
  Commercial................................       9,890      10,845       10,135      10,606       9,574
  Industrial................................       5,033       2,380        1,538       1,278       2,151
  Other.....................................       6,392       6,818        8,290       8,143      12,952
                                              ----------- -----------  ----------- ----------- -----------
    Total gas sales.........................      50,133      52,103       49,245      50,635      53,086
  Transportation throughput.................      44,871      40,161       36,413      33,975      47,010
                                              ----------- -----------  ----------- ----------- -----------
    Total gas throughput....................      95,004      92,264       85,658      84,610     100,096
                                              =========== ===========  =========== =========== ===========
Revenues (in thousands):
  Residential...............................   $ 185,436   $ 184,088    $ 187,681   $ 184,813   $ 177,220
  Commercial................................     237,350     238,830      241,968     237,629     226,146
  Industrial................................      79,671      85,828       88,644      86,927      83,651
  Other ultimate customers..................      16,208      13,777       18,124      10,135      20,804
                                              ----------- -----------  ----------- ----------- -----------
    Total revenues to ultimate customers....     518,665     522,523      536,417     519,504     507,821
Intersegment revenues.......................         707         707          707           -           -
Miscellaneous electric revenues.............      20,093      18,345       19,151       3,331       3,115
                                              ----------- -----------  ----------- ----------- -----------
    Total electric revenues.................   $ 539,465   $ 541,575    $ 556,275   $ 522,835   $ 510,936
                                              ----------- -----------  ----------- ----------- -----------
Gas Revenues:
  Residential...............................   $ 191,221   $ 151,954    $ 160,459   $ 185,984   $ 131,858
  Commercial................................      52,959      37,300       42,500      50,094      33,525
  Industrial................................      24,208       8,595        4,876       4,512       5,208
  Other.....................................      29,216      20,384       27,148      30,121      29,158
                                              ----------- -----------  ----------- ----------- -----------
  Revenues from gas sales...................     297,604     218,233      234,983     270,711     199,749
  Transportation............................      14,163      12,390       13,464      14,172      17,215
  Other.....................................       8,157       6,088        7,528       9,886      10,337
                                              ----------- -----------  ----------- ----------- -----------
    Total gas revenues......................   $ 319,924   $ 236,711    $ 255,975   $ 294,769   $ 227,301
                                              ----------- -----------  ----------- ----------- -----------
         Total Utility Revenues.............   $ 859,389   $ 778,286    $ 812,250   $ 817,604   $ 738,237
                                              =========== ===========  =========== =========== ===========
Customers at Year End:
  Residential...............................     328,519     321,949      319,415     311,314     304,900
  Commercial................................      38,991      38,435       37,652      36,942      36,292
  Industrial................................         371         375          363         363         375
  Other ultimate customers..................         625         625          665         637         632
                                              ----------- -----------  ----------- ----------- -----------
    Total ultimate customers................     368,506     361,384      358,095     349,256     342,199
  Sales for Resale..........................          81          83           83          66          56
                                              ----------- -----------  ----------- ----------- -----------
    Total customers.........................     368,587     361,467      358,178     349,322     342,255
                                              =========== ===========  =========== =========== ===========
Gas:
  Residential...............................     398,623     390,428      383,292     375,032     367,025
  Commercial................................      32,626      32,116       32,004      31,560      30,757
  Industrial................................          50          51           55          50          54
  Other.....................................       3,612       3,688        3,622       3,765       3,541
  Transportation............................          32          32           29          31          36
                                              ----------- -----------  ----------- ----------- -----------
    Total customers.........................     434,943     426,315      419,002     410,438     401,413
                                              =========== ===========  =========== =========== ===========
</TABLE>
                                      F-46
<PAGE>
<TABLE>
<CAPTION>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
                        COMPARATIVE OPERATING STATISTICS

                                                   2000       1999         1998        1997        1996
                                              ----------- -----------  ----------- ----------- -----------
<S>                                            <C>         <C>          <C>        <C>          <C>
Generation and Trading Operations Sales:
Energy Sales--KWh (in thousands):
  Firm-requirements wholesale...............     193,853     179,249      278,615     278,727     282,534
  Other contracted off-system...............   7,385,266   6,196,499    4,033,931   3,790,081   2,928,321
  Economy energy sales......................   4,773,009   4,795,873    4,469,769   2,716,835   1,364,365
                                              ----------- -----------  ----------- ----------- -----------
    Total sales to ultimate customers.......  12,352,128  11,171,621    8,782,315   6,785,643   4,575,220
  Intersegment sales........................   7,088,943   6,803,583    6,739,874   6,534,899   6,406,296
                                              ----------- -----------  ----------- ----------- -----------
                                              19,441,071  17,975,204   15,522,189  13,320,542  10,981,516
                                              =========== ===========  =========== =========== ===========
Revenues (in thousands):
  Firm-requirements wholesale...............       6,568       7,046       10,708      10,690      12,359
  Other contracted off-system...............     371,900     226,773      142,115     118,876      86,689
  Economy energy sales......................     369,724     131,549      122,156      55,768      22,281
                                              ----------- -----------  ----------- ----------- -----------
    Total revenues to ultimate customers....     748,192     365,368      274,979     185,334     121,329
  Intersegment revenues.....................     324,744     318,872      362,722     370,019     380,000
  Miscellaneous electric revenues...........       2,242       5,741        4,657      14,269      13,374
                                              ----------- -----------  ----------- ----------- -----------
    Total generation revenues...............  $1,075,178  $  689,981   $  642,358  $  569,622  $  514,703
                                              =========== ===========  =========== =========== ===========
Customers at Year End:
Generation                                            81          83           83          66          56
                                              =========== ===========  =========== =========== ===========

