================================================================================
                             PARTICIPATION AGREEMENT


                            dated as of July 31, 1986

                                      among

                    CHASE MANHATTAN REALTY LEASING CORPORTION
                              as Owner Participant


                          FIRST PV FUNDING CORPORATION
                               as Loan Participant

                       THE FIRST NATIONAL BANK OF BOSTON,
                 in its individual capacity and as Owner Trustee
                            under a Trust Agreement,
                           dated as of July 31, 1986,
                  with the Owner Participant, as Owner Trustee

                                 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, as Indenture Trustee

                                       and

                      PUBLIC SERVICE COMPANY Of NEW MEXICO,
                                    as Lessee

================================================================================
              Sale and Leaseback of a 1.133333% Undivided Interest
                 in Palo Verde Nuclear Generating Station unit 1
               and a .377777% Undivided Interest in Certain Common
                                   Facilities
================================================================================


6091.50.2831.27:2


<PAGE>


                                 TABLE OF CONTENTS
                                                                       Page
                                                                       ----
SECTION 1      Definitions .........................................     2

SECTION 2      Participation by the
               Loan Participant;
               Refunding ...........................................     2

SECTION 3      Participation by the
               Owner Participant ...................................     4

SECTION 4      Purchase, Sale,
               Financing and Lease of
               the undivided Interest;
               Purchase, Sale and Lease
               of the Real Property
               Interest ............................................     4

SECTION 5      Notice of Closing;
               Closing .............................................     5

SECTION 6      Representations,
               Warranties and
               Agreements of the Loan
               Participant; Direction
               to the Indenture Trustee ............................     6

SECTION 7      Representations,
               Warranties and
               Agreements of the Owner
               Participant .........................................     9

SECTION 8      Representations,
               Warranties and
               Agreements of the Owner
               Trustee and FNB ......................................    16

SECTION 9      Representations,
               Warranties and
               Agreements of Chemical
               Bank .................................................    23


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                          TABLE OF CONTENTS (Continued)
                                                                       Page
                                                                       ----

SECTION 10     Representations,
               warranties and
               Agreements of the Lessee .............................   25

SECTION 11     Conditions Precedent .................................   51

SECTION 12     Consent to Assignment of
               the Facility Lease;
               Consent to Indenture;
               Consent to Assignment of
               Notes ................................................   66

SECTION 13     Lessee's Indemnities and
               Agreements ...........................................   67

SECTION 14     Transaction Expenses .................................   82

SECTION 15     Owner Participant's
               Transfers ............................................   84

SECTION 16     Brokerage and Finders'
               Tees and Commissions .................................   87

SECTION 17     Survival of
               Representations and
               Warranties; Binding
               Effect ...............................................   87

SECTION 18     Notices ..............................................   89

SECTION 19     Miscellaneous ........................................   90

        
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               SCHEDULES

                          TABLE OF CONTENTS (continued)
                                                                       Page
                                                                       ----
Schedule 1     Notice of Closing

Schedule 2     Pricing Assumptions

Schedule 3     Bill of Sale and Assignment (Section 7(b)(4))

Schedule 4     Recordations and Filings

Schedule 5     Affidavit of Owner Trustee (Section 7(c)(6))

               APPENDIX

Appendix A     Definitions
























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                             PARTICIPATION AGREEMENT


                  PARTICIPATION AGREEMENT, dated as of July 31, 1986 among CHASE
MANHATTAN  REALTY  LEASEING  CORPORATION,  a New  York  corporation  (the  Owner
Participant), THE FIRST PV FUNDING CORPORATIOND a Delaware corporation (the Loan
Participant), THE FIRST NATIONAL BANK OF BOSTON, a national banking association,
in its individual  capacity (FNB) and as Owner Trustee (the Owner Trustee) under
a Trust  Agreement,  dated as of July 31,  1986,  with  the  Owner  Participant,
CHEMICAL  BANK,  a New York  banking  corporation,  in its  individual  capacity
(Chemical Bank) and as Indenture  Trustee (the 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 MEW MEXICO,
a New Mexico Corporation (the Lessee).

                              WITNESSETH:


                  WHEREAS,  the Owner Participant  desires to cause the Trust to
acquire the Undivided  Interest and the Real Property  Interest and to lease the
Undivided  Interest  and the Real  Property  Interest  to the  Lessee  under the
Facility Lease;

                  WHEREAS, the Lessee desires to sell the Undivided Interest and
the Real Property  Interest to the Trust and lease the Undivided  Interest.  and
the Real Property Interest back from the Trust under the Facility Leases.

                  WHEREAS,  the Owner Trustee and the Lessee will enter into the
Purchase  Documents  with  respect  to the sale and  purchase  of the  Undivided
Interest and the Real Property Interest;

                  WHEREAS,   pursuant  to  the  terms  and   provisions  of  the
Indenture,  the Owner Trustee will  authorize the creation,  issuance,  sale and
delivery of the Initial  Series Note and the granting of the security  therefor,
and the Indenture Trustee will authenticate the Initial Series Note; and

                  WHEREAS,  the Loan  Participant  is  willing to  purchase  the
Initial Series Note on the terms and conditions set forth herein;



6091.5O.2831.27:2


<PAGE>


                  NOW,  THEREFORE in  consideration of the premises and of other
good and valuable  consideration,  receipt of which is hereby acknowledged,  the
parties hereto agree as follows:

                  SECTION 1. Definitions.
 
                  For the purposes hereof,  capitalized  terms used herein shall
have the  meanings  assigned  to such terms in Appendix  A.  References  in this
Participation  Agreement  to sections,  paragraphs  and clauses are to sections,
paragraphs  and  clauses  in  this  Participation   Agreement  unless  otherwise
indicated.

                SECTION 2. Participation by the Loan Participant; Refunding.

                  (a)   Loan   Participant's   Commitment.   Subject   to   the.
satisfaction  of the conditions in Sections 5(a) and 11(a),  on the closing Date
the Loan  Participant  agrees to lend to the Owner  Trustee,  on a  non-recourse
basis, an amount (the Loan) equal to 8O% of the Purchase Price.

                  (b) Payment; Terms of the Initial series Note.


                  (1)  Payment.  Proceeds of the Loan shall be paid  directly to
         the  Indenture  Trustee,  for the  account  of the  Owner  Trustee,  in
         immediately available funds, at the Indenture Trustee's Office,

                  (2)  Terms of the  Initial  series  Note.  The  Loan  shall be
         evidenced by the Initial  Series Note. The Initial Series Note shall be
         issued by the Owner Trustee under and pursuant to the Indenture,  shall
         be in the  principal  amount of the Loan and shall bear interest at the
         rate or rates  per  annum  and  shall be  payable  as set  forth in the
         Indenture.




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<PAGE>

                  (a)  Refunding  of the  Initial  Series  Note.  Subject to the
satisfaction of the conditions set forth in Section 11(c), on the Refunding Date
the Loan  Participant  agrees to lend to the Owner  Trustee,  on a  non-recourse
basis,  an amount (the Refunding  Loan) equal to the amount  necessary to refund
the Initial  Series Note.  Proceeds of the Refunding Loan shall be paid directly
to the Indenture  Trustee to the extent  necessary to refund the Initial  Series
Note in immediately  available  funds, at the Indenture  Trustee's  Office.  The
Refunding Loan shall be represented by the Fixed Rate Note,  which Note shall be
issued by the Owner  Trustee under and pursuant to the Indenture and shall be in
the principal  amount of the Refunding Loan and shall bear interest at the rates
per annum and shall be payable 85 set forth in the  Indenture.  On the Refunding
Date the Fixed Rate Note shall be exchanged by the Owner Trustee for the Initial
Series Note. Not less than 1 Business Day prior to the Refunding  Date, the Loan
Participant  shall deliver to the Owner Participant and the Lessee a certificate
setting forth the information  necessary to complete the form of Fixed Rate Note
(including  the  schedules  thereto)  set  forth  in the  Indenture.  Upon  such
delivery, and upon approval by the Lessee and the Owner Participant of the terms
thereof, the Owner Participant and the Lessee shall cause the form of Fixed Rate
Note to be  completed.  The  parties  hereto  shall make a good faith  effort to
cooperate  to effect such  amendments  of the  Transaction  Documents  as may be
necessary or appropriate to effect such refunding. The refunding contemplated by
this  section  2(c) shall be  effected  at the  request  of the Lessee  given in
writing at least 5 Business Days prior to the Refunding Date; provided, however,
that (i) no such  request  shall be made or  refunding  occur  while an Event of
Default shall have occurred and be  continuing;  (ii) unless waived by the Owner
Participant,  Net Economic  Return shall not be adversely  affected  thereby (or
appropriate  adjustments  shall have been made or shall be made on the Refunding
Date  pursuant to Section  3(e) of the  Facility  Lease to preserve Net Economic
Return); (iii) unless waived by the Owner Participant,  any modifications of the
Transaction  Documents shall satisfy the provisions of Revenue  Procedure 75-21,
Revenue Procedure 75-28 and any other applicable  statute,  regulation,  revenue
procedure,  revenue  ruling or  technical  information  release  relating to the



                                       -3-
6091.50.2831.27:2


<PAGE>

subject matter of such revenue  procedures;  and (iv) unless waived by the Owner
Participant, such modifications (after giving effect to any adjustments pursuant
to clause  (ii)  above)  shall not,  in the  opinion of the Owner  Participant's
Special  Counsel,  adversely  affect the tax benefits  contemplated by the Owner
Participant in entering into the transactions contemplated by this Participation
Agreement and the other Transaction Documents.

                SECTION 3. Participation by the Owner Participant.

                  Subject to the satisfaction of the conditions in Sections 5(a)
and  11(a),  on the  Closing  Date the Owner  Participant  agrees to (i) make an
equity  investment  with  respect to the  Undivided  Interest  in an amount (the
Investment)  equal to 20% of the Purchase Price,  (ii) make an equity investment
with  respect to the Real  Property  Interest in the amount of $19,417 (the Real
Estate  Investment),  and (iii)  provide to the Owner Trustee an amount equal to
the Estimated  Transaction  Expenses.  Proceeds of the  Investment  and the Real
Estate  Investment  shall  be  paid  directly  to  the  Indenture  Trustee,   in
immediately  available funds, at the Indenture  Trustee's Office.  The Estimated
Transaction  Expenses  shall  be  paid  to the  Owner  Trustee,  in  immediately
available funds, at 100 Federal Street,  Boston,  Massachusetts 02110 Attention:
Manager, Corporate Trust Department.

                SECTION 4. Purchase,  sale, Financing and Lease of the Undivided
Interest; Purchase, Sale and Lease of the Real Property Interest.

                  (a) The Undivided Interest. Subject to (x) the satisfaction of
the  conditions  in  Sections  5(a)  and  11(a),  (y)  receipt  from  the  Owner
Participant  of the  Investment  and an amount  equal to  Estimated  Transaction
Expenses and (a) receipt from the Loan  Participant of the proceeds of the Loan,
on the Closing Date the Owner  Trustee shall (i) cause the Trust to purchase the
Undivided Interest from the Lessee for $50,000,000 (the Purchase Price) and (ii)



                                       -4-

6091.50.2831.27:2


<PAGE>

disburse an amount equal to the Estimated  Transaction  Expenses as contemplated
by Section 14. Subject to the  satisfaction  of the conditions in Section 11(b),
on the Closing  Date the Lessee shall sell the  Undivided  Interest to the Trust
for the Purchase  Price.  Concurrently  with such  purchase and sale,  the Trust
shall lease the Undivided Interest to the Lessee, and the Lessee shall lease the
Undivided Interest from the Trust, pursuant to the Facility Lease.

                (b) The Real Property Interest.  Subject to (x) the satisfaction
        of the  conditions  in Sections  5(a) and 11(a) and (y) receipt from the
        Owner Participant of the Real Estate investment, on the Closing Date the
        Owner  Participant  shall cause the Trust to purchase the Real  Property
        Interest  from the Lessee for a purchase  price equal to the Real Estate
        Investment.  Subject to the  satisfaction  of the  conditions in Section
        11(b),  on the  Closing  Date the Lessee  shall  sell the Real  Property
        Interest to the Trust for such purchase  price.  Concurrently  with such
        purchase and sale,  the Trust shall lease the Real Property  Interest to
        the Lessee,  and the Lessee shall lease the Real Property  Interest from
        the Trust, pursuant to the Facility Lease.

                 SECTION 5. Notice of Closing; Closing.

                  (a) Notice of Closing.  Not later than the Closing  Date,  the
Lessee  shall  deliver to the Owner  Participant,  the Owner  Trustee,  the Loan
Participant,.  the Collateral Trust Trustee and the Indenture  Trustee a notice,
substantially in the form of Schedule 1 (the Notice of Closing), which shall (i)
state that the Closing Date shall occur on the date specified therein,  (ii) set
forth a list of the then known Transaction Expenses payable by the Owner Trustee
pursuant to Section 14(a)(the Estimated  Transaction Expenses) and (iii) provide
payment instructions in respect of the disposition of the Purchase Price and the
amount of the Real Estate Investment.




                                       -5-

6O9l.50.2831.27:2


<PAGE>

                  (b) Closing.  Upon  satisfaction  of the conditions in Section
5(a) and Section 11(a) and upon receipt from the Owner Participant of the amount
of the  Investment,  the Real Estate  Investment  and the Estimated  Transaction
Expenses  and from the Loan  Participant  of the Loan,  on the Closing  Date the
Owner Trustee  shall (i) instruct the Indenture  Trustee to pay to the Lessee an
amount equal to the Purchase Price and the amount of the Real Estate  Investment
in  immediately  available  funds and (ii)  disburse the  Estimated  Transaction
Expenses as contemplated  by Section 14. Upon  satisfaction of the conditions in
Section  11(b),  on the  Closing  Date,  the Lessee  shall  deliver to the Owner
Trustee the Bill of Sale, the Deed and the Assignment of Beneficial Interest.

                  SECTION 6.  Representations,  warranties and Agreements of the
Loan Participant; Direction to the Indenture Trustee.

                  (a) The Loan Participant represents and war rants that:

                  (1) Due  Organization.  The Loan  Participant is a corporation
        duly  organized and validly  existing in good standing under the laws of
        the State of Delaware and has the corporate power and authority to carry
        on its business as presently  conducted,  own its properties,  and enter
        into and perform its obligations under this Participation  Agreement and
        each other Transaction  Document and each Financing Document to which it
        is, or is to become on or before the Closing Date, a party.

                  (2) Due Authorization; Enforceability. The execution, delivery
         and performance by the Loan Participant of this Participation Agreement
         and each other  Transaction  Document  and each  Financing  Document to
         which it is, or is to become,  a party on or before the  Closing  Date,
         have been duly authorized by all necessary corporate action on the part
         of the Loan  Participant  and do not require the consent or approval of
         the stockholder of the Loan Participant.  This Participation  Agreement
         and each other Transaction Document and each Financing


                                       -6-

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<PAGE>


        Document  to which the Loan  Participant  is, or is to become,  a party,
        have  been,  or on or before  the  Closing  Date will  have  been,  duly
        executed and delivered by the Loan  Participant and constitute,  or upon
        execution and delivery thereof will constitute, legal, valid and binding
        agreements of the Loan Participant  enforceable against it in accordance
        with their respective terms.

                  (3)  No  Violation.   Neither  the   execution,   delivery  or
        performance by the Loan Participant of this Participation Agreement, any
        other Transaction  Document or any Financing Document to which it is, or
        is  to  become  on  or  before  the  Closing  Date,  a  party,  nor  the
        consummation by the Loan  Participant of the  transactions  contemplated
        hereby or  thereby,  nor  compliance  by the Loan  Participant  with the
        provisions hereof or thereof conflicts or will conflict with, or results
        or will result in the breach of any  provision  of, the  Certificate  of
        Incorporation  or By-Laws of the Loan  Participant or any Applicable Law
        or any indenture, mortgage or agreement to which the Loan Participant is
        a party  or by  which  it or its  property  is  bound  or  requires  any
        Governmental  Action,  except  such as have  been,  or on or before  the
        Closing Date will have been, duly obtained, given or accomplished.

                (4)  No  Other   Business.   Except  as   contemplated  by  this
        Participation   Agreement,  the  other  Transaction  Documents  and  the
        Financing Documents and except as otherwise  contemplated by the Section
        6(c)  Application,  the Loan  Participant has not engaged,  and will not
        engage, in any business or activity of any type or kind whatever.

                  (5) ERISA. The Loan Participant is not acquiring any Note with
        the "plan assets" of any  "employee  benefit plan" within the meaning of
        section  3(3) of ERISA or any  "plan"  within  the  meaning  of  section
        4975(e)(l) of the Code.




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<PAGE>


                    (6) Securities Act.. The Loan  Participant  understands that
none of the Notes to be acquired by it has been registered  under the Securities
Act and will bear the legend set forth in the form of such Note.

                  (b) Agreements of the Loan  Participant.  The Loan Participant
agrees that:

                  (1) Transfers of the Notes.  Any transfer or assignment of any
         Note or of all or any part of the Loan Participant's interest hereunder
         or under any other Transaction Document or any Financing Document shall
         be effected in a transaction constituting an exempted transaction under
         the  Securities Act and on the express  condition that the  transferee,
         assignee  or  participant  shall  agree to be bound  by the  terms  and
         provisions  hereof and thereof.  Neither the Loan  Participant  nor any
         subsequent Holder of a Note may sell,  exchange or transfer any Note to
         any other Person (other than the Collateral  Trust Trustee) unless such
         transferee  delivers to the other parties hereto a  representation  and
         warranty (and an opinion of counsel  satisfactory  to each of the other
         parties  hereto) to the effect that  neither the  transfer of such Note
         to, nor the ownership of such Note by, such  transferee will cause such
         transferee,  or any other party hereto,  to be engaged in a "prohibited
         transaction", as defined in section 406 of ERISA or section 4975 of the
         Code,  which is not at such time subject to an  exemption  contained in
         ERISA or in the  rules,  regulations,  releases  or  bulletins  adopted
         thereunder.

                  (2) Quiet Enjoyment. The Loan Participant acknowledges Section
         6(a) of the Facility Lease.

                  (3) No  Other  Business.  During  such  time  as any  Note  is
         outstanding  and held by the Loan  Participant or the Collateral  Trust
         Trustee,  the Loan  Participant  will not (i) engage in any business or
         activity other than (1) in connection with the Transaction Documents or
         the Financing Documents or (2) as otherwise contemplated by the section
         6(c)  Application  or (ii) amend or engage in any  activity or take any
         action  not  permitted  by  Article  THIRD,  FOURTH  or  SIXTH  of  its
         Certificate of Incorporation, as in effect on the date of execution and
         delivery  hereof,  without,  in each  case,  the  consent  of the other
         parties hereto.

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6091.50.2831.27:2


<PAGE>

                (c) Direction to the Indenture Trustee. The Loan Participant, as
        purchaser of the Initial Series Note, (i) hereby  authorizes and directs
        the Indenture Trustee to execute, deliver and perform this Participation
        Agreement,  (ii) hereby  authorizes and directs the Indenture Trustee to
        register  such  Note  in the  name of the  Loan  Participant  and,  upon
        authentication  and  delivery  thereof  pursuant  to this  Participation
        Agreement and the  Indenture,  to deliver such Mote (upon  completion by
        the Loan  Participant of the  assignment  attached to the Initial series
        Note) to the Collateral  Trust Trustee  pursuant to the Collateral Trust
        Indenture,  (iii)  acknowledges and agrees that, in connection with this
        Participation  Agreement,  the Indenture Trustee shall have the benefits
        and  protections  of Article VIII of the Indenture and (iv) agrees that,
        in the event of a conflict between the provisions of this  Participation
        Agreement and the Indenture, the Indenture Trustee shall, as between the
        Indenture  Trustee  and the  Loan  Participant,  be fully  protected  in
        relying on the express terms of the Indenture.

                  SECTION 7.  Representations,  Warranties and Agreements of the
Owner Participant.

                  (a)  Representations  and  warranties.  The Owner  Participant
represents and warrants that:

                  (1) Due  Organization.  The Owner Participant is a corporation
        duly  organized and validly  existing in good standing under the laws of
        the state of its incorporation and has the corporate power and authority
         to enter into and  perform  its  obligations  under this  Participation
         Agreement and each other Transaction  Document to which it is, or is to
         become, a party.


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<PAGE>


                (2) Due  Authorization.  This  Participation  Agreement and each
        other  Transaction  Document to which the Owner Participant is, or is to
        become on or before the Closing Date, a party have been duly  authorized
        by all necessary  corporate action on the part of the Owner  Participant
        and do not require the  consent or approval of its  stockholders  or any
        trustee  or  holder  of any of its  indebtedness  or other  obligations,
        except  such as have been,  or on or before the  closing  Date will have
        been, duly obtained, given or accomplished.

                  (3)  Execution.  This  Participation  Agreement and each other
        Transaction  Document to which the Owner Participant is, or is to become
        on or before the Closing  Date,  a party have been,  or on or before the
        Closing Date will have been,  duly  executed and  delivered by the Owner
        Participant and constitute,  or upon execution and delivery thereof will
        constitute, its legal, valid and binding agreements, enforceable against
        it in accordance with their  respective  terms (except as may be limited
        by   bankruptcy,   insolvency  or  other  similar  laws   affecting  the
        enforcement of creditors' rights generally).

                  (4)  No  Violation.   Neither  the   execution,   delivery  or
        performance by the Owner Participant of this Participation  Agreement or
        any  other  Transaction  Document  to which it is, or is to become on or
        prior to the closing Date, a party,  nor the  consummation  by the Owner
        Participant  of the  transactions  contemplated  hereby or thereby,  nor
        compliance  by the  Owner  Participant  with the  provisions  hereof  or
        thereof,  conflicts  with, or results in the breach of any provision of,
        or is inconsistent  with, its documents of  incorporation  or By-Laws or
        contravenes   any  Applicable  Law  applicable  to  it  or  any  of  its
        Affiliates,  or any indenture,  mortgage or agreement for borrowed money
        to which the Owner Participant is a party or any other agreement or


                                      -10-

6091.50.2831.27:2


<PAGE>


       instrument  to which the Owner  Participant  is a party or by which it or
       its property is bound or requires any Governmental Action with respect to
       the Owner  Participant  under  Federal  or New York law on or before  the
       Closing  Date,  except  such  as  are  contemplated  by  the  Transaction
       Documents  or the  Financing  Documents  or such as have  been,  or on or
       before  the  Closing  Date  will  have  been,  duly  obtained,  given  or
       accomplished;  provided,  however,  that the Owner  Participant  makes no
       representation  or  warranty  as to any  Applicable  Law or  Governmental
       Action relating to the Securities  Act, the Securities  Exchange Act, the
       Trust  Indenture  Act, the Federal  Power Act, the Atomic Energy Act, the
       Nuclear Waste Act, ERISA (except to the extent set forth in paragraph (9)
       below),  the Holding  Company Act, the New Mexico Public Utility Act, the
       Arizona Public Utility Act, energy or nuclear matters,  public utilities,
       the environment, health and safety or Unit 1.

                (5) No Owner  Participant's  Liens.  Neither the  execution  and
        delivery by the Owner Participant of this Participation Agreement or any
        other  Transaction  Document to which the Owner Participant is, or is to
        become on or before the Closing bate, a party,  nor the  performance  by
        the Owner Participant of its obligations  hereunder or thereunder,  will
        subject the Trust Estate or the Lease Indenture  Estate,  or any portion
        of either thereof, to any Owner Participant's Lien.

                  (6)  Acquisition.  The  Owner  Participant  is  acquiring  the
        beneficial  interest  in the Trust  Estate  for its own  account  in the
        ordinary  course  of its  business  and  the  Owner  Participant  has no
        intention  of making any sale or other  distribution  of the  beneficial
        interest in the Trust Estate in violation  of any  legislation,  rule or
        regulation  relating to limitations upon the sale or other  distribution
        of interests such as such beneficial interest.



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6091.50.2831.27:2


<PAGE>
                  (7) No Prior  Security  Interest.  There  exists  no  security
         interest in or other Lien on the Lease Indenture Estate in the state of
         the chief place of business of the Owner Participant,  the State of New
         Mexico or the State of Arizona  arising  as a result of claims  against
         the Owner Participant unrelated to the transactions contemplated by the
         Transaction  Documents or the Financing Documents which is prior to the
         Indenture Trustee's security interest in the Lease Indenture Estate.

                (8) No Sales or  Solicitations.  Except as  contemplated  by the
        Financing  Documents  and as  described  in a letter to the Lessee dated
        July 31, 1986,  neither the Owner  Participant  nor anyone acting on its
        behalf has directly or  indirectly  offered or sold,  or  solicited  any
        offer to acquire,  any  beneficial  interest in the Trust  Estate or any
        Note or any Bond.

                (9) ERISA. The Owner  Participant is not acquiring its interests
        in the Trust  with the "plan  assets"  of any  "employee  benefit  plan"
        within the  meaning of  section  3(3) of ERISA or any "plan"  within the
        meaning of section 4975(e)(l) of the Code.

                  (b) Agreements of the Owner Participant. The Owner Participant
agrees that:

                (1) No Owner Participant's Liens. The Owner Participant will not
        create  or  permit  to exist,  and,  at its own cost and  expense,  will
        promptly  take such action as may be necessary  duly to  discharge,  all
        Owner Participant's Liens.

                  (2) Quiet Enjoyment.  The Owner  Participant  acknowledges the
         provision.  of Section 6(a) of the  Facility  Lease and Section 8(c) of
         this Participation Agreement.

                  (3) No-Petition  Agreement..  Prior to the 181st day following
         the payment in full of the Bonds and the discharge in  accordance  with
         its terms of the Collateral Trust Indenture, the Owner Participant


                                      -12-

6091.50.2831.27:2


<PAGE>


        agrees  that it will not file a  petition,  or join in the  filing  of a
        petition, seeking reorganization, arrangement, adjustment or composition
        of, or in respect of, the Loan Participant under the Bankruptcy Code, or
        any other applicable  Federal or state law or the law of the District of
        Columbia.

                (4) Transfer of Interest in the Trust Estate.  Unless the Lessee
        shall have assumed the Notes as  contemplated  by Section  3.9(b) of the
        Indenture,  upon receipt by the Owner  Participant  under Section 5.2 of
        the  Indenture  of the  payments to be made to the Lessor as provided in
        Section  9(c),  9(d),  13(c)  or  16  of  the  Facility  Lease  and,  if
        applicable,  compliance  in full by the Lessee with  Section 9(f) of the
        Facility Lease,  the Owner  Participant  shall (so long as no Default or
        Event of Default shall have occurred and be continuing), and at any time
        following  the  occurrence  of an Event of Loss,  Deemed Loss Event or a
        Special  Purchase Event or a Default or Event of Default or event giving
        rise to the  exercise  of the Cure  Option  the Owner  Participant  may,
        assign, convey and transfer to the Lessee all of the Owner Participant's
        right,  title and interest in, to and under the Trust Estate (except the
        right to receive  Excepted  Payments),  such transfer (i) to be free and
        clear of Owner  Participant's  Liens  but  otherwise  without  recourse,
        representation  or warranty and (ii) if the Owner Participant so elects,
        to be effected by the execution and delivery by the Owner Participant to
        the Lessee of a Bill of Sale and Assignment substantially in the form of
        Exhibit A hereto (and upon the  execution  and delivery  thereof and the
        furnishing  of executed  counterparts  thereof to the Owner Trustee such
        transfer shall be and become effective automatically and without further
        action by the Owner  Trustee6  the Owner  Participant,  the Lessee,  the
        Lessor,  the Indenture  Trustee or any other Person).  The Lessee hereby
        agrees to accept the transfer  contemplated  by this Section 7(b)(4) and
        the  parties  hereto  acknowledge  and  agree  that at the  time of such
        transfer  the  Lessee  shall  be  deemed  to be a  Transferee  that  has
        satisfied   all   conditions   set  forth  in  Section  15(a)  of  this
        Participation Agreement and Section 11.09 of the Trust Agreement.

                                      -13-

6091.50.2831.27:2


<PAGE>


                If,  in  accordance  with the  preceding  paragraph,  the  Owner
        Participant  shall assign,  convey and transfer to the Lessee all of the
        Owner Participant's right, title and interest in, to and under the Trust
        Estate  (except the right to receive  Excepted  Payments)  following the
        occurrence of an Event of Loss,  Deemed Loss Event or a Special Purchase
        Event or a Default or Event of Default or event  giving rise to the Cure
        Option,  but the transferring  Owner Participant shall not have received
        under Section 5.2 of the Indenture the payments to be made to the Lessor
        as provided in Section 9(c), 9(d), 13(c) or 16 of the Facility Lease, as
        the case may be,  the  obligation  of the  Lessee to make such  payments
        (together with interest thereon in accordance with Section  3(b)(iii) of
        the  Facility  Lease) (or to make other  payments  in a like amount with
        respect to Basic Rent or  Supplemental  Rent paid by application of such
        payments (and in which Owner  Trustee has thereby  acquired an interest)
        pursuant to Section 5.1 or 5.3 of the Indenture)  shall not be deemed to
        be cancelled or discharged but shall continue until all such amounts are
        so received by the Lessee,  as successor  Owner  Participant,  or by the
        transferring Owner Participant  pursuant to the following  provisions of
        this Section 7(b)(4).  The Lessee as successor Owner Participant  hereby
        agrees  to pay to the  transferring  Owner  Participant  on the  date of
        transfer an amount equal to the amount of the payments to be made to the
        Lessor as  provided in Section  9(c),  9(d),  13(c) or is together  with
        interest  thereon at the Penalty Rate  (computed in accordance  with the
        Facility  Lease) from the date of transfer,  such  payments (the Secured
        Obligations)  to  be  made  only  from  amounts  payable  to  the  Owner
        Participant  from the Trust  Estate.  The Secured  Obligations  shall be
        secured  by (and the  Lessee  hereby  grants to the  transferring  Owner
        Participant  a security  interest in and  general  lien upon) all of the



                                      -14-

6091.50.2831.27:2


<PAGE>

         right,  title and interest of the Lessee as successor Owner Participant
         in, to and under the Trust Estate. In connection therewith,  the Lessee
         as successor Owner Participant hereby agrees as follows:

                      (i) The transferring  Owner  Participant shall have all of
                the rights and  remedies  of a secured  party  under the Uniform
                Commercial  Code as in  effect in the State of New York (as such
                law may at any time be amended).

                      (ii) Upon the occurrence of such  transfer,  the Lessee as
                successor  Owner  Participant  shall  appoint,  and hereby  does
                appoint,     the    transferring     Owner    Participant    Its
                attorney-in-fact,  irrevocably, with full power of substitution,
                to the exclusion of the Lessee as successor  Owner  Participant,
                to ask,  require,  demand,  receive and give acquittance for any
                and all  moneys  and  claims for moneys due and to become due to
                the Lessee as successor Owner  Participant  under or arising out
                of the Trust Estate,  to endorse any checks or other instruments
                or  orders  in  connection  therewith,  and to take  any  action
                (including the filing of financing statements or other documents
                and the delivery of written  instructions  to the Owner  Trustee
                and the  Indenture  Trustee  specifying  that all payments to be
                made to the  Lessee as  successor  Owner  Participant  under the
                Trust  Agreement and the Indenture shall be made directly to the
                transferring  Owner  Participant  so long as any  portion of the
                Secured  Obligations  remains   outstanding)  or  institute  any
                proceedings  which the transferring  Owner  Participant may deem
                necessary  or  appropriate  to protect and preserve the security
                interest  of the  transferring  Owner  Participant  in the Trust
                Estate and the rights of the transferring  Owner  Participant to
                receive payments thereunder.




                                      -15-

6091.50.2831.27:2


<PAGE>
                     (iii) Upon the occurrence of such  transfer,  and until the
                  Secured obligations have been paid in full, the Lessee (in its
                  capacity as such and as  successor  Owner  Participant)  shall
                  not,  without the prior  written  consent of the  transferring
                  Owner   Participant   (1)  take  any  action  or  deliver  any
                  instruction under any Transaction Document the effect of which
                  would be to (A) relieve or otherwise  affect the obligation of
                  the  Lessee to make such  payments,  (B)  terminate  the Trust
                  Agreement,  (C) terminate or rescind the Facility  Lease,  (D)
                  sell,  assign,  transfer  or deliver  the Trust  Estate to any
                  Person  (except,   in  the  case  of  the  Trust  Estate,   as
                  contemplated  by section  9(j) of the  Facility  Lease) or (2)
                  accept, or approve, any amendment to any Transaction Document.

                      (iv)  The   Lessee  (as  such  and  as   successor   Owner
                  Participant)  covenants  and  agrees  to do all such  acts and
                  execute all such instruments of further  assurance as shall be
                  reasonably  requested  from  time to time by the  transferring
                  Owner  Participant  for the purpose of fully  carrying out and
                  effectuating  the  provisions of this Section  7(b)(4) and the
                  intent thereof.

Upon the  payment in full of the  Secured  Obligations,  the  security  interest
hereinabove provided shall terminate and the transferring Owner Participant,  at
the request of the Lessee as  successor  Owner  Participant,  shall  execute and
deliver  to  the  Lessee  as  successor  Owner   Participant   such  termination
statements,  releases or other instruments  presented to the transferring  Owner
Participant as shall be reasonably required to effect such termination.

                SECTION 8.  Representations,  Warranties  and  Agreements of the
Owner Trustee and FNB.

                (a)  Representations  and  warranties.  FNB as Owner Trustee and
(except as otherwise  provided in the last sentence of this Section a(a)) in its
individual capacity, represents and warrants that:




                                      -16-

6091.50.2831.27:2


<PAGE>


                (1) Due Organization. FNB is a national banking association duly
        organized and validly  existing in good  standing  under the laws of the
        united  States of  America  and has all  requisite  corporate  power and
        authority to enter into and perform its obligations  under (x) the Trust
        Agreement  and,  to the  extent it is a party  hereto in its  individual
        capacity,  this Participation Agreement and (y) acting as Owner Trustee,
        this  Participation  Agreement  and each other  Transaction  Document to
        which FNB is, or is to become on or before the Closing  Date, a party as
        Owner Trustee

                (2) Due Authorization;  Enforceability;  etc. This Participation
        Agreement and each other Transaction  Document to which FNB is, or is to
        become on or before the Closing Date, a party have been duly  authorized
        by all necessary  corporate action of ma (in its individual  capacity or
        as Owner  Trustee,  as the case may be) and, upon execution and delivery
        hereof and thereof,  this  Participation  Agreement  and each such other
        Transaction  Document  will be duly  executed and  delivered and will be
        legal,   valid  and  binding   agreements  of  FNB  (in  its  respective
        capacities),  enforceable  against it (in its respective  capacities) in
        accordance  with  their  respective  terms  (except as may be limited by
        bankruptcy,  insolvency or other similar laws affecting the  enforcement
        of creditors'  rights  generally);  it being  understood that FNB is not
        making any  representation or warranty as to the priorities of the Liens
        created or to be created under any  Transaction  Document,  title to the
        Trust Estate or recordings or filings necessary in connection therewith.

                (3)  Notes.   Upon   execution  of  the  Initial   Series  Note,
        authentication   thereof  by  the  Indenture  Trustee  pursuant  to  the
        Indenture and delivery  thereof against  payment  therefor in accordance
        with this Participation Agreement,  such Note will be a legal, valid and
        binding obligation of the Owner Trustee,  enforceable  against the Owner
        Trustee  in  accordance  with its terms  (except  as may be  limited  by
         bankruptcy,  insolvency or other similar laws affecting the enforcement
         of creditors' rights generally).

                                      -17-

6091.50.2831.27:2


<PAGE>


       (4) No  Violation.  Neither the  execution and delivery by (x) FNB of the
       Trust  Agreement  and,  to  the  extent  FNB  is a  party  hereto  in its
       individual  capacity,  this  Participation  Agreement  and (y) the  Owner
       Trustee  of this  Participation  Agreement  and  each  other  Transaction
       Document (other than the Trust  Agreement) to which the Owner Trustee is,
       or is to  become  on or  before  the  Closing  Date,  a  party,  nor  the
       performance  by FNB, in its individual  capacity or as Owner Trustee,  as
       the case may be,  of its  obligations  under  each,  conflicts  with,  or
       results in the breach of any provision of, its Articles of Association or
       By-Laws and does not  contravene  any Applicable Law of the United States
       of America or The Commonwealth of Massachusetts  governing the banking or
       trust  powers  of FNB,  and does not  contravene  any  provision  of,  or
       constitute a default under,  any indenture,  mortgage,  contract or other
       instrument to which FNB is a party or by which it is bound or require any
       Governmental  Action with respect to the Owner  Trustee under any Federal
       or Massachusetts  law, except such as are contemplated by the Transaction
       Documents  or the  Financing  Documents  or such as have  been,  or on or
       before  the  Closing  Date  will  have  been,  duly  obtained,  given  or
       accomplished;  provided,  however,  that no representation or warranty is
       made with  respect to the right,  power or  authority of FNB or the Owner
       Trustee to act under the ANPP  Participation  Agreement or the License in
       respect of the undivided  interest or Unit 1, and the Owner Trustee makes
       no  representation  or warranty as to any Applicable Law or  Governmental
       Action relating to the Securities  Act, the securities  Exchange Act, the
       Trust  Indenture  Act, the Federal  Power Act, the Atomic Energy Act, the
       Holding  Company  Act,  the New Mexico  Public  Utility  Act, the Arizona
       Public  utility  Act,  the Nuclear  Waste Act,  ERISA,  energy or nuclear
       matters, public utilities, the environment, health and safety or unit 1.





                                      -18-

6091.50.2831.27:2


<PAGE>


                (5) Defaults.  To the best  knowledge of the Owner  Trustee,  no
        Indenture  Default or  Indenture  Event of Default has  occurred  and is
        continuing. The Owner Trustee is not in violation of any of the terms of
        this Participation  Agreement or any other Transaction Document to which
        it is, or is to become on or before the Closing Date, a party.

