Exhibit No. 10.9.7

[*]  INDICATES  THAT THE  CONFIDENTIAL  PORTION HAS BEEN OMITTED FROM THIS FILED
EXHIBIT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.


                          UNDERGROUND LETTER AGREEMENT
                          ----------------------------

         This Underground Letter Agreement ("Agreement") by and between San Juan
Coal Company, a Delaware corporation ("SJCC"), San Juan Transportation  Company,
a Delaware  corporation  ("SJTC"),  Public Service Company of New Mexico,  a New
Mexico  corporation  ("PNM"),  and Tucson  Electric  Power  Company,  an Arizona
corporation  ("TEP") (PNM and TEP are referred to collectively as  "Utilities"),
is executed this 31st day of August, 2000.

                                    Recitals
                                    --------

         WHEREAS, SJCC and the Utilities are parties to the August 18, 1980 Coal
Sales  Agreement,  as amended  from time to time  ("CSA"),  and are parties to a
Waste Disposal Agreement ("Waste Disposal  Agreement"),  dated July 27, 1992, as
amended;

         WHEREAS,  SJTC and the  Utilities  are  parties  to the April 30,  1984
Transportation   Agreement,  as  amended  from  time  to  time  ("Transportation
Agreement");

         WHEREAS,  SJCC has certain  obligations  in the CSA to provide coal for
the San Juan Station;

         WHEREAS,  SJCC and the  Utilities  ("Parties")  are in the  process  of
negotiating a definitive binding agreement  ("Definitive  Agreement"),  which if
adopted,  shall amend or replace the CSA, through which an underground coal mine
as described in the Mining Plan  attached to this  Agreement as Exhibit "A" (the
"San Juan  Underground  Mine"),  shall be developed as the coal source to supply
the San Juan Station;

         WHEREAS,  SJCC and the Utilities have agreed in this Agreement upon the
terms and conditions  pursuant to which coal from the San Juan  Underground Mine
shall be mined by SJCC and  delivered to Utilities  and have  determined  to set
forth their agreement;

         WHEREAS,  once the San Juan Underground Mine is in Commercial Operation
(as  defined  herein)  and is  supplying  coal  as  provided  under  the  CSA or
Definitive  Agreement,  the Utilities will no longer require coal transportation
services under the Transportation Agreement [*];

         WHEREAS,  once the San Juan Underground Mine is in Commercial Operation
(as  defined  herein)  and is  supplying  coal  as  provided  under  the  CSA or
Definitive  Agreement,  the Utilities  will no longer require a coal supply from
existing surface mines [*];

         WHEREAS,  SJTC is a party to this  Agreement  solely for the purpose of
addressing  matters  relating to the  Transportation  Agreement and SJTC and the
Utilities  intend to negotiate and execute,  subsequent to the execution of this
Agreement,  an agreement to amend or replace the  Transportation  Agreement (the
"Definitive Transportation Agreement") on or before July 31, 2001;

<PAGE>

         WHEREAS,  development of the San Juan  Underground Mine may involve the
execution  of a coal  lease  with the United  States  Bureau of Land  Management
("BLM")  for the  lands  described  in the July 29,  1997 Deep  Lease  Extension
application ("DLX");

         WHEREAS,  the Parties are  executing a Deep Lease  Extension  Agreement
concurrently  herewith  ("Deep Lease  Extension  Agreement") to address  pricing
issues that will arise if SJCC does not secure the DLX prior to January 1, 2003;

         WHEREAS, in order to facilitate interim corporate reviews and approvals
and guide preparation of a Definitive Agreement and a Definitive  Transportation
Agreement,  SJCC, SJTC and the Utilities  desire in this  Agreement:  (a) to set
forth the binding  terms to which the Parties  have  agreed;  and (b) to outline
other  non-binding  understandings  about terms to be included in the Definitive
Agreement; and

         WHEREAS,  SJCC and the  Utilities  intend  to  negotiate  and  execute,
subsequent to execution of this Agreement, the Definitive Agreement.

         NOW  THEREFORE,  in  consideration  of  the  covenants  and  conditions
contained herein, SJCC, SJTC and the Utilities agree as follows:

                                    ARTICLE I
                          BINDING TERMS AND CONDITIONS

1.1      Binding  Effect.  Upon execution of this  Agreement,  the provisions of
         this  Article I shall  constitute  a legally  binding  and  enforceable
         agreement  of SJCC,  SJTC,  and the  Utilities in  accordance  with its
         terms.  Subject to the Conditions  Precedent described in Paragraph 1.2
         of this Agreement,  (a) if no Definitive  Agreement is reached pursuant
         to  Paragraph  1.3 by July 31,  2001,  the  terms of  Paragraph  1.6(A)
         through (M) of this Agreement shall at that time  automatically  become
         an  amendment  to the  CSA;  and  (b) if no  Definitive  Transportation
         Agreement is reached  pursuant to Paragraph 1.7 by July 31, 2001,  then
         the terms of Paragraph  1.7(A) through (F) of this  Agreement  shall at
         that time  automatically  become  an  amendment  to the  Transportation
         Agreement.

1.2      Conditions  Precedent.  There are three  Conditions  Precedent  to this
         Agreement becoming effective:

         A.   Final  approval of the San Juan  Underground  Mine by the Board of
              Directors  of  Broken  Hill  Proprietary  Company,  Limited  to be
              obtained no later than January 1, 2001 and written notification of
              such approval to the Utilities by SJCC.

         B.   Final approval of this  Agreement by the San Juan Fuels  Committee
              pursuant to the requirements of the San Juan Project Participation
              Agreement  dated as of October 27,  1999,  to be obtained no later
              than August 31, 2000 and written  notification of such approval to
              SJCC by the Utilities.


                                       2
<PAGE>

         C.   Execution no later than  January 1, 2001 of a written  guaranty of
              this  Agreement by BHP Minerals  International,  Inc. or other BHP
              entity  acceptable  to the  Utilities in a form  acceptable to the
              Utilities as attached to this Agreement.

