================================================================================

                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, 2002

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

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

           Securities Registered Pursuant To Section 12(b) Of The Act:

                                                          Name of Each Exchange
Registrant             Title of Each Class                 on Which Registered
----------             -------------------                 -------------------
PNM Resources, Inc.    Common Stock, No Par Value        New York Stock Exchange

           Securities Registered Pursuant To Section 12(g) Of The Act:

Registrant                                   Title of Each Class
----------                                   -------------------
Public Service Company             1965 Series, 4.58% Cumulative Preferred Stock
of New Mexico                      ($100 stated value without sinking fund)

   Indicate by check mark whether each 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 (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO

   Indicate by check mark 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 registrants' 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. __

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

   The total number of shares of Common Stock of PNM Resources, Inc. outstanding
as of January 31, 2003 was 39,117,799.

   On June 28, 2002, the aggregate market value of the voting stock held by
non-affiliates of PNM Resources, Inc. as computed by reference to the New York
Stock Exchange composite transaction closing price of $24.20 per share reported
by The Wall Street Journal, was $946,650,736.

<PAGE>

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 by PNM Resources, Inc. with the Securities and
Exchange Commission pursuant to Regulation 14A relating to the annual meeting of
stockholders of PNM Resources, Inc. to be held on May 13, 2003 - PART III.

   This combined Form 10-K represents separate filings by PNM Resources, Inc.
and Public Service Company of New Mexico ("PNM"). Information combined herein
relating to an individual registrant is filed by that registrant on its own
behalf. PNM makes no representations as to the information relating to PNM
Resources, Inc. and its subsidiaries other than PNM. When this combined Form
10-K is incorporated by reference into any filing with the SEC made by PNM, the
portions of this Form 10-K that relate to PNM Resources, Inc. and its
subsidiaries other than PNM are not incorporated by reference therein.



                                       ii
<PAGE>

                                TABLE OF CONTENTS
                                                                            Page
                                                                            ----
GLOSSARY....................................................................  v

                                                  PART I

ITEM  1. BUSINESS...........................................................  1
              THE COMPANY...................................................  1
              COMPANY WEBSITE...............................................  1
              UTILITY OPERATIONS............................................  2
                  Electric..................................................  2
                  Gas.......................................................  3
              GENERATION AND MARKETING OPERATIONS...........................  4
                 Power Sales................................................  4
                  Sources of Power..........................................  6
                  Fuel and Water Supply.....................................  7
              UNREGULATED OPERATIONS........................................  9
              RATES AND REGULATION.......................................... 10
                  Electric Rates and Regulation............................. 10
                  Gas Rates and Regulation.................................. 13
              ENVIRONMENTAL MATTERS......................................... 14
              COMPETITION................................................... 15
              EMPLOYEES..................................................... 16

ITEM  2. PROPERTIES......................................................... 16
              ELECTRIC...................................................... 16
                  Fossil-Fueled Plants...................................... 17
                  Nuclear Plant............................................. 17
                  Other Electric Properties................................. 19
              NATURAL GAS................................................... 19
              OTHER INFORMATION............................................. 19

ITEM  3. LEGAL PROCEEDINGS.................................................. 19
                 Navajo Nation Environmental Issues......................... 19
                 KAFB Contract.............................................. 20
                 PVNGS Water Supply Litigation.............................. 21
                 San Juan River Adjudication................................ 21
                 Natural Gas Royalties Qui Tam Litigation................... 22
                 Santa Fe Generation Station................................ 22
                 Former AG&E Manufactured Gas Plant Site.................... 23
                 Citizen Suit Under the Clean Air Act....................... 24
                 Landowner Environmental Claims............................. 24
                 California Attorney General Complaint...................... 24
                 California Antitrust Litigation............................ 24

ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 25

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY........................ 25


                                      iii
<PAGE>
                                     PART II

                                                                            Page
                                                                            ----
ITEM  5.   MARKET FOR THE COMPANY'S COMMON EQUITY AND
                 RELATED STOCKHOLDER MATTERS...............................  28
ITEM  6.   SELECTED FINANCIAL DATA.........................................  29
ITEM  7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATION........................  30
ITEM  7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
                      MARKET RISK..........................................  81
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
                MANAGEMENTAND RELATED STOCKHOLDER MATTERS.................. E-1
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. E-1
ITEM 14.   CONTROLS AND PROCEDURES......................................... E-1

                                                  PART IV

ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
                ON FORM 8-K................................................ E-1
SIGNATURES.................................................................E-27
CERTIFICATIONS.............................................................E-28



                                       iv
<PAGE>



                                    GLOSSARY

Act...................  The Clean Air Act Amendments of 1990
Afton.................  Afton Generating Station
Avistar...............  Avistar, Inc., an unregulated subsidiary of PNM
                           Resources, Inc.
AG....................  New Mexico Attorney General
AG&E..................  Albuquerque Gas and Electric Company
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 Billiton
BLM...................  Bureau of Land Management
BNCC..................  BHP Navajo Coal Company
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
Exchange Act..........  SEC Exchange Act of 1934
FASB..................  Financial Accounting Standards Board
Farmington............  City of Farmington, New Mexico
FERC..................  Federal Energy Regulatory Commission
FIP...................  Federal Implementation Plan
Four Corners..........  Four Corners Power Plant
FPL...................  FPL Energy LLC
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  PNM Resources, Inc.
ISO...................  Independent System Operator
Jicarilla.............  Jicarilla Apache Tribe
KAFB..................  Kirtland Air Force Base
Kv....................  Kilovolt
KW....................  Kilowatt
KWh...................  Kilowatt Hour
Lordsburg.............  Lordsburg Generating Station
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

                                       v
<PAGE>

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
NMWE..................  New Mexico Wind Energy Center
NOPR..................  Notice of Proposed Rulemaking
NRC...................  United States Nuclear Regulatory Commission
NSPS..................  New Source Performance Standards
NSR...................  New Source Review
OCD...................  New Mexico Oil Conservation Division
OMOI..................  Office of Market Oversight and Investigation
PGAC..................  PNM's Purchased Gas Adjustment Clause
PG&E..................  Pacific Gas and Electric Co.
PLP...................  Cobisa-Person Limited Partnership
PPA...................  Power Purchase Agreement
PRC...................  New Mexico Public Regulation Commission, successor to
                            the NMPUC
Processing Company....  Sunterra  Gas  Processing  Company,  a  wholly-owned
                            subsidiary  of  PNM Resources, Inc.
PSD...................  Prevention of Significant Deterioration
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
SO2...................  Sulfur Dioxide
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
USEA..................  United States Executive Agencies
USEC..................  United States Enrichment Corporation
WGA...................  Western Governors Association

                                       vi
<PAGE>

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



                                      vii
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

                                   THE COMPANY

       PNM Resources, Inc. ("Holding Company") was incorporated in the State of
New Mexico on March 3, 2000. The Holding Company's principal subsidiary Public
Service Company of New Mexico ("PNM") was incorporated in the State of New
Mexico on May 9, 1917. This filing for PNM Resources, Inc. and Subsidiaries and
PNM is presented on a combined basis. The Holding Company and PNM have their
principal offices at Alvarado Square, Albuquerque, New Mexico 87158 (telephone
number 505-241-2700). The Holding Company is an investor-owned holding company
of energy and energy-related companies. PNM is a public utility primarily
engaged in the generation, transmission, distribution, sale and marketing of
electricity, and in the transmission, distribution and sale of natural gas
within the State of New Mexico. The business of PNM constitutes substantially
all of the business of the Holding Company. Therefore, the financial results and
results of operations of PNM are virtually identical to the consolidated results
of the Holding Company and all its subsidiaries. For ease of discussion, this
report may use the term "Company" when referring to PNM or when discussing
matters of common applicability to the Holding Company and PNM.

       Upon the completion on December 31, 2001 of a one-for-one share exchange
between PNM and the Holding Company, the Holding Company became the parent
company of PNM. Prior to the share exchange, the Holding Company had existed as
a subsidiary of PNM. The new parent company began trading on the New York Stock
Exchange under the same PNM symbol beginning on December 31, 2001.

       The Company operates as three distinct business units: (1) Utility
Operations, (2) Generation and Marketing Operations and (3) Unregulated
Operations. Utility Operations and Generation and Marketing Operations are
business units of PNM. Utility Operations include Electric Services ("Electric")
and Gas Services ("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. Generation and Marketing Operations include all production and
purchase of electricity, the sale of wholesale electricity to Utility Operations
and third parties, as well as electricity marketing activities. Unregulated
Operations provide energy related services. On January 11, 2002, the Company's
primary subsidiary engaged in unregulated activities, Avistar, was transferred
by way of a dividend to the Holding Company by its subsidiary, PNM.

       Financial information relating to amounts of sales, revenue, net income
and total assets of the Company's business units or reportable segments is
contained in "Part II, Item 7. - Management's Discussion and Analysis of
Financial Condition and Results of Operations" and note 2 of the notes to
consolidated financial statements.

                                 COMPANY WEBSITE

       Upon request the Company will provide free of charge our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act. These reports are also made available on or through
our internet website at www.pnm.com as soon as reasonably practicable after we
electronically file material with the SEC. In addition, you should read the
following discussion and analysis together with our Consolidated Financial
Statements included elsewhere in this report.

                                       1
<PAGE>

                               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. The largest retail electric customer
served by the Company accounted for approximately 4.8% of the Company's total
retail electric revenues for the year ended December 31, 2002.

       For the years 2000 through 2002, retail KWh sales have grown at a
compound annual rate of approximately 2.4%. The Company's system peak demands
for its retail customers and firm requirements customers in summer and winter
for the last three years are shown in the following table:

                               SYSTEM PEAK DEMANDS
                                   (Megawatts)

                                        2002         2001         2000
                                      ---------    ---------    ---------
Summer...............................    1,456        1,397        1,368
Winter...............................    1,297        1,294        1,211

       The Company holds long-term, non-exclusive franchise agreements for its
electric retail operations, expiring between May 2003 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, San Miguel
County, Village of Bosque Farms, Pueblo de Cochiti and Village of Tijeras
franchises have expired. The COA metropolitan area accounted for approximately
53% of the Company's 2002 total electric utility operating revenues, and no
other franchise area represents more than approximately 8%. The Company
continues to collect and pay franchise fees to the COA, City of Santa Fe, the
Town of Cochiti Lake, Village of Bosque Farms and Village of Tijeras. The
Company currently does not pay franchise fees to Bernalillo County, Luna County,
Sandoval County and San Miguel County. The Company remains obligated under New
Mexico state law to provide service to customers in these franchise areas even
in the absence of a franchise agreement.

       Electric procures all of its electric power needs from Generation and
Marketing 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 Generation and Marketing Operations
and a return on the related assets.

       The Company owns or leases 2,897 circuit miles of transmission lines,
interconnected with other utilities in New Mexico, east and south into Texas,
west into Arizona, and north into Colorado and Utah. Due to rapid load growth in

                                       2
<PAGE>

the Company's service territory in recent years and the lack of transmission
development, most of the capacity on this transmission system is fully committed
and there is very little or no additional access available on a firm commitment
basis. These factors result in physical constraints on the system and limit the
ability to wheel power into the Company's service area from outside New Mexico.

Gas

       Gas operations distributes natural gas to most of the major communities
in New Mexico, including the COA and the City of Santa Fe. The COA metropolitan
area accounted for approximately 44% of the total gas revenues in 2002. No
single sales-service customer accounted for more than approximately 1% of the
Company's therm sales in 2002. The Company holds long-term, non-exclusive
franchises with varying expiration dates in all incorporated communities
requiring franchise agreements except for the COA, City of Santa Fe, Aztec,
Village of Bosque Farms, Town of Cochiti Lake, Los Ranchos de Albuquerque and
Tatum. The Company remains obligated to serve these franchise areas pursuant to
state law even in the absence of a franchise agreement.

       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 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 its distribution systems, as well as for delivery to interstate
pipelines. The Company provided gas transportation deliveries to approximately
1,360 gas marketers, producers and end users during 2002.

       During 2002, approximately 48.75% 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. Cost-of-gas revenues, received from sales-service and off-system
customers, and other PGAC-related revenues accounted for approximately 51% of
the Company's total gas operating revenues in 2002. Since a major portion of the
Company's load is related to heating, levels of therm sales are affected by
weather. Approximately 63% of the Company's total therm sales in 2002 occurred
in the months of January, February, March and December.

       The Company obtains its supply of natural gas primarily from sources
within New Mexico by contracting 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 these cities and other portions of its distribution system
have increased.

                                       3
<PAGE>

                       GENERATION AND MARKETING OPERATIONS

       The Company's Generation and Marketing Operations serve four principal
markets. Sales to the Company's Utility Operations to cover jurisdictional
electric demand and sales to firm-requirements wholesale customers 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 consists of other contracted sales to third parties for which
Generation and Marketing 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. These
sales include the Company's wholesale power marketing 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 wholesale power market in 2000 and 2001 was,
and continues to be, extremely volatile due to a power supply shortage and other
constraints. (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 significantly larger portion of the Company's earnings in 2001 and 2000
was derived from its wholesale electric sales than in 2002. However, in the last
half of 2001, the wholesale power market in the Western United States became
extremely volatile and, while providing many marketing opportunities, presented
and continues to present significant risk to companies selling power into this
marketplace. In 2002, the Company's revenues from this marketplace declined
significantly as a result of a slowdown in the wholesale market. The Company has
been successful, however, in developing its wholesale power marketing activities
in the Western United States. Management believes this success is due to its
niche business strategy of providing electric power customized to meet the
special needs of its customers. This niche marketing strategy is based on the
Company's asset-backed methodology whereby the Company's net open position is
always supported by its generation capacity excluded from its retail rates, or
by the availability of power not needed to serve its retail customers. This
asset-backed methodology helps to mitigate the risks inherent in the Company's
wholesale power marketing activities. The Company also utilizes long-term
transactions to enhance its product offering.

       Certain Company generation assets are excluded from retail electric
rates. In 1988, the NMPUC excluded 130MW of SJGS Unit 4 and all of PVNGS Unit 3.
As a result, the Company developed a wholesale power marketing 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. During 2002, 2001 and 2000, the Company's sales in the wholesale
electric markets accounted for approximately 56%, 64% and 64%, respectively, of
its total MWh sales. Of the total wholesale electric sales made in 2002, 2001
and 2000, 70%, 77% and 75%, respectively were transacted through purchases for
resale.

                                       4
<PAGE>

       In 1990, the NMPUC established a wholesale electric sales methodology
that provided for fixed rate paths within its jurisdiction for predetermined
periods with wholesale electric sales accruing to the benefit of shareholders.
Subsequent rate cases continued to utilize this methodology. In setting these
periodic fixed rate paths, PNM has been able to reduce its jurisdictional
electric customers' rates by over $300 million since 1990. On January 28, 2003,
the PRC approved the Global Electric Agreement which sets a rate path through
2007. PNM will decrease retail electric rates 6.5% in two phases over the next
three years. The first phase of the rate reductions become effective in
September 2003. In addition, certain plant and purchased power contracts
previously excluded from retail rates are now included as generation resources
to serve PNM's New Mexico retail and firm wholesale requirements customers'
load. These resources include San Juan Unit 4 and PNM's contracts to purchase
power from SPS, Tri-State and Delta. PVNGS Unit 3 remains excluded as are the
recently operational Lordsburg and Afton plants. (See "Part II - Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Other Issues Facing the Company - Merchant Plant Filing and
Electric Rate Settlement.")

       The Generation and Marketing strategy calls for increased asset-backed
marketing and generation capacity supported by long-term contracts, balanced
with stringent risk management policies. The Company's future growth plans call
for approximately 75% of its new generation portfolio to be committed through
long-term contracts, including sales to retail customers. Growth will be
dependent on market development, and upon the Company's ability to generate
funds for the Company's future expansion. Although the current environment has
led the Company to scale back its expansion plans, the Company will continue to
operate in the wholesale market. Expansion of the Company's generating portfolio
will depend upon acquiring favorably priced assets at strategic locations and
securing long-term commitments for the purchase of power from the acquired
plants.

       The Company has entered into various firm wholesale electric sales
contracts. These contracts contain fixed capacity charges in addition to energy
charges. 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. For 2001, APPA invoked
its option to increase its peak demand to 92 MW. The APPA demand dropped to 15
MW in June 2002. The Company furnished firm-requirements wholesale power in New
Mexico in 2002 to the City of Gallup. The Company is committed to provide
service to the City of Gallup through June 2013. Average monthly demands under
the City of Gallup contract for 2002 were approximately 29 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 50 MW. The Company began serving a partial requirements contract
with the Texas-New Mexico Power Company in July 2001 for 62 MW. The contract
service dropped to 32 MW in 2002, then became a firm-requirements contract in
January 2003 and continues through 2006. Beginning March 1, 2003, the Company
began servicing WAPA for approximately 60 MW of electric power that will be
wheeled to serve KAFB. The Company's firm-requirements demand is expected to be
238 MW in 2003, 241 MW in 2004, 232 MW in 2005, 237 MW in 2006 and 241 MW in
2007. No firm-requirements wholesale customer accounted for more than 4.0% of
the Company's total electric sales for resale revenues for the year ended
December 31, 2002.

                                       5
<PAGE>

  Sources of Power

       As of December 31, 2002, the total net generation capacity of facilities
owned or leased by the Company was 1,742 MW, excluding the operating lease
discussed below which would bring the total to 1,874 MW. The Company is
committed to increasing its utilization of its major generation capacity at
SJGS, Four Corners and PVNGS. SJGS is operated by the Company. SJGS's equivalent
availability and capacity factor were 89.4% and 85.3% respectively, for the
twelve months ended December 31, 2002, as compared to 84.5% and 80.9%,
respectively for 2001. Capacity factors for Four Corners and PVNGS were 73.3%
and 94.4%, respectively, in 2002, as compared to 86.2% and 87.5%, respectively,
in 2001. Four Corners and PVNGS are operated by APS. (See "Item 2. Properties".)

       PNM committed to purchase five combustion turbines for a total cost of
$151.3 million. The turbines are for planned power generation plants with an
estimated cost of construction of approximately $370 million over the next five
years depending on market conditions. PNM has expended $225 million for
construction as of December 31, 2002 of which $144 million was for equipment
purchases. On June 27, 2002, Lordsburg, an 80 MW natural gas fired plant became
fully operational and commenced serving the wholesale power market. Afton, a 141
MW simple cycle gas turbine, became fully operational on December 4, 2002. These
plants are part of the Company's ongoing competitive strategy of increasing
generation capacity over time to serve increasing retail load, sales under
long-term contracts and other sales. These plants were not built to serve New
Mexico retail customers and therefore are not currently, included in the rate
base. However, it is possible that these plants may be needed in the future to
serve the growing retail load. If so, these plants will have to be certified by
the PRC and would then be included in the rate base.

       In addition to generating its own power, 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 per year and expires in May 2011. The
Company may reduce its purchases from SPS by 25 MW annually upon three years
notice. The Company provided notice to reduce the purchase by 25 MW in 1999 and
by an additional 25 MW in 2000. The Company also is party to a master power
purchase and sale agreement with SPS, dated August 2, 1999, pursuant to which
the Company has agreed to purchase 72 MW of firm power from SPS from 2002
through 2005. In addition, the Company has 70 MW of contingent capacity obtained
from El Paso under a transmission capacity for generation capacity trade
arrangement through September 2004. Beginning October 2004 and continuing
through June 2005, the capacity amount will be 39 MW. The Company has a PPA with
Tri-State for 50 MW through June 30, 2010. In addition, the Company is
interconnected with various utilities for economy interchanges and mutual
assistance in emergencies.

       In 1996, the Company entered into an operating lease agreement for the
rights to all the output of the Delta gas-fired generating plant for 20 years.
The plant received FERC approval for "exempt wholesale generator" status. The
maximum dependable capacity under the lease 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 the 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 provided by the Company's Gas operations. In
addition, the unit has the capability to utilize low sulfur fuel oil if natural
gas is neither available nor cost effective.

                                       6
<PAGE>

       On October 21, 2002, PNM entered into an agreement with FPL Energy LLC
("FPL"), a subsidiary of FPL Group, Inc., to develop a 200 MW wind generation
facility in New Mexico. FPL will build, own and operate the New Mexico Wind
Energy Center ("NMWE"), consisting of 136 wind-powered turbines on a site in
eastern New Mexico. PNM will buy all the power generated by the NMWE under a
25-year contract. Construction of the wind energy site began in January 2003.
Construction on a facility of this size typically takes six to nine months to
complete. PNM will ask the PRC to approve a voluntary tariff that would allow
PNM retail customers to buy wind-generated electricity for a small monthly
premium. Power from the facility not subscribed by PNM retail customers under
the voluntary program would be sold on the wholesale market, either within New
Mexico or outside the state.

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 three
years were as follows:

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

2002......     67.7        193.6      30.7         46.0      1.6        326.7
2001......     66.9        179.6      28.4         45.7      4.7        524.5
2000......     68.0        165.3      29.8         45.4      2.2        482.6

       The estimated generation mix for 2003 is 68.5% coal, 28.4% 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 Billiton, which 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 Minerals
International, Inc. has guaranteed the obligations of SJCC under the agreement,
which contemplates the delivery of approximately 103 million tons of coal during
its remaining term. That amount would supply substantially all the requirements
of the SJGS through approximately 2017.

       In August 2001, the Company and Tucson signed an agreement with SJCC to
replace 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 the first
quarter 2003.

       The revised coal contract, entered into as a result of the move to an
underground mine, is expected to save the Company between $400 million and $500
million in base fuel cost reductions and avoided coal cost increases over the
next 15 years. Besides saving on fuel costs, the cleaner-burning, less abrasive
coal is expected to reduce the plant's maintenance and operating expenses. The
plant is expected to realize some of the benefits of the higher quality coal in
2003, as the existing surface mines are phased out and the underground mine is
brought to full capacity.

                                       7
<PAGE>

       Four Corners is supplied with coal under a fuel agreement between the
owners and BNCC, under which BNCC agreed to supply all the coal requirements for
the life of the plant. The current fuel agreement expires December 31, 2004.
Negotiations for an extension have been initiated. BNCC 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.

Natural Gas

       The natural gas used as fuel for the electric generating plant located in
COA (Reeves Station and the Delta operating lease) is delivered by Gas. The
Company's Generation and Marketing Operations procures its gas supply
independently of Gas and contracting with the Utility Operations for
transportation services only.

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 contracted for uranium concentrates that will
meet 100% of requirements for 2003 and 15% of requirements for 2004.

       Through conversion services contracts, the PVNGS participants have
arranged for uranium conversion services that will meet 100% of requirements for
2003 and 15% of requirements for 2004.

       The PVNGS participants have an enrichment services contract that provides
100% of requirements for 2003 and 15% of requirements for 2004.

       The PVNGS participants have a new enriched uranium product (EUP) contract
that will furnish 85% of PVNGS' requirements for uranium, conversion services,
and enrichment services for 2004 and up to 100% of those requirements from 2005
through 2008. This contract could also provide 100% of enrichment services in
2009 and 2010.

       In addition, existing contracts will provide 100% of fuel assembly
fabrication services until at least 2015 for each PVNGS unit.

Water Supply

       Water for SJGS and Four Corners is obtained from the San Juan River. (See
"Item 3. - Legal Proceedings- San Juan River Adjudication".) The Company and
Tucson have a contract with the USBR ("USBR Contract") for consumption of 16,200
acre feet of water per year for SJGS. The contract expires in 2005. In 2000, the
Company signed a twenty-two year contract with Jicarilla, beginning in 2006, for

                                       8
<PAGE>

the full 16,200 acre feet of water from the Jicarilla supply in Navajo Reservoir
("Jicarilla Contract") that will replace the contract expiring in 2005. 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 has received all requisite
approvals. 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 BNCC. BNCC also
has committed a portion of those rights to Four Corners through the life of the
plant.

       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".)

       The Four Corners region, in which SJGS and Four Corners are located, has
been experiencing drought conditions that may affect the water supply for the
plants in 2003, as well as later years if adequate moisture is not received in
the watershed that supplies the area. USBR is working to assess the adequacy of
the water supply under PNM's USBR contract for 16,200 acre feet of water that
supplies SJGS. Additionally, various stakeholders in the San Juan Basin,
including the New Mexico State Engineer, are evaluating the water rights that
might be affected by the drought conditions, including water rights pursuant to
the New Mexico state permit that provide 8,000 acre feet of water to SJGS and
approximately 28,000 acre feet of water to Four Corners. PNM is assessing
alternatives for temporary supplies of water and is working with USBR and area
stakeholders to minimize the effect, if any, on operations of the plants. PNM
has assessed its situation with regard to the drought and the alternatives
available to it and does not believe that its operations will be materially
affected at this time. However, PNM cannot forecast the weather situation and
its ramifications with any degree of certainty or how regulators and legislators
may impact PNM's situation in the future, should the drought continue.

                             UNREGULATED OPERATIONS

       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 business ventures.

       In July 2001, the Board of Directors of Avistar decided to wind down
operations except for Avistar's Reliadigm business unit, which provides
maintenance and productivity improvement solutions to the electric power
industry. Avistar had previously divested itself of its Energy Partners business
unit and liquidated Axon Field services and Pathways Integration. In addition,
the transfer of operation of the Sangre de Cristo Water Company to the City of
Santa Fe was completed in the third quarter of 2001. All remaining non-Reliadigm
investments were written-off with the exception of a portion of Avistar's
investment in Nth Power, an energy venture capital fund. The Company recorded
charges of $13.1 million to reflect these activities and the impairment of its
Avistar investments in 2001.

                                       9
<PAGE>

                              RATES AND REGULATION

       PNM 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 regarding retail
utility services provided in New Mexico. The FERC has jurisdiction over rates
and other matters related to wholesale electric sales and cost recovery of its
transmission network. The FERC has begun to take more aggressive action with
regard to the exercise of its jurisdictional authority over wholesale electric
sales. In February 2000, in response in part to the allegations of wrong-doing
in the California spot market, the FERC announced it was establishing the Office
of Market Oversight and Investigations ("OMOI") as the third prong of its
strategic plan. The stated purpose of the FERC OMOI is to engage in the vigilant
oversight of energy markets to ensure effective regulation and remediation of
market problems, while vigorously enforcing compliance with the FERC's rules and
regulations. The FERC has moved forward to staff its OMOI and it is now a fully
functioning branch of the FERC.

Electric Rates and Regulation

Restructuring the Electric Utility Industry

       See "Part II - Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Restructuring the Electric Utility
Industry."

Merchant Plant Filing and Global Electric Agreement

       See "Part II - Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Merchant Plant Filing and Global Electric
Agreement."

FERC

                  Mandated Regional Transmission Organizations

       With the passage of the Public Utility Regulatory Policies Act of 1978
and the Energy Policy Act of 1992, there has been a significant increase in the
level of competition in the market for the generation and sale of electricity.
Barriers have been reduced for companies wishing to build, own and operate
electric generating facilities. In 1996, the FERC issued Order 888 requiring
electric utilities controlling transmission facilities to file open access
transmission tariffs, which opened the utility transmission systems to wholesale
sellers and buyers of electric energy on a non-discriminatory basis.

       Order 888 also encouraged utilities to investigate the formation of
independent system operators ("ISOs") to operate transmission assets and
provided guidance for the formation, operation and governance of ISOs. In 1999,
the FERC issued Order 2000 on Regional Transmission Organizations ("RTOs"),
which established timelines for transmission-owning entities to join an RTO and
defined the minimum characteristics and functions of an RTO.

       The Company, along with other regional transmission owners ("TOs"),
originally pursued the formation of an RTO through Desert STAR, a non-profit
organization. Because of the FERC's subsequent acceptance of a for-profit RTO
model and because a for-profit RTO was viewed as having the proper motivation to
efficiently facilitate competitive markets, the Company and the TO's formed
WestConnect RTO, LLC ("WestConnect"), a for-profit transmission company.

                                       10
<PAGE>


       On October 16, 2001, WestConnect filed its complete RTO package with FERC
requesting a Declaratory Order confirming the WestConnect filing satisfies the
FERC Order 2000 requirements. There were over 50 intervenors in the WestConnect
docket, including the New Mexico Attorney General, New Mexico Industrial Energy
Consumers and the PRC, which filed comments or concerns regarding WestConnect's
declaratory order petition. WestConnect filed a response to the intervenors'
concerns on December 17, 2001. On October 10, 2002, the FERC issued its
Declaratory Order in the case providing guidance and conditions under which the
proposal for formation of the WestConnect RTO would be deemed to satisfy the
FERC's requirements for RTO status under its Order 2000. Several parties to the
proceeding, including PNM as a proposed member of WestConnect, filed motions for
rehearing and clarification of the FERC's Declaratory Order. On December 23,
2002, the FERC issued its order granting in part and denying in part the
requests for rehearing and provided clarification on certain issues raised by
the parties in the case. This order on rehearing provided for certain filings
that need to be made by WestConnect's proposed participants in order to move
WestConnect forward towards RTO status. PNM is currently evaluating the
requirements of the FERC's order on rehearing.

       Uncertainty exists regarding the FERC's evolving RTO policy. WestConnect
is participating in various workshops and rulemakings before the FERC and is
pursuing avenues to expand its scope so as to enhance its chances for approval
as one of the RTOs in the West.

               El Paso Electric - Afton Generating Station Matter

       With the Company's construction of Afton, PNM representatives have been
engaged in a FERC proceeding with El Paso to obtain transmission capacity on El
Paso's transmission system to transmit 141 MW of power generated at Afton north
to serve certain load needs on PNM's system in the COA area. To date, El Paso
has executed an agreement to transmit only 30 MW of power on a firm service
basis, and offered to supply an additional 20 MW of contingent transmission
service. On October 29, 2002, at PNM's request in the FERC proceeding, El Paso
filed with the FERC its unexecuted transportation agreements to provide 20 MW of
contingent transmission service to PNM. On November 19, 2002, PNM filed its
protests with FERC challenging El Paso's denial of PNM's request for the full
141 MW of transmission service. In an order issued by FERC on December 20, 2002,
FERC ordered the matter to be set for hearing. The FERC has set the hearing in
this matter for July 22, 2003. PNM will participate fully in this matter and
aggressively pursue its rights. PNM cannot predict the outcome of this
proceeding.

                                   Rulemakings

       Over the past year, FERC has issued numerous rulemakings. The Company is
following the rulemakings and will submit its comments or will comment in
conjunction with the Edison Electric Institute ("EEI"). The WestConnect members
are also following, attending workshops and commenting on the rulemakings, which
affect the member companies, including PNM. The rulemaking of particular
interest to PNM include the Standard Market Design ("SMD") rule, in which the
FERC is attempting to remedy what it sees as undue discrimination in the
provision of interstate transmission services, and to ensure just and reasonable

                                       11
<PAGE>

rates for electric energy within and among regional power markets. The proposed
rule would put all transmission customers, including bundled retail customers,
under new pro forma transmission rates for new transmission service. All
transmission will be operated under independent transmission providers
(including RTOs) and congestion management will be handled under locational
marginal pricing with tradable congestion revenue rights. PNM plans to submit
comments on the SMD NOPR along with other WestConnect companies and will
continue to participate in the rulemaking process. Other rulemakings that PNM is
participating in and in which it has filed comments, either alone or in
conjunction with the WestConnect participants, include:

o        Standardizing Generation Interconnection Agreements and Procedures;
o        Standards of Conduct for Transmission Providers; and
o        Standards for Business Practices of Interstate Natural Gas Pipelines.

PRC

                           Transmission Investigation

       In July 2001, the AG filed a petition requesting that the PRC initiate an
investigation of electric transmission issues including FERC versus PRC
jurisdiction and the effect of RTO formation on PRC jurisdiction. The Company
suggested workshops to inform the PRC and other interested parties on the
issues. The PRC held workshops for three days, and subsequently issued an order
requiring that the Company and other transmission-owning entities in the
proceeding file comments on jurisdictional issues. PNM and other New Mexico
jurisdictional utilities filed their comments. Subsequently, on December 9,
2002, the AG filed another motion in the case requesting that the New Mexico
jurisdictional utilities file updated comments and provide a status on their
participation and activities related to the establishment of RTOs, and requested
the PRC to issue an order establishing a moratorium on the filing of
applications seeking approval for participation in an RTO until May 1, 2003. PNM
filed its response on December 23, 2002, suggesting that additional workshops be
held to provide stakeholders with an update on RTO participation and activities,
and that it did not object to a moratorium on the filing of applications seeking
approval for participation in RTOs since it had no current plans to make such a
filing before May 2003. The PRC has not yet issued an order in response to the
AG's motion. On December 12, 2002, SPS filed an application at the PRC
requesting approval of its participation in the TRANSLink RTO. PNM has
intervened in this proceeding and plans to fully participate in it.

                         Renewable Resources Rulemakings

       On May 15, 2001, the PRC issued a Notice of Inquiry seeking input as to
the need for a rule to encourage the development of renewable energy in New
Mexico. Rule 573, includes a provision requiring the use of a minimum of 5%
renewable energy by January 1, 2006, with the minimum amount to increase 1% per
year for each year until a renewable portfolio standard of 10% is reached in the
year 2011. Rule 573 also provides that each kilowatt of electricity generated by
solar technology will count as three KWhs and each kilowatt hour generated by
bio-mass, geothermal landfill gas, or fuel cell sources will count as two KWhs.
All remaining sources of renewable energy, including wind and hydroelectronic
technologies, will count as one KWh for each KW generated. On January 16, 2003,
the Company filed a request for rehearing asking the PRC to reconsider its final
order. By order issued February 4, 2003, the PRC denied all requests for
rehearing. PNM is considering the possibility of filing an appeal with the New
Mexico Supreme Court seeking to reverse the final order. The New Mexico
Legislature is considering legislation that might impact Rule 573. In its
present form, Rule 573 could significantly change the make-up of PNM's energy
supply portfolio. The Company is unable to predict the outcome of this
rulemaking proceeding.

                                       12
<PAGE>

Gas Rates and Regulation

Gas Rate Case

       On January 10, 2003, PNM filed a gas general rate case, which asks the
PRC to approve an increase in the service fees charged to its 441,000
natural-gas customers. The proposal would increase both the set monthly service
fee and the charge tied to monthly usage. Those fees are separate from the cost
of gas charged to customers. The monthly cost of gas charge would not be
affected by the fee increase as discussed below. The proposed cost of service
rate increase of $37.6 million is designed to provide PNM's gas utility an
opportunity to earn a 12 percent return on equity, which is consistent with the
return allowed 15 comparable natural gas utilities. PNM's current return on
equity from its gas business is below 3%. A hearing of the case is anticipated
to begin the last week of June 2003.

Purchase Gas Adjustment Clause

       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 2001, the Company presented workshops to the PRC, advocating that
the PGAC balancing account be reconciled on a monthly basis, rather than
annually. The Company also requested that it be allowed to earn a return on the
balancing account balance. A final order was issued in July 2001 that approves
an agreement among the parties regarding the Company's hedging strategy and the
implementation of a price management fund program which includes a continuous
monthly balancing account adjustment factor with a carrying charge set at the
pre-tax cost of capital approved by the PRC in the Company's last gas rate
proceeding. This carrying charge has the effect of keeping the Company whole on
gas purchase transactions since it is now compensated for the time value of
money.

Discounted Transportation Fee Recovery

       The Company made a request to begin the recovery of discounted
transportation fee amounts from sales and transportation customers. Discounted
transportation fee recovery is a holdover issue from the New Mexico Supreme
Court's ruling that the amounts passing the PRC's cost benefit test were
collectible and leaving open only the issue of allocation between customers. The
discounts passing the PRC's cost benefit test total $4.4 million. A hearing date
of April 17, 2003 has been set.

Notice of Inquiry on Pipeline Safety

       In May 2001, the PRC issued a notice of inquiry into whether the PRC
should consider adopting new rules, including quality of service standards, to
protect the public health and safety, public and private property, and the
environment by ensuring the integrity of pipeline systems. The PRC requested
information from all pipeline operators with underground or above ground
facilities in the state. The Company submitted its comments and participated in
the hearings in this inquiry. Subsequent PRC action is pending.

                                       13
<PAGE>

El Paso Gas Capacity Allocation Matter

       In an order issued by FERC on May 31, 2002, as supplemented by an order
issued on September 20, 2002, the FERC mandated that all full-requirements
customers on EPNG's transmission system, including PNM, convert from their
current full requirements natural gas transportation service to contract-demand
transportation service by November 1, 2002. Under this new type of service, PNM
would be allocated a certain level of transportation capacity on EPNG's
transmission system at certain designated receipt points. Several parties have
filed petitions for rehearing requesting that FERC reconsider its order
requiring the change-over in transportation service. The FERC has subsequently
delayed implementing the conversion to contract demand transportation service
until May 1, 2003. On December 2, 2002, EPNG filed its proposed capacity
allocation report wherein, it purported to assign contract demand capacity at
certain receipt points along its system, as well as reallocate costs among full
requirements customers. On January 13, 2003, PNM filed comments to EPNG's report
objecting to EPNG's proposed reallocation of costs. EPNG's converting customers
are engaged in ongoing negotiations regarding the reallocated capacity available
for converting shippers and the appropriate cost-reallocation methodology. The
costs PNM incurs for obtaining natural gas transportation services are
flowed-through in the transportation component of rates charged to retail
natural gas customers. PNM is participating in this matter fully to protect its
rights, and cannot predict the outcome of this proceeding.

                              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, whether or not such acts may
have been lawful at the time they occurred. (See "Part II, Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Critical Accounting Policies - Contingent Liabilities - Environmental Issues"
for a discussion of applicable accounting policies.)

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 compliance with these potential 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.

                                       14
<PAGE>

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 treatment 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 $4.2 million in additional expenses to complete
the groundwater remediation program at Person Station. The remediation program
continues on schedule.

Retired Fossil-Fueled Plant Decommissioning Costs

       The Company's retired fossil-fueled generating stations, Person, Prager
and Santa Fe Stations, have incurred dismantling and reclamation costs as they
are decommissioned. The Company's share of decommissioning costs for these
fossil-fueled generating stations is projected to be approximately $24 million
stated in 2002 dollars (of which $18.4 million has already been expended).

New Source Review Rules

       See "Part II - Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - New Source Review Rules."

Citizen Suit Under the Clean Air Act

       See "Part II - Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Citizen Suit Under the Clean Air Act."

                                   COMPETITION

       Under current law, the Company is not in any direct retail competition
with any other regulated electric and gas utility, except for sales of natural
gas. 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 by rural electric
cooperatives and municipal utilities.



                                       15
<PAGE>


                                    EMPLOYEES

       As of December 31, 2002, the Company had 2,656 full-time employees. The
following table sets forth the number of employees by business segment as of
December 31, 2002:

                                                              Number
                                                            ----------
      Corporate (1)......................................         426
      Electric Services..................................       1,133
      Gas Services.......................................         526
      Generation and Marketing Operations................         558
      Unregulated Operations.............................          13
                                                            ----------
         Total...........................................       2,656
                                                            ==========

       (1) These employees resided at the Holding Company at December 31, 2002.

       The number of employees of the Company who are represented by unions or
other collective bargaining groups include (i) Electric Services, 244; (ii) Gas
Services, 56; and (iii) Generation and Marketing Operations, 340.

ITEM 2. PROPERTIES

                                    ELECTRIC

       PNM's ownership and capacity in electric generating stations in
commercial service as of December 31, 2002, were as follows:

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

Coal............   SJGS (a)            Waterflow, New Mexico           765
Coal............   Four Corners (b)    Fruitland, New Mexico           192
Gas/Oil.........   Reeves              Albuquerque, New Mexico         154
Gas/Oil.........   Las Vegas           Las Vegas, New Mexico            20
Gas/Oil.........   Afton               La Mesa, New Mexico             141
Gas.............   Lordsburg           Lordsburg, New Mexico            80
Nuclear.........   PVNGS (c)           Wintersburg, Arizona            390 (d)
                                                                    -------
                                                                     1,742
    Delta Operating Lease (e)                                          132
                                                                    -------
                                                                     1,874
                                                                    =======

(a)      SJGS Units 1, 2 and 3 are 50% owned by PNM; SJGS Unit 4 is 38.5% owned
         by the Company.
(b)      Four Corners Units 4 and 5 are 13% owned by PNM.
(c)      PNM is entitled to 10.2% of the power and energy generated by
         PVNGS. PNM 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.
(d)      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.

                                       16
<PAGE>

(e)      The Company has an operating lease for the rights to all output
         of a gas fired generating plant with maximum dependable capacity
         of 132 MW.

       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 PNM. 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.

       PNM 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
and 20 MW of generation capacity at Las Vegas Station in Las Vegas, New Mexico.
During 2002, the Company added Afton, a 141 MW gas or oil fired combustion
turbine plant in La Mesa, New Mexico, and Lordsburg, an 80 MW of gas fired
combustion turbine generator in Lordsburg, New Mexico. In addition, the Company
has 132 MW of generation capacity in COA under an operating lease. These power
sources are used primarily for peaking and transmission support. During times of
excess capacity, resources have been used to augment the Company's wholesale
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.

                                       17

<PAGE>

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 to move 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. In its most recent review,
PVNGS had all 38 indicators green (the best possible of the four indicator
levels).

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

                                       18
<PAGE>

Other PVNGS Matters

       See Note 12 in the notes to the consolidated financial statements for
information on PVNGS Decommissioning Funding, Nuclear Spent Fuel and Waste
Disposal and PVNGS Liability and Insurance Matters.

Other Electric Properties

       As of December 31, 2002, the Company owned, jointly owned or leased,
2,897 circuit miles of electric transmission lines, 4,258 miles of distribution
overhead lines, 3,945 cable miles of underground distribution lines (excluding
street lighting) and 247 substations.

NATURAL GAS

       The natural gas properties as of December 31, 2002, 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 1,555 miles of pipe with appurtenant compression
facilities. The distribution systems consisted of approximately 11,367 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 areas throughout its service territory.

ITEM 3. LEGAL PROCEEDINGS

Navajo Nation Environmental Issues

       Four Corners is located on the Navajo Reservation and is held under an
easement granted by the federal government as well as a lease from the Navajo
Nation. APS is the Four Corners operating agent and PNM 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 "Navajo Acts"). The Navajo Acts
purport to give the Navajo Nation Environmental Protection Agency authority to
promulgate regulations covering air quality, drinking water, and pesticide
activities, including those that occur at Four Corners. The Four Corners
participants dispute that purported authority, and by letter dated October 12,
1995, the Four Corners participants requested the United States Secretary of the
Interior to resolve their dispute with the Navajo Nation regarding whether or
not the Navajo Acts apply to operations of Four Corners. On October 17, 1995,
the Four Corners participants filed a lawsuit in the District Court of the
Navajo Nation, Window Rock District, seeking, among other things, a declaratory
judgment that:

                                       19
<PAGE>

o    the lease and federal easement preclude the application of the Navajo Acts
     to the operations of Four Corners; and

o    the Navajo Nation and its agencies and courts lack adjudicatory
     jurisdiction to determine the enforceability of the Navajo Acts as applied
     to Four Corners.

       On October 18, 1995, the Navajo Nation and the Four Corners participants
agreed to indefinitely stay these proceedings so that the parties may attempt to
resolve the dispute without litigation. The Secretary and the Court have stayed
these proceedings pursuant to a request by the parties. The Company cannot
currently predict the outcome of this matter.

       In February 1998, the EPA issued regulations identifying those Clean Air
Act provisions for which it is appropriate to treat Indian tribes in the same
manner as states. The EPA has announced that it has not yet determined whether
the Clean Air Act would supersede pre-existing binding agreements between the
Navajo Nation and the Four Corners participants that could limit the Navajo
Nation's environmental regulatory authority over Four Corners. The Company
believes that the Clean Air Act does not supersede these pre-existing
agreements. The Company cannot currently predict the outcome of this matter.

       On August 8, 2000, the EPA signed an Eligibility Determination for the
Navajo Nation for Grants Under Section 105 of the Clean Air Act in which the EPA
determined that the Navajo Nation was eligible to receive grants under the Clean
Air Act. On September 8, 2001, after learning of the eligibility determination,
APS, as Four Corners operating agent, filed a Petition for Review of the EPA's
decision in the United States Court of Appeals for the Ninth Circuit in order to
ensure that the EPA's August 2000 determination not be construed to constitute a
determination of the Navajo Nation's authority to regulate Four Corners. APS,
the EPA and other parties have requested that the Court stay any further
briefing while they negotiate a settlement.

       In April 2000, the Navajo Tribal Council approved operating permit
regulations under the Navajo Nation Air Pollution Prevention and Control Act.
The Four Corners participants believe that the regulations fail to recognize
that the Navajo Nation did not intend to assert jurisdiction over Four Corners.
On July 12, 2000, the Four Corners participants each filed a petition with the
Navajo Supreme Court for review of the operating permit regulations. The Company
cannot currently predict the outcome of this matter.

KAFB Contract

       In 1999, PNM was informed that the DOE had entered into an agency
agreement with WAPA on behalf of KAFB, one of PNM'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, PNM
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 PNM's transmission system. PNM denied WAPA's request. On
October 1, 1999, WAPA filed a petition requesting the FERC to order PNM to
provide network transmission service to WAPA on behalf of DOE and several other
entities located on KAFB under PNM's Open Access Transmission Tariff. The
petition claimed KAFB is a wholesale customer of the Company, not a retail
customer.

                                       20
<PAGE>

       After a number of proceedings with the FERC and an appeal by PNM to the
United States Court of Appeals for the Tenth Circuit, PNM, USEA and WAPA settled
the dispute. WAPA agreed to purchase from PNM approximately 60 MW of electric
power that will be wheeled to serve KAFB. The power sales agreement between PNM
and WAPA was executed on February 3, 2003. On March 1, 2003 the power sales
agreement went into effect, and PNM dismissed its appeal at the Tenth Circuit on
March 5, 2003.

       In a related PRC proceeding, a status conference is scheduled on April 1,
2003 to determine how to proceed with the PRC case due to the dismissal of the
Tenth Circuit appeal and implementation of the power sales agreement between
WAPA and PNM.

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 those 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 and the petition was
denied. In addition, the Arizona Supreme Court issued a decision in September
2000 affirming the lower court's criteria for resolving groundwater claims. APS
and other parties filed motions for reconsideration on one aspect of that
decision. Those motions have been denied by the Arizona Supreme Court. APS and
other parties petitioned the United States Supreme Court for review of the
Arizona Supreme Court's decision affirming the lower court's criteria for
resolving groundwater claims, and that petition was denied. 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 Marketing 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.

