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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, 1999     Commission File Number 1 - 6986

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

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


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

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

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

        Title of each class           Name of each exchange on which registered
        -------------------           -----------------------------------------
   Common Stock, $5.00 Par Value               New York Stock Exchange

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

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

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

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

   The total number of shares of the Company's  Common Stock  outstanding  as of
January 31, 2000 was 40,161,299. 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 $15 7/8 per
share reported by the Wall Street Journal, was $637,560,622.

                       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 June 6, 2000 - 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...................................     5
            NATURAL GAS OPERATIONS......................................     8
                Service Area and Customers..............................     8
                Natural Gas Supply......................................     8
                Natural Gas Sales.......................................     9
             UNREGULATED OPERATIONS.....................................
            DEREGULATION AND FORMATION OF HOLDING COMPANY...............    11
            PROPOSED RULEMAKINGS RELATED TO DEREGULATION................    12
            COMPETITION UNDER DEREGULATION .............................    13
            RATES AND REGULATION........................................    14
                Electric Rates and Regulation...........................    14
                Federal Electric Initiatives............................    15
                Gas Rates and Regulation................................    16
            ENVIRONMENTAL FACTORS.......................................    17

ITEM  2. PROPERTIES.....................................................    21
              ELECTRIC..................................................    21
                  Fossil-Fueled Plants..................................    21
                  Nuclear Plant.........................................    22
                  Other Electric Properties.............................    27
              NATURAL GAS...............................................    27
              OTHER INFORMATION.........................................    28

ITEM  3. LEGAL PROCEEDINGS..............................................    28
              PVNGS WATER SUPPLY LITIGATION.............................    28
              SAN JUAN RIVER ADJUDICATION...............................    28
              OTHER PROCEEDINGS.........................................    29
                  Republic Savings Bank Litigation......................    29
                  Purported Navajo Environmental Regulation.............    29
                  Nuclear Decommissioning Trust.........................    30
                  Royalty Claims........................................    31
                  KAFB Contract.........................................    32
                  City of Gallup Complaint..............................    32

ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............    33

                                       ii
<PAGE>

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY....................    34


                                     PART II

ITEM  5.   MARKET FOR THE COMPANY'S COMMON EQUITY AND
                 RELATED STOCKHOLDER MATTERS............................    36

ITEM  6.   SELECTED FINANCIAL DATA......................................    37

ITEM  7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
             CONDITION AND RESULTS OF OPERATIONS........................    38

ITEM  7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
             MARKET RISK ...............................................    62

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-21




                                      iii
<PAGE>


                                    GLOSSARY

Act...................................  The Clean Air Act - Amendments of 1990
Avistar...............................  Avistar, Inc., an unregulated
                                          subsidiary of Public Service  Company
                                          of New Mexico
AG....................................  New Mexico Attorney General
AMDAX.................................  AMDAX.com, an equity investee of Avistar
Anaheim...............................  City of Anaheim, California
APPA..................................  Arizona Power Pooling Association
APS...................................  Arizona Public Service Company
BHP...................................  BHP Minerals International, Inc.
BLM...................................  Bureau of Land Management
BTU...................................  British Thermal Unit
COA...................................  City of Albuquerque, New Mexico
Decatherm.............................  1,000,000 BTUs
DOE...................................  United States Department of Energy
EIP...................................  Eastern Interconnection Project
El Paso...............................  El Paso Electric Company
Energy................................  Manzano Energy Corporation, a proposed
                                          subsidiary   of  Manzano   that  will
                                          contain  unregulated  operations  and
                                          currently  Public Service  Company of
                                          New Mexico
EPA...................................  United States Environmental Protection
                                          Agency
EPNG..................................  El Paso Natural Gas Company
FERC..................................  Federal Energy Regulatory Commission
FASB..................................  Financial Accounting Standards Board
Farmington............................  City of Farmington, New Mexico
FERC..................................  Federal Energy Regulatory Commission
FIP...................................  Federal Implementation Plan
Four Corners..........................  Four Corners Power Plant
FPPCAC................................  Fuel and Purchased Power Cost
                                           Adjustment Clause
Gallup................................  City of Gallup, New Mexico
Gathering Company.....................  Sunterra Gas Gathering Company, a
                                          wholly-owned   subsidiary  of  Public
                                          Service Company of New Mexico
ISO...................................  Independent System Operator
KAFB..................................  Kirtland Air Force Base
Kv....................................  Kilovolt
KW....................................  Kilowatt
KWh...................................  Kilowatt Hour
Los Alamos............................  The County of Los Alamos, New Mexico
mcf...................................  Thousand cubic feet
Manzano...............................  Manzano Corporation, the proposed
                                          holding  company  of  Public  Service
                                          Company of New Mexico
Meadows...............................  Meadows Resources, Inc., a wholly-owned
                                          subsidiary of Public Service  Company
                                          of New Mexico

                                       iv
<PAGE>



M-S-R.................................   M-S-R Public Power Agency, a California
                                           public power agency
MW....................................   Megawatt
MWh...................................   Megawatt Hour
NMED..................................   New Mexico Environment Department
NMPUC.................................   New Mexico Public Utility Commission
NRC...................................   United States Nuclear Regulatory
                                           Commission
OCD...................................   New Mexico Oil Conservation Division
PGAC..................................   PNMGS' Purchased Gas Adjustment Clause
PLP...................................   Cobisa-Person Limited Partnership
PNMGS.................................   Public Service Company of New Mexico
                                           Gas  Services,  a division  of Public
                                           Service Company of New Mexico
PPA...................................   Power Purchase Agreement
PRC...................................   New Mexico Public Regulation
                                           Commission, predecessor of the NMPUC
Processing Company....................   Sunterra Gas Processing Company,
                                           a  wholly-owned  subsidiary of Public
                                           Service Company of New Mexico
PVNGS.................................   Palo Verde Nuclear Generating Station
RCRA..................................   Resource Conservation and Recovery Act
RHC...................................   Republic Holding Company
RSB...................................   Republic Savings Bank
RTO...................................   Regional Transmission Organization
Reeves Station........................   Reeves Generating Station
Salt River Project....................   Salt River Project Agricultural
                                           Improvement and Power District
SCE...................................   Southern California Edison Company
SCPPA.................................   Southern California Public Power
                                           Authority
SDG&E.................................   San Diego Gas and Electric Company
SEC...................................   Securities and Exchange Commission
SJCC..................................   San Juan Coal Company
SJGS..................................   San Juan Generating Station
SPS...................................   Southwestern Public Service Company
TNP...................................   Texas-New Mexico Power Company
Throughput............................   Volumes of gas delivered, whether or
                                           not owned by PNMGS
Tri-State.............................   Tri-State Generation and Transmission
                                           Association, Inc.
Tucson................................   Tucson Electric Power Company
UAMPS.................................   Utah Associated Municipal Power Systems
USBR..................................   United States Bureau of Reclamation
USEC..................................   United States Enrichment Corporation
WGA...................................   Western Governors Association
WRAP..................................   Western Regional Air Partnership
Waste Act.............................   Nuclear Waste Policy Act of 1982, as
                                           amended in 1987
Western...............................   Western Area Power Administration
Williams..............................   Williams Gas Processing-Blanco, Inc.,
                                           a subsidiary  of the  Williams  Field
                                           Services   Group,   Inc.,  of  Tulsa,
                                           Oklahoma

                                       v
<PAGE>


                                     PART I

ITEM 1.  BUSINESS

                                   THE COMPANY

        Public Service Company of New Mexico (the "Company") was incorporated in
the  State of New  Mexico  in 1917 and has its  principal  offices  at  Alvarado
Square,  Albuquerque,  New Mexico 87158  (telephone  number  505-241-2700).  The
Company is a public utility primarily  engaged in the generation,  transmission,
distribution and sale of electricity and in the  transmission,  distribution and
sale of natural gas within the State of New Mexico. In addition, in pursuing new
business  opportunities,  the Company is focusing on energy and utility  related
services  under  Avistar.  Avistar  also  operates  the City of Santa Fe's water
system.  (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  1.35 million,  of which 52.2%
live in the greater Albuquerque area.

        For the year ended December 31, 1999,  the Company  derived 78.8% of its
operating revenues from electric  operations,  20.4% from natural gas operations
and 0.8% from unregulated operations.

        As of December 31, 1999, the Company employed 2,667 persons.

        Financial  information  relating to amounts of  revenue,  net income and
total assets of the Company's  reportable segments is contained in note 1 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 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, 1999, approximately 361,000 retail electric customers
were served by the Company,  the largest of which  accounted  for  approximately
4.7% of the Company's total retail electric revenues for the year ended December
31, 1999.


                                       1
<PAGE>


        The Company holds long-term,  non-exclusive franchise agreements for its
electric retail  operations,  expiring  between June 6, 2000, and November 2028.
These franchise  agreements  provide the Company access to public  rights-of-way
for placement of the Company's electric  facilities.  The COA, City of Santa Fe,
Town of Cochiti Lake,  Bernalillo County,  Luna County,  Sandoval County and San
Miguel  County  franchises  have  expired.  Customers in the area covered by the
expired  franchises  represent  approximately  43.2 of the Company's  1999 total
electric  operating  revenues,  and no other franchise area represents more than
4.97%. The Company  continues to collect and pay franchise fees to the COA, City
of Santa Fe and the Town of Cochiti  Lake.  The Company  currently  does not pay
franchise fees to Bernalillo County, Luna County, Sandoval County and San Miguel
County.  The Company  remains  obligated  under state law to provide  service to
customers in the franchise area even in the absence of a franchise agreement.

Power Sales

        For the years  1995  through  1999,  retail  KWh sales  have  grown at a
compound annual rate of approximately  3.1%. 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)

                                             1999       1998        1997        1996        1995
                                             ----       ----        ----        ----        ----

<S>                                         <C>        <C>         <C>         <C>         <C>
   Retail.................................  $522,523   $536,417    $519,504    $507,821    $485,568
   Firm-requirements wholesale............  $  7,046   $ 10,708    $ 10,690    $ 12,359    $ 20,282
   Other contracted off-system sales......  $226,773   $142,115    $118,876    $ 86,689    $ 43,158*
   Economy energy sales...................  $131,549   $122,156    $ 55,768    $ 22,281    $ 17,509*
</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 in 1995.
<TABLE>
<CAPTION>

                                              ELECTRIC SALES BY MARKET
                                                  (Megawatt hours)

                                           1999        1998        1997        1996        1995
                                           ----        ----        ----        ----        ----

<S>                                       <C>         <C>         <C>         <C>         <C>
Retail................................... 6,803,583   6,739,874   6,534,899   6,406,296   6,029,365
Firm-requirements wholesale..............   179,249     278,615     278,727     282,534     447,629
Other contracted off-system sales........ 6,196,499   4,033,931   3,790,081   2,928,321     594,367
Economy energy sales..................... 4,795,873   4,469,769   2,716,835   1,364,365   1,548,517
</TABLE>

<TABLE>
<CAPTION>

                                                SYSTEM PEAK DEMAND*
                                                     (Megawatts)

                                           1999         1998         1997        1996        1995
                                           ----         ----         ----        ----        ----

<S>                                        <C>          <C>          <C>          <C>        <C>
Summer..................................   1,291        1,313        1,209        1,217      1,247
Winter..................................   1,161        1,135        1,142        1,111      1,076
</TABLE>

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


                                       2
<PAGE>



        The Company's  wholesale  power marketing area continues to increase its
trading activities.  During 1999 and 1998, the Company's sales in the off-system
markets accounted for approximately 61.2% and 54.8%, respectively,  of its total
KWh sales and approximately 40.3% and 32.6%, respectively, of its total revenues
from  energy  sales.  Of the total  off-system  sales  made in 1999,  78.0% were
transacted  through purchases for resale as compared to 67.0% in 1998.  However,
the Company continues to be committed to increasing its utilization of its major
generation capacity at SJGS, Four Corners and PVNGS.  Capacity factors for these
generating  stations  were 80.0%,  71.1% and 93.2%,  respectively,  in 1999,  as
compared to 81.8%,  87.2% and 92.5%,  respectively,  in 1998.  During 1999,  the
Company's major off-system sales 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.  SDG&E has filed four  separate  complaints  with the FERC
against the Company, alleging that certain charges under the 1985 power purchase
agreement are unjust, unreasonable and unduly discriminatory.  See PART II, ITEM
7. - "MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS  - OTHER  ISSUES  FACING  THE  COMPANY - SAN  DIEGO GAS AND  ELECTRIC
("SDG&E") 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 1999.  This resulted in
a peak demand in 1999 of 74 MW. APPA  invoked the same option to reduce its peak
demand in 2000 to 68 MW.

        The Company furnished firm-requirements wholesale power in New Mexico in
1999 to the City of Gallup.  The Company is committed to provide  service to the
City of Gallup  through April 2003.  Average  monthly  demands under the City of
Gallup  contract  for  1999  were  approximately  27  MW.  No  firm-requirements
wholesale  customer accounted for more than 0.8% of the Company's total electric
operating revenues for the year ended December 31, 1999.

Sources of Power

        As of December 31, 1999, the total net generation capacity of facilities
owned or leased by the Company was 1,521 MW.

        In addition to generation  capacity,  the Company purchases power in the
market.  The Company has a power  purchase  contract  with SPS which  originally
provided for the purchase of up to 200 MW, 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 2000 and by an
additional 25 MW in 2001. The Company has 70 MW of contingent  capacity obtained
from El  Paso  under a  transmission  capacity  for  generation  capacity  trade
arrangement  through  2004  and 39 MW in  2005.  In  addition,  the  Company  is
interconnected  with  various  utilities  for  economy  interchanges  and mutual
assistance  in  emergencies.  The  Company  has  been  actively  trading  in the
wholesale  power  market  and has  entered  into  and  anticipates  that it will
continue to enter into power purchases to accommodate its trading activity.


                                       3
<PAGE>

        In 1996,  the Company  entered into a long-term PPA with 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.  In September 1997, the NMPUC approved the Company's and
PLP's  applications  for the project.  In December  1997, PLP also received FERC
approval for "exempt wholesale generator" status with respect to the gas turbine
generating  unit. In March 1998, the Company and PLP executed  amendments to the
PPA and to the associated site lease and interconnection agreement, and executed
a new water use lease.  The PPA was amended to change the maximum  capacity  the
Company was obligated to take to 132 MW and to change the  commercial  operation
date  from  May  1999 to May  2000.  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 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.  Primary fuel for the gas turbine  generating
unit will be natural gas,  which will be provided by the  Company.  In addition,
the unit will have the  capability  to utilize  low sulfur fuel oil in the event
natural gas is not available.

        In the  September  1997 NMPUC  order,  the NMPUC  approved  the  project
application and a stipulated settlement agreement ("Stipulation") which had been
entered  into  earlier  among the  Company,  PLP and the NMPUC  staff to resolve
certain issues raised in this proceeding.  The Stipulation included, among other
things, a provision wherein the Company committed, in cooperation with the NMPUC
staff, to the  development and evaluation of a request for proposal  ("RFP") for
the purchase of approximately 5 MW of capacity from solar generation  resources.
The  Company  was not  obligated  to build such a unit or commit to such a solar
power purchase  agreement  prior to the NMPUC  approval of a full-cost  recovery
mechanism.

        By order dated  October  27,  1998,  the NMPUC  approved  the  Company's
implementation  of a rate rider to collect a 0.5 percent surcharge on all retail
electric bills to pay for solar and other renewable resource projects. Under the
NMPUC's order,  one-half of the monies collected under the rider would have been
used to purchase or acquire  resources the Company had pursued through the solar
RFP  process,  while the other half of the monies would have been used for other
renewable resource projects.

        In November 1998, the NMPUC adopted a rule that established a "renewable
energy  development  program"  and  required  New  Mexico  utilities  to collect
voluntary  contributions to a renewable  energy fund from their  customers.  The
stated purpose of the rule was to support research,  development,  demonstration
and deployment of renewable  energy  resources.  Funds collected by each utility
were  to be  spent  by it on  projects  approved  by  the  PRC  based  upon  the
recommendations  of a Renewable  Energy Advisory Board appointed by the PRC. The
Company  requested  the PRC to exempt it from the rule on the  grounds  that the
rule is more than  satisfied by the renewable  resource  program and 0.5 percent
surcharge  specifically  approved for the Company by the NMPUC in October  1998.
The  Company's  request is pending.  On August 25, 1999,  the PRC  suspended the
proposed  rule and issued an Order  requiring the PRC staff to pursue a proposed
rulemaking  proceeding  for the  purpose of amending  or  repealing  the rule as
currently  promulgated  in  order  to  conform  with  the  requirements  of  the
Restructuring Act.

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


                                       4
<PAGE>

Fuel and Water Supply

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

                      Coal                 Nuclear              Gas and Oil
               --------------------  --------------------   --------------------
               Percent of   Average  Percent of   Average   Percent of   Average
               ----------   -------  ----------   -------   ----------   -------
  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
  1997......      68.1       152.7      31.1       48.3         0.8       326.6
  1998......      68.2       155.3      30.8       46.5         1.0       324.6
  1999......      67.6       165.3      31.0       47.4         1.4       331.9

       The estimated  generation mix for 2000 is 68.2% coal,  30.1% nuclear and
1.7% 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 the  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 the  SJGS  until  2017.  BHP  guaranteed  the
obligations  of SJCC under the  agreement,  which  contemplates  the delivery of
approximately  94 million tons of coal during its  remaining  term.  Such amount
would  supply   substantially   all  the   requirements   of  the  SJGS  through
approximately  2017.  The primary  sources of coal for current  operations are a
mine adjacent to the SJGS and a mine located approximately 25 miles northeast of
the  SJGS in the La Plata  area of  northwestern  New  Mexico.  The  Coal  Sales
Agreement  contemplated  that additional coal resources would be required during
the remaining  term of the  agreement.  The Company is currently in  discussions
with  SJCC  regarding  alternatives  for  coal  resource  selection.  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.


                                       5
<PAGE>

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
available gas supply.

Nuclear Fuel

        The fuel cycle for PVNGS is comprised  of the  following  stages:

        o The mining and milling of uranium ore to produce uranium concentrates,
        o The conversion of uranium concentrates to uranium hexafluoride,
        o The enrichment of uranium hexafluoride,
        o The fabrication of fuel assemblies,
        o The utilization of fuel assemblies in reactors and
        o The storage of spent fuel and the disposal thereof.

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

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

Water Supply

        Water for Four  Corners  and SJGS is  obtained  from the San Juan River.
(See ITEM 3. - "LEGAL  PROCEEDINGS  - SAN JUAN RIVER  ADJUDICATION".)  BHP holds
rights to San Juan River  water and  committed  a portion of 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 the 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 the SJGS through 2005.

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

                                       6
<PAGE>

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

        Currently,   the  Company  is  in  discussions   with  Jicarilla  for  a
twenty-seven  year contract,  beginning in 2006, for the full 16,200 AF of water
from the  Jicarilla  supply  in Navajo  Reservoir  ("Jicarilla  Contract").  The
Jicarilla  Contract is proposed to be  essentially  equivalent to a renewed USBR
Contract,  the only material  difference being that Jicarilla as opposed to USBR
would be the contract supplier. Jicarilla has contract water in Navajo Reservoir
pursuant to a water rights settlement  approved by Congress in 1992 and judicial
decree that was entered February 24, 1999.  Unlike a renewed USBR Contract,  the
Company  would not be  required  to seek  Congressional  approval of a Jicarilla
Contract.

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

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

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


                                       7
<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 426,000 customers as of December 31, 1999. The Albuquerque
metropolitan  area accounts for approximately  51.7% of the total  sales-service
customers.   PNMGS  holds  long-term,   non-exclusive  franchises  with  varying
expiration dates in all incorporated  communities requiring franchise agreements
except for the COA,  which  expired on January 28, 1998.  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  recovered  in  accordance  with  PRC  rules  and
regulations  and 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  1,244  gas
marketers, producers and end users during 1999.

        For the twelve months ended  December 31, 1999,  PNMGS had throughput of
approximately  92.3  million   decatherms,   including  sales  of  52.1  million
decatherms to both sales-service  customers and off-system customers.  No single
sales-service  customer  accounted  for more than 4.2% of PNMGS'  therm sales in
1999.  During 1999,  approximately  43.6% 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, 1999,  were
approximately $236.7 million.  Cost-of-gas revenues, received from sales-service
and  off-system  customers,  accounted for  approximately  47.7% of PNMGS' total
operating revenues.  Since a major portion of PNMGS' load is related to heating,
levels of therm sales are  affected by  weather.  Approximately  43.3% of PNMGS'
total therm sales in 1999 occurred in the months of January, February,  November
and December.

Natural Gas Supply

        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.


                                       8
<PAGE>

Natural Gas Sales

        The following table shows gas throughput by customer class*:

                                 GAS THROUGHPUT
                            (Millions of decatherms)

                           1999       1998        1997       1996       1995
                           ----       ----        ----       ----       ----

Residential..............  29.3        30.3       30.7       27.4        25.9
Commercial...............  10.1        10.4       10.6        9.3         8.9
Industrial...............   2.3         1.5        1.3        2.1         0.7
Public authorities.......   2.9         3.4        4.2        2.6         2.4
Irrigation...............   1.4         1.9        1.6        1.4         1.2
Sales for resale.........   1.2         1.2        1.2        0.8         1.3
Unbilled.................   3.8        (1.3)      (0.2)       1.4        (1.8)
Transportation**.........  40.2        36.4       34.0       47.1        69.8
Off-system sales.........   1.1         1.9        1.2        8.0         1.2
                           ----        ----       ----      -----       -----
                           92.3        85.7       84.6      100.1       109.6
                           ====        ====       ====      =====       =====


         The following table shows gas revenues by customer class*:

                                  GAS REVENUES
                             (Thousands of dollars)

                             1999      1998      1997       1996       1995
                             ----      ----      ----       ----       ----

Residential............... $148,968  $161,153  $187,563   $129,911   $125,290
Commercial................   36,528    42,680    50,502     33,022     32,328
Industrial................    8,550     4,887     4,536      5,179      1,873
Public authorities........    9,782    12,610    17,577      8,018      7,939
Irrigation................    4,229     5,780     5,041      3,252      3,077
Sales for resale..........    2,530     3,596     4,465      2,106      3,114
Unbilled..................    4,107      (955)   (2,172)     2,678     (2,430)
Transportation**..........   12,390    13,464    14,172     17,215     22,172
Liquids...................    1,867     1,463     4,451      7,608     13,414
Processing fees...........        -         -         -          -      5,180
Off-system sales..........    2,357     3,816     1,926     14,352      1,927
Other.....................    5,403     7,481     6,708      3,960      4,101
                           --------  --------  --------   --------   --------
                           $236,711  $255,975  $294,769   $227,301   $217,985
                           ========  ========  ========   ========   ========


*   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.
**  Customer-owned gas.


                                       9
<PAGE>
                             UNREGULATED OPERATIONS

        The Company,  through its wholly-owned subsidiary Avistar, has initiated
several  unregulated  service and  information  business  lines to serve  energy
intensive  customers.  The Avistar  business  lines consist of Energy  Partners,
Pathways  Integration and Phaser  Advanced  Metering  Services.  Energy Partners
provides energy management  solutions that assist customers in implementing cost
effective  procurement,   distribution  and  consumption  of  energy.   Pathways
Integration is seeking  opportunities in  infrastructure  and energy  management
with a specific  focus on the municipal  and Native  American  markets.  Avistar
currently has a contract with the City of Santa Fe to operate the Santa Fe water
system through  mid-2001.  Phaser Advanced  Metering  Services provides electric
meter installation,  testing service and consulting  expertise to energy service
providers as well as commercial and industrial customers. On August 4, 1998, the
Company adopted a plan to discontinue the natural gas trading  operations of its
Energy  Marketing  business  segment of the Energy Services  Business Unit. (See
PART II, ITEM 7. - "MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - RESULTS OF OPERATIONS - Discontinued Operations".)

        In June 1999,  the NMPUC issued a final order  approving  the  Company's
request  to form and invest in a  wholly-owned  subsidiary,  Avistar.  Under the
final order,  the Company is permitted to invest a maximum of $50 million in the
subsidiary,  subject to the availability of the Company's  retained earnings and
to enter  into  reciprocal  loan  agreement  for up to $30  million.  While  the
terminology of "available  unappropriated retained earnings" quoted in the order
is subject to  interpretation,  the Company believes it currently has sufficient
retained earnings to make the investments.

         Avistar commenced  operations starting on August 11, 1999. The business
lines now  contained in Avistar were  operated in the Energy  Services  Business
Unit of the Company  prior to the  formation  and funding of Avistar.  Since its
inception, Avistar has entered into an exclusive license arrangement with Sandia
Corporation  in October 1999, to modify and market a reliability  and predictive
maintenance  software suite. The Company  anticipates  marketing this product to
utilities,  manufacturers  and a variety of other  industry  segments  concerned
about optimizing operational performance.

        Avistar  has also  acquired  approximately  25%  ownership  interest  in
AMDAX.com,  a developer of an internet-based energy exchange, by agreement dated
January 24, 2000. AMDAX has developed a proprietary,  auction platform  designed
to efficiently bring together  electricity buyers and sellers in the deregulated
natural gas and electricity markets.  Avistar has also entered into an agreement
with AMDAX to provide  metering,  regulatory and information  systems support to
AMDAX.

                  DEREGULATION AND FORMATION OF HOLDING COMPANY

        Introduction  of  competitive  market  forces and  restructuring  of the
electric  utility  industry in New Mexico  continue to be key issues  facing the
Company.   The  Electric  Utility  Industry   Restructuring  Act  of  1999  (the
"Restructuring Act"), was enacted into law on April 8, 1999, opening the state's
electric  power  market to  customer  choice  beginning  in 2001.  The law gives
schools,  residential  and small  business  customers the  opportunity to choose
among competing power suppliers  beginning in January 2001.  Competition will be
expanded to include all customers  starting in January 2002.  The PRC,  however,
can  extend  these  dates  by  up to  one  year  if  necessary.  Rural  electric
cooperatives  and municipal  electric systems have the option not to participate
in the competitive market.


                                       10
<PAGE>

        Residential  and  small  business  customers  who do not  select a power
supplier  in the open  market  can buy their  electricity  through  their  local
utility through a "standard offer" whereby the local  distribution  utility will
purchase power supplies  through a competitive  process approved by the PRC. The
local  distribution  utility  system and  related  services  such as billing and
metering  will  continue  to be  regulated  by the  PRC,  while  the  interstate
transmission system will remain subject to Federal regulation.

        The law does not require  utilities to divest their  generating  plants,
but  requires  unregulated   activities  to  be  separated  from  the  regulated
activities through creation of at least two separate corporations.

        The Company is required to file a  transition  plan with the PRC by June
1, 2000.  The  transition  plan must include  proposals  for:  (i)  implementing
customer choice and open access to the Company's  transmission  and distribution
system; (ii) separating regulated and non-regulated  business activities;  (iii)
recommended  rates for  distribution,  transmission and related  services;  (iv)
competitive  procurement  process for  standard  offer;  and (v) the recovery of
stranded  costs and  transition  costs.  The  Company  plans to  reorganize  its
operations  by forming a holding  company  structure as a means of achieving the
corporate and asset separation  required by the  Restructuring  Act. The holding
company,  which was  incorporated  in March  2000,  as a  minimally  capitalized
wholly-owned subsidiary, has been named Manzano Corporation.

        Under the Company's restructuring plan, all of the outstanding shares of
the  Company's  common stock will be exchanged  on a  share-for-share  basis for
shares of Manzano common stock. Thus, when the share exchange is completed, each
shareholder  of the  Company's  common  stock  immediately  prior  to the  share
exchange will own the same number of shares (and  percentage)  of Manzano common
stock. Likewise, Manzano will own all of the outstanding shares of the Company's
common stock.  If the share exchange is  implemented,  shareholders  will not be
required to surrender their existing stock  certificates for stock  certificates
of Manzano.

        If the  shareholders  approve the agreement and plan of share  exchange,
and if the applicable regulatory approvals are obtained and other conditions are
satisfied,  the share  exchange  will  become  effective  upon the filing of the
Articles of Exchange relating to the share exchange with the Corporations Bureau
of the PRC. The share exchange  proposal  requires the  affirmative  vote of the
holders of two-thirds of the shares of the  Company's  common stock  entitled to
vote at the annual meeting.

        If the Company  receives all necessary  regulatory and other  approvals,
pursuant  to the  Restructuring  Act,  all of the  Company's  electric  and  gas
distribution and transmission assets and related liabilities will be transferred
to a newly created subsidiary after completion of the share exchange. After this
asset transfer, this subsidiary will acquire the name "Public Service Company of
New Mexico" (for purposes of this discussion, the subsidiary will be referred to
as "UtilityCo") and the corporation formerly named Public Service Company of New
Mexico will be renamed Manzano Energy  Corporation.  Energy will continue to own
the Company's existing electric  generation and unregulated,  competitive assets
after completion of the transfer of the regulated  business to the newly created
utility  subsidiary.  Shareholder  approval  is not  required  for the asset and
liability  transfer to UtilityCo,  which will occur after the  completion of the
share exchange if the Company  receives all necessary  approvals.  UtilityCo and
Energy will be wholly-owned subsidiaries of Manzano.


                                       11
<PAGE>

        The  share  exchange  itself  will  not  result  in  any  change  in the
outstanding  indebtedness of the Company.  In addition,  the Company's preferred
stock will remain an equity  security of Energy after the share exchange  unless
an exchange  offer for the preferred  stock is made by UtilityCo and accepted by
all the holders or the preferred stock is redeemed by the Company.

        The Company is filing its  transition  plan with the PRC pursuant to the
Restructuring  Act in three parts. In November 1999, the Company filed the first
two parts of the  transition  plan with the PRC. Part one requested  approval by
February  1,  2000  to  create  Manzano  and  UtilityCo  as  wholly-owned  shell
subsidiaries of the Company.  In response to this request,  the Company received
an order from the PRC on February  15, 2000  authorizing  it to form Manzano and
UtilityCo as wholly-owned  shell  subsidiaries  of the Company.  Part two of the
transition plan requested,  by June 1, 2000, all PRC approvals necessary for the
Company to implement  the  formation of the holding  company  structure  and the
share  exchange  and its  separation  plan  pursuant to the  Restructuring  Act.
However,  the part two hearing was  scheduled for May 15, 2000 which will make a
June 1, 2000  approval  unlikely.  Therefore,  the Company has assumed a July 1,
2000 approval  date with an August 1, 2000  separation  date.  PRC staff filed a
motion in February  2000 to delay the May 15,  2000  hearing  date.  The Company
filed a motion in opposition in February  2000.  As discussed,  this  separation
plan involves the transfer of the regulated business of the Company  (generally,
electric and gas distribution  and  transmission  assets) to UtilityCo so Energy
will maintain ownership of the competitive,  deregulated  businesses (generally,
generation  and related  assets).  This transfer is expected to take place after
the  consummation  of the share  exchange  assuming the receipt of all necessary
regulatory and other approvals. Part three of the Company's transition plan will
address transition costs, stranded costs, UtilityCo's cost of service,  standard
offer service and other issues required to be considered under the Restructuring
Act.

        The Company  expects to file a Form S-4  Registration  Statement for the
share  exchange  discussed  above with the  Securities  and Exchange  Commission
subsequent to the filing of this Form 10-K. The Form S-4 will provide additional
detail on the proposed share exchange.

