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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, 1995       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. |X|

   The total number of shares of the Company's  Common Stock  outstanding  as of
January 31, 1996 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 $17 7/8 per
share reported by the Wall Street Journal, was $746,711,733.

                       DOCUMENTS INCORPORATED BY REFERENCE

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

      Proxy  Statement to be filed with the Securities  and Exchange  Commission
      pursuant to Regulation 14A relating to the annual meeting of  stockholders
      to be held on April 30, 1996--PART III.

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                                TABLE OF CONTENTS


                                                                            Page
                                                                            ----
GLOSSARY...................................................................  iv

                                     PART I

ITEM  1. BUSINES...........................................................   1
           THE COMPANY.....................................................   1
           ELECTRIC OPERATIONS.............................................   1
               Service Area and Customers..................................   1
               Power Sales.................................................   2
               Sources of Power............................................   3
               Fuel and Water Supply.......................................   4
           NATURAL GAS OPERATIONS..........................................   6
               Service Area and Customers..................................   6
               Natural Gas Supply..........................................   7
               Natural Gas Sales...........................................   8
           RATES AND REGULATION............................................   9
               FPPCAC......................................................   9
               Fossil-Fueled Plant Decommissioning Costs...................   9
               Energy and Utility Related Subsidiaries.....................   9
               Gas Rate Case...............................................  10
               PGAC Continuation Filing....................................  10
               Consolidation Issues........................................  10
             Legislative Action............................................  11
           ENVIRONMENTAL FACTORS...........................................  11

ITEM  2. PROPERTIES......................................................... 12
              ELECTRIC...................................................... 12
                Fossil-Fueled Plants........................................ 12
                Nuclear Plant............................................... 13
                Other Electric Properties................................... 14
              NATURAL GAS................................................... 15
              OTHER INFORMATION............................................. 15

ITEM  3. LEGAL PROCEEDINGS.................................................. 15
              PVNGS WATER SUPPLY LITIGATION................................. 15
              SAN JUAN RIVER ADJUDICATION................................... 16
              PVNGS PROPERTY TAXES.......................................... 16
              OTHER PROCEEDINGS............................................. 16
                Federal Deposit Insurance Corporation ("FDIC") Litigation... 16
                Four Corners................................................ 18

ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 18

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY........................ 19





                                       ii




                                     PART II

ITEM  5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
              STOCKHOLDER MATTERS...........................................  21

ITEM  6. SELECTED FINANCIAL DATA............................................  22

ITEM  7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS...........................  23

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

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

                                    PART III

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

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

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

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

                                     PART IV

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

SIGNATURES..................................................................E-21





                                       iii



                                    GLOSSARY



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


                                       iv




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
USEC.................................... United States Enrichment Corporation
Williams................................ Williams Gas Processing-Blanco, Inc., a
                                           subsidiary  of  the  Williams   Field
                                           Services   Group,   Inc.,  of  Tulsa,
                                           Oklahoma


                                        v



                                     PART I

ITEM 1.  BUSINESS

                                   THE COMPANY

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

       On June 30, 1995, the Company  consummated the sale of substantially  all
of  the  gas  gathering  and  processing  assets  of the  Company  and  its  gas
subsidiaries to Williams.  On July 3, 1995, the Company  consummated the sale of
the Company's  water division to the City of Santa Fe. (See note 12 of the notes
to consolidated financial statements.)

       The total  population  of the area served by one or more of the Company's
utility services is estimated to be approximately 1.2 million, of which 55% live
in the greater Albuquerque area.

       For the year ended  December 31, 1995,  the Company  derived 72.3% of its
utility  operating  revenues  from electric  operations,  26.9% from natural gas
operations and .8% from water operations.

       As of December 31, 1995, the Company employed 2,626 persons.

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

                               ELECTRIC OPERATIONS

Service Area and Customers

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

       The Company  provides  retail  electric  service to a large area of north
central New Mexico,  including the cities of Albuquerque,  Santa Fe, Rio Rancho,
Las Vegas,  Belen and  Bernalillo.  The Company also  provides  retail  electric
service to Deming in southwestern  New Mexico and to Clayton in northeastern New
Mexico. As of December 31, 1995, approximately 333,000 retail electric customers
were served by the Company,  the largest of which  accounted  for  approximately
3.6% of the Company's  total  electric  revenues for the year ended December 31,
1995.

                                        1



       The Company holds 23 long-term,  non-exclusive  franchise  agreements for
its electric retail operations,  expiring between August 1996 and November 2028.
The City of Albuquerque (the "City") franchise expired in early 1992.  Customers
in the area covered by the City  franchise  represent  approximately  46% of the
Company's 1995 total electric  operating  revenues,  and no other franchise area
represents  more than 6.9%.  These  franchises are  agreements  that provide the
Company access to public  rights-of-way for placement of the Company's  electric
facilities.  The Company remains obligated under state law to provide service to
customers  in the  franchise  area even in the absence of a franchise  agreement
with the City. (See PART II, ITEM 7. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OTHER ISSUES FACING THE COMPANY
- -- ALBUQUERQUE FRANCHISE ISSUES".)