Reliable Net Capability--KW.................   1,521,000   1,521,000    1,506,000   1,506,000   1,506,000
Coincidental Peak Demand--KW................   1,368,000   1,291,000    1,313,000   1,209,000   1,217,000
Average Fuel Cost per Million BTU...........  $   1.3827  $   1.3169   $   1.2433  $   1.2319  $   1.2735
BTU per KWh of Net Generation...............      10,547      10,490       10,784      10,927      10,768

</TABLE>

                                      F-47
<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
July 3,  2001 (the  "2001  Proxy  Statement"),  to PART I,  SUPPLEMENTAL  ITEM -
"EXECUTIVE  OFFICERS  OF THE  COMPANY"  and "Other  Matters"  -  "Section  16(a)
Beneficial Ownership Reporting Compliance" in the 2001 Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

       Reference is hereby made to  "Executive  Compensation"  in the 2001 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 2001 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       Reference is hereby made to the 2001 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 2000, 1999, and
                   and  1998  are  omitted  for the  reason  that  they  are not
                   required or the information is otherwise supplied.

       (a) - 3-A.  Exhibits Filed:

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

10.8.9      Amendment No. 14 to the Arizona Nuclear Power Project  Participation
            Agreement effective June 20, 2000.

10.9.7      Underground  Letter  Agreement dated August 31, 2000, among San Juan
            Coal Company,  San Juan  Transportation  Company,  the Company,  and
            Tucson  Electric  Power  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).

10.43       2001 Officer Incentive Plan effective January 1, 2001



                                      E-1
<PAGE>
Exhibit No.                         Description
-----------                         -----------

10.74.2     Second  Amendment to the Third  Restated and Amended  Public Service
            Company of New Mexico Performance Stock Plan,  effective December 7,
            1998.

10.74.3     Third  Amendment to the Third  Restated and Amended  Public  Service
            Company of New Mexico Performance Stock Plan, effective December 10,
            2000.

23.1        Consent of Arthur Andersen LLP.

27          Financial Data Schedule.

         (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:
-----------                   ----------------------                     -----------------             --------
Articles of Incorporation and By-laws

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

 3.2            By-laws of Public Service Company of             3.2 to Annual Report of the           1-6986
                New Mexico With All Amendments to                Registrant on Form 10-K for
                and including February 8, 2000                   the fiscal year ended
                                                                 December 31, 1999

Instruments Defining the Rights of Security Holders, Including Indentures

 4.1            Indenture of Mortgage and Deed of                4-(d) to Registration Statement       2-99990
                Trust dated as of June 1, 1947, between          No. 2-99990 of the Company.
                the 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.
</TABLE>

                                      E-2

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

<S>            <C>                                               <C>                                    <C>
 4.2           Portions of sixteen supplemental                  4-(e) to Registration Statement        2-99990
               Indentures to the Indenture of Mortgage           No. 2-99990 of the Company.
               and Deed of Trust 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.

4.3            Fifty-third Supplemental Indenture, dated         4.3 to the Company's Quarterly         1-6986
               as of March 11, 1998, supplemental to             Report on Form 10-Q for the
               Indenture of Mortgage and Deed of Trust,          quarter ended March 31, 1998.
               dated as of June 1, 1947, between the
               Company and The Bank of New York
               (formerly Irving Trust Company), as
               trustee.

4.4            Indenture (for Senior Notes), dated as of         4.4 to the Company's                   1-6986
               March 11, 1998, between the Company and The       Quarterly Report on Form
               Chase Manhattan Bank, as Trustee.                 10-Q for the quarter ended March
                                                                 31, 1998.

4.5            First Supplemental Indenture, dated as            4.5 to the Company's                   1-6986
               of March 11, 1998, supplemental to                Quarterly Report on Form
               Indenture, dated as of March 11, 1998,            10-Q for the quarter ended March
               Between the Company and The Chase                 31, 1998.
               Manhattan Bank, as Trustee.

4.6            Second Supplemental Indenture, dated              4.6 to the Company's Quarterly         1-6986
               as of March 11, 1998, supplemental to             Report on Form
               Indenture, dated as of March 11, 1998,            10-Q for the quarter ended March
               Between the Company and The Chase                 31, 1998.
               Manhattan Bank, as Trustee.

4.7            Indenture (for Senior Notes), dated as of         4.1 to Registration                    33-53367
               August 1, 1998, between the Company               Statement No. 33-53367 of the
               and The Chase Manhattan Bank, as                  Company.
               Trustee.

</TABLE>


                                              E-3
<PAGE>

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

<S>            <C>                                               <C>                                    <C>
4.8            First Supplemental Indenture, dated               4.3 to the Company's                   1-6986
               August 1, 1998, supplemental to                   Current Report on Form 8-K
               Indenture, dated as of August 1,                  dated August 7, 1998.
               1998, between the Company and the
               Chase Manhattan Bank, as Trustee.

Material Contracts

10.1           Supplemental Indenture of Lease dated as          4-D to Registration Statement No.      2-26116
               of July 19, 1966 between the Company              2-26116 of the Company.
               and other participants in the Four Corners
               Project and the Navajo Indian Tribal
               Council.
10.1.1         Amendment and Supplement No. 1 to                 10.1.1 to Annual Report of the          1-6986
               Supplemental and Additional Indenture of          Registrant on Form 10-K for fiscal
               Lease dated April 25, 1985 between the            year ended December 31, 1995.
               Navajo Tribe of Indians and Arizona
               Public Service Company, El 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).