                  PROPOSED RULEMAKINGS RELATED TO DEREGULATION

Code of Conduct

       On  August  17,  1999,  the PRC  issued a notice of  proposed  rulemaking
seeking  comments on a Code of Conduct rule.  The stated purpose of the proposed
Code of Conduct rule is to establish  procedures  governing public utilities and
the relationship and interactions between a public utility and an affiliate that
has been licensed by the Commission to provide retail  competitive  power supply
and energy related  services as required by the  Restructuring  Act. The PRC has
not finalized its proposed rule.


                                       12
<PAGE>


Standard Offer Service Rule

        On  August  17,  1999 the PRC  issued a notice  of  proposed  rulemaking
seeking  comments on a Standard  Offer Service rule.  The stated  purpose of the
proposed  Standard  Offer  Service  rule is to  establish  procedures  governing
utilities  regarding the terms and conditions for  acquisition  and service by a
public  utility of generation  service for standard offer service as required by
the  Restructuring  Act (see  PART II. - ITEM 7.  "MANAGEMENT'S  DISCUSSION  AND
ANALYSIS  AND RESULTS OF  OPERATIONS  - OVERVIEW -  Restructuring  the  Electric
Industry").  Numerous parties,  including the Company, submitted comments on the
proposed rule. Hearings were held on November 17, 1999. On January 18, 2000, PRC
Staff filed its proposed  final Standard Offer Service rule. The PRC has not yet
issued the final Standard Offer Service rule.

Customer Protection Rule

        On  September  21, 1999 the PRC issued a notice of  proposed  rulemaking
seeking  comments  on a Customer  Protection  rule.  The  stated  purpose of the
proposed  Customer  Protection  rule is to  carry  out the  requirements  of the
Restructuring  Act to protect New Mexico electric service customers by providing
for: 1) customer  change of competitive  power  suppliers and  authorization  of
service;  2) fair  and  reasonable  marketing,  sales,  and  billing  practices,
including truthful advertising and disclosure  practices;  and 3) an expeditious
procedure  for  resolving  disputes  between  customers  and  competitive  power
suppliers regarding  compliance with this rule. Numerous parties,  including the
Company submitted  comments on the proposed rule.  Hearings were held on January
11, 2000.  On January 18,  2000,  PRC Staff filed its  proposed  final  customer
protection rule. Additional hearings will be held on March 22, 2000. The PRC has
not yet issued the final Customer Protection rule.

                         COMPETITION UNDER DEREGULATION

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

        The Restructuring Act in New Mexico, which was enacted into law on April
8, 1999, opened the state's electric power market to customer choice for certain
customers  beginning in 2001 and the balance of  customers in 2002.  These dates
can be  extended  by one year under the law.  As a result,  the Company may face
competition from companies with greater financial and other resources. There can
be no assurance  that the Company will not face  competition  in the future that
would adversely affect its results.

        It  is  the  current   intention  to  have  the  Company's   competitive
subsidiaries,  including Avistar, engage primarily in energy-related  businesses
that will not be regulated by state or Federal agencies that currently  regulate
public utilities (other than the FERC and NRC).  These  competitive  businesses,
including the generation business,  will encounter competition and other factors
not previously  experienced by the Company, and may have different,  and perhaps
greater,  investment  risks  than  those  involved  in the  regulated  business.
Specifically,  the  passage of the  Restructuring  Act and  deregulation  in the
electric utility industry  generally are likely to have a significant  impact on
the price and margins for  electric  generation  and thus,  the  recovery of the
investment in electric  generation  assets.  In response to competition  and the
need to gain  economies  of scale,  electricity  producers  will need to control


                                       13
<PAGE>

costs to maintain margins,  profitability and cash flow that will be adequate to
support investments in new technology and infrastructure.  The Company's current
business plan includes a 300% increase in sales and a doubling of its generating
capacity  through the construction or acquisition of additional power generation
assets in its  surrounding  region of operations.  Such growth will be dependent
upon  the  Company's  ability  to  generate  $400 to $600  million  to fund  the
Company's   expansion.   There  can  be  no  assurance  that  these  competitive
businesses,  particularly  the  generation  business,  will be successful or, if
unsuccessful, that they will not have a direct or indirect adverse effect on the
Company.

        The  Company's  ability  to obtain  funds to  invest in its  competitive
businesses  depends  upon  recovery  of  stranded  costs,  borrowings  and other
financings, and any issuances of common or preferred stock.

                              RATES AND REGULATION

        The Company is subject to the  jurisdiction of the PRC, the successor of
the NMPUC effective January 1, 1999, with respect to its retail electric and gas
rates, service,  accounting,  issuance of securities,  construction of major new
generation  and  transmission   facilities  and  other  matters.  The  FERC  has
jurisdiction over rates and other matters related to wholesale electric sales.

Electric Rates and Regulation

Electric Rate Case

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

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

        On August 25, 1999, the PRC issued an order approving a settlement.  The
PRC  ordered  the  Company  to  reduce  its  electric  rates  by  $34.0  million
retroactive  to July 30,  1999.  In addition,  the order  includes a rate freeze
until retail  electric  competition is fully  implemented in New Mexico or until
January 1, 2003.  The  settlement  will reduce  annual  revenues by an estimated
$37.0  million  based on  expected  customer  growth  and will  reduce  electric
distribution operating revenues in the year 2000 by approximately $20 million.


                                       14
<PAGE>

        As part of the  settlement,  the Company  agreed that  certain  language
changes to the tariff KAFB  currently  takes service under be set for a separate
hearing before the PRC. Hearings on this issue have not yet been scheduled. KAFB
has not renewed its power  service  contract  with the Company  that  expired in
December 1999 (see ITEM 3. - "LEGAL  PROCEEDINGS - OTHER  PROCEEDINGS - Kirtland
Air Force Base ("KAFB") Contract").

Net Metering Rule

        In  September  1998,  the NMPUC  issued a notice of proposed  rulemaking
seeking  comments  on  a  Net  Metering  rule.  "Net  metering"  refers  to  the
measurement  of the  difference  between the  electricity  that is supplied by a
utility and the electricity that is generated by a customer's  generator and fed
back into the utility's system.  The stated purpose of the proposed net metering
rule was to actively  promote the use of small-scale,  customer-owned  and other
renewable energy resources,  distributed  generation and alternative  technology
energy resources and facilities. Comments on the proposed rule were submitted by
numerous parties,  including the Company.  After additional  comments were filed
and a hearing held on April 19, 1999 the PRC  promulgated  the Net Metering rule
by final order dated  September 7, 1999. The Net Metering rule is (1) limited to
facilities  less than 10 kW; (2) applicable only to qualifying  facilities;  and
(3) provides for  interconnection  of  customer-owned  generation  by qualifying
facilities  with only a single  bi-directional  meter with no payment for excess
generation or demand credits.

Federal Electric Initiatives

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

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

        In January 1998, the Company  entered into a development  agreement with
other transmission  service providers and users to form an ISO in the southwest.
The development  agreement called for the development of the ISO to be separated
into two phases.  The first phase defined the operating,  pricing,  planning and
legal  parameters of the ISO. The second phase,  still underway,  was to develop
the  by-laws,  articles  of  incorporation  and various  tariffs and  agreements
required.


                                       15
<PAGE>


        Desert STAR, Inc. was  incorporated as a non-profit  organization in the
State of Arizona on September 21, 1999.  Desert STAR, Inc. is being developed to
satisfy  the  FERC  functions  and  characteristics  for an  approved  RTO.  The
functions of Desert STAR RTO are envisioned to include the following: (1) tariff
administration  and  design;  (2)  congestion  management;   (3)  parallel  flow
internalization;   (4)  ancillary  services;  (5)  OASIS  management  and  total
transmission  capability and available transmission  capability estimation;  (6)
market   monitoring;   (7)  planning  and  expansion;   and  (8)  inter-regional
coordination.

        The Company is currently  unable to predict the  ultimate  timing of the
formation or the ultimate outcome of the proposed Desert STAR RTO.

Gas Rates and Regulation

The 1995 Gas Rate Case Appeal

        In 1995, the Company filed a request for a $13.3 million increase in its
retail  natural gas sales and  transportation  rates.  On February 13, 1997, the
NMPUC  issued a final  order in the gas rate case,  ordering a rate  decrease of
approximately  $6.9  million.  The Company  filed an appeal to the Supreme Court
from the NMPUC's final order.  The Company is awaiting a decision by the Supreme
Court,  but is unable to predict the timing or the ultimate  outcome.  While the
appeal is pending, the NMPUC's final order remains in effect.

The 1997 Gas Rate Case

        In October 1997, the Company filed a gas rate case in compliance  with a
NMPUC order.  In April 1998, an  uncontested  stipulation  settling the 1997 gas
rate case was filed with the NMPUC.  After a hearing on the stipulation  held in
May  1998,  the  NMPUC  issued  a final  order in  August  1998,  accepting  the
stipulation with certain modifications. The order approved a program under which
customers  could choose between two cost of service rate options (either a $9.00
monthly fee with a higher  volumetric cost of service charge or a $14.56 monthly
fee with a lower volumetric cost of service charge).  This option program became
effective with the December 1998 billing cycle. Subsequent to the NMPUC's denial
of the AG's  request for  rehearing,  the AG  appealed  the order to the Supreme
Court in October 1998. However,  the AG did not request a stay and therefore the
NMPUC's order remains in effect while the appeal is pending.

PGAC Continuation Filing

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


                                       16
<PAGE>
Gas Hedging Investigation

        In  response  to a July 1999  request  from the PRC staff,  the  Company
provided  information  that  included the costs for both  financial and physical
hedges and  physical  transactions  entered  into for the winter of 1998-1999 to
levelize gas costs and protect  against  price  spikes.  The total cost was $7.6
million;  about 7.5% of total annual  purchased gas costs. The PRC staff and the
AG filed a  petition  in May  1999,  requesting  a review of the  Company's  gas
hedging program and that the PRC consider whether specific  guidelines should be
established.  On August 13, 1999, the Company,  staff and the AG jointly filed a
proposal as to the scope for the  proceeding and suggested that the Company file
a white  paper on its  hedging  practices.  The hearing  examiner  adopted  this
proposal and on October 16, 1999,  the Company  filed a report on the history of
the PRC's actions, the results of the Company's hedging activities, and a review
of industry  hedging  practices.  The heart of the case centers on an order from
the former  NMPUC,  in the 1997 PGAC  prudence  case,  in which the  Company was
ordered to engage in gas hedging in an effort to levelize  and/or  stabilize gas
prices  without  detailing  guidelines  under which to do so. The  current  case
appears to be heading in the  direction of allowing the Company to hedge without
ordering it to do so and providing  general  guidelines.  A two-day workshop was
held in early February 2000, and a hearing date is scheduled for March 27, 2000.

PRC PGAC Rule Rewrite

       Throughout  1999 and  continuing  through  the  present,  the Company has
worked in a cooperative  effort with the Commission  staff,  the AG, Zia Natural
Gas and Raton Natural Gas to develop a proposed revision to the PRC PGAC rule. A
joint filing was made  proposing a new PGAC rule on September  30, 1999.  The AG
declined  to sign  the  filing  and  filed an  opposition  to the  petition  for
rulemaking  due to the group's  removal of the phrase "lowest  reasonable  cost"
from the proposed PGAC rule. On October 19, 1999, the Commission issued a notice
of proposed  rulemaking  to address the issue of rewriting  the PRC's PGAC rule.
Following  a  pre-hearing  conference,  the  PRC  issued  a  notice  of  further
rulemaking in mid November  1999,  that directed the parties to file comments in
the case and to comment on the AG's filed opposition. The Company, Staff and Zia
filed comments in support of the proposed rule with minor wording changes to the
proposed  rule and  general  comments  regarding  the AG's filed  opposition  in
December  1999.  All parties,  including the AG, are in agreement to include the
phrase "lowest  reasonable  cost" in the proposed rule so long as that phrase is
adequately defined,  providing clear direction to the gas utilities in their gas
cost recovery efforts.  Should this rule be adopted as proposed, the requirement
that gas utilities  make a biannual PGAC  continuation  filing would be replaced
with a more timely and informative annual supply and demand forecast,  planning,
true-up reporting process,  and a simplified PGAC continuation filing every four
years.  A hearing was held  February 1, 2000 on this  rulemaking.  A workshop to
discuss minor proposed rule revisions has been scheduled for March 27, 2000.

                              ENVIRONMENTAL MATTERS

        The Company, in common with other electric and gas utilities, is subject
to stringent laws and  regulations  for protection of the  environment by local,
state,  Federal and tribal  authorities.  In  addition,  PVNGS is subject to the
jurisdiction  of the NRC,  which has authority to issue permits and licenses and
to regulate nuclear  facilities in order to protect the health and safety of the
public from radioactive hazards and to conduct environmental reviews pursuant to
the  National  Environmental  Policy  Act.  Liabilities  under  these  laws  and
regulations  can be material  and,  in some  instances,  may be imposed  without
regard to fault, or may be imposed for past acts, even though such acts may have
been lawful at the time they occurred.


                                       17
<PAGE>

The Clean Air Act

        The 1990  amendments  to the  Clean  Air Act  established  the acid rain
program which  addresses SO2 and NOx emissions from  fossil-fired  power plants.
All of the  Company's  power  plants that are subject to the acid rain rules are
Phase II units. Phase II of the acid rain program became effective on January 1,
2000.

        Due to the existing air pollution  control  equipment on the  coal-fired
SJGS and Four Corners,  the Company will not be faced with any material  capital
expenditures in order to comply with the acid rain provisions for sulfur dioxide
and  nitrogen  dioxide.  Under  Title V of the Act,  the  Company is 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. The Company
received  operating permits for SJGS and Reeves Station in August 1998 and March
1998, respectively.

        On July 1, 1999, the EPA published the final regional haze  regulations.
The  purpose  of the  regional  haze  regulations  is to address  regional  haze
visibility  impairment  in the 156 Class 1 areas in the  nation.  The final rule
calls for all states to establish  goals and emission  reduction  strategies for
improving  visibility  in all the  Class 1  areas.  The rule  contains  specific
provisions  (section  309 of the rule) to allow the western  states to implement
the Grand Canyon Visibility Transport  Commission's  recommendations  within the
framework of the rule.  The western  states are not obligated to select  section
309 of the rule;  they may, instead, decide to use section 308 of the rule.  The
Company cannot predict at this time what the impact of the implementation of the
regional  haze  rule  (either  section  308 or  309)  will  be on the  Company's
coal-fired  power  plant  operations.   Potentially,   additional  SO2  emission
reductions could be required in the 2013-2018 timeframe.  The nature and cost of
the impacts of these  requirements  cannot be determined at this time.  However,
the Company does not  anticipate  any material  adverse  impact on the Company's
financial condition or results of operations.

        In July 1997,  the EPA  issued its final  rules  revising  the  National
Ambient Air Quality Standards for ozone and particulate matter. In May 1999, the
U.S. Court of Appeals for the D.C. Circuit remanded both of the standards to the
EPA. In October 1999, the D.C. Circuit denied EPA's petition for rehearing.  The
nature and cost of the impacts of these  revisions to the standards,  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.

        APS, as the operating agent of Four Corners, previously filed a petition
for review  alleging EPA improperly  classified Four Corners Unit 4 with respect
to nitrogen oxides emission  limitations.  In December 1999, EPA issued a direct
final rule, which  classified Four Corners Unit 4 as APS proposed.  APS does not
currently  expect  this  rule to have a  material  impact  on the  Four  Corners
operations.


                                       18
<PAGE>

        In a related  matter,  in September  1999, the EPA proposed a FIP to set
air quality  standards at certain power  plants,  including  Four  Corners.  The
comment  period on this proposal  ended in November  1999. The FIP is similar to
current New Mexico regulation of Four Corners with minor modifications. APS does
not  currently  expect  the FIP to have a  material  impact on the Four  Corners
operations.

        The EPA has proposed  changes to its New Source  Review (NSR) rules that
could result in many  actions at power  plants that have always been  considered
routine  repair  and  maintenance  activities  (and  hence  not  subject  to the
application of NSR  requirements)  as now being subject to NSR. The EPA has been
holding stakeholder  meetings to try to reach a resolution on this issue that is
acceptable  to the utility  industry,  regulatory  agencies,  and  environmental
groups. No agreement had been reached by the end of February 2000.

        In November  1999,  the  Department of Justice at the request of the EPA
filed complaints against eight companies alleging the companies over the past 25
years  had  made   modifications  to  their  plants  in  violation  of  the  NSR
requirements,  and in some cases the New  Source  Performance  Standards  (NSPS)
regulations. The activities cited in the complaints are all routine maintenance,
repair,  and  replacement  activities  that are  excluded  from  the  permitting
requirements of NSR and NSPS.  Whether or not the EPA will prevail is unclear at
this time. The Company believes that all of the routine maintenance, repair, and
replacement  work  undertaken  at its power  plants was and  continues  to be in
accordance with the requirements of NSR and NSPS.

        The nature and cost of the impacts of EPA's  changed  interpretation  of
the  application  of the NSR and NSPS,  together with proposed  changes to these
regulations,  may be significant to the power production industry.  However, the
Company  cannot  quantify  these  impacts,  and does not anticipate any material
adverse impact on the Company's  financial condition or results of operations at
this time.

Santa Fe Generating Station ("Santa Fe Station")

        The Company and the NMED have conducted  investigations  of the gasoline
and chlorinated  solvent groundwater  contamination  detected beneath the former
Santa Fe Station site to determine the source of the contamination pursuant to a
1992 Settlement Agreement  ("Settlement  Agreement") between the Company and the
NMED. 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 City
of Santa Fe municipal  supply well and of  groundwater  underlying  the Santa Fe
Station site.  Further,  the NMED letter stated that the Company was required to
proceed with interim remediation of the contamination pursuant to the New Mexico
Water Quality Control Commission regulations.

        In October  1996,  the Company and the NMED signed an  amendment  to the
Settlement  Agreement  concerning the groundwater  contamination  underlying the
site. As part of the amendment,  the Company agreed to spend  approximately $1.2
million for certain costs related to sampling,  monitoring,  and the development
and implementation of a remediation plan.

        The amended Settlement Agreement does not, however,  provide the Company
with  a  full  and  complete  release  from  potential   further  liability  for
remediation of the groundwater contamination. After the Company has expended the
settlement  amount, if the NMED can establish  through binding  arbitration that
the Santa Fe Station is the source of the  contamination,  the Company  could be
required to perform further remediation that is determined to be necessary.  The
Company  continues  to dispute any  contention  that the Santa Fe Station is the
source of the  groundwater  contamination  and believes that  insufficient  data
exists to  identify  the sources of  groundwater  contamination.  The  Company's
aquifer  characterization  and groundwater quality reports compiled from 1996 to
2000 strongly suggest groundwater contamination has been drawn under the site by
the pumping of the Santa Fe supply well.

                                       19
<PAGE>


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

Person Station

        The Company,  in compliance with a Corrective Action Directive issued by
the  NMED,  determined  that  groundwater  contamination  exists in the deep and
shallow  groundwater  at the Person  Station  site.  The  Company is required to
delineate the extent of the  contamination and remediate the contaminants in the
groundwater  at the  Person  Station  site.  The  extent  of  shallow  and  deep
groundwater  contamination  was assessed  and the results  were  reported to the
NMED.  The  Company  currently  is  involved  with the process to renew the RCRA
post-closure care permit for the facility.  Remedial actions for the shallow and
deep  groundwater  will be  incorporated  into the new  permit.  The Company has
installed and is operating a pump and treat system for the shallow  groundwater.
The  Company has  proposed a  monitoring  program in  conjunction  with  natural
attenuation  processes  as  the  most  cost  effective  approach  for  the  deep
groundwater  remediation.  The Company's  current  estimate to decommission  its
retired  fossil-fueled  plants  (discussed  below) includes  approximately  $4.6
million in additional  expenses to complete the groundwater  remediation program
at Person Station. As part of the financial assurance  requirement of the Person
Station  Hazardous  Waste  Permit,  the Company  established  a trust fund.  The
current  value of the trust fund at December 31, 1999,  was  approximately  $4.5
million. The remediation program continues on schedule.

Fossil-Fueled Plant Decommissioning Costs

        The  Company's  six owned or  partially  owned,  in service and retired,
fossil-fueled   generating  stations  are  expected  to  incur  dismantling  and
reclamation   costs  as  they  are   decommissioned.   The  Company's  share  of
decommissioning  costs  for  all of its  fossil-fueled  generating  stations  is
projected to be approximately  $153.5 million stated in 1999 dollars,  including
approximately  $24.0 million (of which $15.5 million has already been  expended)
for Person, Prager and Santa Fe Stations which have been retired. The Company is
currently  recovering  estimated   decommissioning   costs  for  its  in-service
fossil-fueled   generating  facilities  through  rates  charged  to  its  retail
customers.


                                       20
<PAGE>

ITEM 2. PROPERTIES

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

                                    ELECTRIC

        The Company's  ownership and capacity in electric generating stations in
commercial service as of December 31, 1999, were as follows:

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

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

    * For load and resource  purposes,  the Company has notified the PRC that it
      recognizes the maximum dependable capacity rating for PVNGS to be 381 MW.

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

         (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 approximately 7.9% of Units
               1 and 2 and an ownership  interest in approximately 2.3% of Units
               1 and 2.
         (b)   SJGS Units 1, 2 and 3 are 50% owned by the  Company;  SJGS Unit 4
               is 38.5% 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 327 MW, 316 MW, 497 MW and 507 MW, respectively. SJGS Units 1 and 2 are owned
on a 50% shared basis with Tucson. Unit 3 is owned 50% by the Company,  41.8% by
SCPPA and 8.2% by Tri-State.  Unit 4 is owned  38.457% by the Company,  28.8% by
M-S-R, 10.04% by Anaheim, 8.475% by Farmington, 7.2% by Los Alamos and 7.028% by
UAMPS.

        In July  1996,  the  Company  and  other  SJGS  participants  signed  an
agreement to convert the flue gas  desulfurization  (SO2 removal)  system at the
SJGS into a much simpler and cost  effective  limestone  system.  The conversion
project was  completed  in January 1999 and cost the Company  approximately  $40
million.


                                       21
<PAGE>


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

        Four  Corners  and a  portion  of the  facilities  adjacent  to SJGS are
located  on land held  under  easements  from the  United  States and also under
leases from the Navajo  Nation.  The  enforcement  of these leases could require
Congressional  consent.  The Company  does not deem the risk with respect to the
enforcement of these easements and leases to be material.  However,  the Company
is  dependent in some  measure  upon the  willingness  and ability of the Navajo
Nation to protect these properties.

        The Company  owns 154 MW of  generation  capacity  at Reeves  Station in
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.

Nuclear Plant

The Company's Interest in PVNGS

        The Company is participating in the three 1,270 MW units of PVNGS,  also
known as the Arizona Nuclear Power Project, with APS (the operating agent), Salt
River Project,  El Paso, SCE, SCPPA and The Department of Water and Power of the
City of Los Angeles.  The Company has a 10.2% undivided  interest in PVNGS, with
portions of its interests in Units 1 and 2 held under leases. During 1999, PVNGS
was operated at a capacity factor of 93.0% which was the highest yearly capacity
factor attained at the plant. This capacity factor was primarily attributable to
record setting low refueling outage days.

Nuclear Safety Performance Rating on PVNGS

        On April 8, 1998,  APS  received  its latest  Systematic  Assessment  of
Licensee Performance ("SALP") rating from the NRC on the operations of the PVNGS
units.  The SALP  reports  rate  safety  performance  at nuclear  plants in four
functional areas: (i) plant operations; (ii) maintenance; (iii) engineering; and
(iv) plant  support.  Ratings of  category 1, 2, or 3 are  assigned,  reflecting
"superior," "good" or "adequate"  performance.  PVNGS was rated as "superior" in
maintenance,  engineering and plant support categories,  and was rated as "good"
in the area of plant operations.

        In 2000,  the NRC will begin using a new,  objective  oversight  process
that is more focused on safety. The new process includes  objective  performance
thresholds based on insights from safety studies and 30 years of plant operating
experience.  It is more  timely,  moving from the 18 to 24 month time lag of the
old process for assessing plant performance to a quarterly review.  The NRC also
hopes the process will prove to be more  accessible  to, and readily  understood
by, the public.


                                       22
<PAGE>

Steam Generator Tubes

        APS, as the operating agent of PVNGS,  has encountered  tube cracking in
the steam generators and has taken, and will continue to take,  remedial actions
that it believes have slowed the rate of tube degradation. The projected service
life of steam generators is reassessed  periodically and these analyses indicate
that it will be economically desirable to replace the Unit 2 steam generators in
2003. In 1997,  the PVNGS  participants,  including the Company,  entered into a
contract for the fabrication of two replacement  steam  generators.  The cost of
the new steam  generators was updated in late 1999.  The Company's  share of the
fabrication and installation costs will be approximately $22.5 million.

        Based on later  available data, APS estimates that the Unit 1 and Unit 3
steam  generators  should operate for the license  periods (until 2025 and 2027,
respectively),  although APS will  continue its normal  periodic  assessment  of
these  generators.  The Company  expects that some tube  degradation  will occur
through the licensed period.

Low Level Waste

        A new  low-level  waste  facility was built in 1995 on-site  which could
store an amount of waste  equivalent to ten years of normal  operation at PVNGS.
Although some low-level waste has been stored on-site, APS is currently shipping
low-level  waste to off-site  facilities.  APS  currently  believes that interim
low-level  waste storage  methods are or will be available to PVNGS to allow its
continued  operation  and to safely  store  low-level  waste  until a  permanent
disposal facility is available.

Sale and Leaseback Transactions of PVNGS Units 1 and 2

        In 1985 and 1986,  the Company  entered  into a total of eleven sale and
lease back  transactions  under which it sold and leased  back its entire  10.2%
interest  in  PVNGS  Units 1 and 2,  together  with  portions  of the  Company's
undivided interest in certain PVNGS common facilities.  The leases under each of
the sale and leaseback  transactions  have initial lease terms expiring  January
15, 2015 (with  respect to the Unit 1 leases) or January 15, 2016 (with  respect
to the Unit 2 leases).  Each of the leases allows the Company to extend the term
of the lease as well as  containing a repurchase  option.  The lease expense for
the Company's PVNGS leases is approximately  $66.3 million per year.  Throughout
the terms of the  leases,  the  Company  continues  to have  full and  exclusive
authority  and  responsibility  to  exercise  and  perform all of the rights and
duties  of a  participant  in PVNGS  under the  Arizona  Nuclear  Power  Project
Participation  Agreement and retains the exclusive  right to sell and dispose of
its 10.2%  share of the power and energy  generated  by PVNGS Units 1 and 2. The
Company  also  retains  responsibility  for  payment  of its share of all taxes,
insurance  premiums,  operating and maintenance  costs, costs related to capital
improvements  and  decommissioning  and all other  similar  costs  and  expenses
associated  with  the  leased   facilities.   In  1992,  the  Company  purchased
approximately 22% of the beneficial interests in the PVNGS Units 1 and 2 leases.
The related ownership interests were subsequently  reacquired by the Company. 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.





                                       23
<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 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,  except as described  below under "PVNGS  Liability  and  Insurance
Matters",  or any state  legislative or regulatory body that, if adopted,  would
cause any such events.

PVNGS Decommissioning Funding

        The Company has a program for funding its share of decommissioning costs
for PVNGS. (See ITEM 3. - "LEGAL PROCEEDINGS - Nuclear Decommissioning  Trust".)
The nuclear  decommissioning  funding  program is invested in equities and fixed
income  investments in qualified and  non-qualified  trusts.  The results of the
1998  decommissioning cost study indicated that the Company's share of the PVNGS
decommissioning costs excluding spent fuel disposal will be approximately $163.1
million (in 1999 dollars).

        The Company  funded an additional  $3.1  million,  $3.0 million and $2.1
million in 1999,  1998 and 1997,  respectively,  into the qualified trust funds.
The  estimated  market value of the trusts at the end of 1999 was  approximately
$51.8 million.

        The NRC amended its rules on financial  assurance  requirements  for the
decommissioning  of nuclear power plants.  The amended rules became effective on
November 23, 1998.  The NRC has  indicated  that the  amendments  respond to the
potential rate  deregulation in the power  generating  industry and NRC concerns
regarding whether decommissioning funding assurance requirements will need to be
modified.  The amended rules provide that a licensee may use an external sinking
fund as the exclusive  financial  assurance  mechanism if the licensee  recovers
amounts equal to estimated total  decommissioning  costs through cost of service
rates or through a  "non-bypassable  charge".  Other  mechanisms are prescribed,
such as  prepayment, surety  methods,  insurance  and other  guarantees,  if the
requirements  for exclusive  reliance on the external sinking fund mechanism are
not met. The Company  currently relies on the external sinking fund mechanism to
meet the NRC financial  assurance  requirements for its interests in PVNGS Units
1, 2 and 3. The  costs  of PVNGS  Units 1 and 2 are  currently  included  in PRC
jurisdictional  rates,  but the  costs of  PVNGS  Unit 3 are  excluded  from PRC
jurisdictional  rates.  The Company filed a report with the NRC through APS, the
operating agent of PVNGS, at the end of March 1999,  concerning  decommissioning
funding assurance,  and continues to use the external sinking fund method as the
sole financial assurance method for Unit 3 (see ITEM 7. "MANAGEMENT'S DISCUSSION
AND  ANALYSIS  OF  FINANCIAL   CONDITION   AND  RESULTS  OF   OPERATIONS  -  The
Restructuring Act and the Formation of a Holding Company - NRC Prefunding").


                                       24
<PAGE>

Nuclear Spent Fuel and Waste Disposal

        Pursuant to the Waste Act, the DOE is obligated to accept and dispose of
all spent  nuclear fuel and other  high-level  radioactive  wastes  generated by
domestic power reactors.  The NRC, pursuant to the Waste Act, requires operators
of nuclear power reactors to enter into spent fuel disposal  contracts with DOE.
Under the Waste Act, DOE was to develop the facilities necessary for the storage
and  disposal  of spent  nuclear  fuel and to have the first  such  facility  in
operation by 1998. That facility was to be a permanent  repository.  The DOE has
announced  that such a repository  now cannot be completed  before 2010. In July
1996,  the United  States Court of Appeals for the District of Columbia  Circuit
(D. C. Circuit) ruled that the DOE has an obligation to start disposing of spent
nuclear fuel no later than January 31, 1998. By way of letter dated December 17,
1996,  the DOE  informed  the Company and other  contract  holders  that the DOE
anticipates  that it would be unable to begin  acceptance  of nuclear spent fuel
for disposal in a repository or interim storage facility by January 31, 1998. In
November 1997,  the D. C. Circuit  issued a Writ of Mandamus  precluding the DOE
from  excusing  its own delay on the grounds that the DOE has not yet prepared a
permanent  repository or interim  storage  facility.  On May 5, 1998,  the D. C.
Circuit issued a ruling  refusing to order the DOE to begin moving spent nuclear
fuel. See note 12 of Notes to the  Consolidated  Financial  Statements in Item 8
for a discussion of interim spent fuel storage costs.

        Several  bills  have  been  introduced  in  Congress  contemplating  the
construction of a central interim storage facility; however, there is resistance
to certain features of these bills, both in Congress and the Administration.

        Facility funding is a further complication.  While all nuclear utilities
pay into a so-called  nuclear waste fund,  an amount  calculated on the basis of
the output of their respective plants, the annual  Congressional  appropriations
for the  permanent  repository  have been for amounts less than the amounts paid
into the waste fund (the balance of which is being used for other purposes). The
DOE has stated the fund may now be at a level less than needed to achieve a 2010
operational date for a permanent repository.  No funding will be available for a
central interim facility until one is authorized by Congress.

