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

                                    FORM 10-K

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

For the Fiscal Year Ended December 31, 1996      Commission File Number 1-6986



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

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

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

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


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

    Common Stock, $5.00 Par Value             New York Stock Exchange

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

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

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

   Indicate  by check mark  whether  the  registrant  (1) has filed all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during the  preceding  12 months and (2) has been  subject to such  filing
requirements for the past 90 days. YES x/ NO

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

   The total number of shares of the Company's  Common Stock  outstanding  as of
January 31, 1997 was 41,774,083. On such date, the aggregate market value of the
voting stock held by non-affiliates of the Company,  as computed by reference to
the New York Stock Exchange  composite  transaction  closing price of $20.00 per
share reported by the Wall Street Journal, was $835,481,660.

                       DOCUMENTS INCORPORATED BY REFERENCE

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

      Proxy  Statement to be filed with the Securities  and Exchange  Commission
      pursuant to Regulation 14A relating to the annual meeting of  stockholders
      to be held on April 29, 1997--PART III.

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<PAGE>

                                TABLE OF CONTENTS

                                                                        Page
                                                                        ----

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

                                     PART I

ITEM  1. BUSINESS........................................................    1
           THE COMPANY...................................................    1
           ELECTRIC OPERATIONS...........................................    1
             Service Area and Customers..................................    1
             Power Sales.................................................    2
             Sources of Power............................................    3
             Fuel and Water Supply.......................................    4
           NATURAL GAS OPERATIONS........................................    7
             Service Area and Customers..................................    7
             Natural Gas Supply..........................................    7
             Natural Gas Sales...........................................    8
           RATES AND REGULATION..........................................    9
             Proposed Rulemaking.........................................    9
             Fossil-Fueled Plant Decommissioning Costs...................    9
             PGAC Continuation Filing....................................    9
             FPPCAC......................................................   10
             Public Regulation Commission................................   10
           ENVIRONMENTAL FACTORS.........................................   10

ITEM  2. PROPERTIES......................................................   12
           ELECTRIC......................................................   12
             Fossil-Fueled Plants........................................   12
             Nuclear Plant...............................................   13
             Other Electric Properties...................................   15
           NATURAL GAS...................................................   15
           OTHER INFORMATION.............................................   15

ITEM  3. LEGAL PROCEEDINGS...............................................   16
           PVNGS WATER SUPPLY LITIGATION.................................   16
           SAN JUAN RIVER ADJUDICATION...................................   16
           PVNGS PROPERTY TAXES..........................................   16
           OTHER PROCEEDINGS.............................................   17
             Federal Deposit Insurance Corporation ("FDIC") Litigation...   17
             Republic Savings Bank ("RSB") Litigation....................   18
             Four Corners................................................   18

ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............   19

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY.....................   20





                                       ii

<PAGE>


                                     PART II

ITEM  5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
           STOCKHOLDER MATTERS...........................................   22

ITEM  6. SELECTED FINANCIAL DATA.........................................   23

ITEM  7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS...........................   24

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

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

                                    PART III

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

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

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

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

                                     PART IV

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

SIGNATURES...............................................................  E-23





                                       iii

<PAGE>


                                    GLOSSARY



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


                                       iv

<PAGE>




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


                                        v

<PAGE>


                                     PART I

ITEM 1.  BUSINESS

                                   THE COMPANY

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

       The total  population  of the area served by one or more of the Company's
utility services is estimated to be approximately 1.3 million, of which 53% live
in the greater Albuquerque area.

       For the year ended  December 31, 1996,  the Company  derived 73.1% of its
operating revenues from electric  operations,  25.7% from natural gas operations
and 1.2% from energy services operations.

       As of December 31, 1996, the Company employed 2,739 persons.

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

                               ELECTRIC OPERATIONS

Service Area and Customers

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

       The Company  provides  retail  electric  service to a large area of north
central New Mexico,  including the cities of Albuquerque,  Santa Fe, Rio Rancho,
Las Vegas,  Belen and  Bernalillo.  The Company also  provides  retail  electric
service to Deming in southwestern  New Mexico and to Clayton in northeastern New
Mexico. As of December 31, 1996, approximately 342,000 retail electric customers
were served by the Company,  the largest of which  accounted  for  approximately
3.5% of the Company's  total  electric  revenues for the year ended December 31,
1996.

       The Company holds 22 long-term,  non-exclusive  franchise  agreements for
its electric retail  operations,  expiring  between June 1997 and November 2028.
The City of Albuquerque (the "City") franchise expired in early 1992.  Customers
in the area covered by the expired franchise  represent  approximately  43.0% of
the Company's 1996 total electric  operating  revenues,  and no other  franchise
area represents more than 6.6%. These franchises are agreements that provide the
Company access to public  rights-of-way for placement of the Company's  electric

                                        1

<PAGE>


facilities.  The Company remains obligated under state law to provide service to
customers in the  franchise  area even in the absence of a franchise  agreement.
(See PART II, ITEM 7. --  "MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL
CONDITION  AND  RESULTS  OF  OPERATIONS  --  OTHER  ISSUES  FACING  THE  COMPANY
--ALBUQUERQUE FRANCHISE ISSUES".)

Power Sales

       For the  years  1992  through  1996,  retail  KWh sales  have  grown at a
compound annual rate of approximately  4.6%. The Company's system and off-system
sales  (revenues and energy  consumption)  and system peak demands in summer and
winter are shown in the following tables:

<TABLE>
<CAPTION>

                                             ELECTRIC SALES BY MARKET
                                              (Thousands of dollars)


                                          1996       1995        1994       1993        1992
                                        --------   --------    --------   --------    --------
<S>                                     <C>        <C>         <C>        <C>         <C>     
Retail................................. $507,821   $485,568    $506,286   $471,099    $455,387
Firm-requirements wholesale............ $ 12,359   $ 20,282    $ 22,296   $ 18,468    $ 20,173
Other contracted off-system sales...... $ 86,689   $ 43,158+   $ 54,862+  $ 56,214+   $ 62,348
Economy energy sales................... $ 22,281   $ 17,509+   $ 19,663+  $ 25,213+   $ 40,770
</TABLE>

<TABLE>
<CAPTION>

                                             ELECTRIC SALES BY MARKET
                                                 (Megawatt hours)


                                       1996        1995        1994       1993        1992
                                     ---------   ---------   ---------  ---------   ---------

<S>                                  <C>         <C>         <C>        <C>         <C>      
Retail.............................  6,406,296   6,029,365   5,953,151  5,446,788   5,358,246
Firm-requirements wholesale........    282,534     447,629     489,182    342,137     322,177
Other contracted off-system
   sales...........................  2,928,321     594,367   1,403,480  1,450,966   1,198,250
Economy energy sales...............  1,364,365   1,548,517   1,469,271  1,582,113   2,164,991
-----------
</TABLE>

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

                               SYSTEM PEAK DEMAND*
                                   (Megawatts)


                        1996       1995       1994        1993        1992
                      ---------  ---------  ---------   ---------   --------

Summer...............   1,217      1,247      1,189       1,104      1,053
Winter...............   1,111      1,076      1,040         982        992
-----------

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


                                        2

<PAGE>



       During  1996 and 1995,  the  Company's  sales in the  off-system  markets
accounted  for  approximately  39.1% and 24.9%,  respectively,  of its total KWh
sales and  approximately  17.3% and 11.8% (before reduction of revenues from the
M-S-R  contingent  power  purchase  contract,  which were  accounted  for in the
determination of the provision for loss recorded in 1992), respectively,  of its
total revenues from energy sales.  During 1996, the Company's  major  off-system
sale contracts in effect were with SDG&E and APPA.

       The SDG&E  contract  requires  SDG&E to purchase  100 MW from the Company
through April 2001. On October 27, 1993,  SDG&E filed a complaint  with the FERC
against the Company, alleging that certain charges under the 1985 power purchase
agreement were unjust,  unreasonable and unduly discriminatory.  SDG&E requested
that the FERC investigate the rates charged under the agreement.  The relief, if
granted,  would reduce annual demand  charges paid by SDG&E by up to $11 million
per year from the date of the ruling  through April 2001,  and could result in a
refund  of up to  approximately  $14  million.  The  Company  responded  to  the
complaint  on  December  8, 1993,  and SDG&E and the  Company  filed  subsequent
pleadings.

       On March 18, 1996,  SDG&E filed a second  complaint with the FERC against
the Company,  again  alleging  that  charges  under the  agreement  were unjust,
unreasonable and unduly discriminatory.  SDG&E is again requesting that the FERC
investigate  charges under the  agreement.  The Company  responded to the second
complaint on April 26, 1996. The relief under the second complaint is similar to
that requested  under the first  complaint.  The refund period  requested in the
first complaint,  if granted,  would extend for a fifteen month period beginning
December 26, 1993. The refund period  requested under the second complaint would
extend for a fifteen  month  period  beginning  May 17,  1996.  The FERC has not
issued a ruling on either the first or second  complaint  and has not  indicated
when or if either  complaint will be considered.  The Company believes that both
complaints are without merit, and the Company intends to vigorously  resist both
complaints.

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

       The Company furnished  firm-requirements wholesale power in New Mexico in
1996 to the cities of Farmington  and Gallup,  and TNP. The Company is committed
to provide  service to the City of Gallup  through April 2003.  Average  monthly
demands under the City of Gallup contract for 1996 were approximately 26 MW. TNP
may adjust its annual demand  between 15 MW and 40 MW with one year's notice and
may terminate  service with two years' notice.  During 1996, TNP purchased 15 MW
and gave  notice that it will  continue to purchase 15 MW in 1997.  TNP has also
provided   notice  of  its  intent  to   terminate   service   after  1998.   No
firm-requirements  wholesale  customer  accounted  for  more  than  1.3%  of the
Company's  total  electric  operating  revenues for the year ended  December 31,
1996.

Sources of Power

       As of December 31, 1996, the total net generation  capacity of facilities
owned or leased by the Company was 1,506 MW.

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

                                        3

<PAGE>



       The  Company  anticipates  the  need for  approximately  100 to 200 MW of
additional  capacity in the 1998 through 2000  timeframe.  To meet this need, on
October 4, 1996, the Company  entered into a long-term  power purchase  contract
with the Cobisa-Person Limited Partnership ("PLP") to purchase approximately 100
MW of unit contingent  peaking capacity from a gas turbine generating unit for a
period of 20 years,  with an option to renew for an additional  five years.  The
gas turbine  generating unit will be constructed and operated by PLP and will be
located on the  Company's  retired  Person  Generating  Station  site located in
Albuquerque,  New Mexico.  The site for the generating unit was chosen, in part,
to provide needed  benefits to the Company's  constrained  transmission  system.
Depending on the regulatory  timing of NMPUC and FERC approvals and the securing
of necessary  permits,  construction  could start in August 1998 with commercial
operation beginning by May 1999. The operational date was chosen to satisfy both
resource and transmission  needs for the Company's  jurisdictional  load. During
October  1996,  the Company  filed a request for approval from the NMPUC and PLP
filed its  application for requisite state  commission  determinations  from the
NMPUC.  These two applications were consolidated by the NMPUC. In December 1996,
the NMPUC established a procedural  schedule for the consolidated  applications.
The  Company  and PLP have  requested  a final  order from the NMPUC by July 31,
1997.  Thereafter,  certain  actions from the FERC will be  required,  including
approval of PLP's status as an "exempt wholesale  generator" under Section 32 of
the Public Utility Holding Company Act.

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

Fuel and Water Supply

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

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


<C>                   <C>         <C>           <C>          <C>          <C>          <C>  
1992.............     69.2        161.7         30.5         59.8         0.3          239.7
1993.............     72.9        164.7         26.7         58.1         0.4          331.7
1994.............     72.0        162.9         27.8         58.5         0.2          321.7
1995.............     67.9        168.3         31.9         49.1         0.2          242.2
1996.............     68.9        159.3         30.4         49.7         0.7          238.2
</TABLE>



       The estimated  generation  mix for 1997 is 70.4% coal,  28.9% nuclear and
0.7% gas and oil. Due to locally  available  natural gas and oil  supplies,  the
utilization of locally available coal deposits and the generally abundant supply
of  nuclear  fuel,  the  Company  believes  that  adequate  sources  of fuel are
available for its generating stations.

Coal

       The coal requirements for SJGS are being supplied by SJCC, a wholly-owned
subsidiary of BHP, from certain  Federal,  state and private coal leases under a
Coal Sales  Agreement,  pursuant  to which SJCC will supply  processed  coal for
operation of SJGS until 2017. BHP  guaranteed the  obligations of SJCC under the
agreement,  which contemplates the delivery of approximately 114 million tons of
coal during its remaining term. Such amount would supply  substantially  all the
requirements of SJGS through approximately 2017. The primary sources of coal are
a mine adjacent to SJGS and a mine located  approximately  25 miles northeast of

                                        4

<PAGE>


SJGS in the La Plata area of northwestern New Mexico.  On September 1, 1995, the
parties  executed  an  amendment  to the Coal  Sales  Agreement.  The  amendment
provides for flexibility in coal sourcing.  Mining  operations are being shifted
over time to the La Plata Mine and several newly  introduced  sources  including
expanded La Plata reserves and a new lease contiguous with the existing San Juan
Mine.  While  the  savings  in fuel  cost  over  the  life of the  contract  are
continuing to be developed, it is currently estimated that the Company will save
approximately  $200  million of coal fuel costs  during the period 1997  through
2005.  The average cost of fuel,  including  ash  disposal and land  reclamation
costs,  for SJGS for the years 1994, 1995 and 1996 was 172.1 cents,  184.6 cents
and 167.0 cents,  respectively,  per million BTU ($33.62,  $35.75 and $32.18 per
ton, respectively). For other information related to coal requirements, see PART
II, ITEM 7. -- "MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- OTHER ISSUES FACING THE COMPANY -- COAL FUEL SUPPLY".

       Four  Corners is supplied  with coal under a fuel  agreement  between the
owners and BHP, under which BHP agreed to supply all the coal  requirements  for
the life of the plant. BHP holds a long-term coal mining lease, with options for
renewal,  from the Navajo  Nation and operates a surface  mine  adjacent to Four
Corners with the coal supply  expected to be  sufficient to supply the units for
their estimated useful lives.  The average cost of fuel,  including ash disposal
and land  reclamation  costs,  for the years 1994, 1995 and 1996 at Four Corners
was 125.8  cents,  113.4 cents and 125.9  cents,  respectively,  per million BTU
($22.03, $20.04 and $22.90 per ton, respectively).

Natural Gas

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

Nuclear Fuel

       The fuel cycle for PVNGS is comprised of the  following  stages:  (1) the
mining and  milling of uranium  ore to  produce  uranium  concentrates,  (2) the
conversion of uranium concentrates to uranium  hexafluoride,  (3) the enrichment
of  uranium  hexafluoride,  (4)  the  fabrication  of fuel  assemblies,  (5) the
utilization  of fuel  assemblies in reactors,  and (6) the storage of spent fuel
and the disposal  thereof.  The Company has made  arrangements  through contract
flexibilities  to obtain  quantities of uranium  concentrates  anticipated to be
sufficient to meet its share of uranium concentrates  requirements through 2000.
The  Company's  existing  contracts and options could be utilized to meet 75% of
such  requirements  in 2001 and 2002 and 40% of  requirements  from 2003 through
2007.  The  Company   understands  that  other  PVNGS   participants  have  made
arrangements  for the  uranium  concentrate  requirements  through  2000.  Their
existing  contracts and options could be utilized to meet 80% of requirements in
1998 and  1999  and 70% of  requirements  from  2000  through  2006.  The  PVNGS
participants,  including the Company,  contracted  for all  conversion  services
required through 2000. The PVNGS participants,  including the Company, also have
an  enrichment  services  contract  with USEC  which  obligates  USEC to furnish
enrichment  services  required for the operation of the three PVNGS units over a
term  expiring in September  2002,  with options to continue  through  September
2007.

       Existing spent fuel storage facilities at PVNGS have sufficient  capacity
with certain  modifications  to store all fuel  expected to be  discharged  from
normal  operation  of all of the PVNGS  units  through  at least the year  2005.
Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the "Waste
Act"),  DOE is  obligated  to accept and dispose of all spent  nuclear  fuel and
other  high-level  radioactive  wastes generated by all domestic power reactors.
The NRC,  pursuant to the Waste Act,  also  requires  operators of nuclear power
reactors to enter into spent fuel disposal  contracts  with DOE. APS, on its own
behalf  and on behalf of the other  PVNGS  participants,  executed  a spent fuel
disposal  contract  with DOE.  The Waste Act also  obligates  DOE to develop the

                                        5

<PAGE>


facilities  necessary for the permanent disposal of all spent fuel generated and
to be generated by domestic  power  reactors and to have the first such facility
in operation by 1998 under prescribed procedures.  The DOE has announced that it
is not likely to have an operating permanent repository facility before 2015. In
December 1996, DOE sent a letter to the contract holders including APS, advising
that DOE will not be able to fulfill its contractual obligations to accept spent
fuel by January 31, 1998. Because of the uncertainty as to when DOE will be able
to begin spent fuel  acceptance,  the DOE is inviting  the views of all contract
holders on how the delay can best be accommodated.  Under DOE's current criteria
for  shipping  allocation  rights,  PVNGS's  spent  fuel  shipments  to the  DOE
permanent disposal facility would begin in approximately 2025. In addition,  APS
believes that on-site  storage of spent fuel may be required  beyond the life of
the PVNGS Units.  APS  currently  believes that  alternative  interim spent fuel
storage methods are or will be available on-site or off-site for use by PVNGS to
allow its continued  operation  beyond 2002 and to safely store spent fuel until
DOE's scheduled shipments from PVNGS begin.

       Currently,  low-level radioactive waste is being shipped to the low level
waste  repository in Barnwell,  South Carolina.  In addition,  a low-level waste
facility  was built in 1995 at the PVNGS site.  This  facility is being used and
has the capability to store an amount of waste  equivalent to 10 years of normal
operation of PVNGS.

Water Supply

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

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

       Due to extensive lead times required to renew the water rights  contract,
the Company formally  initiated the renewal and extension process for requesting
rights   through  the  year  2025.   The  Company  is  actively   conducting  an
environmental assessment with the USBR and a biological assessment with the U.S.
Fish and Wildlife  Service.  These studies are required by the Federal  agencies
before the  existing  water  contract can be renewed.  In June 1996,  the Navajo
Nation  requested the USBR to withhold renewal of the USBR Contract due to water
shortages  of the Navajo  Indian  Irrigation  Project.  Other tribes in the Four
Corners  area have also  voiced  concern  to the USBR  about the  renewal by the
Company of the USBR Contract.  The Company is currently  involved in discussions
with the Navajo Nation to resolve  concerns  about renewal of the USBR Contract.
The Company is currently unable to predict the outcome of these matters but does
not anticipate any material adverse impact on the Company's  financial condition
or results of operation.

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


                                        6

<PAGE>



                             NATURAL GAS OPERATIONS
Service Area and Customers

       The Company's gas operating division,  PNMGS,  distributes natural gas to
most of the major communities in New Mexico, including Albuquerque and Santa Fe,
serving approximately 401,000 customers as of December 31, 1996. The Albuquerque
metropolitan  area accounts for approximately  54.8% of the total  sales-service
customers.   PNMGS  holds  long-term,   non-exclusive  franchises  with  varying
expiration dates in all incorporated communities requiring franchise agreements.
PNMGS'   customer   base   includes   both    "sales-service"    customers   and
"transportation-service" customers. Sales-service customers purchase natural gas
and receive  transportation  and  delivery  services  from PNMGS for which PNMGS
receives both cost-of-gas and  cost-of-service  revenues.  Cost-of-gas  revenues
collected from on-system  sales-service  customers are a recovery of the cost of
purchased gas in accordance with NMPUC rules and regulations and, in that sense,
do not  affect  the net  earnings  of the  Company.  Additionally,  PNMGS  makes
occasional  gas  sales to  off-system  customers.  Off-system  sales  deliveries
generally  occur  at  interstate  pipeline  interconnects  with  PNMGS'  system.
Transportation-service  customers,  who procure gas  independently  of PNMGS and
contract with PNMGS for transportation and related services,  provide PNMGS with
cost-of-service  revenues  only.  Transportation  services  are  provided to gas
marketers,  producers  and end users for  delivery to locations  throughout  the
PNMGS  distribution  systems,  as well as for delivery to interstate  pipelines.
PNMGS  provided  gas  transportation   deliveries  to  approximately  1,050  gas
marketers, producers and end users during 1996.

       For the twelve months ended  December 31, 1996,  PNMGS had  throughput of
approximately  100.1  million  decatherms,   including  sales  of  53.1  million
decatherms to both sales-service  customers and off-system customers.  No single
"sales-service"  customer  accounted for more than 4.4% of PNMGS' therm sales in
1996.  During 1996,  approximately  47.0% of the PNMGS' total gas throughput was
related  to  transportation  gas  deliveries.  PNMGS'  transportation  rates are
unbundled,  and transportation  customers only pay for the service they receive.
PNMGS'  total  operating  revenues for the year ended  December  31, 1996,  were
approximately $227.3 million.  Cost-of-gas revenues, received from sales-service
and  off-system  customers,  accounted for  approximately  45.8% of PNMGS' total
operating revenues.  Since a major portion of PNMGS' load is related to heating,
levels of therm sales are affected by the weather. Approximately 44.1% of PNMGS'
total therm sales in 1996 occurred in the months of January, February,  November
and December.