                (6)  Litigation.  There is no  action,  suit,  investigation  or
proceeding  pending or, to the knowledge of FNB,  threatened against FNB (in any
capacity) before any court,  arbitrator or  administrative  or governmental body
and which relates to its banking or trust powers which,  individually  or in the
aggregate, if decided adversely to the interests of FNB in such capacity,  would
have a material  adverse  effect  upon the ability of FNB (in any  capacity)  to
perform  its  obligations  under  this  Participation  Agreement  or  any  other
Transaction  Document  to which it is, or is to become on or before the  Closing
Date, a party (in any capacity).

                (7) Location of the Chief Place of Business and Chief  Executive
        Office,  etc. The chief place of business and chief executive  office of
        the Owner  Trustee  and the  office  where its  records  concerning  the
        accounts or contract  rights relating to the  transactions  contemplated
        hereby are kept is located in Boston, Massachusetts.

                (8)  No  Prior  Security  Interest.  There  exists  no  security
        interest in the Lease Indenture Estate in the States of New Mexico,  New
        York or Arizona or in The  Commonwealth  of  Massachusetts  arising as a
        result  of  any  claim  against  FNB   unrelated  to  the   transactions
        contemplated  by the  Transaction  Documents or the Financing  Documents
        which is prior to the Indenture Trustee's security interest in the Lease
        Indenture Estate.



                                      -19-

6091.50.2831.27:2


<PAGE>

                  (9) No Owner Trustee's Liens. Neither the execution by FNB (in
         any capacity) of this Participation  Agreement or any other Transaction
         Document to which it (in any capacity) is, or is to become on or before
         the Closing Date, a party,  nor the  performance in such capacity by it
         of its  obligations  hereunder  or  thereunder,  will subject the Trust
         Estate or the Lease Indenture  Estate,  or any portion thereof,  to any
         Owner Trustee's Lien.

The representations and warranties in Section 8(a)(2) and Section 8(a)(2), as to
Transaction Documents and the Initial Series Mote being legal, valid and binding
obligations  enforceable in accordance with their  respective  terms,  are given
only by FNB in its capacity as Owner Trustee and not in its individual capacity,
except that FNB does represent in its individual  capacity that it is authorized
under the laws of The  Commonwealth of  Massachusetts to execute and deliver the
Transaction Documents to which it is a party.

                  (b) Agreements.  FNB agrees, in its individual capacity, that:

                (1) Discharge of Liens.  FNB will not create or permit to exist,
        and will, at its own cost and expense,  promptly take such action as may
        be necessary duly to discharge, all Owner Trustee's Liens.

                (2) Certain  Amendments.  FNB agrees that unless a Default or an
        Event of Default has occurred and is  continuing  or an Event of Loss or
        Deemed  Loss Event has  occurred,  FNB will not amend any of the payment
        terms of any Note,  or take any action to refund any Note after the date
        of issue thereof pursuant to the terms of this  Participation  Agreement
        and the Indenture  without the prior written consent of the Lessee.  FNB
        agrees that except for amendments or supplements,  if any, made pursuant
        to Article x of the Trust Agreement or contemplated by Section  7(b)(4),
        FNB will not amend or  supplement,  or  consent to any  amendment  of or
        supplement to, the Trust  Agreement if such amendment  would  materially
        and adversely  affect the rights of the Lessee under the Facility  Lease
        and this Participation  Agreement,  without the prior written consent of
        the Lessee  unless a Default or an Event of Default has  occurred and is
        continuing or the Lease Termination Date has occurred.




                                      -20-

609l.50.283l.27:2


<PAGE>


                  (3) Change in Location  of Chief  Place of Business  and chief
         Executive  Office,   etc.  FNB  shall  notify  the  Lessee,   the  Loan
         Participant and the Indenture  Trustee promptly after any change in its
         chief executive office,  principal and chief place of business or place
         where its records  concerning the accounts or contract  rights relating
         to the transactions contemplated hereby are kept.

                (4) No Petition Agreement.  Prior to the 181st day following the
        payment in full of the Bonds and the  discharge in  accordance  with its
        terms of the Collateral Trust Indenture, FNB (in all capacities) agrees
        that it will not file a  petition,  or join in the filing of a petition,
        seeking reorganization,  arrangement, adjustment or composition of or in
        respect of the Loan  Participant  under the Bankruptcy Code or any other
        applicable Federal or state law or the law of the District of Columbia

                  (5) Quiet  Enjoyment.  FNB  acknowledges  Section  6(a) of the
         Facility Lease.

                  (C) Agreements of the Owner Trustee.  The Owner Trustee agrees
         that:

                  (1) Subject and  Subordinate.  The rights and  remedies of the
         Owner Trustee and the Owner Participant in the Undivided Interest,  the
         Real Property Interest and the related Generation Entitlement Share are
         subject  and  subordinate  to the  rights  and  remedies  of  the  ANPP
         Participants  (other  than (i) the  Lessee or (ii) any Person who shall
         become an ANPP  Participant  in respect of the  Lessor's  Interest  (as
         defined in Section B(c)(3)) under the ANPP Project Agreements.

                (2) Lessee to be  Participant.  Except as  provided  in Sections
        15.2.2, 15.6.4 and 15.10 (or any comparable successor provisions) of the
        ANPP  Participation  Agreement,  the Lessee shall be and remain the sole
        "Participant  for all purposes of the ANPP  Participation  Agreement and
        the sole representative (with power to bind the Lessor and the Indenture
       



                                      -21-

6091.50.2831.27:2


<PAGE>

         Trustee) in all dealings with the other ANPP  Participants  in relation
         to the property, rights, titles and interests of the Lessee transferred
         to the Lessor pursuant to the Transaction Documents; provided, however,
         that the foregoing  shall not limit in any way the effect of Section 15
         or 16 of the Facility  Lease or any  liability or  obligation  that the
         Lessee may incur to the Owner  Trustee or the Owner  Participant  under
         any  Transaction  Document  as a  result  thereof  (including,  without
         limitation,  any  liability  that PNM may incur under Section 16 of the
         Facility Lease as the result of an Event of Default).

                (3) Cash Bids.  Upon the  expiration  of the Facility  Lease and
        upon the Lessee  failing to  purchase  or  otherwise  reacquire  all the
        right,  title and  interest  in PVNGS  and  contractual  rights  related
        thereto  necessary  for the  operation  of the  interest  (the  Lessor's
        Interest) acquired by the Lessor pursuant to the Transaction  Documents,
        the Lessor shall entertain cash bids from each ANPP  Participant for the
        Lessor's Interest.

                (4) Survival.  The provisions of this paragraph (4) and Sections
        8(c)(1),  (2) and (3) shall  remain in full force and effect  until such
        time as the ANPP Administrative Committee or the ANPP Participants shall
        otherwise consent.

                (5) License Matters.  The Owner Trustee acknowledges that before
        taking  possession of the  Undivided  Interest or any part thereof or of
        any other  interest in PVNGS,  either of the  following may be required:
        (i) the  issuance of an  appropriate  license  from the NRC,  whether by
        amendment to the License or otherwise, or (ii) a partial transfer of the
        License  authorizing the Lessor to possess its interest in PVNGS, to the
        extent of the undivided Interest,  upon application for partial transfer
        of such License to such extent filed pursuant to Applicable Law. Neither
        the  Owner   Trustee   nor  the  Owner   Participant   shall   have  any
        responsibility whatsoever to take or initiate any action with respect to
        any NRC licensing matter.




                                      -22-

6091.50.2831 27:2


<PAGE>


                (6)  Acknowledgment  and  Agreement.  The Owner  Trustee  hereby
        acknowledges  and agrees to the  provisions  of Section  7(b)(4) of this
        Participation  Agreement.  The Owner  Trustee  hereby  agrees,  upon the
        request of the Owner Participant,  to execute and cause to be filed with
        the County Recorder, Maricopa County, Arizona a duly completed affidavit
        in substantially the form of Schedule 5 hereto.

                  SECTION  9.  Representations,  Warranties  and  Agreements  of
         Chemical lank.

                  (a) Representations  and Warranties.  Chemical Bank represents
         and warrants that:

                (1) Due  Organization.  Chemical  Bank is a banking  corporation
        duly  organized and validly  existing in good standing under the laws of
        the  State of New York and has the  corporate  power and  authority  and
        legal  right to  enter  into  and  perform  its  obligations  under  the
        Indenture,  this  Participation  Agreement  and each  other  Transaction
        Document to which it is, or is to become on or before the Closing  Date,
        a party.

                (2) Due  Authorization.  This  Participation  Agreement and each
        other Transaction Document to which Chemical Bank Is, or is to become on
        or before the Closing Date, a party have been or will be duly authorized
        by all necessary  corporate action of Chemical lank and each has been or
        will have been duly executed and delivered by Chemical Bank.

                (3)  Authentication  of the Initial  Series Note. The officer of
        Chemical  Bank who shall  authenticate  the  Initial  Series  Note to be
        issued  pursuant  to the  Indenture  shall  be,  at  the  time  of  such
        authentication, an Authorized Officer.

                  (4) No  Violation.  Neither  the  execution  and  delivery  by
         Chemical Bank of this Participation Agreement or the Indenture, nor the
         authentication  by it of the Initial Series Note, nor the  consummation
         by it of the  transactions  contemplated  hereby  or  thereby,  nor the
         



                                      -23-

6091.50.2831.27:2


<PAGE>

         compliance by it with the provisions  hereof or thereof will contravene
         any  Applicable   Law  governing  its  banking  or  trust  powers,   or
         contravenes  or results in a breach of, or constitutes a default under,
         its Articles of Incorporation or By-laws,  or requires any Governmental
         Action under any Federal or New York law,  except such as have been, or
         on or before the Closing Date will have been,  duly obtained,  given or
         accomplished;  provided, however, that no representation or warranty is
         made as to (i) any Applicable Law or  Governmental  Action  relating to
         the Securities  Act, the Securities  Exchange Act, the Trust  Indenture
         Act, the Federal Power Act, the Atomic Energy Act, the Holding  Company
         Act, the New Mexico Public Utility Act, the Arizona Public Utility Act,
         the  Nuclear  Waste  Act,  ERISA,  energy or  nuclear  matters,  public
         utilities,  the  environment,  health  and safety or Unit 1 or (ii) the
         Lease  Indenture  Estate to the extent it may constitute  real property
         under Applicable Law.


                 (b)  Agreements. The Indenture Trustee agrees that:

                  (1) Agreement to Discharge Liens.  The Indenture  Trustee will
         not create or permit to exist,  and will  promptly  take such action as
         may be necessary duly to discharge, all Indenture Trustee's Liens.

                  (2) No Petition  Agreement.  Prior to the 181st day  following
         the payment in full of the Bonds and the discharge in  accordance  with
         its terms of the  Collateral  Trust  Indenture,  the Indenture  Trustee
         agrees  that it will not file a  petition,  or join in the  filing of a
         petition,   seeking   reorganization,    arrangement,   adjustment   or
         composition  of or  in  respect  of  the  Loan  Participant  under  the
         Bankruptcy Code or any other applicable Federal or state law or the law
         of the District of Columbia.

                  (3) Quiet Enjoyment.  The Indenture Trustee agrees to be bound
         by Section 6(a) of the Facility Lease.



                                      -24-

6O9l.50.2831.27:2


<PAGE>


                  (4) Acknowledgment.  The Indenture Trustee hereby acknowledges
         the provisions of Section 7(b)(4) of this Participation Agreement.

                  SECTION 10. Representations,  Warranties and Agreements of the
         Lessee.

                  (a) Representations and Warranties.  The Lessee represents and
         warrants that:

                (1) Due Organization. The Lessee is a corporation duly organized
        and validly existing in good standing under the laws of the State of New
        Mexico  and has the  corporate  power  and  authority  to  carry  on its
        business  as  presently  conducted,  to  own or  hold  under  lease  its
        properties  and to enter into and  perform  its  obligations  under this
        Participation   Agreement  and  each  other  Transaction   Document  and
        Financing  Document to which it is, or is to become, a party. The Lessee
        is duly  qualified  and in good  standing  to do  business  as a foreign
        corporation  in the State of Arizona and has not failed to qualify to do
        business  or to be in good  standing  in any  other  jurisdiction  where
        failure  so to  qualify  or be in good  standing  would  materially  and
        adversely affect the financial condition of the Lessee or its ability to
        perform any obligations under this  Participation  Agreement,  any other
        Transaction  Document or any Financing Document to which it is, or is to
        become on or before the Closing Date, a party.

                (2) Due Authorization.  The execution,  delivery and performance
        by the Lessee of this Participation Agreement and each other Transaction
        Document and each Financing  Document to which it is, or is to become on
        or before the Closing  Date, a party,  have been duly  authorized by all
        necessary  corporate  action on the part of the Lessee  and do not,  and
        will not,  require the consent or  approval of the  stockholders  of the
        Lessee or any trustee or holder of any  indebtedness or other obligation
        of the Lessee, other than (i) the Mortgage Release,  (ii) the finding of
        the ANPP  Administrative  Committee  described in Section  15.6.2 of the
        



                                      -25-

6091.50.2831.27:2


<PAGE>


         ANPP  Participation   Agreement  and  (iii)  such  other  consents  and
         approvals  as have  been,  or on or before the  closing  Date will have
         been, duly obtained,  given or  accomplished,  with true copies thereof
         delivered to the Owner Participant prior to the Closing Date.

                (3)  Execution.  This  Participation  Agreement  and each  other
        Transaction Document and each Financing Document to which the Lessee is,
        or is to become on or before the closing  Date, a party,  will have been
        duly  executed  and  delivered  by the  Lessee,  and this  Participation
        Agreement  constitutes,  and upon execution and delivery  thereof,  each
        such  Transaction   Document  and  each  such  Financing  Document  will
        constitute,  the  legal,  valid and  binding  agreement  of the  Lessee,
        enforceable  against  the Lessee in  accordance  with  their  respective
        terms.

                (4) No  Violation,  etc.  Neither  the  execution,  delivery  or
        performance by the Lessee of this  Participation  Agreement or any other
        Transaction  Document or any Financing Document to which it is, or is to
        become on or before the closing Date, a party,  nor the  consummation by
        the  Lessee of the  transactions  contemplated  hereby or  thereby,  nor
        compliance  by  the  Lessee  with  the  provisions  hereof  or  thereof,
        conflicts or will  conflict  with, or results or will result in a breach
        or contravention  of any of the provisions of, the Restated  Articles of
        Incorporation  or By-Laws of the Lessee or any  Affiliate of the Lessee,
        or any Applicable  Law, or any indenture,  mortgage,  lease or any other
        agreement  or  instrument  to which the Lessee or any  Affiliate  of the
        Lessee  is a  party  or by  which  the  property  of the  Lessee  or any
        Affiliate  of the  Lessee is bound,  or  results  or will  result in the
        creation or imposition of any Lien (other than Permitted Liens) upon any
        property  of the  Lessee or any  Affiliate  of the  Lessee.  There is no
        provision of the Restated  Articles of  Incorporation  or By-Laws of the
        Lessee or any  Affiliate of the Lessee,  or any  Applicable  Law, or any
        such indenture,  mortgage,  lease or other agreement or instrument which
       



                                      -26-

6091.50.2831.27:2


<PAGE>
         materially  adversely affects or in the future is likely (so far as the
         Lessee can now foresee) to  materially  adversely  affect the business,
         operations,  affairs, condition, properties or assets of the Lessee, or
         its  ability  to  perform  its  obligations  under  this  Participation
         Agreement or any other Transaction  Document or any Financing  Document
         to which it is, or is to become on or before the Closing Date, a party.

                (5) Governmental  Actions.  No Governmental Action is or will be
        required in connection  with the  execution,  delivery or performance by
        the Lessee  of, or the  consummation  by the Lessee of the  transactions
        contemplated by, this  Participation  Agreement,  any other  Transaction
        Document or any Financing Document, except such Governmental Actions (i)
        as have been,  or on or before  the  closing  Date will have been,  duly
        obtained,  given or accomplished,  with true copies thereof delivered to
        the Owner Participant and the Loan Participant,  (ii) as may be required
        under existing Applicable Law to be obtained, given or accomplished from
        time to time after the closing Date in connection with the  maintenance,
        use, possession or operation of Unit 1 or otherwise with respect to Unit
        1 and the Lessee's or the Operating  Agent's  involvement  therewith and
        which  are,  for  PVNGS,  routine  in nature and which the Lessee has no
        reason  to  believe  will not be  timely  obtained  and  (iii) as may be
        required under Applicable Law not now in effect. No Governmental  Action
        (except  Governmental  Action  as may be  required  by any  Governmental
        Authority  of or in New York or  Delaware) is or will be required (a) in
        connection with the  participation  by the Owner Trustee,  the Indenture
        Trustee,   the  Owner   Participant  or  the  Loan  Participant  in  the
        consummation  of the  transactions  contemplated  by this  Participation
        Agreement,  any other Transaction  Document or any Financing Document or
        (b) to be  obtained  by any of  such  Persons  during  the  term  of the
        Facility Lease with respect to Unit 1 except such  Governmental  Actions
        (i) as have been, or on or before the Closing Date will have been,  duly
        obtained,  given or accomplished,  with true copies thereof delivered to




                                      -27-

6091.50.2831.27:2


<PAGE>

         the Owner Participant, the Owner Trustee and the Loan Participant prior
         to the closing Date,  (ii) as may be required by Applicable Law not now
         in effect,  (iii) as may be required in  consequence of any transfer of
         ownership of the Undivided  Interest or the Real  Property  Interest by
         the Owner Trustee, (iv) as would be required by existing Applicable Law
         upon termination or expiration of the Facility Lease in connection with
         taking  possession  of an interest in Unit 1, (V) as may be required by
         existing  Applicable  Law if, after  termination  or  expiration of the
         Facility Lease, the Lessee should provide transmission services for the
         Owner  Trustee or cease to be agent for the Owner  Trustee as  provided
         under the  Assignment  and  Assumption,  or (vi) as may be  required in
         consequence  of any  exercise of  remedies or other  rights by any such
         Person in connection with taking possession of an interest in Unit 1.

                (6) Securities Act.  Neither the Lessee nor anyone acting on its
        behalf has directly or indirectly offered or sold any Bond, any interest
        in any  Note,  any note  issued  with  respect  to any  other  undivided
        interest  in Unit 1,  the  Undivided  Interest  or any  other  undivided
        interest  in Unit  1,  the  Facility  Lease  or any  other  lease  of an
        undivided  interest in Unit 1, or any similar  security or lease, or any
        interest in any security or lease the offering of which, for purposes of
        the  Securities  Act, would be deemed to be part of the same offering as
        the offering of the aforementioned securities or leases, in either case,
        or solicited any offer to acquire any of the  aforementioned  securities
        or leases in violation of Section 5 of the Securities Act, and except as
        contemplated by this Participation Agreement, neither the Lessee nor any
        one  authorized  to act on its behalf  will take any action  which would
        subject the issuance or sale of any Note or any interest in the Facility
        Lease or any other debt  instrument  (other  than the  Refunding  Bonds)
        issued  or to be  issued  to  finance  the  Undivided  Interest  to  the
        registration requirements of such Section 5.





                                      -28-

6091.50.2831.27:2


<PAGE>
                  (7)  Title  to  the  Undivided   Interest  and  Real  Property
         Interest;  Security  Interest.  On  the  Closing  Date,  (A)  good  and
         marketable title to the Undivided  Interest and the related  Generation
         Entitlement  Share will be duly,  validly and effectively  conveyed and
         transferred to the Owner Trustee,  free and clear of all Liens,  except
         Permitted  Liens  (other  than those  described  in clause  (ii) of the
         definition  of such  term  and  that  portion  of  clause  (iv) of such
         definition  relating to Liens for taxes being contested),  (B) good and
         marketable  title to the Real Property  Interest will be duly,  validly
         and  effectively  conveyed and  transferred  to the Owner  Trustee,  as
         provided in the Deed and the Assignment of Beneficial Interest, (C) the
         Lessee will have good and marketable title to its ownership interest in
         the  Retained  Assets,  free and  clear of all Liens  except  Permitted
         Liens, the Lien of the Existing  Mortgage and matters  disclosed in the
         title report referred to in Section 11(a)(33), (D) the Lessee will have
         good and valid title to its ownership  interest in the PVNGS Site,  (E)
         Unit 1 will be wholly  located on the PVNGS Site  without any  material
         encroachments  by any portion  thereof on any other  property,  (F) all
         filings and  recordings  necessary  or  advisable  to perfect the Owner
         Trustee's right,  title and interest in and to the Undivided  Interest,
         the  related  Generation   Entitlement  Share  and  the  Real  Property
         Interest,  and to perfect for the benefit of the Indenture  Trustee and
         the holders of the Notes the first priority security interest, mortgage
         and assignment of rents  provided for in the Indenture,  will have been
         duly  made and (G) no other  action,  including  any  action  under any
         fraudulent  conveyance  statute,  will be required to protect the title
         and interests of the Owner  Trustee in and to the  Undivided  Interest,
         the related Generation Entitlement Share and the Real Property Interest
         against  the claims of all  Persons  other  than the ANPP  Participants
         under  the AMPP  Project  Agreements  (in  accordance  with  the  terms
         thereof), or to perfect such first priority security interest, mortgage
         and assignment of rents in favor of the Indenture Trustee.





                                      -29-

6091.50.2831.27:2


<PAGE>
                  (8) Non-Interference. None of the Permitted Liens will, on and
         after the Closing Date, materially interfere with the use or possession
         of the Undivided Interest,  the related Generation Entitlement Share or
         the Real  Property  Interest or the use of or the exercise by the Owner
         Trustee of its rights under the Bill of Sale,  the Deed, the Assignment
         of Beneficial  Interest and the Assignment and Assumption  with respect
         to, the  interests in PVNGS  granted or to be granted under the Bill of
         Sale,  the  Deed,  the  Assignment  of  Beneficial   Interest  and  the
         Assignment and Assumption.

                (9) Personal  Property.  Unit 1, based on the  agreements of the
        Lessee  and  the  other  ANPP  Participants  in the  ANPP  Participation
        Agreement  and of the  Lessee  and the Owner  Trustee  herein and in the
        other  Transaction  Documents,  is  to  the  full  extent  permitted  by
        Applicable Law personal property under the laws of the State of Arizona.

                (10) Location of Chief  Executive  Office.  The chief  executive
        office and place of business of the Lessee and the office where it keeps
        its records  concerning  its accounts or contract  rights is at Alvarado
        Square, Albuquerque, Bernalillo County, New Mexico 87158.

                (11) Financial  Statements.  The consolidated  balance sheets of
        the  Lessee  and  subsidiaries  (A) as of  December  31,  1985 and 1984,
        respectively,  and the related  consolidated.  statements  of  earnings,
        retained  earnings  and changes in  financial  position  for each of the
        years in the three-year  period ended  December 31, 1985,  together with
        the notes accompanying such financial statements, all certified by Peat,
        Marwick,  Mitchell  & Co.,  and  (B) as of  March  31,  1986  and  1985,
        respectively,  and the  related  consolidated  statements  of  earnings,
        retained earnings and changes in financial  position for the three-month
        period  ended  March  31,  1986 and  March 31,  1985  respectively,  all
        certified by the Controller or an Assistant Controller of the Lessee, as
        furnished  to  the  Owner  Participant,  fairly  present  the  financial
        position  of the  Lessee and its  subsidiaries  taken as a whole at each
        such date and the results of their operations for each of the



                                      -30-

6091.50.2831.27:2


<PAGE>


        periods then ended,  in conformity  with generally  accepted  accounting
        principles  applied  on  a  consistent  basis  and  in  conformity  with
        applicable Accounting Practice.

                  (12)  Disclosure.  None of the  financial  statements to which
        reference  is made in  paragraph  11  above  nor the  reports  to  which
        reference  is made in this  paragraph  12 nor any (other  than  publicly
        available documents of any Governmental Authority, (other than documents
        prepared  by or on  behalf  of  the  Lessee),  and  any  press  reports,
        insurance  reports,  if  delivered  on or before the Closing  Date,  and
        appraisals) certificate.,  written statement or other document furnished
        to the Owner  Participant  or the  Appraiser by the Lessee in connection
        with the transactions  contemplated  hereby (under the  circumstances at
        the time and for the purposes for which any  statement  made therein was
        made) contains any untrue statement of a material fact or omits to state
        a material fact necessary to make the statements therein not misleading.
        There is no fact  known to the  Lessee  that  materially  and  adversely
        affects or, so far as the Lessee can now reasonably  foresee,  is likely
        to materially and adversely affect, the business or financial  condition
        of the Lessee or any material  portion of its  properties or its ability
        to perform its  obligations  under this  Participation  Agreement or any
        other Transaction Document or any Financing Document to which the Lessee
        is, or is to become, a party. The Lessee has heretofore delivered to the
        Owner  Participant  the Lessee's Annual Report on Form 10-K for the year
        ended December 31, 1985, the Lessees  Quarterly  Report on Form l0-Q for
        the quarter  ended  March 31,  1986 and the Current  Reports on Form 8-K
        filed on February 12, 1985 (as amended by Form 8 filed April 12,  1985),
        January  14,  March 3,  June 30 and July 16,  1986 and to be filed on or
        about July 31, 1986.

                  (13)  Litigation.  Except as disclosed in the reports to which
         reference  is made in  paragraph  12 above,  there is no action,  suit,
         investigation or proceeding pending or, to the knowledge of the



                                      -31-

6091.50.2831.27:2


<PAGE>


        Lessee,  threatened  against the Lessee before any court,  arbitrator or
        administrative  or  governmental  body which  questions  the validity or
        enforceability of this Participation  Agreement or any other Transaction
        Document  or any  Financing  Document  to which the  Lessee is, or is to
        become, a party, or which,  individually or in the aggregate, if decided
        adversely to the interests of the Lessee,  would have a material adverse
        effect  on  the  business  or  financial  condition  of  the  Lessee  or
        materially  and  adversely  affect the ability of the Lessee to per-form
        its  obligations  under  this  Participation   Agreement  or  any  other
        Transaction  Document or any Financing  Document to which it is or is to
        become a party.

                (14) Tax Returns. The Lessee has filed all Federal, state, local
        and foreign,  if any, tax returns which were  required to be tiled,  and
        has paid all Taxes shown to be due and  payable on such  returns and has
        paid all other Taxes in respect of the  Lessee's  interest in Unit 1 and
        in the PVNGS Site which are payable by the Lessee to the extent the same
        have become due and  payable  and before  they have  become  delinquent,
        except (i) for any Taxes the amount,  applicability or validity of which
        may be in dispute and which are currently  being contested in good faith
        by appropriate  proceedings and with respect to which the Lessee has set
        aside on its  books  reserves  (segregated  to the  extent  required  by
        generally  accepted  accounting  principles) deemed by it to be adequate
        and (ii)  for any  Taxes  relating  to PVNGS  in  respect  of which  the
        Operating Agent has not given notice to the Lessee that the same are due
        and  payable.  The  Federal  income tax  returns of the Lessee have been
        audited by the ms for taxable years through 1980.

                (15) ERISA.  In reliance  upon,  and subject to the accuracy of,
        the representations  made by the Loan Participant in Section 6(a)(5) and
        the Owner Participant in Section 7(a)(9),  the execution and delivery of
        this Participation  Agreement,  the other Transaction  Documents and the
        Financing Documents by the Lessee will not involve any prohibited
        transaction within the meaning of ERISA or section 4975 of the Code.


                                      -32-

6091.50.2831.27:2


<PAGE>



                (16)  Regulation.  So long as the  Facility  Lease is in effect,
        assuming  the  proper  filing  of Form U 7D with the SEC on or within 30
        days after the Closing Date, under Applicable Law now in effect, neither
        the Loan Participant,  the Owner Participant,  FNB nor the Owner Trustee
        will be or  become,  solely by reason of either its  entering  into this
        Participation  Agreement or any other Transaction  Document to which any
        of them is, or is to become, a party, or the  transactions  contemplated
        hereby or thereby,  subject to regulation (i) as an "electric  utility",
        an "electric  utility company",  a "public  utility",  a "public utility
        company", a "holding company",  or a "public utility holding company" by
        any Federal,  state (other than, as to the Owner Participant,  New York,
        as to which no  representation.  or warranty  is given) or local  public
        utility  commission  or  other  regulatory  body,   authority  or  group
        (including,  without  limitation,  the SEC,  the FERC,  the MMPSC or the
        Arizona Corporation  Commission).  or (ii) in any manner by the NRC. The
        Lessee  is  not,  and  covenants  that  (except  in  connection  with  a
        transaction  permitted  by  Section  l0(b)(3)(ii)  hereof)  it will  not
        become,  a "holding  company"  or a  "subsidiary  company" of a "holding
        company" or an "affiliate" of a "holding  company" within the meaning of
        the Holding  Company Act. The Lessee is not subject to regulation by the
        Arizona  Corporation  Commission as a public utility or a public service
        corporation.

                (17)  Authorizations,  etc.  The Lessee has not failed to obtain
        any  Governmental  Action  or other  authorization,  license,  approval,
        permit, consent, right or interest, where a failure to obtain such would
        materially  and  adversely  affect the ability of the Lessee to carry on
        its business as presently  conducted or as described in the Registration
        Statement.





                                      -33-

6091.50.2831.27:2


<PAGE>
                  (18) No Default,  etc.  The Lessee is not in  default,  and no
         condition  exists  that,  with the giving of notice or lapse of time or
         both,  would  constitute  a default by the Lessee,  under any  material
         mortgage, deed of trust, indenture, lease, contract or other instrument
         or  agreement  to which the  Lessee is a party or by which it or any of
         its properties or assets may be bound.

                (19)  Certain  Documents.  True and  correct  copies of the ANPP
        Participation   Agreement,  the  Material  Project  Agreements  and  the
        Existing Mortgage have been delivered to the Owner Participant's Special
        Counsel for and on behalf of the Owner  Participant prior to the date of
        execution  hereof.  No ANPP  Project  Agreement  will,  on and after the
        closing Date,  materially and adversely interfere with ( i ) (except for
        the  AMP?  Participation   Agreement  in  the  case  of  the  Generation
        Entitlement  Share only) the title of the Owner Trustee to the Undivided
        Interest,  the related Generation Entitlement Share or the Real Property
        Interest or (ii) except for the ANPP  Participation  Agreement,  the use
        of,  or the  exercise  by the  Owner  Trustee  of its  rights  under the
        Facility Lease, the Deed, the Assignment of Beneficial  Interest and the
        Assignment and Assumption with respect to, the Undivided  Interest,  the
        related  Generation  Entitlement  Share,  and the interests in the PVNGS
        Site  (including  the Real Property  Interest)  granted or to be granted
        under the Deed, the Assignment of Beneficial Interest and the Assignment
        and Assumption. No payment default or other default of a material nature
        by the Lessee has occurred and is continuing under the Existing Mortgage
        or any ANPP Project Agreement. The AMPP Participation Agreement and each
        other ANPP Project  Agreement are in full force and effect and no breach
        of any thereof,  to the Lessee's  knowledge,  by any other party thereto
        has occurred and is continuing,  except where the failure to be in force
        and effect or such breach would not have a material  and adverse  effect
        on the Undivided Interest, the related Generation Entitlement Share, the
        Real Property Interest, Unit 1 or the rights,  interests and benefits of
        the  Owner  Trustee  or the  Owner  Participant  under  any  Transaction



                                      -34-



6091.50.2831.27:2


<PAGE>

         Document.  Upon execution and delivery of the Mortgage  Release and the
         recordation  thereof or of UCC  releases  in respect  thereof,  (i) the
         mortgagee and secured party  thereunder  will have released the lien of
         the Existing Mortgage on the Undivided Interest, the related Generation
         Entitlement Share and the Real Property Interest and (ii) the rights of
         the Owner  Trustee  in the  Undivided  Interest  and the Real  Property
         Interest and the related Generation  Entitlement Share will not be, and
         will not become,  subject or  subordinate  to the rights of any Person,
         except  the  Indenture   Trustee  under  the  Indenture  and  the  ANPP
         Participants   to  the   extent   expressly   set  forth  in  the  ANPP
         Participation  Agreement  (as in effect on the Closing Date) and except
         as may otherwise expressly be permitted by the Facility Lease. The lien
         of the  Existing  Mortgage  does not  extend  to  rights  of PNM  under
         Transaction Documents (other than the Lessee's leasehold interest under
         the Facility Lease) or to the Generation  Entitlement  Share related to
         the  Undivided   Interest.   Neither  Section   15.6.3.5  of  the  ANPP
         Participation  Agreement  nor  Section  8(c)(3)  of this  Participation
         Agreement  (i)  requires  the  Owner  Trustee  to  accept  any cash bid
         referred  to therein or (ii)  otherwise  materially  impedes  the Owner
         Trustee's right,  upon a failure by the Lessee to purchase or otherwise
         reacquire the Undivided  Interest and the Real  Property  Interest,  to
         conclude a sale or lease to a Person  constituting a "Transferee" under
         Section 15.10 of the ANPP Participation Agreement

                  (20) Unit 1. The  description of unit 1 set forth in Exhibit B
         to the Bill of Sale is correct  and  sufficiently  complete to identify
         such property.

                  (21)  Investment  Company Act. The Lessee is not, and will not
         become1  an  "investment  company  or  a  company  "controlled"  by  an
         "investment company", within the meaning of the Investment Company Act.

                (b)     Agreements of Lessee.




                                      -35-

6091.50.2831.27:2


<PAGE>


                  (1)  Delivery  of  Documents.  The Lessee  agrees that it will
         deliver to the Owner  Participant and the Loan Participant (and, in the
         case of sections l0(b)(1)(iii) and (v) hereof, the Owner Trustee)

                      (i) Financial Statements: (A) as soon as practicable,  and
                in any event within 120 days,  after the end of each fiscal year
                of the Lessee,  a  consolidated  balance sheet of the Lessee and
                subsidiaries  as of the  end of such  fiscal  year  and  related
                consolidated  statements  of  earnings,  retained  earnings  and
                changes in financial  position for such year,  all in reasonable
                detail and  certified in an opinion by a  nationally  recognized
                term of  independent  public  accountants,  and the  annual  and
                interim reports of the Lessee to its stockholders as soon as the
                same  have  been  mailed  to such  stockholders,  (B) as soon as
                practicable,  and in any event within 60 days,  after the end of
                each fiscal quarter (other than the last fiscal quarter) of each
                fiscal year of the Lessee,  a consolidated  balance sheet of the
                Lessee  and  subsidiaries  as of the  end of said  period  and a
                related  consolidated  statement ~f earnings,  retained earnings
                and  changes  in  financial  position  for said  period,  all in
                reasonable  detail,  and  certified  by  the  Controller  or  an
                Assistant  Controller  or the  Chief  Financial  Officer  of the
                Lessee and (C) as soon as  practicable  after the same have been
                filed, a copy of all documents  filed by the Lessee with the SEC
                pursuant  to  the  reporting   requirements  of  the  securities
                Exchange Act;

                      (ii)  Other   Reports:   promptly   upon  their   becoming
                available,  any  registration  statement,   offering  statement,
                investment  memorandum or  prospectus  prepared by the Lessee in
                connection  with the public  offering of securities  (other than
                public  offerings of  securities  under  employee  stock option,
                consumer stock or dividend reinvestment plans);



                                      -36-

6091.50.2831.27:2


<PAGE>


                 (iii)  Notice of  Default:  promptly  upon the Lessee  becoming
                 aware of the existence  thereof,  written notice specifying any
                 condition which constitutes a Default or an Event of Default or
                 a default by any ANPP Participant under the ANPP  Participation
                 Agreement and the nature and status thereof;

                    (iv)  Annual  Certificate:  within 120 days after the end of
                each  fiscal year of the Lessee,  a  certificate  of the Lessee,
                signed by the Controller or an Assistant Controller or the Chief
                Financial Officer of the Lessee, to the effect that such officer
                has reviewed,  or caused to be reviewed by individuals under his
                supervision,   this  Participation   Agreement  and  each  other
                Transaction  Document and each  Financing  Document to which the
                Lessee is a party and has made,  or caused to be made  under his
                supervision,  a review of the transactions  contemplated  hereby
                and  thereby  and  the  condition  of  the  Lessee  during  such
                preceding  fiscal year,  and such review has not  disclosed  the
                existence during such fiscal period,  nor does such officer have
                knowledge of the  existence as at the date of such  certificate,
                of any condition or event that constitutes a Default or Event of
                Default or, if any such  condition or event  exists,  specifying
                the nature and period of  existence  thereof  and any action the
                Lessee has taken,  is taking,  or proposes to take with  respect
                thereto;

                      (v) Opinion of  Counsel:  within 120 days after the end of
                each  fiscal  year  of  the  Lessee,  an  opinion  or  opinions,
                satisfactory to the Owner  Participant,  the Owner Trustee,  the
                Collateral Trust Trustee and the Indenture Trustee, of Keleher &
                McLeod, P.A., as general counsel for the Lessee, Snell & Wilmer,
                as special Arizona counsel for the Lessee,  and/or other counsel
                acceptable  to the Owner  Participant  (A)  either to the effect
                that  (1)  all  filings  and   recordations  (or  refilings  and
                


                                      -37-
6091.50.2831.27:2


<PAGE>

                  rerecordations)  required to (i) convey to the Owner  Trustee,
                  and establish,  preserve, protect and perfect the title of the
                  Owner  Trustee  to,  the  Undivided   Interest,   the  related
                  Generation  Entitlement  Share and the Real Property  Interest
                  and establish, preserve and protect the Owner Trustee's rights
                  under this Agreement and the other Transaction Documents, and,
                  (ii) so long as any Note is  Outstanding,  grant,  perfect and
                  preserve the security interest of the Indenture Trustee in the
                  Lease  Indenture  Estate  have been duly made,  or (2) no such
                  additional filings, recordations,  refilings or rerecordations
                  are  necessary,  to (i)  convey  to  the  Owner  Trustee,  and
                  establish,  preserve,  protect  and  perfect  the title of the
                  Owner  Trustee  to,  the  Undivided   Interest,   the  related
                  Generation  Entitlement  Share and the Real Property  Interest
                  and establish, preserve and protect the Owner Trustee's rights
                  under this Agreement and the other Transaction Documents,  and
                  (ii) so long as any Note is  Outstanding,  grant,  perfect and
                  preserve the security interest of the Indenture Trustee in the
                  Lease  Indenture  Estate and (B) specifying the particulars of
                  all action  required  during the period  from the date of such
                  opinion through the last day of the next  succeeding  calendar
                  year,  including,   in  the  case  of  each  UCC  continuation
                  statement  required to be filed during such period, the office
                  in which each such  continuation  statement is to be filed and
                  the filing date and filing  number of the  original  financing
                  statement  or fixture  filing to be  continued,  and the dates
                  within which such  continuation  statement  may be filed under
                  Applicable   Law;   such  opinion   shall  also  address  such
                  additional  matters  relating  to actions  taken by the Lessee
                  pursuant to Section  1O(b)(2) as the Loan  Participant  or the
                  Owner Participant may reasonably request;

                  (vi) ANPP Information:  upon receipt by the Lessee,  copies or
                  advice of all  Systematic  Assessment of Licensee  Performance
                  



                                      -38-

6091.50.2831.27:2


<PAGE>

                  Reports (or comparable  successor  report) and of all material
                  notices,  data,  information and other written  communications
                  received by the Lessee  under or pursuant to any ANPP  Project
                  Agreement  or  otherwise  with respect to Unit 1, PVNGS or the
                  PVNGS Site, subject in each case to applicable confidentiality
                  undertakings  with  respect  thereto,   unless  prohibited  by
                  Applicable Law;

                 (vii) Other PVNGS Information:  the Lessee having undertaken to
                 furnish a letter to the Owner  Participant  to be dated  August
                 12, 1986,  describing  its internal  procedures  for monitoring
                 PVNGS and  reporting  to the  Owner  Participant  with  respect
                 thereto,  prior writ. ten notice of any material change in such
                 procedures;  and, upon receipt by the Lessee,  copies or advice
                 of all notices of  violation or other  material  communications
                 from the NRC and all  notices  of  nuclear  incidents  or other
                 material occurrence at PVNGS given to the NRC;

                 (viii)  Annual PVNGS  Report:  within 120 days after the end of
                 each  fiscal year of the Lessee,  a  certificate  of the Lessee
                 with  respect to the status and  operations  of Unit 1 for such
                 fiscal year and current  information  respecting  the status of
                 decommissioning funding arrangements for Unit 1;

                      (ix)  Information  Relating to Weighted  Annual Lease Rate
                Factor  under New Mexico  Order:  through  the  Refunding  Date,
                promptly  after any change (other than a change  resulting  from
                changes  in the  interest  rate  borne  from time to time by the
                Initial Series Notes) in the "weighted annual lease rate factor"
                referred to in Section  13(c) of the  Facility  Lease,  a notice
                specifying the amount of such change,. the amount of such factor
                after giving effect to such change and the event or events which
                resulted  in such  change  and,  promptly  following  the  Owner
                Participant's request therefor, from time to time, such other



                                      -39-

6091.50.2831.27:2


<PAGE>


                  information  regarding  such factor and any events  which have
                  resulted or may result in a change therein; and

                      (x) Requested  Information:  with  reasonable  promptness,
                such  other  data  and   information  as  to  the  business  and
                properties  of the  Lessee  or as to Unit 1,  PVNGS or the PVNGS
                Site as from  time to time may be  reasonably  requested  by the
                Owner   Participant,   subject   in  each  case  to   applicable
                confidentiality   undertakings  with  respect  thereto,   unless
                prohibited by Applicable Law.