        APS has storage  capacity in existing fuel storage pools at PVNGS which,
with certain modifications, could accommodate all fuel expected to be discharged
from  normal  operation  of PVNGS  through  about  2002.  Construction  of a new
facility for on-site dry storage of spent fuel is underway.  Once this  facility
is completed and approvals are granted,  APS believes that spent fuel storage or
disposal  methods  will be  available  for use by PVNGS to allow  its  continued
operation beyond 2002.

        A new low-level  waste  facility was built in 1995 on site,  which could
store an amount of waste  equivalent to ten years of normal  operation at PVNGS.
Although some low-level waste has been stored on site, APS is currently shipping
low-level  waste to off-site  facilities.  APS  currently  believes that interim
low-level  waste  storage  methods are or will be available  for use by PVNGS to
allow its  continued  operation  and to safely  store  low-level  waste  until a
permanent disposal facility is available.


                                       25
<PAGE>


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

PVNGS Liability and Insurance Matters

        The PVNGS  participants  have insurance for public  liability  resulting
from nuclear  energy  hazards to the full limit of liability  under Federal law.
This potential  liability is covered by primary liability  insurance provided by
commercial  insurance  carriers in the amount of $200 million and the balance by
an  industry-wide  retrospective  assessment  program.  If losses at any nuclear
power plant covered by the program exceed the primary liability insurance limit,
the Company could be assessed  retrospective  premium  adjustments.  The maximum
assessment  per  reactor  under  the  program  for  each  nuclear   incident  is
approximately $88 million, subject to an annual limit of $10 million per reactor
per incident.  Based upon the Company's 10.2% interest in the three PVNGS units,
the Company's maximum  potential  assessment per incident for all three units is
approximately $26.9 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 NRC  announced  that it had  provided a report to  Congress,  making
certain  recommendations,  with  respect to the Federal  law  referred to above,
which provides for payment of public  liability claims in case of a catastrophic
accident involving a nuclear power plant. One of the  recommendations by the NRC
would be that Congress  consider  amending the law to provide that the maximum a
nuclear  utility can be assessed per reactor per incident per year be doubled to
$20 million.  The $88 million maximum  retrospective  assessment per reactor per
incident  would be unchanged  under the NRC proposal.  The NRC also  recommended
that  Congress  investigate  whether  the $200  million now  available  from the
private  insurance  market for liability  claims per reactor can be increased to
keep pace with  inflation.  The Company cannot  predict  whether or not Congress
will act on the NRC's  recommendations.  However,  if  adopted,  certain  of the
recommendations  could possibly trigger "Deemed Loss Events" under the Company's
PVNGS leases, absent waiver by the lessors.

        The PVNGS participants  maintain "all-risk"  (including nuclear hazards)
insurance for nuclear  property damage to, and  decontamination  of, property at
PVNGS in the  aggregate  amount  of $2.75  billion  as of  January  1,  2000,  a
substantial   portion   of  which  must  be   applied   to   stabilization   and
decontamination.  The Company has also secured insurance against portions of the
increased  cost of  generation  or  purchased  power and  business  interruption
resulting  from  certain  accidental  outages  of any of the three  units if the
outages  exceed 12 weeks.  The insurance  coverage  discussed in this section is
subject to certain policy conditions and exclusions.  The Company is a member of
an industry mutual insurer. This mutual insurer provides both the "all-risk" and
increased cost of generation  insurance to the Company.  In the event of adverse
losses experienced by this insurer, the Company is subject to an assessment. The
Company's  maximum  share of any  assessment is  approximately  $2.6 million per
year.


                                       26
<PAGE>


Other Electric Properties

        As of December  31, 1999,  the Company  owned,  jointly  owned or leased
2,803 circuit miles of electric  transmission lines, 4,399 miles of distribution
overhead lines,  3,590 cable miles of underground  distribution lines (excluding
street lighting) and 214 substations.

Acquisition of Certain  Assets of Plains  Electric  Generation and  Transmission
Cooperative, Inc. ("Plains")

In July 1998, the Company and Tri-State Generation and Transmission Association,
Inc.  ("Tri-State")  made a non-binding  joint proposal in response to a request
for proposals  issued by Plains.  The Company and Tri-State  submitted a binding
proposal  in  September  1998,  and Plains  announced  that it would  enter into
exclusive  negotiations  with the Company  and  Tri-State  regarding  this joint
proposal.  In  September  1999,  Plains  and  Tri-State  agreed to  merge,  with
Tri-State being the surviving entity.  Following the merger, Tri-State will sell
certain assets to the Company  consisting  primarily of transmission  assets,  a
fifty percent  interest in an inactive power plant located near  Albuquerque and
the Plains  headquarters  building  in  Albuquerque.  In  addition,  the Company
entered  into an  agreement  to become the power  supplier of 50 MW to Navopache
Electric Cooperative, Inc.

        In early 1999, the Company, Tri-State and Plains filed applications with
the PRC  seeking  approval  of the  various  transactions.  The  parties to that
proceeding entered into a stipulation that would have approved the transactions.
On  January  19,  2000,  the  hearing  examiner  issued a  recommended  decision
disapproving  the  stipulation  because,  among other things,  provisions of the
stipulation, relating to the PRC's jurisdiction over Tri-State after the merger,
were not in the public interest. On February 8, 2000, Plains and Tri-State filed
exceptions to the recommended decision. In addition, on January 20, 2000, a bill
was  introduced  in  the  New  Mexico   Legislature   that  would  restrict  the
jurisdiction  of the PRC over  generation  and  transmission  cooperatives  like
Tri-State.  The bill  passed  both the House and the  Senate and it has now been
signed  by the  governor.  On  February  22,  2000,  the  PRC,  noting  that the
Legislature  had  passed  legislation  containing  jurisdictional   restrictions
similar to the  stipulation,  declined  to adopt the  recommended  decision  and
instead  adopted the  stipulation  with  jurisdiction  over  Tri-State  being in
conformance with the laws of the State of New Mexico.

        The Company and  Tri-State  entered into an asset sale  agreement  dated
September  9,  1999,  pursuant  to  which  Tri-State  has  agreed  to  sell  the
above-referenced  assets to the Company.  The purchase  price is $13.2  million,
subject to adjustment at the time of closing.  The asset sale agreement contains
standard  covenants and  conditions for this type of agreement.  Currently,  the
parties anticipate that the merger will occur in the summer of 2000 and with all
asset  transfers  to the Company to be completed  by  approximately  the fall of
2000.

NATURAL GAS

        The natural gas properties as of December 31, 1999,  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  1,334 miles of pipe with  appurtenant  compression
facilities.  The distribution systems consisted of approximately 10,693 miles of
pipe.


                                       27
<PAGE>

        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 acquisition by the Company was approved
by the NMPUC in December 1996.  Final  right-of-way  clearances were obtained in
July 1999.  Effective  August 1, 1999,  the DOE  delivered to the Company a Quit
Claim Deed  conveying the pipeline and all land  interests  associated  with the
pipeline.  The transfer  effectively  terminated  the Company's  existing  lease
agreement  with the DOE.  The  Company  will pay the $3.1  million by  providing
transportation  services to Los Alamos  National  Laboratory for a period not to
exceed three years.  Any part of the  remaining  purchase  price still due after
three years may either be remitted  to the  government  in a final lump sum cash
payment or used for additional transportation services.

                                OTHER INFORMATION

        The electric and gas transmission  and distribution  lines are generally
located within easements and rights-of-way on public,  private and Indian lands.
The Company leases  interests in PVNGS Units 1 and 2 and related  property,  EIP
and  associated  equipment,  data  processing,  communication,  office and other
equipment,  office space,  utility poles (joint use),  vehicles and real estate.
The Company also owns and leases  service and office  facilities in  Albuquerque
and in other operating divisions throughout its service territory.

ITEM 3. LEGAL PROCEEDINGS

                          PVNGS WATER SUPPLY LITIGATION

        The Company  understands  that a summons  served on APS in 1986 required
all water  claimants in the Lower Gila River  Watershed of Arizona to assert any
claims to water on or before  January  20,  1987,  in an action  pending  in the
Maricopa  County  Superior  Court.  PVNGS is located within the geographic  area
subject to the summons and the rights of the PVNGS  participants,  including the
Company,  to the use of  groundwater  and effluent at PVNGS are  potentially  at
issue in this  action.  APS, as the PVNGS  project  manager,  filed  claims that
dispute the court's jurisdiction over the PVNGS participants' groundwater rights
and their contractual  rights to effluent relating to PVNGS and,  alternatively,
seek confirmation of such rights.  Issues important to the claims are pending in
an  interlocutory  appeal to the Arizona Supreme Court. No trial date concerning
the water  rights  claims has been set in this matter.  Although  the  foregoing
remains subject to further evaluation, APS expects that the described litigation
will not have a material adverse impact on the operation of PVNGS.

                           SAN JUAN RIVER ADJUDICATION

        In 1975,  the State of New Mexico filed an action  entitled State of New
Mexico v. United States,  et al., in the District Court of San Juan County,  New
Mexico,  to adjudicate  all water rights in the "San Juan River Stream  System".
The  Company  was made a  defendant  in the  litigation  in 1976.  The action is
expected to adjudicate  water rights used at Four Corners and at SJGS. (See ITEM
1. "BUSINESS - 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 and is unable to predict the ultimate outcome.


                                       28
<PAGE>

                                OTHER PROCEEDINGS

Republic Savings Bank Litigation

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

        RSB  filed a  motion  for  partial  summary  judgment  on the  issue  of
liability based on the United States Supreme  Court's  decision in United States
v. Winstar  Corporation,  decided in 1996. The Federal  government filed a cross
motion for summary judgment and opposed RSB's motion.  Decision on those motions
is still pending.  The parties completed fact based discovery in 1999 and are in
the process of discovery  of experts.  No trial date has been  established.  RSB
amended its summary  judgment motion in December 1999, to seek summary  judgment
on the issue of  damages.  The Federal  government  will  oppose  RSB's  amended
motion.  It is premature to estimate the amount of recovery,  if any, by Meadows
and RHC.

Purported Navajo Environmental Regulation

        Four  Corners is located  on the  Navajo  Reservation  and is held under
easement  granted by the  Federal  government  as well as leases from the Navajo
Nation. APS is the operating agent and the Company owns a 13% ownership interest
in Units 4 and 5 of Four Corners.  In July 1995,  the Navajo Nation  enacted the
Navajo Nation Air Pollution  Prevention  and Control Act, the Navajo Nation Safe
Drinking  Water Act and the  Navajo  Nation  Pesticide  Act  (collectively,  the
"Acts"). Pursuant to the Acts, the Navajo Nation Environmental Protection Agency
is authorized to promulgate regulations covering air quality, drinking water and
pesticide  activities,  including  those that occur at Four  Corners.  By letter
dated  October 12, 1995,  the Four  Corners  participants  requested  the United
States Secretary of the Interior (the "Secretary") to resolve their dispute with
the Navajo Nation  regarding  whether or not the Acts apply to operation of Four
Corners.  The Four  Corners  participants  subsequently  filed a lawsuit  in the
District Court of the Navajo Nation (the "Court"), Window Rock District, seeking
a declaratory  judgment that: (i) the Four Corners leases and Federal  easements
preclude the  application  of the Acts to the operation of Four Corners and (ii)
the Navajo Nation and its agencies and courts lack adjudicatory  jurisdiction to
determine the enforceability of the Acts as applied to Four Corners.  In October
1995, the Navajo Nation and the Four Corners participants agreed to indefinitely
stay the  proceedings  so that the  parties  may  attempt to resolve the dispute
without  litigation,  and the Secretary  and the Court stayed these  proceedings
pursuant  to a request by the  parties.  The  Company  is unable to predict  the
outcome of this matter.

        In February 1998, the EPA issued  regulations  specifying  provisions of
the Clean Air Act for which it is appropriate to treat Indian tribes in the same
manner as states.  The EPA  indicated  that it  believes  that the Clean Air Act
generally would  supersede  pre-existing  binding  agreements that may limit the
scope of tribal  authority  over  reservations.  APS and the Company  have filed
appeals,  which have been  consolidated,  in the United States  Circuit Court of
Appeals  for the  District  of  Columbia  ("D.  C.  Circuit")  to contest  EPA's
authority  under the  regulations.  The  Navajo  Nation  has  intervened  in the
consolidated appeal. The Navajo Nation is a tribe which could potentially assert
its status as a state under the Act pursuant to the EPA rule in question. In the
consolidated  appeal, the Company's interests as operator and joint owner of the
SJGS, owner of other facilities  located on reservations  located in New Mexico,
and joint owner of Four Corners are involved.


                                       29
<PAGE>


        In  February  1999,  the EPA  issued  regulations  under  which  Federal
operating  permits  for  stationary  sources  in  Indian  country  can be issued
pursuant  to Title V of the Clean Air Act.  The  regulations  rely on  authority
contained in an earlier  rule in which the EPA  outlined  treatment of tribes as
states  under  the  Clean  Air Act.  That  rule is the  subject  of an appeal as
described  above.  APS and the Company have filed appeals,  which have also been
consolidated  in the D. C.  Circuit to  contest  the EPA's  authority  under the
regulations. In the consolidated appeal, the Company's interests as operator and
joint  owner of the SJGS,  owner of other  facilities  located  on  reservations
located in New Mexico, and joint owner of Four Corners are involved. This appeal
has been stayed  pending the outcome of the other appeal  described  above.  The
Company cannot predict the outcome of the consolidated appeal.

Nuclear Decommissioning Trust

        In  1998,   the  Company  and  the  trustee  of  the  Company's   master
decommissioning  trust  filed  a  civil  complaint  and  an  amended  complaint,
respectively,    against    several    companies   and   individuals   for   the
under-performance  of a corporate  owned life  insurance  program.  The program,
which was approved by the NMPUC and set up in a trust in 1987,  was used to fund
a portion of the Company's  nuclear  decommissioning  obligations  for its 10.2%
interest in PVNGS.  In January 1999, the life insurance  program was terminated,
and the life  insurance  policies were  surrendered by the trust in exchange for
the cash surrender value of the policies.  In the lawsuit,  the Company asserted
various tort,  contract and equity  theories  against the  defendants,  seeking,
among other  things,  an amount  sufficient  to  compensate  for the harm to the
Company  caused by the  defendants'  conduct.  A  defendant  counterclaimed  for
indemnity based on its engagement contract with the Company, claiming that if it
had injured the  trustee,  then the Company  must pay the  damages.  The Company
denied  liability under the counterclaim  and set forth numerous  defenses.  The
case is proceeding in State District Court in Santa Fe County.  The  defendants'
motions to dismiss were denied and the  Company's  motions to further  amend the
complaint to assert claims against two additional defendants,  a law firm and an
accounting firm, were granted.

        On August  13,  1999,  the  Company  appealed  one of the trial  court's
decisions regarding pretrial discovery to the New Mexico Court of Appeals. While
this decision is on appeal,  all pretrial discovery is being stayed. The Company
is currently  unable to predict the ultimate  outcome or amount of recovery,  if
any.


                                       30
<PAGE>


Royalty Claims

Natural Gas Royalties Qui Tam Litigation

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

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

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

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

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

        The Quinque case was removed to the United States District Court for the
District  of  Kansas.  Thereafter,  several  defendants  moved  the MDL Panel to
transfer  the case to the  United  States  District  Court  for  Wyoming  and to
consolidate  it with  the In re:  Natural  Gas  Royalties  Qui  Tam  Litigation.
Plaintiffs have filed  objections to the motions to consolidate and transfer and
have filed with the U. S District Court in Kansas a motion to remand the case to
state court. Both matters are awaiting decision.

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




                                       31
<PAGE>

 KAFB Contract

        The  Company  was  informed  that  the DOE had  entered  into an  agency
agreement  with Western on behalf of KAFB,  one of the Company's  largest retail
electric customers,  by which Western will competitively procure power for KAFB.
The proposed wholesale power procurement would begin at the expiration of KAFB's
power service  contract with the Company in December  1999. On May 4, 1999,  the
Company  received  a request  for  network  transmission  service  from  Western
pursuant to Section 211 of the Federal Power Act to  facilitate  the delivery of
wholesale  power to KAFB over the  Company's  transmission  system.  The Company
denied Western's  request,  by letter dated June 30, 1999,  citing the fact that
KAFB is and will continue to be a retail  customer until the effective date KAFB
can elect customer choice service under the provisions of the  Restructuring Act
of 1999 (the  effective  date for  customer  choice for KAFB is January 1, 2002,
unless  extended  by the PRC).  The Company  also cited  several  provisions  of
Federal law that prohibit the provision of such service to Western. On September
30,  1999,  DOE/Western  filed a  petition  at the FERC  requesting  the FERC to
consider,  on an  expedited  basis,  ordering  the  Company to  provide  network
transmission  service to Western  under the Company's  Open Access  Transmission
Tariff on behalf of DOE and several other entities located on KAFB. The petition
claims KAFB is a wholesale  customer of the Company,  not a retail customer.  On
October 8, 1999, Western filed a request at FERC for expedited  consideration of
its  petition  for an order to assure  continued  service by the Company to KAFB
once the contract between the Company and KAFB expired on December 13, 1999. The
Company  filed a separate  motion to intervene,  protest,  and motion to dismiss
each of the  petitions on October 25, 1999 and November 11, 1999,  respectively.
In a  separate  but  related  proceeding,  the  Company  and the  United  States
Executive  Agencies  on behalf of KAFB are  involved  in a PRC case  regarding a
dispute  over the  specific  Company  tariff  language  under  which the Company
provides  retail  service to KAFB.  The  Company  agreed to  continue to provide
service to KAFB after  expiration  of the  contract,  pending  resolution of all
relevant issues. The Company has attempted to pursue a negotiated  resolution of
the issues  regarding  the provision of electric  service to KAFB,  but has been
unsuccessful. On February 3, 2000, Western withdrew its petition for an Order to
secure continuation of service.

        The net  revenue  loss to the  Company if the Company is replaced as the
power supplier to KAFB is estimated to be approximately  $7.0 million  annually.
The  Company  is  currently  unable to  predict  the  ultimate  outcome of these
matters, and intends to continue to vigorously defend its position.

City of Gallup Complaint

        In 1998, Gallup,  Gallup Joint Utilities and the Pittsburg & Midway Coal
Mining Co.  ("Pitt-Midway")  filed a joint complaint and petition  ("Complaint")
with the  NMPUC  (predecessor  of the PRC).  The  Complaint  sought  an  interim
declaratory order stating,  among other things, that Pitt-Midway is no longer an
obligated  customer of the Company,  Gallup is entitled to serve Pitt-Midway and
the Company must wheel power  purchased by Gallup from other  suppliers over the
Company's  transmission  system.  In September  1998,  the NMPUC issued an order
without conducting a hearing, granting the requests sought in the Complaint.



                                       32
<PAGE>


        On October 13, 1999,  issued an opinion and Order annulling and vacating
the NMPUC  Order,  stating  that:  (1) Gallup does not qualify as an  interested
electric utility authorized to seek a wheeling order from the NMPUC; and (2) the
NMPUC did not have the statutory  authority to order  Wheeling  under the Public
Utility Act.

        On December 1, 1999, Gallup and Pitt-Midway submitted a Joint Request to
the PRC for an expedited order to comply with the mandate of the Court,  stating
that the original NMPUC Order included  several other findings not  specifically
overturned by the Court,  and the  Commission  should issue an order to "affirm"
the findings and issues not  disposed of by the Supreme  Court.  On December 13,
1999,  the Company filed a response  stating that the Supreme Court had annulled
and  vacated  the  PRC  remand  order  in  its  entirety,  and  the  PRC  has no
jurisdiction to reconsider the issues raised.  On January 28, 2000, Gallup filed
a motion for leave to respond to the Company's  response,  which the company has
opposed as untimely.

        The PRC has taken no action on this  case  other  than  during a working
session,  in which (based on Gallup and  Pitt-Midway  joint motion for expedited
order on remaining issues) they requested that PRC counsel write up a procedural
order  allowing  the parties to resubmit  the issues to the PRC. The PRC counsel
charged with that task  subsequently  left the PRC and the procedural  order was
never completed.

        Hearings  were held at the FERC in late  February  2000,  regarding  the
issue of whether the  Company-Gallup  Agreement requires the Company to transmit
power to Gallup for delivery at the  Yah-Ta-Hey  Substation.  A decision on this
issue is not expected until late summer.

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

       None.


                                       33
<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,
1999, except as otherwise noted:
<TABLE>
<CAPTION>

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

<S>                             <C><C>                                                         <C>
B. F. Montoya  (1).........     64 Chairman, President and Chief Executive
                                      Officer                                                      June 15, 1999
                                   President and Chief Executive Officer                          August 1, 1993

R. J. Flynn................     57 Executive Vice President, Electric and Gas
                                      Services                                                  January 18, 1999
                                   Senior Vice President, Electric Services                     December 1, 1994

W. J. Real.................     51 Executive Vice President, Energy Services and
                                     Power Production                                           January 18, 1999
                                   Senior Vice President, Gas Services                          December 6, 1994
                                   Senior Vice President, Utility Operations                    December 7, 1993
                                   Senior Vice President, Customer Service and
                                     Operations                                                    March 2, 1993
                                   Executive Vice President, Gas Operations                        June 19, 1990

B. L. Barsky...............     55 Senior Vice President, Corporate Strategy and
                                     Investor Relations                                        February 19, 2000
                                   Senior Vice President and Corporate Secretary                   March 6, 1999
                                   Vice President, Strategic Analysis and Investor
                                     Relations                                                 February 14, 1996
                                   Director, Investor Relations and Financial Analysis             July 19, 1993

M. D. Christensen..........     51 Senior Vice President, Shared Services                        October 1, 1999
                                   Senior Vice President, New Mexico Retail Services            November 3, 1997
                                   Senior Vice President, Customer Service and
                                     Public Affairs                                              January 9, 1996
                                   Vice President, Public Affairs                               December 7, 1993
                                   Vice President, Communications                                  July 22, 1991

M. H. Maerki...............     59 Senior Vice President and Chief Financial Officer            December 7, 1993
                                   Senior Vice President, Administration and Chief
                                     Financial Officer                                             March 2, 1993
                                   Senior Vice President and Chief Financial Officer                June 1, 1988

</TABLE>

                                       34
<PAGE>
<TABLE>
<CAPTION>

            Name               Age                          Office                         Initial Effective Date
            ----               ---                          ------                         ----------------------
<S>                            <C><C>                                                         <C>
P. T. Ortiz................    49 Senior Vice President, General Counsel and  Secretary
                                  Senior Vice President, Regulatory Policy, General
                                    Counsel and Secretary                                      December 7, 1993
                                  Senior Vice President, Public Policy, General
                                    Counsel and Secretary                                         March 2, 1993
                                  Senior Vice President, General Counsel and
                                    Corporate Secretary                                        February 4, 1992

E. Padilla, Jr.............    46 Senior Vice President, Bulk Power Marketing and
                                    Development                                                February 8, 2000
                                  Vice President, Bulk Power Marketing and
                                    Development                                               December 14, 1996
                                  Director, Marketing and Power Contracts                      January 14, 1991

R. B. Ridgeway.............    41 Senior Vice President, Energy Services                      December 14, 1996
                                  Vice President, Corporate Planning                            August 10, 1996
                                  Director, Corporate Strategy                                     July 2, 1994
                                  Consultant, Competitive Analysis                              October 5, 1992
---------------------
</TABLE>

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

        (1) Benjamin F.  Montoya,  Chief  Executive  Officer and Chairman of the
Board,  has announced his decision to retire sometime within the next 18 months.
In January 2000,  Jeffry E. Sterba was hired to succeed Mr. Monotya.  Mr. Sterba
was  Executive  Vice  President  for USEC,  Inc., a provider of fuel for nuclear
power plants,  from January 1999 to March 2000.  From March 1997 to December 31,
1998, Mr. Sterba was Executive Vice President and Chief Operating Officer of the
Company. From December 1994 to March 1997, Mr. Sterba was Senior Vice President,
Bulk Power Services for the Company.  Mr. Sterba assumed the duties of President
in March 2000. He will assume the duties of Chief Executive Officer in June 2000
and become Chairman of the Board upon Mr. Montoya's retirement.


                                       35
<PAGE>


                                     PART II

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

       The  Company's  common  stock is traded on the New York  Stock  Exchange.
Ranges of sales  prices of the  Company's  common  stock,  reported as composite
transactions (Symbol:  PNM), and dividends declared on common stock for 1999 and
1998, by quarters, are as follows:


                                                    Range of
      Quarter Ended                                Sales Prices
      -------------                                ------------       Dividends
                                               High           Low     Per Share
                                               ----           ---     ---------
      1999
         December 31 .....................      18 7/8    15 7/16       $0.20
         September 30 ....................      21 1/2    16  3/4        0.20
         June 30 .........................      21 1/8    16  7/8        0.40
         March 31 ........................      20 5/8    14 27/32       0.20
                                                                        -----
            Fiscal Year ..................      21 1/2    14 27/32      $1.00
                                                                        =====
      1998
         December 31 .....................     23 5/16    17 3/8        $  - *
         September 30 ....................     23 3/16    19 1/16        0.20
         June 30 .........................      24 3/4    20 15/16       0.20
         March 31 ........................    24 11/16    22 1/8         0.20
                                                                        -----
            Fiscal Year ..................      24 3/4    17 3/8        $0.60
                                                                        =====

          *On January 18,  1999,  the  Company's  Board of  Directors  ("Board")
           declared a  quarterly  cash  dividend of 20 cents per share of common
           stock  payable  February 19, 1999,  to  shareholders  of record as of
           February 1, 1999.

       On January 31, 2000, there were 16,013 holders of record of the Company's
common stock.

        The Board set the dividend  payout  ratio below the industry  average to
allow for dividend growth in the future and to sustain financial flexibility for
the  Company  to respond  to  potential  opportunities  in the  evolving  energy
marketplace.  In  establishing  its  dividend  policy,  the  Board  weighed  the
Company's  current  financial  position and its future business plan, as well as
the regulatory and business climate in New Mexico.  Future dividend  declaration
will be reviewed for action by the Board.  The payment of future  dividends will
depend on a number of  factors,  including  the  extent to which cash flows will
support  dividends,   the  availability  of  retained  earnings,  the  financial
circumstances  and  performance  of the  Company,  the  PRC's  decisions  on the
Company's various regulatory cases currently pending, the effect of deregulating
generation markets and market and economic  conditions  generally.  In addition,
the ability to recover stranded costs in  deregulation,  future growth plans and
the related capital requirements and standard business  considerations will also
affect the Company's ability to pay dividends.

Cumulative Preferred Stock

       While isolated  sales of the Company's  cumulative  preferred  stock have
occurred in the past,  the Company is not aware of any active trading market for
its  cumulative  preferred  stock.  Quarterly  cash  dividends  were paid on the
Company's cumulative preferred stock at the stated rates during 1999 and 1998.


                                       36
<PAGE>



ITEM 6.       SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
                                                       1999           1998           1997          1996          1995
                                                    ----------    -----------     ----------    ----------    ----------
                                                              (In thousands except per share amounts and ratios)

<S>                                                 <C>           <C>             <C>           <C>           <C>
Total Operating Revenues.........................   $1,157,543    $ 1,092,445     $1,020,521    $  873,778    $  808,465
Earnings from Continuing Operations..............   $   79,614    $    95,119     $   86,497    $   72,969    $   75,562
Net Earnings.....................................   $   83,155    $    82,682     $   80,995    $   72,580    $   75,562
Earnings per Common Share:
  Continuing Operations..........................   $     1.93    $      2.27     $     2.05    $     1.73    $     1.72
  Basic..........................................   $     2.01    $      1.97     $     1.92    $     1.72    $     1.72
  Diluted........................................   $     2.01    $      1.95     $     1.91    $     1.71    $     1.72
Total Assets.....................................   $2,723,268    $ 2,668,603     $2,407,410    $2,313,334    $2,107,908
Long-Term Debt, including Current Maturities.....   $  988,489    $ 1,008,614     $  714,345    $  728,889    $  728,989
Common Stock Data:
  Market price per common share at year end......   $   16.250    $    20.438     $   23.688    $   19.625    $   17.625
  Book value per common share at year end........   $    21.79    $     20.63     $    19.26    $    18.06    $    16.82
  Average number of common shares outstanding....       41,038         41,774         41,774        41,774        41,774
  Cash dividend declared per common share........   $     1.00    $      0.60     $     0.68    $     0.48    $       -
Return on Average Common Equity..................          9.5%           9.9%          10.2%          9.8%         10.7%
Capitalization:
  Common stock equity............................         46.7%          45.4%          52.6%         50.4%         48.6%
  Preferred stock without mandatory redemption
    Requirements.................................          0.7            0.7            0.8           0.9           0.9
  Long-term debt, less current maturities........         52.6           53.9           46.6          48.7          50.5
                                                   -------------  -------------  ------------   -----------  ------------
                                                         100.0%         100.0%        100.0%         100.0%       100.0%
                                                   =============  =============  ============   ===========  ============
</TABLE>


         Due to the  discontinuance of the natural gas trading operations of its
Energy  Services  Business  Unit  (see  note  13 of the  notes  to  consolidated
financial  statements),  certain  prior year amounts have been  reclassified  as
discontinued operations.

         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.


                                       37
<PAGE>


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

       The  following is  management's  assessment  of the  Company's  financial
condition and the significant factors affecting the results of operations.  This
discussion  should  be read  in  conjunction  with  the  Company's  consolidated
financial  statements  and  PART  I,  ITEM 3. - Legal  Proceedings.  Trends  and
contingencies  of a  material  nature  are  discussed  to the  extent  known and
considered relevant.

                                    OVERVIEW

        The Company is a public  utility  primarily  engaged in the  generation,
transmission,  distribution  and sale of  electricity  and in the  transmission,
distribution  and  sale of  natural  gas  within  the  State of New  Mexico.  In
addition,  in pursuing new business  opportunities,  the Company provides energy
and utility related activities through its wholly owned subsidiary, Avistar.

ELECTRIC OPERATIONS

        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
megawatts-MW) or energy (measured in megawatt  hours-MWh) over a given period of
time. The fourth market consists of economy energy sales made on an hourly basis
at  fluctuating,  spot-market  rates.  Sales to the third and fourth markets are
sometimes referred to collectively as "off-system" sales.

         The Company  provides retail electric  service to a large area of north
central  New  Mexico,  including  the  cities of  Albuquerque  and Santa Fe, and
certain  other areas of New  Mexico.As  of  December  31,  1999,  1998 and 1997,
approximately  361,000,  358,000  and  349,000,  respectively,  retail  electric
customers were served by the Company.

                            ELECTRIC SALES BY MARKET
                             (Thousands of dollars)

                                                   1999       1998       1997
                                                 ---------  ---------  ---------

   Retail  ....................................  $522,523   $536,417   $519,504
   Firm-requirements wholesale.................     7,046     10,708     10,690
   Other contracted off-system sales...........   226,773    142,115    118,876
   Economy energy sales........................   131,549    122,156     55,768
   Other   ....................................    24,086     23,808     17,600
                                                 ---------  ---------  ---------
                                                 $911,977   $835,204   $722,438
                                                 =========  =========  =========



                                       38
<PAGE>

                            ELECTRIC SALES BY MARKET
                                (Megawatt hours)

                                                1999        1998        1997
                                             ----------  ----------  ----------

   Retail  .................................  6,803,853   6,739,874   6,534,899
   Firm-requirements wholesale..............    179,249     278,615     278,727
   Other contracted off-system sales........  6,196,499   4,033,931   3,790,081
   Economy energy sales.....................  4,795,873   4,469,769   2,716,835
                                             ----------  ----------  ----------
                                             17,975,474  15,522,189  13,320,542
                                             ==========  ==========  ==========

        The Company has  ownership  interests in certain  generating  facilities
located in New Mexico,  including  Four Corners,  a coal fired unit, and SJGS, a
coal fired unit. In addition,  the Company has ownership and leasehold interests
in PVNGS located in Arizona.  These generation  assets are used to supply retail
and wholesale customers.  The Company also owns Reeves, a gas and oil fired unit
and Las  Vegas,  a gas and oil fired unit that are used  solely for  reliability
purposes or to generate  electricity for the wholesale market during peak demand
periods in the Company's  wholesale power markets.  As of December 31, 1999, the
total net generation  capacity of facilities  owned or leased by the Company was
1,521 MW. In addition to generation capacity, the Company purchases power in the
open  market.  The Company is also  interconnected  with various  utilities  for
economy  interchanges and the mutual assistance in emergencies.  The Company has
been  actively  trading in the  wholesale  power market and has entered into and
anticipates  that it will  continue to enter into power  purchase  agreements to
accommodate its trading activity.