10.2           Fuel Agreement, as supplemented, dated            4-H to Registration Statement No.      2-35042
               as of September 1, 1966 between Utah              2-35042 of the Company.
               Construction & 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           Registrant on Form 10-K for fiscal
               1, 1981, between Utah International Inc.          year ended December 31, 1991.
               and the participants in the Four Corners
               Project, including the Company.

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

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

</TABLE>

                                              E-4
<PAGE>

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

<S>            <C>                                               <C>                                    <C>
10.8           Arizona Nuclear Power Project                     5-T to Registration Statement         2-50338
               Participation Agreement among the                 No. 2-50338 of the Company.
               Company and Arizona Public 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                 10.8.1 to Annual Report of the         1-6986
               Arizona Nuclear Power Project                     Registrant on Form 10-K for
               Participation Agreement.                          fiscal year ended December 31,
                                                                 1991.


10.8.2         Amendment No. 7 effective April 1,                10.8.2 to Annual Report of the         1-6986
               1982, to the Arizona Nuclear Power                Registrant on Form 10-K for
               Project Participation Agreement (refiled).        fiscal year ended December 31,
                                                                 1991.
10.8.3         Amendment No. 8 effective September 12,           10.58 to Annual Report of the          1-6986
               1983, to the Arizona Nuclear Power                Registrant on Form 10-K for
               Project Participation Agreement (refiled).        fiscal year ended December 31,
                                                                 1993.

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

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


10.8.7         Amendment No. 12 to Arizona Nuclear               19.1 to the Company's Quarterly        1-6986
               Power Project Participation Agreement             Report on Form 10-Q for the
               dated June 14, 1988, and effective                quarter ended September 30, 1990.
               August 5, 1988.

10.8.8         Amendment No. 13 to the Arizona                   10.8.10 to Annual Report of            1-6986
               Nuclear Power Project Participation               Registrant on Form 10-K for the
               Agreement dated April 4, 1990, and                fiscal year ended December 31,
               effective June 15, 1991.                          1990.

10.9           Coal Sales Agreement executed August 18,          10.9 to Annual Report of the           1-6986
               1980 among San Juan Coal Company,                 Registrant on Form 10-K for
               the Company and Tucson Electric                   fiscal year ended December 31,
               Power Company, together with                      1991.
               Amendments No. One, Two, Four, and
               Six thereto.

</TABLE>

                                              E-5
<PAGE>

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

<S>            <C>                                               <C>                                    <C>
10.9.1         Amendment No. Three to Coal Sales                 10.9.1 to Annual Report of the         1-6986
               Agreement dated April 30, 1984 among              Registrant on Form 10-K for
               San Juan Coal Company, the Company                fiscal year ended December 31,
               and Tucson Electric Power 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                  10.9.2 to Annual Report of the         1-6986
               Agreement dated May 29, 1990 among                Registrant on Form 10-K for
               San Juan Coal Company, the Company                fiscal year ended December 31,
               and Tucson 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                 19.3 to the Company's Quarterly        1-6986
               Agreement, dated as of July 27, 1992              Report on Form 10-Q for the
               among San Juan Coal Company, the                  quarter ended September 30, 1992
               Company and Tucson Electric Power                 (confidentiality treatment was
               Company.                                          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-6
<PAGE>

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

<S>            <C>                                               <C>                                    <C>
10.9.4         First Supplement to Coal Sales                    19.4 to the Company's Quarterly        1-6986
               Agreement, dated July 27, 1992 among              Report on Form 10-Q for the
               San Juan Coal Company, the Company                quarter ended September 30, 1992
               and Tucson 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                 10.9.5 to Annual Report of the         1-6986
               Agreement, dated as of September 1,               Registrant on Form 10-K for
               1995, among San Juan Coal Company,                fiscal year ended December 31,
               the Company and Tucson Electric                   1995.
               Power Company .

10.9.6         Amendment No. Nine to Coal Sales                  10.9.6 to Annual Report of the         1-6986
               Agreement, dated as of December 31, 1995,         Registrant on Form 10-K for
               among San Juan Coal Company, the Company          fiscal year ended December 31,
               and Tucson Electric Power Company.                1996.

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                    quarter ended March 31, 1994.
               Company and M-S-R Public Power
               Agency, and Modification No. 2 to the
               San Juan Project Agreements dated
               December 31, 1983 (refiled).

10.11.1        Amendment No. 1 to the Early Purchase             10.11.1 to Annual Report of the        1-6986
               and Participation Agreement between               Registrant on Form 10-K for
               Public Service Company of New Mexico              fiscal year ended December 31,
               and M-S-R Public Power Agency,                    1997.
               executed as of December 16, 1987, for
               San Juan Unit 4 (refiled).

10.11.3        Amendment No. 3 to the San Juan Unit              10.11.3 to Annual Report of            1-6986
               4 Early Purchase and Participation                the Registrant on Form 10-K
               Agreement between Public Service                  for fiscal year ended
               Company of New Mexico and M-S-R                   December 31, 1999.
               Public Power Agency, dated as of
               October 27, 1999.
</TABLE>

                                               E-7

<PAGE>

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

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

10.12.1        Amendment No. 1 to the Amended and                10.12.1 to Annual Report of            1-6986
               Restated San Juan Unit 4 Purchase and             the Registrant on Form 10-K
               Participation Agreement between Public            for fiscal year ended
               Service Company of New Mexico and                 December 31, 1999.
               M-S-R Public Power Agency, dated as of
               October 27, 1999.