Power Sales

       For the  years  1991  through  1995,  retail  KWh sales  have  grown at a
compound annual rate of approximately  4.1%. The Company's system and off-system
sales  (revenues and energy  consumption)  and system peak demands in summer and
winter are shown in the following tables:



                            ELECTRIC SALES BY MARKET
                             (Thousands of dollars)


                                      1995        1994        1993        1992       1991
                                    --------    --------    --------    --------   --------
                                                                         
Retail ..........................   $485,568    $506,286    $471,099    $455,387   $444,594
Firm-requirements wholesale .....   $ 20,282    $ 22,296    $ 18,468    $ 20,173   $ 22,390
Other contracted off-system sales   $ 43,158+   $ 54,862+   $ 56,214+   $ 62,348   $ 55,581
Economy energy sales ............   $ 17,509+   $ 19,663+   $ 25,213+   $ 40,770   $ 29,665




                            ELECTRIC SALES BY MARKET
                                (Megawatt hours)


                                1995        1994        1993        1992        1991
                              ---------   ---------   ---------   ---------   ---------
                                                                     
Retail ....................   6,029,365   5,953,151   5,446,788   5,358,246   5,139,954
Firm-requirements wholesale     447,629     489,182     342,137     322,177     308,390
Other contracted off-system
   sales ..................     594,367   1,403,480   1,450,966   1,198,250   1,223,212
Economy energy sales ......   1,548,517   1,469,271   1,582,113   2,164,991   1,559,939




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

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


                             1995      1994      1993      1992     1991
                           --------- --------- --------- --------- --------

Summer....................   1,247    1,189     1,104      1,053     1,018
Winter....................   1,076    1,040       982        992       955
- -----------

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

                                        2




       During  1995 and 1994,  the  Company's  sales in the  off-system  markets
accounted  for  approximately  24.9% and 30.8%,  respectively,  of its total KWh
sales and  approximately  11.8% and 15.8% (before reduction of revenues from the
M-S-R  contingent  power  purchase  contract,  which were  accounted  for in the
determination of the provision for loss recorded in 1992), respectively,  of its
total revenues from energy sales.  During 1995, the Company's  major  off-system
sale contracts in effect were with SDG&E and APPA.

       The SDG&E  contract  requires  SDG&E to purchase  100 MW from the Company
through April 2001. On October 27, 1993,  SDG&E filed a complaint  with the FERC
against  the  Company,  alleging  that  certain  charges  under  this 1985 power
purchase agreement are unjust, unreasonable and unduly discriminatory.  SDG&E is
requesting that the FERC investigate the rates charged under the agreement.  The
relief,  if granted,  would reduce annual demand  charges paid by SDG&E by up to
$11 million per year from the date of the ruling  through April 2001,  and could
require a refund of up to approximately  $14 million.  The Company  responded to
the complaint on December 8, 1993,  and SDG&E and the Company  filed  subsequent
pleadings.  The FERC has not  issued a ruling in the case and has not  indicated
when or if the  complaint  will be  considered.  The Company  believes  that the
complaint is without  merit,  and the Company  intends to vigorously  resist the
complaint.

       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  the power  demand in 1995,  resulting  in a peak
demand of 89 MW.

       The Company furnished  firm-requirements wholesale power in New Mexico in
1995 to the cities of Farmington and Gallup,  TNP and Plains.  Plains terminated
its contract for 10 MW in 1995.  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 1995 were  approximately 26 MW. TNP is currently  purchasing
36 MW but has provided notice that it will reduce its purchase to 15 MW for 1996
and 1997.  TNP may  adjust its  annual  demand  between 15 MW and 40 MW with one
year's  notice  and  may   terminate   service  with  two  years'   notice.   No
firm-requirements  wholesale  customer  accounted  for  more  than  1.6%  of the
Company's  total  electric  operating  revenues for the year ended  December 31,
1995.

Sources of Power

       As of December 31, 1995, the total net generation  capacity of facilities
owned or leased by the Company was 1,506 MW.

       In addition, the Company has a power purchase contract with SPS for up to
200 MW from May 1995 through May 2011. The Company may reduce its purchases from
SPS by 25 MW annually upon three years' notice. The Company provided such notice
in 1995 to reduce the purchase by 25 MW in 1999.  Also, the Company has 39 MW of
contingent  capacity  obtained  from El Paso under a  transmission  capacity for
generation  capacity trade arrangement that increases to 70 MW from 1998 through
2003.  In addition,  the Company is  interconnected  with various  utilities for
economy interchanges and mutual assistance in emergencies.

       The  Company  anticipates  the  need for  approximately  100 to 200 MW of
additional  generating  capacity  in the 1998  through  2000  timeframe,  and is
currently pursuing its options to meet these capacity needs.


                                        3



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

1991............    67.1      167.9       32.9       67.9       --        216.5
1992............    69.2      161.7       30.5       59.8       0.3       239.7
1993............    72.9      164.7       26.7       58.1       0.4       331.7
1994............    72.0      162.9       27.8       58.5       0.2       321.7
1995............    67.9      168.3       31.9       49.1       0.2       242.2


       The estimated  generation  mix for 1996 is 71.5% coal,  28.4% nuclear and
0.1% gas and oil. Due to locally  available  natural gas and oil  supplies,  the
utilization of locally available coal deposits and the generally abundant supply
of  nuclear  fuel,  the  Company  believes  that  adequate  sources  of fuel are
available for its generating stations.