NATURAL GAS OPERATIONS

        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 426,000,  419,000 and 410,438 customers as of December 31,
1999,  1998  and  1997,   respectively.   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.   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.


                                       39
<PAGE>


        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.

        The following table shows gas throughput by customer class:

                                 GAS THROUGHPUT
                            (Millions of decatherms)

                                                      1999      1998     1997
                                                     ------    ------   -------

   Residential....................................     29.3     30.3      30.7
   Commercial.....................................     10.1     10.4      10.6
   Industrial.....................................      2.3      1.5       1.3
   Public authorities.............................      2.9      3.4       4.2
   Irrigation.....................................      1.4      1.9       1.6
   Sales for resale...............................      1.2      1.2       1.2
   Unbilled.......................................      3.8     (1.3)     (0.2)
   Transportation*................................     40.2     36.4      34.0
   Off-system sales...............................      1.1      1.9       1.2
                                                     ------    ------   -------
                                                       92.3     85.7      84.6
                                                     ======    ======   =======

        The following table shows gas revenues by customer:

                                          GAS REVENUES
                                     (Thousands of dollars)

                                                 1999        1998       1997
                                               --------   ---------  ----------

   Residential..............................   $148,968   $161,153   $ 187,563
   Commercial...............................     36,528     42,680      50,502
   Industrial...............................      8,550      4,887       4,536
   Public authorities.......................      9,782     12,610      17,577
   Irrigation...............................      4,229      5,780       5,041
   Sales for resale.........................      2,530      3,596       4,465
   Unbilled.................................      4,107       (955)     (2,172)
   Transportation*..........................     12,390     13,464      14,172
   Liquids..................................      1,867      1,463       4,451
   Off-system sales.........................      2,357      3,816       1,926
   Other....................................      5,403      7,481       6,708
                                               --------   ---------  ----------
                                               $236,711   $255,975    $294,769
                                               ========   =========  ==========

   *Customer-owned gas.

                                       40
<PAGE>

AVISTAR

        The Company's  wholly-owned  subsidiary,  Avistar,  was formed in August
1999  as  a  New  Mexico   corporation  and  is  currently  engaged  in  certain
unregulated,   non-utility  businesses,  including  energy  and  utility-related
services previously  operated by the Company.  The PRC authorized the Company to
invest  $50  million in equity in Avistar  and to enter into a  reciprocal  loan
agreement for up to $30 million.  The Company has currently invested $25 million
in Avistar.  In February  2000,  Avistar  invested  $3 million in  AMDAX.com,  a
start-up company which will provide an on line auction service to bring together
electricity  buyers and sellers in the  deregulated  electric  power market.  In
addition,  Avistar entered into an agreement with Sandia  Corporation to jointly
develop  and market new risk and  reliability  software  for  private  industry.
Avistar, also, operates and manages the City of Santa Fe's water system.

RESTRUCTURING THE ELECTRIC UTILITY INDUSTRY

        Introduction  of  competitive  market  forces and  restructuring  of the
electric  utility  industry in New Mexico  continue to be key issues  facing the
Company.  The Restructuring  Act was enacted into law on April 8, 1999,  opening
the state's  electric power market to customer choice beginning in 2001. The law
gives  schools,  residential  and small  business  customers the  opportunity to
choose among competing power  suppliers  beginning in January 2001.  Competition
will be expanded to include all  customers  starting in January  2002.  The PRC,
however,  can extend these dates by up to one year if necessary.  Rural electric
cooperatives  and municipal  electric systems have the option not to participate
in the competitive market.

        Residential  and  small  business  customers  who do not  select a power
supplier  in the open  market  can buy their  electricity  through  their  local
utility through a "standard offer" whereby the local  distribution  utility will
purchase power supplies  through a competitive  process approved by the PRC. The
local  distribution  utility  system and  related  services  such as billing and
metering  will  continue  to be  regulated  by the  PRC,  while  the  interstate
transmission system will remain subject to Federal regulation.

        The law does not require  utilities to divest their  generating  plants,
but  requires  unregulated   activities  to  be  separated  from  the  regulated
activities through creation of at least two separate corporations.

        The law also  provides  for sharing of stranded  costs  between  utility
shareholders and customers,  allowing utilities to recover at least half of such
stranded  costs.  Stranded  costs  are  defined  in the law to  include  nuclear
decommissioning  costs,  regulatory  assets,  leases and other costs  recognized
under existing regulation.  Utilities could be allowed to recover more than half
of their stranded costs if they meet the criteria specified in the law. Stranded
costs will be recovered from customers over a five-year  period.  Utilities will
also be allowed to recover through 2007 all transition costs reasonably incurred
to comply with the new law.

        The law, however, does not provide a guaranteed rate cut for residential
customers.  Electric rates during the  transition to competition  will be set by
the PRC.  The Company  received a recent rate case order,  which did result in a
rate reduction. (See "Electric Rate Case" below.)



                                       41
<PAGE>

        The Company is required to file a  transition  plan with the PRC by June
1, 2000.  The  transition  plan must include  proposals  for:  (i)  implementing
customer choice and open access to the Company's  transmission  and distribution
system; (ii) separating regulated and non-regulated  business activities;  (iii)
recommended  rates for  distribution,  transmission and related  services;  (iv)
competitive procurement process for standard offer; and (v) recovery of stranded
costs and  transition  costs.  The Company plans to reorganize its operations by
forming a holding  company  structure as a means of achieving  the corporate and
asset separation required by the Restructuring Act. The proposed holding company
will be called Manzano  Corporation.  On February 15, 2000, the PRC approved the
Company's request to form a wholly-owned  shell subsidiary which will become the
holding  company.  The  Company's  plan for a  holding  company  structure  will
separate  the  Company  into  two  subsidiaries.  Shareholders  will be asked to
approve the holding  company  structure.  If the Company  receives all necessary
regulatory and other approvals,  pursuant to the  Restructuring  Act, all of the
Company's  electric and gas  distribution  and  transmission  assets and related
liabilities will be transferred to a newly created subsidiary.  After this asset
transfer,  this  subsidiary will acquire the name "Public Service Company of New
Mexico" (for purposes of this discussion,  the subsidiary will be referred to as
"UtilityCo")  and the  corporation  formerly named Public Service Company of New
Mexico  will  be  renamed  Manzano  Energy  Corporation  (for  purposes  of this
discussion,  the  subsidiary  will be  referred  to as  "Energy").  Energy  will
continue to own the Company's  existing  electric  generation  and  unregulated,
competitive assets after completion of the transfer of the regulated business to
the newly created utility subsidiary.  UtilityCo and Energy will be wholly-owned
subsidiaries of Manzano. (See "FORMATION OF HOLDING COMPANY" below.)

COMPETITIVE STRATEGY

       The  restructuring  of the  electric  utility  industry  will provide new
opportunities; however, the Company anticipates that it will experience downward
pressure on the  Company's  utility  earnings  from their  current  levels.  The
reasons for the downward  pressure  include possible limits on return on equity,
disallowance of some stranded costs and the potential loss of certain  customers
in a competitive environment.

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

        The  Company's  bulk  power  operations  have  contributed   significant
earnings  to the  Company in recent  years as a result of  increased  off-system
sales.  The Company plans to expand its wholesale power trading  functions which
could include an expansion of its generation portfolio. The Company continuously
evaluates its physical asset acquisition  strategies to ensure an optimal mix of
base-load  generation,  peaking  generation  and  purchased  power in its  power
portfolio.


                                       42
<PAGE>


        In addition to the continued power trading operations,  the Company will
further  focus on  opportunities  in the market place where  excess  capacity is
disappearing and mid- to long-term market demands are growing.

        The  Company's  current  business plan includes a 300% increase in sales
and  a  doubling  of  its  generating   capacity  through  the  construction  or
acquisition of additional power generation  assets in its surrounding  region of
operations. Such growth will be dependent upon the Company's ability to generate
$400 to $600 million to fund the Company's expansion.  There can be no assurance
that these competitive businesses, particularly the generation business, will be
successful  or, if  unsuccessful,  that they will not have a direct or  indirect
adverse effect on the Company.

       At the  Federal  level,  there  are a number  of  proposals  on  electric
restructuring  being considered with no concrete timing for definitive  actions.
It  is  expected  that  previously   introduced   restructuring  bills  will  be
re-introduced  this year.  Issues such as stranded cost recovery,  market power,
utility regulations reform, the role of states, subsidies,  consumer protections
and  environmental  concerns  are  expected  to  be  at  the  forefront  of  the
Congressional debate. In addition, the FERC has stated that if Congress mandates
electric retail access, it should leave the details of the program to the states
and the FERC has the  authority to order the necessary  transmission  access for
the delivery of power for the states' retail access programs.

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


                                       43
<PAGE>
                              RESULTS OF OPERATIONS

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

                          Year Ended December 31, 1999

                                       Electric    Gas       Other  Consolidated
                                       --------- --------- -------- ------------

Operating revenues...................   100.00%   100.00%   100.00%   100.00%
Cost of energy sold..................    45.95%    47.71%     0.00%    45.96%
Cost of sales and projects...........     0.00%     0.00%    91.35%     0.70%
                                       --------- --------- --------- --------
Gross Margin.........................    54.05%    52.29%     8.65%    53.35%
                                       --------- --------- --------- --------
Administrative and other costs.......     9.23%    22.15%   101.82%    12.58%
Energy production costs..............    15.27%     0.63%     0.00%    12.16%
Depreciation and amortization........     7.99%     8.35%     0.00%     8.00%
Transmission and distribution costs..     3.40%    11.92%     0.00%     5.12%
Taxes other than income taxes........     3.12%     2.98%   (15.90)%    2.94%
Income taxes.........................     3.03%    (0.14)%  (25.53)%    2.16%
                                       --------- --------- --------- --------
Total non-fuel operating expenses....    42.04%    45.90%    60.38%    42.97%
                                       --------- --------- --------- --------
Operating income.....................    12.01%     6.39%   (51.73)%   10.37%
                                       --------- --------- --------- --------

                          Year Ended December 31, 1998

Operating revenues..................    100.00%   100.00%   100.00%   100.00%
Cost of energy sold.................     37.68%    52.64%     0.00%    41.14%
Cost of sales and projects..........      0.00%     0.00%    73.93%     0.09%
                                       --------- --------- --------- --------
Gross Margin........................     62.32%    47.36%    26.07%    58.77%
                                       --------- --------- --------- --------
Administrative and other costs......      9.12%    19.13%   760.66%    12.34%
Energy production costs.............     17.90%     0.09%     0.00%    13.71%
Depreciation and amortization.......      8.41%     6.20%     4.98%     7.89%
Transmission and distribution costs.      3.85%     9.51%     0.00%     5.17%
Taxes other than income taxes.......      3.67%     2.78%    20.22%     3.48%
Income taxes........................      4.83%     1.80%  (288.94%)    3.78%
                                       --------- --------- --------- --------
Total non-fuel operating expenses...     47.78%    39.50%   496.92%    46.36%
                                       --------- --------- --------- --------
Operating income....................     14.55%     7.85%  (470.85%)   12.42%
                                       --------- --------- --------- --------

                          Year Ended December 31, 1997

Operating revenues..................    100.00%   100.00%   100.00%   100.00%
Cost of energy sold.................     33.22%    57.59%     0.00%    40.15%
Cost of sales and projects..........      0.00%     0.00%    79.39%     0.26%
                                       --------- --------- --------- --------
Gross Margin........................     66.78%    42.41%    20.61%    59.59%
                                       --------- --------- --------- --------
Administrative and other costs......      9.48%    16.10%   180.21%    11.95%
Energy production costs.............     19.10%     0.10%     0.00%    13.55%
Depreciation and amortization.......      9.42%     4.95%     0.54%     8.10%
Transmission and distribution costs.      4.41%     8.53%     0.00%     5.58%
Taxes other than income taxes.......      4.17%     2.21%     4.62%     3.61%
Income taxes........................      5.04%     2.57%   (63.13%)    4.11%
                                       --------- --------- --------- --------
Total non-fuel operating expenses...     51.63%    34.46%   122.24%    46.90%
                                       --------- --------- --------- --------
Operating income....................     15.15%     7.95%  (101.63%)   12.69%
                                       --------- --------- --------- --------


                                       44
<PAGE>

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

        Electric  Operations - Operating  revenues grew $76.8 million (9.2%) for
the year to $912.0 million as a 32.9% improvement in wholesale electricity sales
volume was only partially  offset by the  implementation  of a new rate order in
late July 1999 (which  lowered  rates by $18 million and will lower rates by $37
million  annually  based on expected  customer  growth).  The Company  delivered
wholesale (bulk) power of 11.17 million MWh of electricity this year compared to
8.78 million MWh delivered last year, an increase of 27.2%.  Retail  electricity
delivery was 6.8 million MWh compared to 6.7 million MWh delivered  last year, a
1.5% improvement while revenues declined 2.6% as a result of the new rate order.
Revenue  growth for both the  retail and  wholesale  businesses  was  negatively
impacted by cooler  temperatures  in the southwest  during the summer months and
the  availability  of abundant  hydro power which  competes  with the  Company's
wholesale business.

       The gross margin, or operating  revenues minus cost of energy,  decreased
$27.6 million  reflecting a decrease in gross margin as a percentage of revenues
of 8.3%.  This decline  reflects the rate reduction  discussed  above and higher
fuel and purchased power costs.

       Administrative  and general  increased $7.9 million (10.4%) for the year.
This  increase is due to Year 2000 ("Y2K")  compliance  costs (see "OTHER ISSUES
FACING THE COMPANY - THE YEAR 2000  ISSUE") and costs  related to the  Company's
implementation  of its new customer  billing  system.  In addition,  the Company
increased its bad debt accrual  throughout 1999 by $5.5 million as a result of a
significant  increase  in  delinquent  accounts  due  to  system  implementation
problems  (see  Implementation  of  New  Billing  System  below  for  additional
discussion). These increases primarily occurred in the distribution business. As
a percentage of revenues,  administrative and other remained relatively constant
at 9.2% and 9.1% for the years ended  December 31, 1999 and 1998,  respectively.
This is a result of a decrease in  administrative  and other, as a percentage of
revenues,  in the generation and  transmission  businesses due to an increase in
costs for 1998 and 1999 allocated to the partners in a jointly-owned  generation
plant following an audit of such costs.

       Energy  production  costs  decreased  $10.2 million  (6.8%) for the year.
These costs are  generation  related.  The decrease is primarily  due to reduced
nuclear fuel storage costs at PVNGS.  In 1998, the Company  recorded a charge of
$12.1  million  for  spent  nuclear  fuel at  PVNGS  as it was  determined  that
alternatives to the DOE storage and disposal  facilities  would be necessary due
to the DOE's failure to complete such facilities by 1998 as required by law. The
charge  represents  the cost of  storage  for  spent  fuel  through  1998.  As a
percentage of revenues,  energy  production costs decreased form 17.9% to 15.3%.
The  decrease is due to cost  control and the  decreased  nuclear  fuel  storage
costs.

       Depreciation  and  amortization  increased  $2.7 million  (3.95%) for the
year.  The  increase  is  due  to  pollution  control  improvements  at  certain
generation  plants and the impact of a new customer billing system.  As a result
of the additions,  the Company revised its depreciation rates as required by the
PRC.  Depreciation and  amortization as a percentage of revenues  decreased from
8.4% to 8.0% reflecting an increase in energy production without a corresponding
increase in plant additions.


                                       45
<PAGE>

        Transmission  and  distribution  costs decreased $1.1 million (3.4%) for
the year.  As a percentage  of revenues,  transmission  and  distribution  costs
decreased from 3.9% to 3.4%.  These decreases were primarily the result of lower
maintenance costs due to the milder weather.

        Gas  Operations - Operating  revenues  declined $19.3 million (7.5%) for
the year to $236.7  million.  This decline was driven by a 13.8%  decline in the
average  rate  charges  per  decatherm  due to weak gas prices and a mild winter
resulting in a 3.2% volume  decrease to residential  and  commercial  customers.
Price  declines  were  partially  offset  by  a  7.7%  volume  improvement,   as
transportation volume posted double-digit growth of 10.3%.

       The gross margin, or operating  revenues minus cost of energy,  increased
$2.6 million (2.2%).  As a percentage of revenues,  gross margin increased 4.9%.
These increases are due to lower gas costs.

       Administrative  and general increased $3.5 million (7.2%).  This increase
is mainly due to Y2K  compliance  costs of $2.6 million and costs related to the
Company's  implementation of its new customer billing system.  In addition,  the
Company  increased its bad debt accrual  throughout  1999 by $2.7 million,  as a
result  of  a  significant   increase  in  delinquent  accounts  due  to  system
implementation  problems  (see  Implementation  of New Billing  System below for
additional  discussion).  As a percentage of revenues,  administrative and other
costs  increased from 19.1% to 22.5%  reflecting  primarily the effects of lower
gas costs discussed above.

       Depreciation  and  amortization  increased  $3.9 million  (24.7%) for the
year. The increase is due to the impact of the new customer billing system. As a
result of the addition,  the Company revised its depreciation  rates as required
by  the  PRC.  Depreciation  and  amortization,  as a  percentage  of  revenues,
increased from 6.2% to 8.4%  reflecting the effects of lower gas costs discussed
above and plant additions.

       Transmission and distribution expenses increased $3.9 million (16.1%) for
the year.  The increase is  primarily  due to Y2K  compliance  costs (see "OTHER
ISSUES FACING THE COMPANY - THE YEAR 2000 ISSUE"). Transmission and distribution
expenses, as a percentage of revenues,  increased from 9.5% to 11.9%, reflecting
the effects of lower gas costs discussed above and the Y2K compliance costs.

       Other - Other includes the Company's  unregulated  businesses,  including
Avistar and certain corporate functions.  The unregulated businesses contributed
$8.9  million in revenues in 1999  compared to $1.3  million in 1998.  Operating
loss for the unregulated  businesses decreased from $5.8 million in 1998 to $4.6
million in 1999 reflecting their expansion.

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

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


                                       46
<PAGE>

        The Company's  consolidated  income tax expense,  before the  cumulative
effect of accounting change and discontinued  operations,  was $42.3 million,  a
decrease of $14 million for the year. The Company's  income tax effective  rate,
before the cumulative effect of accounting  change and discontinued  operations,
decreased  from 37.2% to 34.7%.  This decrease is primarily due to the favorable
tax treatment  received on the equity income  discussed  above.  The  investment
income qualifies for the 80% dividends received deduction under Internal Revenue
Service regulations.

        The Company's net earnings from continuing operations for the year ended
December 31, 1999,  were $79.6  million  compared to $95.1  million for the year
ended  December 31, 1998.  Earnings per share from  continuing  operations  on a
diluted basis were $1.93 compared to $2.25 for the year ended December 31, 1998.
Diluted weighted  average shares  outstanding were 41.1 million and 42.1 million
in  1999  and  1998,  respectively.  The  decrease  reflects  the  common  stock
repurchase  program in 1999.  The 1999 results were  negatively  impacted by the
electric rate reduction in the third quarter, increased fuel and purchased power
costs,  a weak gas  market  and  cooler  weather  in the West  during the summer
months. In addition,  costs related to Y2K compliance and the  implementation of
the new customer  billing  system  increased  costs.  This impact was  partially
offset by the gains recorded in other income.

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

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

      Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

         Electric  Operations - Operating  revenues grew $112.8 million  (15.6%)
for the year to $835.2 million.  The Company delivered wholesale (bulk) power of
8.8 million MWh of  electricity  this year compared to 6.9 million MWh delivered
last year, an increase of 27.5%. Retail electricity delivery was 6.7 million MWh
compared to 6.5 million MWh  delivered  last year,  a 3.1%  improvement.  Retail
revenues   increased  3.3%.  Revenue  growth  for  the  wholesale  business  was
positively impacted by an unusually hot summer in Arizona and California.

       The gross margin or  operating  revenues  minus cost of energy  increased
38.0 million;  however,  gross margin as a percentage  of revenues  decreased by
4.5%.  This is the result of increased  purchases for resale as wholesale  power
marketing activities increased.

       Administrative and general increased $7.7 million (11.2%) for the year as
a result of increased Y2K  compliance  costs and an increase in certain  benefit
costs. As a percentage of revenues, administrative and other decreased from 9.5%
to 9.1%.

                                       47
<PAGE>

       Energy  production  costs increased 10.8 million (7.8%) for the year as a
result of a charge of $12.1  million for spent  nuclear fuel costs at PVNGS (See
"Year  Ended   December   31,  1999,   compared  to  Year  Ended   December  31,
1998--Electric Operations"). These costs are generation related. As a percentage
of revenues, energy production costs decreased from 19.1% to 17.9%.

       Depreciation and  amortization  increased 2.1 million (3.1%) for the year
as a  result  of  utility  plant  improvements  and  the  write-off  of  certain
unamortized   computer  software  to  depreciation  and  amortization   expense.
Depreciation and amortization as a percentage of revenues decreased from 9.4% to
8.4%.

       Transmission and distribution costs decreased $1.2 million (3.8%) for the
year as a result  of lower  maintenance  costs.  As a  percentage  of  revenues,
transmission and distribution costs decreased from 4.1% to 3.9%.

       Gas Operations - Operating  revenues  declined $38.8 million  (13.2%) for
the year to $256.0  million.  This decline was driven by a 13.8%  decline in the
average rate charges per decatherm.  Total gas throughput volume increased 1.3%,
while residential and commercial volume decreased 1.5%.

       The gross margin or  operating  revenues  minus cost of energy  decreased
$3.8  million  (3.0%) as a result of warmer  weather  conditions  in 1998.  As a
percentage of revenues, gross margin increased 4.9%.

       Administrative  and general increased $1.5 million (3.2%) for the year as
a result of increased Y2K compliance  costs and an increase in certain  benefits
costs.  As a percentage of revenues,  administrative  and other costs  increased
from 16.1% to 19.1%.

       Depreciation and amortization  increased $1.0 million (6.7%) for the year
as a result of the write-off of certain retired plant assets to depreciation and
amortization  expense.   Depreciation  and  amortization,  as  a  percentage  of
revenues, increased from 5.0% to 6.2%.

       Transmission and distribution  expenses decreased $0.8 million (3.2%) for
the year as a result of higher  maintenance costs in 1997 for items that did not
reoccur in 1998.  Transmission  and  distribution  expenses,  as a percentage of
revenues, increased form 8.5% to 9.5%.

       Other - Other  includes the Company's  unregulated  business,  which were
incorporated  as  Avistar  in  1999,  and  certain  corporate   functions.   The
unregulated  businesses contributed $1.3 million in revenues in 1998 compared to
$3.3 million in 1997.  Operating loss for the unregulated  businesses  increased
from $3.3 million in 1997 to $5.8 million in 1998. The remaining costs represent
corporate administrative costs.

       Consolidated  - Net other income and  deductions  increased  $9.5 million
over a year ago as a result of the investment income, proceeds from a litigation
settlement and the reversal of a gas rate case reserve.

       Net interest  charges  increased $7.0 million in 1998 due to the issuance
of $435 million of SUNs and increased  short-term  borrowings for the retirement
of $140 million of first mortgage bonds.

       The  Company's  consolidated  income  tax  expense,  before  discontinued
operations,  was $56.3  million,  an increase of $6.0 million for the year.  The
Company's income tax effective rate, before discontinued  operations,  increased
from 36.8% to 37.2%.

                                       48
<PAGE>

       The Company's net earnings from continuing  operations for the year ended
December 31, 1998,  were $95.1  million  compared to $86.5  million for the year
ended  December 31, 1997.  Earnings per share from  continuing  operations  on a
diluted basis were $2.25 compared to $2.05 for the year ended December 31, 1997.
Diluted weighted  average shares  outstanding were 42.1 million and 42.0 million
in 1998 and 1997, respectively.

       Discontinued  Operations - In August 1998, the Company  adopted a plan to
discontinue the natural gas trading  operations of its Energy Services  Business
Unit and completely  discontinued  these operations on December 31, 1998. Losses
from  discontinued  operations,  net of taxes,  for the year ended  December 31,
1998, were $12.4 million,  including a charge of $5.1 million for estimated loss
on  disposal,  compared  to $5.5  million in 1997.  Loss per  share,  net of tax
benefit, on a diluted basis for the discontinued  operations was $0.30 and $0.13
for 1998 and 1997, respectively.

                         LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 1999,  the Company had working  capital of $167 million
including cash and cash  equivalents of $120.4  million.  This is an increase in
working  capital of $87.8  million.  This increase is primarily the result of an
increase  in cash and cash  equivalents  of $59.1  million  and a  reduction  in
short-term  debt of $26.6 million,  partially  offset by an increase in accounts
payable, reflecting higher year-over-year business levels.

        Cash generated from operating activities was $214.5 million, an increase
of $3.5 million from 1998.  This  increase was offset by an increase in accounts
receivable  of $30.2  million due to billing  problems  associated  with the new
customer billing system (see Implementation of New Billing System below).

         Cash used for investing  activities  was $55.9 million in 1999 compared
to $340.1 million in 1998. This decreased  spending reflects lower  construction
expenditures  in 1999 of $32.3 million and the  liquidation  of  insurance-based
investments in the nuclear decommissioning trust of $26.6 million (see financing
activities  for the  payment  of  decommissioning  debt of  $26.6  million).  In
addition,  in 1998,  the Company  purchased  $215.7  million of debt  underlying
certain of its leases of PVNGS.

        Cash used for  financing  activities  was $99.5  million  in 1999.  This
increase is the result of the  repurchase of $31.6  million of senior  unsecured
notes, $26.6 million of loan repayments associated with nuclear  decommissioning
trust  activities  and an $18.8  million stock  repurchase by the Company.  Cash
provided  from  financing  activities  in 1998 was  $173  million  and  included
proceeds  from the  issuance  of  senior  unsecured  notes of $435  million  and
repayment of short-term borrowings of $231.3 million.




                                       49
<PAGE>

Capital Requirements

        Total capital requirements include construction  expenditures as well as
other major capital requirements and cash dividend  requirements for both common
and preferred  stock.  The main focus of the Company's  construction  program is
upgrading  generating  systems,  upgrading  and  expanding  the electric and gas
transmission and distribution  systems and purchasing nuclear fuel.  Projections
for total capital requirements and construction expenditures for 2000 are $250.9
million and $219.1 million,  respectively.  Such  projections for the years 2000
through 2004 are $1.2 billion and $1.1 billion,  respectively.  These  estimates
are under continuing review and subject to on-going  adjustment (see Competitive
Strategy above).

        The Company's  construction  expenditures  for 1999 were entirely funded
through cash generated from operations.  The Company currently  anticipates that
internal  cash  generation  and current debt capacity will be sufficient to meet
capital requirements for the years 2000 through 2004. To cover the difference in
the amounts and timing of cash  generation  and cash  requirements,  the Company
intends to use short-term borrowings under its liquidity arrangements.

Liquidity

        At the end of February  2000,  the Company had $175 million of available
liquidity  arrangements,  consisting  of $150  million  from a senior  unsecured
revolving credit facility ("Credit Facility"), and $25 million in local lines of
credit. The Credit Facility will expire in March 2003. There were no outstanding
borrowings as of February 29, 2000.

        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.

       On August 26, 1999, two major credit rating agencies,  Moody's  Investors
Services,  Inc.  ("Moody's") and Standard and Poor's Corp.  ("S&P") upgraded the
Company's  securities  following  the rate order by the PRC (see  "OTHER  ISSUES
FACING ATHE COMPANY - Electric Rate Case" below).  The Company's  rating outlook
by both rating  agencies is "stable".  Moody's  upgrades  include the  Company's
senior unsecured notes and senior unsecured  pollution  control revenue bonds to
"Baa3"  from  "Ba1";  and  preferred  stock to "ba1"  from  "b1".  The EIP lease
obligation  bonds were also  upgraded  to "Ba1" from "Ba2".  S&P also  upgraded,
among other things,  the Company's  senior  unsecured  debt and bank loan credit
rating to BBB- from BB+. Investors are cautioned that a security rating is not a
recommendation  to buy,  sell  or hold  securities,  that it may be  subject  to
revision or  withdrawal at any time by the assigning  rating  organization,  and
that each rating should be evaluated independently of any other rating.

       These rating actions  reflect the  resolution of the Company's  litigious
electric rate case that began in 1997 and the passage of the  Restructuring  Act
(see  "Overview"  above)  that  allows  utilities  to recover no less than fifty
percent of their stranded costs. If certain  conditions  identified in the state
law are met,  utilities may be allowed  recovery of up to one hundred percent of
stranded costs.  The rating  agencies  believe that the combination of these two
events  reduces a large  component of regulatory  and  legislative  uncertainty,
which  collectively  help to  support  the  Company's  long-term  prospects  for
maintaining  cash flow and  earning  stability.  Future  rating  actions for the
Company's  securities  will  depend  in large  part on the  filing  with the PRC
relating to numerous  restructuring  issues,  including  the  Company's  plan to
separate  the  utility  into  a  generation  business  and  a  distribution  and
transmission business as required by the recently enacted state law. The Company
is required to file a transition plan with the PRC by June 1, 2000.


                                       50
<PAGE>

       Covenants in the Company's PVNGS Units 1 and 2 lease agreements (see PART
I, ITEM 2. - "PROPERTIES - Nuclear Plant") limit the Company's ability,  without
consent of the owner participants in the lease  transactions:  (i) to enter into
any merger or  consolidation,  or (ii) except in connection with normal dividend
policy, to convey, transfer, lease or dividend more than 5% of its assets in any
single  transaction  or series of  related  transactions.  The  Credit  Facility
imposes similar restrictions regardless of credit ratings.

Financing Activities

        In 1999, the Company retired $31.6 million of its 7.1% senior  unsecured
notes through open market purchases, utilizing the funds from operations and the
funds from temporary investments.  In January 2000, the Company reacquired $35.0
million of its 7.5% senior  unsecured  notes through open market  purchases.  On
October 28, 1999,  tax-exempt  pollution  control revenue bonds of $11.5 million
with an interest  rate of 6.60% were issued to partially  reimburse  the Company
for expenditures  associated with its share of a recently  completed  upgrade of
the emission control system at SJGS.

       The Company currently has no requirements for long-term financings during
the period of 2000  through  2004  except as part of its  implementation  of its
holding company plan. However,  during this period, the Company could enter into
long-term  financings  for the purpose of  strengthening  its balance  sheet and
reducing its cost of capital.  The Company  continues to evaluate its investment
and debt  retirement  options to optimize  its  financing  strategy and earnings
potential.  No additional first mortgage bonds may be issued under the Company's
mortgage.  The  amount of SUNs that may be  issued  is not  limited  by the SUNs
indenture.  However,  debt to capital  requirements  in certain of the Company's
financial  instruments would ultimately  restrict the Company's ability to issue
SUNs.