Natural Gas Supply

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

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


                                        7

<PAGE>

Natural Gas Sales

       The following table shows gas throughput by customer class**:

                                 GAS THROUGHPUT
                            (Millions of decatherms)


                               1996    1995     1994      1993      1992
                               ----    ----     ----      ----      ----

Residential................    27.4    25.9     27.1      28.0      27.1
Commercial.................     9.3     8.9      9.8      10.4      10.6
Industrial.................     2.1     0.7      0.8       0.9       0.7
Public authorities.........     2.6     2.4      2.5       2.5       4.2
Irrigation.................     1.4     1.2      1.3       1.3       1.1
Sales for resale...........     0.8     1.3      0.7       1.0       2.0
Unbilled...................     1.4    (1.8)    (0.3)     (0.6)      0.6
Transportation*............    47.1    69.8     90.2      91.8      73.6
Off-system sales...........     8.0     1.2       --        --       0.9
                              -----   -----    -----     -----     -----
                              100.1   109.6    132.1     135.3     120.8
                              =====   =====    =====     =====     =====
 


         The following table shows gas revenues by customer class**:

                                  GAS REVENUES
                             (Thousands of dollars)


                              1996       1995       1994       1993       1992
                            --------   --------   --------   --------   --------

Residential................ $129,911   $125,290   $149,439   $149,796   $125,313
Commercial.................   33,022     32,328     42,725     44,575     37,222
Industrial.................    5,179      1,873      2,905      3,369      2,063
Public authorities.........    8,018      7,939      9,969      9,694     12,313
Irrigation.................    3,252      3,077      4,061      4,418      2,713
Sales for resale...........    2,106      3,114      2,462      3,137      4,460
Unbilled...................    2,677     (2,430)       267     (1,573)       716
Transportation*............   17,215     22,172     27,592     26,729     18,753
Liquids....................    7,608     13,414     16,090     18,724     26,427
Processing fees............       --      5,180     10,638      9,761      6,795
Off-system sales...........   14,353      1,927         --          4      1,410
Other......................    3,960      4,101      3,362      2,453      4,974
                            --------   --------   --------   --------   --------
                            $227,301   $217,985   $269,510   $271,087   $243,159
                            ========   ========   ========   ========   ========


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

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



                                        8

<PAGE>

                              RATES AND REGULATION

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

Proposed Rulemaking

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

Fossil-Fueled Plant Decommissioning Costs

    The  Company's  six  owned or  partially  owned,  in  service  and  retired,
fossil-fueled   generating  stations  are  expected  to  incur  dismantling  and
reclamation   costs  as  they  are   decommissioned.   The  Company's  share  of
decommissioning  costs  for  all of its  fossil-fueled  generating  stations  is
projected to be  approximately  $145 million  stated in 1996 dollars,  including
approximately  $24.0 million (of which $13.7 million has already been  expended)
for Person, Prager and Santa Fe Stations which have been retired.

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

PGAC Continuation Filing

    Retail gas rate schedules  contain a PGAC which provides for timely recovery
of the cost of gas purchased for resale to its sales-service customers. On April
20, 1993, PNMGS filed its application  requesting  authority to continue the use
of its PGAC.  An item  included  in this  application  was a request  to recover
reservation  fees as a cost of gas through the PGAC.  On October 26,  1995,  the
Hearing Examiner issued a Recommended Decision allowing,  among other items, the
continued  use  of  the  PGAC  but  recommended  that  reservation  fees  not be
recoverable  through the PGAC.  PNMGS filed an  exception  to the portion of the
Recommended Decision relating to reservation fees. PNMGS is awaiting final NMPUC
approval.  On  February  13,  1997,  the NMPUC  denied  recovery  of these  same
reservation fees in the ongoing general rate proceeding (see PART II, ITEM 7. --
"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS  -- OTHER ISSUES  FACING THE COMPANY -- GAS RATE CASE").  On February
19,  1996,  the  NMPUC  issued  an order  requiring  PNMGS to file  supplemental
testimony regarding the volatile nature of its gas costs.

    In a related proceeding, the NMPUC on September 18, 1995, issued a Notice of
Inquiry seeking comments as to whether the NMPUC rule that governs the operation
of PGACs should be amended.  In November 1995, the Company joined with the NMPUC
Staff and the AG in recommending that such rule be substantially  rewritten.  In
October 1996, the NMPUC issued an order  establishing a working group  including
the NMPUC staff,  the AG and other New Mexico gas utilities to rewrite the rule.
Several  intervenors  including New Mexico industrial end users and national gas
marketing companies have been allowed to join the working group.

                                        9

<PAGE>



FPPCAC

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

Public Regulation Commission

    On November 5, 1996,  New Mexico  voters  approved an amendment to the state
constitution which will replace the present State Corporation Commission and the
NMPUC with a single,  elected five member regulatory  authority.  The new Public
Regulation Commission will be responsible for overseeing registration of all New
Mexico  corporations,  as  well  as  regulating  insurers,   transportation  and
telecommunications  companies,  oil and gas pipelines,  and gas, electric, water
and  sewer  public  utilities  operating  in the  state.  Implementing  the  new
regulatory  structure will require legislation to establish new voting districts
and revise the statutes which now govern the two existing regulatory bodies.

    For other rates and regulation issues facing the Company,  see PART II, ITEM
7. -- "MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS
OF OPERATIONS -- OVERVIEW -- OTHER ISSUES FACING THE COMPANY -- GAS RATE CASE --
NMPUC ORDER --THE COMPANY'S JANUARY 1997 PGAC FACTOR VARIANCE REQUEST;  ORDER TO
FILE NEW  RETAIL  ELECTRIC  and GAS RATE CASES and  TRANSMISSION  ISSUES -- FERC
Transmission Issues".

                              ENVIRONMENTAL FACTORS

    The Company, in common with other electric and gas utilities,  is subject to
stringent  regulations for protection of the  environment by state,  Federal and
tribal  authorities.  In addition,  PVNGS is subject to the  jurisdiction of the
NRC,  which has authority to issue permits and licenses and to regulate  nuclear
facilities  in order to  protect  the  health  and  safety  of the  public  from
radioactive  hazards  and  to  conduct  environmental  reviews  pursuant  to the
National   Environmental  Policy  Act.  The  Company  believes  that  it  is  in
compliance,  in all material respects,  with the environmental laws. The Company
does not currently expect that material  expenditures for environmental  control
facilities will be required to meet environmental  regulations in 1997 and 1998.
However,  in  order  to  achieve  operational  efficiencies,   the  Company  and
participants  decided  to begin a retrofit  environmental  project at SJGS which
will cost the SJGS  participants  approximately  $80  million  over the next two
years.



                                       10

<PAGE>

The Clean Air Act

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

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

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

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

    In a related matter,  the EPA proposed revisions to the National Ambient Air
Quality  Standards for ozone and particulate  matter.  The nature of and cost of
the impacts of these  proposed  revisions,  if any, to the Company's  operations
cannot be determined at this time; however,  the Company does not anticipate any
material  adverse  impact on the  Company's  financial  condition  or results of
operations.

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


                                       11

<PAGE>



ITEM 2.  PROPERTIES

    Substantially  all of the Company's utility plant is mortgaged to secure its
first mortgage bonds.

                                    ELECTRIC

    The  Company's  electric  generating  stations in  commercial  service as of
December 31, 1996, were as follows:

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

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

        *  For load and  resource  purposes,  the Company has notified the NMPUC
           that it recognizes the maximum  dependable  capacity rating for PVNGS
           to be 375 MW.
         -----------------

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

Fossil-Fueled Plants

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

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

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


                                       12

<PAGE>

Nuclear Plant

The Company's Interest in PVNGS

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

       During 1996,  PVNGS was operated at a capacity  factor of 89.1% which was
the highest yearly capacity  factor attained at the plant.  This capacity factor
was primarily attributable to record setting low refueling outage days.

Sale and Leaseback Transactions of PVNGS Units 1 and 2

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

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


                                       13

<PAGE>



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

PVNGS Decommissioning Funding

       The Company has a program for funding its share of decommissioning  costs
for PVNGS. Under this program,  the Company makes a series of annual deposits to
an  external  trust over the  estimated  useful life of each unit with the trust
funds being invested under a plan which allows the accumulation of funds largely
on a tax-deferred  basis through the use of life  insurance  policies on certain
current  and former  employees.  The results of the 1995  decommissioning  study
indicate that the  Company's  share of the PVNGS  decommissioning  costs will be
approximately  $147.5  million,  a decrease  from  $157.8  million  based on the
previous 1992 study (both amounts are stated in 1995 dollars).

       The Company  determined  that a supplemental  investment  program will be
needed  as a  result  of both  historical  cost  increases  and the  lower  than
anticipated  performance  of the existing  program.  On September 29, 1995,  the
Company filed a request for  permission  from the NMPUC to establish a qualified
tax advantaged  trust for PVNGS Units 1 and 2. Due to Internal  Revenue  Service
("IRS") regulations, PVNGS Unit 3 will remain in a non-qualified trust.

       Pursuant  to NMPUC  approval,  the  Company  funded an  additional  $12.5
million into the qualified and  non-qualified  funds. The estimated market value
of the trusts, including the current life insurance policies, at the end of 1996
was approximately $25.6 million.

PVNGS Liability and Insurance Matters

       The PVNGS  participants  have  insurance  for public  liability  payments
resulting  from  nuclear  energy  hazards to the full limit of  liability  under
Federal law. This potential  liability is covered by primary liability insurance
provided by commercial  insurance carriers in the amount of $200 million and the
balance  by an  industry-wide  retrospective  assessment  program.  The  maximum
assessment per reactor under the  retrospective  rating program for each nuclear
incident  occurring  at  any  nuclear  power  plant  in  the  United  States  is
approximately  $79.3  million,  subject to an annual  limit of $10  million  per
incident.  Based upon the Company's 10.2% interest in the three PVNGS units, the
Company's  maximum  potential  assessment  per  incident  for all three units is
approximately $24.3 million, with an annual payment limitation of $3 million per
incident.  The  insureds  under  this  liability  insurance  include  the  PVNGS
participants  and "any other  person or  organization  with respect to his legal
responsibility  for damage caused by the nuclear  energy  hazard".  If the funds
provided by this  retrospective  assessment  program  prove to be  insufficient,
Congress could impose revenue  raising  measures on the nuclear  industry to pay
claims.

                                       14

<PAGE>



       The PVNGS participants  maintain  "all-risk"  (including nuclear hazards)
insurance for nuclear  property damage to, and  decontamination  of, property at
PVNGS in the aggregate  amount of  approximately  $2.75 billion as of January 1,
1997,  a  substantial  portion of which must be  applied  to  stabilization  and
decontamination.  The Company has also secured insurance against portions of the
increased  cost of  generation  or  purchased  power and  business  interruption
resulting from certain accidental outages of any of the three PVNGS units if the
outage  exceeds  21  weeks.  The  Company  is a member  of two  industry  mutual
insurers.  These mutual insurers  provide both the "all-risk" and increased cost
of  generation  insurance  to  the  Company.  In the  event  of  adverse  losses
experienced  by these  insurers,  the Company is subject to an  assessment.  The
Company's  maximum  share of any  assessment is  approximately  $3.9 million per
year.

Other Electric Properties

       Four Corners and a portion of the facilities adjacent to SJGS are located
on land held under  easements  from the United States and also under leases from
the Navajo Nation,  the enforcement of which leases might require  Congressional
consent.  The risk with respect to the enforcement of these easements and leases
is not deemed by the Company to be material.  However,  the Company is dependent
in some measure upon the willingness and ability of the Navajo Nation to protect
these properties. (See PART II, ITEM 7. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL  CONDITION  AND RESULTS OF  OPERATIONS  -- OTHER ISSUES  FACING THE
COMPANY -- TRANSMISSION ISSUES -- Transmission Right-of-Way".)

       In July 1996, the Company and other SJGS participants signed an agreement
to convert the existing flue gas  desulfurization  (SO2  removal)  system at the
SJGS into a much simpler and cost  effective  limestone  system.  The conversion
project will cost the participants  approximately  $80 million over the next two
years.  The NMPUC has been notified of the conversion and expected cost savings.
The NMED  approval of a new air permit for the  limestone  system and a disposal
permit for the mine has been  requested.  Construction  is scheduled to begin in
April 1997 and expected to be completed by the end of 1998.

       As of December 31, 1996, the Company owned, jointly owned or leased 2,803
circuit  miles of  electric  transmission  lines,  5,333  miles of  distribution
overhead lines,  3,299 cable miles of underground  distribution lines (excluding
street lighting) and 226 substations.

                                   NATURAL GAS

       The natural gas property as of December 31, 1996  consisted  primarily of
natural gas storage,  transmission  and  distribution  systems.  Provisions  for
storage made by the Company  include  ownership and operation of an  underground
storage facility located near Albuquerque,  New Mexico. The transmission systems
consisted  of  approximately  1,277 miles of pipe with  appurtenant  compression
facilities.  The distribution systems consisted of approximately 10,098 miles of
pipe.

       On June 21, 1996, the Company entered into a purchase  agreement with the
DOE for the purchase of  approximately  130 miles of transmission  pipe for $3.1
million for the  transmission  of natural gas to Los Alamos and to certain other
communities in northern New Mexico. The purchase is subject to the DOE providing
right-of-way  satisfactory  to the Company.  The  acquisition by the Company was
approved by the NMPUC in December 1996.  Right-of-way  resolution is expected to
be completed in the first quarter of 1997.

                                OTHER INFORMATION

       The electric and gas transmission  and  distribution  lines are generally
located within easements and rights-of-way on public,  private and Indian lands.

                                       15

<PAGE>


The Company leases  interests in PVNGS Units 1 and 2 and related  property,  EIP
and  associated  equipment,  data  processing,  communication,  office and other
equipment,  office space,  utility poles (joint use),  vehicles and real estate.
The Company also owns and leases  service and office  facilities in  Albuquerque
and in other operating divisions throughout its service territory.

ITEM 3.  LEGAL PROCEEDINGS

                          PVNGS WATER SUPPLY LITIGATION

       The validity of the primary effluent contract under which water necessary
for the operation of the PVNGS units is obtained was  challenged in a suit filed
in  January  1982  by  the  Salt  River  Pima-Maricopa   Indian  Community  (the
"Community") against the Department of the Interior,  the Federal agency alleged
to have  jurisdiction  over the use of the  effluent.  The  PVNGS  participants,
including the Company,  were named as additional  defendants in the  proceeding,
which is before the United  States  District  Court for the District of Arizona.
The portion of the action  challenging  the  effluent  contract  has been stayed
until the  Community  litigates  certain  claims in the same action  against the
Department of the Interior and other  defendants.  On October 21, 1988,  Federal
legislation was enacted conforming to the requirements of a proposed  settlement
that would  terminate  this case without  affecting  the validity of the primary
effluent contract. However, certain contingencies are to be performed before the
settlement is finalized and the suit is dismissed. One of these contingencies is
the approval of the  settlement  by the court in the Lower Gila River  Watershed
litigation referred to below.

       The  Company  understands  that a  summons  served  on APS in early  1986
required  all water  claimants  in the Lower Gila River  Watershed of Arizona to
assert any claims to water on or before  January 20, 1987, in an action  pending
in the Maricopa County  Superior  Court.  PVNGS is located within the geographic
area subject to the summons and the rights of the PVNGS  participants to the use
of  groundwater  and effluent at PVNGS are  potentially at issue in this action.
APS,  as the PVNGS  project  manager,  filed  claims  that  dispute  the court's
jurisdiction  over  the  PVNGS   participants'   groundwater  rights  and  their
contractual  rights to  effluent  relating  to PVNGS  and,  alternatively,  seek
confirmation of such rights. No trial date has been set in this matter.

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

                           SAN JUAN RIVER ADJUDICATION

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

                              PVNGS PROPERTY TAXES

       On June 29, 1990, an Arizona  state tax law was enacted,  effective as of
December 31, 1989, which adversely  impacted the Company's earnings in the years
of 1990 through 1995 by approximately $5 million per year,  before income taxes.

                                       16

<PAGE>


On December 20, 1990,  the PVNGS  participants,  including the Company,  filed a
lawsuit in the Arizona Tax Court,  a division of the  Maricopa  County  Superior
Court,  against the Arizona Department of Revenue, the Treasurer of the State of
Arizona,  and various  Arizona  counties,  claiming,  among other  things,  that
portions of the new tax law are  unconstitutional.  In December  1992, the court
granted  summary  judgment to the taxing  authorities,  holding  that the law is
constitutional.  The PVNGS  participants  appealed  this decision to the Arizona
Court of Appeals.  On November 21, 1995,  the Arizona  Court of Appeals ruled in
favor of the PVNGS participants. In April 1996, the participants and the Arizona
Department  of Revenue  reached an agreement  to settle the pending  litigation.
Pursuant to the tentative settlement, the Company will relinquish its claims for
relief with respect to prior years and the  defendants  will not  challenge  the
Court of Appeals decision concerning  prospective relief (for tax years 1996 and
thereafter).

       On July 18, 1996,  the Arizona  legislature  passed,  and the Governor of
Arizona  subsequently  signed,  a $200  million  property  tax  reduction  which
codifies  the terms of the  settlement.  Final  documents  are  currently  being
prepared for the  signatures  of the parties to this  action.  The result of the
legislation  and the  settlement  will be a reduction in the  Company's  Arizona
property  tax of  approximately  $4.0  million  annually  beginning  in 1996 and
extending at least three years, barring any subsequent changes in the applicable
tax law.

                                OTHER PROCEEDINGS

Federal Deposit Insurance Corporation ("FDIC") Litigation, formerly Resolution 
  Trust Corporation ("RTC") Litigation ("MDL-995")

       On April 16, 1993, the Company and certain  current and former  employees
of the Company or Meadows ("BCD  parties") were named as defendants in an action
filed in the United  States  District  Court for the  District of Arizona by the
RTC, as receiver for Western Savings and Loan Association ("Western").  Three of
the individuals sued by the RTC have indemnity  agreements with the Company. The
claims relate to alleged actions of the Company's or Meadows'  employees in 1987
in  connection  with a loan  procured by BCD,  whose  general  partners  include
Meadows,  from Western and the purchase by that partnership of property owned by
Western.  The RTC apparently claims that the Company's  liability stems from the
actions of a former  employee who  allegedly  acted on behalf of the Company for
the  Company's  benefit.  The RTC is claiming in excess of $40 million in actual
damages  from  the  BCD/Western   transactions  and  is  also  claiming  damages
substantially  exceeding that amount on Arizona  racketeering,  civil conspiracy
and aiding and abetting theories . These allegations  involve claims against the
Company  for  damages  to  Western  caused by other  defendants  and from  other
transactions  to which  BCD was not a party.  The  Company  is sued  only on the
Arizona  racketeering  claims.  The RTC claims  that  damages  under the Arizona
racketeering  statute  would  be  trebled  under  applicable  Arizona  law.  The
prevailing parties on the Arizona  racketeering claims could seek their fees and
costs from the parties who do not prevail.

       On  December  31,  1995,  the RTC  ceased  to exist  and its  duties  and
responsibilities were transferred to the FDIC. The FDIC has been substituted for
the RTC as plaintiff in MDL-995.


                                       17

<PAGE>


       On April 11,  1996,  representatives  of the BCD parties and the FDIC met
with a mediator  to  continue  settlement  discussions.  The  mediation  session
resulted in an  agreement  to settle the case for  approximately  $5.8  million,
approximately  $3.1  million  of  which  would  be paid by the  Company  and the
remainder to be paid by insurance covering the BCD parties. Settlement documents
are being drafted for submission to the Court for approval.  After consideration
of  established  reserves,  the Company  believes that there will be no material
adverse effect on the Company's financial condition or results of operations.

       The Company  continues to believe that all of the claims made by the FDIC
in this case are without  merit but, for  business  reasons,  believes  that the
settlement is in the best interest of the Company.

Republic Savings Bank ("RSB") Litigation

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

       Meadows  owns  directly a 100%  ownership  interest in  Republic  Holding
Company ("RHC"),  and RSB was a wholly-owned  subsidiary of RHC. Meadows and RHC
have pending before the United States Court of Federal  Claims,  a lawsuit filed
on April 13, 1992, alleging similar  contractual  arrangements to those at issue
in the Winstar case. The Federal  government  has filed a counterclaim  alleging
breach by RHC of its  obligation  to  maintain  RSB's net worth and has moved to
dismiss Meadows' claim for lack of standing.

       RSB was the thrift  organized upon the  acquisition  of Citizens  Federal
Savings and Loan Association and Fireside Federal Savings and Loan  Association,
both Illinois corporations,  in 1985. The plaintiffs invested $17 million of new
capital in the failing  institutions.  The Federal regulators expressly promised
that   approximately  $23  million  of  supervisory   goodwill  created  by  the
transaction  could be accounted for as an intangible  asset to be counted toward
regulatory capital.  Additionally, the regulators promised to allow a $3 million
cash  contribution by the Federal  Savings and Loan Insurance  Corporation to be
recorded as a direct credit to regulatory  capital.  On June 5, 1992, the Office
of Thrift  Supervision  placed  RSB in  receivership  and  appointed  the RTC as
receiver.  On November 6, 1992, RTC sold RSB as a going concern for a premium of
nearly $1  million,  with  approximately  $215.5  million  in assets  and $203.9
million in liabilities.

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

Four Corners

       The  Company  owns a 13%  ownership  interest  in  Units  4 and 5 of Four
Corners  located  in  northwestern  New  Mexico on land  leased  from the Navajo
Nation.  In July 1995, the Navajo Nation enacted the Navajo Nation Air Pollution
Prevention  and Control Act, the Navajo Nation Safe  Drinking  Water Act and the
Navajo Nation Pesticide Act (collectively,  the "Acts"). By letter dated October
12, 1995, the Four Corners participants requested the United States Secretary of


                                       18

<PAGE>


the Interior (the  "Secretary")  to resolve their dispute with the Navajo Nation
regarding  whether or not the Acts apply to operation of Four Corners.  The Four
Corners  participants  subsequently filed a lawsuit in the District Court of the
Navajo Nation (the "Court"), Window Rock District,  seeking, among other things,
a declaratory  judgment that: (i) the Four Corners leases and Federal  easements
preclude the application of the Acts to the operation of Four Corners;  and (ii)
the Navajo Nation and its agencies and courts lack adjudicatory  jurisdiction to
determine the enforceability of the Acts as applied to Four Corners.  On October
18,  1995,  the  Navajo  Nation  and the Four  Corners  participants  agreed  to
indefinitely  stay the  proceedings  referenced  above so that the  parties  may
attempt to resolve the dispute without  litigation,  and have requested that the
Secretary and the Court stay these proceedings. The Company is unable to predict
the outcome of this matter but does not anticipate  any material  adverse impact
on the Company's financial condition or results of operation.