1.3      Good Faith Agreement to Negotiate a Definitive  Agreement.  The Parties
         agree to  negotiate in good faith and use their best efforts to execute
         a  Definitive  Agreement  that  incorporates  the  terms  described  in
         Paragraph 1.6, and to the extent mutually agreed after the date of this
         Agreement,  Article II of this Agreement and other appropriate terms by
         no later than July 31, 2001.  The Definitive  Agreement  shall amend or
         replace the CSA.

1.4      Term of the Agreement.

         A.   Subject to the provisions of Paragraph 1.2 of this Agreement,  all
              provisions  of  this  Agreement   except  those  relating  to  the
              Transportation Agreement shall terminate on the earlier of (a) the
              date the Definitive Agreement is effective,  (b) on July 31, 2001,
              provided  that  Paragraphs  1.6 (A) through (M) of this  Agreement
              shall  constitute  an  amendment  to the  CSA  that  survives  the
              termination of this Agreement, or (c) as otherwise mutually agreed
              by the Parties.
         B.   Subject to the provisions of Paragraph 1.2 of this Agreement,  all
              provisions  of this  Agreement  except  those  relating to the CSA
              shall  terminate  on the  earlier  of (a) the date the  Definitive
              Transportation  Agreement  is  effective,  (b) on July  31,  2001,
              provided  that  Paragraphs  1.7(A)  through (E) of this  Agreement
              shall constitute an amendment to the Transportation Agreement that
              survives the  termination of this  Agreement,  or (c) as otherwise
              mutually agreed by SJTC and the Utilities.

1.5      Utilities' Obligations are Joint and Several. The Utilities' duties and
         obligations under this Agreement shall be joint and several.

1.6      Terms  to be  Included  in the  Definitive  Agreement.  The  Definitive
         Agreement  shall  include  the  substance  of  the  terms  provided  in
         Paragraphs 1.6 (A) through (M). The language employed in the Definitive
         Agreement  shall reflect and elaborate  upon the substance of the terms
         summarized  in  Paragraphs  1.6 (A) through (M) and may, if the Parties
         mutually agree,  differ (in form) from, but may not (unless the Parties
         mutually  agree)  be  inconsistent  with  the  language  used  in  this
         Agreement to summarize those terms. This Agreement binds the Parties to
         so include these terms in the Definitive Agreement, if reached.

         A.   Price and Price Structure.

              (1)  An  "Unadjusted  New Mining  CIE" of [*] per ton [*] shall be
                   adopted  consistent  with the CSA. The  Unadjusted New Mining
                   CIE will be adjusted as described below to determine the "New
                   Mining  CIE".  The New Mining CIE will be payable on [*] tons
                   tendered for  delivery  pursuant to Exhibit H of the CSA [*].
                   In the future  the New  Mining  CIE may be  further  adjusted
                   pursuant  to the  provisions  of  the  Deep  Lease  Extension
                   Agreement, if applicable. Documentation of the Unadjusted New
                   Mining CIE is in Exhibit B (1).


                                       3
<PAGE>

                   a) An "SJCC  Concession  CIE  Adjustment"  of [*] per ton [*]
                      will be  subtracted  from the  Unadjusted  New Mining CIE.
                      Documentation  of the SJCC Concession CIE Adjustment is in
                      Exhibit B (2).

                   b) A  "Budget  DLX CIE  Adjustment"  of [*]  per ton  will be
                      subtracted  from the  Unadjusted New Mining CIE to reflect
                      the  removal  of the  budget  DLX bid  payments  from  the
                      Unadjusted New Mining CIE. Documentation of the Budget DLX
                      CIE Adjustment is in Exhibit B (3).

                   c) If the DLX is acquired  before January 1, 2003, a "DLX CIE
                      Adjustment" will be determined and added to the Unadjusted
                      New Mining CIE. The DLX CIE Adjustment  will be determined
                      as detailed in Exhibit B (4).

                   d) A "CIE True Up Adjustment" will be [*] from the Unadjusted
                      New Mining  CIE [*].  The CIE True Up  Adjustment  will be
                      determined  as  defined in  Exhibit B (5).  The  Utilities
                      shall have the right to audit  capital  expenditures  that
                      are included as part of the True-Up Process.  Any disputes
                      regarding  the  True-Up  Process  shall be referred to the
                      Joint Committee.

                   e) An "Incremental Mining CIE Adjustment" of [*] per ton will
                      be  subtracted   from  the   Unadjusted  New  Mining  CIE.
                      Documentation of the Incremental  Mining CIE Adjustment is
                      in Exhibit B(6).

              (2)  Incremental Mining CIE. There will be an "Incremental  Mining
                   CIE"  of [*]  per  ton  [*]  payable  on [*]  tons  delivered
                   pursuant to the CSA [*].

              (3)  The New Mining CIE will be payable on [*] tons  tendered  for
                   delivery  pursuant  to Exhibit H of the CSA [*] and billed in
                   accordance  with  Paragraph  2.3 (Monthly  Invoicing) of this
                   Agreement.

              (4)  Operating Costs. Mining Operating Costs will be as defined in
                   the CSA, Exhibit F. Starting  January 1, 2003,  reimbursement
                   for Mining  Operating  Costs for all  mining and  reclamation
                   related activities on the Coal Leases will be [*].

                   Processing Operating Costs.  There will be [*] in processing
                   operating cost reimbursement.


              (5)  Payment  (of the New  Mining CIE and the  Incremental  Mining
                   CIE) required pursuant to subparagraph 1.6 A(1) and A(2) will
                   begin  on  January  1,  2003 and will  continue  pursuant  to
                   Exhibit H of the CSA as modified by this Agreement.

                                       4
<PAGE>

              (6)  Inflation/deflation  treatment  of the New Mining CIE will be
                   adjusted [*]. The Incremental Mining CIE will [*].

              (7)  Tax,   depletion   allowance,   and   inflation  /  deflation
                   adjustment  formulas  for the New Mining CIE will be reviewed
                   and corrected appropriately.

              (8)  The La Plata  Administration  Component  will be [*] starting
                   January 1, 2003.

              (9)  The Fruitland Administration Component shall [*].

             (10)  For calendar  years 2001 and 2002,  existing CIE Discounts as
                   defined in Paragraph 2 entitled "Mining CIE Discounts" of the
                   Interim   Invoicing   Agreement  between  the  Parties  dated
                   December 31, 1999, shall [*].