       Implementation  of the Company's  holding company plan will not result in
any change in the  consolidated  outstanding  indebtedness  of the  Company.  In
connection  with the  transfer  of the  regulated  business  by the  Company  to
UtilityCo and the  permanent  debt  financing for the assets to be  transferred,
subject  to the  receipt  of  the  necessary  regulatory  and  other  approvals,
UtilityCo may make an offer to holders of the Company's  public senior unsecured
notes ($403 million outstanding as of December 31, 1999) to exchange these notes
for newly-issued senior unsecured notes of UtilityCo with substantially the same
terms as the  existing  notes.  Alternatively,  some or all of these notes could
continue  to be equity  securities  of Energy  depending  on the  results of any
exchange offer or if it is more  appropriate to capitalize  UtilityCo with newly
issued debt and use the  proceeds  from this debt issue to purchase a portion of
the assets to be transferred to UtilityCo from Energy.  It is currently  planned
that $586 million of  currently  outstanding  pollution  control  revenue  bonds
(secured by senior  unsecured  notes and first mortgage  bonds) will remain as a
debt  obligation of Energy after the share exchange and  corporation  separation
since these bonds were issued to finance the ownership and operation of electric
generation assets.

        The Company's  preferred stock ($12.8 million outstanding as of December
31,  1999),  will remain an equity  security of Energy after the share  exchange
unless an exchange offer is made by UtilityCo and accepted by all holders or the
preferred  stock is redeemed  by the  Company.  Depending  on the results of any
exchange for the Company's  preferred stock,  some or all of the preferred stock
could  remain an equity  security  of Energy or become a new equity  security of
UtilityCo.


                                       51
<PAGE>
Stock Repurchase

        In March  1999,  the  Company's  board of  directors  approved a plan to
repurchase up to 1,587,000 shares of the Company's outstanding common stock with
maximum  purchase  price of $19.00 per share.  In December  1999,  the Company's
board of directors  authorized  the Company to  repurchase  up to an  additional
$20.0  million of the  Company's  common  stock.  As of December 31,  1999,  the
Company repurchased 1,070,700 shares of its previously  outstanding common stock
at a cost of $18.8 million.  From January 2, 2000 through February 29, 2000, the
Company repurchased an additional 963,284 shares of its outstanding common stock
at a cost of  $15.7  million.  The  Company  may  from  time-to-time  repurchase
additional common stock for various corporate purposes.

Dividends

        The Company resumed the payment of cash dividends on common stock in May
1996. The Company's board of directors reviews the Company's  dividend policy on
a continuing  basis.  The payment of future dividends will depend on a number of
factors,  including the extent to which cash flows will support  dividends,  the
availability of retained earnings,  the financial  circumstances and performance
of the Company,  the PRC's decisions on the Company's  various  regulatory cases
currently  pending,  the effect of  deregulating  generation  markets and market
economic  conditions  generally.  In addition,  the ability to recover  stranded
costs in deregulation,  future growth plans and the related capital requirements
and standard business  considerations  will also affect the Company's ability to
pay dividends.

Capital Structure

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

                                                       1999       1998
                                                       ----       ----

         Common Equity..............................   46.7%      45.4%
         Preferred Stock............................    0.7        0.7
         Long-term Debt.............................   52.6       53.9
                                                      -----      -----
            Total Capitalization*...................  100.0%     100.0%
                                                      =====      =====

        *Total  capitalization  does not include as debt the present value ($161
         million as of December 31, 1999) of the Company's  lease  obligations
         for PVNGS Units 1 and 2 and EIP.


                                       52
<PAGE>

                         OTHER ISSUES FACING THE COMPANY

THE RESTRUCTURING ACT AND THE FORMATION OF HOLDING COMPANY

        The Restructuring Act requires that assets and activities subject to the
PRC  jurisdiction,  primarily  electric and gas  distribution,  and transmission
assets and activities  (collectively,  the "Regulated  Business"),  be separated
from other competitive  business,  primarily electric generation and service and
certain  other  energy  services  (collectively,  "the  Deregulated  Competitive
Businesses").  Such  separation  is  required  to be  accomplished  through  the
creation  of at least two  separate  corporations.  The  Company  has decided to
accomplish the mandated separation by the formation of a holding company and the
transfer of the Regulated Businesses to a newly-created, wholly owned subsidiary
of the holding company,  subject to various  regulatory  approvals.  The holding
company structure is expressly  authorized by the Restructuring  Act.  Corporate
separation of the Regulated Business from the Deregulated Competitive Businesses
must be completed by January 1, 2001,  although  the date  may be extended by up
to one year by the PRC. Completion of corporate separation will require a number
of regulatory  approvals by, among  others,  the PRC and the Nuclear  Regulatory
Commission.

        Completion will also require shareholder  approval and a number of other
consents from  creditors  and lessors.  Completion  may also entail  significant
restructuring  activities  with  respect  to the  Company's  existing  liquidity
arrangements  and the Company's  publicly-held  senior  unsecured notes of which
$403.4  million  were  outstanding  as of  December  31,  1999.  Holders  of the
Company's  senior  unsecured  notes,  $135 million at 7.5% and $268.4 million at
7.1%, may be offered the  opportunity  to exchange their  securities for similar
senior unsecured notes of the newly created  regulated  business (see "Liquidity
and Capital Resources - Financing Activities" above).

Regulated Business

         The Regulated Business comprised  approximately  47.9% of the Company's
total assets and  contributed  approximately  39.6% of the  Company's  operating
revenues  and  approximately  61.1% of the  Company's  operating  income  before
interest charges in 1999.

Stranded Costs

         The  Restructuring  Act recognizes  that electric  utilities  should be
permitted a reasonable opportunity to recover an appropriate amount of the costs
incurred previously in providing electric service ("stranded  costs").  Stranded
costs  include  plant  decommissioning  costs,   regulatory  assets,  lease  and
lease-related costs recognized under cost-of-service regulation.  Utilities will
be allowed to  recover no less than 50% of such costs  through a  non-bypassable
charge on all  customer  bills for five years after  implementation  of customer
choice.  The PRC could authorize a utility to recover up to 100% of its stranded
costs if the PRC finds  that  recovery  of more than 50%:  (i) is in the  public
interest;  (ii) is necessary to maintain the  financial  integrity of the public
utility;  (iii) is necessary to continue adequate and reliable service; and (iv)
will not cause an increase in rates to residential  or small business  customers
during the transition period. While recoverable stranded costs will be collected
as part of the regulated business, it is anticipated that such collections would
be paid to the Company and be part of the revenues  available to the competitive
businesses   subsequent  to   restructuring.   However,   no  determination  and
quantification  of stranded  cost  recovery  has yet been made by the PRC.  Such
determination will have a material impact on the consolidated  financial results
and position of the Company.




                                       53
<PAGE>

Transition Cost Recovery

        Pursuant to the  Restructuring  Act,  utilities  will also be allowed to
recover in full any prudent and reasonable  costs incurred in implementing  full
open access ("transition costs"). The transition costs will be recovered through
2007 by means of a separate wires charge. The Company estimates that these costs
will be in excess of $50 million.  Transition costs include, but are not limited
to,  professional fees,  financing costs including  underwriting fees,  consents
relating  to the  transfer  to assets,  management  information  system  changes
including  billing  system  changes  and  public  and  customer   education  and
communications. Recoverable transition costs are currently being capitalized and
will be amortized over the recovery period to match related  revenues.  Recovery
of any  transition  costs,  which are not deemed  recoverable by the PRC, may be
vigorously  pursued  through all  remedies  available  to the  Company  with the
ultimate outcome uncertain. Costs not recoverable will be expensed when incurred
unless these costs are otherwise  permitted to be capitalized  under current and
future  accounting  rules. If the amount of  nonrecoverable  transition costs is
material,  the  resulting  charge to earnings may have a material  impact on the
consolidated financial results and position of the Company.

Deregulated Competitive Businesses

        The Deregulated  Competitive  Businesses  which would be retained by the
Company  include the  Company's  interests in generation  facilities,  including
PVNGS, Four Corners,  and SJGS,  together with the pollution control  facilities
which have been financed with pollution  control  revenue  bonds.  Approximately
$586 million in pollution  control  revenue bonds would remain as obligations of
the  generation  subsidiary,  as would certain other of the Company's  long-term
obligations.  The  Deregulated  Competitive  Businesses  would not be subject to
regulation by the PRC.  Under the Company's  restructuring  plan,  the Company's
bondholders  will  continue  to  hold  obligations  of  the  Company   following
restructuring.  Since the Restructuring Act requires  significant changes in the
assets and  businesses  of the Company,  the  bondholders  will be accepting the
risks involved in those changes.

        The Company will continue its Deregulated Competitive Business following
the  restructuring,  which will be subject to market  conditions.  Following the
separation  as required by the  Restructuring  Act, in support of its  wholesale
trading  operations,  the Company is targeting to double its generating capacity
and  triple its sales  volume.  Recently,  the  Company  formed a  non-regulated
subsidiary,   Avistar,  in  August  1999,  to  implement   competitive  business
strategies.  Avistar  provides  services in the areas of utility  management for
municipalities and other communities,  remote metering and development of energy
conservation and supply projects for federal government facilities.  The Company
does not  anticipate  an earnings  contribution  from  Avistar over the next few
years.

NRC Prefunding

        Pursuant  to NRC  rules  on  financial  assurance  requirements  for the
decommissioning  of nuclear  power plant,  the Company has a program for funding
its share of  decommissioning  costs for PVNGS through a sinking fund  mechanism
(see  PART  I  -  ITEM  2.  PROPERTIES  -  ELECTRIC  -  Nuclear  Plant  -  PVNGS
Decommissioning Funding"). The NRC rules on financial assurance became effective
on November  23,  1998.  The amended  rules  provide  that a licensee may use an
external  sinking fund as the  exclusive  financial  assurance  mechanism if the
licensee recovers estimated  decommissioning costs through cost of service rates
or  a  "non-bypassable  charge".  Other  mechanisms  are  prescribed,   such  as
prepayment,  surety methods,  insurance and other guarantees, to the extent that
the requirements for exclusive reliance on the fund mechanism are not met.

         The Restructuring  Act allows for the  recoverability of 50% up to 100%
of stranded costs including decommissioning costs (see "Stranded Costs"). If the
Company is unable to meet the  requirements of the NRC rules  permitting the use
of an external sinking fund because it is unable to recover all of its estimated
decommissioning  costs through a non-bypassable  charge, the Company may have to
pre-fund  or find a  similarly  capital  intensive  means to meet the NRC rules.
There can be no  assurance  that such an event  will not  negatively  affect the
funding of the Company's growth plans.

                                       54
<PAGE>

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

Competition

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

         The  Restructuring  Act  opens the  state's  electric  power  market to
customer  choice for  certain  customers  beginning  in 2001 and the  balance of
customers in 2002. As a result,  the Company may face competition from companies
with greater  financial and other resources.  There can be no assurance that the
Company will not face  competition in the future that would adversely affect its
results.

         It  is  the  current  intention  to  have  the  Company's   Deregulated
Competitive  Businesses engage primarily in energy-related  businesses that will
not be regulated by state or Federal  agencies that  currently  regulate  public
utilities (other than the FERC and NRC). These competitive businesses, including
the  generation  business,  will  encounter  competition  and other  factors not
previously  experienced  by the  Company,  and may have  different,  and perhaps
greater,  investment  risks than those  involved in the regulated  business that
will be engaged in by the Regulated Businesses. Specifically, the passage of the
Restructuring Act and deregulation in the electric utility industry generally is
likely to have an impact on the price and margins for  electric  generation  and
thus, the return on the investment in electric generation assets. In response to
competition and the need to gain economies of scale,  electricity producers will
need to control costs to maintain margins, profitability and cash flow that will
be adequate to support  investments in new technology  and  infrastructure.  The
Company will have to compete directly with independent power producers,  many of
whom will be larger in scale,  thus  creating a  competitive  advantage for such
producers due to scale  efficiencies.  The Company's  current five year business
plan includes a 300% increase in sales and through  doubling the construction or
acquisition of additional power generation  assets in its surrounding  region of
operations. Such growth will be dependent upon the Company's ability to generate
$400 to $600 million to fund the deregulated competitive expansion. There can be
no assurance that these  Deregulated  Competitive  Businesses,  particularly the
generation business, will be successful or, if unsuccessful,  that they will not
have a direct or indirect adverse effect on the Company.

IMPLEMENTATION OF NEW BILLING SYSTEM

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


                                       55
<PAGE>

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

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

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

       The following is a summary of the allowance for doubtful  accounts during
1999, 1998 and 1997:

                                                        1999     1998    1997
                                                      --------  ------- -------
                                                           (In thousands)
 Allowance for doubtful accounts beginning
   of year.........................................   $   836   $  783  $  709
 Bad debt accrual..................................    11,496    3,325   3,378
 Less:  Write off (adjustments) of
        uncollectible accounts ....................      (172)   3,272   3,304
                                                      --------  ------- -------
 Allowance for doubtful accounts, end of year .....   $12,504   $  836  $  783
                                                      ========  ======= =======

ELECTRIC RATE CASE

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


                                       56
<PAGE>

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

        On August 25, 1999, the PRC issued an order approving a settlement.  The
PRC  ordered  the  Company  to  reduce  its  electric  rates  by  $34.0  million
retroactive  to July 30,  1999.  In addition,  the order  includes a rate freeze
until retail  electric  competition is fully  implemented in New Mexico or until
January 1, 2003.  The  settlement  will reduce  annual  revenues by an estimated
$37.0  million  based on  expected  customer  growth  and will  reduce  electric
distribution operating revenues in the year 2000 by approximately $20 million.

        As part of the  settlement,  the Company  agreed that  certain  language
changes to the tariff KAFB  currently  takes service under be set for a separate
hearing before the PRC. Hearings on this issue have not yet been scheduled. KAFB
has not renewed its power  service  contract  with the Company  that  expired in
December 1999 (see ITEM 3. - "LEGAL  PROCEEDINGS - OTHER  PROCEEDINGS - Kirtland
Air Force Base ("KAFB") Contract").

EFFECTS OF CERTAIN PENDING EVENTS ON FUTURE REVENUES

        The Company's contract with SDG&E to provide  electricity will expire in
April of 2001.  SDG&E  has  notified  the  Company  that it will not  renew  its
contract.  The  Company  currently  estimates  that  the net  revenue  reduction
resulting from the expiration of the SDG&E  contract will be  approximately  $20
million annually. In addition, there is currently ongoing litigation between the
Company and SDG&E regarding prior years' contract pricing.

        On October 4, 1999, Western, filed a petition at the FERC requesting the
FERC to consider, on an expedited basis, ordering the Company to provide network
transmission  service to Western  under the Company's  Open Access  Transmission
Tariff on behalf of the DOE as contracting  agent for KAFB. The Company  intends
to litigate this matter vigorously.  The net revenue reduction to the Company if
the  Company  is  replaced  as the power  supplier  to KAFB is  estimated  to be
approximately $7.0 million annually.

        A further  discussion of these and other legal  proceedings can be found
in PART I, ITEM 3. - "LEGAL PROCEEDINGS" in this Annual Report on Form 10-K.

THE YEAR 2000 ISSUE

        The Company experienced no year 2000 failures of its electric generation
or its gas  and  electric  distribution  and  transmission  systems  during  the
critical year 2000 transition  period.  Further,  the Company has experienced no
failures  in any of  these  systems  in the  ensuing  period.  As a  result,  no
customers  experienced  a year 2000 related  disruption to their gas or electric
service.

        The Company anticipates that minor,  previously undetected,  programming
issues might surface during the year 2000.  These are not expected to impact the
Company's customers.

        During 1999, the Company expended $15.3 million on the Year 2000 Project
for a total  expenditure  of $20.7 million  through the end of 1999. The Company
expects to spend  approximately  $175  thousand  in 2000 on efforts to  finalize
project documentation and to file reports with various regulatory agencies.


                                       57
<PAGE>

COAL FUEL SUPPLY

        The coal  requirements for the 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 the SJGS until 2017.  The primary  sources of coal for current
operations are a mine adjacent to the SJGS and a mine located  approximately  25
miles  northeast  of the SJGS in the La Plata area of  northwestern  New Mexico.
Additional  coal  resources  will be  required.  The  Company  is  currently  in
discussions regarding alternatives.

       In 1997,  the Company was  notified by SJCC of certain  audit  exceptions
identified by the Federal  Minerals  Management  Service  ("MMS") for the period
1986  through  1997.  These  exceptions  pertain  to the  valuation  of coal for
purposes of calculating the Federal coal royalty. Primary issues include whether
coal processing and transportation costs should be included in the base value of
La Plata  coal for  royalty  determination.  Administrative  appeals  of the MMS
claims are pending.

       The Company was notified  during the fourth  quarter of 1998 that the MMS
agreed to a mediation of the claims. It is the Company's  understanding that the
mediation has not yet occurred.  The Company is unable to predict the outcome of
this matter and the Company's exposures have not yet been assessed.

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

FUEL, WATER AND GAS NECESSARY FOR GENERATION OF ELECTRICITY

        The Company's  generation mix for 1999 was 69.0% coal, 30.0% nuclear and
1.0% gas and oil. Due to locally  available  natural gas and oil  supplies,  the
utilization of locally available coal deposits and the generally abundant supply
of  nuclear  fuel,  the  Company  believes  that  adequate  sources  of fuel are
available for its generating stations (see "COAL FUEL SUPPLY" above).


                                       58
<PAGE>

        Water for Four Corners and SJGS is obtained from the San Juan River. BHP
holds rights to San Juan River water and has  committed a portion of such rights
to Four Corners  through the life of the project.  The Company and Tucson have a
contract with the USBR for consumption of 16,200 acre feet of water per year for
the SJGS, which contract  expires in 2005. In addition,  the Company was granted
the  authority to consume 8,000 acre feet of water per year under a state permit
that is held by BHP.  The Company is of the  opinion  that  sufficient  water is
under  contract  for  the  SJGS  through  2005.  Currently,  the  Company  is in
discussions  with the Jicarilla  Apache Tribe for a twenty-seven  year contract,
beginning in 2006,  for a replacement of the current USBR contract for 16,200 AF
of water.  The  Company  cannot  predict the  outcome of these  discussions  but
expects to obtain a replacement  water supply for the USBR contract that expires
in  2005.  Various  environmental  approvals  will  likely  be  required  for  a
replacement water supply. The Company is actively involved in the San Juan River
Recovery  Implementation Program to mitigate any concerns with the taking of the
negotiated  water  supply  from a river that  contains  endangered  species  and
critical  habitat.  As a result,  the Company  believes that adequate sources of
water are available for its generating stations.

        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.  The Company  believes that adequate sources of gas are
available for its distribution systems.

COMPLIANCE WITH ENVIRONMENTAL LAWS AND REGULATIONS

        The Company's  operations are subject to various federal,  state, local
and tribal  environmental laws and regulations,  including,  but not limited to,
those  governing  discharges into the air and water,  the storage,  handling and
disposal of solid and hazardous wastes,  the remediation of soil and groundwater
contaminated  by hazardous  substances  or wastes,  and the health and safety of
employees  particularly  as it relates to the  Company's  coal,  gas and nuclear
based electric  generation assets.  Compliance with environmental laws, stricter
interpretations  of or amendments  to such laws,  or more  vigorous  enforcement
policies  by  regulatory  agencies  may  require  material  expenditures  by the
Company.  The nature of the  Company's  current  and former  operations  and the
history of industrial  uses at some of its facilities  result in exposure to the
risk of  liabilities or claims with respect to  environmental  and worker health
and safety matters. In addition,  under certain environmental laws, a current or
previous  owner or operator of property may be jointly and severally  liable for
the costs of  investigation,  removal or remediation  of certain  substances on,
under, or in such property,  without regard to negligence or fault. The presence
of, or failure to remediate  properly,  such substances may adversely affect the
ability  to sell or rent such  property  or to borrow  using  such  property  as
collateral.  In  addition,  persons who  generate,  arrange for the  disposal or
treatment of, or dispose of,  hazardous  substances may be jointly and severally
liable for the costs of investigation,  remediation or removal of such hazardous
substances at or from the disposal or treatment facility,  regardless of whether
the facility is owned or operated by such person.  Responsible  parties also may
be  subject to common law  claims by third  parties  based on damages  and costs
resulting from environmental contamination emanating from a site.

                                       59
<PAGE>

Labor Union Negotiations

        The Company and the  International  Brotherhood  of  Electrical  Workers
("IBEW") Local Union 611 will enter into negotiations for a successor  agreement
during  the later  part of the first  quarter of 2000.  The  current  collective
bargaining  agreement,  which covers the 654  bargaining  unit  employees in the
Company's  regulated   operations,   expires  on  May  1,  2000.  The  Company's
negotiating team is currently preparing for the upcoming negotiations. While the
Company  believes that its relations  with its  employees  are  satisfactory,  a
dispute  between  the  Company and its  employees'  representative  could have a
material adverse effect on the Company.

Navajo Nation Tax Issues

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

NEW AND PROPOSED ACCOUNTING STANDARDS

        Decommissioning:  The Staff of the  Securities  and Exchange  Commission
("SEC")  has  questioned  certain of the  current  accounting  practices  of the
electric industry  regarding the recognition,  measurement and classification of
decommissioning costs for nuclear generating stations in financial statements of
electric  utilities.  In response to these questions,  the FASB has a project on
its agenda to review the  accounting  for closure and removal  costs,  including
decommissioning of nuclear power plants. If current electric industry accounting
practices for nuclear  power plant  decommissioning  are changed,  the estimated
cost for decommissioning could be recorded as a liability 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.

       EITF Issue 99-14,  Recognition of Impairment  Losses on Firmly  Committed
Executory Contracts:  The Emerging Issues Task Force ("EITF") has added an issue
to its agenda to address  impairment of leased assets. A significant  portion of
the Company's nuclear  generating assets are held under operating leases.  Based
on the  alternative  accounting  methods being explored by the EITF, the related
financial  impact of the future adoption of EITF Issue No. 99-14 should not have
a  material  adverse  effect on  results  of  operations.  However,  a  complete
evaluation  of the financial  impact from the future  adoption of EITF Issue No.
99-14 will be undeterminable until EITF deliberations are completed and stranded
cost recovery issues are resolved.


                                       60
<PAGE>

       Accounting for Derivative  Instruments and Hedging Activities,  SFAS 133:
SFAS 133  establishes  accounting and reporting  standards  requiring that every
derivative  instrument  be recorded  in the balance  sheet as either an asset or
liability  measured at its fair value.  The Statement also requires that changes
in the  derivatives'  fair value be  recognized  currently  in  earnings  unless
specific hedge accounting  criteria are met.  Special  accounting for qualifying
hedges  allows  derivative  gains and  losses to offset  related  results on the
hedged item in the income  statement,  and requires that a company must formally
document,  designate,  and assess the effectiveness of transactions that receive
hedge accounting. The Company is in the process of reviewing and identifying all
financial  instruments  currently existing in the Company in compliance with the
provisions  of SFAS 133.  It is likely  that the  adoption  of SFAS 133 will add
volatility  to the  Company's  operating  results  and/or  asset  and  liability
valuations  reflecting  the impact of  mark-to-market  accounting  for commodity
contracts.  In June 1999,  Financial  Accounting Standards Board ("FASB") issued
SFAS 137 to amend the effective  date for the  compliance of SFAS 133 to January
1, 2001.

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. Words
such as "estimates," "expects,"  "anticipates," "plans," "believes," "projects,"
and similar expressions identify forward-looking  statements.  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  costs;  (iv) the  inability  of the  Company to  successfully  compete
outside its traditional  regulated  market;  (v) regional  economic  conditions,
which  could  affect  customer  growth;  (vi)  adverse  impacts  resulting  from
environmental  regulations;  (vii) loss of  favorable  fuel supply  contracts or
inability to negotiate new fuel supply contracts; (viii) failure to obtain water
rights  and  rights-of-way;  (ix)  operational  and  environmental  problems  at
generating  stations;  (x) the cost of debt and  equity  capital;  (xi)  weather
conditions; and (xii) technical developments in the utility industry.


                                       61
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

        The Company uses derivative  financial  instruments in limited instances
to manage risk as it relates to changes in natural gas and  electric  prices and
adverse market changes for investments held by the Company's various trusts. The
Company  is  exposed  to  credit  losses  in the  event  of  non-performance  or
non-payment by  counterparties.  The Company uses a credit management process to
assess and monitor the financial conditions of counterparties.  The Company also
uses,  on a  limited  basis,  certain  derivative  instruments  for  bulk  power
electricity  trading  purposes in order to take  advantage  of  favorable  price
movements  and  market  timing   activities  in  the  wholesale  power  markets.
Information  about  market  risk  is set  forth  in Note 5 to the  Notes  to the
Consolidated  Financial Statements and incorporated by reference.  The following
additional information is provided.

        The  Company  uses  value at risk  ("VAR")  to  quantify  the  potential
exposure to market movement on its open contracts and excess generating  assets.
The VAR is calculated  utilizing  the  variance/co-variance  methodology  over a
three day period within a 99% confidence level.

        The  Company's  VAR as of December  31, 1999 from its  electric  trading
contracts and gas purchase contracts was $2.4 million.

        The VAR  represents  an estimate of the  reasonably  possible net losses
that would be recognized on the portfolio of derivatives  assuming  hypothetical
movements in future market rates,  and is not  necessarily  indicative of actual
results that may occur,  since  actual  future gains and losses will differ from
those estimated. Actual gains and losses may differ from estimates due to actual
fluctuations in market rates,  operating  exposures,  and the timing thereof, as
well as changes to the portfolio of derivatives during the year.


                                       62
<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                      INDEX

                                                                          Page
                                                                          ----

Management's Responsibility for Financial Statements ..................    F-1
Report of Independent Public Accountants ..............................    F-2
Financial Statements:
   Consolidated Statements of Earnings ................................    F-3
   Consolidated Balance Sheets ........................................    F-4
   Consolidated Statements of Cash Flows ..............................    F-6
   Consolidated Statements of Capitalization ..........................    F-7
   Notes to Consolidated Financial Statements .........................    F-8
Supplementary Data:
   Quarterly Operating Results ........................................   F-42
   Comparative Operating Statistics ...................................   F-43


              MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS

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

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

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

                                       F-1

<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the accompanying  consolidated  balance sheets and statements of
capitalization   of  Public  Service   Company  of  New  Mexico  (a  New  Mexico
Corporation)  and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, comprehensive income, retained earnings and
cash flows for each of the three years in the period  ended  December  31, 1999.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of Public Service Company of New
Mexico and subsidiaries as of December 31, 1999 and 1998, and the results of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.

                                      ARTHUR ANDERSEN LLP

Albuquerque, New Mexico
    January 26, 2000

                                      F-2
<PAGE>

<TABLE>
<CAPTION>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF EARNINGS

                                                               -----------------------------------
                                                                     Year Ended December 31,
                                                               -----------------------------------
                                                                 1999          1998       1997
                                                               ----------   ----------  ----------
                                                             (In thousands, except per share amounts)
<S>                                                            <C>          <C>          <C>
Operating Revenues: (note 1, 7)
  Electric...................................................  $ 911,977    $ 835,204    $722,438
  Gas........................................................    236,711      255,975     294,769
  Unregulated businesses.....................................      8,855        1,266       3,314
                                                               ----------   ----------  ----------
     Total operating revenues................................  1,157,543    1,092,445   1,020,521
                                                               ----------   ----------  ----------
Operating Expenses:
  Cost of energy sold........................................    531,952      449,426     409,717
  Administrative and general.................................    153,709      135,727     124,591
  Energy production costs....................................    140,784      149,747     138,245
  Depreciation and amortization..............................     92,661       86,141      82,694
  Transmission and distribution costs........................     59,264       56,457      56,983
  Taxes, other than income taxes.............................     34,084       37,992      36,803
  Income taxes (note 7)......................................     25,010       41,306      41,941
                                                               ----------   ----------  ----------
     Total operating expenses................................  1,037,464      956,796     890,974
                                                               ----------   ----------  ----------
     Operating income........................................    120,079      135,649     129,547
                                                               ----------   ----------  ----------
Other Income and Deductions:
  Other......................................................     47,500       37,672      21,548
  Income tax expense  (note 7)...............................    (17,298)     (14,985)     (8,384)
                                                               ----------   ----------  ----------
     Net other income and deductions.........................     30,202       22,687      13,164
                                                               ----------   ----------  ----------
     Income before interest charges..........................    150,281      158,336     142,711
                                                               ----------   ----------  ----------

Interest Charges:
  Interest on long-term debt (note 3)........................     65,899       50,929      46,670
  Other interest charges.....................................      4,768       12,288       9,544
                                                               ----------   ----------  ----------
     Net interest charges....................................     70,667       63,217      56,214
                                                               ----------   ----------  ----------
Net Earnings from Continuing Operations......................     79,614       95,119      86,497

Discontinued Operations, Net of Tax (note 13)................          -      (12,437)     (5,502)
Cumulative Effect of a Change in Accounting..................
   Principle, Net of Tax (note 14)...........................      3,541            -           -
                                                               ----------   ----------  ----------

Net Earnings.................................................     83,155       82,682      80,995
Preferred Stock Dividend Requirements........................        586          586         586
                                                               ----------   ----------  ----------
Net Earnings Applicable to Common Stock......................  $  82,569     $ 82,096    $ 80,409
                                                               ==========   ==========  ==========

Net Earnings per Share of Common Stock (Basic) (note 6)......   $   2.01     $   1.97     $  1.92
                                                               ==========   ==========  ==========

Net Earnings per Share of Common Stock (Diluted) (note 6)....   $   2.01     $   1.95     $  1.91
                                                               ==========   ==========  ==========

Dividends Paid per Share of Common Stock.....................   $   0.80     $   0.77     $  0.63
                                                               ==========   ==========  ==========


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

</TABLE>


                                      F-3
<PAGE>
<TABLE>
<CAPTION>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

                                                                                                 As of December 31,
                                                                                                1999           1998
                                                                                              -----------  -----------
                                                                                                   (In thousands)
<S>                                                                                           <C>          <C>
Utility Plant, at original cost except PVNGS:  (notes 10, 11)
  Electric plant in service.................................................................  $1,976,009   $1,966,277
  Gas plant in service......................................................................     483,819      467,758
  Common plant in service and plant held for future use.....................................      69,273       63,796
                                                                                              -----------  -----------
                                                                                               2,529,101    2,497,831
  Less accumulated depreciation and amortization............................................   1,077,576      998,175
                                                                                              -----------  -----------
                                                                                               1,451,525    1,499,656
  Construction work in progress.............................................................     104,934       66,677
  Nuclear fuel, net of accumulated amortization of $20,832 and $21,898......................      25,923       27,426
                                                                                              -----------  -----------
     Net utility plant......................................................................   1,582,382    1,593,759
                                                                                              -----------  -----------
Other Property and Investments:
  Other investments (notes 5, 12)...........................................................     483,008      518,959
  Non-utility property, net of accumulated depreciation of $1,261 and $1,129................       4,439        4,875
                                                                                              -----------  -----------
     Total other property and investments...................................................     487,447      523,834
                                                                                              -----------  -----------