For  a  discussion  of  other  legal  proceedings,  see  PART  II,  ITEM  7.  --
"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS  -- OTHER ISSUES  FACING THE COMPANY -- GAS RATE CASE and NMPUC ORDER
-- THE COMPANY'S JANUARY 1997 PGAC FACTOR VARIANCE REQUEST; ORDER TO FILE RETAIL
ELECTRIC AND GAS RATE CASES".

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

       None.


                                       19

<PAGE>



SUPPLEMENTAL ITEM.  EXECUTIVE OFFICERS OF THE COMPANY

       Executive officers, their ages, offices held with the Company in the past
five years and initial effective dates thereof,  were as follows on December 31,
1996, except as otherwise noted:
<TABLE>
<CAPTION>

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

<S>                     <C><C>                                          <C>    
B. F. Montoya........   61 President and Chief Executive Officer          August 1, 1993

M. P. Bourque*.......   49 Senior Vice President, Energy Services       December 6, 1994
                           Senior Vice President, Marketing and 
                             Customer Services                          December 7, 1993
                           Senior Vice President, Marketing and            March 2, 1993
                              Energy Management
                           Senior Vice President, Gas Management           June 19, 1990
                              Services

M. D. Christensen....   48 Senior Vice President, Customer Service       January 9, 1996
                              and Public Affairs
                           Vice President, Public Affairs               December 7, 1993
                           Vice President, Communications                  July 22, 1991

R. J. Flynn..........   54 Senior Vice President, Electric Services     December 1, 1994

M. H. Maerki.........   56 Senior Vice President and Chief Financial    December 7, 1993
                              Officer
                           Senior Vice President, Administration           March 2, 1993
                              and Chief Financial Officer
                           Senior Vice President and Chief Financial        June 1, 1988
                              Officer

P. T. Ortiz..........   46 Senior Vice President, General Counsel       December 6, 1994
                              and Secretary
                           Senior Vice President, Regulatory Policy,    December 7, 1993
                              General Counsel and Secretary
                           Senior Vice President, Public Policy,           March 2, 1993
                              General Counsel and Secretary
                           Senior Vice President, General Counsel       February 4, 1992
                              and Corporate Secretary
                           Senior Vice President and General            October 14, 1991
                              Counsel

W. J. Real...........   48 Senior Vice President, Gas Services          December 6, 1994
                           Senior Vice President, Utility Operations    December 7, 1993
                           Senior Vice President, Customer Service         March 2, 1993
                              and Operations
                           Executive Vice President, Gas Operations        June 19, 1990

R. B. Ridgeway.......   38 Senior Vice President, Energy Services      December 14, 1996
                           Vice President, Corporate Planning            August 10, 1996
                           Director, Corporate Strategy                     July 2, 1994
                           Consultant, Competitive Analysis              October 5, 1992
                           Director, Strategic Planning                 February 1, 1991
                           Manager, Gas Supply Planning                     June 4, 1990


</TABLE>

                                       20

<PAGE>
<TABLE>
<CAPTION>

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

<S>                     <C><C>                                          <C>    
J. E. Sterba............41 Senior Vice President, Bulk Power             December 6, 1994
                              Services
                           Senior Vice President, Corporate              December 7, 1993
                              Development
                           Senior Vice President, Asset                     April 6, 1993
                              Restructuring
                           Senior Vice President, Retail Electric and    January 29, 1991
                              Water Services
                           Senior Vice President, Business              September 1, 1988
                              Development Group, Electric and Water
                              Operations

J. A. Zanotti...........56 Senior Vice President, Human Resources         January 9, 1996
                           Vice President, Human Resources                  March 2, 1993
                           Senior Vice President, Human Resources           July 26, 1990
                              and Communications
</TABLE>

-----------

       *M. P. Bourque resigned as an executive officer of the Company effective
        December 24, 1996.

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

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


                                       21

<PAGE>



                                     PART II

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

       The  Company's  common  stock is traded on the New York  Stock  Exchange.
Ranges of sales  prices of the  Company's  common  stock,  reported as composite
transactions  (Symbol:  PNM),  and  dividends  paid on common stock for 1996 and
1995, by quarters, are as follows:


Quarter                                          Range of
Ended                                          Sales Prices             
-------------------                      ------------------------    Dividends
                                            High          Low        per Share
                                         ---------     ----------   -----------
1996:
   December 31..........................    19 7/8     18 1/8          $0.12
   September 30.........................    20 3/8     19              $0.12
   June 30..............................    20 1/2     17 1/4          $0.12
   March 31.............................    18 3/4     17 3/8          $0.00
                                                                       -----
      Fiscal Year.......................    20 1/2     17 1/4          $0.36
                                                                       =====

1995:
   December 31..........................    18 1/4     16 1/8          $0.00
   September 30.........................    16 3/8     13 3/4          $0.00
   June 30..............................    14 1/4     12 3/8          $0.00
   March 31.............................    13 7/8     12 1/4          $0.00
                                                                       -----
      Fiscal Year.......................    18 1/4     12 1/4          $0.00
                                                                       =====

       On January 31, 1997, there were 18,835 holders of record of the Company's
common stock.

       On December 31, 1996, the Company's Board of Directors ("Board") declared
a quarterly cash dividend of 12 cents per share of common stock payable February
21, 1997 to  shareholders  of record as of  February  3, 1997.  This will be the
fourth quarterly dividend to the Company's common shareholders since the Company
reinstated its common stock dividend in May 1996.

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

Cumulative Preferred Stock

       While isolated  sales of the Company's  cumulative  preferred  stock have
occurred in the past,  the Company is not aware of any active trading market for
its  cumulative  preferred  stock.  Quarterly  cash  dividends were paid on each
series of the Company's  cumulative preferred stock at their stated rates during
1996 and 1995.



                                       22

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
                                            1996          1995          1994          1993           1992
                                         ----------    ----------    ----------    ----------     ----------
                                                  (In thousands except per share amounts and ratios)
                                           
<S>                                      <C>           <C>           <C>           <C>            <C>            
Total Operating Revenues................ $  883,386    $  808,465    $  904,711    $  873,878     $  851,953
Net Earnings (Loss)..................... $   72,580    $   75,562    $   80,318    $  (61,486)*   $ (104,255)+
Earnings (Loss) per Common                                                                               
   Share................................ $     1.72    $     1.72    $     1.77    $    (1.64)*   $    (2.67)+
Total Assets............................ $2,230,314    $2,035,669    $2,203,265    $2,212,189     $2,375,582
Preferred Stock with Mandatory
   Redemption Requirements..............         --            --    $   17,975    $   24,386     $   25,700
Long-Term Debt, less Current
   Maturities........................... $  713,919    $  728,843    $  752,063    $  957,622     $  911,252
Common Stock Data:
   Market price per common
      share at year end................. $   19.625    $   17.625    $    13.00    $    11.25     $   12.375
   Book value per common share
      at year end....................... $    18.06    $    16.82    $    15.11    $    13.29     $    15.00
   Average number of common
      shares outstanding................     41,774        41,774        41,774        41,774         41,774
   Cash dividend declared per
      common share...................... $     0.48            --            --            --             --
Return on Average Common
   Equity...............................        9.8%         10.7%         12.4%        (10.7)%        (15.0)%
Capitalization:
   Common stock equity..................       50.9%         48.6%         43.2%         34.8%          38.6%
   Preferred stock:
      Without mandatory
        redemption requirements.........        0.9           0.9           4.1           3.7            3.6
      With mandatory redemption
        requirements....................         --            --           1.2           1.5            1.6
   Long-term debt, less current
      maturities........................       48.2          50.5          51.5            60           56.2
                                         -----------   -----------   -----------    ----------    -----------
                                                100%          100%          100%          100%           100%
                                         ===========   ===========   ===========    ==========    ===========
</TABLE>

-----------

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

+    Includes the write-down of the Company's investment in PVNGS Unit 3 and the
     provision  for loss  associated  with the M-S-R  power  purchase  contract,
     aggregating $126.2 million, net of taxes ($3.02 per share).

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

                                       23

<PAGE>



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

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

OVERVIEW

Restructuring the Electric Utility Industry

     The electric  utility  industry  continues to be in a period of fundamental
change intended to promote a competitive environment in the retail and wholesale
energy  marketplaces.  Legislators  and regulators at both the state and Federal
levels  continue to  consider  how to promote  competition  among  suppliers  of
electricity and how to provide customers with choice among suppliers.

     At the state level, the Integrated Water and Resource Planning Committee of
the New Mexico State  Legislature  (the "IWRPC") held hearings during 1996 which
focused on the issues related to restructuring  of the electric  industry in New
Mexico.  The Company  participated  extensively  in these  hearings  and, at the
invitation of the IWRPC,  submitted  draft  legislation to be used as a starting
point for the  various  parties to  consider  regarding  the  electric  industry
restructuring.  The draft legislation would allow an electric utility to recover
all of its  prudently  incurred  stranded  costs,  and also  provide  a path for
business  flexibility.  The AG testified that retail  competition  should not be
introduced at this time but, if it is, there should be independent  ownership of
generation,  transmission  and  distribution  facilities,  due to  market  power
concerns.  At its  November  1996  meeting,  the IWRPC  voted  not to  recommend
restructuring   legislation  in  the  1997  session  but  instead  to  recommend
continuation of the IWRPC and a study of the tax effects of  restructuring.  The
IWRPC  also  sent a letter  to the  NMPUC  calling  for no  restructuring  to be
undertaken by the NMPUC without legislative approval. The New Mexico legislative
session is  currently  in progress  and the  Company  will  closely  monitor any
legislative action regarding restructuring of the electric utility industry.

     During  1996,  the NMPUC  conducted  a series of  workshop  meetings in its
"Investigation  of Restructuring  of Regulation of the Electric  Industry in New
Mexico". The Company actively  participated in these workshops and presented the
Company's  position on various  matters related to industry  restructuring.  The
Company provided data and analysis in the areas of market structure, measurement
and collection of stranded  costs,  market power,  potential  changes in Company
structure and issues related to the transition  phase.  In conjunction  with the
workshop  meetings,  the NMPUC ordered all utilities  under its  jurisdiction to
file their  estimates  of  stranded  costs,  absent any  recovery  method  being
adopted,  based on the Texas Public Utility Commission Economic Cost Over Market
("ECOM") model. The Company,  in its filing,  presented two  methodologies:  (i)
using the ECOM  model,  the  Company's  stranded  cost  estimates  run from $657
million  for a 1998 full  retail  access  case to $119  million  for a 2002 full
retail  access  case,  and  (ii)  using a  second  methodology,  based  upon the
difference  between the Company's costs of existing  generation and the costs of
new combined  cycle and  combustion  turbine  units to serve the same load,  the
Company's  costs  above  the  level  of new gas  units,  in 1997  dollars,  were
estimated at $748 million for a 1998 full retail access case to $327 million for
a 2002 full retail access case.  The Company  advised the NMPUC that the results
of the ECOM  model  are  highly  sensitive  to  various  assumptions,  primarily
projections  of  future  gas  prices.  To date,  the  NMPUC has not acted on the
requested information.

     At the  Federal  level,  two  orders  and a Notice of  Proposed  Rulemaking
("NOPR")  related to the provision of transmission  service by public  utilities
were issued in 1996. FERC Order 888,  effective July 9, 1996,  addresses,  among
other things,  numerous subjects related to the terms and conditions under which
public  utilities are required to provide access to  transmission  services,  to
purchase  transmission  service  on  comparable  terms for  their own  wholesale


                                       24

<PAGE>

marketing  activities,  to  recover  stranded  costs  from  departing  wholesale
customers  and to conform  existing  power pool  agreements  to the open  access
provision of the order. All public utilities were required to have filed, by the
effective  date, an Open Access  Transmission  Tariff based on the provisions of
the  order.  In  July  1996,  the  Company  filed  its  compliance  Open  Access
Transmission Tariff under Order 888.

     FERC Order 889,  effective  January 3, 1997,  requires public  utilities to
install and operate an Open Access Same-time  Information System and comply with
certain  standards of conduct among  employees in  transmission  operations  and
wholesale power marketing,  designed to prevent employees of a public utility or
its  affiliates  engaged  in  wholesale   marketing   functions  from  obtaining
preferential  access to  transmission-related  information  or from  engaging in
unduly  discriminatory  business  practices  regarding  access  to  transmission
service.  On January 2, 1997,  the Company  filed with the FERC its Standards of
Conduct report in compliance with provisions of Order 889.

     A  NOPR  relating  to  transmission   capacity   reservation  proposed  the
elimination of the provision of separate "network" and "point-to-point"  service
as provided in Order 888,  providing  all open access  service  under a capacity
reservation  tariff.  Industry comments were submitted to the FERC on October 1,
1996. The FERC has provided no indication of any future activity on the proposed
rulemaking. The Company continues to assess the impact of both the rules and the
potential impact of the proposed rulemaking.

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

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

Competitive Strategy

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

     In pursuing new business  opportunities,  the Company is focusing on energy
and utility related  activities  under its Energy Services  Business Unit. These
activities will provide energy marketing and energy management  services focused
on residential and small customers, management services for water and wastewater
systems  and utility  related  management  and  operation  services  for Federal
installations  and other large  commercial  institutions  in the Southwest.  The
Energy Services Business Unit is also pursuing business opportunities in Mexico.

     In June  1995,  the  Company  filed  an  application  with  the  NMPUC  for
authorization for the creation of three wholly-owned non-utility subsidiaries as
part of the Energy Services Business Unit. The Company sought approval to invest
a maximum of $50 million in the three  subsidiaries  over time and to enter into
reciprocal  loan agreements for up to $30 million with these  subsidiaries.  The
NMPUC staff filed a motion on September 20, 1995 to have the case dismissed.  On
January 31, 1996, the hearing examiner assigned to the case recommended that the
NMPUC deny the Staff's motion. In March 1996, the NMPUC issued an order adopting
the hearing examiner's recommendation and denied NMPUC staff's motion to dismiss
the case. On July 8, 1996, hearings in the case began and were concluded on July


                                       25

<PAGE>


19, 1996.  The NMPUC staff  alleged that certain  activities  undertaken  by the
Company,  that would be transferred to the  subsidiaries if approval is granted,
required  prior  approval  thus leaving the Company  subject to  sanctions.  The
Company currently cannot predict the ultimate outcome of this proceeding but has
and intends to continue to vigorously  defend against any allegation  that it is
in violation of any legal requirements.

     In December 1996, the Company filed an  application  for certain  variances
and  authorization  to  invest  up  to  $7.5  million  of  equity  capital  in a
partially-owned  subsidiary  company  to be  incorporated  under the laws of the
United Mexican States,  and to provide  guarantees,  as necessary,  of up to $10
million that may be required in  connection  with the forming of a subsidiary in
Mexico.  The Company  jointly  with  Triturados  Basalticos  y  Derivados,  S.A.
("Tribasa"),  one of the largest construction  companies in Mexico,  submitted a
bid to develop, design,  construct,  manage and operate natural gas distribution
systems in the cities of Chihuahua, Cuauhtemoc-Anahuac and Delicias in the State
of Chihuahua,  Mexico. If the Company and Tribasa,  and possibly a third entity,
were to be awarded the permit jointly, these companies would be required,  under
Mexican law, to form and capitalize a Mexican  corporation to comply with permit
requirements.  In such event,  the Company would serve as technical  participant
and would be  required  to  maintain a certain  equity  ownership  interest.  On
January 17, 1997, the NMPUC gave the Company conditional approval to proceed. On
February 3, 1997, the Company made its compliance filing pursuant to the NMPUC's
conditional approval.  The Company is currently unable to predict the outcome of
the bid.

     The Company  believes  that  successful  operation  of the Energy  Services
Business Unit  activities  will better  position the Company in an  increasingly
competitive utility environment.  The Company is currently awaiting NMPUC action
on the formation of the energy and non-utility  related  subsidiaries  under the
Company's general diversification plan discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Capital Requirements and Liquidity

     Total capital  requirements  include  construction  expenditures as well as
other major  capital  requirements,  including  retirement  of  long-term  debt,
long-term debt sinking funds and cash dividend  requirements for both common and
preferred  stock.  The  main  focus of the  Company's  construction  program  is
upgrading  generating  systems,  upgrading  and  expanding  the electric and gas
transmission and distribution systems and purchasing nuclear fuel. Total capital
requirements  and  construction  expenditures  for 1996 were $321.0  million and
$103.1 million,  respectively.  Projections for total capital  requirements  and
construction  expenditures  for years  1997-2001  are $914.7  million and $563.7
million,  respectively.  These estimates are under continuing review and subject
to on-going  adjustment.  In conjunction with upgrading  generating systems, the
Company has begun a retrofit  environmental  project at the SJGS which will cost
the Company approximately $40 million during the next two years.

     The  Company's  construction  expenditures  for 1996 were  entirely  funded
through cash generated from operations.  The Company currently  anticipates that
internal cash generation will be sufficient to meet capital  requirements during
1997 through  2001.  To cover the  difference  in the amounts and timing of cash
generation  and cash  requirements,  the Company  intends to utilize  short-term
borrowings under its liquidity arrangements.

     In September 1996, the NMPUC granted the Company's request for the purchase
of up to $300 million of PVNGS LOBs and Eastern  Interconnection Project secured
facility bonds over the next three years. In October 1996, the Company purchased
$200 million of PVNGS LOBs at a premium with accrued interest. In purchasing the
LOBs,   the  Company   borrowed  $100  million   against  the  credit   facility
collateralized by the Company's utility customer accounts receivable and certain
amounts  being  recovered  from gas  customers  relating to certain gas contract
settlements  and utilized $118 million of its cash.  Although the PVNGS LOBs are


                                       26

<PAGE>


off-balance  sheet  debt,  these  outstanding  bonds have been  included  in the
calculation  of the Company's  debt to  capitalization  ratio as well as various
financial coverage ratios by the major rating agencies. The purchase of the LOBS
will not only improve these ratios,  but will also increase earnings in the form
of interest  income.  At the end of 1996,  the Company had $20.3 million in cash
and temporary investments and $100.4 million in short-term borrowings.

     In addition,  at year-end 1996 the Company had $110.6  million of available
liquidity  arrangements,  consisting of $100 million from the  revolving  credit
facility  ("Facility") and $10.6 million in local lines of credit . The Facility
will expire in June 1998 and includes a maximum  allowed debt to  capitalization
ratio of 70%. As of December  31,  1996,  such ratio was 61.7 %,  including  the
PVNGS and EIP leases as debt. The Company  expects to renew the Facility  before
its expiration date.

Financing Capability and Dividend Restrictions

     The Company's  ability to finance its construction  program at a reasonable
cost and to  provide  for other  capital  needs is  largely  dependent  upon its
ability to earn a fair return on equity, results of operations,  credit ratings,
regulatory approvals and financial market conditions.  Financing  flexibility is
enhanced by  providing a high  percentage  of total  capital  requirements  from
internal  sources  and having the  ability,  if  necessary,  to issue  long-term
securities,  and to obtain  short-term  credit.  In September  1996,  Standard &
Poor's Corp. and Moody's Investors  Service,  Inc. upgraded the Company's credit
ratings to one level below  investment  grade.  Duff & Phelps  Credit Rating Co.
maintains an investment grade rating for the Company's first mortgage bonds, but
continues to rate all other  securities of the Company below  investment  grade.
The Company may face  limited  credit  markets and higher  financing  costs as a
result of its securities being rated below investment grade.

     One impact of the Company's current ratings, together with covenants in the
Company's  PVNGS  Units  1 and 2  lease  agreements  (see  PART  I,  ITEM  2. --
"PROPERTIES  -- Nuclear  Plant"),  is to limit the  Company's  ability,  without
consent of the owner participants and bondholders in the lease transactions, (i)
to enter into any merger or  consolidation,  or (ii) except in  connection  with
normal dividend policy, to convey,  transfer,  lease or dividend more than 5% of
its assets in any single  transaction  or series of  related  transactions.  The
Facility  and a  reimbursement  agreement  associated  with the letter of credit
supporting  $37.3  million of pollution  control  revenue  bonds impose  similar
restrictions irrespective of credit ratings.

     The issuance of first  mortgage bonds by the Company is subject to earnings
and bondable property provisions of the Company's first mortgage indenture.  The
Company also has the capability under the mortgage indenture,  without regard to
the earnings test but subject to other conditions, to issue first mortgage bonds
on the basis of certain previously retired bonds. At December 31, 1996, based on
the earnings test, the Company could have issued  approximately  $254 million of
additional  first  mortgage  bonds,  assuming  an annual  interest  rate of 8.65
percent.  The Company's  restated articles of incorporation  limit the amount of
preferred stock which may be issued. Assuming a preferred stock dividend rate of
9.40 percent,  the Company could have issued $379 million of preferred  stock as
of year-end.

     In  December  1996,  the  Company  refinanced  $23  million  1984  Series A
Pollution  Control Revenue Bonds,  $77.045 million 1977 Series Pollution Control
Revenue Bonds and $65 million 1978 Series A Pollution Control Revenue Bonds with
fixed rates of 6.3%, 6.3% and 5.7%,  respectively.  The maturity dates for these
new bonds are December 2026, December 2016 and December 2016,  respectively.  In
addition,  the Company is currently in the process of  refinancing an additional
$190 million of  pollution  control  revenue  bonds.  On January 21,  1997,  the
Company  received NMPUC approval for the refinancing of such bonds,  and closing
is  anticipated  for late February  1997.  The remaining $60 million of the 1978
Series A Pollution  Control  Revenue Bonds and $40 million of the Company's 1979
Series A Pollution  Control  Revenue  Bonds will be  refinanced as variable rate
bonds in the weekly mode. The initial  variable rate will be determined prior to
closing.  The  remaining  $90  million of the 1979  Series A  Pollution  Control
Revenue Bonds will be refinanced  with a fixed rate of 6.375%.  The total of the
$190 million bonds will mature in April 2022.

