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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, 1998     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, 1999 was 41,774,083. On such date, the aggregate market value of the
voting stock held by non-affiliates of the Company,  as computed by reference to
the New York Stock Exchange composite transaction closing price of $18 13/16 per
share reported by the Wall Street Journal, was $785,874,936.

                       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 8, 1999 - 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....................................     7
             Service Area and Customers..............................     7
             Natural Gas Supply......................................     8
             Natural Gas Sales.......................................     9
           ENERGY SERVICES BUSINESS UNIT OPERATIONS..................    10
           RATES AND REGULATION......................................    10
             Gas Rates and Regulation................................    11
             Electric Rates and Regulation...........................    12
             Proposed Rulemakings....................................    13
           ENVIRONMENTAL FACTORS.....................................    14


ITEM  2. PROPERTIES..................................................    17
           ELECTRIC..................................................    17
             Fossil-Fueled Plants....................................    17
             Nuclear Plant...........................................    18
             Other Electric Properties...............................    22
           NATURAL GAS...............................................    23
           OTHER INFORMATION.........................................    23

ITEM  3. LEGAL PROCEEDINGS...........................................    23
           PVNGS WATER SUPPLY LITIGATION.............................    23
           SAN JUAN RIVER ADJUDICATION...............................    23
           OTHER PROCEEDINGS.........................................    24
             Republic Savings Bank ("RSB") Litigation................    24
             Purported Navajo Environmental Regulation...............    25
             Nuclear Decommissioning Trust...........................    25

ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........    26

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY.................    27

                                       ii
<PAGE>


                                     PART II

ITEM  5. MARKET FOR THE COMPANY'S COMMON EQUITY AND
           RELATED STOCKHOLDER MATTERS...............................    29

ITEM  6. SELECTED FINANCIAL DATA.....................................    30

ITEM  7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
             CONDITION AND RESULTS OF OPERATIONS.....................    31

ITEM  7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT 
           MARKET RISK...............................................    48

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-24





                                      iii
<PAGE>



                                    GLOSSARY


AG...........................   New Mexico Attorney General
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
decatherm....................   1,000,000 BTUs
DOE..........................   United States Department of Energy
EIP..........................   Eastern Interconnection Project
El Paso......................   El Paso Electric Company
EPA..........................   United States Environmental Protection Agency
EPNG.........................   El Paso Natural Gas Company
FASB.........................   Financial Accounting Standards Board
Farmington...................   City of Farmington, New Mexico
FERC.........................   Federal Energy Regulatory Commission
Four Corners.................   Four Corners Power Plant
FPPCAC.......................   Fuel and Purchased Power Cost Adjustment Clause
Gathering Company............   Sunterra Gas Gathering Company, a wholly-owned
                                  subsidiary of the Company
Kv...........................   Kilovolt
KW...........................   Kilowatt
KWh..........................   Kilowatt Hour
Los Alamos...................   The County of Los Alamos, New Mexico
mcf..........................   Thousand cubic feet
Meadows......................   Meadows Resources, Inc., a wholly-owned
                                  subsidiary of the Company
M-S-R........................   M-S-R Public Power Agency, a California public
                                  power agency
MW...........................   Megawatt
MWh..........................   Megawatt Hour
NMED.........................   New Mexico Environment Department
NMPUC........................   New Mexico Public Utility Commission
NRC..........................   United States Nuclear Regulatory Commission
OCD..........................   New Mexico Oil Conservation Division
PGAC.........................   PNMGS' Purchased Gas Adjustment Clause
PNMGS........................   Public Service Company of New Mexico Gas 
                                  Services, a division of the Company
PRC..........................   New Mexico Public Regulation Commission
Processing Company...........   Sunterra Gas Processing Company, a wholly-owned
                                  subsidiary of the Company
PVNGS........................   Palo Verde Nuclear Generating Station
RCRA.........................   Resource Conservation and Recovery Act
Reeves Station...............   Reeves Generating Station



                                       iv
<PAGE>


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
Tucson.......................   Tucson Electric Power Company
UAMPS........................   Utah Associated Municipal Power Systems
USBR.........................   United States Bureau of Reclamation
USEC.........................   United States Enrichment Corporation
Williams.....................   Williams Gas Processing-Blanco, Inc., a
                                  subsidiary of the Williams Field Services
                                  Group, Inc., of Tulsa, Oklahoma









                                       v
<PAGE>

                                     PART I

ITEM 1.  BUSINESS
                                   THE COMPANY

        Public Service Company of New Mexico (the "Company") was incorporated in
the  State of New  Mexico  in 1917 and has its  principal  offices  at  Alvarado
Square,  Albuquerque,  New Mexico 87158  (telephone  number  505-241-2700).  The
Company is a public utility primarily  engaged in the generation,  transmission,
distribution and sale of electricity and in the  transmission,  distribution and
sale of natural gas within the State of New Mexico. In addition, in pursuing new
business  opportunities,  the Company is focusing on energy and utility  related
activities  under  its  Energy  Services  Business  Unit.  The  Company  is also
operating  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  1.3 million,  of which 52.9%
live in the greater Albuquerque area.

        For the year ended December 31, 1998,  the Company  derived 76.5% of its
operating revenues from electric  operations,  23.4% from natural gas operations
and .1% from energy services operations.

        As of December 31, 1998, the Company employed 2,717 persons.

        Financial  information  relating to amounts of  revenue,  net income and
total assets of the Company's reportable segments is contained in note 13 of the
notes to consolidated financial statements.

                               ELECTRIC OPERATIONS

Service Area and Customers

        The Company's electric operations serve four principal markets. Sales to
retail customers and sales to firm-requirements  wholesale customers,  sometimes
referred to collectively as "system" sales,  comprise two of these markets.  The
third  market  consists of other  contracted  sales to  utilities  for which the
Company  commits to deliver a specified  amount of capacity  (measured in MW) or
energy (measured in MWh) over a given period of time. The fourth market consists
of economy  energy  sales made on an hourly  basis 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, 1998, approximately 358,000 retail electric customers
were served by the Company,  the largest of which  accounted  for  approximately
3.4% of the Company's  total  electric  revenues for the year ended December 31,
1998.


                                       1
<PAGE>
        The Company holds 20 long-term,  non-exclusive  franchise agreements for
its electric  retail  operations,  expiring  between July 1, 1999,  and November
2028.  These franchises are agreements that provide the Company access to public
rights-of-way for placement of the Company's  electric  facilities.  The City of
Albuquerque  (the  "COA"),  Bernalillo  County  and  the  Town of  Cochiti  Lake
franchises expired in 1992, 1997 and 1998,  respectively.  Customers in the area
covered by the expired franchises represent  approximately 35.1%, 7.7% and .02%,
respectively,  of the Company's 1998 total electric operating  revenues,  and no
other franchise area represents more than 5.4%. The Company continues to collect
and pay franchise fees to both the COA and the Town of Cochiti Lake. The Company
currently does not pay franchise fees to Bernalillo  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  1994  through  1998,  retail  KWh sales  have  grown at a
compound annual rate of approximately  3.2%. 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)

                                        1998        1997        1996        1995        1994
                                        ----        ----        ----        ----        ----
<S>                                   <C>         <C>         <C>         <C>         <C>     
 Retail.............................. $536,417    $519,504    $507,821    $485,568    $506,286
 Firm-requirements wholesale......... $ 10,708    $ 10,690    $ 12,359    $ 20,282    $ 22,296
 Other contracted off-system sales... $142,115    $118,876    $ 86,689    $ 43,158*   $ 54,862*
 Economy energy sales................ $122,156    $ 55,768    $ 22,281    $ 17,509*   $ 19,663*

</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 and $25.0 million in 1995 and 1994, respectively.

<TABLE>
<CAPTION>
                                   ELECTRIC SALES BY MARKET
                                       (Megawatt hours)

                                       1998        1997        1996        1995        1994
                                       ----        ----        ----        ----        ----

<S>                                  <C>         <C>         <C>         <C>         <C>      
Retail.............................. 6,739,874   6,534,899   6,406,296   6,029,365   5,953,151
Firm-requirements wholesale.........   278,615     278,727     282,534     447,629     489,182
Other contracted off-system sales... 4,033,931   3,790,081   2,928,321     594,367   1,403,480
Economy energy sales................ 4,469,769   2,716,835   1,364,365   1,548,517   1,469,271
</TABLE>

                               SYSTEM PEAK DEMAND*
                                   (Megawatts)

                                    1998      1997      1996      1995    1994
                                    ----      ----      ----      ----    ----

Summer............................  1,313     1,209     1,217     1,247   1,189
Winter............................  1,135     1,142     1,111     1,076   1,040

   *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 1998 and 1997, the Company's sales in the off-system
markets accounted for approximately 54.8% and 48.9%, respectively,  of its total
KWh sales and approximately 32.6% and 24.8%, respectively, of its total revenues
from  energy  sales.  Of the  total  off-system  sales  made in  1998,  67% were
transacted through purchases for resale as compared to 47% in 1997. 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 81.8%,  87.2% and 92.5%,  respectively,  in 1998,  as
compared to 81.4%,  74.8% and 90.6%,  respectively,  in 1997.  During 1998,  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 were 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 1998.  This resulted in
a peak demand in 1998 of 89 MW. APPA  invoked the same option to reduce its peak
demand in 1999 to 74 MW.

        The Company furnished firm-requirements wholesale power in New Mexico in
1998 to the City of Gallup and TNP. The Company is committed to provide  service
to the City of Gallup through April 2003. Average monthly demands under the City
of Gallup contract for 1998 were approximately 27 MW. During 1998, TNP purchased
15 MW.  Service  to TNP  terminated  December  31,  1998.  No  firm-requirements
wholesale  customer accounted for more than 1.0% of the Company's total electric
operating revenues for the year ended December 31, 1998.

Sources of Power

        As of December 31, 1998, the total net generation capacity of facilities
owned or leased by the Company was 1,506 MW. The Company anticipates an increase
of 15 MW in the Company's  share of capacity at the SJGS during 1999 as a result
of a new, more efficient SO2 removal system.

        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 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 up to 70 MW from 1999 through 2003. 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>

       The  Company  anticipates  the  need for  approximately  100 to 200 MW of
additional  capacity  in the 1999  through  2000  timeframe.  To meet  projected
capacity  needs,  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.  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 will be used to
purchase or acquire  resources  the  Company  had pursued  through the solar RFP
process,  while the other  half of the monies  will be used for other  renewable
resource projects.

        In November 1998, the NMPUC adopted a rule that establishes a "renewable
energy  development  program"  and  requires  New  Mexico  utilities  to collect
voluntary  contributions to a renewable  energy fund from their  customers.  The
stated purpose of the rule is to support  research,  development,  demonstration
and deployment of renewable  energy  resources.  Funds collected by each utility
are  to be  spent  by it  on  projects  approved  by  the  PRC  based  upon  the
recommendations  of a Renewable Energy Advisory Board which will be appointed by
the PRC.  The  Company has  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.

        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
             ----------   -------   ----------   -------   ----------   -------
  1994......    72.0       162.9       27.8       58.5         0.2       321.7
  1995......    67.9       168.3       31.9       49.1         0.2       242.2
  1996......    68.9       159.3       30.4       49.7         0.7       238.2
  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

        The estimated  generation mix for 1999 is 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.

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  100 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.  The average cost
of fuel, including ash disposal and land reclamation costs, for the SJGS for the
years  1996,  1997 and 1998 was  167.0  cents,  164.2  cents  and  168.8  cents,
respectively, per million BTU ($32.18, $31.59 and $32.16 per ton, respectively).
For  other  information  related  to coal  requirements,  see PART  II,  ITEM 7.
"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS - OTHER ISSUES FACING THE COMPANY - COAL FUEL SUPPLY".

        Four Corners is supplied  with coal under a fuel  agreement  between the
owners and BHP, under which BHP agreed to supply all the coal  requirements  for
the life of the plant. BHP holds a long-term coal mining lease, with options for
renewal,  from the Navajo  Nation and operates a surface  mine  adjacent to Four
Corners with the coal supply  expected to be  sufficient to supply the units for
their estimated useful lives.  The average cost of fuel,  including ash disposal
and land  reclamation  costs,  for the years 1996, 1997 and 1998 at Four Corners
was 125.9  cents,  100.1  cents and 99.2  cents,  respectively,  per million BTU
($22.90 , $17.77  and  $17.64  per ton,  respectively).  The  reductions  in the
average cost of fuel for 1997 and 1998 reflect the  settlement of certain issues
between  APS,  the  operating   agent,  and  the  Navajo  Nation  regarding  the
computation of royalties due on the sales of coal and possessory  interest taxes
paid by the Four Corners coal supplier.


                                       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 gas
supply.

Nuclear Fuel

        The fuel cycle for PVNGS is comprised of the following  stages:  (1) the
mining and  milling of uranium  ore to  produce  uranium  concentrates;  (2) the
conversion of uranium concentrates to uranium  hexafluoride;  (3) the enrichment
of  uranium  hexafluoride;  (4)  the  fabrication  of fuel  assemblies;  (5) the
utilization  of fuel  assemblies in reactors;  and (6) the storage of spent fuel
and the  disposal  thereof.  The  Company  made  arrangements  through  contract
flexibilities  to obtain  quantities of uranium  concentrates  anticipated to be
sufficient to meet its share of uranium concentrates  requirements through 2000.
Existing   contracts  and  options  could  be  utilized  to  meet  80%  of  such
requirements  in 2001 and 2002 and 50% of  requirements  from 2003 through 2007.
Spot  purchases in the uranium market will be made, as  appropriate,  in lieu of
any uranium that might be obtained through contract  flexibilities  and options.
The Company  understands that the other PVNGS  participants have made comparable
arrangements for their uranium concentrates requirements.

        The  PVNGS  participants,  including  the  Company,  contracted  for all
conversion services required with options through 1999 and for up to 60% through
2002.  The  PVNGS  participants,  including  the  Company,  contracted  for  all
enrichment services required for 1999 under an existing contract with USEC and a
new  contract  for   enrichment   services  with  Urenco   Limited.   Under  the
arrangements,  USEC will provide 80% of the requirements and Urenco Limited will
provide 20% of the requirements through September 2002, with an option with USEC
to renew the service  contract  through  September  2007. In addition,  existing
contracts  will provide fuel assembly  fabrication  services until at least 2003
for each  PVNGS  unit,  and  through  contract  options,  approximately  fifteen
additional years are available.

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.

        Although  discussions  are  continuing  with the  USBR,  the  status  of
discussions  with the Navajo Nation is uncertain due to transition in the tribal
government as the result of the last tribal  elections.  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.

        In July 1997,  the  Company  was  notified by the USBR that the USBR had
received  from the  Solicitor  of the U.S.  Department  of Interior a memorandum
opinion  concluding  that the Company's  contract  extension with the USBR would
require  Congressional  approval  pursuant  to Section  11 of the Navajo  Indian
Irrigation  Project and San Juan-Chama  Project  Authorization  Act of 1962. The
Company intends to pursue such approval once the contract is negotiated with the
USBR.

        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".)

                             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 419,000 customers as of December 31, 1998. The Albuquerque
metropolitan  area accounts for approximately  55.5% 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. This franchise with the COA expired on January 28, 1998. The
Company is currently engaged in discussions  regarding renewal of the franchise.
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 1,266 gas marketers, producers and end users during 1998.

                                       7
<PAGE>

        For the twelve months ended  December 31, 1998,  PNMGS had throughput of
approximately  85.7  million   decatherms,   including  sales  of  49.2  million
decatherms to both sales-service  customers and off-system customers.  No single
sales-service  customer  accounted  for more than 2.4% of PNMGS'  therm sales in
1998.  During 1998,  approximately  42.5% 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, 1998,  were
approximately $256.0 million.  Cost-of-gas revenues, received from sales-service
and  off-system  customers,  accounted for  approximately  52.6% 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  45.8% of PNMGS'
total therm sales in 1998 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)

                           1998       1997       1996        1995       1994
                           ----       ----       ----        ----       ----

Residential............    30.3       30.7       27.4        25.9       27.1
Commercial.............    10.4       10.6        9.3         8.9        9.8
Industrial.............     1.5        1.3        2.1         0.7        0.8
Public authorities.....     3.4        4.2        2.6         2.4        2.5
Irrigation.............     1.9        1.6        1.4         1.2        1.3
Sales for resale.......     1.2        1.2        0.8         1.3        0.7
Unbilled...............    (1.3)      (0.2)       1.4        (1.8)      (0.3)
Transportation**.......    36.4       34.0       47.1        69.8       90.2
Off-system sales.......     1.9        1.2        8.0         1.2          -
                           ----       ----      -----       -----      -----
                           85.7       84.6      100.1       109.6      132.1
                           ====       ====      =====       =====      =====


        The following table shows gas revenues by customer class*:

                                  GAS REVENUES
                             (Thousands of dollars)
 
                              1998      1997      1996      1995      1994
                              ----      ----      ----      ----      ----

Residential...............  $161,153  $187,563  $129,911  $125,290  $149,439
Commercial................    42,680    50,502    33,022    32,328    42,725
Industrial................     4,887     4,536     5,179     1,873     2,905
Public authorities........    12,610    17,577     8,018     7,939     9,969
Irrigation................     5,780     5,041     3,252     3,077     4,061
Sales for resale..........     3,596     4,465     2,106     3,114     2,462
Unbilled..................      (955)   (2,172)    2,678    (2,430)      267
Transportation**..........    13,464    14,172    17,215    22,172    27,592
Liquids...................     1,463     4,451     7,608    13,414    16,090
Processing fees...........         -         -         -     5,180    10,638
Off-system sales..........     3,816     1,926    14,352     1,927         -
Other.....................     7,481     6,708     3,960     4,101     3,362
                            --------  --------  --------  --------  --------  
                            $255,975  $294,769  $227,301  $217,985  $269,510
                            ========  ========  ========  ========  ========


*   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>


                    Energy Services Business Unit Operations

        The Company has been  conducting  energy services  activities  under its
Energy Services Business Unit. This business unit has initiated several business
lines to position the Company for an increasingly competitive market. The Energy
Services  Business  Unit  consists  of  Energy  Partners,  Pathways  Integration
formerly known as Water Services 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  management with
a specific  focus on the  municipal  and Native  American  markets.  The Company
currently has a contract with the City of Santa Fe to operate the Santa Fe water
system  through  the year  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".)  The Energy Services  Business Unit is also pursuing
energy and transmission business opportunities in Mexico.

        In December 1998, the NMPUC issued a final order approving the Company's
request to form and invest in three wholly-owned  subsidiaries.  Under the final
order,  the  Company is allowed to invest a maximum of $50  million in the three
subsidiaries, subject to the availability of the Company's retained earnings and
to enter  into  reciprocal  loan  agreements  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.

        If the Electric  Industry  Restructuring Act of 1999 is passed (see PART
II, ITEM 7. - "MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND
RESULTS OF  OPERATIONS  - OTHER  ISSUES  FACING THE COMPANY - ELECTRIC  INDUSTRY
RESTRUCTURING  ACT OF 1999"),  the Company is planning to seek  shareholder  and
other regulatory approvals to form a holding company; however, the Company still
intends  to move  forward  during the  interim  period to form and invest in the
three wholly-owned subsidiaries to achieve competitive business strategies.

                              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.


                                       10
<PAGE>

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 with the Supreme Court
regarding  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  where
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.

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.  On November 24, 1997, in a proceeding  related to the Company's 1993
PGAC continuation filing, the NMPUC issued a final order approving continued use
of the Company's  PGAC.  As part of this order,  the Company is required to make
its next PGAC continuation filing no later than November 23, 1999.

Levelized PGAC

        In July 1997,  the Company  submitted a request  with the NMPUC  seeking
approval  to modify the method by which it  recovers  its gas cost  through  the
PGAC.  The new method  would enable the Company to levelize the price it charges
its customers  during the winter  heating  season.  In November  1997, the NMPUC
approved  the  proposed  "levelized"  PGAC.  The order  allowed  the  Company to
implement the levelized PGAC mechanism  effective  December 1, 1997, and granted
the  Company  authorization  to  include  the cost of hedging  transactions  for
recovery through its PGAC.

NMPUC Order on the Cost of Gas Case

        The  NMPUC  issued  a final  order in a  proceeding  that  commenced  in
December  1996  and  related  to  an  investigation  initiated  because  of  the
significant  increase  in the cost of gas the Company  billed its  sales-service
customers. In its initial order, the NMPUC disallowed collection of $1.6 million
of gas costs and imposed but suspended a civil penalty of $2.2 million due to an
allegedly  incorrect  gas cost factor filed by the Company which the order found
misled the NMPUC. Subsequently,  the NMPUC granted a request for rehearing filed
by  the  Company.   In  September  1998,  the  NMPUC  issued  its  final  order,
withdrawing:  (i) the  portion of the  initial  order  which had stated that the
Company  deliberately  misled the NMPUC; (ii) the imposition of the $2.2 million
civil  penalty;  and (iii) the  disallowance  of the $1.6  million  of gas costs
imposed by the initial order.


                                       11
<PAGE>

Gas Choice

        In  February  1997,  the  NMPUC  ordered  the  Company  to make a filing
addressing  the terms and  conditions  under  which the Company  would  consider
exiting the merchant function (the sale of gas to its sales-service  customers).
Through the use of working groups,  a stipulation was filed with the NMPUC which
outlined interim  measures,  known as the Gas Choice Program,  to facilitate the
choice of suppliers by small commercial and residential customers for the winter
of 1997-98.  This stipulation was approved in August 1997.  Modifications to the
program,   including  the  ability  to  recover   implementation   costs,   were
incorporated in a supplemental stipulation approved by the NMPUC in July 1998.

Electric Rates and Regulation

        For  electric  rates and  regulation  regarding  "Electric  Rate  Case",
"Residential Electric, Incorporated ("REI"), "City of Albuquerque ("COA") Retail
Pilot Load Aggregation Program" and "City of Gallup ("Gallup")  Complaint",  see
PART II, ITEM 7.  "MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION
AND RESULTS OF OPERATIONS - OTHER ISSUES  FACING THE COMPANY - NMPUC  REGULATORY
ISSUES".