10.13          Amendment No. 2 to the San Juan                   10.13 to Annual Report of              1-6986
               Unit 4 Purchase Agreement and                     the Registrant on Form 10-K
               Participation Agreement between                   for fiscal year ended
               Public Service Company of New                     December 31, 1999.
               Mexico and The Incorporated County
               of Los Alamos, New Mexico, dated
               October 27, 1999.

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

10.16          Interconnection Agreement dated                   10.16 to Annual Report of the          1-6986
               November 23, 1982, between the                    Registrant on Form 10-K for
               Company and Southwestern Public                   fiscal year ended December 31,
               Service Company (refiled).                        1992.

10.18*         Facility Lease dated as of December 16,           10.18 to Annual Report of the          1-6986
               1985 between The First National Bank              Registrant on Form 10-K for
               of Boston, as Owner Trustee, and Public           fiscal year ended December 31,
               Service Company of New Mexico                     1995.
               together with Amendments No. 1, 2 and 3
               thereto (refiled).
10.18.4*       Amendment No. 4 dated as of March 8,              10.18.4  to the Company's              1-6986
               1995, to Facility Lease between Public            Quarter Report on Form
               Service Company of New Mexico and                 10-Q for the quarter ended March
               the First National Bank of Boston, dated          31, 1995.
               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                Registrant on Form 10-K for
               Boston, as Owner Trustee, and Public              fiscal year ended December 31,
               Service Company of New Mexico                     1996.
               together with Amendments No. 1, 2 and 3
               thereto (refiled).

</TABLE>


                                               E-8
<PAGE>

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

<S>            <C>                                               <C>                                    <C>
10.20*         Facility Lease dated as of August 12,             10.20 to Annual Report of the          1-6986
               1986, between The First National Bank             Registrant on Form 10-K for
               of Boston, as Owner Trustee, and Public           fiscal year ended December 31,
               Service Company of New Mexico                     1996.
               together with Amendments No. 1 and 2
               thereto (refiled).

10.20.2        Amendment No. 2 dated as of April 10, 1987 to     10.20.2 to Annual Report of the        1-6986
               Facility Lease dated as of August 12, 1986,       Registrant on Form 10-K for
               as amended, between The First National Bank       fiscal year ended December 31,
               of Boston, not in its individual capacity,        1998.
               but solely as Owner  Trustee  under a Trust
               Agreement,  dated as of  August  12,  1986,
               with MFS Leasing  Corp.,  Lessor and Public
               Service  Company  of  New  Mexico,   Lessee
               (refiled)

10.20.3        Amendment No. 3 dated as of March 8,              10.20.3  to the Company's              1-6986
               1995, to Facility Lease between Public            Quarterly Report on Form
               Service Company of New Mexico and                 10-Q for the quarter ended March
               the First National Bank of Boston,                31, 1995.
               dated as of August 12, 1986.

10.21          Facility Lease dated as of December 15,           10.21 to Annual Report of the          1-6986
               1986, between The First National Bank             Registrant on Form 10-K for
               of Boston, as Owner Trustee, and Public           fiscal year ended December 31,
               Service Company of New Mexico (Unit 1             1996.
               Transaction) together with Amendment No. 1
               thereto (refiled).

10.22          Facility Lease dated as of December 15,           10.22 to Annual Report of the          1-6986
               1986, between The First National Bank             Registrant on Form 10-K for
               of Boston, as Owner Trustee, and Public           fiscal year ended December 31,
               Service Company of New Mexico                     1996.
               Unit 2 Transaction) together with
               Amendment No. 1 thereto (refiled).

10.23**        Restated and Amended Public Service Company of    10.23 to Annual Report of the          1-6986
               New Mexico Accelerated Management Performance     Registrant on Form 10-K for
               Plan (1988) (August 16, 1988) (refiled).          fiscal year ended December 31,
                                                                 1998.

10.23.1**      First Amendment to Restated and Amended Public    10.23.1 to Annual Report of the        1-6986
               Service Company of                                Registrant on Form 10-K for
               New Mexico Accelerated Management Performance     fiscal year ended December 31,
               Plan (1988) (August 30, 1988) (refiled).          1998.

</TABLE>


                                               E-9
<PAGE>

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

<S>            <C>                                               <C>                                    <C>
10.23.2**      Second Amendment to Restated and Amended Public   10.23.2 to Annual Report of the        1-6986
               Service Company of New Mexico Accelerated         Registrant on Form 10-K
               Management Performance Plan (1988)(December 29,   for fiscal year
               1989) (refiled).                                  ended December 31, 1998.

10.23.4**      Fourth Amendment to the Restated and Amended      10.23.4 to the Company's               1-6986
               Public Service Company of New Mexico              Quarterly Report on Form 10-Q
               Accelerated  Management Performance Plan,  as     for the quarter ended March 31,
               amended effective December 7, 1998                1999.

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

10.25.1**      Second Restated and Amended Public                10.25.1 to Annual Report for the       1-6986
               Service Company of New Mexico                     Registrant on Form 10-K for
               Executive Medical Plan as amended on              fiscal year ended December 31,
               December 28, 1995.                                1997.