                                       27

<PAGE>



     The Company  currently has no requirements  for long-term  financing during
the period of 1997 through 2001. However,  during this period, the Company could
enter into  long-term  financing  for the purpose of  strengthening  its balance
sheet and  reducing its cost of capital.  The Company  continues to evaluate its
investment and debt  retirement  options to optimize its financing  strategy and
earnings potential.

     The Company  resumed the payment of cash dividends on common stock starting
in May 1996 and continued a quarterly cash dividend of 12 cents per common share
during 1996.  The Company's  board of directors  reviews the Company's  dividend
policy on a continuing  basis.  The declaration of common dividends is dependent
upon a number of factors  including  earnings  and  financial  condition  of the
Company and market conditions.

Capital Structure

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

                                                   1996      1995     1994
                                                   -----     -----    -----

Common Equity.....................................   50.4%    48.6%    39.2%
Preferred Stock...................................    0.9      0.9      4.8
Long-term Debt (including current maturities) ....   48.7     50.5     56.0
                                                   ------    ------   ------
   Total Capitalization*..........................  100.0%   100.0%   100.0%
                                                    =====    =====    ===== 


-----------

     *   Total  capitalization  does  not  include  the  present  value  of  the
         Company's lease obligations for PVNGS Units 1 and 2 and EIP as debt but
         does  include,  for  1994,  the debt  associated  with  the  beneficial
         interests  in  certain  PVNGS  Units 1 and 2  leases  purchased  by the
         Company, which were retired in March 1995.

                              RESULTS OF OPERATIONS

     Earnings  per share of common  stock were $1.72,  $1.72 and $1.77 for 1996,
1995 and 1994,  respectively.  The sales of the gathering and processing  assets
and the Company's  water  division in 1995 had a significant  positive  earnings
effect in 1995 and impacted 1996 earnings by reducing operating margin, reducing
operating expenses, reducing interest charges and increasing investment income.

     Electric  gross margin  (operating  revenues less fuel and purchased  power
expense)  increased  $23.3 million in 1996 as a result of retail load growth and
warmer than normal weather and increased  off-system sales margin as a result of
improved wholesale power market conditions.

     Electric gross margin  decreased $37.9 million in 1995 from 1994 due to the
retail rate reduction  implemented in late 1994,  reduced  off-system sales as a
result of the  expiration of three sales  contracts and generally poor wholesale
power  market  conditions.  An  offset to such  decreases  was the  increase  in
revenues resulting from retail load growth.

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

     Gas gross margin decreased $16.4 million in 1995 from 1994 due to decreased
gas  deliveries  resulting  from warmer than normal  weather in 1995 and reduced
margin as a result of the sale of the gas assets in 1995.

                                       28

<PAGE>




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

     Other O&M  expenses  decreased  $12.3  million in 1995 from 1994 due to the
following:  (i) a decrease  of A&G  expense  of $7.5  million  due to  decreased
injuries  and  damages as a result of the  recording  of  worker's  compensation
liability in 1994 and a decrease in temporary  office labor and postage expense,
(ii) a  decrease  in gas  production  and  products  extraction  expense of $6.2
million  resulting  from  the gas  assets  sale in  1995,  (iii) a $4.1  million
decrease in  production  O&M  expenses as a result of a reduction  in  scheduled
maintenance  outage  hours  and (iv) a  decrease  in water O&M  expense  of $2.1
million  resulting from the sale of the Company's  water division in 1995.  Such
decreases  were offset by (i) higher A&G labor  expense of $4.7 million and (ii)
higher  employee  benefit  expense  of $2.7  million  caused by the  retroactive
deferral  of the gas  operation's  retirees  health  care  costs for  regulatory
purposes recorded in 1994.

     Depreciation and amortization  expenses  decreased $2.7 million from a year
ago as a result of the sale of the  Company's  water  division and gas assets in
1995 and an  adjustment  recorded in 1996 for the over  amortization  of certain
intangible  utility  plant.  Depreciation  and  amortization  expenses  for 1995
increased  $6.7  million  from  1994 as a result  of the  implementation  of new
depreciation rates approved by the NMPUC in November 1994.

     Net other income and deductions decreased $18.8 million from a year ago and
increased $20.3 million in 1995 from 1994. Significant 1996 items, net of taxes,
included the following: (i) a regulatory liability of $10.1 million, (ii) a $1.7
million  write-down  of certain  assets  related to the  Company's  natural  gas
vehicle   program  and  (iii)  an   additional   accrual  of  $1.0  million  for
environmental  liabilities  associated with the 1995 gas assets sale. Offsetting
such decreases was a curtailment  gain of $8.0 million  related to the change of
the Company's  defined  benefit  pension plan and higher interest income of $7.6
million as a result of increased temporary  investments in 1996 and the purchase
of the PVNGS LOBs.

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

     Significant  1994  items,  net of  taxes,  included  the  following:  (i) a
write-off of $3.0 million relating to gas take-or-pay  settlement payments which
were not  recoverable  through  rates,  (ii) an  additional  provision for legal
expenses of $3.6  million and (iii) a gain and  associated  tax benefits of $6.1
million from the sale of generating facilities to UAMPS.

     Net interest  charges  decreased $3.2 million and $12.7 million in 1996 and
1995,  respectively,  as a result of the  retirement of $132.7  million of PVNGS
LOBs in March  1995.  An  offset  to the 1996  decrease  was  higher  short-term
interest  charges  resulting from short-term  borrowings for the purchase of the
PVNGS  LOBs and an  interest  assessment  from the IRS.  In  addition,  the 1995
decrease  included the effect of the retirement of $45 million of first mortgage
bonds in April 1994.

                                       29

<PAGE>



     Preferred  stock  dividend  requirements  decreased  $3.1  million and $2.7
million in 1996 and 1995,  respectively,  as a result of the  retirement  of $64
million of preferred stock in August 1995.

                         OTHER ISSUES FACING THE COMPANY

GAS RATE CASE

     On  August  28,  1995,  the  Company  filed a request  for a $13.3  million
increase in its retail natural gas sales and  transportation  rates. NMPUC Staff
and intervenors in the case filed their testimony on January 16, 1996. The Staff
recommended a $2.5 million rate decrease and the AG  recommended a $13.2 million
rate  decrease.  On February 13, 1997, the NMPUC issued a final order in the gas
rate case,  ordering a rate  decrease  of $7.0  million.  In  ordering  the rate
decrease,  among other  things,  the NMPUC  disallowed  the  recovery of certain
regulatory  assets.  The Company strongly disagrees with the NMPUC's final order
and filed an appeal with the New Mexico  Supreme Court on February 17, 1997. The
Company has  evaluated  the impacts of the rate  reduction  and has  established
appropriate  reserves in its 1996 financial  statements,  pending the outcome of
the appeal.

NMPUC ORDER -- THE COMPANY'S JANUARY 1997 PGAC FACTOR VARIANCE REQUEST;
ORDER TO FILE NEW RETAIL ELECTRIC AND GAS RATE CASES

     Due to rapidly rising gas supply costs in December 1996,  PNMGS requested a
variance,  on December 18, 1996,  from the NMPUC to increase its gas cost factor
by more than 10% without a prior  mandatory  hearing.  Pursuant to NMPUC  rules,
PNMGS  implemented the new gas cost factor with its January billing cycle.  This
increase in gas cost along with  increased gas  consumption  and longer  billing
periods for some  customers  resulted in a  substantial  increase to  customers'
bills.  The NMPUC  denied  PNMGS'  variance to increase the factor more than 10%
without a hearing  and held  public  hearings  to  receive  public  comment  and
testimony. These hearings began on January 22 and concluded on January 30, 1997.
The Company provided testimony regarding the higher gas costs.

     The NMPUC issued a final order in this case on February  13,  1997.  In the
order, the NMPUC imposed,  but suspended,  a fine of $2.2 million to the Company
due to an allegedly  incorrect  cost factor (too low) that was filed in November
1996. In addition,  the NMPUC disallowed collection of $1.6 million of gas costs
and ordered an  independent  audit to be conducted to review the Company's  PGAC
factor  calculations  for the period of December 1995 through  January 1997. The
NMPUC also ordered the  docketing of two new  investigations.  The first,  which
requires a Company filing by March 15, 1997, will investigate whether or not the
Company  should  exit  the  merchant  function  in  providing  gas  supplies  to
customers.  The second, will investigate the prudence of the Company's portfolio
strategies and purchase practices. In addition, the NMPUC ordered the Company to
file a new gas rate case by August 1, 1997, and also ordered the Company to file
an electric retail rate case by May 1, 1997.

     In the order,  the NMPUC  accused  the Company of  intentionally  filing an
inaccurate  factor to avoid a hearing,  thus,  impairing the NMPUC's  ability to
investigate  rising gas prices.  The Company strongly disagrees with the NMPUC's
final order and is evaluating  its options,  including  rehearing and a possible
appeal to the New Mexico Supreme Court.

TRANSMISSION ISSUES

Transmission Right-of-Way

     The Company  has  easements  for  right-of-way  with the Navajo  Nation for
portions of several  transmission  lines that deliver the  Company's  generation
resources  to the  Albuquerque  metropolitan  area.  One grant of  easement  for
approximately  4.2 miles of  right-of-way  for two parallel 345 Kv  transmission
lines  expired  in 1993.  Prior to the  expiration,  the  Company  had  numerous


                                       30

<PAGE>


unsuccessful  negotiation meetings with the Navajo Nation for the renewal of the
long-term  grant.  In 1994, the Navajo Nation  adopted a Civil Trespass  Statute
providing for civil penalties, damages and other remedies, including removal, to
be imposed for unconsented or unauthorized  use of Navajo Nation lands. In 1995,
the  Company  reached  a  tentative  agreement  with  the  Navajo  Nation  for a
twenty-year  renewal of the transmission  easement and a resolution of all other
transmission  right-of-way  issues.  Prior to the  execution  of the  agreement,
another agency of the Navajo Nation  notified the Company that it was contesting
certain  water  rights  at  the  SJGS,  which  has  delayed  resolution  of  the
transmission  right-of-way issues. The Company continued to work with the Navajo
Nation in 1996 to resolve this conflict.

     The  Company  continues  to assess its  options  but will not pursue  other
alternatives unless it receives indications that settlement cannot be reached in
a satisfactory  manner.  The Company currently cannot predict the outcome of the
negotiations or the costs resulting  therefrom;  however,  the Company  believes
that  resolution  of this issue will not have a material  adverse  impact on the
Company's financial condition or results of operations.

FERC Transmission Issues

     In April 1996,  the Company  filed a notice of change in rates for firm and
non-firm transmission  services. The Company also filed two transmission service
tariffs and a market-based  generation  tariff.  The Company  requested that the
rate change filings,  as well as the transmission and generation tariff filings,
be  consolidated  with four Section 206 complaint  proceedings  of four affected
customers,  as  well  as a rate  change  proceeding  related  to  the  Company's
provision of firm transmission  service to EPE. Seven dockets (the "consolidated
dockets") were consolidated for purposes of determining appropriate transmission
service rates.

     In  addition,   two  wholesale  customers  separately  filed  requests  for
transmission  service under Section 211 of the Federal Power Act in 1996. One of
these  customers  notified the Company of its  intention  to  terminate  certain
transmission  service  agreements and the Company filed notice of termination of
this transmission service agreement with the FERC.

     Prior to the scheduled hearings in the case, the parties were able to reach
a negotiated  settlement of the consolidated  dockets,  the transmission service
requests  and  the  Company's  market-based   generation  rate  tariff.  Certain
provisions of the Company's Open Access  Transmission Tariff ("the Tariff") were
also incorporated into the settlement, leaving portions of the Tariff subject to
further FERC review. A stipulation on the settlement  reached by the parties was
filed with the FERC on December  16, 1996.  In  accordance  with the  stipulated
agreement,  the Company  will refund  approximately  $3.7 million of revenues it
collected from the customers  during the time their Section 206 complaints  were
pending. In addition, the Company's firm wholesale transmission service revenues
will be reduced by  approximately  $1.6 million  annually.  The  stipulation was
certified by the  Administrative  Law Judge to the FERC on January 22, 1997. The
Company anticipates that the FERC will take action on the stipulation before the
end of the second  quarter of 1997. The Company does not anticipate any material
adverse  impact on the  Company's  financial  condition or results of operations
from the settlement agreement.

ENVIRONMENTAL ISSUES

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


                                       31

<PAGE>



Electric Operations

Santa Fe Station

     The Company and the NMED have conducted  investigations  of the groundwater
contamination  detected  beneath the former Santa Fe Generating  Station site to
determine  the  source  of  the  contamination.  The  Company  has  been  and is
continuing to cooperate with the NMED regarding site investigations and remedial
planning pursuant to a settlement agreement between the Company and the NMED. In
June 1996, the Company received a letter from the NMED, indicating that the NMED
believes the Company is the source of gasoline contamination in a municipal well
supplying the City of Santa Fe and groundwater  underlying the Santa Fe Station.
Further,  the NMED letter  stated that the Company was  required to proceed with
interim  remediation  of the  contamination  pursuant  to the New  Mexico  Water
Quality Control Commission ("NMWQCC") regulations.

     In July 1996,  the Company filed an appeal with the NMWQCC  protesting  the
determination  and  directives   contained  in  the  NMED's  June  1996  letter.
Subsequently,  negotiation  meetings were conducted  between the Company and the
NMED for a resolution of the groundwater contamination issue.

     On October 3, 1996,  the Company and the NMED  signed an  Amendment  to the
Settlement  Agreement concerning the groundwater  contamination.  As part of the
Amendment,  the Company agreed to spend approximately $1.2 million  ("Settlement
Amount") for certain costs related to sampling,  monitoring, and development and
implementation  of a remediation  plan. The remediation  plan is to be developed
jointly by the Company and the NMED. Since the contamination affects a municipal
well  supplying  the City of Santa Fe, the  cooperation  of the City of Santa Fe
will also be sought in the  development  of the  plan.  The  amended  Settlement
Agreement  does not,  however,  provide  the  Company  with a full and  complete
release from potential  further  liability for  remediation  of the  groundwater
contamination. After the Company has expended the Settlement Amount, if the NMED
can  establish  through  binding  arbitration  that the Santa Fe  Station is the
source of the  contamination,  the Company could be required to perform  further
remediation that is determined to be necessary. The Company continues to dispute
any  contention  that the Santa Fe  Station  is the  source  of the  groundwater
contamination and believes that insufficient data exists to identify the sources
of   groundwater   contamination.   The   Company  has   completed   an  aquifer
characterization  report and a groundwater quality report associated with the 40
day  reactivation  of the  adjacent  Santa Fe supply  well in July and August of
1996.  These reports  strongly  suggest the groundwater  contamination  does not
originate  from the Santa Fe Station  site and has been drawn  under the site by
the pumping of the Santa Fe supply well. In addition, other urban wells in Santa
Fe are likely vulnerable to contamination from off-site sources.  The Company is
working to provide a remedial approach plan by April 1997 in accordance with the
amended Settlement Agreement.

Person Station

     The Company,  in compliance with the NMED's  Corrective  Action  Directive,
determined that groundwater  contamination  exists in the deep and shallow water
aquifers.  The Company is required to delineate the extent of the  contamination
and  remediate  the  contaminants  in  the   groundwater.   The  extent  of  the
contaminated  plume in the deep water  aquifer was  assessed  and  results  were
reported to the NMED. The Company also proposed  revised remedial options to the
NMED.  The Company is awaiting a final  response  from the NMED.  The  Company's
current  estimate to  decommission  its retired  fossil-fueled  plants  includes
approximately  $10.9 million to complete the groundwater  remediation program at
Person  Station.  As part of the financial  assurance  requirement of the Person
Station  Hazardous  Permit,  the Company posted a $5.1 million  performance bond
with a trustee. The remediation program continues on schedule.


                                       32

<PAGE>



Gas Operations

Gas Wellhead Pit Remediation

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

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

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

COAL FUEL SUPPLY

     In July 1996,  the Company was notified by BHP,  fuel supplier to the SJGS,
that the Navajo Nation has proposed to select certain  properties within the San
Juan and La Plata Mines (the "mining  properties")  pursuant to the  Navajo-Hopi
Land Settlement Act of 1974 (the "Act").  The mining  properties are operated by
BHP under  leases  from the BLM and  comprise a portion  of the fuel  supply for
SJGS. An administrative  appeal by BHP is pending.  In the appeal, BHP expressed
concern that transfer of the mining  properties to the Navajo Nation may subject
the mining  operations  to  taxation  and  additional  regulation  by the Navajo
Nation, both of which could increase the price of coal that might potentially be
passed  on to SJGS  through  the  existing  Coal Sale  Agreement.  A stay of all
actions  by the BLM has been  ordered  by the  Interior  Board  of Land  Appeals
pending  resolution of the issues on appeal.  The Company is monitoring  closely
the appeal and other  developments  on this  issue and will  continue  to assess
potential impacts to SJGS and the Company's operations.  Currently,  the Company
is unable to predict the ultimate outcome of this matter but does not believe it
will have a material  adverse  effect on the  Company's  financial  condition or
results of operations.


                                       33

<PAGE>



ALBUQUERQUE FRANCHISE ISSUES

     The Company's  non-exclusive  electric  service  franchise with the City of
Albuquerque (the "City") expired in 1992. The franchise  agreement  provided for
the Company's use of City  rights-of-way  for placement of electric  facilities.
The  Company  provides  service  to the  area  which  contributed  43.0%  of the
Company's  total 1996 electric  operating  revenues.  The absence of a franchise
does not change the  Company's  right and  obligation  to serve those  customers
under state law. The Company  continues to collect and pay franchise fees to the
City.

     In 1991,  the New  Mexico  Supreme  Court  ("Court")  ruled that a city can
negotiate rates for its citizens in addition to its own facility uses. The Court
also ruled that any contracts  with utilities for electric rates are a matter of
statewide  concern and subject to approval,  disapproval or  modification by the
NMPUC.  In  addition,  the  Court  reaffirmed  the  NMPUC's  exclusive  power to
designate  providers of utility service within a municipality and confirmed that
municipal  franchises  are not  licenses to serve but rather  provide  access to
public rights-of-way.

     In October 1996, a local news media reported that the Mayor of the City had
met with two NMPUC  Commissioners about his concern that state efforts regarding
retail wheeling were proceeding too slowly and that he was evaluating the City's
option to implement  Article XV of the City Charter  requiring  competitive bids
for electric franchises.  The Company has taken the position that the NMPUC does
not have authority to order retail wheeling. (See "OVERVIEW -- Restructuring the
Electric Utility Industry".)

     Although  a  measure  designed  to  start  municipalization  activities  in
Albuquerque was defeated by the City Council, the City continues to maintain its
options by advocating industry restructuring and monitoring the municipalization
activities  of the City of Las Cruces.  In September  1996,  the Court agreed to
decide the question.  In August 1996, in an action brought seeking condemnation,
the  Federal  Magistrate  Court  ruled that the City of Las Cruces had failed to
prove  that  condemnation  would not  materially  impair  service  by El Paso to
customers  outside Las Cruces and  certified  the question of whether  state law
allows condemnation of an electric utility to the Court.

     The Company filed a "friend of the Court" brief in support of El Paso.  The
Court  heard  oral  argument  on  February  11,  1997,  and took the case  under
advisement.  The  Company is  currently  unable to predict  the outcome of these
matters,  but does not anticipate any material impact on the Company's financial
condition or results of operation.

ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION

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


                                       34

<PAGE>



PVNGS -- STEAM GENERATOR TUBES

     APS, as the operating agent of PVNGS,  has encountered tube cracking in the
steam generators and has taken, and will continue to take, remedial actions that
it believes have slowed further tube  degradation.  The steam generator tubes in
each unit continue to be inspected in conjunction with their respective outages.
APS  currently  believes  that the PVNGS steam  generators  in Units 1 and 3 are
capable of operating for their designed life of forty years;  although,  at some
point,  long-term economic  considerations  may warrant  examination of possible
steam generator  replacement.  APS's ongoing  analyses  indicate that it will be
economically  desirable  for APS to replace the Unit 2 steam  generators,  which
have been most affected by tube cracking, in five to ten years. APS expects that
the steam generator  replacement can be accomplished within financial parameters
established before replacement was a consideration. Based on APS's analyses, the
Company  believes that its share of the  replacement  costs (in 1996 dollars and
including installation and replacement power costs) would be approximately $15.3
million,  most of which would be incurred  after the year 2000. APS expects that
the replacement would be performed in conjunction with a normal refueling outage
in order to limit additional  incremental  outage time to approximately 50 days.
APS believes that replacement of the Unit 2 steam generators  within five to ten
years will be economically  desirable.  However, a formal decision as to when to
replace the steam generators has not been made by the PVNGS participants.

ACCOUNTING STANDARDS

     Environmental  Remediation  Liabilities.  Effective  January 1,  1997,  the
Company  will adopt the  provisions  for  Statement  of Position  ("SOP")  96-1,
Environmental  Remediation  Liabilities.  This Statement provides  authoritative
guidance for recognition,  measurement,  display and disclosure of environmental
remediation liabilities in financial statements. The Company previously recorded
environmental liabilities of $24.0 million for its retired fossil-fueled plants.
Approximately  $13.7  million of the $24.0  million  has been  expended  through
December  31,  1996.  The Company  does not expect that the adoption of SOP 96-1
will have a material  impact on the Company's  financial  position or results of
operations.