                (2) Further Assurances. The Lessee will cause to be promptly and
        duly taken, executed,  acknowledged and delivered all such further acts,
        documents and assurances as the Owner  Participant may from time to time
        reasonably request in order to carry out more effectively the intent and
        purposes  of  this  Participation   Agreement,   the  other  Transaction
        Documents and the Financing Documents, and the transactions contemplated
        hereby and thereby.  The Lessee will cause the financing statements (and
        continuation   statements  with  respect   thereto)  and  the  documents
        enumerated  and  described  in  Schedule  3,  and  all  other  documents
        necessary or advisable  in that  connection,  to be recorded or filed at
        such places and times, and in such manner,  and will take all such other
        actions  or cause  such  actions  to be taken,  as may be  necessary  or
        reasonably  requested by the Owner  Participant,  the  Collateral  Trust
        Trustee,  the  Owner  Trustee  or the  Indenture  Trustee,  in  order to
        establish,  preserve, protect and perfect the title of the Owner Trustee
        to the Undivided Interest,  the related Generation Entitlement share and
        the Real Property Interest, and the Owner Trustee's rights and interests
        under this Participation  Agreement and the other Transaction  Documents
        and, so long as any Note is  Outstanding,  the first and prior  security
        interest of the Indenture  Trustee in the Lease Indenture Estate and the
        Indenture  Trustee's rights under this  Participation  Agreement and the
        




                                      -40-

6091.50.2831.27:2


<PAGE>

         other  Transaction  Documents,  all referred to and included  under the
         granting clause of the Indenture.

                (3)   Covenants. The Lessee covenants and agrees as follows:

                      (i)  Maintenance of Corporate  Existence,  etc. The Lessee
                shall at all times maintain its existence as a corporation under
                the laws of the  State of New  Mexico,  except as  permitted  by
                paragraph (ii) below. The Lessee will do or cause to be done all
                things  necessary  to preserve and keep in full force and effect
                its rights  (charter and  statutory) and  franchises;  provided,
                however,  that the Lessee may discontinue any right or franchise
                if  its   board  of   directors   shall   determine   that  such
                discontinuance  is necessary or desirable in the con duct of its
                business  and  does  not  materially  and  adversely  affect  or
                diminish  any  right  of  the  Owner  Participant  or  the  Loan
                Participant.

                      (ii) Merger,  Sale, etc.: Owner  Participant.  Without the
                consent  6f the  Owner  Participant,  the  Lessee  shall not (1)
                consolidate with any Person,  (2) merge with or into any Person,
                or (3) except in connection  with normal  dividend policy of the
                Lessee,  convey,  transfer,   lease,  or  dividend  (other  than
                transfers  and  dividends   described  in  the  Lessee's   proxy
                statement  dated April 11, 1986 and  transfers  and  conveyances
                constituting  sale and  leaseback  transactions  under  the AMP?
                Participation  Agreement)  to any  Person  more  than  5% of its
                assets,  including cash, in any single  transaction or series of
                related transactions; unless, immediately after giving effect to
                such transaction:


                                (A) the  Person  who is the  Lessee  immediately
                           following  such  consolidation,  merger,  conveyance,
                           transfer or lease (the Surviving Lessee) shall be a



                                      -41-

6091.50.2831.27:2


<PAGE>


                         corporation  or (with  the prior  consent  of the Owner
                         Participant,  which consent  shall not be  unreasonably
                         withheld)  other legal  entity  which (i) is  organized
                         under the laws of the United States of America, a state
                         thereof or the District of Columbia,  (ii) is a "public
                         utility" under applicable state and Federal laws, (iii)
                         is an ANPP  Participant  under  the ANPP  Participation
                         Agreement   with  respect  to  Unit  1  (including  the
                         Undivided  Interest),  (iv) if other  than  the  Lessee
                         immediately  prior  to  such  transaction,  shall  have
                         assumed each covenant and condition of the Lessee under
                         the ANPP  Participation  Agreement  and each other ANPP
                         Project  Agreement and (v) holds a valid and subsisting
                         license from the NRC to possess  Unit 1 (including  the
                         Undivided Interest);

                                (B) the  Surviving  Lessee,  if  other  than the
                           Lessee  immediately prior to such transaction,  shall
                           execute  and  deliver  to the  Owner  Participant  an
                           agreement,   in   farm   and   substance   reasonably
                           satisfactory to the Owner Participant, containing the
                           assumption by the  Surviving  Lessee of each covenant
                           and condition of this Participation  Agreement,  each
                           other   Transaction   Document  and  each   Financing
                           Document  to which the  Lessee  immediately  prior to
                           such  transaction was a party  immediately  preceding
                           such transaction;

                                (C) no Default  (other than a failure to deliver
                           documents and other information  specified in Section
                           10(b)(l)(vi),  (vii)  or  (viii)  hereof),  Event  of
                           Default,  Event of Loss or Deemed  Loss  Event  shall
                           have occurred and be continuing;

                                (D)  the Bonds (or, if the Bonds are not then 
                           rated, the preferred stock of



                                      -42-

6091.50.2831.27:2


<PAGE>


                         the  Surviving  Lessee)  after  giving  effect  to such
                         transaction,  (1)  shall be rated at least  "investment
                         grade" by  Standard & Poor's  Corporation  and  Moody's
                         Investors   Service,   Inc.   and  (2)  shall  have  an
                         investment rating by Standard & Poor's  Corporation and
                         Moody's  Investors  Service,  Inc.  not  less  than one
                         'smallest notch" below the rating assigned to the Bonds
                         (or,  if the Bonds are not then  rated,  the  preferred
                         stock of the  Surviving  Lessee)  immediately  prior to
                         such   transaction  (or,  if  neither  of  such  rating
                         organizations  shall rate the Bonds (or, if applicable,
                         the  preferred  stock of the  surviving  Lessee) at the
                         time, by any nationally  recognized rating organization
                         in the United States of America);

                                (E) the Surviving Lessee shall have a Minimum
                          Net Worth;

                                (F) the Surviving Lessee shall have delivered to
                         the Qwner  Participant  and the  Indenture  Trustee  an
                         Officers'   Certificate  and  an  opinion,   reasonably
                         satisfactory  to the Owner  Participant,  of counsel to
                         the  Surviving  Lessee,  each  stating  that  (1)  such
                         transaction  complies with this  subparagraph  (ii) and
                         (2) all  conditions  precedent to the  consummation  of
                         such   transaction   have   been   satisfied   and  any
                         Governmental  Action  required in connection  with such
                         transaction has been obtained, given or accomplished;

                                (G) the Surviving Lessee shall have delivered to
                           the  Owner   Participant   an   opinion,   reasonably
                           satisfactory to the Owner Participant, of independent
                           counsel (if other than nudge Rose Guthrie Alexander &
                           Ferdon, such counsel to be reasonably satisfactory to
                           the  Owner   Participant)  to  the  Surviving  Lessee
                         



                                                       -43-

6091.50.2831.27:2


<PAGE>

                         stating  that  such  transaction  does not and will not
                         cause a Loss  (as  defined  in the Tax  Indemnification
                         Agreement);

                               (H) such  transaction  is otherwise  permitted by
                         and  in   accordance   with  the   ANPP   Participation
                         Agreement; and

                               (I) the Coverage  Ratio of the  Surviving  Lessee
                         shall be at least 1.6 to 1.

                 Upon the consummation of such transaction the Surviving Lessee,
                 if other than the Lessee immediately prior to such transaction,
                 shall  succeed to, and be  substituted  for,  and may  exercise
                 every right and power of, the Lessee  immediately prior to such
                 transaction under this  Participation  Agreement and each other
                 Transaction  Document and each Financing  Document to which the
                 Lessee  immediately  prior  to  such  transaction  was a  party
                 immediately  preceding the date of such  transaction,  with the
                 same effect as if the  Surviving  Lessee had been named  herein
                 and therein.

                    (iii) Merger, Sale, etc.: Bondholders.  The Lessee shall not
                enter into any transaction constituting a consolidation, merger,
                conveyance, transfer, lease or dividend not permitted by Section
                l0(b)(3)(ii), irrespective of any consent or waiver of the Owner
                Participant,  unless  immediately  after  giving  effect to such
                transaction, the Bonds (or, if the Bonds are not then rated, the
                preferred stock of the Surviving Lessee), after giving effect to
                such transaction,  shall be rated at least "investment grade" by
                Standard & Poor's  Corporation  and Moody's  Investors  Service,
                Inc.

                    (iv) Prior Notice to Rating Agencies. Prior to entering into
                any  transaction  as  to  which  the  conditions  set  forth  in
                paragraphs (ii) and (iii) above shall be applicable,  the Lessee
                shall give notice  thereof to the rating  agencies  specified in
                such  paragraphs,  such notice to be  sufficiently in advance of
                such  transaction  to enable  the  rating  agencies  to  respond
                thereto prior to consummation thereof.


                                      -44-

6091.50.2831.27:2


<PAGE>


                      (V)  Incurrence of Debt.  Without the consent of the Owner
                Participant, the Lessee shall not issue or assume any secured or
                unsecured  indebtedness maturing more than eighteen months after
                the date of issuance thereof,  if,  immediately after such issue
                or  assumption,  the total  amount of all secured and  unsecured
                indebtedness of the Lessee maturing more than one year after the
                date  of  such  issue  or  assumption  shall  exceed  65% of the
                aggregate  of (x) such  total  amount  and (y) the  total of the
                capital and surplus of the Lessee.

                    (vi)  Change in Chief  Executive  Office.  The  Lessee  will
                notify  the  Owner  Trustee,  the  Owner  Participant,  the Loan
                Participant and the Indenture  Trustee promptly after any change
                of location of its chief executive office and place of business,
                principal place of business or place where the Lessee  maintains
                its business records.

                    (vii)  No  Petition  Agreement.   Prior  to  the  181st  day
                following  the payment in full of the Bonds and the discharge in
                accordance with its terms of the Collateral Trust Indenture, the
                Lessee  will not file a  petition,  or join in the  filing  of a
                petition,  seeking  reorganization,  arrangement,  adjustment or
                composition of or in respect of the Loan  Participant  under the
                Bankruptcy Code or any other applicable  Federal or state law or
                the law of the District of Columbia.




                                      -45-

6091.50.2831.27:2


<PAGE>
                    (viii) ANPP Project Agreements.  Except where the failure to
                do so would  not  have a  material  and  adverse  effect  on the
                Undivided  Interest,  the Real Property Interest,  Unit 1 or the
                rights, interests and benefits of the Owner Trustee or the Owner
                Participant  under any Transaction  Document the Lessee (without
                limiting its obligations  under the next sentence) at all times,
                unless the Owner Participant shall otherwise  consent,  (1) will
                perform its obligations  under and comply with the terms of each
                ANPP  Project  Agreement  to be  complied  with by it,  (2) will
                exercise  its rights under the ANPP  Participation  Agreement to
                maintain  each ANPP Project  Agreement in full force and effect,
                (3) will keep unimpaired all of the Lessee's rights,  powers and
                remedies  under each ANPP  Project  Agreement  and  prevent  any
                forfeiture  or  impairment  thereof,  (4) will  enforce the ANPP
                Participation  Agreement  in  accordance  with its terms and (5)
                will  not  take or fail to take or join in (i) any  action  with
                respect to1 nor accept or approve any  amendment to or any other
                change in, the ANPP  Participation  Agreement  or any other ANPP
                Project  Agreement,  or (ii) any  action or change the effect of
                which would be to relieve the Lessee of any obligation under the
                ANPP  Participation  Agreement on or after the Closing Date. The
                Lessee  will  not,  unless  the  Owner   Participant   otherwise
                consents,  accept or approve any  amendment  to any ANPP Project
                Agreement  the  effect  of  which  would  be to (A)  reduce  the
                Generation  Entitlement Share related to the Undivided Interest,
                (B)  impose,  directly or  indirectly,  at any time on the Owner
                Trustee or the Owner  Participant any  obligations  (unless such
                Person is then an ANPP  Participant),  (C) discriminate  against
                (x) the Owner Trustee or the Owner  Participant  in its capacity
                as  lessor  in a sale  and  lease-back  transaction  or (y)  any
                present or future ANPP Participant because such ANPP Participant
                derived or will  derive its  status as  "Participant"  under the
                ANPP  Participation  Agreement  from  a  lessor  in a  sale  and
                lease-back  transaction,  (K) deprive  the Owner  Trustee or the
                Owner  Participant,  as the  case  may  be,  of the  benefit  of
                Sections 15.2.2, 15.10 and 32.1 of the ANPP Participation



                                      -46-

6091.50.2831.27:2


<PAGE>


                Agreement (or any comparable successor provisions), or (F) amend
                or  otherwise  change  section  15.10 of the ANPP  Participation
                Agreement.  The Lessee shall (A) provide  copies of any proposed
                amendment to or modification of the ANPP Participation Agreement
                to the  Owner  Participant  not less  than 45 days  prior to the
                execution  thereof  by the  Lessee  (except  where the Lessee is
                unaware thereof 45 days prior to such  execution,  in which case
                the Lessee shall provide  notice thereof as promptly as possible
                after becoming so aware) and (B) upon such execution  furnish to
                the  Owner   Participant  a  copy  of  any  such   amendment  or
                modification  as  executed.  The  Lessee  will  not,  except  as
                permitted  by  paragraph  (ii)  above or by the  Assignment  and
                Assumption,  sell, transfer, assign or otherwise. dispose of all
                or any of its rights or interests in and to PVNGS.

                      (ix) Notes and Bands.  The Lessee  will not,  and will not
                permit any of its  Affiliates  to,  acquire any of the Notes or,
                except in connection  with the selection of Bonds for redemption
                pursuant to the Collateral Trust Indenture, the Bonds.

                      (x) Cooperation.  The Lessee will cooperate with the Owner
                Participant  and the Owner  Trustee in  obtaining  the valid and
                effective  issue,  or, as the case may be, transfer or amendment
                of all Governmental Actions (including,  but without limitation,
                the  License)   necessary  or,  in  the  opinion  of  the  Owner
                Participant,   desirable  for  the   ownership,   operation  and
                possession of the Undivided Interest, the Real Property Interest
                or any  portion  of  Unit 1  represented  thereby  by the  Owner
                Trustee or any  transferee,  lessee or assignee  thereof for the
                period  from and after the Lease  Termination  Date.  The Lessee
                agrees to accept and  cooperate in receiving any transfer of the
                Owner  Participant's  right,  title  and  interest  in the Trust
                Estate made pursuant to Section 7(b)(4)



                                      -47-

                 6091.50.2831.27:2

<PAGE>


                      (xi) Decommissioning.  (A) The Lessee will comply with its
                obligations under Applicable Law concerning the  decommissioning
                and retirement from service of Unit 1 (which term shall include,
                for  all  purposes  of this  paragraph  (xi),  (i)  the  cost of
                removal,   decontamination  and  disposition  of  equipment  and
                fixtures,   the  cost  of  safe   storage  for  later   removal,
                decontamination  and  disposal  and the  cost of  entombment  of
                equipment and fixtures,  and (ii) the cost of (x) razing of Unit
                1, (y) removal and disposition of debris from the PVNGS Site and
                (z)  restoration  of  relevant  portions of the PVNGS Site) . If
                Applicable  Law or  Governmental  Action shall not, on or before
                December  31,  1990,  impose upon the Lessee the  obligation  to
                create,  fund and maintain an external reserve fund dedicated to
                paying  all the  costs  of  decommissioning  and  removing  from
                service the Undivided Interest,  then the Lessee will create and
                maintain  the   Decommissioning   Fund;  if  Applicable  Law  or
                Governmental  Action shall thereafter  impose upon the Lessee an
                obligation  to  create  and  maintain  such a fund,  any fund in
                compliance with Applicable Law or such Governmental Action shall
                be deemed  satisfactory to the Owner Participant for purposes of
                the preceding sentence;  provided,  however, the Lessee shall in
                any and all events maintain and fund such an external reserve in
                accordance with prudent utility  practice and thereafter  review
                such fund,  at least  every five years after its  creation,  and
                modify  the same as to amount or rate of  accumulation  to bring
                the same, if necessary,  into  conformity  with prudent  utility
                practice.  (B) Except to the extent  provided in clauses (C) and
                (D) below, as between the Lessee,  the Owner Trustee,  the Owner
                Participant  and any  transferee  (including by way of lease) or
                assignee  of any  of the  Lessor's  or the  Owner  Participant's
                right,



                                      -48-

6091.50.2831.27:2


<PAGE>


                 title or  interest  in Unit 1, the  Lessee  agrees  to pay,  be
                 solely  responsible for, and to indemnify such parties against,
                 all costs and expenses relating or allocable to, or incurred in
                 connection  with,  the   decommissioning  and  retirement  from
                 5ervice of Unit 1,  notwithstanding  (i) the  occurrence of the
                 Lease Termination Date, any Event of Default, Default, Event of
                 Loss, Deemed Lass Event or any other event or occurrence,  (ii)
                 any provision of any Transaction  Document,  or other document,
                 instrument  or  agreement,  including  the  ANPP  Participation
                 Agreement,  (iii) any  provision  of the  License  or any other
                 license  or  permit,  or (iv) any  Applicable  Law,  charter or
                 by-law  provision,  Governmental  Action  or other  impediment,
                 including,  without limitation, the bankruptcy or insolvency of
                 the  Lessee,  either  now or  hereafter  in  effect;  it  being
                 understood that the obligations of the Lessee under this clause
                 (3) are and shall be  absolute  and  unconditional.  (C) In the
                 event  that (i) the  Facility  Lease  shall have  expired  upon
                 expiration (or early  termination  pursuant to section 14(e) of
                 the Facility Lease) of the Lease Term (other than in connection
                 with an Event of Loss,  Deemed  Loss Event or Event of Default)
                 and (ii) thereafter the Lessor shall (1) re-lease the Undivided
                 Interest to any Person or (2) retain the Undivided Interest and
                 sell power and energy  from its  Generation  Entitlement  Share
                 through  PNM, as agent,  then after the Lessor has received (x)
                 in the case of clause (1) above,  gross  rents in an  aggregate
                 amount (when discounted back to such Lease  Termination Date at
                 a rate per  annum  equal  to the  Prime  Rate)  equal to 20% of
                 Facility  Cost,  or (y) in the case of clause  (2)  above,  net
                 electric  revenues  in  an  aggregate  amount   (discounted  as
                 aforesaid)  equal to 20% of  Facility  Cost,  the Lessor  shall
                 thereafter   reimburse   the   Lessee   in   respect   of   the
                 decommissioning obligation of the Lessee hereunder in an amount
                 equal to any further rent received or proceeds received



                                      -49-

6091.50.2831.27:2


<PAGE>


                 from the sale of power and energy to the extent  that such rent
                 or proceeds are attributable to the decommissioning  obligation
                 of the Lessee under this Section  l0(b)(3)(xi)  with respect to
                 the period from and after such Lease  Termination Date (payable
                 on an annual basis with respect to each year or portion thereof
                 during the term of such lease  referred  to in clause (1) above
                 or  such  agency  period  referred  to in  clause  (2)  above);
                 provided,  however,  that  when such  amount  has been paid the
                 Lessor  shall be relieved of all  obligations  to make  further
                 reimbursement to the Lessee for such purpose.  (D) In the event
                 that  (i) the  Facility  Lease  shall  have  expired  upon  the
                 expiration (or early  termination  pursuant to Section 14(e) of
                 the Facility Lease) of the Lease Term (other than in connection
                 with an Event of Loss,  Deemed  Loss Event or Event of Default,
                 (ii) the Lessor shall sell (other than in  connection  with the
                 termination   by  the   Lessee  of  the   Facility   Lease  for
                 obsolescence  pursuant to Section 14 of the Facility Lease) the
                 Undivided  Interest  to any  Person  (including  the  Lessee in
                 connection  with the  exercise  by the  Lessee of the  purchase
                 option  provided by Section 13(b) of the Facility  Lease),  and
                 (iii) the net sales  proceeds  (discounted  back to such  Lease
                 Termination  Date at a rate per annum  equal to the Prime Rate)
                 received by the Lessor in connection therewith shall exceed 20%
                 of Facility Cost (reduced by the  percentage of Facility  Cost,
                 if any,  actually  realized by the Lessor pursuant to clause (C
                 above),  then the Lessor shall  reimburse the Lessee in respect
                 of the decommissioning obligation of the Lessee hereunder in an
                 amount  equal to any net  proceeds  of such sale to the  extent
                 that such  proceeds  are  attributable  to the  decommissioning
                 obligation of the Lessee under this Section  l0(b)(3)(xi)  with
                 respect  to the  period  from and  after  the date of such sale
                 through  the  remaining  useful life of Unit 1  (whereupon  the
                



                                      -50-

6091.50.2831.27:2


<PAGE>

                reimbursement  obligations  of the  Lessor  under  this  Section
                l0(b)(3)(xi) shall terminate);  provided, however, that any such
                reimbursement  shall  not  reduce  the  amount of such net sales
                proceeds  retained  by the  Lessor to an amount  (discounted  as
                aforesaid)  equal to less than 20% of Facility  Cost (reduced by
                the  percentage of Facility Cost, if any,  actually  realized by
                the Lessor  pursuant  to clause (C)  above).  The  reimbursement
                obligations  of the Lessor  under  clauses (C) and (D) above are
                for the sole benefit of the Lessee, and no other Person shall be
                a third party  beneficiary  with respect  thereto.  In the event
                that the Lessee and the Lessor  shall not agree as to the amount
                of gross  rents,  net  electric  revenues or net sales  proceeds
                attributable  to the  decommissioning  obligation  of the Lessee
                under this Section 10(b)(3)(xi), such amount shall be determined
                by  the  Appraisal  Procedure.  For  purposes  of  deter  mining
                Facility  Cost  under  clauses  (C)  and  (D)  of  this  Section
                l0(b)(3)(xi),  Facility  Cost shall be  adjusted  to reflect any
                inflation or deflation  from the Closing Date to the time of the
                determination.

                (xii)  Acknowledgment and Agreement.

                The Lessee hereby  acknowledges  and agrees to the provisions of
                Section 7(b)(4) of this Participation Agreement.

                SECTION 11. Conditions Precedent.

                  (a) Owner  Participant and Loan  Participant  Conditions.  The
obligation of (x) the Loan Participant to make the Loan on the Closing Date, and
(y) the Owner  Participant to make the Investment and the Real Estate Investment
on the  Closing  Date,  shall be subject to the  fulfillment  on or prior to the
Closing Date of the following conditions  precedent (each instrument,  document,
certificate  or  opinion   referred  to  below  to  be  in  form  and  substance
satisfactory to the Loan Participant and the Owner Participant):




                                      -51-
6091.50.2831.27:2


<PAGE>


                  (1) Notice of Closing;  Transaction Documents. Each shall have
         received executed copies, or sets of executed counterparts,  of (x) the
         Notice of Closing,  and (y) each  Transaction  Document (other than the
         Tax Indemnification  Agreement),  the Mortgage Release,  each Financing
         Document being  executed on the closing Date and such other  documents.
         as are contemplated by this Participation Agreement.

                  (2) Tax Indemnification Agreement. The Owner Participant shall
         have received an executed copy of the Tax Indemnification Agreement.

                  (3)  Authentication  Request etc. The Owner Trustee shall have
         delivered  to the  Indenture  Trustee (x) a request,  dated the Closing
         Date, authorizing the Indenture Trustee to authenticate and deliver the
         Initial  Series  Note to the Loan  Participant  upon its payment to the
         Indenture  Trustee,  for  the  account  of the  Owner  Trustee,  of the
         proceeds of the Loan, and (y) the Original of the Facility Lease.

                  (4) Due  Authorization,  Execution  and  Delivery.  All of the
         documents  described in clauses (1) and (2) of this Section 11(a) shall
         have been duly  authorized,  executed and  delivered by the  respective
         parties  thereto  and shall be in full force and effect on the  Closing
         Date, and the Loan  Participant  and the Owner  Participant  shall have
         received evidence as to such authorization, execution and delivery.

                (5) Initial Series Note and Bond  Transactions;  Investment.  In
        the case of the Loan  Participant,  (A) the Loan Participant  shall have
        received  the  proceeds  from the sale of the Initial  Series Bonds as a
        result of the consummation of the transactions  contemplated by the Term
        Loan  Agreement,  (6) the Owner  Trustee  shall have  executed,  and the
        Indenture  Trustee  shall have  authenticated  and delivered to the Loan
        Participant,  the Initial  series Note  evidencing  the Loan made on the
        Closing Date, (C) the  Collateral  Trust Trustee shall have accepted the
        Term Note Supplemental Indenture and shall have



                                      -52-
6091.50.2831.27:2


<PAGE>


       released  the  amount of the Loan from the lien of the  Collateral  Trust
       indenture,  and CD) the Owner  Participant shall have made the Investment
       and the Real Estate Investment on the Closing Date.

                  (6)  Loan.  in the  case of the  Owner  Participant,  the Loan
         Participant shall have made the Loan.

                  (7) ANPP  Administrative  Committee.  The ANPP  Administrative
         Committee shall have made the finding required by section 15.6.2 of the
         ANPP  Participation  Agreement,  and the Lessee  shall  have  delivered
         evidence of such finding having been made.

                  (8) No Violation.  The making by the Owner  Participant of the
         Investment and the Real Estate  Investment and by the Loan  Participant
         of the Loan shall not violate any Applicable Law.

                  (9) No Default. No Default or Event of Default or, in the case
         of the,  Loan  Participant,  Indenture  Default or  indenture  Event of
         Default, shall have occurred and be continuing.


                (10) Recording and Filing. The financing  statements and fixture
        filings  under  the  Uniform  Commercial  Code and  certain  Transaction
        Documents, in each case as enumerated and described in Schedule 3, shall
        have been duly filed or recorded in the respective places or offices set
        forth in such  Schedule and all  recording  and filing fees with respect
        thereto shall have been paid.

                (11) Representations and Warranties of the Loan Participant.  in
        the case of the Owner Participant, the representations and warranties of
        the Loan Participant set forth in Section 6(a) shall be true and correct
        on and as of the Closing Date with the same effect as though made on and
        as of the Closing Date, and the Owner Participant shall have received an
        Officers'  Certificate of the Loan Participant,  dated the Closing Date,
        to such effect.




                                      -53-

6091.50.2831.27:2


<PAGE>


                (12) Opinion of the Loan Participant's  Counsel.  In the case of
        the Owner Participant, it shall have received a favorable opinion of the
        Loan Participant's  counsel, dated the Closing Date and addressed to the
        Owner Participant,  addressing such matters relating to the transactions
        contemplated hereby and by the other Transaction  Documents as the Owner
        Participant may reasonably request.

                (13) Representations and Warranties of the Owner Participant. In
        the case of the Loan Participant,  the representations and warranties of
        the  Owner  Participant  set  forth in  Section  7(a)  shall be true and
        correct  on and as of the  Closing  Date with the same  effect as though
        made on and as of the Closing Date, and the Loan Participant  shall have
        received a certificate of an officer of the Owner Participant, dated the
        Closing Date, to such effect.

                (14) Opinion of the Owner Participant's  Special Counsel. In the
        case of the Loan Participant, it shall have received a favorable opinion
        of the Owner Participant's  Special Counsel,  dated the Closing Date and
        addressed to the Loan  Participant,  addressing such matters relating to
        the  transactions  contemplated  hereby  and  by the  other  Transaction
        Documents, as the Loan Participant may reasonably request.

                (15)  Representations  and Warranties of the Owner Trustee.  The
        representations and warranties of FNB and the Owner Trustee set forth in
        Section  8(a) shall be true and  correct on and as of the  Closing  Date
        with the same effect as though made on and as of the Closing  Date,  and
        the Loan  Participant  and the Owner  Participant  shall have received a
        certificate  from an  officer  of FNB  and a  certificate  of the  Owner
        Trustee, dated the Closing Date, to such effect.





                                                       -54-
6091.50.2831.27:2


<PAGE>
                  (16)  Opinion  of  the  Owner  Trustee's  Counsel.   The  Loan
         Participant and the Owner  Participant  shall have received a favorable
         opinion of the Owner  Trustee's  counsel,  dated the  Closing  Date and
         addressed to each such Person,  addressing such matters relating to the
         transactions contemplated hereby and by the other Transaction Documents
         as  the  Loan  Participant  or the  Owner  Participant  may  reasonably
         request.

                (17)  Representations  and Warranties of the Indenture  Trustee.
        The representations and warranties of the Indenture Trustee set forth in
        Section  9(a) shall be true and  correct on and as of the  Closing  Date
        with the same effect as though made on and as of the Closing  Date,  and
        the Loan  Participant  and the Owner  Participant  shall have received a
        certificate  of the Indenture  Trustee,  dated the closing Date, to such
        effect.

                (18) Opinion of the Owner Participant's Special NRC Counsel. The
        Owner  Participant  shall have received a favorable opinion of the Owner
        Participant's special NRC Counsel,  dated the Closing Date and addressed
        to the  Owner  Participant,  addressing  such  matters  relating  to the
        transactions  contemplated hereby and by the other Transaction Documents
        as the Owner Participant may reasonably request.

                (19)  Representations  and  warranties  of the  Lessee.  (A) The
        Representations and Warranties of the Lessee set forth in Section 10(a),
        in each other  Transaction  Document,  in the Term Loan Agreement and in
        each  certificate  or other  document  to which  the  Lessee  is a party
        executed or delivered in connection with the  transactions  contemplated
        hereby or thereby  shall be true and  correct  on and as of the  Closing
        Date with the same effect as though  made on and as of the Closing  Date
        and (3) no Default, Event of Default, Deemed Loss Event or Event of Loss
        shall have occurred and be continuing and the Loan  Participant  and the
        Owner  Participant  shall have received an Officers'  Certificate of the
        Lessee,   dated  the  Clo5ing  Date,  to  such  effect.  Such  Officers'
        Certificate  shall state that there has been no material  adverse change
        in the  properties,  business,  prospects or financial  condition of the
        Lessee since March 31, 1986, and no event has



                                      -55-

6091.50.2831.27:2


<PAGE>


       occurred  since that date which  would  materially  adversely  affect the
       ability of the Lessee to perform its obligations under this Participation
       Agreement  or any  other  Transaction  Document  to  which it is or is to
       become a party.

                (20)  Opinion  of  the  Lessee's  Special   Counsel.   The  Loan
        Participant  and the Owner  Participant  shall have received a favorable
        opinion of the  Lessee's  Special  Counsel,  dated the Closing  Date and
        addressed to each such Person,  addressing such matters  relating to the
        transactions  contemplated hereby and by the other Transaction Documents
        as the  Loan  Participant  or the  Owner  Participant  shall  reasonably
        request.

                (21) Opinion of Lessee's General  Counsel.  The Loan Participant
        and the Owner Participant shall have received a favorable opinion of the
        Lessee's General  Counsel,  dated the Closing Date and addressed to each
        such  Person,  addressing  such  matters  relating  to the  transactions
        contemplated  hereby and by the other Transaction  Documents as the Loan
        Participant or the Owner Participant shall reasonably request.

        (22) Opinion of Lessee's Arizona  Counsel.  The Loan Participant and the
        Owner  Participant  shall  have  received  a  favorable  opinion  of the
        Lessee's Special Arizona  Counsel,  dated the Closing Date and addressed
        to  each  such  Person,   addressing   such  matters   relating  to  the
        transactions  contemplated hereby and by the other Transaction Documents
        as the  Loan  Participant  or the  Owner  Participant  shall  reasonably
        request.

        (23) Opinion of Owner Participant's  Special Arizona Counsel.  The Owner
        Participant  shall  have  received  a  favorable  opinion  of the  Owner
        Participant's  Special  Arizona  Counsel,  dated  the  Closing  Date and
        addressed to the Owner Participant,  addressing such matters relating to
        the  transactions  contemplated  hereby  and  by the  other  Transaction
        Documents as the Owner Participant shall reasonably request.



                                      -56-

6091.50.2831.27:2


<PAGE>


        (24)  Opinion of Owner  Participant's  Special New Mexico  Counsel.  The
        Owner  Participant  shall have received a favorable opinion of the Owner
        Participant's  Special New Mexico  Counsel,  dated the Closing  Date and
        addressed to the Owner Participant,  addressing such matters relating to
        the  transactions  contemplated  hereby  and  by the  other  Transaction
        Documents as the Owner Participant may reasonably request.

        (25)  Opinion  of the Owner  Participant's  special  Counsel.  The Owner
        Participant  shall  have  received  a  favorable  opinion  of the  Owner
        Participant's  Special Counsel,  dated the Closing Date and addressed to
        the Owner  Participant,  with  respect to such Federal tax and other tax
        matters as the Owner Participant may reasonably request.

        (26) Opinion of the Loan  Participant's  Counsel.  The Loan  Participant
        shall  have  received  a  favorable  opinion  of the Loan  Participant's
        Counsel,  dated the Closing  Date and  addressed  to it, with respect to
        such matters as the Loan Participant shall reasonably request.

        (27) Taxes. All Taxes, if any, payable in connection with the execution,
        delivery,  recording and filing of the Transaction Documents and all the
        documents and instruments  enumerated and described in Schedule 3, or in
        connection with the issuance and sale of the Initial Series Note and the
        Initial  Series  Bonds and the  making by the Owner  Participant  of the
        Investment  and the Real  Estate  Investment,  and all Taxes  payable in
        connection with the consummation of the transactions contemplated hereby
        and by the other  Transaction  Documents,  shall  have been duly paid in
        full by the Lessee.

        (28) Form U-7D. A certificate  on Form U-7D with respect to the Facility
        Lease shall have been duly  executed and  delivered by the Owner Trustee
        and the Owner Participant and shall be in due form for filing.