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 1998 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 PRC retail
customers.

New Mexico Industrial Energy Consumers ("NMIEC")

        In April 1997,  NMIEC filed a petition  for  declaratory  order with the
NMPUC.  In its petition,  NMIEC stated that the Company  interrupted  service to
NMIEC members taking service under the  Experimental  Incremental  Interruptible
Power Rate ("EIIPR") during off-peak periods and such interruptions  violate the
terms of the EIIPR. The interruptions  resulted from a scheduled maintenance for
the  Company's  345 kV line  connected to Four  Corners.  NMIEC alleges that its
members  have  suffered  economic  harm from  losses in  production  due to such
interruptions.  The petition requests,  among other things: (i) clarification of
the EIIPR to determine that EIIPR  customers are entitled to be treated the same
as  all  other  customers  with  similar   consumption   when  system  emergency
curtailments  occur  during the  off-peak  hours;  (ii)  determination  that the
Company's  practice of  interrupting  EIIPR  customers  during off-peak hours is
discriminatory;   and  (iii)  the  Company  to  discontinue   such  practice  of
interrupting EIIPR customers.  The Company,  in a filing with the NMPUC,  stated
that  it  unintentionally  misapplied  the  tariff  and as a  result,  filed  an
amendment  to its EIIPR  tariff  to  clarify  the  language  regarding  off-peak
interruptions. The PRC has not issued a ruling on NMIEC's petition.



                                       12
<PAGE>

Independent System Operator ("ISO")

        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  initially  had a one year term,  since  extended to
December 31, 1999. The  development  agreement  calls for the  development to be
separated into two phases.  The first phase will define the operating,  pricing,
planning  and legal  parameters  of the ISO.  The second  phase will develop the
by-laws,  articles of incorporation and various tariffs and agreements required.
Over fifty  entities are  participating  in the  development  process  including
investor owned utilities,  generation and transmission cooperatives,  government
entities,  private  corporations  and other interested  groups.  FERC Order 888,
issued in 1996,  encourages  utilities to investigate the formation of such ISOs
and provides  criteria  under which the  formation,  operation and governance of
ISOs would be reviewed.

        The  proposed  ISO,  named  the  Desert   Southwest   Transmission   and
Reliability  operator  ("Desert  STAR"),  is envisioned to include the following
functions:  (i) transmission security monitoring;  (ii) handling of transmission
service  reservations,   transmission  service  scheduling  and  accounting  and
managing relief of congestion of the  transmission  grid;  (iii)  procurement of
ancillary  services  required  for  transmission  system  operation;   and  (iv)
operation of a grid-wide Open Access Same-time  Information System.  Desert STAR
would be governed by an independent  board.  The Company is currently  unable to
predict the ultimate  timing of the  formation  or the  ultimate  outcome of the
proposed ISO.

Proposed Rulemakings

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.  On November  30,  1998,  the NMPUC
promulgated  a net metering  rule as NMPUC Rule 571. On December  31, 1998,  the
NMPUC denied the motions for rehearing  filed by the Company and other  parties,
but limited the application of the rule to customer  generation  resources of up
to one megawatt. On January 8, 1999, the Company and other parties refiled their
motions for  rehearing  with the PRC. On January 12,  1999,  the PRC granted the
motions for rehearing and suspended Rule 571, effective  immediately.  A hearing
has been scheduled for April 19, 1999, to receive oral arguments.

Renewable Resources Rule

       In  September  1998,  the NMPUC  issued a notice of  proposed  rulemaking
regarding a "renewable  energy fund" rule. The stated purpose of the rule was to
support research, development,  demonstration and deployment of renewable energy
resources by requiring  all  utilities  to bill their  electric  customers a 0.5
percent surcharge on their electric bills and also by allowing customers to make
voluntary  contributions  to a renewable  energy fund.  Comments on the proposed
rule were submitted by numerous parties,  including the Company. On November 24,


                                       13
<PAGE>


1998, the NMPUC  promulgated a "renewable energy  development  program" as NMPUC
Rule 572. Rule 572 differed materially from the originally proposed rule in that
it was limited solely to the collection of voluntary  contributions.  No parties
appealed the promulgation of Rule 572 and the rule is currently in effect.

       On February 10, 1999, the Company filed with the PRC an application for a
variance from the voluntary  collection  requirements of Rule 572. The basis for
the  variance  request  was that the  Company  already  has in place a renewable
energy resource  program that is as good as or better than the renewable  energy
development  program  contained in Rule 572 (See "Sources of Power"  above.) The
Company's application for a variance is pending at this time.

                              ENVIRONMENTAL FACTORS

        The Company, in common with other electric and gas utilities, is subject
to stringent  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.  The Company  believes  that it is in
compliance,  in all material respects,  with the environmental laws. The Company
does not currently expect that material  expenditures for environmental  control
facilities will be required to meet environmental  regulations in 1999 and 2000.
However,  in order to achieve  operational  efficiencies,  the  Company  began a
retrofit  environmental  project at SJGS in 1997.  This project was completed in
January 1999 and cost the Company approximately $40 million.

The Clean Air Act

        The Clean Air Act Amendments of 1990 (the "Act") impose stringent limits
on emissions of sulfur dioxide and nitrogen oxides from  fossil-fueled  electric
generating  plants.  The Act is intended to reduce air contamination  from every
sizeable  source  of  air  pollution  in the  nation.  Electric  utilities  with
fossil-fueled  generating units will be affected  particularly by the section of
the Act which deals with acid rain. To comply with the Act, many  utilities will
be faced with installing  expensive sulfur dioxide removal  equipment,  securing
low sulfur coal, buying sulfur dioxide emission allowances,  or a combination of
these.  Due to the existing air pollution  control  equipment on the  coal-fired
SJGS and Four Corners,  the Company  believes that it will not be faced with any
material  capital  expenditures in order to comply with the acid rain provisions
(both  sulfur  dioxide and nitrogen  dioxide) of the Act.  SJGS and Four Corners
have  installed  flow  monitoring  equipment  and have  completed  certification
testing of their continuous emission monitoring equipment.  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.

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


                                       14
<PAGE>


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

        The Commission did not recommend any additional  emission reductions for
point sources.  The  recommendations  include  monitoring the impact of existing
Clean Air Act  requirements on emission  reductions and the resulting  effect on
visibility,  setting regional targets for SO2 emissions from stationary  sources
for the year 2000 and  developing  a  regulatory  program  to  implement  if the
targets are exceeded. The regulatory program will include a market-based trading
of emissions allowances.  The Western Regional Air Partnership ("WRAP") has been
established  as the  follow-up  organization  to the  Commission  and  has  been
directed to implement the  Commission  recommendations.  Currently,  the WRAP is
actively  working  to  implement  the  recommendations.   The  targets  and  the
regulatory  program have not yet been developed;  however,  the Company does not
expect a material adverse effect on the Company's financial condition or results
of operations.

        In a related matter, the EPA proposed regional haze regulations in 1997.
These proposed  regulations address visibility  impairment in Class I areas. The
EPA has  stated  that it  considered  the  Commission's  recommendations  in the
formulation of the proposed  regulations.  In June 1998,  the Western  Governors
Association  ("WGA")  submitted  a  document  to  the  EPA  discussing  how  the
Commission  recommendations  could be directly  incorporated  into the  proposed
regional  haze  rule.  The EPA  re-opened  the  comment  period on the  proposed
regional haze rule in order to allow all  interested  parties an  opportunity to
comment on the WGA document.  The Company provided comments on the WGA document.
The final regional haze regulations are expected to be promulgated in 1999.

        In July 1997,  the EPA  issued its final  rules  revising  the  National
Ambient Air Quality Standards for ozone and particulate  matter.  The EPA is now
involved in developing  implementation  plans for these revised  standards.  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.

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
municipal well supplying the City of Santa Fe 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.



                                       15
<PAGE>

        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
1999 strongly suggest the groundwater  contamination does not originate from the
Santa Fe Station  site and has been drawn  under the site by the  pumping of the
Santa Fe supply well.

        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.

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 includes  approximately $5.0 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,  1998,  was $7.7  million.  The  remediation  program
continues on schedule.

Pit Closure and Remediation

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


                                       16
<PAGE>

ITEM 2. PROPERTIES

        The  Company's  owned  interests  in PVNGS are  mortgaged  to secure its
remaining first mortgage bonds. (See PART II, ITEM 7.  "MANAGEMENT'S  DISCUSSION
AND ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF  OPERATIONS - LIQUIDITY AND
CAPITAL RESOURCES - Financing Activities".)

                                    ELECTRIC

        The Company's  ownership and capacity in electric generating stations in
commercial service as of December 31, 1998, were as follows:
                                                                   Total Net
                                                                   Generation
     Type                 Name           Location                Capacity (MW)
     ----                 ----           --------                -------------

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

    * For load and resource purposes, the Company has notified the NMPUC that it
      recognizes the maximum dependable capacity rating for PVNGS to be 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
            38.457% owned by the Company.
       (c)  Four Corners Units 4 and 5 are 13% owned by the Company.

Fossil-Fueled Plants

        SJGS is located in northwestern  New Mexico,  and consists of four units
operated by the Company.  Units 1, 2, 3 and 4 at SJGS have net rated  capacities
of 316 MW, 312 MW, 488 MW and 498 MW, respectively. SJGS Units 1 and 2 are owned
on a 50% shared basis with Tucson. Unit 3 is owned 50% by the Company,  41.8% by
SCPPA  and  8.2%  by  Tri-State   Generation   and   Transmission   Association,
Inc.("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.


                                       17
<PAGE>
        In July  1996,  the  Company  and  other  SJGS  participants  signed  an
agreement to convert the existing flue gas desulfurization  (SO2 removal) system
at the  SJGS  into a much  simpler  and cost  effective  limestone  system.  The
conversion   project  was  completed  in  January  1999  and  cost  the  Company
approximately $40 million.

       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 1998, PVNGS
was operated at a capacity factor of 92.5% 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.

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
between 2003 and 2008. 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 to the Company will be  approximately  $9.1
million.  These  generators  will be  used as  replacements  if  performance  of
existing generators  deteriorates to less than acceptable levels. The generators
are expected to be on site in 2002. The Company's  share of  installation  costs
will be approximately $8.4 million.


                                       18
<PAGE>

        Based on latest 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.

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
for $17.5 million. The related ownership interests were subsequently  reacquired
by the  Company.  For  accounting  purposes,  this  transaction  was  originally
recorded as a purchase with the Company recording  approximately  $158.3 million
as  utility  plant  and  $140.8  million  as  long-term  debt  on the  Company's
consolidated balance sheet. (See PART II, ITEM 7. - "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF  FINANCIAL  CONDITION  AND  RESULTS OF  OPERATIONS  - LIQUIDITY  AND
CAPITAL  RESOURCES - Financing  Activities".) 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.

        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


                                       19
<PAGE>

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. Under a portion of this program,  the Company made a series of annual
deposits  under  agreements  approved by the NMPUC to an external  non-qualified
trust  which were  applied  pursuant  to a split  dollar  agreement  between the
Company and its employees towards an investment in whole life insurance policies
on certain  current and former  employees.  The program for  investment  in life
insurance policies has been terminated (see ITEM 3. - "LEGAL PROCEEDINGS - OTHER
PROCEEDINGS - Nuclear  Decommissioning  Trust").  The  remaining  portion of the
nuclear decommissioning funding program is invested in equities 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 $155.4 million (in 1998 dollars).

        Pursuant  to NMPUC  approval,  the  Company  funded an  additional  $3.0
million,  $2.1 million and $12.5 million in 1998,  1997 and 1996,  respectively,
into the qualified and non-qualified  trust funds. The estimated market value of
the trusts,  including the net cash value of the life insurance policies, at the
end of 1998 was approximately $40 million.

       The  NRC  has  recently   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 estimated total  decommissioning costs through cost of service
rates or through a  "non-bypassable  charge".  Other  mechanisms are prescribed,
including prepayment, 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 will be filing a report
with the NRC through  APS,  the  operating  agent of PVNGS,  at the end of March
1999, concerning  decommissioning  funding assurance,  and believes that it will
continue  to be  allowed to use the  external  sinking  fund  method as the sole
financial assurance method for Unit 3.

Nuclear Spent Fuel and Waste Disposal

        Pursuant to the  Nuclear  Waste  Policy Act of 1982,  as amended in 1987
(the "Waste  Act"),  DOE is obligated to accept and dispose of all spent nuclear
fuel and other  high-level  radioactive  wastes  generated by all domestic power
reactors.  The NRC,  pursuant to the Waste Act,  requires  operators  of nuclear
power reactors to enter into spent fuel disposal contracts with DOE. APS, on its
own behalf and on behalf of the other PVNGS participants,  executed a spent fuel
disposal  contract  with DOE.  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.  DOE  announced  that  such a  repository  now  cannot be
completed before 2010.


                                       20
<PAGE>

       In  response  to  lawsuits  filed over DOE's  obligation  to accept  used
nuclear  fuel,  the United States Court of Appeals for the D.C.  Circuit  ("D.C.
Circuit") has ruled that DOE had an obligation to begin  accepting  used nuclear
fuel in 1998. However, the D.C. Circuit refused to issue an order compelling DOE
to begin moving used fuel.  Instead,  the D.C. Circuit ruled that any damages to
utilities  should be sought under the standard  contract  signed between DOE and
utilities,  including  APS,  the  operating  agent of PVNGS.  The United  States
Supreme Court has refused to grant review of the D.C.  Circuit's  decisions.  In
July 1998, APS filed a petition for review  regarding DOE's  obligation to begin
accepting spent nuclear fuel.

       APS 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 wet
storage  with 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 million (in 1998 dollars) over the life of PVNGS 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  1998,  the  Company  expensed
approximately $12 million for on-site interim nuclear fuel storage costs related
to nuclear fuel burned prior to 1999.  APS  currently  believes  that spent fuel
storage or  disposal  methods  will be  available  for use by PVNGS to allow its
continued operation beyond 2002.

       A low-level  radioactive  waste  facility built in 1995 at the PVNGS site
could store an amount of waste  equivalent  to 10 years of normal  operation  of
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 facility is available.

        While believing that  scientific and financial  aspects of the issues of
spent  fuel  and   low-level   waste   storage  and  disposal  can  be  resolved
satisfactorily,  the Company  acknowledges  that their ultimate  resolution in a
timely  fashion will  require  political  resolution  and action on national and
regional scales which it is less able to predict.

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  accumulated  funds,  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 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


                                       21
<PAGE>

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 has also  recently  announced  that it has  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,  1999,  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 exceeds 17 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  $3.3 million per
year.

Other Electric Properties

        As of December  31, 1998,  the Company  owned,  jointly  owned or leased
2,803 circuit miles of electric  transmission lines, 5,370 miles of distribution
overhead lines,  3,497 cable miles of underground  distribution lines (excluding
street lighting) and 188 substations.

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

       In July 1998, the Company and Tri-State made a non-binding joint proposal
in  response  to the request  for  proposals  issued by Plains in May 1998.  The
proposal  was  subsequently  selected as a finalist  by Plains.  The Company and
Tri-State  submitted a binding offer in September 1998, and Plains  subsequently
announced that it would be entering into exclusive negotiations with the Company
and Tri-State  regarding the joint proposal.  It is now contemplated that Plains
will merge with Tri-State,  with Tri-State being the surviving entity. Tri-State
will  then  sell  certain  assets  to  the  Company   consisting   primarily  of
transmission  assets and the Plains  headquarters  building in  Albuquerque.  In
addition,  the Company may have the  opportunity to become the power supplier of
50 MW to one of Plains' member  cooperatives.  Once the final  transactions  are
negotiated,  the  transactions  will be submitted  to various  state and Federal
regulatory agencies for approval. Closing of the transactions will depend on the
timing of regulatory and other approvals.


                                       22
<PAGE>

                                   NATURAL GAS

        The natural gas properties as of December 31, 1998,  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  1,338 miles of pipe with  appurtenant  compression
facilities.  The distribution systems consisted of approximately 10,566 miles of
pipe.

        On June 21, 1996, the Company entered into a purchase agreement with the
DOE for the purchase of  approximately  130 miles of transmission  pipe for $3.1
million for the  transmission  of natural gas to Los Alamos and to certain other
communities in northern New Mexico. The purchase is subject to the DOE providing
right-of-way  satisfactory  to the Company.  The  acquisition by the Company was
approved by the NMPUC in December 1996.  Right-of-way  resolution is expected to
be completed by the second quarter of 1999.

                                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.

                                       23
<PAGE>

                                OTHER PROCEEDINGS

Republic Savings Bank ("RSB") Litigation

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

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

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

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

        RSB  filed a  motion  for  partial  summary  judgment  on the  issue  of
liability  under its breach of contract claim based on the United States Supreme
Court's  decision in the Winstar  case.  The  Federal  government  filed a cross
motion for summary judgment and opposed RSB's motion.  On December 22, 1997, the
judge  entered an opinion,  addressing  eleven  issues common to the question of
governmental  liability in a number of cases  including the RSB case,  ruling in
favor of the plaintiffs on all issues and severely  critical of the government's
litigation  tactics.  The judge  ordered  the Federal  government  to show cause
within  sixty  days as to why the  motions  for  summary  judgment  on  contract
liability  issues of RSB and  plaintiffs in similar cases should not be granted.
The Federal government timely filed its response to the show cause order and RSB
filed its reply.  Decision on summary  judgment is still pending.  The court has
ordered  the  parties  to  appoint  representatives  to  develop a  process  for
settlement of the cases and has assigned a judge to assist with the process.  It
is premature to estimate the amount of recovery, if any, by Meadows and RHC.


                                       24
<PAGE>

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 D.C. Circuit Court of Appeals 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. The Company
cannot predict the outcome of the consolidated appeal.

Nuclear Decommissioning Trust

        On March 31 and April 21,  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 have been  surrendered by the trust in exchange
for the cash surrender value of the policies.


                                       25
<PAGE>

        In the lawsuit,  the Company asserts  various tort,  contract and equity
theories  against the  defendants.  The Company is seeking,  among other things,
damages in an amount that represents the difference  between what the defendants
represented  that the life  insurance  program would achieve and the amount that
the Company's  experts  currently  project that the life insurance  program will
achieve.  On May 29,  1998,  the  defendants  filed a notice of  removal  to the
Federal District Court. On June 26, 1998, the Company and trustee filed a motion
to remand the proceeding back to State District Court.  Several defendants filed
answers and motions to dismiss the lawsuit with the Federal  District  Court.  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.  On  July  17,  1998,  the  Company  denied  liability  under  the
counterclaim and set forth numerous  defenses.  On November 5, 1998, the Federal
District  Court  granted  the  Company's  and  trustee's  motion  remanding  the
proceeding back to State District Court. Discovery is currently proceeding.  The
Company  is  currently  unable to  predict  the  ultimate  outcome  or amount of
recovery, if any.

       For a  discussion  of other  legal  proceedings,  see PART II,  ITEM 7. -
"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS - OTHER ISSUES FACING THE COMPANY - NMPUC REGULATORY ISSUES".

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

       None.


                                       26
<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,
1998, except as otherwise noted:
<TABLE>
<CAPTION>

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

<S>                    <C>                                                           <C>    
B. F. Montoya........  63 President and Chief Executive Officer                        August 1, 1993

J. E. Sterba.........  43 Executive Vice President and Chief Operating Officer         March 11, 1997
                          Senior Vice President, Bulk Power Services                 December 6, 1994
                          Senior Vice President, Corporate Development               December 7, 1993
                          Senior Vice President, Asset Restructuring                    April 6, 1993
                          Senior Vice President, Retail Electric and Water           January 29, 1991
                          Services

M. D. Christensen....  50 Senior Vice President, New Mexico Retail Services          November 3, 1997
                          Senior Vice President, Customer Service and Public          January 9, 1996
                          Affairs
                          Vice President, Public Affairs                             December 7, 1993
                          Vice President, Communications                                July 22, 1991

R. J. Flynn..........  56 Senior Vice President, Electric Services                   December 1, 1994

M. H. Maerki.........  58 Senior Vice President and Chief Financial Officer          December 7, 1993
                          Senior Vice President, Administration and Chief               March 2, 1993
                          Financial Officer
                          Senior Vice President and Chief Financial Officer              June 1, 1988

P. T. Ortiz..........  48 Senior Vice President, General Counsel and Secretary       December 6, 1994
                          Senior Vice President, Regulatory Policy, General          December 7, 1993
                          Counsel and Secretary
                          Senior Vice President, Public Policy, General                 March 2, 1993
                          Counsel and Secretary
                          Senior Vice President, General Counsel and Corporate       February 4, 1992
                          Secretary

W. J. Real...........  50 Senior Vice President, Gas Services                        December 6, 1994
                          Senior Vice President, Utility Operations                  December 7, 1993
                          Senior Vice President, Customer Service and                   March 2, 1993
                          Operations
                          Executive Vice President, Gas Operations                      June 19, 1990

</TABLE>

                                       27


<TABLE>
<CAPTION>

     Name             Age                     Office                           Initial Effective Date
     ----             ---                     ------                           ----------------------
<S>                    <C>                                                          <C>    
R. B. Ridgeway.......  40 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
J. A. Zanotti........  59 Senior Vice President, Human Resources                      January 9, 1996
                          Vice President, Human Resources                               March 2, 1993
                          Senior Vice President, Human Resources and                    July 26, 1990
                          Communications
</TABLE>

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

        J.E.  Sterba resigned as an executive vice president and chief operating
officer of the Company, effective December 31, 1998.

        J.A. Zanotti resigned as a senior vice president, Human Resources of the
Company, effective July 31, 1998.