Current Assets:
  Cash and cash equivalents.................................................................     120,399       61,280
  Accounts receivables, net of allowance for uncollectible accounts of $12,504 and $836.....     147,746      130,809
  Other receivables                                                                               68,911       59,745
  Inventories...............................................................................      39,992       35,674
  Regulatory assets (note 2)................................................................      24,056       15,618
  Other current assets......................................................................       4,934        4,666
                                                                                              -----------  -----------
     Total current assets...................................................................     406,038      307,792
                                                                                              -----------  -----------
Deferred charges:
  Regulatory assets (note 2)................................................................     195,898      186,383
  Prepaid pension cost (note 8).............................................................      16,126       16,714
  Other deferred charges....................................................................      35,377       40,121
                                                                                              -----------  -----------
     Total deferred charges.................................................................     247,401      243,218
                                                                                              -----------  -----------
                                                                                              $2,723,268   $2,668,603
                                                                                              ===========  ===========

</TABLE>

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

                                      F-4
<PAGE>

<TABLE>
<CAPTION>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                         CAPITALIZATION AND LIABILIITES

                                                                                      As of December 31,
                                                                                  --------------------------
                                                                                      1999          1998
                                                                                  ------------   -----------
                                                                                          (In thousands)
<S>                                                                                <C>            <C>
Capitalization: (note 3)
  Common stock equity:
    Common stock outstanding--40,703 and 41,774 shares..........................   $  203,517     $ 208,870
    Additional paid-in capital..................................................      453,393       465,386
    Accumulated other comprehensive income, net of tax (note 3).................        2,352         1,127
    Retained earnings...........................................................      227,829       186,220
                                                                                  ------------   -----------
       Total common stock equity................................................      887,091       861,603
  Minority interest.............................................................       12,771        13,405
  Cumulative preferred stock without mandatory redemption requirements..........       12,800        12,800
  Long-term debt, less current maturities (note 3)..............................      988,489     1,008,614
                                                                                  ------------   -----------

     Total capitalization.......................................................    1,901,151     1,896,422
                                                                                  ------------   -----------
Current Liabilities:
  Short-term debt...............................................................           -         26,620
  Accounts payable..............................................................      150,645       113,975
  Accrued interest and taxes....................................................       34,237        34,289
  Other current liabilities.....................................................       54,137        45,169
                                                                                 ------------   -----------
     Total current liabilities..................................................      239,019       220,053
                                                                                 ------------   -----------
Deferred Credits:
  Accumulated deferred income taxes (note 7)....................................      153,335       129,990
  Accumulated deferred investment tax credits (note 7)..........................       50,996        54,404
  Regulatory liabilities (note 2) ..............................................       88,497        89,559
  Regulatory liabilities related to accumulated deferred income tax (note 2) ...       14,935        14,287
  Accrued postretirement benefits cost (note 8).................................        8,945         4,675
  Other deferred credits (note 12)..............................................      266,390       259,213
                                                                                  ------------   -----------
     Total deferred credits.....................................................      583,098       552,128
                                                                                  ------------   -----------
Commitments and Contingencies (note 11).........................................            -             -
                                                                                  ------------   -----------
                                                                                   $2,723,268    $2,668,603
                                                                                  ============   ===========

</TABLE>

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

                                      F-5
<PAGE>


<TABLE>
<CAPTION>

                      PUBLIC SERVICE COMPANY OF NEW MEXICO

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                    Year Ended December 31,
                                                                              ---------------------------------
                                                                                1999         1998       1997
                                                                              ----------  ----------  ---------
                                                                                          (In thousands)
<S>                                                                            <C>         <C>        <C>
Cash Flows From Operating Activities:
  Net earnings.............................................................    $ 83,155    $ 82,682   $ 80,995
  Adjustments to reconcile net earnings to net cash flows..................
    from operating activities:
      Depreciation and amortization........................................     103,891      98,154     94,924
      Gain on cumulative effect of a change in
         Accounting principle (note 14)....................................      (5,862)          -          -
      Other, net...........................................................      27,623      27,462     20,025
      Changes in certain assets and liabilities:
        Accounts receivables...............................................     (16,937)      1,302    (14,038)
        Other assets ......................................................     (20,189)     31,066      3,946
        Accounts payable...................................................      36,670     (40,490)    23,808
        Other liabilities..................................................       6,147      10,812      3,462
                                                                              ----------  ----------  ---------
              Net cash flows provided from operating activities............     214,498     210,988    213,122
                                                                              ----------  ----------  ---------
Cash Flows From Investing Activities:
  Utility plant additions..................................................     (95,298)   (128,784)  (128,371)
  Return (purchase) of PVNGS lease obligation bonds........................      16,903    (204,364)   (23,882)
  Other investing..........................................................      22,509      (7,844)   (29,814)
                                                                              ----------  ----------  ---------
              Net cash flows used in investing activities..................     (55,886)   (340,992)  (182,067)
                                                                              ----------  ----------  ---------
Cash Flows From Financing Activities:
  Borrowings (note 3)......................................................      11,500     896,348     27,600
  Repayments (note 3)......................................................     (58,200)   (694,651)   (28,870)
  Exercise of employee stock options (note 9)..............................           -      (3,687)    (1,285)
  Common stock repurchase (note 3).........................................     (18,799)          -          -
  Dividends paid...........................................................     (33,359)    (32,789)   (26,864)
  Other Financing..........................................................        (635)      7,868     (3,693)
                                                                              ----------  ----------  ---------
              Net cash flows (used) generated by financing activities......     (99,493)    173,089    (33,112)
                                                                              ----------  ----------  ---------
Increase (Decrease) in Cash and Cash Equivalents...........................      59,119      43,085     (2,057)
Beginning of Year..........................................................      61,280      18,195     20,252
                                                                              ----------  ----------  ---------
End of Year................................................................   $ 120,399    $ 61,280   $ 18,195
                                                                              ==========  ==========  =========
Supplemental cash flow disclosures:
  Interest paid............................................................   $  67,770    $ 50,109   $ 57,302
                                                                              ==========  ==========  =========
  Income taxes paid, net of refunds........................................   $  36,575    $ 49,048   $ 20,175
                                                                              ==========  ==========  =========
  Acquired DOE pipeline in exchange for transportation services............   $   3,100           -          -
                                                                              ==========  ==========  =========

</TABLE>

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

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

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF CAPITALIZATION

                                                                                    December 31,
                                                                                1999           1998
                                                                             -----------   -----------
                                                                                   (In thousands)
<S>                                                                          <C>           <C>
Common Stock Equity: (note 3)
    Common Stock, par value $5 per share..................................   $  203,517    $  208,870
    Additional paid-in capital............................................      453,393       465,386
    Accumulated other comprehensive income, net of tax                            2,352         1,127
    Retained earnings.....................................................      227,829       186,220
                                                                             -----------   -----------
        Total common stock equity.........................................      887,091       861,603
                                                                             -----------   -----------
Minority Interest.........................................................       12,771        13,405
                                                                             -----------   -----------
Cumulative Preferred Stock: (note 3)
    Without mandatory redemption requirements:
        1965 Series, 4.58% with a stated value of $100.00 and a
         current redemption price of $102.00.  Outstanding shares
         at December 31, 1999 were 128,000................................       12,800        12,800
                                                                             -----------   -----------
Long-Term Debt: (note 3)
Issue and Final Maturity
    First Mortgage Bonds, Pollution Control Revenue Bonds:
        5.7%  due  2016...................................................       65,000        65,000
      6.375%  due  2022...................................................       46,000        46,000
                                                                             -----------   -----------
        Total First Mortgage Bonds                                              111,000       111,000
                                                                             -----------   -----------
     Senior Unsecured Notes, Pollution Control Revenue Bonds:
       6.30%    due  2016.................................................       77,045        77,045
       5.75%    due  2022.................................................       37,300        37,300
       5.80%    due  2022.................................................      100,000       100,000
       6.375%   due  2022.................................................       90,000        90,000
       6.375%   due  2023.................................................       36,000        36,000
       6.40%    due  2023.................................................      100,000       100,000
       6.30%    due  2026.................................................       23,000        23,000
       6.60%    due  2029.................................................       11,500             -
                                                                             -----------   -----------
         Total Senior Unsecured Notes, Pollution Control Revenue Bonds....      474,845       463,345
                                                                             -----------   -----------
       Senior Unsecured Notes:
          7.10%  due  2005................................................      268,420       300,000
          7.50%  due  2018................................................      135,000       135,000
     Other, including unamortized premium and (discounted), net...........        (776)         (731)
                                                                             -----------   -----------
             Total long-term debt.........................................      988,489     1,008,614
                                                                             -----------   -----------
Total Capitalization......................................................   $1,901,151    $1,896,422
                                                                             ===========   ===========
</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, 1999, 1998 and 1997

Summary of Significant Accounting Policies

Accounting Principles

        The Company  prepares its financial  statements  in accordance  with the
uniform  system  of  accounts   prescribed  by  the  Federal  Energy  Regulatory
Commission   ("FERC")  and  the  National   Association  of  Regulatory  Utility
Commissioners,  and  adopted  by the New  Mexico  Public  Regulation  Commission
("PRC"),  the successor of the New Mexico Public Utility  Commission  ("NMPUC"),
effective January 1, 1999.

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

       To  the  extent  that  the  Company  concludes  that  the  recovery  of a
regulatory asset is no longer probable due to regulatory treatment,  the effects
of competition or other factors,  the amount would be recorded as a charge to in
earnings as recovery is no longer  probable.  The Company has  discontinued  the
application of SFAS 71 as of December 31, 1999,  for the  generation  portion of
its  business  effective  with the  passage  of the  Electric  Utility  Industry
Restructuring  Act of 1999  ("Restructuring  Act") in accordance  with Financial
Accounting Standards No. 101, "Accounting for the Discontinuation of Application
of FASB  Statement No. 71". The Company  evaluated its  regulatory  assets under
Financial  Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of
Long-Lived  Assets and for Long-Lived  Assets to be Disposed of" ("FAS 121") and
determined no impairment exists. The Company believes that it will recover costs
associated  with  stranded  assets  including  asset  closure  costs  through  a
non-bypassable  charge as  permitted  by the  Restructuring  Act. See Note 2 for
additional discussion.

Principles of Consolidation

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

Financial Statement Preparation and Presentation

       The  preparation  of financial  statements in conformity  with  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.



                                      F-8
<PAGE>



              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

Summary of Significant Accounting Policies (Continued)

Utility Plant

        Utility  plant,  with the  exception  of Palo Verde  Nuclear  Generating
Station  ("PVNGS") Unit 3 and the Company's owned interests in PVNGS Units 1 and
2, is stated at original cost, which includes capitalized  payroll-related costs
such as taxes,  pension and other fringe benefits,  administrative  costs and an
allowance  for funds used during  construction.  Pursuant to a rate  stipulation
dated  October  1993,  the Company  did not  capitalize  amounts  relating to an
allowance  for funds used during  construction  in 1999,  1998 or 1997.  Utility
plant includes certain electric assets not subject to regulation.

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

Depreciation and Amortization

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

                                                   1999       1998      1997
                                                   ----       ----      ----

       Electric plant ...........................  3.38%      3.32%     3.33%
       Gas plant ................................  3.37%      3.06%     3.23%
       Common plant .............................  7.73%      7.34%     7.60%

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

Nuclear Decommissioning

        The   Company   accounts   for  nuclear   decommissioning   costs  on  a
straight-line  basis over the respective license period.  Such amounts are based
on the future value of expenditures estimated to be required to decommission the
plant.


                                      F-9
<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

Summary of Significant Accounting Policies (Continued)

Recoverable Fuel Costs

       The Company's  fuel and purchased  power costs for its firm  requirements
wholesale  customers  that are  above  the  levels  included  in base  rates are
recoverable  under a fuel and purchased  power cost  adjustment  approved by the
FERC.  Such  costs are  deferred  until the  period in which  they are billed or
credited to customers.  The  Company's gas purchase  costs that are above levels
included in base rates are  recoverable  under similar  Purchased Gas Adjustment
Clause administered by the PRC. For gas, the excess or deficiency is accumulated
for refund or  surcharge to customers  on an annual  basis.  Future  recovery of
these costs is subject to approval by the PRC.

Amortization of Debt Acquisition Costs

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

Stock Options

       The  Company  continues  to apply  Accounting  Principles  Board  ("APB")
Opinion  No.  25,  Accounting  for  Stock  Issued  to  Employees,   and  related
interpretations  in accounting for its plan.  Accordingly,  no compensation cost
has been recognized for this plan.

Income Taxes

       The  Company  reports  income tax  expense in  accordance  with SFAS 109,
Accounting  for Income Taxes.  SFAS 109 requires that deferred  income taxes for
temporary  differences  between  financial  and income tax reporting be recorded
using the liability method. Therefore,  deferred income taxes are computed using
the statutory  tax rates  scheduled to be in effect when  temporary  differences
reverse.  Current  PRC  jurisdictional  rates  include  the tax  effects  of the
majority of these temporary differences  (normalization).  Recovery of reversing
temporary differences  previously accounted for under the flow-through method is
also  included in rates  charged to customers.  For  regulated  operations,  any
changes in tax rates  applied to  accumulated  deferred  income taxes may not be
immediately  recognized  because of  ratemaking  and tax  accounting  provisions
required by the Internal  Revenue Code.  Items accorded  flow-through  treatment
under PRC orders,  deferred  income taxes and the future  ratemaking  effects of
such taxes, as well as  corresponding  regulatory  assets and  liabilities,  are
recorded in the financial statements.



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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

Summary of Significant Accounting Policies (Continued)

Asset Impairment

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

Financial Instruments

       The Company  periodically  enters into energy  trading  contracts to take
advantage  of market  opportunities  associated  with the  purchase  and sale of
electricity.  Such contracts are marked-to-market  each period end. In addition,
the Company  protected  its  decommissioning  and retiree  trust assets  against
market price  volatility  by purchasing  financial  put and call options.  These
instruments  are  also  marked-to-market  each  period  end.  The  Company  also
periodically  hedges natural gas purchases to limit commodity price  volatility.
Unrealized gains and losses from natural gas-related swaps,  futures and forward
contracts  are  deferred  and  recognized  as the  natural  gas is  sold  and is
recovered through gas rates charged to customers (see Notes 5 and 14).

Accounting  for  Contracts  Involved  in  Energy  Trading  and  Risk  Management
Activities

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

Change in Presentation

       Certain prior year amounts have been  reclassified to conform to the 1999
financial statement presentation.



                                      F-11
<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

(1)    Nature of Business and Segment Information

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

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

        As it currently operates,  the Company's principal business segments are
electric  ("Electric") and gas ("Gas")  operations.  Electric  consists of three
major   business  lines  that  include  the  Electric   Service   Business  Unit
("Distribution"),   Transmission  Service  Business  Unit  ("Transmission")  and
Generation Business Unit ("Generation").

ELECTRIC OPERATIONS

        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 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 and Santa Fe and certain
other areas of New Mexico. As of December 31, 1999, approximately 361,000 retail
electric  customers were served by the Company,  the largest of which  accounted
for  approximately  4.7% of the Company's total retail electric revenues for the
year ended December 31, 1999.


                                      F-12
<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997


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

        The Company has  ownership  interests in certain  generating  facilities
located in New Mexico, including the Four Corners Power Plant, a coal fired unit
("Four Corners"),  and San Juan Generating  Station, a coal fired unit ("SJGS").
In addition,  the Company has ownership and leasehold interests in PVNGS located
in Arizona.  These  generation  assets are used to supply  retail and  wholesale
customers.  The  Company  also owns  Reeves  Station,  a gas and oil fired  unit
("Reeves")  and Las Vegas  Generating  Station,  a gas and oil fired  unit ("Las
Vegas") that are used solely for reliability purposes or to generate electricity
for the wholesale  market during peak demand periods in the Company's  wholesale
power markets.  As of December 31, 1999,  the total net  generation  capacity of
facilities  owned or  leased  by the  Company  was  1,506  MW.  In  addition  to
generation capacity, the Company purchases power in the open market. The Company
is also interconnected  with various utilities for economy  interchanges and the
mutual  assistance in emergencies.  The Company has been actively trading in the
wholesale  power  market  and has  entered  into  and  anticipates  that it will
continue to enter into power  purchase  agreements  to  accommodate  its trading
activity.

GAS OPERATIONS

        The Company's  gas operating  division,  Public  Service  Company of New
Mexico Gas Services,  as division of the Company ("PNMGS"),  distributes natural
gas to most of the major  communities in New Mexico,  including  Albuquerque and
Santa Fe,  serving  approximately  426,000  customers  as of December  31, 1999.
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.  Additionally,  PNMGS
makes  occasional  gas  sales to  off-system  customers.  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.


                                      F-13
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997


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

        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 El Paso  Natural Gas Company 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.

UNREGULATED

       The Company's wholly-owned subsidiary, Avistar, was formed in August 1999
as a New Mexico  corporation  and is currently  engaged in certain  unregulated,
non-utility businesses, including energy and utility-related services previously
operated by the Company. The PRC authorized the Company to invest $50 million in
equity in Avistar and to enter into a reciprocal  loan  agreement  for up to $30
million.  The Company has currently invested $25 million in Avistar. In February
2000,  Avistar  invested $3 million in AMDAX.com,  a start-up company which will
provide an on line  auction  service to bring  together  electricity  buyers and
sellers in the  deregulated  electric  power  market.  Avistar also operates and
manages the City of Santa Fe's water system.

RISKS AND UNCERTAINTIES

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



                                      F-14
<PAGE>
<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

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

     Summarized  financial  information by business  segment for 1999,  1998 and
1997 is as follows:

<TABLE>
<CAPTION>
                                                          Electric
                                      -----------------------------------------------------
                                      Distribution   Transmission   Generation     Total      Gas    Unregulated  Consolidated
                                      ------------   ------------   ----------  ----------- -------- -----------  ------------
                                                                           (In thousands)
<S>                                     <C>          <C>          <C>            <C>        <C>         <C>        <C>
1999:
Operating revenues:
   External customers.................. $ 525,348    $  15,520    $  371,109     $ 911,977  $ 236,711   $ 8,855    $1,157,543
   Intersegment revenues...............         -       29,801       318,872       348,673          -         -       348,673
Depreciation and amortization..........    23,564        8,373        40,949        72,886     19,775                  92,661
Interest income........................    13,731        4,569        20,681        38,981      9,093     6,095        54,169
Net interest charges...................    21,510        7,515        26,341        55,366     16,353    (1,052)       70,667
Income tax expense (benefit) from
  Continuing operations................    22,406        2,745        17,904        43,055      3,211    (3,958)       42,308
Operating income.......................    48,796        9,454        51,275       109,525     15,135    (4,581)      120,079
Cumulative effect of a change in
  Accounting principle, net of tax.....         -            -         3,541         3,541          -         -         3,541
Segment net income (loss)..............    34,939        4,615        41,644        81,198      4,171    (2,214)       83,155

Total assets...........................   593,485      207,132     1,394,283     2,194,900    502,838    25,530     2,723,268
Gross property additions...............    30,585       12,489        24,426        67,500     27,798         -        95,298

1998:
Operating revenues:
   External customers.................. $ 539,972     $ 15,596     $ 279,636     $ 835,204  $ 255,975   $ 1,266    $1,092,445
   Intersegment revenues...............         -       29,091       362,722       391,813          -         -       391,813
Depreciation and amortization..........    23,396        8,527        38,292        70,215     15,863        63        86,141
Interest income........................     9,200        4,286        15,001        28,487      6,130       424        35,041
Net interest charges...................    16,057        7,547        26,179        49,783     13,784      (350)       63,217
Income tax expense (benefit) from
  Continuing operations................    15,160        4,165        33,804        53,129      7,754    (4,592)       56,291
Operating income.......................    30,895       11,868        78,750       121,513     20,099    (5,963)      135,649
Discontinued operations, net of tax....         -            -             -             -          -   (12,437)      (12,437)
Segment net income (loss)..............    22,317        6,828        61,949        91,094     11,056   (19,468)       82,682

Total assets...........................   587,835      198,718     1,410,818     2,197,371    447,074    24,158     2,668,603
Gross property additions...............    50,399        9,156        30,969        90,524     38,260         -       128,784

</TABLE>


                                      F-15
<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

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

<TABLE>
<CAPTION>
                                                          Electric
                                      -----------------------------------------------------
                                      Distribution   Transmission   Generation     Total        Gas    Unregulated  Consolidated
                                      ------------   ------------   ----------  -----------  --------  -----------  ------------
                                                                           (In thousands)
<S>                                     <C>                <C>    <C>           <C>          <C>         <C>          <C>
1997:
Operating revenues:
   External customers.................. $522,835           -      $ 199,603     $ 722,438    $294,769    $ 3,314      $1,020,521
   Intersegment revenues...............                    -        370,019       370,019           -          -         370,019
Depreciation and amortization..........   21,754           -         46,335        68,089      14,587         18          82,694
Interest income........................    6,715           -         12,714        19,429       4,313         34          23,776
Net interest charges...................   15,900           -         27,613        43,513      12,701          -          56,214
Income tax expense (benefit) from
  Continuing operations................   15,924           -         26,963        42,887      10,169    (2,731)          50,325
Operating income.......................   37,296           -         72,175       109,471      23,444    (3,368)         129,547
Discontinued operations, net of tax....        -           -              -             -           -    (5,502)         (5,502)
Segment net income (loss)..............   24,496           -         51,260        75,756      14,602    (9,363)          80,995

Total assets...........................  612,136           -      1,257,767     1,869,903     482,206     55,301       2,407,410
Gross property additions...............   45,302           -         51,661        96,963      31,408          -         128,371

</TABLE>

       The unregulated segment includes Avistar and certain corporate activities
which are not material.

       The Transmission  Service Business Unit was established in 1998. Prior to
1998,  it was  combined  with  the  Bulk  Power  Business  Unit.  Prior  periods
information for the Transmission Service Business Unit is not available.

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



                                      F-16
<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

(2)  Regulatory Assets and Liabilities

        The Company is subject to the  provisions  of SFAS 71,  with  respect to
operations  regulated by the PRC.  Regulatory  assets represent  probable future
revenue to the Company  associated  with  certain  costs which will be recovered
from customers through the ratemaking process.  Regulatory liabilities represent
probable  future  reductions in revenues  associated with amounts that are to be
credited to customers  through the  ratemaking  process.  Regulatory  assets and
liabilities  reflected  in the  Consolidated  Balance  Sheets as of December 31,
relate to the following:

                                                          1999         1998
                                                          ----         ----
                                                            (In thousands)
  Assets:
  Current:
       PGAC ........................................... $ 19,310     $  5,294
       Gas Take-or-Pay Costs ..........................    4,746       10,324
                                                        --------     --------
          Subtotal ....................................   24,056       15,618
                                                        --------     --------
  Deferred:
       Deferred Income Taxes ..........................   35,713       35,564
       Loss on Reacquired Debt ........................    8,133        8,499
       Gas Imputed Revenues ...........................    7,290        6,726
       Gas Reservation Fees ...........................    7,029        7,029
       Deferred Customer Expense on Gas Assets Sale ...    6,468        5,260
       Gas Retirees' Health Care Costs ................    3,264        4,804
       Proposed Transmission Line Costs ...............    2,432        2,660
       Gas Rate Case Costs ............................    1,571        1,571
       Other ..........................................      331          471
                                                        --------     --------
          Subtotal  ...................................   72,731       72,584
                                                        --------     --------
       Stranded and Transition Assets..................  123,167      113,799
                                                        --------     --------
          Total Assets.................................  219,454      202,001
                                                        --------     --------
  Liabilities:
  Deferred:
       Deferred Income Taxes ..........................  (31,880)     (49,971)
       Gas Regulatory Reserve .........................  (20,830)     (21,308)
       Customer Gain on Gas Assets Sale ...............   (7,226)      (7,226)
       DOE Line Acquisition............................   (3,083)           -
       Gain on Reacquired Debt ........................     (708)        (484)
       Other...........................................     (607)        (774)
                                                        --------     --------
          Subtotal.....................................  (79,269)     (70,763)
                                                        --------     --------
       Stranded and Transition Liabilities.............  (24,163)     (24,083)
                                                        --------     --------
          Total Liabilities............................ (103,432)    (103,846)
                                                        --------     --------
          Net Regulatory Assets ....................... $116,022     $ 98,155
                                                        ========     ========



                                      F-17
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

(2)   Regulatory Assets and Liabilities (Continued)

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

        In 1999,  the State of New Mexico  enacted  the  Restructuring  Act that
provides guidelines to deregulated power generation activities in New Mexico and
opens the state's power markets to customer  choice  beginning as early as 2001.
The Restructuring  Act recognizes that electric  utilities should be permitted a
reasonable  opportunity to recover an  appropriate  amount of the costs incurred
previously in providing  electric  service  ("stranded  costs").  Stranded costs
include plant decommissioning costs,  regulatory assets, lease and lease-related
costs recognized under cost-of-service  regulation. As of December 31, 1999, the
Company  discontinued  the use of the  provisions of SFAS No. 71 for  generation
activities  due to the  passage  of the  Restructuring  Act.  Utilities  will be
allowed  to  recover  no less than 50% of such  costs  through a  non-bypassable
charge on all  customer  bills for five years after  implementation  of customer
choice.  The PRC could authorize a utility to recover up to 100% of its stranded
costs if the PRC finds  that  recovery  of more than 50%:  (i) is in the  public
interest;  (ii) is necessary to maintain the  financial  integrity of the public
utility;  (iii) is necessary to continue adequate and reliable service; and (iv)
will not cause an increase in rates to residential  or small business  customers
during the transition period. The Restructuring Act also allows for the recovery
of  decommissioning  costs by means of a  separate  wires  charge.  The  Company
expects  to  recover  its  regulatory  assets  associated  with the  deregulated
business  through its stranded costs recovery.  As a result,  a regulatory asset
has been  established to reflect the costs  associated with  discontinuation  of
SFAS 71  accounting  and  adoption of SFAS 101.  The  Company's  estimate of its
stranded costs,  including nuclear and fossil fuel decommissioning costs, ranges
from $530 million to $730 million which includes other operating costs in excess
of its related  regulatory  assets.  The Company  believes  that it will recover
these costs as permitted under the  restructuring  act. Final  determination and
quantification  of stranded  cost  recovery  has not been made by the PRC.  Such
determination will have an impact on the recoverability of the related assets.

        Pursuant to the  Restructuring  Act,  utilities  will also be allowed to
recover in full any prudent and reasonable  costs incurred in implementing  full
open access ("transition costs"). The transition costs will be recovered through
2007 by means of a separate wires charge. The Company estimates that these costs
as being in excess of $50 million. Transition costs include, but are not limited
to,  professional fees,  financing costs including  underwriting fees,  consents
relating  to the  transfer  to assets,  management  information  system  changes
including  billing  system  changes  and  public  and  customer  communications.
Recoverable transition costs will be capitalized and amortized over the recovery
period to match related  revenues.  Costs not recoverable  will be expensed when
incurred unless otherwise capitalizable under the accounting rules.



                                      F-18
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

(2)   Regulatory Assets and Liabilities (Continued)

        Regulatory assets and liabilities  reflected in the Consolidated Balance
Sheets as of December 31, 1999,  related to stranded or transitions costs are as
follows:
                                                           1999         1998
                                                         ---------    ---------
                                                             (In thousands)

       Assets
       Transition Costs................................  $  4,293     $      -
       Mine Reclamation Costs..........................    78,856       75,101
       Deferred Income Taxes...........................    37,725       36,089
       Loss on Reacquired Debt.........................     2,293        2,609
                                                         ---------   ---------
            Subtotal...................................   123,167      113,799
                                                         ---------   ---------

       Liabilities
       Deferred Income Taxes...........................   (14,935)     (14,287)
       PVNGS Prudence Audit............................    (5,809)      (6,185)
       Settlement Due Customers........................    (3,384)      (3,564)
       Gain on Reacquired Debt.........................       (35)         (47)
                                                         ---------   ---------
            Subtotal...................................   (24,163)     (24,083)
                                                         ---------   ---------
            Net Stranded Cost and Transition Cost......  $ 99,004    $  89,716
                                                         =========   =========

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




                                      F-19
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

(3)  Capitalization

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

<TABLE>
<CAPTION>
                                                     Common Stock
                                              -----------------------------
                                                                         Additional
                                                 Number      Aggregate    Paid-In     Retained     Comprehensive
                                                Of Shares    Par Value    Capital     Earnings         Income
                                                ---------    ---------   ----------   --------     -------------
                                                                          (Dollars in thousands)
<S>                                            <C>           <C>         <C>         <C>            <C>
Balance at December 31, 1997.................  41,774,083    $ 208,870   $469,073    $ 129,188      $    486
Exercise of stock options....................           -            -     (3,687)           -             -
Net earnings.................................           -            -          -       82,682             -
Dividends:
   Cumulative preferred stock................           -            -          -         (586)            -
   Common Stock..............................           -            -          -      (25,064)            -
Other Comprehensive Income, net of tax:
  Unrealized gain (loss) on securities:
   Unrealized holding gains arising
      During the period......................           -            -          -            -         1,519
     Less reclassification adjustment for
     Gains included in net income............           -            -          -            -          (673)
  Minimum pension liability adjustment.......           -            -          -            -          (205)
                                               -----------  -----------  ----------  -----------    ---------
Balance at December 31, 1998.................  41,774,083      208,870    465,386      186,220         1,127
Stock Repurchase.............................  (1,070,700)      (5,353)   (11,993)           -             -
Net earnings.................................           -            -          -       83,155             -
Dividends:
   Cumulative preferred stock................           -            -          -         (586)            -
   Common Stock..............................           -            -          -      (40,960)            -
Other Comprehensive Income, net of tax:
  Unrealized gain (loss) on securities:
   Unrealized holding gains arising
      During the period......................           -            -          -            -         4,120
     Less reclassification adjustment for
     Gains included in net income............           -            -          -            -        (4,282)
  Minimum pension liability adjustment.......                                                          1,387
                                               -----------  -----------  ----------  -----------    ---------
Balance at December 31, 1999.................  40,703,383    $ 203,517   $ 453,393    $ 227,829     $  2,352
                                               ===========  ===========  ==========  ===========    =========

</TABLE>


                                      F-20
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

(3)  Capitalization (Continued)

Comprehensive Income

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

Common Stock

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

       In March  1999,  the  Company's  Board of  Directors  approved  a plan to
repurchase up to 1,587,000 shares of the Company's outstanding common stock with
maximum purchase price of $19.00 per share.  The repurchase  program was created
to  facilitate  the  Company's  stock  option  program.  In December  1999,  the
Company's  Board of  Directors  authorized  the Company to  repurchase  up to an
additional $20.0 million of the Company's common stock. As of December 31, 1999,
the Company  had  repurchased  1,070,700  shares of its  previously  outstanding
common stock at a cost of $18.8 million.  From January 2, 2000 through  February
29, 2000, the Company repurchased an additional 963,284 shares of its previously
outstanding  common  stock  at a cost of $15.7  million.  The  Company  may from
time-to-time repurchase additional common stock for various corporate purposes.

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

Cumulative Preferred Stock

       The  number of  authorized  shares of  cumulative  preferred  stock is 10
million shares. The Company has 128,000 shares, 1965 Series, 4.58%, stated value
of $100 per share, of cumulative  preferred stock  outstanding.  The 1965 Series
does not have a mandatory  redemption  requirement but may be redeemable at 102%
of the par value with  accrued  dividends.  The  holders of the 1965  Series are
entitled  to  payment  before  holders  of  common  stock  in the  event  of any
liquidation  or  dissolution  or  distribution  of  assets  of the  Company.  In
addition,  the 1965  Series  is not  entitled  to a sinking  fund and  cannot be
converted into any other class of stock of the Company.  The Company's  restated
articles  of  incorporation  limit the amount of  preferred  stock  which may be
issued.  The earnings test in the Company's  restated  articles of incorporation
currently allows for the issuance of additional preferred stock.


                                      F-21
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997


(3)  Capitalization (Continued)

Long-Term Debt

       The Company has no long-term debt that matures from 2000 through 2004.