                                      -57-
6091.50.2831.27:2


<PAGE>


                    (29) Appraisal.  The Owner Participant shall have received a
letter, dated the Closing Date and addressed to the Owner Participant,  from the
Appraiser  containing an appraisal of the Undivided  Interest,  which  appraisal
shall reflect the  Appraiser's  reasonable  conclusion  that (w) the fair market
value in the hands of the Owner Trustee of the Undivided Interest on the Closing
Date,  taking  into  account  the  effect  and  existence  of the Real  Property
Interest, the Assignment and Assumption and the ANPP Participation Agreement, is
equal to the  Purchase  Price as set  forth in the  Notice of  Closing,  (x) the
estimated  remaining  economic  useful life of Unit 1 (including  the  undivided
Interest) is at least 38 years and 6 months,  (y) at the expiration of the first
two years of the Renewal  Term the  undivided  Interest  will have an  estimated
residual  value  taking  into  account  the  effect  and the  existence  of this
Participation   Agreement,  the  Real  Property  Interest,  the  Assignment  and
Assumption  and the ANPP  Participation  Agreement,  in the  hands of the  Owner
Trustee or a Person  (unrelated  to the Lessee) who could lease or purchase  the
Undivided :Interest from the Owner Trustee for commercial use, equal to at least
20% of the  Purchase  Price,  determined  without  including  in such  value any
increase or  decrease  for  inflation  or  deflation  during the period from the
Closing Date through the  expiration of the first two years of the Renewal Term,
and (2) taking into account the effect and the  existence  of the Real  Property
Interest,  the Assignment and Assumption and the ANPP  Participation  Agreement,
the use of the Undivided  Interest at the Lease  Termination bate by any User is
feasible  from an  engineering  and economic  point of view and is  commercially
reasonable.
                    (30)  Offering and Sale at Interest.  The Loan  Participant,
the Owner  Trustee and the Owner  Participant  shall have received a letter from
Kidder  Peabody with  respect to the  offering and sale of the  interests in the
transactions  contemplated  by  this  Participation  Agreement  and  each  other
participation agreement relating to an undivided interest in Unit 1.



                                      -58-

6091.50.2831.27:2


<PAGE>


                  (31) Extension  Letter.  The Extension  Letter shall have been
         duly executed by the  respective  parties  thereto and delivered to the
         collateral Trust Trustee.

                  (32) Governmental  Action.  The Lessee shall have obtained all
         Governmental  Actions (including,  without  limitation,  the New Mexico
         Order  and  the  FERC   Order,   which   order.   shall  be  final  and
         non-appealable, and the NRC Order, which order shall be final) required
         or,  in the  opinion  of  the  Owner  Participant,  advisable  for  the
         consummation of all the transactions contemplated by this Participation
         Agreement  and  the  other  Transaction  Documents  and  the  Financing
         Documents in accordance with their terms

        (33) Title  Report Title  Insurance.  The Owner  Participant  shall have
        received  (i) an updated  title  report,  dated the Closing  Date,  with
        respect to the nuclear  plant site,  which  report does not disclose any
        exceptions  materially  adverse to the possession or operation of Unit 1
        or  the  performance  by  the  Lessee  of  its  obligations  under  this
        Participation Agreement and the other Transaction Documents to which the
        Lessee is, or is to  become,  a party;  and (ii) such  title  insurance.
        policies with respect to the nuclear plant site and improvements thereon
        (including  the Owner  Trustee's  interests  therein)  as it shall  have
        reasonably  requested,  such  policies  to  be  in  form  and  substance
        satisfactory to the Owner Participant.

        (34) No Change or  Proposed  Change in Tax Laws.  No change  shall  have
        occurred  or been  proposed  in the Code or any other tax  statute,  the
        regulations   thereunder  or  any  interpretation   thereof  that  would
        adversely  affect  the  tax   consequences   anticipated  by  the  Owner
        Participant  with  respect  to  the  transactions  contemplated  by  the
        Transaction Documents, unless the Lessee shall have agreed in writing to
        protect the Owner Participant,  in the Tax Indemnification  Agreement or
        otherwise, in a manner reasonably satisfactory to it, against the effect
        of such change or proposed change.



                                      -59-

6091 - 50.2831.27:2


<PAGE>


                (35)  Insurance.  The Owner  Participant  shall have  received a
        written  report from its  independent  insurance  consultant in form and
        substance satisfactory to the Owner Participant.

                  (36) Site Arrangement  Plan. The Owner  Participant's  special
         Counsel  shall have  received a site  arrangement  plan of the  nuclear
         plant site prepared subsequent to January 1, l979

                    (37)   special   Certificate   of  the  Lessee.   The  Owner
           Participant  shall have received a certificate  of the Lessee,  dated
           the  Closing  Date,  to the effect  that,  except as set forth on the
           Schedule  thereto,  (A)  Unit 1 has  been  in all  material  respects
           completed in a good and workmanlike manner and in accordance with the
           plans and specifications  relating thereto (as the same may have been
           modified from time to time to reflect Unit 1 as actually  completed),
           Applicable Law (including, but without limitation, the regulations of
           the NRC), the License and the AN?? Participation  Agreement,  (B) all
           Governmental Action necessary for the commercial  operation of Unit 1
           (including the Undivided  Interest)  have been  received,  other than
           Governmental  Action  that is  routine  in  nature  for PVNCS or that
           cannot be obtained under  Applicable Law, or is typically not applied
           for, prior to the time it is required, and that the Lessee reasonably
           expects  to  be   obtained   in  due   course,   (C)  the  plans  and
           specifications  relating  to  Unit 1 are  complete  in  all  material
           respects  (modified or to be modified as  aforesaid)  and  consistent
           with  prudent  engineering  practice,  (D) the  testing  and  startup
           procedures for Unit 1 were and the operation and maintenance programs
           for  Unit  1 are  consistent  with  such  plans  and  specifications,
           Applicable Law and prudent engineering practice,  (I) Unit 1 has been
           tested  in  accordance   with  all  customary   testing  and  startup
           procedures which would have been performed on or prior to the Closing
           Date,  and such tests and  procedures  indicate that Unit 1 will have
           the  capacity  and  functional   ability  to  perform  in  commercial
           operation,  on a  continuing  basis,  the  function  for  which it is
           



                                      -60-

6091.50.2831.27:2


<PAGE>

         designed in  accordance  with such plans and  specifications  and has a
         nominal  capacity  of  1,270  megawatts  electric,   (F)  all  material
         Governmental  Actions  relating  to  the  construction,   operation  or
         maintenance of Unit 1 are listed in a schedule to such certificate, (G)
         there is no present event or condition which would materially adversely
         affect the  capability  of Unit 1 to operate  in  accordance  with such
         plans  and  specifications  and (H)  based  upon the  Lessee's  present
         reasonable expectations,  and subject to Applicable Law, the rights and
         interests  made  available  to the  ANPP  Participants  (including  the
         Lessee) pursuant to the ANPP  Participation  Agreement,  as such rights
         and interests are made available to the Owner Trustee, any successor or
         assign of the Owner  Trustee or any  "Transferee"  of the Owner Trustee
         under  Section  15.10 of the ANPP  Participation  Agreement,  under and
         pursuant to this  Agreement,  the Deed,  the  Assignment  of Beneficial
         Interest or the Assignment and Assumption,  together with the rights to
         be made available  under and pursuant to the Assignment and Assumption,
         are  adequate  to  permit,   during  the  period  following  the  Lease
         Termination Date or the taking of possession of the Undivided  Interest
         and the Real  Property  Interest  in the  exercise  of  remedies  under
         section 16 of the Facility  Lease,  in accordance with the ANPP Project
         Agreements  (i) the  construction,  location,  occupation,  connection,
         maintenance,  replacement,  renewal,  repair or removal of Unit 1, (ii)
         the use,  operation and  possession of Unit 1, (iii) the  construction,
         use,  operation,  possession,  maintenance,  replacement,  renewal  and
         repair  of  all  alterations,   modifications,  additions,  accessions,
         improvements, appurtenances, replacements and substitutions thereof and
         thereto,  (iv)  adequate  ingress  to and  egress  from  Unit 1 for any
         reasonable  purpose in connection with the exercise of rights under the
         Assignment and Assumption and the Owner  Trustee's or any  transferee's
         ownership  and  possession  of  the  Undivided  Interest  and  (v)  the
         obtaining of nuclear fuel, of water and of transmission services to the
         ANPP  switchyard  sufficient  to  enable  delivery  of  the  Generation
         Entitlement  share related to the undivided  Interest in a commercially
         efficient manner and on commercially reasonable



                                      -61-

6091.50.2831 27:2


<PAGE>


       terms.  Nothing in the  foregoing  clause (H) shall be deemed to be or be
       construed  as a  warranty  by the  Lessee  as to the  performance  by the
       Operating  Agent  of  its  obligations   under  the  ANPP   Participation
       Agreement.  Such certificate  shall also be attested to by J.L.  Wilkins,
       Senior Vice President,  Power Supply, PNM Electric,  who shall state that
       (i) he has made such  investigation,  inspection  and  review as he deems
       necessary to make the statements in the  certificate and (ii) to the best
       of his knowledge,  the statements of the Lessee in such  certificate  are
       true and correct.

        (38) Real Estate Appraisal. The Owner Participant shall have received an
        appraisal of the Real Property  Interest,  which appraisal shall reflect
        the appraiser's  reasonable conclusion that the fair market value in the
        hands of the Owner Trustee of the Real Property  Interest on the Closing
        Date is equal to the Real Estate Investment.  Such appraisal shall cover
        such other matters as the Owner Participant shall have requested.

        (39) Other Unit 1 Leases.  The Lessee  shall have  obtained  the consent
        required by Section 10  (b)(3)(xii)  of each of the three  Participation
        Agreements dated as of December 16, 1985,  relating to separate sale and
        leaseback  transactions  involving  undivided  interests  in  Unit  1 in
        respect of which the Lessee is lessee.

        (40) opinion of Lessee's  FERC  Counsel.  The Loan  Participant  and the
        Owner  Participant  shall have received a favorable  opinion of Lessee's
        FERC Counsel,  dated the Closing Date and addressed to each such Person,
        addressing  such  FERC  matters  as the Loan  Participant  or the  Owner
        Participant may reasonably request.

        (41) Other Matters. The Loan Participant and the Owner Participant shall
        have received  such other  documents,  certificates  and opinions as the
        Loan Participant or the Owner Participant,  or their respective counsel,
        shall reasonably request.




                                      -62-

6091.50.2831.27:2


<PAGE>


                  (b) Lessee  Conditions.  The  obligation of the Lessee to sell
and lease back the  undivided  Interest  and the Real  Property  Interest on the
Closing  Date  pursuant to Section 4 shall be subject to the  fulfillment  on or
prior to the Closing Date of the following conditions precedent, in each case in
form and substance satisfactory to the Lessee:

                  (1) Paragraph (a) Documents. The Lessee, the Owner Trustee and
         the  Indenture  Trustee  shall  have  received  executed  copies of the
         documents,  certificates,  opinions (other than the opinion referred to
         in Section 11  (a)(25)),  appraisals,  letters and forms  described  in
         paragraph (a) of this Section 11. All such opinions  shall be addressed
         to the Lessee,  the Owner Trustee and the Indenture  Trustee except the
         opinions or documents to which reference is made in clauses (18), (23),
         (24) and (251 of said paragraph (a).

                  (2) Payment of Purchase  Price.  The Owner  Trustee shall have
         paid to the Lessee an amount, in immediately  available funds, equal to
         the Purchase Price and the Real Estate Investment.

                  (3)  Special  Opinion of the  Lessee's  Special  Counsel.  The
         Lessee shall have received a favorable  opinion of the Lessee's Special
         Counsel,  dated the Closing  Date and  addressed  to the  Lessee,  with
         respect  to such  Federal  tax and  other  matters  as the  Lessee  may
         reasonably request.

                  (4)  Accountant's  Letter.  The Lessee  shall have  received a
         letter  satisfactory to it from Peat,  Marwick,  Mitchell & Co., to the
         effect that, under generally  accepted  accounting  principles and FASS
         No. 13, the Facility Lease is an "operating lease".

                  (5) Changes in Pricing  Assumptions.  If any change or changes
         in the Pricing Assumptions shall have occurred on or before the Closing
         Date, the effect of such change or changes will not require the payment
         of Basic Rent (as to be adjusted  pursuant to Section 3(e)(iv) 0(pound)
         the  Facility  Lease) on an annual  basis to exceed  11.7% of  Facility
         Cost.



                                      -63-

6091.50.2831.27:2


<PAGE>


                  (C)  Conditions to Refunding.  In addition to the  limitations
set forth in Section 2(c), the obligation of the Owner  Participant and the Loan
Participant to participate in a refunding of the Initial Series Note as provided
in section 2(c) shall be subject to the  fulfillment  on or before the Refunding
Date  of  the  following  conditions   precedent  (each  instrument,   document,
certificate  or opinion  to be in form and  substance  satisfactory  to the Loan
Participant and the Owner Participant):

        (1) Authentication  Request, etc. The Owner Trustee shall have delivered
        to  the  Indenture   Trustee  a  request,   dated  the  Refunding  Date,
        authorizing the Indenture  Trustee to authenticate and deliver the Fixed
        Rate Note to the Loan  Participant  against  redelivery  of the  Initial
        series Note to the Indenture Trustee for cancellation.

        (2) Fixed Rate Note and Bond Transaction. (A) The Loan Participant shall
        have received the proceeds from the sale of Refunding Bonds in an amount
        sufficient to make the Refunding  Loan, (B) the Owner Trustee shall have
        executed,  and  the  Indenture  Trustee  shall  have  authenticated  and
        delivered to the Loan  Participant,  the Fixed late Note  evidencing the
        Refunding Loan made on the Refunding  Date and (C) the Collateral  Trust
        Trustee  shall  have  accepted  the  Refunding   Supplemental  Indenture
        subjecting  the  Fixed  Rate  Note to the lien of the  Collateral  Trust
        Indenture and shall have released the Initial  Series Note from the lien
        of the Collateral Trust Indenture.

                  (3) No  Default.  No Default or Event of Default or  Indenture
         Event of Default shall have occurred and be continuing.

        (4)  Representations  and  warranties  of  the  Owner  Participant.  The
        representations  and  warranties of the Owner  Participant  set forth in
        section 7(a) shall be true and correct on and as of the  Refunding  Date
        with the same  effect as  though  made on and as of the  Refunding  Date
        (with all references to the Closing Date in such representations and



                                      -64-

6091.50. 283l .27:2


<PAGE>


       warranties  being changed to references to the Refunding  Date),  and the
       Loan  Participant   shall  have  received  a  certificate  of  the  Owner
       Participant, dated the Refunding Date, to such effect.

        (5)   Representations   and  warranties  of  the  Owner   Trustee.   The
        representations and warranties of FNB and the Owner Trustee set forth in
        Section 8(a) shall be true and correct on and as of the  Refunding  Date
        with the same  effect as  though  made on and as of the  Refunding  Date
        (with all  references  to the Closing Date in such  representations  and
        warranties  being changed to references to the Refunding  Date), and the
        Loan  Participant  and the  Owner  Participant  shall  have  received  a
        certificate  from an  officer  of FNB  and a  certificate  of the  Owner
        Trustee, dated the Refunding Date, to such effect.

                (6)  Representations  and  warranties  of the  Lessee.  (A)  The
        representations  and warranties of the Lessee set forth in Section 10(a)
        shall be true and correct on and as of the Refunding  Date with the same
        effect  as  though  made  on and  as of the  Refunding  Date  (with  all
        references to the Closing Date in such  representations  and  warranties
        being  changed to references  to the  Refunding  Date),  (B) no Event of
        Default,  Deemed Loss Event or Event of Loss shall have  occurred and be
        continuing and the Loan Participant and the Owner Participant shall have
        received an Offic9rs'  Certificate  of the Lessee,  dated the  Refunding
        Date, to such effect and (C) on the date it became  effective and on the
        Refunding Date, the Registration  Statement did not and will not contain
        any untrue statement of a material fact or omit to state a material fact
        necessary to make the statements  contained therein not misleading,  and
        the Final  Prospectus did not and will not contain any untrue  statement
        of a material  fact or omit to state a material  fact  necessary to make
        the statements  contained therein not misleading under the circumstances
        under which any such shall have been made.





                                      -65-

6091.50.2831.27:2


<PAGE>

                  (7) Opinions at Counsel.  The Loan  Participant  and the Owner
         Participant  shall  have  received a  favorable  opinion of each of the
         Owner Participant's  special Counsel,  the Owner Trustee's Counsel, the
         Lessee's Special Counsel and the Lessee's  General Counsel,  each dated
         the  Refunding  Date  and  addressing  such  matters  relating  to  the
         transactions  in  connection  with  the  Refunding  Note  as  the  Loan
         Participant  or the Owner  Participant  (or any other party hereto) may
         reasonably request.

                  SECTION  12.  Consent to  Assignment  of the  Facility  Lease;
Consent to Indenture; Consent to Assignment of Notes.

                  (a) Consent to Assignment of Facility Lease. The Lessee hereby
acknowledges,  and consents in all respects  to, the partial  assignment  of the
Facility Lease by the Owner Trustee to the Indenture  Trustee under and pursuant
to the Indenture and agrees:

                (i) to make each payment of Basic Rent and supplemental Rent due
                or to become due thereunder to the extent constituting  Assigned
                Payments  (excluding,  in  any  event,  all  Excepted  Payments)
                directly to the  Indenture  Trustee at the  Indenture  Trustee's
                Office,  so long as any of the Notes  shall be  Outstanding  and
                unpaid; and

                                  (ii) not to seek to recover any payment (other
                than a payment that both the Owner  Trustee and the Lessee agree
                was made in mistake) made to the Indenture Trustee in accordance
                with the Indenture once such payment is made.

                  (b) Consent to Indenture.  The Lessee  hereby  consents in all
respects to the execution and delivery of the Indenture, and to all of the terms
thereof,  and the Lessee acknowledges  receipt of an executed counterpart of the
Indenture;  it being  understood  that such  consent  shall not be  construed to
require the Lessee's consent to any future  supplement to, or amendment,  waiver
or modification of the terms of, the Indenture or any Note, except to the extent
expressly provided for.




                                      -66-
6091.50.2831.27:2


<PAGE>


                  (C) Consent to  Assignment  by Loan  Participant.  Each of the
parties hereto  acknowledges  that the Loan  Participant is assigning its right,
title  and  interest  in and to the Notes to the  Collateral  Trust  Trustee  as
security  for  the  Bonds  to the  extent  set  forth  in the  Collateral  Trust
Indenture, and each of the parties hereto consents to such assignment.

                  SECTION 13. Lessee's Indemnities and Agreements.

                  (a) General Indemnity.  The Lessee agrees,  whether or not any
of the transactions  contemplated hereby shall be consummated and whether or not
the Facility Lease,  any other  Transaction  Document or any Financing  Document
shall have expired or have been  terminated,  to assume  liability  for, and the
Lessee does hereby agree to indemnify,  protect,  defend, save and keep harmless
each Indemnitee,  on an  After-Tax-Basis,  from and against,  any and all Claims
which may be imposed on, incurred by or asserted against any Indemnitee (whether
because of act or omission by such  Indemnitee  or otherwise  and whether or not
such  Indemnitee  shall  also be  indemnified  as to any such Claim by any other
Person)  in any way  relating  to or  arising  out of (i) Unit 1, the  Undivided
Interest,  the Real Property  Interest,  PYNGS or the PVNGS Site, or any part of
any thereof (or any beneficial  interest therein) , any ANPP Project  Agreement,
the' issuance or payment of the Bonds or the Notes, this Participation Agreement
or any other Transaction Document or any Financing Document (including,  without
limitation,  the  performance or enforcement of any of the obligations and terms
hereunder or thereunder), (ii) a disposition of all or any part of the Undivided
Interest, the Real Property Interest,  Unit 1 or any other interest of the Owner
Trustee or Owner  Participant in connection with any termination of the Facility
Lease,  or  (iii)  the  design,  manufacture,   financing,  erection,  purchase,
acceptance,  rejection,  ownership,  acquisition,  delivery, nondelivery, lease,
sublease,  preparation,  installation,  repair, transfer of title,  abandonment,
possession,  use,  operation,  maintenance,  condition,  sale, return,  storage,
disposition, or decommissioning (including, but without limitation, with respect




                                      -67-

6091.50.2831.27:2


<PAGE>

to the  Termination  Obligation)  of the  Undivided  Interest,  Unit 1, the Real
Property Interest, any Capital Improvement, the PVNGS Site, any other facilities
on  the  PVNGS  Site  or any  other  interest  of the  Owner  Trustee  or  Owner
Participant in any thereof or any accident,  nuclear  incident or  extraordinary
nuclear occurrence in connection therewith (including,  without limitation,  (A)
claims or  penalties  arising  from any  violation  of law or  liability in tort
(strict  or  otherwise)  or  from  the  active  or  passive  negligence  of  any
Indemnitee, (B) loss of or damage to any property or the environment or death or
injury to any Person, (C) latent and other defects, whether or not discoverable,
(D) any claim for patent trademark,  service-mark or copyright  infringement and
(E)  any  claim  of any  Indemnitee  incurred  in  the  administration  of  this
Participation  Agreement,  any  other  Transaction  Document  or  any  Financing
Document and not paid as Transaction  Expenses or included in Facility Cost and,
if not included in Transaction  expenses,  the reasonable fees and disbursements
of counsel and other professionals incurred in connection therewith);  provided,
however,  that the Lessee  shall not be required  to  indemnify  any  Indemnitee
pursuant  to this  section  13(a),  (1) for any Claim in  respect of unit 1, the
undivided Interest or the Real Property Interest arising from acts or events not
attributable  to the  Lessee  which  occur  after  redelivery  of the  undivided
Interest  to the Owner  Trustee in  accordance  with  section 5 of the  Facility
Lease, except to the extent expressly provided in any Transaction Document,  the
ANPP  Participation  Agreement  or any other  agreement  or  undertaking  of the
Lessee,  (2) for any Claim against such  Indemnitee  resulting  solely from acts
which  would  constitute  the willful  misconduct  or gross  negligence  of such
Indemnitee (unless imputed to such Indemnitee by reason of Unit 1, the undivided
Interest,  the Real  Property  Interest,  PVNGS,  the  PVNGS  Site or any  other
facilities at the PVNGS Site or any occurrence in connection  with any thereof),
(3) for any  Transaction  Expense to be paid by the Owner  Trustee  pursuant  to
Section 14(a) or (4) for any Claim resulting solely from a transfer by the Owner
Trustee or the Owner  Participant of all or part of its interest in the Facility
Lease, unit 1, the Real Property  Interest or the undivided  Interest other than
in connection  with any early  termination of the Facility Lease or any exercise



                                      -68-

6091. 50.2831.27:2


<PAGE>


of remedies under Section 16  thereof or the  transfer  contemplated  by Section
7(b)(4) or the first  transfer by the Owner  Participant  to an Affiliate of the
Owner   Participant.   To  the  extent  that  an  Indemnitee  in  fact  receives
indemnification payments from the Lessee under the indemnification provisions of
this  Section  13(a),  the  Lessee  shall be  subrogated,  to the extent of such
indemnity paid, to such  Indemnitee's  rights with respect to the transaction or
event  requiring  or  giving  rise to such  indemnity,  but only so long as such
subrogation shall not materially  adversely affect the rights of such Indemnitee
or any other Indemnitee  hereunder.  Nothing herein contained shall be construed
as constituting a guaranty by the Lessee of the principal of or premium, if any,
or interest on the Notes or the Bonds or of the residual value or useful life of
the undivided Interest.

        (b)      General Tax Indemnity.

        (1)  Indemnity.  All  payments  by the  Lessee  in  connection  with the
        transactions  contemplated by the Transaction Documents shall be free of
        withholdings  of any nature  whatsoever (and at the time that the Lessee
        is required to make any payment upon which any  withholding is required,
        the  Lessee  shall pay an  additional  amount  such that :he net  amount
        actually  received by the Person  entitled to receive such payment will,
        after such  withholding,  equal the full amount of the payment then due)
        and shall be free of expense to each  Indemnitee for collection or other
        charges.  If, for any reason, the Lessee is required to make any payment
        to a  taxing  authority  with  respect  to,  or  as  a  result  of,  any
        withholding tax imposed on any Indemnitee in respect of the transactions
        contemplated  by the  Transaction  Documents by reason of the Indemnitee
        not being a united States person,  then such Indemnitee shall pay to the
        Lessee on an  After-Tax-Basis  an amount which equals the amount paid by
        the  Lessee  with  respect  to or as a result of such  withholding  tax.
        whether  or  not  any  of  the  transactions   contemplated  hereby  are
        consummated,  except as provided in Section  13(b)(2),  the Lessee shall
        pay, and shall indemnify,  defend and hold each Indemnitee harmless,  on
        



                                      -69-

6091.50.283l.27:2


<PAGE>

         an  After-Tax  Basis,  from and  against,  any and all Taxes  howsoever
         imposed  (whether  imposed on or with  respect to the  Indemnitee,  the
         Lessee, Unit 1, the undivided Interest, the Real Property Interest, any
         Capital  Improvement  or the PVNGS Site or any part thereof or interest
         therein or  otherwise)  by any Federal,  state or local  government  or
         subdivision  thereof or taxing authority in the United States or by any
         foreign   country  or   subdivision   thereof  or  by  any  foreign  or
         international  taxing  authority in connection  with or relating to (A)
         the design, construction, financing, purchase, acquisition, acceptance,
         rejection,  delivery,  nondelivery,   transport,  ownership,  assembly,
         possession,  repossession,   operation,  use,  condition,  maintenance,
         repair,  improvement,   sale,  return,  abandonment,   decommissioning,
         preparation,    installation,    storage,   replacement,    redelivery,
         manufacture, insuring, leasing, subleasing,  modification,  transfer of
         title,   rebuilding,   rental,   importation,   exportation   or  other
         application  or  disposition  of,  or the  imposition  of any  Lien (or
         incurrence  of any  liability  to  refund  or pay over any  amount as a
         result  of any Lien  other  than  Owner  Participant's  Liens and Owner
         Trustee's  Liens)  other  than  Owner  Participant's  Liens  and  Owner
         Trustee's Liens on, Unit 1, the Undivided  Interest,  the Real Property
         Interest,  any  Capital  Improvement  or the  PVNGS  Site,  or any part
         thereof or interest therein, (B) the payment of Rent or the receipts or
         earnings arising from or received with respect to, and the indebtedness
         with  respect to, Unit 1, the  undivided  Interest,  the Real  Property
         Interest  or any Capital  Improvement,  or any part  thereof,  interest
         therein or application or disposition  thereof,  (C) any amount paid or
         payable pursuant to, or contemplated by, this Participation  Agreement,
         any  other  Transaction  Document  or  any  Financing  Document  or the
         transactions  contemplated  hereby or thereby (D) Unit 1, the Undivided
         Interest,  the Real Property Interest,  any Capital  Improvement or the
         PVNGS  Site,  or  any  part  thereof,  or  interest  there-in,  or  the
         applicability  of the Facility  Lease to the Undivided  Interest or any
         Capital Improvement,  or any part thereof or interest therein, (2) this
         Participation Agreement, any other Transaction


                                      -70-

6O9l.50.2831.27:2


<PAGE>


       Document or any Financing Document or (F) otherwise with respect to or in
       connection  with  the  transactions  contemplated  by this  Participation
       Agreement, any other Transaction Document or any Financing Document.

                  (2)   Exclusions   from   General   Tax   Indemnity.   Section
13(b)(l)(except for the first sentence thereof) shall not apply to:


                      (i) Taxes based on, or measured by, net income  imposed by
                the  united  States  federal  government   (including,   without
                limitation,  any minimum Taxes,  capital gains Taxes,  any Taxes
                on,  or  measured  by;  items  of  tax  preference,  surcharge.,
                additions to tax,  penalties,  fines or other charges in respect
                thereof);

                                  (ii) Taxes  (other than  sales,  use or rental
                Taxes)  imposed by any state or local  government or subdivision
                thereof or other taxing authority in the United States or by any
                foreign  country or  subdivision  thereof  or by any  foreign or
                international  taxing  authority  that are based on, or measured
                by,  the net  income,  items  of tax  preference,  net  worth or
                capital of an Indemnitee,  or other taxes imposed in lieu of any
                such  Taxes,  except,  with  respect to the Owner  Trustee,  the
                Trust,  the  Trust  Estate,.   the  Owner  Participant  and  any
                Affiliate  of  any  thereof,   any  such  Taxes   imposed  by  a
                jurisdiction  as a result of a relation or asserted  relation of
                such  jurisdiction  to  the  transactions  contemplated  by  the
                Transaction  Documents or the Financing Documents or as a result
                of the  activities of the Lessee,  any ANPP  Participant  or any
                Affiliate  of  any  thereof  in  such  jurisdiction;   provided,
                however,  that the amount of any such  excepted  Taxes  shall be
                calculated   (i)  on  a  pro  forma  basis  assuming  that  such
                Indemnitee  has no other  taxable  income or loss in the  taxing
                jurisdiction  imposing the Tax (provided  that such  calculation
                shall take into account any allocation or  apportionment  method
                



                                      -71-

6091.50.2831.272


<PAGE>

                  used by such  jurisdiction  except  to the  extent  that  such
                  method takes into account the income or activities of business
                  entities  organized  outside the united States) and is able to
                  use any net operating  loss  carryovers  (generated  solely by
                  reason  of  and  solely   attributable  to  the   transactions
                  contemplated  by the  Transaction  Documents or the  Financing
                  Documents,   and  for  this   purpose  a  similar   pro  forma
                  calculation  shall be made) to the fullest extent,  reasonably
                  determined,  in good  faith,  by the  Indemnitee,  and (ii) by
                  taking  into  account  any actual  reduction  in Taxes in such
                  jurisdiction  or in  any  other  jurisdiction  in  which  such
                  Indemnitee is subject to tax (whither such  reduction  results
                  from the operation of allocation  or  apportionment  formulas,
                  from  credits or  otherwise,  except that no account  shall be
                  taken of any actual  reductions  of tax benefits  described in
                  the  Tax  Indemnification   Agreement  or  any  tax  liability
                  generated by transactions other than those contemplated by the
                  Transaction   Documents  or  the  Financing  Documents)  which
                  reduction  results from the  transactions  contemplated by the
                  Transaction  Documents or the  Financing  Documents;  provided
                  further,  however,  that, with respect to any Tax based on, or
                  measured  by,  capital or net worth,  the  Lessee's  indemnity
                  obligation  shall not exceed the  incremental  portion of such
                  Tax  attributable  to  the  transactions  contemplated  by the
                  Transaction Documents;

                  (iii) Taxes attributable to the undivided Interest or the Real
                  Property  Interest  to the extent  that such Taxes are imposed
                  with  respect  to any period  after (a) the Lease  Termination
                  Date and (b) the date possession of the undivided Interest and
                  the Real Property Interest has been delivered to the Lessor as
                  provided in Section  5(a) of the Facility  Lease,  unless such
                  Taxes relate to events  occurring or matters  arising prior to
                  or simultaneously with either at the aforementioned dates;



                                      -72-

6091.50.2831.27:2


<PAGE>


                           (iv)  Taxes  on or  with  respect  to  an  Indemnitee
                arising from any  voluntary  transfer by such  Indemnitee of any
                interest in the undivided Interest,  the Real Property Interest,
                the Trust Estate,  the Indenture Estate,  the Notes or any other
                right or interest arising under the Transaction Documents or the
                Financing Documents, unless an Event of Default has occurred and
                is continuing,  or Taxes arising from an involuntary transfer by
                such  Indemnitee of any such interest  arising from a bankruptcy
                or similar  proceeding  in which such  Indemnitee  is the debtor
                unless such bankruptcy or other proceeding was caused,  in whole
                or in part, by the Lessee or any Affiliate thereof;

                      (v) Taxes based on or measured by any fees,  commission or
                compensation received by an Indemnitee for acting as trustee, or
                for  other  services  rendered,  in  connection  with any of the
                transactions  contemplated by the  Transaction  Documents or the
                Financing Documents;

                           (vi)  Taxes  on or  with  respect  to  an  Indemnitee
                arising by reason of. such  Indemnitee's  failure to file proper
                and timely reports or returns (unless the filing of such reports
                or returns is the obligation of the Lessee under the Transaction
                Documents  or the  Financing  Documents)  and any  penalties  or
                additions to tax imposed by reason of such Indemnitee's  failure
                to  comply  with the  laws  imposing  such  Tax or its  material
                failure to comply with its obligations  under Section 13 (b)(6),
                unless  such  failure  results  from any action of the Lessee or
                failure  by the  Lessee  to  comply  with any  provision  of the
                Transaction Documents or the Financing Documents,  including the
                failure to provide necessary information;



                                      -73-
609l.50.283l.27:2


<PAGE>


                 (vii) Taxes on or with  respect to an  Indemnitee  arising as a
                 result of a material  failure of such Indemnitee to fulfill its
                 obligations  with  respect  to  the  contest  of any  claim  in
                 accordance   with  Section   l3(b)(4)  of  this   Participation
                 Agreement;

                (viii)  Taxes  imposed on or with  respect to a  transferee  (or
                subsequent  transferee) of an original  Indemnitee (other than a
                transferee or subsequent  transferee that is an Affiliate of its
                transferor)  to the extent that the amount of such Taxes exceeds
                the  amount of taxes  that  would  have been  imposed on or with
                respect to such original Indemnitee but for the transfer to such
                transferee  or,  if  imposed,  would not have  been  subject  to
                indemnification  under this Section  13(b),  provided,  however,
                that  the  exception  in this  clause  shall  not  apply  to any
                transferee  where such transfer  shall have occurred  during the
                continuance of an Event of Default;

                (ix) any Taxes  imposed on the  Lessor or the Owner  Participant
                resulting  from,  or  which  would  not have  occurred  but for,
                Lessor's  Liens  or  Owner  Participant's  Liens  and any  Taxes
                imposed on the  Indenture  Trustee which would not have occurred
                but for Indenture Trustee's Liens;

                      (x) any Tax that results  solely from the activities of an
                Indemnitee  in any  taxing  jurisdiction  which  activities  are
                unrelated to the  transactions  contemplated  by the Transaction
                Documents or the Financing Documents;

                (xi) any Tax on or with respect to an Indemnitee  resulting from
                any amendment or modification entered into by such Indemnitee to
                any Transaction  Document or Financing Document if the Lessee is
                not a  party  to  such  amendment  or  modification  or has  not
                consented to such amendment or modification, in each



                                      -74-
6091.50.2831.27:2


<PAGE>


                  case  unless an Event of Default  shall have  occurred  and be
                  continuing; and

                         (xii)  any  Tax on or  with  respect  to an  Indemnitee
                 resulting  from the gross  negligence or willful  misconduct of
                 such  Indemnitee  (it being  understood  that no  Indemnitee is
                 responsible  for  determining  whether a Tax is  payable if the
                 Lessee is required to  indemnify  the  Indemnitee  for such Tax
                 under this section 13(b));

       provided,  however, that the foregoing subclauses (i) through (xii) shall
       not apply to any Tax  imposed on the Loan  Participant  or the  indenture
       estate under the Collateral Trust Indenture.

                (3)  Calculation  of  General  Tax  Indemnity  Payments.  If any
        Indemnitee realizes a net permanent tax benefit by reason of the payment
        of any indemnity  under section  13(b),  such  Indemnitee  shall pay the
        Lessee,  but  not  before  the  Lessee  shall  have  made  all  payments
        theretofore  due to such  Indemnitee  pursuant to this Section 13(b), an
        amount  equal to the lesser of (x) the sum of such tax benefit  plus any
        other net tax benefit  realized by such  Indemnitee as the result of any
        payment made by such Indemnitee pursuant to this sentence (determined in
        a manner consistent with the definition of After-Tax-Basis  set forth in
        Appendix A and with the last  sentence  of section 13 (b)(6)  hereof) or
        (y) the amount of such payment by the Lessee to such  Indemnitee and any
        other payment by the Lessee to such Indemnitee theretofore made pursuant
        to this Section 13(b) less the aggregate amount of all prior payments by
        such  Indemnitee to the Lessee  pursuant to this clause (y) with respect
        to amounts paid pursuant to section 13(b) (1), it being intended that no
        Indemnitee  should  realize a net tax benefit  pursuant to this  Section
        13(b)  unless  the  Lessee  shall  first  have been  made  whole for any
        payments  by it to  such  Indemnitee  pursuant  to this  Section  13(b);
        provided,  however,  that in computing any  permanent tax benefit,  such
        Indemnitee  shall be deemed first to have  utilized all  deductions  and




                                      -75-

6091.50.2831.27:2


<PAGE>

         credits  available to it otherwise than by reason of any payment by the
         Lessee pursuant to this Section 13(b); provided further,  however, that
         notwithstanding  the  provisions  of this clause (3),  such  Indemnitee
         shall not be  obligated  to make any payment to the Lessee  pursuant to
         this  clause (3) if at the time such  payment  shall be due an Event of
         Default shall have occurred and be continuing.