                                       21
<PAGE>

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, the "Company" for
purposes of this discussion), by purportedly failing to properly measure natural
gas from Federal and tribal properties in New Mexico, and consequently,
underpaying royalties owed to the Federal government. A private relator is
pursuing the lawsuit. The complaint was served after the 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 for pretrial purposes 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." PNM,
along with 250 other defendants, filed a motion to dismiss the complaint for
failure to plead properly in November 1999. On May 18, 2001, the Wyoming court
denied defendants' motion to dismiss the complaint.

       While the government has chosen not to participate in the case as a
plaintiff, on July 20, 2000 it did file a motion to dismiss certain allegations
in the complaint. The motion was limited in its scope to allegations relating to
royalty valuation and did not address any of the allegations of gas
mismeasurement. The government's motion was granted on October 9, 2002 and the
relator has subsequently amended the complaint to remove the royalty valuation
allegations.

       Currently the parties are engaged in discovery on the issue of whether
the relator meets the requirements for bringing a claim under the False Claims
Act. The Company expects to participate with other defendants in a motion to
dismiss on the ground that the relator does not meet those requirements.

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

Santa Fe Generating Station ("Santa Fe Station")

       PNM and the NMED conducted investigations of the gasoline and chlorinated
solvent groundwater contamination detected beneath PNM's former Santa Fe Station
site to determine the source of the contamination pursuant to a 1992 Settlement
Agreement ("Settlement Agreement") between PNM and the NMED. No source of
gasoline contamination in the groundwater was identified as originating from the
site. However, in June 1996, PNM received a letter from the NMED, indicating
that the NMED believed PNM is the source of gasoline contamination in a City of
Santa Fe municipal supply well and in groundwater underlying the Santa Fe
Station site. Further, the NMED letter stated that PNM was required to proceed
with interim remediation of the contamination pursuant to the New Mexico Water
Quality Control Commission regulations. In October 1996, PNM and the NMED signed
an amendment to the Settlement Agreement concerning the groundwater
contamination underlying the site. As part of the amendment, PNM agreed to spend
approximately $1.2 million for certain costs related to sampling, monitoring and
the development and implementation of a remediation plan with respect to
gasoline contamination in the groundwater.

                                       22
<PAGE>

       The amended Settlement Agreement does not, however, provide PNM with a
full release from potential further liability for remediation of the gasoline
contamination in the groundwater. After PNM has expended the settlement amount,
if the NMED can establish through binding arbitration that the Santa Fe Station
is the source of the contamination, PNM could be required to perform further
remediation that is determined to be necessary. PNM continues to dispute any
contention that the Santa Fe Station is the source of the gasoline contamination
in the groundwater and believes that insufficient data exists to identify the
source(s) of the groundwater contamination. PNM's aquifer characterization and
groundwater quality reports compiled from 1996 through 2002 strongly suggest
groundwater contamination has been drawn under the site by the pumping of the
Santa Fe supply well. PNM 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, PNM 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 gasoline
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.

       By letter dated August 7, 2002, PNM provided written notice to the NMED
and the City of Santa Fe that PNM had satisfied its obligations with respect to
the gasoline contamination under the amended Settlement Agreement, and PNM also
stated its intention to cease operation, effective October 5, 2002, of the
wellhead and bioremediation systems, and to discontinue monitoring and reporting
with respect to gasoline contamination at the site. The NMED responded with a
written notice of determination dated August 16, 2002, stating that PNM is the
responsible party for gasoline contamination at the site and requested that PNM
refrain from cessation of operation of the remediation systems, monitoring and
reporting. In a meeting held on September 5, 2002, the NMED indicated its
intention to file a court action seeking an order invalidating the binding
arbitration provisions of the amended Settlement Agreement and a declaratory
judgment that PNM is the responsible party for the gasoline contamination at the
site. PNM, the NMED and the City of Santa Fe have entered into a tolling
agreement whereby the parties agreed to refrain from filing any actions or
invoking the dispute resolution provisions under the Settlement Agreement
pending further data review and negotiation with respect to the NMED's
determination. The tolling agreement expired on March 5, 2003. As part of the
tolling agreement, PNM agreed to continue operation of the wellhead treatment
system at the site and to continue well monitoring and reporting to the NMED
through October 5, 2003. The Company cannot predict the outcome of these
negotiations with NMED.

Former AG&E Manufactured Gas Plant Site

        On December 8, 1999, PNM received a letter from the NMED notifying PNM
that it had been designated as a "responsible person" under the New Mexico Water
Quality Control abatement regulations. PNM was directed to submit an abatement
plan to investigate alleged contamination detected in the vicinity of a former
manufactured gas plant ("MGP") owned and operated by AG&E in southeast
Albuquerque. The contamination identified in the December 8 letter was described
as "tar" and "Volatile Organic Compounds." PNM agreed to conduct voluntary
abatement.

                                       23
<PAGE>

        PNM submitted its voluntary stage 1 abatement plan to the NMED on August
31, 2000. By letter dated November 30, 2000, the NMED conditionally approved
PNM's voluntary stage 1 abatement plan. PNM submitted its voluntary stage 1
abatement plan report ("Report") on October 12, 2001. The Report confirmed the
presence of soil contamination at the site resulting from the operations of the
former MGP. By letter dated December 20, 2001, the NMED approved the Report and
directed PNM to submit a voluntary stage 2 abatement plan for corrective action
at this site. PNM submitted its voluntary stage 2 abatement plan on November 12,
2002 and has selected a remedial alternative and contractor. PNM is currently
seeking approvals from regulatory and community groups for the proposed remedial
alternative. NMED has indicated that groundwater does not appear to have been
impacted by the former MGP operations although groundwater beneath the site
contains contaminants consistent with known upgradient diesel sources. Soils at
the site contaminated with oil and tar-like materials are proposed for
excavation and disposal. Residual contaminants below 15-feet will be capped. The
current property owner proposes to construct a two story building at the site in
2003. Completion of remedial activities is anticipated for second quarter 2003.

Citizen Suit Under the Clean Air Act

       See "Part II - Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Citizen Suit Under the Clean Air Act".

Landowner Environmental Claims

       See "Part II - Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Landowner Environmental Claims".

California Attorney General Complaint

       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 - California Attorney General Complaint".

California Antitrust Litigation

       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 - California Antitrust Litigation".





                           (Intentionally left blank)

                                       24
<PAGE>


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

       None.

SUPPLEMENTAL ITEM.  EXECUTIVE OFFICERS OF PNM RESOURCES

       Executive officers, their ages, offices held with PNM Resources since
December 31, 2001 (effective date of the Holding Company):
<TABLE>
<CAPTION>
       Name             Age                Office                                  Initial Effective Date
       ----             ---                ------                                  ----------------------

<S>                      <C>
J. E. Sterba..........   47 Chairman, President and Chief Executive
                               Officer                                                 December 31, 2001

R. J. Flynn...........   60 Executive Vice President and Chief
                               Operating Officer                                           July 23, 2002
                            Executive Vice President, Electric and Gas
                               Services                                                December 31, 2001

A. A. Cobb............   55 Senior Vice President, Peoples Services and
                               Development                                             December 31, 2001

J. R. Loyack..........   39 Senior Vice President, and Chief
                               Financial Officer                                         January 1, 2003
                            Vice President, Controller and
                               Chief Accounting Officer                                December 31, 2001

M. H. Maerki..........   62 Senior Vice President, Corporate Strategy
                               and Development and President and
                               Chief Executive Officer, Avistar, Inc.                    January 1, 2003
                            Senior Vice President and Chief Financial
                               Officer and President and Chief
                               Executive Officer, Avistar, Inc.                        December 31, 2001

P. T. Ortiz...........   52 Senior Vice President, General Counsel
                               and  Secretary                                          December 31, 2001

E. Padilla, Jr........   49 Senior Vice President, Bulk Power
                               Marketing and Development                               December 31, 2001

W.J. Real.............   54 Senior Vice President, Public Policy                           July 23, 2002
                            Executive Vice President, Power Production
                               and Marketing                                           December 31, 2001

R. A. Lumney..........   36 Vice President, Controller and Chief
                               Accounting Officer                                        January 1, 2003

</TABLE>

       (See Public Service Company of New Mexico on pages 26-27 for prior
positions held).

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


                                       25
<PAGE>


EXECUTIVE OFFICERS OF PUBLIC SERVICE COMPANY OF NEW MEXICO

       Executive officers, their ages, offices held with Public Service Company
of New Mexico in the past five years, (or other companies if less than five
years with PNM) and initial effective dates thereof, except as otherwise noted:
<TABLE>
<CAPTION>
       Name             Age                Office                              Initial Effective Date
       ----             ---                ------                              ----------------------

<S>                     <C>
J. E. Sterba........    47 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.........    60 Executive Vice President and Chief
                              Operating Officer                                       July 23, 2002
                           Executive Vice President, Electric and Gas
                              Services                                             January 18, 1999
                           Senior Vice President, Electric Services                December 1, 1994

A. A. Cobb..........    55 Senior Vice President, Peoples Services and
                              Development                                        September 11, 2001
                           Global Human Resources Officer,
                              Clientlogic                                         November 22, 1999
                           Executive Vice President, Human
                              Resources, Aames Financial                           February 2, 1999
                           Senior Vice President, Human Resources,
                              Aames Financial                                      November 1, 1996

J. R. Loyack........    39 Senior Vice President, and Chief
                              Financial Officer                                     January 1, 2003
                           Vice President, Controller and
                              Chief Accounting Officer                                July 19, 1999
                           Director, Financial Reporting,
                              Union Pacific Corporation                             October 1, 1998
                           Senior Manager, Business Analysis,
                              Union Pacific Corporation                             January 1, 1996

P. T. Ortiz.........    52 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
</TABLE>


                                       26
<PAGE>

<TABLE>
<CAPTION>
       Name             Age                Office                                  Initial Effective Date
       ----             ---                ------                                  ----------------------
<S>                      <C>
M. H. Maerki.........    62 Senior Vice President, Corporate Strategy
                               and Development and President and
                               Chief Executive Officer, Avistar, Inc.                   January 1, 2003
                            Senior Vice President and Chief Financial Officer,
                               and President and Chief Executive Officer,
                               Avistar, Inc.                                         September 14, 2001
                            Senior Vice President and Chief Financial
                               Officer                                                 December 7, 1993

E. Padilla, Jr.......    49 Senior Vice President, Bulk Power
                               Marketing and Development                               February 8, 2000
                            Vice President, Bulk Power Marketing
                               and Development                                        December 14, 1996

W. J. Real...........    54 Senior Vice President, Public Policy                          July 23, 2002
                            Executive Vice President, Power
                               Production and Marketing                                January 18, 1999
                            Senior Vice President, Gas Services                        December 6, 1994

R. A. Lumney.........    36 Vice President, Controller and Chief
                               Accounting Officer                                       January 1, 2003
                            Vice President and Corporate Controller
                               Global Crossing Development Co.                        February 19, 2001
                            Director of Accounting
                               Global Crossing Development Co.                           August 6, 1999
                            Senior Manager
                               Arthur Andersen LLP                                         July 1, 1995
---------------------
</TABLE>

         The President is elected annually by the Holding Company Board of
         Directors. All other officers are elected annually by the Board of
         Directors of PNM.





                           (Intentionally left blank)


                                       27
<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 and its predecessor's common stock,
reported as composite transactions (Symbol: PNM), and dividends declared on the
common stock for 2002 and 2001, by quarters, are as follows:

                                                 Range of
 Quarter Ended                             Sales Prices           Dividends
 ----------------------             --------------------------
                                        High          Low         Per Share
                                    --------------------------  --------------

 2002
    December 31 ...................    24.67        17.47           $0.22
    September 30 ..................    24.33        17.25            0.22
    June 30 .......................    30.55        23.30            0.22
    March 31 ......................    30.76        25.33            0.22
                                                                    -----
      Fiscal Year .................    30.76        17.25           $0.88
                                                                    =====

 2001
    December 31 ...................    28 17/25     24 7/20         $0.20
    September 30 ..................    33 11/20     24 18/25         0.20
    June 30 .......................    37 4/5       28 7/10          0.20
    March 31 ......................    29 7/20      22 7/8           0.20
                                                                    -----
      Fiscal Year .................    37 4/5       22 7/8          $0.80
                                                                    =====

       On December 10, 2002, the Company's Board of Directors ("Board") declared
       a quarterly cash dividend of $0.22 per share of common stock payable
       February 14, 2003, to shareholders of record as of February 3, 2003.

       On January 31, 2003, there were 15,046 holders of record of the Company's
common stock.

       See "Part II. Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition - Liquidity and Capital Resources -
Dividends", for a discussion on the payment of future dividends.






                           (Intentionally left blank)


                                       28

<PAGE>



Cumulative Preferred Stock

       While isolated sales of PNM's cumulative preferred stock have occurred in
the past, PNM is not aware of any active trading market for its cumulative
preferred stock. Quarterly cash dividends were paid on PNM's cumulative
preferred stock at the stated rates during 2002 and 2001.

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>
                                                         2002           2001            2000          1999            1998
                                                     -------------  -------------   -------------  ------------   -------------
                                                                (In thousands except per share amounts and ratios)
<S>                                                   <C>             <C>            <C>                           <C>
Total Operating Revenues............................  $1,168,996      $2,339,817     $1,611,274     $1,157,543     $1,092,445
Earnings from Continuing Operations.................    $ 64,272       $ 150,433      $ 100,946       $ 79,614       $ 95,119
Net Earnings........................................    $ 64,272       $ 150,433      $ 100,946       $ 83,155       $ 82,682
Earnings per Common Share:
  Continuing Operations.............................    $   1.63        $   3.83       $   2.54       $   1.93       $   2.27
  Basic.............................................    $   1.63        $   3.83       $   2.54       $   2.01       $   1.97
  Diluted...........................................    $   1.61        $   3.77       $   2.53       $   2.01       $   1.95
Cash Flow Data:
  Net cash flows provided from operating activities.    $ 97,251       $ 327,346      $ 239,515      $ 213,045      $ 210,988
  Net cash flows used in investing activities.......  $ (200,427)     $ (407,014)    $ (157,500)     $ (55,886)    $ (340,992)
  Net cash flows generated (used)
     by financing activities........................    $ 78,470         $   385      $ (94,723)     $ (98,040)     $ 173,089
Total Assets........................................  $3,026,907      $2,913,788     $2,889,917     $2,723,268     $2,668,603
Long-Term Debt, including current maturities........   $ 980,092       $ 953,884      $ 953,823      $ 988,489     $1,008,614
Common Stock Data:
  Market price per common share at year end.........    $ 23.820        $ 27.950       $ 26.813       $ 16.250       $ 20.438
  Book value per common share at year end...........    $  24.90        $  25.87       $  23.42       $  21.79       $  20.63
  Average number of common shares outstanding.......      39,118          39,118         39,487         41,038         41,774
  Cash dividend declared per common share...........    $   0.88        $   0.80       $   0.80       $   1.00       $   0.60
  Return on Average Common Equity...................         6.2  %         14.8  %        11.1  %         9.5  %         9.9  %
Capitalization:
  Common stock equity...............................        49.2  %         50.8  %        48.6  %        46.7  %        45.4  %
  Preferred stock without mandatory redemption
    Requirements....................................         0.7             0.6            0.7            0.7            0.7
  Long-term debt, less current maturities...........        50.1            48.6           50.7           52.6           53.9
                                                     -------------  --------------  -------------  -------------  -------------
                                                          100.00  %       100.00  %      100.00  %      100.00  %      100.00  %
                                                     =============  ==============  =============  =============  =============
</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, certain prior year amounts have been
reclassified as discontinued operations.

                                       29

<PAGE>

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

       The Management's Discussion and Analysis of Financial Condition and
Results of Operations for PNM Resources, Inc. ("Holding Company") and its
Subsidiaries and Public Service Company of New Mexico ("PNM") (collectively, the
"Company") is presented on a combined basis. The Holding Company assumed
substantially all of the corporate activities of PNM on December 31, 2001. These
activities are billed to PNM on a cost basis to the extent they are for the
corporate management of PNM. In January 2002, Avistar, Inc. ("Avistar") and
certain inactive subsidiaries were transferred by way of a dividend to the
Holding Company pursuant to an order from the New Mexico Public Regulation
Commission ("PRC"). The reader of this Management's Discussion and Analysis of
Financial Condition and Results of Operations should assume that the information
presented applies to consolidated results of operations and financial position
of both PNM Resources, Inc. and Subsidiaries and PNM, except where the context
or references clearly indicate otherwise. Discussions regarding specific
contractual obligations generally reference the company that is legally
obligated. In the case of contractual obligations of PNM, these obligations are
consolidated with PNM Resources, Inc. and its Subsidiaries under Generally
Accepted Accounting Principles ("GAAP"). Broader operational discussion
references the Company.

       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 related notes. Trends and contingencies of a material
nature are discussed to the extent known and considered relevant.

                                    OVERVIEW

       The Holding Company is an investor-owned holding company of energy and
energy related companies. Its principal subsidiary, PNM, is an integrated public
utility primarily engaged in the generation, transmission, distribution and sale
and marketing of electricity; transmission, distribution and sale of natural gas
within the State of New Mexico; and the sale and marketing of electricity in the
Western United States.

       Upon the completion on December 31, 2001 of a one-for-one share exchange
between PNM and the Holding Company, the Holding Company became the parent
company of PNM. Prior to the share exchange, the Holding Company had existed as
a subsidiary of PNM. The new parent company began trading on the New York Stock
Exchange under the same PNM symbol beginning on December 31, 2001.

                              COMPETITIVE STRATEGY

       The Company is positioned as a "merchant utility," primarily operating as
a regulated energy service provider. The Company is also engaged in the sale and
marketing of electricity in the competitive energy market place. As a utility,
PNM has an obligation to serve its customers under the jurisdiction of the PRC.
As a merchant, PNM markets excess production from the utility, as well as
unregulated generation, into a competitive marketplace. The Company also has an
electric power marketing operation focused on purchasing wholesale electricity

                                       30
<PAGE>

in the open market for future resale or to provide energy to jurisdictional
customers in New Mexico when the Company's generation assets cannot satisfy
demand. The marketing operations utilize an asset-backed marketing strategy,
whereby the Company's aggregate net open position for the sale of electricity is
covered by the Company's excess generation capabilities.

       As it currently operates, the Company's principal business segments are
Utility Operations, which include Electric Services ("Electric") and Gas
Services ("Gas"), and Generation and Marketing Operations ("Generation and
Marketing"). Electric 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. Unregulated Operations
provide energy related services.

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

       The Generation and Marketing strategy calls for increased asset-backed
marketing and generation capacity supported by long-term contracts, balanced
with stringent risk management policies. The Company's future growth plans call
for approximately 75% of its new generation portfolio to be committed through
long-term contracts, including sales to retail customers. Growth will be
dependent on market development, and upon the Company's ability to generate
funds for the Company's future expansion. Although the current environment has
led the Company to scale back its expansion plans, the Company will continue to
operate in the wholesale market. Expansion of the Company's generating portfolio
will depend upon acquiring favorably priced assets at strategic locations and
securing long-term commitments for the purchase of power from the acquired
plants.









                           (Intentionally left blank)


                                       31
<PAGE>

                              RESULTS OF OPERATIONS

      Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Consolidated

       The Company's net earnings available to common shareholders for the year
ended December 31, 2002 were $63.7 million, a 57.5% decrease in net earnings
from $149.8 million in 2001. This decrease primarily reflects the slowdown in
the wholesale electric market, where both prices and market liquidity were
significantly lower than the prior year. Despite the slowdown in the wholesale
electric market, PNM's electric utility operations recorded an operating income
growth of 5.3%. This growth came from a combination of load growth and cost
savings, demonstrating the balance the regulated utility provides in the
Company's "merchant utility" strategy.

       Earnings in 2002 and 2001 were affected by certain non-recurring gains
and charges. These special items are detailed in the individual business segment
discussions below. The following table enumerates these non-recurring charges
and shows their effect on diluted earnings per share, in thousands, except per
share amounts.
<TABLE>
<CAPTION>
                                                           2002                           2001
                                                ----------------------------  ------------------------------
                                                                   EPS                             EPS
                                                  Earnings      (Diluted)        Earnings       (Diluted)
                                                -------------- -------------  --------------- --------------
Net Earnings Available for Common
<S>                                                  <C>             <C>           <C>               <C>
   Shareholders...............................       $63,686         $1.61         $149,847          $3.77
                                                -------------- -------------  --------------- --------------
Adjustment for Special (Gains) and Charges
  (net of income tax effects):
  Realignment costs...........................         5,337          0.14              -               -
  Transmission line project write-off.........         2,911          0.07              -               -
  PVNGS and Four Corners severance costs......           942          0.03
  Contribution to PNM Foundation..............             -             -            3,021           0.08
  Nonrecoverable coal
    mine decommissioning costs................             -             -            7,840           0.20
  Write-off of Avistar investments............             -             -            7,907           0.20
  Western Resources acquisition and
    legal costs...............................        (1,471)        (0.04)          10,859           0.27
                                                -------------- -------------   -------------- --------------
    Total.....................................         7,719          0.20           29,627           0.75
                                                -------------- -------------   -------------- --------------
Net Earnings Available For Common
   Shareholders Excluding Special Gains
   and Charges                                       $71,405         $1.81        $179,474           $4.52
                                                ============== =============   =============  ==============
</TABLE>

       To adjust reported net earnings and diluted earnings per share to exclude
the non-recurring gains and charges, gains, net of income tax expense, are
subtracted from reported net earnings under GAAP, and charges, net of income tax
benefit, are added back to reported net earnings under GAAP.

                                       32
<PAGE>

       The following discussion is based on the financial information presented
in the Consolidated Financial Statements - Segment Information note in the Notes
to Consolidated Financial Statements.

Utility Operations

Electric

       The table below sets forth the operating results for the Electric
business segment.
<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                             --------------------------------------
                                                   2002                 2001               Variance
                                             -----------------    -----------------    ------------------
                                                                   (In thousands)
Operating revenues:
<S>                                                <C>                  <C>                    <C>
  External customers.......................        $ 570,089            $ 559,226              $ 10,863
  Intersegment revenues....................              707                  707                     -
                                             -----------------    -----------------    ------------------
  Total revenues...........................          570,796              559,933                10,863
                                             -----------------    -----------------    ------------------
Cost of energy sold........................            3,888                5,102                (1,214)
Intersegment purchases.....................          348,935              341,608                 7,327
                                             -----------------    -----------------    ------------------
  Total cost of energy.....................          352,823              346,710                 6,113
                                             -----------------    -----------------    ------------------
Gross margin...............................          217,973              213,223                 4,750
                                             -----------------    -----------------    ------------------
Administrative and other...................           52,660               48,821                 3,839
Depreciation and amortization..............           34,025               32,666                 1,359
Transmission and distribution costs........           34,236               37,376                (3,140)
Taxes other than income taxes..............           12,482               12,336                   146
Income taxes...............................           24,121               24,607                  (486)
                                             -----------------    -----------------    ------------------
  Total non-fuel operating expenses........          157,524              155,806                 1,718
                                             -----------------    -----------------    ------------------
Operating income...........................         $ 60,449             $ 57,417              $  3,032
                                             -----------------    -----------------    ------------------
</TABLE>

       Operating revenues increased $10.9 million or 1.9% for the period to
$570.8 million. Retail electricity delivery grew 2.1% to 7.4 million MWh in 2002
compared to 7.3 million MWh delivered in the prior year, resulting in increased
revenues of $14.4 million year-over-year. This volume increase was the result of
a weather-driven increase in consumption and continued customer growth. Year
over year, customer growth was 1.8%. This increase in revenues was partially
offset by a decrease of $3.4 million in revenues from third party sales of the
Company's transmission capacity due to the slowdown in the wholesale market.





                                       33
<PAGE>


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

                                Electric Revenues
                                 (In thousands)

                                                          Year Ended
                                                         December 31,
                                                   --------------------------
                                                      2002          2001
                                                   ------------  ------------
        Residential..........................         $ 197,174     $ 187,600
        Commercial...........................           247,800       242,372
        Industrial...........................            82,009        82,752
        Other................................            43,813        47,209
                                                   ------------  ------------
                                                      $ 570,796     $ 559,933
                                                   ============  ============
        Average customers....................           384,478       377,589
                                                   ============  ============

       The following table shows electric sales by customer class:

                                 Electric Sales
                                (Megawatt hours)

                                                          Year Ended
                                                         December 31,
                                                      2002          2001
                                                   ------------  ------------
        Residential..........................         2,298,542     2,197,889
        Commercial...........................         3,254,576     3,213,208
        Industrial...........................         1,612,723     1,603,266
        Other................................           240,665       240,934
                                                   ------------  ------------
                                                      7,406,506     7,255,297
                                                   ============  ============

       The gross margin, or operating revenues minus cost of energy sold,
increased $4.8 million or 2.2%, which reflects the increased energy sales.
Electric exclusively purchases power from Generation and Marketing at internally
developed prices, which are not based on market rates. These intercompany
revenues and expenses are eliminated in the consolidated results.

       Total non-fuel operating expenses increased $1.7 million or 1.1%.
Administrative and other costs increased $3.8 million or 7.9% due to higher
allocated corporate administrative costs of $5.7 million, partially offset by
lower bad debt expense of $1.5 million as a result of collection improvements
and the absence of losses from the bankruptcy of a significant customer in 2001.
Depreciation and amortization increased $1.4 million or 4.2% for the year due to
the purchase of transmission plant assets in early 2002. Transmission and
distribution costs decreased $3.1 million or 8.4% primarily due to maintenance
performed in 2001 to improve system reliability, which did not recur in 2002.
Income taxes, which include taxes associated with interest charges, decreased
$0.5 million or 2.0% due to lower pre-tax income.

                                       34
<PAGE>

Gas

       The table below sets forth the operating results for the Gas business
segment.
<TABLE>
<CAPTION>
                                                              Gas
                                                    Year Ended December 31,
                                             ---------------------------------------
                                                   2002                  2001             Variance
                                             ------------------    -----------------   ----------------
                                                                  (In thousands)
<S>                                                 <C>                  <C>                <C>
Operating revenues.........................         $ 272,118            $ 385,418          $(113,300)
Total cost of energy.......................           139,045              251,296           (112,251)
                                             ------------------    -----------------   ----------------
Gross margin...............................           133,073              134,122             (1,049)
                                             ------------------    -----------------   ----------------
Administrative and other...................            53,012               53,093                (81)
Depreciation and amortization..............            20,964               21,465               (501)
Transmission and distribution costs........            29,306               31,072             (1,766)
Taxes other than income taxes..............             7,793                6,881                912
Income taxes...............................             3,346                3,881               (535)
                                             ------------------    -----------------   ----------------
  Total non-fuel operating expenses........           114,421              116,392             (1,971)
                                             ------------------    -----------------   ----------------
Operating income...........................         $  18,652            $  17,730            $   922
                                             ------------------    -----------------   ----------------
</TABLE>

       Operating revenues decreased $113.3 million or 29.4% for the period to
$272.1 million, primarily because of lower natural gas prices in 2002 as
compared to 2001 and a decrease in gas sales volumes of 6.0%, largely resulting
from fewer purchases from Generation and Marketing to support gas-fired
generation. Despite the volume decline, customer growth was approximately 2.0%.
PNM purchases natural gas in the open market and resells it at cost to its
distribution customers. As a result, increases or decreases in gas revenues
driven by gas costs do not impact the Company's consolidated gross margin or
earnings.

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

                                  Gas Revenues
                                 (In thousands)

                                                         Year Ended
                                                        December 31,
                                                     2002          2001
                                                  ------------  ------------

       Residential..........................         $ 172,200     $ 232,321
       Commercial...........................            52,530        68,895
       Industrial...........................             2,872        27,519
       Transportation*......................            17,735        20,188
       Other................................            26,781        36,495
                                                  ------------  ------------
                                                     $ 272,118     $ 385,418
                                                  ============  ============
       Average customers....................           443,396       434,591
                                                  ============  ============


                                       35
<PAGE>


       The following table shows gas throughput by customer class:

                                 Gas Throughput
                            (Thousands of decatherms)

                                                         Year Ended
                                                        December 31,
                                                     2002          2001
                                                  ------------  ------------
       Residential...........................           29,627        27,848
       Commercial............................           12,009        10,421
       Industrial............................              749         3,920
       Transportation*.......................           44,889        51,395
       Other.................................            4,806         4,355
                                                  ------------  ------------
                                                        92,080        97,939
                                                  ============  ============

       *Customer-owned gas.

       The gross margin, or operating revenues minus cost of energy sold,
decreased $1.0 million or 0.8%. This decrease is due mainly to lower consumption
of gas for electric generation of $6.0 million partially offset by a 2.0% growth
in customer base of $5.0 million. Gross margin is expected to decrease in 2003
due to the expiration of a rate rider in January 2003. The Company currently
believes that gas assets are not earning an adequate level of return. As a
result, the Company filed a request for increased rates in January 2003. The
Company's last gas rate case filing was in October 1997.

       Total non-fuel operating expenses decreased $2.0 million or 1.7%.
Administrative and other costs decreased only slightly from the prior year. In
2002, the Company recognized lower bad debt expense of $3.0 million because of
collection improvements and the absence of losses from the bankruptcy of a
significant customer in 2001, lower amortization costs of $1.2 million for SFAS
106 deferred costs (which were fully amortized in 2001), and lower consulting
expenses of $0.5 million in connection with cost control and process improvement
initiatives in 2001 and lower legal expenses of $0.5 million for routine
business matters. These decreases were mostly offset by higher allocated
corporate administrative costs of $5.6 million. Transmission and distribution
costs decreased $1.8 million or 5.7% primarily due to maintenance performed in
2001 to improve system reliability, which did not recur in 2002. Taxes other
than income taxes increased $0.9 million or 13.3% due to the absence of
favorable audit outcomes by certain tax authorities recognized in 2001. Income
taxes, which include income taxes for interest charges, decreased $0.5 million
or 13.8% due to lower pre-tax income.



                                       36
<PAGE>


Generation and Marketing Operations

       The table below sets forth the operating results for the Generation and
Marketing business segment.
<TABLE>
<CAPTION>
                                                    Generation and Marketing
                                                    Year Ended December 31,
                                            -----------------------------------------
                                                  2002                   2001               Variance
                                            ------------------     ------------------   -----------------
                                                                   (In thousands)
Operating revenues:
<S>                                                <C>                   <C>               <C>
  External customers......................         $ 325,385             $1,393,635        $ (1,068,250)
  Intersegment revenues...................           348,935                341,608               7,327
                                            ------------------     ------------------   -----------------
  Total revenues..........................           674,320              1,735,243          (1,060,923)
                                            ------------------     ------------------   -----------------
Cost of energy sold.......................           406,310              1,267,887            (861,577)
Intersegment purchases....................               707                    707                   -
                                            ------------------     ------------------   -----------------
  Total cost of energy....................           407,017              1,268,594            (861,577)
                                            ------------------     ------------------   -----------------
Gross margin..............................           267,303                466,649            (199,346)
                                            ------------------     ------------------   -----------------
Administrative and other..................            35,452                 34,730                 722
Energy production costs...................           146,901                149,585              (2,684)
Depreciation and amortization.............            43,837                 42,766               1,071
Taxes other than income taxes.............            11,060                  8,865               2,195
Income taxes..............................             5,316                 80,138             (74,822)
                                            ------------------     ------------------   -----------------
  Total non-fuel operating expenses.......           242,566                316,084             (73,518)
                                            ------------------     ------------------   -----------------
Operating income..........................          $ 24,737              $ 150,565          $ (125,828)
                                            ------------------     ------------------   -----------------
</TABLE>

       Operating revenues declined $1.1 billion or 61.1% for the year to $674.3
million. This decrease in wholesale electricity sales primarily reflects the
slowdown in the wholesale electric market, which resulted from steep declines in
wholesale prices and market liquidity as compared to the prior year period.

       The significantly higher wholesale pricing in 2001 was driven by
increased demand in California, a lack of generating assets to serve the market
and the impact of warm weather. By contrast, 2002 has seen relatively mild
weather in the West, an abundance of low cost hydropower and weak economic
conditions in the region. As a result, the average price realized by the Company
fell to approximately $34 per MWh in 2002 versus $111 per MWh in 2001. The low
wholesale prices are expected to continue into 2003.

       The decline in merchant sales volumes reflect the reduction in market
participants in the wholesale market caused by bankruptcy, reduced credit
quality of firms in the market and firms exiting the wholesale market. There are
also significant unresolved legal, political and regulatory issues that had a
dampening effect on activity in the marketplace. As a result, the Company's spot
market and short-term sales have declined significantly. The Company delivered
wholesale (bulk) power of 9.5 million MWh of electricity for the year ended
December 31, 2002, compared to 12.6 million MWh for the same period in 2001.

                                       37
<PAGE>

       Although other firms have exited the wholesale market or have had their
access to the wholesale market limited due to concerns over credit quality, the
Company remains committed to be a participant in this market place. While market
liquidity is weak, the Company will focus on long-term relationships with
smaller wholesale customers (small investor-owned utilities, municipal utilities
and co-ops). At the same time, the Company will continue to monitor market
conditions. This commitment to the wholesale market leaves the Company poised to
participate in the market as liquidity returns and regulatory issues are
resolved.

       The following table shows revenues by customer class:

                        Generation and Marketing Revenues
                                 (In thousands)

                                                         Year Ended
                                                        December 31,
                                                    2002            2001
                                               --------------- ---------------

       Intersegment sales.................          $348,935       $ 341,608
       Long-term contract.................            40,132          77,250
       Other merchant sales*..............           266,956       1,313,739
       Other..............................            18,297           2,646
                                               --------------- ---------------
                                                    $674,320      $1,735,243
                                               =============== ===============

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

       The following table shows sales by customer class:

                         Generation and Marketing Sales
                                (Megawatt hours)

                                                        Year Ended
                                                       December 31,
                                                   2002            2001
                                              --------------- ---------------

       Intersegment sales.................         7,406,506       7,255,297
       Long-term contract.................           844,168       1,463,031
       Other merchant sales...............         8,605,987      11,114,069
                                              --------------- ---------------
                                                  16,856,661      19,832,397
                                              =============== ===============

       The gross margin, or operating revenues minus cost of energy sold,
decreased $199.3 million or 42.7%. Lower margins were created primarily by weak
pricing, less price volatility and lower market liquidity. In addition,
unexpected outages at Four Corners reduced availability of power for wholesale
sales. These lower margins were partially offset by a favorable change in the
mark-to-market position of the marketing portfolio of $55.3 million
year-over-year ($29.5 million gain in 2002 versus $25.8 million loss in 2001). A
majority of the gain in 2002 represents the reversal of previously recognized
mark-to-market losses.

                                       38
<PAGE>


       Total non-fuel operating expenses decreased $73.5 million or 23.3%.
Administrative and other costs increased $0.7 million or 2.1% for the year. This
increase is primarily due to higher corporate administrative cost allocations of
$4.9 million, partially offset by an adjustment of $1.6 million to prior year
San Juan Generating Station ("SJGS") participant billings (the Company is the
operator of SJGS and shares costs with other owners) and lower costs of $2.3
million resulting from increased capital activity for generation expansion.
Energy production costs decreased $2.7 million or 1.8% for the period reflecting
the benefits of $2.3 million for the acceleration into 2001 of a planned outage
at SJGS, decreased costs of $3.5 million for planned outages at SJGS and an
adjustment of $3.6 million to prior year Palo Verde Nuclear Generating Station
("PVNGS") billings from Arizona Public Service Company, the operator of PVNGS.
These cost decreases were partially offset by costs of $4.0 million related to
the future expansion of Afton Generating Station ("Afton"), severance costs of
$1.6 million at PVNGS and Four Corners Power Plant ("Four Corners"), costs of
$1.4 million for planned and unplanned outages at Four Corners and costs of $0.8
million at Lordsburg Generating Station ("Lordsburg"), which became fully
operational in June 2002. Depreciation and amortization increased $1.1 million
or 2.5% due to the addition of Lordsburg. Taxes other than income taxes
increased $2.2 million or 24.8% reflecting adjustments recorded in the prior
year for favorable audit outcomes by certain tax authorities. Income taxes,
which include income taxes for interest charges, decreased $74.8 million or
93.4% due to a decline in pre-tax income.

Corporate

       Corporate administrative and general costs, which represent costs that
are driven primarily by corporate-level activities, increased $3.0 million or
3.2% for the period to $95.4 million. This increase was due to severance costs
of $8.8 million resulting from a realignment of the Company's business structure
(the "Realignment"), higher labor of $8.2 million resulting from a transfer of
employees from operations to corporate and outside services of $2.9 million
primarily related to audit and other consulting services. These increases were
partially offset by lower bonus expense of $11.9 million in the current year
resulting from lower earnings projections and lower costs of $4.6 million
resulting from the reduction of certain unregulated activities. In accordance
with EITF 94-3, Liability Recognition for Certain Employee - Termination
Benefits and other Costs to Exit an Activity ("EITF 94-3"), the Company incurred
a liability of $8.8 million for severance and other related costs associated
with the involuntary termination of employees in connection with the
realignment. As of December 31, 2002, $3.0 million of severance-related benefits
were paid and charged against the liability.

Other Non-Operating

       Other income decreased by $3.8 million or 7.3% reflecting lower
year-over-year returns on investments reflecting market conditions.

       Other deductions decreased $54.9 million or 81.7% primarily due to
charges in 2001 that did not recur in 2002. In 2001, the Company recognized
charges for the write-off of an Avistar investment of $13.1 million, the
write-off of non-recoverable coal mine decommissioning costs of $13.0 million,
non-recoverable regulatory costs of $11.1 million, a contribution to the PNM
Foundation of $5.0 million, and certain costs related to the Company's now
terminated acquisition of Western Resources' electric utility operations of
$18.0 million. In 2002, the Company recognized a gain from the reversal of a

                                       39
<PAGE>

reserve of $2.4 million to reflect the early, successful resolution of the
litigation stemming from the terminated Western Resources transaction and a
charge of $4.8 million for the cancellation of a transmission line project.

Income Taxes

       The Company's consolidated income tax expense was $33.0 million for the
year ended December 31, 2002, compared to $81.1 million for the year ended
December 31, 2001. The decrease was due to the impact of lower earnings and a
decline in the effective tax rate. The Company's effective income tax rates for
the years ended December 31, 2002 and 2001 were 33.95% and 35.02%, respectively.
The decrease in the effective rate year over year was due to the reduction in
earnings in 2002 without a corresponding reduction in permanent tax benefits and
the recognition of certain affordable housing and research and development
credits in 2002.










                           (Intentionally left blank)


                                       40
<PAGE>

      Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Consolidated

       The Company's net earnings available to common shareholders for the year
ended December 31, 2001 were $149.8 million, a 49.3% increase over net earnings
of $100.4 million in 2000. This increase reflects strong market pricing and an
active wholesale electric market in the Western United States in the first half
of 2001 and continuing growth in utility operations.

       Earnings in both 2001 and 2000 were affected by certain special gains and
non-recurring charges. These special items are detailed in the individual
business segment discussions below. The following table enumerates these special
gains and non-recurring charges and shows their effect on diluted earnings per
share, in thousands, except per share amounts.
<TABLE>
<CAPTION>
                                                           2001                           2000
                                                ----------------------------  ------------------------------
                                                                   EPS                             EPS
                                                  Earnings      (Diluted)        Earnings       (Diluted)
                                                -------------- -------------  --------------- --------------
Net Earnings Available for Common
<S>                                                 <C>              <C>           <C>               <C>
   Shareholders...............................      $149,847         $3.77         $100,360          $2.53
                                                -------------- -------------  --------------- --------------
Adjustment for Special (Gains) and Charges
  (net of income tax effects):
  Contribution to PNM Foundation..............         3,021          0.08              -               -
  Nonrecoverable coal
    mine decommissioning costs................         7,840          0.20              -               -
  Write-off of Avistar investments............         7,907          0.20              -               -
  Settlement of lawsuit.......................             -             -           (8,306)         (0.21)
  Resolution of two gas rate claims...........             -             -           (2,808)         (0.07)
  Impairment of certain regulatory assets.....             -             -            6,552           0.16
  Costs for the acquisition of long-term
    wholesale customer........................             -             -            2,740           0.07
  Western Resources acquisition costs.........        10,859          0.27            4,047           0.10
                                                -------------- -------------   -------------- --------------
    Total.....................................        29,627          0.75            2,225           0.05
                                                -------------- -------------   -------------- --------------
Earnings Available For Common
   Shareholders Excluding Special Gains
   and Charges................................      $179,474         $4.52         $102,585          $2.58
                                                ============== =============   =============  ==============
</TABLE>

       To adjust reported net earnings and diluted earnings per share to exclude
the special gains and non-recurring charges, special gains, net of income tax
expense, are subtracted from reported net earnings under GAAP and non-recurring
charges, net of income tax benefit, are added back to reported net earnings
under GAAP.

                                       41
<PAGE>


       The following discussion is based on the financial information presented
in the Consolidated Financial Statements - Segment Information note. The tables
below set forth the operating results for each business segment.

Utility Operations

Electric

       The table below sets forth the operating results for the Electric
business segment.

                          Year Ended December 31, 2001

<TABLE>
<CAPTION>
                                                        Electric
                                                 Year Ended December 31,
                                          ---------------------------------------
                                                2001                  2000               Variance
                                          -----------------      ----------------     ----------------
                                                                (In thousands)
Operating revenues:
<S>                                              <C>                  <C>                   <C>
  External customers....................         $559,226             $ 538,758             $ 20,468
  Intersegment revenues.................              707                   707                    -
                                          -----------------      ----------------     ----------------
  Total revenues........................          559,933               539,465               20,468
                                          -----------------      ----------------     ----------------
Cost of energy sold.....................            5,102                 5,048                   54
Intersegment purchases..................          341,608               324,744               16,864
                                          -----------------      ----------------     ----------------
  Total cost of energy..................          346,710               329,792               16,918
                                          -----------------      ----------------     ----------------
Gross margin............................          213,223               209,673                3,550
                                          -----------------      ----------------     ----------------
Administrative and other................           48,821                46,905                1,916
Depreciation and amortization...........           32,666                31,480                1,186
Transmission and distribution costs.....           37,376                33,092                4,284
Taxes other than income taxes...........           12,336                14,102               (1,766)
Income taxes............................           24,607                27,743               (3,136)
                                          -----------------      ----------------     ----------------
  Total non-fuel operating expenses.....          155,806               153,322                2,484
                                          -----------------      ----------------     ----------------
Operating income........................         $ 57,417              $ 56,351              $ 1,066
                                          -----------------      ----------------     ----------------
</TABLE>

       Operating revenues increased $20.5 million or 3.8% for the period to
$559.9 million. Retail electricity delivery grew 2.3% to 7.3 million MWh in 2001
compared to 7.1 million MWh delivered in the prior year period, resulting in
increased revenues of $8.9 million year-over-year. This volume increase was the
result of load growth from economic expansion in New Mexico. In addition,
revenues from third party use of the Company's transmission system increased
$9.6 million as a result of additional contracts from increased activity in the
Western power market. Revenues also benefited from a $1.1 million increase in
revenue from property leasing.





                                       42
<PAGE>


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

                                Electric Revenues
                                 (In thousands)

                                                         Year Ended
                                                        December 31,
                                                     2001          2000
                                                  ------------  ------------
       Residential..........................         $ 187,600     $ 186,133
       Commercial...........................           242,372       238,243
       Industrial...........................            82,752        79,671
       Other................................            47,209        35,418
                                                  ------------  ------------
                                                     $ 559,933     $ 539,465
                                                  ============  ============
       Average customers....................           377,589       368,506
                                                  ============  ============

       The following table shows electric sales by customer class:

                                 Electric Sales
                                (Megawatt hours)

                                                         Year Ended
                                                        December 31,
                                                     2001          2000
                                                  ------------  ------------
       Residential..........................         2,197,889     2,171,945
       Commercial...........................         3,213,208     3,133,996
       Industrial...........................         1,603,266     1,544,367
       Other................................           240,934       238,635
                                                  ------------  ------------
                                                     7,255,297     7,088,943
                                                  ============  ============

       The gross margin, or operating revenues minus cost of energy sold,
increased $3.6 million, which reflects the increased energy sales, transmission
revenue and property leasing revenue, partially offset by higher cost for the
electricity sold to retail customers. Electric exclusively purchases power from
Generation and Marketing at Company developed prices which are not based on
market rates. These intercompany revenues and expenses are eliminated in the
consolidated results.

       Total non-fuel operating expenses increased $2.5 million or 1.6%.
Administrative and general costs increased $1.9 million or 4.1% for the period.
This increase is primarily due to higher allocated corporate administrative
costs of $5.0 million. Consulting expenses focused on cost control and process
improvement initiatives also contributed to the increase. These increases were


                                       43
<PAGE>

partially offset by lower bad debt and collection expense of $3.4 million. By
December 2000, the Company had resolved most of the problems associated with
implementing its new billing system. As a result, bad debt expense was
significantly lower in 2001. Depreciation and amortization increased $1.2
million or 3.8% due to a higher depreciable plant base. Transmission and
distribution costs increased $4.3 million or 12.9% primarily due to a
non-recurring increase in maintenance to improve reliability for the
transmission and distribution systems. Taxes other than income taxes decreased
$1.8 million or 12.5% reflecting favorable audit outcomes by certain tax
authorities and tax planning strategies in 2001. Income taxes, which include
taxes associated with interest charges, decreased $3.1 million or 11.3% due to
lower pre-tax income.

Gas

       The table below sets forth the operating results for the Gas business
segment.
<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                            -------------------------------------
                                                 2001                 2000             Variance
                                            ---------------      ----------------    --------------
                                                                (In thousands)
<S>                                             <C>                   <C>                <C>
Operating revenues........................      $ 385,418             $ 319,924          $ 65,494
Total cost of energy......................        251,296               195,334            55,962
                                            ---------------      ----------------    --------------
Gross margin..............................        134,122               124,590             9,532
                                            ---------------      ----------------    --------------
Administrative and other..................         53,093                44,104             8,989
Depreciation and amortization.............         21,465                19,994             1,471
Transmission and distribution costs.......         31,072                27,206             3,866
Taxes other than income taxes.............          6,881                 8,502            (1,621)
Income taxes..............................          3,881                 5,680            (1,799)
                                            ---------------      ----------------    --------------
  Total non-fuel operating expenses.......        116,392               105,486            10,906
                                            ---------------      ----------------    --------------
Operating income..........................       $ 17,730             $  19,104          $ (1,374)
                                            ---------------      ----------------    --------------
</TABLE>

       Operating revenues increased $65.5 million or 20.5% for the period to
$385.4 million. The Company purchases natural gas in the open market and resells
it at cost to its distribution customers. As a result, increased gas revenues
driven by increased gas costs do not impact the Company's gross margin or
earnings. The revenue increase was driven primarily by a 17.6% increase in
average gas prices in the first half of 2001, resulting from increased market
demand. In addition, a 3.1% volume increase and a gas rate increase, which
became effective October 30, 2000 contributed to the increase. The gas rate
increase added $7.8 million of revenue. Transportation volume increased 14.5% or
$6.0 million. This growth was primarily attributed to gas transportation
customers whose increased demand was driven by the strong power market in the
Western United States during the first half of 2001. Approximately $28.1 million
of gas revenue in 2001 was attributable to sales to the Company's Generation and
Marketing Operations.