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

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

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

       In 1999, the Company  retired $31.6 million of its 7.1% senior  unsecured
notes through open market purchases, utilizing the funds from operations and the
funds from  temporary  investments.  On October 28, 1999,  tax-exempt  pollution
control  revenue  bonds of $11.5  million  with an  interest  rate of 6.60% were
issued to partially  reimburse the Company for expenditures  associated with its
share of a recently  completed  upgrade of the emission  control system at SJGS.
The gain  recognized was  immaterial.  In January 2000,  the Company  reacquired
$35.0 million of its 7.5% senior unsecured notes through open market purchases.


                                      F-22
<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

(3)   Capitalization (Continued)

Revolving Credit Facility and Other Credit Facilities

        At December 31, 1999, the Company had a $300 million unsecured revolving
credit facility (the  "Facility") with an expiration date of March 31, 2003. The
Company must pay  commitment  fees of .1875% per year on the total amount of the
Facility. The Company also had an $80 million credit facility,  which expired on
May 20, 2001, and was  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.  In addition,  the Company had $25
million in local lines of credit.  On February 15, 2000, the Company reduced the
borrowing  capacity  under its $300 million  revolving  credit  facility to $150
million and terminated its $80 million securitization facility.

(4)   Lease Commitments

        The  Company  leases  interests  in  Units  1  and 2 of  PVNGS,  certain
transmission  facilities,  office  buildings and other equipment under operating
leases.  The lease  expense for PVNGS is $66.3  million per year over base lease
terms expiring in 2015 and 2016.  Covenants in the Company's PVNGS Units 1 and 2
lease  agreements  limit the  Company's  ability,  without  consent of the owner
participants  and bondholders in the lease  transactions,  (i) to enter into any
merger or  consolidation,  or (ii) except in  connection  with  normal  dividend
policy, to convey, transfer, lease or dividend more than 5% of its assets in any
single transaction or series of related transactions.

     Future minimum operating lease payments (in thousands) at December 31, 1999
are:

         2000 ................................................     $ 79,675
         2001 ................................................       78,726
         2002 ................................................       78,613
         2003 ................................................       78,610
         2004 ................................................       78,610
         Later years .........................................      799,197
                                                                 ----------
           Total minimum lease payments ......................   $1,193,431
                                                                 ==========

       Operating  lease expense,  inclusive of PVNGS leases,  was  approximately
$81.1  million  in 1999,  $82.6  million  in 1998  and  $80.8  million  in 1997.
Aggregate minimum payments to be received in future periods under  noncancelable
subleases are approximately $4.6 million.


                                      F-23
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997


(5)   Financial Instruments

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

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

<TABLE>
<CAPTION>
                                                          1999                   1998
                                                   -------------------   -----------------------
                                                   Carrying    Fair       Carrying      Fair
                                                    Amount     Value       Amount       Value
                                                   --------   --------   ----------   ----------
                                                                  (In thousands)
<S>                                               <C>         <C>        <C>          <C>
   Long-Term Debt ............................... $(988,489)  $(932,687) $(1,008,614) $(1,042,557)
   Decommissioning Trust Debt....................         -          -        26,620       26,620
   Investment in PVNGS Lessors' Notes............   424,605    455,888       443,748      459,167
   Derivatives ..................................         -    (25,921)            -       11,307
   Decommissioning Trust.........................    51,752     51,770        59,803       64,509
   Fossil-Fueled Plant Decommissioning Trust.....     4,591      4,591         7,676        7,676
   Rabbi Trust...................................    16,901     16,931         9,804       17,012

</TABLE>

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

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

        The Company is exposed to credit losses in the event of  non-performance
or non-payment by  counterparties.  The Company uses a credit management process
to assess and monitor the financial conditions of counterparties.

Natural Gas Contracts

       Pursuant to an order  issued by the NMPUC,  predecessor  to the PRC,  the
Company has previously  entered into swaps to hedge certain  portions of natural
gas supply  contracts in order to protect the  Company's  natural gas  customers
from the risk of adverse  price  fluctuations  in the natural  gas  market.  The
financial  impact of all hedge  gains and losses from swaps  flowed  through the
Company's  purchased  gas  adjustment  clause and are fully  recoverable  by the
Company. As a result, earnings were not affected by gains or losses generated by
these  instruments.  The Company hedged 40% of its natural gas deliveries during
the 1998-1999  heating season.  Less than 15.5% of the 1998-1999  heating season
portfolio was hedged using financial hedging contracts. The Company has hedged a
portion of its 1999-2000  heating season gas supply portfolio through the use of
both  physical and  financial  hedging  tools.  Less than 9.1% of the  Company's
1999-2000 heating season portfolio is hedged using financial hedging  contracts.
As of December 31, 1999, the Company had unrecognized  mark-to-market  losses of
$1.1 million associated with its gas-related financial hedging activities.


                                      F-24
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997


(5)  Financial Instruments (Continued)

Electricity Trading Contracts

         To take advantage of market opportunities  associated with the purchase
and sale of electricity,  the Company's  wholesale power operation  periodically
enters into derivative financial instrument contracts.  In addition, the Company
enters  into  forward  physical  contracts  and  physical  options.  The Company
accounts  for  these  financial  instruments  as  trading  activities  under the
accounting  guidelines  set forth under The Emerging  Issues Task Force ("EITF")
Issue No. 98-10. As a result, all open contracts are marked to market at the end
of each period. The physical  contracts are subsequently  recognized as revenues
or purchased power when the actual physical  delivery occurs.  The effect of the
initial  application of the new standard is reported as a cumulative effect of a
change in accounting  principle.  Accordingly,  the Company recorded  additional
earnings,  net of taxes,  of  approximately  $3.5  million,  or $0.08 per common
share, to recognize the gain on net open physical electricity purchase and sales
commitments considered to be trading activities.

          Through  December 31, 1999, the Company's  wholesale  electric trading
operations  settled trading contracts for the sale of electricity that generated
$43.9 million of electric  revenues by  delivering  1.2 million KWh. The Company
purchased  $46.2  million or 1.4 million  KWh of  electricity  to support  these
contractual sale and other open market sales opportunities.

         As of  December  31,  1999,  the  Company  had  open  trading  contract
positions  to buy $29.1 million  and to sell $32.3 million  of  electricity.  At
December 31, 1999, the Company had a gross  mark-to-market gain (asset position)
on these  trading  contracts  of $6.9  million  and  gross  mark-to-market  loss
(liability  position)  of $6.8  million,  with net  mark-to-market  gain  (asset
position)  of $0.1  million.  The  mark-to-market  valuation  is  recognized  in
earnings each period.

Corporate Hedge

         The  Company  has about $62  million  invested  in  domestic  stocks in
various  trusts for nuclear  decommissioning,  executive  retirement and retiree
medical  benefits.  At the end of March 1999, the Company began using  financial
derivatives  based on the Standard & Poor's ("S&P") 500 Index to limit potential
loss on these  investments due to adverse market  fluctuations.  The options are
structured as a collar, protecting the portfolio against losses beyond a certain
amount and  balancing the cost of that  downside  protection by foregoing  gains
above a certain level.  If the S&P 500 Index is within the specified  range when
the option contract expires,  the Company will not be obligated to pay, nor will
the Company have the right to receive cash. The Company  accounts for the market
value changes of these options  under  mark-to-market  accounting on a quarterly
basis.  At December 31, 1999,  the Company  recorded an unrealized  year-to-date
loss of $2.6 million  (pre-tax) on the market value of these  options,  although
the S&P 500 Index is still within the specified range of the collar.


                                      F-25
<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

(6)    Earnings Per Share

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

<TABLE>
<CAPTION>

                                                                           1999       1998        1997
                                                                        ---------   ---------   ---------
<S>                                                                     <C>         <C>         <C>
Basic:
Net Earnings from Continuing Operations..............................   $ 79,614    $ 95,119    $ 86,497
Discontinued Operations, net of tax (note 13):                                 -     (12,437)     (5,502)
Cumulative Effect of a Change in Accounting
   Principle, net of tax (note 14)...................................      3,541           -           -
                                                                        ---------   ---------   ---------
Net Earnings.........................................................     83,155      82,682      80,995
Preferred Stock Dividend Requirements................................        586         586         586
                                                                        ---------   ---------   ---------
Net Earnings Applicable to Common Stock..............................   $ 82,569    $ 82,096    $ 80,409
                                                                        =========   =========   =========
Average Number of Common Shares Outstanding..........................     41,038      41,774      41,774
                                                                        =========   =========   =========
Net Earnings (Loss) per Share of Common Stock:
  Earnings from continuing operations................................   $   1.93    $   2.27    $   2.05
  Discontinued operations (note 13)..................................         -        (0.30)      (0.13)
  Cumulative effect of a change in accounting principle (note 14)....       0.08           -           -
                                                                        ---------   ---------   ---------
Net Earnings per Share of Common Stock (Basic).......................   $   2.01    $   1.97    $   1.92
                                                                        =========   =========   =========
Diluted:
Net Earnings from Continuing Operations..............................   $ 79,614    $ 95,119    $ 86,497
Discontinued Operations, net of tax (note 13)........................          -     (12,437)     (5,502)
Cumulative Effect of a Change in Accounting
   Principle, net of tax (note 14)...................................      3,541           -           -
                                                                        ---------   ---------   ---------
Net Earnings.........................................................     83,155      82,682      80,995
Preferred Stock Dividend Requirements................................        586         586         586
                                                                        ---------   ---------   ---------
Net Earnings Applicable to Common Stock..............................   $ 82,569    $ 82,096    $ 80,409
                                                                        =========   =========   =========
Average Number of Common Shares Outstanding..........................     41,038      41,774      41,774
Diluted effect of common stock equivalents (a).......................         65         298         217
                                                                        ---------   ---------   ---------
Average common and common equivalent shares
  Outstanding........................................................     41,103      42,072      41,991
                                                                        =========   =========   =========
Net Earnings (Loss) per Share of Common Stock:
  Earnings from continuing operations................................   $   1.93    $   2.25    $   2.05
  Discontinued operations............................................          -        (0.30)      (0.13)
  Cumulative effect of a change in accounting principle..............       0.08           -           -
                                                                        ---------   ---------   ---------
Net Earnings per Share of Common Stock (Basic).......................   $   2.01    $   1.95    $   1.91
                                                                        =========   =========   =========
</TABLE>

(a)  Excludes  the  effect of average  anti-dilutive  common  stock  equivalents
related to out of-the-money options of 66,143;  23,794; and 36,310 for the years
ended 1999, 1998 and 1997, respectively.



                                      F-26
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997


 (7)   Income Taxes

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

                                                     1999      1998     1997
                                                     ----      ----     ----
                                                          (In thousands)

   Current Federal income tax ....................   $23,511  $32,785  $35,875
   Current state income tax ......................     8,502   11,451   10,502
   Deferred Federal income tax ...................    13,494   15,797    8,781
   Deferred state income tax .....................       210     (324)    (397)
   Amortization of accumulated investment
     tax credits .................................    (3,409)  (3,418)  (4,436)
                                                     -------  -------  -------
      Total income taxes .........................   $42,308  $56,291  $50,325
                                                     =======  =======  =======

   Charged to operating expenses .................   $25,010  $41,306  $41,941
   Charged  to other income and deductions .......    17,298   14,985    8,384
                                                     -------  -------  -------
        Total income taxes........................   $42,308  $56,291  $50,325
                                                     =======  =======  =======

        The Company's provision for income taxes before discontinued  operations
and  cumulative  effect of a change in  accounting  principle  differed from the
Federal  income tax computed at the statutory  rate for each of the years shown.
The differences are attributable to the following factors:

                                                     1999      1998     1997
                                                     ----      ----     ----
                                                          (In thousands)

  Federal income tax at statutory rates .......... $42,673   $52,993   $47,888
   Investment tax credits ........................  (3,409)   (3,418)   (4,436)
   Depreciation of flow-through items ............     605       531       519
   Gains on the sale and leaseback of PVNGS
      Units 1 and 2 ..............................    (527)     (527)     (527)
   Dividends received deduction                     (1,301)        -         -
   Annual reversal of deferred income taxes
     accrued at prior tax rates                     (2,320)   (1,905)   (1,082)
   State income tax ..............................   5,541     7,074     6,381
   Other .........................................   1,046     1,543     1,582
                                                   -------   -------   -------
      Total income taxes ......................... $42,308   $56,291   $50,325
                                                   =======   =======   =======

    Effective tax rate                              34.70%    37.18%    36.78%


                                      F-27
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997


(7)  Income Taxes (Continued)

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

                                                   1999      1998       1997
                                                   ----      ----       ----
                                                         (In thousands)

  Deferred fuel costs .......................... $ 3,176   $(11,097)  $(9,133)
  Depreciation and cost recovery ...............   5,111      7,526     6,390
  Contributions in aid of construction .........  (1,709)    (2,826)   (3,185)
  Alternative minimum tax in excess of
    regular tax ................................  15,634     21,144    12,482
  PVNGS decommissioning costs ..................    (793)      (618)   (1,512)
  Contribution to 401(h) plan ..................  (1,185)      (763)    3,181
  PVNGS spent fuel disposal costs ..............  (5,202)         -         -
  Other ........................................  (1,328)     2,107       161
                                                 -------   --------   -------
     Net deferred taxes provided ............... $13,704   $ 15,473   $ 8,384
                                                 =======   ========   =======


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

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

    Deferred Tax Assets:
       Alternative minimum tax credit carryforward  ....   $ 18,420    $ 34,055
       Nuclear decommissioning costs....................     22,073      20,062
       Regulatory liabilities related to income taxes ..     44,547      47,615
       Other ...........................................     52,199      45,480
                                                           --------    --------
          Total deferred tax assets ....................   $137,239    $147,212
                                                           ========    ========

    Deferred Tax Liabilities:
       Depreciation ....................................   $184,687    $184,462
       Investment tax credit ...........................     50,996      54,404
       Fuel costs ......................................     15,984      12,808
       Regulatory assets related to income taxes........     71,170      69,298
       Other ...........................................     33,668      24,921
                                                           --------    --------
          Total deferred tax liabilities ...............    356,505     345,893
                                                           --------    --------
    Accumulated deferred income taxes, net .............   $219,266    $198,681
                                                           ========    ========


                                      F-28
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997


(7)   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
consolidated statement of earnings for the period:

 Net change in deferred income tax liability per above table.........  $20,585
 Change in tax effects of income tax related regulatory
   assets and liabilities ...........................................   (4,940)
 Tax effect of excess pension liability..............................     (910)
 Tax effect of mark-to-market on investments available for sale......   (2,119)
 Deferred tax expense relating to cumulative effect of a change
    in accounting principle..........................................   (2,321)
                                                                       -------
 Deferred income tax expense from continuing operations
    for the period...................................................  $10,295
                                                                       =======

       The Company has no net operating  loss  carryforwards  as of December 31,
1999.

       The  Company  defers  investment  tax credits  related to rate  regulated
assets and amortizes them over the estimated  useful lives of those assets.  The
Company anticipates that this practice will continue after the generation assets
are no longer rate regulated upon full  implementation  of the Restructuring Act
in 2002.

(8)   Pension and Other Postretirement Benefits

Pension Plan

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

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


                                      F-29
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997


(8)   Pension and Other Postretirement Benefits (Continued)

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

                                                             Pension Benefits
                                                           --------------------
                                                              1999       1998
                                                           ---------- ---------
   Change in Benefit Obligation:
     Benefit obligation at beginning of year.............  $ 330,048   297,679
     Service cost........................................      7,407     6,660
     Interest cost.......................................     21,777    20,101
     Actuarial loss......................................    (12,797)   19,380
     Benefits paid.......................................    (15,374)  (13,772)
                                                           ---------- ---------
         Benefit obligation at end of period.............    331,061   330,048
                                                           ---------- ---------
   Change in Plan Assets:
     Fair value of plan assets at beginning of year......    330,556   330,550
     Actual return on plan assets........................     46,458    13,593
     Employer contribution...............................          -       185
     Benefits paid.......................................    (15,374)  (13,772)
                                                           ---------- ---------
         Fair value of plan assets at end of year........    361,640   330,556
                                                           ---------- ---------
     Funded Status.......................................     30,579       508
     Unamortized transition assets.......................     (2,322)   (3,486)
     Unrecognized net actuarial loss.....................    (12,209)   19,580
     Unrecognized prior service cost.....................         78       112
                                                           ---------- ---------
         Prepaid pension cost............................  $  16,126  $ 16,714
                                                           ========== =========
   Weighted - Average Assumptions as of December 31,
     Discount rate.......................................       7.50%    6.75%
     Expected return on plan assets......................       8.50%    8.50%
     Rate of compensation increase.......................         N/A      N/A

                                                        Pension Benefits
                                                   -----------------------------
                                                     1999      1998      1997
                                                   --------- --------  ---------
   Components of Net Periodic Benefit Cost:

     Service cost................................  $  7,407  $  6,660  $  6,535
     Interest cost...............................    21,777    20,101    19,592

     Expected return on plan assets..............   (27,466)  (26,755)  (23,426)
     Amortization of prior service cost..........    (1,130)   (1,130)   (1,130)
                                                   --------- --------- ---------
         Net periodic pension expense (income)...  $    588  $ (1,124) $  1,571
                                                   ========= ========= =========




                                      F-30
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997


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

                                                              Other Benefits
                                                            -------------------
                                                              1999       1998
                                                            --------   --------
    Change in Benefit Obligation:

      Benefit obligation at beginning of year.............  $ 74,539   $ 59,084
      Service cost........................................     1,402      1,292
      Interest cost.......................................     4,782      4,501
      Actuarial loss (gain)...............................    (6,958)     9,662
                                                            --------- ----------
          Benefit obligation at end of period.............    73,765     74,539
                                                            --------- ----------
    Change in Plan Assets:

      Fair value of plan assets at beginning of year......    37,602     33,158
      Actual return on plan assets........................     5,269      4,444
      Employer contribution...............................       597          -
      Benefits paid.......................................    (1,643)         -
                                                            --------- ----------
          Fair value of plan assets at end of year........  $ 41,825   $ 37,602
                                                            --------- ----------

      Funded Status.......................................  $(31,940)  $(36,937)
      Unamortized transition assets.......................      (622)     6,826
      Unrecognized prior service cost.....................    23,617     25,436
           Accrued postretirement benefits cost...........  $ (8,945)  $ (4,675)
    Weighted - Average Assumptions as of December 31,
      Discount rate.......................................      7.50%      6.75%
      Expected return on plan assets......................      8.75%      8.75%
      Rate of compensation increase.......................        N/A        N/A

                                                        Pension Benefits
                                                    ----------------------------
                                                     1999      1998       1997
                                                    --------  --------  --------
    Components of Net Periodic Benefit Cost:

      Service cost................................  $  1,402   $ 1,292  $ 1,300
      Interest cost...............................     4,782     4,501    4,452
      Expected return on plan assets..............    (3,135)   (2,943)  (1,884)
      Amortization of prior service cost..........     1,817     1,817    1,817)
                                                    ---------  -------- --------
          Net periodic pension expense ...........  $  4,866   $ 4,667  $ 5,685
                                                    =========  ======== ========



                                      F-31
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

(8)    Pension and Other Postretirement Benefits (Continued)

       The  effect of a 1%  increase  in the health  care trend rate  assumption
would increase the accumulated  postretirement benefit obligation as of December
31, 1999, by approximately  $12.1 million and the aggregate service and interest
cost  components  of net  periodic  postretirement  benefit  cost  for  1999  by
approximately  $1.4  million.  The health  care cost trend rate is  expected  to
decrease to 5.0% by 2010 and to remain at that level thereafter.

Executive Retirement Program

       The Company has an executive retirement program for a group of management
employees.  The  program  was  intended  to  attract,  motivate  and  retain key
management  employees.  The  Company's  projected  benefit  obligation  for this
program,  as of December 31, 1999, was $18.1 million,  of which the  accumulated
and vested benefit  obligation  was $19.5 million.  As of December 31, 1999, the
Company has recognized an additional liability of $3.6 million for the amount of
unfunded  accumulated  benefits  in excess of  accrued  pension  costs.  The net
periodic cost for 1999,  1998 and 1997 was $2.3  million,  $2.3 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.   Marketable  securities  in  the  amount  of
approximately  $12.1 million (fair market value of $16.9  million) are presently
in trust. No additional funds have been provided to the trust since 1989.

(9)    Stock Option Plans

        The Company's  Performance  Stock Plan ("PSP") is a non-qualified  stock
option  plan,  covering a group of  management  employees.  Options to  purchase
shares of the Company's common stock are granted at the fair market value of the
shares on the date of the grant.  Options granted through December 31, 1995 vest
on June 30, 1996 and have an  exercise  term of up to 10 years.  All  subsequent
awards granted after December 31, 1995,  vest three years from the grant date of
the awards.  Options  granted or approved on or after February 9, 1998, can also
vest upon retirement.  The maximum number of options authorized are five million
shares through December 31, 2000.

        In addition,  the Company has a Director  Retainer  Plan  ("DRP")  which
provides  for  payment of the  Directors'  annual  retainer in the form of cash,
restricted  stock or options to purchase  shares of the Company's  common stock.
The number of options  granted  in 1999 under the DRP was 8,000  shares  with an
exercise price of $9.69.  No options were  exercised  under the DRP during 1999.
The maximum  number of options  authorized  are 100,000 shares through April 30,
2002. The number of options outstanding as of December 31, 1999, was 29,000.

        The fair value of each option grant is  determined  on the date of grant
using  the  Black-Scholes   option-pricing  model  with  the  following  average
assumptions used for grants in 1997, 1998 and 1999, respectively: dividend yield
of 3.0%,  3.75%  and  4.9%;  expected  volatility  of 20%,  26.78%  and  30.29%,
risk-free  interest rates of 5.69%,  4.65% and 6.43%; and expected lives of four
years.


                                      F-32
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

(9)      Stock Option Plans (Continued)

        A summary of the status of the Company's  stock option plans at December
31, and changes  during the years then ended is presented  below.  Prior periods
have been restated for comparability purposes.

<TABLE>
<CAPTION>
                                                     1999                  1998                  1997
                                           ----------------------  --------------------   ----------------------
                                                         Weighted              Weighted              Weighted
                                                          Average              Average                Average
                                                         Exercise              Exercise              Exercise
               Fixed Options                  Shares       Price     Shares     Price      Shares      Price
----------------------------------------     ---------   --------  ---------  ---------   --------   --------
<S>                                            <C>        <C>      <C>          <C>      <C>         <C>
Outstanding at beginning of year........       996,175    $18.819  1,539,214    $17.704  1,619,406   $15.905

Granted.................................       608,708    $17.397     10,000    $12.750    312,707   $23.033

Exercised...............................             -        N/A    473,063    $14.663    379,833   $14.453

Forfeited...............................        19,949    $18.649     79,976    $21.194     13,066   $19.450
                                             ----------            ----------           -----------
Outstanding at end of year..............     1,584,934               996,175    $18.819  1,539,214   $17.704
                                             ==========            ==========           ===========

Options exercisable at year-end ........       749,948               400,158               861,221
                                             ==========            ==========           ===========

Options available for future grant .....     2,183,624             2,752,806             2,672,832
                                             ----------            ----------           -----------
Weighted-average fair value of
options granted during the year:

     PSP................................         $3.89                   N/A                 $4.21
                                             ==========                                 ===========
     DRP................................         $5.85                 $7.32                $15.69
                                             ==========            ==========           ===========

</TABLE>

The following table summarizes  information  about stock options  outstanding at
December 31, 1999:

<TABLE>
<CAPTION>
                                                Options Outstanding                                Options Exercisable
                          ----------------------------------------------------------------   ---------------------------------
                                                      Weighted-
                                                       Average              Weighted                             Weighted
        Range of                Number                Remaining              Average             Number           Average
        Exercise              Outstanding            Contractual            Exercise          Exercisable        Exercise
         Prices               At 12/31/99                Life                Prices           At 12/31/99         Prices
   --------------------   --------------------   ---------------------  ------------------   ---------------  ----------------

   <S>                          <C>                   <C>                    <C>                  <C>             <C>
   $5.50 - $12.75                  29,000             8.15 years             $ 9.466               21,000         $ 9.381
   $11.50 - $23.688             1,555,934             7.56 years             $18.398              728,948         $17.343
                              ------------                                                     -----------
                                1,584,934             7.57 years             $18.235              749,948         $17.120
                              ============                                                     ===========

</TABLE>


                                      F-33
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997


(9)    Stock Option Plans (Continued)

       Had  compensation  cost for the  Company's  performance  stock  plan been
determined   consistent   with  SFAS  No.  123,   Accounting   for   Stock-Based
Compensation,  the effect on the  Company's pro forma net earnings and pro forma
earnings per share would be as follows (in thousands, except per share data):

<TABLE>
<CAPTION>

                                           1999                      1998                       1997
                                 -------------------------  ------------------------  -------------------------
                                 As Reported    Pro forma   As Reported   Pro forma   As Reported   Pro forma
                                 -------------  ----------  ------------  ----------  ------------- -----------
<S>                                 <C>         <C>           <C>         <C>            <C>         <C>
Net earnings: (available for
  Common)......................     $82,569     $81,573       $82,096      $81,554       $80,409     $80,018
Net earnings per share
    Basic......................     $  2.01     $  1.99       $  1.97      $  1.95       $  1.92     $  1.92
    Diluted....................     $  2.01     $  1.98       $  1.95      $  1.95       $  1.91     $  1.90
</TABLE>

(10)  Construction Program and Jointly-Owned Plants

        The  Company's  construction  expenditures  for 1999 were  approximately
$95.3 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,  1999,  the  Company's  interests  and  investments  in
jointly-owned generating facilities are:

<TABLE>
<CAPTION>

                                                                  Construction
                                       Plant in     Accumulated     Work in     Composite
Station (Fuel Type)                     Service    Depreciation     Progress     Interest
-------------------                    --------    ------------   ------------  ---------
                                                         (In thousands)
<S>                                     <C>          <C>             <C>          <C>
San Juan Generating Station (Coal)....  $704,458     $330,457        $ 5,088      46.3%
Palo Verde Nuclear Generating
  Station (Nuclear)*..................  $197,369     $ 49,284        $18,818      10.2%
Four Corners Power Plant
  Units 4 and 5 (Coal) ...............  $117,799     $ 66,755        $ 1,788      13.0%
</TABLE>

-----------

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


                                      F-34
<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

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

San Juan Generating Station ("SJGS")

        The Company  operates and jointly owns SJGS. At December 31, 1999,  SJGS
Units 1 and 2 are  owned  on a 50%  shared  basis  with  Tucson  Electric  Power
Company, Unit 3 is owned 50% by the Company, 41.8% by Southern California Public
Power  Authority  ("SCPPA") and 8.2% by Tri-State  Generation  and  Transmission
Association,  Inc. Unit 4 is owned 38.457% by the Company, 28.8% by M-S-R Public
Power Agency, ("M-S-R"),  10.04% by the City of Anaheim,  California,  8.475% by
the City of  Farmington,  7.2% by the County of Los  Alamos,  and 7.028% by Utah
Associated Municipal Power Systems.

Palo Verde Nuclear Generating Station

       The Company is a participant  in the three 1,270 MW units of PVNGS,  also
known as the Arizona Nuclear Power Project,  with Arizona Public Service Company
("APS") (the operating agent), Salt River Project, El Paso Electric Company ("El
Paso"),  Southern  California Edison Company,  SCPPA and The Department of Water
and Power of the City of Los Angeles. The Company has a 10.2% undivided interest
in PVNGS,  with  portions of its  interests in Units 1 and 2 held under  leases.
(See Note 11 for additional discussion.)

(11)   Commitments and Contingencies

Long-Term Power Contracts

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

         In 1996, the Company entered into a long-term power purchase  agreement
("PPA") with 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 agreement  calls for PLP to construct  and operate a gas turbine  generating
unit  located  on the  Company's  retired  Person  Generating  Station  site  in
Albuquerque, New Mexico.



                                      F-35
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

(11)    Commitments and Contingencies (Continued)

       In 1998,  the PPA was amended to change the maximum  capacity the Company
was obligated to take to 132 MW and to change the commercial operation date from
May 1999 to May 2000.  Primary fuel for the gas turbine  generating unit will be
natural gas, which will be provided by the Company.  In addition,  the unit will
have the  capability  to utilize low sulfur fuel oil in the event natural gas is
not available.

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

Construction Commitment

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

Plains Acquisition

         The Company and Tri-State  Generation  and  Transmission  Cooperatives,
Inc. ("Tri-State") entered into an asset sale agreement dated September 9, 1999,
pursuant  to which  Tri-State  has  agreed  to sell  certain  assets  consisting
primarily of transmission  assets, a fifty percent interest in an inactive power
plant  located near  Albuquerque,  and an office  building to the  Company.  The
purchase price is $13.2  million,  subject to adjustment at the time of closing.
The asset sale  agreement  contains  standard  covenants and conditions for this
type of agreement.  Currently the Company  anticipates that the purchase will be
completed by approximately the fall of 2000.

New Customer Billing System

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

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


                                      F-36
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997


(11)     Commitments and Contingencies (Continued)

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

       The following is a summary of the allowance for doubtful  accounts during
1999, 1998 and 1997:

                                                        1999     1998    1997
                                                      --------  ------- -------
                                                           (In thousands)
 Allowance for doubtful accounts beginning
   of year.........................................   $   836   $  783  $  709
 Bad debt accrual..................................    11,496    3,325   3,378
 Less:  Write off (adjustments) of
        uncollectible accounts ....................      (172)   3,272   3,304
                                                      --------  ------- -------
 Allowance for doubtful accounts, end of year .....   $12,504   $  836  $  783
                                                      ========  ======= =======

       Bad debt  accruals  for 1999  represent  management's  best  estimate  of
potential  uncollectible  accounts based upon information  available at December
31, 1999. The Company will make every  reasonable  effort to collect all amounts
owed  from  delinquent  customers.  As new data  becomes  available  from  these
efforts,  management will re-evaluate the adequacy of the bad debt reserve.  Any
required  change to the  allowance  for doubtful  accounts  will be reflected in
operating results in the period new information  becomes available.  The Company
will also provide  additional  disclosures as collection  efforts  progress over
time.

Rate Case Settlement

       On August  25,  1999,  the PRC  issued an order  approving  the rate case
settlement  resulting from the NMPUC's final order of November 30, 1998. The PRC
ordered  the  Company to reduce its  electric  rates by $34.0  million  annually
retroactive  to July 30,  1999.  In addition,  the order  includes a rate freeze
until electric  competition is fully  implemented in New Mexico or until January
1, 2003.  The  settlement  will reduce  annual  revenues by an  estimated  $37.0
million based on expected customer growth.

PVNGS Liability and Insurance Matters

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


                                      F-37
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

(11)     Commitments and Contingencies (Continued)

approximately $27.0 million, with an annual payment limitation of $3 million per
incident.  If the funds provided by this retrospective  assessment program prove
to be  insufficient,  Congress  could  impose  revenue  raising  measures on the
nuclear industry to pay claims. The United States Nuclear Regulatory  Commission
and Congress are reviewing the related laws. The Company cannot predict  whether
or not Congress will change the law.  However,  certain  changes could  possibly
trigger "Deemed Loss Events" under the Company's PVNGS leases,  absent waiver by
the lessors.

        The PVNGS participants  maintain "all-risk"  (including nuclear hazards)
insurance for nuclear  property damage to, and  decontamination  of, property at
PVNGS in the  aggregate  amount of $2.75  billion as of  January  1,  2000.  The
Company  is a member of an  industry  mutual  insurer  which  provides  both the
"all-risk"  and increased  cost of generation  insurance to the Company.  In the
event of adverse losses  experienced by this insurer,  the Company is subject to
an assessment.  The Company's  maximum share of any assessment is  approximately
$2.6 million per year.