        (4) General  Tax  Indemnity-Contests.  If a written  claim shall be made
        against  any  Indemnitee  for any Tax for which the Lessee is  obligated
        pursuant to this Section 13(b),  such Indemnitee shall notify the Lessee
        promptly of such claim but the failure so to notify the Lessee shall not
        affect any obligation of the Lessee  pursuant to this Section 13(b).  If
        the Lessee  shall  reasonably  request  in writing  within 30 days after
        receipt of such notice,  such Indemnitee  shall in good faith and at the
        Lessee's  expense  contest  the  imposition  of  such  Taxes;  provided,
        however,  that such  Indemnitee  may in its sole  discretion  select the
        forum for such contest and  determine  whether any such contest shall be
        by (A)  resisting  payment of such  Taxes,  (B) paying  such Taxes under
        protest or (C) paying such Taxes and seeking a refund thereof;  provided
        further,  however,  that (W) such  Indemnitee  shall not be obligated to
        contest any claim in which the amount in question is less than $250,000,
        (X) at such Indemnitee's  option, such contest shall be conducted by the
        Lessee in the name of such Indemnitee (subject to the preceding proviso)
        and (Y) in no event  shall such  Indemnitee  be  required  or the Lessee
        permitted to contest the imposition of any Taxes for which the Lessee is
        obligated  pursuant to this  Section  13(b)  unless (u) the Lessee shall
        have  acknowledged  its  liability to such  Indemnitee  for an indemnity
        payment  pursuant to this Section 13(b) as a result of such claim if and
        to the extent such  Indemnitee or the Lessee,  as the case may be, shall
        not prevail in the contest of such claim; (v) such Indemnitee shall have
        received from the Lessee (i)  satisfactory  indemnity for any liability,
        expense or loss  arising out of or relating to such  contest  including,
        but not limited to, (A) all reasonable legal, accountants' and



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<PAGE>


       investigatory  fees and  disbursements,  (B) the amount of any  interest,
       additions  to  tax or  penalties  that  may be  payable  as a  result  of
       contesting  such claim and (C.) if such contest is to be initiated by the
       payment of, and the claiming of a refund for such Tax,  sufficient  funds
       to make  such  payment  on an  After-Tax-Basis  and  (ii) an  opinion  of
       independent  tax  counsel  selected  by the Lessee and  approved  by such
       Indemnitee  (which  approval  shall  not be  unreasonably  withheld)  and
       furnished  at the  Lessee's  sole expense to the effect that a Reasonable
       Basis  exists  for  contesting  such claim or, in the event of an appeal,
       that there exists a substantial possibility that an appellate court or an
       administrative  agency with appellate  jurisdiction,  as the case may be,
       will reverse or substantially  modify the adverse  determination that the
       Lessee  desires to contest;  (w) the Lessee shall have agreed to pay such
       Indemnitee on demand, and on an After-Tax-Basis, all reasonable costs and
       expenses that such  Indemnitee  may incur in connection  with  contesting
       such claim (including,  without limitation,  all costs, expenses, losses,
       reasonable legal and accounting fees, disbursements,  penalties, interest
       and  additions  to  tax);  (x)  such  Indemnitee  shall  have  reasonably
       determined  that the  action to be taken will not result in any danger of
       sale,  forfeiture  or loss of, or the creation of any Lien (except if the
       Lessee shall have adequately bonded such Lien or otherwise made provision
       to protect the interests of such  Indemnitee in a manner  satisfactory to
       such  Indemnitee) on, Unit 1, any part thereof,  the Undivided  Interest,
       the Real Property Interest, or any interest in any of the foregoing;  and
       (y) if such contest shall be conducted in a manner  requiring the payment
       of the claim, the Lessee shall have paid the amount required.  The Lessee
       agrees to give such Indemnitee  reasonable notice of any contest prior to
       the commencement thereof. If any Indemnitee shall obtain a refund of. all
       or any part of any Taxes paid by the Lessee,  or if any such refund would
       be payable to the  Indemnitee in the absence of an  offsetting  liability
       for Taxes payable to the taxing  authority in question,  such  Indemnitee
       shall pay the Lessee, but not before the Lessee



                                      -77-
                                                                                
6091.50.2831.27:2


<PAGE>


       shall have made all payments  theretofore due to such Indemnitee pursuant
       to this Section  13(b),  an amount equal to the lesser of (xx) the amount
       of such refund so received or receivable,  including interest received or
       receivable and attributable  thereto,  plus any net permanent tax benefit
       realized by such Indemnitee  (determined in a manner  consistent with the
       definition of  After-Tax-Basis  set forth in Appendix A and with the last
       sentence of Section  13(b)(E)  hereof) as a result of any payment by such
       Indemnitee  made  pursuant to this  sentence (but only to the extent that
       such net  permanent  tax benefit was not taken into  account  pursuant to
       Section 13(b)(3)),  and after taking into account the tax consequences of
       the receipt of such refund and such interest) or (yy) such tax payment by
       the  Lessee to such  Indemnitee  plus any other  payment by the Lessee to
       such  Indemnitee  theretofore  made  pursuant to this Section  13(b),  in
       either  case,  net of any  expenses  not already  paid or incurred by the
       Lessee;  provided,  however,  that in  computing  any net  permanent  tax
       benefit,  such  Indemnitee  shall be deemed  first to have  utilized  all
       deductions  and credits  available to it otherwise  than by reason of any
       payment by the Lessee pursuant. to this Section 13(b)1 provided, further,
       however,  that  not-withstanding  the provisions of this clause (4), such
       Indemnitee  shall not be  obligated  to make any  payment  to the  Lessee
       pursuant  to this clause (4) if at the time such  payment  shall be due a
       Default or an Event of  Default  shall have  occurred  and be  continuing
       under the Facility Lease. An Indemnitee shall not be required to make any
       payment  pursuant to this clause (4) before such time as the Lessee shall
       have made all payments  and  indemnities  then due under the  Transaction
       Documents to such Indemnitee.  Notwithstanding anything contained in this
       clause (4) to the contrary,  no  Indemnitee  shall be required to contest
       any claim if the subject matter  thereof shall be of a continuing  nature
       and shall have previously been decided pursuant to the contest provisions
       of this  clause  (4)  unless  there  shall  have been a change in the law
       (including,  without  limitation,  amendments to statutes or regulations,
       administrative rulings and court decisions) after



                                      -78-

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<PAGE>


       such claim shall have been so  previously  decided,  and such  Indemnitee
       shall have received an opinion of independent tax counsel selected by the
       Lessee and  approved  by such  Indemnitee  (which  approval  shall not be
       unreasonably  withheld) and furnished at the Lessee's sole expense to the
       effect  that such change  provides a  Reasonable  Basis for the  position
       which such Indemnitee and the Lessee, as the case may be, had asserted in
       such  previous  contest or for an  alternative  position  based upon such
       change that the Lessee now desires to assert.  Nothing  contained in this
       section  13(b)  shall  require  any  Indemnitee  to contest or permit the
       Lessee to contest a claim which it would otherwise be required to contest
       pursuant to this Section 13(b) if such Indemnitee  shall waive payment by
       the Lessee of any amount  that might  otherwise  be payable by the Lessee
       under this Section 13(b) by way of indemnity in respect of such claim. If
       Lessee  4oes  not  request  that  a Tax be  contested  pursuant  to  this
       paragraph (5),  Lessee shall pay the Indemnitee  therefor unless such Tax
       was not included in the  indemnification  under  Section 13 (b)(l) or was
       excluded by Section 13 (b) (2).

        (5) General Tax Indemnity-Reports. If any report, return or statement is
        required to be filed with respect to any obligations of the Lessee under
        or arising out of this Section 13(b), the Lessee shall timely notify the
        Indemnitee and timely file the same, except for any such report,  return
        or  statement  which such  Indemnitee  has  notified  the Lessee that it
        intends to file.  The Lessee shall  either file such  report,  return or
        statement so as to show the ownership of the  undivided  Interest or the
        Real  Property  Interest,  as the case may be, in the Owner  Trustee and
        send a copy of such report, return or statement to the Owner Trustee and
        such Indemnitee or, where not so permitted, notify the Owner Trustee and
        such Indemnitee of such requirement and prepare and deliver such report,
        return or statement to the Owner Trustee and such Indemnitee in a manner
        



                                      -79-
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<PAGE>

         satisfactory  to  the  Owner  Trustee  and  Such  Indemnitee  within  a
         reasonable  time prior to the time such report,  return or statement is
         to be filed  or,  where  such  return,  statement  or  report  shall be
         required to reflect items in addition to any  obligations of the Lessee
         under or arising out of this Section  13(b),  provide the Owner Trustee
         and such Indemnitee with information  sufficient to permit such return,
         statement or report properly to be made with respect to any obligations
         of the  Lessee  under or  arising  out of this  Section  13(b) (and the
         Lessee  shall  hold  each  Indemnitee  harmless  from and  against  any
         liabilities,  obligations, losses, damages, penalties, claims, actions,
         suits  and  reasonable  costs  arising  out  of  any  insufficiency  or
         inaccuracy in any such return,  statement report or  information).  The
         Lessee  shall  not have any right to  examine  the tax  returns  of any
         Indemnitee.

        (6)       General Tax Indemnity-Payment. All Taxes
        shall be paid when due and payable and,  unless  otherwise  requested by
        the appropriate Indemnitee,  the Lessee shall pay any Taxes for which it
        is liable  pursuant to this Section  13(b)  directly to the  appropriate
        taxing authority and shall pay such appropriate  Indemnitee  promptly on
        demand in  immediately  available  funds any amount due such  Indemnitee
        pursuant to this  Section  13(b) with  respect to such  Taxes.  Any such
        demand shall specify in reasonable detail the payment and the facts upon
        which the right to  payment is based.  Each  Indemnitee  shall  promptly
        forward  to the  Lessee  any  notice,  bill  or  advice  received  by it
        concerning  any Taxes.  Within 30 days after the date of each payment by
        the  Lessee of any Taxes,  the  Lessee  shall  furnish  the  appropriate
        Indemnitee  the  original  or a  certified  copy  of a  receipt  for the
        Lessee's payment of such Taxes or such other evidence of payment of such
        Taxes as is acceptable to such Indemnitee. The Lessee shall also furnish
        promptly upon request such data as any  Indemnitee may require to enable
        such   Indemnitee  to  comply  with  the   requirements  of  any  taxing
        jurisdiction. whenever any payment is to be made by


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<PAGE>


        the  Lessee  under  this  Section  13(b) and it shall be  necessary,  in
        calculating the  After-Tax-Basis  amount of such payment, to compute the
        amount of any  liability  for federal,  state or local tax imposed on or
        measured by the net income of any Indemnitee,  such computation shall be
        based on the assumption  that such taxes shall be payable at the highest
        marginal statutory rate in effect for the relevant period.

        (7)  Definition of Indemnitee.  For purposes of this Section 13(b),  the
        term  Indemnitee  shall mean and include the  successors  and assigns of
        each  respective  Indemnitee,  and for purposes of federal income taxes,
        the affiliated group of corporations and each member thereof (within the
        meaning  of  Section  1504 of the Code) of which  such  Indemnitee  is a
        member,  if such group shall file a  consolidated  united States federal
        income tax  return,  and,  for  purposes  of income or  franchise  taxes
        imposed by a particular state or local taxing  jurisdiction,  shall mean
        and include any  consolidated or combined group of which such Indemnitee
        is or shall be a member  that is  treated as such by such state or local
        taxing jurisdiction.

           (C) Supporting Material.  Upon receipt of any payment provided for by
this Section 13, the  Indemnitee  receiving the same shall provide to the Lessee
such supporting material (other than tax returns) as the Lessee shall reasonably
request.  The Lessee shall reimburse to any Indemnitee,  on an  After-Tax-Basis,
any expenses incurred in providing requested supporting material to the Lessee.

           (d) Coordination with Tax Indemnification Agreement. Any amounts that
the Lessee is liable to pay pursuant to this  Section  13(b) shall be payable by
the  Lessee  hereunder  even if such Taxes are not the  liability  of the Lessee
pursuant to the Tax Indemnification Agreement.




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6091.5O .2831.27:2


<PAGE>



                 SECTION 14. Transaction Expenses.

                  (a)  Transaction  Expenses.   Subject  to  the  provisions  of
paragraph (c) below,  with funds  provided by the Owner  Participant,  the Owner
Trustee hereby agrees that it will pay when due an appropriate  portion  (taking
into account the other undivided  interests in Unit 1 sold on December 31, 1985)
of the following costs and expenses (Transaction Expenses):

                       (i) the reasonable  legal fees and  disbursements  of the
                  Loan Participant's  Counsel,  the Owner Participant's  Special
                  Arizona Counsel,  the Owner  Participant's  Special New Mexico
                  Counsel,  the Owner Participant's  Special Counsel,  the Owner
                  Participant's Special NRC Counsel, the Owner Trustee's Counsel
                  and  the  Indenture   Trustee's  Counsel  for  their  services
                  rendered in connection with the execution and delivery of this
                  Participation  Agreement and the other  Transaction  Documents
                  and all fees,  expenses and disbursements  incurred by them in
                  connection with such transactions;  and reasonable legal fees,
                  expenses and  disbursements  in  connection  with NRC and ANPP
                  Participant approvals in connection with such transactions;

                      (ii)  the  initial  (but  not and  expenses  of the  Owner
                  Indenture Trustee; the ongoing) fees Trustee and the

                  (iii)  all  stenographic,  printing,  reproduction,  and other
                  reasonable   out-of-pocket  expenses  (other  than  investment
                  banking or brokerage  fees)  incurred in  connection  with the
                  execution and delivery of this Participation Agreement and the
                  other   Transaction   Documents  and  all  other   agreements,
                  documents  or  instruments  prepared in  connection  therewith
                  (including all computer analysis and travel related costs);



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<PAGE>


                      (iv) the fees of the  Appraiser  for services  rendered as
                contemplated by Section 11(a)(29), the fees of the appraiser for
                services  rendered as contemplated by Section  11(a)(38) and the
                fees  of the  insurance  consultant  for  services  rendered  as
                contemplated by Section 11(a)(35);

                         (V) all costs of issue of the Initial  Series Bonds and
                the Refunding Bonds including,  without limitation, the costs of
                preparing the Financing  Documents,  filing fees relating to the
                Registration  Statement and the fees, expenses and disbursements
                of  Collateral  Trust  Trustee's  Counsel,  Bank  Counsel,  Loan
                Participant's  special  Arizona  counsel  and special New Mexico
                counsel,   underwriter's   Counsel,  the  initial  fees  of  the
                Collateral Trust Trustee and its out-of-pocket  expenses through
                the Refunding Date, rating agency fees, the fees and commissions
                of the  underwriters  of  the  Refunding  Bonds  and  the  fees,
                expenses and disbursements of the Loan Participant; and

                         (vi) the  fees and  out-of-pocket  expenses  of  Kidder
                Peabody  in  connection  with the  placement  of the  beneficial
                interest in the Trust.

Subject to the  provisions  of  paragraph  (c) below,  funds for the  payment of
Transaction  Expenses  will be  provided by the Owner  Participant  to the Owner
Trustee and the Owner Trustee will promptly disburse such funds.

                  (b)   Post-closing   Expenses.   The  Lessee   will  pay,   as
Supplemental  Rent,  (i) the ongoing  fees,  expenses,  disbursements  and costs
(including legal and other professional fees and expenses) of or incurred by the
Owner Trustee, the Indenture Trustee and the collateral Trust Trustee, including
in  connection  with the issue,  sale and  purchase of Notes and Bonds after the
Closing Date, and (ii) all fees,  expenses,  disbursements  and costs (including



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6091.50.2831.27:2


<PAGE>

legal  and  other   professional  fees  and  expenses)   incurred  by  the  Loan
Participant, the Owner Participant, the Owner Trustee, the Indenture Trustee and
the  Collateral  Trust  Trustee in  connection  with (a) any  Default,  Event of
Default,  Indenture Default or Indenture Event of Default, (b) the entering into
or giving or withholding of any amendment,  modification,  supplement, waiver or
consent with respect to any Transaction Document or Financing Document,  (c) any
Event of Loss or Deemed Loss Event,  (d) any  transfer of all or any part of the
right,  title  and  interest  of the  Indenture  Trustee  in,  to and  under the
Transaction  Documents,  (e) any transfer of all or any part of the right, title
and interest of the Owner Trustee in the undivided  Interest,  the Real Property
Interest  or in,  to and  under  the  Transaction  Documents,  (f) any  transfer
contemplated   by  Section   7(b)(4),   (g)  the  fees  and  expenses  of  Owner
Participant's  special  Counsel in connection  with the review of changes in the
Price-Anderson  Act up to $25,000 and (h) any  refunding  referred to in section
2(c) (except to the extent constituting Transaction Expenses).

                (C) Lessee's Obligation.  Notwithstanding  Section 14(a) hereof,
(i) in the event the transactions  contemplated by this Participation  Agreement
shall not be  consummated,  the Lessee shall pay or cause to be paid,  and shall
indemnify and hold harmless the Loan  Participant,  the Indenture  Trustee,  the
Collateral Trust Trustee, the Owner Trustee and the Owner Participant in respect
of all  Transaction  Expenses  unless such  failure to  consummate  shall result
solely from the Owner Participant's  default in making its Investment  hereunder
and (ii) the Lessee  shall pay or cause to be paid that  portion of  Transaction
Expenses which exceeds a percentage of the Purchase Price equal to 2.50%.

                  SECTION 15. Owner Participant's Transfers.




                                      -84-

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<PAGE>
                  (a) Transfers.  After the Closing Date, except as contemplated
by Section 7(b)(4), the Owner Participant shall not assign,  convey or otherwise
transfer all or any part of (including  without limitation an undivided interest
in) its right, title or interest in and to this Participation  Agreement, any of
the other Transaction Documents or the Trust Estate (except its right to receive
Excepted  Payments)  to any  Person  (a  Transferee)  except  on  the  following
conditions:

                       (i) the  Transferee  shall  enter  into an  agreement  or
                  agreements whereby such Transferee  confirms that (1) it shall
                  be bound by the terms of this Participation Agreement and each
                  other  Transaction  Document,  to the  extent of the  interest
                  transferred,  as if it had been originally  named as the Owner
                  Participant   hereunder  and   thereunder   and  (2)  if  such
                  Transferee is a public utility  company,  it shall have waived
                  its right to claim Special  Casualty Value upon the occurrence
                  of a Deemed Loss Event (of the type specified in clause (1) of
                  the definition thereof) under the Facility Lease;

                      (ii)  the  Transferee  shall  be  either  (A) a  financial
                  institution,  a corporation or a partnership  with a net worth
                  or capital  and  surplus of at least  $25,000,000  (or, in the
                  case of a partnership,  at least one of whose general partners
                  has such a net worth or capital and  surplus),  or a direct or
                  indirect   wholly  owned   subsidiary   of  such  a  financial
                  institution or  corporation,  (B) a direct or indirect  wholly
                  owned  subsidiary  of (1)  the  Owner  Participant  or (2) any
                  parent of the Owner Participant,  (C) the Lessee or such other
                  Person as shall  have been  approved  by the Lessee or (D) any
                  Person;  provided,  however,  that  if  the  Transferee  is  a
                  subsidiary  referred  to  in  clause  (A)  above  or a  Person
                  referred  to in  clause  (D)  above,  the  transferring  Owner
                  Participant  (and  any  parent  thereof   secondarily   liable
                  pursuant  to this  section  l5(a)(ii))  shall  continue  to be
                  liable  for (or the  parent of such  Transferee,  which  shall
                  otherwise be a permitted Transferee,


                                      -85-

6091.50.2831.27:2


<PAGE>


                 shall enter into an agreement whereby such parent confirms that
                 it shall be  secondarily  liable for) the  obligations  of such
                 Transferee under section 7(b)(1) notwithstanding such transfer;
                 and

                 (iii) such transfer shall not violate the securities Act or any
                 provision  of,  or  create  a  relationship  which  would be in
                 violation  of, any  Applicable  Law or  agreement  to which the
                 transferring  Owner Participant or the Transferee is a party or
                 by which its property is bound

Upon any such transfer,  the transferring  Owner  Participant  shall,  except as
expressly  provided in clause (ii) above, be released from its obligations under
this Participation  Agreement and the other Transaction  Documents to the extent
of the interest transferred. An agreement to transfer shall not in and of itself
constitute a transfer for purposes of this Section 15

                (b)  Procedure.  If the Owner  Participant  transfers all or any
part of its  interest  hereunder  pursuant  to this  Section  15, it shall  give
written notice thereof to the Lessee,  the Owner Trustee,  the Indenture Trustee
and the Loan  Participant,  specifying  the name and  address for notices to the
Transferee,  such  other  information  and  evidence  as shall be  necessary  to
establish  compliance  with  this  Section  15 and the  extent  of the  interest
transferred  to such  Transferee.  If,  as a result  of any such  transfer,  the
original Owner Participant is not to continue to receive all payments to be made
by the Indenture  Trustee to the "Owner  Participant"  under the Indenture,  the
original Owner  Participant  shall from time to time, by notice to the Indenture
Trustee,  with copies to the Lessee,  the Owner Trustee and the Collateral Trust
Trustee,  designate  the  manner  in  which  any  such  payments  to the  "Owner
Participant" are to be allocated, and the Indenture Trustee shall be entitled to
rely on such notice for all purposes. This Section 15 (other than the notice


                                      -86-

6091.50.2831.27:2


<PAGE>


provisions  contained in the first  sentence of this  section  15(c)) is for the
benefit of the Lessee,  the Owner Trustee and the Owner  Participant and may not
be enforced by any other party hereto.

                SECTION 16. Brokerage and Finders' Fees and Commissions.

                Except to the extent of amounts payable by the Owner Participant
pursuant to Section 14, the Lessee will  indemnify  and hold  harmless  the Loan
Participant,  the Indenture Trustee, the Owner Trustee and the Owner Participant
in respect of any commissions,  fees,  judgments or other expenses of any nature
and kind which any of them may  become  liable to pay by reason of any claims by
or on behalf of brokers,  finders,  agents,  advisors or  investment  bankers in
connection with the transactions  contemplated by this Participation  Agreement,
any other Transaction  Document or any Financing Document,  or any litigation or
similar  proceeding arising from any such claim, other than those claims arising
out of written  undertakings  of the party claiming  indemnification  under this
Section 16 or any Affiliate or shareholder (or Affiliate of such shareholder) of
such Person with any such broker, finder, agent, advisor' or investment banker.

                SECTION 17. Survival of Representations and warranties; Binding 
Effect.

                  (a) Survival. All indemnities,  representations and warranties
contained in this Participation Agreement, in any other Transaction Document, in
any Financing Document and in any agreement,  document or certificate  delivered
pursuant  hereto or  thereto  or in  connection  herewith  or  therewith,  shall
survive,  and shall continue in effect following,  the execution and delivery of
this  Participation  Agreement,  the  making  of the  investments  and the loans
referred to herein,  any disposition of any interest in the undivided  Interest,
Unit 1 or any other property referred to in this Participation Agreement and the
expiration or other termination of any of the Transaction Documents or


                                      -87-
6091.50.2831.27:2


<PAGE>


Financing Documents and shall be and continue in effect  notwithstanding (i) any
investigation  made by the Owner Participant or the Loan Participant or (ii) the
fact that any of the Indenture Trustee,  the Owner Trustee, the Loan Participant
or the Owner  Participant  may  waive  compliance  with any of the other  terms,
provisions  or  conditions  of any of the  Transaction  Documents  or  Financing
Documents. The obligations of the Lessee under sections l0 (b)(l)(x), 10 (b)(2),
10 (b)(3)(vii),  10(b)(3)(x),  10(b)(3)(xi),  13, 14, 16 and 19(f) shall survive
the expiration or other termination of this Participation Agreement or any other
Transaction  Document or Financing  Document.  The  extension of any  applicable
statute of limitations by the Owner Trustee,  the Indenture Trustee, the Lessee,
the Owner  Participant,  the Loan Participant or any Indemnitee shall not affect
such survival.

           (b) Binding Effect. All agreements, representations and warranties in
this Participation  Agreement, the other Transaction Documents and the Financing
Documents and in any agreement,  document or certificate delivered  concurrently
with  the  execution  of  this  Participation  Agreement  or  from  time to time
thereafter,  shall  bind  the  party  making  the same  and its  successors  and
permitted assigns and shall inure to the benefit of each party for whom made and
its successors and permitted  assigns,  and, to the extent  provided in the next
sentence, each Indemnitee and its successors and assigns. The obligations of the
Lessee  under  Section  13  hereof  and  Section  20 of the  Facility  Lease are
expressly made for the benefit of, and shall be enforceable  by, any Indemnitee,
separately or together,  without  declaring the Facility  Lease to be in default
and notwithstanding any assignment by the Lessor of the Facility Lease or any of
its rights  thereunder or any  disposition of all or any part of any interest in
the Undivided Interest, the Real Property Interest, Unit 1 or any other property
referred to in this Participation  Agreement, or in this Participation Agreement
or any other  Transaction  Document  or any  Financing  Document.  All  payments
required to be made  pursuant to Section 13 hereof shall be made directly to, or
as otherwise


                                      -88-

6091.50.2831.27:2


<PAGE>


requested  by, the  Indemnitee  entitled  thereto  upon  written  demand by such
Indemnitee.  The  Lessee  shall not  assign any of its  rights.  or  obligations
hereunder  without the prior written  consent of the Owner  Participant  and the
Owner Trustee. Except as otherwise indicated, all references herein to any party
to this  Participation  Agreement  and the  other  Transaction  Documents  shall
include the permitted successors and assigns of such party.

SECTION 18. Notices.

                All  communications,  notices and  consents  provided for herein
shall be in  writing,  including  telex,  telecopy  or other  wire  transmission
containing a request for  assurance of receipt in a manner  typical with respect
to  communications  of that type,  or mailed by  registered  or certified  mail,
personally delivered (with signed receipt of an officer of the Owner Participant
in the case of  delivery  to the Owner  Participant)  or  delivered  by  express
delivery service, and shall be addressed (1) if to the Owner Participant, at One
Chase  Manhattan  Plaza (20th  floor),  New York,  New York 10081,  Attention of
Leasing  Administrator;  (ii) if to First PV Funding  Corporation at Corporation
Trust Center,  1209 Orange  Street,  Wilmington,  Delaware  19801,  Attention of
President; (iii) if to The First National Bank of Boston, at 100 Federal Street,
Boston, Massachusetts 02110, Attention of Corporation Trust Division; (iv) if to
Chemical  Bank,  at 55 Water  Street,  New York,  New York 10041,  Attention  of
Corporate  Trustee  Administration;  and (v) if to Public Service Company of New
Mexico, at Alvarado Square, Albuquerque, New Mexico 87158, Attention: Secretary;
or at such other address as any party hereto may from time to time  designate by
notice duly given in accordance with the provisions of this Section to the other
parties  hereto.  All such  communications,  notices and  consents  given in the
manner  provided  above  shall  be  effective  on the  date of  receipt  of such
communication or notice.





                                      -89-

6091.50.2831.27:2


<PAGE>


                  SECTION 19. Miscellaneous.

                  (a) Execution. This Participation Agreement may be executed in
any number of  counterparts  and by the  different  parties  hereto on  separate
counterparts,  each of  which,  when so  executed  and  delivered,  shall  be an
original,  but all such counterparts  shall together  constitute but one and the
same instrument.  Although this Participation  Agreement is dated as of the date
first above written for convenience, the actual dates of execution hereof by the
parties hereto are respectively the dates set forth under the signatures hereto,
and this Participation Agreement shall be effective on the latest such date.

                  (b) Intention of the Owner Trustee and the Owner  Participant.
Each of the Owner  Trustee and the Owner  Participant  intends to  exercise  its
rights and carry out its obligations  hereunder and under the other  Transaction
Documents  solely with a view to furthering  its own best interests and does not
have,  and does not expect to have,  any form of joint  profit  motive  with any
other Person.  The Owner Trustee and the Owner Participant shall not be required
to share any Rent to which they are entitled  under the Facility  Lease,  or the
residual value of the Undivided Interest or the Real Property Interest, with any
other  person.  The Owner  Trustee and the Owner  Participant  are not under the
control of nor shall they be deemed to be under the control of any other  Person
having any  interest in Unit 1, and shall not be the agent of or have a right or
power to bind any such Person (other than the Owner  Participant  as regards the
Owner Trustee)  without its express written  consent.  The Owner Trustee and the
Owner Participant accordingly do not intend to create any form of partnership or
joint venture with any other Person by virtue of the  transactions  contemplated
hereby  or by  any  of the  Transaction  Documents.  In  the  event  that  it is
determined,  contrary  to  the  intent  of  the  Owner  Trustee  and  the  Owner
Participant,  that, for purposes of the Code or any other income tax law, a form
of  partnership  or joint venture  exists between the Owner Trustee or the Owner



                                      -90-

6091.50.2831.27:2


<PAGE>

Participant  and any other Person,  the Owner Trustee and the Owner  Participant
hereby  elect to the  extent  permitted  by law (i) not to have the  partnership
provisions  of the  Code or  such  other  income  tax  law  apply  to any of the
transactions contemplated hereby or by any of the Transaction Documents and (ii)
to be treated solely as owning the Undivided Interest.

                  (c)  Governing  Law.  This  Participation  Agreement  has been
negotiated  and delivered in the State of New York and shall be governed by, and
be construed in accordance with, the laws of the State of Mew York.

                  (d) Amendments,  Supplements,  etc. Neither this Participation
Agreement  nor any of the terms hereof may be amended,  supplemented,  waived or
modified  orally,  but only by an  instrument  in  writing  signed  by the party
against which enforcement of such change is sought.

                  (e) Headings.  The headings of the sections and  paragraphs of
this  Participation  Agreement  have been inserted for  convenience of reference
only and  shall in no way  restrict  or  otherwise  modify  any of the  terms or
provisions hereof.

                (f)   Bankruptcy  of  Owner   Participant.   If  (a)  the  Owner
Participant or the Owner Trustee becomes a debtor subject to the  reorganization
provisions of the Bankruptcy Code, or any successor  provision,  (b) pursuant to
such  reorganization  provisions  the Owner  Participant or the Owner Trustee is
required,  by  reason  of the  Owner  Participant  being  held to have  recourse
liability  directly  or  indirectly  to the Holder of any Note or the  Indenture
Trustee,  to make  payment  on account of any  amount  payable as  principal  or
interest,  and  premium  (if  any),  on such  Note  and (c) such  Holder  or the
Indenture Trustee actually  receives any Excess Amount (as hereinafter  defined)
which reflects any payment by the Owner  Participant on account of clause (b) of
this  Section,  then such Holder or the Indenture  Trustee,  as the case may be,
shall promptly refund to the Owner Participant such Excess Amount.  For purposes
of this Section,  "Excess Amount" means the amount by which such payment exceeds



                                      -91-

6091.50.2831.27:2


<PAGE>

the  amount  which  would  have  been  received  on or prior to the date of such
payment by such Holder or the Indenture  Trustee if the Owner Participant or the
Owner Trustee had not become  subject to the recourse  liability  referred to in
clause (b) of this Section. Nothing contained in this Section shall prevent such
Holder or the Indenture Trustee from enforcing any personal recourse  obligation
(and retaining the proceeds thereof) of the Owner Participant expressly provided
for under this Participation Agreement.

           (g) Entire Agreement.  This  Participation  Agreement  (including the
Schedules hereto),  the other Transaction  Documents and the Financing Documents
supersede  all prior  agreements,  written or oral,  between or among any of the
parties hereto relating to the transactions  contemplated hereby and thereby and
each of the  parties  hereto  represents  and  warrants  to the others that this
Participation  Agreement and the other  Transaction  Documents and the Financing
Documents  constitute  the entire  agreement  among the parties  relating to the
transactions contemplated hereby and thereby.

(h)  Publicity.  Each party hereto  agrees that it will not issue or release for
external  publication any article or advertising or publicity matter relating to
the transaction contemplated hereby or any similar transaction and mentioning or
implying the identity of the Owner Participant without the prior written consent
of the Owner Participant;  provided,  however, that the Owner Participant agrees
that such written  consent shall not be withheld if such  disclosure is required
by Applicable Law.












                                      -92-

6091.50.2831.27:2


<PAGE>


IN WITNESS  WHEREOF,  the parties  hereto have each.  caused this  Participation
Agreement  to be duly  executed  by their  respective  officers  thereunto  duly
authorized as of the dates set forth below.

                                      CHASE    MANHATTAN     REALTY     LEASING
                                         CORPORATION 

                                       By        
                                            --------------------------
                                              Vice President

                                       Date:  July 31, 1966



                                       FIRST PV FUNDING CORPORATION


                                       By
                                            --------------------------
                                               Vice President
             
                                       Date: July 31, 1986


                                       PUBLIC SERVICE COMPANY OF NEW MEXICO


                                       BY
                                            --------------------------
                                            Senior Vice President and
                                             Chief Financial Officer

                                       Date: July 31, 1986






                                      -94-
6091.50.2831.27:1


<PAGE>


                                       THE FIRST NATIONAL BANK OF
                                         BOSTON, in its individual capacity and 
                                         as Owner Trustee


                                       By:
                                            --------------------------
                                              Assistant Vice President


                                        Date: July 31, 1986


                                        CHEMICAL BANK, in its individual 
                                          capacity and as Indenture Trustee


                                         By
                                            --------------------------
                                                Vice President

                                         Date: July 31, 1986



















                                      -95-
6091.50.2831.27:1


<PAGE>


                                   Schedule 1


                      PUBLIC SERVICE COMPANY OF NEW MEXICO

                          PALO VERDE NUCLEAR GENERATING
                                 STATION UNIT 1


                                NOTICE OF CLOSING

                   CHA8E MANHATTAN REALTY LEASING CORPORATION


                Pursuant to Section 5(a) of the Participation  Agreement,  dated
as of July 31, 1986 (the  Participation  Agreement) among Chase Manhattan Realty
Leasing  Corporation,  as Owner  Participant (the Owner  Participant),  First PY
Funding Corporation, as Loan Participant,  The First National Bank of Boston, as
Owner Trustee,  Chemical Sank, as Indenture Trustee,  and Public Service Company
of New Mexico (PNM), PNM hereby gives notice of a Closing to occur at 10:00 a.m.
on August 1, 1986 (the Closing Date). The Closing will be held at the offices of
Messrs.  nudge Rose Guthrie  Alexander & Ferdon,  180 Maiden Lane, New York, New
York 10038.

                      (i) Based upon  information  supplied to PNM,  the current
                  estimate  of   Transaction   Expenses  is  an   aggregate   of
                  $1,000,000.  A list of such  transaction  expenses is attached
                  hereto.

                      (ii) Payment of the Purchase  Price and the purchase price
                  for the Real Property  Interest  shall be made pursuant to the
                  Omnibus Transfer  Instruction and Receipt dated August 1, 1986
                  (a copy of which is attached hereto).

Capitalized  terms used herein and not  otherwise  specifically  defined  herein
shall have the meanings set forth in Appendix A to the Participation Agreement.




6091.50.2831.27:2

<PAGE>



                IN WITNESS  WHEREOF,  Public  Service  Company of New Mexico has
executed this Notice of closing this 1st day of August, 1986.


                                        PUBLIC SERVICE COMPANY OF NEW MEXICO



                                        By
                                            --------------------------
                                               Senior Vice President
                                            and Chief Financial Officer





















                                       -2-

6091.50.2831.27:2


<PAGE>


                                   Schedule 2

                               PRICING ASSUMPTIONS


                  Basic  Rent,  Casualty  values,  Special  Casualty  values and
Termination  values, as set forth in the Facility Lease as originally  executed,
have been computed on the basis of the following pricing assumptions:

l. Investment Percentage:                     20%
2. Loan Percentage:                           80%

3. Interest Rate on Initial
    Series Note:                              10.0% per annum.


4. Federal ACRS  Deductions:                  10-year  public utility 
                                              property  deductions  on the basis
                                              of   100%   of   Facility    Cost.
                                              $16,283,450  shall be  subject  to
                                              Section  168(f)  (10) as to  which
                                              the ACRI  deduction for 1986 shall
                                              be 6/12's of the deduction for the
                                              second  year  of  cost   recovery,
                                              1987, the full third year etc.


5. State and City  Deductions:                16 Year 150% declining  balance
                                              switch  to  straight  line  at the
                                              optimal point, using the half year
                                              convention,  on the  basis of 100%
                                              of Lessor's Cost.



6091.50.2831.27:2


<PAGE>


6. Owner Participant's Tax
   Year - End:                                December 31, 1986.

7. Closing Date:                              July 31, 1986.

8. Transaction Expenses:                      2.0% of Facility
                                              Cost paid by the Owner Participant
                                              in  addition  to  its   Investment
                                              (amortized   on  a   straight-line
                                              basis   during  the  Basic   Lease
                                              Term).

9. Real Estate Investment:                    $19,417.

1O.Basic Rent Payment Date:                   January 15 and
                                              July 15 of each year
                                              (rent   payable   in
                                              arrears).

11. First Rent Payment
    Date:                                     July 15, 1987.

12. Last Basic Rent Payment
    Date:                                     January 15, 2015.

13.   Interim Rent Payment Date               January 15, 1987

14.   Marginal Federal Tax Rate               46%

15.   Marginal Combined New York State 
      and City Tax Rate:                      8.6% deductible for Federal taxes
                        
16.  First Estimated Tax Payment
     Date:                                    September 15, 1986.

17.  Tax Accounting Method:                   Accrual.





                                       -2-

6091.50.2831.27:2


<PAGE>


18. Amortization of Initial 
      Series Note:                            See schedule attached thereto.





























                                       -3-

6091.50.2831.27:2


<PAGE>


                                   Schedule 3

                           BILL OF SALE AND ASSIGNMENT


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



                           BILL OF SALE AND ASSIGNMENT
                         dated as of ___________, 19___
                                      from

                  [CHASE MANHATTAN REALTY LEASING CORPORATION]



                                       to



                      PUBLIC SERVICE COMPANY OF NEW PIEXICO




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








6091.50.2831.27:2


<PAGE>


                BILL OF SALE AND ASSIGNMENT,  dated as of _________,19_____ from
[CHASE MANHATTAN REALTY LEASING  CORPORATION , a New York corporation (the Owner
Participant),  to PUBLIC SERVICE COMPANY OF NEW MEXICO, a New Mexico corporation
(PNM).