                           (Intentionally left blank)

                                       44
<PAGE>



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

                                  Gas Revenues
                                 (In thousands)

                                                         Year Ended
                                                        December 31,
                                                     2001          2000
                                                  ------------  ------------
       Residential..........................         $ 232,321     $ 191,231
       Commercial...........................            68,895        52,964
       Industrial...........................            27,519        24,206
       Transportation*......................            20,188        14,163
       Other................................            36,495        37,360
                                                  ------------  ------------
                                                     $ 385,418     $ 319,924
                                                  ============  ============
       Average customers....................           434,591       434,943
                                                  ============  ============

       The following table shows gas throughput by customer class:

                                 Gas Throughput
                            (Thousands of decatherms)

                                                         Year Ended
                                                        December 31,
                                                     2001          2000
                                                  ------------  ------------
       Residential...........................           27,848        28,810
       Commercial............................           10,421         9,859
       Industrial............................            3,920         5,038
       Transportation*.......................           51,395        44,871
       Other.................................            4,355         6,426
                                                  ------------  ------------
                                                        97,939        95,004
                                                  ============  ============

       *Customer-owned gas.

       The gross margin, or operating revenues minus cost of energy sold,
increased $9.5 million or 7.7%. This increase is due to the rate increase and
higher transportation volumes.

       Total non-fuel operating expenses increased $10.9 million or 10.3%.
Administrative and general costs increased $9.0 million or 20.4%. This increase
is due to higher allocated corporate administrative costs of $6.3 million and
consulting expenses incurred in connection with cost control and process
improvement initiatives, partially offset by decreased bad debt and collection
costs of $1.8 million. Depreciation and amortization increased $1.5 million or
7.4% for the period due to a higher depreciable plant base. Transmission and
distribution costs increased $3.9 million or 14.2% primarily due to a
non-recurring increase in maintenance to improve reliability for the
transmission and distribution systems, as the Company continues to focus on

                                       45
<PAGE>

improving reliability and effectiveness of its retail distribution system. Taxes
other than income taxes decreased $1.6 million or 19.1% due to favorable audit
outcomes by certain tax authorities. Income taxes, which include taxes for
interest charges, decreased $1.8 million or 31.7% due to lower pre-tax income.

Generation and Marketing Operations

       The table below sets forth the operating results for the Generation and
Marketing business segment.
<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                            ------------------------------------
                                                 2001                 2000             Variance
                                            ----------------      --------------    ----------------
                                                                (In thousands)
Operating revenues:
<S>                                            <C>                   <C>                 <C>
  External customers......................     $ 1,393,635           $ 750,434           $ 643,201
  Intersegment revenues...................         341,608             324,744              16,864
                                            ----------------      --------------    ----------------
  Total revenues..........................       1,735,243           1,075,178             660,065
                                            ----------------      --------------    ----------------
Cost of energy sold.......................       1,267,887             749,499             518,388
Intersegment purchases....................             707                 707                   -
                                            ----------------      --------------    ----------------
  Total cost of energy....................       1,268,594             750,206             518,388
                                            ----------------      --------------    ----------------
Gross margin..............................         466,649             324,972             141,677
                                            ----------------      --------------    ----------------
Administrative and other..................          34,730              32,886               1,844
Energy production costs...................         149,585             137,202              12,383
Depreciation and amortization.............          42,766              41,559               1,207
Taxes other than income taxes.............           8,865              11,457              (2,592)
Income taxes..............................          80,138              23,417              56,721
                                            ----------------      --------------    ----------------
  Total non-fuel operating expenses.......         316,084             246,521              69,563
                                            ----------------      --------------    ----------------
Operating income..........................       $ 150,565            $ 78,451            $ 72,114
                                            ----------------      --------------    ----------------
</TABLE>

       A significant increase in regional wholesale electric prices occurred in
the first half of 2001 and the second half of 2000. This increase was caused by,
among other things, the power supply/demand imbalance in the Western United
States, a lack of generating assets to serve the market and increased natural
gas prices. The high wholesale prices seen in 2001 and 2000 did not recur in
2002. At the end of the second quarter of 2001, the market experienced declining
price levels. This trend continued in the last half of 2001. As a result, market
liquidity - the opportunity to buy and resell power profitably in the
marketplace - also declined reflecting the bankruptcy of a major, market
participant and limited price volatility.

       Operating revenues grew $660.1 million or 61.4% for the period to $1.7
billion. This increase in wholesale electricity sales primarily reflects the
strong regional wholesale electric prices in the first half of 2001. The Company
delivered wholesale (bulk) power of 12.6 million MWh of electricity in 2002,
compared to 12.4 million MWh in the prior period. The average price realized by
the Company increased to approximately $111 per MWh in 2001 compared to $61 per
MWh in 2000. Wholesale revenues from third-party customers increased from $750.4
million to $1.4 billion, an 85.7% increase.

                                       46
<PAGE>

       The following table shows revenues by customer class:

                        Generation and Marketing Revenues
                                 (In thousands)

                                                        Year Ended
                                                       December 31,
                                                   2001             2000
                                              ---------------- ---------------

       Intersegment sales.................         $ 341,608       $ 324,744
       Long-term contract.................            77,250          87,731
       Other merchant sales*..............         1,313,739         655,881
       Other..............................             2,646           6,822
                                              ---------------- ---------------
                                                  $1,735,243      $1,075,178
                                              ================ ===============

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

       The following table shows sales by customer class:

                         Generation and Marketing Sales
                                (Megawatt hours)

                                                         Year Ended
                                                        December 31,
                                                    2001             2000
                                               ---------------- ---------------

       Intersegment sales...................         7,255,297       7,088,943
       Long-term contract...................         1,463,031         330,003
       Other merchant sales.................        11,114,069      12,022,125
                                               ---------------- ---------------
                                                    19,832,397      19,441,071
                                               ================ ===============

       The gross margin, or operating revenues minus cost of energy sold,
increased $141.7 million or 43.6%. The Company's margin benefits significantly
from rising gas prices as most of the Company's generation portfolio is fueled
by stable priced fuel sources, such as coal and uranium. As the increase in gas
prices puts upward pressure on electricity prices, the profitability of the
Company's stable low-cost generation increases significantly. Margin also
benefited from the Company's power marketing activities. The Company buys and
then resells electricity in the market generating incremental margin by taking
advantage of price changes in the electricity sales market. In addition, the
Company also tailors electric deliveries for its wholesale customers creating
incremental margin opportunities. Generally, as market prices decline, marketing
volumes rise supporting margin levels in lower price electric markets. These
higher margins were partially offset by an unfavorable change in the
mark-to-market position of the marketing portfolio of $21.0 million
year-over-year ($25.8 million loss in 2001 versus $4.8 million loss in 2000) as
the Western power market deterioration in the latter half of 2001 resulted in a
reduction of the Company's merchant energy portfolio.


                                       47
<PAGE>


       Total non-fuel operating expenses increased $69.6 million or 28.2%.
Administrative and general costs increased $1.8 million or 5.6% for the period.
This increase is primarily due to higher allocated corporate administrative
costs of $5.4 million and higher power marketing expenses of $1.0 million mainly
for additional incentive bonuses and consulting fees and other expenses of $0.6
million related to business development and process improvement. This increase
was partially offset by lower year-over-year Generation and Marketing business
development costs of $4.5 million due to significant costs related to the
acquisition of a long-term wholesale customer. Energy production costs increased
$12.4 million or 9.0% for the year. The increase is primarily due to higher
maintenance costs of $7.9 million in 2001 resulting from scheduled and
unscheduled outages at PVNGS, SJGS and Reeves Generating Station ("Reeves"),
additional incentive bonuses of $0.5 million at SJGS, and increased operations
costs of $1.2 million for generation at Reeves, one of the Company's gas
generation facilities, which has a higher cost of production than the Company's
coal and nuclear facilities. This increase was partially offset by lower
maintenance costs of $1.3 million at Four Corners as a result of decreased
outage time. A significant unscheduled outage occurred in the fall of 2001 at
SJGS, which resulted in higher costs of $2.3 million in 2001. The Company took
advantage of the outage to accelerate its outage scheduled for the spring of
2002. As a result, maintenance costs and the related lost market potential of
the accelerated outage was avoided in the spring of 2002. Depreciation and
amortization increased $1.2 million or 2.9% for the period due to a higher
depreciable plant base. Taxes other than income taxes decreased $2.6 million or
22.6% as a result of favorable audit outcomes by certain tax authorities. Income
taxes, which include taxes for interest charges, increased $56.7 million or
242.2% due to an increase in pre-tax income.

Unregulated Businesses

       In July 2001, the Board of Directors of Avistar decided to wind down all
unregulated operations except for Avistar's Reliadigm business unit, which
provides maintenance solutions and technologies to the electric power industry.
Avistar had previously divested itself of its Energy Partners business unit and
liquidated Axon Field Services and Pathways Integration. This divestiture was
largely in response to market disruptions caused by the California energy
crisis. In addition, the transfer of operation of the Sangre de Cristo Water
Company to the City of Santa Fe was completed in the third quarter of 2001. All
remaining non-Reliadigm investments were written-off with the exception of
Avistar's investment in Nth Power, an energy related venture capital fund. These
write-downs reflect the significant decline in the technology market and
bankruptcy of these investees. The Company recorded non-operating charges of
$13.1 million to reflect these activities and the impairment of its Avistar
investments.

       Due to the cessation of much of Avistar's historic operations, business
activity declined significantly. Revenues decreased 30.8% for the period to $1.5
million. Operating losses for Avistar decreased from $4.6 million in 2000 to
$4.2 million in 2001 primarily due to decreased costs as a result of the
shutdown of certain operations. In January 2002, Avistar was transferred by way
of a dividend to Holding Company by PNM.

                                       48
<PAGE>

Corporate

       Corporate administrative and general costs, which represent costs that
are driven exclusively by corporate-level activities, increased $13.3 million or
16.8% for the period to $92.4 million. This increase was due to increased
pension and post-retirement benefits expense of $9.9 million and higher legal
costs of $0.8 million associated with routine business operations.

Other Non-Operating Costs

       Other income decreased $14.1 million for the year. In 2000, the Company
recognized a gain of $13.8 million related to the settlement of a lawsuit.

       Other deductions increased $55.3 million for the year. In 2001, the
Company recorded charges of $13.1 million to write-off certain permanently
impaired Avistar investments, $13.0 million of non-recoverable coal mine
decommissioning costs previously established as a regulatory asset,
non-recoverable regulatory costs of $11.1 million, a donation of $5.0 million to
the PNM Foundation and a charge of $18.0 million related to the Company's
terminated acquisition of Western Resources. In 2000, the Company recognized
gains of $4.5 million for the reversal of certain reserves associated with the
resolution of two gas rate claims and $2.4 million related to the Company's
hedge of certain non-qualified retirement plan trust assets. In addition, in
2000, the Company recorded charges of $12.5 million related to the Company's
terminated acquisition of Western Resources.

Income Taxes

       The Company's consolidated income tax expense was $81.1 million in the
twelve months ended December 31, 2001, an increase of $6.7 million for the year.
This increase was due to higher earnings in 2001. The Company's effective income
tax rates for the years ended 2001 and 2000 were 35.02% and 42.41%,
respectively. In 2001, the Company determined that $6.6 million of valuation
allowances taken against certain income tax related regulatory assets were no
longer required due to changes in the evaluation of its regulatory strategy in
light of the holding company filing in May 2001. In 2000, when the allowance was
established, management believed these income-tax-related regulatory assets
would not be recoverable based on the probable regulatory outcome of industry
restructuring in New Mexico. Currently, management fully expects to recover
these costs in future rate cases, a situation that was not possible prior to the
delay of open access in New Mexico. Excluding the impact of the valuation
reserve changes, the Company's effective income tax rates for the years ended
2001 and 2000 were 37.85% and 38.67%, respectively. The decrease in the
effective rate was primarily due to the favorable tax treatment received on 2001
equity earnings from a passive investment.

                               FUTURE EXPECTATIONS

       On January 2, 2003, the Company announced that it expects 2003 earnings
for the twelve months to be in the range of $1.80 to $2.05. Although the
Company's electric utility continues to perform well, the depressed level of
wholesale prices in the West, coupled with the significantly decreased marketing
activity in that market, has severely limited the earnings potential of
Generation and Marketing. This estimated range is based on a number of factors,
including growth rates in the New Mexico service territory, wholesale prices,
merchant sales velocity (ability to market around assets) and spark spread.

                                       49
<PAGE>

       Please note that the following are simplifying guidelines that attempt to
quantify a number of complex and interdependent factors affecting the Company's
earnings. These are provided to generally assist investors in developing their
own independent assessment of the Company's future earnings prospects.

       As a result of an agreement ("Global Electric Agreement") approved by
regulators in January 2003, retail electric rates will decline by 4% beginning
in September 2003, which is projected to reduce earnings by $0.08 per share for
the year. The Global Electric Agreement also provides for recovery of $100
million of coal mine decommissioning costs to be amortized over 17 years. Those
costs will be amortized beginning September 2003, reducing earnings by $0.03 per
share in 2003. Retail electric revenue growth is projected at about 2%, with
every 1% increase in load adding $0.05 per share. For further information see
"Other Issues Facing the Company - Merchant Plant Filing and Global Electric
Agreement."

       Return on the Company's gas assets will continue to be poor in 2003. In
2002, this return was below 3%, and in 2003 returns will be reduced by another
$3 million through the expiration of an existing rate rider in January 2003. The
Company filed a gas rate case in January 2003, seeking a $37.6 million rate
increase in cost of service rates and a $1.6 million increase in miscellaneous
fees. This case is subject to a ten-month timeframe, which may be extended. If
an order is received within this timeframe, the Company would have some small
improvement in earnings per share in December 2003.

       On the wholesale side, the baseline forecast assumes continued low
liquidity and a marginal improvement in prices. The Company is projecting an
average market price of about $34/MWh, around-the-clock on an annualized basis.
Although the current forward prices are stronger than this, the forward price
curve cannot translate directly to the Company's mix of short-term and long-term
sales. A $1 change in market price equals $0.05 per share. The Company is
assuming a merchant sales velocity for the year of about 1.5, which is about 50%
more power sold than actually generated by PNM. Velocity did pick up at the end
of 2002, boosting overall velocity for the year to 1.6. When velocity goes from
1.5 to 1.6, earnings increase $0.01 per share. The Company's 2003 earnings
guidance assumes spark spread remains at levels that will restrict operation of
PNM's gas fired assets to capacity factors below 10%.

       Several increases in cost affect earnings potential in 2003. The
Company's earnings assumptions include increased medical and pension costs for
the year. The impact of low interest rates and poor market performance on the
pension fund in 2002 will be offset somewhat by a $20 million contribution to
the fund in 2003. Insurance costs since September 11, 2001 have also risen
sharply.

       Longer plant maintenance schedules and lost market opportunity from plant
unavailability will also put pressure on earnings in 2003. PVNGS will replace a
steam generator in Unit 2, which will add forty-two days to its regular planned
outage schedule. San Juan has scheduled two major outages this year, extending
the regular outage schedule by fifty days more than 2002. In addition, this will
be the first full year of operation and maintenance costs and depreciation for
the Company's new plants in southern New Mexico, Afton and Lordsburg.

                                       50
<PAGE>

       In 2002, the Company's construction expenditures were $240 million of
which, $67.0 million was for new generating plants. Over the five-year planning
horizon, the Company expects capital expenditures, not inclusive of any
generation acquisitions, to average $140 million a year. In 2003, capital
expenditures are estimated to be $156 million due to the front loading of
certain projects such as the replacement of the steam generator at PVNGS,
increased plant outage schedules including a turbine rewind at San Juan, a
turbine progress payment and other non-utility capital increases. The Company
expects to fund these expenditures from internal cash generation and current
debt capacity.

       Although other firms have exited the wholesale market or have had their
access to the wholesale market limited due to concerns over credit quality, the
Company remains committed to be a participant in this market place. While market
liquidity remains low, the Company will focus on long-term relationships with
smaller wholesale customers (small investor-owned utilities, municipal utilities
and co-ops). At the same time, the Company will continue to monitor market
conditions. This commitment to the wholesale market leaves the Company poised to
participate in the market as liquidity returns and regulatory issues are
resolved.

       This discussion of future expectations is forward looking information
within the meaning of Section 21E of the Securities Exchange Act of 1934. 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 that could cause the Company's actual financial results to differ
materially from the expected results discussed above.

                   CRITICAL ACCOUNTING POLICIES AND ESTIMATES

       The preparation of financial statements in accordance with GAAP requires
that management to select and apply accounting policies that best provide the
framework to report the Company's results of operations and financial position.
The selection and application of those policies require management to make
difficult subjective or complex judgments concerning reported amounts of revenue
and expenses during the reporting period and the reported amounts of assets and
liabilities at the date of the financial statements. The judgments and
uncertainties inherent in this process affect the application of those policies.
As a result, there exists the likelihood that materially different amounts would
be reported under different conditions or using different assumptions.
Management has identified the following accounting policies that it deems
critical to the portrayal of the Company's financial condition and results and
that involve significant subjectivity. Management believes that its selection
and application of these policies best represent the operating results and
financial position of the Company. The following discussion provides information
on the processes utilized by management in making judgments and assumptions as
they apply to its critical accounting policies.


                                       51
<PAGE>

Revenue Recognition

                            Unbilled Utility Revenues

       Revenues related to the sale of energy are generally recorded when
service is rendered or energy is delivered to customers. However, the
determination of the energy sales to individual customers is based on the
reading of their meters, which occurs on a systematic basis throughout the
month. At the end of each month, amounts of energy delivered to customers since
the date of the last meter reading are estimated and the corresponding unbilled
revenue is estimated. The cycle meter reading results in unbilled consumption
between the date of the last meter reading in a particular month and the end of
the month. This unbilled revenue is estimated each month based on the daily
generation volumes, estimated customer usage by class, weather factors, line
losses and applicable customer rates based on regression analyses reflecting
significant historical trends and experience.

       The Company purchases gas on behalf of sales service customers while
other marketers or producers purchase gas on behalf of transportation service
customers. The Company collects a cost of service revenue for the
transportation, delivery, and customer service provided to these customers.
Sales-service tariffs are subject to the terms of the Purchase Gas Adjustment
Clause ("PGAC") while transportation service customers are metered and billed on
the last day of the month. Therefore, the Company estimates unbilled decatherms
and cost of service revenues for sales service customers only.

       The unbilled decatherms are based on consumption estimates and the
associated cost of service revenue for the period. A cycle bill contains an
amount for both the current period's consumption and the prior period's
consumption. The unbilled portion that is recorded is estimated as a percentage
of the next month's budgeted cycle billings. These budgets are prepared using
historical data adjusted for known trends, including prior period consumption.
Adjustments are also made to the budgeted cycle billings for weather variations
above or below normal, customer growth, and any pricing changes by customer rate
and revenue class. Any differences between the estimate and the actual cycle
billings are recorded in the month billed.

                   Unbilled Wholesale Power Marketing Revenues

       Wholesale power marketing revenues are recognized in the month the energy
is delivered to the customer and are based on the actual amounts supplied to the
customer. However, in accordance with the Western Systems Power Pool contract,
these revenues are billed in the month subsequent to their delivery.
Consequently, wholesale power marketing revenues for the last month in any
reporting period are unbilled when reported.

       Accrued unbilled utility revenues and unbilled wholesale power marketing
revenues are combined and specifically identified in the consolidated balance
sheets.

                                       52
<PAGE>

Regulatory Assets and Liabilities

       The accounting rules for rate-regulated entities require a company to
reflect the effects of regulatory decisions in its financial statements pursuant
to Statement of Financial Accounting Standards, No. 71, "Accounting for the
Effects of Certain Types of Regulation" ("SFAS 71"). In accordance with these
accounting rules, the Company has deferred certain costs that are rate
recoverable and recorded certain liabilities for amounts to be returned to
retail customers pursuant to the rate actions of the PRC and its predecessor and
the Federal Energy Regulatory Commission ("FERC"). Substantially all of the
Company's regulatory assets and regulatory liabilities are reflected in rates
charged to retail customers or have been addressed in a regulatory proceeding.
To the extent that management concludes that the recovery of a regulatory asset
is no longer probable due to changes in 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 continually assesses
whether the regulatory assets are probable of future recovery by considering
factors such as applicable regulatory environment changes, recent rate orders to
other regulated entities in the same jurisdiction, anticipated future regulatory
decisions and their impact, competition on the ratemaking process and the
ability to recover costs, and the status of any deregulation legislation.

       The Company discontinued the application of regulatory accounting as of
December 31, 1999, for the generation portion of its business effective with the
passage in New Mexico of the Electric Utility Industry Restructuring Act of 1999
("Restructuring Act"). The Company evaluated these assets under the same
impairment rules that it uses to evaluate tangible long-lived assets. During
2000, the Company entered into negotiations with the PRC staff and other
interveners regarding a rate settlement in anticipation of open access occurring
in New Mexico under the Restructuring Act. As part of the negotiations, the
parties in the settlement discussions agreed on a fixed dollar amount of
stranded costs that would be recovered through a non-bypassable wires charge. In
2000, the Company recorded a charge to earnings of $6.6 million as valuation
allowances against certain income tax related regulatory assets. This charge was
equal to the difference between the agreed to dollar amount and the actual
stranded costs that were recorded on the Company's balance sheet. The write-off
was not specific to any one particular regulatory asset but was simply the
difference between the two previously discussed amounts. Before a final
settlement was reached, the New Mexico Legislature in 2001 passed Senate Bill
266, that delayed open access. With the passage of Senate Bill 266, the
settlement discussions terminated. Therefore, in 2001 the Company reversed the
2000 valuation allowance as it was determined that it was no longer required due
to changes in the evaluation of the Company's regulatory strategy in light of
the holding company filing in May 2001.

       In August 2001, the Company signed an agreement with San Juan Coal
Company ("SJCC") and Tucson Electric Power Company ("Tucson") to replace two
surface mining operations with a single underground mine located adjacent to the
SJGS. As a result of the negotiations for the new coal contract, the Company
recorded a regulatory asset in 1999 for the estimated costs anticipated to close
the surface mining operation. This regulatory asset was anticipated to be
recovered through the non-bypassable wires charge discussed above. As the
settlement discussions progressed, it became clear that a portion of the costs
capitalized by the Company for decommissioning the coal mine would not be
collectible. As a result, the Company was unable to defer this portion of coal
mine decommissioning costs as a regulatory asset for future recovery through
regulated rates. Therefore, in 2001, the Company wrote-off $13 million for the
portion of coal mine decommissioning costs associated with the Company's FERC
firm requirements customers and a portion of SJGS Unit 4. In addition, the
Company wrote-off $11.1 million of additional regulatory assets of which $8.1
million related to non-recoverable transition costs and $3 million for other
non-recoverable regulatory assets.

                                       53
<PAGE>

       On October 10, 2002, the Company and several other parties signed the
Global Electric Agreement, that provides for a five-year rate path for the
Company's New Mexico jurisdictional customers beginning in September of 2003.
The Global Electric Agreement also seeks to repeal the Restructuring Act. The
Company will re-apply SFAS 71 to its Generation and Marketing Operations during
the first quarter of 2003 as the Global Electric Agreement was approved by the
PRC on January 28, 2003. In connection with the Global Electric Agreement, the
Company has agreed to forego recovery of the transition costs incurred to date.
The forgone transition costs include: professional fees, financing costs
including underwriting fees, costs relating to the transfer of assets, the cost
of management information system changes including billing system changes, and
public and customer communication costs. The Company will incur a one-time
charge of $16.7 million for the non-recoverable transition costs in the first
quarter of 2003. As the Company's electric rates are fixed, the opportunity to
recover increased costs and the costs of new investment in facilities through
rates during the five-year rate freeze period is also limited. The Company will
continue to assess the recoverability of its regulatory assets. If future
recovery of costs ceases to be probable, the Company would be required to record
a charge for the portion of the costs that were not recoverable in current
period earnings.

Asset Impairment

       The Company evaluates its tangible long-lived assets for impairment
whenever indicators of impairment exist pursuant to Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS 144"). These
potential impairment triggers would include fluctuating market conditions as a
result of industry deregulation; planned and scheduled customer purchase
commitments; future market penetration; customer growth; fluctuating market
prices (resulting from changing fuel costs, other economic conditions, etc.);
weather patterns, and other market trends. Accounting rules require that if the
sum of the undiscounted expected future cash flows from a company's asset
(without interest charges that will be recognized as expenses when incurred), is
less than the carrying value of the asset, an asset impairment must be
recognized in the financial statements. The amount of impairment recognized is
calculated by subtracting the fair value of the asset from the carrying value of
the asset.

       Impairment testing for the Company's power generation assets is done in
two parts: those power generation assets used to supply New Mexico retail
customer needs (evaluated as one group) and those used to supply wholesale
market needs (evaluated as another group). Management's assumptions about future
prices, volumes, and other market trends in the wholesale electricity market
have fluctuated in the past and are expected to continue to be volatile. A
significant adverse change in these assumptions may result in an impairment of
the Company's power generation assets. Please note that the assumptions inherent
in the Company's analysis of asset impairment are inter-dependent. Changes in
any one assumption is a simplified view which attempts to give the reader an
understanding of the sensitivities affecting the Company's earnings. If market
prices were to decrease 22% below the Company's projected average market price
of $34/MWh, the Company may be required to recognize a charge to earnings for
the related asset impairment in accordance with SFAS 144.

                                       54
<PAGE>

Pension and Other Post-retirement Benefits

       The Company and its subsidiaries maintain a qualified defined benefit
pension plan (the "Plan"), which covers eligible non-union and union employees
including officers. The Plan was frozen at the end of 1997 to new participants,
salary levels and benefits. The Company's policy is to fund
actuarially-determined contributions.

       The Company's income for its Plan approximated $1.4 million for the year
ended December 31, 2002, and is calculated based upon a number of actuarial
assumptions, including an expected long-term rate of return on the Plan assets
of 9.0%. In developing the expected long-term rate of return assumption, the
Company evaluated input from its actuaries, including their review of asset
class return expectations as well as long-term inflation assumptions. This
long-term rate of return assumption compares to the historical 10-year
compounded return of 8.6% through the end of December 2002. The expected
long-term rate of return on the Plan assets is based on an asset allocation
assumption of 65% with equity managers, 25% with fixed income managers, and 10%
with alternative investments that are primarily real estate and timber. Because
of market fluctuation, the Plan's actual asset allocation as of December 31,
2002 was 63% with equity managers, 27% with fixed income managers, and 10% with
alternative investments. The Company reviews the actual asset allocation and
periodically rebalances the asset allocation to the targeted allocation. The
Company continues to believe that 9.0% is a reasonable long-term rate of return
on the Plan's assets, despite the recent market downturn in which the Plan
assets had an actual loss of 8.3% for the twelve months ended December 31, 2002.
The Company will continue to evaluate its actuarial assumptions, including
expected rate of return, at least annually, and will adjust as necessary.

       The Company bases its determination of pension expense or income on a
market-related valuation of assets, which reduces year-to-year volatility. If
investment return is outside a range of 5% to 13% (expected long-term rate of
return plus or minus 4%), this market-related valuation recognizes the portion
of return that is outside the range over a five year period from the year in
which the return occurs. Since the market-related value of assets recognizes the
portion of return that is outside the range over a five-year period, the future
value of assets will be impacted as previously deferred returns are recorded.

       The discount rate that the Company utilizes for determining future
pension obligations is based on a review of long-term high-grade bonds. The
discount rate determined on this basis has decreased to 6.75% at September 30,
2002 from 7.50% at September 30, 2001. Based on an expected rate of return on
the Plan assets of 9.0%, a discount rate of 6.75% and various other assumptions,
it is estimated that the pension expense for the Plan will approximate $3.2
million in fiscal year 2003 and $3.8 million in fiscal year 2004. Future actual
pension income or expense will depend on future investment performance, changes
in future discount rates and various other factors related to the populations
participating in our pension plans.

       Lowering the Plan's expected long-term rate of return on pension assets
by 0.5% (from 9% to 8.5%) would have lowered pension income for fiscal 2002 by
approximately $1.9 million. Lowering the discount rate by 0.5% would have
lowered pension income for fiscal year 2002 by approximately $200,000.

                                       55
<PAGE>

       The value of the Plan assets has decreased from $339.7 million at
September 30, 2001 to $325.1 million at September 30, 2002 including $26.1
million of contributions during 2002. The Company expects to make $20 million in
contributions for the 2003 plan year. These contributions are expected to help
the Company avoid potential actions of the Pension Benefit Guaranty Corporation
for under-funded plans including higher insurance premiums and notification to
participants of the under-funded plan status.

Decommissioning Costs

       Accounting for decommissioning costs for nuclear and fossil-fuel
generation involves significant estimates related to costs to be incurred many
years in the future. Changes in these estimates could significantly impact the
Company's financial position, results of operation and cash flows. The Company
owns and leases nuclear and fossil-fuel facilities that are within and outside
of its retail service areas. The Company will adopt the new accounting
requirements of Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations" ("SFAS 143") in the first quarter of 2003.
Under SFAS 143, the Company is only required to recognize and measure
decommissioning liabilities for tangible long-lived assets for which a legal
obligation exists. Adoption of the statement will change the Company's method of
accounting for both nuclear generation decommissioning and fossil-fuel
generation decommissioning. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - New and Proposed Accounting
Standards", for additional discussion regarding the Company's accounting policy
for decommissioning and the anticipated effects for adoption of the new
standard. Nuclear decommissioning costs are based on site-specific estimates of
the costs for removing all radioactive and other structures at the site. PVNGS
Unit 3 is currently excluded from the Company's retail rate base while Units 1
and 2 are included in the Company's retail rate base. The Company collects a
provision for ultimate decommissioning of Units 1 and 2 in its rates.
Fossil-fuel decommissioning costs are also approved by the PRC as a component of
the Company's depreciation rates. The Company believes that it will continue to
be able to collect for its legal asset retirement obligations for nuclear and
fossil-fuel generation activities included in the ratemaking process described
above.

       In addition, the Company has a contractual obligation with the PVNGS
participants to fund separately the nuclear decommissioning at a level in excess
of what the Company has identified as its legal asset retirement obligation
under SFAS 143. The contractual funding obligation is based on a site-specific
estimate prepared by a third party. The Company's most recent site-specific
estimates for nuclear decommissioning costs were developed in 2001, using 2001
cost factors, and are based on prompt dismantlement decommissioning, reflecting
the costs of removal discussed above, with such removal occurring shortly after
operating license expiration. The Company's share of the contractual funding
obligation is approximately $201 million (2001 dollars) at December 31, 2002.
The estimates are subject to change based on a variety of factors including,
cost escalation, changes in technology applicable to nuclear decommissioning and
changes in federal, state or local regulations. The operating licenses for PVNGS
Units 1, 2 and 3 expire in 2024, 2025, and 2027, respectively. The Company does
not have a similar contractual funding obligation related to its fossil-fuel
plants.

                                       56
<PAGE>

Self-Insurance

       The Company self-insures for certain losses related to general liability,
workers' compensation and automobile claims. The Company maintains insurance
with third-party insurers in excess of the Company's self-insured retentions to
limit the Company's exposure per occurrence or accident, as applicable. The
Company's self-insurance liabilities reflect the estimated ultimate cost of
claims incurred as of the balance sheet date. The estimated liabilities are not
discounted and are established based upon claims filed, estimated claims
incurred but not reported, and analyses of industry and historical data.
Management reviews the amounts recorded for these liabilities on a quarterly
basis to ensure that they are appropriate. While management believes that these
estimates are reasonable based on the information available, the Company's
financial results could be impacted if actual trends, including the severity or
frequency of claims or fluctuations in premiums, differ from the Company's
estimates.

Contingent Liabilities

       There are various claims and lawsuits pending against the Company and
certain of its subsidiaries. The Company has recorded a liability where the
effect of litigation can be estimated and where an outcome is considered
probable. Management's estimates are based on its knowledge of the relevant
facts at the time of the issuance of the Company's consolidated financial
statements. Subsequent developments could materially alter management's
assessment of a matter's probable outcome and the estimate of liability.

Environmental Issues

       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,
current 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). Subsequent developments could materially alter management's assessment
of a matter's probable outcome and the estimate of liability.

Legal Fees

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

                                       57
<PAGE>

       See "Item 7A. Quantitative and Qualitative Disclosure About Market Risk -
Interest Rate Risk and Financial Instruments" for discussion regarding the
Company's accounting policies and sensitivity analysis for the Company's
financial instruments and derivative energy and other derivative contracts. See
also "Planned Financing Activities" below for additional discussion regarding
the Company's accounting policies for forward interest swaps.

                         LIQUIDITY AND CAPITAL RESOURCES

       At December 31, 2002, the Company had cash and short-term cash
investments of $83.3 million compared to $179.2 million in cash and short-term
and long-term cash investments at December 31, 2001. Certain long-term
investments have been reclassified as short-term to reflect the Company's
liquidity needs to fund certain construction projects in 2002.

       Cash provided from operating activities for the year ended December 31,
2002 was $97.3 million compared to cash provided by operating activities of
$327.3 million for the year ended December 31, 2001. This decrease was primarily
the result of a decline in operating income due to the deterioration of
wholesale market conditions. Also, contributing to the decrease was a payment of
$36.0 million for the termination of the surface coal mine contract, the
Company's $26.1 million contribution to its pension and post-retirement benefit
plans and a payment of $23.2 million to secure a long-term wholesale contract.
In addition, the Company did not make its first quarter 2001 estimated federal
income tax payment of $32.0 million until January 2002 because of an extension
granted by the IRS to taxpayers in several counties in New Mexico as a result of
wildfires in 2000. These non-recurring payments reduced operating cash flows
below historical levels.

       Cash used for investing activities was $200.4 million in 2002 compared to
$407.0 million in 2001. Cash used for investing activities includes construction
expenditures for new generating plants of $67.4 million in 2002 compared to
$70.9 million in 2001. Payments for combustion turbines not yet included in
plant were $31.3 million in 2002 compared to $32.6 million in 2001. In addition,
cash used for investing in 2001 includes the purchase of short-term and
long-term investments of $150.0 million. The change in cash used for investing
activities was partially offset by the redemption of short-term investments of
$76.6 million in 2002. Expenditures in 2001 reflect the acquisition of certain
transmission assets and other related investing activities of $13.9 million.

       Cash generated by financing activities was $78.5 million in 2002 compared
to $0.4 million in 2001. Financing activities in 2002 were primarily short-term
borrowings of $115.0 million compared to $35.0 million in 2001 for liquidity
reasons, partially offset by an 8% increase in cash payments for common stock
dividends.

                                       58
<PAGE>

Capital Requirements

       Total capital requirements include construction expenditures as well as
other major capital requirements and cash dividend requirements for both common
and preferred stock. The main focus of the Company's current construction
program is upgrading generation systems upgrading and expanding the electric and
gas transmission and distribution systems, and purchasing nuclear fuel. To
preserve a strong financial position, the Company announced in 2002 its plans to
eliminate capital expenditures for previously planned generation expansion until
market conditions warrant further investment. Projections for total capital
requirements for 2003 are $176 million and projections for construction
expenditures for 2003 are $156 million including remaining payments on the
combustion turbines discussed below. For 2003-2007 projections, total capital
requirements are $800 million and construction expenditures are $708 million.
These estimates are under continuing review and subject to on-going adjustment.

       PNM had previously committed to purchase five combustion turbines for a
total cost of $151.3 million. The turbines are for power generation plants with
an estimated cost of construction of approximately $370 million over the next
five years depending on market conditions. PNM has expended $225 million as of
December 31, 2002 of which $144 million was for equipment purchases. On June 27,
2002, Lordsburg, an 80 MW natural gas fired plant, became fully operational and
commenced serving the wholesale power market. Afton, a 141 MW simple cycle gas
turbine, became fully operational on December 4, 2002. These plants are part of
the Company's ongoing competitive strategy of increasing generation capacity
over time to serve increasing retail load, sales under long-term contracts and
other merchant sales. These plants were not originally planned to serve New
Mexico retail customers and therefore are not currently, included in the rate
base. However, it is possible that these plants may be needed in the future to
serve the growing retail load. If so, these plants will have to be certified by
the PRC and would then be included in the rate base.

       In 2002, the Company utilized cash generated from operations, cash on
hand, as well as its liquidity arrangements to cover its construction
commitments. The Company anticipates that internal cash generation and current
debt capacity will be sufficient to meet all its capital requirements for the
years 2003 through 2007. To cover the difference in the amounts and timing of
cash generation and cash requirements, the Company intends to use short-term
borrowings under its current and future liquidity arrangements.

Liquidity

       As of February 28, 2003, PNM had $215 million of liquidity arrangements
in addition to $76 million of cash. The liquidity arrangements consist of $195
million from an unsecured revolving credit facility ("Credit Facility") and $20
million in local lines of credit. PNM entered into a new revolving credit
facility on December 19, 2002, which increased borrowing capacity from $150
million to $195 million. This facility will mature December 18, 2003. There were
$170 million in borrowings against the Credit Facility as of February 28, 2003.
In addition, the Holding Company has $15 million in local lines of credit.

                                       59
<PAGE>

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

       PNM's credit outlook is considered stable by Moody's Investor Services,
Inc. ("Moody's") and Standard and Poor's Ratings Services ("S&P") and positive
by Fitch, Inc. ("Fitch"). The Company is committed to maintaining or improving
its investment grade ratings. S&P currently rates PNM's senior unsecured notes
("SUNs") and its Eastern Interconnection Project ("EIP") senior secured debt
"BBB-" and its preferred stock "BB". Moody's rates PNM's SUNs and senior
unsecured pollution control revenue bonds "Baa3" and preferred stock "Ba1". The
EIP senior secured debt is also rated "Ba1". Fitch rates PNM's SUNs and senior
unsecured pollution control revenue bonds "BBB-," PNM's EIP lease obligation
"BB+" and PNM'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.

Long-term Obligations and Commitments

       The following tables show the Company's long-term obligations and
commitments as of December 31, 2002.
<TABLE>
<CAPTION>
                                                                Payments Due
                                    ----------------------------------------------------------------------
                                                               (In thousands)

                                                    Less than                                    After
        Contractual Obligations        Total         1 year       2-3 years     4-5 years       5 years
----------------------------------  -------------  ------------  ------------  -------------  ------------
<S>                                    <C>            <C>           <C>            <C>         <C>
Short-Term Debt (a)...............     $ 150,000      $150,000      $      -       $      -    $        -
Long-Term Debt....................       980,092         1,852       272,728          5,260       700,252
Operating Leases..................       446,973        28,216        58,216         62,391       298,150
Purchased Power Agreement........        213,191        23,889        48,217         34,704       106,381
Coal Contract (b).................     1,496,838       106,048       205,229        183,252     1,002,309
                                    -------------  ------------  ------------  -------------  ------------
Total Contractual Cash
   Obligations....................    $3,287,094      $310,005      $584,390       $285,607    $2,107,092
                                    =============  ============  ============  =============  ============
</TABLE>
(a)   Represents the actual outstanding balance of the Credit Facility as of
      December 31, 2002.
(b)   Assumes deliveries under the Coal Contract. If no deliveries are made,
      certain minimum payments may be required under the Coal Contract.


                                       60
<PAGE>

<TABLE>
<CAPTION>
                                                 Amount of Commitment Expiration Per Period
                                 -----------------------------------------------------------------------
                                                             (In thousands)

                                     Total
          Other Commercial          Amounts                                                   After
             Commitments           Committed       1 year       2-3 years     4-5 years       5 years
-------------------------------  --------------  ------------  ------------  ------------  -------------

<S>                                   <C>           <C>              <C>           <C>            <C>
Short-Term Debt (c)............       $ 41,500      $ 41,500         $   -         $   -          $   -
Local Lines of Credit..........         35,000        35,000             -             -              -
Letters of Credit..............          5,700         5,700             -             -              -
                                 --------------  ------------  ------------  ------------  -------------
Total Commercial
   Commitments.................       $ 82,200      $ 82,200         $   -         $   -          $   -
                                 ==============  ============  ============  ============  =============
</TABLE>
    (c) Represents the unused borrowing capacity of the Credit Facility
        less outstanding letters of credit of $3.5 million as of December
        31, 2002.

       PNM 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. In 1998, PNM established PVNGS Capital Trust ("Capital Trust")
for the purpose of acquiring all the debt underlying the PVNGS leases. PNM
consolidates Capital Trust in its consolidated financial statements. The
purchase was funded with the proceeds from the issuance of $435 million of SUNs,
which were loaned to Capital Trust. Capital Trust then acquired and now holds
the debt component of the PVNGS leases. For legal and regulatory reasons, the
PVNGS lease payment continues to be recorded and paid gross with the debt
component of the payment returned to PNM via Capital Trust. As a result, the net
cash outflows for the PVNGS lease payment were $13.2 million for the year ended
December 31, 2002. The table above reflects the net lease payment.

       PNM's other significant operating lease obligations include the EIP, a
leased interest in transmission line with annual lease payments of $2.8 million
(see "Planned Financing Activities" below), and an operating lease for the
entire output of Delta, a gas fired generating plant in Albuquerque, New Mexico,
with imputed annual lease payments of $6.0 million.

       The Company's off-balance sheet obligations are limited to PNM's
operating leases and certain financial instruments related to the purchase and
sale of energy (see below). The present value of PNM's operating lease
obligations for PVNGS Units 1 and 2, EIP and the Delta operating lease was $196
million as of December 31, 2002.

       PNM has entered into various long-term power purchase agreements ("PPAs")
obligating it to buy electricity for aggregate fixed payments of $213.2 million
plus the cost of production and a return. These contracts expire December 2006
through July 2010. In addition, PNM is obligated to sell electricity for $185.2
million in fixed payments plus the cost of production and a return. These
contracts expire December 2003 through June 2010. PNM's marketing portfolio as
of December 31, 2002 included open contract positions to buy $59.7 million of
electricity and to sell $56.1 million of electricity. In addition, PNM had open
forward positions classified as normal sales of electricity under the derivative
accounting rules of $140.7 million and normal purchases of electricity of $98.9
million.

                                       61
<PAGE>

       PNM contracts for the purchase of gas to serve its retail customers.
These contracts are short-term in nature, supplying the gas needs for the
current heating season and the following off-season months. The price of gas is
a pass-through, whereby PNM recovers 100% of its cost of gas.

Contingent Provisions of Certain Obligations

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

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

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

       PNM's committed Credit Facility contains a "ratings trigger." If PNM is
downgraded or upgraded by the ratings agencies, the result would be an increase
or decrease in interest cost, respectively. PNM's committed Credit Facility
contains a MAC provision which, if triggered, could prevent PNM from drawing on
its unused capacity under the Credit Facility. In addition, the Credit Facility
contains a contingent requirement that requires PNM to maintain a
debt-to-capital ratio, inclusive of off-balance sheet debt, of less than 65% as
well as maintenance of an earnings before interest, taxes, depreciation and
amortization ("EBITDA")/interest coverage ratio of three times. If PNM's
debt-to-capital ratio, inclusive of off-balance sheet debt, were to exceed 65%
or its interest coverage ratio falls below 3.0, PNM could be required to repay
all borrowings under the Credit Facility, be prevented from drawing on the
unused capacity under the Credit Facility, and be required to provide security
for all outstanding letters of credit issued under the Credit Facility. At
December 31, 2002, PNM had $5.7 million of letters of credit outstanding. The
outstanding balance of the Credit Facility at December 31, 2002 was $150.0
million.

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

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<PAGE>

Planned Financing Activities

       As of December 31, 2002, PNM has $268.4 million of long-term debt that
matures in August 2005 excluding sinking fund payments related to EIP secured
lease bonds. All other long-term debt of PNM matures in 2016 or later. The
Company could enter into other long-term financings for the purpose of
strengthening its balance sheet, funding growth and reducing its cost of
capital. The Company continues to evaluate its investment and debt retirement
options to optimize its financing strategy and earnings potential. No additional
first mortgage bonds may be issued under PNM's mortgage. The amount of SUNs that
may be issued is not limited by the SUNs indenture. However, debt-to-capital
requirements in certain of PNM's financial instruments and regulatory agreements
would ultimately limit the amount of additional debt PNM would issue.

       PNM currently has $46 million of tax-exempt bonds outstanding that were
callable at a premium beginning December 15, 2002, and an additional $136
million that become callable at a premium in August 2003. PNM intends to
refinance these bonds, assuming the interest rate of the refinancing does not
exceed the current interest rate of the bonds, and has hedged the entire planned
refinancing. The Company received regulatory approval to refund the tax-exempt
bonds on October 29, 2002. This approval is effective for one year. In order to
take advantage of current low interest rates, PNM entered into five forward
starting interest rate swaps in the fourth quarter of 2001 and the first quarter
of 2002. PNM designated these swaps as cash flow hedges. The hedged risks
associated with these instruments are the changes in cash flows related to
general moves in interest rates expected for the refinancing. The swaps
effectively cap the interest rate on the refinancing to 4.95% plus an adjustment
for PNM's and the industry's credit rating. PNM's assessment of hedge
effectiveness is based on changes in the hedge interest rates. The derivative
accounting rules, as amended, provide 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 transactions affect earnings. Any hedge ineffectiveness is required
to be presented in current earnings. For the year ended December 31, 2002, PNM
recognized $0.4 million of hedge ineffectiveness in earnings. At December 31,
2002, the fair market value of these derivative financial instruments was
approximately $18.4 million unfavorable to the Company.

       A forward starting swap does not require any upfront premium and captures
changes in the corporate credit component of an investment grade company's
interest rate as well as the underlying benchmark. The five forward starting
interest rate swaps have a termination date of May 15, 2003 for a combined
notional amount of $182.0 million. There were no fees on the transaction, as
they are imbedded in the rates, and the transaction will be settled in cash on
the mandatory unwind date (strike date) corresponding to the refinancing date of
the underlying debt. The settlement will be capitalized as a cost of issuance
and amortized over the life of the debt as a yield adjustment provided that the
forecasted transactions (interest payments) occur as anticipated. The Company
would seek regulatory approval to recover any hedge cost which could not be
capitalized under the accounting rules in its next litigated electric rate
proceeding.