             (11)  Minimum  annual tons will be [*] tons per year for the period
                   from 2003 through 2017 [*] ("New Minimum Annual  Tons").  The
                   Parties understand [*]. Any shortfall in Utilities' purchases
                   below the level of the New Minimum  Annual Tons will [*]. The
                   carry  forward  provisions  of the  CSA  regarding  Fruitland
                   Minimum  tons  and La  Plata  Minimum  Tons  will  expire  on
                   December 31, 2002. No carry forward  provisions will apply to
                   the New Minimum Annual Tons.

                   In the event  that the DLX is not  secured  by SJCC,  the New
                   Minimum  Annual  Tons in CSA  Exhibit  H will be  reduced  as
                   described  in  Attachment  2  to  the  Deep  Lease  Extension
                   Agreement. This tonnage schedule specifies the number of tons
                   used as the basis for the  Premium  (as  defined  in the Deep
                   Lease Extension Agreement) adjustment to the New Mining CIE.

             (12)  Coal  produced by  underground  methods  from the Deep Lease,
                   DLX,  South Lease  Extension  and the  Fruitland  Leases,  is
                   hereby approved as Replacement Tons.

         B.   Term. The term of the CSA shall be unaltered by this Agreement.

         C.   [*]. SJCC and the Utilities agree as follows:

              (1)  The La Plata CIE (CSAP. 9.3(b)) will be[*] after December 31,
                   2002.

              (2)  The Fruitland CIE (CSAP.  9.2(b)) will be [*] after  December
                   31, 2002.

              (3)  The Utilities shall pay to SJCC [*] of the CSA.

              (4)  At the  Utilities'  election,  the  [*]  can be  paid  [*] on
                   January 1, 2003 or as [*] on January 1, 2003.  The [*] amount
                   of the [*] is [*] or if paid as [*]  per  year  [*].  The [*]
                   amount  will be [*] to January  1,  2003.  If paid [*] in the
                   same way the CIEs are treated  under the CSA, and the term of
                   the [*] shall be from 2003 through 2017 inclusive.

                                       5
<PAGE>

              (5)  [*]  payments  incurred  as a result  of [*] and the  payment
                   thereof shall be [*].

              Concurrent  with the  negotiation  and execution of the Definitive
              Agreement as  contemplated  under Paragraph 1.3 of this Agreement,
              the  appropriate  parties agree to negotiate in good faith and use
              their best  efforts to  execute a separate  agreement  by July 31,
              2001,  if  not  completed   earlier,   reflecting  the  terms  and
              conditions for payment of the [*].

         D.   Reclamation.  All  reclamation  activity,  related to Coal Leases,
              including  leases  that may  become  Coal  Leases  on or after the
              effective  date of this  Agreement,  during the term of the CSA or
              Definitive  Agreement will be reimbursed as [*]. Effective January
              1,  2003,  reimbursement  for [*]  will be  [*].  Any  reclamation
              activity  after the term of the CSA will be handled  according  to
              terms of the CSA as amended herein.

         E.   Processing.  The  Processing  CIE  will be [*]  per ton  beginning
              January 1, 2003. This [*] will not be subject to [*]. The [*] will
              be applied after the Processing CIE is [*].

         F.   Dedicated Coal Supply.  The Deep Lease and the associated  surface
              agreements  and  property  rights that have been  acquired by SJCC
              through an Acquisition  Agreement  dated as of March 25, 1983 with
              Paragon  Resources Inc. and Valencia Energy Company ("Deep Lease")
              for use in connection with the San Juan Underground  Mine, as well
              as the proposed DLX, and any contiguous lease extensions  approved
              by the Joint  Committee  (which  approval  shall  not be  withheld
              unreasonably),  when acquired,  are hereby dedicated to production
              for the San Juan  Station  and are  designated  for  inclusion  as
              approved coal sources under the CSA, and shall be deemed  included
              within the  definition  of "Coal  Leases," as that term is used in
              the CSA. SJCC shall exercise  diligence in acquiring the DLX. SJCC
              shall consult with Utilities  concerning the bid. If at that time,
              SJCC determines that it is appropriate to submit a bid, SJCC shall
              prepare  and  submit  its  timely  bid  for the  DLX.  Appropriate
              property  descriptions will be included in a Definitive  Agreement
              or as an amendment to the CSA, as appropriate.

              Upon Commercial  Operation (as defined below), the Utilities shall
              release SJCC from all coal delivery  obligations from the La Plata
              Leases.  Ongoing Operating Costs,  including,  but not limited to,
              the  Cimarron Net Profits  Interest,  if any,  will be  reimbursed
              pursuant to the terms of the CSA.

              Upon Commercial  Operation (as defined below), the Utilities shall
              release  SJCC  from  the  coal  delivery  obligations  tied to the
              surface  tons  from  the  Fruitland  Leases.  Release  of La Plata
              Reserves and San Juan Reserves shall occur only after the San Juan
              Underground  Mine has achieved  Commercial  Operation and SJCC can
              affect  a  reasonable  cessation  of  mining  activities  on those
              leases.  Until that time, La Plata  Reserves and San Juan Reserves
              shall continue to serve as coal sources for the San Juan Station.

                                       6
<PAGE>

              SJCC will maintain the Fruitland Leases, or an appropriate portion
              thereof,   as  an  ash  disposal  area,  per  the  Waste  Disposal
              Agreement.  Costs  related  to  cessation  and  closure of surface
              mining operations, will be reimbursed as Operating Costs according
              to terms of the CSA.

         G.   Non-SJCC Coal.  Delivery of approved sources of Non-SJCC Coal will
              satisfy New Minimum  Annual Tons and the New Mining CIE will apply
              unless limited by Non-Normal  Conditions as described in Paragraph
              16.1 of the CSA.

         H.   Mineable  Coal.  The term  "Mineable  Coal"  shall be  amended  to
              include  coal  produced by  underground  methods as  described  in
              Exhibit A that meet the  requirements  of the CSA  within the Deep
              Lease, DLX, South Lease Extension and the Fruitland Leases.