Coal

       The coal requirements for SJGS are being supplied by SJCC, a wholly-owned
subsidiary of BHP, from certain  Federal,  state and private coal leases under a
Coal Sales  Agreement,  pursuant  to which SJCC will supply  processed  coal for
operation of SJGS until 2017. BHP  guaranteed the  obligations of SJCC under the
agreement,  which contemplates the delivery of approximately 121 million tons of
coal during its remaining term. Such amount would supply  substantially  all the
requirements of SJGS through approximately 2017. The primary sources of coal are
a mine adjacent to SJGS and a mine located  approximately  25 miles northeast of
SJGS in the La Plata area of northwestern  New Mexico.  The Company is currently
discussing  with SJCC  alternatives  for securing  both short and long term fuel
resource  requirements  which at this  time are  uncommitted.  As a part of this
discussion,  the Company is also  negotiating  other  issues which may result in
modifications to certain Coal Sales Agreement terms and provisions which include
but are not limited to cost  recovery  and pricing.  On  September 1, 1995,  the
parties  executed  an  amendment  to the Coal  Sales  Agreement.  The  amendment
provides for flexibility in coal sourcing.  Mining  operations are being shifted
over time to the La Plata Mine and several newly  introduced  sources  including
expanded La Plata reserves and a new lease contiguous with the existing San Juan
Mine.  While  the  savings  in fuel  cost  over  the  life of the  contract  are
continuing to be developed, it is currently estimated that the Company will save
approximately  $200  million of coal fuel costs  during the period 1996  through
2004.  The average cost of fuel,  including  ash  disposal and land  reclamation
costs,  for SJGS for the years 1993, 1994 and 1995 was 177.4 cents,  172.1 cents
and 184.6 cents,  respectively,  per million BTU ($34.59,  $33.62 and $35.75 per
ton, respectively).

       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 strip 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 1993, 1994 and 1995 at Four Corners
was 114.9  cents,  125.8 cents and 113.4  cents,  respectively,  per million BTU
($20.11, $22.03 and $20.04 per ton, respectively).


                                        4



Natural Gas

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

Nuclear Fuel

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

       Existing spent fuel storage facilities at PVNGS have sufficient  capacity
with certain  modifications  to store all fuel  expected to be  discharged  from
normal  operation  of all of the PVNGS  units  through  at least the year  2005.
Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the "Waste
Act"),  DOE is  obligated  to accept and dispose of all spent  nuclear  fuel and
other  high-level  radioactive  wastes generated by all domestic power reactors.
The NRC,  pursuant to the Waste Act,  also  requires  operators of nuclear power
reactors to enter into spent fuel disposal  contracts  with DOE. APS, on its own
behalf  and on behalf of the other  PVNGS  participants,  executed  a spent fuel
disposal  contract  with DOE.  The Waste Act also  obligates  DOE to develop the
facilities  necessary for the permanent disposal of all spent fuel generated and
to be generated by domestic  power  reactors and to have the first such facility
in operation by 1998 under prescribed procedures. In November 1989, DOE reported
that such a permanent  disposal facility will not be in operation until 2010. As
a result,  under DOE's current criteria for shipping allocation rights,  PVNGS's
spent fuel  shipments  to the DOE  permanent  disposal  facility  would begin in
approximately 2025. In addition, APS believes that on-site storage of spent fuel
may be required beyond the life of the PVNGS Units. APS currently  believes that
alternative  interim spent fuel storage methods are or will be available on-site
or off-site for use by PVNGS to allow its continued operation beyond 2005 and to
safely store spent fuel until DOE's scheduled shipments from PVNGS begin.

       Currently,  low-level  radioactive  waste is being stored on-site.  A new
low-level  waste  facility was built in 1995 on the PVNGS site. The new facility
has the capability to store an amount of waste  equivalent to 10 years of normal
operation of PVNGS.  APS, the operating agent of PVNGS, is currently  evaluating
its options of shipping  low-level  waste to  facilities  that have  reopened or
continuing to store the waste in the new facility.

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


                                        5



Water Supply

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

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

       Due to extensive lead times required to renew the water rights  contract,
the Company  has  formally  initiated  the  renewal  and  extension  process for
requesting  rights through the year 2025. The Company is actively  conducting an
environmental  assessment  with  the  Bureau  of  Reclamation  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.  The
Company is currently unable to predict the outcome of these matters.

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

                             NATURAL GAS OPERATIONS

       On June 30, 1995, the Company,  Gathering Company and Processing  Company
sold  substantially  all of their gas gathering and processing  facilities.  The
Company  believes  that the sale  allows the Company to focus on  providing  gas
transportation  and  retail gas  services  to New  Mexico  gas  consumers  while
maintaining  its  flexibility in accessing  competitively  priced,  reliable and
secure gas  supplies.  (See PART II,  ITEM 7. --  "MANAGEMENT'S  DISCUSSION  AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OTHER ISSUES FACING
THE COMPANY -- SALE OF GAS GATHERING AND PROCESSING ASSETS".)