                                       63
<PAGE>

       On November 1, 2002, the Company filed for approval from the PRC to enter
into a transaction providing for the securitization of PNM's retail electric
service accounts receivable, wholesale electric service accounts receivables and
retail gas services accounts receivable ("Securitization") to reduce the amount
of debt outstanding under the Credit Facility and to raise cash for PNM's
ongoing working capital requirements and other capital requirements. The total
capacity, or maximum that could be borrowed, under the Securitization will not
exceed $100 million. In the proposed transaction, PNM would sell its accounts
receivables from time to time. The PRC approved this request on December 17,
2002. The Company expects to enter into this transaction in March 2003.

       PNM has notified the Holding Company that it intends to exercise its
early buyout option related to its 60% ownership interest in the EIP
transmission line and related facilities. In conjunction with the early buyout
option, PNM will retire the related $26.2 million of 10.25% debt. PNM caused the
related notification of mandatory redemptions to be distributed on February 24,
2003, calling the debt on April 1, 2003. Additionally, the Company acquired the
remaining $12.5 million of publicly-traded EIP Secured Facility Bonds. These
bonds have been retired and ownership of the related lease debt is expected to
be transferred to PNM, subject to regulatory approvals.

Dividends

       The Holding Company's board of directors regularly reviews the dividend
policy. The declaration of common dividends is dependent upon a number of
factors including the ability of the Holding Company's subsidiaries to pay
dividends. Currently, PNM is the Holding Company's primary source of dividends.
As part of the order approving the formation of the Holding Company, the PRC
placed certain restrictions on the ability of PNM to pay dividends to the
Holding Company. PNM cannot pay dividends that will cause its debt rating to go
below investment grade; and PNM cannot pay dividends in any year, as determined
on a rolling four-quarter basis, in excess of net earnings for that year without
prior PRC approval. In January 2003, with the signing of the Global Electric
Agreement, the PRC modified the PNM dividend restriction to allow PNM to
dividend future equity contributions made by the Holding Company back to the
Holding Company. Additionally, PNM has various financial covenants, which limit
the transfer of assets, whether through dividends or other means.

       In addition, the ability of the Holding Company to declare dividends is
dependent upon the extent to which cash flows will support dividends, the
availability of earnings, its financial circumstances and performance, the
effect of regulatory decisions and legislative activities, future growth plans,
the related capital requirements, standard business considerations and market
and economic conditions generally.

       Consistent with the PRC's holding company order, PNM paid dividends of
$127.0 million to the Holding Company on December 31, 2001. On March 4, 2002,
the PNM board of directors declared a dividend of $5.5 million, which was paid
on March 19, 2002. On June 10, 2002, the PNM board of directors declared a
dividend of $24.7 million, which was paid on June 28, 2002.

       On February 18, 2003, the Holding Company's board of directors approved a
4.5% increase in the common stock dividend. The increase raised the quarterly
dividend to $0.23 per share, for an indicated annual dividend of $0.92 per
share.

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<PAGE>

Capital Structure

       The Company's capitalization, including current maturities of long-term
debt, at December 31, 2002 and 2001 are shown below:

                                                  2002            2001
                                              -------------  -------------

         Common Equity......................      49.2%           50.8%
         Preferred Stock....................       0.7             0.6
         Long-term Debt.....................      50.1            48.6
                                              -------------  -------------
            Total Capitalization*...........     100.0%          100.0%
                                              =============  =============

           *  Total capitalization does not include as debt the present value of
              PNM's operating lease obligations for PVNGS Units 1 and 2, EIP and
              the Delta operating lease, which was $196 million as of December
              31, 2002 and $224 million as of December 31, 2001.

                         OTHER ISSUES FACING THE COMPANY

                   RESTRUCTURING THE ELECTRIC UTILITY INDUSTRY

State

       In April 1999, the New Mexico Electric Utility Industry Restructuring Act
of 1999 ("Restructuring Act") was enacted into law. The Restructuring Act opens
the state's electric power market to customer choice. In March 2001, amendments
to the Restructuring Act were passed which delayed the original implementation
dates by approximately five years, including the requirement for corporate
separation of supply service and energy-related service assets from distribution
and transmission service assets. The Restructuring Act, as amended, will give
schools, residential and small business customers the opportunity to choose
among competing power suppliers beginning in January 2007. Competition would be
expanded to include all customers starting in July 2007.

       On October 10, 2002, PNM announced that it had agreed with the PRC Staff,
the AG, and other consumer groups on the Global Electric Agreement that includes
agreement to support repeal of a majority of the Restructuring Act, as amended.
The Global Electric Agreement, which includes agreement on a five-year rate
path, procedures for the Company's participation in merchant plant activities
and other regulatory issues, was approved by the PRC on January 28, 2003. The
New Mexico Legislature is currently in session. Legislation repealing the
Restructuring Act, as amended, and continuing the authorization for utilities to
participate in merchant plant activities for a limited time has been introduced
as SB 718. On February 28, 2003, SB 718 passed the Senate by a vote of 37-2. It
is now awaiting action in the House of Representatives. The Company is unable to
predict at this time if restructuring will occur as provided in current law or,
if so, what form it will take. (See "Merchant Plant Filing and Global Electric
Agreement" below).

                                       65
<PAGE>

       The Restructuring Act, as amended, recognized 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.
These 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 would 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, as amended, 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 $135 million of
costs associated with the power supply and energy services businesses under the
Restructuring Act, as amended, were established as regulatory assets. Because of
the Company's belief that recovery is probable, these assets continue to be
classified as regulatory assets, although the Company has discontinued the use
of accounting for rate regulated activities. See Note 12 of the notes to
consolidated financial statements for further developments.

Federal

       The 107th Congress adjourned without passing comprehensive energy
legislation. Both the House and the Senate passed energy legislation but were
unable to resolve disagreement on a number of provisions during conference
committee discussions. President Bush has expressed his continuing commitment to
his National Energy Policy and has urged Congress to move forward with energy
legislation. Key committee chairs in both the House and the Senate have
expressed desires to move quickly on a comprehensive energy bill. The Company is
unable to predict if energy legislation will be passed or if passed, what form
it will take, or if it will be signed by the President if passed.

               MERCHANT PLANT FILING AND GLOBAL ELECTRIC AGREEMENT

       Senate Bill ("SB 266"), enacted by the 2001 session of the New Mexico
legislature, allowed public utilities to "invest in, construct, acquire or
operate" generating plants not intended to provide retail electric service
("merchant plant"), free of certain otherwise applicable regulatory requirements
contained in the Public Utility Act. By order entered on March 27, 2001, the PRC
found that these provisions of SB 266 raised issues such as cost allocations for
ratemaking, revenue allocations for off-system sales, how the PRC can ensure the
utility will meet its duty to provide service when the utility invests in
merchant plant, how that plant will be financed and how transactions between
regulated services and merchant plants will be conducted. The PRC initiated
proceedings to address these issues.

                                       66
<PAGE>

       In November 2001, PNM began negotiations with the PRC utility staff and
intervenors in order to resolve its merchant plant filing and other matters.
Discussions included the future framework for restructuring the electric
industry in New Mexico under the Restructuring Act, a future retail electric
rate path and PNM's merchant plant filing.

       The year-long negotiations ended on October 10, 2002 with the filing of
the Global Electric Agreement with the PRC. The Global Electric Agreement sets a
rate path through 2007 and resolves the issues surrounding industry deregulation
in New Mexico and PNM's merchant power strategy. The Global Electric Agreement
was signed by PNM, the PRC Staff, the New Mexico Attorney General's Office, the
New Mexico Industrial Energy Consumers, the City of Albuquerque, and the
University of New Mexico. The United States Executive Agencies ("USEA")
subsequently agreed to support the Global Electric Agreement as if they had
signed it. The Global Electric Agreement also provides for the signatories to
support passage of legislation to repeal the Restructuring Act and concerning
merchant plant activities in the New Mexico Legislature. The Global Electric
Agreement was approved by the PRC on January 28, 2003.

       Under the Global Electric Agreement, PNM will decrease retail electric
rates 6.5% in two phases over the next three years. The first phase will be a
4.0% decrease, effective September 2003. The second phase will be a further 2.5%
decrease from current rate levels, effective in September 2005. Rates would then
be frozen at that level until the end of 2007. The Company expects to achieve
necessary cost savings through additional cost efficiencies and fuel savings.
The risks and benefits of all wholesale electric sales, inure solely to the
Company's shareholders until December 2007. Since the Global Electric Agreement
does not provide for a fuel cost adjustment, the lower fuel costs sought to be
captured by shifting to underground mining for the coal supplies at SJGS will
flow through to the Company's earnings largely offsetting the reduction in
retail revenues.

       PNM will be able to seek a general rate adjustment during the rate freeze
period if complying with any new or changed environmental or tax law or
regulation, or a new broader application of existing environmental or tax laws
or regulations, would compromise its financial integrity. PNM also is permitted
to capitalize the reasonable costs of mandatory renewable energy resources,
including an after-tax cost of capital of 8.64% to be recorded concurrently with
the deferral of those costs.

       PNM is authorized to recover in the stipulated rates and future retail
rates, its New Mexico jurisdictional share of the decommissioning costs
associated with the San Juan, La Plata and Navajo surface coal mines. PNM is
allowed to recover up to $100 million of the costs, composed of approximately
$69 million in surface coal mine reclamation costs, and approximately $31
million of contract buyout costs, without being subject to prudence challenge by
the signatories to the Global Electric Agreement. The costs will be amortized
over 17 years commencing September 1, 2003 and in equal amounts each year
thereafter. PNM cannot seek to recover a return on the unamortized reclamation
costs, but could seek to recover a return on the unamortized contract buyout
costs remaining as of December 31, 2007 in future rate adjustment proceedings.

                                       67
<PAGE>

       The stipulated rates also provide for full recovery of nuclear
decommissioning costs accrued in accordance with the estimates in the applicable
decommissioning cost study during the rate freeze period for PNM's interests in
PVNGS Units 1 and 2. The portion of SJGS Unit 4 previously treated as an
excluded resource from PNM's New Mexico retail rates are included as a
generation resource to serve PNM's New Mexico retail and wholesale firm
requirements customers' load. PNM's contracts to purchase power from Tri-State,
Delta and firm power from SPS would also be included as generation resources to
serve PNM's New Mexico retail and wholesale firm requirements customers' load
until each contract expires under the Global Electric Agreement.

       PRC approval or other authorization from the PRC is not required for
PNM's merchant plant investment as long as PNM meets the following conditions:
(a) PNM does not invest more than $1.25 billion in merchant plant; (b) PNM has
an investment grade credit rating on a stand-alone basis and on a consolidated
basis with the Holding Company; and (c) PNM spends at least $60 million per year
in gas and electric utility, non-merchant plant infrastructure needed to
maintain adequate and reliable service. No prior approval for merchant plant
participation would be required and expedited PRC approval would be available
for financing of merchant plant if certain specified financial conditions are
met. If PNM's credit rating on a stand-alone or consolidated basis with the
Holding Company falls below investment grade, however, approvals are needed for
new merchant plant projects and for continuing to participate in merchant plant
projects of more than certain dollar value and under certain conditions.

       PRC approval is not required for PNM to transfer any part of its
interests in merchant plant or PVNGS Unit 3 from time to time to any other legal
entity, provided that the following conditions are met: (a) PNM's debt to
capital ratio will not exceed 65% after giving effect to the transfer and (b)
PNM's investment grade status on a stand-alone basis and on a consolidated basis
with the Holding Company will not be impaired by the transfer of merchant plant
or PVNGS Unit 3 at the time of transfer.

       PNM further agreed in the Global Electric Agreement that it will transfer
all its interests in merchant plant out of PNM by January 1, 2010. PNM will
accelerate the mandatory transfer to a date one year after PNM has completed
expenditures of $1.25 billion on merchant plant. PNM may seek a variance from
the PRC at any time prior to January 1, 2010 to extend or vacate the time or
terms and conditions requiring the transfer but not beyond January 1, 2015.

       Under the Global Electric Agreement, if merchant plant or PVNGS Unit 3 is
transferred to a PNM affiliate, PNM's generation resources and the affiliate's
generation resources may be jointly dispatched at the merchant affiliate's sole
discretion until January 1, 2015. Joint dispatch of all utility, PVNGS Unit 3 or
merchant plant resources would be terminable at any time between 2008 and 2015
at PNM's discretion, as long as the utility's dispatch capability is not
impaired in any way.

       PNM agreed to forego recovery of the costs incurred in preparing to
transition to a competitive retail market in New Mexico. This will result in a
one-time charge of approximately $16.7 million, pre-tax, in the first quarter of
2003.

       In the Global Electric Agreement, PNM, PRC utility staff and intervenors
agreed to actively support the repeal of a majority of the Restructuring Act, as
amended. Legislation repealing the Restructuring Act, as amended, and continuing
authorization for utilities to participate in merchant plant for a limited time
has been introduced as SB 718. On February 28, 2003, SB 718 passed the Senate by

                                       68
<PAGE>

a vote of 37-2. It is now awaiting action in the House of Representatives. If
the repeal does not occur during the 2003 New Mexico Legislative Session,
various modifications to the conditions of the Global Electric Agreement are
triggered depending on how long repeal is delayed.

       In summary, the terms of this Global Electric Agreement and the Company's
continuing efforts to control expenses offer significant benefits to both
customers and shareholders in the form of lower rates, a predictable rate path,
and the resolution of important issues affecting implementation of the Company's
strategic plan over the next several years.

       The Company is currently unable to predict the impact these proceedings
may have on its plans to expand its generating capacity and its future financial
condition and results of operations.

                                  WATER SUPPLY

       There is a growing concern in New Mexico about the use of water for power
plants, due to the state's arid climate and current drought conditions. The
availability of sufficient water supplies to meet all the needs of the state,
including growth, is a major issue. An interim committee of the legislature
refused to support legislation mandating the use of dry cooling technology.
However, legislation requiring a water conservation plan as part of an
application for siting generation plants of a certain size is being considered
in the 2003 session. In building the Afton and Lordsburg plants, the Company has
secured sufficient water rights.

       The Four Corners region, in which SJGS and Four Corners are located, has
been experiencing drought conditions that may affect the water supply for the
plants in 2003, as well as later years if adequate moisture is not received in
the watershed that supplies the area. USBR is working to assess the adequacy of
the water supply under PNM's USBR contract for 16,200 acre feet of water that
supplies SJGS. Additionally, various stakeholders in the San Juan Basin,
including the New Mexico State Engineer, are evaluating what water rights might
be affected by the drought conditions, including water rights pursuant to the
New Mexico state permit that provide 8,000 acre feet of water to SJGS and
approximately 28,000 acre feet of water for Four Corners. PNM is assessing
alternatives for temporary supplies of water and is working with USBR and area
stakeholders to minimize the effect on operations of the plants. PNM has
assessed its situation with regard to the drought and the alternatives available
to it and does not believe that its operations will be materially affected at
this time. However, PNM cannot forecast the weather situation and its
ramifications with any degree of certainty or how regulators and legislators may
impact PNM's situation in the future, should the drought continue.

                  WESTERN UNITED STATES WHOLESALE POWER MARKET

       A significant portion of the Company's earnings in 2001 was derived from
the Company's wholesale power marketing operations, which benefited from strong
demand and high wholesale prices in the Western United States. These market
conditions were driven by a number of separate factors, including electric power

                                       69
<PAGE>

supply shortages in the Western United States during the first half of 2001,
weather conditions, gas supply costs and transmission constraints. As a result
of these factors, the wholesale power market in the Western United States became
extremely volatile and, while providing many marketing opportunities, presented
and continues to present significant risk to companies selling power into this
marketplace.

       These conditions resulted in the well-publicized "California energy
crisis" and in the bankruptcy filings of the California Power Exchange ("Cal
PX") and of Pacific Gas and Electric Company ("PG&E"), although the turmoil in
the Western markets was not limited to California. However, since the third
quarter of 2001, conditions in the Western wholesale power market have changed
substantially as the result of certain regulatory actions (see below), moderate
weather conditions, conservation measures, the construction of additional
generation, and a decline in natural gas prices, as well as the lingering
slowdown in the regional economy. These changes have placed and are expected to
continue to place downward pressure on wholesale electricity prices.

       In response to the turmoil in the Western energy market, the FERC
initially imposed a "soft" price cap of $150 per MWh for sales to the Cal PX and
the California Independent System Operator ("Cal ISO") that required any
wholesale sales of electricity into these markets be capped at $150 per MWh
unless the seller could demonstrate that its costs exceeded the cap. This price
cap was modified by orders of the FERC that directed certain power suppliers to
provide refunds for overcharges calculated on the basis of a formula that
sanctioned wholesale prices considerably in excess of the $150 per MWh level.
Shortly thereafter, the FERC adopted an order establishing prospective
mitigation and a monitoring plan for the California wholesale markets and which
established a further investigation of public utility rates in wholesale Western
energy markets. This plan replaced the $150 per MWh soft cap previously
established and applied during periods of system emergency. Subsequently, the
FERC issued still another order that changed the previous orders and expanded
the price mitigation approach to the entire Western region.

       In July 2002, the FERC issued further orders to address wholesale power
prices in the Western market. On July 11, the FERC established a price cap of
$91.87 per MWh for the period ending September 30, 2002. On July 17, the FERC
entered an order, which was to have taken effect October 1, 2002, raising the
price cap to $250 per MWh. However, the FERC extended the $91.87 per MWh price
cap through October 31, 2002. According to the FERC, this price cap will spur
new investment in generation and will foster the eventual return of a robust
competitive marketplace. The July 17 order also established mechanisms to
prevent power suppliers from engaging in market manipulation activities.

       As a result of the foregoing conditions in the Western market, the FERC
and other federal and state governmental authorities are conducting
investigations and other proceedings relevant to the Company and other sellers.
The more significant of these in relation to the Company are summarized below.


                                       70
<PAGE>

California Refund Proceeding

       By order dated June 19, 2001, in response to a complaint filed by San
Diego Gas and Electric Company ("SDG&E") and other California buyers against
sellers into the California wholesale electric market, the FERC directed one of
its administrative law judges ("ALJ") to convene a settlement conference to
address potential refunds owed by sellers into the California market. The
settlement conference, in which PNM participated, was ultimately unsuccessful,
and the ALJ recommended to the FERC that an evidentiary hearing be held to
resolve the dispute, suggesting that refunds were due; however, the estimated
refunds were significantly lower than those demanded by California, and in most
instances, were offset by the amounts due suppliers from the Cal PX and Cal ISO.
The California parties had demanded refunds of approximately $9 billion from
power suppliers. Hearings on the refunds were held in September 2002 and the ALJ
issued his Proposed Findings on California Refund Liability on December 12,
2002, in which he determined that the Cal ISO had, for the most part, calculated
the amounts of the refunds correctly. In his appendix identifying the amounts of
the refunds, he identified what he termed "ballpark" figures for the amount of
refunds due under his order. PNM was identified as having a refund liability of
approximately $4.3 million, while being owed approximately $7 million from the
Cal ISO. Pursuant to the FERC's order, PNM filed, in conjunction with the
competitive supplier group, initial comments on January 13, 2003 to the ALJ's
preliminary findings addressing errors the Company believes the ALJ made in his
proposed findings and reply comments on February 3, 2003. Prior to the December
12, 2002 ALJ decision, the Ninth Circuit Court of Appeals ordered FERC to allow
the parties in the case to provide additional evidence in the case. Several
California parties submitted additional evidence on March 3, 2003, which they
argue supports their position that virtually all market participants either
engaged in specific market manipulation strategies or facilitated such
strategies, including PNM. PNM maintains that it did not engage in improper
wholesale trading activities. PNM, along with other members of the competitive
supplier group, will file reply evidence on March 20, 2003. PNM cannot predict
what effect this additional evidence will have on the prior decision of the ALJ
as to specific refund amounts. The Company is unable to predict the ultimate
outcome of this FERC proceeding, or whether PNM will be directed to make any
refunds as the result of a FERC order.

Pacific Northwest Refund Proceeding

       In addition to the California refund proceedings, Puget Sound Energy,
Inc., filed a complaint at FERC alleging that spot market prices in the Pacific
Northwest wholesale electric market were unjust and unreasonable. On September
24, 2001, the ALJ issued a recommended decision and declined to order refunds
associated with wholesale electric sales in the Pacific Northwest. Prior to the
FERC acting on the ALJ's recommended decision, several parties joined in filing
a motion at the FERC requesting the FERC to reopen the proceeding, in view of
the issuance of the FERC Staff's report on the Enron trading strategies, to
permit further investigation and discovery into transactions in the wholesale
electric market in the Pacific Northwest. The FERC re-opened the docket to
receive additional evidence from the parties. The FERC did not remand the case
to the ALJ, but determined to undertake themselves the review of any additional
evidence in conjunction with the ALJ's recommended decision. On March 3, 2003,
Puget Sound and other parties submitted additional evidence to FERC alleging the
existence of unlawful wholesale electric prices in the Pacific Northwest and
that FERC should require sellers to provide refunds for spot market bilateral

                                       71
<PAGE>

sales transactions in the Pacific Northwest. The Company believes there is
nothing in this additional evidence that requires FERC to reverse the prior
decision of the ALJ denying refunds. The Company is unable to predict the
ultimate outcome of this FERC proceeding, or whether PNM will be directed to
make any refunds as the result of an order by the FERC.

FERC Investigation of "Enron-Like" Trading Practices

       The FERC has also initiated a market manipulation investigation,
partially in response to the bankruptcy filing of the Enron Corporation
("Enron") and to allegations that Enron may have engaged in manipulation of
portions of the Western wholesale power market. In connection with that
investigation, all FERC jurisdictional and non-jurisdictional sellers into
Western electric and gas markets have been required to submit data regarding
short-term transactions in 2000-2001. PNM made its data submission on April 2,
2002. Subsequently, in May 2002, new Enron documents came to light that raised
additional concerns about Enron's trading practices. In light of these new
revelations, the FERC issued additional orders in the pending investigation
requiring sellers to respond to detailed questions by admitting or denying that
they had engaged in trading practices similar to those practiced by Enron and
certain other sellers, including so-called "wash" transactions. The FERC issued
supplemental requests for data submissions. In its responses to the FERC
requests, PNM denied that it had engaged in improper activities such as those
identified in Enron's memos and also denied engaging in "wash" transactions. PNM
admitted engaging in certain activities described in the memos that were not
improper. Where appropriate, PNM's responses addressed any arguable similarities
between any of its trading activities and those under investigation by the FERC.
The FERC staff has issued a preliminary report on its findings, recommending
that the FERC initiate formal investigative proceedings directed at three
companies and the FERC has done so. The Company was not among the companies
named. The Company cannot predict the outcome of this investigation.

California Power Exchange and Pacific Gas and Electric Bankruptcies

       In January and February 2001, SCE and PG&E, major purchasers of power
from the Cal PX and Cal ISO, defaulted on payments due the Cal PX for power
purchased from the Cal PX in 2000. These defaults caused the Cal PX to seek
bankruptcy protection. PG&E subsequently also sought bankruptcy protection. PNM
has filed its proofs of claims in the Cal PX and PG&E bankruptcy proceedings.
Total amounts due PNM from the Cal PX or Cal ISO for power sold to them in 2000
and 2001 total approximately $7 million. The Company has provided allowances for
the total amount due from the Cal PX and Cal ISO.

California Attorney General Complaint

       In March 2002, the California Attorney General filed a complaint with the
FERC against numerous sellers regarding prices for wholesale electric sales into
the Cal ISO and Cal PX and to the California Department of Water Resources ("Cal
DWR"). PNM was among the sellers identified in this complaint and filed its
answer and motion to intervene. In its answer, PNM defended its pricing and
challenged the theory of liability underlying the California Attorney General's

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complaint. On May 31, 2002, the FERC entered an order denying the California
Attorney General's request to initiate a refund proceeding, but directed
sellers, including PNM, to comply with additional reporting requirements with
regard to certain wholesale power transactions. PNM has made filings required by
the May 31, 2002 order. The California Attorney General filed a request for
rehearing contesting the FERC decision. On September 23, 2002, the FERC issued
its order denying the California Attorney General's request for rehearing. The
California Attorney General has filed a petition for review in the United States
Court of Appeals for the Ninth Circuit. PNM has intervened in the Ninth Circuit
appeal and intends to participate as a party in that proceeding. The Company
cannot predict the outcome of this appeal. As addressed below, the California
Attorney General has also threatened litigation against PNM in state court in
California based on similar allegations.

California Attorney General Threatened Litigation

       The California Attorney General has filed several lawsuits in California
state court against certain power marketers for alleged unfair trade practices
involving alleged overcharges for electricity. By letter dated April 9, 2002,
the California Attorney General notified PNM of its intention to file a
complaint in California state court against PNM concerning its alleged failure
to file rates for wholesale electricity sold in California and for allegedly
charging unjust and unreasonable rates in the California markets. The letter
invited PNM to contact the California Attorney General's office before the
complaint was filed, and PNM has met several times with representatives of the
California Attorney General's office. Further discussions are contemplated. To
date, a lawsuit has not been filed by the California Attorney General and the
Company cannot predict the outcome of this matter.

California Antitrust Litigation

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

Block Forward Agreement Litigation

       On February 1, 2002, PNM was served with a declaratory relief complaint
filed by the State of California in California state court. The state's
declaratory relief complaint seeks a determination that the state is not liable

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for its commandeering of certain energy contracts known as "Block Forward
Agreements". The Block Forward Agreements were a form of futures contracts for
the purchase of electricity at below-market prices and served as security for
payment by PG&E and SCE for their electricity purchases through the Cal PX. When
PG&E and SCE defaulted on payment obligations incurred through the Cal PX, the
Cal PX moved to liquidate the Block Forward Agreements to satisfy in part the
obligations owed by PG&E and SCE. Before the Cal PX could liquidate the Block
Forward Agreements, California commandeered them for its own purposes. In March
2001, PNM and other similarly situated sellers of electricity through the Cal PX
filed claims for damages with the California state Victims Compensation and
Government Claims Board ("Victims Claims Board") on the theory that the state,
by commandeering the Block Forward Agreements, had deprived them of security to
which they were entitled under the terms of the Cal PX's tariff. The Victims
Claims Board filing was an administrative remedy that served as a mandatory
prerequisite to filing suit against the state for recovery of damages related to
the commandeering of the Block Forward Agreements. The Victims Claims Board
denied PNM `s claim on March 22, 2002. PNM filed a complaint against the State
of California in California state court on September 20, 2002 seeking damages
for the state's commandeering of the Block Forward Agreements and requesting
judicial coordination with the state's declaratory relief action filed in
February 2002 on the basis that the two actions raise essentially the same
issues. The California State court stayed the proceedings through April 11, 2003
pending resolution of certain related issues before the FERC.

                  Effects of Certain Events on Future Revenues

       On October 1, 1999, Western Area Power Administration ("WAPA") filed a
petition at the FERC requesting the FERC to order PNM to provide network
transmission service to WAPA under PNM's Open Access Transmission Tariff on
behalf of the United States Department of Energy ("DOE") as contracting agent
for Kirtland Air Force Base ("KAFB").

       On April 29, 2002, the FERC issued its Final Order directing PNM to
provide the service. The Company filed an appeal of the April 29th order in the
United States Court of Appeals for the 10th Circuit. The Company, USEA and WAPA
entered a binding memorandum of understanding resolving the dispute. The
memorandum provided that upon approval by the PRC of the Agreement resolving the
Company's electric rate path and merchant plant issues described earlier in
(wherever it is described), the Company would dismiss its appeal at the Tenth
Circuit and WAPA would purchase from the Company approximately 60 MW of electric
power that will be wheeled under the FERC Final Order to serve KAFB. The power
sales agreement between the Company and WAPA was executed on February 3, 2003.
On March 1, 2003 the power sales agreement went into effect and the Company
dismissed its appeal at the 10th Circuit on March 5, 2003.

       Due to the price difference between New Mexico jurisdictional retail
sales rates and the wholesale rates under the power sales agreement between the
Company and WAPA, the loss in revenue is expected to be $2.8 million per year
beginning in 2004.

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       In a separate but related proceeding, PNM and the United States Executive
Agencies on behalf of KAFB are involved in a PRC case regarding a dispute over
specific Company tariff language under which PNM provides service to KAFB. The
PRC case was held in abeyance, pending the outcome of the FERC proceeding. A
status conference is scheduled before the PRC Hearing Examiner to determine how
to proceed with the case due to the dismissal of the Tenth Circuit appeal and
implementation of the power sales agreement between Wapa and the Company.

                             NEW SOURCE REVIEW RULES

       In November 1999, the Department of Justice at the request of the
Environmental Protection Agency ("EPA") filed complaints against seven companies
alleging the companies over the past 25 years had made modifications to their
plants in violation of the New Source Review ("NSR") requirements and in some
cases the New Source Performance Standard ("NSPS") regulations, which could
result in the requirement to make costly environmental additions to older power
plants. Whether or not the EPA will prevail is unclear at this time. The EPA has
reached a settlement with one of the companies sued by the Justice Department.
Discovery continues in the pending litigation, several of the pending cases are
approaching trial, and a trial has commenced in one of the cases. No complaint
has been filed against PNM by the EPA, and the Company believes that all of the
routine maintenance, repair, and replacement work undertaken at its power plants
was and continues to be in accordance with the requirements of NSR and NSPS.
However, by letter dated October 23, 2000, the New Mexico Environmental
Department ("NMED") made an information request of PNM, advising PNM that the
NMED was in the process of assisting the EPA in the EPA's nationwide effort "of
verifying that changes made at the country's utilities have not inadvertently
triggered a modification under the Clean Air Act's Prevention of Significant
Determination ("PSD") policies." PNM has responded to the NMED information
request. In late June 2002, PNM received another information request from the
NMED for a list of capital projects budgeted or completed in 2001 or 2002. PNM
has responded to this additional NMED information request.

       The National Energy Policy released in May 2001 by the National Energy
Policy Development Group called for a review of the pending EPA enforcement
actions. As a result of that review, on June 14, 2002, the EPA announced its
intention to pursue steps to increase energy efficiency, encourage emissions
reductions and make improvements and reforms to the NSR program. The EPA
announced that, among other things, the NSR program had impeded or resulted in
the cancellation of projects that would maintain or improve reliability,
efficiency and safety of existing power plants. The EPA's June 2002 announcement
contemplated further rulemakings on NSR-related issues and expressly cautioned
that the announcement was not intended to affect pending NSR enforcement
actions. Thereafter, on December 31, 2002, the EPA promulgated certain
long-awaited revisions to the NSR rules, along with proposals to revise the
routine maintenance, repair and replacement exclusion contained in the
regulations. There is no specific timetable for these revisions and the ultimate
resolution of NSR-related issues raised by the enforcement actions remains
unclear. If the EPA were to prevail in the position advanced in the pending
litigation, 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.

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                      Citizen Suit Under the Clean Air Act

       By letter dated January 9, 2002, counsel for the Grand Canyon Trust and
Sierra Club (collectively, "GCT") notified PNM of GCT's intent to file a
so-called "citizen suit" under the Clean Air Act, alleging that PNM and
co-owners of the SJGS violated the Clean Air Act, and the implemention of
federal and state regulations, at SJGS. Pursuant to that notification, on May
16, 2002, the GCT filed suit in federal district court in New Mexico against PNM
(but not against the other SJGS co-owners). The suit alleges two violations of
the Clean Air Act and related regulations and permits. First, GCT argues that
the plant has violated, and is currently in violation of, the federal PSD rules,
as well as the corresponding provisions of the New Mexico Administrative Code,
at SJGS Units 3 and 4. Second, GCT alleges that the plant has "regularly
violated" the 20% opacity limit contained in SJGS's operating permit and set
forth in federal and state regulations at Units 1, 3 and 4. The lawsuit seeks
penalties as well as injunctive and declaratory relief. PNM filed its answer in
federal court on June 6, 2002, denying the material allegations in the
complaint. Both sides in the litigation have filed motions for partial summary
judgment, but the court has, to date, made no rulings on any of these matters. A
trial date on liability issues has been scheduled on a trailing docket for June
2003. Based on its investigation to date, the Company firmly believes that the
allegations are without merit and PNM vigorously disputes the allegations. PNM
has always adhered and continues to adhere to high environmental standards as
evidenced by its ISO 14000 certification. The Company is, however, unable to
predict the ultimate outcome of the matter.

                              NATURAL GAS EXPLOSION

       On April 25, 2001, a natural gas explosion occurred in Santa Fe, New
Mexico. The apparent cause of the explosion was a leak from a PNM line near the
location. The explosion destroyed a small building and injured two persons who
were working in the building. PNM's investigation indicates that the leak was an
isolated incident likely caused by a combination of corrosion and increased
pressure. PNM also cooperated with an investigation of the incident by the PRC's
Pipeline Safety Bureau (the "Bureau"), which issued its report on March 18,
2002. The Bureau's report gave PNM notice of probable violations of the New
Mexico Pipeline Safety Act and related regulations. PNM and the Bureau staff
entered a compliance agreement addressing the probable violations and filed it
with the PRC for approval on March 4, 2003. PNM agreed to undertake a list of
twenty-four corrective actions, including internal policy changes, retraining
employees and enhancing gas line monitoring. PNM has also agreed to voluntarily
accelerate spending on pipeline replacement by more than $10.0 million and to
commit an additional $1.8 million to development and implementation of systems
to improve gas line management. The compliance agreement is pending before the
PRC-. Two lawsuits against PNM by the injured persons along with several claims
for property and business interruption damages have been resolved.

                         LANDOWNER ENVIRONMENTAL CLAIMS

       In March 2002, a lawsuit was filed in New Mexico state court by a
landowner owning property in the vicinity of SJGS, against PNM and SJCC. The
lawsuit was served on the defendants on June 11, 2002. The complaint seeks $20
million in damages, plus pre-judgment interest and punitive damages, based on
allegations related to the alleged discharge of pollutants into an arroyo near

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the plant, including damage to the plaintiff's livestock. A jury trial has been
demanded. PNM has denied the allegations of wrongdoing and is vigorously
defending this matter, but is unable to predict the outcome of this matter.

                         ARCHEOLOGICAL SITE DISTURBANCE

       The Company hired a contractor, Great Southwestern Construction, Inc.
("Great Southwestern"), to conduct certain "climb and tighten" activities on a
number of electric transmission lines in New Mexico between July 2001 and
December 2001. Those lines traverse a mix of federal, state, tribal and private
properties in New Mexico. In late May 2002, the U.S. Forest Service ("USFS")
notified PNM that apparent disturbances to archeological sites had been
discovered in and around the rights-of-way for PNM's transmission lines in the
Carson National Forest in New Mexico. Great Southwestern performed "climb and
tighten" activities on those transmission lines. PNM has confirmed the existence
of the disturbances, as well as disturbances associated with certain arroyos
that may raise issues under section 404 of the Clean Water Act. PNM has given
the Corps of Engineers notice concerning the disturbances in arroyos. The Corps
of Engineers has acknowledged the Company's notice and asked PNM to cooperate in
addressing these disturbances. No formal or written demand by the USFS has been
made on the Company with respect to this matter, but the USFS has verbally
instructed PNM to undertake an assessment and possible related mitigation
measures with respect to the archeological sites in question. PNM contracted for
an archeological assessment and a proposed remediation plan with respect to the
disturbances and has provided the assessment to the USFS and the federal Bureau
of Land Management ("BLM"). PNM has provided Great Southwestern with notice and
a demand for indemnity. A subsequent preliminary investigation into other
transmission lines that were covered by the "climb and tighten" project
indicated that there are disturbances on lands governed by other federal
agencies and Indian tribes. PNM and Great Southwestern have provided notice of
the potential disturbances to these other agencies and tribes. No formal action
has been initiated against PNM and no notice of any contemplated action has been
received. The Company had been informed that the USFS and BLM had commenced a
criminal investigation into Great Southwestern's activities on this project.
However, the Company recently received verbal confirmation that the USFS and the
BLM have decided to decline criminal prosecution. The State of New Mexico
recently requested information from PNM concerning the location of potential
disturbances on state lands. The Navajo Nation has also requested further
information concerning disturbances on Navajo land. The Company is unable to
predict the outcome of this matter and cannot estimate with any certainty the
potential impact on the Company's operations.

                     DUGAN PRODUCTION CORPORATION LITIGATION

       On July 30, 2002, Dugan Production Corp. filed a lawsuit in the County of
San Juan, New Mexico, against the SJCC. On September 2, 2002, the SJCC removed
the lawsuit to the United States District Court for the District of New Mexico.
The lawsuit seeks to enjoin the underground mining of coal from a portion of the
land that is to be used for the underground mine. The plaintiff also seeks
monetary damages.

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       The SJCC, through leases with the federal government and the State of New
Mexico, owns coal interests with respect to the underground mine. The plaintiff,
through leases with the federal government, the State of New Mexico and certain
private parties, claims to own certain oil and gas interests in portions of the
land that is to be used for the underground mine. The plaintiff alleges that the
SJCC's underground coal mining operations have or will interfere with
plaintiff's gas production and result in the dissipation of natural gas that it
otherwise would be entitled to recover. The plaintiff also alleges, and seeks a
declaration by the court, that the rights under its leases are senior and
superior to the rights of the SJCC.

       The SJCC has informed the Company that SJCC intends to vigorously dispute
the litigation. On September 17, 2002, the SJCC filed a motion to dismiss the
claims against it on several grounds. Discovery for the lawsuit has not yet
started. The Company cannot predict the ultimate outcome of the litigation or
whether the litigation will adversely affect the amount of coal available, or
its price for SJGS.

                            EXCESS EMISSIONS REPORTS

       As required by law, whenever there are excess emissions from SJGS, due to
such causes as start-up, shutdown, upset, breakdown or certain other conditions,
PNM makes filings with the NMED. For some two years, PNM has been in discussions
with NMED concerning excess emissions reports for the period after January 1997.
NMED is still in the process of investigating the circumstances of these excess
emissions and whether these emissions involve any violation of applicable
permits and regulations. PNM and NMED have entered into several agreements
tolling the running of the statute of limitations in order to allow NMED to
complete its review of these filings. The present tolling agreement expires
March 14, 2003. PNM has been advised by NMED counsel that NMED is in the process
of preparing a draft administrative compliance order addressing certain claimed
violations, but PNM has not seen this draft order and has not had a chance to
meet with NMED to address any violations that might be claimed. The Company is
unable to predict the outcome of this matter and cannot estimate the potential
impact on the Company's operations.

                      NEW AND PROPOSED ACCOUNTING STANDARDS

       Statement of Financial Accounting Standards No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"). In June 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS 143. SFAS 143 requires the
recognition and measurement of liabilities associated with the retirement of
tangible long-lived assets that result from the acquisition, construction or
development and or the normal operations of the long-lived assets. Retirement
obligations associated with long-lived assets included within the scope of SFAS
143 are those for which a legal obligation exists under enacted laws, statutes,
written or oral contracts, including obligations arising under the doctrine of
promissory estoppel. Under the standard, the asset retirement obligation ("ARO")
liability is recognized at its fair value as incurred.

       The recognition of an ARO results in an increase in the carrying cost of
the long-lived asset, which will be amortized using a systematic and rationale
basis over the remaining life of the related asset as depreciation expense. An
ARO represents a future liability and, as a result, accretion expense will be

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accrued on this liability until such time as the obligation is satisfied.
Accretion of the ARO liability due to the passage of time is recorded as an
operating expense. If at the end of the asset's life the recorded liability
differs from the actual settled obligation, the Company may incur a gain or loss
that will be recognized at that time. The net difference between the amounts
determined under SFAS 143 and the Company's previous method of accounting for
such activities net of expected regulatory recovery, will be recognized as a
cumulative effect of a change in accounting principle, net of related income
taxes. The Company is currently calculating the liability associated with its
AROs but does not believe there will be a material effect on continuing
operations for the adoption of this standard.

       Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). In April 2002, the FASB issued SFAS 145. This
statement updates and clarifies existing accounting pronouncements for the
treatment of gains and losses from extinguishment of debt and eliminates an
inconsistency between required accounting for sale-leaseback transactions and
the required accounting for certain lease modifications that have similar
economic effects as sale-leaseback transactions. In accordance with previous
accounting standards, gains and losses from extinguishment of debt were
classified as extraordinary gains and losses. The current statement permits
gains and losses from extinguishment of debt to be classified as ordinary and
included in income from operations, unless they are unusual in nature or occur
infrequently and therefore included as an extraordinary item.

       SFAS 145 is effective for fiscal years beginning after May 15, 2002 for
the provisions related to the rescission of FASB Statements No. 4, 44 and 64,
and for all transactions entered into after May 15, 2002 for the provision
related to the amendments of FASB Statement No. 13. The Company does not believe
there will be a material effect from the adoption of this standard on the
Company's consolidated statements of financial position or results of
operations.

       Statement of Financial Accounting Standards No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS 146"). In July 2002,
the FASB issued SFAS 146. This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred and is effective for exit or disposal activities that
are initiated after December 31, 2002 and nullifies EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." It also
substantially nullifies EITF Issue No. 88-10, "Costs Associated with Lease
Modification or Termination." Previously issued financial statements, including
interim financial statements, cannot be restated. The Company does not expect
its adoption of this standard in fiscal year 2003 to have a significant impact
on its financial statements.

       Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, Amendment of FASB
Statement No. 123 and APB Opinion No. 28" ("SFAS 148"). In December 2002, the
FASB issued SFAS 148 that amended SFAS 123 to provide alternative methods of
transition to SFAS 123's fair value method of accounting for stock-based
employee compensation but does not require fair value accounting as prescribed
in SFAS 123. SFAS 148 is effective for fiscal years ending after December 15,
2002. It also amends the disclosure provisions of SFAS 123 and Accounting
Principles Board Opinion No. 28 to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy

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with respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. The disclosure
provisions of SFAS 148 are incremental to the existing disclosure requirements
of SFAS 123 and are applicable to all companies with stock-based compensation.
The Company adopted the disclosure requirements of this standard in fiscal year
2002, but continues to account for stock-based compensation under APB 25.

       Financial Accounting Standards Board ("FASB") Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34"
("FIN 45 "). In November 2002, the FASB issued FIN 45 which enhances the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also requires a
guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of the obligations it has undertaken in issuing the guarantee. FIN 45
applies to contracts or indemnification agreements that contingently require the
guarantor to make payments to the guaranteed party based on changes in an
underlying obligation that is related to an asset, liability, or an equity
security of the guaranteed party. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The initial recognition and initial measurement provisions are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The guarantor's previous
accounting for guarantees issued prior to the date of initial application should
not be revised or restated. The Company adopted FIN 45, and such adoption did
not have a material impact on the financial statements.

       Financial Accounting Standards Board ("FASB") Interpretation No. 46,
"Consolidation of Variable Interest Entities", an interpretation of Accounting
Research Bulletin (ARB) No. 51, "Consolidated Financial Statements" ("FIN 46").
In January 2003, the FASB issued FIN 46 to address the consolidation of variable
interest entities that have one or both of the following characteristics: (1)
the equity investment at risk is not sufficient to permit the entity to finance
its activities without additional subordinated financial support from other
parties, which is provided through other interests that will absorb some or all
of the expected losses of the entity and (2) the equity investors lack one or
more of the following essential characteristics of a controlling financial
interest: (a) the direct or indirect ability to make decisions about the
entity's activities through voting rights or similar rights, (b) the obligation
to absorb the expected losses of the entity if they occur, which makes it
possible for the entity to finance its activities, or (c) the right to receive
the expected residual returns of the entity if they occur, which is the
compensation for the risk of absorbing the expected losses. FASB believes that
if a business enterprise has a controlling financial interest in a variable
interest entity, the assets, liabilities, and results of the activities of the
variable interest entity should be included in consolidated financial statements
with those of the business enterprise. FIN 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved. There are
also additional disclosure requirements for an enterprise that holds significant
variable interests in a variable interest entity but is not the primary
beneficiary. FIN 46 applies immediately to variable interest entities created
after January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date and may be applied prospectively with a

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cumulative-effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
Currently, the Company does not have interests in any variable interest entity.

       EITF 02-3 "Issues Related to Accounting for Contracts Involved in Energy
Trading and Risk Management Activities", EITF 98-10 "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities" and Statement of
Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative
Instruments and Hedging Activities". On October 25, 2002, the EITF reached a
final consensus on EITF 02-3 that rescinds EITF 98-10 and requires that all
energy contracts held for trading purposes be presented on a net margin basis in
the statement of earnings. The rescission of EITF 98-10 requires that energy
contracts which do not meet the definition of a derivative under SFAS 133 no
longer be marked to market and recognized in current earnings. As a result, all
contracts which were marked to market under EITF 98-10 and must now be accounted
for under the accrual method should be written back to cost with any difference
included as a cumulative effect adjustment in the period of adoption. This
transition provision will be effective for the first quarter of 2003. The
rescission of EITF 98-10 did not have a material impact on the Company's
financial condition or results of operations as all contracts previously
marked-to-market under the definition provided in EITF 98-10 also met the
definition of a derivative under SFAS 133 and are properly recorded at fair
value with gains and losses recorded in earnings. The Company is reviewing its
energy contract portfolio to determine whether its contracts meet the definition
of trading activities under EITF 02-3 which should be presented on a net margin
basis. The Company will reclassify prior periods to a net margin basis for those
contracts previously accounted for under EITF 98-10 in the first quarter of
2003. The Company does not expect to report revenues and cost of energy sold on
a net margin basis on a prospective basis as a result of the application of EITF
02-3 as none of the of Company's marketing activities meet the definitions of
trading activities as prescribed by EITF 02-3.

                 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 all forward-looking statements are based upon current
expectations and are subject to risk and uncertainties. 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. Future
financial results will be affected by a number of factors, including interest
rates, weather, fuel costs, changes in supply and demand in the market for
electric power, wholesale power prices, market liquidity, the competitive
environment in the electric and natural gas industries, the performance of
generating units and transmission system, state and federal regulatory and
legislative decisions and actions, and the performance of state, regional and
national economies.

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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, changes in interest rates
and, historically, adverse market changes for investments held by the Company's
various trusts. The Company also uses certain derivative instruments for
wholesale power marketing transactions in order to take advantage of favorable
price movements and market timing activities in the wholesale power markets. The
following additional information is provided.

Risk Management

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

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

       The RMC also proposes Value at Risk ("VAR") limits to the Finance
Committee. The Finance Committee ultimately sets the aggregate VAR limit.