         I.   Mining Plans and Methods.  Paragraph  1.4 and Exhibit C of the CSA
              are hereby  amended to include:  The Mining Plans for the San Juan
              Underground  Mine are as set forth in Exhibit A of this Agreement,
              and may be  revised  in  accordance  with  the  CSA.  The  primary
              underground methods are longwall mining for primary production and
              room and pillar mining in  development  areas.  Other  underground
              mining  methods may be employed from time to time as necessary for
              efficient  and  economic  production  if  approved  by  the  Joint
              Committee.

         J.   Schedule   for   Commercial   Operation.    Commercial   Operation
              ("Commercial Operation") of the San Juan Underground Mine shall be
              defined as two (2) consecutive months of production  equivalent to
              550,000 tons per month.  SJCC will  exercise good faith efforts to
              achieve Commercial Operation on or before December 31, 2002.

         K.   Non-Normal   Conditions,   Material   Default,   Termination   and
              Expiration.  The CSA  will be  amended  to  replace  the  existing
              Section 16 as follows:


              "16.1 Non-Normal Conditions, Right to Cure, and Offers of Non-SJCC
              Coal.

              The Parties intend that in the effort to avoid  Material  Default,
              the  provisions of this  Paragraph  16.1 shall be utilized  before
              notice of Material  Default  Conditions  is  provided  pursuant to
              Paragraph 16.2.

                  (a)  Non-Normal  Conditions.  Non-Normal Conditions exist when
                       any of the following three conditions are present:

                       (1) The  Reserve  of  Coal  (as   defined  in   Paragraph
                           16.2(a)(3)) has fallen below the level of 1.2 million
                           tons,
                       (2) SJCC  has  determined  that  there  is  a  reasonable
                           probability  that  the  Reserve  of Coal  will in the
                           future fall below such inventory level, or

                                       7
<PAGE>

                       (3) SJCC   anticipates  or  is  experiencing   any  other
                           condition  that may give rise to SJCC not being  able
                           to deliver coal according to the CSA.

                  (b)  Notice.   SJCC  shall  provide   written  notice  to  the
                       Utilities  if any  Non-Normal  Conditions  exist,  or the
                       Joint Committee may determine that Non-Normal  Conditions
                       exist,  which  shall  constitute  notice  to SJCC and the
                       Utilities as of the date of such written determination.

                  (c)  Prevention Due to  Uncontrollable  Forces. In addition to
                       providing written notice of Non-Normal  Conditions,  SJCC
                       may elect to declare that the performance is prevented by
                       reason of  uncontrollable  forces in accordance  with the
                       terms of Paragraph 17.1 "Uncontrollable Forces".

                  (d)  Coal Usage Forecast.  Within fifteen (15) days of receipt
                       of notice of Non-Normal  Conditions,  the Utilities  will
                       review  dispatch at San Juan  Station and provide to SJCC
                       an updated coal usage forecast.

                  (e)  Cure of Non-Normal  Conditions.  The Parties  intend that
                       cooperation  among the Parties in developing and agreeing
                       upon a Cure  Plan (as  defined  below) is  preferable  to
                       pursuing termination of the CSA. The Parties will provide
                       reasonable  cooperation  to  facilitate  SJCC's  cure  of
                       Non-Normal  Conditions  to avoid  Material  Default while
                       allowing the  Utilities to continue  operation of the San
                       Juan  Station.  To initiate  and  effectuate  cure of the
                       Non-Normal Condition, SJCC shall do the following:

                       (1) Provide   within  fifteen  (15)  days  of  notice  of
                           Non-Normal  Conditions,  or as otherwise agreed to by
                           the  Parties,  a  written  cure  plan  to  the  Joint
                           Committee  describing SJCC's proposed means of curing
                           the Non-Normal Conditions and its proposed deliveries
                           in the interim ("Cure Plan");

                       (2) Within  thirty  (30)  days of  notice  of  Non-Normal
                           Conditions, or as otherwise agreed to by the Parties,
                           SJCC may provide  written  offers to the Utilities to
                           supply  Non-SJCC Coal. If the  Non-Normal  Conditions
                           are caused by  "Uncontrollable  Forces"  pursuant  to
                           Paragraph  17.1,  then  such  Non-SJCC  Coal  will be
                           priced  [*].  If there is a dispute  whether  the Non
                           Normal   Conditions  are  caused  by   Uncontrollable
                           Forces, the Non-SJCC Coal will be priced [*] and will
                           be  adjusted  if   necessary   when  the  dispute  is
                           resolved. If the Non-Normal Conditions are not caused
                           by  Uncontrollable  Forces,  then,  the Non-SJCC Coal
                           shall  be  priced  [*].  SJCC  will  provide  quality
                           information  for the  Non-SJCC  Coal with the written
                           offers and will  propose the  delivery  schedule  and
                           quantity of Non-SJCC Coal to be supplied.


                                       8
<PAGE>

                       (3) Within  fifteen  (15) days of  receipt  of a proposed
                           Cure Plan, the Joint Committee shall meet to consider
                           and act on the Cure Plan.

                       (4) Within  fifteen  (15) days of  receipt of an offer to
                           Supply  Non-SJCC Coal, the Joint  Committee will meet
                           to approve or reject the Non-SJCC Coal offer. Failure
                           to approve the offer shall constitute its rejection.

                       (5) For offers of Non-SJCC Coal only,  SJCC will meet the
                           revised coal minimum quality standard of at least [*]
                           Btu per pound measured as provided in Paragraph 5.2.

                       (6) As part of its Cure Plan,  SJCC will  provide  weekly
                           written  notice to the  Utilities of daily  inventory
                           levels.

                  (f)  Rejection  of  Non-SJCC  Coal.  If  the  Joint  Committee
                       rejects an offer of Non-SJCC Coal that is proposed and if
                       the price of that  Non-SJCC  Coal offer is [*],  then the
                       offer of Non-SJCC Coal will be credited as coal delivered
                       for the purpose of determining whether a Material Default
                       Condition exists,  unless the Joint Committee agrees that
                       the Non-Normal Condition is due to Uncontrollable  Forces
                       in   which   case   Material   Default   provisions   are
                       inapplicable.