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 393,000 customers as of December 31, 1995. The Albuquerque
metropolitan  area accounts for approximately  54.7% of the total  sales-service
customers.   PNMGS  holds  long-term,   non-exclusive  franchises  with  varying
expiration dates in all incorporated communities requiring franchise agreements.
PNMGS completed  franchise  negotiations with the City of Santa Fe extending the
franchise   through  October  25,  2020.  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  sales-service  customers are a
recovery  of the cost of  purchased  gas in  accordance  with  NMPUC  rules  and
regulations  and, in that sense,  do not affect the net earnings of the Company.


                                        6





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 generally for delivery to locations  throughout the PNMGS distribution
systems, to natural gas producers generally for delivery to interstate pipelines
and directly to  end-users.  PNMGS  provided gas  transportation  deliveries  to
approximately 1,200 gas marketers and producers during 1995.

       For the twelve months ended  December 31, 1995,  PNMGS had  throughput of
approximately 110 million decatherms, including sales of 37.3 million decatherms
to sales-service  customers.  No single  "sales-service"  customer accounted for
more than 1.5% of PNMGS' therm sales in 1995. During 1995,  approximately  63.7%
of the PNMGS' total gas throughput was related to transportation gas deliveries.
PNMGS' transportation rates are unbundled, and transportation customers only pay
for the amount of  transportation  service they receive.  PNMGS' total operating
revenues  for the year  ended  December  31,  1995,  were  approximately  $218.0
million. Cost-of-gas revenues, received from sales-service customers,  accounted
for  approximately  39.7% of  PNMGS'  total  operating  revenues.  Since a major
portion of PNMGS' load is related to heating, levels of therm sales are affected
by the weather. Approximately 44.2% of PNMGS' total therm sales in 1995 occurred
in the months of January, February, November and December.

Natural Gas Supply

       During the late 1980's, there were significant changes in the natural gas
industry  brought  about by Federal  and state  regulations  which  dramatically
altered the way gas is bought,  transported and sold  nationwide.  These changes
required  PNMGS to reform or terminate  certain  natural gas purchase  contracts
which required PNMGS to take gas in excess of demand.  This process  resulted in
breach of contract  claims from some  producers.  PNMGS has been able to resolve
substantially all of the producer  litigation and reform its supply portfolio so
that it better  matches the  demands of PNMGS'  sales-service  customers.  These
reformations have also allowed PNMGS to seek new sources of gas supplies through
pipeline  interconnects  which have created a more flexible and reliable  supply
portfolio. PNMGS obtains its supply of natural gas primarily from sources within
New Mexico  pursuant to contracts with producers and marketers.  These contracts
are generally sufficient to meet the PNMGS's 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's transmission facilities,  gas transported by these
companies is the sole supply source for those  cities.  Such  transportation  is
regulated  by  FERC.  As  a  result  of  FERC  Order  636,  PNMGS'  options  for
transporting  gas to such cities and other portions of its  distribution  system
have increased.


                                        7



Natural Gas Sales

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

                                 GAS THROUGHPUT
                            (Millions of decatherms)


                               1995      1994      1993      1992     1991
                              ------    ------    ------    ------   ------

Residential ............       25.9      27.1      28.0      27.1     26.2
Commercial .............        8.9       9.8      10.4      10.6     11.4
Industrial .............        0.7       0.8       0.9       0.7      0.8
Public authorities......        2.4       2.5       2.5       4.2      4.9
Irrigation .............        1.2       1.3       1.3       1.1      1.4
Sales for resale........        2.5       0.7       1.0       2.0      1.4
Unbilled ...............       (1.8)     (0.3)     (0.6)      0.6       --
Transportation* ........       69.8      90.2      91.8      73.6     62.6
Spot market sale .......         --        --        --       0.9      1.6
                             ------    ------    ------    ------   ------
                              109.6     132.1     135.3     120.8    110.3
                             ======    ======    ======    ======   ======
                      


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


                                  GAS REVENUES
                             (Thousands of dollars)


                           1995       1994       1993       1992       1991
                         ---------  ---------  ---------  ---------  ---------

Residential ..........   $ 125,290  $ 149,439  $ 149,796  $ 125,313  $ 137,436
Commercial ...........      32,328     42,725     44,575     37,222     46,676
Industrial ...........       1,873      2,905      3,369      2,063      2,754
Public authorities....       7,939      9,969      9,694     12,313     17,711
Irrigation ...........       3,077      4,061      4,418      2,713      4,495
Sales for resale .....       4,999      2,462      3,137      4,460      3,848
Unbilled .............      (2,430)       267     (1,573)       716       --
Transportation* ......      22,172     27,592     26,729     18,753     16,997
Liquids ..............      13,414     16,090     18,724     26,427     30,500
Processing fees ......       5,180     10,638      9,761      6,795      5,819
Spot market sales.....          42       --            4      1,410      1,771
Other ................       4,101      3,362      2,453      4,974      9,062
                         ---------  ---------  ---------  ---------  ---------
                         $ 217,985  $ 269,510  $ 271,087  $ 243,159  $ 277,069
                         =========  =========  =========  =========  =========
          

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

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


                                        8



                              RATES AND REGULATION

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

FPPCAC

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

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  $141 million  stated in 1995 dollars,  including
approximately  $24.0 million (of which $12.1 million has already been  expended)
for Person, Prager and Santa Fe Stations which have been retired.