                               WI T N E S S E T H:


                WHEREAS,  pursuant  to  Section  7(b)(4)  of  the  Participation
Agreement  dated as of July 31,  1986  among  the  Owner  Participant,  First PV
Funding Corporation, as Loan Participant,  The First National Bank of Boston, as
Owner Trustee,  Chemical  flank, as Indenture  Trustee and PNM, as Lessee,  (the
Participation  Agreement),  the Owner Participant desires to sell and PNM desire
to buy the Assigned Property (as hereinafter defined);

                NOW,  THEREFORE,  in  consideration of the premises and of other
good and valuable  consideration,  receipt and  sufficiency  of which are hereby
acknowledged, the parties hereto agree as follows:


                                    ARTICLE I

                                   DEFINITIONS

                SECTION 1.01. For purposes hereof, capitalized terms used herein
shall have the meanings assigned to such terms in the  Participation  Agreement.
References in this Agreement to articles,  sections and clauses are to articles,
sections and clauses in this Agreement unless otherwise indicated.












6091.50.2831.27:2


<PAGE>


                                   ARTICLE II

                           ASSIGNMENT OF TRUST ESTATE

         SECTION  2.01.  Assignment.  The Owner  Participant  does hereby grant,
bargain,  convey, sell, assign,  transfer and set over to PNM, without recourse,
representation  or  warranty,  express  and  implied,  of any nature  whatsoever
(except  as set  forth  in  the  next  succeeding  sentence),  all of the  Owner
Participant's right, title and interest in, to and under the Trust Estate except
the  Owner  Participant's  right to  receive  Excepted  Payments  (the  Assigned
Property) [subject to the Owner Participant's  security interest in, and general
lien upon all of the right,  title,  and  interest  of PNM, as  successor  Owner
Participant  in, to and under the  Assigned  Property*].  The Owner  Participant
hereby  represents and warrants to PNM that the Owner  Participant  has good and
valid  title to  Assigned  Property  free and clear of all  Owner  Participant's
Liens.

                (Insert the following provision if the Owner Participant has not
received under Section 5.2 of the Indenture the payments provided for in Section
9(c), 9(d) or 16(e) of the Facility Lease, as the case may be:

                SECTION 2.02. No Release of nut. Notwithstanding the transfer of
the Assigned Property to PNM pursuant to Section 2.01 hereof,  the obligation of
PNM to make the  payments  as provided in Section  (insert  applicable  section:
9(c),  9(d),  13(c) or 16] of the Facility Lease (together with interest thereon
in accordance  with Section  3(b)(iii) of the Facility  Lease) (or to make other
payment.  in a like amount with respect to Basic Rent or Supplemental  Rent paid
by application of such payments (and in which Owner Trustee has thereby



----------
*To be inserted if on the date of the  transfer  the Owner  Participant  has not
received under Section 5.2 of the Indenture the payments provided for in Section
9(c), 9(d), 13(c) or 16 of the Facility Lease, as the case may be.

                                       -2-


6091.50.2831.27:2


<PAGE>


acquired an interest  pursuant to Section 5.1 or 5.3 of the Indenture) shall not
be deemed to be  cancelled  or  discharged  but  shall  continue  until all such
amounts  are so  received  by PNM, as  successor  Owner  Participant,  or by the
transferring Owner Participant  pursuant to the provisions of Section 7(b)(4) of
the Participation Agreement.]

         (Insert  following if the Owner  Participant has received under Section
5.2 of the Indenture the payments  provided for in Section 9(c),  9(d), 13(c) or
16 of the Facility Lease, as the case may be:

                SECTION  2.03.  Acknowledgment.  The  Owner  Participant  hereby
acknowledges receipt of  $______representing  payment in full of all amounts due
to the Owner Participant under Section [9(c), 9(d), 13(c) or 16] of the Facility
Lease.


                                   ARTICLE III

                            EFFECTIVENESS OF TRANFER

                SECTION  3.01.  Effectiveness  of Transfer.  The transfer of the
Assigned  Property  shall  become  effective  without  further  action  upon the
execution  and delivery by the Owner  Participant  to the Lessee of this Bill of
Sale and Assignment and the furnishing of a counterpart of this Bill of Sale and
Assignment to the Owner Trustee.


                                   ARTICLE IV

                                  MISCELLANEOUS

                  SECTION 4.01.  Successors  and Assigns.  This Bill of Sale and
Assignment  shall be binding upon the Owner  Participant  and its successors and
shall inure to the benefit of PNM and its successors and assigns.

                  SECTION 4.02.  Governing Law. This Bill of Sale and Assignment
shall be governed by and construed  and enforced in  accordance  with the law of
the State of New York.

                                       -3-
6091.50.2831.27:2


<PAGE>




                SECTION  4.03.  Headings.  The division of this Bill of Sale and
Assignment  into sections,  and the insertion of headings are for convenience of
reference only and shall not affect the construction or  interpretation  of this
Bill of Sale and Assignment.

                IN WITNESS WHEREOF, the undersigned has caused this Bill of Sale
and Assignment to be duly executed as of the day and year written above.




                                      [CHASE MANHATTAN REALTY
                                       LEASING CORPORATION]



                                       By
                                          --------------------------- 
                                          Title:

















                                       -4-

6091.50.2831.27:2


<PAGE>


                                   Schedule 4

                            Recordations and Filings

Part I.   Recordations  in  Respect  of the Sale of,  and the Owner  Trustee's  
          Title to,  the Undivided Interest and the Real Property Interest.

          A.  County Recorder, Maricopa County, Arizona:

              (i)  Deed; 
             (ii)  Bill of Sale 
            (iii)  Assignment and Assumption;   
             (iv)  Facility   Lease;   
              (v)  Indenture;   
             (vi)  Indenture  of  Partial Release/Facility;  and 
            (vii)  Indenture  of  Partial  Release/Real Property.


Part II.  UCC-1 Financing Statements.

          A. County Recorder, Maricopa County, Arizona:

                (i) A financing  statement  on form UCC-l naming PNM, as lessee,
              the Owner  Trustee,  as  lessor,  and the  Indenture  Trustee,  as
              assignee of the Owner Trustee, in respect of the Facility Lease;

                (ii) A  financing  statement  on form  UCC-1  naming  the  Owner
              Trustee,  as debtor, and the Indenture Trustee,  as secured party,
              in respect of the Lease Indenture Estate; and

                (iii) A financing  statement  amendment on form UCC-2 naming the
              Loan Participant,  as debtor, and the Collateral Trust Trustee, 45
              secured  party,   with  respect  to  the  Term  Note  Supplemental
              Indenture.

           B. Secretary of State, Arizona:

                (i) A financing  statement  on form UCC-1 naming PNM, as lessee,
              the Owner  Trustee,  as  lessor,  and the  Indenture  Trustee,  as
              assignee of the Owner Trustee, in respect of the Facility Lease;'

6091.50.2831.27:2


<PAGE>

                        
                (ii) A financing  statement on form UCC-1 naming PNM, as lessee,
              the  Owner  Trustee,  as  lessor  and the  Indenture  Trustee,  as
              assignee of the Owner  Trustee,  in respect of the Facility  Lease
              [Filed as a public utility filing];

                (iii) A naming the Indenture  respect of financing  statement on
              Owner  Trustee,  as debt Trustee , as secured the Lease  Indenture
              form UCC-1 or, and the party, in Estate; and

                (iv) A financing  statement  amendment  on form UCC-2 naming the
                Loan Participant,  as debtor,  and the Collateral Trust Trustee,
                as secured party, in respect of the Pledged Property (as defined
                in the Collateral Trust Indenture) with respect to the Term Note
                supplemental Indenture.

                C.  Office of County Clerk, Bernalillo County, New Mexico:

                (i) A financing  statement  on form UCC-l naming PNM, as lessee,
                the Owner  Trustee,  as lessor,  and the Indenture  Trustee,  as
                assignee of the Owner Trustee, in respect of the Facility Lease;

                (ii) A  financing  statement  on form  UCC-1  naming  the  Owner
              Trustee,  as debtor, and the Indenture Trustee,  as secured party,
              in respect of the Lease Indenture Estate; and

                 (iii) A UCC  financing  statement  amendment  naming  the  Loan
                 Participant,  as debtor,  and the Collateral Trust Trustee,  as
                 secured  party,  with  respect  to the Term  Note  Supplemental
                 Indenture





                                       -2-

6091.50.2831.27:2


<PAGE>


                D.       Secretary of State, New Mexico:

                (i) A financing  statement  on form UCC-l naming PNM, as lessee,
                the Owner  Trustee,  as lessor,  and the Indenture  Trustee,  as
                assignee of the Owner Trustee, in respect of the Facility Lease;

                         (ii) A  financing  statement  on form UCC-l  naming the
                Owner Trustee,  as debtor, and the Indenture Trustee, as secured
                party, in respect of the Lease Indenture Estate; and

                (iii)  A UCC  financing  statement  amendment  naming  the  Loan
                Participant,  as debtor,  and the Collateral  Trust Trustee,  as
                secured  party,  with  respect  to the  Term  Note  Supplemental
                Indenture.

                E.       Secretary of State, Massachusetts:

                           (i) A financing  statement  on form UCC-l  naming the
                Owner Trustee,  as debtor, and the Indenture Trustee, as secured
                party, in respect of the Lease Indenture Estate.

    Part III. Other Filings:

                Filing of the Indenture with the Secretary of State of the State
of New Mexico pursuant to the New Mexico Public Utility Act.













                                       -3-




6O9l.5O.283l.27:2


<PAGE>


                                   Schedule 5

                              AFFIDAVIT OF TRUSTEE

                       THE FIRST NATIONAL BANK OF BOSTON,
                       as Owner Trustee under that certain
                        Trust Agreement dated as of July
                      31, 1986 with Chase Manhattan Realty
                              Leasing Corporation


         The undersigned,  being a duly authorized  representative  of The First
National Bank of Boston,  a national banking  association,  a. Trustee under the
above-captioned  Trust Agreement (the Trust  Agreement),  does hereby affirm and
acknowledge  that The First  National  Bank of Boston,  as Trustee,  holds legal
title to certain real (and other)  property on behalf of a certain  beneficiary,
such property and beneficiary being more particularly  described in that certain
Deed recorded  August 1, 1986, as instrument No. 56 records of Maricopa  County,
Arizona;  being further described in that certain Deed and Bill of Sale recorded
August 1, 1986,  as instrument  No. 86-,  records of Maricopa  County,  Arizona;
being  further  described in that  certain  Assignment,  Assumption  and Further
Agreement  recorded  August 1, 1986, as Instrument No. 86-,  records of Maricopa
County, Arizona; and being further described in that certain Deed and Assignment
of  Beneficial  Interest  dated July 31, 1986,  and that certain  related  Third
Amended Affidavit of Trustee executed by Title USA Company of Arizona as Trustee
of its Trust No. 530 and recorded August 1, 1986, as instrument No. 86-, records
of  Maricopa  County,   Arizona;  the  property   descriptions  and  beneficiary
disclosures  contained in or incorporated  into each of said  instruments  being
incorporated herein by this reference as if fully set forth herein.

         A certain change in ownership of the  beneficial  interest in the Trust
Agreement has occurred since the recordation of the above-described instruments.
As now reflected in the records of The First  National Bank of Boston,  the sole
beneficiary of the Trust Agreement is:

                          Public Service Company of New Mexico
                          Alvarado Square
                          P O Box 2267
                          Albuquerque, New Mexico 87103


6091.50.2898.57:1


<PAGE>


        A copy of the Trust Agreement is available for inspection at the offices
of The First National flank of Boston, 100 Federal Street, Boston, Massachusetts
02110.

DATED THIS_____ day of THE FIRST NATIONAL BANK OF BOSTON,  not in its individual
capacity, but solely as Owner Trustee under the Trust Agreement dated as of July
31, 1986, with Chase Manhattan Realty Leasing Corporation



                                               By:
                                                  ------------------------
                                                   Its Authorized Officer


STATE OF ____________)
                     )        ss:
COUNTY of ___________)

        The foregoing  instrument  was  acknowledged  before me this _____day of
__________,  _________, by _________ an Authorized Officer of THE FIRST NATIONAL
BANK OF BOSTON,  a  national  banking  association,  under  that  certain  Trust
Agreement  dated  as of July  31,  1986  with  Chase  Manhattan  Realty  Leasing
Corporation.



                                                   ------------------------
                                                         Notary Public






                                       -2-

6091.50.2898.57:1


<PAGE>


                                                                    Appendix A

                               DEFINITION OF TERMS

                  The terms defined herein relate to the Participation Agreement
(as  defined  below)  and  certain  Transaction  Documents  executed,  or  to be
executed, in connection with the Participation Agreement. Such terms include the
plural as well as the singular. Any agreement defined or referred to below shall
include each amendment,  modification and supplement  thereto and waiver thereof
as may become effective from time to time, except where otherwise indicated. Any
term defined below by reference to any agreement shall have such meaning whether
or not such document is in effect. The terms "hereof", "herein", "hereunder" and
comparable  terms refer to the entire agreement with respect to which such terms
are  used  and not to any  particular  article,  section  or  other  subdivision
thereof.

                    If,  and  to  the  extent  that,  either  the  Participation
Agreement or any other  Transaction  Document which  incorporates  this Appendix
shall be amended from time to time  pursuant to the  respective  terms  thereof,
this Appendix shall be, or be deemed to have been, amended concurrently with the
execution  and  delivery  of  each  such  amendment  in  order  to  conform  the
definitions herein to the new or amended definitions set forth in or required by
each such amendment.

         Acceptable  Change  shall mean any change in or new  interpretation  by
Governmental  Authority  having  jurisdiction of the  Price-Anderson  Act or the
Atomic  Energy Act (or the  regulations  of the NRC relating  thereto) if, after
giving  effect  to  such  change  or  new  interpretation:  (a)  the  "aggregate
liability" for a single  "nuclear  incident of "persons  indemnified"  shall not
exceed 86.563 billion (assuming 101. operating nuclear facilities  participating
in the  deferred  premium or similar  plan  referred  to in clause (d) below and
subject  to  adjustment  (X) in an amount not  exceeding  $63  million  for each


6091.50.2831.55:2


<PAGE>

increase or decrease in said number of operating  nuclear  facilities and (Y) in
an amount not exceeding  the  aggregate of all changes in the standard  deferred
premium to reflect the effects of inflation  contemplated pursuant to clause (d)
below);  (b) the amount of primary insurance  coverage available from commercial
insurance  underwriters  on terms  substantially  equivalent  (in the reasonable
opinion of the Owner  Participant)  to the terms in effect on the  Closing  Date
under  Applicable Law and required to be maintained by licensees with respect to
any single  nuclear  facility  shall be at least equal to $160 million;  (c) the
amount of primary financial protection (excluding the primary insurance coverage
referred to in clause (b) above  required of each  licensee  with respect to any
single nuclear facility under  Applicable Law shall not exceed $40 million;  (d)
the amount payable by any licensee with respect to any single  nuclear  facility
under any deferred  premium or similar plan required under  Applicable Law shall
not exceed $63 million per "nuclear  incident"  (subject to an annual adjustment
upward  for  each  calendar  year  after  the  enactment  of  a  change  in  the
Price-Anderson  Act (if such change increases the standard  deferred premium) by
an amount equal to, if specified by such change or otherwise by Applicable  law,
(X) the annual  percentage  change during the immediately prior calendar year in
the implicit  price  deflator for the Gross  National  Product  published by the
United States  Department of Commerce or (Y) the annual percentage change in the
consumer  price index  since the  immediately  prior  calendar  year;  provided,
however,  that (i) in the  event  that  Applicable  Law  shall  not  specify  an
inflation   adjustment,   then  the  inflation   adjustment  permitted  by  this
parenthetical shall be that & specified in the preceding sub-clause (x) and (ii)
in the event that Applicable Law shall specify a standard deferred premium below
$63 million,  the inflation adjustment factor shall not be available to increase
the  standard  deferred  premium  permissible  under this  clause (d) beyond $63
million until such lower deferred premium (as so inflated) equals or exceeds $63
million) (C) the amount  payable by any licensee in any one year with respect to
any one nuclear  incident  under any deferred  premium or similar plan  required



                                       -2-

6091.50.2831.55:2


<PAGE>

under  Applicable  Law shall not  exceed $10  million;  (f)  insurance  or other
financial  protection  shall be in  effect  under  which the  providers  of such
insurance or other financial protection shall agree to pay any amount payable by
any licensee  under any deferred  premium or similar plan upon a default in such
payment by such licensee up to a maximum  aggregate amount for all such defaults
in payment of not less than $30 million;  (g) the NRC is, under  Applicable Law,
authorized  to borrow from the united  States  Treasury and to make  payments on
behalf of any  licensees  under any  deferred  premium or similar  plan (and the
reimbursement obligation of such licensees in any calendar year shall not exceed
$10 million); (h) as a result of such change or new interpretation,  there shall
be no claim,  liability or expense  excluded  from the  limitation  of liability
established  by the  Price-Anderson  Act  (as in  effect  on the  Closing  Date)
(through  modification  of the  definitions of "aggregate  liability",  "persons
indemnified",  "nuclear  incident" or  otherwise) or excluded (or the funding or
payment  thereof  deferred)  under  commercially  available  insurance  or other
financial  protection  provisions provided for by Applicable Law as in effect on
the Closing  Date (other than an  exclusion  of the costs of  investigating  and
settling claims and defending suits for damages),  except,  for purposes of this
clause  (h), to the extent and in the amount  excluded  or deferred  pursuant to
Applicable  Law as in effect on the  Closing  Date,  and (I)  neither  the Owner
Trustee  nor the  Owner  Participant  shall be (in the  opinion  of  independent
counsel to the Owner  Participant)  exposed to any other increase in its real or
potential  liability  with  respect to a "nuclear  incident",  either  during or
subsequent  to the  Lease  Term.  For  purposes  of  this  definition,  "nuclear
facility" shall mean and refer to a facility designed for producing  substantial
amounts  of  electricity  and  having a rated  capacity  of  100,000  electrical
kilowatts or more.

                  Additional  Bonds  shall mean Bonds in addition to the Initial
Series Bonds.





                                       -3-

6091.50.2831 55:2


<PAGE>


                Additional Equity Investment shall have the meaning specified in
Section 8(t) of the Facility Lease.

                  Additional  Notes  shall  have the  meaning  set  forth in the
recitations in the Indenture, which Additional Notes shall be issued, if at all,
pursuant to Section 3.5 of the Indenture.

                Affiliate,  with  respect  to any  Person,  shall mean any other
Person  directly or indirectly  controlling or controlled by, or under direct or
indirect common control with, such Person. For purposes of this definition,  the
term "control"  (including the correlative meanings of the terms "controlled by"
and "under common control with), as used with respect to any Person,  shall mean
the  possession,  directly  or  indirectly,  of the power to direct or cause the
direction  of the  management  policies  of such  Person,  whether  through  the
ownership of voting securities or by contract or otherwise.

                  After-Tax-Basis  shall  mean,  with  respect  to  any  payment
received  or accrued or deemed to have been  received  or accrued by any Person,
the amount of such payment  supplemented  by a further payment to that Person so
that the sum of the two payments  shall,  after deduction of all taxes and other
charges (taking into account any credits or deductions arising therefrom and the
timing  thereof  and  computed  at the  highest  marginal  statutory  tax  rate)
resulting from the receipt (actual or constructive) of such two payments imposed
under any  Applicable  Law or by any  Governmental  Authority,  be equal to such
payment received or accrued or deemed to have been received or accrued.

                  Agent and Agency Period shall have the meanings  specified in
Section 7.01 of the  Assignment and Assumption.






                                       -4-

6091.50.2831.55:2


<PAGE>


                ANPP   Administrative   Committee   shall  mean  the   committee
established  pursuant to Section 6.1.1 of the ANPP  Participation  Agreement (or
any comparable successor provision)

         ANPP Operating Committee shall mean the committee  established pursuant
to  Section  6.1.2  of the  ANPP  Participation  Agreement  (or  any  comparable
successor provision)

                ANPP  Participants  shall have the meaning  assigned to the word
"Participant" under the ANPP Participation Agreement.

                  ANPP  Participation  Agreement  shall mean the Arizona Nuclear
Power Project Participation  Agreement,  dated as of August 23, 1973, among API,
Salt River,  Southern  California,  PNM, El Paso, LADWP and SCPPA, as heretofore
and hereafter amended pursuant to the terms thereof -

                  ANPP  Project  Agreements  shall  mean the ANPP  Participation
Agreement and the other Project  Agreements (as such term is defined in the ANPP
Participation Agreement)

                  ANPP  Switchyard  shall mean the ANPP High Voltage  Switchyard
located  at  the  PVNGS  Site,  the  ownership,   construction,   operation  and
maintenance  of  which  are  governed  by  the  ANPP  High  Voltage   Switchyard
Participation  Agreement  executed  as of  August  20,  1981 (APS  Contract  No.
2252-419,00),  the parties to which are APS, PNM, Salt River, El Paso,  Southern
California and LADWP.

                  ANPP  Transferee  shall have the meaning  specified in Section
4.01 of the Assignment and Assumption.




                                       -5-

6091.50.2831.55:2


<PAGE>
                  Applicable  Law  shall  mean all  applicable  laws,  statutes,
treaties, rules, codes, ordinances,  regulations, permits, certificates, orders,
interpretations,   licenses  and  permits  of  any  Governmental  Authority  and
judgments,  decrees,  injunctions,  writs,  orders or like  action of any court,
arbitrator  or  other  judicial  or quasi  judicial  tribunal  (including  those
pertaining to health, safety, the environment or otherwise).

                  Appraisal   Procedure  shall  mean  a  procedure  whereby  two
independent  appraiser.,  one chosen by the Lessee and one by the Lessor,  shall
mutually  agree  upon  the  value,  period  or  amount  then the  subject  of an
appraisal.  If  either  the  Lessor  or the  Lessee,  as the case may be,  shall
determine  that a value,  period or amount to be  determined  under the Facility
Lease or any other Transaction Document cannot promptly be established by mutual
agreement,  such party shall appoint its appraiser and deliver a written  notice
thereof to the other party.  such other party shall appoint its appraiser within
15 days after receipt from the other party of the foregoing  written notice.  If
within 20 days after appointment of the two appraisers,  as described above, the
two appraisers are unable to agree upon the value, period or amount in question,
a third independent  appraiser shall be chosen within ten days thereafter by the
mutual  consent of such first two  appraisers  or, if such first two  appraisers
fail to agree upon the appointment of a third appraiser within such period, such
appointment  shall  be  made by the  American  Arbitration  Association,  or any
organization successor thereto, from a panel of arbitrators having experience in
the business of operating a nuclear electric  generating plant and a familiarity
with  equipment  used or operated in such  business.  The  decision of the third
appraiser  so  appointed  and  chosen  shall be given  within ten days after the
selection of such third appraiser. If three appraisers shall be so appointed and
the determination of one appraiser is disparate from the middle determination by
more than twice the amount,  period or value by which the third determination is
disparate  from  the  middle  determination,  then  the  determination  of  such
appraiser shall be excluded,  the remaining two determinations shall be averaged
and such average  shall be binding and  conclusive on the Lessor and the Lessee;
otherwise  the  average  of  all  three  determinations  shall  be  binding  and



                                                        -6-

6091.50.2831.55:2


<PAGE>

conclusive  on the Lessor and the Lessee.  The fees and  expenses of  appraisers
incurred in connection with any Appraisal  Procedure relating to any transaction
contemplated  by any  provision  of any  Transaction  Document  shall be divided
equally between the Lessor and the Lessee (except  pursuant to Section 16 o; the
Facility Lease, which shall be paid solely by the Lessee).

                APS shall  mean  Arizona  Public  Service  Company,  an  Arizona
corporation.

                Appraiser shall mean Ebasco Business Consulting Company.

                Arizona  Public  Utility  Act Sha11  mean  Chapter  2, Title 40,
Arizona Revised Statutes.

                Assigned  Payments  shall have the meaning  specified in Section
2.1(1) of the Indenture.

                Assignment and Assumption shall mean the Assignment,  Assumption
and  Further  Agreement,  dated as of July 31,  1986,  between PNM and the Owner
Trustee.

                Assignment  of  Beneficial  Interest  shall  mean  the  Deed and
Assignment of Beneficial  Interest  under Title USA Company of Arizona Trust No.
530, dated as of July 31, 1986, from PNM to the Owner Trustee.

                  Assumption  Agreement  sha11 mean the Assumption  Agreement of
PNM substantially in the form of Exhibit B to the Indenture.

                 Assumptions  shall  mean the  Pricing  Assumptions  and the Tax
Assumptions.

                  Atomic Energy Act shall mean the Atomic Energy Act of 1954, as
amended,  and  regulations  from time to time issued,  published or  promulgated
pursuant thereto.





                                       -7-

    6091.50.2831.55:2


<PAGE>


                  Authorized  Officer shall mean,  with respect to the Indenture
Trustee,  any officer of the Indenture  Trustee who shall be duly  authorized by
appropriate corporate action to authenticate a Note and shall mean, with respect
to the  Owner  Trustee,  any  officer  of the  Owner  Trustee  who shall be duly
authorized by appropriate corporate action to execute any Transaction Document -

                  Bank shall mean the bank party to the Term Loan Agreement.

                  Bank counsel shall mean  Milbank,  Tweed,  Hadley & McCloy,  1
Chase Manhattan Plaza, New York, New York 10005.

                  Bankruptcy Code shall mean the Bankruptcy  Reform Act of 197e,
as amended, and any law with respect to bankruptcy, insolvency or reorganization
successor thereto.

                  Basic Lease Tern shall mean the initial  term of the  Facility
Lease, which shall begin on the Closing Date and end on January 15, 2015, unless
earlier terminated as provided in the Facility Lease.

                  Basic Rent shall have the meaning set forth in Section 3(a) of
the Facility Lease.

                  Basic Rent Payment Dates shall mean and include July 15, 1987,
and January 15 and July 15 of each year thereafter, commencing January 15, 1988,
and ending  January 15, 2015,  and, if the Lessee shall elect the Renewal  Term,
each  January 15 and July l5.of each year  during the Renewal  Term,  commencing
July 15, 2015 and ending on the last day of the Renewal Term.

                  Bill of sale shall mean the need and Bill of Sale, dated as of
July 31, 1986, between PNM and the Owner Trustee.





                                       -8-
6091.50.2831.55:2


<PAGE>


                  Bonds  shall  mean all  bonds,  notes and other  evidences  of
indebtedness from time to time issued and outstanding under the Collateral Trust
Indenture,  including,  but without  limitation,  the Initial Series Bonds,  the
Refunding Bonds and any other Additional Bonds.

                  Business  day shall  mean any day  other  than a  Saturday  or
Sunday or other day on which banks in  Albuquerque,  New Mexico,  New York,  New
York or Boston, Massachusetts are authorized or obligated to be closed.

                  Capital Improvement shall mean (a) the addition, betterment or
enlargement of any property  constituting  part of Unit 1 or the  replacement of
any  such  property  with  other  property,  irrespective  of  whether  (i) such
replacement  property  constitutes  an enlargement or betterment of the property
which it replaces, (ii) the cost of which addition,  betterment,  enlargement or
replacement is or may be  capitalized  or charged to maintenance or repairs,  in
accordance  with the  Uniform  System of Accounts  or,  (iii) in the case of any
addition,  betterment or enlargement,  is not included or reflected in the plans
and specifications  for Unit 1, as built, and (b) any alteration,  modification,
addition  or  improvement  to  Unit  1,  other  than  original,   substitute  or
replacement parts incorporated into unit 1; provided,  however, that any Capital
Improvement with respect to any portion of Unit 1 constituting a Common Facility
shall  mean only an  undivided  interest  in and to  one-third  of such  Capital
Improvement.

                  Casualty  Value,  as of any Basic Rent Payment Date during the
Basic Lease Term,  shall mean the percentage of Facility Cost set forth opposite
such Basic Rent  Payment  Date in  Schedule 1 to the  Facility  Lease.  Anything
contained in the  Participation  Agreement or the Facility Lease to the contrary
notwithstanding,  Casualty Value shall be, when added to all other amounts which
the Lessee is required to pay under  Section 9(c) of the Facility  Lease (taking
into account any assumption of the Notes by the Lessee), under any circumstances
and in any event, in an amount at least sufficient to pay in


                                       -9-

6091.50.2831.55:2


<PAGE>


full, as of any Basic Rent Payment Date, the aggregate  unpaid  principal amount
of all Notes  Outstanding  at the close of business on such date,  together with
accrued and unpaid  interest on such Notes.  Casualty Value as of any Basic Rent
Payment  Date during the Renewal Term shall mean the  unamortized  portion as of
such Basic Rent  Payment  Date of the Fair Market  Sales Value of the  Undivided
Interest1 determined by the straight-line amortization of such Fair Market Sales
Value at the  commencement  of such  Renewal  Term  over the  period  from  such
commencement date through the remaining term of the License determined  pursuant
to the Appraisal  Procedure  undertaken in accordance  with the last sentence of
Section 13(a) of the Facility Lease.

                  Change in Tax Law shall  mean any  change in the State Tax Law
(as such term is defined in Section 1(a) of the Tax Indemnification  Agreement),
Code or successor  legislation enacted by the appropriate  legislative bodies of
New York State or New York City no later than the date of adjournment of the One
Hundredth  Congress,  or enacted by either the Ninety-ninth or the One hundredth
Congress (without regard to the date of presidential signature),  or if prior to
January 15, 1997 (i) there is enacted any technical correction to such enactment
or (ii) there is promulgated,  issued or published any proposed,  temporary,. or
final  Regulations  resulting from such  enactment  (regardless of the effective
date of such technical  corrections or  Regulations,  but only if such technical
corrections or Regulations would affect Net Economic Return).

                  Chemical  Bank shall mean  Chemical  Bank,  a New York banking
corporation.

                  Chief  Financial  Officer shall mean the person  designated by
the Board of Directors of PNM as the chief financial officer of PNM.







                                       -10-
6091.50.2831.55:2


<PAGE>


                Claims shall mean  liabilities,  obligations,  losses,  damages,
penalties, claims (including,  without limitation, claims involving liability in
tort, strict or otherwise), actions, suits, judgments, costs, interest, expenses
and  disbursements,  whether  or not any of the  foregoing  shall be  founded or
unfounded (including,  without limitation,  legal fees and expenses and costs of
investigation)  of any kind and nature  whatsoever  without any limitation as to
amount.

                Closing  shall mean the  proceedings  which occur on the Closing
Date, as contemplated by the Participation Agreement.

                 Closing Date shall mean August 1, 1986.

                Code shall mean the Internal  Revenue Code of 1954,  as amended,
or any comparable successor law.

                  Collateral  Trust  Indenture  shall mean the Collateral  Trust
Indenture,  dated as of  December  16,  1985,  among PNM,  Funding  Corp and the
Collateral  Trust Trustee - Collateral  Trust Indenture  Supplement shall mean a
supplement to the Collateral Trust Indenture.

                  Collateral  Trust Trustee shall mean Chemical Bank, not in its
individual capacity, but solely as Collateral Trust Trustee under the Collateral
Trust Indenture, and the successors or assigns of such Trustee.

                  Common  Facilities  shall mean all PVNGS common  facilities as
set forth in Item B of Exhibit B to the Bill of Sale other than excluded  common
facilities  as set forth in said Stem B to such  Exhibit B or common  facilities
constituting Unit 1 Retained Assets.








                                      -11-
6091.50 .2831. 55:2


<PAGE>


                Coverage  Ratio shall mean the fraction (i) the  denominator  of
which shall be the sum  (calculated  as of a date no earlier than 135 days prior
to the date of  calculation) of (x) the interest that will be payable during the
twelve-month  period following the date of the transaction with respect to which
a calculation is required to be made on the debt (both long-term and short-term)
of the Surviving Lessee, and (y) the interest portion of payments due during the
twelve-month  period following the date of such transaction on lease obligations
of the  Surviving  Lessee  with a term in  excess  of one  year,  and  (ii)  the
numerator  of which shall be the sum of (x) the pro forma net  earnings  (before
taxes and excluding the  allowance  for funds used during  construction)  of the
Surviving Lessee for a twelve-month period ending no earlier than 135 days prior
to the date of such transaction, and (y) such denominator.

                  Cure Option shall have the meaning set forth in Section  16(e)
of the Facility Lease.

         Decommissioning  Fund shall mean with respect to Unit 1 Decommissioning
Costs, an external reserve fund which fund shall be segregated from the Lessee's
assets,  but may be within  the  Lessee's  administrative  control,  into  which
deposits  are made at least  annually in an amount  equal to the quotient of (i)
Unit 1 Decommissioning  Costs (less the balance of the Decommissioning  Fund and
reasonably projected earnings thereon through the date of expiry of the License)
divided  by (ii) the  number  of years  remaining  until  date of  expiry of the
License,  provided that the amount in the  Decommissioning  Fund, on the date of
expiry of the License, shall be at least equal to Unit 1 Decommissioning Costs,

                Deed shall mean the Deed, dated as of July 31, 1986, from PNM to
the Owner Trustee.






                                      -12-

6091.50.2831.55:2


<PAGE>


                  Deemed  Loss  Event  shall  mean any of the  following  events
(unless  waived by the Owner  Participant,  which waiver shall be in writing and
may be either indefinite or for a specific period): (1) if at any time after the
Closing Date and before the Lease  Termination  Date,  the Owner  Trustee or the
Owner  Participant,  by reason of the ownership of the Undivided Interest or the
Real  Property  Interest  or any part  thereof by the Lessor (or any  beneficial
interest  therein  by the  Owner  Participant)  or the  lease  of the  Undivided
Interest  or the  Real  Property  Interest  to the  Lessee  or any of the  other
transactions   contemplated  by  the  Transaction   Documents  (the  tern  Owner
Participant, as used in this definition, not including any Transferee who at the
time of transfer to such Transferee is a non-exempt  entity of the type referred
to in this definition,  whether by reason of such ownership, lease, transactions
or otherwise) shall be deemed by any Governmental  Authority having jurisdiction
to be,  or  shall  become  subject  to  regulation  (other  than  Non-Burdensome
Regulation) as, an "electric utility" or a "public utility" or a "public utility
holding  company"  under any  Applicable  Law or by  reason of any  Governmental
Action,  and the effect thereof on the Lessor or the Owner Participant would be,
in the sole  judgment  of either  such  Person,  acting  on  advice of  counsel,
adverse,  and the  Owner  Trustee  and the  Owner  Participant  have not  waived
application of this definition;  except that if the Lessee, at its sole cost and
expense,  is  contesting  diligently  and  in  good  faith  any  action  by  any
Governmental  Authority  which would  otherwise  constitute  a Deemed Loss Event
under this  clause  (1),  such  Deemed  Loss  Event  shall be deemed not to have
occurred  so long as (i)  such  contest  does  not  involve  any  danger  of the
foreclosure,  sale,  forfeiture  or loss of, or the creation of any Lien on, the
Undivided  Interest,  the Real  Property  Interest  or any part  thereof  or any
interest  therein,  (ii) such contest does not  adversely  affect the  Undivided
Interest,  the Real Property Interest or any part thereof or any other property,
assets or right.  of the  Lessor  or the  Owner  Participant  or the lien of the
Indenture thereon, (iii) the Lessee shall have furnished the Owner Trustee,


                                      -13-

6091.50.2831.55:2


<PAGE>


the Owner Participant,  and the Indenture Trustee with an opinion of independent
counsel  satisfactory  to each such  Person to the effect  that  there  exists a
reasonable basis for contesting such determination,  (iv) such determination and
the effects thereof shall be effectively stayed or withdrawn during such contest
(and shall not be subject to  retroactive  application at the conclusion of such
contest)  in  a  manner   satisfactory  to  the  Owner  Trustee  and  the  Owner
Participant,  and the Owner  Participant shall have determined that the Lessor's
continued  ownership of the Undivided  Interest and the Real  Property  Interest
during the pendency of such contest or such  contest will not  adversely  affect
its or its Affiliate's  business,  and (v) the Lessee shall have indemnified the
Owner Trustee and the Owner  Participant in a manner  satisfactory  to each such
Person for any  liability or loss which either such Person may incur as a result
of  the  Lessee's  contest;   (2)  any  change  in,  or  new  interpretation  by
Governmental Authority having jurisdiction of, Applicable Law, including without
limitation,  the Price-Anderson Act, the Atomic Energy Act or the regulations of
the NRC, in each case as in effect on the Closing Date, as a result of which (in
the opinion of independent  counsel to the Owner  Participant) (i) the aggregate
liability for a single "nuclear incident" of "persons indemnified" (as each such
term is defined in the  Price-Anderson  Act as in effect on the closing Date) is
increased,  unless the change is such that  neither  the Owner  Trustee  nor the
Owner Participant may be exposed, either during or subsequent to the Lease Term,
to any increased real or potential liability in respect of a "nuclear incident",
(ii) the  "aggregate  liability"  for a single  "nuclear  incident"  of "persons
indemnified"  (as each term is defined in the Price Anderson Act as in effect on
the Closing Date) exceeds the amount of financial protection  established by the
NRC as a condition  to the  License,  unless the change is such that neither the
Owner  Trustee  nor the  Owner  Participant  may be  exposed,  either  during or
subsequent to the Lease Term, to any  increased  real or potential  liability in
respect  of a  "nuclear  incident",  (iii) the  amount of  financial  protection



                                      -14-

6091.50.2831.55:2


<PAGE>

required,  including but not limited to the limitation on the amount of deferred
premiums for such financial protection, is increased,  unless the change is such
that neither the Owner Trustee nor the Owner Participant may be exposed,  either
during or  subsequent  to the Lease Term,  to any  increased  real or  potential
liability in respect of a "nuclear  incident",  or (iv) either the Owner Trustee
or the Owner  Participant  may be exposed to any other  increase  in its real or
potential  liability  in  respect  of a  "nuclear  incident",  either  during or
subsequent  to the Lease  Term;  provided,  however,  that no such change or new
interpretation  shall  constitute  a Deemed  Loss  Event if such  change  or new
interpretation  constitutes  an  Acceptable  Change;  (3) any  change in, or new
interpretation by Governmental  Authority having jurisdiction of, Applicable Law
as a result of which the Owner Trustee (but not the Trust Estate),  or the Owner
Participant  shall become liable in any  capacity,  in respect of any portion of
the  Termination  Obligation or, during the Lease Term,  any other  liability or
obligation imposed as of the date hereof on licensees of the NRC; (4) any change
in, or new  interpretation by Governmental  Authority having  jurisdiction.  of,
Applicable  Law or any  Governmental  Action  the effect of which is to make the
transactions contemplated by the Transaction Documents unauthorized,  illegal or
otherwise  contrary to Applicable Law; (5) any change in, or new  interpretation
by Governmental  Authority having jurisdiction of, the License and the NRC Order
(each as in effect on the Closing Date)  constituting an assertion to the effect
that the  exercise by the Owner  Trustee or the Owner  Participant  of any right
(irrespective  of the event  giving  rise to such right)  under any  Transaction
Document would constitute  impermissable control over Unit 1 or the licensees of
Unit 1, other than an assertion that affects such rights in a manner  consistent
with  both  Section  1a4 of the  Atomic  Energy  Act and the  NRC's  regulations
thereunder (including,  without limitation,  10 CFR 550.81, as now and hereafter
in  effect);   (6)  any  expiration,   revocation,   suspension,   amendment  or
interpretation  by any  Governmental  Authority of the NRC Order, the License or
the  licensing  of the  Lessee  by the NRC or any other  Governmental  Action or



                                      -15-
6091.50.2831.55:2


<PAGE>

change in, or new interpretation by Governmental  Authority having  jurisdiction
of,  Applicable  Law as a result of which either the Owner  Trustee or the Owner
Participant shall be required to become a licensee of the NRC prior to the Lease
Termination  Date; (7) any policy of public liability  insurance with respect to
PVNGS or unit 1 shall be suspended or  terminated  for any reason  whatsoever or
shall be amended or  supplemented in a manner which may expose the Owner Trustee
or the Owner Participant,  either during or subsequent to the Lease Term, to any
increased  real or potential  liability in respect of a "nuclear  incident"  (as
defined in the  Price-Anderson  Act) and such policy of  insurance  shall not be
immediately  replaced by insurance  effective  immediately upon such suspension,
termination,  amendment or  supplementation  which, in the reasonable opinion of
the  Owner  Participant,  is at  least  as  protective  of it (in  all  respects
reasonably  deemed  by it  to  be  material)  as  the  policy  of  insurance  so
terminated, suspended, amended or supplemented, unless the "aggregate liability"
for a "nuclear  incident" of "persons  indemnified"  (as each term is defined in
the Atomic  Energy Act of 1954, as amended) is reduced by an amount equal to the
amount of liability insurance so terminated,  suspended, amended or supplemented
and, in the reasonable opinion of the Owner Participant, it may not otherwise be
exposed, either during or subsequent to the Lease Term, to any increased real or
potential  liability in respect of a "nuclear incident" as a consequence of such
suspension,  termination,  amendment  or  supplementation;  (8) with  respect to
PVNGS,  the NRC  shall  have  issued  within a five  year  period  three or more
Modification  Orders  provided that such  Modification  Orders are issued (x) in
connection  with violations  constituting  "Severity Level I" or "Severity Level
II" violations within the activity area of "Reactor  Operations",  as such terms
are used in Supplement S to Appendix C to 10 C.F.R.,  Part 2 as in effect on the
date hereof  (or, if such  Supplement  is amended or  superseded  to change such
categories of violations or areas, violations or areas falling within comparable
categories)  or (y) in  connection  with wilfull or flagrant  violations  in any
"activity area",  repeated poor  performance in a particular  "activity area" or



                                      -16-

6091.50.2831.55:2


<PAGE>

serious breakdowns in management control;  and (9) the cessation of operation of
Unit 1 or as a result of either (x) the occurrence of an  Extraordinary  Nuclear
Occurrence or an Incipient  Extraordinary  Nuclear Occurrence at PVNGS Unit 2 or
PVNGS Unit 3 or (y) a Nuclear  Incident  at PVNGS Unit 2 or PVNGS Unit 3 and the
continuation,  in the case of this clause (y), of such cessation for the Minimum
Period.