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

        All of the above  executive  officers  have been employed by the Company
and/or its  subsidiaries  for more than five years in  executive  or  management
positions,  with the exception of R. J. Flynn. R. J. Flynn has a 30-year history
in the utility  industry  working with Pacific Gas and Electric  Company.  Since
1989, R. J. Flynn held the position of Regional Vice President,  responsible for
all gas and electric utility operations in the San Joaquin Valley.


                                       28
<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 1998 and
1997, by quarters, are as follows:

                                                    Range of
  Quarter Ended                                    Sales Prices     
  -------------                                ------------------    Dividends
                                                High         Low     per Share
                                               ------       -----    --------- 
  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
                                                                        =====
  1997
     December 31 .........................    23 15/16    18   7/8      $0.17
     September 30 ........................    19  9/16    17   3/4       0.17
     June 30 .............................    18   5/8    15   3/4       0.17
     March 31 ............................    20   1/2    17   1/4       0.17
                                                                        -----
        Fiscal Year ......................    23 15/16    15   3/4      $0.68
                                                                        =====

       *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, 1999, there were 16,390 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 new dividend  policy,  the Board weighed the
Company's  current  financial  position and its future business plan, as well as
the regulatory and business climate in New Mexico.  Future dividend  declaration
will be reviewed for action by the Board.  The payment of future  dividends will
depend on earnings,  the financial  condition of the Company,  market conditions
and other factors,  including in particular, the outcome of the pending electric
rate case  proceedings.  (See PART II, ITEM 7. -  "MANAGEMENT'S  DISCUSSION  AND
ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS - OTHER ISSUES FACING
THE COMPANY - NMPUC REGULATORY ISSUES - Electric Rate Case".)

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 1998 and 1997.


                                       29
<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                   1998         1997         1996         1995         1994
                                                ----------   ----------   ----------   ----------  -----------
                                                      (In thousands except per share amounts and ratios)

<S>                                             <C>          <C>          <C>          <C>          <C>       
Total Operating Revenues                        $1,092,445   $1,020,521   $  873,778   $  808,465   $  904,711
Earnings from Continuing Operations             $   95,119   $   86,497   $   72,969   $   75,562   $   80,318
Net Earnings                                    $   82,682   $   80,995   $   72,580   $   75,562   $   80,318
Earnings per Common Share:
  Continuing Operations                         $     2.27   $     2.05   $     1.73   $     1.72   $     1.77
  Basic                                         $     1.97   $     1.92   $     1.72   $     1.72   $     1.77
  Diluted                                       $     1.95   $     1.91   $     1.71   $     1.72   $     1.77
Total Assets                                    $2,576,788   $2,320,555   $2,230,314   $2,035,669   $2,203,265
Preferred Stock with Mandatory Redemption
  Requirements                                         -            -            -            -     $   17,975
Long-Term Debt, including Current Maturities    $1,008,614   $  714,345   $  728,889   $  728,989   $  900,595
Common Stock Data:
  Market price per common share at year end     $   20.438   $   23.688   $   19.625   $   17.625   $   13.000
  Book value per common share at year end       $    20.63   $    19.26   $    18.06   $    16.82   $    15.11
  Average number of common shares outstanding       41,774       41,774       41,774       41,774       41,774
  Cash dividend declared per common share       $     0.60*  $     0.68   $     0.48          -             -
Return on Average Common Equity                        9.9%        10.2%         9.8%        10.7%        12.4%
Capitalization:
  Common stock equity                                 45.4%        52.6%        50.4%        48.6%        39.2%
  Preferred stock:
    Without mandatory redemption requirements          0.7          0.8          0.9          0.9          3.7
    With mandatory redemption requirements             -            -            -            -            1.1
  Long-term debt, less current maturities             53.9         46.6         48.7         50.5         56.0
                                               ------------  -----------  -----------  -----------  -----------
                                                     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  12 of the  notes  to  consolidated
financial statements), certain prior year amounts have been restated.

         *On January 18, 1999,  the Company's  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.

----------

         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.


                                       30

<PAGE>

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

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

                                    OVERVIEW

Restructuring the Electric Utility Industry

        Introduction  of  competitive  market  forces and  restructuring  of the
electric  utility  industry in New Mexico  continue to be key issues  facing the
Company.  During 1998, in  conjunction  with the electric rate case, the Company
and  other  interested  parties  put  significant  efforts  into  negotiating  a
settlement  agreement  which would have  resolved  the rate case and  produced a
proposal  for  legislation  for open  access and  electric  competition  for the
Company's  customers (see "Electric Rate Case" below).  However,  efforts failed
due to various unresolved issues among the parties.

       Senator Michael Sanchez,  chairman of the New Mexico Legislative  Interim
Committee  on  Utilities  and  Telecommunications,  introduced  a  senate  bill,
Electric Industry  Restructuring Act of 1999, in the 1999 New Mexico Legislature
on February 5, 1999.  The bill  includes  provisions  for the  protection of the
residential and small business  customers during the transition  period and also
includes  provisions to preserve the financial integrity of the state's electric
utilities by giving  reasonable  opportunity  to recover  stranded  costs.  (See
"ELECTRIC INDUSTRY RESTRUCTURING ACT OF 1999" below.)

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

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.

                                       31
<PAGE>

       To better  position  itself for  competition,  the Company  adopted a new
internal corporate structure in January 1999. With the new corporate  structure,
the regulated  businesses  will be separated from the other business  activities
which the Company  anticipates will be unregulated in the future.  The Company's
realignment of its business structure was approved by the Board in January 1999.
If the Electric  Industry  Restructuring  Act of 1999 is passed,  the Company is
planning to seek  shareholder and other  regulatory  approvals to form a holding
company  by January  2001.  Under a holding  company  structure,  the  regulated
businesses  (natural gas and electric  transmission  and  distribution)  will be
grouped under a separate  company  (wires and pipes  company) and would focus on
the core utility  business in New Mexico.  The proposed  unregulated  businesses
(power production,  bulk power marketing and energy services) would aggressively
pursue their 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  due,  in  part,  to  favorable  weather  conditions  experienced  in  the
Southwest.  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.  Under the proposed senate bill, the generation  assets of
the  Company's  electric  operations  would  be  separated  from  the  regulated
businesses.  Depending upon the aspects of the  legislation  that are ultimately
enacted into law, an expansion of the  Company's  generation  assets might occur
without a  regulatory  approval  process.  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  competitive  businesses,   through  its  Energy  Services
Business  Unit,  will  continue to seek  opportunities  in the area of water and
wastewater  management  services and utility  related  management and operations
services for Federal installations and other large commercial  institutions.  In
order to focus on profitable  ventures,  the Company made a decision to exit the
unsuccessful natural gas trading business in August 1998 and completely disposed
of its natural gas trading  operations in December  1998.  The Company's  Energy
Services  Business Unit  currently  operates the City of Santa Fe's water system
and is expanding such services to other  communities,  including  Indian tribes.
The Company is expanding its utility related services such as providing metering
services,  energy and  process  optimization  solutions  and  energy  consulting
services in the deregulated energy markets in the Southwest. The Company is also
pursuing  business   opportunities  to  serve  mid-sized  utilities,   including
cooperatives,   municipalities  and  others  with  cost  effective  billing  and
collection  services.  The Company  intends to move  forward  during the interim
period to form and  invest in the three  wholly-owned  subsidiaries  to  achieve
competitive  business  strategies.  The Company does not  anticipate an earnings
contribution from its Energy Services Business Unit over the next few years.


                                       32
<PAGE>


                         LIQUIDITY AND CAPITAL RESOURCES

Capital Requirements and Liquidity

        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. Total capital
requirements  and  construction  expenditures  for 1998 were $161.6  million and
$128.8 million,  respectively.  Projections for total capital  requirements  and
construction   expenditures   for  1999  are  $176  million  and  $145  million,
respectively.  Such projections for the years 1999 through 2003 are $769 million
and $609 million, respectively.  These estimates are under continuing review and
subject to on-going adjustment.

        The Company's  construction  expenditures  for 1998 were entirely funded
through cash generated from operations.  The Company currently  anticipates that
internal cash generation will be sufficient to meet capital requirements for the
years 1999 through  2003.  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.

        At the end of February  1999,  the Company had $405 million of available
liquidity  arrangements,  consisting  of $300  million  from a senior  unsecured
revolving  credit  facility  ("Credit  Facility"),  $80 million from an accounts
receivable  securitization  and $25 million in local lines of credit. The Credit
Facility will expire in March 2003.

        As of December 31, 1998, the Company had approximately  $61.3 million in
cash and temporary investments and $26.6 million in short-term borrowings.

Financing Capability

        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.  Standard & Poor's
Corp. and Moody's  Investors  Services,  Inc.  currently  maintain the Company's
credit ratings at one level below investment  grade. Duff & Phelps Credit Rating
Co.  currently  maintains an  investment  grade rating for the  Company's  first
mortgage bonds,  but continues to rate all other securities of the Company below
investment  grade.  The  Company  may face  limited  credit  markets  and higher
financing  costs as a result of its  securities  being  rated  below  investment
grade.  As a result of the recently issued  unfavorable  NMPUC orders which have
been appealed to the New Mexico Supreme Court  ("Supreme  Court") (see "Electric
Rate Case" and "Residential Electric,  Incorporated ("REI")" in NMPUC REGULATORY
ISSUES below),  the major rating agencies put the Company on a credit watch list
for a possible downgrade.



                                       33
<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  Facility  imposes
similar restrictions regardless of credit ratings.

Financing Activities

       By written consents  executed in March 1998, the holders of more than 75%
of the  outstanding  first  mortgage  bonds  approved  certain  revisions to the
mortgage  to allow  the  Company  more  flexibility  with  respect  to  property
releases,  as well as with respect to covenants and administrative  requirements
under the mortgage. In March 1998, the Company replaced the first mortgage bonds
collateralizing  $463 million of  tax-exempt  pollution  control  revenue  bonds
("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.

       Coincident  with  the  above  transactions,  the  Company  established  a
five-year,  $300 million  Credit  Facility to replace the Company's $100 million
secured  revolving credit facility.  Funds borrowed through this Credit Facility
were used to retire the $140 million principal amount of first mortgage bonds.

       In August 1998,  the Company  issued and sold $435 million of SUNs in two
series.  Approximately  $420 million from the proceeds from the sale of the SUNs
were loaned to PVNGS Capital Trust ("Capital  Trust"),  a special purpose entity
established  in August  1998,  for the  purpose of  purchasing  PVNGS lease debt
("Lease  Debt") held by the  Company as well as Lease Debt  publicly  held.  The
Capital  Trust  currently  holds all the  outstanding  Lease  Debt,  and all the
publicly-held lease obligation bonds have been retired. As a result, the Company
received  approximately  $288 million from Capital  Trust for its  investment in
Lease  Debt and paid off its  outstanding  short-term  debt.  In  addition,  the
Company invested approximately $13.4 million in Capital Trust in August 1998.

       In 1999,  the  Company  intends to request PRC  authority  to issue $11.5
million in  tax-exempt  PCBs in  connection  with the retrofit of the  pollution
control facilities at the SJGS.

       The Company currently has no other requirements for long-term  financings
during the period of 1999 through 2003. 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.



                                       34
<PAGE>


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  declaration  of common  dividends is dependent upon a
number of factors including earnings and financial condition of the Company, the
Supreme Court's  decisions on the Company's  various  regulatory cases currently
pending (see "NMPUC REGULATORY ISSUES" below) and market conditions.

Capital Structure

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

                                                1998        1997       1996
                                                ----        ----       ----

    Common Equity............................   45.4%       52.6%      50.4%
    Preferred Stock..........................    0.7         0.8        0.9
    Long-term Debt...........................   53.9*       46.6       48.7
                                               -----       -----      -----
       Total Capitalization**................  100.0%      100.0%     100.0%
                                               =====       =====      ===== 


   *  Increase was due to the issuance of $435 million of SUNs in August 1998.
   ** Total capitalization does not include as debt the present value ($161
      million as of December 31, 1998) of the Company's  lease  obligations
      for PVNGS Units 1 and 2 and EIP.

                              RESULTS OF OPERATIONS

       Basic earnings per share from  continuing  operations  were $2.27, a 10.7
percent  increase over the $2.05 earned in 1997 and a 31.2 percent increase over
the $1.73 earned in 1996. Total basic earnings per share including  discontinued
operations were $1.97, $1.92 and $1.72 for 1998, 1997 and 1996, respectively.

Continuing Operations

       Electric gross margin  (operating  revenues less fuel and purchased power
expense) increased $38.2 million in 1998 over 1997 as a result of the success in
wholesale power marketing  operations.  Electric gross margin for 1997 increased
$20.1  million  over  1996 as a result  of  retail  load  growth  and  increased
wholesale marketing activities.  Wholesale power sales exceeded retail sales for
the second  year in a row in 1998.  Sales for resale  totaled 8.8 million MWh in
1998, up approximately  2.0 million MWh over 1997 and 4.2 million MWh over 1996.
An unusually hot summer in Arizona and California  contributed,  in part, to the
profitable bulk power operations in 1998; however,  the success of the Company's
bulk power  operation  was also  attributable  to the location of the  Company's
assets in the  Southwest.  The  favorable  results of the  Company's  bulk power
operations are not necessarily indicative of future operating results.

       Gas gross  margin  (operating  revenues  less gas  purchased  for resale)
decreased  $3.8  million  in  1998  from  1997 as a  result  of  warmer  weather
conditions in 1998. Such margin  increased $1.3 million in 1997 over 1996 due to
the  implementation  of a higher fixed monthly  customer  charge (access fee) in
February 1997 pursuant to a gas rate order.

                                       35
<PAGE>

       Other operation and maintenance  ("O&M") expenses increased $23.9 million
in 1998 over 1997 due to: (i) the  recording of expenses  associated  with PVNGS
spent fuel disposal costs; (ii) increased maintenance  activities at SJGS; (iii)
increased  401(k)  benefit  expense;  (iv)  increased  O&M  expense  for  Energy
Services; and (v) increased expenses associated with the Year 2000 program. Such
O&M expenses in 1997 increased $9.4 million over 1996 due to: (i) a write-off of
obsolete  inventory  and  undistributed  stores  expense at PVNGS;  (ii)  higher
distribution expense for increased  maintenance and service enhancement efforts;
(iii) increased customer service related and sales expense; and (iv) a severance
accrual at the SJGS.

       Depreciation and amortization expenses increased $3.4 million in 1998 due
to  increased  utility  plant and a write-off  of certain  unamortized  computer
software  costs.  Such  expenses  increased  $4.6 million in 1997 as a result of
additional  utility  plant  and an  adjustment  recorded  in 1996  for the  over
amortization of certain intangible utility plant.

       Net other income and deductions increased $9.5 million over a year ago as
a result of the investment income from Capital Trust, proceeds from a litigation
settlement  and the  reversal of a gas rate case  reserve.  Net other income and
deductions  in 1997  increased  $11.9  million over 1996 due to higher  interest
income from the investment in PVNGS Lease  Obligation Bonds ("PVNGS LOBs") and a
1996  reserve for matters  related to a gas rate case,  offset by a  curtailment
gain resulting from the change in the Company's pension plan in 1996.

       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. Net interest charges for 1997 increased
$1.5 million over 1996 due to short-term borrowings for the purchase of the $200
million of PVNGS LOBs in late 1996.

Discontinued Operations

       On August 4, 1998,  the  Company  adopted a plan to  discontinue  the gas
trading  operations  in its  Energy  Services  Business  Unit.  The gas  trading
business was completely disposed of by the end of 1998. Accordingly, the Company
recorded a loss of $5.1 million, net of tax. In addition, losses from operations
of the  discontinued  segment,  net of tax were $7.4 million in 1998 compared to
$5.5  million  in 1997.  (See  note 12 of the  notes to  consolidated  financial
statements.)

                         OTHER ISSUES FACING THE COMPANY

ELECTRIC INDUSTRY RESTRUCTURING ACT OF 1999

       Senate Bill 428, sponsored by Senator Michael Sanchez,  was introduced in
the 1999 New Mexico  Legislature  on February 5, 1999.  Under the proposed bill,
customer  choice of power  supplier  would be available to schools,  residential
customers and small business  customers in New Mexico beginning January 1, 2001,
and to all customers  beginning  January 1, 2002.  Transmission and distribution
services  along with related  services  such as meter  reading and billing would
remain  subject to the PRC  jurisdiction.  This bill would not  require a public
utility to divest itself of any of its assets owned or leased.  However,  before
January 1, 2001, a public  utility  would be required to organize  into at least
two corporations,  dividing  regulated from unregulated  services through either
the creation of separate affiliated companies under a holding company or through
the creation of separate non-affiliated corporations.


                                       36
<PAGE>
       If enacted,  the bill would require all public utilities operating in New
Mexico to submit a transition plan to the PRC no later than March 1, 2000, to be
approved  no later than  December 1, 2000.  The  transition  plan would  include
proposed  tariffs for  transmission  and  distribution  services,  together with
proposed  standard  offer service  tariffs for  residential  and small  business
customers  who do not  select a power  supplier.  The plan  would  also  include
proposals for effectively  separating the utilities' regulated and non-regulated
business activities.

       The bill  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 and other costs recognized  under  cost-of-service  regulation.  Utilities
would be allowed  to  recover  no less than 50  percent of such costs  through a
nonbypassable  charge on all customer bills for five years after  implementation
of  customer  choice.  The PRC could  authorize  a utility  to recover up to 100
percent of its  stranded  costs if the PRC finds that  recovery  of more than 50
percent:  (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.  Utilities
would also be allowed to recover in full any costs incurred in implementing full
open access  ("transition  costs").  Those  transition  costs would be recovered
through 2007 by means of a separate wires charge.  Due to  uncertainties  in the
bill regarding the amounts of recovery and  calculation of stranded  costs,  the
Company is currently  unable to determine  what  financial  impact the bill,  if
enacted, will have on the Company.

       Other significant  provisions of the bill include: (i) customers would be
allowed  to  prepay  their  allotted  share  of  stranded  costs  prior  to  the
implementation  of choice for that customer class;  (ii) the PRC would adopt and
enforce  codes  of  conduct  to  protect   customer  privacy  and  prevent  such
anticompetitive  practices as cross-subsidization or favoritism of non-regulated
energy suppliers by regulated  affiliates;  and (iii) a system benefit charge of
$0.0003 per KWh would be added to customer  bills to fund no less than  $500,000
annually for low income energy assistance programs,  and no more than $4 million
a year for  renewable  energy  projects,  in addition to other  public  interest
programs. The bill provides for penalties of up to $2 million for each violation
of the Act. The bill also requires  licensing for competitive  power  suppliers,
which is defined to include providers of energy-related services.

       The Company's  primary concerns with the proposed bill revolve around the
treatment of stranded cost recovery. The Company intends to work with the bill's
sponsor,  interested  parties,  and the  Legislature  as a whole to address  its
concerns  and to maximize the chances for passage of  restructuring  legislation
which is beneficial to the State as a whole.  It is the Company's  position that
this bill goes a long way in properly balancing the interests involved,  and, in
that  respect,  provides  a  good  vehicle  for  the  passage  of  restructuring
legislation in this session.

       On  February  28,  1999,  the full  Senate  passed the bill with  various
amendments  by a vote of 32-6.  The Bill has been  assigned to both the Business
and Industry  Committee and the Appropriation and Finance Committee in the State
House of Representatives  ("House") for  consideration.  The House has a similar
competing  bill,  House Bill 865, that has been assigned to the House  Judiciary
Committee and the House  Appropriation and Finance  Committee.  No hearings have
been scheduled on House Bill 865. The most  significant  difference  between the
two bills is the size of the proposed subsidy for renewable  energy  technology.
The  House  bill  earmarks  approximately  $20  million  a  year  for  renewable
technology, compared to $4 million designated in Senate Bill 428. However, it is
likely that,  like the  Company,  other  parties will  continue to seek to amend
various  provisions  of the bill.  Given the  Legislature's  past  reluctance to
implement  retail  competition,  the Company is unable to predict whether or not
legislation will pass or what its provisions are likely to be.

                                       37
<PAGE>

NMPUC REGULATORY ISSUES

Electric Rate Case

       On November  30, 1998,  the NMPUC  issued a final order in the  Company's
electric rate case. In the final order,  the NMPUC ordered the Company to reduce
its rates for  certain  cost of  service  items and for the  revaluation  of its
generation  resources  based on a  so-called  "market-based  price" and  further
stated  that  recovery of stranded  costs is  illegal.  The NMPUC's  order would
require 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. If the order is implemented
and the Company is required to collect its generation costs at a rate lower than
its embedded cost of generation with no recovery of stranded costs,  the Company
could be required to record a pre-tax accounting loss of up to $540 million.

       On  December  14,  1998,  the  Company  filed a notice of appeal with the
Supreme Court,  requesting a stay of the final order pending appeal. The Company
argued that it met the  standard  for a stay in that there is a  likelihood  the
Company  will  prevail  on the merits and  irreparable  harm would  occur to the
Company if the stay were not  granted  and no  irreparable  harm would  occur to
opponents  or the public by granting  the stay.  The Supreme  Court  granted the
Company's motion for a stay of the final order on December 16, 1998, prohibiting
any further actions or proceedings until further order of the Supreme Court.

       On December  23, 1998,  the NMPUC filed a motion with the Supreme  Court,
requesting  the Supreme Court reverse its order so that an immediate $61 million
rate cut could be granted to the  Company's  customers  or, in the  alternative,
allow an immediate rate  reduction of  approximately  $37 million,  which is the
amount the NMPUC said it would have  ordered if it had not  revalued  generation
assets.  On January 13, 1999,  the Supreme Court rejected the NMPUC's motion and
affirmed the stay on the electric rate case order  indefinitely until the merits
of the case are decided.  In addition,  the Supreme Court  combined the electric
rate case and the REI case (see below).

       On March 1, 1999, after hearing oral arguments including arguments by the
PRC  supporting  the NMPUC order,  the Supreme Court took under  advisement  the
appeal  of the  NMPUC  order on the  Company's  electric  rate case and the writ
petition  regarding the rate case (see below).  The Supreme Court  continued the
stay  preventing  implementation  of  the  NMPUC  rate  reduction,  pending  its
decision.