       The Company is currently recovering estimated  decommissioning costs from
NMPUC retail customers through its depreciation rates.  Depreciation amounts for
the retired generating units are not being recovered.

Energy and Utility Related Subsidiaries

       On June 23, 1995, the Company filed an application for  authorization for
the creation of three wholly-owned subsidiaries to: (i) manage and operate water
and wastewater systems;  (ii) pursue energy marketing,  alternative fuel vehicle
services and energy  management  services;  and (iii) pursue utility  management
services and related energy  management  services for Federal  installations and
large commercial  customers.  The Company sought approval to invest a maximum of
$50  million in the three  subsidiaries  over time and to enter into  reciprocal
loan agreements for up to $30 million with these  subsidiaries.  The NMPUC Staff
filed a motion on September 20, 1995 to have the case dismissed.  On January 31,
1996, the hearing examiner  assigned to the case recommended that the NMPUC deny
the Staff's  motion.  On February 5, 1996,  the Staff filed a motion  seeking to
have the Company file an immediate report on its non-regulated  activities being
conducted  without  prior  NMPUC  approval;  explain  why NMPUC  approval is not
required;  and explain why  sanctions  should not be  considered  if approval is
required.  On February 19, 1996,  the Company filed its response  describing its
non-utility  (energy and utility  related)  activities  and presenting the legal
authority  demonstrating that prior NMPUC approval is not required.  The Company
currently  cannot predict the ultimate outcome of this proceeding but intends to
vigorously  defend against any  allegation  that it is in violation of any legal
requirements.

                                        9


Gas Rate Case

       On August 28,  1995,  the  Company  filed a request  for a $13.3  million
increase in its retail natural gas sales and  transportation  rates. NMPUC Staff
and intervenors in the case filed their testimony on January 16, 1996. The Staff
recommended a $2.5 million rate decrease and the AG  recommended a $14.7 million
rate decrease.  The major issues in the case center around the Company's request
to recover certain costs  associated with reservation  fees,  discounts given to
large and industrial  transportation  customers and losses incurred to reacquire
debt. The Company  anticipates  that it will have deferred as regulatory  assets
approximately  $22 million related to these items through July 1, 1996, the date
when rates are anticipated to go into effect. The Company will file its rebuttal
testimony  on  February  23,  1996 and  hearings  will  begin on March 4,  1996.
Although  the Company  cannot  predict the  ultimate  outcome of this case,  the
Company believes that it has meritorious  claims and will vigorously  pursue the
recovery of these assets.

PGAC Continuation Filing

       Retail  gas rate  schedules  contain a PGAC  which  provides  for  timely
recovery of the cost of gas purchased for resale to its sales-service customers.
On April 20, 1993, PNMGS filed its application  requesting authority to continue
the use of its PGAC.  An item  included  in this  application  was a request  to
recover reservation fees as a cost of gas through the PGAC. On October 26, 1995,
the Hearing Examiner issued a Recommended Decision allowing,  among other items,
the  continued  use of the PGAC but  recommended  that  reservation  fees not be
recoverable  through the PGAC.  PNMGS filed an  exception  to the portion of the
Recommended Decision relating to reservation fees. PNMGS is awaiting final NMPUC
approval.  PNMGS is  attempting to recover  these same  reservation  fees in the
ongoing  general rate  proceeding  (see "Gas Rate Case" above).  On February 19,
1996, the NMPUC issued an order requiring PNMGS to file  supplemental  testimony
regarding the volatile nature of its gas costs.

       In a related proceeding, the NMPUC on September 18, 1995, issued a Notice
of Inquiry  seeking  comments  as to whether  the NMPUC  rule that  governs  the
operation of PGACs should be amended.  In November 1995, the Company joined with
the NMPUC  Staff  and the AG in  recommending  that  such rule be  substantially
rewritten.

Consolidation Issues

       Pursuant to a prior NMPUC  order,  the Company  filed an  application  in
December 1993 for NMPUC approval to combine certain customer  service  functions
of its gas and electric  utility  divisions  in order to achieve more  efficient
operations  and to improve  service to customers.  At the same time, the Company
filed a separate request for a declaratory  order from the NMPUC confirming that
the Company's realignment of senior corporate officers'  responsibilities during
1993  complies  with  a  1984  NMPUC  order   placing   certain   organizational
restrictions  on the operation of the gas and electric  divisions.  In 1994, the
NMPUC consolidated the two proceedings.