                Default shall mean an event or condition which,  with the giving
of notice or lapse of time, or both, would constitute an Event of Default.

                Directive  shall  mean an  instrument  in  writing  executed  in
accordance  with the terms and  provisions of the  Indenture by the Holders,  or
their duly authorized  agents or  attorneys-in-fact,  representing a Majority in
Interest of Holders of Notes, directing the Indenture Trustee to take or refrain
from taking the action specified in such instrument.

                  Early  Termination  Date shall have the meaning  specified  in
section 14(d) of the Facility Lease.

                  Early  Termination  Notice shall have the meaning specified in
Section 14(d) of the Facility Lease.

                  El  Paso  shall  mean  El  Paso  Electric  Company,   a  Texas
corporation.

                  ERISA shall mean the Employee  Retirement  Income Security Act
of 1974, as amended.

                  Estimated  Transaction  Expenses  shall have the  meaning  set
forth in Section 5(a) of the Participation Agreement.

                  Event of Default  shall have the  meaning set forth in Section
15 of the Facility Lease.







                                      -17-

6091.50.2831.55:2


<PAGE>


                Event of Loss  shall  mean any of the  following  events:  (a) a
Final Shutdown,  (b) a Requisition of Title,  (C) a Requisition of Use which can
reasonably be expected to exceed, or for a stated period which ends on or after,
the penultimate day of the Lease Term, (d) any degradation of the rated capacity
of Unit 1 to below, or the inability of Unit 1 to produce electricity at a level
above, 630 megawatts  electric for the minimum Period (for any reason other than
as a result of damage to or  destruction  of Unit 1,  Governmental  Action or an
event  referred to in clause  (iii)(x) or (iii)(y) of the  definition  of "Final
Shutdown").

                Excepted  Payments  shall mean (i) all payments of  Supplemental
Rent, other than payments by the Lessee (x) of Casualty Value, Termination Value
or Special  Casualty Value or in connection with the exercise of the Cure Option
or the occurrence of the Special Purchase Event or (y) of indemnity  payments to
which either the Loan Participant or any Indemnitee other than the Owner Trustee
or the  Owner  Participant,  or any of  their  respective  Affiliates,  (or  the
respective successors, assigns., agents, officers, directors or employees of the
Owner Trustee or the Owner  Participant)  is entitled;  (ii) any amounts payable
under any Transaction Document to reimburse the Lessor or the Owner Participant,
or any of their respective Affiliates, (including the reasonable expenses of the
Lessor or the Owner  Participant  incurred in connection  with any such payment)
for performing or complying with any of the  obligations of the Lessee under and
as permitted by any Transaction Document,  (iii) any amount payable to the Owner
Participant by any  Transferee as the purchase price of the Owner  Participant's
interest in the Trust Estate,  (iv) so long as no Indenture Default or Indenture
Event of Default  shall have occurred and be  continuing,  all payments of Basic
Rent in excess of amounts then due and owing in respect of the  principal of and
premium,  if any,  and  interest  on all Notes  Outstanding;  (V) any  insurance
proceeds  with  respect  to an Event of Loss in excess of  amounts  then due and
owing in respect of the  principal of and  premium,  if any, and interest on all



                                      -18-

6091.50.2831.55:2


<PAGE>

Notes  Outstanding,  (vi) any  insurance  proceeds (or payments  with respect to
risks  self-insured)  under liability policies and (vii) any payments in respect
of interest to the extent  attributable  to payments  referred to in clauses (i)
through (vi) above.

                  Existing  Mortgage  shall mean the  Indenture  of Mortgage and
Deed of Trust dated as of June 1, 1947, between PNM and Irving Trust Company, as
heretofore supplemented by all Supplemental Indentures thereto.

                Expenses shall mean liabilities,  obligations,  losses, damages,
taxes (other than taxes on income),  claims,  actions,  suits, costs,  interest,
expenses and  disbursements  (including legal fees and expenses) of any kind and
nature whatsoever.

                  Extension Letter shall mean the Extension  Letter, to be dated
the Closing Date and addressed to the Collateral Trust Trustee by the parties to
the Participation Agreement.

                  Extraordinary  Nuclear  Occurrence  shall have its  meaning as
defined  in  Section  11 of the  Atomic  Energy  Act of 1954,  as amended to the
Closing Date.

                Facility Cast shall mean the Purchase  Price plus the sum of (x)
all Supplemental  Financing  Amounts,  and (y) all Additional  Equity Investment
amounts.

                  Facility Lease shall mean the Facility Lease, dated as of July
31, 1986, between PNM, as Lessee, and the Owner Trustee, as Lessor.

                  Fair Market  Rental  Value or lair  Market  Sales value of any
property or service  shall mean the value of such  property or service for lease
or sale determined on the basis of an arm's-length  transaction for cash between
an informed and willing  lessee or purchaser  (under no  compulsion  to lease or
purchase)  and an informed and willing  lessor or seller (under no compulsion to
lease or sell),  and shall take into account the Lessor's rights and obligations
under the Assignment  and  Assumption and the Assignment of Beneficial  Interest



                                      -19-

6091.50.2831.55:2


<PAGE>


and rights  under the need and the Bill of Sale,but  shall be without  regard to
any rights of the Lessee (including any renewal options) under the Lease. Except
pursuant to Section 16 of the Facility  Lease  (other than  Section  16(a)(v)(D)
thereof) and Section 6.01 of the Assignment and  Assumption,  Fair Market Rental
Value  and Fair  Market  Sales  Value  of the  Undivided  Interest  and the Real
Property Interest shall be determined on the assumption that (i) Unit l has been
maintained  in  accordance   with,   and  the  Lessee  has  complied  with,  the
requirements of the Facility Lease, the other Transaction Documents and the ANPP
Participation  Agreement,  (ii) the Lessee shall not bear the obligation imposed
by Section l0(b)(3)(xi) of the Participation Agreement in respect of Transferees
(as defined in the ANPP  Participation  Agreement) of the Lessor,  and (iii) the
Lessee or inn, as possessor  of the  Undivided  Interest  and the Real  Property
Interest,  is otherwise in compliance  with the  requirements of all Transaction
Documents.  Fair Market Rental Value shall be determined on the assumption  that
rent will be pay-able in equal semi-annual installments in arrears.

                  Federal  Power  Act  shall  mean the  Federal  Power  Act,  as
amended.

                  Federal Securities shall have the meaning set forth in Section
2.3(c) of the Indenture.

                  FERC shall mean the Federal  Energy  Regulatory  Commission of
the United States of America or any successor agency.

                  FERC  order  shall  mean the  Order  Disclaiming  Jurisdiction
issued by FERC on December 5, 19S5 (Docket No. EL86-5-000.

                  Final  Prospectus  shall mean the  Prospectus  included in the
Registration  Statement  relating to the Refunding  Bonds,  including  documents
incorporated  into said  Prospectus by reference and any  applicable  Prospectus
Supplement.




                                      -20-

6091.50.2831.55:2


<PAGE>


                Final  Shutdown  shall  mean  the  earlier  to  occur of (i) the
expiration or revocation  of the License,  or any portion  thereof such that the
operation of Unit 1 or the  possession by the Lessee of the  Undivided  Interest
and the Real Property Interest are no longer  permitted;  (ii) the taking of any
Governmental Action or the adoption or making of any interpretations, directives
or requests by any Governmental  Authority (including,  without limitation,  the
staff thereof) or the concurrence by any Governmental Authority in the voluntary
action of the operator thereof, in each such case whether formal or informal, by
reason  of which  Unit 1 shall  cease to  operate,  or  shall  be  unable  under
Applicable Law to resume operation, at a capacity level of a least 630 megawatts
electric for the Minimum Period, (iii) the cessation of operation of Unit 1 as a
result of either (x) the occurrence of. an Extraordinary  Nuclear  Occurrence or
an  Incipient  Extraordinary  Nuclear  Occurrence  relating  to  Unit 1 or (y) a
Nuclear  Incident  relating to Unit 1 and,  in the case of this clause (y),  the
continuation of such cessation for the Minimum Period, (iv) damage to Unit 1 and
the  failure  of the  Lessee,  or of the  Lessee  and  one or  more  other  ANPP
Participants,  to agree within three years of the  occurrence  of such damage to
restore and  reconstruct  Unit 1, (v) damage to Unit 1, without  restoration  or
reconstruction  having been completed by the  expiration of the Minimum  Period,
such that Unit 1 has a rated  capacity of at least 630  megawatts  electric,  or
(vi)  destruction  of Unit 1. For purposes of this  definition,  Final  Shutdown
pursuant to the  foregoing  clause (iv) will be deemed to have occurred upon the
earlier of (x) the written  declaration of the Lessee of its intent not to agree
and (y) the  expiration  of the 3-year  period  referred  to in said clause (iv)
without written agreement. Final Shutdown pursuant to the foregoing clause (ii),
(iii)(y)  or (V) will be deemed to have  occurred on the last day of the Minimum
Period.







                                      -21-

6091.50.2831.55:2


<PAGE>


         Financing Documents shall mean the Collateral Trust Indenture, the Term
Note Supplemental Indenture, the Underwriting Agreement, the Term Loan Agreement
and the Refunding Supplemental Indenture.

                  Fixed Rate Note shall mean the  non-recourse  promissory note,
to be issued by the Owner Trustee and  authenticated by the Indenture Trustee on
the Refunding Date to refund the Initial Series Note.

         FNB shall mean the Owner Trustee in its  individual  capacity,  and its
successors and assigns.

         Farm U-7D shall mean the. certificate to be filed pursuant to Rule 7(4)
of the Holding  Company Act for the purpose of exempting  the Owner  Participant
and the Owner Trustee from registration under the Holding Company Act.

         Funding  Corp  shall  mean  First PV  Funding  Corporation,  a Delaware
corporation.

                  Generating  Unit  shall  mean  Unit  1 or  any  of  the  other
Generating Units (as such term is defined in the ANPP  Participation  Agreement)
constituting PVNGS.

                  Generation  Entitlement  Share shall have the meaning assigned
thereto in the ANPP  Participation  Agreement  and (i) when used in reference to
Unit  1,  shall  mean  the  Generation  Entitlement  Share  of PNM  as the  ANPP
Participant  with respect to its interest in Unit 1, (ii) when used in reference
to the undivided Interest, shall mean that portion of the Generation Entitlement
Share  attributable to the Undivided  Interest and (iii) when used in Section 19
of the Facility Lease,  shall refer to the Generation  Entitlement  Share of the
Lessee in all Generating Units at PVNGS.

                  Governmental Action shall mean all  authorizations,  consents,
approvals,  waivers,  exceptions,   variances,  orders,  licenses,   exemptions,
publications,  filings,  notices to and declarations of or with any Governmental




                                       -22-

6O9l.50.2831.55:2


<PAGE>

Authority (other than routine reporting  requirements the failure to comply with
which will not affect the validity or  enforceability  of any of the Transaction
Documents or have a material adverse effect on the transactions  contemplated by
any  Transaction  Document or any  Financing  Document)  or any other  action in
respect of any Governmental Authority and shall include, without limitation, all
siting,  environmental and operating permits and licenses which are required for
the use and operation of Unit 19 including  the Undivided  Interest and the Real
Property Interest.

                Governmental  Authority sha11 mean any Federal,  state,  county,
municipal,  foreign,  international,  regional or other governmental  authority,
agency, board, body, instrumentality or court.

                Holders shall mean the holders of the Notes.

                Holding  Company  Act  shall  mean the  Public  utility  Holding
Company Act of 1935, as amended.

                  Incipient Extraordinary Nuclear Occurrence shall mean an event
causing a discharge or dispersal of nuclear  source,  special nuclear or nuclear
by-product  material from its intended  place of confinement in amounts off site
or on site or causing a radiation level off site or on site which an independent
nuclear  consultant  agreed  to by the  Lessee  and the Owner  Participant  (or,
failing prompt agreement,  appointed by the American  Arbitration Society) to be
substantial  and which such  consultant  determines  has resulted in substantial
injury to persons on or off the PVNGS Site or substantial damage to property off
the PVNGS Site.

                  Indemnitee  shall  mean  the  Owner  Participant,   the  Owner
Trustee,  FNB, the Loan  Participant,  the  stockholder  of Funding Corp and its
officers and directors,  Chemical Bank, the Indenture Trustee,  each Holder of a
Note from time to time Outstanding, the Collateral Trust Trustee, the Trust, the
Trust  Estate,  the Lease  Indenture  Estate,  the  indenture  estate  under the
Collateral  Trust  Indenture,  any  Affiliate  of any of the  foregoing  and the



                                      -23-

6091.50.2831.55:2


<PAGE>

respective successors,  assigns, agents, officers, directors or employees of the
foregoing, excluding, however, any ANPP Participant other than the Owner Trustee
or the Owner Participant.

                  Indenture shall mean the Trust Indenture,  Mortgage,  Security
Agreement and Assignment of Rents,  dated as of July 31, 1986, between the Owner
Trustee and the Indenture Trustee.

                Indenture Default shall mean an event or condition which,  after
giving of notice or lapse of time, or both,  would become an Indenture  Event of
Default.

                  Indenture  Event  of  Default  shall  mean  any of the  events
specified in Section 6.2 of the Indenture.

                  Indenture Trustee shall mean Chemical Bank, a New York banking
corporation,  not in its individua1  capacity,  but solely as Indenture  Trustee
under the Indenture and each successor trustee and co-trustee thereunder

                  Indenture   Trustee's  counsel  Sha11  mean  Willikie  Farr  &
Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York 10022.

                  Indenture  Trustee's  Liens shall mean Liens against the Lease
Indenture  Estate  which  result from acts of, or any failure to act by, or as a
result of claims against,  the Indenture  Trustee,  in its individual  capacity,
unrelated to the transactions contemplated by the Transaction Documents.

                  Indenture  Trustee's  Office  shall  mean  the  office  of the
Indenture Trustee located at 55 Water Street,  New York, New York 10041, or such
other office as may be designated by the Indenture  Trustee to the Owner Trustee
and each Molder of a Note Outstanding under the Indenture.






                                      -24-

6091.50.2831.55:2


<PAGE>


                Initial Series Bands sha11 mean the promissory  notes of Funding
Corp  evidencing  the loan made to Funding  Corp under the Term Loan  Agreement,
issued,  authenticated  and  delivered  under  the Term Loan  Agreement  and the
Collateral  Trust  Indenture,  as  supplemented  by the Term  Note  Supplemental
Indenture.

                  Initial  Serie5  Note  shall mean the  nonrecourse  promissory
note,  substantially in the form of Exhibit A to the Indenture,  to be issued by
the Owner Trustee and authenticated by the Indenture Trustee on the Closing Date
to finance a portion of the Purchase Price.

                Investment  shall have the meaning set forth in Section 3 of the
Participation Agreement.

                  Investment  Company Act shall mean the Investment  Company Act
of 1940, as amended.

                  IRS shall  mean the  Internal  Revenue  Service  of the United
States Department of the Treasury or any successor agency.

                  Kidder Peabody shall mean Kidder, Peabody & Co. Incorporated.

                  LADWP shall mean the Department of Water and Power of The City
of Los Angeles,  a department  organized  and existing  under the charter of the
City of Los Angeles, a municipal corporation of the State of California.

                  Lease  Indenture  Estate  shall have the  meaning set forth in
Section 2.1 of the Indenture.

                  Lease Tern shall mean the  aggregate  of the Basic  Lease Term
and the Renewal Term, if any.







                                      -25-

6091.50.2831.55:2


<PAGE>


                Lease Termination Date shall mean the last day of the Lease Term
(whether occurring by reason of a termination or expiration of the Lease Term)

                  Lessee shall mean Public Service Company of New Mexico,  a New
Mexico corporation, and its successors and assigns, as lessee under the Facility
Lease and as party to the other Transactions  Documents and Financing  Documents
to which it is a signatory.

                  Lessee's FERC Counsel  shall mean Newman &  Holtzanger,  P.C.,
1615 L Street, Washington, D.C. 20036.

                  Lessee's  General  Counsel shall mean Keleher & McLeod,  P.A.,
P.O. Drawer AA, Albuquerque, New Mexico 87103.

                  Lessee's  Special  Arizona  Counsel shall mean Snell & Wilmer,
3100 Valley Bank Center, Phoenix, Arizona 85073.

                  Lessee's   Special  Counsel  shall  mean  Mudge  Rose  Guthrie
Alexander & Ferdon, 180 Maiden Lane, New York, New York 10038.

                  Lessor  shall  mean the Owner  Trustee,  as  lessor  under the
Facility Lease, and its successors and assigns.

                  Lessor's  Interest shall have the meaning set forth in Section
8(c) (3) of the Participation Agreement.

                  Lessor's  Liens or Owner  Trustee's  Liens  shall  mean  Liens
against the Trust Estate or the Lease  Indenture  Estate  (other than  Permitted
Liens) for which the Lessee is not responsible and which result from acts of, or
any  failure  to act by, or as a result of claims  against,  FNB or the  Lessor,
unrelated  to the  ownership  of the  Undivided  Interest  or the Real  Property
Interest,   the   administration   of  the  Trust  Estate  or  the  transactions
contemplated by the Transaction Documents or the Financing Documents.


                                      -26-

6091.50.2831.55:2


<PAGE>

                License shall mean NRC Facility Operating License No. NPF-41, as
the same may be amended, modified,  extended, renewed or superseded from time to
time.

                  License  Expiration  Date shall mean the date of expiration of
the License.

                  Lien  shall  mean any  mortgage,  pledge,  security  interest,
encumbrance, lien, easement, servitude or charge of any kind, including, without
limitation,  any conditional sale or other title retention agreement,  any lease
in the nature  thereof or the filing of, or  agreement  to give,  any  financing
statement under the Uniform Commercial Code of any jurisdiction.

                Loan shall  have the  meaning  set forth in Section  2(a) of the
Participation Agreement.

                Loan Participant shall mean Funding Corp.

                  Loan  Participant's  Counsel  shall mean  nudge  Rose  Guthrie
Alexander & Ferdon, 180 Maiden Lane, New York, New York 10038.

                  Majority in Interest of Holders of Notes shall mean Holders of
a majority in principal amount of all Notes  Outstanding  under the Indenture at
the time of any such determination.

                  Material  Project  Agreements  sha11  mean  (i)  Nuclear  Fuel
Contract between APS and Combustion  Engineering,  Inc. (CE), dated as of August
20,  1973,  (ii)nuclear  Steam Supply  Contract  between APS and CE, dated as of
August 20,  1973,  (iii)  Turbine  Generator  Contract  between  APS and General
Electric Company,  dated as of March 21, 1974, (iv) Uranium Enrichment  Services
Contract  between the United States of America (USA) and APS, dated November 15,
1984, and the Associated Supplemental Agreement of Settlement between USA and


                                      -27-

6091.50.2831.55:2


<PAGE>


APS, dated November 15, 1984, (V) Contract between APS and Westinghouse Electric
Corporation  for fuel  fabrication  services for reload batches of nuclear fuel,
dated August 7, 1974,  as amended,  (vi)  Agreement for the Sale and Purchase of
Waste Water  Effluent  between the City of Tolleson,  APS and Salt River,  dated
June 12, 1981, (vii) Agreement for Construction of Arizona Nuclear Power Project
between  Bechtel Power  Corporation  (Bechtel) and API,  dated January 15, 1973,
(viii)  Agreement  for  Engineering  and  Procurement  Services  between APS and
Bechtel,  dated January 15, 1973, and (ix) Option and Purchase of Effluent dated
April  23,  1973,  among  the  Cities  of  Phoenix,  Glendale,  Mesa,  Tempe and
Scottsdale, the Town of Youngtown, APS and Salt River.

                  Maximum  Option  Period  shall  mean the  period,  in no event
ending after  January 15, 2023,  determined  as provided in section 13(a) of the
Facility  Lease as of the date of expiration of the Basic Lease Term, (i) at the
end of which the residual  value of the Undivided  Interest  (without  regard to
inflation  or  deflation  from  the  Closing  Date  and  without  regard  to the
obligation  of the  Lessee to pay  decommissioning  costs  pursuant  to  Section
10(b)(3)(xi) of the Participation  Agreement,  but taking into consideration the
existence and effect of the Assignment and  Assumption,  the ANPP  Participation
Agreement and the License) shall be equal to at least 20% of Facility Cost, (ii)
which,  when added to the Basic Lease Term,  does not exceed 80% of the economic
useful life of the Undivided Interest from the Closing Date and (iii) at the end
of which,  taking into  consideration the existence and effect of the Assignment
and Assumption, the ANPP Participation Agreement and the License, the use of the
Undivided  Interest  by any User (in a  transaction  pursuant to which the Owner
Participant.  could  realize  the  amount  referred  to in clause  (i) above) is
feasible  from an  engineering  and economic  point of view and is  commercially
reasonable.  Unless the period,  as computed in  accordance  with the  preceding
sentence,  shall end on a January 15 or July 15,  the final date of the  Maximum
Option  Period  shall be the final  January 15 or July 15 in the  period,  as so
computed.  In no event  shall the  Maximum  Option  Period end after the License
Expiration Date.

                                      -28-

6091.50.2831.55:2


<PAGE>


                  Minimum  Net worth  means a Net worth  equal to the greater of
(x)  $700,000,000  and  (y) (1)  $950,000,000  less  (2)  with  respect  to each
Generating Unit as to which PNM shall have entered into one or more transactions
constituting  sale and  leaseback  transactions  under  the  ANPP  Participation
Agreement (including,  but without limitation,  the transaction  contemplated by
the  Participation  Agreement),  (A)  $50,000,000  (in  the  case of Unit 1) and
$100,000,000 (in the case of each other Generating Unit) times (B) the aggregate
percentage of the Lessee's undivided interest in such PVNGS unit subject to such
transactions.

                Minimum  Period shall mean the shorter of (a) the shorter of (1)
an indefinite period unless such period can reasonably be expected to be shorter
than the applicable  Benchmark  Period and (2) an actual period in excess of the
applicable  Benchmark  Period  and  (b)  a  period  beginning  on  the  date  of
determination  through and including the  penultimate day of the Lease Term. The
Benchmark Period shall be a period equal to any. 60 consecutive  calendar months
except that a period of 36 consecutive  calendar months shall be applicable with
respect to events  specified  in clause  (iii)(y)  of the  definition  of "Final
Shutdown" or clause (9)(y) of the definition of "Deemed Loss Event".  The period
specified in the foregoing  clause (a)(l) shall be determined by an  independent
nuclear  consultant  agreed  to by the  Lessee  and the Owner  Participant,  or,
failing  prompt  agreement  upon  such  consultant,  appointed  by the  American
Arbitration Society (or comparable or successor organization).

                  Modification  Order shall  mean:  (i) an order  modifying  the
License or the NRC  license  for either  PVNGS Unit 2 or PVNGS Unit 3  effective
immediately  upon issuance  thereof;  (ii) an order modifying the License or the
NRC  license  for  either  PVNGI  Unit 2 or  PVNGS  Unit 3  effective  upon  the
expiration  of the time period for a demand for a hearing if such hearing is not



                                      -29-

6091.50.2831.55:2


<PAGE>

demanded  within such period or if the  penultimate day of the Lease Term occurs
prior to such demand; or (iii) an order modifying the License or the NRC license
for either  PVNGS Unit 2 or PVNGS Unit 3 effective  following a hearing (and not
subject to further appeal) or subject to a hearing (or to further appeal) on the
penultimate day of the Lease Term.

                  Mortgage Relea5e shall mean the Indentures of Partial Release,
to be dated the Closing Date, under and with respect to the Existing Mortgage.

                  Net  Economic  Return  shall  mean  the  after-tax  yield  and
after-tax  cash flows (after all Federal,  state and local taxes) and the return
on investment  originally  expected by the Owner Participant with respect to the
Undivided   Interest,   utilizing  the  Pricing   Assumptions  and  the  initial
computation  of  Basic  Rent,  Casualty  values,  special  Casualty  values  and
Termination values derived from such Pricing Assumptions.

                  Net  Worth  means  the  excess  of  assets  over   liabilities
determined  by  the  Lessee's  auditors  on  the  basis  of  generally  accepted
accounting principles.

                  New Mexico  order shall mean the order  issued by the NMPSC on
November 27, 1985, as amended by Order Adopting Errata Notice issued on November
30, 1985,  in Case No. 1995,  approving,  among other  things,  the terms of the
Facility Lease and the execution and delivery of the Facility Lease by PNM.

                  New Mexico Public Utility Act shall mean the New Mexico Public
Utility Act, as amended.

                  NMPSC  shall mean the New  Mexico  Public  service  Commission
established pursuant to Section 62-5-1 of New Mexico Statutes Annotated, 1978.







                                      -30-

6091.50.2831.55:2


<PAGE>


                  Non-Burdensome  Regulation  sha11 mean (i) regulation to which
the Owner Participant or the Owner Trustee is otherwise subject by reason of its
lease financing or other activities  unrelated to the transactions  contemplated
by the Transaction Documents,  (ii) ministerial regulatory requirements which do
not impose limitations or regulatory  requirements on the business or activities
of the Owner Participant and which are deemed,  in the reasonable  discretion of
the Owner Participant, not to be burdensome, (iii) regulation resulting from any
possession of the Undivided  Interest on or after the Lease  Termination Date or
(iv)  regulation  of  the  Owner  Trustee  which  would  be  terminated  by  the
appointment of a successor Owner Trustee or a co-Owner  Trustee  pursuant to the
terms of the Trust Agreement.

                  Nonseverable,   when  used  with   respect   to  any   Capital
Improvement, shall mean any Capital Improvement which is not a Severable Capital
Improvement.

                  Noteholder  shall mean any Holder  from time to time of a Note
Outstanding under the Indenture.

                  Notes  shall mean the (i)  Initial  Series Note and (ii) Fixed
Rate Note and any other Additional Notes

                  Notice of Closing  shall have the meaning set forth in Section
5(a) of the Participation Agreement.

                  NRC shall mean the Nuclear Regulatory Commission of the United
States of America or any successor agency.

                NRC  Order  shall  mean the  Order of the NRC in the  matter  of
Arizona Public Service Company,  et al. (Palo Verde Nuclear Generating  Station,
Unit 1); Application In Respect Of A Sale And Leaseback Financing Transaction By
Public Service Company Of New Mexico (Docket No. STN 50-528), December 12, 1985.




                                      -31-

6091.50.2831.55:2


<PAGE>


                Nuclear  Incident  shall  mean  any  occurrence  causing  bodily
injury,  sickness,  disease, or death, or loss of or damage to, property, or the
loss of use of  property,  arising  out of or  resulting  from the  radioactive,
toxic,  explosive  or other  hazardous  properties  of nuclear  source,  special
nuclear or nuclear by-product material.

                Officers'  Certificate  shall mean a  certificate  signed by the
President or any vice President and by the Treasurer,  any Assistant  Treasurer,
the  Secretary  or any  Assistant  Secretary of the Person with respect to which
such term is used.

                  Operating Agent shall have the meaning assigned thereto in the
ANPP Participation Agreement.

                Original of the  Facility  Lease  shall mean the fully  executed
counterpart  of the Facility  Lease,  marked "This  Counterpart  is the Original
Counterpart", pursuant to Section 22(e) of the Facility Lease and containing the
receipt of the Indenture Trustee.

                  Outstanding,  when used with respect to Notes,  shall mean, as
of the date of determination,  all such Notes theretofore issued,  authenticated
and delivered under the Indenture, except (a) Notes theretofore cancelled by the
Indenture Trustee or delivered to the Indenture  Trustee for  cancellation,  (b)
Notes or portions  thereof for the payment of which the Indenture  Trustee holds
(and has notified  the holders  thereof that it holds) in trust for that purpose
an  amount  sufficient  to make full  payment  thereof  when  due,  (C) Notes or
portions  thereof which have been pledged as collateral  for any  obligations of
the obligor thereof to the extent that an amount sufficient to make full payment
of such  obligations  when due has been deposited with the pledgee of such Notes
for the  purpose  of  holding  such  amount  in trust  for the  payment  of such
obligations  in  accordance  with the  indenture or  agreement  under which such
obligations  are  secured and (d) Notes in  exchange  for, or in lieu of,  which
other  Notes have been  issued,  authenticated  and  delivered  pursuant  to the



                                      -32-

6091.50.2831.55:2


<PAGE>

Indenture;  provided,  however,  that any Note  owned by the Lessee or the Owner
Trustee or any Affiliate of either thereof shall be  disregarded  and deemed not
to be Outstanding for the purpose of any Directive.

                Overdue  Interest Rate shall mean the weighted  average rate per
annum of interest  payable with respect to overdue  payments of principal on the
Notes Outstanding, computed as act forth in such Notes.

                Owner  Participant  shall mean Chase  Manhattan  Realty  Leasing
Corporation,  a New York  corporation,  and the  successors  and assigns of such
Person in accordance with the Trust Agreement and the Participation Agreement.

                  Owner  Participant's  Liens shall mean Liens against the Trust
Estate or the Lease Indenture  Estate (other than Permitted Liens) for which the
Lessee is not  responsible  and which result from acts of, or any failure to act
by, or as a result of claims  against,  the Owner  Participant  unrelated to the
transactions   contemplated  by  the  Transaction  Documents  or  the  Financing
Documents -

                  Owner Participant's  Special Arizona Counsel shall mean Meyer,
Hendricks,  Victor,  Osborne & Maledon,  2700 North  Third  Street,  Suite 4000,
Phoenix, Arizona 85004.

                  Owner  Participant's  Special  NRC  Counsel  shall  mean Shaw,
Pittman, Potts & Trowbridge, 1800 M Street, N.W., Washington, D.C. 20036.

                  Owner  Participant's  Special  New Mexico  Counsel  shall mean
Rodey,  Dickason,  Sloan,  Akin  &  Robb,  P.A.,  20  First  Plaza,  Suite  700,
Albuquerque, New Mexico 87103.

                  Owner Participant's Special Counsel shall mean Milbank, Tweed,
Hadley & McCloy, One Chase Manhattan Plaza, New York, New York, 10005.




                                      -33-
                                        I
6091.50.2831.55:2


<PAGE>


                  Owner Trustee shall mean The First National Bank of Boston,  a
national  banking  association,  not in its individual  capacity,  but solely as
Owner Trustee under the Trust Agreement, and each successor as trustee, separate
trustee and co-trustee thereunder.

                  Owner  Trustee's  Counsel shall mean Csaplar & Bok, 1 Winthrop
Square, Boston, Massachusetts 02110.

                Participation Agreement Sha11 mean the Participation  Agreement,
dated as of July 31,  1986,  among the Owner  Trustee,  the  Indenture  Trustee,
Funding Corp, the Owner Participant and PNM.

                Penalty Rate shall mean the greater of 2% per annum in excess of
the  Prime  Rate and 2% per  annum in excess  of the  weighted  average  rate of
interest on the Bonds.

         Permitted  Liens shall mean (i) the respective  rights and interests of
the Lessee,  the Owner  Participant,  the Lessor,  the Loan  Participant and the
Indenture Trustee, as provided in the Transaction Documents; (ii.) the rights of
any  sublessee or assignee  under a sublease or an  assignment  permitted by the
terms of the  Facility  Lease;  (iii) the Lien of the  Existing  Mortgage on the
leasehold  estate under the Facility Lease;  (iv) Liens for taxes either not yet
due or which are being  contested in good faith and by  appropriate  proceedings
diligently  conducted,  so long as such  proceedings  shall not (x)  involve any
danger of the sale,  forfeiture  or loss of the  undivided  Interest or the Real
Property  Interest or any part thereof or interest  therein of the Lessor or the
Owner Participant,  (y) interfere with the use, possession or disposition of the
Undivided  Interest  or the  Real  Property  Interest,  or any part  thereof  or
interest  therein,  or (a) impair payment of Rent;  (V) inchoate  materialmen's,
mechanics', workmen's, repairmen's,  employees', carriers',  warehouse-men's, or
other like Liens arising in the ordinary  course of business for PVNGS,  and not
delinquent;  (vi)  Lessor's  Liens,  Owner  Participant's  Liens  and  Indenture
Trustee's Liens; (vii) choate Liens that have


                                      -34-

6091.50.2831.55:2


<PAGE>


been  bonded for the full  amount in dispute or as to which  other  satisfactory
security  arrangements  shall  have been  made and  which  are  being  contested
diligently by the appropriate party in good faith and by appropriate proceedings
so long as such  proceedings  shall not violate clause (x), (y) or (z) of clause
(iv) above;  (viii)  choate  Liens of any of the types  described  in clause (v)
above that have been  bonded for the full amount in dispute or as to which other
satisfactory  security  arrangements shall have been made and which arise out of
judgments  or awards and with respect to which (A) an appeal or  proceeding  for
review is being  prosecuted in good faith and for the payment of which  adequate
reserves shall have been provided as required by generally  accepted  accounting
principles  and (B) there shall have been  secured a stay of  execution  pending
such appeal or  proceeding  for review,  so long as such  proceedings  shall not
violate  clause  (x),  (y) or (z) of clause  (iv)  above;  (ix) the  rights  and
interests of the Lessee under the Assignment and  Assumption;  (x) the rights of
the NRC under the License;  (xi) the rights of the ANPP Participants (other than
(i) the  Lessee  and (ii) any Person  who shall  become an ANPP  Participant  in
respect of the Undivided  Interest and the Real.  Property  Interest)  under the
ANPP  Participation  Agreement or any other AMP?  Project  Agreement;  and (xii)
Liens on the undivided  ownership  interests in Unit 1 of the ANPP  Participants
and other Persons (other than the Lessee).