Residential Electric, Incorporated ("REI")

       In  October  1998,  REI, a new  entity  incorporated  in the state of New
Mexico for the purpose of supplying  electricity to retail customers,  filed the
following with the NMPUC:  (i) an  application  for a certificate of convenience
and necessity and an advice  notice,  requesting  authority to provide  electric
services within the metropolitan areas of Albuquerque,  Rio Rancho and Santa Fe;
and (ii) an application and complaint seeking the unbundling of distribution and
transmission facilities of the Company and the use of these facilities by REI to
deliver its power  supplies to retail  customers.  Included in the filing were a
motion for a procedural and case management  order and a brief  discussing legal
principles based on NMPUC orders in other cases.


                                       38
<PAGE>

       Hearings were held at the NMPUC in November 1998. Subsequently, the NMPUC
held oral arguments on November 23, 1998, in lieu of briefs, and took the matter
under  advisement.  The NMPUC  issued  its order  approving  REI's  requests  on
November 30, 1998.

       On December 29, 1998, the Company and the AG each filed their  respective
notices of appeal of the REI decision at the Supreme Court. In a related matter,
a  bipartisan   group  of  legislators,   the  local  business  manager  of  the
International  Brotherhood of Electrical Workers,  and a member of the Company's
shareholder alliance filed a petition on December 21, 1998, at the Supreme Court
seeking a writ of mandamus (the "writ proceeding") declaring the rate case order
and the REI order as a violation of the separation of powers clause of the State
constitution and prohibiting their enforcement, and requesting a stay of the REI
order. The Supreme Court granted a stay with respect to the REI order and held a
hearing on the issues on January 13,  1999.  At the hearing,  the Supreme  Court
ordered the  consolidation of the Company's rate case appeal,  the Company's REI
appeals, and the writ proceeding, and continued the stays.

       On March 1, 1999, after hearing oral arguments, the Supreme Court granted
the writ of  mandamus,  overturning  the REI order,  finding  that the NMPUC had
overstepped  its  authority and departed  from the  principles  that have guided
regulatory policy in New Mexico since 1941.

City of Albuquerque ("COA") Retail Pilot Load Aggregation Program

       The COA filed a petition with the NMPUC in September  1997 to institute a
Retail Pilot Load Aggregation Program (the "pilot") wherein COA would serve as a
load  aggregator,  and the pilot would  consist  mainly of COA  facility  loads.
Hearings on COA's pilot proposal were held in January 1998. The Company  opposed
the  program  from the outset  stating,  among other  things,  that only the New
Mexico  Legislature has the authority to order retail  competition or a pilot on
retail access and that the pilot being proposed by COA would provide very little
useful  information on retail  access.  The NMPUC issued an order in August 1998
requiring  the Company to implement a 16 MW retail pilot  program for a one year
period  starting in December  1998. In November  1998, the NMPUC issued an order
requiring  the Company to begin pilot  enrollment  by January 12,  1999,  and to
implement  the pilot on or before March 1, 1999.  The Company filed a motion for
stay with the Supreme  Court,  arguing  that the NMPUC lacks  authority to order
retail competition through a pilot program. On December 15, 1998, oral arguments
were held at the Supreme  Court and the Supreme  Court issued an order,  staying
the NMPUC's order on the pilot.

City of Gallup ("Gallup") Complaint

       In January  1998,  Gallup,  Gallup Joint  Utilities  and the  Pittsburg &
Midway Coal Mining Co.  ("Pitt-Midway")  filed a joint  complaint  and  petition
("Complaint")  with the NMPUC for a declaratory  order regarding  service status
and abandonment of facilities. The Complaint sought an interim declaratory order
stating: (i) Pitt-Midway is no longer an obligated customer of the Company; (ii)
Gallup is entitled to serve Pitt-Midway; (iii) abandonment of the power line and
related  facilities by the NMPUC is not  necessary;  (iv) the Company must wheel
power purchased by Gallup from other  suppliers over the Company's  transmission
system;  and (v) the Company must enter into an  interconnection  agreement with
Gallup.


                                       39
<PAGE>


       In September  1998,  the NMPUC issued a final order without  conducting a
hearing,  stating that Pitt-Midway is not, as a matter of law, obligated to be a
customer of the Company, and ordered that the Company start on or before October
1, 1998 to: (i) wheel power on behalf of Gallup pursuant to existing contractual
obligations  under an  agreement;  (ii)  deliver  power to Gallup at a specified
substation pursuant to a contract  agreement;  and (iii) transfer ownership of a
specified transmission line to Pitt-Midway pursuant to a 1975 agreement.

       The Company  strongly  disagreed with the NMPUC's  decision and filed, in
September 1998, a motion with the Supreme Court, requesting an emergency stay of
the NMPUC order pending its appeal of the order.  The Company  believes that the
issues  are  complex,  that the NMPUC was  premature  in  issuing a final  order
without evidentiary proceedings and that the NMPUC has exceeded its jurisdiction
and has  attempted  to preempt  FERC  authority.  The Supreme  Court  denied the
Company's request and remanded the matter back to the NMPUC for consideration of
matters raised by the Company. The Company also filed a petition for declaratory
order at the FERC regarding several jurisdictional issues in the NMPUC's order.

       The remanded  issues were reheard at the NMPUC during  October  1998.  On
November  30,  1998,  the  NMPUC  issued  its  "final  order on  remand",  which
essentially  reaffirmed  its earlier  position  and order.  The Company  filed a
supplement to its September 1998 petition for  declaratory  order at FERC to add
the NMPUC's  "final order on remand" to its  previously  filed  information.  On
December 15, 1998,  the Company also filed a supplement  to its notice of appeal
at the Supreme Court to add the "final order on remand" to the record.

       The Company  worked  diligently  with Gallup to meet  obligations  of the
final  order  on  remand.  However,  Gallup  notified  the  Company  that it was
terminating  negotiations until all the pending issues were resolved at the FERC
and the Supreme Court.

       The  Company   maintains   its  position  that  the  FERC  has  exclusive
jurisdiction over any wholesale transactions, including wholesale power sales to
Gallup,  interconnection  agreements  and wholesale  power wheeling on behalf of
Gallup.  The Company also believes that the NMPUC orders  disregarded New Mexico
law with the respect to municipal  boundary  limitations.  On February 17, 1999,
the Company filed its  brief-in-chief  in this matter at the Supreme Court.  The
Company is currently unable to predict the ultimate outcome of this case and the
effects thereof.

SAN DIEGO GAS AND ELECTRIC COMPANY ("SDG&E") COMPLAINTS

       The Company has a 100 MW power  sales  contract  with SDG&E that began in
June 1988 and extends  through April 2001. In 1993,  1996 and 1997,  SDG&E filed
three  separate  and similar  complaints  with the FERC,  alleging  that certain
charges under the power sales  agreement  were unjust,  unreasonable  and unduly
discriminatory.  In  each  of  the  complaints,  SDG&E  requested  the  FERC  to
investigate  the charges under the  agreements.  The Company filed  responses to
each of the complaints, denying the allegations made by SDG&E, and requested the
FERC dismiss each complaint. The Company has estimated that if the relief sought
by SDG&E is granted for all three complaints,  the annual demand charges paid by
SDG&E would be  significantly  reduced from the date of the ruling through April
2001, and could result in a refund of approximately $41.6 million as of December
31, 1998.


                                       40
<PAGE>

       In  December  1998,   the  FERC  issued  an  order  on  the   complaints,
consolidating all three dockets,  conditionally  denying the Company's motion to
dismiss the complaints  made in 1993 and 1996, and denying the motion to dismiss
the 1997  complaint.  In the order,  the FERC  stated  that it was  setting  the
complaint for a trial-type,  evidentiary  hearing, but would hold the hearing in
abeyance and  encouraged  the parties to make every effort to reach a settlement
before any hearing  procedures  begin. The FERC indicated that this matter was a
good  candidate  for  settlement  because the  complaint was confined to narrow,
specific rate issues.  The FERC also  provided for a settlement  judge to assist
the parties in arriving at a settlement.  In the event the parties are unable to
reach a settlement,  a public hearing will be held and the FERC estimated that a
final decision would not be issued until October 15, 2001. On December 23, 1998,
SDG&E filed a fourth complaint with the FERC, making the same  allegations.  The
Company again filed a response  denying the allegations  and requesting  summary
dismissal.  If the relief sought by the fourth complaint is granted, the Company
would be required to refund an  additional  $12.5  million  plus  interest.  The
refund period covered by the fourth complaint is February 1999 through May 2000.

       Settlement  discussions  with SDG&E and the FERC Staff were held with the
settlement  judge on March 4, 1999.  However,  the parties  were unable to reach
settlement on the issues and the complaint cases will be set for public hearing.
The Company  firmly  believes  that all four  complaints  are without  merit and
intends to  vigorously  defend its  position.  The  Company  cannot  predict the
outcome of any proceeding to be held at the FERC.

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 has been unable to send
proper bills or bills at all to  approximately  10% of its  accounts.  Under PRC
rules and PRC-approved  Company rules, the Company is required to issue customer
bills on a monthly basis.

       On  February 2, 1999,  the Company  filed an  application  for  temporary
variance,  allowing it to send bills for more than one billing cycle and setting
forth a process  designed to mitigate the impact to customers  who receive bills
for more than one month of service. The PRC Staff recommended that the PRC grant
the  Company  a  variance   under  certain   conditions   and  docket  a  formal
investigation  into the  prudency of the  selection,  analysis,  implementation,
operational performance and associated costs of the new billing system.

       On February  16,  1999,  the PRC issued an order  granting  the Company a
temporary variance through April 15, 1999, which will allow the Company to issue
bills to customers that have been delayed from 60-120 days. The PRC's order also
delayed the docketing of a prudence investigation. In accordance with the order,
the Company submitted a status report on the billing system problems on March 2,
1999,  and is required to continue to provide  twice  weekly  updates to the PRC
Staff.  In addition,  the order stated that the granting of temporary  variances
shall  neither  excuse the Company  from past or ongoing  violations  of the New
Mexico Public Utility Act ("Utility  Act") or PRC rules,  nor act as retroactive
authorization   for   actions   taken  by  the  Company   associated   with  the
implementation  of the new billing  system.  The order  further  provided that a
hearing  examiner  take  evidence  on whether  the  Company  has  violated or is
violating PRC rules, regulations,  orders or the Utility Act, and if so, whether
sanctions  or  fines  should  be  imposed.  The PRC  may  impose  penalties  for
violations  of the Utility Act or failure to obey any lawful order of the PRC in
the amount of $100 to $100,000 for each violation.


                                       41
<PAGE>

       Because  of the  problems  associated  with the  Company's  new  customer
billing system,  the Company has been  estimating  revenues,  customer  accounts
receivable and bad debt expense since its  implementation  in November 1998. The
Company's  financial,  tax and regulatory  reports reflect these estimates.  The
Company has been  diligently  working with the software  manufacturer to resolve
the problems in an expeditious manner;  however, the Company is currently unable
to predict the ultimate timing for the completion of the  remediation  effort or
ultimate  regulatory  actions regarding these problems or the ultimate impact on
the Company.

THE YEAR 2000 ISSUE

Background

       The Year 2000 issue is a consequence of computer  programs  ("Information
Technology  Systems" or "IT Systems") being written using two digits rather than
four digits to define the applicable  year. As a result,  computer systems could
recognize the year 2000 as the year 1900.  This could result in a system failure
or miscalculations  causing  disruptions of operations.  Equipment that contains
embedded chips ("Embedded Systems") may also be affected by the Year 2000 issue.
Equipment  affected may include such things as hand held meter reading  devices,
distribution and transmission control systems, elevators,  routers and generator
controls.

       The  Company  has  adopted  a plan to  address  the Year  2000  issue for
internal systems and external dependencies ("Year 2000 Project").  The Year 2000
Project  is  comprised  of eight  phases:  (1)  Awareness;  (2)  Inventory;  (3)
Assessment;   (4)  Planning  and  Scheduling;   (5)  Repair;  (6)  Testing;  (7)
Re-Integration/Deployment; and (8) Company-Wide Testing.

State of Readiness

       In early 1998, the Company established  completion date goals for each of
the eight phases.  Those goals were  established at a point when the Company was
still in the early  stages of  evaluating  the  extent  of the  effort  required
company-wide  to complete the Year 2000  Project.  Those goals and the estimated
status of each phase as of February 28, 1999, are set out below:

                                      Phase Targeted        Estimated Status of
   Year 2000 Project Phase           Completion Dates            Completion*
   -----------------------           ----------------       -------------------

Awareness Phase                          06/01/98                 Completed
Inventory Phase                          06/26/98                    97%
Assessment Phase                         08/28/98                    81%
Planning and Scheduling Phase            10/30/98                    61%
Repair Phase                             04/02/99                    32%
Testing Phase                            05/28/99                    11%
Re-Integration/Deployment Phase          07/02/99                     6%
Company-Wide Testing Phase               10/01/99                     2%

   * The  stated  percentages  represent  the  status of  completion  as of
     February 28, 1999,  of all of the  Company's  IT Systems and  Embedded
     Systems,  including  mission  critical  systems.  For purposes of this
     presentation,   "mission   critical  systems"  include  systems  whose
     failures could cause an  interruption  in the supply of electricity or
     gas to the Company's  customers,  could  interfere  with the Company's
     ability to communicate  with  customers,  or could  interfere with the
     Company's cashflow.


                                    42
<PAGE>

       The  estimated  status of any of the eight  phases may be  adjusted  upon
completion of the Assessment Phase on the basis of information then available to
the Company.  However,  until completion of the Assessment Phase, the Company is
unable to reliably estimate the completion status of each of those phases.  Work
in the Company-Wide  Testing Phase commences when all segments of a process have
completed remediation. A segment is the portion of a process that receives input
from and/or sends output to another segment of a process.

       At the  inception of the Year 2000 Project,  there were several  projects
then underway to upgrade and replace some IT Systems and Embedded  Systems.  One
result of those  projects was to make the systems Year 2000  compliant.  Due, in
part,  to the  status of those  projects  and the fact that the Year 2000  issue
affects each area of the Company in different  ways, the Year 2000 Project is at
varying stages of completion throughout the Company.

       Several IT Systems known to be noncompliant have already been remediated.
Other IT Systems  that are  determined  to be  noncompliant  will be  remediated
according to schedules  established  during the Planning and Scheduling Phase of
the Year 2000 Project. Most of the Company's mission critical systems are in the
operations areas and are a combination of both IT Systems and Embedded  Systems.
While the  Company  can,  in many  instances,  perform  the  necessary  test and
remediation  functions on the IT portion of these systems,  the Company does not
generally  possess  the  required  equipment  and skills  necessary  to test and
remediate the embedded portion of these systems at the microchip level and must,
therefore,  rely upon  manufacturers  or  suppliers  to  assist  in  remediating
noncompliant systems.  Where necessary,  the Company has contracted with vendors
to assist with the  assessment,  remediation  and testing work  required in this
area.

       The Company is  participating  in the Year 2000 program  sponsored by the
Electric Power  Research  Institute  ("EPRI").  The program  involves  utilities
sharing Year 2000 compliance  information about specific embedded systems,  test
protocols, data and results and project management ideas. EPRI is also assisting
in  coordinating   communications   between  the  electric  power  industry  and
manufacturers and suppliers.

Costs

       The Company  currently  estimates that during 1999, the Year 2000 Project
will generate  incremental  expenditures  of  approximately  $12.6  million.  An
additional  $2.7  million  of  payroll  cost  will  be  transferred  from  other
operations and  maintenance  expenses.  In the year 2000, the Company will incur
additional expenditures associated with the steps necessary to finalize the Year
2000 Project and  document  results.  The estimate  does not include the cost of
upgrades and replacements of the systems that were undertaken independent of the
Year 2000 issue where the projects have not been accelerated to address the Year
2000  issue,  even  though one result is that  those  systems  will be Year 2000
compliant.  The Company's  estimate is under continuous  review as the Year 2000
Project proceeds.  During 1998, the Company incurred  approximately $5.3 million
of costs for the Year 2000 Project.


                                    43
<PAGE>

Risks

       The Company is  connected  to one of the three major  electric  grids for
North America. That electric grid known as the Western Interconnection  connects
utilities  throughout the western  portion of North  America.  The stability and
reliability  of the  operations of each utility on any of the electric grids is,
to a certain extent, dependent upon these interconnections.  A major disturbance
within a grid can have an immediate effect  throughout the grid. Even though the
Company addresses the Year 2000 issue for its systems,  it could still encounter
difficulties  due to the state of  readiness  of another  utility on the Western
Interconnection. There is a likelihood of at least minor disruptions on the grid
as a result of the Year 2000  issue.  The  Company is working  with the  Western
Systems Coordinating Council ("WSCC"),  as well as with the utilities with which
the Company is directly  connected on the grid. The Company will  participate in
the initiatives of WSCC in connection with grid stability.

       The Company's  natural gas operations rely upon timely receipt of natural
gas from gas transporters and suppliers.  The ability of those  transporters and
suppliers to continue to provide an  uninterrupted  and  adequate  supply of gas
also may be  dependent  upon their Year 2000  readiness  and is  critical to the
operations of the Company's gas operations.  The Company is working with each of
its primary  transporters  and suppliers to determine  their Year 2000 readiness
and to jointly develop contingency plans.

       The  continuation  of the Company's  operations is also  dependent upon a
number of significant  suppliers and service  providers.  The Company is working
with these parties to determine their Year 2000 readiness and to jointly develop
contingency plans. The Company is working with its fuel suppliers to ensure that
an  uninterrupted  and  adequate  fuel  supply  exists for its power  generation
operations.  Disruption  in the  services  from third  party  telecommunications
providers   would  impair  the   Company's   ability  to  operate  its  electric
transmission  and  distribution  and natural gas  distribution  operations.  The
Company is working on how to assess the Year 2000 readiness of these third party
telecommunications providers.

       The goal of the  Company has been to make its  mission  critical  systems
Year 2000  compliant  by  mid-1999.  However,  because the Company  must rely on
outside  vendors  for the  remediation  of a  portion  of its  mission  critical
systems,  there  is a  probability  that  remediation  and  testing  will not be
completed  on some of these  systems  until  after  this  date.  If a delay past
mid-1999 is anticipated,  then specific contingency plans will be developed. The
Company anticipates that the conversion of certain  non-critical systems may not
be completed  until late 1999.  The Company  believes that if remediation of its
mission  critical IT Systems and Embedded Systems is not completed  timely,  the
Year  2000  issue  could  have  a  material  adverse  impact  on  the  Company's
operations.

Contingency Plans

       The Company is in the process of reviewing its existing  contingency  and
business  continuity  plans for  applicability to the Year 2000 Project and will
enhance or replace these plans as required.  New plans specific to the Year 2000
Project will be developed  if these issues have not been  previously  addressed.
The Company has begun  developing high level  contingency  plans that respond to
problems unique to the Year 2000 issue.



                                    44
<PAGE>


       The Company  currently expects that the most reasonably likely worst case
scenario in connection with its electric  operations will be voltage  variations
and some frequency variations around the time of the date rollover to January 1,
2000, and in the following  several days. The volume of these events is expected
to be greater than during normal operations. The result will be that the Company
will not be able to control these  variations and maintain  system  stability to
the usual degree. The Company currently believes that existing contingency plans
should adequately  address this scenario.  The operations of only a small number
of customers would be sensitive to such variations.  The Company does not expect
these variations to have a material adverse impact on the Company's  operations.
It is also  possible,  but less likely,  that there may be  intermittent,  short
duration  electric outages  occurring during the several days following the date
rollover to January 1, 2000.

       The Company is,  nevertheless,  developing  contingency plans intended to
further  improve  the  probability  that no  interruptions  in the  delivery  of
electricity  to its customers will occur.  These plans are being  developed both
internally  and in  conjunction  with  the  WSCC.  The  WSCC  has  made  certain
recommendations  for electric  operations around the date rollover to January 1,
2000. The Company's contingency plans are consistent with those recommendations.
The Company will be establishing a company-wide emergency operations center that
will be staffed  prior to the date  rollover  to  January  1, 2000,  until it is
decided that the center is no longer required for Year 2000 contingency planning
purposes. The Company will have additional staff present at its power plants and
mission critical substations and switching facilities in case there is a need to
manually  operate any systems or make any repairs.  Remote  facilities will have
backup communications systems in place.

       The Company  currently expects that the most reasonably likely worst case
scenario in connection with its gas operations is the loss of electric supply to
certain  compression  and processing  facilities  belonging to the Company's gas
suppliers  and  transporters.  However,  the  suppliers  and  transporters  have
provided  the Company with  information  that  indicates  that there is adequate
natural gas fired  compression on their systems to maintain main line pressures.
Further  they have  represented  that the  primary  processing  facilities  have
adequate backup sources of electric generation to operate without  interruption.
If these facilities  incur other unexpected Year 2000 problems,  they can bypass
the  processing  facilities  and run the gas through  dehydrators to dry the gas
prior to delivery to the main pipelines.

       The Company is developing  contingency  plans intended to further improve
the probability  that no  interruptions of gas supply will occur. In addition to
the company-wide  emergency  operations  center, the Company will have employees
stationed  at  mission  critical  gas  interchange  points to allow  for  manual
operation if required. Backup communications systems will be in place for remote
facilities. Alternate operating procedures will be in place in order to maintain
pipeline   pressures   if  any  problems   are   experienced   with  the  backup
communications  systems.  The Company will have additional  supply  contracts in
place to allow  for  delivery  of gas from  multiple  points in case one or more
transporters are unable to deliver the full contracted quantity of gas.

Year 2000 Readiness Disclosure

       The Year 2000  statements in "The Year 2000 Issues" section are Year 2000
Readiness  Disclosures  pursuant  to the Year  2000  Information  and  Readiness
Disclosure Act, Pub. L. No. 105-271, 112 Stat. 2386 (1998).



                                    45
<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.