                  (g)  Rejection of Non-SJCC Coal after Initial Approval. If the
                       Utilities  determine and the Joint Committee  agrees that
                       delivery of coal from a certain  Non-SJCC  Coal source is
                       shown to  materially  impair  operations  at the San Juan
                       Station, the Utilities may reject the unburned portion of
                       that coal and,  if so, SJCC shall  terminate  delivery of
                       that coal.  The remainder of such rejected coal shall not
                       be credited as coal delivered for purposes of determining
                       whether a Material Default Condition exists.

                  (h)  Termination  of  Non-Normal  Conditions.  The  Non-Normal
                       Conditions  will  terminate  when  all of  the  following
                       occur:

                       (1) SJCC's  Reserve  of Coal (as  defined  below)  of 1.2
                           million tons is obtained;

                       (2) SJCC can supply the  quantities  of coal  required by
                           the  CSA  from  the  Coal  Leases  and/or  previously
                           acquired Non-SJCC Coal;

                                       9
<PAGE>


                       (3) SJCC can meet normal CSA coal quality specifications;
                           and

                       (4) SJCC  gives  written  notice  of the  termination  of
                           Non-Normal Conditions.

      16.2     Material Default.

                  (a)  Material Default Conditions.  The existence of any of the
                       following material default conditions  ("Material Default
                       Conditions") may result in a Material Default by SJCC:

                       (1) Failure  of SJCC to  deliver  coal  as  specified  in
                           Paragraph 3.1 such that:

                           (i)  A  ten  percent   (10%)  per  month  or  greater
                                shortfall in  deliveries as set forth in Exhibit
                                "D" occurs in any six (6) consecutive months (as
                                adjusted   pursuant  to   Paragraph   16.1(d)(2)
                                "Rejection of Non-SJCC Coal"); or

                           (ii) A cumulative shortfall of sixty percent (60%) in
                                deliveries  as set forth in  Exhibit  "D" occurs
                                over any  three (3) month  period  (as  adjusted
                                pursuant to Paragraph  16.1(d)(2)  "Rejection of
                                Non-SJCC Coal");

                       (2) Failure of SJCC to comply  with the  requirements  of
                           Paragraph 5.2 "Coal Quality" (as amended by Paragraph
                           16.1(d)(5)   in  the  event  that  Non-SJCC  Coal  is
                           supplied under Non-Normal Conditions);

                       (3) Failure of SJCC to maintain a Reserve of Coal greater
                           than 250,000 tons.

                       "Reserve of  Stripped  Coal" in  Paragraph  8.3 is hereby
                       amended to (i) change the  heading to  "Reserve of Coal";
                       and (ii) include all coal in storage on SJCC's  premises,
                       including  Non-SJCC Coal approved by the Joint Committee,
                       and (iii) delete the 60-day requirement.

                       The  occurrence  of any of these three  conditions is not
                       itself a Material Default. A Material Default exists when
                       (1) one or more of the Material Default Conditions exist;
                       (2) notice is  provided  pursuant  to  Paragraph  16.2(b)
                       "Notice of  Material  Default  Conditions;"  and (3) SJCC
                       fails to avoid Material  Default under Paragraph  16.2(c)
                       "Avoidance of Material Default."


                                       10
<PAGE>

                  (b)  Notice of Material Default  Condition(s).  SJCC shall not
                       be in  Material  Default  under the CSA  unless and until
                       SJCC shall have received from Utilities written notice of
                       one or more Material  Default  Conditions  specifying the
                       particulars.  SJCC may seek to avoid or cure the Material
                       Default  Condition(s)   pursuant  to  the  provisions  of
                       Paragraph 16.2(c).  SJCC shall not be conclusively deemed
                       in Material Default if SJCC disputes the existence of any
                       alleged  Material  Default  unless  and until  there is a
                       final  resolution  pursuant  to  Section 14 of the CSA to
                       determine  the  existence  or  non-existence  of Material
                       Default.

                  (c)  Avoidance  of Material  Default.  SJCC can prevent any of
                       the Material Default  Conditions from becoming a Material
                       Default by any one or more of the following actions:

                       (1) SJCC  proceeds with due diligence to cure the alleged
                           Material Default Condition(s) within thirty (30) days
                           of  receipt  of  the  notice  of   Material   Default
                           Condition(s);

                       (2) BHP Minerals  International,  Inc.  ("BMII") proceeds
                           with due diligence to cure the alleged default within
                           thirty (30) days of receipt of the notice of Material
                           Default Condition(s);

                       (3) SJCC declares  prevention of performance by reason of
                           uncontrollable  forces  pursuant  to  Paragraph  17.1
                           "Uncontrollable  Forces," and that declaration is not
                           subsequently invalidated by arbitration;

                       (4) SJCC  gives  notice  of  Non-Normal   Conditions  and
                           operates  according  to a Cure Plan  approved  by the
                           Joint Committee; or

                       (5) SJCC  disputes  the  existence  of  Material  Default
                           Condition(s),   and  there  is  a  final   resolution
                           pursuant to Section 14  "Arbitration" of the CSA that
                           SJCC was not in Material Default hereunder.

                  (d)  Utilities'  Remedies for SJCC's Material Default.  Upon a
                       Material  Default  caused by the  existence of a Material
                       Default   Condition  that  is  not  avoided  pursuant  to
                       Paragraph 16.1(c), the Utilities shall have the following
                       remedies:

                       (1) The  Utilities  may  terminate  the CSA for  Material
                           Default  if SJCC  fails  to  avoid  Material  Default
                           pursuant to Paragraph  16.1(c).  Upon termination for
                           Material  Default,   the  Utilities  shall  have  the
                           options set forth in Paragraph 16.3 "Termination."

                       (2) Only  in  the  event  of an  emergency  situation  as
                           provided in Paragraph  13.1,  Utilities or Utilities'
                           agents  may,  in lieu of seeking  termination  or any
                           other remedy, go upon SJCC's  facilities,  use SJCC's
                           equipment  to mine coal  therefrom,  and deliver such
                           coal to the delivery  points.  The compensation to be
                           paid by  Utilities  to SJCC for  such  use of  SJCC's
                           equipment   shall  be   agreed   upon  by  the  Joint
                           Committee.   Such   operations  by  Utilities   shall
                           terminate when SJCC gives notice that SJCC is able to
                           assume normal deliveries.