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

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


                                       35

<PAGE>



DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

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


                                       36

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



                                      INDEX




                                                                         Page
                                                                       --------

Management's Responsibility for Financial Statements..................    F-1
Report of Independent Public Accountants .............................    F-2
Financial Statements:
   Consolidated Statements of Earnings ...............................    F-3
   Consolidated Statements of Retained Earnings (Deficit).............    F-4
   Consolidated Balance Sheets........................................    F-5
   Consolidated Statements of Cash Flows..............................    F-6
   Consolidated Statements of Capitalization..........................    F-7
   Notes to Consolidated Financial Statements.........................    F-8
Supplementary Data:
   Quarterly Operating Results........................................   F-34
   Comparative Operating Statistics...................................   F-35

              MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS


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



                                       F-1

<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the accompanying  consolidated  balance sheets and statements of
capitalization   of  Public  Service   Company  of  New  Mexico  (a  New  Mexico
corporation)  and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of earnings, retained earnings (deficit), and cash flows
for each of the  three  years in the  period  ended  December  31,  1996.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of Public Service Company of New
Mexico and  subsidiaries  as of December  31, 1996 and 1995,  and the results of
their  operations and their cash flows for each of the three years in the period
ended  December  31,  1996 in  conformity  with  generally  accepted  accounting
principles.


                                          ARTHUR ANDERSEN LLP

Albuquerque, New Mexico
  February 13, 1997



                                       F-2

<PAGE>



              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>

                                                                    Year Ended December 31,
                                                             ----------------------------------
                                                                1996        1995         1994
                                                             ----------  ----------  ----------
                                                              (In thousands except per share amounts)

<S>                                                          <C>         <C>         <C>       
Operating Revenues:
   Electric..................................................$  645,639  $  584,284  $  621,794
   Gas.......................................................   227,301     217,985     269,510
   Energy Services...........................................    10,446          --          --
   Water.....................................................        --       6,196      13,407
                                                             ----------   ---------  ----------
                                                                         
Total operating revenues.....................................   883,386     808,465     904,711
                                                             ----------   ---------  ---------- 
Operating Expenses:
   Fuel and purchased power..................................   178,807     140,752     140,411
   Gas purchased for resale..................................   113,059      94,299     129,381
   Other operation expenses..................................   263,432     257,627     264,391
   Maintenance and repairs...................................    49,694      55,809      61,386
   Depreciation and amortization.............................    78,116      80,865      74,137
   Taxes, other than income taxes............................    34,864      35,531      39,717
   Income taxes..............................................    39,395      30,194      44,210
      Total operating expenses...............................   757,367     695,077     753,633
                                                             ----------   ---------  ---------- 
      Operating income.......................................   126,019     113,388     151,078
                                                             ----------   ---------  ---------- 
Other Income and Deductions:
   Other.....................................................     2,367      40,707      (3,512)
   Income tax benefit (expense)..............................    (1,099)    (20,599)      3,339
      Net other income and deductions........................     1,268      20,108        (173)
                                                             ----------   ---------  ---------- 
      Income before interest charges.........................   127,287     133,496     150,905
                                                             ----------   ---------  ---------- 
Interest Charges:
   Interest on long-term debt................................    49,009      52,637      65,511
   Other interest charges....................................     5,698       5,297       5,341
   Allowance for borrowed funds used during construction.....        --          --        (265)
                                                             ----------   ---------  ---------- 
      Net interest charges...................................    54,707      57,934      70,587
                                                             ----------   ---------  ---------- 

Net Earnings ................................................    72,580      75,562      80,318
Preferred Stock Dividend Requirements........................       586       3,714       6,433
                                                             ----------   ---------  ---------- 
Net Earnings Available for Common Stock......................$   71,994  $   71,848  $   73,885
                                                             ==========  ==========  ==========   
Average Number of Common Shares Outstanding..................    41,774      41,774      41,774
                                                             ==========  ==========  ==========   
Net Earnings per Share of Common Stock.......................$     1.72  $     1.72  $     1.77
                                                             ==========  ==========  ==========   
Dividends Paid per Share of Common Stock.....................$     0.36  $       --  $       --
                                                             ==========  ==========  ==========   


</TABLE>



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

                                       F-3

<PAGE>



              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)


                                                    Year Ended December 31,
                                               --------------------------------
                                                 1996       1995       1994
                                               ---------  --------  ----------
                                                        (In thousands)

Balance at Beginning of Year.................. $  25,243  $(46,006) $ (120,848)
Net earnings .................................    72,580    75,562      80,318
Redemption of cumulative preferred stock......        --      (599)        957
Dividends:
   Cumulative preferred stock dividends.......      (586)   (3,714)     (6,433)
   Common stock dividends ....................   (20,052)       --          --
                                               ---------  --------  ----------
Balance at End of Year........................ $  77,185  $ 25,243  $  (46,006)
                                               =========  ========  ==========

































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

                                       F-4

<PAGE>



              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                 As of December 31,
                                                             -----------------------
                                                                 1996           1995
                                                             -----------  -----------
                                                              (Dollars in thousands)
<S>                                                          <C>          <C>        
Utility Plant, at original cost except PVNGS:
   Electric plant in service................................ $ 1,918,238  $ 1,871,897
   Gas plant in service.....................................     424,827      419,346
   Energy services plant in service.........................       1,241        2,261
   Common plant in service..................................      40,005       35,222
   Plant held for future use................................         639          639
                                                             -----------  -----------
                                                               2,384,950    2,329,365
   Less accumulated depreciation and amortization...........     937,228      892,727
                                                             -----------  -----------
                                                               1,447,722    1,436,638
   Construction work in progress............................      76,038      106,892
   Nuclear fuel, net of accumulated amortization 
     of $20,413 and $26,395 ................................      28,933       30,904
                                                             -----------  -----------
      Net utility plant.....................................   1,552,693    1,574,434
                                                             -----------  -----------
Other Property and Investments:
   Non-utility property, net of accumulated depreciation
     of $1,774 and $1,547...................................       3,434        4,063
   Other investments, at cost...............................     250,834       29,370
                                                             -----------  -----------
      Total other property and investments..................     254,268       33,433
                                                             -----------  -----------
Current Assets:
   Cash.....................................................      11,125        4,228
   Temporary investments, at cost...........................       9,128       95,972
   Receivables, net of allowance for uncollectible
     accounts of $709 and $569..............................     197,025      127,642
   Income taxes receivable..................................      18,825        4,792
   Fuel, materials and supplies, at average cost............      41,260       44,660
   Gas in underground storage, at average cost..............       2,679        5,431
   Other current assets.....................................       6,632        7,186
                                                             -----------  -----------
        Total current assets................................     286,674      289,911
                                                             -----------  -----------
Deferred Charges............................................     136,679      137,891
                                                             -----------  -----------
                                                             $ 2,230,314  $ 2,035,669
                                                             ===========  ===========

                         CAPITALIZATION AND LIABILITIES
Capitalization:
   Common stock equity:
      Common stock outstanding-- 41,774,083 shares.......... $   208,870  $   208,870
      Additional paid-in capital............................     470,358      470,358
      Excess pension liability, net of tax..................      (2,102)      (1,623)
      Retained earnings since January 1, 1989...............      77,185       25,243
                                                             -----------  -----------
        Total common stock equity...........................     754,311      702,848
   Cumulative preferred stock without mandatory redemption
     requirements...........................................      12,800       12,800
   Long-term debt, less current maturities..................     713,919      728,843
                                                             -----------  -----------
        Total capitalization................................   1,481,030    1,444,491
                                                             -----------  -----------
Current Liabilities:
   Short-term debt..........................................     100,400           --
   Accounts payable.........................................     130,661       93,666
   Dividends payable........................................       5,159           --
   Current maturities of long-term debt.....................      14,970          146
   Accrued interest and taxes...............................      23,356       26,856
   Other current liabilities................................      25,477       44,699
                                                             -----------  -----------
        Total current liabilities...........................     300,023      165,367
                                                             -----------  -----------
Deferred Credits:
   Accumulated deferred investment tax credits..............      62,258       66,734
   Accumulated deferred income taxes........................     110,266       78,829
   Other deferred credits...................................     276,737      280,248
                                                             -----------  -----------
        Total deferred credits..............................     449,261      425,811
                                                             -----------  -----------
Commitments and Contingencies (notes 2 through 12)
                                                             $ 2,230,314  $ 2,035,669
                                                             ===========  ===========


</TABLE>



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

                                       F-5

<PAGE>



              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>


                                                                          Year Ended December 31,
                                                                    ---------------------------------
                                                                       1996       1995         1994
                                                                    ---------  ----------  ----------
                                                                              (In thousands)
<S>                                                                 <C>        <C>         <C>       
Cash Flows From Operating Activities:
   Net earnings ................................................... $  72,580  $   75,562  $   80,318
   Adjustments to reconcile net earnings to net cash flows from
      operating activities:
      Depreciation and amortization................................    91,340      93,125      90,656
      Accumulated deferred investment tax credit...................    (4,476)     (4,830)     (6,898)
      Accumulated deferred income taxes............................    31,436       1,622      23,069
      Gain on sale of utility property.............................      (309)    (39,050)     (6,576)
      Write-down of natural gas vehicle program....................     2,810       1,445          --

      Curtailment gain on defined benefit pension plan.............   (13,316)         --          --
      Changes in certain assets and liabilities:
        Receivables................................................   (83,416)        795      23,868
        Fuel, materials and supplies...............................     5,795     (26,505)     (3,126)
        Deferred charges...........................................     5,190       6,731       8,427
        Accounts payable...........................................    36,930     (11,527)    (11,893)
        Accrued interest and taxes.................................    (3,500)     (1,218)     (1,919)
        Deferred credits...........................................    12,655      29,185      (5,418)
        Other......................................................    (9,279)      5,645      (3,604)
      Other, net...................................................     7,278      16,095      14,160
                                                                    ---------  ----------  ----------
           Net cash flows from operating activities................   151,718     147,075     201,064
                                                                    ---------  ----------  ----------
Cash Flows From Investing Activities:
   Utility plant additions.........................................   (88,904)   (106,627)   (119,284)
   Utility plant sales.............................................       333     206,482      39,562
   Other property sales............................................       702        (801)     (1,307)
   Net increase in other property and investments..................   (14,706)         --          --
   Purchase of PVNGS lease obligation bonds........................  (208,446)         --          --
   Decrease (increase) in temporary investments, net...............    86,844     (21,451)    (26,671)
                                                                    ---------  ----------  ----------
           Net cash flows from investing activities................  (224,177)     77,603    (107,700)
                                                                    ---------  ----------  ----------
Cash Flows From Financing Activities:
   Redemptions of PVNGS lease obligation bonds ....................        --    (132,663)         --
   Redemptions and repurchases of preferred stock..................        --     (64,175)     (7,711)
   Redemption of first mortgage bonds..............................        --          --     (45,000)
   Bond redemption premium and costs...............................    (5,158)       (505)     (2,732)
   Proceeds from asset securitization..............................   100,400      18,758          --
   Repayments of long-term debt....................................      (326)    (57,768)    (31,002)
   Dividends paid..................................................   (15,560)     (5,126)     (6,400)
                                                                    ---------  ----------  ----------
           Net cash flows from financing activities................    79,356    (241,479)    (92,845)
                                                                    ---------  ----------  ----------
Increase (Decrease) in Cash........................................     6,897     (16,801)        519
Cash at Beginning of Year..........................................     4,228      21,029      20,510
                                                                    ---------  ----------  ----------
Cash at End of Year................................................ $  11,125  $    4,228  $   21,029
                                                                    =========  ==========  ==========


Supplemental cash flow disclosures:
   Interest paid................................................... $  55,480  $   63,366  $   70,720
                                                                    =========  ==========  ==========
   Income taxes paid............................................... $  31,617  $   52,405  $   20,000
                                                                    =========  ==========  ==========
                                                                                             

</TABLE>


Cash consists of currency on hand and demand deposits.

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

                                       F-6

<PAGE>



              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>


                                                                                           December 31,
                                                                                    ------------------------
                                                                                        1996         1995
                                                                                    -----------  -----------
<S>                                                                                  <C>         <C>        
Common Stock Equity:

   Common Stock, par value $5 per share............................................  $  208,870  $   208,870
   Additional paid-in capital......................................................     470,358      470,358
   Excess pension liability, net of tax............................................      (2,102)      (1,623)
   Retained earnings since January 1, 1989.........................................      77,185       25,243
                                                                                     ----------  ------------
        Total common stock equity..................................................     754,311      702,848
                                                                                     ----------  ------------
</TABLE>

<TABLE>
<CAPTION>

                                                      Shares
                                                    Outstanding
                                                         at          Current
                                          Stated    December 31,    Redemption
                                           Value        1996          Price
                                          -------   ------------   -----------
<S>                                       <C>           <C>           <C>                <C>          <C>   

Cumulative Preferred Stock:
  Without mandatory redemption
    requirements:
    1965 Series, 4.58%..................  $100.00       128,000       $102.00            12,800       12,800
                                                    ------------                    -----------   ----------

Long-Term Debt:

Issue and Final Maturity                               Interest Rates
----------------------------------------             -------------------
  First mortgage bonds:
    1997................................                          5 7/8%                 14,650        14,650
    1999 through 2002...................                7 1/4% to 8 1/8%                 42,876        43,063
    2004 through 2007...................                8 1/8% to 9 1/8%                 43,276        43,421
    2008................................                               %                 54,374        54,374
    Pollution control revenue bonds: 
    2007 through 2026...................                  5.7% to 7 3/4%                537,045       537,045
    2022................................                   Variable rate                 37,300        37,300

                                                                                     ----------   -----------
      Total first mortgage bonds........                                                729,521       729,853

   Other, including unamortized
      premium and (discount), net.........                                                 (632)         (864)
                                                                                     ----------   -----------
        Total long-term debt..............                                              728,889       728,989
   Less current maturities................                                               14,970           146
                                                                                     ----------   -----------
        Long-term debt, less current
        maturities........................                                              713,919       728,843
                                                                                     ----------   -----------
Total Capitalization......................                                           $1,481,030   $ 1,444,491
                                                                                     ==========   ===========
</TABLE>




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

                                       F-7


<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 1996, 1995 and 1994

(1)     Summary of Significant Accounting Policies

Organization

       Public Service Company of New Mexico (the "Company") is an investor-owned
utility company engaged in the generation,  transmission,  distribution and sale
of electricity.  The Company provides retail electric service to a large area of
north  central New Mexico,  including the cities of  Albuquerque,  Santa Fe, Rio
Rancho,  Las  Vegas,  Belen and  Bernalillo.  The  Company  provides  service to
customers  in the City of  Albuquerque  without  a  franchise  agreement,  which
contributes  approximately  one-half of the Company's  total electric  operating
revenues.  The absence of a franchise  does not change the  Company's  right and
obligation to serve these  customers  under state law. The Company also provides
retail electric  service to Deming in southwestern  New Mexico and to Clayton in
northeastern  New  Mexico.  The  Company is also  engaged  in the  transmission,
distribution and sale of natural gas within the State of New Mexico. The Company
distributes  natural  gas  to  most  of the  major  communities  in New  Mexico,
including Albuquerque and Santa Fe. The Company is also engaged in the operation
and  management  of the City of Santa Fe's  Water  System  and is  pursuing  new
business activities in the energy and utility related services area.

Systems of Accounts

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

Principles of Consolidation

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

Use of Estimates

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

Utility Plant

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


                                       F-8

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


(1)    Summary of Significant Accounting Policies (Continued)

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

Depreciation and Amortization

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


                                          1996          1995          1994
                                      ------------   -----------   -----------

Electric plant.....................        3.32%         3.32%         3.01%
Gas plant..........................        3.27%         3.21%         3.15%
Water plant (1)....................           --            --         2.68%
Common plant (2)...................           --            --         4.94%

         (1)    Water plant was sold in July 1995 (see note 12).
         (2) As a result of the water plant sale,  common plant was  transferred
to electric plant.

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

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

Nuclear Decommissioning

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

Fuel and Purchased Power Adjustment Clause ("FPPCAC")

       The Company's  FPPCAC for its retail customers was eliminated in November
1994. A base fuel cost was  incorporated  with the overall rates approved by the
NMPUC. The Company uses the deferral method of accounting for fuel and purchased
power costs for its  firm-requirements  wholesale  customers.  Such  amounts are
reflected in subsequent periods under a FPPCAC approved by the FERC.


                                       F-9

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


(1)    Summary of Significant Accounting Policies (Continued)

Purchased Gas Adjustment Clause ("PGAC")

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

Amortization of Debt Discount, Premium and Expense

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

Income Taxes

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

Investments in Debt and Equity Securities

       Certain  of  the   Company's   other   investments   are   classified  as
Held-to-Maturities  under the terms of SFAS No.  115,  "Accounting  for  Certain
Investments  in Debt and Equity  Securities",  and measured at amortized cost in
the statement of financial position.

                                      F-10

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


(1)    Summary of Significant Accounting Policies (Continued)

Accounting Standards

       Environmental  Remediation  Liabilities.  Effective  January 1, 1997, the
Company  will adopt the  provisions  of  Statement  of  Position  ("SOP")  96-1,
Environmental  Remediation  Liabilities.  This Statement provides  authoritative
guidance for recognition,  measurement,  display and disclosure of environmental
remediation liabilities in financial statements. The Company previously recorded
environmental liabilities of $24.0 million for its retired fossil-fueled plants.
Approximately  $13.7  million  of the  $24.0  million  has been  expended  as of
December  31,  1996.  The Company  does not expect that the adoption of SOP 96-1
will have a material  impact on the Company's  financial  position or results of
operations.

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

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

(2)    Risks and Uncertainties

       The electric utility industry  continues to be in a period of fundamental
change intended to promote a competitive environment in the retail and wholesale
energy  marketplaces.  Legislators  and regulators at both the state and Federal
levels  continue to  consider  how to promote  competition  among  suppliers  of
electricity and how to provide customers with choice among suppliers.


                                      F-11

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


(2)    Risks and Uncertainties (Continued)

       At the state level, the Integrated Water and Resource Planning  Committee
of the New Mexico State  Legislature  (the "IWRPC")  held  hearings  during 1996
which focused on the issues related to restructuring of the electric industry in
New Mexico. The Company  participated  extensively in these hearings and, at the
invitation of the IWRPC,  submitted  draft  legislation to be used as a starting
point for the  various  parties to  consider  regarding  the  electric  industry
restructuring.  The draft legislation would allow an electric utility to recover
all of its  prudently  incurred  stranded  costs  and  also  provide  a path for
business  flexibility.  The AG testified that retail  competition  should not be
introduced at this time but, if it is, there should be independent  ownership of
generation,  transmission  and  distribution  facilities,  due to  market  power
concerns.  At its  November  1996  meeting,  the IWRPC  voted  not to  recommend
restructuring   legislation  in  the  1997  session  but  instead  to  recommend
continuation of the IWRPC and a study of the tax effects of  restructuring.  The
IWRPC  also  sent a letter  to the  NMPUC  calling  for no  restructuring  to be
undertaken by the NMPUC without legislative approval. The New Mexico legislative
session is  currently  in progress  and the  Company  will  closely  monitor any
legislative action regarding restructuring of the electric utility industry.

       During  1996,  the NMPUC  conducted a series of workshop  meetings in its
"Investigation  of Restructuring  of Regulation of the Electric  Industry in New
Mexico". The Company actively  participated in these workshops and presented the
Company's  position on various  matters related to industry  restructuring.  The
Company provided data and analysis in the areas of market structure, measurement
and collection of stranded  costs,  market power,  potential  changes in Company
structure and issues related to the transition  phase.  In conjunction  with the
workshop  meetings,  the NMPUC ordered all utilities  under its  jurisdiction to
file their  estimates  of  stranded  costs,  absent any  recovery  method  being
adopted,  based on the Texas Public Utility Commission Economic Cost Over Market
("ECOM") model. The Company,  in its filing,  presented two  methodologies:  (i)
using the ECOM  model,  the  Company's  stranded  cost  estimates  run from $657
million  for a 1998 full  retail  access  case to $119  million  for a 2002 full
retail  access  case,  and  (ii)  using a  second  methodology,  based  upon the
difference  between the Company's costs of existing  generation and the costs of
new combined  cycle and  combustion  turbine  units to serve the same load,  the
Company's  costs above the level of new gas units were estimated at $748 million
for a 1998 full retail access case to $327 million for a 2002 full retail access
case.  The  Company  advised  the NMPUC  that the  results of the ECOM model are
highly  sensitive to various  assumptions,  primarily  projections of future gas
prices. To date, the NMPUC has not acted on the requested information.


                                      F-12

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


(3)  Regulatory Assets and Liabilities

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

                                                     1996         1995
                                                  ---------     ---------
                                                      (In thousands)

Deferred Income Taxes............................ $  71,682     $  71,094
Gas Take-or-Pay Costs............................    36,335        50,870
Purchased Gas Adjustment Clause..................    28,873           931
Gas Imputed Revenues.............................    10,362         8,113
Loss on Reacquired Debt..........................     7,850         6,377
Gas Reservation Fees.............................     7,029         5,622
Deferred Customer Expense on Gas Assets Sale.....     5,260         2,755
Gas Retirees' Health Care Costs..................     4,437         4,437
Proposed Transmission Line Costs.................     3,111            --
Gas Rate Case Costs..............................     1,571         1,100
Other............................................       598           422
                                                  ---------     ---------
     Subtotal....................................   177,108       151,721
                                                  ---------     ---------

Deferred Income Taxes............................   (56,961)      (60,815)
Gas Regulatory Reserve...........................   (24,614)       (7,328)
Customer Gain on Gas Assets Sale.................   (22,230)      (31,559)
PVNGS Prudence Audit.............................    (6,937)       (7,313)
Settlement Due Customers.........................    (4,072)       (4,101)
Revenue Subject to Refund........................    (3,594)         (382)
Gain on Reacquired Debt..........................      (559)         (669)
                                                  ---------     ---------
     Subtotal                                      (118,967)     (112,167)
                                                  ---------     ---------
     Net Regulatory Assets....................... $  58,141     $  39,554
                                                  =========     =========


     As of December  31, 1996,  substantially  all of the  Company's  regulatory
assets  and  regulatory  liabilities  are being  recovered  in rates  charged to
customers or have been addressed in a regulatory proceeding. If a portion of the
Company's  operations under the NMPUC jurisdiction  becomes no longer subject to
the  provisions  of SFAS No.  71, a write off of related  regulatory  assets and
liabilities  would be required,  unless some form of  transition  cost  recovery
(refund)  continues  through rates  established  and collected for the Company's
remaining regulated operations.