       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  will occur during 1999.  The Company is unable to predict the outcome
of this matter and the Company's exposures have not yet been assessed.

       The  Company  was also  notified  of claims  by a  private  royaltyholder
involving  royalty  valuation at the La Plata Mine. During the fourth quarter of
1998,  the Company was notified  that  settlement  discussions  with the private
royaltyholder  resulted  in  potential  agreement  on all  claims.  Based on the
Company's  understanding of the proposed settlement,  it does not believe that a
material impact will result.

       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  closely  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.

ACCOUNTING STANDARDS

       Decommissioning:  The  Staff  of the 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.


                                       46
<PAGE>


       Accounting for Derivative  Instruments and Hedging Activities,  Statement
of Financial  Accounting  Standards  ("SFAS") No. 133: SFAS No. 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  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.  This statement is
effective for fiscal years  beginning after June 15, 1999, and cannot be applied
retroactively.  The Company has not yet fully quantified the impacts of adopting
SFAS No. 133 on the financial  statements.  However, it is anticipated that SFAS
No. 133 could increase volatility in earnings and other comprehensive income.

       Accounting for Contracts  Involved in Energy Trading and Risk  Management
Activities (EITF Issue 98-10):  In December 1998, the Emerging Issues Task Force
("EITF") of the FASB reached  consensus  on EITF Issue  98-10.  EITF Issue 98-10
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 and  separately  disclosed in the  financial  statements or
footnotes  thereto.  EITF Issue 98-10 is effective  for fiscal  years  beginning
after December 15, 1998. The effects of initial  application of EITF Issue 98-10
will be reported as a  cumulative  effect of a change in  accounting  principle.
Financial  statements for periods prior to initial  adoption of EITF Issue 98-10
may not be allowed to be  restated.  The  Company is  currently  evaluating  the
Company's energy portfolio to determine which contracts and activities should be
considered trading activities. As a result, the Company has not fully quantified
potential  gains or losses  related to these  activities.  The Company  does not
believe  that the  adoption  of EITF Issue  98-10  will have a material  adverse
effect on the results of operations.

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; (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.

       The costs of the  Company's  Year 2000 Project and the dates on which the
Company  believes  it will  complete  the phases of the  Project  are based upon
management's  best  estimates,  which were derived  using  numerous  assumptions
regarding  future  events,  including  the  continued  availability  of  certain
resources,  third-party  remediation  plans, and other factors.  There can be no
assurance  that these  estimates  will prove to be accurate  and actual  results
could differ materially from those currently anticipated.  Specific factors that
could  cause such  material  differences  include,  but are not  limited to, the
availability and cost of personnel  trained in Year 2000 issues,  the ability to
identify,  assess,  remediate and test all relevant  computer codes and embedded
technology, and similar uncertainties.

                                       47
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

       The following  discussion  regarding the Company's  market risk sensitive
instruments   contains   forward-looking   information   involving   risks   and
uncertainties.  The  statements  regarding  potential  gains and losses are only
estimates  of what may occur in the  future.  Actual  future  results may differ
materially from those estimates  presented due to the model  characteristics and
the risks and uncertainties involved.

       The  Company  is  potentially  exposed  to market  risk due to changes in
interest rates, equity and other investment returns and commodity prices. All of
the Company's  derivative  commodity  instruments  described  below are held for
purposes other than trading. The Company's other financial  instruments are held
both for trading and for other purposes.

Interest Rate Risk

       The Company's  interest rate exposure relates primarily to debt financing
issued  to  fund  capital   requirements   including  refund  of  maturing  debt
securities.  Except for the proposed issuance of pollution control revenue bonds
of $11.5 million,  the Company currently does not have a plan to issue long-term
debt within the next five years.  The Company's  long-term debt  obligations are
all fixed rate  obligations  with varying  maturities.  The Company  managed its
interest  rate risk  through  the  issuance  of  fixed-rate  debt  with  varying
maturities.  The table below  presents  principal cash flows,  estimated  market
values at December 31, 1998, and related  weighted average interest rates of the
Company's long-term debt by expected maturity dates.


<TABLE>
<CAPTION>

                                  December 31,
                                                                                   Estimated
                                                                                     Market
                        1998   1999  2000   2001   2002   Thereafter     Total       Value
                        ----   ----  ----   ----   ----   ----------     -----     ---------
                                                (Dollars in Millions)
<S>                      <C>    <C>   <C>    <C>    <C>    <C>          <C>          <C>   
Pollution Control
  Revenue Bonds          $0     $0    $0     $0     $0     $ 574.3      $ 574.3      $ 594.6
Weighted-Average
  Interest Rate           -      -     -      -      -        6.15%        6.15%
Senior Unsecured
  Notes                                                    $  435.0     $  435.0     $  447.9
Weighted-Average
  Interest Rate           -      -     -      -      -        7.22%        7.22%

Total                    $0     $0    $0     $0     $0     $1,009.3     $1,009.3     $1,042.5
</TABLE>


                                       48
<PAGE>


Equity and Other Investment Return Risk

       At December 31, 1998, the Company's  equity and other  investment  return
exposure related  primarily to corporate owned life insurance  ("COLI") policies
and equity  investments  held within the Company's  non-qualified  and qualified
nuclear  decommissioning  trusts.  (See PART II, ITEM 2, - "PROPERTIES - Nuclear
Plant - PVNGS Decommissioning  Funding") In January 1999, the COLI policies were
surrendered for approximately  $42.1 million.  After repayment of a related bank
loan for $26.7 million incurred by the decommissioning trust for the payments of
COLI policy premiums and interest  charges,  the Company  invested the remaining
$15.4 million in temporary  investments  within the  non-qualified  trust.  This
investment  is carried at its market  value of $15.4  million.  Neither the fair
value of these  investments  nor  near-term  investment  losses from  reasonably
possible  near-term  changes in market  prices were  material  to the  financial
position, results of operations or liquidity of the Company.

       As of December 31, 1998, the fair value of equity investments held within
the trusts was  approximately  $24.7 million.  The Company  records the gains or
losses resulting from the market changes in those investments.  Neither the fair
value of these  investments  nor  near-term  investment  losses from  reasonably
possible  near-term  changes in market  prices were  material  to the  financial
position, results of operations or liquidity of the Company.

       The Company  also has other  investment  return  exposure  related to $50
million  invested  in  temporary  investments.  Neither  the fair value of these
investments  nor  the  near-term  investment  losses  from  reasonably  possible
near-term  changes in market  prices are  material  to the  financial  position,
results of operations or liquidity of the Company.

Commodity Price Risk

       At December 31, 1998, the Company's  derivative  commodity price exposure
relates  to "swap"  agreements  entered  into by the  Company to hedge the price
risks associated with a portion of anticipated  1998-1999  winter-heating season
natural  gas  purchases.  These  instruments  are settled in cash at or prior to
expiration. Under these instruments,  payments are made or received based on the
difference  between a fixed and a variable product price. The Company defers the
impact of changes in the market  value of these  instruments  until the  related
transaction is completed.  As of December 31, 1998, the Company had  outstanding
basis swap agreements covering approximately 3 million decatherms of natural gas
purchases  through March 1999. The Company had unrealized losses of $3.1 million
at December 31, 1998,  related to the outstanding  agreements.  Neither the fair
value of the derivatives outstanding nor potential,  near-term derivative losses
from reasonably possible near-term changes in market prices were material to the
financial position,  results of operations or liquidity of the Company. The risk
of gas cost variations under the swap agreements should be mitigated by the PGAC
in New Mexico.  The Company is  evaluating  the use of swap  agreements  for the
1999-2000 winter heating season.



                                       49
<PAGE>

Other Commodity Price Risks

       The Company also has commodity price exposure related to agreements other
than  derivative  financial  and  commodity   instruments  and  other  financial
instruments.  The Company utilizes contracts of various duration for the forward
sale and purchase of natural gas to effectively manage its available natural gas
supply  portfolio.  These agreements  contain  fixed-priced  and  variable-price
provisions  and are settled in physical  delivery.  The contracts  with variable
pricing  provisions are exposed to  fluctuations in prices of natural gas due to
unpredictable  factors,  such as weather,  which impacts  supply and demand.  To
reduce price risk caused by market fluctuations, the Company hedges a portion of
its purchases as discussed  under  Commodity  Price Risk above.  The risk of gas
cost  variations  under the these  agreements  is  mitigated  by the PGAC in New
Mexico.

       The  Company  utilizes  contracts  of various  duration  for the  forward
purchases  of coal and  uranium to  effectively  manage its  available  coal and
uranium supply  portfolio for the generation of  electricity.  These  agreements
contain  fixed-price and  variable-price  provisions and are settled by physical
delivery of the commodity.

       In the normal  course of  business,  the Company  utilizes  contracts  of
various duration for the forward sale and purchase of electricity to effectively
manage  its  available  generating  capacity.  Such  contracts  include  forward
contracts for wholesale  sales of generating  capacity and energy during periods
when the  Company's  available  power  resources  are  expected  to  exceed  the
requirements of its native load customers. It may also include forward contracts
for the  purchase of  wholesale  capacity  and energy  during  periods  when the
anticipated  market  price  of  electricity  is  below  the  Company's  expected
incremental  power  production  cost.  In addition,  for trading  purposes,  the
Company  routinely buys and sells  electricity in the wholesale  market and also
writes and  purchases  option  contracts on a limited  basis.  These forward and
option  contracts  require  physical  delivery of electricity.  The use of these
types of  physical  commodity  instruments  is  designed to allow the Company to
manage and hedge its contractual  commitments,  reduce its exposure  relative to
the  volatility  of market  prices,  and take  advantage  of selected  arbitrage
opportunities.

       The Company  structures and modifies its net resource position to capture
expected  changes in future demand,  seasonal  market  pricing  characteristics,
overall  market  sentiment,  and  price  relationships  between  different  time
periods.  The Company is exposed to the risk that  fluctuating  market prices of
electric power may  potentially  impact its financial  condition,  or results of
operations. The Company is not currently using mark-to-market accounting. Actual
gains and losses are recorded for financial  statement  purposes  after physical
delivery.  As previously  discussed,  the  requirements  of EITF Issue 98-10 are
currently being evaluated and will be adopted in the first quarter of 1999.

       The Company's Risk  Management  Committee (the  "Committee")  established
policies,  procedures, and limits designed to minimize the Company's exposure to
electricity  commodity  price risk.  The  Committee  periodically  reviews these
policies to ensure they are  responsive  to changing  business  conditions.  The
Company uses a value-at-risk  methodology and mark-to-market gains and losses to
assess  the market  risk of the  anticipated  excess  capacity  and  electricity
trading  portfolio.  These  exposures are revalued and reported to the Committee
daily.


                                       50
<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                                      INDEX


                                                                          Page

Management's Responsibility for Financial Statements ...................   F-1
Report of Independent Public Accountants ...............................   F-2
Financial Statements:
   Consolidated Statements of Earnings .................................   F-3
   Consolidated Statements of Comprehensive Income .....................   F-4
   Consolidated Statements of Retained Earnings ........................   F-5
   Consolidated Balance Sheets .........................................   F-6
   Consolidated Statements of Cash Flows ...............................   F-7
   Consolidated Statements of Capitalization ...........................   F-8
   Notes to Consolidated Financial Statements ..........................   F-9
Supplementary Data:
   Quarterly Operating Results .........................................  F-42
   Comparative Operating Statistics ....................................  F-43

              MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS

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


                                       F-1

<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the accompanying  consolidated  balance sheets and statements of
capitalization   of  Public  Service   Company  of  New  Mexico  (a  New  Mexico
corporation)  and subsidiaries as of December 31, 1998 and 1997, 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,
1998.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of Public Service Company of New
Mexico and  subsidiaries  as of December  31, 1998 and 1997,  and the results of
their  operations and their cash flows for each of the three years in the period
ended  December  31,  1998 in  conformity  with  generally  accepted  accounting
principles.


                                       ARTHUR ANDERSEN LLP

Albuquerque, New Mexico
    March 2, 1999


                                      F-2
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                           --------------------------------------
                                                              1998          1997         1996
                                                           -----------   -----------  -----------
                                                           (In thousands except per share amounts)
<S>                                                        <C>           <C>          <C>       
Operating Revenues:
  Electric                                                 $  835,204    $  722,438   $  645,639
  Gas                                                         255,975       294,769      227,301
  Energy Services                                               1,266         3,314          838
                                                           -----------   -----------  -----------
     Total operating revenues                               1,092,445     1,020,521      873,778
                                                           -----------   -----------  -----------
Operating Expenses:
  Fuel and purchased power                                    310,098       235,508      178,807
  Gas purchased for resale                                    134,755       169,758      103,574
  Cost of sales and projects - Energy Services                    936         2,631          110
  Other operation expenses                                    293,902       269,013      262,584
  Maintenance and repairs                                      51,666        52,626       49,693
  Depreciation and amortization                                86,141        82,694       78,115
  Taxes, other than income taxes                               37,992        36,803       34,837
  Income taxes                                                 41,306        41,941       39,650
                                                           -----------   -----------  -----------
     Total operating expenses                                 956,796       890,974      747,370
                                                           -----------   -----------  -----------
     Operating income                                         135,649       129,547      126,408
                                                           -----------   -----------  -----------
Other Income and Deductions:
  Other                                                        37,672        21,548        2,367
  Income tax expense                                          (14,985)       (8,384)      (1,099)
                                                           -----------   -----------  -----------
     Net other income and deductions                           22,687        13,164        1,268
                                                           -----------   -----------  -----------
     Income before interest charges                           158,336       142,711      127,676
                                                           -----------   -----------  -----------
Interest Charges:
  Interest on long-term debt                                   50,929        46,670       49,009
  Other interest charges                                       12,288         9,544        5,698
                                                           -----------   -----------  -----------
     Net interest charges                                      63,217        56,214       54,707
                                                           -----------   -----------  -----------
Net Earnings from Continuing Operations                        95,119        86,497       72,969

Discontinued Operations, net of tax:
  Loss from operations of gas marketing                        (7,386)       (5,502)        (389)
  Estimated loss on disposal of gas marketing, 
    including provision for operating losses
    during phase-out period                                    (5,051)         -            -
                                                           -----------   -----------  -----------
Net Earnings                                                   82,682        80,995       72,580
Preferred Stock Dividend Requirements                             586           586          586
                                                           -----------   -----------  -----------
Net Earnings Available for Common Stock                    $   82,096    $   80,409   $   71,994
                                                           ===========   ===========  ===========
Average Number of Common Shares Outstanding                    41,774        41,774       41,774
                                                           ===========   ===========  ===========

Net Earnings (Loss) per Common Share:
  Earnings from continuing operations                      $     2.27    $     2.05   $     1.73
  Loss from discontinued operations                             (0.18)        (0.13)       (0.01)
  Estimated loss on disposal of gas marketing                   (0.12)            -            -
                                                           -----------   -----------  -----------
Net Earnings per Common Share (Basic)                      $     1.97    $     1.92   $     1.72
                                                           ===========   ===========  ===========
Net Earnings per Common Share (Diluted)                    $     1.95    $     1.91   $     1.71
                                                           ===========   ===========  ===========
Dividends Paid per Share of Common Stock                   $     0.77    $     0.63   $     0.36
                                                           ===========   ===========  ===========

</TABLE>

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


                                      F-3


<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                                                   Year Ended December 31,
                                              ---------------------------------
                                                1998        1997        1996
                                              ---------   ---------   ---------
                                                      (In thousands)

Net Earnings                                  $ 82,682    $ 80,995    $ 72,580
                                              ---------   ---------   ---------
Other Comprehensive Income, net of tax: 
  Unrealized gain (loss) on securities:
    Unrealized holding gains arising from
      the period                                 1,519       1,529       1,176
    Less reclassification adjustment for 
      gains included in net income                (673)       (672)       (347)
   Minimum pension liability adjustment           (205)       (626)       (478)
                                              ---------   ---------   ---------
Total Other Comprehensive Income                   641         231         351
                                              ---------   ---------   ---------
Total Comprehensive Income                    $ 83,323    $ 81,226    $ 72,931
                                              =========   =========   =========



Note:  Tax expense for Total Other Comprehensive Income for 1998, 1997 and 1996
       was $420, $151, and $230, respectively.
























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


                                      F-4

<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                  CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

                                             Year Ended December 31,
                                      ------------------------------------
                                         1998         1997         1996
                                      ----------   ----------    ---------
                                                       (In thousands)

Balance at Beginning of Year          $ 129,188    $  77,185     $ 25,243
Net earnings                             82,682       80,995       72,580
Dividends:
   Cumulative preferred stock              (586)        (586)        (586)
   Common stock                         (25,064)     (28,406)     (20,052)
                                      ---------    ---------     --------
Balance at End of Year                $ 186,220    $ 129,188     $ 77,185
                                      ==========   ==========    =========





























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


                                      F-5

<PAGE>
                   PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                                CONSOLIDATED BALANCE SHEETS

                                          ASSETS

<TABLE>
<CAPTION>
                                                                 As of December 31,
                                                             ---------------------------
                                                                1998             1997
                                                             ------------   ------------
                                                                   (In thousands)
<S>                                                          <C>            <C>        
Utility Plant, at original cost except PVNGS:
  Electric plant in service                                  $ 1,966,277    $ 1,958,912
  Gas plant in service                                           467,758        441,045
  Common plant in service                                         63,245         43,415
  Plant held for future use                                          551            551
                                                             ------------   ------------
                                                               2,497,831      2,443,923
  Less accumulated depreciation and amortization                 998,175      1,003,086
                                                             ------------   ------------
                                                               1,499,656      1,440,837
  Construction work in progress                                   66,677        104,497
  Nuclear fuel, net of accumulated amortization
    of $21,898 and $21,263                                        27,426         27,816
                                                             ------------   ------------
     Net utility plant                                         1,593,759      1,573,150
                                                             ------------   ------------
Other Property and Investments:
  Non-utility property, net of accumulated
    depreciation of $1,129 and $2,146                              4,875          4,502
  Other investments                                              518,959        307,261
                                                             ------------   ------------
     Total other property and investments                        523,834        311,763
                                                             ------------   ------------
Current Assets:
  Cash                                                             2,573          8,705
  Temporary investments, at cost                                  58,707          9,490
  Receivables, net of allowance for uncollectible 
    accounts of $836 and $783                                    197,906        216,305
  Income taxes receivable                                          8,266           -
  Fuel, materials and supplies, at average cost                   33,137         33,664
  Gas in underground storage, at average cost                      2,537         13,158
  Other current assets                                             4,666          4,509
                                                             ------------   ------------
     Total current assets                                        307,792        285,831
                                                             ------------   ------------
Deferred charges                                                 151,403        149,811
                                                             ------------   ------------
                                                             $ 2,576,788    $ 2,320,555
                                                             ============   ============

                              CAPITALIZATION AND LIABILITIES

Capitalization:
  Common stock equity:
    Common stock outstanding--41,774 shares                  $   208,870    $   208,870
    Additional paid-in capital                                   465,386        469,073
    Accumulated other comprehensive income, net of tax             1,127            486
    Retained earnings since January 1, 1989                      186,220        129,188
                                                             ------------   ------------
       Total common stock equity                                 861,603        807,617
  Minority interest                                               13,405          -
  Cumulative preferred stock without mandatory 
    redemption requirements                                       12,800         12,800
  Long-term debt, less current maturities                      1,008,614        713,995
                                                             ------------   ------------
     Total capitalization                                      1,896,422      1,534,412
                                                             ------------   ------------
Current Liabilities:
  Short-term debt                                                 26,620        114,100
  Accounts payable                                               113,975        154,501
  Dividends payable                                                  147          7,248
  Current maturities of long-term debt                              -               350
  Accrued interest and taxes                                      34,289         24,161
  Other current liabilities                                       28,308         26,102
                                                             ------------   ------------
     Total current liabilities                                   203,339        326,462
                                                             ------------   ------------
Deferred Credits:
  Accumulated deferred investment tax credits                     54,404         57,823
  Accumulated deferred income taxes                              144,277        124,054
  Other deferred credits                                         278,346        277,804
                                                             ------------   ------------
     Total deferred credits                                      477,027        459,681
                                                             ------------   ------------
Commitments and Contingencies
                                                             $ 2,576,788    $ 2,320,555
                                                             ============   ============

</TABLE>

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


                                      F-6
<PAGE>

                   PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                           CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                   ------------------------------------
                                                                      1998         1997         1996
                                                                   ----------   ----------   ----------
                                                                                (In thousands)
<S>                                                                <C>          <C>          <C>      
Cash Flows From Operating Activities:
  Net earnings                                                     $  82,682    $  80,995    $  72,580
  Adjustments to reconcile net earnings to net cash flows
    from operating activities:
      Depreciation and amortization                                   98,154       94,924       90,458
      Accumulated deferred investment tax credit                      (3,418)      (4,436)      (4,476)
      Accumulated deferred income taxes                               18,292       11,080       31,436
      Changes in certain assets and liabilities:
        Receivables                                                   17,009        4,554      (83,416)
        Fuel, materials and supplies                                  11,148       (2,883)       5,795
        Deferred charges                                               8,509      (11,190)       5,190
        Accounts payable                                             (40,490)      23,808       36,930
        Accrued interest and taxes                                    10,128          805       (3,500)
        Deferred credits                                              (1,938)       2,455       12,655
        Other                                                         (1,676)        (371)      (9,279)
      Other, net                                                      12,587       13,381       11,528
                                                                   ----------   ----------   ----------
           Net cash flows from operating activities                  210,987      213,122      165,901
                                                                   ----------   ----------   ----------
Cash Flows From Investing Activities:
  Utility plant additions                                           (128,784)    (128,371)    (103,087)
  Purchase of PVNGS lease debt                                      (215,701)          -            -
  Increase in nuclear decommissioning trust                           (3,620)     (23,000)          -
  Return of principal of PVNGS lease obligation bonds                 11,337        5,018           -
  Utility plant sales                                                     -            -           333
  Other property sales                                                    -            -           702
  Net increase in other property and investments                      (4,224)      (6,814)     (14,706)
  Escrow for purchase of PVNGS lease obligation bonds                     -       (28,900)    (208,446)
  Decrease (increase) in temporary investments, net                  (49,216)        (363)      86,844
                                                                   ----------   ----------   ----------
           Net cash flows from investing activities                 (390,208)    (182,430)    (238,360)
                                                                   ----------   ----------   ----------
Cash Flows From Financing Activities:
  Proceeds from issuance of senior unsecured notes                   892,728           -            -
  Redemption of pollution control revenue bonds                     (463,345)
  Redemption of first mortgage bonds                                (140,206)          -            -
  Short-term borrowings for redemption of first mortgage bonds       140,206           -            -
  Proceeds from minority interest in Capital Trust                    13,405           -            -
  Bond redemption premium and costs                                   (5,537)      (3,693)      (5,158)
  Proceeds from (repayments of) asset securitization                      -       (13,900)     100,400
  Repayments of long-term debt                                            -       (14,970)        (326)
  Trust borrowing for nuclear decommissioning                          3,620       23,000           -
  Increase (decrease) in short-term debt                            (231,306)       4,600           -
  Exercise of employee stock options                                  (3,687)      (1,285)          -
  Dividends paid                                                     (32,789)     (26,864)     (15,560)
                                                                   ----------   ----------   ----------
           Net cash flows from financing activities                  173,089      (33,112)      79,356
                                                                   ----------   ----------   ----------
Increase (Decrease) in Cash                                           (6,132)      (2,420)       6,897
Cash at Beginning of Year                                              8,705       11,125        4,228
                                                                   ----------   ----------   ----------
Cash at End of Year                                                $   2,573    $   8,705    $  11,125
                                                                   ==========   ==========   ==========
Supplemental cash flow disclosures:
  Interest paid                                                    $  50,109    $  57,302    $  55,480
                                                                   ==========   ==========   ==========
  Income taxes paid, net of refunds                                $  49,048    $  20,175    $  31,617
                                                                   ==========   ==========   ==========
</TABLE>

  Cash consists of currency on hand and demand deposits.