                                       11
<PAGE>

                       (3) In addition to the rights  provided in Paragraph 16.3
                           to  termination   and  the  limited  right  to  mine,
                           Utilities  shall have any other remedies  provided by
                           law, subject to the waiver of  consequential  damages
                           in  Paragraph   1.6.L  of  the   Underground   Letter
                           Agreement between the Parties.

     16.3    Termination.

                  (a)  Options of Utilities Upon  Termination.  Upon termination
                       of the CSA for  Material  Default,  in  addition to other
                       remedies  provided in Paragraph  16.2(d)  "Remedies," the
                       Utilities shall have the option to:

                       (i)  Acquire SJCC's rights,  title and interest in and to
                            any or all of  SJCC's  plant and  capital  equipment
                            used by SJCC in carrying out its  obligations  under
                            this  Agreement  and the Coal Leases  including  all
                            SJCC's permits and  reclamation  bonds,  paying SJCC
                            therefor  in cash the  greater  of the  fair  market
                            value of SJCC's  plant and  capital  equipment,  and
                            Coal Leases as determined by the Joint Committee, or
                            SJCC's book cost net of  depreciation  of said plant
                            and  capital  equipment,  and the net  value  of the
                            acquisition cost of the Coal Leases;

                       (ii) Require  SJCC  to  dispose  of any or all of  SJCC's
                            plant and capital equipment used by SJCC in carrying
                            out  its  obligations  under  this  Agreement,   and
                            interest  in the Coal  Leases  including  all SJCC's
                            permits   and   reclamation   bonds,   for  cash  at
                            prevailing  market  prices and to pay SJCC all costs
                            of disposal plus the amount, if any, by which SJCC's
                            book  cost net of  depreciation  of said  plant  and
                            capital   equipment,   and  the  net  value  of  the
                            acquisition  cost  of the  Coal  Leases  exceed  the
                            amount  received by SJCC on account of the  disposal
                            thereof; or

                       (iii) Exercise neither of the above options.


                                       12
<PAGE>

                  (b)  Notice  of  Election.   Within  thirty  (30)  days  after
                       termination  of the CSA, the Joint  Committee  (the Joint
                       Committee  will not disband until it determines  the fair
                       market value) will  determine  fair market value and book
                       value of SJCC's  plant,  capital  equipment  and the Coal
                       Leases,  including all of SJCC's permits and  reclamation
                       bonds. Within thirty (30) days after receipt of the Joint
                       Committee  determination  of value,  the Utilities  shall
                       notify SJCC in writing  which of the above three  options
                       the Utilities  elect.  In the event the  Utilities  elect
                       option  (a)(i),  SJCC shall,  within  thirty (30) days of
                       written notice of said  election,  deliver to Utilities a
                       sufficient bill of sale or other  appropriate  instrument
                       of  conveyance,  together  with  an  invoice  showing  in
                       reasonable  detail the amount  due,  whereupon  Utilities
                       shall,  within sixty (60) days thereafter,  remit to SJCC
                       the amount due. In the event Utilities shall elect option
                       (a)(ii),  SJCC shall undertake to promptly dispose of its
                       plant and  capital  equipment,  and  interest in the Coal
                       Leases,  including all of SJCC's permits and  reclamation
                       bonds,  and shall  thereafter  invoice  Utilities for the
                       amount  due  SJCC  (said  invoice  to show in  reasonable
                       detail the amount,  if any,  received as a result of said
                       disposition,  SJCC's book cost (net of depreciation)  and
                       the balance due), whereupon Utilities shall, within sixty
                       (60) days of receipt of said  invoice,  remit to SJCC the
                       amount due SJCC.

                  (c)  Terms of Transfer.  Any transfer of all of SJCC's  right,
                       title and interest in and to the Coal  Leases,  including
                       all of SJCC's permits and  reclamation  bonds shall be by
                       an  appropriate  instrument of  conveyance,  with special
                       warranty covenants,  subject to necessary  consents,  and
                       such assignment  and/or transfer will become effective at
                       the earliest  possible time after the  termination of the
                       CSA or extension thereof.

                  (d)  Liabilities  Upon   Termination.   Upon  termination  the
                       Utilities shall assume all financial obligations, if any,
                       attributable  to  (i)  the  then  remaining  term  of the
                       Assignment  Agreement dated October 30, 1979,  originally
                       between  Cimarron  Coal  Company and Western Coal Co., as
                       amended and assigned to SJCC ("the  Cimarron  Agreement")
                       and (ii) all other  leases  and  subleases  that are Coal
                       Leases as of the date immediately  prior to the effective
                       date  of  the  Underground  Letter  Agreement  (including
                       private royalty  obligations or retained  interests).  In
                       addition,  after  termination  of the CSA, the  Utilities
                       remain  obligated to pay for all surface  reclamation and
                       related  liabilities,  obligations  and costs.  Under the
                       option described under Paragraph 16.3(a)(iii), SJCC shall
                       retain such property interests as are necessary,  and for
                       the time  required to satisfy all  reclamation  and other
                       obligations,    including,    without   limitation,   the
                       obligations  referred to in Paragraph 8.7  "Reclamation",
                       accrued  prior  to  the  date  of any  assignment  and/or
                       transfer  or arising in  connection  with the  operations
                       prior to said date under the Coal Leases.

                                       13

<PAGE>


         16.4     Expiration.

                  (a)  Options  of  Utilities  Upon  Expiration  and  Notice  of
                       Election. Upon expiration as provided in Section 2 of the
                       CSA,  the   Utilities   may  elect  one  of  the  options
                       identified in Paragraph 16.3(a)(i), Paragraph 16.3(a)(ii)
                       and Paragraph 16.3(a)(iii) of the CSA, provided, however,
                       that the  Utilities  also  have  both the  obligation  to
                       negotiate  provided in the first  paragraph  of Paragraph
                       2.4,  and  the  notice  obligations  specified  later  in
                       Paragraph 2.4.