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


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

Commodity Risk

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

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

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







                           (Intentionally left blank)


                                       83
<PAGE>


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

                                                             Year Ended
                                                             December 31,
                                                          2002          2001
                                                      -----------   ------------
                                                           (In thousands)
 Mark-to-Market Energy Contracts:
    Current asset....................................  $  4,531       $  9,461
    Long-term asset..................................       267          1,469
                                                      -----------   ------------
       Total mark-to-market assets...................     4,798         10,930
                                                      -----------   ------------
    Current liability................................    (5,725)       (36,256)
    Long-term liability..............................         -         (5,114)
                                                      -----------   ------------
       Total mark-to-market liabilities..............    (5,725)       (41,370)
                                                      -----------   ------------
 Net fair value of mark-to-market energy contracts...   $  (927)     $ (30,440)
                                                      ===========   ============

       The mark-to-market energy portfolio positions at December 31, 2002 and
December 31, 2001 represent net liabilities after netting all open purchase and
sale contracts. Because the contractual amounts required to settle the open net
liability were greater than the current market values of the contracts, the
Company recorded a net loss position in 2002 and 2001; however, the settlement
of certain of these transactions in 2002 and changes in market prices
significantly reduced the loss position and resulted in the recognition of a
mark-to-market gain.

       The market prices used to value PNM's mark-to-market energy portfolio are
based on closing exchange prices and over-the-counter quotations. As of December
31, 2002 and December 31, 2001, PNM did not have any outstanding contracts that
were valued using methods other than quoted prices. The Company did not change
its methods for valuing its mark-to-market energy portfolio in 2002 as compared
to 2001.

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

                                                          Year Ended
                                                         December 31,
                                                    2002             2001
                                                  ------------    ------------
                                                         (In thousands)
   Sources of Fair Value Gain/(Loss)
   Fair value at beginning of year...............  $ (30,440)       $ (4,643)
   Amount realized on contracts delivered
      during period..............................     26,339           2,239
   Changes in fair value.........................      3,174         (28,036)
                                                  ------------    ------------
   Net fair value at end of period...............   $   (927)       $(30,440)
                                                  ============    ============
   Net change recorded as mark-to-market.........   $ 29,513        $(25,797)
                                                  ============    ============

                                       84
<PAGE>

       This table provides the maturity of the net assets/liabilities of the
Company, giving an indication of when these mark-to-market amounts will settle
and generate/(use) cash:

                   Fair Value at December 31, 2002

                                                   Maturities
                                     -----------------------------------------
                                     Less than
    Sources of Fair Value              1 year       1-3 Years        Total
    -------------------------------  -----------  -------------  -------------
                                                  (In thousands)

    Mark-to-market energy contracts     $(1,194)       $  267        $ (927)

       Note:  All values determined using broker quotes.

       As of December 31, 2002, a decrease in market pricing of PNM's
mark-to-market energy portfolio by 10% would have resulted in a decrease in net
earnings of less than 1%. Conversely, an increase in market pricing of this
portfolio by 10% would have resulted in an increase in net earnings of less than
1%.

       At December 31, 2002, the market value of PNM's normal sales and
purchases of electricity was a $54.6 million asset using the valuation methods
described above. If these transactions did not meet the definition of normal
under the accounting rules for derivatives, the Company would have recognized
unrealized gains of $56.3 million as an adjustment to Generation and Marketing
operating revenues based on the change in fair value of these contracts from
January 1, 2002 to December 31, 2002.

       The Company assesses the risk of these long-term contracts and merchant
sales activities using the VAR method to maintain the Company's total exposure
within management-prescribed limits. The Company utilizes the
variance/covariance model of VAR, which is a probabilistic model that measures
the risk of loss to earnings in market sensitive instruments. The
variance/covariance model relies on statistical relationships to analyze how
changes in different markets can affect a portfolio of instruments with
different characteristics and market exposure. VAR models are relatively
sophisticated; however, the quantitative risk information is limited by the
parameters established in creating the model. The instruments being evaluated
may trigger a potential loss in excess of calculated amounts if changes in
commodity prices exceed the confidence level of the model used. The VAR
methodology employs the following critical parameters: volatility estimates,
market values of open positions, appropriate market-oriented holding periods and
seasonally adjusted correlation estimates. The Company's VAR calculation only
considers the Company's forward position for the proceeding eighteen months. The
Company uses a holding period of three days as the estimate of the length of
time that will be needed to liquidate the positions. The volatility and the
correlation estimates measure the impact of adverse price movements both at an
individual position level as well as at the total portfolio level. The
confidence level established is 99%. For example, if VAR is calculated at $10
million, it is estimated at a 99% confidence level that if prices move against
PNM's positions, the Company's pre-tax gain or loss in liquidating the portfolio
would not exceed $10 million in the three days that it would take to liquidate
the portfolio.

                                       85
<PAGE>

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

       The Company accounts for the sale of electric generation in excess of its
retail needs or the purchase of power for retail needs as normal purchases and
sales under SFAS 133. Purchases for resale and subsequent resales are accounted
for as energy trading contracts in accordance with EITF 98-10 and comprise PNM's
mark-to-market portfolio. The VAR for the mark-to-market portfolio was $72,027
at December 31, 2002. The Company also calculates a portfolio VAR, which in
addition to its mark-to-market portfolio includes all contracts designated as
normal sales and purchases, hedges, and its estimated excess generation assets.
This excess is determined using average peak forecasts for the respective block
of power in the forward market. The Company's portfolio VAR was $2.0 million at
December 31, 2002.

       The following table shows the high, average and low market risk as
measured by VAR on the Company's mark-to-market portfolio (three day holding
period, 99% two-tailed confidence level):

                                       Year Ended
                                    December 31, 2002
                      -----------------------------------------
                         High            Average         Low
                      ------------    ------------    ---------
                                      (In thousands)

                          $3,408          $1,112          $29

Credit Risk

       PNM is exposed to credit losses in the event of non-performance or
non-payment by counterparties. The Company uses a credit management process to
assess and monitor the financial conditions of counterparties. Credit exposure
is also regularly monitored by the RMC. The Company provides for losses due to
market and credit risk. PNM's credit risk with its largest counterparty as of
December 31, 2002 was $18.7 million.

       In 2001, in response to the increased credit risk and market price
volatility described above, the Company provided an allowance against revenue of
$12.0 million for anticipated losses to reflect management's estimate of the
increased market and credit risk in the wholesale power market and its impact on
2001 revenues. As of December 31, 2001, $8.9 million was transferred to the
allowance for bad debt. The Company reduced its reserves by $0.6 million for the
year ended December 31, 2002 as a result of a lack of market liquidity, lower
prices and lower volatility. Based on information available at December 31,
2002, the Company believes the total allowance for anticipated losses (exclusive
of bad debt), currently established at $2.4 million, is adequate for
management's estimate of losses from credit risk. The Company will continue to
monitor the wholesale power marketplace and adjust its estimates accordingly.

                                       86
<PAGE>

       The following table provides information related to PNM's credit
exposure, net of collateral as of December 31, 2002. It further delineates that
exposure by the credit worthiness (credit rating) of the counterparties and
provides guidance as to the concentration of credit risk to individual
counterparties PNM may have.

           Schedule of Wholesale Power Marketing Credit Risk Exposure
                                December 31, 2002

<TABLE>
<CAPTION>
                                                                                    Net
                           Exposure                                  Number      Exposure
                            Before                                     of          of
                            Credit         Credit                   Counter-     Counter-
                          Collateral     Collateral  Net Exposure    parties      parties
Rating (a)                    (b)            (c)                      >10%         >10%
------------------------  -----------   ------------  -----------  -----------  -----------
                                           (Dollars in thousands)
<S>                          <C>             <C>         <C>            <C>        <C>
Investment grade........     $35,397         $    -      $35,397        1          $18,732
Non-investment grade           4,837              -        4,837                         -
Split rating............          20              -           20                         -
Internal ratings
   Investment grade.....         635              -          635                         -
   Non-investment
     grade..............      15,446            211       15,235         1           6,096
                          -----------   ------------  -----------               -----------
        Total...........     $56,335        $   211      $56,124                   $24,828
                          ===========   ============  ===========               ===========
Credit reserves                                          $ 2,433
                                                      ===========
</TABLE>

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

(b)    The Exposure Before Credit Collateral is the net credit exposure to PNM
       from its wholesale power marketing activities. This includes long-term
       contracts and other merchant sales and purchases. The exposure captures
       the net amounts due to PNM from receivables/payables for realized
       transactions, delivered and unbilled revenues, and mark-to-market
       gains/losses (pursuant to contract terms). Exposures are offset according
       to legally enforceable netting arrangements. Amounts are presented before
       those reserves that are determined on a portfolio basis. (See "Item 7.
       Management's Discussion and Analysis of Financial Condition and Results
       of Operations - Western United States Wholesale Power Market" for
       discussion of the reserves.)

(c)    The Credit Collateral reflects the face amount of cash deposits, letters
       of credit and performance bonds received from counterparties.

                                       87
<PAGE>

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

Interest Rate Risk

       As of December 31, 2002, the Company has an investment portfolio of
fixed-rate government obligations and corporate securities, which were subject
to the risk of loss, associated with movements in market interest rates. For
accounting purposes, the portfolio is classified as available-for-sale and is
marked-to-market. As a result, unrealized losses resulting from interest rate
increases are recorded as a component of comprehensive income. If interest rates
were to rise 50 basis points from their levels at December 31, 2002, the fair
value of these instruments would decline by 0.7% or $0.6 million. In addition,
because of this interest rate sensitivity, early or unplanned redemption of
these investments in a period of increasing interest rates would subject the
Company to risk of a realized loss of principal as the fair market value of
these investments would be less than their carrying value. The Company employs
investment managers to mitigate this risk. As part of its investing strategies,
the Company has diversified its portfolio with investments of varying maturity
and obligors and limits credit exposure to high investment grade quality
investments.

       PNM has long-term debt which subjects it to the risk of loss associated
with movements in market interest rates. All of the Company's long-term debt is
fixed-rate debt, and therefore, does not expose the Company's earnings to a risk
of loss due to adverse changes in market interest rates. However, the fair value
of these debts instruments would increase by approximately 4.05% or $38.8
million if interest rates were to decline by 50 basis points from their levels
at December 31, 2002. As of December 31, 2002, the fair value of PNM's long-term
debt was $960 million as compared to a book-value of $954 million. In general,
an increase in fair value would impact earnings and cash flows if PNM were to
re-acquire all or a portion of its debt instruments in the open market prior to
their maturity. Certain issuances of the debt have call dates in December 2002
and August 2003. To hedge against the risk of rising interest rates and their
impact on the economics of calling the debt, PNM has entered into forward
starting interest rate swaps in 2001 and 2002. These forward interest rate swaps
effectively lock-in interest rates for the notional amount of the debt that is
callable at a rate of approximately 4.95% plus an adjustment for PNM's and the
industry's credit ratings. At December 31, 2002, the fair market value of these
derivative financial instruments was approximately $18.4 million unfavorable to
the Company.

       PNM contributed $6.1 million in 2001 to a trust established to fund
decommissioning costs for PVNGS. In January 2002, PNM contributed $23.5 million
for plan year 2001 to the trust for the Company's pension plan, and other post
retirement benefits. Additional contributions were made in September 2002 for
$1.1 million and in December 2002 for $1.5 million for the 2002 plan year. The
securities held by the trusts had an estimated fair value of $63.2 million as of
December 31, 2002, of which approximately 27% were fixed-rate debt securities
that subject the Company to risk of loss of fair value with movements in market
interest rates. If rates were to increase by 50 basis points from their levels
at December 31, 2002, the decrease in the fair value of the securities would be
3.2% or $4.3 million. PNM does not currently recover or return through rates any

                                       88
<PAGE>

losses or gains on these securities; therefore, the Company is at risk for
shortfalls in its funding of its obligations due to investment losses. However,
the Company does not believe that long-term market returns over the period of
funding will be less than required for the Company to meet its obligations. (For
further information, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Pension and Other
Post-Retirement Benefits.")

Equity Market Risk

       As discussed above under Interest Rate Risk, PNM contributes to trusts
established to fund its share of the decommissioning costs of PVNGS and pension
and other post-retirement benefits. The trusts hold certain equity securities as
of December 31, 2002. These equity securities also expose the Company to losses
in fair value. Approximately 65% of the securities held by the various trusts
were equity securities as of December 31, 2002. Similar to the debt securities
held for funding decommissioning and certain pension and other post-retirement
costs, PNM does not recover or earn a return on through rates, any losses or
gains on these equity securities. (For further information, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Pension and Other Post-Retirement Benefits.")

       In 2001, the Company implemented an enhanced cash management strategy
using derivative instruments based on the Standard & Poor's 100, S&P 500, and
Nasdaq composite indices. The strategy is designed to capitalize on high market
volatility or benefit from market direction. An investment manager is utilized
to execute the program. The program is carefully managed by the RMC and has VAR
and stop-loss limits established. Trades are typically closed-out before the end
of a reporting period and within the same day of execution. There were no open
positions as of December 31, 2002.


                                       89
<PAGE>

               ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



                                      INDEX



                                                                          Page
                                                                          ----

Management's Responsibility for Financial Statements...................    F-1
Report of Independent Auditor (PNM Resources, Inc.)....................    F-3
Report of Independent Auditor (Public Service Company of New Mexico)...    F-4
Financial Statements:
   PNM Resources, Inc. and Subsidiaries
       Consolidated Statements of Earnings.............................    F-5
       Consolidated Statements of Retained Earnings....................    F-6
       Consolidated Balance Sheets.....................................    F-7
       Consolidated Statements of Cash Flows...........................    F-9
       Consolidated Statements of Capitalization.......................   F-10
       Consolidated Statements of Comprehensive Income/(Loss)..........   F-11
   Public Service Company of New Mexico
       Consolidated Statements of Earnings.............................   F-12
       Consolidated Statements of Retained Earnings....................   F-13
       Consolidated Balance Sheets.....................................   F-14
       Consolidated Statements of Cash Flows...........................   F-16
       Consolidated Statements of Capitalization.......................   F-17
       Consolidated Statements of Comprehensive Income/(Loss)..........   F-18
   Notes to Consolidated Financial Statements..........................   F-19
Supplementary Data:
   Quarterly Operating Results.........................................   F-65
   Comparative Operating Statistics....................................   F-67
   Independent Auditors' Report........................................   F-68
   Schedule I Condensed Financial Information of Parent Company........   F-69
   Schedule II Valuation and Qualifying Accounts.......................   F-72

              MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS

The accompanying financial statements of PNM Resources, Inc. and its
subsidiaries and Public Service Company of New Mexico and its subsidiaries, a
wholly owned subsidiary of PNM Resources, Inc., have been prepared in conformity
with accounting principles generally accepted in the United States of America.

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 PNM Resources,

                                       F-1

<PAGE>

Inc.'s and Public Service Company of New Mexico'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 and Ethics Committee of the Board of Directors of PNM Resources, Inc.,
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 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-2
<PAGE>


                         REPORT OF INDEPENDENT AUDITORS
                         ------------------------------


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


We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of PNM Resources, Inc. and subsidiaries as of
December 31, 2002 and 2001, and the related consolidated statements of earnings,
retained earnings, comprehensive income (loss), and cash flows for each of the
three years in the period ended December 31, 2002. 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 of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of PNM Resources, Inc. and
subsidiaries as of December 31, 2002 and 2001, and results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America.



DELOITTE & TOUCHE LLP


Omaha, Nebraska
February 11, 2003




                                       F-3

<PAGE>


                         REPORT OF INDEPENDENT AUDITORS
                         ------------------------------


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


We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of Public Service Company of New Mexico and
subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of earnings, retained earnings, comprehensive income (loss), and cash
flows for each of the three years in the period ended December 31, 2002. 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 of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Public Service Company of New
Mexico and subsidiaries as of December 31, 2002 and 2001, and results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.



DELOITTE & TOUCHE LLP


Omaha, Nebraska
February 11, 2003




                                       F-4

<PAGE>



                      PNM RESOURCES, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                -------------------------------------------
                                                                     2002           2001           2000
                                                                -------------  -------------  -------------
                                                                  (In thousands, except per share amounts)
Operating Revenues: (notes 1 and 2)
<S>                                                               <C>           <C>            <C>
  Electric.....................................................   $ 895,474     $1,952,861     $1,289,192
  Gas..........................................................     272,118        385,418        319,924
  Unregulated businesses.......................................       1,404          1,538          2,158
                                                                -------------  -------------  -------------
     Total operating revenues..................................   1,168,996      2,339,817      1,611,274
                                                                -------------  -------------  -------------
Operating Expenses:
  Cost of energy sold..........................................     550,053      1,524,285        949,880
  Administrative and general...................................     146,231        155,392        147,268
  Energy production costs......................................     149,528        152,455        139,894
  Depreciation and amortization................................     102,409         96,936         93,059
  Transmission and distribution costs..........................      63,870         69,001         60,330
  Taxes, other than income taxes...............................      34,244         30,302         34,405
  Income taxes (note 1 and 8)..................................      20,887         88,769         53,964
                                                                -------------  -------------  -------------
     Total operating expenses..................................   1,067,222      2,117,140      1,478,800
                                                                -------------  -------------  -------------
     Operating income..........................................     101,774        222,677        132,474
                                                                -------------  -------------  -------------
Other Income and Deductions:
  Other income.................................................      48,360         52,147         66,246
  Other deductions.............................................     (12,306)       (67,257)       (11,950)
  Income tax (expense) benefit  (notes 1 and 8)................     (12,144)         7,706        (20,382)
                                                                -------------  -------------  -------------
     Net other income and deductions...........................      23,910         (7,404)        33,914
                                                                -------------  -------------  -------------
     Earnings before interest charges..........................     125,684        215,273        166,388
                                                                -------------  -------------  -------------
Interest Charges:
  Interest on long-term debt (note 4)..........................      56,409         62,716         62,823
  Other interest charges.......................................       5,003          2,124          2,619
                                                                -------------  -------------  -------------
     Net interest charges......................................      61,412         64,840         65,442
                                                                -------------  -------------  -------------
Net Earnings...................................................      64,272        150,433        100,946
Preferred Stock Dividend Requirements..........................         586            586            586
                                                                -------------  -------------  -------------
Net Earnings Applicable to Common Stock........................   $  63,686      $ 149,847      $ 100,360
                                                                =============  =============  =============
Net Earnings per Share of Common Stock (Basic) (note 7)........   $    1.63      $    3.83      $    2.54
                                                                =============  =============  =============
Net Earnings per Share of Common Stock (Diluted) (note 7)......   $    1.61      $    3.77      $    2.53
                                                                =============  =============  =============
Dividends Paid per Share of Common Stock.......................   $    0.86      $    0.80      $    0.80
                                                                =============  =============  =============

</TABLE>

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

                                      F-5
<PAGE>



                      PNM RESOURCES, INC. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                        ----------------------------------------
                                                            2002          2001          2000
                                                        ------------  ------------  ------------
                                                                     (In thousands)

<S>                                                      <C>           <C>           <C>
Balance at Beginning of Year..........................   $ 415,388     $ 296,843     $ 227,828
  Net earnings before preferred stock dividends.......      64,272       150,433       100,946
  Dividends (note 4):
     Cumulative preferred stock.......................        (586)         (586)         (586)
     Common stock.....................................     (34,423)      (31,302)      (31,345)
                                                        ------------  ------------  ------------
Balance at End of Year................................   $ 444,651     $ 415,388     $ 296,843
                                                        ============  ============  ============

</TABLE>

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


                                      F-6
<PAGE>



                      PNM RESOURCES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
<TABLE>
<CAPTION>
                                                                                As of December 31,
                                                                            ---------------------------
                                                                               2002           2001
                                                                            -------------  ------------
                                                                                   (In thousands)
Utility Plant:  (notes 1, 11 and 12)
<S>                                                                          <C>            <C>
  Electric plant in service................................................  $2,301,673     $2,117,947
  Gas plant in service.....................................................     615,907        575,350
  Common plant in service and plant held for future use....................      79,987         45,223
                                                                            -------------  ------------
                                                                              2,997,567      2,738,520
  Less accumulated depreciation and amortization...........................   1,330,376      1,251,801
                                                                            -------------  ------------
                                                                              1,667,191      1,486,719
  Construction work in progress............................................     173,248        246,278
  Nuclear fuel, net of accumulated amortization of $16,568 and $16,954.....      26,832         26,940
                                                                            -------------  ------------
     Net utility plant.....................................................   1,867,271      1,759,937
                                                                            -------------  ------------
Other Property and Investments:
  Other investments (notes 1, 6 and 12)....................................     442,704        552,453
  Non-utility property, net of accumulated depreciation of
    $1,750 and $1,580......................................................       1,528          1,784
                                                                            -------------  ------------
     Total other property and investments..................................     444,232        554,237
                                                                            -------------  ------------
Current Assets:
  Cash and cash equivalents................................................       3,702         28,408
  Accounts receivables, net of allowance for uncollectible accounts
     of $15,575 and  $18,025...............................................      76,850         84,620
  Unbilled revenues (note 1)...............................................      49,079         62,377
  Other receivables........................................................      47,122         51,883
  Inventories (note 1).....................................................      37,230         36,483
  Regulatory assets (note 3)...............................................      24,027         10,473
  Short-term investments (note 1)..........................................      79,630         45,111
  Other current assets.....................................................      32,753         33,243
                                                                            -------------  ------------
     Total current assets..................................................     350,393        352,598
                                                                            -------------  ------------
Deferred charges:
  Regulatory assets (note 3)...............................................     196,283        195,367
  Prepaid retirement cost (note 9).........................................      39,665         18,273
  Other deferred charges...................................................     129,063         33,376
                                                                            -------------  ------------
     Total deferred charges................................................     365,011        247,016
                                                                            -------------  ------------
                                                                             $3,026,907     $2,913,788
                                                                            =============  ============
</TABLE>

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

                                      F-7

<PAGE>


                      PNM RESOURCES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                         CAPITALIZATION AND LIABILITIES

<TABLE>
<CAPTION>
                                                                                     As of December 31,
                                                                                -----------------------------
                                                                                      2002           2001
                                                                                --------------  -------------
                                                                                        (In thousands)
Capitalization:
  Common stockholders' equity:
<S>                                                                               <C>             <C>
    Common stock outstanding--39,118 shares, no par value (note 4).............    $ 624,119       $625,632
    Accumulated other comprehensive loss, net of tax...........................      (94,721)       (28,996)
    Retained earnings..........................................................      444,651        415,388
                                                                                --------------  -------------
       Total common stockholders' equity.......................................      974,049      1,012,024
  Minority interest (notes 1 and 5)............................................       11,760         11,652
  Cumulative preferred stock without mandatory redemption
    requirements (note 4)......................................................       12,800         12,800
  Long-term debt (note 4)......................................................      980,092        953,884
                                                                                --------------  -------------
     Total capitalization......................................................    1,978,701      1,990,360
                                                                                --------------  -------------
Current Liabilities:
  Short-term debt..............................................................      150,000         35,000
  Accounts payable.............................................................       97,968         76,141
  Accrued interest and taxes (notes 1 and 8)...................................       46,189         72,022
  Other current liabilities....................................................       99,019        149,454
                                                                                --------------  -------------
     Total current liabilities.................................................      393,176        332,617
                                                                                --------------  -------------
Deferred Credits:
  Accumulated deferred income taxes (notes 1 and 8)............................      125,595        120,153
  Accumulated deferred investment tax credits (notes 1 and 8)..................       41,583         44,714
  Regulatory liabilities (note 3)..............................................       52,019         54,295
  Regulatory liabilities related to accumulated deferred income tax (note 3)...       14,137         14,163
  Accrued post-retirement benefit cost (note 9)................................       17,335         14,929
  Other deferred credits (note 13).............................................      404,361        342,557
                                                                                --------------  -------------
     Total deferred credits....................................................      655,030        590,811
                                                                                --------------  -------------
Commitments and Contingencies (note 12)........................................            -              -
                                                                                --------------  -------------
                                                                                 $ 3,026,907     $2,913,788
                                                                                ==============  =============

</TABLE>

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

                                      F-8

<PAGE>

                      PNM RESOURCES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                       --------------------------------------
                                                                          2002          2001         2000
                                                                       ------------ ------------ ------------
Cash Flows From Operating Activities:                                              (In thousands)
<S>                                                                     <C>           <C>          <C>
  Net earnings........................................................  $ 64, 272     $150,433     $100,946
  Adjustments to reconcile net earnings to net cash flows
    from operating activities:
      Depreciation and amortization...................................    115,415      106,768      103,829
      Accumulated deferred investment tax credit......................     (3,131)      (3,139)      (3,143)
      Accumulated deferred income tax.................................     47,269      (32,927)      21,215
      Asset write-offs................................................      4,817       24,079            -
      Write-off Avistar investments...................................          -       12,417            -
      Non-recurring merger costs......................................     (2,436)      17,975        6,700
      Net unrealized losses on trading and investment contracts.......    (29,513)      26,172          370
      Wholesale credit reserve........................................          -       (5,406)       8,456
      Other, net......................................................      2,083       (4,297)       (330)
      Changes in certain assets and liabilities:
        Accounts receivables..........................................     10,220       92,990      (90,680)
        Other assets..................................................    (52,655)      32,481      (32,444)
        Accounts payable..............................................     23,660     (137,073)     107,346
        Other liabilities.............................................    (82,750)      46,873       17,250
                                                                       ------------ ------------ ------------
          Net cash flows provided by operating activities.............     97,251      327,346      239,515
                                                                       ------------ ------------ ------------
Cash Flows From Investing Activities:
  Utility plant additions.............................................   (240,225)    (264,844)    (146,878)
  Redemption of short-term investments................................     76,633            -            -
  Return of principal PVNGS lessor notes..............................     17,531       16,674       16,668
  Merger acquisition costs............................................          -      (11,567)      (6,700)
  Short-term and long-term investments................................          -     (150,000)            -
  Other...............................................................    (54,366)       2,723      (20,590)
                                                                       ------------ ------------ ------------
          Net cash flows used for investing activities................   (200,427)   (407,014)     (157,500)
                                                                       ------------ ------------ ------------
Cash Flows From Financing Activities:
  Borrowings (note 4).................................................    115,000       35,000            -
  Repayments (note 4).................................................          -            -      (32,800)
  Exercise of employee stock options (note 10)........................     (2,412)      (2,179)      (1,232)
  Common stock repurchase (note 4)....................................          -            -      (27,867)
  Dividends paid......................................................    (34,226)     (31,876)     (32,265)
  Other...............................................................        108         (560)        (559)
                                                                       ------------ ------------ ------------
          Net cash flows provided by (used for) financing activities..     78,470          385      (94,723)
                                                                       ------------ ------------ ------------
Decrease in Cash and Cash Equivalents.................................    (24,706)     (79,283)     (12,708)
Beginning of Year.....................................................     28,408      107,691      120,399
                                                                       ------------ ------------ ------------
End of Year...........................................................   $  3,702     $ 28,408    $ 107,691
                                                                       ============ ============ ============
Supplemental cash flow disclosures:
  Interest paid, net of capitalized interest..........................   $ 53,041     $ 62,216    $  64,045
                                                                       ============ ============ ============
  Income taxes paid, net..............................................   $ 13,541     $ 72,146    $  50,480
                                                                       ============ ============ ============
  Long-term debt assumed for transmission line........................   $ 26,152     $      -    $       -
                                                                       ============ ============ ============
</TABLE>

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

                                      F-9
<PAGE>

                      PNM RESOURCES, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
                                                                                  As of December 31,
                                                                             --------------------------
                                                                                2002         2001
                                                                             ------------- ------------
                                                                                  (In thousands)
Common Stock Equity:
<S>                                                                            <C>          <C>
    Common Stock, no par value (note 4).....................................   $ 624,119    $  625,632
    Accumulated other comprehensive income, net of tax......................     (94,721)      (28,996)
    Retained earnings.......................................................     444,651       415,388
                                                                             ------------- ------------
        Total common stock equity...........................................     974,049     1,012,024
                                                                             ------------- ------------
Minority Interest (notes 1 and 5)...........................................      11,760        11,652
                                                                             ------------- ------------
Cumulative Preferred Stock: (note 4)
    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, 2002 were 128,000..................................      12,800        12,800
                                                                             ------------- ------------
Long-Term Debt: (note 4)
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       100,025
     EIP debt due 2003-2012.................................................      26,152             -
     Other, including unamortized discounts.................................        (350)         (406)
                                                                             ------------- ------------
             Total long-term debt...........................................     980,092       953,884
                                                                             ------------- ------------
Total Capitalization........................................................ $ 1,978,701   $ 1,990,360
                                                                             ============= ============
</TABLE>

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


                                      F-10
<PAGE>



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

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                         ------------------------------------
                                                                             2002        2001         2000
                                                                         ----------- ------------ -----------
                                                                                    (In thousands)
<S>                                                                       <C>          <C>         <C>
Net Earnings Before Preferred Stock Dividends...........................  $ 64,272     $150,433    $100,946
                                                                         ----------- ------------ -----------
  Other Comprehensive Income (Loss), net of tax:

  Unrealized gain (loss) on securities:
      Unrealized holding gains arising during the period................     1,303           70       2,508
      Reclassification adjustment for losses included in net income.....      (919)        (526)     (4,887)

  Minimum pension liability adjustment..................................   (55,061)     (28,858)          -
  Mark-to-market adjustment for certain derivative transactions
      Initial implementation of SFAS 133 designated cash flow hedges....         -        6,148           -
      Change in fair market value of designated cash flow hedges........   (10,361)         345           -
      Reclassification adjustment for losses included in net income.....      (687)      (6,148)          -
                                                                         ----------- ------------ -----------
Total Other Comprehensive Loss..........................................   (65,725)     (28,969)     (2,379)
                                                                         ----------- ------------ -----------
Total Comprehensive Income (Loss).......................................   $(1,453)    $121,464    $ 98,567
                                                                         =========== ============ ===========
</TABLE>


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


                                      F-11
<PAGE>



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

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                        --------------------------------------------------
                                                             2002              2001             2000
                                                        ---------------   ---------------  ---------------
                                                             (In thousands, except per share amounts)
Operating Revenues: (notes 1 and 2)
<S>                                                         <C>              <C>              <C>
  Electric............................................      $ 895,474        $1,952,861       $1,289,192
  Gas.................................................        272,118           385,418          319,924
  Unregulated businesses..............................              -             1,538            2,158
                                                        ---------------   ---------------  ---------------
     Total operating revenues.........................      1,167,592         2,339,817        1,611,274
                                                        ---------------   ---------------  ---------------
perating Expenses:
  Cost of energy sold.................................        549,243         1,524,285          949,880
  Administrative and general..........................        140,500           155,392          147,268
  Energy production costs.............................        149,528           152,455          139,894
  Depreciation and amortization.......................        101,689            96,936           93,059
  Transmission and distribution costs.................         63,870            69,001           60,330
  Taxes, other than income taxes......................         31,333            30,302           34,405
  Income taxes (note 1 and 8).........................         22,774            88,769           53,964
                                                        ---------------   ---------------  ---------------
     Total operating expenses.........................      1,058,937         2,117,140        1,478,800
                                                        ---------------   ---------------  ---------------
     Operating income.................................        108,655           222,677          132,474
                                                        ---------------   ---------------  ---------------
Other Income and Deductions:
  Other income........................................         40,446            52,147           66,246
  Other deductions....................................        (15,059)          (67,257)         (11,950)
  Income tax (expense) benefit  (notes 1 and 8).......        (10,096)            7,706          (20,382)
                                                        ---------------   ---------------  ---------------
     Net other income and deductions..................         15,291            (7,404)          33,914
                                                        ---------------   ---------------  ---------------
     Earnings before interest charges.................        123,946           215,273          166,388
                                                        ---------------   ---------------  ---------------
Interest Charges:
  Interest on long-term debt (note 4).................         56,409            62,716           62,823
  Other interest charges..............................          5,321             2,124            2,619
                                                        ---------------   ---------------  ---------------
     Net interest charges.............................         61,730            64,840           65,442
                                                        ---------------   ---------------  ---------------
Net Earnings Before Preferred Stock Dividends.........         62,216           150,433          100,946
Preferred Stock Dividend Requirements.................            586               586              586
                                                        ---------------   ---------------  ---------------
Net Earnings..........................................      $  61,630         $ 149,847        $ 100,360
                                                        ===============   ===============  ===============

</TABLE>

                    See disclosures regarding Public Service
             Company of New Mexico and subsidiaries included in the
                 notes to the consolidated financial statements.

                                      F-12
<PAGE>



              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                         --------------------------------------------------
                                                              2002              2001             2000
                                                         ---------------   ---------------  ---------------
                                                                          (In thousands)
<S>                                                           <C>               <C>              <C>
Balance at Beginning of Year...........................       $288,388          $296,843         $227,828
  Net earnings before preferred stock dividends........         62,216           150,433          100,946
  Dividends (note 4):
     Cumulative preferred stock........................           (586)             (586)            (586)
     Common stock......................................              -           (31,302)         (31,345)
  Dividends to Parent (note 4):
     Assets............................................        (34,880)                -                -
     Cash..............................................        (58,981)         (127,000)               -
                                                         ---------------   ---------------  ---------------
Balance at End of Year.................................       $256,157          $288,388         $296,843
                                                         ===============   ===============  ===============
</TABLE>

                                  See disclosures regarding Public Service
                         Company of New Mexico and subsidiaries included in the
                         notes to the consolidated financial statements.

                                      F-13
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
<TABLE>
<CAPTION>
                                                                                     As of December 31,
                                                                                ----------------------------
                                                                                   2002           2001
                                                                                -------------  -------------
                                                                                      (In thousands)
Utility Plant: (notes 1, 11 and 12)
<S>                                                                               <C>            <C>
  Electric plant in service...................................................    $2,301,048     $2,117,947
  Gas plant in service........................................................       615,907        575,350
  Common plant in service and plant held for future use.......................        18,137         45,223
                                                                                -------------  -------------
                                                                                   2,935,092      2,738,520
  Less accumulated depreciation and amortization..............................     1,326,286      1,251,801
                                                                                -------------  -------------
                                                                                   1,608,806      1,486,719
  Construction work in progress...............................................       159,435        246,278
  Nuclear fuel, net of accumulated amortization of $16,568 and $16,954........        26,832         26,940
                                                                                -------------  -------------
     Net utility plant........................................................     1,795,073      1,759,937
                                                                                -------------  -------------
Other Property and Investments:
  Other investments (notes 1, 6 and 12).......................................       428,823        446,784
  Non-utility property, net of accumulated depreciation of $2,000 and $1,580..           966          1,784
                                                                                -------------  -------------
     Total other property and investments.....................................       429,789        448,568
                                                                                -------------  -------------
Current Assets:
  Cash and cash equivalents...................................................         3,094         17,028
  Accounts receivables, net of allowance for uncollectible accounts
      of $15,575 and  $18,025.................................................        76,850         84,620
  Unbilled revenue (note 1)...................................................        49,079         62,377
  Intercompany receivable.....................................................         4,593              -
  Other receivables...........................................................        46,853         51,883
  Inventories (note 1)........................................................        37,228         36,483
  Regulatory assets (note 3)..................................................        24,027         10,473
  Short-term investments (note 1).............................................             -         45,111
  Other current assets........................................................        22,872         23,292
                                                                                -------------  -------------
     Total current assets.....................................................       264,596        331,267
                                                                                -------------  -------------
Deferred charges:
  Regulatory assets (note 3)..................................................       196,242        195,367
  Prepaid retirement cost (note 9)............................................        39,665         18,273
  Other deferred charges......................................................       129,083         33,376
                                                                                -------------  -------------
     Total deferred charges...................................................       364,990        247,016
                                                                                -------------  -------------
                                                                                  $2,854,448     $2,786,788
                                                                                =============  =============
</TABLE>
                                   See disclosures regarding Public Service
                           Company of New Mexico and subsidiaries included in
                           the notes to the consolidated financial statements.


                                      F-14
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                         CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
                                                                                     As of December 31,
                                                                                -----------------------------
                                                                                   2002            2001
                                                                                --------------  -------------
                                                                                        (In thousands)
Capitalization:
  Common Stockholders' Equity:
<S>                                                                                <C>            <C>
    Common stock outstanding - 39,118 shares (note 4)..........................    $ 195,589      $ 195,589
    Paid-in capital............................................................      430,043        430,043
    Accumulated other comprehensive loss, net of tax (note 3)..................      (94,130)       (28,996)
    Retained earnings..........................................................      256,157        288,388
                                                                                --------------  -------------
       Total common stockholders' equity.......................................      787,659        885,024
  Minority interest (notes 1 and 5)............................................       11,760         11,652
  Cumulative preferred stock without mandatory redemption
    requirements (note 4)......................................................       12,800         12,800
  Long-term debt (note 4)......................................................      953,940        953,884
                                                                                --------------  -------------
     Total capitalization......................................................    1,766,159      1,863,360
                                                                                --------------  -------------
Current Liabilities:
  Short-term debt..............................................................      150,000         35,000
  Intercompany debt............................................................       28,436              -
  Accounts payable.............................................................       95,714         76,141
  Intercompany accounts payable................................................       34,468              -
  Accrued interest and taxes (notes 1 and 8)...................................       36,450         72,022
  Other current liabilities....................................................       87,701        149,454
                                                                                --------------  -------------
     Total current liabilities.................................................      432,769        332,617
                                                                                --------------  -------------
Deferred Credits:
  Accumulated deferred income taxes (notes 1 and 8)............................      128,383        120,153
  Accumulated deferred investment tax credits (notes 1 and 8)..................       41,583         44,714
  Regulatory liabilities (note 3)..............................................       52,019         54,295
  Regulatory liabilities related to accumulated deferred income tax (note 3)...       14,137         14,163
  Accrued post-retirement benefit cost (note 9)................................       17,335         14,929
  Other deferred credits (note 13).............................................      402,063        342,557
                                                                                --------------  -------------
     Total deferred credits....................................................      655,520        590,811
                                                                                --------------  -------------
Commitments and Contingencies (note 12)........................................            -              -
                                                                                --------------  -------------
                                                                                 $ 2,854,448     $2,786,788
                                                                                ==============  =============
</TABLE>

                    See disclosures regarding Public Service
             Company of New Mexico and subsidiaries included in the
                 notes to the consolidated financial statements.

                                      F-14
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                                     ----------------------------------------
                                                                       2002          2001          2000
                                                                     ------------  ------------  ------------
                                                                                  (In thousands)
Cash Flows From Operating Activities:
<S>                                                                    <C>           <C>           <C>
  Net earnings before preferred stock dividends.....................   $ 62,216      $150,433      $100,946
  Adjustments to reconcile net earnings to net cash flows
    from operating activities:
      Depreciation and amortization.................................    114,695       106,768       103,829
      Accumulated deferred investment tax credit....................     (3,131)       (3,139)       (3,143)
      Accumulated deferred income tax...............................     49,338       (32,927)       21,215
      Asset write-offs..............................................      4,817        24,079             -
      Write-off Avistar investments.................................          -        12,417             -
      Non-recurring merger costs....................................     (2,436)       17,975         6,700
      Net unrealized (gains) losses on trading and investment
        contracts...................................................    (29,513)       26,172           370
      Wholesale credit reserve......................................          -        (5,406)        8,456
      Other, net....................................................      3,924        (4,297)        (330)
      Changes in certain assets and liabilities:
        Accounts receivables........................................     10,220        92,990       (90,680)
        Other assets................................................    (72,293)       42,432       (32,444)
        Accounts payable............................................     19,573      (137,073)      107,346
        Other liabilities...........................................    (96,430)       46,873        17,250
                                                                     ------------  ------------  ------------
              Net cash flows provided by operating activities.......     60,980       337,297       239,515
                                                                     ------------  ------------  ------------
Cash Flows From Investing Activities:
  Utility plant additions...........................................   (219,821)     (264,844)     (146,878)
  Redemption of short-term investments..............................      45,621            -             -
  Return of principal PVNGS lessor notes............................      17,531       16,674        16,668
  Merger acquisition costs..........................................          -       (11,567)       (6,700)
  Short-term and long-term investments..............................          -       (45,000)            -
  Other.............................................................    (32,097)        3,392       (20,590)
                                                                     ------------  ------------  ------------
              Net cash flows used for investing activities..........   (188,766)     (301,345)     (157,500)
                                                                     ------------  ------------  ------------
Cash Flows From Financing Activities:
  Borrowings (note 4)...............................................    115,000        35,000             -
  Repayments (note 4)...............................................          -             -       (32,800)
  Exercise of employee stock options (note 10)......................          -        (2,179)       (1,232)
  Common stock repurchase (note 4)..................................          -             -       (27,867)
  Dividends paid....................................................    (59,567)     (158,876)      (32,265)
  Other.............................................................        108          (560)         (559)
  Change in intercompany accounts...................................     58,311             -             -
                                                                     ------------  ------------  ------------
              Net cash flows provided by (used for) financing
                 activities.........................................    113,852      (126,615)      (94,723)
                                                                     ------------  ------------  ------------
Decrease in Cash and Cash Equivalents...............................    (13,934)      (90,663)      (12,708)
Beginning of Year...................................................     17,028       107,691       120,399
                                                                     ------------  ------------  ------------
End of Year.........................................................   $  3,094      $ 17,028      $107,691
                                                                     ============  ============  ============
Supplemental cash flow disclosures:
  Interest paid, net of capitalized interest........................   $ 53,350      $ 62,216      $ 64,045
                                                                     ============  ============  ============
  Income taxes paid, net............................................   $  9,901      $ 72,146      $ 50,480
                                                                     ============  ============  ============
  Non-cash dividends to parent......................................   $ 34,880      $      -      $      -
                                                                     ============  ============  ============

</TABLE>

                    See disclosures regarding Public Service
               Company of New Mexico and subsidiaries included in
               the notes to the consolidated financial statements.

                                      F-15
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
                                                                                    As of December 31,
                                                                            ---------------------------------
                                                                                 2002              2001
                                                                            ---------------   ---------------
                                                                                     (In thousands)
Common Stock Equity:
<S>                                                                             <C>               <C>
    Common stock outstanding, par value $5 per share (note 4)..............     $ 195,589         $ 195,589
    Paid-in capital........................................................       430,043           430,043
    Accumulated other comprehensive income, net of tax.....................       (94,130)          (28,996)
    Retained earnings......................................................       256,157           288,388
                                                                            ---------------    --------------
        Total equity.......................................................       787,659           885,024
                                                                            ---------------    --------------
Minority Interest (notes 1 and 5)..........................................        11,760            11,652
                                                                            ---------------    --------------
Cumulative Preferred Stock: (note 4)
    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, 2002 were 128,000.................................        12,800            12,800
                                                                            ---------------    --------------
Long-Term Debt: (note 4)
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           100,025
     Other, including unamortized discounts................................          (350)             (406)
                                                                            ---------------    --------------
             Total long-term debt..........................................       953,940           953,884
                                                                            ---------------    --------------
Total Capitalization.......................................................   $ 1,766,159       $ 1,863,360
                                                                            ===============    ==============
</TABLE>
                                  See disclosures regarding Public Service
                         Company of New Mexico and subsidiaries included in the
                         notes to the consolidated financial statements.

                                      F-17

<PAGE>


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

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                       --------------------------------------
                                                                         2002         2001          2000
                                                                       -----------  ------------  -----------
                                                                                   (In thousands)

<S>                                                                      <C>          <C>          <C>
Net Earnings before preferred stock dividends.........................   $62,216      $150,433     $100,946
                                                                       -----------  ------------  -----------
  Other Comprehensive Income (Loss), net of tax:

  Unrealized gain (loss) on securities:
      Unrealized holding gains arising from the period................       861            70        2,508
      Reclassification adjustment for gains included in net income....      (919)         (526)      (4,887)

  Minimum pension liability adjustment................................   (55,061)      (28,858)           -

  Mark-to-market adjustment for certain derivative transactions
      Initial implementation of SFAS 133 designated cash flow hedges..         -         6,148            -
      Change in fair market value of designated cash flow hedges......    (9,328)          345            -
      Reclassification adjustment for losses included in net income...      (687)       (6,148)           -
                                                                       -----------  ------------  -----------
Total Other Comprehensive Loss........................................   (65,134)      (28,969)      (2,379)
                                                                       -----------  ------------  -----------
Total Comprehensive Income (Loss).....................................   $(2,918)     $121,464     $ 98,567
                                                                       ===========  ============  ===========
</TABLE>

                                 See disclosures regarding Public Service
                        Company of New Mexico and subsidiaries included in the
                        notes to the consolidated financial statements.

                                      F-18


<PAGE>


                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000

(1)    Summary of the Business and Significant Accounting Policies

Nature of Business

       PNM Resources, Inc. (the "Holding Company") is an investor-owned holding
company of energy and energy related businesses. Its principal subsidiary,
Public Service Company of New Mexico ("PNM"), is an integrated public utility
primarily engaged in the generation, transmission, distribution and sale and
marketing of electricity; transmission, distribution and sale of natural gas
within the State of New Mexico and the sale and marketing of electricity in the
Western United States. The Holding Company and its subsidiaries, including PNM,
are herein after referred to as the "Company". In addition, the Company provides
energy and utility related services under its wholly-owned subsidiary, Avistar,
Inc. ("Avistar").

       Upon the completion on December 31, 2001, of a one-for-one share exchange
between PNM and the Holding Company, the Holding Company became the parent
company of PNM. Prior to the share exchange, the Holding Company had existed as
a subsidiary of PNM. The new parent company began trading on the New York Stock
Exchange under the same PNM symbol beginning on December 31, 2001.

Presentation

       The Notes to Consolidated Financial Statements of the Company are
presented on a combined basis. The Holding Company assumed substantially all of
the corporate activities of PNM on December 31, 2001. These activities are
billed to PNM on a cost basis to the extent they are for the corporate
management of PNM. In January 2002, Avistar and certain inactive subsidiaries of
PNM were transferred by way of a dividend to the Holding Company pursuant to an
order from the New Mexico Public Regulation Commission ("PRC"). Readers of the
Notes to Consolidated Financial Statements should assume that the information
presented applies to the consolidated results of operations and financial
position of both the Holding Company and its subsidiaries and PNM, except where
the context or references clearly indicate otherwise. Discussions regarding
specific contractual obligations generally reference the company that is legally
obligated. In the case of contractual obligations of PNM, these obligations are
consolidated with the Holding Company and its subsidiaries under generally
accepted accounting principles ("GAAP"). Broader operational discussions refer
to the Company.

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").

                                      F-19
<PAGE>


                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       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 FERC, and the PRC and
its predecessor. These "regulatory assets" and "regulatory liabilities" are
enumerated and discussed in Note 3.

       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 Statement of
Financial Accounting Standards No. 101, Accounting for the Discontinuation of
Application of FASB Statement No. 71" ("SFAS 101"). The Company evaluates its
regulatory assets under Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("SFAS 144"). In 2000, the Company determined certain stranded
costs would not be recovered and recorded a charge to earnings for these amounts
recorded as stranded cost assets.