                                      F-13

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


(3)  Regulatory Assets and Liabilities (Continued)

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

(4)  Capitalization

     Changes  in  common  stock,   additional  paid-in  capital  and  cumulative
preferred stock are as follows:

<TABLE>
<CAPTION>
                                                                                       Cumulative Preferred Stock
                                                                             ----------------------------------------------
                                                                               Without Mandatory         With Mandatory
                                                                                   Redemption              Redemption
                                           Common Stock                           Requirements            Requirements
                                   -----------------------------             ----------------------  ----------------------
                                      Number                     Additional              Aggregate               Aggregate
                                        of          Aggregate      Paid-In     Number      Stated      Number      Stated
                                      Shares        Par Value      Capital   of Shares     Value     of Shares     Value
                                   -------------   -----------   ----------- ----------  ----------  ----------  ----------
                                                                    (Dollars in thousands)

<S>                                   <C>          <C>           <C>            <C>      <C>            <C>      <C>       
Balance at December 31, 1994.......   41,774,083   $   208,870   $   469,648    590,000  $   59,000     179,750  $   17,975

   Redemption of preferred stock...           --            --           710   (462,000)    (46,200)   (179,750)    (17,975)
                                      ----------   -----------   -----------    -------  ----------     -------  ----------
Balance at December 31, 1995
   and 1996........................   41,774,083   $   208,870      $470,358    128,000  $   12,800          --          --
                                      ==========   ===========   ===========    =======  ==========     =======  ==========

</TABLE>


Common Stock

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

       On December 31, 1996, the Company's Board of Directors ("Board") declared
a quarterly cash dividend of 12 cents per share of common stock payable February
21, 1997 to  shareholders  of record as of  February  3, 1997.  This will be the
fourth quarterly dividend to the Company's common shareholders since the Company
reinstated its common stock dividend in May 1996.

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


                                      F-14

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


(4)    Capitalization (Continued)

Cumulative Preferred Stock

       The  number of  authorized  shares of  cumulative  preferred  stock is 10
million  shares.  The Company's  restated  articles of  incorporation  limit the
amount  of  preferred  stock  which  may be  issued.  The  earnings  test in the
Company's  restated articles of incorporation  currently allows for the issuance
of preferred stock.

Long-Term Debt

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

       The aggregate  amounts (in thousands) of maturities for 1997 through 2001
on long-term debt outstanding at December 31, 1996 are as follows:


1997.............................................................. $    14,970
1998.............................................................. $       350
1999.............................................................. $    12,030
2000.............................................................. $     1,050
2001.............................................................. $    16,038


Revolving Credit Facility and Other Credit Facilities

         At December 31, 1996, the Company has a $100 million  revolving  credit
facility (the  "Facility") with an expiration date of June 30, 1998. The Company
must pay commitment  fees of 3/10% per year on the total amount of the Facility.
The  Company  expects to renew the  Facility  before its  expiration  date.  The
Company also has a $100 million credit facility,  which expires on May 20, 2001,
and is  collateralized  by the  Company's  electric  and gas  customer  accounts
receivable and certain  amounts being  recovered from gas customers  relating to
certain gas  contract  settlements.  As of December  31,  1996,  the Company has
$110.6 million of available liquidity  arrangements,  consisting of $100 million
from the Facility and $10.6 million from local lines of credit.

Off-Balance Sheet Items

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



                                      F-15

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


(5)  Fair Value of Financial Instruments

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

                                        1996                     1995
                                 -------------------     --------------------
                                 Carrying     Fair       Carrying     Fair
                                  Amount      Value       Amount      Value
                                 --------    --------    --------    --------
                                                  (In thousands)

Long-Term Debt.................. $728,889    $731,358    $728,989    $730,337
Investment in PVNGS LOBs........ $212,979    $211,327          --          --

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

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


                                      F-16

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994

(6)    Income Taxes

       Income taxes consist of the following components:

                                                       1996     1995      1994
                                                      -------  -------  -------
                                                           (In thousands)

Current Federal income tax........................... $14,815  $45,940  $24,243
Current state income tax.............................   2,847    5,864       --
Deferred Federal income tax..........................  22,372   (3,212)  15,449
Deferred state income tax............................   4,936    7,031    8,077
Amortization of accumulated investment tax credits...  (4,476)  (4,442)  (4,701)
Recognition of accumulated deferred investment tax
   credits relating to sales of utility property ....      --     (388)  (2,197)
                                                      -------  -------  --------
   Total income taxes................................ $40,494  $50,793  $40,871

Charged to operating expenses........................ $39,395  $30,194  $44,210
Charged (credited) to other income and deductions....   1,099   20,599   (3,339)
                                                      -------  -------  --------
   Total income taxes ............................... $40,494  $50,793  $40,871
                                                      =======  =======  =======


       The Company's provision for income taxes differed from the Federal income
tax computed at the statutory rate for each of the years shown.  The differences
are attributable to the following factors:

                                                       1996    1995     1994
                                                     -------  -------  -------
                                                           (In thousands)

Federal income tax at statutory rates................$39,576  $44,224  $42,417
Investment tax credits............................... (4,476)  (4,442)  (4,701)
Depreciation of flow-through items...................    519      723    1,112
Gains on the sale and leaseback of PVNGS
   Units 1and 2......................................   (527)    (527)    (527)
State income tax.....................................  5,192    7,146    5,222
Gains on sale of utility property....................     --    3,090   (2,139)
Other................................................    210      579     (513)
                                                     -------  -------  --------
   Total income taxes ...............................$40,494  $50,793  $40,871
                                                     =======  =======  =======





                                      F-17

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994

(6)    Income Taxes (Continued)


       Deferred  income  taxes  result  from  certain  differences  between  the
recognition of income and expense for tax and financial reporting  purposes,  as
described in note 1. The major sources of these  differences  for which deferred
taxes have been provided and the tax effects of each are as follows:


                                                   1996      1995       1994
                                                  -------  --------  ---------
                                                                (In thousands)

Deferred fuel costs.............................. $ 8,234  $ (3,990) $  (1,945)
Depreciation and cost recovery...................  18,048    12,730     22,118
Loss provision for the M-S-R power purchase
  contract.......................................      --     3,497      5,632
Contributions in aid of construction.............  (4,053)   (4,308)    (5,055)
Alternative minimum tax in excess of regular
  tax............................................  (1,052)  (26,002)   (24,100)
Net operating losses utilized ...................      --    55,217     35,077
PVNGS decommissioning............................     537    (2,321)    (2,445)
Gains on sale of utility property................      --   (29,868)    (8,421)
Contribution to 401(h) plan......................    (510)     (885)     1,204
Regulatory liability.............................  (6,651)       --         --
Curtailment gain (pension plan)..................   5,272        --         --
Transmission project cost........................   4,898    (3,177)      (792)
Other............................................   2,585     2,926      2,253
                                                  -------- --------  ---------
   Net deferred taxes provided................... $27,308  $  3,819  $  23,526
                                                  =======  ========  =========


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


                                                           1996      1995
                                                         --------   --------
                                                           (In thousands)
Deferred Tax Assets:
   Alternative minimum tax credit carryforward.......... $ 67,681   $ 66,628
   Nuclear decommissioning..............................   16,303     14,023
   Regulatory liabilities...............................   54,430     60,070
   Other................................................   48,944     45,403
                                                         --------   --------
      Total deferred tax assets......................... $187,358   $186,124
                                                         --------   --------
Deferred Tax Liabilities:
   Depreciation......................................... $179,430   $168,562
   Investment tax credit................................   62,258     66,734
   Fuel costs...........................................   33,038     24,804
   Regulatory assets....................................   69,151     70,348
   Other................................................   16,005      1,239
                                                         --------   --------
      Total deferred tax liabilities....................  359,882    331,687
                                                         --------   --------
Accumulated deferred income taxes, net.................. $172,524   $145,563
                                                         ========   ========



                                      F-18

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


(6)    Income Taxes (Continued)

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


Net change in deferred income tax liability per above table.......  $ 26,961
Change in tax effects of income tax related regulatory assets 
       and liabilities............................................    (4,443)
Tax effect of excess pension liability............................       314
                                                                    --------
Deferred income tax expense for the period........................  $ 22,832
                                                                    ========

       The Company has no net operating  loss  carryforwards  as of December 31,
1996.

(7)    Employee and Post-Employment Benefits

Pension Plan

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


                                                1996        1995       1994
                                              ---------   --------   --------

Service cost................................. $   8,540   $  6,770   $  8,121
Interest cost................................    20,546     18,332     17,589
Actual loss (return) on plan assets..........   (31,211)   (42,148)     1,079
Net amortization and deferral................     9,577     23,295    (18,731)
                                              ---------   --------   --------
et periodic pension cost....................      7,452      6,249      8,058
Curtailment gain.............................   (13,317)        --         --
                                              ---------   --------   --------
Total pension expense (income)............... $  (5,865)  $  6,249   $  8,058
                                              =========   ========   ========







                                      F-19

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


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

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

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


                                                               1996      1995
                                                             --------  --------

Vested benefits............................................  $233,687  $222,501
Non-vested benefits........................................    13,470    10,556
                                                             --------  --------
Accumulated benefit obligation.............................   247,157   233,057
Effect of future compensation levels.......................    11,894    46,889
                                                             --------  --------
Projected benefit obligation...............................   259,051   279,946
Fair value of plan assets..................................   273,981   246,670
                                                             --------  --------
Projected benefit obligation in excess of (less than) 
  assets...................................................   (14,930)   33,276
Unrecognized prior service cost............................      (180)     (214)
Net unrecognized loss from past experience different 
  from assumed and the effects of changes in assumptions...    (5,814)  (41,185)
Unamortized asset at transition, being amortized through 
  the year 2002............................................     5,814     6,978
                                                             --------  --------
Accrued pension asset......................................  $(15,110) $ (1,145)
                                                             ========  ======== 



       The weighted average discount rate used to measure the projected  benefit
obligation was 7.75% and 7.50% for 1996 and 1995, respectively, and the expected
long-term rate of return on plan assets was 8.75% for 1996 and 1995. The rate of
increase in future  compensation levels based on age-related scales was 4.1% for
1996 and 1995.



                                      F-20

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


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

Other Postretirement Benefits

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

                                                   1996        1995     1994
                                                  -------    -------   ------

Service cost..................................... $ 1,449    $ 1,869   $1,389
Interest cost....................................   4,478      4,962    3,250
Actual loss (return) on plan assets..............  (1,208)    (2,726)     100
Transition obligation amortization...............   1,817      1,817    1,817
Net amortization and deferral....................    (159)     2,498     (295)
                                                  -------    -------   ------
Total postretirement benefit expense............. $ 6,377    $ 8,420   $6,261
                                                  =======    =======   ======

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


                                                            1996        1995
                                                          --------    --------
Accumulated benefit obligations for:
   Retirees.............................................. $ 25,237    $ 29,088
   Fully eligible employees..............................   15,375       7,144
   Active employees......................................   17,787      39,854
                                                          --------    --------
Accumulated benefit obligation...........................   58,399      76,086
Fair value of plan assets................................   20,930      15,600
                                                          ---------   ---------
Funded status............................................  (37,469)    (60,486)
Net unrecognized loss....................................    2,416      22,196
Unrecognized transition obligation (being amortized 
  through the year 2012).................................   29,074      30,891
                                                          ---------   ---------
Accrued postretirement liability......................... $ (5,979)   $ (7,399)
                                                          ========    ======== 



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

       The weighted average discount rate used to measure the projected  benefit
obligation was 7.75% and 7.50% for 1996 and 1995, respectively, and the expected
long-term  rate of return on plan assets was 8.75% for 1996 and 1995. The health
care  cost  trend  rate  was  8.0%,  8.0%  and 7.5%  for  1996,  1995 and  1994,
respectively.  The  effect  of a 1%  increase  in the  health  care  trend  rate
assumption would increase the accumulated  postretirement  benefit obligation as
of December 31, 1996 by  approximately  $10.4 million and the aggregate  service
and interest  cost  components of net periodic  postretirement  benefit cost for
1996 by approximately $1.1 million. The health care cost trend rate was expected
to decrease to 6.0% by 2010 and to remain at that level thereafter.



                                      F-21

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


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

Executive Retirement Program

       The Company has an executive retirement program for a group of management
employees.  The  program  was  intended  to  attract,  motivate  and  retain key
management  employees.  The  Company's  projected  benefit  obligation  for this
program,  as of December 31, 1996, was $18.3 million,  of which the  accumulated
and vested benefit  obligation  was $17.4 million.  As of December 31, 1996, the
Company has recognized an additional liability of $2.1 million for the amount of
unfunded  accumulated  benefits  in excess of  accrued  pension  costs.  The net
periodic pension cost for 1996, 1995 and 1994 was $2.1 million, $2.0 million and
$2.2 million,  respectively.  In 1989,  the Company  established  an irrevocable
grantor trust in connection  with the executive  retirement  program.  Under the
terms of the trust,  the Company may, but is not obligated to,  provide funds to
the trust,  which was  established  with an  independent  trustee,  to aid it in
meeting its obligations under such program. Funds in the amount of approximately
$10.1  million (fair market value of $13.9  million) are presently in trust.  No
additional funds have been provided to the trust since 1989.

Performance Stock Plan

     The Company has a  non-qualifying  stock option  plan,  covering a group of
management employees. Options are granted at the fair market value of the shares
on the date of the grant.  Options granted through December 31, 1995,  vested on
June 30, 1996,  have an exercise term of up to 10 years.  All subsequent  awards
granted after  December 31, 1995,  shall vest three years from the grant date of
the awards and the maximum  number of options are five  million  shares  through
December 31,  2000.  In addition,  the Company has a Director  Restricted  Stock
Retainer  Plan. The number of option shares granted in 1996 under the restricted
stock retainer plan was 4,000 shares with an exercise price of $5.50. No options
under the restricted stock retainer plan were exercised during 1996.

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

     The  Company  applies  APB  Opinion  25,  Accounting  for  Stock  Issued to
Employees,  and related interpretations in accounting for its plan. Accordingly,
no  compensation  cost has been  recognized for its fixed stock option plan. Had
compensation  cost  for  the  Company's  stock  based   compensation  plan  been
determined   consistent   with  SFAS  No.  123,   Accounting   for   Stock-Based
Compensation,  the  effect on the  Company's  pro forma net income and pro forma
earnings per share would not be material.

                                      F-22

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


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

     A  summary  of  the  status  of  the  Company's  fixed  stock  option  plan
(Performance  Stock Plan) at December  31, 1996 and 1995 and changes  during the
years then ended is presented below:

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

Outstanding at beginning of year     508,986     $17.625         --          --
Granted                              390,228     $19.480   508,9866     $17.625
Exercised                             52,427          --         --          --
Forfeited                                 --          --         --          --
                                    --------               --------
Outstanding at end of year           846,787     $18.480   508,9866     $17.625
                                    ========               ========

Options exercisable at year-end      456,559                     --

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


     The  following  table  summarizes  information  about fixed  stock  options
outstanding at December 31, 1996:

                    Options Outstanding                Options Exercisable
          ----------------------------------------- ------------------------
                          Weighted-
                           Average       Weighted
Range of     Number       Remaining       Average      Number      Weighted
Exercise  Outstanding    Contractual     Exercise    Exercisable    Average
 Prices   at 12/31/96       Life          Prices     at 12/31/96     Price
--------- -------------- --------------  ---------- -------------  ---------

$  5.50 -
$19.625      846,787      9.46 years      $18.547      456,559      $17.625


                                      F-23

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


(8)    Construction Program and Jointly-Owned Plants

     It is estimated that the Company's construction  expenditures for 1997 will
be approximately $165 million, including expenditures on jointly-owned projects.
The Company's  proportionate  share of expenses for the jointly-owned  plants is
included in operating expenses in the consolidated statements of earnings.

     At  December  31,  1996,  the  Company's   interests  and   investments  in
jointly-owned generating facilities are:


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

San Juan Generating Station (Coal)... $724,525     $319,962    $ 3,755    46.3%
Palo Verde Nuclear Generating                               
   Station (Nuclear)*................ $198,549     $ 43,052    $10,723    10.2%
Four Corners Power Plant Units 4      
   and 5 (Coal)...................... $117,884     $ 48,879    $ 3,613    13.0%

-----------

     *  Includes the Company's  interest in PVNGS Unit 3, the Company's interest
        in  common  facilities  for all  PVNGS  units  and  the  22%  beneficial
        interests in the PVNGS Units 1 and 2 leases.

San Juan Generating Station ("SJGS")

     The Company  operates  and jointly owns SJGS.  At December  31, 1996,  SJGS
Units 1 and 2 are  owned  on a 50%  shared  basis  with  Tucson  Electric  Power
Company, Unit 3 is owned 50% by the Company, 41.8% by Southern California Public
Power Authority and 8.2% by Tri-State  Generation and Transmission  Association,
Inc. Unit 4 is owned 38.457% by the Company, 28.8% by M-S-R Public Power Agency,
California  public  power  agency  ("M-S-R"),  10.04%  by the  City of  Anaheim,
California,  8.475% by the City of Farmington, 7.2% by the County of Los Alamos,
and 7.028% by Utah Associated Municipal Power Systems.

Palo Verde Nuclear Generating Station

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

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

                                      F-24

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


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

     The  PVNGS  participants  have  insurance  for  public  liability  payments
resulting  from  nuclear  energy  hazards to the full limit of  liability  under
Federal law. This potential  liability is covered by primary liability insurance
provided by commercial  insurance carriers in the amount of $200 million and the
balance  by an  industry-wide  retrospective  assessment  program.  The  maximum
assessment per reactor under the  retrospective  rating program for each nuclear
incident  occurring  at  any  nuclear  power  plant  in  the  United  States  is
approximately  $79.3  million,  subject to an annual  limit of $10  million  per
incident.  Based upon the Company's 10.2% interest in the three PVNGS units, the
Company's  maximum  potential  assessment  per  incident  for all three units is
approximately $24.3 million, with an annual payment limitation of $3 million per
incident.  The  insureds  under  this  liability  insurance  include  the  PVNGS
participants  and "any other  person or  organization  with respect to his legal
responsibility  for damage caused by the nuclear  energy  hazard".  If the funds
provided by this  retrospective  assessment  program  prove to be  insufficient,
Congress could impose revenue  raising  measures on the nuclear  industry to pay
claims.

     The PVNGS  participants  maintain  "all-risk"  (including  nuclear hazards)
insurance for nuclear  property damage to, and  decontamination  of, property at
PVNGS in the aggregate  amount of  approximately  $2.75 billion as of January 1,
1997,  a  substantial  portion of which must be  applied  to  stabilization  and
decontamination.  The Company has also secured insurance against portions of the
increased  cost of  generation  or  purchased  power and  business  interruption
resulting from certain accidental outages of any of the three PVNGS units if the
outage  exceeds  21  weeks.  The  Company  is a member  of two  industry  mutual
insurers.  These mutual insurers  provide both the "all-risk" and increased cost
of  generation  insurance  to  the  Company.  In the  event  of  adverse  losses
experienced  by these  insurers,  the Company is subject to an  assessment.  The
Company's  maximum  share of any  assessment is  approximately  $3.9 million per
year.

     The Company has a program  for funding its share of  decommissioning  costs
for PVNGS. Under this program,  the Company makes a series of annual deposits to
an  external  trust over the  estimated  useful life of each unit with the trust
funds being invested under a plan which allows the accumulation of funds largely
on a tax-deferred  basis through the use of life  insurance  policies on certain
current  and former  employees.  The results of the 1995  decommissioning  study
indicate that the  Company's  share of the PVNGS  decommissioning  costs will be
approximately  $147.5  million,  a decrease  from  $157.8  million  based on the
previous 1992 study (both amounts are stated in 1995 dollars).

     The Company  determined  that a  supplemental  investment  program  will be
needed  as a  result  of both  historical  cost  increases  and the  lower  than
anticipated  performance  of the existing  program.  On September 29, 1995,  the
Company filed a request for  permission  from the NMPUC to establish a qualified
tax advantaged  trust for PVNGS Units 1 and 2. Due to Internal  Revenue  Service
regulations, PVNGS Unit 3 will remain in a non-qualified trust.

     Pursuant to NMPUC approval the Company  funded an additional  $12.5 million
into the qualified and  non-qualified  funds.  The estimated market value of the
trusts,  including the current life insurance  policies,  at the end of 1996 was
approximately $25.6 million.



                                      F-25

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


(9)  Long-Term Power Contracts and Franchises

     The Company had two long-term contracts for the purchase of electric power.
Under a contract  with  M-S-R,  which  expired in early  1995,  the  Company was
obligated to pay certain minimum amounts and a variable  component  representing
the  expenses  associated  with the  energy  purchased  and debt  service  costs
associated  with  capital  improvements.  Total  payments  under  this  contract
amounted to approximately $14 million for 1995 and $42 million for 1994.

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

     The  Company  anticipates  the  need  for  approximately  100  to 200 MW of
additional  capacity in the 1998 through 2000  timeframe.  To meet this need, on
October 4, 1996, the Company  entered into a long-term  power purchase  contract
with the Cobisa-Person Limited Partnership ("PLP") to purchase approximately 100
MW of unit contingent  peaking capacity from a gas turbine generating unit for a
period of 20 years,  with an option to renew for an additional  five years.  The
gas turbine  generating unit will be constructed and operated by PLP and will be
located on the  Company's  retired  Person  Generating  Station  site located in
Albuquerque,  New Mexico.  The site for the generating unit was chosen, in part,
to provide needed  benefits to the Company's  constrained  transmission  system.
Depending on the regulatory  timing of NMPUC and FERC approvals and the securing
of necessary  permits,  construction  could start in August 1998 with commercial
operation beginning by May 1999. The operational date was chosen to satisfy both
resource and transmission  needs for the Company's  jurisdictional  load. During
October  1996,  the Company  filed a request for approval from the NMPUC and PLP
filed its  application for requisite state  commission  determinations  from the
NMPUC.  These two applications were consolidated by the NMPUC. In December 1996,
the NMPUC established a procedural  schedule for the consolidated  applications.
The  Company  and PLP have  requested  a final  order from the NMPUC by July 31,
1997.  Thereafter,  certain  actions from the FERC will be  required,  including
approval of PLP's status as an "exempt wholesale  generator" under Section 32 of
the Public Utility Holding Company Act.