       In January  1995,  the Company and the staff of the NMPUC  entered into a
stipulation  regarding the consolidated cases. The stipulation  provides for the
approval of the  consolidation of certain customer service  functions of the gas
and  electric  divisions,  as  proposed by the  Company.  The  stipulation  also
provides  for the  dismissal  of the  declaratory  order  proceeding  without  a
determination  that the  Company's  1993 or 1994  organizational  structure  was
either in  compliance  or not in  compliance  with the 1984 NMPUC order.  In May
1995, the NMPUC issued its final order approving the stipulation.  In its order,
the NMPUC stated that it was  explicitly  not ruling at this time on whether the
Company's 1993-1994  organization has harmed the public interest. The NMPUC also
approved  the phase-in of  consolidation  of certain  customer  services for one
year. During this period, the Company is required to submit semi-annual  reports
to the NMPUC on the costs and savings of customer service consolidation.

                                       10


Legislative Action

       In the recent legislature  session which ended February 15, 1996, the New
Mexico  Legislature  approved a  constitutional  amendment which would alter the
current state regulatory system relating to the electric utility industry in New
Mexico. If approved by voters at the next general election in November 1996, the
amendment to the state  constitution  would replace the existing NMPUC and State
Corporate Commission with a single,  elected regulatory body. Beginning in 1999,
the new five-member  "Public Regulation  Commission" would regulate electric and
gas utilities as well as telecommunications,  cable TV, insurance,  trucking and
all other entities  presently  regulated under current state law. The Company is
neutral on this proposed change.

                              ENVIRONMENTAL FACTORS

       The Company, in common with other electric and gas utilities,  is subject
to stringent  regulations  for  protection of the  environment by both state and
Federal authorities.  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
in 1996 and 1997.

The Clean Air Act

       The Clean Air Act amendments of 1990 (the "Act") impose  stringent limits
on emissions of sulfur dioxide and nitrogen oxides from  fossil-fueled  electric
generating  plants.  The Act is intended to reduce air contamination  from every
sizeable  source  of  air  pollution  in the  nation.  Electric  utilities  with
fossil-fueled  generating units will be affected  particularly by the section of
the Act which  deals  with acid rain.  To be in  compliance  with the Act,  many
utilities  will be  faced  with  installing  expensive  sulfur  dioxide  removal
equipment,  securing low sulfur coal, buying sulfur dioxide emission allowances,
or a combination of these. Due to the existing air pollution  control  equipment
on the coal-fired SJGS and Four Corners,  the Company  believes that it will not
be faced with any material  capital  expenditures  in order to be in  compliance
with the acid rain  provision of the Act.  SJGS and Four Corners have  installed
flow  monitoring  equipment and have  completed  certification  testing of their
continuous  emission  monitoring  equipment.   Certification  testing  data  was
submitted to the EPA on January 30,  1995,  as  required.  Certification  of the
monitoring  systems by the EPA is expected.  Under other  provisions of the Act,
the  Company  will be  required  to obtain  operating  permits for its coal- and
gas-fired  generating units and to pay annual fees associated with the operating
permit program.  The New Mexico operating permit program was approved by the EPA
in November 1994.  Operating permit  applications were submitted to the state in
1995. The state has not issued any operating permits.

       The Act also 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 ("Golden Circle"). The Commission must report to the EPA by
June 1996 on its findings and make  recommendations  regarding what actions,  if
any,  should be  pursued  in order to remedy the  visibility  impairment  in the
Golden Circle.  Depending on the recommendations of the Commission,  the EPA may
require stricter  controls on sources that may be contributing to the visibility
impairment.  Both SJGS and Four Corners are located near the Golden Circle.  The
exact nature and cost of additional controls,  if any, that may be required as a
result of the recommendations cannot be estimated at this time.


                                       11


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

ITEM 2.  PROPERTIES

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

                                    ELECTRIC

       The Company's  electric  generating  stations in commercial service as of
December 31, 1995, were as follows:

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

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

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

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

Fossil-Fueled Plants

       SJGS is located in  northwestern  New Mexico,  and consists of four units
operated by the Company.  Units 1, 2, 3 and 4 at SJGS have net rated  capacities
of 316 MW, 312 MW, 488 MW and 498 MW, respectively. SJGS Units 1 and 2 are owned
on a 50% shared basis with Tucson. Unit 3 is owned 50% by the Company,  41.8% by
SCPPA and 8.2% by Tri-State Generation and Transmission Association, Inc. Unit 4
is owned 38.457% by the Company,  8.475% by Farmington,  28.8% by M-S-R, 7.2% by
Los Alamos,  10.04% by Anaheim and 7.028% by UAMPS.  The Company's net aggregate
ownership in SJGS is 750 MW. In connection  with the Company's  sale to M-S-R in
December 1983 of a 28.8% interest in SJGS Unit 4, the Company agreed to purchase
under certain  conditions  73.53% (105 MW) of M-S-R's capacity through April 30,
1995. The Company also agreed to market the energy associated with the remaining
26.47% portion of M-S-R's capacity through April 30, 1995.

       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.

                                       12


       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
its interests in Units 1 and 2 held under leases. In September 1992, the Company
purchased approximately 22% of the beneficial interests in the PVNGS Units 1 and
2 leases for approximately $17.5 million.  The Company's ownership and leasehold
interests in PVNGS amount to 130 MW per unit,  or a total of 390 MW. PVNGS Units
1, 2 and 3 were declared in  commercial  service by the Company in January 1986,
September  1986 and January 1988,  respectively.  Commercial  operation of PVNGS
requires  full  power  operating   licenses  which  were  granted  by  the  NRC.
Maintenance of these licenses is subject to NRC regulation.