10.27          Amendment No. 2 dated as of April 10,             10.53 to Annual Report of the          1-6986
               1987, to the Facility Lease dated as of           Registrant on Form 10-K for
               August 12, 1986, between The First                fiscal year ended December 31,
               National Bank of Boston, as Owner                 1987.
               Trustee,  and Public  Service  Company of 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.)

10.32**        Supplemental Employee Retirement                  10.32 to Annual Report of              1-6986
               Agreements dated August 4, 1989,                  the Registrant on Form 10-K
               Between Public Service Company of                 for fiscal year ended
               New Mexico and John R. Ackerman                   December 31, 1999.
               and Max Maerki (refilled).

10.32.1**      First Amendment to the Supplemental               10.32.1 to the Company's               1-6986
               Employee Retirement Agreement.                    Quarterly Report on Form 10-Q
                                                                 for the quarter ended September
                                                                 30, 1998.

10.32.2**      Second Amendment to the Supplemental Employee     10.32.2 to the Company's               1-6986
               Retirement Agreement for Max H. Maerki, as        Quarterly Report on Form 10-Q
               amended effective December 7, 1998                for the quarter ended March 31,
                                                                 1999.
</TABLE>

                                               E-10

<PAGE>

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

<S>            <C>                                               <C>                                    <C>
10.32.3**      First Amendment to the Supplemental Employee      10.32.3 to the Company's               1-6986
               Retirement Agreement for John T. Ackerman, as     Quarterly Report on Form 10-Q
               amended effective December 7, 1998                for the quarter ended March 31,
                                                                 1999.

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

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

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

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

10.36.1        Amendment No. 1 to the San Juan Unit              10.36.1 to Annual Report of            1-6986
               4 Purchase and Participation Agreement            the Registrant on Form 10-K for
               between Public Service Company of New             fiscal year ended
               Mexico and The City of Anaheim,                   December 31, 1999.
               California, dated October 27, 1999

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


10.38.1        Amendment No. 1 to the Restated and               10.38.1 to Annual Report of            1-6986
               Amended San Juan Unit 4 Purchase                  the Registrant on Form 10-K
               And Participation Agreement between               for fiscal year ended
               Public Service Company of New Mexico              December 31, 1999.
               And Utah Associated Municipal Power
               Systems, dated October 27, 1999.

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

</TABLE>

                                               E-11
<PAGE>

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

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

10.44.2**      Second Restated and Amended Non-Union Severance   10.44.2 to the Company's               1-6986
               Pay Plan of Public Service Company of New Mexico  Quarterly Report on Form 10-Q
               dated  August  1,  1999                           for the quarter ended September
                                                                 30, 1999.

10.45**        Second  Amendment to the Public Service Company   10.45 to the Company's  Quarterly      1-6986
               of New Mexico Service Bonus Plan, as              Report on Form 10-Q for the
               amended   effective  December 7, 1998             quarter ended March 31, 1999.


10.47**        Compensation Arrangement with Chief               10.3 to the Company's Quarterly        1-6986
               Executive Officer, Benjamin F. Montoya            Report on Form 10-Q for the
               effective June 23, 1993.                          quarter ended June 30, 1993.

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

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

10.47.4**      First Amendment to the Pension Service            10.47.4 to the Company's               1-6986
               Adjustment Agreement for Benjamin F.              Quarterly Report on Form 10-Q
               Montoya.                                          for the quarter ended June 30,
                                                                 1998.

10.47.6**      Second Amendment to the Pension Service           10.47.6 to the Company's               1-6986
               Adjustment Agreement for Benjamin F. Montoya, as  Quarterly Report on Form 10-Q
               amended effective December 7, 1998                for the quarter ended March 31,
                                                                 1999.

</TABLE>

                                               E-12

<PAGE>

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

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

10.48.1**      First Amendment to the Public Service Company of  10.48.1 to the Company's               1-6986
               New Mexico OBRA '93 Retirement Plan, as amended   Quarterly Report on Form 10-Q
               effective  December 7, 1998                       for the quarter ended March 31,
                                                                 1999.

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

10.50**        Public Service Company of New Mexico              10.50 to Annual Report of the          1-6986
               Section 415 Plan dated January 1, 1994.           Registrant on Form 10-K for
                                                                 fiscal year ended December 31,
                                                                 1993.

10.51.2**      First Restated and Amended Executive Retention    10.51.2 to the Company's               1-6986
               Plan, as amended effective December 7, 1998       Quarterly Report on Form 10-Q
                                                                 for the quarter ended March 31,
                                                                 1999.

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.

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

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
               Service  Company of New Mexico,  Citibank  and    Form 10-Q for the
               Citicorp North America,  Inc. and Amended         quarter ended June 30,
               Restated  Collection  Agent  Agreement dated      1996.
               May 20, 1996, between Public Service Company
               of  New  Mexico, Corporate Receivables
               Corporation and Citibank, N.A.

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

</TABLE>


                                               E-13
<PAGE>

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

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

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.

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

10.67          New Mexico Public Service Commission             10.67 to Annual Report of the          1-6986
               Order dated July 30, 1987, and Exhibit I         Registrant on Form 10-K for
               thereto, in NMPUC Case No. 2004,                 fiscal year ended December 31,
               regarding the PVNGS decommissioning              1997.
               trust fund (refiled).