                  (b)  Terms of Transfer and Liabilities  Upon  Expiration.  Any
                       transfer of all SJCC's  right,  title and interest in and
                       to the Coal Leases,  including all of SJCC's  permits and
                       reclamation bonds, shall be by an appropriate  instrument
                       of conveyance,  with special warranty covenants,  subject
                       to  necessary   consents,   and  such  assignment  and/or
                       transfer will become  effective at the earliest  possible
                       time  after  the  expiration  of  the  CSA  or  extension
                       thereof.  After  expiration  of the  CSA,  the  Utilities
                       remain  obligated to pay for all  reclamation and related
                       obligations and costs.  Under the option  described under
                       Paragraph  16.3(a)(iii),  SJCC shall retain such property
                       interests as are necessary,  and for the time required to
                       satisfy all reclamation and other obligations, including,
                       without  limitation,   the  obligations  referred  to  in
                       Paragraph 8.7 "Reclamation", accrued prior to the date of
                       any assignment  and/or  transfer or arising in connection
                       with the  operations  prior to said  date  under the Coal
                       Leases."

         L.  Waiver of Consequential  Damages. The Parties waive any recovery of
             consequential damages related to the breach of this Agreement.
         .
         M.  Annual Interim  Invoicing  Agreement.  An "Annual Interim Invoicing
             Agreement"  will be put in place each year by mutual  agreement  of
             the Parties to govern the monthly invoicing of coal.

1.7      Terms to be Included in the Definitive  Transportation  Agreement. SJTC
         and the  Utilities  agree to negotiate in good faith and use their best
         efforts  to  execute  a  Definitive   Transportation   Agreement   that
         incorporates  the  terms  described  in this  Paragraph  1.7 and  other
         appropriate  terms  by no later  than  July 31,  2001.  The  Definitive
         Transportation  Agreement  shall  include  the  substance  of the terms
         provided in  Paragraphs  1.7 (A) through (F). The language  employed in
         the  Definitive  Transportation  Agreement  shall reflect and elaborate
         upon the  substance  of the  terms  summarized  in  Paragraphs  1.7 (A)
         through (F) and may, if SJTC and the Utilities  mutually agree,  differ
         (in form) from, but may not (unless the SJTC and the Utilities mutually
         agree) be  inconsistent  with the  language  used in this  Agreement to
         summarize those terms.  This Agreement binds the SJTC and the Utilities
         to so include these terms in the Definitive  Transportation  Agreement,
         if reached.


                                       14
<PAGE>

         A.  [*]. SJTC and the Utilities agree as follows:

             (1)  The CIE and Incremental  CIE as defined in the  Transportation
                  Agreement will be [*] after December 31, 2002.

             (2)  The Utilities shall pay to SJTC [*].

             (3)  The  [*]  can be  paid,  at the  Utilities'  election,  [*] on
                  January 1, 2003 or [*] on  January 1, 2003.  The [*] amount of
                  the [*] is [*] or [*] per year [*]. The [*] amount will be [*]
                  January  1,  2003.  If  paid  [*] in the  same  way the CIE is
                  treated under the  Transportation  Agreement,  and the term of
                  the [*] shall be from 2003 through 2017 inclusive.

             (4)  [*]  payments  incurred  as a  result  of [*] and the  payment
                  thereof shall be [*].

                  The  Utilities  and SJTC agree to  negotiate in good faith and
                  use their best efforts to execute,  by July 31,  2001,  if not
                  completed  earlier,  a Transportation [*] Agreement to reflect
                  the terms and conditions for payment of the [*].


         B.  The Administration  Component in the Transportation  Agreement will
             be [*] starting January 1, 2003.

         C.  SJTC  Operating  Costs.  SJTC and the  Utilities  agree that SJTC's
             Operating Costs will be as defined in the Transportation Agreement,
             Exhibit A. Reimbursement for SJTC Operating Cost will be [*].

         D.  SJTC  Reclamation.   All  reclamation  activity,   related  to  the
             Transportation  Agreement,  during  the term of the  Transportation
             Agreement will be reimbursed as [*]. Any reclamation activity after
             the term of the Transportation  Agreement will be handled according
             to terms of the Transportation Agreement.

         E.  Waiver of Consequential  Damages.  SJTC and the Utilities waive any
             recovery  of  consequential  damages  related to the breach of this
             Agreement.

         F.  Annual Interim  Invoicing  Agreement.  An annual interim  invoicing
             agreement  will be put in place  each year by mutual  agreement  of
             SJTC and the  Utilities to govern the monthly  invoicing  under the
             Transportation Agreement.

1.8      Construction.  Once a  Definitive  Agreement  is reached,  neither this
         Agreement,  nor the Parties'  negotiation  of it, shall be used for any
         purpose  in  ascertaining  the  rights,  obligations,  or intent of the
         Parties  under the  Definitive  Agreement,  the CSA,  or the  agreement
         concerning the [*]. If a Definitive  Agreement is not reached,  subject
         to Paragraph  1.9 of this  Agreement,  neither this  Agreement  nor the
         Parties'  negotiation  of it shall be used to construe parts of the CSA
         not amended or changed by this Agreement.


                                       15
<PAGE>

         Once the Definitive  Transportation  Agreement is reached, neither this
         Agreement, nor STJC and the Utilities' negotiation of it, shall be used
         for any purpose in ascertaining the rights,  obligations,  or intent of
         the  parties  under  the  Definitive   Transportation   Agreement,  the
         Transportation  Agreement,  or the agreement concerning the [*]. If the
         Definitive  Transportation  Agreement  is not  executed,  neither  this
         Agreement nor SJTC and the  Utilities'  negotiation of it shall be used
         to  construe  parts of the  Transportation  Agreement  not  amended  or
         changed by this Agreement.

1.9      Ratification of the CSA and Transportation  Agreement.  The CSA and the
         Transportation  Agreement are affirmed and ratified except as expressly
         amended by this Agreement;  provided,  however, that in the event of an
         inconsistency  between  the  terms  of  this  Agreement  and the CSA or
         Transportation Agreement, the terms of this Agreement control.

1.10     Defined Terms. Capitalized terms used and not otherwise defined in this
         Agreement  shall have the respective  meanings given to them in the CSA
         and the Transportation Agreement.

1.11     Counterparts.  This Agreement may be executed in counterparts, and each
         executed  counterpart  shall  have  the same  force  and  effect  as an
         original  instrument as if all  signatories to the Agreement had signed
         the same instrument.