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

                                           F-7

<PAGE>
                   PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                         CONSOLIDATED STATEMENTS OF CAPITALIZATION

<TABLE>
<CAPTION>
                                                                         December 31,
                                                                   -------------------------
                                                                      1998          1997
                                                                   -----------   -----------
                                                                        (In thousands)
<S>                                                                <C>           <C>       
Common Stock Equity:
    Common Stock, par value $5 per share                           $  208,870    $  208,870
    Additional paid-in capital                                        465,386       469,073
    Accumulated other comprehensive income, net of tax                  1,127           486
    Retained earnings since January 1, 1989                           186,220       129,188
                                                                   -----------   -----------
        Total common stock equity                                     861,603       807,617
                                                                   -----------   -----------
Minority Interest                                                      13,405         -
                                                                   -----------   -----------
Cumulative Preferred Stock:
    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, 1998 were 128,000.                               12,800        12,800
                                                                   -----------   -----------
Long-Term Debt:
Issue and Final Maturity
    First Mortgage Bonds (taxable)                                      -           140,206
    First Mortgage Bonds, Pollution Control Revenue Bonds:
      5.7%   due  2016                                                 65,000        65,000
      5.75% to 6.4%  due 2016 through 2026                              -           463,345
      6.375% due  2022                                                 46,000        46,000
                                                                   -----------   -----------
        Total First Mortgage Bonds                                    111,000       714,551
                                                                   -----------   -----------
    Senior Unsecured Notes, Pollution Control Revenue Bonds:
      6.30%    due  2016                                               77,045         -
      5.75%    due  2022                                               37,300         -
      5.80%    due  2022                                              100,000         -
      6.375%   due  2022                                               90,000         -
      6.375%   due  2023                                               36,000         -
      6.40%    due  2023                                              100,000         -
      6.30%    due  2026                                               23,000         -
                                                                   -----------   -----------
         Total Senior Unsecured Notes, Pollution Control 
           Revenue Bonds                                              463,345         -
                                                                   -----------   -----------
     Senior Unsecured Notes:
          7.10%  due  2005                                            300,000         -
          7.50%  due  2018                                            135,000         -
     Other, including unamortized premium and (discounted), net          (731)         (206)
                                                                   -----------   -----------
         Total long-term debt                                       1,008,614       714,345
    Less current maturities                                             -               350
                                                                   -----------   -----------
         Long-term debt, less current maturities                    1,008,614       713,995
                                                                   -----------   -----------
Total Capitalization                                               $1,896,422    $1,534,412
                                                                   ===========   ===========

</TABLE>

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


                                           F-8
<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

(1) Summary of Significant Accounting Policies

Organization

        Public   Service   Company  of  New  Mexico   (the   "Company")   is  an
investor-owned   utility  company  engaged  in  the  generation,   transmission,
distribution  and sale of  electricity.  The Company  provides  retail  electric
service to a large area of north  central  New Mexico,  including  the cities of
Albuquerque,  Santa Fe, Rio Rancho, Las Vegas, Belen and Bernalillo. The Company
also provides retail electric  service to Deming in southwestern  New Mexico and
to  Clayton in  northeastern  New  Mexico.  The  Company is also  engaged in the
transmission,  distribution  and sale of  natural  gas  within  the State of New
Mexico. The Company  distributes natural gas to most of the major communities in
New  Mexico,  including  Albuquerque  and  Santa Fe. In  addition,  the  Company
provides energy and utility related services under its Energy Services  Business
Unit. These activities include energy management  services,  management services
for water and wastewater  systems and utility  related  management and operation
services. The Company is also operating the City of Santa Fe's water system.

Systems of Accounts

        The Company maintains its accounts for utility  operations  primarily in
accordance with the uniform systems of accounts prescribed by the Federal Energy
Regulatory  Commission  ("FERC")  and the  National  Association  of  Regulatory
Utility  Commissioners,   and  adopted  by  the  New  Mexico  Public  Regulation
Commission  ("PRC"),  the successor of the New Mexico Public Utility  Commission
("NMPUC"), effective January 1, 1999.

Principles of Consolidation

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

Use of Estimates

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


                                      F-9
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(1) 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.  Utility plant  includes  certain
electric  assets not subject to  regulation.  The results of  operations of such
electric assets are included in operating income.

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

Depreciation and Amortization

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

                                             1998        1997        1996
                                             ----        ----        ----

    Electric plant ....................      3.32%       3.33%       3.32%
    Gas plant .........................      3.06%       3.23%       3.27%
    Common plant ......................      7.34%       7.60%       7.00%

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

Nuclear Decommissioning

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


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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


(1) Summary of Significant Accounting Policies (Continued)

Fuel and Purchased Power Cost Adjustment Clause ("FPPCAC")

        The  Company  uses  the  deferral  method  of  accounting  for  fuel and
purchased  power  costs  for its  firm-requirements  wholesale  customers.  Such
amounts are reflected in subsequent periods under a FPPCAC approved by the FERC.

Purchased Gas Adjustment Clause ("PGAC")

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

Amortization of Debt Discount, Premium and Expense

        Discount,  premium and expense related to the issuance of long-term debt
are amortized over the lives of the respective  issues.  In connection  with the
retirement of long-term debt, such amounts  associated with resources subject to
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.

Income Taxes

       The Company  reports  income tax expense in accordance  with Statement of
Financial  Accounting  Standards ("SFAS") No. 109,  Accounting for Income Taxes.
SFAS No. 109  requires  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-11

<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(1) Summary of Significant Accounting Policies (Continued)

New Accounting Standards

       The Financial  Accounting  Standards  Board ("FASB") issued SFAS No. 130,
Reporting  Comprehensive  Income, SFAS No. 131, Disclosures about Segments of an
Enterprise  and Related  Information  and SFAS No. 132,  Employers'  Disclosures
about Pensions and Other Postretirement  Benefits,  all of which were adopted in
1998.

       SFAS  No.  130  establishes   standards  for  reporting  and  display  of
comprehensive income and its components in financial  statements.  The objective
of this  standard  is to report a measure of all  changes in equity  that result
from   transactions   and  other  economic  events  of  the  period  other  than
transactions with owners.

       SFAS No. 131  requires a public  company to report  selected  information
about  its  reportable  operating  segments  in  annual  and  interim  financial
statements.  Operating  segments are components of an enterprise  that engage in
business  activities  that earn revenues and incur  expenses,  and are evaluated
regularly  by the chief  operating  decision  maker  within a company for making
operating decisions and assessing performance.

       SFAS No. 132  standardizes  the disclosure  requirements for pensions and
other  postretirement  benefits  other than pensions.  This  statement  requires
additional  information on changes in the benefit obligations and fair values of
plan assets and eliminates certain disclosures that are no longer useful.

Nuclear Decommissioning Costs

       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,  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.

Performance Stock Plan

       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.

                                      F-12

<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(2) Risks and Uncertainties

Electric Rate Case

       On November  30, 1998,  the NMPUC  issued a final order in the  Company's
electric rate case. In the final order,  the NMPUC ordered the Company to reduce
its rates for  certain  cost of  service  items and for the  revaluation  of its
generation  resources  based on a  so-called  "market-based  price" and  further
stated  that  recovery of stranded  costs is  illegal.  The NMPUC's  order would
require the Company to reduce rates in 1999 by $60.2  million,  by $25.6 million
in each year 2000 and by an  additional  $25.6  million in 2001. If the order is
implemented  and the Company is required  to collect its  generation  costs at a
rate lower than its  embedded  cost of  generation  with no recovery of stranded
costs,  the Company could be required to record a pre-tax  accounting loss of up
to $540 million.

       On December 14, 1998,  the Company  filed a notice of appeal with the New
Mexico  Supreme Court  ("Supreme  Court"),  requesting a stay of the final order
pending  appeal.  The Company argued that it met the standard for a stay in that
there is a likelihood  the Company  will  prevail on the merits and  irreparable
harm  that  would  occur to the  Company  if the stay  were not  granted  and no
irreparable  harm would occur to  opponents  or the public by granting the stay.
The Supreme Court granted the Company's  motion for a stay of the final order on
December 16, 1998,  prohibiting any further actions or proceedings until further
order of the Supreme Court.

       On December  23, 1998,  the NMPUC filed a motion with the Supreme  Court,
requesting  the Supreme Court reverse its order so that an immediate $61 million
rate cut could be granted to the  Company's  customers  or, in the  alternative,
allow an immediate rate  reduction of  approximately  $37 million,  which is the
amount the NMPUC said it would have  ordered if it had not  revalued  generation
assets.  On January 13, 1999,  the Supreme Court rejected the NMPUC's motion and
affirmed the stay on the electric rate case order  indefinitely until the merits
of the case are decided.

       On March 1, 1999, after hearing oral arguments including arguments by the
PRC  supporting  the NMPUC order,  the Supreme Court took under  advisement  the
appeal  of the  NMPUC  order on the  Company's  electric  rate case and the writ
petition  regarding  the  rate  case.  The  Supreme  Court  continued  the  stay
preventing implementation of the NMPUC rate reduction, pending its decision.


                                      F-13

<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(2) Risks and Uncertainties (Continued)

Electric Industry Restructuring Act of 1999

       Senate Bill 428, sponsored by Senator Michael Sanchez,  was introduced in
the 1999 New Mexico  Legislature  on February 5, 1999.  Under the proposed bill,
customer  choice of power  supplier  would be available to schools,  residential
customers and small business  customers in New Mexico beginning January 1, 2001,
and to all customers  beginning  January 1, 2002.  Transmission and distribution
services  along with related  services  such as meter  reading and billing would
remain  subject to the PRC  jurisdiction.  This bill would not  require a public
utility to divest itself of any of its assets owned or leased.  However,  before
January 1, 2001, a public  utility  would be required to organize  into at least
two corporations,  dividing  regulated from unregulated  services through either
the creation of separate affiliated companies under a holding company or through
the creation of separate non-affiliated corporations.

       If enacted,  the bill would require all public utilities operating in New
Mexico to submit a transition plan to the PRC no later than March 1, 2000, to be
approved  no later than  December 1, 2000.  The  transition  plan would  include
proposed  tariffs for  transmission  and  distribution  services,  together with
proposed  standard  offer service  tariffs for  residential  and small  business
customers  who do not  select a power  supplier.  The plan  would  also  include
proposals for effectively  separating the utilities' regulated and non-regulated
business activities.

       The bill  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 and other costs recognized  under  cost-of-service  regulation.  Utilities
would be allowed  to  recover  no less than 50  percent of such costs  through a
nonbypassable  charge on all customer bills for five years after  implementation
of  customer  choice.  The PRC could  authorize  a utility  to recover up to 100
percent of its  stranded  costs if the PRC finds that  recovery  of more than 50
percent:  (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.  Utilities
would also be allowed to recover in full any costs incurred in implementing full
open access  ("transition  costs").  Those  transition  costs would be recovered
through 2007 by means of a separate wires charge.  Due to  uncertainties  in the
bill regarding the amounts of recovery and  calculation of stranded  costs,  the
Company is currently  unable to determine  what  financial  impact the bill,  if
enacted, will have on the Company.


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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(2) Risks and Uncertainties (Continued)

       Other significant  provisions of the bill include: (i) customers would be
allowed  to  prepay  their  allotted  share  of  stranded  costs  prior  to  the
implementation  of choice for that customer class;  (ii) the PRC would adopt and
enforce  codes  of  conduct  to  protect   customer  privacy  and  prevent  such
anticompetitive  practices as cross-subsidization or favoritism of non-regulated
energy suppliers by regulated  affiliates;  and (iii) a system benefit charge of
$0.0003 per KWh would be added to customer  bills to fund no less than  $500,000
annually for low income energy assistance programs,  and no more than $4 million
a year for  renewable  energy  projects,  in addition to other  public  interest
programs. The bill provides for penalties of up to $2 million for each violation
of the Act. The bill also requires  licensing for competitive  power  suppliers,
which is defined to include providers of energy-related services.

       The Company's  primary concerns with the proposed bill revolve around the
treatment of stranded cost recovery. The Company intends to work with the bill's
sponsor,  interested  parties,  and the  Legislature  as a whole to address  its
concerns  and to maximize the chances for passage of  restructuring  legislation
which is beneficial to the State as a whole.  It is the Company's  position that
this bill goes a long way in properly balancing the interests involved,  and, in
that  respect,  provides  a  good  vehicle  for  the  passage  of  restructuring
legislation in this session.

         On February  28,  1999,  the full Senate  passed the bill with  various
amendments  by a vote of 32-6.  The Bill has been  assigned to both the Business
and Industry  Committee and the Appropriation and Finance Committee in the State
House of Representatives  ("House") for  consideration.  The House has a similar
competing  bill,  House Bill 865, that has been assigned to the House  Judiciary
Committee and the House  Appropriation and Finance  Committee.  No hearings have
been scheduled on House Bill 865. The most  significant  difference  between the
two bills is the size of the proposed subsidy for renewable  energy  technology.
The  House  bill  earmarks  approximately  $20  million  a  year  for  renewable
technology, compared to $4 million designated in Senate Bill 428. However, it is
likely that,  like the  Company,  other  parties will  continue to seek to amend
various  provisions  of the bill.  Given the  Legislature's  past  reluctance to
implement  retail  competition,  the Company is unable to predict whether or not
legislation will pass or what its provisions are likely to be.


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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(3) Regulatory Assets and Liabilities

       The Company is subject to the  provisions of SFAS No. 71,  Accounting for
the Effects of Certain Types of Regulation,  on operations regulated by the 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:

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

    Deferred Income Taxes ............................$  71,653      $  70,968
    Loss on Reacquired Debt ..........................   11,108          8,869
    Gas Take-or-Pay Costs ............................   10,740         19,953
    Gas Reservation Fees .............................    7,029          7,029
    Gas Imputed Revenues .............................    6,726         12,823
    PGAC .............................................    5,294         16,006
    Deferred Customer Expense on Gas Assets Sale .....    5,260          5,260
    Gas Retirees' Health Care Costs ..................    4,804          6,345
    Proposed Transmission Line Costs .................    2,660          2,903
    Gas Rate Case Costs ..............................    1,571          1,571
    Other ............................................      471            118
                                                      ---------     ----------
         Subtotal ....................................  127,316        151,845
                                                      ---------     ----------
   
    Deferred Income Taxes ............................  (49,971)       (53,132)
    Gas Regulatory Reserve ...........................  (21,308)       (27,881)
    Customer Gain on Gas Assets Sale .................   (7,643)       (11,856)
    PVNGS Prudence Audit .............................   (6,185)        (6,561)
    Settlement Due Customers .........................   (3,564)        (3,743)
    Gain on Reacquired Debt ..........................     (531)          (546)
    Other ............................................     (773)          (723)
                                                      ---------     ----------
         Subtotal                                       (89,975)      (104,442)
                                                      ---------     ----------
         Net Regulatory Assets .......................$  37,341      $  47,403
                                                      =========      =========


                                      F-16


<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(3) Regulatory Assets and Liabilities (Continued)

         As of December 31, 1998,  substantially all of the Company's regulatory
assets  and  regulatory  liabilities  are being  recovered  in rates  charged to
customers or have been addressed in a regulatory proceeding. If a portion of the
Company's operations under the PRC jurisdiction becomes no longer subject to the
provisions  of SFAS  No.  71,  a write  off of  related  regulatory  assets  and
liabilities  would be required,  unless some form of  transition  cost  recovery
(refund)  continues  through rates  established  and collected for the Company's
remaining  regulated   operations.   The  enactment  of  the  Electric  Industry
Restructuring  Act  of  1999  would  require  the  Company  to  discontinue  the
application  of SFAS No. 71 to certain  of the  Company's  operations;  however,
discontinuance  of the application of SFAS No. 71 would not result in a material
adverse  impact to the  Company.  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.

(4) Capitalization

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


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


<S>                             <C>           <C>          <C>           <C>        <C>     
Balance at December 31, 1996    41,774,083    $ 208,870    $ 470,358     128,000    $ 12,800
Exercise of stock options           -             -           (1,285)       -          -
                                -----------   ----------   ----------   ---------   ---------
Balance at December 31, 1997    41,774,083      208,870      469,073     128,000      12,800
Exercise of stock options           -             -           (3,687)       -          -
                                -----------   ----------   ----------   ---------   ---------
Balance at December 31, 1998    41,774,083    $ 208,870    $ 465,386     128,000    $ 12,800
                                ===========   ==========   ==========   =========   =========

</TABLE>

Common Stock

       The number of authorized  shares of common stock with par value of $5 per
share is 80 million  shares.  The  declaration of common  dividends is dependent
upon a number of factors  including  earnings  and  financial  condition  of the
Company,  the Supreme Court decisions on the Company's various  regulatory cases
and market conditions.


                                      F-17

<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(4)  Capitalization (Continued)

        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.

Long-Term Debt

        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.

         The Company has no long-term debt that matures from 1999 through 2003.

         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.


                                      F-18

<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(4)  Capitalization (Continued)

Revolving Credit Facility and Other Credit Facilities

        At December 31, 1998, the Company has a $300 million unsecured revolving
credit facility (the  "Facility") with an expiration date of March 31, 2003. The
Company  must pay  commitment  fees of .200% per year on the total amount of the
Facility. The Company also has a $100 million credit facility,  which expires on
May 20, 2001, and is collateralized  by the Company's  electric and gas customer
accounts  receivable  and certain  amounts  being  recovered  from gas customers
relating to certain gas contract settlements.  In addition,  the Company has $25
million in local lines of credit.