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

10.68.1        Amendment Number One to the Master               10.68.1 to Annual Report of the        1-6986
               Decommissioning Trust Agreement for              Registrant on Form 10-K for
               Palo Verde Nuclear Generating Station            fiscal year ended December 31,
               dated January 27, 1997, between Public           1997.
               Service Company of 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.
</TABLE>

                                               E-14

<PAGE>

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

<S>            <C>                                               <C>                                    <C>
10.72          Revolving Credit Agreement dated as of           10.72 to the Company's Quarterly       1-6986
               March 11, 1998, among the Company,               Report on Form 10-Q for the
               the Chase Manhattan Bank, Citibank,              quarter ended March 31, 1998.
               N.A., Morgan Guaranty Trust Company
               of New York, and Chase Securities, Inc.,
               and the Initial Lenders Named Therein.
10.73          Refunding Agreement No. 8A, dated as             10.73 to the Company's Quarterly       1-6986
               of December 23, 1997, among the                  Report on Form 10-Q for the
               Company, the Owner Participant Named             quarter ended March 31, 1998.
               Therein, State Street Bank and Trust
               Company, as Owner Trustee, The Chase
               Manhattan Bank, as Indenture Trustee,
               and First PV Funding Corporation.

10.74**        Third Restated and Amended Public                10.74 to the Company's Quarterly       1-6986
               Service Company of New Mexico                    Report on Form 10-Q for the
               Performance Stock Plan effective March           quarter ended March 31, 1998.
               10, 1998.

10.74.1**      First Amendment to the Third Restated            10.74.1 to the Company's               1-6986
               and Amended Public Service Company               Quarterly Report on Form
               of New Mexico Performance Stock Plan             10-Q for the quarter ended
               Dated February 7, 2000                           March 31, 2000.

10.75**        Executive Savings Plan effective July 1,         10.75 to the Company's Quarterly
               1998.                                            Report on Form 10-Q for the
                                                                quarter ended June 30, 1998.

10.76          PVNGS Capital Trust--Variable Rate               10.76 to the Company's Quarterly       1-6986
               Trust Notes--PVNGS Note Agreement                Report on Form 10-Q for the
               dated as of July 31, 1998.                       quarter ended September 30, 1998.

10.77          San Juan Project Participation Agreement dated   10.77 to the Company's Quarterly       1-6986
               as of October 27, 1999, among Public Service     Report on Form 10-Q for the
               Company of New Mexico, Tucson Electric Power     quarter ended September 30, 1999.
               Company, The City of Farmington, New Mexico,
               M-S-R Public Power Agency,  The Incorporated
               County of Los Alamos,  New Mexico,  Southern
               California  Public Power Authority,  City of
               Anaheim,  Utah  Associated  Municipal  Power
               System   and   Tri-State    Generation   and
               Transmission Association, Inc.

</TABLE>

                                              E-15
<PAGE>

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

<S>            <C>                                              <C>                                    <C>
10.78          Stipulation in the matter of the Commission's    10.78 to the Company's Quarterly       1-6986
               investigation of the rates for electric          Report on Form 10-Q for the
               service of Public Service Company of New         quarter ended September 30, 1999.
               Mexico, Rate Case No. 2761, dated May 21, 1999

10.78.1        Stipulation in the matter of the Commission's    10.78.1 to the Company's               1-6986
               investigation of the rates for electric service  Quarterly Report on Form
               of Public Service  Company of New Mexico,        10-Q the quarter ended
               Rate for Case No. 2761, dated May 27, 1999       September 30, 1999.

10.79          Asset Sale Agreement between Tri-State           10.79 to the Company's Quarterly       1-6986
               Generation and Transmission Association, Inc.,   Report on Form 10-Q for the
               a Colorado Cooperative Association and Public    quarter ended September 30, 1999.
               Service Company of New Mexico, a New Mexico
               Corporation, dated September 9, 1999

10.80**        Supplemental Employee Retirement                 10.80 to the Company's                 1-6986
               Agreement, dated March 14, 2000 for              Quarterly Report on Form
               Patrick T. Ortiz                                 10-Q for the quarter ended
                                                                March 31, 2000.

10.81**        Supplemental Employee Retirement                 10.81 to the Company's                 1-6986
               Agreement, dated March 22, 2000 for              Quarterly Report on Form
               Jeffry E. Sterba                                 10-Q for the quarter ended
                                                                March 31, 2000.

10.82          Manzano Corporation Omnibus Performance          10 to Registration Statement No.       333-32170
               Equity Plan                                      333-32170 of the Company filed
                                                                April 18, 2000.

Additional Exhibits

21            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-16
<PAGE>

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

<S>           <C>                                                <C>                                    <C>
99.2*         Participation Agreement dated as of                99.2 to Annual Report of the           1-6986
              December 16, 1985, among the Owner                 Registrant on Form 10-K for
              Participant named therein, First PV                fiscal year ended December 31,
              Funding Corporation. The First National            1995.
              Bank of Boston, in its 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               99.3 to the Company's Quarterly        1-6986
              Agreement and Assignment of Rents                 Report on Form 10-Q for the
              dated as of December 16, 1985, between            quarter ended March 31, 1996.
              the First National Bank of 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             99.3.3 to the Company's                1-6986
              of March 8, 1995, to Trust Indenture              Quarterly Report on Form 10-Q
              Mortgage, Security Agreement and                  for the quarter ended March 31,
              Assignment of Rents between The First             1995.
              National Bank of Boston and Chemical
              Bank dated as of December 16, 1985.