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


                                      F-26

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


(10)    Lease Commitments

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

     Future minimum operating lease payments (in thousands) at December 31, 1996
are:


1997.............................................................. $   79,028
1998..............................................................     78,700
1999..............................................................     78,333
2000..............................................................     78,213
2001..............................................................     78,100
Later years.......................................................  1,026,864
                                                                   ----------
   Total minimum lease payments................................... $1,419,238
                                                                   ==========


       Operating  lease expense,  inclusive of PVNGS leases,  was  approximately
$80.3  million  in 1996,  $80.0  million  in 1995  and  $79.1  million  in 1994.
Aggregate minimum payments to be received in future periods under  noncancelable
subleases are approximately $6.6 million.

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

        The  Company  has  evaluated  the  potential  impacts  of the  following
environmental issues and believes,  after consideration of established reserves,
that the ultimate outcome of these environmental issues will not have a material
adverse effect on the Company's financial condition or results of operations.


                                      F-27

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


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

Electric Operations

Santa Fe Station

       The Company and the New Mexico  Environmental  Department  ("NMED")  have
conducted  investigations of the groundwater  contamination detected beneath the
former  Santa  Fe  Generating  Station  site  to  determine  the  source  of the
contamination. The Company has been and is continuing to cooperate with the NMED
regarding site  investigations  and remedial  planning  pursuant to a settlement
agreement between the Company and the NMED. In June 1996, the Company received a
letter  from the NMED,  indicating  that the NMED  believes  the  Company is the
source of gasoline contamination in a municipal well supplying the City of Santa
Fe and  groundwater  underlying the Santa Fe Station.  Further,  the NMED letter
stated that the Company was required to proceed with interim  remediation of the
contamination  pursuant  to the New  Mexico  Water  Quality  Control  Commission
("NMWQCC") regulations.

       In July 1996, the Company filed an appeal with the NMWQCC  protesting the
determination  and  directives   contained  in  the  NMED's  June  1996  letter.
Subsequently,  negotiation  meetings were conducted  between the Company and the
NMED for a resolution of the groundwater contamination issue.

       On October 3, 1996,  the Company and the NMED signed an  Amendment to the
Settlement  Agreement concerning the groundwater  contamination.  As part of the
Amendment,  the Company agreed to spend approximately $1.2 million  ("Settlement
Amount") for certain costs related to sampling,  monitoring, and development and
implementation  of a remediation  plan. The remediation  plan is to be developed
jointly by the Company and the NMED. Since the contamination affects a municipal
well  supplying  the City of Santa Fe, the  cooperation  of the City of Santa Fe
will also be sought in the  development  of the  plan.  The  amended  Settlement
Agreement  does not,  however,  provide  the  Company  with a full and  complete
release from potential  further  liability for  remediation  of the  groundwater
contamination. After the Company has expended the Settlement Amount, if the NMED
can  establish  through  binding  arbitration  that the Santa Fe  Station is the
source of the  contamination,  the Company could be required to perform  further
remediation that is determined to be necessary. The Company continues to dispute
any  contention  that the Santa Fe  Station  is the  source  of the  groundwater
contamination and believes that insufficient data exists to identify the sources
of   groundwater   contamination.   The   Company  has   completed   an  aquifer
characterization  report and a groundwater quality report associated with the 40
day  reactivation  of the  adjacent  Santa Fe supply  well in July and August of
1996.  These reports  strongly  suggest the groundwater  contamination  does not
originate  from the Santa Fe Station  site and has been drawn  under the site by
the pumping of the Santa Fe supply well. In addition, other urban wells in Santa
Fe are likely vulnerable to contamination from off-site sources.  The Company is
working to provide a remedial approach plan by April 1997 in accordance with the
amended Settlement Agreement.


                                      F-28

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


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

Person Station

       The Company,  in compliance with the NMED's  Corrective Action Directive,
determined that groundwater  contamination  exists in the deep and shallow water
aquifers.  The Company is required to delineate the extent of the  contamination
and  remediate  the  contaminants  in  the   groundwater.   The  extent  of  the
contaminated  plume in the deep water  aquifer was  assessed  and  results  were
reported to the NMED. The Company also proposed  revised remedial options to the
NMED.  The Company is awaiting a final  response  from the NMED.  The  Company's
current  estimate to  decommission  its retired  fossil-fueled  plants  includes
approximately  $10.9 million to complete the groundwater  remediation program at
Person  Station.  As part of the financial  assurance  requirement of the Person
Station  Hazardous  Permit,  the Company posted a $5.1 million  performance bond
with a trustee. The remediation program continues on schedule.

Gas Operations

Gas Wellhead Pit Remediation

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

       These   gas   gathering    facilities   were   sold   to   Williams   Gas
Processing-Blanco  Inc., a subsidiary of Williams Field Services Group, Inc., of
Tulsa Oklahoma  ("Williams")  on June 30, 1995. As a part of the sale agreement,
the Company  agreed to cease  discharge to unlined  earthen  pits in  designated
vulnerable areas and to retain the  responsibility for pit closures for a stated
period of time and to a stated  dollar  amount  (see note 12).  The  Company has
assessed  the pits in  accordance  with  OCD/BLM  directives,  and is now in the
process  of  closing  pits and  remediating  them,  if  necessary,  at  wellhead
locations  within the designated  vulnerable  areas. The Company has submitted a
groundwater  management  plan to the OCD and has received  approval of the plan,
and  is  proceeding  with  delineation  of  groundwater  contamination  and,  as
necessary,  cleanup,  in  accordance  with the approved  plan.  The Company will
address groundwater contamination within the dollar and time limitations imposed
by the sale agreement with Williams,  and in accordance with the requirements of
the OCD.


                                      F-29

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


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

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

(12)   Asset Sales

       In 1995, the Company and its subsidiaries sold certain  non-strategic gas
assets for approximately $154 million to Williams, recognizing an after-tax gain
of $12.8  million.  This gain was  adjusted  to $11.8  million in 1996 due to an
accrual for additional gas environmental  costs. Under the NMPUC order approving
the sale,  the Company is required to share  approximately  $35 million from the
sale with  customers,  which will be credited to the customers'  bills over five
years.  After  completion  of the  fifth  year,  the  amount  of  gain  will  be
recalculated to include actual expenses  specified in the agreement,  subject to
NMPUC review.  As of December 31, 1996,  the Company has a remaining  balance of
$22.2  million  for future  years  credit to the  customers.  In  addition,  the
Company,  in 1995,  sold its  water  division  to the City of Santa Fe for $51.2
million  (exclusive  of current  assets  netted  against  current  liabilities),
recognizing a after-tax gain of $6.4 million.  Pursuant to the purchase and sale
agreement,  the Company, through its Energy Service Business Unit, will continue
to operate the water  utility up to four years from the  closing  date for a fee
under a contract with the City of Santa Fe.


                                      F-30

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994

(13)   Segment Information

       The financial information  pertaining to the Company's electric,  gas and
other  operations  for the years ended  December 31, 1996,  1995 and 1994 are as
follows:
<TABLE>
<CAPTION>

                                                          Electric*      Gas      Other      Total
                                                         ----------   --------   -------  ----------
                                                                      (In thousands)
1996:

<S>                                                      <C>          <C>        <C>      <C>       
   Operating revenues................................... $  645,639   $227,301   $10,446  $  883,386
   Operating expenses excluding income taxes............    509,804    191,922    16,246     717,972
                                                         ----------   --------   -------  ----------    
   Pre-tax operating income (loss)......................    135,835     35,379    (5,800)    165,414
   Operating income tax.................................     32,422      8,927    (1,954)     39,395
                                                         ----------   --------   -------  ----------
   Operating income (loss).............................. $  103,413   $ 26,452   $(3,846) $  126,019
                                                         ==========   ========   =======  ==========
                                                                                         

   Depreciation and amortization expense................ $   64,817   $ 13,122   $   177  $   78,116
                                                         ==========   ========   =======  ==========
   Construction expenditures............................ $   76,572   $ 26,497   $    18  $  103,087
                                                         ==========   ========   =======  ==========
   Identifiable assets:
      Net utility plant................................. $1,270,141   $281,348   $ 1,204  $1,552,693
      Other.............................................    449,478    202,725    25,418     677,621
                                                         ----------   --------   -------  ----------    
        Total assets.................................... $1,719,619   $484,073   $26,622  $2,230,314
                                                         ==========   ========   =======  ==========

1995:

   Operating revenues................................... $  584,284   $217,985   $ 6,196  $  808,465
   Operating expenses excluding income taxes............    470,824    190,128     3,931     664,883
                                                         ----------   --------   -------  ----------    
   Pre-tax operating income.............................    113,460     27,857     2,265     143,582
   Operating income tax.................................     24,884      4,313       997      30,194
                                                         ----------   --------   -------  ----------   
   Operating income..................................... $   88,576   $ 23,544   $ 1,268  $  113,388
                                                         ==========   ========   =======  ==========
   Depreciation and amortization expense................ $   63,047   $ 17,248   $   570  $   80,865
                                                         ==========   ========   =======  ==========
   Contruction expenditures............................. $   76,610   $ 26,315   $ 4,741  $  107,666
                                                         ==========   ========   =======  ==========

   Identifiable assets:
      Net utility plant................................. $1,298,103   $276,218   $   113  $1,574,434
      Other.............................................    327,547    125,387     8,301     461,235
                                                         ----------   --------   -------  ----------   
        Total assets.................................... $1,625,650   $401,605   $ 8,414  $2,035,669
                                                         ==========   ========   =======  ==========
                                                                                  
</TABLE>






                                      F-31

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


(13)    Segment Information (Continued)
<TABLE>
<CAPTION>
                                                         Electric*      Gas      Other      Total
                                                         ----------   --------   -------  ----------
                                                                       (In thousands)
1994:

<S>                                                      <C>          <C>        <C>      <C>       
   Operating revenues................................... $  621,794   $269,510   $13,407  $  904,711
   Operating expenses excluding income taxes............    468,519    233,743     7,161     709,423
                                                         ----------   --------   -------  ----------
   Pre-tax operating income.............................    153,275     35,767     6,246     195,288
   Operating income tax.................................     32,998      9,158     2,054      44,210
                                                         ----------   --------   -------  ----------
   Operating income..................................... $  120,277   $ 26,609   $ 4,192  $  151,078
                                                         ==========   ========   =======  ==========
                                                         
   Depreciation and amortization expense................ $   56,003   $ 16,847   $ 1,287  $   74,137 
                                                         ==========   ========   =======  ==========
                                                         
   Construction expenditures............................ $   80,282   $ 31,518   $ 8,506  $  120,306
                                                         ==========   ========   =======  ==========

   Identifiable assets:
      Net utility plant................................. $1,302,467   $341,232   $52,988  $1,696,687
      Other.............................................    307,010    187,748    11,820     506,578
                                                         ----------   --------   -------  ----------
        Total assets.................................... $1,609,477   $528,980   $64,808  $2,203,265
                                                         ==========   ========   =======  ==========

</TABLE>

-----------

* Includes the resources excluded from NMPUC retail rates regulation.

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

(14)   Subsequent Events

       On  February  13,  1997,  the NMPUC  issued a final order in the gas rate
case,  ordering  a rate  decrease  of $7.0  million.  (See  PART II,  ITEM 7. --
"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS  -- OTHER ISSUES  FACING THE COMPANY -- GAS RATE CASE and NMPUC ORDER
-- THE COMPANY'S JANUARY 1997 PGAC FACTOR VARIANCE REQUEST; ORDER TO FILE RETAIL
ELECTRIC  AND GAS RATE CASES" in this  report.) In ordering  the rate  decrease,
among other  things,  the NMPUC  disallowed  the recovery of certain  regulatory
assets. The Company strongly disagrees with the NMPUC's final order and filed an
appeal with the New Mexico  Supreme Court on February 17, 1997.  The Company has
evaluated  the impacts of the rate  reduction  and has  established  appropriate
reserves in its 1996 financial statements, pending the outcome of the appeal.


                                      F-32

<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1996, 1995 and 1994


(14)   Subsequent Events (Continued)

       The NMPUC issued a final order in the Company's  January 1997 PGAC Factor
Variance  Request on February 13, 1997.  In the order,  the NMPUC  imposed,  but
suspended,  a fine of $2.2 million to the Company due to an allegedly  incorrect
cost factor (too low) that was filed in November  1996.  In addition,  the NMPUC
disallowed  collection  of $1.6 million of gas costs and ordered an  independent
audit to be conducted to review the Company's PGAC factor  calculations  for the
period of  December  1995  through  January  1997.  The NMPUC also  ordered  the
docketing of two new investigations.  The first, which requires a Company filing
by March 15, 1997, will  investigate  whether or not the Company should exit the
merchant  function in providing  gas  supplies to  customers.  The second,  will
investigate  the prudence of the  Company's  portfolio  strategies  and purchase
practices.  In  addition,  the NMPUC  ordered the Company to file a new gas rate
case by August 1, 1997, and also ordered the Company to file an electric  retail
rate case by May 1, 1997.

   In the  order,  the NMPUC  accused  the  Company of  intentionally  filing an
inaccurate  factor to avoid a hearing,  thus,  impairing the NMPUC's  ability to
investigate  rising gas prices.  The Company strongly disagrees with the NMPUC's
final order and is evaluating  its options,  including  rehearing and a possible
appeal to the New Mexico Supreme Court.


                                      F-33

<PAGE>



              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
                           QUARTERLY OPERATING RESULTS


   The unaudited operating results by quarters for 1996 and 1995 are as follows:


                                                     Quarter Ended
                                     -------------------------------------------
                                     March 31  June 30  September 30 December 31
                                     --------  -------- ------------ -----------
                                       (In thousands except per share amounts)
1996:
   Operating Revenues................ $241,904  $197,597   $210,757    $233,128
   Operating Income.................. $ 38,475  $ 25,346   $ 32,412    $ 29,786
   Net Earnings (1), (2) ............ $ 26,448  $ 13,542   $ 19,940    $ 12,650
   Net Earnings per Share (1), (2)... $   0.63  $   0.32   $   0.47    $   0.30

1995:
   Operating Revenues................ $230,235  $191,532   $195,586    $191,112
   Operating Income.................. $ 33,731  $ 25,024   $ 34,734    $ 19,899
   Net Earnings (1).................. $ 18,184  $ 23,419   $ 28,969    $  4,990
   Net Earnings per Share (1)........ $   0.40  $   0.52   $   0.68    $   0.12


        In the opinion of management of the Company, all adjustments (consisting
   of normal recurring  accruals)  necessary for a fair statement of the results
   of operations for such periods have been included.

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

(1)      On June 30, 1995, the Company consummated the sale of substantially all
         of the gas gathering and  processing  assets of the Company and its gas
         subsidiaries  to Williams.  The Company  recorded an after-tax  gain of
         $12.8 million,  or 31 cents per share.  The gain amount was adjusted by
         $1.0  million  or two  cents per  share in 1996 due to an  accrual  for
         additional  gas  environmental  costs.  On July 3,  1995,  the  Company
         consummated  the sale of the  Company's  water  division to the City of
         Santa Fe. The Company recorded an after-tax gain of $6.4 million, or 15
         cents per share (see note 12).

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

                                      F-34

<PAGE>


<TABLE>
<CAPTION>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                        COMPARATIVE OPERATING STATISTICS


                                                     1996        1995        1994        1993         1992
                                                 -----------  ----------  ----------  ----------   ----------
<S>                                                <C>         <C>         <C>         <C>          <C>      
Electric Service Energy Sales -- KWh 
  (in thousands):
   Residential..................................   1,892,290   1,795,371   1,786,292   1,683,213    1,650,491
   Commercial...................................   2,698,087   2,578,243   2,534,507   2,398,725    2,353,152
   Industrial...................................   1,505,801   1,434,974   1,268,208   1,145,369    1,087,357
   Other ultimate customers.....................     310,118     220,777     364,144     219,481      267,246
                                                 -----------  ----------  ----------  ----------   ----------
      Total sales to ultimate customers.........   6,406,296   6,029,365   5,953,151   5,446,788    5,358,246
   Sales for resale.............................   4,575,220   2,590,513   3,361,933   3,375,216    3,685,418
                                                 -----------  ----------  ----------  ----------   ----------
      Total KWh sales...........................  10,981,516   8,619,878   9,315,084   8,822,004    9,043,664
                                                 ===========  ==========  ==========  ==========   ==========
Electric Revenues (in thousands):
   Residential.................................. $   177,220  $  168,633  $  172,559  $  163,131   $  158,190
   Commercial...................................     226,146     218,222     229,851     218,263      211,086
   Industrial...................................      83,651      79,964      79,729      74,157       69,590
   Other ultimate customers.....................      20,804      18,749      24,147      15,548       16,521
                                                 -----------  ----------  ----------  ----------   ----------
      Total revenues to ultimate
        customers...............................     507,821     485,568     506,286     471,099      455,387
   Sales for resale.............................     121,329      80,949*     96,821*     99,895*     123,291
                                                 -----------  ----------  ----------  ----------   ----------
      Total revenues from energy sales..........     629,150     566,517     603,107     570,994      578,678
   Miscellaneous electric revenues..............      16,489      17,767      18,687      18,734       17,645
                                                 -----------  ----------  ----------  ----------   ----------
      Total electric revenues................... $   645,639  $  584,284  $  621,794  $  589,728   $  596,323
                                                 ===========  ==========  ==========  ==========   ==========

Customers at Year End:
   Residential..................................     304,900     296,821     287,369     278,357      271,155
   Commercial...................................      36,292      35,390      34,336      33,568       32,504
   Industrial...................................         375         374         384         381          386
   Other ultimate customers.....................         632         598         599         576          537
                                                 -----------  ----------  ----------  ----------   ----------
      Total ultimate customers..................     342,199     333,183     322,688     312,882      304,582
   Sales for Resale.............................          56          37          42          37           47
                                                 -----------  ----------  ----------  ----------   ----------
      Total customers...........................     342,255     333,220     322,730     312,919      304,629
                                                 ===========  ==========  ==========  ==========   ==========

Reliable Net Capability-- KW....................   1,506,000   1,506,000   1,506,000   1,541,000    1,591,000
Coincidental Peak Demand-- KW...................   1,217,000   1,247,000   1,189,000   1,104,000    1,053,000
Average Fuel Cost per Million BTU............... $    1.2735  $   1.3177  $   1.3488  $   1.3844   $   1.3263
BTU per KWh of Net Generation...................      10,768      10,811      10,817      11,036       11,039

Water Service**
   Water Sales-- Gallons (in thousands)                   --   1,616,544   3,366,388   3,414,950    3,224,271
   Revenues (in thousands)......................          --  $    6,196  $   13,407  $   13,063   $   12,471
   Customers at Year End........................          --      23,752      23,452      22,743       22,098
</TABLE>

---------

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

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

                                      F-35

<PAGE>


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

                        COMPARATIVE OPERATING STATISTICS

                                                  1996        1995       1994       1993      1992
                                                ---------  ---------   --------   --------  ---------
<S>                                                <C>        <C>        <C>        <C>        <C>   
Gas Throughput--Decatherms (in thousands)
PNMGS:
   Residential..................................   27,387     25,865     27,139     28,031     27,063
   Commercial...................................    9,310      8,864      9,767     10,428     10,590
   Industrial...................................    2,136        661        831        923        707
   Public authorities...........................    2,591      2,411      2,465      2,473      4,199
   Irrigation...................................    1,418      1,245      1,272      1,259      1,134
   Sales for resale.............................    3,094      1,266        680      1,041      2,035
   Off-System Sales.............................    5,745      1,176         --         --         --
   Unbilled.....................................    1,405     (1,764)      (309)      (636)       649
                                                ---------  ---------   --------   --------  ---------
   PNMGS sales..................................   53,086     39,724     41,845     43,519     46,377
   Transportation throughput....................   47,010     49,136     43,135     46,059     48,674
                                                ---------  ---------   --------   --------  ---------
   PNMGS throughput.............................  100,096     88,860     84,980     89,578     95,051
Gathering Company:
   Spot market sales............................       --         39         --         --        858
   Transportation throughput....................       --     20,695     47,091     45,754     24,889
                                                ---------  ---------   --------   --------  ---------
      Total throughput..........................  100,096    109,594    132,071    135,332    120,798
                                                =========  =========   ========   ========  =========

Gas Revenues (in thousands)
PNMGS:
   Residential..................................$ 129,911  $ 125,290   $149,439   $149,796  $ 125,313
   Commercial...................................   33,022     32,328     42,725     44,575     37,222
   Industrial...................................    5,179      1,873      2,905      3,369      2,063
   Public authorities...........................    8,018      7,939      9,969      9,694     12,313
   Irrigation...................................    3,252      3,077      4,061      4,418      2,713
   Sales for resale.............................    2,106      3,114      2,462      3,137      4,460
   Off-System Sales.............................   14,352      1,885         --         --         --
   Imbalance penalties..........................    1,231      1,786        944         --         --
   Unbilled.....................................    2,677     (2,430)       267     (1,573)       716
                                                ---------  ---------   --------   --------  ---------
   Revenues from gas sales......................  199,749    174,862    212,772    213,416    184,800
   Transportation...............................   17,215     18,532     19,742     19,376     14,861
   Liquids......................................    7,608     12,782     14,551     18,214     25,620
   Other........................................    2,729      3,606      4,705      3,576      5,810
                                                ---------  ---------   --------   --------  ---------
   PNMGS operating revenues.....................  227,301    209,782    251,770    254,582    231,091
Gathering Company:
   Spot market sales............................       --         42         --          4      1,410
   Transportation...............................       --      3,640      7,850      7,353      3,892
   Imbalance penalties..........................       --        418         26         --         --
Processing Company:
   Liquids revenue..............................       --        632       (621)      (311)       807
   Processing fees..............................       --      3,471     10,485      9,459      6,795
                                                ---------  ---------   --------   --------  ---------
      Total operating revenues..................$ 227,301  $ 217,985   $269,510   $271,087  $ 243,159
                                                =========  =========   ========   ========  =========
                                   
Customers at Year End
PNMGS:
   Residential..................................  367,025    358,822    348,715    337,768    329,385
   Commercial...................................   30,757     30,493     30,139     30,151     29,765
   Industrial...................................       54         59         57         72         61
   Public authorities...........................    2,462      2,444      2,463      1,958      2,004
   Irrigation...................................    1,076        886        899        951      1,012
   Sales for resale.............................        3          2          3          3          4
   Transportation...............................       36         38         43         37         43
                                                ---------  ---------   --------   --------  ---------
   PNMGS customers..............................  401,413    392,744    382,319    370,940    362,274
Gathering Company:
   Off-system sales.............................       --         --         --          1          2
   Transportation...............................       --         --         21         21         16
Processing Company..............................       --         --         32         25         22
                                                ---------  ---------   --------   --------  ---------
      Total customers...........................  401,413    392,744    382,372    370,987    362,314
                                                =========  =========   ========   ========  =========
</TABLE>

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

 <PAGE>

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

         None.
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

       Reference  is hereby made to  "Election of  Directors"  in the  Company's
Proxy  Statement  relating to the annual meeting of  stockholders  to be held on
April 29, 1997 (the "1997 Proxy  Statement") and to PART I, SUPPLEMENTAL ITEM --
"EXECUTIVE OFFICERS OF THE COMPANY".