Fair Value of Financial Instruments

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

<TABLE>
<CAPTION>
                                                          1998                   1997
                                                  ----------------------  --------------------
                                                   Carrying      Fair      Carrying     Fair
                                                    Amount       Value      Amount      Value
                                                  ----------  ----------  ---------  --------
                                                                (In thousands)

<S>                                               <C>         <C>         <C>        <C>      
   Long-Term Debt ..............................  $1,008,614  $1,042,557  $ 714,345  $ 743,524
   Decommissioning Trust Debt...................  $   26,620  $   26,620  $  23,000  $  23,000
   Investment in PVNGS Lessors' Notes...........  $  443,748  $  459,167  $   -      $   -
   Investment in PVNGS LOBs ....................  $     -     $     -     $ 237,774  $ 236,049
   Decommissioning Trust........................  $   59,803  $   64,509  $  51,857  $  53,900
   Fossil-Fueled Plant Decommissioning Trust....  $    7,676  $    7,676  $   7,245  $   7,273
   Rabbi Trust..................................  $    9,804  $   17,012  $  10,080  $  15,218
</TABLE>

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

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

                                      F-19

<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(5)  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:

                                                                      Per-Share
                                               Income      Shares      Amount
                                               -------    --------    ---------
                                                   (In thousands except per 
                                                        share amounts)
   December 31, 1998
   Net Earnings                                $82,682
   Less: Preferred stock dividends                (586)
                                               --------
   Basic Earnings per Share
   Net earnings available for common stock      82,096     41,774      $1.97
                                                                      =======
   Options issued                                 -           298
                                               --------   --------
   Diluted Earnings per Share
   Net earnings available for common stock     $82,096     42,072      $1.95
                                               ========   ========    =======

   December 31, 1997
   Net Earnings                                $80,995
   Less: Preferred stock dividends                (586)
                                               --------
   Basic Earnings per Share
   Net earnings available for common stock      80,409     41,774      $1.92
                                                                      =======
   Options issued                                 -           217
                                               --------   --------
   Diluted Earnings per Share
   Net earnings available for common stock     $80,409     41,991      $1.91
                                               ========   ========    =======

   December 31, 1996
   Net Earnings                                $72,580
   Less: Preferred stock dividends                (586)
                                               --------
   Basic Earnings per Share
   Net earnings available for common stock      71,994     41,774      $1.72
                                                                      =======
   Options issued                                 -           332
                                               --------   --------
   Diluted Earnings per Share
   Net earnings available for common stock     $71,994     42,106      $1.71
                                               ========   ========    =======



                                      F-20
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(6)  Income Taxes

     Income taxes consist of the following components:

                                                     1998      1997       1996
                                                     ----      ----       ----
                                                         (In thousands)

     Current Federal income tax ................... $26,824   $32,911   $14,815
     Current state income tax .....................  10,157     9,859     2,847
     Deferred Federal income tax ..................  15,062     8,781    22,372
     Deferred state income tax ....................    (484)     (397)    4,936
     Amortization of accumulated investment
        tax credits ...............................  (3,418)   (4,436)   (4,476)
                                                    -------   -------   ------- 
        Total income taxes ........................ $48,141   $46,718   $40,494

     Charged to operating expenses ................ $41,306   $41,941   $39,650
     Charged  to other income and deductions ......   6,835     4,777       844
                                                    -------   -------   ------- 
        Total income taxes......................... $48,141   $46,718   $40,494
                                                    =======   =======   =======

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

                                                     1998      1997       1996
                                                     ----      ----       ----
                                                         (In thousands)

     Federal income tax at statutory rates ........ $45,788   $44,700   $39,576
     Investment tax credits .......................  (3,418)   (4,436)   (4,476)
     Depreciation of flow-through items ...........     531       519       519
     Gains on the sale and leaseback of PVNGS
        Units 1 and 2 .............................     527)     (527)     (527)
     State income tax .............................   6,129     5,963     5,192
     Other ........................................    (362)      499       210
                                                    -------   -------   ------- 
        Total income taxes ........................ $48,141   $46,718   $40,494
                                                    =======   =======   =======



                                      F-21
<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(6) 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 note 1. The  major  sources  of these  differences  for  which
deferred taxes have been provided and the tax effects of each are as follows:

                                                   1998        1997       1996
                                                   ----        ----       ----
                                                         (In thousands)

     Deferred fuel costs ......................  $(11,097)   $(9,133)  $  8,234
     Depreciation and cost recovery ...........     7,526      6,390     18,048
     Contributions in aid of construction .....    (2,826)    (3,185)    (4,053)
     Alternative minimum tax in excess of  
       regular tax ............................    21,144     12,482     (1,052)
     PVNGS decommissioning ....................      (618)    (1,512)       537
     Contribution to 401(h) plan ..............      (763)     3,181       (510)
     Regulatory liability .....................         -          -     (6,651)
     Curtailment gain  ........................         -          -      5,272
     Transmission project cost ................         -          -      4,898
     Other ....................................     1,212        161      2,585
                                                  -------    -------   --------
        Net deferred taxes provided ...........   $14,578    $ 8,384   $ 27,308
                                                  =======    =======   ========

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

                                                              1998        1997
                                                              ----        ----
                                                               (In thousands)
    Deferred Tax Assets:
       Alternative minimum tax credit carryforward  .....   $ 34,055    $55,198
       Nuclear decommissioning ..........................     20,062     18,226
       Regulatory liabilities ...........................     47,615     50,689
       Other ............................................     45,480     46,079
                                                            --------   --------
          Total deferred tax assets .....................   $147,212   $170,192

    Deferred Tax Liabilities:
       Depreciation .....................................   $184,462   $182,641
       Investment tax credit ............................     54,404     57,823
       Fuel costs .......................................     12,808     23,905
       Regulatory assets ................................     69,298     68,524
       Other ............................................     24,921     19,176
                                                            --------   --------
          Total deferred tax liabilities ................    345,893    352,369
                                                            --------   --------
    Accumulated deferred income taxes, net ..............   $198,681   $181,877
                                                            ========   ========


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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(6)   Income Taxes (Continued)

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

   Net change in deferred income tax liability per above table.......  $16,804
   Change in tax effects of income tax related regulatory
     assets and liabilities .........................................   (3,848)
   Tax effect of excess pension liability............................      134
   Tax effect of mark-to-market on investments available for sale....   (1,930)
                                                                      --------
   Deferred income tax expense for the period........................  $11,160
                                                                      ========

       The Company has no net operating  loss  carryforwards  as of December 31,
1998.

(7)   Employee and Other Postretirement Benefits

Pension Plan

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

        In December 1996, the Company's Board approved  changes to the Company's
defined benefit pension plan and the  implementation  of a defined  contribution
plan effective January 1, 1998. As a result,  the Company recorded a curtailment
gain of approximately $13.3 million in the consolidated financial statements for
the year ended December 31, 1996.


                                      F-23

<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(7)   Employee 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
                                                          ---------------------
                                                            1998        1997
                                                          ---------   ---------
Change in Benefit Obligation:
  Benefit obligation at beginning of year                 $297,679    $259,051
  Service cost                                               6,660       6,535
  Interest cost                                             20,101      19,592
  Actuarial loss                                            19,380      25,001
  Benefits paid                                            (13,772)    (12,500)
                                                          ---------   ---------
      Benefit obligation at end of period                  330,048     297,679
                                                          ---------   ---------
Change in Plan Assets:                                                
  Fair value of plan assets at beginning of year           330,550     273,981
  Actual return on plan assets                              13,593      69,069
  Employer contribution                                        185       2,000
  Benefits paid                                            (13,772)    (12,500)
                                                          ---------   ---------
      Fair value of plan assets at end of year             330,556     332,550
                                                          ---------   ---------

  Funded Status                                                508      34,871
  Unamortized transition assets                             (3,486)     (4,650)
  Unrecognized net actuarial loss                           19,714     (12,828)
  Unrecognized prior service cost                              112         146
                                                          ---------   ---------
      Prepaid benefit cost                                $ 16,848    $ 17,539
                                                          =========   =========
Weighted - Average Assumptions as of December 31,
  Discount rate                                              6.75%       7.25%
  Expected return on plan assets                             8.50%       8.25%
  Rate of compensation increase                              N/A         N/A


                                      F-24

<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(7)  Employee and Other Postretirement Benefits (Continued)

                                                     Pension Benefits
                                            -----------------------------------
                                               1998        1997         1996
                                            ----------   ---------   ----------

Components of Net Periodic Benefit Cost:
  Service cost                               $  6,660     $ 6,535     $  8,540
  Interest cost                                20,101      19,592       20,546
  Expected return on plan assets              (26,755)    (23,426)     (31,211)
  Amortization of prior service cost           (1,130)     (1,130)       9,577
                                            ----------   ---------   ----------
      Net periodic benefit cost                (1,124)      1,571        7,452
  Curtailment gain                                  -           -      (13,317)
                                            ----------   ---------   ----------
      Total pension expense (benefit)        $ (1,124)    $ 1,571     $ (5,865)
                                            ==========   =========   ==========

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
                                                        ----------------------
                                                          1998         1997
                                                        ----------  ----------

Change in Benefit Obligation:
  Benefit obligation at beginning of year                $ 59,084    $ 58,399
  Service cost                                              1,292       1,300
  Interest cost                                             4,501       4,452
  Actuarial loss (gain)                                     9,662      (5,067)
                                                        ----------  ----------
      Benefit obligation at end of period                  74,539      59,084
                                                        ----------  ----------
Change in Plan Assets:
  Fair value of plan assets at beginning of year           33,158      20,930
  Actual return on plan assets                              4,444       6,076
  Employer contribution                                         -       6,152
                                                        ----------  ----------
      Fair value of plan assets at end of year           $ 37,602    $ 33,158
                                                        ----------  ----------




                                      F-25
<PAGE>


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(7)  Employee and Other Postretirement Benefits (Continued)

                                                       Other Benefits
                                                     ------------------
                                                       1998     1997
                                                     -------- ---------

  Funded Status                                      $(36,937) $(25,926)
  Unamortized transition assets                         6,826    (4,033)
  Unrecognized prior service cost                      25,440    27,257
                                                     --------  --------
      Accrued benefit cost                           $ (4,671) $ (2,702)
                                                     ========  ========
Weighted - Average Assumptions as of December 31,
  Discount rate                                        6.75%     7.25%
  Expected return on plan assets                       8.75%     8.75%
  Rate of compensation increase                        n/a       n/a


                                                       1998     1997      1996
                                                     -------- --------- --------
Components of Net Periodic Benefit Cost:
  Service cost                                       $ 1,292   $ 1,300  $ 1,449
  Interest cost                                        4,501     4,452    4,478
  Expected return on plan assets                      (2,943)   (1,884)  (1,367)
  Amortization of prior service cost                   1,817     1,817    1,817
                                                     -------- --------- --------
      Net periodic benefit cost                      $ 4,667   $ 5,685  $ 6,377
                                                     ======== ========= ========


       The  effect of a 1%  increase  in the health  care trend rate  assumption
would increase the accumulated  postretirement benefit obligation as of December
31, 1998, by approximately  $13.6 million and the aggregate service and interest
cost  components  of net  periodic  postretirement  benefit  cost  for  1998  by
approximately  $1.2  million.  The health  care cost trend rate is  expected  to
decrease to 5.0% by 2010 and to remain at that level thereafter.



                                      F-26

<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(7)    Employee and Other Postretirement Benefits (Continued)

Executive Retirement Program

       The Company has an executive retirement program for a group of management
employees.  The  program  was  intended  to  attract,  motivate  and  retain key
management  employees.  The  Company's  projected  benefit  obligation  for this
program,  as of December 31, 1998, was $19.5 million,  of which the  accumulated
and vested benefit  obligation  was $19.5 million.  As of December 31, 1998, the
Company has recognized an additional liability of $5.8 million for the amount of
unfunded  accumulated  benefits  in excess of  accrued  pension  costs.  The net
periodic pension cost for 1998, 1997 and 1996 was $2.3 million, $2.2 million and
$2.1 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 $9.8 million (fair market value of $17.0 million) are presently
in trust. No additional funds have been provided to the trust since 1989.

Stock Option Plans

        The Company's  Performance  Stock Plan ("PSP") is a non-qualified  stock
option plan,  covering a group of management  employees.  Options are granted at
the fair market  value of the shares on the date of the grant.  Options  granted
through December 31, 1995,  vested on June 30, 1996, have an exercise term of up
to 10 years.  All subsequent  awards granted after December 31, 1995, vest three
years  from  the  grant  date of the  awards.  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 stock options.  The number of options granted in 1998 under
the DRP was  10,000  shares  with an  exercise  price of  $12.75.  The number of
options  exercised  during  1998 under the DRP was 5,000.  The number of options
outstanding as of December 31, 1998, was 21,000.

        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 1996, 1997 and 1998, respectively: dividend yield
of 2.4%, 3.0% and 3.75%;  expected volatility of 18%, 20% and 26.78%,  risk-free
interest rates of 5.59%, 5.69% and 4.65%; and expected lives of four years.



                                      F-27
<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


(7)      Employee and Other Postretirement Benefits (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>

                                          1998                      1997                   1996
                                   --------------------    ---------------------   ---------------------
                                               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                          1,539,214    $17.704    1,619,406    $15.905    1,652,977     $14.457

Granted                               10,000    $12.750      312,707    $23.033      390,228     $19.480

Exercised                            473,063    $14.663      379,833    $14.453      408,822     $13.691

Forfeited                             79,976    $21.194       13,066    $19.450       14,977     $19.625
                                   ---------               ---------               ---------  
Outstanding at end of year           996,175    $18.819    1,539,214    $ 17.70    1,619,406     $15.905
                                   =========               =========               =========
Options exercisable at year-end      400,158                 861,221               1,244,155

Weighted-average fair value of 
options granted during the year:

          PSP                            N/A                  $ 4.21                  $ 3.56
          DRP                          $7.32                  $15.69                  $11.50

</TABLE>

The following table summarizes  information  about stock options  outstanding at
December 31, 1998:

<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 12/31/98        Life            Prices      at 12/31/98      Prices
     --------       -----------   ----------------    --------     -----------     ---------
     <S>               <C>            <C>             <C>            <C>            <C>    
     $  5.50 -
     $ 12.75            21,000        9.33 years      $  9.381        11,000        $ 6.318
     $ 11.50 -
     $ 23.6875         975,175        7.62 years      $ 19.022       389,158        $15.298
     ---------      ----------    ----------------    --------     -----------     ---------
     $  5.50 -
     $ 23.6875         996,175        7.65 years      $ 18.819       400,158        $15.051
                    ==========                                     ===========

</TABLE>

                                      F-28


<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(7)      Employee and Other Postretirement Benefits (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:

                                                1998        1997         1996
                                                ----        ----         ----
                                                   (In thousands except per
                                                         share amounts)
   Net Earnings:
   (Available for common)    As Reported       $82,096     $80,409      $71,994
                             Pro Forma         $81,554     $80,018      $70,952

   Basic EPS:                As Reported       $  1.97     $  1.92      $  1.72
                             Pro Forma         $  1.95     $  1.92      $  1.70

   Diluted EPS:              As Reported       $  1.95     $  1.91      $  1.71
                             Pro Forma         $  1.95     $  1.90      $  1.70

(8)   Construction Program and Jointly-Owned Plants

        The  Company's  construction  expenditures  for 1998 were  approximately
$128.8 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,  1998,  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)......  $704,890    $310,678       $15,310      46.3%
  Palo Verde Nuclear Generating
    Station (Nuclear).....................  $197,369*   $ 43,822*      $12,156*     10.2%
  Four Corners Power Plant 
    Units 4 and 5 (Coal)..................  $120,492    $ 62,494       $ 1,690      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-29

<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

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

San Juan Generating Station ("SJGS")

        The Company  operates and jointly owns SJGS. At December 31, 1998,  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,  California public power agency  ("M-S-R"),  10.04% by the City of
Anaheim, California, 8.475% by the City of Farmington, 7.2% by the County of Los
Alamos, and 7.028% by Utah Associated Municipal Power Systems.

Palo Verde Nuclear Generating Station

       The Company is participating  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.
During  1998,  PVNGS was  operated  at a capacity  factor of 92.5% which was the
highest yearly capacity  factor attained at the plant.  This capacity factor was
primarily attributable to record setting low refueling outage days.

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 accumulated  funds,  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 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.


                                      F-30

<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

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

       The United States Nuclear Regulatory Commission ("NRC") has also recently
announced   that  it  has  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,  1999,  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 exceeds 17 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  $3.3 million per
year.

PVNGS Decommissioning Funding

       The Company has a program for funding its share of decommissioning  costs
for PVNGS. Under a portion of this program,  the Company made a series of annual
deposits  under  agreements  approved by the NMPUC to an external  non-qualified
trust  which were  applied  pursuant  to a split  dollar  agreement  between the
Company and its employees towards an investment in whole life insurance policies
on certain  current and former  employees.  The program for  investment  in life
insurance  policies has been  terminated.  The remaining  portion of the nuclear
decommissioning  funding  program is  invested  in  equities  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 $155.4 million (in 1998 dollars).


                                      F-31

<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

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

        Pursuant  to NMPUC  approval,  the  Company  funded an  additional  $3.0
million,  $2.1 million and $12.5 million in 1998,  1997 and 1996,  respectively,
into the qualified and non-qualified  trust funds. The estimated market value of
the trusts,  including the net cash value of the life insurance policies, at the
end of 1998 was approximately $40 million.

       The  NRC  has  recently   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 estimated total  decommissioning costs through cost of service
rates or through a  "non-bypassable  charge".  Other  mechanisms are prescribed,
including prepayment, 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 will be filing a report
with the NRC through  APS,  the  operating  agent of PVNGS,  at the end of March
1999, concerning  decommissioning  funding assurance,  and believes that it will
continue  to be  allowed to use the  external  sinking  fund  method as the sole
financial assurance method for Unit 3.

Nuclear Spent Fuel and Waste Disposal

       Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the
"Waste Act"),  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.  The NRC,  pursuant to the Waste Act,
requires  operators of nuclear power  reactors to enter into spent fuel disposal
contracts  with DOE.  APS,  on its own behalf  and on behalf of the other  PVNGS
participants,  executed a spent fuel disposal contract with DOE. 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.  DOE  announced  that such a
repository now cannot be completed before 2010.

       In  response  to  lawsuits  filed over DOE's  obligation  to accept  used
nuclear  fuel,  the United States Court of Appeals for the D.C.  Circuit  ("D.C.
Circuit") has ruled that DOE had an obligation to begin  accepting  used nuclear
fuel in 1998. However, the D.C. Circuit refused to issue an order compelling DOE
to begin moving used fuel.  Instead,  the D.C. Circuit ruled that any damages to
utilities  should be sought under the standard  contract  signed between DOE and
utilities,  including  APS,  the  operating  agent of PVNGS.  The United  States
Supreme Court has refused to grant review of the D.C.  Circuit's  decisions.  In
July 1998, APS filed a petition for review  regarding DOE's  obligation to begin
accepting spent nuclear fuel.


                                      F-32

<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

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

       APS 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 wet
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 million (in 1998 dollars) over the life of PVNGS 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  1998,  the  Company  expensed
approximately $12 million for on-site interim nuclear fuel storage costs related
to nuclear fuel burned prior to 1999.  APS  currently  believes  that spent fuel
storage or  disposal  methods  will be  available  for use by PVNGS to allow its
continued operation beyond 2002.

         A low-level  radioactive waste facility built in 1995 at the PVNGS site
could store an amount of waste  equivalent  to 10 years of normal  operation  of
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 facility is available.

       While  believing that  scientific and financial  aspects of the issues of
spent  fuel  and   low-level   waste   storage  and  disposal  can  be  resolved
satisfactorily,  the Company  acknowledges  that their ultimate  resolution in a
timely  fashion will  require  political  resolution  and action on national and
regional scales which it is less able to predict.

(9) 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 up to 70 MW
from 1999 through 2003. 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.

         The Company  anticipates  the need for  approximately  100 to 200 MW of
additional  capacity  in the 1999  through  2000  timeframe.  To meet  projected
capacity  needs,  in 1996, the Company  entered into a long-term  power purchase


                                      F-33

<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(9)      Long-Term Power Contracts (Continued)

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.  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 will be used to
purchase or acquire  resources  the  Company  had pursued  through the solar RFP
process,  while the other  half of the monies  will be used for other  renewable
resource projects.

        In November 1998, the NMPUC adopted a rule that establishes a "renewable
energy  development  program"  and  requires  New  Mexico  utilities  to collect
voluntary  contributions to a renewable  energy fund from their  customers.  The
stated purpose of the rule is to support  research,  development,  demonstration
and deployment of renewable  energy  resources.  Funds collected by each utility
are  to be  spent  by it  on  projects  approved  by  the  PRC  based  upon  the
recommendations  of a Renewable Energy Advisory Board which will be appointed by
the PRC.  The  Company has  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.

                                      F-34

<PAGE>

              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(9)  Long-Term Power Contracts (Continued)

       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.

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

     Future minimum operating lease payments (in thousands) at December 31, 1998
are:

       1999 ...............................................   $   79,805
       2000 ...............................................       78,974
       2001 ...............................................       78,779
       2002 ...............................................       78,666
       2003 ...............................................       78,663
       Later years ........................................      875,088
                                                              ----------
          Total minimum lease payments ....................   $1,269,975
                                                              ==========

        Operating lease expense,  inclusive of PVNGS leases,  was  approximately
$82.6  million  in 1998,  $80.8  million  in 1997  and  $80.3  million  in 1996.
Aggregate minimum payments to be received in future periods under  noncancelable
subleases are approximately $5.3 million.

(11)  Environmental Issues

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

                                      F-35

<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(11)  Environmental Issues (Continued)

Electric Operations

Santa Fe Generating Station ("Santa Fe Station")

        The  Company and the New Mexico  Environment  Department  ("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 municipal well supplying the City of Santa
Fe 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 complied from 1996 to
1999 strongly suggest the groundwater  contamination does not originate from the
Santa Fe Station  site and has been drawn  under the site by the  pumping of the
Santa Fe supply well.

        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.

                                      F-36

<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(11)  Environmental Issues (Continued)

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 Resource
Conservation  and  Recovery  Act  ("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  includes
approximately  $5.0 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,
1998, was $7.7 million. The remediation program continues on schedule.

Gas Operations

Pit Closure and Remediation

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


                                      F-37


<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(12)   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  was $5.1  million  (net of income tax benefit of $3.3  million),  which
includes a provision for anticipated operating losses prior to disposal.

       Operating  results of the  discontinued  operations  prior to the date of
discontinuation are shown separately in the accompanying consolidated statements
of earnings. Such amounts include income tax benefits related to the losses from
discontinued  operations  of $4.8 million in 1998,  $3.6 million in 1997 and $.3
million  in 1996.  Total  sales from the  discontinued  operations  were  $159.2
million,  $114.7 million and $9.6 million in 1998, 1997 and 1996,  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-38

<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(13)   Segment Information

        In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. The Company's principal business segments
are  the  four  regulated   business  units:   Electric  Service  Business  Unit
("Distribution"),  Transmission  Service  Business Unit  ("Transmission"),  Bulk
Power Business Unit  ("Generation") and Gas Services Business Unit ("Gas").  The
Company's non operating  subsidiaries and Energy Services  Business Unit are not
reportable  segments  and are included in "Other" for  reconciliation  purposes.
Intersegment  revenues are determined  based on a formula  mutually  agreed upon
between affected  segments and are not based on market rates.  Such intersegment
items are eliminated for consolidation purposes.