1.12     Arbitration.  All  provisions  of this  Agreement  shall be  subject to
         arbitration pursuant to Section 14 of the CSA.

1.13     Nondisclosure.  The terms and conditions,  including those dealing with
         compensation,  set forth in this Agreement are considered by Utilities,
         SJCC and SJTC to be confidential  and proprietary  information and none
         of the parties shall  disclose any such  information to any third party
         other than the  attorneys,  auditors and agents of Utilities,  SJCC and
         SJTC without the advance written consent of the other parties; provided
         however,  disclosure may be made without  advance consent where, in the
         opinion of counsel,  such  disclosure may be required by order of court
         or regulatory  agency, law or regulation or in connection with judicial
         or administrative  proceedings involving a party hereto, in which event
         the party to make such  disclosure  shall  advise the other  parties in
         advance  as  soon as  possible  and  cooperate  to the  maximum  extent
         practicable  to  minimize  the  disclosure  of  any  such   information
         (including, where practicable,  deletion of portions of this Agreement,
         and  specifically,   Paragraphs  1.6(A),  1.6(C),  1.6(D),  1.6(E)  and
         Paragraphs 1.7(A), 1.7(B), 1.7 (C) and Exhibit B).




                                   ARTICLE II
                        NON-BINDING TERMS AND CONDITIONS

2.1      Non-Binding  Effect.  The  provisions  in this  Article II express  the
         Parties'  understanding  with respect to the matters described therein,
         but  these  Article  II  provisions  are  expressly  understood  not to
         constitute a complete statement of, or a legally binding or enforceable

                                       16
<PAGE>

         agreement or  commitment on the part of any of the Parties with respect
         to the matters described therein. These provisions are included in this
         Article II rather than among the provisions for negotiation included in
         Paragraph  1.6,  "Terms to be  Included in the  Definitive  Agreement,"
         because  the  Parties  have yet to  devote  the time and  attention  to
         drafting them as has been devoted to the  provisions in Paragraph  1.6,
         and although the Parties  intend to do so between now and the execution
         of the Definitive Agreement, current time constraints prevent including
         greater detail in this Agreement. The Parties may decide not to include
         some  of the  additional  terms  described  in  Paragraph  2.4 of  this
         Agreement,  and the Parties  reserve  the right to bring in  additional
         terms,  not  inconsistent  with  the  terms  of  this  Agreement,   for
         negotiations.

2.2      [*]  Proposal.  The Parties  agree to negotiate in good faith as to the
         possibility of [*].

2.3      Monthly  Invoicing.  The Parties  agree that monthly  invoicing  with a
         known  price is  required  to send an  appropriate  pricing  signal for
         maximum dispatch of electricity. It is proposed that the Utilities give
         SJCC an  annual  budget  for  minimum  monthly  tons to be  taken  on a
         take-or-pay  basis in conjunction with an incremental price in order to
         encourage maximum burn.

2.4      Summary of Additional  Terms.  The following  additional  terms in this
         Paragraph  2.4 are a  non-exclusive  listing  of  provisions  that  the
         Parties  agree to discuss in  connection  with the  negotiations  for a
         Definitive Agreement.

         A.  Arbitration or Dispute Resolution Clause. An arbitration or dispute
             resolution clause should clearly apply to the binding resolution of
             all  disputes  arising  under  or  relating  to  the  CSA  and  its
             performance by the Parties. The clause also should be modernized to
             include  provisions  that  are  now  common  (e.g.  disinterest  of
             arbitrators,  location of  arbitration,  schedule for  arbitration,
             etc.).  The  related  Coordinating  Committee  and Joint  Committee
             Provisions should be updated and harmonized with the Arbitration or
             Dispute Resolution Clause.

         B.  Indemnification Clause.  Reciprocal  indemnification of the Parties
             should be  provided,  consistent  with the laws of the State of New
             Mexico,  including,  but not  limited  to  indemnification  for the
             Utilities' actions on SJCC property.

         C.  Compliance  with Applicable  Laws. A general  requirement to comply
             with laws should be included.

         D.  Emergency Expenditures.  The Parties will discuss reimbursement for
             expenditures in addressing emergencies, which may not fall within a
             strict definition of "Operating Costs."

         E.  Updating Exhibits. The Parties will update CSA exhibits as needed.

         F.  Insurance  and  Deductibles.  The  Parties  will  update  insurance
             coverage and deductibles as required.


                                       17
<PAGE>

         G.  Delineation of Expenses. The Parties will discuss  characterization
             of expenses as capital or operations and maintenance.

         H.  Formalization  of  Water  Agreements.   The  Parties  will  discuss
             formalization of Water Assignment and Guaranty.

         I.  Itemized Invoicing. The Parties will discuss itemized invoicing for
             Surface   Reclamation   Activities.   The  Parties  recognize  that
             invoicing   may  be  modified  to  reflect   itemized   reclamation
             activities.

         J.  Overland   Conveyor   Project.   The  Parties   agree  to  initiate
             discussions regarding development of an overland conveyor project.

         K.  Replacement  of DLX  Resources.  If  appropriate,  the Parties will
             discuss replacement of the DLX resources.

         L.  Mechanics  of  True-Up   Process.   The  Parties  will  discuss  an
             implementation of the True-Up Process.

         M.  Utility  Holding  Company  Participation.  The Parties will discuss
             whether it is appropriate to require financial  assurances from the
             Utilities' respective holding companies, if applicable.


         IN  WITNESS  WHEREOF,  SJCC,  SJTC and the  Utilities,  by  their  duly
authorized  representatives,  have  entered  into this  Agreement as of the date
first written above.


         PUBLIC SERVICE COMPANY OF NEW MEXICO

         By:   /s/ Patrick J. Goodman
               ----------------------------------
               Patrick J. Goodman, Vice President


         TUCSON ELECTRIC POWER COMPANY

         By:   /s/ T. A. Delawder
               ----------------------------------
               Thomas A. Delawder, Vice President


         SAN JUAN COAL COMPANY

         By:   /s/ Chris S. Ellefson
               ----------------------------------
               Chris S. Ellefson, Vice President


         SAN JUAN TRANSPORTATION COMPANY


         By:   /s/ John W. Grubb
               ----------------------------------
               John W. Grubb, President



                                       18