ITEM 11.  EXECUTIVE COMPENSATION

       Reference is hereby made to  "Executive  Compensation"  in the 1997 Proxy
Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT

       Reference is hereby made to "Voting Information", "Election of Directors"
and "Stock Ownership of Certain Executive Officers" in the 1997 Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       Reference is hereby made to the 1997 Proxy Statement for such disclosure,
if any, as may be required by this item.

                                     PART IV

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

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

       (a) -- 2. Financial Statement Schedules for the years 1996, 1995,
                 and  1994  are  omitted  for the  reason  that  they  are not
                 required or the information is otherwise supplied.

       (a) -- 3-A. Exhibits Filed:


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

10.9.6          Amendment  Number  Nine to Coal  Sales  Agreement,  dated  as of
                December 31, 1995, among San Juan Coal Company,  the Company and
                Tucson Electric Power Company.

10.19           Facility Lease dated as of July 31, 1986, between The First 
                National Bank of Boston,  as Owner  Trustee,  and Public Service
                Company of New Mexico  together with  Amendments  No. 1, 2 and 3
                thereto (refiled).




                                       E-1

<PAGE>



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

10.20*          Facility Lease dated as of August 12, 1986, between The First
                National Bank of Boston,  as Owner  Trustee,  and Public Service
                Company  of New  Mexico  together  with  Amendments  No. 1 and 2
                thereto (refiled).

10.21           Facility Lease dated as of December 15, 1986, between The First
                National Bank of Boston,  as Owner  Trustee,  and Public Service
                Company  of  New  Mexico  (Unit  1  Transaction)  together  with
                Amendment No 1 thereto (refiled).

10.22           Facility Lease dated as of December 15, 1986, between The First
                National Bank of Boston,  as Owner  Trustee,  and Public Service
                Company  of  New  Mexico  (Unit  2  Transaction)  together  with
                Amendment No. 1 thereto (refiled).

10.70**         Employment Termination and Release Agreement for M. Phyllis 
                Bourque.

23.1            Consent of Arthur Andersen LLP.

27              Financial Data Schedule.

99.5            Participation  Agreement  dated as of July 31,  1986,  among the
                Owner Participant named therein,  First PV Funding  Corporation.
                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),  Chemical  Bank, in its
                individual  capacity  and as  Indenture  Trustee  (under a Trust
                Indenture,  Mortgage, Security Agreement and Assignment of Rents
                dated as of July 31, 1986, with the Owner  Trustee),  and Public
                Service Company of New Mexico,  including Appendix A definitions
                together with Amendment No. 1 thereto (refiled).

99.6            Trust Indenture, Mortgage, Security Agreement and Assignment of
                Rents dated as of July 31, 1986, between The First National Bank
                of Boston,  as Owner  Trustee,  and Chemical  Bank, as Indenture
                Trustee  together  with  Supplemental  Indenture  No. 1  thereto
                (refiled).

99.7            Assignment, Assumption, and Further Agreement dated as of 
                July 31, 1986,  between Public Service Company of New Mexico and
                The First National Bank of Boston, as Owner Trustee (refiled).

99.9*           Trust Indenture,  Mortgage, Security Agreement and Assignment of
                Rents dated as of August 12,  1986,  between The First  National
                Bank  of  Boston,  as  Owner  Trustee,  and  Chemical  Bank,  as
                Indenture  Trustee  together with  Supplemental  Indenture No. 1
                thereto (refiled).

99.15           Trust Indenture, Mortgage, Security Agreement and Assignment of 
                Rents dated as of December 31, 1986,  between the First National
                Bank  of  Boston,  as  Owner  Trustee,  and  Chemical  Bank,  as
                Indenture Trustee (Unit 2 Transaction) (refiled)

99.17*          Waiver letter with respect to "Deemed Loss Event" dated as of
                August 18, 1986,  between the Owner  Participant  named therein,
                and Public Service Company of New Mexico (refiled).

99.18*          Waiver letter with respect to "Deemed Loss Event" dated as of
                August 18, 1986,  between the Owner  Participant  named therein,
                and Public Service Company of New Mexico (refiled).




                                       E-2

<PAGE>


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

99.19           Agreement  No. 13904  (Option and Purchase of  Effluent),  dated
                April 23, 1973, among Arizona Public Service Company, Salt River
                Project Agricultural  Improvement and Power District, the Cities
                of Phoenix,  Glendale, Mesa, Scottsdale, and Tempe, and the Town
                of Youngtown (refiled).

99.20           Agreement  for the Sale and  Purchase  of  Wastewater  Effluent,
                dated June 12, 1981, among Arizona Public Service Company,  Salt
                River Project  Agricultural  Improvement  and Power District and
                the City of Tolleson, as amended (refiled).

-----------

          *       One or more additional documents,  substantially  identical in
                  all material respects to this exhibit, have been entered into,
                  relating  to  one  or  more   additional  sale  and  leaseback
                  transactions. Although such additional documents may differ in
                  other respects (such as dollar amounts and percentages), there
                  are no  material  details in which such  additional  documents
                  differ from this exhibit.
         **       Designates  each management  contract or compensatory  plan or
                  arrangement  required to be identified pursuant to paragraph 3
                  of Item 14(a) of Form 10-K.

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

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

<TABLE>
<CAPTION>

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

Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession

<S>    <C>                                         <C>                               <C>    
 2.1   Purchase and Sale Agreement By and          4-(b) to Registration             2-99990
       Among Public Service Company of New         Statement No. 2-99990 of
       Mexico, Sunterra Gas Gathering              the Company.
       Company, Sunterra Gas Processing
       (Sellers) and Williams Gas Processing-
       Blanco, Inc. (Buyer).

2.1.1  First Amendment to Purchase and Sale        2.1.1 to Annual Report of         1-6986
       Agreement By and Among Public Service       the Registrant on Form 10-K
       Company of New Mexico, Sunterra Gas         for fiscal year ended
       Gathering Company, Sunterra Gas             December 31, 1994.
       Processing Company (Sellers) and
       Williams Gas Processing-Blanco, Inc.
       (Buyer)
</TABLE>



                                       E-3

<PAGE>
<TABLE>
<CAPTION>

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

<S>    <C>                                         <C>                               <C>    
2.1.2  Second Amendment to Purchase and Sale       2.1.2 to Annual Report of         1-6986
       Agreement By and Among Public Service       the Registrant on Form 10-K
       Company of New Mexico, Sunterra Gas         for fiscal year ended
       Gathering Company, Sunterra Gas             December 31, 1994.
       Processing Company (Sellers) and
       Williams Gas Processing-Blanco, Inc.
       (Buyer)
       
2.2    Agreement to Purchase and Sell Between      4-(b)to the Registration           2-99990
       City of Santa Fe, New Mexico and Public     Statement No. 2-99990 of
       Service Company of New Mexico.              the Company.

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

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

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

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

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

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

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


Articles of Incorporation and By-laws

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

</TABLE>

                                       E-4

<PAGE>
<TABLE>
<CAPTION>

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

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

Instruments Defining the Rights of Security Holders, Including Indentures

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

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

Material Contracts

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

</TABLE>


                                       E-5

<PAGE>
<TABLE>
<CAPTION>

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

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

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

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

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

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

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

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

</TABLE>


                                       E-6

<PAGE>
<TABLE>
<CAPTION>

Exhibit
  No.         Description of Exhibit                 Filed as Exhibit:              File No:
-------       ----------------------                 ----------------               -------- 
<S>      <C>                                         <C>                               <C>    

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

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

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

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

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

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

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

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


</TABLE>

                                       E-7

<PAGE>
<TABLE>
<CAPTION>

Exhibit
  No.         Description of Exhibit                 Filed as Exhibit:              File No:
-------       ----------------------                 ----------------               -------- 
<S>      <C>                                         <C>                               <C>    

10.8.1   Amendments No. 1 through No. 6 to           10.8.1 to Annual Report of        1-6986
         Arizona Nuclear Power Project               the Registrant on Form 10-K
         Participation Agreement.                    for fiscal year ended
                                                     December 31, 1991.

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

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

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

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

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

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

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


                                       E-8

<PAGE>
<TABLE>
<CAPTION>

Exhibit
  No.         Description of Exhibit                 Filed as Exhibit:              File No:
-------       ----------------------                 ----------------               -------- 
<S>      <C>                                         <C>                               <C>    

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

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

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

</TABLE>


                                       E-9

<PAGE>
<TABLE>
<CAPTION>

Exhibit
  No.         Description of Exhibit                 Filed as Exhibit:              File No:
-------       ----------------------                 ----------------               -------- 
<S>      <C>                                         <C>                               <C>    

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

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

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

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

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

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


</TABLE>

                                      E-10

<PAGE>
<TABLE>
<CAPTION>

Exhibit
  No.         Description of Exhibit                 Filed as Exhibit:              File No:
-------       ----------------------                 ----------------               -------- 
<S>       <C>                                           <C>                           <C>    

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

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

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

10.20.3   Amendment No. 3 dated as of March 8,          10.20.3 to the Company's      1-6986
          1995, to Facility Lease between Public        Quarterly  Report  on Form
          Service Company of New Mexico and the         10-Q for the quarter ended
          First National Bank of Boston, dated as of    March 31, 1995.
          August 12, 1996.

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

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

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

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

10.25**   Amended and Restated Medical                  19.6 to the Company's         1-6986
          Reimbursement Plan of Public Service          Quarterly Report on
          Company of New Mexico.                        Form 10-Q for the quarter
                                                        ended March 31, 1987.


</TABLE>

                                      E-11

<PAGE>
<TABLE>
<CAPTION>

Exhibit
  No.         Description of Exhibit                 Filed as Exhibit:              File No:
-------       ----------------------                 ----------------               -------- 
<S>        <C>                                       <C>                             <C>    

10.25.1**  Second Restated and Amended Public        10.25.1 to Annual Report of     1-6986
           Service Company of New Mexico             the Registrant on Form 10-K
           Executive Medical Plan.                   for the fiscal year ended
                                                     December 31, 1992.

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

10.29      Decommissioning Trust Agreement           10.55 to Annual Report of       1-6986
           between Public Service Company of New     the Registrant on Form 10-K
           Mexico and First Interstate Bank of       for fiscal year ended
           Albuquerque dated as of July 31, 1987.    December 31, 1987.

10.30      New Mexico Public Service Commission      10.56 to Annual Report of       1-6986
           Order dated July 30, 1987, and Exhibit 1  the Registrant on Form 10-K
           thereto, in NMPUC Case No. 2004,          for fiscal year ended
           regarding the PVNGS decommissioning       December 31, 1987.
           trust fund.

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

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

10.33**    Supplemental Employee Retirement          10.47 to Annual Report of       1-6986
           Agreement dated March 6, 1990.            the Registrant on Form 10-K
                                                     for fiscal year ended
                                                     December 31, 1989.

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


</TABLE>

                                      E-12

<PAGE>
<TABLE>
<CAPTION>

Exhibit
  No.         Description of Exhibit                 Filed as Exhibit:              File No:
-------       ----------------------                 ----------------               -------- 
<S>      <C>                                         <C>                             <C>    

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

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

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

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

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

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

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

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


</TABLE>

                                      E-13

<PAGE>
<TABLE>
<CAPTION>

Exhibit
  No.         Description of Exhibit                 Filed as Exhibit:              File No:
-------       ----------------------                 ----------------               -------- 
<S>       <C>                                        <C>                             <C>    
10.41     Waste Disposal Agreement, dated as of      19.5 to the Company's           1-6986
          July 27, 1992 among San Juan Coal          Quarterly Report on
          Company, the Company and Tucson            Form 10-Q for the quarter
          Electric Power Company.                    ended September 30, 1992
                                                     (confidentiality treatment
                                                     was requested as to portions
                                                     of this exhibit, and such
                                                     portions were omitted from
                                                     the exhibit and were filed
                                                     separately with the Securities
                                                     and Exchange Commission).

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

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

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

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

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

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

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

</TABLE>


                                      E-14

<PAGE>
<TABLE>
<CAPTION>

Exhibit
  No.         Description of Exhibit                 Filed as Exhibit:              File No:
-------       ----------------------                 ----------------               -------- 
<S>       <C>                                        <C>                              <C>    


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

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

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

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

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

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

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

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

10.51.1** Second Amendment to the Public Service     10.51.1 to the Company's         1-6986
          Company of New Mexico Executive            Quarterly Report on
          Retention Plan.                            Form 10-Q for the quarter
                                                     ended June 30, 1994.

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

</TABLE>


                                      E-15

<PAGE>
<TABLE>
<CAPTION>

Exhibit
  No.         Description of Exhibit                 Filed as Exhibit:              File No:
-------       ----------------------                 ----------------               -------- 
<S>        <C>                                       <C>                             <C>    

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

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

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

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

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

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

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

</TABLE>


                                      E-16

<PAGE>
<TABLE>
<CAPTION>

Exhibit
  No.         Description of Exhibit                 Filed as Exhibit:              File No:
-------       ----------------------                 ----------------               -------- 
<S>       <C>                                        <C>                             <C>    


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

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

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

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

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

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

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

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

10.67**   Deferred Compensation Agreement for        10.67 to Annual Report of       1-6986
          Jeffry E. Sterba                           the Registrant on Form 10-K
                                                     for fiscal year ended
                                                     December 31, 1995.

</TABLE>


                                      E-17

<PAGE>
<TABLE>
<CAPTION>

Exhibit
  No.         Description of Exhibit                 Filed as Exhibit:              File No:
-------       ----------------------                 ----------------               -------- 
<S>      <C>                                         <C>                            <C>    

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

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

Additional Exhibits

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

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

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

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

</TABLE>


                                      E-18

<PAGE>
<TABLE>
<CAPTION>

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

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

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

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


</TABLE>

                                      E-19

<PAGE>
<TABLE>
<CAPTION>

Exhibit
  No.         Description of Exhibit                 Filed as Exhibit:              File No:
-------       ----------------------                 ----------------               -------- 
<S>      <C>                                         <C>                            <C>    

99.8     Participation Agreement dated as of         2.1 to the Company's           1-6986
         August 12, 1986, among the Owner            Current Report on Form 8-K
         Participant named therein, First            dated August 18, 1986.
         PV Funding Corporation. The First
         National Bank of Boston, in its 
         individual capacity and as Owner
         Trustee (under a Trust Agreement 
         dated as of August 12, 1986,
         with the Owner  Participant),
         Chemical  Bank, in its individual
         capacity and as Indenture Trustee
         (under a Trust  Indenture,
         Mortgage, Security Agreement and
         Assignment of Rents dated as of
         August 12, 1986, with the Owner
         Trustee),  and Public  Service
         Company of New Mexico, including
         Appendix A definitions.

99.8.1*  Amendment No. 1 dated as of November        28.8 to the Company's          1-6986
         18, 1986, to Participation Agreement        Current Report on Form 8-K
         dated as of August 12, 1986.                dated November 25, 1986.

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

99.10*   Assignment, Assumption, and Further         28.3 to the Company's          1-6986
         Agreement dated as of August 12, 1986,      Current Report on Form 8-K
         between Public Service Company of New       dated August 18, 1986.
         Mexico and The First National Bank of
         Boston, as Owner Trustee.

</TABLE>


                                      E-20

<PAGE>
<TABLE>
<CAPTION>

Exhibit
  No.         Description of Exhibit                 Filed as Exhibit:              File No:
-------       ----------------------                 ----------------               -------- 
<S>      <C>                                         <C>                             <C>    


99.11*   Participation Agreement dated as of         2.1 to the Company Current      1-6986
         December 15, 1986, among the Owner          Report on Form 8-K dated
         Participant named therein, First PV         December 17, 1986.
         Funding Corporation, The First 
         National Bank of Boston, in its
         individual capacity and as Owner 
         Trustee (under a Trust Agreement
         dated as of December 15, 1986, with
         the Owner  Participant), Chemical 
         Bank, in its individual capacity
         and as Indenture Trustee (under a 
         Trust  Indenture,  Mortgage,
         Security  Agreement and Assignment
         of Rents dated as of December
         15, 1986, with the Owner Trustee), 
         and Public Service Company of
         New  Mexico, including Appendix A 
         definitions (Unit 1 Transaction).

99.12    Trust Indenture, Mortgage, Security         28.2 to the Company's           1-6986
         Agreement and  Assignment  of Rents         Current  Report on Form 8-K
         dated as of December 15, 1986, between      dated December 17, 1986.
         The First National Bank of Boston, as
         Owner Trustee, and Chemical Bank, as
         Indenture Trustee (Unit 1 Transaction).

99.13    Assignment, Assumption and Further          28.3 to the Company's           1-6986
         Agreement dated as of December 15,          Current Report on Form 8-K
         1986, between Public Service Company of     dated December 17, 1986.
         New Mexico and The First National Bank
         of Boston, as Owner Trustee (Unit 1
         Transaction).

</TABLE>


                                      E-21

<PAGE>
<TABLE>
<CAPTION>

Exhibit
  No.         Description of Exhibit                 Filed as Exhibit:              File No:
-------       ----------------------                 ----------------               -------- 
<S>      <C>                                         <C>                             <C>    

99.14    Participation Agreement dated as of         2.2 to the Company's            1-6986
         December 15, 1986, among the Owner          Current Report on Form 8-K
         Participant named therein, First            dated December 17, 1986.
         PV Funding Corporation, The First
         National Bank of Boston, in its 
         individual capacity and as Owner
         Trustee (under a Trust  Agreement
         dated as of December 15, 1986,
         with the Owner  Participant),  
         Chemical  Bank, in its individual
         capacity  and as  Indenture Trustee
         (under a Trust Indenture,
         Mortgage, Security Agreement and
         Assignment of Rents dated as of
         December 15, 1986, with the Owner 
         Trustee),  and Public Service
         Company of New Mexico, including 
         Appendix A definitions (Unit 2
         Transaction).

99.16    Assignment, Assumption, and Further         28.11 to the Company's          1-6986
         Agreement dated as of December 15,          Current Report on Form 8-K
         1986, between Public Service Company of     dated December 17, 1986.
         New Mexico and The First National Bank
         of Boston, as Owner Trustee (Unit 2
         Transaction).

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


-----------

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

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

     (b)  Reports on Form 8-K:

         None.


                                      E-22

<PAGE>


                                   SIGNATURES

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

                                     PUBLIC SERVICE COMPANY OF NEW MEXICO
                                                (Registrant)

Date: February 18, 1997              By  /s/ B. F. MONTOYA 
                                        -------------------------------------
                                                    B. F. Montoya
                                        President and Chief Executive Officer

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

              Signature                                 Capacity                                  Date
              ---------                                 --------                                  ----

<S>                                           <C>                                             <C> 
/s/ B. F. MONTOYA                             Principal Executive Officer and                 February 18, 1997
------------------------------------------      Director
B. F. MONTOYA
President and Chief Executive Officer

/s/ M. H. MAERKI                              Principal Financial Officer                     February 18, 1997
------------------------------------------
M. H. Maerki
Senior Vice President and
Chief Financial Officer

/s/ D. M. BURNETT                             Principal Accounting Officer                    February 18, 1997
------------------------------------------
D. M. Burnett
Corporate Controller and
Chief Accounting Officer

/s/ J. T. ACKERMAN                            Chairman of the Board                           February 18, 1997
------------------------------------------
J. T. Ackerman

/s/ R. G. ARMSTRONG                           Director                                        February 18, 1997
------------------------------------------
R. G. Armstrong

/s/ J. A. GODWIN                              Director                                        February 18, 1997
------------------------------------------
J. A. Godwin

/s/ L. H. LATTMAN                             Director                                        February 18, 1997
------------------------------------------
L. H. Lattman

/s/ M. LUJAN JR.                              Director                                        February 18, 1997
------------------------------------------
M. Lujan Jr.

/s/ R. U. ORTIZ                               Director                                        February 18, 1997
------------------------------------------
R. U. Ortiz

/s/ R. M. PRICE                               Director                                        February 18, 1997
------------------------------------------
R. M. Price

/s/ P. F. ROTH                                Director                                        February 18, 1997
------------------------------------------
P. F. Roth
</TABLE>



                                      E-23

<PAGE>