PVNGS Decommissioning Funding

       The Company has a program for funding its share of decommissioning  costs
for PVNGS. The nuclear  decommissioning  funding program is invested in equities
and fixed income instruments in qualified and non-qualified  trusts. The results
of the 1998 decommissioning cost study indicated that the Company's share of the
PVNGS  decommissioning costs excluding spent fuel disposal will be approximately
$163.1 million (in 1999 dollars).

        The Company  funded an additional  $3.1  million,  $3.0 million and $2.1
million in 1999,  1998 and 1997,  respectively,  into the qualified trust funds.
The  estimated  market value of the trusts at the end of 1999 was  approximately
$51.8 million.

Nuclear Spent Fuel and Waste Disposal

       Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the
"Waste  Act"),  the United States  Department of Energy  ("DOE") is obligated to
accept and dispose of all spent  nuclear fuel and other  high-level  radioactive
wastes generated by all domestic power reactors. Under the Waste Act, DOE was to
develop the  facilities  necessary for the storage and disposal of spent nuclear
fuel and to have the first such facility in operation by 1998. DOE has announced
that such a repository now cannot be completed before 2010.

       The  operator of PVNGS has  capacity in existing  fuel  storage  pools at
PVNGS which, with certain modifications,  could accommodate all fuel expected to
be discharged from normal operation of PVNGS through 2002, and believes it could
augment that storage  with the new  facilities  for on-site dry storage of spent
fuel for an indeterminate  period of operation beyond 2002, subject to obtaining
any required  governmental  approvals.  The Company currently  estimates that it
will incur  approximately $41.0 million (in 1999 dollars) over the life of PVNGS


                                      F-38
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997


(11)  Commitments and Contingencies (Continued)

for its share of the costs  related  to the  on-site  interim  storage  of spent
nuclear  fuel.  The Company  accrues these costs as a component of fuel expense,
meaning the charges are accrued as the fuel is burned.  During 1999, the Company
expensed  approximately  $1.0 million for on-site  interim  nuclear fuel storage
costs  related to nuclear  fuel  burned  prior to 2000.  The  operator  of PVNGS
currently believes that spent fuel storage or disposal methods will be available
for use by PVNGS to allow its continued operation beyond 2002.

Contingencies

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

(12) Environmental Issues

        The normal  course of  operations  of the Company  necessarily  involves
activities and substances that expose the Company to potential liabilities under
laws and regulations  protecting the environment.  Liabilities  under these laws
and  regulations  can be material and in some  instances may be imposed  without
regard to fault, or may be imposed for past acts, even though such past acts may
have been lawful at the time they occurred.  Sources of potential  environmental
liabilities  include  (but  are  not  limited  to)  the  Federal   Comprehensive
Environmental  Response Compensation and Liability Act of 1980 and other similar
statutes.

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

         The Company's  recorded  estimated  minimum  liability to remediate its
identified  sites is $8.3  million.  The ultimate cost to clean up the Company's
identified  sites  may  vary  from  its  recorded   liability  due  to  numerous
uncertainties inherent in the estimation process, such as: the extent and nature
of  contamination;  the scarcity of reliable data for identified  sites; and the
time  periods  over which site  remediation  is expected  to occur.  The Company
believes that, due to these uncertainties,  it is remotely possible that cleanup
costs could exceed its  recorded  liability  by up to $30.3  million.  The upper
limit of this range of costs was estimated using  assumptions least favorable to
the Company.


                                      F-39

<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997

(12) Environmental Issues (Continued)

         Remediation of identified sites previously used in operations,  used by
tenants or contaminated  by former owners  required  spending of $4.4 million in
1999 and $1.0 million in 1998. In 2000,  the Company  anticipates  spending $2.2
million for remediation and $6 million for control and prevention.  The majority
of the December 31, 1999 environmental liability is expected to be paid over the
next five years, funded by cash generated from operations.  Future environmental
obligations  are not  expected  to have a  material  impact  on the  results  of
operations or financial condition of the Company.

(13)   Discontinued Operations

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

       Operating  losses  of the  discontinued  operations  prior to the date of
discontinuation   were  $7.4   million  and  $5.5  million  in  1998  and  1997,
respectively.  Such amounts  include  income tax benefits  related to the losses
from  discontinued  operations of $4.8 million in 1998 and $3.6 million in 1997.
Total sales from the  discontinued  operations  were  $159.2  million and $114.7
million in 1998 and 1997,  respectively.  Prior to the  decision to  discontinue
non-utility  operations,  such total sales and income tax benefits were included
in operating  revenues and operating  expenses in the consolidated  statement of
earnings.


                                      F-40
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1999, 1998 and 1997


(14)  New and Proposed Accounting Standards

       Decommissioning:  The Staff of the  Securities  and  Exchange  Commission
("SEC")  has  questioned  certain of the  current  accounting  practices  of the
electric industry  regarding the recognition,  measurement and classification of
decommissioning costs for nuclear generating stations in financial statements of
electric  utilities.  In response to these questions,  the Financial  Accounting
Standards  Board  ("FASB") has a project on its agenda to review the  accounting
for  closure and  removal  costs,  including  decommissioning  of nuclear  power
plants.  If current  electric  industry  accounting  practices for nuclear power
plant  decommissioning are changed, the estimated cost for decommissioning could
be recorded as a liability  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.

       EITF Issue 99-14,  Recognition of Impairment  Losses on Firmly  Committed
Executory  Contracts:  The EITF has  added an  issue to its  agenda  to  address
impairment  of leased  assets.  A significant  portion of the Company's  nuclear
generating  assets are held under  operating  leases.  Based on the  alternative
accounting  methods being explored by the EITF, the related  financial impact of
the future  adoption of EITF Issue No. 99-14 should not have a material  adverse
effect on results of operations. However, a complete evaluation of the financial
impact from the future  adoption of EITF Issue No. 99-14 will be  undeterminable
until EITF  deliberations  are completed  and stranded cost recovery  issues are
resolved.

       Accounting for Derivative  Instruments and Hedging Activities,  SFAS 133:
SFAS 133  establishes  accounting and reporting  standards  requiring that every
derivative  instrument  be recorded  in the balance  sheet as either an asset or
liability  measured at its fair value.  The Statement also requires that changes
in the  derivatives'  fair value be  recognized  currently  in  earnings  unless
specific hedge accounting  criteria are met.  Special  accounting for qualifying
hedges  allows  derivative  gains and  losses to offset  related  results on the
hedged item in the income  statement,  and requires that a company must formally
document,  designate,  and assess the effectiveness of transactions that receive
hedge accounting. The Company is in the process of reviewing and identifying all
financial  instruments  currently existing in the Company in compliance with the
provisions  of SFAS 133.  It is likely  that the  adoption  of SFAS 133 will add
volatility  to the  Company's  operating  results  and/or  asset  and  liability
valuations  reflecting  the impact of  mark-to-market  accounting  for commodity
contracts.  In June 1999,  FASB issued SFAS 137 to amend the effective  date for
the compliance of SFAS 133 to January 1, 2001.



                                      F-41
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                           QUARTERLY OPERATING RESULTS

   The unaudited operating results by quarters for 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                                     Quarter Ended
                                                ------------------------------------------------------
                                                   March 31      June 30    September 30   December 31
                                                -------------  -----------  ------------   -----------
                                                        (In thousands, except per share amounts)
  1999:
<S>                                                 <C>          <C>          <C>           <C>
    Operating Revenues...........................   $272,818     $261,371     $ 340,604     $ 282,750
    Operating Income.............................     35,068       29,247        30,275        25,489
    Earnings from Continuing Operations..........     23,130       18,172        21,401        16,911
    Net Earnings (1).............................     26,671       18,172        21,401        16,911
    Net Earnings per share from Continuing
       Operations................................       0.55         0.44          0.52          0.41
    Net Earnings per Share (Basic)...............       0.64         0.44          0.52          0.41
    Net Earnings per Share (Diluted).............       0.63         0.44          0.52          0.41

  1998:
    Operating Revenues...........................    282,560      230,478       320,438       258,969
    Operating Income.............................     36,626       26,042        47,446        25,535
    Earnings from Continuing Operations..........     25,561       16,497        34,656        18,405
    Net Earnings (2).............................     21,214       14,778        31,989        14,701
    Net Earnings per share from Continuing
       Operations................................       0.61         0.39          0.83          0.44
    Net Earnings per Share (Basic)...............       0.50         0.35          0.76          0.36
    Net Earnings per Share (Diluted).............       0.50         0.35          0.76          0.34

</TABLE>

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

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

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

(2)      On August 4, 1998, the Company  adopted a plan to  discontinue  the gas
         trading  operations of its Energy Services  Business Unit. As a result,
         estimated  losses of $1.4  million  ($0.03 per  common  share) and $3.7
         million  ($0.09 per common  share) for the third quarter and the fourth
         quarter,  respectively,  were recognized.  (See note 13 of the notes to
         consolidated financial statements.) In addition,  certain prior periods
         amounts have been restated.

                                      F-42
<PAGE>

<TABLE>
<CAPTION>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                        COMPARATIVE OPERATING STATISTICS

                                                    1999       1998        1997        1996         1995
                                                 ---------- -----------  ---------- -----------  ----------
<S>                                               <C>         <C>         <C>         <C>         <C>
Electric Service
Energy Sales--KWh (in thousands):
  Residential..................................   2,027,099   2,007,852   1,976,434   1,892,290   1,795,371
  Commercial...................................   2,980,935   2,888,539   2,841,831   2,698,087   2,578,243
  Industrial...................................   1,559,155   1,571,824   1,556,264   1,505,801   1,434,974
  Other ultimate customers.....................     236,394     271,659     160,370     310,118     220,777
                                                 ---------- -----------  ---------- -----------  ----------
    Total sales to ultimate customers..........   6,803,583   6,739,874   6,534,899   6,406,296   6,029,365
  Sales for resale.............................  11,171,621   8,782,315   6,785,643   4,575,220   2,590,513
                                                 ---------- -----------  ---------- -----------  ----------
    Total KWh sales............................  17,975,204  15,522,189  13,320,542  10,981,516   8,619,878
                                                 ========== ===========  ========== ===========  ==========
Electric Revenues (in thousands):
  Residential..................................  $  184,088 $   187,681  $  184,813 $   177,220  $  168,633
  Commercial...................................     238,830     241,968     237,629     226,146     218,222
  Industrial...................................      85,828      88,644      86,927      83,651      79,964
  Other ultimate customers.....................      13,777      18,124      10,135      20,804      18,749
                                                 ---------- -----------  ---------- -----------  ----------
    Total revenues to ultimate customers.......     522,523     536,417     519,504     507,821     485,568
  Sales for resale.............................     365,368     274,979     185,334     121,329      80,949
                                                 ---------- -----------  ---------- -----------  ----------
    Total revenues from energy sales...........     887,891     811,396     704,838     629,150     566,517
  Miscellaneous electric revenues..............      24,086      23,808      17,600      16,489      17,767
                                                 ---------- -----------  ---------- -----------  ----------
    Total electric revenues....................  $  911,977 $   835,204  $  722,438 $   645,639  $  584,284
                                                 ========== ===========  ========== ===========  ==========
Customers at Year End:
  Residential..................................     321,949     319,415     311,314     304,900     296,821
  Commercial...................................      38,435      37,652      36,942      36,292      35,390
  Industrial...................................         375         363         363         375         374
  Other ultimate customers.....................         625         665         637         632         598
                                                 ---------- -----------  ---------- -----------  ----------
    Total ultimate customers...................     361,384     358,095     349,256     342,199     333,183
  Sales for Resale.............................          83          83          66          56          37
                                                 ---------- -----------  ---------- -----------  ----------
    Total customers............................     361,467     358,178     349,322     342,255     333,220
                                                 ========== ===========  ========== ===========  ==========

Reliable Net Capability--KW....................   1,521,000   1,506,000   1,506,000   1,506,000   1,506,000
Coincidental Peak Demand--KW...................   1,291,000   1,313,000   1,209,000   1,217,000   1,247,000
Average Fuel Cost per Million BTU..............  $   1.3169  $   1.2433  $   1.2318  $   1.2735  $   1.3177
BTU per KWh of Net Generation..................      10,490      10,784      10,927      10,768      10,811

Water Service**
  Water Sales--Gallon (in thousands)...........        -            -            -          -     1,616,544
  Revenues (in thousands)......................        -            -            -          -    $    6,196
  Customers at Year End........................        -            -            -          -        23,752

</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 for 1995.

**  On July 3,  1995,  the  Company  sold  its  water  utility  division.  Water
    Service's comparative operating statistics for 1995 are through this date.

                                      F-43
<PAGE>

<TABLE>
<CAPTION>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                        COMPARATIVE OPERATING STATISTICS

                                                  1999        1998        1997        1996         1995
                                               ----------  ----------  ----------   ----------  ----------
<S>                                               <C>         <C>         <C>          <C>         <C>
Gas Throughput--Decatherms (in thousands)
PNMGS:
    Residential.............................      29,309      30,258      30,755       27,387      25,865
    Commercial..............................      10,134      10,387      10,644        9,310       8,864
    Industrial..............................       2,338       1,553       1,280        2,136         661
    Public authorities......................       2,902       3,427       4,153        2,591       2,411
    Irrigation..............................       1,382       1,869       1,593        1,418       1,245
    Sales for resale........................       1,181       1,205       1,233        3,094       1,266
    Off-system sales........................       1,073       1,889       1,179        5,745       1,176
    Unbilled................................       3,784      (1,343)       (202)       1,405      (1,764)
                                               ----------  ----------  ----------   ----------  ----------
    PNMGS sales.............................      52,103      49,245      50,635       53,086      39,724
    Transportation throughput...............      40,161      36,413      33,975       47,010      49,136
                                               ----------  ----------  ----------   ----------  ----------
   PNMGS throughput.........................      92,264      85,658      84,610      100,096      88,860
Gathering Company:
    Spot market sales.......................           -           -           -            -          39
    Transportation throughput...............           -           -           -            -      20,695
                                               ----------  ----------  ----------   ----------  ----------
         Total throughput...................      92,264      85,658      84,610      100,096     109,594
                                               ==========  ==========  ==========   ==========  ==========
Gas Revenues (in thousands)
PNMGS:
    Residential.............................   $ 148,968   $ 161,153   $ 187,563    $ 129,911   $ 125,290
    Commercial..............................      36,528      42,680      50,502       33,022      32,328
    Industrial..............................       8,550       4,887       4,536        5,179       1,873
    Public authorities......................       9,782      12,610      17,577        8,018       7,939
    Irrigation..............................       4,229       5,780       5,041        3,252       3,077
    Sales for resale........................       2,530       3,596       4,465        2,106       3,114
    Off-system sales........................       2,357       3,816       1,926       14,352       1,885
    Imbalance penalties.....................       1,182       1,416       1,273        1,231       1,786
    Unbilled................................       4,107        (955)     (2,172)       2,678      (2,430)
                                               ----------  ----------  ----------   ----------  ----------
    Revenues from gas sales.................     218,233     234,983     270,711      199,749     174,862
    Transportation..........................      12,390      13,464      14,172       17,215      18,532
    Liquids.................................       1,867       1,463       4,451        7,608      12,782
    Other...................................       4,221       6,065       5,435        2,729       3,606
                                               ----------  ----------  ----------   ----------  ----------
    PNMGS operating revenues................     236,711     255,975     294,769      227,301     209,782
Gathering Company:
    Spot market sales.......................           -           -           -            -          42
    Transportation..........................           -           -           -            -       3,640
    Imbalance penalties.....................           -           -           -            -         418
Processing Company:
    Liquids revenue.........................           -           -           -            -         632
    Processing fees.........................           -           -           -            -       3,471
                                               ----------  ----------  ----------   ----------  ----------
         Total operating revenues...........   $ 236,711   $ 255,975   $ 294,769    $ 227,301   $ 217,985
                                               ==========  ==========  ==========   ==========  ==========
Customers at Year End
PNMGS:
    Residential.............................     390,428     383,292     375,032      367,025     358,822
    Commercial..............................      32,116      32,004      31,560       30,757      30,493
    Industrial..............................          51          55          50           54          59
    Public authorities......................       2,547       2,429       2,735        2,462       2,444
    Irrigation..............................       1,026       1,078       1,027        1,076         886
    Sales for resale........................           3           3           3            3           2
    Gas choice..............................         112         112           -            -           -
    Transportation..........................          32          29          31           36          38
                                               ----------  ----------  ----------   ----------  ----------
         Total customers....................     426,315     419,002     410,438      401,413     392,744
                                               ==========  ==========  ==========   ==========  ==========

</TABLE>

----------
On June 30, 1995,  the Company sold  substantially  all of the gas gathering and
processing assets of the Company and its gas subsidiaries. Comparative operating
statistics for Gathering Company and Processing Company are through this date.

                                      F-44
<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
June 6,  2000 (the  "2000  Proxy  Statement"),  to PART I,  SUPPLEMENTAL  ITEM -
"EXECUTIVE  OFFICERS  OF THE  COMPANY"  and "Other  Matters"  -  "Section  16(a)
Beneficial Ownership Reporting Compliance" in the 2000 Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

       Reference is hereby made to  "Executive  Compensation"  in the 2000 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 2000 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       Reference is hereby made to the 2000 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 1999,  1998,
                   and 1997 are omitted for the reason that they are not
                   required or the information is otherwise supplied.

       (a) - 3-A.  Exhibits Filed:

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

         3.2       By-laws of Public  Service  Company  of New  Mexico  With All
                   Amendments to and including February 8, 2000



                                      E-1

<PAGE>



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

         4.6.1     Third  Supplement,  dated as of October 1, 1999 to  Indenture
                   dated as of March 11, 1998, between Public Service Company of
                   New Mexico and The Chase Manhattan Bank, as Trustee

         10.11.3   Amendment  No. 3 to the San Juan  Unit 4 Early  Purchase  and
                   Participation Agreement between Public Service Company of New
                   Mexico and M-S-R Public Power Agency, dated as of October 27,
                   1999

         10.12.1   Amendment  No. 1 to the Amended and  Restated San Juan Unit 4
                   Purchase and  Participation  Agreement between Public Service
                   Company  of New  Mexico  and The  Incorporated  County of Los
                   Alamos, New Mexico, dated October 27, 1999

         10.13     Amendment No. 2 to the San Juan Unit 4 Purchase Agreement and
                   Participation Agreement between Public Service Company of New
                   Mexico and The City of Farmington,  New Mexico, dated October
                   27, 1999

         10.32**   Supplemental  Employee Retirement  Agreements dated August 4,
                   1989,  between Public Service  Company of New Mexico and John
                   T. Ackerman and Max Maerki (refiled)

         10.36.1   Amendment  No.  1  to  the  San  Juan  Unit  4  Purchase  and
                   Participation Agreement between Public Service Company of New
                   Mexico and The City of Anaheim, California, dated October 27,
                   1999

         10.38.1   Amendment  No. 1 to the  Restated and Amended San Juan Unit 4
                   Purchase and  Participation  Agreement between Public Service
                   Company  of New Mexico and Utah  Associated  Municipal  Power
                   Systems, dated October 27, 1999

         23.1      Consent of Arthur Andersen LLP.

         27        Financial Data Schedule.

----------

         **    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:


                                      E-2
<PAGE>

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

<TABLE>
<CAPTION>

Exhibit No.                   Description of Exhibit                     Filed as Exhibit:             File No:
-----------                   ----------------------                     -----------------             --------
Articles of Incorporation and By-laws

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

Instruments Defining the Rights of Security Holders, Including Indentures

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

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

</TABLE>

                                              E-3
<PAGE>


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

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

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

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

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

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

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

Material Contracts

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


                                              E-4
<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 the          1-6986
               Supplemental and Additional Indenture of          Registrant on Form 10-K for fiscal
               Lease dated April 25, 1985 between the            year ended December 31, 1995.
               Navajo Tribe of Indians and Arizona
               Public Service Company, El Paso Electric
               Company, Public Service Company of
               New Mexico, Salt River Project
               Agricultural Improvement and Power
               District, Southern California Edison
               Company, and Tucson Electric Power
               Company (refiled).

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


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

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

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


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

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


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


                                              E-5
<PAGE>

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

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

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

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


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

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

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

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

</TABLE>

                                              E-6
<PAGE>

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

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

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

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

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

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

                                               E-7
<PAGE>

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

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

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

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

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

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

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

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

10.19          Facility Lease dated as of July 31, 1986,         10.19 to Annual Report of the          1-6986
               between the First National Bank of                Registrant on Form 10-K for
               Boston, as Owner Trustee, and Public              fiscal year ended December 31,
               Service Company of New Mexico                     1996.
               together with Amendments No. 1, 2 and 3
               thereto (refiled).
</TABLE>


                                               E-8
<PAGE>

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

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

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

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

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

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

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

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

</TABLE>

                                               E-9
<PAGE>

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

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

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

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

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

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

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

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

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

</TABLE>


                                               E-10
<PAGE>

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

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

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

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

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

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

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

10.41          Waste Disposal Agreement, dated as of July 27,    19.5 to the Company's Quarterly        1-6986
               1992 among San Juan Coal Company, the Company     Report on Form 10-Q for the
               and Tucson Electric Power Company.                quarter ended September 30, 1992
                                                                 (confidentiality   treatment  was
                                                                 requested  as to portions of this
                                                                 exhibit,  and such  portions were
                                                                 omitted from the exhibit and were
                                                                 filed    separately    with   the
                                                                 Securities      and      Exchange
                                                                 Commission).


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

</TABLE>


                                               E-11
<PAGE>

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

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

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

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


10.47**        Compensation Arrangement with Chief               10.3 to the Company's Quarterly        1-6986
               Executive Officer.                                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.

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

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

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

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

</TABLE>


                                               E-12
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.                   Description of Exhibit                     Filed as Exhibit:             File No:
-----------                   ----------------------                     -----------------             --------

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


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

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

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


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


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

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

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

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

</TABLE>


                                               E-13
<PAGE>

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

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

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

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

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

10.68.1        Amendment Number One to the Master               10.68.1 to Annual Report of the        1-6986
               Decommissioning Trust Agreement for              Registrant on Form 10-K for
               Palo Verde Nuclear Generating Station            fiscal year ended December 31,
               dated January 27, 1997, between Public           1997.
               Service Company of New Mexico and
               Mellon Bank, N.A.

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

10.72          Revolving Credit Agreement dated as of           10.72 to the Company's Quarterly       1-6986
               March 11, 1998, among the Company,               Report on Form 10-Q for the
               the Chase Manhattan Bank, Citibank,              quarter ended March 31, 1998.
               N.A., Morgan Guaranty Trust Company
               of New York, and Chase Securities, Inc.,
               and the Initial Lenders Named Therein.
</TABLE>


                                               E-14
<PAGE>

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

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

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

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

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

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

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

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

</TABLE>


                                              E-15
<PAGE>

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

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

Additional Exhibits

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

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

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

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

</TABLE>

                                              E-16
<PAGE>

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

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

99.5          Participation Agreement dated as of July           99.5 to Annual Report of the           1-6986
              31, 1986, among the Owner Participant named        Registrant on Form 10-K for
              herein, First PV Funding Corporation, The          fiscal year ended December 31,
              First National Bank of Boston, in its              1996.
              individual   capacity  and  as  Owner  Trustee
              (under a Trust  Agreement dated as of July 31,
              1986,  with the Owner  Participant),  Chemical
              Bank,  in  its  individual   capacity  and  as
              Indenture  Trustee  (under a Trust  Indenture,
              Mortgage, Security Agreement and Assignment of
              Rents  dated  as of July  31,  1986,  with the
              Owner Trustee),  and Public Service Company of
              New Mexico,  including  Appendix A definitions
              together   with   Amendment   No.  1   thereto
              (refiled).

99.6          Trust Indenture, Mortgage, Security                99.6 to Annual Report of the           1-6986
              Agreement  and  Assignment  of Rents               Registrant  on Form 10-K for
              dated as of July 31, 1986,  between The            fiscal year ended December
              First  National Bank of Boston,  as Owner          31, 1996.
              Trustee,   and  Chemical  Bank,  as  Indenture
              Trustee together with  Supplemental  Indenture
              No. 1 thereto (refiled).

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


                                              E-17
<PAGE>

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

<S>            <C>                                               <C>                                    <C>
99.8          Participation Agreement dated as of                99.8 to the Company's Quarterly        1-6986
              August 12, 1986, among the Owner                   Report on Form 10-Q for the
              Participant named therein, First PV                quarter ended March 31, 1997.
              Funding Corporation. The First National
              Bank of Boston, in its individual capacity and
              as  Owner  Trustee  (under  a Trust  Agreement
              dated as of August  12,  1986,  with the Owner
              Participant), Chemical Bank, in its individual
              capacity  and as  Indenture  Trustee  (under a
              Trust Indenture,  Mortgage, Security Agreement
              and Assignment of Rents dated as of August 12,
              1986,  with the  Owner  Trustee),  and  Public
              Service  Company  of  New  Mexico,   including
              Appendix A definitions (refiled).


99.8.1*       Amendment No. 1 dated as of November               99.8.1 to the Company's                1-6986
              18, 1986, to Participation Agreement               Quarterly Report on Form 10-Q
              dated as of August 12, 1986 (refiled).             for the quarter ended March 31,
                                                                 1997.

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

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

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


                                              E-18
<PAGE>

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

<S>            <C>                                               <C>                                    <C>
99.11*        Participation Agreement dated as of                99.1 to the Company's Quarterly        1-6986
              December 15, 1986, among the Owner                 Report on Form 10-Q for the
              Participant named therein,  First PV quarter        ended March 31, 1997.
              Funding  Corporation,  The First National Bank
              of Boston,  in its individual  capacity and as
              Owner Trustee (under a Trust  Agreement  dated
              as  of  December  15,  1986,  with  the  Owner
              Participant), Chemical Bank, in its individual
              capacity  and as  Indenture  Trustee  (under a
              Trust Indenture,  Mortgage, Security Agreement
              and  Assignment  of Rents dated as of December
              15, 1986, with the Owner Trustee),  and Public
              Service  Company  of  New  Mexico,   including
              Appendix A  definitions  (Unit 1  Transaction)
              (refiled).

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

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

99.14         Participation Agreement dated as of                99.14 to the Company's                 1-6986
              December 15, 1986, among the Owner                 Quarterly Report on Form
              Participant named therein, First PV                10-Q for the quarter ended
              Funding Corporation, The First National            March 31, 1997.
              Bank of Boston, in its individual capacity and
              as  Owner  Trustee  (under  a Trust  Agreement
              dated as of December 15, 1986,  with the Owner
              Participant), Chemical Bank, in its individual
              capacity  and as  Indenture  Trustee  (under a
              Trust Indenture,  Mortgage, Security Agreement
              and  Assignment  of Rents dated as of December
              15, 1986, with the Owner Trustee),  and Public
              Service  Company  of  New  Mexico,   including
              Appendix A  definitions  (Unit 2  Transaction)
              (refiled).
</TABLE>

                                              E-19
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.                   Description of Exhibit                     Filed as Exhibit:             File No:
-----------                   ----------------------                     -----------------             --------

<S>            <C>                                               <C>                                    <C>
99.15         Trust Indenture, Mortgage, Security                99.15 to Annual Report of the          1-6986
              Agreement and  Assignment  of Rents dated          Registrant on Form 10-K
              as of  December  31,  1986,  between  the          for fiscal  year  ended
              First  National  Bank of  Boston,  as  Owner       December 31, 1996.
              Trustee,   and  Chemical  Bank,  as  Indenture
              Trustee (Unit 2 Transaction) (refiled).

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

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

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

99.19         Agreement No. 13904 (Option and                    99.19 to Annual Report of the          1-6986
              Purchase of Effluent), dated April 23,             Registrant on Form 10-K for
              1973, among Arizona Public Service                 fiscal year ended December 31,
              Company, Salt River Project Agricultural           1996.
              Improvement and Power District, the
              Cities of Phoenix, Glendale, Mesa,
              Scottsdale, and Tempe, and the Town of
              Youngtown (refiled).

99.20         Agreement for the Sale and Purchase of             99.20 to Annual Report of the          1-6986
              Wastewater Effluent,  dated June 12, 1981,         Registrant on Form 10-K
              Among  Arizona  Public  Service  Company,          for fiscal  year  ended
              Salt River Project Agricultural Improvement         December 31, 1996.
              and Power District and the City of Tolleson,
              as amended (refiled).

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


                                              E-20
<PAGE>

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

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

</TABLE>

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

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

     (b)  Reports on Form 8-K:

         During  the  quarter  ended  December  31,  1999 and  during the period
beginning  January 1, 2000 and ending March 8, 2000, the Company  filed,  on the
date indicated, the following report on Form 8-K.
<TABLE>
<CAPTION>

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

<S>                              <C>                            <C>
November 18, 1999                November 17, 1999              The Company Seeks to Form Holding Company

December 8, 1999                 December 7, 1999               The Company Announces $20 Million Common Stock
                                                                Repurchase and Quarterly Dividend

January 26, 2000                 January 27, 2000               The Company Names New President

January 27, 2000                 January 27, 2000               The Company Reports 1999 Earnings of $2.01 Per Share

February 10, 2000                February 17, 2000              The Company's wholly-owned subsidiary, Avistar
                                                                Invests in Internet Energy Exchange

February 11, 2000                February 17, 2000              The Company Names New Senior Vice President

February 22, 2000                March 7, 2000                  The Company Subsidiary Announces Technology
                                                                Partnership with Sandia National Labs

February 23, 2000                March 7, 2000                  The Company Picks Manzano for New Holding Company

</TABLE>


                                              E-21

<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:  March 9, 2000                     By          /s/ B. F. Montoya
                                             -------------------------------
                                                       B. F. Montoya
                                                  Chairman, President and
                                                  Chief Executive Officer

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

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

<S>                                               <C>                                      <C>
                /s/ B. F. MONTOYA                 Principal Executive Officer and          March 9, 2000
----------------------------------------------    Chairman of the Board
                  B. F. MONTOYA
             Chairman, President and
             Chief Executive Officer

                /s/ M. H. MAERKI                  Principal Financial Officer              March 9, 2000
----------------------------------------------
                  M. H. Maerki
            Senior Vice President and
             Chief Financial Officer

                /s/ J. R. LOYACK                  Principal Accounting Officer             March 9, 2000
----------------------------------------------
                  J. R. Loyack
      Vice President, Corporate Controller
          and Chief Accounting Officer

               /s/ J. T. ACKERMAN                 Director                                 March 9, 2000
----------------------------------------------
                 J. T. Ackerman

               /s/ R. G. ARMSTRONG                Director                                 March 9, 2000
----------------------------------------------
                 R. G. Armstrong

                /s/ J. A. GODWIN                  Director                                 March 9, 2000
----------------------------------------------
                  J. A. Godwin

                /s/ L. H. LATTMAN                 Director                                 March 9, 2000
----------------------------------------------
                  L. H. Lattman

                /s/ M. LUJAN JR.                  Director                                 March 9, 2000
----------------------------------------------
                  M. Lujan Jr.

                 /s/ R. U. ORTIZ                  Director                                 March 9, 2000
----------------------------------------------
                   R. U. Ortiz

                 /s/ R. M. PRICE                  Director                                 March 9, 2000
----------------------------------------------
                   R. M. Price

                 /s/ P. F. ROTH                   Director                                 March 9, 2000
----------------------------------------------
                   P. F. Roth

</TABLE>

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