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

</TABLE>


                                              E-17
<PAGE>

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

<S>            <C>                                               <C>                                    <C>
99.5          Participation Agreement dated as of July          99.5 to Annual Report of the           1-6986
              31, 1986, among the Owner Participant named       Registrant on Form 10-K for
              herein, First PV Funding Corporation, The         fiscal year ended December 31,
              First National Bank of Boston, in its             1996.
              individual   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               99.6 to Annual Report of the           1-6986
              Agreement  and  Assignment  of Rents              Registrant  on Form 10-K for
              dated as of July 31, 1986,  between The           fiscal year ended December
              First  National Bank of Boston,  as Owner         31, 1996.
              Trustee,   and  Chemical  Bank,  as  Indenture
              Trustee together with  Supplemental  Indenture
              No. 1 thereto (refiled).

99.7          Assignment, Assumption, and Further               99.7 to Annual Report of the           1-6986
              Agreement dated as of July 31, 1986,              Registrant on Form 10-K for
              between Public Service Company of                 fiscal year ended December 31,
              New Mexico and The First National Bank            1996.
              of Boston, as Owner Trustee (refiled).

99.8          Participation Agreement dated as of                99.8 to the Company's Quarterly        1-6986
              August 12, 1986, among the Owner                   Report on Form 10-Q for the
              Participant named therein, First PV                quarter ended March 31, 1997.
              Funding Corporation. The 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-18
<PAGE>

<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               99.8.1 to the Company's                1-6986
              18, 1986, to Participation Agreement               Quarterly Report on Form 10-Q
              dated as of August 12, 1986 (refiled).             for the quarter ended March 31,
                                                                 1997.

99.9*         Trust Indenture, Mortgage, Security                99.9 to Annual Report of the           1-6986
              Agreement  and  Assignment  of Rents dated         Registrant  on Form 10-K for
              as of  August  12,  1986,  between  the First      fiscal  year  ended
              National  Bank of  Boston,  as  Owner Trustee,     December 31, 1996.
              and  Chemical   Bank,  as  Indenture   Trustee
              together  with  Supplemental  Indenture  No. 1
              thereto (refiled).

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

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

99.11*        Participation Agreement dated as of                99.1 to the Company's Quarterly        1-6986
              December 15, 1986, among the Owner                 Report on Form 10-Q for the
              Participant named therein,  First PV quarter        ended March 31, 1997.
              Funding  Corporation,  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 1 Transaction) (refiled).

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

</TABLE>

                                              E-19
<PAGE>

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

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

99.14         Participation Agreement dated as of                99.14 to the Company's                 1-6986
              December 15, 1986, among the Owner                 Quarterly Report on Form
              Participant named therein, First PV                10-Q for the quarter ended
              Funding Corporation, The First National            March 31, 1997.
              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                99.15 to Annual Report of the          1-6986
              Agreement and  Assignment  of Rents dated          Registrant on Form 10-K
              as of  December  31,  1986,  between  the          for fiscal  year  ended
              First  National  Bank of  Boston,  as  Owner       December 31, 1996.
              Trustee,   and  Chemical  Bank,  as  Indenture
              Trustee (Unit 2 Transaction) (refiled).

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

99.17*        Waiver letter with respect to "Deemed              99.17 to Annual Report of the          1-6986
              Loss Event" dated as of August 18, 1986,           Registrant  on Form 10-K
              between the Owner Participant named                for fiscal year ended December
              therein, and  Public Service Company of            31, 1996.
              New Mexico (refiled).

99.18*        Waiver letter with respect to Deemed               99.18 to Annual Report of the          1-6986
              Loss Event" dated as of August 18, 1986,           Registrant  on Form 10-K
              for between the Owner Participant named            for fiscal year ended December
              therein, and Public Service Company of             31, 1996.
              New Mexico (refiled).
</TABLE>

                                              E-20
<PAGE>

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

<S>           <C>                                                <C>                                    <C>
99.19         Agreement No. 13904 (Option and                    99.19 to Annual Report of the          1-6986
              Purchase of Effluent), dated April 23,             Registrant on Form 10-K for
              1973, among Arizona Public Service                 fiscal year ended December 31,
              Company, Salt River Project Agricultural           1996.
              Improvement and Power District, 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,         Registrant on Form 10-K
              Among  Arizona  Public  Service  Company,          for fiscal  year  ended
              Salt River Project Agricultural Improvement         December 31, 1996.
              and Power 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                   quarter ended September 30, 1996.
              Assignment of 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.

99.22         1997 Supplemental Indenture, dated as of           99.22 to the Company's Quarterly       1-6986
              December 23, 1997, to Trust Indenture,             Report on Form 10-Q for the
              Mortgage, Security Agreement and                   quarter ended March 30, 1998.
              Assignment of Rents, dated as of August
              12, 1986, between State Street Bank and
              Trust, 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.

<PAGE>

                                      E-21

     (b)  Reports on Form 8-K:

         During  the  quarter  ended  December  31,  2000 and  during the period
beginning  January 1, 2001 and ending  February 20, 2001, the Company filed, on
the date indicated, the following reports on Form 8-K.