                  Person shall mean any  individual,  partnership,  corporation,
trust,  unincorporated  association  or  joint  venture,  a  government  or  any
department or agency thereof, or any other entity.

                  PNM' shall mean Public  Service  Company of New Mexico,  a New
Mexico corporation.

                  Price-Anderson Act shall mean the Price-Anderson  Act, Pub. L.
No. 85-256, 71 Stat. 576 (1957), as amended to the Closing Date.




                                      -35-

6091.50.2831.55:2


<PAGE>


                  Pricing  Assumptions  shall mean the pricing  assumptions  set
forth in Schedule 2 to the Participation Agreement.

                  Prime Rate shall mean the rate of interest  per annum equal to
the prime commercial rate of The Chase Manhattan Bank (National Association), as
announced  from time to time at its principal  office in New York,  New York, in
effect from time to time.

                Project Insurance shall have the meaning assigned thereto in the
ANPP Participation Agreement.

                  Project Manager shall have the meaning assigned thereto in the
ANPP Participation Agreement.

                  Purchase  Documents  shall mean the Bill of Sale, the Deed and
the  Assignment  of  Beneficial  Interest and such other  documents as the Owner
Participant,  the Owner Trustee,  the Indenture Trustee, the Loan Participant or
their  respective  counsel  shall deem  desirable to convey good and  marketable
title to the Undivided Interest and the Real Property Interest to the Trust.

                  Purchase  Price  shall have the  meaning  set forth in section
4(a) of the Participation Agreement.

                  PVNGS shall mean the.  Arizona Nuclear Power Project,  as that
term is defined in the ANPP Participation Agreement.

                  PVNGS Site shall mean the  interest in the Arizona  land trust
and the real property described in Exhibit A to the Bill of Sale.

                  Real  Estate  Investment  shall have the  meaning set forth in
Section 3 of the Participation Agreement.







                                      -36-
6091.50.2831.55:2


<PAGE>


                  Real  Property  Interest  shall  mean  the  right,  title  and
interest of the Owner Trustee  acquired  pursuant to the Deed and the Assignment
of Beneficial Interest

                Reasonable  Basis for a position  shall exist if tax counsel may
properly  advise  reporting  such  position on a tax return in  accordance  with
Formal  Opinion   85-352  issued  by  the  Standing   Committee  on  Ethics  and
Professional Responsibility of the American Bar Association.

                  Refunding  Bonds shall mean Funding  Corp's  Lease  Obligation
Bonds series 19863,  issued,  authenticated  and delivered  under the Collateral
Trust Indenture,  as supplemented by the Refunding  supplemental  Indenture,  as
described in the Underwriting Agreement.

                Refunding  Date shall mean the date of issuance of the Refunding
Bonds.

                  Refunding  Loan  shall have the  meaning  set forth in section
2(c) of the Participation Agreement.

                  Refunding Supplemental Indenture shall mean the Refunding Bond
Supplemental  Indenture,  among  PNM,  Funding  Corp  and the  Collateral  Trust
Trustee, supplementing the Collateral Trust Indenture and providing, among other
things, for the issuance of the Refunding Bonds.

                  Registration  Statement shall mean the registration  statement
on Form 8-3 (rile No. 33-2031),  as amended,  and any other similar registration
statement,  including  all  exhibits  and  all  documents  incorporated  in  the
Registration Statement by reference, filed with the SEC under the Securities Act
in connection with the offer, issue and sale of the Refunding Bonds.







                                      -37-
                                        
6091.50.2831.55:2


<PAGE>


                  Regulations  shall  mean the income  tax  regulations  issued,
published or promulgated under the Code.

                  Renewal Tern shall have the meaning set forth in section 12 of
the Facility Lease.

                Rent shall mean Basic Rent and Supplemental Rent.

                  Rent Differential  shall have the meaning set forth in section
3(h) of the Facility Lease.

                  Requisition of Title shall mean any  circumstance  or event in
consequence  of which Unit 1 or the  Undivided  Interest  shall be  condemned or
seized or title  thereto  shall be  requisitioned  or taken by any  Governmental
Authority under power of eminent domain or otherwise and all  administrative  or
judicial appeals opposing such  condemnation,  seizure or taking shall have been
exhausted or the period for such appeal shall have expired.

                  Requisition  of Use shall  mean any  circumstance  or event in
consequence  of  which  the use of Unit 1 or the  Undivided  Interest  shall  be
requisitioned  or taken by any  Governmental  Authority  under  power of eminent
domain or otherwise, other than a Requisition of Title.

                  Responsible  Officer  shall mean,  with respect to the subject
matter of any covenant,  agreement or  obligation of any party  contained in any
Transaction  Document,  the  President,  or any Vice  President,  Assistant Vice
President,  Treasurer,  Assistant  Treasurer or other  officer who in the normal
performance  of his  operational  responsibility  would have  knowledge  of such
matter and the requirements with respect thereto.







                                      -38-

6091.59.2831.55:2


<PAGE>


                  Retained Assets shall mean (i) the Lessee's ownership interest
in PVNGS other than the Undivided Interest,  the related Generation  Entitlement
Share and the Real Property Interest1 (ii) Severable Capital  Improvements title
to the undivided  interest in which is retained by the Lessee in accordance with
Section 2(e) of the Facility Lease, and (iii) any additional  interest in and to
PVNGS (other than the Undivided  Interest,  the related  Generation  Entitlement
Share and the Real Property  Interest) to which the Lessee  becomes  entitled in
consequence of sections 16.2 or 23.5 of the ANPP Participation Agreement (except
as otherwise provided in Section 5(a) or 19 of the Facility Lease).

                Sale  Proceeds  shall  mean,  with  respect  to any  sale of the
Undivided  Interest and the Real  Property  Interest by the Lessor to any Person
other than the Lessee, the gross proceeds of such sale payable in cash, less all
costs and expenses  whatsoever  incurred by the Lessor and the Owner Participant
in connection therewith.

                Salt  River   shall  mean  Salt   River   Project   Agricultural
Improvement and Power District, an Arizona agricultural improvement district.

                SCPPA shall mean southern  California Public Power Authority,  a
California joint powers agency (doing business in Arizona as Southern California
Public Power Authority Association)

                  SEC shall mean the Securities  and Exchange  Commission of the
United States of America or any successor agency.

                  Section 6(c) Application shall mean Funding Corp's Application
for an Order under Section 6(c) of the Investment  Company Act of 1940 Exempting
First PV Funding  Corporation from All Provisions of such Act, as filed with the
SEC on  September  20,  1985,  as amended by an  Amendment  No. 1 thereto  dated
November 8, 1985 and Amendment No. 2 thereto dated November 25, 1985.



                                      -39-
6091.50.2831.55:2


<PAGE>


                Securities  Act  shall  mean  the  securities  Act of  1933,  as
amended.

                Securities  Exchange Act sha11 mean the Securities  Exchange Act
of 1934, as amended.

                Severable  when used with  respect to any  Capital  Improvement,
shall mean any  Capital  Improvement  which can be  removed  from Unit 1 without
materially  damaging  Unit 1 or materially  diminishing  or impairing the value,
utility  or  condition  which Unit 1 would  have had if the  applicable  Capital
Improvement had not been made

                Share  shall  mean  a  percentage  equal  to the  percentage  of
Undivided  Interest  in  Unit 1 or the  Common  Facilities,  as the  context  so
requires.

                  Southern  California  shall mean  Southern  California  Edison
Company, a California corporation.

                  Special  Casualty  Value shall mean (i) during the Basic Lease
Term, the percentage of Facility Cost set forth opposite such date in Schedule 2
to the Facility Lease and (ii) during the Renewal Term, the amount determined by
amortizing  ratably the Fair Market Sales Value of the Undivided  Interest as of
the day  following  the last day of the Basic  Term in  monthly  steps  over the
remaining  term of the  License  determined  pursuant  to  Section  13(a) of the
Facility  Lease.  Anything  contained  in the  Facility  Lease  to the  contrary
notwithstanding,  Special  Casualty  value  shall  be,  when  added to all other
amounts  which the Lessee is required to pay under  Section 9(d) of the Facility
Lease (taking into account any assumption of the Notes by the Lessee), under any
circumstances and in any event, in an amount at least sufficient to pay in full,
as of any date of payment,  the aggregate  unpaid  principal amount of all Notes
Outstanding  at the close of business on such date,  together  with  accrued and
unpaid interest on such Notes.




                                      -40-

6091.50.2831.55:2


<PAGE>


                  Special  Purchase  Event shall have the meaning  specified  in
Section 13(c) of the Facility Lease.

                  Substituted  Lessee  shall  have  the  meaning  specified  in.
section 6.8(c) of the Indenture.

                  Supplemental   Financing   shall  mean  a  financing   of  the
Supplemental  Financing Amount of Capital  improvements made pursuant to Section
8(f) of the Facility Lease.

                  Supplemental  Financing  Amount  sha11  mean that  portion  of
1.133333%  of the cost of a Capital  Improvement  to Unit 1 and  .377777% of the
cost of a Capital Improvement to the Common Facilities that shall not exceed (i)
the amount of the  increase,  if any,  in the Owner  Participant's  basis in the
Undivided  Interest for purposes of section 1012 of the Code as a result of such
Capital  Improvement  less (ii) the  amount  of the  related  Additional  Equity
Investment of the Lessor, if any.

                Supplemental  Rent shall have the  meaning  set forth in Section
3(b) of the Facility Lease.

                  Surviving  Lessee shall have the meaning  specified in Section
10(b)(3)(ii) of the Participation Agreement.

                  Tax  shall   mean  any  and  all  fees   (including,   without
limitation,  documentation,  recording,  filing, license and registration fees),
taxes  (including,  without  limitation,  net income,  franchise,  value  added,
advalorem,  gross income,  gross receipts,  sales, use,  property,  personal and
real,  tangible and  intangible,  excise,  and stamp  taxes),  levies,  imposts,
duties, charges, assessments, or withholdings of any nature whatsoever,  general
or specific,  ordinary or  extraordinary,  together with any and all  penalties,
fines, additions to tax and interest thereon.





                                      -41-

6091.50.2831.55:2


<PAGE>


                  Tax  Assumptions  shall  mean  the  assumptions  set  forth in
Section 1(a) of the Tax Indemnification  Agreement,  with respect to the Federal
income tax consequences of the transactions included or reflected in the Pricing
Assumptions.

                  Tax    Indemnification    Agreement   shall   mean   the   Tax
Indemnification  Agreement, dated as of July 31, 1986, between PNM and the Owner
Participant.

                  Term Loan Agreement  shall mean the Term Loan Agreement  dated
as of July 31, 1986 among Funding Corp,  PNM and the bank named on the signature
page thereto.

                  Term Note  Supplemental  Indenture shall mean the Series 1986A
Term Note  Supplemental  Indenture dated as of July 31, 1986 among PNM,  Funding
Corp and the  Collateral  Trust Trustee,  supplementing  the'  Collateral  Trust
Indenture and  providing,  among other  things,  for the issuance of the Initial
Series Bonds.

                  Termination  Date shall have the  meaning set forth in Section
14(a) of the Facility Lease.

                  Termination  Event  shall  mean any early  termination  of the
Facility Lease in accordance with Section 14 thereof.

                Termination  Notice  shall have the meaning set forth in Section
14(a) of the Facility Lease.

                  Termination  Obligation  shall have the  meaning  set forth in
Section 15.10.2 of the ANPP Participation Agreement (or any comparable successor
provision).

                  Termination  Value,  as of any Basic Rent  Payment Date during
the Basic  Lease Term,  shall mean the  percentage  of  Facility  Cost set forth
opposite  such Basic Rent  Payment  Date in  Schedule 3 to the  Facility  Lease.
Anything  contained  in the  Facility  Lease  to the  contrary  notwithstanding,
Termination  value shall be, when added to all other amounts which the Lessee is
required to pay under Section 14 of the Facility Lease,


                                      -42-

6091.50.2831.55:2


<PAGE>


under any  circumstances  and in any event, in an amount at least  sufficient to
pay in full as of any Basic Rent Payment  Date the  aggregate  unpaid  principal
amount of all Motes Outstanding at the close of business on such date,  together
with accrued and unpaid interest on such Notes'.

                  Transaction Documents shall mean the Participation  Agreement,
the Facility Lease, the Trust Agreement,  the Indenture,  the Extension  Letter,
the Tax  Indemnification  Agreement,  the Mortgage  Release,  the Assignment and
Assumption, each Purchase Document and the Notes.

                  Transaction  Expenses  shall  have the  meaning  set  forth in
Section 14(a) of the Participation Agreement.

                  Transfer  shall  mean  the  transfer,   by  bill  of  sale  or
otherwise, by the Lessor of all the Lessor's right, title and interest in and to
the Undivided  Interest and the Real Property  Interest and under the Assignment
and  Assumption  on an "as is,  where is" basis,  free and clear of all Lessor's
Liens  and  Owner   Participant's   Liens  but   otherwise   without   recourse,
representation or warranty  (including an express  disclaimer of representations
and warranties in a manner 'comparable to that set forth in the second. sentence
of Section 6(b) of the Facility Lease),  to9ether with the due assumption by the
transferee  of,  and  the due  release  of the  Lessor  from,  all the  Lessor's
obligations under the Assignment and Assumption and the Assignment of Beneficial
Interest by an instrument or instruments  satisfactory  in form and substance to
the Lessor and the Owner Participant.

                Transferee shall have the meaning assigned thereto in Section 15
of the Participation Agreement.

                Trust shall mean the trust created by the Trust Agreement.





                                      -43-

6091.50.2831.55:2


<PAGE>


                  Trust  Agreement shall mean the Trust  Agreement,  dated as of
July 31, 1986, between the Owner Participant and FNB.

                Trust Estate shall have the meaning set forth in section 2.03 of
the Trust Agreement.

                  Trust  Indenture  Act shall  mean the Trust  Indenture  Act of
1939, as amended.

                  Trustee's   Expenses  shall  mean  any  and  all  liabilities,
obligations,  costs, compensation,  fees, expenses and disbursements (including,
without  limitation,  legal fees and expenses) of any kind and nature whatsoever
(other than such amounts as are included in Transaction  Expenses)  which may be
imposed on, incurred by or asserted against the Indenture  Trustee or any of its
agents, servants or personal representatives,  in any way relating to or arising
out of the Indenture, the Lease Indenture Estate, the Participation Agreement or
the Facility Lease, or any document  contemplated thereby, or the performance or
enforcement  of any of the terms  thereof,  or in any way relating to or arising
out of the  administration  of such  Lease  Indenture  Estate  or the  action or
inaction of the Indenture Trustee under the Indenture;  provided,  however, that
such amounts shall not include any Taxes or any amount  expressly  excluded from
the Lessee's  indemnity  obligations  pursuant to section  13(a) or 13(b) of the
Participation Agreement

                  UCC  or  Uniform   Commercial  code  shall  mean  the  Uniform
Commercial Code as in effect in any applicable jurisdiction.

                  Underwriting  Agreement shall mean the agreement among Funding
Corp,  PNM,  Kidder  Peabody,  Goldman,  Sachs & Co. and Drexel Burnham  Lambert
Incorporated  (both acting  either as  underwriters  or  representatives  of the
underwriters  named therein) relating to the purchase,  sale and delivery of the
Refunding Bonds and any applicable pricing agreements.



                                      -44-

6091.50.2831.55:2


<PAGE>


                Underwriters'  counsel shall mean Wilikie Farr & Gallagher,  One
Citicorp Center, 153 East 53rd Street, New York, New York 10022.

                  Undivided  Interest shall mean a 1.133333%  undivided interest
in Unit 1 and a .377777% undivided  interest in Common Facilities;  the owner of
the Undivided  Interest shall be a tenant-in-common  with the owner.  (including
PNM, if it should be such an owner) of all other  undivided  interests in Unit 1
and the Common  Facilities.  Unless the context  otherwise  requires,  Undivided
Interest includes an appropriate portion of Generation Entitlement Share.

                  Undivided  Interest   Indenture   Supplement  shall  mean  the
supplement  to the  Indenture  substantially  in the form of  Exhibit  C thereto
pursuant to which the Owner Trustee  causes the Undivided  Interest and the Real
Property Interest to be subjected to the Lien of the Indenture.

                  Undivided  Interest   Percentage  shall  mean  the  respective
percentages  identified  as such on Schedule 2 to the  Participation  Agreement;
provided,  however, that in respect to the portion of Unit 1 constituting Common
Facilities,  the Undivided  Interest  Percentage  shall be a percentage equal to
one-third  of the  percentage  identified  on Schedule  2, to the  Participation
Agreement with respect to Unit 1.

                  Uniform  System of Accounts  shall mean the Uniform  System of
Accounts prescribed for Public Utilities and Licensees subject to the provisions
of the Federal  Power Act (Class A and Class B), 18 CFR 101, as in effect on the
date of execution of the  Participation  Agreement,  as amended or modified from
time to time after such date.

                  Unit 1 shall mean the 1,270  megawatt unit  commonly  known as
Unit 1 at the Palo Verde Nuclear Generating Station, all as more fully described
in  Item A of  Exhibit  I to  the  Bill  of  Sale,  together  with  all  Capital
Improvements thereto, but excluding all common facilities.


                                      -45-

6091.50.2831.55:2


<PAGE>


                  Unit  1   Decommissioning   Costs  Sha11  mean   approximately
$23,000,000  (1986  dollars) (or such other amount as shall be determined by the
Lessee,  in good faith, in accordance with prudent  utility  practice)  adjusted
annually on the last day of each calendar year, for inflation using an inflation
rate twice that indicated by the change in the Consumer Price Index published by
the U. S.  Department  of Labor,  Bureau of Labor  Statistics  for such calendar
year, such adjustment to take effect on the first day of the succeeding calendar
year.

                Unit  1  Retained  Assets  shall  mean  (i)  all  resident  fuel
assemblies,  equipment and personal property constituting part of the Generating
Unit (as defined in the ANPP Participation  Agreement)  designated as Palo Verde
Nuclear  Generating  Station Unit 1 (other than common  facilities) owned by the
Lessee but excluded  from Unit 1 as set forth in Item A of Exhibit B to the Bill
of Sale and (ii) a one-third  interest in all  equipment  and  personal and real
property  constituting  PVNGS  common  facilities  under the ANPP  Participation
Agreement  owned by the Lessee but excluded  from the Common  Facilities  as set
forth in Item B of Exhibit B to the Bill of Sale.

                  User shall mean a Person  unrelated to PNM (within the meaning
of Section 318 of the Code)  possessing  the Undivided  Interest after the tease
Termination Date.













                                      -46-

6091.50.2831.55:2

<PAGE>

================================================================================
                                 AMENDMENT NO.1

                          Dated as of November 18, 1986

                                       to

               PARTICIPATION AGREEMENT Dated as to July 31, 1986

                                      among

                   CHASE MANHATTAN REALTY LEASING CORPORATION,
                              as Owner Participant

                          FIRST PV FUNDING CORPORATION,
                               as Loan Participant

                       THE FIRST NATIONAL BANK OF BOSTON,
                 in its individual capacity and as Owner Trustee
                            under a Trust Agreement,
                           dated as of July 31, 1986,
                  with the Owner Participant, as Owner Trustee

                                 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, as Indenture Trustee

                                       and

                      PUBLIC SERVICE COMPANY OF NEW MEXICO,
                                    as Lessee

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

                 Sale and Leaseback of an Undivided Interest in
                  Palo Verde Nuclear Generating Station Unit 1
                      and Certain Related ommon Facilities

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


6091.CHASE.DEBT.181A.1
<PAGE>

                AMENDMENT  NO.  1,  dated  as  of  November  18,  1986,  to  the
Participation Agreement, dated as of July 31, 1986, among CHASE MANHATTAN REALTY
LEASING  CORPORATION,  a New York corporation (the Owner Participant),  FIRST PV
FUNDING  CORPORATION,  a Delaware  corporation  (the Loan  Participant THE FIRST
NATIONAL  BANK OF BOSTON,  a national  banking  association,  in its  individual
capacity (FNB) and as Owner Trustee (the Owner Trustee) under a Trust Agreement,
dated as of July 31, 1986, with the Owner Participant, CHEMICAL BANK, a New York
banking corporation, in its individual capacity (Chemical Bank) and as Indenture
Trustee (the Indenture  Trustee)  under a Trust  Indenture,  Mortgage,  Security
Agreement  and  Assignment of Rents,  dated as of July 21, 1986,  with the Owner
Trustee, and PUBLIC SERVICE COMPANY OF NEW Mexico, a New Mexico corporation (the
Lessee).

                              W I T N E S S E T H:

                WHEREAS, the Owner Participant,  the Loan Participant, the Owner
Trustee,  the Indenture  Trustee and the Lessee have  previously  entered into a
Participation Agreement dated as of July 31, 1986 (the Participation Agreement);

                WHEREAS, the Initial Series Note was issued by the Owner Trustee
in connection with the acquisition of the Undivided interest;

                WHEREAS,  Section 2(c) of the Participation  Agreement  provides
for a  refunding  of the  Initial  Series  Note  upon  the  satisfaction  of the
conditions set forth in Sections 2(c) and 11(c) of the Participation Agreement;

                WHEREAS,  the parties  hereto wish to refund the Initial  Series
Note;

                WHEREAS,  such refunding of the Initial Series Note necessitates
this Amendment No. 1 to the Participation Agreement (Amendment No. 1);

                WHEREAS,  Section  l0.l(viii) of the Indenture  provides,  among
other  things,  that the Owner Trustee and  Indenture  Trustee may,  without the
consent  of the  Holders  of Notes  Outstanding,  execute  a  supplement  to the
Indenture  in order,  among other  things,  to evidence  the  issuance of and to
provide the terms of Additional Notes;

6091.CHASE.DEBT.181A.1


<PAGE>


                WHEREAS,  the Owner Trustee and the Indenture  Trustee intend to
execute   Supplemental   Indenture   No.  1,  dated  as  of  November  18,  1986
(Supplemental Indenture No. 1), to the indenture, providing, among other things,
for the  issuance  under the  Indenture  of the Fixed Rate Notes (as  defined in
Supplemental Indenture No. 1), to the Indenture,  providing, among other things,
for the  issuance  under the  Indenture  of the Fixed Rate Notes (as  defined in
Supplemental Indenture No. 1);

                WHEREAS, Section 10.2(ii) of the Indenture provides, among other
things,  that,  upon  receipt of a written  instruction  from the Lessee and the
Owner Trustee,  the indenture Trustee shall consent to certain amendments to the
Facility Lease: and

                WHEREAS,  the Owner  Trustee  and the  Lessee  intend to execute
Amendment  No. 1, dated as of November 18, 1986 (Lease  Amendment No. 1), to the
Facility Lease, to amend Section 3(a) thereof and the schedules thereto;

                NOW,  THEREFORE  in  consideration  of the premises and of other
good and valuable  consideration,  receipt of which is hereby acknowledged,  the
parties hereto agree as follows:

                SECTION 1. Definitions; Amendment.

                  (a) Definitions. Except as otherwise defined herein and in the
recitals,  capitalized terms used herein shall have the respective  meanings set
forth in Appendix A to the Participation Agreement.

                  (b) Amendment to Tax Indemnification  Agreement. The fact that
an amendment to the Tax Indemnification Agreement is contained in this Amendment
No 1 to the Participation  Agreement does not mean that the consent or agreement
of any party to this Amendment No. 1 to the  Participation  Agreement other than
the  Lessee  and  the  Owner   Participant   is   required   to  amend  the  Tax
Indemnification  Agreement at this time or at any time in the future. The Lessee
and  the  Owner   Participant   hereby  amend  Section  1(a)  (11)  of  the  Tax
Indemnification Agreement to read in its entirety as follows:

        "(11)  Without  giving  effect to any  credits  against  tax,  the Owner
        Participant's  (i)  marginal  federal rate of income tax is 46% in 1986,
        39.950685%  in 1997 and 34% in 1988 and (ii) New York State and New York
        City rates of income tax are 9% and 9%, respectively."


                                       -2-

6091.CHASE.DEBT. 181A:1



<PAGE>

                SECTION 2. Implementation.

                (a) Forms.  The forms of Supplemental  Indenture No. 1 and Lease
Amendment  No. 1 are  attached  hereto as Exhibit.  A and B,  respectively.  All
blanks  in  Supplemental  Indenture  No. 1 and  Lease  Amendment  No. 1 shall be
appropriately  filled in or completed,  all in a manner consistent therewith and
with the Transaction Documents and the Financing Documents.

                (b) Request by the Owner Participant. In accordance with Section
2.01 of the Trust  Agreement,  the Owner  Participant  hereby  requests that the
Owner  Trustee  (i)  execute  and deliver  this  Amendment  No. 1,  Supplemental
Indenture  No.  1  and  Lease  Amendment  No.  1  (collectively,  the  Refunding
Amendments);  (ii)  execute  the Fixed  Rate Notes and.  request  the  Indenture
Trustee to  authenticate  and deliver  the Fixed Rate Notes  pursuant to Section
3.5(2) of the  Indenture;  and (iii)  execute and deliver all other  agreements,
instruments and  certificates  contemplated by the  Transaction  Documents,  the
Financing Documents and the Refunding Amendments.

                (c)  Instruction  and Consent.  The Lessee and the Owner Trustee
hereby  instruct the Indenture  Trustee (i) to consent to Lease Amendment No. 1,
and  the  Indenture  Trustee  so  consents,  and  (ii) to  execute  Supplemental
Indenture No. 1, all in accordance with section 10.2 of the Indenture.

                (d)  Recordations  and Filings.  The Lessee agrees that it shall
cause to be made the recordations and filings set forth in Schedule 1 hereto and
represents  that such  filings and  recordations  are all the  recordations  and
filings that are  necessary in order to preserve,  protect and perfect the Owner
Trustee's  rights and interests  under the Facility  Lease,  as amended by Lease
Amendment  No. 1, and the first and prior  security  interest  of the  Indenture
Trustee  in the Lease  Indenture  Estate  under the  Indenture,  as  amended  by
Supplemental Indenture No. 1.



                                       -3-
6091.CHASE.DEBT.l81A:l


<PAGE>
                (e) Refunding of Bonds. The Loan Participant agrees that, unless
it obtains the written consent of the Owner Participant,  (1) it will refund its
Lease Obligation Bonds, series 19863 (the Bonds),  issued pursuant to the Series
1986B Bond  Supplemental  Indenture,  dated as of November  18, 1986 (the series
1986B Bond Supplemental Indenture),  only in connection with the refunding of an
equal principal  amount of the Pledged Lessor Notes  identified in Schedule 2 to
the series 19863 Bond Supplemental Indenture (the Pledged Lessor Notes) , or, to
the extent that the Lessor  Notes  described  in Schedule 3 to such Series 19863
Bond Supplemental  Indenture (the Lessor Notes) are subjected to the lien of the
Collateral  Trust  Indenture,  in  connection  with  the  refunding  of an equal
principal  amount of such Lessor  Notes and (2)  subsequent  to any Lessor Notes
being subjected to the lien of the Collateral Trust Indenture, or, if the Lessor
Notes are not so subjected,  a mandatory redemption of Bonds pursuant to Section
1.04 (a) of the Series 19863 Bond Supplemental  Indenture,  the principal amount
of Pledged Lessor Notes bearing interest at the rates per annum of 8.05%,  8.95%
and 10.15% respectively, and Lessor Notes, if any, bearing interest at the rates
per annum of 8.05%, 8.95% and 10.15%,  respectively,  shall not be less than the
principal  amount  of Bonds  bearing  interest  at the rates per annum of 8.05%,
8.95% and 10.15% respectively.

                  (f)  Reoptimization  of the Notes. If the Lessee,  in a timely
manner,  provides the Owner Trustee and the Owner  Participant  with information
sufficient for the Owner Trustee to direct the adjustments  described in Section
2(b) of  Supplemental  Indenture No. 1, together with a certificate (in form and
substance  reasonably  satisfactory to the Owner Participant) to the effect that
such  adjustments  minimize the aggregate  increase in Basic Rent occurring as a
result of the operation  section 3(d) of the Facility  Lease,  the Owner Trustee
shall  deliver to the Indenture  Trustee a certificate  pursuant to such Section
2(b).  Notwithstanding  the  foregoing,  the Owner  Participant,  the  Indenture
Trustee  and the Owner  Trustee may rely on such  certificate  and shall have no
obligation to verify the same.

                 (g)  Payment of  Transaction  Expenses.  The Owner  Participant
shall pay to the Owner Trustee on the  Refunding  Date the sum of $100,000 to be
disbursed  by  the  Owner  Trustee  on  account  of   Transaction   Expenses  as
contemplated by section 14 of the Participation Agreement.



                                       -4-

609l.CHASE.DEBT. 18lA: 1


<PAGE>


                 SECTION 3. Miscellaneous.

                (a)  Execution.  This  Amendment  No. 1 may be  executed  in any
number  of  counterparts  and  by  the  different  parties  hereto  on  separate
counterparts  each of  which,  when  so  executed  and  delivered,  shall  be an
original,  but all such counterparts  shall together  constitute but one and the
same  instrument.  Although  this  Amendment No. 1 is dated as of the date first
above  written for  convenience,  the actual  dates of  execution  hereof by the
parties hereto are respectively the dates set forth under the signatures hereto,
and this Amendment No. 1 shall be effective on the latest of such dates.

                (b) Governing Law. This Amendment No. 1 has been  negotiated and
delivered in the State of New York and shall be governed by, and be construed in
accordance with, the laws of the State of New York.

                (c) Responsibility  Far Recitals.  The recitals contained herein
shall be taken as the  statements of the Lessee,  and the other  parties  hereto
assume no responsibility for the correctness of the same.














                                      -5-



6O91.CHASE.DEBT. 18lA: 1



<PAGE>


                IN WITNESS  WHEREOF,  the  parties  hereto have each caused this
Amendment  No. 1 to the  Participation  Agreement  to be duly  executed by their
respective officers thereunto duly authorized as of the dates set forth below.


                                       CHASE MANHATTAN REALTY
                                       LEASING CORPORATION



                                       By
                                          ---------------------------
                                              Vice President

                                       Date:  November 25, 1986


                                       FIRST PV FUNDING CORPORATION


                                       By
                                           --------------------------
                                                  President

                                       Date:  November 25, 1985


                                       PUBLIC SERVICE COMPANY
                                            OF NEW MEXICO


                                       By: 
                                            -------------------------
                                               Vice President and
                                              Corporate Controller

                                       Date:  November 25, 1986










                                       -6-
6091.CHASE.DEBT.181A:l


<PAGE>


                                            THE FIRST NATIONAL BANK OF BOSTON; 
                                              in itsindividual capacity and
                                              as Owner Trustee

                                             By: 
                                                 ---------------------------
                                                   Assistant Vice President


                                             Date:  November 25, 1986



                                             CHEMICAL BANK, in its individual 
                                               capacity and as Indenture Trustee


                                             By: 
                                                  --------------------------   
                                                    Authorized Officer


                                             Date:  November 25, 1986



















                                       -7-

6O91.CHASE.DEBT.181A:l


<PAGE>

                                   Schedule 1
                                       to
                                 Amendment No.1
                                       to
                             Participation Agreement

                             RECORDATONS AND FILINGS
Part I.  Recordations.

         County Recorder, Maricopa County, Arizona:

                (i)  Amendment No. 1 to the Facility Lease; and

               (ii)  Supplemental Indenture No. 1 to the Indenture.


Part II.  Filings.

                  (a)  Separate  financing  statement  amendments  naming PNM as
"Lessee"  and  the  Owner  Participant's  Owner  Trustee  as  "Lessor",  and the
Indenture  Trustee,  as  Assignee  of the Owner  Trustee,  with  respect  to the
Facility  Lease, as amended by Lease Amendment No. 1, to be filed in the records
of:

                        (1)  the  Secretary  of  State of the  State of  Arizona
                             (regular and public utility filings);

                        (2)  the Clerk of Maricopa County, Arizona;

                        (3)  the  Secretary of State of the State of New Mexico;
                             and

                        (4)  the Clerk of Bernalillo County, New Mexico.

                  (b) Separate financing  statement  amendments naming the Owner
Trustee as "Debtor" and the Indenture  Trustee as "Secured Party",  with respect
to the Indenture, as amended by Supplemental Indenture No. 1, to be filed in the
records of:

                         (1)  the Secretary of State of the State of Arizona;


6O9l.CHASE.DEBT. 181A: 1


<PAGE>


                         (2)  the Clerk of Maricopa County, Arizona;

                         (3)  the Secretary of State of the State of New Mexico
                              and

                         (4)  the Clerk of Bernalillo County, New Mexico.

                  (c) A financing  statement  amendment naming the Owner Trustee
as "Debtor"  and the  Indenture  Trustee as "Secured  Party" with respect to the
Indenture,  as amended  by  Supplemental  Indenture  No. 1, to be filed with the
Secretary of State of the Commonwealth of Massachusetts.

                  (d) Separate  financing  statement  amendments  naming Funding
Corp.  as "Debtor" and the  Collateral  Trust  Trustee as "Secured  Party",  and
listing,  as  collateral  covered  thereby,  the  "Pledged  Property"  under the
Collateral  Trust  Indenture,  as amended and  supplemented,  to be filed in the
records of:

                         (1)  the Secretary of State of the State of Arizona;

                         (2)  the County Clerk of Maricopa County, Arizona;

                         (3)  the Secretary of State of the State of New Mexico;
                              and

                         (4)  the County Clerk of Bernalillo County, New Mexico.

                  (e) Supplemental Indenture No. 1 to the Indenture, to be filed
with the Secretary of State of the State of New Mexico, under the Public Utility
Act.













                                       -2-

6O9l.CHASE.DEBT. l8lA:l


<PAGE>


                      PUBLIC SERVICE COMPANY OF NEW MEXICO
                                 Alvarado Square
                          Albuquerque, New Mexico 87158



                                              November 25, 1986


Chase Manhattan Realty Leasing Corporation
One Chase Manhattan Plaza
New York, New York 10005

                           Current Pricing Assumptions
               Participation Agreement dated as of July 31, 1986,
                                   as amended

Dear Sirs:

Attached hereto as Schedule 1 is a list of the Current Pricing  Assumptions used
in  connection  with the  adjustment  to Basic Rent,  Casualty  Values,  Special
Casualty  Values  and  Termination  Values  agreed  to in  connection  with  the
transactions   consummated   on  November   25,   1926,   with  respect  to  the
above-captioned  Participation Agreement and the Facility Lease, as amended, and
the Indenture, as amended, referred to therein.

We  understand  that the Current  Pricing  Assumptions  reflected  on Schedule 1
hereto may not be amended without your prior written consent.

                                          Sincerely,

                                          PUBLIC SERVICE COMPANY OF NEW MEXICO

                                          By:   /s/ B. D. Lackey
                                               -------------------------------
                                                    Vice President and
                                                   Corporate Controller

6091.CHASE.DEBT.l81P:l


<PAGE>


                                   SCHEDULE 1

                           CURRENT PRICING ASSUMPTIONS

                  Basic  Rent,  Casualty  Values,  Special  Casualty  Values and
Termination  Values, as set forth in the Facility Lease, as amended by Amendment
No.  1  thereto,  have  been  computed  on the  basis of the  following  pricing
assumptions:

  1.    Investment Percentage:                             20%

  2.    Loan Percentage:                                   80%

  3.    Interest Rate on:
         (a)   Fixed Rate Note due
               January 15, 1992
               ($1,501,000)                                8.05%

         (b)   Fixed Rate Note due
               January 15, 1997
               ($5,625,000)                                8.95%

         (c)   Fixed Rate Note due
               January 15, 2015
               ($32,873,000)                              10.15%

         (d)   Assumed Interest Rate
               for interim period                          9.9024175%

4.  Federal ACRS Deductions:                               10-year public util-
                                                           ity property deduc-
                                                           tions on the basis
                                                           of 100% of Facility
                                                           Cost.

5.  State and City Deductions:                             16 Year 150% declin-
                                                           ing balance switch-
                                                           ing to straight line
                                                           at the optimal
                                                           point, using the
                                                           half year conven-
                                                           tion, on the basis
                                                           of 100% of Lessor's
                                                           Cost.


                                      -2-
6091.CHASE. DEBT. 181P: 1


<PAGE>
6.    Owner Participant's Tax
      Year-End:                                            December 31, 1996

7.    Closing Date:                                        August 1, 1986

8.    Transaction Expenses:                                2.0% of Facility Cost
                                                           paid  by  the   Owner
                                                           Participant   on  the
                                                           Closing  Date and .2%
                                                           of Facility Cost paid
                                                           on November  25, 1986
                                                           in  addition  to  its
                                                           Investment  Amortized
                                                           on  a   straight-line
                                                           basis  from  the date
                                                           of  payment   through
                                                           the end of the  Basic
                                                           Lease Term)

 9.    Real Estate Investment:                             $19,417

10.    Basic Rent Payment Date:                            January 15 and
                                                           July 15 of each year
                                                           (rent payable in
                                                           arrears)

11.    First Basic Rent Payment
        Date:                                              July 15, 1997

12.    Last Basic Rent Payment
        Date:                                              January 15, 2015

13.    Interim Rent Payment Date:                          January 15, 1987

14.    Marginal Federal Tax Rate:                          46% for 1986, 
                                                           39.950685%  for  1987
                                                           and 34% thereafter

15.    Marginal Combined New York
        State and City Tax Rate:                           8.6% deductible for 
                                                           Federal taxes

16.    First Estimated Tax Payment
        Date:                                              September 15, 1986

17.     Tax Accounting Method:                             Accrual

18.    Amortization of Fixed Rate
         Notes:                                            As set forth in 
                                                           schedules attached
                                                           thereto

Accepted and Agreed:

CHASE MANHATTAN REALTY LEASING CORPORATION


By
     ------------------------------
     Title:  Vice President


                                       -3-

6091.CHASE.DEBT.181P:l