Principles of Consolidation

       The consolidated financial statements include the accounts of the Company
and subsidiaries in which it owns a majority voting interest or meets the
criteria of Emerging Issues Task Force ("EITF") 90-15, "Impact of
Non-Substantive Lessors, Residual Value Guarantees and Other Provisions in
Leasing Transactions." All significant intercompany transactions and balances
have been eliminated. There were no intercompany transactions between the
Holding Company and PNM in 2001 and 2000, except the dividend, consolidation of
PVNGS capital trust and minority interest described in Note 5.

Financial Statement Preparation

       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.

Cash and Cash Equivalents

       All liquid investments with maturities of three months or less at the
date of purchase are considered cash equivalents.


                                      F-20
<PAGE>

                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

Utility Plant

       Utility plant, with the exception of Palo Verde Nuclear Generating
Station ("PVNGS") Unit 3, a portion San Juan Generating Station ("SJGS") Unit 4
and PNM'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. In 1989, PVNGS Unit 3 and a portion of SJGS Unit 4 were
excluded from New Mexico rate base. As a result, PNM wrote-down $17.4 million of
its carrying cost related to these assets. In 1993, PNM announced specific
actions determined to be necessary in order to accelerate PNM's preparation for
the competitive electric energy market. As part of this announcement, PNM stated
its intention to attempt to sell PVNGS Unit 3. As a result, PNM wrote-down PVNGS
Unit 3 by $181.3 million based on the estimated net realizable value of the
asset. Since that time, PNM has decided not to sell PVNGS Unit 3. In connection
with a rate reduction in 1994, PNM wrote down $131.6 million of its owned
interest in Units 1 and 2.

       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 regulated property
in the normal course of business are credited or charged to the accumulated
provision for depreciation.

Allowance For Funds Used During Construction ("AFUDC")

       The calculation of AFUDC is only permitted if a rate order exists that
provides recovery. AFUDC uses a weighted average cost of capital. PNM did not
calculate AFUDC on construction projects in 2002, 2001 or 2000.

Capitalized Interest

       SFAS 34, "Capitalization of Interest Costs" requires that interest cost
be capitalized as part of the historical cost of acquiring certain assets and is
calculated using only the cost of borrowing. Under GAAP, interest can only be
capitalized on non-SFAS 71 assets. PNM capitalizes interest on its generation
projects not included in rate base that are under construction in which ground
has been broken for the project, i.e. construction activities are underway. The
interest cost to be capitalized is theoretically that portion of interest
expense that could have been avoided if construction expenditures were not made.
The rate used for capitalization is the rate for borrowings specific to the
project. If there are no specific borrowings, the weighted average borrowing
rate for the Company is used. PNM has not borrowed any funds specifically for
any projects; therefore interest is being capitalized at the overall weighted
average borrowing rate of 6.6%. PNM's capitalized interest was $6.4 million in
2002. No interest was capitalized in 2001 or 2000.

Inventory

       Inventory consists principally of materials and supplies, natural gas
held in storage for eventual resale, and coal held for use in electric
generation.

                                      F-21
<PAGE>

                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       Generally, materials and supplies include the costs of transmission,
distribution and generating plant materials. Materials and supplies are charged
to inventory when purchased and are expensed or capitalized as appropriate when
issued. Materials and supplies are valued using an average costing method.
Obsolete materials and supplies are immediately expensed when identified.

       Gas in underground storage is valued using a weighted-average inventory
method. Withdrawals are charged to sales service customers through the Purchased
Gas Adjustment Clause ("PGAC"). Adjustments to gas in underground storage due to
migration are charged to the PGAC and are based on a PRC pre-approved percentage
of injections.

       Coal is valued using a rolling weighted average costing method that is
updated based on the current period cost per tons. Periodic aerial surveys are
performed and any necessary adjustments are expensed as identified.

       Inventories consisted of the following at December 31, (in thousands).

                                                     2002         2001
                                                 ------------- ------------

             Coal...............................      $12,678      $12,960
             Gas in underground storage.........        2,001        3,664
             Materials and supplies.............       22,551       19,859
                                                 ------------- ------------
                                                      $37,230      $36,483
                                                 ============= ============

Investments

       The Company's investments are comprised of U.S., state, and municipal
government obligations and corporate securities. Investments with maturities of
less than one year are considered short-term and are carried at fair value. All
investments are held in the Company's name and are in the custody of major
financial institutions. The specific identification method is used to determine
the cost of securities disposed of, with realized gains and losses reflected in
other income and expense. At December 31, 2002, all of the Company's investments
were classified as available for sale. Unrealized gains and losses on these
investments are included as a separate component of stockholders' equity, net of
any related tax effect.

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 adjustments for differences in gas purchase costs
that are above or below levels included in base rates but are recoverable under
the PGAC administered by the PRC. The Company recognizes this adjustment when
PNM is permitted to bill under PRC guidelines.

       However, the determination of the energy sales to individual customers is
based on the reading of their meters, which occurs on a systematic basis
throughout the month. At the end of each month, amounts of energy delivered to
customers since the date of the last meter reading are estimated and the
corresponding unbilled revenue is estimated. The cycle meter reading results in

                                      F-22
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

unbilled consumption between the date of the last meter reading in a particular
month and the end of the month. Unbilled electric revenue is estimated each
month based on the daily generation volumes, estimated customer usage by class,
weather factors, line losses and applicable customer rates based on regression
analyses reflecting significant historical trends and experience.

       The Company purchases gas on behalf of sales-service customers while
other marketers or producers purchase gas on behalf of transportation service
customers. The Company collects a cost of service revenue for the
transportation, delivery, and customer service provided to these customers.
Sales-service tariffs are subject to the terms of the PGAC while transportation
service customers are metered and billed on the last day of the month.
Therefore, the Company estimates unbilled decatherms and cost of service
revenues for sales-service customers only.

       The unbilled decatherms are based on consumption estimates and the
associated cost of service revenue for the period. A cycle bill contains an
amount for both the current period's consumption and the prior period's
consumption. The unbilled portion that is recorded is estimated as a percentage
of the next month's budgeted cycle billings. These budgets are prepared using
historical data adjusted for known trends, including prior period consumption.
Adjustments are also made to the budgeted cycle billings for weather variations
above or below normal, customer growth, and any pricing changes by customer rate
and revenue class. Any differences between the estimate and the actual cycle
billings are recorded in the month billed.

       The Company's Generation and Marketing Operations record operating
revenues to the Utility Operations and to third parties in the period of
delivery or as services are provided. These electricity sales are recorded as
operating revenues while the electricity purchases are recorded as costs of
energy sold. These amounts are recorded on a gross basis, because the Company
does not act as an agent or broker for these merchant energy contracts but takes
title and has the risks and rewards of ownership. 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 Marketing Operations
transactions that are net settled, are recorded gross in operating revenues and
fuel and purchased power expense.

       The Company enters into merchant energy contracts to take advantage of
market opportunities associated with the purchase and sale of electricity.
Unrealized gains and losses resulting from the impact of price movements on the
Company's derivative energy contracts that are not deemed normal purchases and
sales or hedges are recognized as adjustments to Generation and Marketing
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-23
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       However, in accordance with the Western Systems Power Pool contract,
these revenues are billed in the month subsequent to their delivery.
Consequently, wholesale power marketing revenues for the last month in any
reporting period are unbilled when reported.

       Unbilled utility revenues and unbilled wholesale power marketing revenues
are combined and specifically identified in the consolidated balance sheets.

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. The costs are deferred until the period in which they are billed or
credited to customers. The Company's gas purchase costs are recoverable under a
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:

                                             2002        2001        2000
                                          -----------  ----------  ----------

       Electric plant..................       3.42%       3.39%       3.42%
       Gas plant.......................       3.02%       3.21%       3.28%
       Common plant....................       7.34%       6.92%       6.75%

       The provision for depreciation of certain equipment is 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.

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
early 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-24
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

Financial Instruments

       In December 1998, the EITF reached consensus on EITF Issue No. 98-10
which requires that energy trading contracts 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. (See Note 16 for further discussion).

       The Company implemented SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"), as amended, on January 1,
2001. SFAS 133, as amended, establishes accounting and reporting standards
requiring derivative instruments to be recorded in the balance sheet as either
an asset or liability measured at their fair value. SFAS 133, as amended, also
requires that changes in the derivatives' fair value be recognized currently in
earnings unless specific hedge accounting or normal purchase and sale 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. 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. All energy
contracts marked-to-market under EITF 98-10 were subject to mark-to-market
accounting upon adoption of SFAS 133 (see further discussion in Note 16).

Stock Options

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

       SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. The Company
has elected to remain on its current method of accounting as described above,
and has adopted the disclosure requirements of SFAS No. 123 only (see further
discussion in Note 16).

                                      F-25
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       At December 31, 2002 the Company had three stock-based employee
compensation plans of which options continue to be granted under only two of the
plans. These plans are described more fully in Note 10. Had compensation expense
for the Company's stock options been recognized based on the fair value on the
grant date under the methodology prescribed by SFAS No. 123, 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):

                                                  Year Ended December 31,
                                            ------------------------------------
                                               2002         2001         2000
                                            ----------  -----------  -----------
Net earnings: (available for common).......  $63,686     $149,847     $100,360
Deduct:  Total stock-based employee
   compensation expense determined under
   fair value based method for all awards,
   net of related tax effects..............   (4,422)      (3,351)      (3,578)
                                            ----------  -----------  -----------
Pro forma net earnings.....................  $59,264     $146,496     $ 96,782
                                            ==========  ===========  ===========
Earnings per share:
    Basic - as reported....................   $  1.63     $  3.83       $  2.54
                                            ==========  ===========  ===========
    Basic - pro forma......................   $  1.51     $  3.74       $  2.45
                                            ==========  ===========  ===========
    Diluted - as reported..................   $  1.61     $  3.77       $  2.53
                                            ==========  ===========  ===========
    Diluted - pro forma....................   $  1.50     $  3.69       $  2.44
                                            ==========  ===========  ===========

Income Taxes

       The Company accounts for income taxes in accordance with the provisions
of SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), which uses the
asset and liability method for accounting for income taxes. Under SFAS 109,
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying value of existing assets and liabilities and their respective tax
basis. Current PRC approved rates include the tax effects of the majority of
these differences. SFAS No. 109 requires that rate-regulated enterprises record
deferred income taxes for temporary differences accorded flow-through treatment
at the direction of a regulatory commission. The resulting deferred tax assets
and liabilities are recorded at the expected cash flow to be reflected in future
rates. Since the PRC has consistently permitted the recovery of previously
flowed-through tax effects, the Company has established regulatory liabilities
and assets offsetting such deferred tax assets and liabilities. 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.

                                      F-26
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

Asset Impairment

       The Company evaluates the carrying value of regulatory and tangible
long-lived assets in relation to their future undiscounted cash flows to assess
recoverability in accordance with SFAS 144. 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.

Change in Presentation

       Certain prior year amounts have been reclassified to conform to the 2002
financial statement presentation.

(2)    Segment Information

       As it currently operates, the Company's principal business segments are
Utility Operations, which include Electric Services ("Electric") and Gas
Services ("Gas"), Generation and Marketing Operations ("Generation and
Marketing") and Unregulated Operations ("Unregulated"). Electric 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.

                               UTILITY OPERATIONS

Electric

       PNM provides retail electric service, regulated by the PRC, to a large
area of north central New Mexico, including the cities of Albuquerque and Santa
Fe, and certain other areas of New Mexico. PNM owns or leases 2,890 circuit
miles of transmission lines, interconnected with other utilities in New Mexico
and south and east into Texas, west into Arizona, and north into Colorado and
Utah.

       Electric exclusively acquires its electricity sold to retail customers
from Generation and Marketing. Intersegment purchases from Generation and
Marketing 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 delivery and production that includes
certain generation assets that are part of Generation and Marketing plus a rate
of return.

Gas

       PNM's gas operations distribute natural gas to most of the major
communities in New Mexico, including Albuquerque and Santa Fe. PNM's customer
base includes both sales-service customers and transportation-service customers.

                                      F-27
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

Customer rates for gas service are set by the PRC based on the recovery of the
cost of delivering gas plus a rate of return, with the cost of gas procured for
customers being passed through to customers through a purchased gas adjustment
clause ("PGAC").

       In 2000 and the first quarter of 2001, Generation and Marketing procured
its gas fuel supply from Gas. Beginning with the second quarter of 2001,
Generation and Marketing began procuring its gas supply independently of Gas and
contracted with Gas for transportation services only.

                       GENERATION AND MARKETING OPERATIONS

       Generation and Marketing serves four principal markets. These include
sales to PNM's Utility Operations to cover retail electric demand, sales to
firm-requirement 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. In addition to
generation capacity, PNM purchases power in the open market. As of December 31,
2002, the total net generation capacity of facilities owned or leased by PNM was
1,742 MW, including a 132 MW power purchase contract accounted for as an
operating lease.

                              UNREGULATED AND OTHER

       The Holding Company's wholly-owned subsidiary, Avistar, was formed in
August 1999 as a New Mexico corporation and is currently engaged in certain
unregulated and non-utility businesses. Unregulated also includes immaterial
corporate activities and eliminations. The immaterial corporate activities were
assumed by the Holding Company on December 31, 2001. Avistar was transferred by
a way of a dividend to the Holding Company by its subsidiary, PNM.

                             RISKS AND UNCERTAINTIES

       The Company's future results may be affected by changes in regional
economic conditions; the outcome of labor negotiations with union employees;
fluctuations in fuel, purchased power and gas prices; the actions of utility
regulatory commissions; changes in law and environmental regulations; the
performance of PNM's generating units and the success of any generation
expansion and external factors such as the weather, including the drought
conditions currently prevalent in New Mexico. In the early 1990s, federal and
state policymakers began investigating and implementing major reforms regarding
the public utility industry, designed to transform electric generation into a
competitive business separate from the regulated monopoly businesses of
transmission and distribution, at least on a functional basis. These reforms
introduced new risks into the Company's business which had the potential to
impact future results, such as the Company's ability to recover stranded costs,
incurred previously in providing power generation to electric service customers,
the market price of electricity and natural gas costs, 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

                                      F-28
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

resources. However, as a result of the energy crisis in California and the
Global Electric Agreement (see Note 12), plans for restructuring the industry
are undergoing fundamental review. Legislation to repeal existing law providing
for customer choice and competition in retail electric power supplies, currently
scheduled to commence in 2007, is being considered in the 2003 session of the
New Mexico Legislature. This legislation, SB 718, has passed the Senate on a
37-2 vote and is currently awaiting action in the House of Representatives. Any
reforms that may be made to existing plans for restructuring the industry will
also affect the Company's future results. In addition to the fate of retail
electric competition in New Mexico, the Company's future results will continue
to be affected on the wholesale side by the market price of electricity and
natural gas costs, and the results of federal reforms regarding the wholesale
market and transmission service.

       Summarized financial information by business segment for 2002, 2001 and
2000 is as follows:
<TABLE>
<CAPTION>
                                             Utility
                                  ------------------------------    Generation   Unregulated
                                  Electric      Gas       Total    and Marketing  and Other   Consolidated
                                  --------  ---------  ---------   ------------- -----------  ------------
                                                            (In thousands)
Twelve Months Ended:
--------------------------
2002:
Operating revenues:
<S>                                <C>       <C>         <C>          <C>            <C>        <C>
   External customers............. 570,089   272,118     842,207      325,385        1,404      1,168,996
   Intersegment revenues..........     707         -         707      348,935     (349,642)             -
Depreciation and amortization.....  34,025    20,964      54,989       43,837        3,583        102,409
Interest income...................     436       436         872        1,995       42,087         44,954
Interest charges..................  23,640    13,546      37,186       16,625        7,601         61,412
Operating income (loss)...........  60,449    18,652      79,101       24,737      (2,064)        101,774
Income tax expense................  21,731     4,351      26,082        4,596        2,353         33,031
Segment net income................  33,163     6,640      39,803        7,013       17,456         64,272

Total assets...................... 761,694   505,692   1,267,386    1,124,387      635,134      3,026,907
Gross property additions..........  56,698    46,676     103,374      116,447       20,404        240,225

Twelve Months Ended:
--------------------------
2001:
Operating revenues:
   External customers............. 559,226   385,418      944,644   1,393,635        1,538      2,339,817
   Intersegment revenues..........     707         -          707     341,608     (342,315)             -
Depreciation and amortization.....  32,666    21,465       54,131      42,766           39         96,936
Interest income...................   1,626       596        2,222       3,215       43,304         48,741
Interest charges..................  19,868    11,807       31,675      28,282        4,883         64,840
Operating income (loss)...........  57,417    17,730       75,147     150,565       (3,035)       222,677
Income tax expense (benefit)......  23,679     3,469       27,148      73,525      (19,610)        81,063
Segment net income (loss).........  36,130     5,498       41,628     112,194       (3,389)       150,433

Total assets...................... 749,948   469,410    1,219,358   1,430,917      263,513      2,913,788
Gross property additions..........  74,316    48,978      123,294     126,605       14,945        264,844

</TABLE>

                                      F-29
<PAGE>

                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>
                                             Utility
                                  ------------------------------    Generation   Unregulated
                                  Electric      Gas       Total    and Marketing  and Other   Consolidated
                                  --------  ---------  ---------   ------------- -----------  ------------
                                                            (In thousands)
Twelve Months Ended:
--------------------------
2000:
Operating revenues:
<S>                                 <C>       <C>         <C>         <C>            <C>       <C>
   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.....   31,480    19,994      51,474      41,559           26        93,059
Interest income...................    1,158         9       1,167       1,708       45,820        48,695
Interest charges..................   17,771    11,089      28,860      37,058         (476)       65,442
Operating income (loss)...........   56,351    19,104      75,455      78,451      (21,432)      132,474
Income tax expense................   27,419     7,588      35,007      28,337       11,002        74,346
Segment net income................   38,999    11,208      50,207      49,372        1,367       100,946
Unaudited:
Total assets......................  698,979   516,430   1,215,409   1,400,910      277,914     2,894,233
Gross property additions..........   51,815    40,418      92,233      53,025        1,620       146,878


</TABLE>




                           (Intentionally left blank)



                                      F-30

<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

(3)    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:
<TABLE>
<CAPTION>
                                                                2002             2001
                                                            -------------   --------------
                                                                    (In thousands)
    Assets:
    Current:
<S>                                                              <C>              <C>
         PGAC.............................................       $23,907          $ 9,065
         Gas Take-or-Pay Costs............................           120            1,408
                                                            -------------   --------------
            Subtotal......................................        24,027           10,473
                                                            -------------   --------------
    Deferred:
         Deferred Income Taxes............................        33,321           33,632
         Loss on Reacquired Debt..........................         5,978            6,798
         Other............................................         2,312              710
                                                            -------------   --------------
            Subtotal......................................        41,611           41,140
         Stranded and Transition Assets...................       154,672          154,227
                                                            -------------   --------------
            (see discussion below)
            Total Deferred Assets.........................       196,283          195,367
                                                            -------------   --------------
            Total Assets..................................       220,310          205,840
                                                            -------------   --------------
    Liabilities:
    Deferred:
         Deferred Income Taxes............................       (38,941)         (41,915)
         Unrealized loss on PVNGS decommissioning trust...        (3,813)          (2,137)
         Gain on Reacquired Debt..........................        (1,495)          (1,640)
         Other............................................        (1,755)          (2,119)
                                                            -------------   --------------
            Subtotal......................................       (46,004)         (47,811)
         Stranded and Transition Liabilities..............       (20,152)         (20,647)
                                                            -------------   --------------
            (see discussion below)
            Total Deferred Liabilities....................       (66,156)         (68,458)
                                                            -------------   --------------
            Net Regulatory Assets ........................     $ 154,154        $ 137,382
                                                            =============   ==============
</TABLE>

       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. The Company does not receive or pay a material rate
of return on these regulatory assets and regulatory liabilities.

                                      F-31
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       The Restructuring Act, as amended, 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 or determined to be recoverable in
rates, in excess of the expected competitive market price of such 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, as amended, 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 $135 million of costs associated with the unregulated
businesses under the Restructuring Act, as amended, were established as
regulatory assets. Because of the Company's belief that recovery through rates
is probable as established by law, these assets continue to be classified as
regulatory assets, although the Company's Generation and Marketing Operations
has discontinued SFAS 71 and adopted SFAS 101. On October 10, 2002, the Company
and several other parties signed the Global Electric Agreement which provides
for a five year rate path for the Company's New Mexico retail electric customers
beginning in September 2003 and seeks a repeal of a majority of the
Restructuring Act, as amended. (See Note 12 for further discussion.) As a
result, the Company expects to re-apply SFAS 71 to certain Generation and
Marketing Operations upon approval by the PRC of the Global Electric Agreement.

       In 2001, the Company recognized the write-off of $13.0 million of
non-recoverable coal mine decommissioning costs previously established as a
regulatory asset. As a result of the Company's evaluation of its regulatory
strategy in light of its holding company filing in May 2001, management
determined that it would not seek recovery of a portion of its previously
established stranded costs that were not a component of retail ratemaking. The
Company may recover the remaining $100 million of costs associated with coal
mine decommissioning that are attributed to New Mexico retail customers in its
Global Electric Agreement which provides for a 17-year recovery of these costs
beginning in September 2003.

       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 are presently scheduled
to be recovered beginning 2007 through 2012 by means of a separate wires charge.
Transition costs include professional fees, financing costs including
underwriting fees, costs relating to the transfer of assets, the cost of
management information system changes including billing system changes and
public and customer communications costs. (See "Note 12 Global Electric
Agreement" for further developments.)

                                      F-32
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       On December 31, 2001, the Company implemented a holding company structure
without separation of supply service and energy-related service assets from
distribution and transmission service assets as permitted under the amended
Restructuring Act. The Company is unable to predict the form its further
restructuring will take under delayed implementation of customer choice, or if
further restructuring will take place under any repeal of the Restructuring Act.

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

                                                         2002           2001
                                                      -----------   -----------
                                                           (In thousands)
       Assets:
       Transition costs..............................  $  16,720     $  15,908
       Mine reclamation costs........................    100,877       100,877
       Deferred income taxes.........................     35,708        35,775
       Loss on reacquired debt.......................      1,367         1,667
                                                       ----------   -----------
            Subtotal.................................    154,672       154,227
                                                       ----------   -----------
       Liabilities:
       Deferred income taxes.........................    (14,137)      (14,163)
       PVNGS prudence audit..........................     (4,682)       (5,058)
       Settlement due customers......................     (1,325)       (1,408)
       Gain on reacquired debt.......................         (8)          (18)
                                                       ----------   -----------
            Subtotal.................................    (20,152)      (20,647)
                                                       ----------   -----------
            Net Stranded cost and transition cost....  $ 134,520     $ 133,580
                                                       ==========   ===========

       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, except for the transition
costs (see further discussion in Note 12).

(4)    Capitalization

Common Stock

       The number of authorized shares of common stock of the Holding Company is
120 million shares with no par value. The number of shares outstanding was
39,117,799 as of December 31, 2002 and 2001. The only change to common stock of
the Holding Company in 2002 was for the exercise of stock options of $1.8
million. In 2001, the exercise of stock options of $2.2 million was the only
change to additional paid-in-capital of PNM. There were no changes to common
stock or additional-paid-in-capital of PNM in 2002.

       The declaration of common dividends is dependent upon a number of factors
including the ability of the Holding Company's subsidiaries to pay dividends.
Currently, PNM is the Holding Company's primary source of dividends. As part of
the order approving the formation of the Holding Company, the PRC placed certain
restrictions on the ability of PNM to pay dividends to its parent.

                                      F-33
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       The PRC order imposed the following conditions regarding dividends paid
by PNM to the holding company: PNM can not pay dividends which cause its debt
rating to go below investment grade; and PNM can not pay dividends in any year,
as determined on a rolling four quarter basis, in excess of net earnings without
prior PRC approval. Additionally, PNM has various financial covenants which
limit the transfer of assets, through dividends or other means.

       In addition, the ability of the Company to declare dividends is dependent
upon the extent to which cash flows will support dividends, the availability of
retained earnings, the financial circumstances and performance, the PRC's
decisions in various regulatory cases currently pending and which may be
docketed in the future, the effect of deregulating generation markets and market
economic conditions generally. Conditions imposed by the PRC on holding company
formation, future growth plans and the related capital requirements and standard
business considerations may also affect the Company's ability to pay dividends.

       Consistent with the PRC's holding company order, PNM paid dividends of
$127.0 million to the Company on December 31, 2001. On March 4, 2002, the PNM
board of directors declared an additional dividend of approximately $5.5
million, which was paid March 19, 2002. On June 10, 2002, the PNM board of
directors declared a dividend of $24.7 million, which was paid on June 28, 2002.

       On February 18, 2003, the Holding Company's board of directors approved a
4.5 percent increase in the common stock dividend. The increase raised the
quarterly dividend to $0.23 per share, for an indicated annual dividend of $0.92
per share.

       On August 8, 2000, PNM's board of directors approved a plan to repurchase
up to $35 million of PNM's common stock through the end of the first quarter of
2001. From August 8, 2000 through December 31, 2000, PNM repurchased an
additional 417,900 shares of its outstanding common stock at a cost of $9.0
million.

Cumulative Preferred Stock

       No Holding Company preferred stock is outstanding. The Holding Company's
restated articles of incorporation authorize 10 million shares of preferred
stock, which may be issued without restriction. The number of authorized shares
of PNM cumulative preferred stock is 10 million shares. PNM has 128,000 shares,
1965 Series, 4.58%, par 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 the holders of common
stock in the event of any liquidation or dissolution or distribution of assets
of PNM. In addition, the 1965 Series is not entitled to a sinking fund and
cannot be converted into any other class of stock of PNM.

                                      F-34
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

Long-Term Debt

       On March 11, 1998, PNM modified its 1947 Indenture of Mortgage and Deed
of Trust so that no future bonds can be issued under the mortgage. While first
mortgage bonds continue to serve as collateral for Pollution Control Bonds
("PCBs") in the outstanding principal amount of $111 million, the lien of the
mortgage covers only PNM's ownership interest in PVNGS. Senior unsecured notes
("SUNs"), which were issued under a senior unsecured note indenture, serve as
collateral for PCBs in the outstanding principal amount of $463.3 million. With
the exception of the $111 million of PCBs secured by first mortgage bonds, the
SUNs are and will be the senior debt of PNM.

       In August 1998, PNM 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. In 1999, PNM retired $31.6 million of its 7.10% SUNs through open
market purchases, utilizing the funds from operations and the funds from
temporary investments leaving an outstanding principal balance of $268.4
million. In January 2000, PNM 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 leaving an outstanding principal balance of
$100.0 million. The gains recognized on these purchases were immaterial.

       On December 20, 2002, the Holding Company acquired the equity interest of
the grantor trust that owns 60% of the EIP transmission line and related
activities. As a result, $26.1 million of related debt was brought on to the
consolidated balance sheet. This debt was previously disclosed and reported as
off balance sheet debt. The EIP debt bears interest at the rate of 10.25%,
requires semi-annual principal and interest payments and matures on April 1,
2012.

Revolving Credit Facility and Other Credit Facilities

       At December 31, 2002, PNM had a $195 million unsecured revolving credit
facility (the "Facility") with an expiration date of December 18, 2003. PNM must
pay commitment fees of 0.2% per year on the unused amount of the Facility. PNM
must also pay a utilization fee of .125% for all borrowings in excess of 33% of
the committed amount. PNM also had $20 million in local lines of credit. In
addition, the Holding Company has a $20 million reciprocal borrowing agreement
with PNM and $15 million in local lines of credit.

       There were $150 million in outstanding borrowings bearing interest at a
weighted average interest rate of 2.759% under the Facility as of December 31,
2002. On January 31, 2003, this amount was refunded at an interest rate of
2.325%. PNM was in compliance with all covenants under the Facility.

                                      F-35
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

(5)    Lease Commitments

       PNM 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 PNM's PVNGS Units 1 and 2 lease agreements limit
PNM'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.

       In 1998, PNM established PVNGS Capital Trust ("Capital Trust") for the
purpose of acquiring all the debt underlying the PVNGS leases. PNM consolidates
Capital Trust in its consolidated financial statements. The purchase was funded
with the proceeds from the issuance of $435 million of SUNS (see Note 4), which
were loaned to Capital Trust. Capital Trust then acquired and holds the debt
component of the PVNGS leases. For legal and regulatory reasons, the PVNGS lease
payment continues to be recorded and paid gross with the debt component of the
payment returned to PNM via Capital Trust. As a result, the net cash outflows
for the PVNGS lease payment were $13.2, $12.4 and $10.7 million in 2002, 2001
and 2000, respectively. The summary of PNM's future minimum operating lease
payments below reflects the net cash outflow related to the PVNGS leases.

       PNM's other significant operating lease obligations include a leased
interest in a transmission line with annual lease payments of $7.3 million and a
power purchase agreement for the entire output of a gas-fired generating plant
in Albuquerque, New Mexico, with imputed annual lease payments of $6.0 million.
On December 20, 2002, the Holding Company acquired the equity interest of the
grantor trust, which owns 60% of the EIP transmission line and related
activities.

       Future minimum operating lease payments (in thousands) at December 31,
2002 are:

             2003...................................   $ 28,216
             2004...................................     28,280
             2005...................................     29,936
             2006...................................     30,753
             2007...................................     31,638
             Later years............................    298,150
                                                     -----------
               Total minimum lease payments.........   $446,973
                                                     ===========

       Operating lease expense, inclusive of the net PVNGS lease payment, was
approximately $34.9 million in 2002, $32.7 million in 2001 and $28.5 million in
2000. Aggregate minimum payments to be received in future periods under
non-cancelable subleases are approximately $4.5 million.

                                      F-36
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

(6)    Fair Value of Financial Instruments

       The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. Although management uses its best
judgment in estimating the fair value of these financial instruments, there are
inherent limitations in any estimation technique. Therefore, the fair value
estimates presented herein are not necessarily indicative of the amounts that
the Company could realize in a current transaction.

Fair value is based on market quotes provided by the Company's investment
bankers and trust advisors. The market prices used to value PNM's mark-to-market
energy portfolio are based on closing exchange prices and over-the-counter
quotations.

       The carrying amounts reflected on the consolidated balance sheets
approximate fair value for cash, temporary instruments, receivables, and
payables due to the short period of maturity. The carrying amount and fair value
of the Company's financial instruments (including current maturities) at
December 31 are:
<TABLE>
<CAPTION>
                                                      2002                              2001
                                        ---------------------------------- -------------------------------
                                        Carrying Amount     Fair Value        Carrying       Fair Value
                                                                               Amount
                                        ----------------  ---------------- --------------- ---------------
                                                                    (In thousands)

<S>                                           <C>              <C>               <C>            <C>
Long-Term Debt..........................      $ 980,092        $1,027,435        $953,884       $ 973,569
Investment in PVNGS Lessors' Notes......      $ 368,010         $ 436,345        $387,347       $ 417,828
</TABLE>

     The amortized cost, gross unrealized gain and losses and estimated fair
value of investments in available-for-sale securities at December 31 are as
follows (in thousands):
<TABLE>
<CAPTION>
                                                               2002
                                      --------------------------------------------------------
                                      Amortized Cost  Unrealized     Unrealized    Fair Value
                                                        Gains         Losses
                                      -------------- -------------  ------------- ------------
                                                            (In thousands)
Available-for-sale:
<S>                                       <C>             <C>        <C>             <C>
Equity securities...................      $ 32,643        $4,134     $ (1,514)       $ 35,263
Mortgage-backed securities..........        33,145           410          (93)         33,462
Corporate bonds.....................        32,466           438          (19)         32,885
Municipal bonds.....................        21,229         1,394          (24)         22,599
U.S. Government securities..........        12,725           702            -          13,427
Other investments...................        14,716             -            -          14,716
                                      -------------- -------------  ------------- ------------
                                         $ 146,924        $7,078      $(1,650)      $ 152,352
                                      ============== =============  ============= ============

</TABLE>

                                      F-37
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>
                                                                   2001
                                    --------------------------------------------------------------------
                                     Amortized Cost     Unrealized        Unrealized       Fair Value
                                                          Gains            Losses
                                    ---------------- ----------------  ---------------  ----------------
                                                              (In thousands)
  Available-for-sale:
<S>                                      <C>                 <C>           <C>               <C>
  Mortgage-backed securities.......      $ 60,145            $  92         $  (250)          $ 59,987
  Equity securities................        29,965            8,700          (1,595)            37,070
  U.S. Government securities.......        36,523              282            (157)            36,648
  Corporate bonds..................        32,273               43            (143)            32,173
  Municipal bonds..................        21,420              597            (153)            21,864
  Other investments................        31,170                -               -             31,170
                                    ---------------- ----------------  ---------------  ----------------
                                        $ 211,496          $ 9,714        $ (2,298)          $218,912
                                    ================ ================  ===============  ================
</TABLE>

       At December 31, 2002, the available-for-sale securities held by the
Company had the following maturities (in thousands):

                                              Amortized Cost     Fair Value
                                             ---------------- ----------------
                                                      (In thousands)
  Within 1 year............................        $ 6,198          $ 6,203
  After 1 year through 5 years.............         41,020           41,838
  After 5 years through 10 years...........          4,343            4,511
  Over 10 years............................         48,004           49,821
  Equity securities........................         32,643           35,263
  Other investments........................         14,716           14,716
                                             ---------------- ----------------
                                                 $ 146,924        $ 152,352
                                             ================ ================

       The proceeds and gross realized gains and losses on the disposition of
available-for-sale investments are shown in the following table (in thousands).
Realized gains and losses are determined by specific identification.

                                       2002         2001          2000
                                   -----------  ------------- -------------
                                               (In thousands)
  Proceeds from sales............    $219,880      $80,943       $59,323
  Gross realized gains...........       2,537        3,077         8,516
  Gross realized losses..........      (7,624)      (7,476)       (5,341)

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

                                      F-38
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       The Company is exposed to credit risk in the event of non-performance or
non-payment by counterparties of its financial derivative instruments. The
Company uses a credit management process to assess and monitor the financial
conditions of counterparties. The Company's credit risk with its largest
counterparty as of December 31, 2002 and 2001 was $18.7 million and $7.5
million, respectively.

Natural Gas Contracts

                               Utility Operations

       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, earnings are not affected by gains or losses generated by
these instruments.

       PNM purchased gas options, a type of hedge, to protect its natural gas
customers from the risk of price fluctuation during the 2002-2003 heating
season. PNM expended $6.0 million to purchase options that limit the maximum
amount the Company would pay for gas during the winter heating season. The
Company recovered its actual hedging expenditures as a component of the PGAC
during the months of October 2002 through February 2003 in equal allotments of
$1.2 million.

                            Generation and Marketing

       Commencing in 2000, the Company's Generation and Marketing Operations
conducted a hedging program to reduce its exposure to fluctuations in prices for
natural gas used as a fuel source for some of its generation. The Generation and
Marketing Operations purchased futures contracts for a portion of its
anticipated natural gas needs in the second, third and fourth quarters of 2001.
The futures contracts capped the Company's natural gas purchase prices at $5.08
to $6.40 per MMBTU and had a notional amount of $33.6 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. The Company accounted for these transactions as cash flow
hedges; accordingly, gains and losses related to these transactions are deferred
and recorded as a component of Other Comprehensive Income. These gains and
losses were reclassified and recognized in earnings as an adjustment to the
Company's cost of fuel when the hedged transaction affected earnings. The fuel
hedge program ended in December 2001.

                                      F-39
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

Electricity Contracts

       For the year ended December 31, 2002, the Company's wholesale electric
marketing operations settled forward contracts for the sale of electricity that
generated $43.9 million of electric revenues by delivering 1.2 million MWh. The
Company purchased $74.5 million or 1.4 million MWh of electricity to support
these contractual sales and other open market sales opportunities. For the year
ended December 31, 2001, the Company's wholesale electric marketing operations
settled forward contracts for the sale of electricity that generated $77.9
million of electric revenues by delivering 2.1 million MWh. The Company
purchased $76.7 million or 1.9 million MWh of electricity to support these
contractual sales and other open market sales opportunities.

       As of December 31, 2002, the Company had open contract positions to buy
$59.7 million and to sell $56.1 million of electricity. At December 31, 2002,
the Company had a gross mark-to-market gain (asset position) on these forward
contracts of $4.8 million and gross mark-to-market loss (liability position) of
$5.7 million, with net mark-to-market loss (liability position) of $0.9 million.
The change in mark-to-market valuation is recognized in earnings each period.

       In addition, the Company's Generation and Marketing Operations entered
into forward physical contracts for the sale of the Company's electric capacity
in excess of its retail and wholesale firm requirement needs, including
reserves, or the purchase for retail needs, including reserves, when resource
shortfalls exist. The Company generally accounts for these derivative financial
instruments as normal sales and purchases as defined by SFAS 133, as amended.
The Company from time to time makes forward purchases to serve its retail needs
when the cost of purchased power is less than the incremental cost of its
generation. At December 31, 2002, the Company had open forward positions
classified as normal sales of electricity of $141 million and normal purchases
of electricity of $99 million.

       The Company's Generation and Marketing Operations, including both firm
commitments and other merchant sale 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 retail load
requirements were greater than anticipated. If the Company were required to
cover all or a portion of its net open contract position, it would have to meet
its commitments through market purchases.

Forward Starting Interest Rate Swaps

       PNM currently has $182.0 million of tax-exempt bonds outstanding that are
callable at a premium at December 31, 2002, and an additional $136 million that
become callable at a premium in August 2003. PNM intends to refinance these
bonds, assuming the interest rate of the refinancing does not exceed the current
interest rate of the bonds, and has hedged the entire planned refinancing. The
Company received regulatory approval to refund the tax-exempt bonds on October
29, 2002. This approval is effective for one year. In order to take advantage of
current low interest rates, PNM entered into five forward starting interest rate

                                      F-40
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

swaps in the fourth quarter of 2001 and the first quarter of 2002. PNM
designated these swaps as cash flow hedges. The hedged risks associated with
these instruments are the changes in cash flows related to general moves in
interest rates expected for the refinancing. The swaps effectively cap the
interest rate on the refinancing to 4.95% plus an adjustment for PNM's and the
industry's credit rating. PNM's assessment of hedge effectiveness is based on
changes in the hedge interest rates. The derivative accounting rules, as
amended, provide 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
transactions affect earnings. Any hedge ineffectiveness is required to be
presented in current earnings. For the year ended December 31, 2002, PNM
recognized $0.4 million of hedge ineffectiveness in earnings. At December 31,
2002, the fair market value of these derivative financial instruments was
approximately $18.4 million unfavorable to the Company.

       A forward starting swap does not require any upfront premium and captures
changes in the corporate credit component of an investment grade company's
interest rate as well as the underlying benchmark. The five forward starting
interest rate swaps have a termination date of May 15, 2003 for a combined
notional amount of $182.0 million. There were no fees on the transaction, as
they are imbedded in the rates, and the transaction will be cash settled on the
mandatory unwind date (strike date), corresponding to the refinancing date of
the underlying debt. The settlement will be capitalized as a cost of issuance
and amortized over the life of the debt as a yield adjustment.








                           (Intentionally left blank)



                                      F-41


<PAGE>

                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

(7)    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>
                                                              2002           2001           2000
                                                          -------------  -------------  -------------
                                                           (In thousands, except per share amounts)
Basic:
<S>                                                           <C>           <C>            <C>
Net Earnings.............................................     $ 64,272      $ 150,433      $ 100,946
Preferred Stock Dividend Requirements....................          586            586            586
                                                          -------------  -------------  -------------
Net Earnings Applicable to Common Stock..................     $ 63,686      $ 149,847      $ 100,360
                                                          =============  =============  =============
Average Number of Common Shares Outstanding..............       39,118         39,118         39,487
                                                          =============  =============  =============
Net Earnings per Share of Common Stock (Basic)...........      $  1.63       $   3.83       $   2.54
                                                          =============  =============  =============
Diluted:
Net Earnings.............................................     $ 64,272      $ 150,433      $ 100,946
Preferred Stock Dividend Requirements....................          586            586            586
                                                          -------------  -------------  -------------
Net Earnings Applicable to Common Stock..................     $ 63,686      $ 149,847      $ 100,360
                                                          =============  =============  =============
Average Number of Common Shares Outstanding..............       39,118         39,118         39,487
Diluted Effect of Common Stock Equivalents (a)...........          325            613            223
                                                          -------------  -------------  -------------
Average Common and Common Equivalent Shares
  Outstanding............................................       39,443         39,731         39,710
                                                          =============  =============  =============
Net Earnings per Share of Common Stock (Diluted).........     $   1.61       $   3.77       $   2.53
                                                          =============  =============  =============
</TABLE>

    (a)  Excludes the effect of average anti-dilutive common stock equivalents
         related to out of-the-money options of 1,602,277 and 105,336 for the
         years ended December 31, 2002 and 2000, respectively. There were no
         anti-dilutive common stock equivalents in 2001.






                           (Intentionally left blank)


                                      F-42

<PAGE>

                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

(8)    Income Taxes

       Income taxes from net earnings consist of the following
components:

<TABLE>
<CAPTION>
                                                                  2002          2001          2000
                                                              ------------  ------------  ------------
                                                                          (In thousands)
<S>                                                              <C>          <C>           <C>
     Current Federal income tax.............................     $(9,327)     $ 97,661      $ 41,666
     Current state income tax...............................      (1,780)       21,220        13,726
     Deferred Federal income tax............................      38,413       (28,967)       19,729
     Deferred state income tax..............................       8,856        (5,712)        2,368
     Amortization of accumulated investment tax credits.....      (3,131)       (3,139)       (3,143)
                                                              ------------  ------------  ------------
        Total income taxes..................................    $ 33,031      $ 81,063      $ 74,346

     Charged to operating expenses..........................    $ 20,887      $ 88,769      $ 53,964
     Charged to other income and deductions.................      12,144        (7,706)       20,382
                                                              ------------  ------------  ------------
        Total income taxes..................................    $ 33,031      $ 81,063      $ 74,346
                                                              ============  ============  ============
</TABLE>
       The Company's provision for income taxes differed from the Federal income
tax computed at the statutory rate for each of the years shown. The differences
are attributable to the following factors:
<TABLE>
<CAPTION>
                                                                  2002          2001           2000
                                                              -------------  ------------   ------------
                                                                           (In thousands)

<S>                                                              <C>           <C>            <C>
       Federal income tax at statutory rates.................    $ 34,056      $ 81,024       $ 61,352
       Investment tax credits ...............................      (3,131)       (3,139)        (3,143)
       Depreciation of flow-through items....................       2,112         2,249          2,250
       Gains on the sale and leaseback of PVNGS
          Units 1 and 2......................................        (527)         (527)          (527)
       Equity income from passive investments................           -        (1,180)              -
       Annual reversal of deferred income taxes accrued
          at prior tax rates.................................      (1,963)       (1,963)        (2,477)
       Valuation reserve.....................................           -        (6,552)         6,552
       Research and development credit.......................        (551)            -              -
       Affordable housing credit.............................        (947)            -              -
       State income tax......................................       4,715        10,706          8,343
       Other ................................................        (733)          445          1,996
                                                              -------------  ------------   ------------
          Total income taxes.................................    $ 33,031      $ 81,063       $ 74,346
                                                              =============  ============   ============
       Effective tax rate                                           33.95%       35.02%         42.41%
                                                              =============  ============   ============

</TABLE>

                                      F-43
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000


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

                                                         2002        2001
                                                       -----------  ----------
                                                           (In thousands)
 Deferred Tax Assets:
    Nuclear decommissioning costs.....................   $32,192      $28,138
    Regulatory liabilities related to income taxes ...    37,656       40,594
    Minimum pension liability.........................    56,008       19,924
    Net operating loss................................         -       29,451
    Other ............................................    57,373       59,049
                                                       -----------  ----------
       Total deferred tax assets .....................   183,229      177,156
                                                       -----------  ----------
 Deferred Tax Liabilities:
    Depreciation .....................................   216,425      189,157
    Investment tax credit ............................    41,583       44,714
    Fuel costs .......................................    11,749        5,515
    Regulatory assets related to income taxes.........    67,744       68,086
    Other ............................................    27,043       19,263
                                                       -----------  ----------
       Total deferred tax liabilities ................   364,544      326,735
                                                       -----------  ----------
    Valuation allowance...............................         -       29,451
                                                       -----------  ----------
 Accumulated deferred income taxes, net ..............  $181,315     $179,030
                                                       ===========  ==========

       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......   $ 2,285
Change in tax effects of income tax related regulatory assets
  and liabilities................................................    (2,596)
Tax effect of mark-to-market on investments available for sale...     8,365
Tax effect of excess pension liability...........................    36,084
                                                                  -----------
   Deferred income tax expense for the period....................  $ 44,138
                                                                  ===========

       The Company has no net operating loss carryforwards as of December 31,
2002.

       The Company defers investment tax credits related to rate regulated
assets and amortizes them over the estimated useful lives of those assets.

       All federal income tax years prior to 1997 are closed, and most issues
for 1997 through 1998 have been resolved. No years are currently under
examination by the IRS.

       There are no material differences between the provision for income taxes
and deferred income taxes between the Company and PNM.


                                      F-44
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000


(9)   Pension and Other Post-retirement 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.
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. In addition, in January
2002, the Company made an aggregate contribution of $23.5 million to fund
pension and other post-retirement benefit plans. An additional aggregate
contribution of $1.1 million was made in September 2002 and $1.5 million in
December 2002. The Company contributions to the 401(k) plan consist of a 3%
non-matching contribution, and a 75% match on the first 6% contributed by the
employee on a before-tax basis. The Company contributed $9.5, $9.0 and $8.9
million in the years ended December 31, 2002, 2001 and 2000, respectively.