       During 1995,  PVNGS was operated at a capacity  factor of 83.6%.  This is
the  highest  yearly  capacity  factor that has been  attained at the plant.  In
addition, PVNGS operating costs declined and the length of refueling outages was
significantly  reduced.  Recently,  an  independent  organization  that  reviews
nuclear  plants for safety and  effectiveness  of  operation  awarded  PVNGS the
highest rating possible.

Steam Generator Tubes

       For information concerning steam generator tubes, see PART II, ITEM 7. --
"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS  -- OTHER  ISSUES  FACING  THE  COMPANY  -- PVNGS -- STEAM  GENERATOR
TUBES".

Sale and Leaseback Transactions of PVNGS Units 1 and 2

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


                                       13


PVNGS Units 1 and 2 leases to $46.7 million.  In March 1995, the Company retired
approximately $130 million of PVNGS lease obligation bonds ("LOBs").

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

PVNGS Decommissioning Funding

       For information  concerning PVNGS  decommissioning  funding, see PART II,
ITEM 7.  --"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND
RESULTS  OF  OPERATIONS  -- OTHER  ISSUES  FACING THE  COMPANY -- PVNGS  NUCLEAR
DECOMMISSIONING".

PVNGS Liability and Insurance Matters

       The PVNGS  participants  have  insurance  for public  liability  payments
resulting  from  nuclear  energy  hazards to the full limit of  liability  under
Federal law. This potential  liability is covered by primary liability insurance
provided by commercial  insurance carriers in the amount of $200 million and the
balance  by an  industry-wide  retrospective  assessment  program.  The  maximum
assessment per reactor under the  retrospective  rating program for each nuclear
incident  occurring  at  any  nuclear  power  plant  in  the  United  States  is
approximately  $79.3  million,  subject to an annual  limit of $10  million  per
incident.  Based upon the Company's 10.2% interest in the three PVNGS units, the
Company's  maximum  potential  assessment  per incident is  approximately  $24.3
million,  with an annual  payment  limitation of $3 million.  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".  The PVNGS participants  maintain "all-risk"  (including
nuclear hazards)  insurance for nuclear property damage to, and  decontamination
of, property at PVNGS in the aggregate amount of approximately  $2.75 billion as
of  January  1,  1996,  a  substantial  portion  of  which  must be  applied  to
stabilization  and  decontamination.  The  Company  has also  secured  insurance
against a  portion  of the  increased  cost of  generation  or  purchased  power
resulting from certain accidental outages of any of the three PVNGS units if the
outage exceeds 21 weeks.

Other Electric Properties

       Four Corners and a portion of the facilities adjacent to SJGS are located
on land held under  easements  from the United States and also under leases from
the Navajo Nation,  the enforcement of which leases might require  Congressional
consent. The risk with respect to the enforcement of these easements

                                       14


and leases is not deemed by the Company to be material.  However, the Company is
dependent in some measure upon the  willingness and ability of the Navajo Nation
to protect these properties.  (See PART II, ITEM 7. -- "MANAGEMENT'S  DISCUSSION
AND ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF  OPERATIONS -- OTHER ISSUES
FACING THE COMPANY -- TRANSMISSION ISSUES -- Transmission Right-of-Way".)

       As of December 31, 1995, the Company owned, jointly owned or leased 2,789
circuit  miles of  electric  transmission  lines,  5,279  miles of  distribution
overhead lines,  3,109 cable miles of underground  distribution lines (excluding
street lighting) and 225 substations.

                                   NATURAL GAS

       The natural gas property as of December 31, 1995  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  and an agreement  with owners of a
unitized oil field  located near Artesia,  New Mexico,  in which the Company has
injection and redelivery rights. The Company has agreed to terminate the storage
agreement  with owners of the  unitized  oil field and plans to withdraw all gas
stored in that facility by April 1996.  The  transmission  systems  consisted of
approximately 1,256 miles of pipe with appurtenant compression  facilities.  The
distribution systems consisted of approximately 9,898 miles of pipe.

       The Company leases  approximately 98 miles of transmission  pipe from the
DOE for  transportation  of  natural  gas to Los  Alamos  and to  certain  other
communities in northern New Mexico.  The lease can be terminated by either party
on 30 days written notice, although the Company believes it has the right to use
the facility for two years after  termination.  The DOE has  announced  plans to
sell the  pipeline and issued a draft  Request for  Proposal  with a schedule to
complete the sale of the pipeline by September  30, 1996.  Several  right-of-way
and regulatory issues remain to be resolved making the scheduled completion date
questionable.  The Company has been and will  continue to be highly  involved in
the process.

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


                                       15





settlement is finalized and the suit is dismissed. One of these contingencies is
the approval of the  settlement  by the court in the Lower Gila River  Watershed
litigation referred to below.

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

       Although the foregoing matters remain subject to further evaluation,  APS
expects that the described litigation will not have a material adverse impact on
the operation of PVNGS.