<TABLE>
<CAPTION>

     Dated:                          Filed:                                  Relating to:
     ------                          ------                                  ------------

<S>                              <C>                            <C>
July 31, 2000                    September 6, 2000              The Company Reports its Comparative
                                                                Operating Statistics for July 2000 and 1999

September 14, 2000               September 19, 2000             The Company Projects a Strong Third Quarter
                                                                Ups Earnings Estimate for 2000, 2001

October 2, 2000                  October 3, 2000                The Company Names New Chairman

September 14, 2000               October 3, 2000                The Company's CEO Encourages NM
                                                                Regulators to Press on Toward Electric Choice

August 31, 2000                  October 3, 2000                The Company Reports Comparative
                                                                Operating Statistics for August 2000 and 1999

September 30, 2000               October 16, 2000               The Company Reports Comparative
                                                                Operating Statistics for September 2000 and
                                                                1999

October 16, 2000                 October 16, 2000               The Company Hosts Third Quarter Earnings
                                                                Conference Call on the Web

October 18, 2000                 October 19, 2000               The Company Reports Quarter and Nine
                                                                Months Ended September 30, 2000 Earnings
                                                                Announcement and Consolidated Statement
                                                                of Earnings

October 17, 2000                 October 20, 2000               The Company Negotiates Cost-Saving
                                                                Revisions to San Juan Coal Contract

October 31, 2000                 October 31, 2000               The Company `Boutique" Strategy Key to
                                                                Wholesale Success, CEO Tells Analysts

November 9, 2000                 November 9, 2000               The Company Reports it will Acquire Western
                                                                Resources Electric Utility Operations in a
                                                                Tax-Free, Stock-for-Stock Transaction

November 9, 2000                 November 9, 2000               The Company Reports it will Purchase the
                                                                Electric Utility Operations of Western
                                                                Resources

November 9, 2000                 November 13, 2000              The Company Reports the Acquisition of
                                                                Western Resources Expected to Provide
                                                                Immediate Earnings Boost

November 14, 2000                November 14, 2000              The Company Provides More Detail on
                                                                Proposed Western Resources Acquisition


</TABLE>
                                              E-22

<PAGE>

<TABLE>
<CAPTION>

     Dated:                          Filed:                                  Relating to:
     ------                          ------                                  ------------

<S>                              <C>                            <C>
November 9, 2000                 November 16, 2000              The Company Reports Press Conference
                                                                Transcript to Discuss the Acquisition of
                                                                Western Resources

November 8, 2000                 November 17, 2000              The Company Enters a Merger Agreement
                                                                With Western and Westar Industries

November 14, 2000                November 16, 2000              The Company Provides Information to Utility
                                                                Investment Analysts about A High-Voltage
                                                                Combination - The Company and Western
                                                                Resources

November 27, 2000                November 30, 2000              Western Resources Asks Kansas Regulators
                                                                to Approve a $151 million in Retail Rate
                                                                Increases for KPL and KGE

October 31, 2000                 November 29, 2000              The Company Reports Comparative
                                                                Operating Statistics for October 2000 and 1999

December 12, 2000                December 13, 2000              The Company Declares Common and
                                                                Preferred Stock Dividend

November 30, 2000                December 15, 2000              The Company Reports Comparative
                                                                Operating Statistics for November 2000 and
                                                                1999

December 12, 2000                December 27, 2000              The Company Declares Common and
                                                                Preferred Stock Dividend

December 19, 2000                December 27, 2000              The Company's Subsidiary to Invest
                                                                $10 Million in Internet Gateway Services
                                                                Company

December 31, 2000                January 18, 2001               The Company Reports Comparative
                                                                Operating Statistics for December 2000 and
                                                                1999

January 25, 2001                 January 25, 2001               The Company Reports Quarter and Nine
                                                                Months Ended December 31, 2000 Earnings
                                                                Announcement and Consolidated Statement
                                                                of Earnings

January 25, 2001                 January 25, 2001               The Company Reports Fourth Quarter and
                                                                Year End 2000 Earnings
</TABLE>

                                              E-23

<PAGE>

                                   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 21, 2001                By          /s/ J. E. Sterba
                                             -------------------------------
                                                      J. E. Sterba
                                                  Chairman, 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>
                /s/ J. E. STERBA                  Principal Executive Officer and          February 21, 2001
----------------------------------------------    Chairman of the Board
                  J. E. STERBA
             Chairman, President and
             Chief Executive Officer

                /s/ M. H. MAERKI                  Principal Financial Officer              February 21, 2001
----------------------------------------------
                  M. H. Maerki
            Senior Vice President and
             Chief Financial Officer

                /s/ J. R. LOYACK                  Principal Accounting Officer             February 21, 2001
----------------------------------------------
                  J. R. Loyack
      Vice President, Corporate Controller
          and Chief Accounting Officer

               /s/ J. T. ACKERMAN                 Chairman of the Board                    February 21, 2001
----------------------------------------------
                 J. T. Ackerman

               /s/ R. G. ARMSTRONG                Director                                 February 21, 2001
----------------------------------------------
                 R. G. Armstrong

                /s/ J. A. GODWIN                  Director                                 February 21, 2001
----------------------------------------------
                  J. A. Godwin

                /s/ M. LUJAN JR.                 Director                                  February 21, 2001
----------------------------------------------
                  M. Lujan Jr.

                /s/ B. F. MONTOYA                 Director                                 February 21, 2001
----------------------------------------------
                  B. F. Montoya

                 /s/ T. F. PATLOVICH              Director                                 February 21, 2001
----------------------------------------------
                   T. F. Patlovich

                 /s/ R. M. PRICE                  Director                                 February 21, 2001
----------------------------------------------
                   R. M. Price

                 /s/ P. F. ROTH                   Director                                 February 21, 2001
----------------------------------------------
                   P. F. Roth

</TABLE>

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