                           (Intentionally left blank)



                                      F-45
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000



       The following sets forth the pension plan's funded status, components of
pension costs and amounts (in thousands) at the plan valuation date of September
30:
<TABLE>
<CAPTION>
                                                                                  Pension Benefits
                                                                            -----------------------------
                                                                                2002           2001
                                                                            -------------- --------------
   Change in Projected Benefit Obligation:
<S>                                                                             <C>            <C>
     Projected benefit obligation at beginning of year....................      $373,434       $321,429
     Service cost.........................................................         5,539          5,544
     Interest cost........................................................        27,238         25,758
     Amendments...........................................................             -          3,560
     Actuarial gain.......................................................        41,192         36,143
     Benefits paid........................................................       (20,518)       (19,000)
                                                                            -------------- --------------
         Projected benefit obligation at end of period....................       426,885        373,434
                                                                            -------------- --------------
   Change in Plan Assets:
     Fair value of plan assets at beginning of year.......................       339,838        389,827
     Actual return on plan assets.........................................       (20,207)       (30,989)
     Contribution.........................................................        20,000              -
     Benefits paid........................................................       (20,518)       (19,000)
                                                                            -------------- --------------
         Fair value of plan assets at end of year.........................       319,113        339,838
                                                                            -------------- --------------
     Funded Status........................................................      (107,772)       (33,596)
     Unrecognized net actuarial loss......................................       144,328         48,432
     Unrecognized prior service cost......................................         3,109          3,437
                                                                            -------------- --------------
         Prepaid pension cost.............................................      $ 39,665       $ 18,273
                                                                            ============== ==============
   The amounts recognized in the Consolidated Balance Sheet consist of:
     Accrued benefit liability............................................     $(107,772)      $(33,596)
     Intangible asset.....................................................         3,109          3,437
     Accumulated other comprehensive income...............................       144,328         48,432
                                                                            -------------- --------------
        Net amount recognized.............................................      $ 39,665       $ 18,273
                                                                            ============== ==============
   Weighted - Average Assumptions as of September 30,
     Discount rate........................................................         6.75%          7.50%
     Expected return on plan assets.......................................         9.00%          7.75%
</TABLE>
<TABLE>
<CAPTION>
                                                                    Pension Benefits
                                                         ----------------------------------------
                                                            2002          2001          2000
                                                         ------------  ------------  ------------
   Components of Net Periodic Benefit Cost:
<S>                                                         <C>           <C>           <C>
     Service cost......................................     $ 5,539       $ 5,544       $ 6,491
     Interest cost.....................................      27,238        25,758        23,572
     Expected return on plan assets....................     (34,497)      (29,488)      (30,923)
     Amortization of net gain..........................           -          (847)            -
     Amortization of transition obligation.............           -        (1,158)       (1,164)
     Amortization of prior service cost................         326            34            34
                                                         ------------  ------------  ------------
         Net periodic pension benefit..................    $ (1,394)       $ (157)     $ (1,990)
                                                         ============  ============  ============
</TABLE>

                                      F-46
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

Other Post-retirement 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 the plan
valuation date of September 30:

<TABLE>
<CAPTION>
                                                                         Other Benefits
                                                                  ------------------------------
                                                                       2002            2001
                                                                  -------------  ---------------
    Change in Benefit Obligation:
<S>                                                                  <C>              <C>
      Benefit obligation at beginning of year...................     $109,408         $ 81,711
      Service cost..............................................        2,694            2,644
      Interest cost.............................................        8,082            7,906
      Amendments................................................      (31,960)               -
      Unrecognized actuarial loss...............................       32,876           20,500
      Expected benefit paid.....................................       (3,304)          (3,353)
                                                                  -------------  ---------------
          Benefit obligation at end of period...................      117,796          109,408
                                                                  -------------  ---------------
    Change in Plan Assets:
      Fair value of plan assets at beginning of year............       42,132           44,694
     Actual return on plan assets...............................       (6,478)          (5,161)
      Employer contribution.....................................        7,429            6,748
      Benefits paid.............................................       (2,881)          (3,553)
                                                                  -------------  ---------------
          Fair value of plan assets at end of year..............       40,202           42,728
                                                                  -------------  ---------------
      Funded Status.............................................      (77,594)         (66,680)
      Unrecognized net transition obligation....................       18,171           19,988
      Unrecognized net actuarial loss...........................       74,048           31,763
      Unrecognized prior service cost...........................      (31,960)               -
                                                                  -------------  ---------------
           Accrued post-retirement costs........................    $ (17,335)       $ (14,929)
                                                                  =============  ===============
   Weighted - Average Assumptions as of September 30,
      Discount rate.............................................         6.75%            7.50%
      Expected return on plan assets............................         9.00%            8.25%

</TABLE>
<TABLE>
<CAPTION>
                                                                             Other Benefits
                                                              ---------------------------------------------
                                                                  2002            2001            2000
                                                              -------------  ---------------  -------------
    Components of Net Periodic Benefit Cost:
<S>                                                               <C>             <C>             <C>
      Service cost..........................................      $ 2,694         $  2,644        $ 1,053
      Interest cost.........................................        8,082            7,906          5,428
      Expected return on plan assets........................       (4,505)          (3,412)        (3,572)
      Amortization of net loss..............................        1,320              799              -
      Amortization of transition obligation.................        1,817            1,817          1,817
                                                              -------------  ---------------  -------------
          Net periodic post-retirement benefit cost.........      $ 9,408         $  9,754        $ 4,726
                                                              =============  ===============  =============
</TABLE>


                                      F-47
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       The effect of a 1% increase in the health care trend rate assumption
would increase the accumulated post-retirement benefit obligation as of
September 30, 2002, by approximately $21.3 million and the aggregate service and
interest cost components of net periodic post-retirement benefit cost for 2002
by approximately $2.0 million. The health care cost trend rate is expected to
decrease to 6.0% by 2011 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 the plan valuation date of September 30, 2002 and 2001, was $19.0
million and $17.7 million, respectively. As of December 31, 2002 and 2001, the
Company has recognized an additional minimum liability of $4.1 million and $2.8
million, respectively, for the amount of unfunded accumulated benefits in excess
of accrued pension costs. The net periodic cost for 2002, 2001 and 2000 was $1.7
million, $1.7 million and $1.9 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 the program.
Marketable securities in the amount of approximately $8.2 million (fair market
value of $8.2 million) are presently in the trust. No additional funds have been
provided to the trust since 1989.

(10)    Stock Option Plans

       The Company's Performance Stock Plan ("PSP") expired on December 31,
2000. The PSP was a non-qualified stock option plan, covering a group of
management employees. Options to purchase shares of the Company's common stock
were granted at the fair market value of the shares at the close of business 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 between December 31, 1995 and February 2000, vest three years from the
grant date of the awards. All options vest upon death, disability, retirement,
impaction or involuntary termination other than for cause. Awards granted in
December 2000 vest ratably over three years on the anniversary of the grant
date. The maximum number of options authorized was 5.0 million shares that could
be granted through December 31, 2000. Although the authority to grant options
under the PSP expired on December 31, 2000, the options that were granted
continue to be effective according to their terms.

       A new employee stock incentive plan, the Omnibus Performance Equity Plan
("PEP"), became effective with the formation of the Holding Company on December
31, 2001. The PEP 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 all awards under the PEP

                                      F-48
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

may not exceed 2.5 million, subject to adjustment under certain circumstances
defined in the PEP. The number of shares of stock subject to the grant of
restricted stock rights, performance shares and units and stock appreciation
rights is limited to 500,000 shares. Re-pricing of stock options is prohibited
unless specific shareholder approval is obtained. 855,000 options and 1,620
restricted stock rights were awarded in 2002. Under the PEP, 2,500 options were
exercised in 2002. The number of options and restricted stock rights outstanding
as of December 31, 2002 were 847,500 and 1,620, respectively.

       Stock options may also be provided to non-employee directors of the
Company under the Company's Director Retainer Plan ("DRP"). Prior to December
31, 2001, non-employee directors could elect to receive payment of the 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 2002 under the DRP
was 35,000 shares with an exercise price of $27.35 and 10,000 with an exercise
price of $20.15 and in 2001 6,000 shares with an exercise price of $22.61. Under
the DRP plan, vesting occurs on the date of the next annual meeting after the
award. Under the DRP 5,000 options were exercised in 2002, 4,000 in 2001 and
4,000 in 2000. The number of options outstanding as of December 31, 2002, was
73,000. Restricted stock issuances were based on the fair market value of the
Company's common stock at the close of business on the date of grant and vest
ratably three years on the anniversary of the grant date. As of December 31,
2002, there was no restricted stock outstanding under the DRP plan. Amendments
to the DRP were approved by the shareholders on July 3, 2001 and the amended
plan became the DRP for the new Holding Company on December 31, 2001. Under the
new DRP, the maximum number of authorized shares was increased from 100,000 to
200,000 (including shares previously granted) through July 1, 2005. The annual
retainer is payable in cash and stock options. Restricted stock is no longer
available under the plan. The exercise price of stock options granted under the
DRP is determined by the fair market value of the stock at the close of business
on the grant date.





                           (Intentionally left blank)




                                      F-49
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       A summary of the status of the Company's stock option plans at December
31, and changes during the years then ended is presented below.
<TABLE>
<CAPTION>
                                                2002                       2001                      2000
                                     ------------------------ ---------------------- ------------------------
                                                   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....   2,981,301     $19.100    3,336,221   $19.120    1,574,418    $18.207

Granted.............................     901,620     $25.745        6,000   $22.610    2,078,500    $19.403

Exercised...........................     356,132     $18.044      299,951   $19.610      296,027    $16.363

Forfeited...........................      16,167     $21.390       60,969   $17.961       20,670    $17.320
                                     ------------             -----------            -----------
Outstanding at end of year..........   3,510,622                2,981,301              3,336,221
                                     ============             ===========            ===========
Options exercisable at year-end.....   1,525,345                  981,197                916,263
                                     ============             ===========            ===========
Options available for future grant..   1,777,880                2,500,000                      -
                                     ============             ===========            ===========
</TABLE>

       The following table summarizes information about stock options
outstanding at December 31, 2002:
<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 12/31/02            Life           Prices At      12/31/02        Prices
-------------------------   --------------  -----------------   ------------  ---------------  ----------

<S>     <C>                        <C>         <C>                 <C>                <C>       <C>
DRP     $5.50 - $27.35             73,000      8.363 years         $20.429            28,000    $11.876

PSP     $11.50 - $24.313        2,588,502      6.888 years         $19.332         1,433,895    $20.644

PEP     $     0 - $28.22          849,120      9.246 years         $25.745            63,450    $25.943
                            --------------                                    ---------------

                                3,510,622      7.489 years         $20.906         1,525,345    $20.703
                            ==============                                    ===============
</TABLE>



                                      F-50
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       The following table summarizes weighted-average fair value of options
granted during the year:

                                                2002         2001        2000
                                             ----------   ----------  ----------

PEP........................................      $7.42         $  -      $ 7.24
                                             ==========   ==========  ==========
DRP........................................      $7.03       $13.94      $ 6.98
                                             ==========   ==========  ==========
Total fair market value of all options
  granted (in thousands)...................     $6,677         $ 83     $15,054
                                             ==========   ==========  ==========

       The fair value of each option grant is determined on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:

                                       2002            2001            2000
                                   -------------   -------------   -------------

Dividend yield...................         3.43%           3.10%           2.98%
Expected volatility..............        33.62%          33.99%          26.43%
Risk-free interest rates.........         4.87%           5.38%           5.11%
Expected life....................    10.0 years      10.0 years      10.0 years

(11)   Construction Program and Jointly-Owned Plants

       The Company's construction expenditures for 2002 were approximately $240
million, including expenditures on jointly-owned projects. The Company's
proportionate share of operating and maintenance expenses for the jointly-owned
plants is included in operating expenses in the consolidated statements of
earnings.

       At December 31, 2002, 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)......  $710,027     $ 393,892      $  9,046        46.3%
    Palo Verde Nuclear Generating
      Station (Nuclear)*....................  $216,940     $  67,732      $ 31,300        10.2%
    Four Corners Power Plant Units 4
       and 5 (Coal) ........................  $118,509     $  88,549      $  6,113        13.0%
</TABLE>

       *   Includes the Company's interest in PVNGS Unit 3, the Company's
           interest in common facilities for all PVNGS units and the Company's
           owned interests in PVNGS Units 1 and 2.


                                      F-51
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

San Juan Generating Station ("SJGS")

       The Company operates and jointly owns SJGS. At December 31, 2002, 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.

Palo Verde Nuclear Generating Station ("PVNGS")

       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 12 for additional discussion.)

(12)   Commitments and Contingencies

Long-Term Power Contracts

       PNM 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. PNM may reduce its purchases from SPS by 25 MW annually
upon three years' notice. PNM provided such notice to reduce the purchase by 25
MW in 1999 and by an additional 25 MW in 2000. PNM also is party to a master
power purchase and sale agreement with SPS, dated August 2, 1999, pursuant to
which PNM has agreed to purchase 72 MW of firm power from SPS from 2002 through
2005. PNM has 70 MW of contingent capacity obtained from El Paso under a
transmission capacity for generation capacity trade arrangement through
September 2004. Beginning October 2004 and continuing through June 2005, the
capacity amount is 39 MW. PNM holds a power purchased agreement ("PPA") with
Tri-State for 50 MW through June 30, 2010. In addition, PNM is interconnected
with various utilities for economy interchanges and mutual assistance in
emergencies.

       In 1996, PNM entered into an operating lease for the rights to all the
output of a new gas-fired generating plant for 20 years. The operating lease's
maximum dependable capacity is 132 MW. In July 2000, the plant went into
operation. The gas turbine generating unit is operated by Delta-Person Limited
Partnership ("Delta") and is located on PNM '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 PNM. In addition, the unit has the
capability to utilize low sulfur fuel oil in the event natural gas is not
available or cost effective.

                                      F-52
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       In July 2001, PNM entered into a long-term wholesale power contract with
Texas-New Mexico Power ("TNMP") to provide power to serve TNMP's firm retail
customers. The contract has a term of 5 1/2 years commencing July 1, 2001. PNM
will provide varying amounts of firm power on demand to complement existing TNMP
contracts. As those contracts expire, PNM will replace them and become TNMP's
sole supplier beginning January 1, 2003. In the last year of the contract, it is
estimated that TNMP will need 114 MW of firm power.

       On October 21, 2002, PNM entered into an agreement with FPL Energy LLC
("FPL"), a subsidiary of FPL Group, Inc., to develop a 200 MW wind generation
facility in New Mexico. FPL Energy will build, own and operate the New Mexico
Wind Energy Center ("NMWE"), consisting of 136 wind-powered turbines on a site
in eastern New Mexico. PNM will buy all the power generated by the NMWE under a
25-year contract. Construction of the wind energy site began in January 2003.
Construction on a facility of this size typically takes six to nine months to
complete. PNM will ask the PRC to approve a voluntary tariff that will allow PNM
retail customers to buy wind-generated electricity for a small monthly premium.
Power from the facility not subscribed by PNM retail customers under the
voluntary program will be sold on the wholesale market, either within New Mexico
or outside the state.

       In December 2002, PNM entered into a two-year contract to supply 80 MW of
power to U.S. Navy facilities in San Diego, California. PNM began delivering
power under the contract January 1, 2003. The contract runs through March 2005.

Coal Supply

       The coal requirements for the SJGS are being supplied by San Juan Coal
Company ("SJCC"), a wholly-owned subsidiary of BHP Holdings, 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
Minerals International, Inc. has guaranteed the obligations of SJCC under the
agreement, which contemplates the delivery of approximately 103 million tons of
coal during its remaining term. That amount would supply substantially all the
requirements of the SJGS through approximately 2017.

       Four Corners Power Plant ("Four Corners") is supplied with coal under a
fuel agreement between the owners and BHP Navajo Coal Company ("BNCC"), under
which BNCC agreed to supply all the coal requirements for the life of the plant.
The current fuel agreement expires December 31, 2004. Negotiations for an
extension have been initiated. BNCC 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.

Natural Gas Supply

       The Company contracts for the purchase of gas to serve its retail
customers. These contracts are short-term in nature supplying the gas needs for
the current heating season and the following off-season months. The price of gas
is a pass-through, whereby the Company recovers 100% of its cost of gas.

                                      F-53
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       The natural gas used as fuel by Generation and Marketing was delivered by
Gas. In the second quarter of 2001, Generation and Marketing began procuring its
gas supply independent of the Company and contracting with the Utility
Operations for transportation services only.

Construction Commitment

       PNM had previously committed to purchase five combustion turbines for a
total cost of $151.3 million. The turbines are for planned power generation
plants with an estimated cost of construction of approximately $370 million over
the next five years depending on market conditions. PNM has expended $226
million as of December 31, 2002 of which $144 million was for equipment
purchases. On June 27, 2002, Lordsburg, an 80 MW natural gas fired plant became
fully operational and commenced serving the wholesale power market. Afton, a 141
MW simple cycle gas-fired plant, became fully operational on December 4, 2002.
These plants are part of the Company's ongoing competitive strategy of
increasing generation capacity over time to serve increasing retail load, sales
under long-term contracts and other sales. These plants were not built to serve
New Mexico retail customers and therefore are not currently, included in the
rate base. However, it is possible that these plants may be needed in the future
to serve the growing retail load. If so, these plants will have to be certified
by the PRC and would then be included in the rate base.

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
life of steam generators is assessed on an on-going basis. Two replacement steam
generators will be installed in Unit 2 during its Fall 2003 refueling outage.
The Company's share of the fabrication and installation costs (exclusive of
replacement power costs) will be approximately $22 million.

       The PVNGS participants ("Participants") have approved the purchase of
replacement steam generators for Units 1 and 3. Preliminary work for the
installation of the replacement steam generators has also been approved by the
Participants. These actions will provide the Participants with options regarding
the replacement of steam generators in Unit 1 and Unit 3. Unit 1 could be
replaced as early as Fall 2005, should the Participants choose to do so. The
Company estimates that its portion of the fabrication and installation costs and
associated power upgrade modifications for Units 1 and 3, will be approximately
$46 million over the period 2002-2003 (exclusive of replacement power costs),
should installation of the ordered replacement steam generators be approved.

Terrorism Insurance

       President Bush signed the Terrorism Risk Insurance Act of 2002 (TRIA) on
November 26, 2002. Effective that date, to the extent covered by the act,
endorsements excluding terrorism became null and void. Under the act, insurers
are required to provide a premium quotation to the insured for terrorism
coverage, with limits and deductibles similar to other coverage provided. The
insured must accept and pay the premium, or reject the coverage within 30 days

                                      F-54
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

of receipt of the premium quotation. The Company has accepted all property and
liability insurance offers of TRIA coverage. The Company also purchases
$5,000,000 of non-TRIA terrorism coverage. Four Corners, in which the Company
has a 13% interest in Units 4 and 5, has elected not to purchase TRIA or
non-TRIA property insurance terrorism coverage.

PVNGS Liability and Insurance Matters

       The PVNGS participants have financial protection for public liability
resulting from nuclear energy hazards to the full limit of liability under
federal law. This potential liability is covered by primary liability insurance
provided by commercial insurance carriers in the amount of $300 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 million, with an annual payment limitation of approximately $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 Price-Anderson Act, the federal law
referred to above, was up for renewal in August 2002. Price-Anderson has been
extended to December 31, 2003.

       The PVNGS participants maintain "all-risk" (including nuclear hazards)
insurance for damage to, and decontamination of, property at PVNGS in the
aggregate amount of $2.75 billion as of October 1, 2002, 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 $5.1 million per year.

PVNGS Decommissioning Funding

       PNM 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 2001 decommissioning cost study indicated that PNM's share of the PVNGS
decommissioning costs, excluding spent fuel disposal, would be approximately
$201 million (2001 dollars).

                                      F-55
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       PNM provided an additional $10.7 million, $6.1 million and $3.9 million
funding for the year ended December 31, 2002, 2001 and 2000 respectively, into
the qualified and non-qualified trust funds. The estimated market value of the
trusts for the year ended December 31, 2002 was approximately $63.2 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 domestic power reactors. Under the Waste Act, the DOE was to
develop facilities necessary for the storage and disposal of spent nuclear fuel
and to have the first facility in operation by 1998. The DOE has announced that
such a repository cannot be completed before 2010.

       The operator of PVNGS has capacity in existing fuel storage pools at
PVNGS, which can accommodate all fuel expected to be discharged from normal
operation of PVNGS until September 2003. The operator of PVNGS believes that it
will be able to load dry storage casks and place the casks in the completed dry
storage facility prior to September 2003. PNM currently estimates that it will
incur approximately $41.0 million (in 2001 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. PNM accrues these costs as
a component of fuel expense, meaning that the charges are accrued as the fuel is
burned. The Company has accrued $1.0 million in 2002 for interim storage costs.
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 2003.

Natural Gas Explosion

       On April 25, 2001, a natural gas explosion occurred in Santa Fe, New
Mexico. The apparent cause of the explosion was a leak from a PNM line near the
location. The explosion destroyed a small building and injured two persons who
were working in the building. PNM's investigation indicates that the leak was an
isolated incident likely caused by a combination of corrosion and increased
pressure. PNM also cooperated with an investigation of the incident by the PRC's
Pipeline Safety Bureau (the "Bureau"), which issued its report on March 18,
2002. The Bureau's report gave PNM notice of probable violations of the New
Mexico Pipeline Safety Act and related regulations. PNM and the Bureau staff
entered a compliance agreement addressing the probable violations and filed it
with the PRC for approval on March 4, 2003. PNM agreed to undertake a list of
twenty-four corrective actions, including internal policy changes, retraining
employees and enhancing gas line monitoring. PNM has also agreed to voluntarily
accelerate spending on pipeline replacement by more than $10.0 million and to
commit an additional $1.8 million to development and implementation of systems
to improve gas line management. The compliance agreement is pending before the
PRC-. Two lawsuits against PNM by the injured persons along with several claims
for property and business interruption damages have been resolved.

Global Electric Agreement

       In November 2001, PNM began settlement negotiations with the PRC utility
staff and intervenors in order to resolve its merchant plant filing and other
matters. Discussions included the future framework for restructuring the
electric industry in New Mexico under the Restructuring Act, a future retail
electric rate path and PNM's merchant plant filing.

                                      F-56
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       The year-long negotiations ended on October 10, 2002 with the filing of
the Global Electric Agreement with the PRC. The Global Electric Agreement sets a
rate path through 2007 and will resolve the issues surrounding industry
deregulation in New Mexico and the PNM's merchant power strategy. The Global
Electric Agreement was signed by PNM, the PRC Staff, the New Mexico Attorney
General's Office, the New Mexico Industrial Energy Consumers, the City of
Albuquerque, and the University of New Mexico. The United States Executive
Agencies ("USEA") subsequently agreed to support the Global Electric Agreement
as if they had signed it. The Global Electric Agreement also provides for the
signatories to support passage of legislation concerning merchant plant
activities and repeal of a majority of the Restructuring Act in the New Mexico
Legislature.

       Under the Global Electric Agreement, PNM will decrease retail electric
rates 6.5% in two phases over the next three years. The first phase will be a
4.0% decrease, effective September 2003. The second phase will be a further 2.5%
decrease from current rate levels, effective in September 2005. Rates would then
be frozen at that level until the end of 2007. In addition, the risks and
benefits of all wholesale electric sales, inure solely to the Company's
shareholders until December 2007. Since the new rate Global Electric Agreement
does not provide for a fuel cost adjustment, the lower fuel costs sought to be
captured by shifting to underground mining for the coal supplies at SJGS will
flow through to the Company's earnings largely offsetting the reduction in
retail revenues.

       PNM will be able to seek a general rate adjustment during the rate freeze
period if complying with any new or changed environmental or tax law or
regulation, or a new broader application of existing environmental or tax laws
or regulations, would compromise its financial integrity. PNM also is permitted
to capitalize all the reasonable costs of mandatory renewable energy resources,
including an after-tax cost of capital of 8.64% to be recorded concurrently with
the deferral of those costs.

       PNM is authorized to recover in the stipulated rates and future retail
rates, its New Mexico jurisdictional share of the decommissioning costs
associated with the San Juan, La Plata and Navajo surface coal mines. PNM is
allowed to recover up to $100 million of the costs, composed of approximately
$69 million in surface coal mine reclamation costs, and approximately $31
million of contract buyout costs without being subject to prudence challenge by
the signatories to the Global Electric Agreement. The costs will be amortized
over 17 years commencing September 1, 2003 and in equal amounts each year
thereafter. PNM cannot seek to recover a return on the unamortized reclamation
costs, but could seek to recover a return on the unamortized contract buyout
costs remaining as of December 31, 2007 in future rate adjustment proceedings.

                                      F-57
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       The stipulated rates also provide for full recovery of nuclear
decommissioning costs accrued in accordance with the estimates in the applicable
decommissioning cost study during the rate freeze period for PNM's interests in
PVNGS Units 1 and 2. The portion of SJGS Unit 4 previously treated as an
excluded resource from PNM's New Mexico retail rates are included as a
generation resource to serve PNM's New Mexico retail and wholesale firm
requirements customers' load. PNM's contracts to purchase power from Tri-State,
Delta Limited Partnership and firm power from SPS would also be included as
generation resources to serve PNM's New Mexico retail and wholesale firm
requirements customers' load until each contract expires under the Global
Electric Agreement.

       PRC approval or other authorization from the PRC is not required for
PNM's merchant plant investment as long as PNM meets the following conditions:
(a) PNM does not invest more than $1.25 billion in merchant plant; (b) PNM has
an investment grade credit rating on a stand-alone basis and on a consolidated
basis with the Holding Company; and (c) PNM spends at least $60 million per year
in gas and electric utility, non-merchant plant infrastructure needed to
maintain adequate and reliable service. No prior approval for merchant plant
participation would be required and expedited PRC approval would be available
for financing of merchant plant if certain specified financial conditions are
met. If PNM's credit rating on a stand-alone or consolidated basis with the
Holding Company falls below investment grade, however, approvals are needed for
new merchant plant projects and for continuing to participate in merchant plant
projects of more than a certain dollar value and under certain conditions.

       PRC approval is not required for PNM to transfer any part of its
interests in merchant plant or PVNGS Unit 3 from time to time to any other legal
entity, provided that the following conditions are met: (a) PNM's debt to
capital ratio will not exceed 65% after giving effect to the transfer and (b)
PNM's investment grade status on a stand-alone basis and on a consolidated basis
with the Holding Company will not be impaired by the transfer of merchant plant
or PVNGS Unit 3 at the time of transfer.

       PNM further agreed in the Global Electric Agreement that it will transfer
all its interests in merchant plant out of PNM by January 1, 2010. PNM will
accelerate the mandatory transfer to a date one year after PNM has completed
expenditures of $1.25 billion on merchant plant. PNM may seek a variance from
the PRC at any time prior to January 1, 2010 to extend or vacate the time or
terms and conditions requiring the transfer but not beyond January 1, 2015.

       Under the Global Electric Agreement, if merchant plant or PVNGS Unit 3 is
transferred to a PNM affiliate, PNM's generation resources and the affiliate's
generation resources may be jointly dispatched at the merchant affiliate's sole
discretion until January 1, 2015. Joint dispatch of all utility, PVNGS Unit 3 or
merchant plant resources would be terminable at any time between 2008 and 2015
at PNM's discretion, as long as the utility's dispatch capability is not
impaired in any way.

       PNM agreed to forego recovery of the costs incurred in preparing to
transition to a competitive retail market in New Mexico. This will result in a
one-time write-off of approximately $16.7 million, pre-tax, upon approval by the
PRC of the Global Electric Agreement.

       In the Global Electric Agreement, PNM, PRC utility staff and intervenors
agreed to actively support the repeal of a majority of the Restructuring Act of
1999. If the repeal does not occur during the 2003 New Mexico Legislative
Session, various modifications to the conditions of the Global Electric
Agreement are triggered depending on how long repeal is delayed. SB 718 in the
2003 session would repeal the Restructuring Act as contemplated in the Global
Electric Agreement. On February 28, 2003, SB 718 passed the Senate by a vote of
37-2. It is currently awaiting action in the House of Representatives.

                                      F-58
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       In summary, the terms of this Global Electric Agreement and the Company's
continuing efforts to control expenses offer significant benefits to both
customers and shareholders in the form of lower rates, a predictable rate path,
and the resolution of important issues affecting implementation of the Company's
strategic plan over the next several years.

       The Company is currently unable to predict the impact these proceedings
may have on its plans to expand its generating capacity and its future financial
condition and results of operations.

Other

       There are various claims and lawsuits pending against the Company. The
Company is also subject to federal, state and local environmental laws and
regulations, and is currently participating in the investigation and remediation
of numerous sites. In addition, the Company periodically enters into financial
commitments in connection with its business operations. It is not possible at
this time for the Company to determine fully the effect of all litigation 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.

       The Company is involved in various legal proceedings in the normal course
of business. The associated legal costs for these legal matters are accrued when
incurred. It is also the Company's policy to accrue for legal costs expected to
be incurred in connection with SFAS 5 legal matters when it is probable that a
SFAS 5 liability has been incurred and the amount of expected legal costs to be
incurred is reasonably estimable. These estimates include costs for external
counsel professional fees.

(13)   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 such reasonably
likely range of costs (classified as other long-term liabilities at undiscounted
amounts).

                                      F-59
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       The Company's recorded minimum liability estimated to remediate its
identified sites was $8.5 million and $6.8 million as of December 31, 2002 and
2001, respectively. 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.

       For the year ended December 31, 2002, 2001 and 2000, the Company spent
$0.7 million, $1.7 million and $1.6 million, respectively, for remediation. The
majority of the December 31, 2002 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.

(14)   Company Realignment

       On August 22, 2002, the Company was realigned due to the changes in the
electric industry and particularly, the negative impact on the Company's
earnings and growth prospects from wholesale market uncertainty. The changes
included consolidation of similar functions. A total of 85 salaried and hourly
employees were notified of their termination as part of the realignment. In
accordance with EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity", the Company incurred
a liability of $8.8 million for severance and other related costs associated
with the involuntary termination of employees, which was charged to operations
in the quarter ended September 30, 2002 and is included in administrative and
general in the consolidated statements of earnings for the year ended December
31, 2002. The Company paid $5.8 million through December 31, 2002.






                           (Intentionally left blank)




                                      F-60
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000


(15)   Other Income and Deductions

       The following table details the components of other income and deductions
for PNM Resources, Inc. and subsidiaries:
<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                        -------------------------------------------
                                                            2002          2001            2000
                                                        -------------  ------------   -------------
                                                                      (In thousands)
   Other income:
<S>                                                         <C>           <C>             <C>
   Interest and dividend income.......................      $44,954       $48,742         $48,695
   Settlement of lawsuit..............................            -             -          13,750
   Miscellaneous non-operating income.................        3,406         3,405           3,801
                                                        -------------  ------------   -------------
                                                            $48,360       $52,147         $66,246
                                                        =============  ============   =============
   Other deductions:
   Merger costs and related legal costs...............      $(2,436)      $17,975          $6,700
   Write-off of Avistar investments...................            -        13,089           4,100
   Nonrecoverable coal mine decommissioning costs.....            -        12,979               -
   Write-off of regulatory assets.....................            -        11,100               -
   Contribution to PNM Foundation.....................            -         5,000               -
   Transmission line project write-off................        4,818             -               -
   Miscellaneous non-operating deductions.............        9,924         7,114           1,150
                                                        -------------  ------------   -------------
                                                            $12,306       $67,257         $11,950
                                                        =============  ============   =============
</TABLE>

       The following table details the components of other income and deductions
for Public Service Company of New Mexico and subsidiaries:
<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                        -------------------------------------------
                                                            2002          2001            2000
                                                        -------------  ------------   -------------
                                                                      (In thousands)
   Other income:
<S>                                                         <C>           <C>             <C>
   Interest and dividend income.......................      $37,632       $48,742         $48,695
   Settlement of lawsuit..............................            -             -          13,750
   Miscellaneous non-operating income.................        2,814         3,405           3,801
                                                        -------------  ------------   -------------
                                                            $40,446       $52,147         $66,246
                                                        =============  ============   =============
   Other deductions:
   Merger costs and related legal costs...............  $         -       $17,975          $6,700
   Write-off of Avistar investments...................            -        13,089           4,100
   Nonrecoverable coal mine decommissioning costs.....            -        12,979               -
   Write-off of regulatory assets.....................            -        11,100               -
   Contribution to PNM Foundation.....................            -         5,000               -
   Transmission line project write-off................        4,818             -               -
   Miscellaneous non-operating deductions.............       10,241         7,114           1,150
                                                        -------------  ------------   -------------
                                                            $15,059       $67,257         $11,950
                                                        =============  ============   =============

</TABLE>

                                      F-61
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

(16)   New and Proposed Accounting Standards

       Statement of Financial Accounting Standards No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"). In June 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS 143. SFAS 143 requires the
recognition and measurement of liabilities associated with the retirement of
tangible long-lived assets that result from the acquisition, construction or
development and or the normal operations of the long-lived assets. Retirement
obligations associated with long-lived assets included within the scope of SFAS
143 are those for which a legal obligation exists under enacted laws, statutes,
written or oral contracts, including obligations arising under the doctrine of
promissory estoppel. Under the standard, the asset retirement obligation ("ARO")
liability is recognized at its fair value as incurred.

       The recognition of an ARO results in an increase in the carrying cost of
the long-lived asset, which will be amortized using a systematic and rationale
basis over the remaining life of the related asset as depreciation expense. An
ARO represents a future liability and, as a result, accretion expense will be
accrued on this liability until such time as the obligation is satisfied.
Accretion of the ARO liability due to the passage of time is recorded as an
operating expense. If at the end of the asset's life the recorded liability
differs from the actual settled obligation, the Company may incur a gain or loss
that will be recognized at that time. The net difference between the amounts
determined under SFAS 143 and the Company's previous method of accounting for
such activities net of expected regulatory recovery, will be recognized as a
cumulative effect of a change in accounting principle, net of related income
taxes. The Company is currently calculating the liability associated with its
AROs but does not believe there will be a material effect on continuing
operations for the adoption of this standard.

       Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). In April 2002, the FASB issued SFAS 145. This
statement updates and clarifies existing accounting pronouncements for the
treatment of gains and losses from extinguishment of debt and eliminates an
inconsistency between required accounting for sale-leaseback transactions and
the required accounting for certain lease modifications that have similar
economic effects as sale-leaseback transactions. In accordance with previous
accounting standards, gains and losses from extinguishment of debt were
classified as extraordinary gains and losses. The current statement permits
gains and losses from extinguishment of debt to be classified as ordinary and
included in income from operations, unless they are unusual in nature or occur
infrequently and therefore included as an extraordinary item.

       SFAS 145 is effective for fiscal years beginning after May 15, 2002 for
the provisions related to the rescission of FASB Statements No. 4, 44 and 64,
and for all transactions entered into after May 15, 2002 for the provision
related to the amendments of FASB Statement No. 13. The Company does not believe
there will be a material effect from the adoption of this standard on the
Company's consolidated statements of financial position or results of
operations.

                                      F-62
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       Statement of Financial Accounting Standards No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS 146"). In July 2002,
the FASB issued SFAS 146. This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred and is effective for exit or disposal activities that
are initiated after December 31, 2002 and nullifies EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." It also
substantially nullifies EITF Issue No. 88-10, "Costs Associated with Lease
Modification or Termination." Previously issued financial statements, including
interim financial statements, cannot be restated. The Company does not expect
its adoption of this standard in fiscal year 2003 to have a significant impact
on its financial statements.

       Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, Amendment of FASB
Statement No. 123 and APB Opinion No. 28" ("SFAS 148"). In December 2002, the
FASB issued SFAS 148 that amended SFAS 123 to provide alternative methods of
transition to SFAS 123's fair value method of accounting for stock-based
employee compensation but does not require fair value accounting as prescribed
in SFAS 123. SFAS 148 is effective for fiscal years ending after December 15,
2002. It also amends the disclosure provisions of SFAS 123 and Accounting
Principles Board Opinion No. 28 to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. The disclosure
provisions of SFAS 148 are incremental to the existing disclosure requirements
of SFAS 123 and are applicable to all companies with stock-based compensation.
The Company adopted the disclosure requirements of this standard in fiscal year
2002, but continues to account for stock-based compensation under APB 25.

       Financial Accounting Standards Board ("FASB") Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34"
("FIN 45 "). In November 2002, the FASB issued FIN 45 which enhances the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also requires a
guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of the obligations it has undertaken in issuing the guarantee. FIN 45
applies to contracts or indemnification agreements that contingently require the
guarantor to make payments to the guaranteed party based on changes in an
underlying obligation that is related to an asset, liability, or an equity
security of the guaranteed party. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The initial recognition and initial measurement provisions are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The guarantor's previous
accounting for guarantees issued prior to the date of initial application should
not be revised or restated. The Company adopted FIN 45, and such adoption did
not have a material impact on the financial statements.

                                      F-63
<PAGE>
                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2002, 2001 and 2000

       Financial Accounting Standards Board ("FASB") Interpretation No. 46,
"Consolidation of Variable Interest Entities", an interpretation of Accounting
Research Bulletin (ARB) No. 51, "Consolidated Financial Statements" ("FIN 46").
In January 2003, the FASB issued FIN 46 to address the consolidation of variable
interest entities that have one or both of the following characteristics: (1)
the equity investment at risk is not sufficient to permit the entity to finance
its activities without additional subordinated financial support from other
parties, which is provided through other interests that will absorb some or all
of the expected losses of the entity and (2) the equity investors lack one or
more of the following essential characteristics of a controlling financial
interest: (a) the direct or indirect ability to make decisions about the
entity's activities through voting rights or similar rights, (b) the obligation
to absorb the expected losses of the entity if they occur, which makes it
possible for the entity to finance its activities, or (c) the right to receive
the expected residual returns of the entity if they occur, which is the
compensation for the risk of absorbing the expected losses. FASB believes that
if a business enterprise has a controlling financial interest in a variable
interest entity, the assets, liabilities, and results of the activities of the
variable interest entity should be included in consolidated financial statements
with those of the business enterprise. FIN 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved. There are
also additional disclosure requirements for an enterprise that holds significant
variable interests in a variable interest entity but is not the primary
beneficiary. FIN 46 applies immediately to variable interest entities created
after January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date and may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
Currently, the Company does not have interests in any variable interest entity.

       EITF 02-3 "Issues Related to Accounting for Contracts Involved in Energy
Trading and Risk Management Activities", EITF 98-10 "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities" and Statement of
Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative
Instruments and Hedging Activities". On October 25, 2002, the EITF reached a
final consensus on EITF 02-3 that rescinds EITF 98-10 and requires that all
energy contracts held for trading purposes be presented on a net margin basis in
the statement of earnings. The rescission of EITF 98-10 requires that energy
contracts which do not meet the definition of a derivative under SFAS 133 no
longer be marked-to-market and recognized in current earnings. As a result, all
contracts which were marked to market under EITF 98-10 and must now be accounted
for under the accrual method should be written back to cost with any difference
included as a cumulative effect adjustment in the period of adoption. This
transition provision will be effective for the first quarter of 2003. The
rescission of EITF 98-10 did not have a material impact on the Company's
financial condition or results of operations as all contracts previously marked
to market under the definition provided in EITF 98-10 also met the definition of
a derivative under SFAS 133 and are properly recorded at fair value with gains
and losses recorded in earnings. The Company is reviewing its energy contract
portfolio to determine whether its contracts meet the definition of trading
activities under EITF 02-3 which should be presented on a net margin basis. The
Company will reclassify prior periods to a net margin basis for those contracts
previously accounted for under EITF 98-10 in the first quarter of 2003. The
Company does not expect to report revenues and cost of energy sold on a net
margin basis on a prospective basis as a result of the application of EITF 02-3
as none of the of Company's marketing activities meet the definitions of trading
activities as prescribed by EITF 02-3.

                                      F-64

<PAGE>

                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO
                           QUARTERLY OPERATING RESULTS

       The unaudited operating results by quarters for 2002 and 2001 are as
follows:
<TABLE>
<CAPTION>
                                                             Quarter Ended
                                            -----------------------------------------------------
                                             March 31    June 30     September 30    December 31
                                            ----------- ----------- --------------- -------------
                                                    (In thousands, except per share amounts)
  2002:
<S>                                          <C>         <C>             <C>           <C>
    Operating Revenues.....................  $ 313,996   $ 264,569       $ 289,440     $ 300,991
    Operating Income.......................     32,687      19,449          29,135        20,503
    Net Earnings...........................     24,949      11,157          17,797        10,369

    Net Earnings per Share (Basic).........       0.63        0.28            0.45          0.26
    Net Earnings per Share (Diluted).......       0.63        0.28            0.45          0.26

  2001:
    Operating Revenues.....................  $ 736,530   $ 666,091       $ 621,895     $ 315,301
    Operating Income.......................     77,300      80,547          47,422        17,408
    Net Earnings ..........................     63,552      49,597          32,775         4,509

    Net Earnings per Share (Basic).........       1.62        1.26            0.83          0.11
    Net Earnings per Share (Diluted).......       1.60        1.24            0.82          0.11
</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.



                                      F-65
<PAGE>



                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO
                        COMPARATIVE OPERATING STATISTICS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                 2002         2001         2000        1999         1998
                                             ------------ ------------ ------------ ----------- -----------
Utility Operations Sales:
Energy Sales--KWh (in thousands):
<S>                                            <C>          <C>          <C>         <C>         <C>
  Residential..............................    2,298,542    2,197,889    2,171,945   2,027,589   2,022,598
  Commercial...............................    3,254,576    3,213,208    3,133,996   2,981,656   2,909,752
  Industrial...............................    1,612,723    1,603,266    1,544,367   1,559,155   1,571,824
  Other ultimate customers.................      240,665      240,934      238,635     235,183     235,700
                                             ------------ ------------ ------------ ----------- -----------
    Total KWh sales........................    7,406,506    7,255,297    7,088,943   6,803,583   6,739,874
                                             ============ ============ ============ =========== ===========
Gas Throughput--Decatherms (in thousands):
  Residential..............................       29,627       27,848       28,810      32,121      29,258
  Commercial...............................       12,009       10,421        9,859      11,106      10,044
  Industrial...............................          749        3,920        5,038       2,338       1,553
  Other....................................        4,806        4,355        6,426       6,538       8,390
                                             ------------ ------------ ------------ ----------- -----------
    Total gas sales........................       47,191       46,544       50,133      52,103      49,245
  Transportation throughput................       44,889       51,395       44,871      40,161      36,413
                                             ------------ ------------ ------------ ----------- -----------
    Total gas throughput...................       92,080       97,939       95,004      92,264      85,658
                                             ============ ============ ============ =========== ===========
Revenues (in thousands):
Electric Revenues:
  Residential..............................    $ 197,174    $ 187,600    $ 186,133   $ 184,088   $ 187,681
  Commercial...............................      247,800      242,372      238,243     238,830     241,968
  Industrial...............................       82,009       82,752       79,671      85,828      88,644
  Other ultimate customers.................       14,942       14,795       14,618      13,777      18,124
                                             ------------ ------------ ------------ ----------- -----------
    Total revenues to ultimate customers...      541,925      527,519      518,665     522,523     536,417
  Intersegment revenues....................          707          707          707         707         707
  Miscellaneous electric revenues..........       28,164       31,707       20,093      18,345      19,151
                                             ------------ ------------ ------------ ----------- -----------
    Total electric revenues................    $ 570,796    $ 559,933    $ 539,465   $ 541,575   $ 556,275
                                             ------------ ------------ ------------ ----------- -----------
Gas Revenues:
  Residential..............................    $ 172,200    $ 232,321    $ 191,231   $ 152,266   $ 160,398
  Commercial...............................       52,530       68,895       52,964      37,337      42,480
  Industrial...............................        2,872       27,519       24,206       8,550       4,887
  Other....................................       20,906       28,896       29,203      20,080      27,218
                                             ------------ ------------ ------------ ----------- -----------
  Revenues from gas sales..................      248,508      357,631      297,604     218,233     234,983
  Transportation...........................       17,735       20,188       14,163      12,390      13,464
  Other....................................        5,875        7,599        8,157       6,088       7,528
                                             ------------ ------------ ------------ ----------- -----------
    Total gas revenues.....................    $ 272,118    $ 385,418    $ 319,924   $ 236,711   $ 255,975
                                             ------------ ------------ ------------ ----------- -----------
         Total Utility Revenues............    $ 842,914    $ 945,351    $ 859,389   $ 778,286   $ 812,250
                                             ============ ============ ============ =========== ===========

</TABLE>

                                      F-66

<PAGE>



                    PNM RESOURCES, INC. AND SUBSIDIARIES AND
                      PUBLIC SERVICE COMPANY OF NEW MEXICO
                        COMPARATIVE OPERATING STATISTICS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                 2002          2001          2000         1999          1998
                                            ------------ -------------  ------------ ------------ ------------

Utility Customers at Year End:
Electric:
<S>                                             <C>           <C>           <C>          <C>          <C>
  Residential.............................      345,588       340,656       332,332      321,949      319,415
  Commercial..............................       41,092        40,065        39,525       38,435       37,652
  Industrial..............................          311           377           371          375          363
  Other ultimate customers................          796           924           625          625          665
                                            ------------ -------------  ------------ ------------ ------------
    Total ultimate customers..............      387,787       382,022       372,853      361,384      358,095
  Sales for Resale........................           76            79            81           83           83
                                            ------------ -------------  ------------ ------------ ------------
    Total customers.......................      387,863       382,101       372,934      361,467      358,178
                                            ============ =============  ============ ============ ============
Gas:
  Residential.............................      411,642       404,753       398,623      390,428      383,292
  Commercial..............................       35,194        32,894        32,626       32,116       32,004
  Industrial..............................           58            50            50           51           55
  Other...................................        3,664         3,528         3,612        3,688        3,622
  Transportation..........................           27            34            32           32           29
                                            ------------ -------------  ------------ ------------ ------------
    Total customers.......................      450,585       441,259       434,943      426,315      419,002
                                            ============ =============  ============ ============ ============
Generation and Marketing Operations Sales:
Energy Sales--KWh (in thousands):
  Firm-requirements wholesale.............      581,428       616,703       330,003      179,249      278,615
  Other contracted off-system.............    4,192,788     6,900,589     7,315,679    6,196,499    4,033,931
  Economy energy sales....................    4,675,939     5,059,808     4,706,446    4,795,873    4,469,769
                                            ------------ -------------  ------------ ------------ ------------
    Total sales to ultimate customers.....    9,450,155    12,577,100    12,352,128   11,171,621    8,782,315
  Intersegment sales......................    7,406,506     7,255,297     7,088,943    6,803,583    6,739,874
                                            ------------ -------------  ------------ ------------ ------------
    Total energy sales....................   16,856,661    19,832,397    19,441,071   17,975,204   15,522,189
                                            ============ =============  ============ ============ ============
Revenues (in thousands):
  Firm-requirements wholesale.............   $   25,973     $  24,754     $  15,540     $  7,046    $  10,708
  Other contracted off-system.............      135,322       879,824       364,278      226,773      142,115
  Economy energy sales....................      116,280       512,209       368,374      131,549      122,156
                                            ------------ -------------  ------------ ------------ ------------
    Total revenues to ultimate customers..      277,575     1,416,787       748,192      365,368      274,979
  Intersegment revenues...................      348,935       341,608       324,744      318,872      362,722
  Miscellaneous electric revenues.........       47,810       (23,152)        2,242        5,741        4,657
                                            ------------ -------------  ------------ ------------ ------------
    Total generation revenues.............   $  674,320    $1,735,243    $1,075,178    $ 689,981    $ 642,358
                                            ============ =============  ============ ============ ============
Customers at Year End:
Generation                                           76            79            81           83           83
                                            ============ =============  ============ ============ ============
Reliable Net Capability--KW...............    1,734,000     1,521,000     1,521,000    1,521,000    1,506,000
Coincidental Peak Demand--KW..............    1,456,000     1,397,000     1,368,000    1,291,000    1,313,000
Average Fuel Cost per Million BTU.........   $   1.3910    $   1.6007    $   1.3827    $  1.3169    $  1.2433
BTU per KWh of Net Generation.............       10,568        10,549        10,547       10,490       10,784

</TABLE>
                                      F-67
<PAGE>

       INDEPENDENT AUDITORS' REPORT

       To the Board of Directors and Stockholders of PNM Resources, Inc.
       and Public Service Company of New Mexico


       We have audited the consolidated financial statements of PNM Resources,
       Inc. and subsidiaries and Public Service Company of New Mexico and
       subsidiaries (collectively, the Company) as of December 31, 2002 and
       2001, and for each of the three years in the period ended December 31,
       2002, and have issued our reports thereon dated February 11, 2003. Our
       audits also included the financial statement schedules listed in Item 15.
       These financial statement schedules are the responsibility of the
       Company's management. Our responsibility is to express an opinion based
       on our audits. In our opinion, such financial statement schedules, when
       considered in relation to the basic consolidated financial statements
       taken as a whole, present fairly in all material respects the information
       set forth therein.