       Summarized  financial  information by business segment for 1998, 1997 and
1996 is as follows:

<TABLE>
<CAPTION>
                                                      Electric
                                       --------------------------------------
                                       Distribution Transmission   Generation      Gas        Other        Total
                                       ------------ ------------   ----------    --------    --------    ----------
                                                                      (In thousands)
<S>                                       <C>         <C>          <C>           <C>         <C>         <C>       
1998:
Operating revenues:
   External customers                     $539,972    $ 15,596     $  279,636    $255,975    $  1,266    $1,092,445
   Intersegment revenues                     -        $ 29,091     $  362,722       -        $   -       $  391,813
Depreciation and amortization             $ 23,396    $  8,527     $   38,292    $ 15,863    $     63    $   86,141
Interest income                           $  9,200    $  4,286     $   15,001    $  6,130    $    424    $   35,041
Net interest charges                      $ 16,057    $  7,547     $   26,179    $ 13,784    $   (350)   $   63,217
Operating income tax expense (benefit)    $ 10,217    $  2,518     $   27,632    $  4,597    $ (3,658)   $   41,306
Segment net income (loss)                 $ 22,317    $  6,828     $   61,949    $ 11,056    $(19,468)   $   82,682

Total assets                              $583,104    $197,085     $1,328,691    $443,750    $ 24,158    $2,576,788
Gross property additions                  $ 50,399    $  9,156     $   30,969    $ 38,260        -       $  128,784

1997:
Operating revenues:
   External customers                     $522,835       -         $  199,603    $294,769    $  3,314    $1,020,521
   Intersegment revenues                     -           -         $  370,019       -        $   -       $  370,019
Depreciation and amortization             $ 21,754       -         $   46,335    $ 14,587    $     18    $   82,694
Interest income                           $  6,715       -         $   12,714    $  4,313    $     34    $   23,776
Net interest charges                      $ 15,900       -         $   27,613    $ 12,701        -       $   56,214
Operating income tax expense (benefit)    $ 13,890       -         $   22,556    $  7,587    $ (2,092)   $   41,941
Segment net income (loss)                 $ 24,496       -         $   51,260    $ 14,602    $ (9,363)   $   80,995

Total assets                              $607,898       -         $1,178,036    $479,320    $ 55,301    $2,320,555
Gross property additions                  $ 45,302       -         $   51,661    $ 31,408        -       $  128,371

</TABLE>

                                      F-39
<PAGE>
              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996

(13)     Segment Information (Continued)

<TABLE>
<CAPTION>
                                                      Electric
                                       --------------------------------------
                                       Distribution Transmission   Generation      Gas        Other        Total
                                       ------------ ------------   ----------    --------    --------    ----------
                                                                      (In thousands)
<S>                                       <C>            <C>       <C>           <C>         <C>         <C>       
1996:
Operating revenues:
   External customers                     $510,936       -         $  134,703    $227,301     $   838    $  873,778
   Intersegment revenues                     -           -         $  380,000       -         $  -       $  380,000
Depreciation and amortization             $ 19,883       -         $   44,934    $ 13,122     $   176    $   78,115
Interest income                           $  2,386       -         $    5,700    $  4,420        -       $   12,506
Net interest charges                      $ 12,346       -         $   30,817    $ 11,544        -       $   54,707
Operating income tax expense (benefit)    $  8,559       -         $   23,863    $  8,927     $(1,699)   $   39,650
Segment net income (loss)                 $ 16,800       -         $   52,237    $  8,909     $(5,366)   $   72,580

Total assets                              $579,793       -         $1,139,827    $484,073     $26,621    $2,230,314
Gross property additions                  $ 49,221       -         $   27,351    $ 26,497     $    18    $  103,087

</TABLE>

       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 gas
trading  operations of its Energy Services Business Unit (see note 12). Included
in the line item  Segment net income  (loss)  under Other are losses of $18,501,
$9,050 and  $5,058  for the  discontinued  operations  for 1998,  1997 and 1996,
respectively.


                                      F-40
<PAGE>



              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
                           QUARTERLY OPERATING RESULTS


   The unaudited operating results by quarters for 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                                        Quarter Ended
                                                        --------------------------------------------
                                                        March 31    June 30  September 30  December 31
                                                        --------    -------  ------------  -----------
                                                           (In thousands except per share amounts)
<S>                                                     <C>         <C>         <C>         <C>     
  1998:
     Operating Revenues ................................$282,560    $230,478    $320,438    $258,969
     Operating Income ..................................$ 36,626    $ 26,042    $ 47,446    $ 25,535
     Earnings Before Discontinued Operations............$ 25,561    $ 16,497    $ 34,656    $ 18,405
     Net Earnings  (1)..................................$ 21,214    $ 14,778    $ 31,989    $ 14,701
     Net Earnings per share before Discontinued
        Operations......................................$   0.61    $   0.39    $   0.83    $   0.44
     Net Earnings per Share (basic).....................$   0.50    $   0.35    $   0.77    $   0.35
     Net Earnings per share (diluted)...................$   0.50    $   0.35    $   0.76    $   0.34

  1997:
     Operating Revenues ................................$285,290    $219,435    $254,600    $261,196
     Operating Income ..................................$ 36,893    $ 26,781    $ 35,152    $ 30,721
     Earnings before Discontinued Operations............$ 25,096    $ 16,354    $ 24,586    $ 20,461
     Net Earnings  .....................................$ 24,896    $ 15,567    $ 24,319    $ 16,213
     Net Earnings per share before Discontinued
       Operations.......................................$   0.60    $   0.39    $   0.59    $   0.48

     Net Earnings per Share (basic).....................$   0.59    $   0.37    $   0.58    $   0.38
     Net Earnings per share (diluted)...................$   0.59    $   0.37    $   0.57    $   0.38

</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)  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 12 of the notes to consolidated
     financial statements.) In addition, certain prior periods amounts have been
     restated.

                                      F-41

<PAGE>

<TABLE>
<CAPTION>

                             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                                       COMPARATIVE OPERATING STATISTICS

                                                      1998          1997          1996          1995          1994
                                                   -----------   -----------   -----------   -----------   -----------
<S>                                                 <C>           <C>           <C>           <C>           <C>      
Electric Service Energy Sales--KWh (in thousands):
  Residential                                       2,007,852     1,976,434     1,892,290     1,795,371     1,786,292
  Commercial                                        2,888,539     2,841,831     2,698,087     2,578,243     2,534,507
  Industrial                                        1,571,824     1,556,264     1,505,801     1,434,974     1,268,208
  Other ultimate customers                            271,659       160,370       310,118       220,777       364,144
                                                   -----------   -----------   -----------   -----------   -----------
    Total sales to ultimate customers               6,739,874     6,534,899     6,406,296     6,029,365     5,953,151
  Sales for resale                                  8,782,315     6,785,643     4,575,220     2,590,513     3,361,933
                                                   -----------   -----------   -----------   -----------   -----------
    Total KWh sales                                15,522,189    13,320,542    10,981,516     8,619,878     9,315,084
                                                   ===========   ===========   ===========   ===========   ===========

Electric Revenues (in thousands):
  Residential                                        $187,681      $184,813      $177,220      $168,633      $172,559
  Commercial                                          241,968       237,629       226,146       218,222       229,851
  Industrial                                           88,644        86,927        83,651        79,964        79,729
  Other ultimate customers                             18,124        10,135        20,804        18,749        24,147
                                                   -----------   -----------   -----------   -----------   -----------
    Total revenues to ultimate customers              536,417       519,504       507,821       485,568       506,286
  Sales for resale                                    274,979       185,334       121,329        80,949 *      96,821 *
                                                   -----------   -----------   -----------   -----------   -----------
    Total revenues from energy sales                  811,396       704,838       629,150       566,517       603,107
  Miscellaneous electric revenues                      23,808        17,600        16,489        17,767        18,687
                                                   -----------   -----------   -----------   -----------   -----------
    Total electric revenues                          $835,204      $722,438      $645,639      $584,284      $621,794
                                                   ===========   ===========   ===========   ===========   ===========

Customers at Year End:
  Residential                                         319,415       311,314       304,900       296,821       287,369
  Commercial                                           37,652        36,942        36,292        35,390        34,336
  Industrial                                              363           363           375           374           384
  Other ultimate customers                                665           637           632           598           599
                                                   -----------   -----------   -----------   -----------   -----------
    Total ultimate customers                          358,095       349,256       342,199       333,183       322,688
  Sales for Resale                                         83            66            56            37            42
                                                   -----------   -----------   -----------   -----------   -----------
    Total customers                                   358,178       349,322       342,255       333,220       322,730
                                                   ===========   ===========   ===========   ===========   ===========

Reliable Net Capability--KW                         1,506,000     1,506,000     1,506,000     1,506,000     1,506,000
Coincidental Peak Demand--KW                        1,313,000     1,209,000     1,217,000     1,247,000     1,189,000
Average Fuel Cost per Million BTU                    $ 1.2433      $ 1.2319      $ 1.2735       $1.3177       $1.3488
BTU per KWh of Net Generation                          10,784        10,927        10,768        10,811        10,817

Water Service  **
  Water Sales--Gallon (in thousands)                     -            -              -        1,616,544     3,366,388
  Revenues (in thousands)                                -            -              -          $ 6,196       $13,407
  Customers at Year End                                  -            -              -           23,752        23,452

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

</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 and $25.0 million for 1995 and 1994, respectively

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


                                                     F-42

<PAGE>

<TABLE>
<CAPTION>

                             PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                                       COMPARATIVE OPERATING STATISTICS

                                             1998        1997        1996        1995       1994
                                           ---------   ---------   ---------   ---------  ---------
<S>                                          <C>         <C>         <C>         <C>        <C>   
Gas Throughput--Decatherms (in thousands)
PNMGS:
    Residential                              30,258      30,755      27,387      25,865     27,139
    Commercial                               10,387      10,644       9,310       8,864      9,767
    Industrial                                1,553       1,280       2,136         661        831
    Public authorities                        3,427       4,153       2,591       2,411      2,465
    Irrigation                                1,869       1,593       1,418       1,245      1,272
    Sales for resale                          1,205       1,233       3,094       1,266        680
    Off-system sales                          1,889       1,179       5,745       1,176       -
    Unbilled                                 (1,343)       (202)      1,405      (1,764)      (309)
                                           ---------   ---------   ---------   ---------  ---------
    PNMGS sales                              49,245      50,635      53,086      39,724     41,845
    Transportation throughput                36,413      33,975      47,010      49,136     43,135
                                           ---------   ---------   ---------   ---------  ---------
   PNMGS throughput                          85,658      84,610     100,096      88,860     84,980
Gathering Company:
    Spot market sales                          -           -          -              39       -
    Transportation throughput                  -           -          -          20,695     47,091
                                           ---------   ---------   ---------   ---------  ---------
         Total throughput                    85,658      84,610     100,096     109,594    132,071
                                           =========   =========   =========   =========  =========

Gas Revenues (in thousands)
PNMGS:
    Residential                            $161,153    $187,563    $129,911    $125,290   $149,439
    Commercial                               42,680      50,502      33,022      32,328     42,725
    Industrial                                4,887       4,536       5,179       1,873      2,905
    Public authorities                       12,610      17,577       8,018       7,939      9,969
    Irrigation                                5,780       5,041       3,252       3,077      4,061
    Sales for resale                          3,596       4,465       2,106       3,114      2,462
    Off-system sales                          3,816       1,926      14,352       1,885       -
    Imbalance penalties                       1,416       1,273       1,231       1,786        944
    Unbilled                                   (955)     (2,172)      2,678      (2,430)       267
                                           ---------   ---------   ---------   ---------  ---------
    Revenues from gas sales                 234,983     270,711     199,749     174,862    212,772
    Transportation                           13,464      14,172      17,215      18,532     19,742
    Liquids                                   1,463       4,451       7,608      12,782     14,551
    Other                                     6,065       5,435       2,729       3,606      4,705
                                           ---------   ---------   ---------   ---------  ---------
    PNMGS operating revenues                255,975     294,769     227,301     209,782    251,770
Gathering Company:
    Spot market sales                          -           -           -             42       -
    Transportation                             -           -           -          3,640      7,850
    Imbalance penalties                        -           -           -            418         26
Processing Company:
    Liquids revenue                            -           -           -            632       (621)
    Processing fees                            -           -           -          3,471     10,485
                                           ---------   ---------   ---------   ---------  ---------
         Total operating revenues          $255,975    $294,769    $227,301    $217,985   $269,510
                                           =========   =========   =========   =========  =========
Customers at Year End
PNMGS:
    Residential                             383,292     375,032     367,025     358,822    348,715
    Commercial                               32,004      31,560      30,757      30,493     30,139
    Industrial                                   55          50          54          59         57
    Public authorities                        2,429       2,735       2,462       2,444      2,463
    Irrigation                                1,078       1,027       1,076         886        899
    Sales for resale                              3           3           3           2          3
    Gas choice                                  112     -           -           -          -
    Transportation                               29          31          36          38         43
                                           ---------   ---------   ---------   ---------  ---------
    PNMGS customers                         419,002     410,438     401,413     392,744    382,319
Gathering Company:
    Transportation                          -           -           -           -               21
Processing Company                          -           -           -           -               32
                                           ---------   ---------   ---------   ---------  ---------
         Total customers                    419,002     410,438     401,413     392,744    382,372
                                           =========   =========   =========   =========  =========

</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-43
<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 8,  1999 (the  "1999  Proxy  Statement"),  to PART I,  SUPPLEMENTAL  ITEM -
"EXECUTIVE   OFFICERS  OF  THE  COMPANY"  and  "Other  Matters"  "Section  16(a)
Beneficial Ownership Reporting Compliance" in the 1999 Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

       Reference is hereby made to  "Executive  Compensation"  in the 1999 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 1999 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       Reference is hereby made to the 1999 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  1998,  1997,
                   and 1996 are  omitted for the reason that they are not
                   required or the information is otherwise supplied.

       (a) - 3-A.  Exhibits Filed:

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

         10.20.2        Amendment  No. 2 dated as of April 10,  1987 to Facility
                        Lease dated as of August 12, 1986,  as amended,  between
                        The First National Bank of Boston, not in its individual
                        capacity,  but  solely  as Owner  Trustee  under a Trust
                        Agreement, dated as of August 12, 1986, with MFS Leasing
                        Corp.,  Lessor and Public Service Company of New Mexico,
                        Lessee (refiled).


                                       E-1

<PAGE>

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

         10.23**        Restated  and  Amended  Public  Service  Company  of New
                        Mexico  Accelerated  Management  Performance Plan (1988)
                        (August 16, 1988) (refiled).

         10.23.1**      First  Amendment to Restated and Amended  Public Service
                        Company of New Mexico Accelerated Management Performance
                        Plan (1988) (August 30, 1988) (refiled).

         10.23.2**      Second Amendment to Restated and Amended Public Service
                        Company of New Mexico Accelerated Management Performance
                        Plan (1988) (December 29, 1989) (refiled).

         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:

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

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

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

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

</TABLE>
                                                  E-2


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

2.1.2   Second  Amendment to Purchase and                2.1.2 to Annual  Report of the         1-6986
        Sale  Agreement  By and Among Public             Registrant  on Form
        Service  Company  of New  Mexico,                10-K for  fiscal year  ended
        Sunterra Gas Gathering Company,                  December 31, 1994.
        Sunterra Gas Processing Company
        (Sellers) and Williams Gas Processing-
        Blanco, Inc. (Buyer)

2.2     Agreement to Purchase and Sell Between           4-(b) to Registration Statement        2-99990
        City of Santa Fe, New Mexico and                 No. 2-99990 of the Company.
        Public Service Company of New Mexico.

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

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

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

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

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

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

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

                                                  E-3

<PAGE>
<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.

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

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.

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.

</TABLE>
                                                  E-4

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

<S>     <C>                                              <C>                                    <C>    
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.

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).


                                                  E-5

</TABLE>

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

<S>     <C>                                              <C>                                    <C>    
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.

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

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

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

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

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

</TABLE>
                                                  E-6
<TABLE>
<CAPTION>
Exhibit No.        Description of Exhibit                      Filed as Exhibit:               File No:
-----------        ----------------------                      -----------------               --------

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

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

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

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

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

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.



                                                  E-7
</TABLE>


<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
        1987 to Arizona Nuclear Power Project            December 31, 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).


                                                  E-8
</TABLE>


<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 .



                                                  E-9

</TABLE>


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

<S>     <C>                                              <C>                                    <C>    
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,              Registrant on Form 10-K for 
        1995,  among San Juan Coal  Company,             fiscal year ended December 31,
        the Company and Tucson Electric Power            1996.
        Company.

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                 1994.
        County of Los Alamos (refiled).

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



                                                  E-10

</TABLE>


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

<S>       <C>                                            <C>                                    <C>    
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).

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).

10.20.3   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
          of Boston,  as Owner  Trustee,  and Public     for fiscal year ended
          Service Company of New Mexico (Unit 1          December 31, 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).

10.24**   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.


                                                  E-11

</TABLE>


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

<S>       <C>                                            <C>                                    <C>    
10.25.1** Second Restated and Amended Public             10.25.1 to Annual Report 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 Form10-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.)

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

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

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.

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

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.

                                                  E-12
</TABLE>


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

<S>       <C>                                            <C>                                    <C>    
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.

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

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

10.38     Restated and Amended San Juan Unit 4           10.2.1 to the Company's                1-6986
          Purchase and  Participation  Agreement         Quarterly Report on Form
          between  Public  Service  Company of           10-Q for the quarter  ended
          New Mexico and Utah  Associated  Municipal     September 30, 1993.
          Power 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          19.5 to the Company's Quarterly        1-6986
          July 27, 1992 among San Juan Coal Company,     Report on Form 10-Q for the
          the Company and Tucson Electric Power          quarter ended September 30, 1992
          Company.                                       (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.


                                                  E-13

</TABLE>


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

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

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.

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

10.47.4** 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.

10.48**   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.

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

                                                  E-14
</TABLE>


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

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

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

10.52     Memorandum of Agreement between                10.52 to the Company's Quarterly       1-6986
          the Navajo Nation and Public Service           Report on Form 10-Q for the
          Company of New Mexico (Nine-Mile               quarter ended June 30, 1997.
          Transmission R-O-W).

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 Form 10-Q
          Service Company of New Mexico, Citibank and    for the quarter ended June 30,
          Citicorp North America, Inc. and Amended       1996.
          Restated Collection Agent Agreement dated 
          May 20, 1996, between Public Service Company 
          of New Mexico, Corporate Receivables 
          Corporation and Citibank, N.A.

10.59*    Amended and Restated Lease dated as of         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.


                                                  E-15
</TABLE>


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

<S>       <C>                                            <C>                                    <C>    
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
          Power Company and certain financial            December 31, 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.

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

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.


                                                  E-16

</TABLE>


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

<S>       <C>                                            <C>                                    <C>    
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.

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       1-6986
                                                         Report on Form 10-Q for the
                                                         quarter ended June 30, 1998.



                                                  E-17
</TABLE>


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

<S>       <C>                                            <C>                                    <C>    
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.

Additional Exhibits

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

99.2*     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.


                                                  E-18


</TABLE>


<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 31,
          of New Mexico and The First National           1995.
          Bank of Boston, as Owner Trustee
          (refiled).

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

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 31,
          First National Bank of Boston, as Owner        1996.
          Trustee, and Chemical Bank, as Indenture
          Trustee together with Supplemental
          Indenture No. 1 thereto (refiled).

99.7      Assignment, Assumption, and Further            99.7 to 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).




                                                  E-19


</TABLE>


<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 December 31,
          First National Bank of Boston, as Owner        1996.
          Trustee, and Chemical Bank, as Indenture
          Trustee together with Supplemental
          Indenture No. 1 thereto (refiled).

99.9.2    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).


                                                  E-20

</TABLE>


<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).

                                                  E-21

</TABLE>


<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 for
          as of December 31, 1986, between the           fiscal year ended December 31,
          First National Bank of Boston, as Owner        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 for
          between the Owner Participant named            fiscal year ended December 31,
          therein, and Public Service Company of         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            fiscal year ended December 31,
          therein, and Public Service Company of         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 for
          among Arizona Public Service Company,          fiscal year ended December 31,
          Salt River Project Agricultural                1996.
          Improvement and Power District and the
          City of Tolleson, as amended (refiled).



                                                  E-22

</TABLE>


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

<S>       <C>                                            <C>                                    <C>    

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.

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,  1998 and  during the period
beginning  January 1, 1999 and ending March 8, 1999, the Company  filed,  on the
date indicated, the following report on Form 8-K.

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

November 30, 1998   December 18, 1998  Electric Rate Case; Residential Electric,
                                       Incorporated;    Creation    of   Three
                                       Non-Utility   Subsidiaries;   City   of
                                       Albuquerque     Retail    Pilot    Load
                                       Aggregation  Project;   Resignation  of
                                       Chief Operating Officer


                                      E-23

<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 8, 1999                  By         /s/ B. F. Montoya
                                          -------------------------------------
                                                   B. F. Montoya
                                          President and Chief Executive Officer

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

<TABLE>
<CAPTION>

               Signature                                   Capacity                     Date
               ---------                                   --------                     ----
<S>   <C>                                         <C>                                <C>                           
                /s/ B. F. MONTOYA                 Principal Executive Officer and    March 8, 1999
-------------------------------------------         Director
                  B. F. MONTOYA                    
      President and Chief Executive Officer


            /s/ M. H. MAERKI                      Principal Financial Officer        March 8, 1999
-------------------------------------------
              M. H. Maerki
        Senior Vice President and
         Chief Financial Officer


            /s/ D. M. BURNETT                     Principal Accounting Officer       March 8, 1999
-------------------------------------------
              D. M. Burnett
    Vice President, Corporate Controller 
        and Chief Accounting Officer


           /s/ J. T. ACKERMAN                     Chairman of the Board              March 8, 1999
-------------------------------------------
             J. T. Ackerman


           /s/ R. G. ARMSTRONG                    Director                           March 8, 1999
-------------------------------------------
             R. G. Armstrong


            /s/ J. A. GODWIN                      Director                           March 8, 1999
-------------------------------------------
              J. A. Godwin


            /s/ L. H. LATTMAN                     Director                           March 8, 1999
-------------------------------------------
              L. H. Lattman


            /s/ M. LUJAN JR.                      Director                           March 8, 1999
-------------------------------------------
              M. Lujan Jr.

 
             /s/ R. U. ORTIZ                      Director                           March 8, 1999
-------------------------------------------
               R. U. Ortiz


             /s/ R. M. PRICE                      Director                           March 8, 1999
-------------------------------------------
               R. M. Price


             /s/ P. F. ROTH                       Director                           March 8, 1999
-------------------------------------------
               P. F. Roth

</TABLE>

                                                  E-24