       DELOITTE & TOUCHE LLP


       Omaha, Nebraska
       February 11, 2003




                                      F-68
<PAGE>



                                   SCHEDULE I

    The PNM Resources, Inc. holding company structure was effected
through a one-for-one share exchange between the shareholders of Public
Service Company of New Mexico ("PNM") and PNM Resources, Inc. (the
"Holding Company") on December 31, 2001, whereby the shareholders of PNM
became shareholders of the Holding Company and the Holding Company
acquired all of PNM's common stock. The Holding Company has no
significant operations other than billings of corporate activities to PNM
on a cost basis and its equity interest in PNM. There were no material
Holding Company operations in 2001; therefore, a statement of earnings is
not presented for 2001.


                               PNM RESOURCES, INC.
                CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
                                  BALANCE SHEET

<TABLE>
<CAPTION>
                                                                     As of December 31,
                                                                   2002            2001
                                                               -------------   --------------
                                                                      (In thousands)
Assets
<S>                                                                 <C>             <C>
 Cash and cash equivalents................................          $    -          $ 11,380
 Intercompany receivables.................................          48,736                 -
 Short-term investments...................................          79,630                 -
 Other current assets.....................................          10,091             9,951
                                                               -------------   --------------
    Total current assets..................................         138,457            21,331
                                                               -------------   --------------
 Property, plant and equipment, net of accumulated
   depreciation of $5,839.................................          72,068                 -
 Long-term investments....................................               -           105,669
 Investment in subsidiaries...............................         864,738           885,328
 Other long-term assets...................................          15,694                 -
                                                               -------------   --------------
    Total long-term assets................................         952,500           990,997
                                                               -------------   --------------
    Total Assets..........................................      $1,090,957        $1,012,328
                                                               =============   ==============
Liabilities and Shareholder's Equity
 Current liabilities......................................        $ 23,300            $    -
 Long-term debt...........................................          26,152                 -
 Other long-term liabilities..............................           1,737                 -
                                                               -------------   --------------
    Total Liabilities.....................................          51,189                 -
                                                               -------------   --------------
 Common stock, 39,118 shares, issued and authorized.......       1,010,510         1,012,328
 Accumulated other comprehensive income, net of tax.......            (591)                -
 Retained earnings........................................          29,849                 -
                                                               -------------   --------------
    Total common stockholder's equity.....................       1,039,768         1,012,328
                                                               -------------   --------------
    Total Liabilities and Shareholder's Equity............      $1,090,957        $1,012,328
                                                               =============   ==============
</TABLE>


                                      F-69
<PAGE>



                               PNM RESOURCES, INC.
                CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
                             STATEMENTS OF EARNINGS

                                                         Year ended
                                                        December 31,
                                                            2002
                                                     ------------------
                                                       (In thousands)

 Operating revenues................................        $ 72,865
 Operating expenses................................          79,543
                                                       --------------
    Operating loss.................................          (6,678)
                                                       --------------
 Other income and deductions:
 Equity in earnings of subsidiaries................          61,042
 Other income......................................          11,289
 Other deductions..................................            (450)
                                                       --------------
    Net other income and deductions................          71,881
                                                       --------------
 Income before income taxes........................          65,203
 Income tax expense................................             931
                                                       --------------
 Net income........................................        $ 64,272
                                                       ==============



                                      F-70
<PAGE>



                                   SCHEDULE I
                               PNM RESOURCES, INC.
                CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
                             STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                                 2002            2001
                                                                            -------------------------------
                                                                                    (In thousands)
 Cash Flows From Operating Activities:
<S>                                                                              <C>             <C>
   Net earnings............................................................      $ 64,272        $      -
   Adjustments to reconcile net earnings to net cash flows
     from operating activities:
       Depreciation and amortization.......................................           715               -
       Accumulated deferred income tax.....................................        (2,542)              -
       Equity in earnings of subsidiaries..................................       (61,042)              -
       Changes in certain assets and liabilities:
         Other assets......................................................        (3,882)              -
         Accounts payable..................................................         2,579               -
         Other liabilities.................................................        22,458               -
                                                                            ---------------  --------------
               Net cash flows provided by operating activities.............        22,558               -
                                                                            ---------------  --------------
 Cash Flows From Investing Activities:
   Property plant and equipment............................................       (20,405)              -
   Redemption of short-term investments....................................        31,012               -
   Cash dividends from subsidiaries........................................        30,206         127,000
   Short-term and long-term investments....................................             -        (115,620)
   Other...................................................................        10,194               -
                                                                            ---------------  --------------
               Net cash flows used for investing activities................        51,007          11,380
                                                                            ---------------  --------------
 Cash Flows From Financing Activities:
   Exercise of employee stock options (note 10)............................        (1,785)              -
   Dividends paid..........................................................       (34,424)              -
   Change in intercompany accounts.........................................       (48,736)              -
                                                                            ---------------  --------------
               Net cash flows provided by (used for) financing activities..       (84,945)              -
                                                                            ---------------  --------------
 Decrease in Cash and Cash Equivalents.....................................       (11,380)         11,380
 Beginning of Year.........................................................        11,380               -
                                                                            ---------------  --------------
 End of Year...............................................................      $      -        $ 11,380
                                                                            ===============  ==============
 Supplemental cash flow disclosures:
   Income taxes paid, net..................................................      $  3,640        $      -
                                                                            ===============  ==============
   Non-cash dividends from subsidiaries....................................      $ 34,880        $      -
                                                                            ===============  ==============
   Long-term debt assumed for transmission line............................      $ 26,152        $      -
                                                                            ===============  ==============

</TABLE>

                                      F-71
<PAGE>



                                   SCHEDULE II
                               PNM RESOURCES, INC.
                      PUBLIC SERVICE COMPANY OF NEW MEXICO
                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                             Additions               Deductions
                                                    -----------------------------  -------------

                                       Balance at    Charged to       Charged to
                                      beginning of    costs and          other       Write off     Balance at
                Description              year        expenses          accounts     adjustments   end of year
------------------------------------  ------------  -------------   -------------  ------------- ------------
                                                            (In thousands)
Allowance for doubtful accounts,
 year ended December 31:
<S> <C>                                   <C>          <C>              <C>           <C>          <C>
    2000                                  $12,504      $ 14,296         $    -        $13,521      $ 13,279

    2001                                  $13,279      $ 10,312         $    -        $ 5,566      $ 18,025

    2002                                  $18,025      $ (2,450)        $    -        $     -      $ 15,575

Allowance for market and credit
 volatility year ended December 31:
    2000                                  $     -      $  4,139         $    -        $     -      $  4,139

    2001                                  $ 4,139      $ (1,090) (a)    $    -        $     -      $  3,049

    2002                                  $ 3,049      $   (616)        $    -        $     -      $  2,433

</TABLE>

    (a) Represents a change in assessed market and credit volatility risk by
        the Company (see "Item 7. Management's Discussion and Analysis of
        Results of Operations and Financial Condition - Critical Accounting
        Policies").

                                      F-72
<PAGE>

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

       Information has been previously reported as defined in SEC Rule 12b-2.

                                    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 May
13, 2003 (the "2003 Proxy Statement"), to PART I, SUPPLEMENTAL ITEM - "EXECUTIVE
OFFICERS OF THE COMPANY" and "Other Matters" - "Section 16(a) Beneficial
Ownership Reporting Compliance" in the 2003 Proxy Statement.

ITEM 11.       EXECUTIVE COMPENSATION

       Reference is hereby made to "Executive Compensation" in the 2003 Proxy
Statement.

ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
               AND RELATED STOCKHOLDER MATTERS

       Reference is hereby made to "Voting Information", "Election of
Directors", "Stock Ownership of Certain Executive Officers" and "Equity
Compensation Plan Information" in the 2003 Proxy Statement.

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       Reference is hereby made to the 2003 Proxy Statement for such disclosure,
if any, as may be required by this item.

ITEM 14.        CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

       The Company's principal executive officer and principal financial officer
have concluded that the Company's disclosure controls and procedures, based on
their evaluation on March 5, 2003 of these disclosure controls and procedures,
are effective to ensure that material information relating to the Company,
including its consolidated subsidiaries, was made known to them by others within
those entities, particularly during the period in which the periodic reports are
being prepared.

(b)   Changes in internal controls.

       None.


                                      E-1
<PAGE>


                                     PART IV

ITEM 15.        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 2001, 2000, and
                   1999 are omitted for the reason that they are not
                   required or the information is otherwise supplied.

       (a) - 3-A.  Exhibits Filed:

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

3.2              Bylaws of PNM Resources, with all amendments to and including
                 February 18, 2003

10.23.5**        Fifth Amendment dated November 27, 2002 to Restated and Amended
                 PNM Accelerated  Management Performance Plan

10.25.1**        Amendment dated November 27, 2002 to the Second Restated and
                 Amended PNM Executive Medical Plan

10.43.1**        2002 Officer Incentive Plan

10.43.2**        2003 Officer Incentive Plan

10.45.4**        Fourth Amendment dated November 27, 2002 to the Service Bonus
                 Plan

10.48.2**        Second Amendment dated November 27, 2002 to the PNM OBRA '93
                 Retirement Plan

10.50.1**        First Amendment dated December 7, 1998, Second Amendment dated
                 August 7, 1999 and Third Amendment dated November 22, 2002 to
                 the PNM Section 415 Plan

10.51.1**        First Amendment dated November 27, 2002 to the PNM First
                 Restated and Amended Executive Retention Plan

10.52**          PNM Resources, Inc. Executive Spending Account Plan executed
                 November 27, 2002

10.72            Credit Agreement dated as of December 19, 2002 among PNM, the
                 Lenders identified therein, Bank of America, N.A. as
                 administrative agent, Wachovia Bank, as syndication agent, and
                 Fleet National Bank, as documentation agent


                                      E-2
<PAGE>

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

10.75**          Second Restated and Amended PNM Resources, Inc. Executive
                 Savings Plan dated January 1, 2003

10.86            Stipulation in the matter of PNM's transition plan, Utility
                 Case 3137, dated October 10, 2002, as amended by Amendment to
                 Stipulated Agreement dated October 18, 2002

10.87**          Long Term Care Insurance Plan effective January 1, 2003

10.88**          Executive Long Term Disability effective January 1, 2003

23.1             Consent of Deloitte & Touche LLP for PNM Resources, Inc.

23.2             Consent of Deloitte & Touche LLP for Public Service Company of
                 New Mexico.

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

99.2             Chief Financial Officer (Max H. Maerki, through December 31,
                 2002) Certification Pursuant to Section 906 of the
                 Sarbanes-Oxley Act of 2002.

99.3             Chief Financial Officer (John R. Loyack, beginning January 1,
                 2003) Certification Pursuant to Section 906 of the
                 Sarbanes-Oxley Act of 2002.

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

         In addition to those Exhibits shown above, PNM and PNM Resources hereby
incorporate 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

<C>            <C>                                          <C>                            <C>
3.1.1          Restated Articles of Incorporation of        4-(b) to PNM's                 2-99990
               PNM, as amended through                      Registration Statement
               May 10, 1985

3.2            Bylaws of PNM Resources, Inc.                4.2 of Post-Effective         333-10993
               with all Amendments to and                   Amendment No. 1 to
               including April 17, 2001                     PNM Resources Form
                                                            S-3 Registration
                                                            Statement filed
                                                            October 4, 2001
</TABLE>

                                      E-3
<PAGE>

<TABLE>
<CAPTION>

Exhibit No.         Description of Exhibit                   Filed as Exhibit:             File No:
----------          ----------------------                   -----------------             --------

Instruments Defining the Rights of Security Holders, Including Indentures

<C>            <C>                                            <C>                          <C>
3.2.1          By-laws of PNM with All                        3.2 to PNM's Annual          1-6986
               Amendments to and including                    Report on Form 10-K
               February 8, 2000                               for the fiscal year ended
                                                              December 31, 2000

4.1            Indenture of Mortgage and Deed of              4-(d) to PNM's               2-99990
               Trust dated as of June 1, 1947, between        Registration Statement
               PNM and The Bank of New York                   No. 2-99990
               (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 PNM

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

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

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

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

4.6.1          Third Supplemental Indenture, dated            4.6.1 to PNM's Annual        1-6986
               as of October 1, 1999 to Indenture             Report on Form 10-K
               dated as of March 11, 1998, between            for the fiscal year ended
               PNM and The Chase Manhattan                    December 31, 1999.
               Bank, as Trustee
</TABLE>

                                      E-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.         Description of Exhibit                   Filed as Exhibit:             File No:
----------          ----------------------                   -----------------             --------

<C>            <C>                                            <C>                          <C>
4.7            Indenture (for Senior Notes), dated            4.1 to PNM's                 3-53367
               as of August 1, 1998, between PNM              Registration Statement
               and The Chase Manhattan Bank, as               No. 33-53367
               Trustee.

Material Contracts

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

10.1.1         Amendment and Supplement No. 1                 10.1.1 to PNM's              1-6986
               to Supplemental and Additional Indenture       Annual Report on
               of Lease dated April 25,                       Form 10-K for fiscal
               1985 between the Navajo Tribe of               year ended December
               Indians and Arizona Public Service             31, 1995.
               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,               4-H to PNM's                 2-35042
               dated as of September 1, 1966 between          Registration Statement
               Utah Construction & Mining Co. and             No. 2-35042
               the participants in the Four Corners
               Project including PNM.

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

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

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

10.5           Water Supply Agreement between                 10.5 to PNM's Quarterly      1-6986
               the Jicarilla Apache Tribe and Public          Report of Form 10-Q for
               Service Company of New Mexico,                 the quarter ended
               dated July 20, 2000                            September 30, 2001

</TABLE>

                                      E-5
<PAGE>
<TABLE>
<CAPTION>

Exhibit No.         Description of Exhibit                   Filed as Exhibit:                 File No:
----------          ----------------------                   -----------------                 --------

<C>            <C>                                           <C>                               <C>
10.8           Arizona Nuclear Power Project                 5-T to PNM's                      2-50338
               Participation Agreement among PNM             Registration Statement
               and Arizona Public Service Company,           No. 2-50338
               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 PNM's Annual            1-6986
               Arizona Nuclear Power Project                 Report on Form 10-K
               Participation Agreement.                      for fiscal year ended
                                                             December 31, 1991.

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

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

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

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

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

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

10.8.9         Amendment No. 14 to the Arizona Nuclear       10.8.9 to PNM's Annual Report
               Power Project Participation Agreement         on Form 10-K for the fiscal
               effective June 20, 2000.                      year ended December 31, 2000.
</TABLE>

                                      E-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.         Description of Exhibit                   Filed as Exhibit:                  File No:
----------          ----------------------                   -----------------                  --------
<C>            <C>                                           <C>                                <C>
10.9           Coal Sales Agreement executed August 18,      10.9 to PNM's Annual Report        1-6986
               1980 among San Juan Coal Company, PNM         for fiscal year ended December
               and Tucson Electric Power Company,            31, 1991.
               together with Amendments No. One, Two,
               Four, and Six thereto.

10.9.1         Amendment No. Three to Coal Sales             10.9.1 to PNM's Annual Report      1-6986
               Agreement dated April 30, 1984 among San      on Form 10-K for fiscal year
               Juan Coal Company, PNM and Tucson Electric    ended December 31, 1994
               Power Company.                                (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 PNM's Annual Report      1-6986
               Agreement dated May 29, 1990 among            on Form 10-K for fiscal year
               San Juan Coal Company, PNM and Tucson         ended December 31, 1991
               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).

10.9.3         Amendment No. Seven to Coal Sales             19.3 to PNM's Quarterly Report     1-6986
               Agreement, dated as of July 27,               on Form 10-Q for the quarter
               1992 among San Juan Coal Company,             ended September 30, 1992
               PNM 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).

</TABLE>
                                      E-7

<PAGE>
<TABLE>
<CAPTION>
Exhibit No.         Description of Exhibit                   Filed as Exhibit:                  File No:
----------          ----------------------                   -----------------                  --------
<C>            <C>                                           <C>                                <C>
10.9.4         First Supplement to Coal Sales Agreement,     19.4 to PNM's Quarterly Report     1-6986
               dated July 27, 1992 among San Juan Coal       on Form 10-Q for the quarter
               Company, PNM and Tucson Electric Power        ended September 30, 1992
               Company.                                      (confidentiality treatment
                                                             was requested as to
                                                             portions of this exhibit,
                                                             and such portions were
                                                             omitted from the exhibit
                                                             filed and were filed
                                                             separately with the
                                                             Securities and Exchange
                                                             Commission).

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

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

10.9.8         Amendment No. 11 to Coal Sales Agreement,     10.9.8 to PNM's Quarterly
               Adated ugust 31, 2001 among San Juan          report on Form 10-Q for the
               Coal Company, PNM and Tucson Electric         quarter ended September 30,
               Power Company                                 2001. (Confidential 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).

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

</TABLE>

                                      E-8

<PAGE>
<TABLE>
<CAPTION>
Exhibit No.         Description of Exhibit                            Filed as Exhibit:                  File No:
----------          ----------------------                            -----------------                  --------
<C>            <C>                                                    <C>                                <C>
10.11.1        Amendment No. 1 to the Early Purchase and              10.11.1 to PNM's Annual            1-6986
               Participation Agreement between Public                 Report on Form 10-K
               Service Company of New Mexico and M-S-R                for fiscal year
               Public Power Agency, executed as of December           ended December 31, 1997.
               16, 1987, for San Juan Unit 4 (refiled).


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

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

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

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

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

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

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

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

                                      E-9
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.         Description of Exhibit                            Filed as Exhibit:                  File No:
----------          ----------------------                            -----------------                  --------
<C>            <C>                                                    <C>                                <C>
10.19          Facility Lease dated as of July 31, 1986, between the  10.19 to PNM's Annual Report       1-6986
               First National Bank of Boston, as Owner Trustee, and   on Form 10-K for fiscal year
               Public Service Company of New Mexico together with     ended December 31, 1996.
               Amendments No. 1, 2 and 3 thereto (refiled).

10.20*         Facility Lease dated as of August 12, 1986, between    10.20 to PNM's Annual Report       1-6986
               The First National Bank of Boston, as Owner Trustee,   on Form 10-K for fiscal year
               and Public Service Company of New Mexico together      ended December 31, 1996.
               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 PNM's Annual Report     1-6986
               Facility Lease dated as of August 12, 1986, as         on Form 10-K for fiscal year
               amended, between The First National Bank of Boston,    ended December 31, 1998.
               not in its individual capacity, 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, 1995, to          10.20.3  to PNM's Quarterly        1-6986
               Facility Lease between Public Service Company of New   Report on Form 10-Q dated
               Mexico and the First National Bank of Boston,          for the quarter ended March
               as of August 12, 1986.                                 31, 1995.

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

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

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


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

                                      E-10
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.         Description of Exhibit                            Filed as Exhibit:                  File No:
----------          ----------------------                            -----------------                  --------
<C>            <C>                                                    <C>                                <C>
10.23.2**      Second Amendment to Restated and Amended Public        10.23.2 to PNM's Annual Report     1-6986
               Service Company of New Mexico Accelerated              on Form 10-K for fiscal year
               Management Performance Plan (1988)                     ended December 31, 1998.
               (December 29, 1989) (refiled).

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

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

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

10.27          Amendment No. 2 dated as of April 10, 1987, to the     10.53 to PNM's Annual Report on    1-6986
               Facility Lease dated as of August 12, 1986, between    Form 10-K for fiscal year ended
               The First National Bank of Boston, as Owner Trustee,   December 31, 1987.
               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 Agreements dated      10.32 to PNM's Annual Report on    1-6986
               August 4, 1989, Between Public Service Company of      Form 10-K for fiscal year ended
               New Mexico and John R. Ackerman and Max Maerki         December 31, 1999.
               (refiled).

10.32.1**      First Amendment to the Supplemental Employee           10.32.1 to PNM's Quarterly         1-6986
               Retirement Agreement for Max H. Maerki, as amended     Report on Form 10-Q for the
               effective August 10, 1998.                             quarter ended September 30, 1998.

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

</TABLE>

                                      E-11
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.         Description of Exhibit                            Filed as Exhibit:                  File No:
----------          ----------------------                            -----------------                  --------
<C>            <C>                                                    <C>                                <C>

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

10.34          Settlement Agreement between Public Service Company   10.34 to PNM's Quarterly            1-6986
               of New Mexico and Creditors of Meadows Resources,     Report on Form 10-Q for
               Inc. dated November 2, 1989 (refiled).                quarter ended June 30, 2000.

10.34.1        First amendment dated April 24, 1992 to the           10.34.1 to PNM's Quarterly          1-6986
               Settlement Agreement dated November 2, 1989           Report on Form 10-Q for
               among  Public Service Company of New                  quarter ended June 30, 2000.
               Mexico, the lender  parties thereto
               and collateral agent (refiled).

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

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

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

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

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

                                      E-12

<PAGE>
<TABLE>
<CAPTION>
Exhibit No.         Description of Exhibit                             Filed as Exhibit:                  File No:
----------          ----------------------                             -----------------                  --------
<C>            <C>                                                    <C>                                <C>
10.40**         PNM Resources, Inc. Director Retainer Plan, dated      4.3 to PNM Resources, Inc.        333-03289
                December 31, 2001                                      Post-Effective Amendment No.
                                                                       1 to Form 8 Registration
                                                                       Statement filed December 31,
                                                                       2001

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

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

10.43           2001 Officer Incentive Plan effective January 1, 2001  10.43 to PNM's Annual Report
                                                                       on Form 10-K for the fiscal
                                                                       year ended December 31, 2000

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

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

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

                                      E-13

<PAGE>
<TABLE>
<CAPTION>
Exhibit No.         Description of Exhibit                            Filed as Exhibit:                  File No:
----------          ----------------------                            -----------------                  --------
<C>            <C>                                                    <C>                                <C>
10.47.1**       Pension Service Adjustment Agreement for Benjamin F.  10.3.1 to PNM's Quarterly         1-6986
                Montoya.                                              Report on Form 10-Q for the
                                                                      quarter ended September 30,
                                                                      1993.

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

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

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

10.48**         Public Service Company of New Mexico OBRA `93         10.4 to PNM's Quarterly            1-6986
                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 PNM's Quarterly         1-6986
                New Mexico OBRA '93 Retirement Plan, as  amended      Report on Form 10-Q for the
                effective December 7, 1998                            quarter ended March 31, 1999.

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

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

10.51.2**       First Restated and Amended Executive Retention Plan,  10.51.2 to PNM's Quarterly         1-6986
                as amended effective December 7, 1998                 Report on Form 10-Q for the
                                                                      quarter ended March 31, 1999.
</TABLE>
                                      E-14
<TABLE>
<CAPTION>
<PAGE>
Exhibit No.         Description of Exhibit                            Filed as Exhibit:                  File No:
----------          ----------------------                            -----------------                  --------
<C>            <C>                                                    <C>                                <C>
10.53        January 12, 1994 Stipulation.                            10.53 to PNM's Annual Report       1-6986
                                                                      on Form 10-K for fiscal year
                                                                      ended December 31, 1993.

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

10.56.1      Amended and Restated Receivables Purchase Agreement      10.56.1 to PNM's Quarterly         1-6986
             dated May 20, 1996, between Public Service Company of    Report on Form 10-Q for the
             New Mexico, Citibank and Citicorp North America, Inc.    quarter ended June 30, 1996.
             and Amended Restated Collection Agent Agreement dated
             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 September 1,      10.59 to PNM's Annual              1-6986
             1993, between The First National Bank of Boston,         Report on Form 10-K for
             Lessor, and PNM, Lessee (EIP Lease).                     fiscal year ended December
                                                                      31, 1993.

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

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

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

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

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

<TABLE>
<CAPTION>
                                      E-15
<PAGE>
Exhibit No.         Description of Exhibit                            Filed as Exhibit:                 File No:
----------          ----------------------                            -----------------                 --------
<C>            <C>                                                    <C>                               <C>
10.68        Master Decommissioning Trust Agreement for Palo Verde    10.68 to PNM's Quarterly          1-6986
             Nuclear Generating Station dated March 15, 1996, Report  on Form 10-Q for the
             between Public Service Company of New Mexico and         quarter ended March 31,
             Mellon  Bank, N.A.                                       1996.

10.68.1      Amendment Number One to the Master Decommissioning       10.68.1 to PNM's Annual           1-6986
             Trust Agreement for Palo Verde Nuclear Generating        Report of the Registrant on
             Station dated January 27, 1997, between Public Service   Form 10-K for fiscal year
             Company of New Mexico and Mellon Bank, N.A.              ended December 31, 1997.

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

10.72        Revolving Credit Agreement dated as of March 11,         10.72 to PNM's Quarterly          1-6986
             1998, among PNM,                                         Report on Form 10-Q for the
             the Chase Manhattan Bank, Citibank,                      quarter ended March 31,
             N.A., Morgan Guaranty Trust Company                      1998.
             of New York, and Chase Securities, Inc.,
             and the Initial Lenders Named Therein.

10.73        Refunding Agreement No. 8A, dated as                     10.73 to PNM's Quarterly          1-6986
             of December 23, 1997, among PNM, the Owner               Report on Form 10-Q for the
             Participant Named                                        quarter ended March 31,
             Therein, State Street Bank and Trust                     1998.
             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 PNM's Quarterly          1-6986
             Service Company of New Mexico                            Report on Form 10-Q for the
             Performance Stock Plan effective March 10, 1998.         quarter ended March 31,
                                                                      1998.

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

</TABLE>
                                      E-16
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.         Description of Exhibit                            Filed as Exhibit:                  File No:
----------          ----------------------                            -----------------                  --------
<C>            <C>                                                    <C>                                <C>

10.74.2**      Second Amendment to the Third Restated and Amended     10.74.2 to PNM's Annual
               Public Service Company of New Mexico Performance       Report on Form 10-K for the
               Stock Plan, effective December 7, 1998                 fiscal year ended December
                                                                      31, 2000.

10.74.3**      Third Amendment to the Third Restated and Amended      10.74.3 to PNM's Annual
               Public Service Company of New Mexico Performance       Report on Form 10-K for the
               Stock Plan, effective December 10, 2000.               fiscal year ended December
                                                                      31, 2000.

10.74.4**      Fourth Amendment to Third Restated and Amended Public  4.3.5 to PNM Resources'          333-03303
               Service Company of New Mexico Performance Stock Plan   Post-Effective Amendment
               dated December 31, 2001                                No. 1 to Form 8
                                                                      Registration Statement
                                                                      filed December 31, 2001

10.75**        First Amended and Restated Public Service Company of   10.75 to PNM Resources and         1-6986
               New Mexico Executive Savings Plan dated November 16,   PNM's Annual Report on Form
               2001.                                                  10-K for the fiscal year
                                                                      ended December 31, 2001

10.75.1**      First Amendment to the First Amended and Restated      4.6 to PNM Resources' Form       333-76316
               Public Service Company of New Mexico Executive         8 Registration Statement
               Savings Plan effective January 1, 2002                 filed January 4, 2002

10.76          PVNGS Capital Trust--Variable Rate                     10.76 to PNM'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 as of   10.77 to PNM's Quarterly           1-6986
               October 27, 1999, among Public Service Company of New  Report on Form 10-Q for the
               Mexico, Tucson Electric Power Company, The City of     quarter ended September 30,
               Farmington, New Mexico, M-S-R Public Power Agency,     1999.
               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-17
<TABLE>
<CAPTION>
<PAGE>
Exhibit No.         Description of Exhibit                            Filed as Exhibit:                 File No:
----------          ----------------------                            -----------------                 --------
<C>            <C>                                                    <C>                               <C>
10.78          Stipulation in the matter of the Commission's          10.78 to PNM's Quarterly          1-6986
               investigation of the rates for electric service of     Report on Form 10-Q for the
               Public Service Company of New Mexico, Rate Case No.    quarter ended September 30,
               2761, dated May 21, 1999                               1999.

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

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

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

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

10.82          PNM Resources, Inc. Omnibus Performance Equity Plan    4.3 to PNM Resources' Form      333-76288
               dated December 31, 2001                                8 Registration Statement
                                                                      filed January 4, 2001
</TABLE>
                                      E-18
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.         Description of Exhibit                            Filed as Exhibit:                  File No:
----------          ----------------------                            -----------------                  --------
<C>            <C>                                                    <C>                                <C>
10.83          Transportation Agreement Buy Out Agreement, dated      10.83 to PNM's Quarterly
               August 31, 2001 among San Juan Transportation          Report on Form 10-Q for the
               Company, PNM and Tucson Electric Power Company.        quarter ending September
                                                                      31, 2001 (Confidential
                                                                      treatment was requested
                                                                      to portions of this
                                                                      exhibit, and such
                                                                      portions were omitted
                                                                      from this exhibits
                                                                      filed and were filed
                                                                      separately with the
                                                                      Securities and Exchange
                                                                      Commission.)

10.84          Coal Sales Agreement Buy Out Agreement, dated August   10.8 4 to PNM's Quarterly
               31, 2001 among San Juan Coal Company, PNM and Tucson   Report on Form 10-Q for the
               Electric Power Company.                                quarter ending September
                                                                      31, 2001  (Confidential
                                                                      treatment was requested to
                                                                      portions of this exhibit,
                                                                      and such portions were
                                                                      omitted from this exhibits
                                                                      filed and were filed
                                                                      separately with the
                                                                      Securities and Exchange
                                                                      Commission.)

10.85          Underground Coal Sales Agreement, dated August 31,     10.85 to PNM's Quarterly
               2001 among San Juan Coal Company, PNM and Tucson       Report on Form 10-Q for the
               Electric Power Company.                                quarter ending September
                                                                      31, 2001  (Confidential
                                                                      treatment was requested to
                                                                      portions of this exhibit,
                                                                      and such portions were
                                                                      omitted from this exhibits
                                                                      filed and were filed
                                                                      separately with the
                                                                      Securities and Exchange
                                                                      Commission).

</TABLE>
                                      E-19
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.         Description of Exhibit                            Filed as Exhibit:                  File No:
----------          ----------------------                            -----------------                  --------

Additional Exhibits
<C>                                                                   <C>                               <C>
99.2*         Participation Agreement dated as of                     99.2 to PNM's Annual Report       1-6986
              December 16, 1985, among the Owner                      on Form 10-K for fiscal
              Participant named therein, First PV                     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 PNM'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,
              the First National Bank of Boston, as                   1996.
              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 PNM's Quarterly         1-6986
              of March 8, 1995, to Trust Indenture                    Report on Form 10-Q for the
              Mortgage, Security Agreement and                        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 PNM's Annual Report       1-6986
              Agreement dated as of December 16,                      on Form 10-K for fiscal
              1985, between Public Service Company                    year ended December 31,
              of New Mexico and The First National                    1995.
              Bank of Boston, as Owner
              Trustee (refiled).

99.5          Participation Agreement dated as of July                99.5 to PNM's Annual Report       1-6986
              31, 1986, among the Owner Participant                   on Form 10-K for fiscal
              named herein, First PV Funding                          year ended December 31,
              Corporation, The First National Bank of                 1996.
              Boston, in its 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).
</TABLE>
                                      E-20
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.         Description of Exhibit                            Filed as Exhibit:                 File No:
----------          ----------------------                            -----------------                 --------
<C>                                                                   <C>                               <C>
99.6          Trust Indenture, Mortgage, Security                     99.6 to PNM's Annual Report       1-6986
              Agreement and Assignment of Rents                       on Form 10-K for fiscal
              dated as of July 31, 1986, between The                  year ended December 31,
              First National Bank of Boston, as Owner                 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 PNM's Annual Report       1-6986
              Agreement dated as of July 31, 1986,                    on Form 10-K for fiscal
              between Public Service Company of                       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 PNM'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,
              Funding Corporation. The First National                 1997.
              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).

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

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

</TABLE>

                                      E-21
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.         Description of Exhibit                            Filed as Exhibit:                 File No:
----------          ----------------------                            -----------------                 --------
<C>                                                                   <C>                               <C>
99.9.2        Supplemental Indenture No. 2 dated as                   99.9.1 to PNM's Quarterly         1-6986
              of March 8, 1995, to Trust Indenture,                   Report on Form 10-Q for the
              Mortgage, Security Agreement and                        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 PNM'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,
              Mexico and The First National Bank of                   1997.
              Boston, as Owner
              Trustee (refiled).

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

99.13         Assignment, Assumption and Further                      99.13 to PNM'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).

</TABLE>
                                      E-22
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.         Description of Exhibit                            Filed as Exhibit:                 File No:
----------          ----------------------                            -----------------                 --------
<C>                                                                   <C>                               <C>
99.14         Participation Agreement dated as of December 15, 1986,  99.14 to PNM's                    1-6986
              among the Owner Participant named therein, First PV     Quarterly Report on Form
              Funding Corporation, The First National Bank of         10-Q for the quarter ended
              Boston, in its individual capacity and as Owner         March 31, 1997.
              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 PNM's Annual             1-6986
              Agreement and Assignment of Rents dated                 Report on Form 10-K for
              as of December 31, 1986, between the                    fiscal year ended December
              First National Bank of Boston, as Owner                 31, 1996.
              Trustee, and Chemical Bank, as Indenture
              Trustee (Unit 2 Transaction) (refiled).

99.16         Assignment, Assumption, and Further                     99.16 to PNM'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,
              New Mexico and The First National                       1997.
              Bank of Boston, as Owner Trustee
              (Unit 2 Transaction) (refiled).

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

99.19         Agreement No. 13904 (Option and Purchase of Effluent),  99.19 to PNM's Annual             1-6986
              dated April 23, 1973, among Arizona Public Service      Report on Form 10-K for
              Company, Salt River Project Agricultural Improvement    fiscal year ended December
              and Power District, the Cities of Phoenix, Glendale,    31, 1996.
              Mesa, Scottsdale, and Tempe, and the Town of Youngtown
              (refiled).

</TABLE>
                                      E-23

<PAGE>
<TABLE>
<CAPTION>
Exhibit No.         Description of Exhibit                            Filed as Exhibit:                 File No:
----------          ----------------------                            -----------------                 --------
<C>                                                                   <C>                               <C>
99.20         Agreement for the Sale and Purchase of                  99.20 to PNM's Annual             1-6986
              Wastewater Effluent, dated June 12, 1981,               Report on Form 10-K for
              Among Arizona Public Service Company,                   fiscal year ended December
              Salt River Project Agricultural                         31, 1996.
              Improvement and Power District and the
              City of Tolleson, as amended (refiled).

99.21*        1996 Supplemental Indenture dated as of                 99.21 to PNM'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,
              Assignment of Rents dated as of December                1996.
              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 PNM'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,
              Assignment of Rents, dated as of August                 1998.
              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.


                                      E-24
<PAGE>





(b) Reports on Form 8-K:

         During the quarter ended December 31, 2002 and during the period
beginning January 1, 2003 and ending March 12, 2003, the Company filed, on the
date indicated, the following reports on Form 8-K.
<TABLE>
<CAPTION>
     Dated:                          Filed:                                Relating to:
     ------                          ------                                ------------
<S>                              <C>                            <C>
October 1, 2002                  October 4, 2002                The Company declares common stock
                                                                dividend.

October 10, 2002                 October 11, 2002               The Company announces to set five-year rate
                                                                path and projected cost savings will offset
                                                                lower rates.

September 30, 2002               October 15, 2002               The Company's Comparative Operating
                                                                Statistics for the months of September 2002
                                                                and 2001 and the years ended September 2002
                                                                and 2001.

October 21, 2002                 October 22, 2002               The Company entered into an agreement with
                                                                FPL Energy LLC, a subsidiary of FPL Group,
                                                                Inc., to develop a 200 MW wind generation
                                                                facility in New Mexico.

October 29, 2002                 October 30, 2002               The Company's quarter ended September 30,
                                                                2002 Earnings Announcement, Consolidated
                                                                Statement of Earnings, Consolidated Balance
                                                                Sheets, Consolidated Statement of Cash Flow
                                                                and Comparative Operating Statistics.

October 31, 2002                 November 14, 2002              The Company's Comparative Operating
                                                                Statistics for the months of October 2002 and
                                                                2001 and the years ended October 2002
                                                                and 2001.

December 9, 2002                 December 10, 2002              The Company declares preferred dividends.

December 10, 2002                December 11, 2002              The Company declares common stock
                                                                dividend.

December 10, 2002                December 11, 2002              The Company names new CFO, out-going
                                                                CFO to lead corporate strategy and
                                                                technology efforts.

November 30, 2002                December 19, 2002              The Company's Comparative Operating
                                                                Statistics for the months of November 2002
                                                                and 2001 and the years ended November 2002
                                                                and 2001.
</TABLE>
                                      E-25
<PAGE>
<TABLE>
<CAPTION>

     Dated:                          Filed:                               Relating to:
     ------                          ------                               ------------
<S>                              <C>                            <C>
January 2, 2003                  January 3, 2003                The Company updates 2002 earnings
                                                                guidance, provides guidance for 2003.

January 3, 2003                  January 3, 2003                The Company's utility unit expands
                                                                revolving  credit agreement.  The Company
                                                                also purchases lease of major NM-Texas
                                                                Transmission lines.

January 10, 2003                 January 10, 2003               The Company's utility unit seeks increase in
                                                                natural gas cost of service.

January 14, 2003                 January 14, 2003               The Company's Comparative Operating
                                                                Statistics for the months of
                                                                December 2002 and 2001 and the
                                                                years ended December 2002 and 2001.

January 28, 2003                 January 29, 2003               The Company announces the New Mexico
                                                                Public Regulation Commission approves
                                                                the Company's Electric Rate Agreement.

January 29, 2003                 January 31, 2003               The Company wins 80 MW San Diego
                                                                Navy Contract.

February 11, 2003                February 12, 2003              The Company's quarter ended December 31,
                                                                2002 Earnings Announcement, Unaudited
                                                                Consolidated Statement of Earnings,
                                                                Unaudited Consolidated Balance Sheets,
                                                                Unaudited Consolidated Statement of Cash
                                                                Flows, Comparative Operating Statistics
                                                                and Other Select Financial Information

</TABLE>

                                      E-26

<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.

                                                      PNM RESOURCES, INC.
                                                         (Registrant)

Date:  March 18, 2003                     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             March 18, 2003
------------------------------                Chairman of the Board
          J. E. Sterba
   Chairman, President and
    Chief Executive Officer

       /s/ J. R. LOYACK                  Principal Financial Officer                 March 18, 2003
------------------------------
         J. R. Loyack
   Senior Vice President and
    Chief Financial Officer

       /s/ R. A. LUMNEY                  Principal Accounting Officer                March 18, 2003
------------------------------
         R. A. Lumney
Vice President, Controller and
   Chief Accounting Officer

      /s/ R. G. ARMSTRONG                Director                                    March 18, 2003
------------------------------
        R. G. Armstrong

       /s/ R. M. CHAVEZ                  Director                                    March 18, 2003
------------------------------
         R. M. Chavez

       /s/ J. A. DOBSON                  Director                                    March 18, 2003
------------------------------
         J. A. Dobson

       /s/ J. A. GODWIN                  Director                                    March 18, 2003
------------------------------
         J. A. Godwin

       /s/ M. T. PACHECO                 Director                                    March 18, 2003
------------------------------
         M. T. Pacheco

      /s/ T. F. PATLOVICH                Director                                    March 18, 2003
------------------------------
        T. F. Patlovich

        /s/ R. M. PRICE                  Director                                    March 18, 2003
------------------------------
          R. M. Price

        /s/ B. S. REITZ                  Director                                    March 18, 2003
------------------------------
          B. S. Reitz

        /s/ P. F. ROTH                   Director                                    March 18, 2003
------------------------------
          P. F. Roth

</TABLE>
                                      E-27
<PAGE>

CERTIFICATIONS:

I, Jeffry E. Sterba, certify that:

     1.   I have reviewed this annual report on Form 10-K of PNM Resources, Inc.
          and Public Service Company of New Mexico;

     2.   Based on my knowledge, this annual report does not contain any untrue
          statement of a material fact or omit to state a material fact
          necessary to make the statements made, in light of the circumstances
          under which such statements were made, not misleading with respect to
          the period covered by this annual report;

     3.   Based on my knowledge, the financial statements, and other financial
          information included in this annual report, fairly present in all
          material respects the financial condition, results of operations and
          cash flows of the registrant as of, and for, the periods presented in
          this annual report;

     4.   The registrant's other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as
          defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
          and we have:

          a)   designed such disclosure controls and procedures to ensure that
               material information relating to the registrant, including its
               consolidated subsidiaries, is made known to us by others within
               those entities, particularly during the period in which this
               annual report is being prepared;

          b)   evaluated the effectiveness of the registrant's disclosure
               controls and procedures as of a date within 90 days prior to the
               filing date of this annual report (the "Evaluation Date"); and

          c)   presented in this annual report our conclusions about the
               effectiveness of the disclosure controls and procedures based on
               our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent evaluation, to the registrant's auditors and the
          audit committee of registrant's board of directors (or persons
          performing the equivalent function):

          a)   all significant deficiencies in the design or operation of
               internal controls which could adversely affect the registrant's
               ability to record, process, summarize and report financial data
               and have identified for the registrant's auditors any material
               weaknesses in internal controls; and

          b)   any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal controls; and

                                      E-28
<PAGE>




     6.   The registrant's other certifying officers and I have indicated in
          this annual report whether or not there were significant changes in
          internal controls or in other factors that could significantly affect
          internal controls subsequent to the date of our most recent
          evaluation, including any corrective actions with regard to
          significant deficiencies and material weaknesses.


March 18, 2003




/s/ Jeffry E. Sterba
----------------------------------
Jeffry E. Sterba,
Chairman, President and
Chief Executive Officer





                                      E-29
<PAGE>




I, Max H. Maerki, certify that:

     1.   I have reviewed this annual report on Form 10-K of PNM Resources, Inc.
          and Public Service Company of New Mexico;

     2.   Based on my knowledge, this annual report does not contain any untrue
          statement of a material fact or omit to state a material fact
          necessary to make the statements made, in light of the circumstances
          under which such statements were made, not misleading with respect to
          the period covered by this annual report;

     3.   Based on my knowledge, the financial statements, and other financial
          information included in this annual report, fairly present in all
          material respects the financial condition, results of operations and
          cash flows of the registrant as of, and for, the periods presented in
          this annual report;

     4.   The registrant's other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as
          defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
          and we have:

          a)   designed such disclosure controls and procedures to ensure that
               material information relating to the registrant, including its
               consolidated subsidiaries, is made known to us by others within
               those entities, particularly during the period in which this
               annual report is being prepared;

          b)   evaluated the effectiveness of the registrant's disclosure
               controls and procedures as of a date within 90 days prior to the
               filing date of this annual report (the "Evaluation Date"); and

          c)   presented in this annual report our conclusions about the
               effectiveness of the disclosure controls and procedures based on
               our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent evaluation, to the registrant's auditors and the
          audit committee of registrant's board of directors (or persons
          performing the equivalent function):

          a)   all significant deficiencies in the design or operation of
               internal controls which could adversely affect the registrant's
               ability to record, process, summarize and report financial data
               and have identified for the registrant's auditors any material
               weaknesses in internal controls; and

          b)   any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal controls; and

                                      E-30
<PAGE>




     6.   The registrant's other certifying officers and I have indicated in
          this annual report whether or not there were significant changes in
          internal controls or in other factors that could significantly affect
          internal controls subsequent to the date of our most recent
          evaluation, including any corrective actions with regard to
          significant deficiencies and material weaknesses.


March 18, 2003




/s/ Max H. Maerki
----------------------------------
Max H. Maerki,
Senior Vice President,
Corporate Strategy and Development
Former Senior Vice President and
Chief Financial Officer during the fiscal
year ended on December 31, 2002




                                      E-31
<PAGE>




I, John R. Loyack, certify that:

     1.   I have reviewed this annual report on Form 10-K of PNM Resources, Inc.
          and Public Service Company of New Mexico;

     2.   Based on my knowledge, this annual report does not contain any untrue
          statement of a material fact or omit to state a material fact
          necessary to make the statements made, in light of the circumstances
          under which such statements were made, not misleading with respect to
          the period covered by this annual report;

     3.   Based on my knowledge, the financial statements, and other financial
          information included in this annual report, fairly present in all
          material respects the financial condition, results of operations and
          cash flows of the registrant as of, and for, the periods presented in
          this annual report;

     4.   The registrant's other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as
          defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
          and we have:

          a)   designed such disclosure controls and procedures to ensure that
               material information relating to the registrant, including its
               consolidated subsidiaries, is made known to us by others within
               those entities, particularly during the period in which this
               annual report is being prepared;

          b)   evaluated the effectiveness of the registrant's disclosure
               controls and procedures as of a date within 90 days prior to the
               filing date of this annual report (the "Evaluation Date"); and

          c)   presented in this annual report our conclusions about the
               effectiveness of the disclosure controls and procedures based on
               our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent evaluation, to the registrant's auditors and the
          audit committee of registrant's board of directors (or persons
          performing the equivalent function):

          a)   all significant deficiencies in the design or operation of
               internal controls which could adversely affect the registrant's
               ability to record, process, summarize and report financial data
               and have identified for the registrant's auditors any material
               weaknesses in internal controls; and

          b)   any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal controls; and

                                      E-32
<PAGE>




     6.   The registrant's other certifying officers and I have indicated in
          this annual report whether or not there were significant changes in
          internal controls or in other factors that could significantly affect
          internal controls subsequent to the date of our most recent
          evaluation, including any corrective actions with regard to
          significant deficiencies and material weaknesses.



March 18, 2003




/s/ John R. Loyack
----------------------------------
John R. Loyack,
Senior Vice President and
Chief Financial Officer




                                      E-33