                           SAN JUAN RIVER ADJUDICATION

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

                              PVNGS PROPERTY TAXES

       On June 29, 1990, an Arizona  state tax law was enacted,  effective as of
December 31, 1989, which adversely  impacted the Company's earnings in the years
of 1990 through 1995 by approximately $5 million per year,  before income taxes.
On December 20, 1990,  the PVNGS  participants,  including the Company,  filed a
lawsuit in the Arizona Tax Court,  a division of the  Maricopa  County  Superior
Court,  against the Arizona Department of Revenue, the Treasurer of the State of
Arizona,  and various  Arizona  counties,  claiming,  among other  things,  that
portions of the new tax law are  unconstitutional.  In December  1992, the court
granted  summary  judgment to the taxing  authorities,  holding  that the law is
constitutional.  The PVNGS  participants  appealed  this decision to the Arizona
Court of Appeals.  On November 21, 1995,  the Arizona  Court of Appeals ruled in
favor of the PVNGS participants. Due to the significance of this decision, it is
anticipated  that the case will be  further  pursued  through  the  courts.  The
Company cannot currently predict the ultimate outcome of this matter.

                                OTHER PROCEEDINGS

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

       On March 31, 1993,  certain  individuals  ("the New Mexico  Plaintiffs"),
formerly affiliated with BCD, whose general partners include Meadows, filed suit
("the New Mexico suit") in the United States  District Court for the District of
New Mexico against numerous parties,  including the Company,  current and former
employees of the Company or Meadows,  and MCB Financial Group,  Inc., a Delaware
corporation  ("MCB"),  50% of which  stock is owned by  Meadows.  The New Mexico
Plaintiffs  did not request any monetary  relief  against the Company or certain
current and former employees of the Company and Meadows but have

                                       16


joined  those  parties  in  connection  with  insurance  coverage  and bad faith
insurance  practices  alleged  against the insurance  company which had issued a
directors and officers  liability policy to various entities,  including MCB and
BCD. The insurance  allegations  are made in  connection  with claims which were
then threatened by the RTC, as receiver for Western  Savings & Loan  Association
("Western"), against the Company and others. The New Mexico Plaintiffs also sued
the RTC for a  declaration  that they are not liable for any claims  asserted by
the RTC  involving  Western  and BCD.  The  Company  and the  current and former
employees  of the  Company  or  Meadows  counterclaimed  against  the New Mexico
Plaintiffs  and  cross-claimed  against  the  insurance  company  and the RTC in
connection  with  insurance  coverage  and bad  faith  insurance  practices.  In
addition,  the Company and the  current and former  employees  of the Company or
Meadows cross-claimed against the RTC, seeking a declaration of non-liability.

       The RTC moved to transfer the case to the United  States  District  Court
for the  District  of  Arizona.  On  February  7,  1994,  an order  was  entered
transferring the case in its entirety.  Prior to the transfer,  however, the New
Mexico  magistrate  judge  issued a proposed  order  which,  if  accepted by the
district  judge,  would  require the parties to enter into  mediation of all the
claims.  The parties to the New Mexico  suit  reached  agreement  on a dismissal
without  prejudice of the claims  remaining in that suit, and on April 22, 1995,
the Court  entered an order  dismissing  the case without  prejudice.  Under the
terms of the proposed order of dismissal,  a motion for sanctions  filed against
the RTC by the Company and other  parties to the suit  (which  asserts  that RTC
engaged in bad faith settlement negotiations) remains pending before the Arizona
court.

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

       In May 1994,  the RTC filed a motion  seeking to amend the  complaint  to
allege  against  the  Company  civil  conspiracy,  common law  fraud,  negligent
misrepresentation,  aiding and abetting breach of fiduciary  duties,  aiding and
abetting common law fraud,  aiding and abetting violation of Federal and Arizona
racketeering  laws  (all of  which  claims  are  already  asserted  against  the
Company's  current and former employees named in the suit) and claims seeking to
hold the Company liable on undisclosed principal and unjust enrichment theories.
The Company filed an opposition to the motion and, in September  1994, the Court
denied the RTC's  motion to amend.  Previously,  the Court  dismissed  the RTC's
claims  for  aiding  and  abetting   violations   of  the  Federal  and  Arizona
racketeering  laws against the Company,  the current and former employees of the
Company or Meadows and others.

       Subsequent  to the  Court's  denial  of the  RTC's  motion  to amend  the
complaint,  the RTC filed a motion  seeking to amend the case  management  order
previously  entered by the Court. The purpose of the motion was to allow the RTC
to file an amended complaint which would include the allegations against the

                                       17


Company  sought by the motion to amend that was denied by the Court in September
1994. On November 7, 1994, the Court denied this new motion.

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

       The  Company  and the  current  and former  employees  of the  Company or
Meadows sued by the RTC continued to have settlement  negotiations  with the RTC
during  its  existence,  but  those  efforts  were  not  successful.  Settlement
discussions will continue with the FDIC.

       The Company  continues to investigate  all of the claims made by the FDIC
in this litigation and is vigorously  defending those claims. The Company cannot
predict  the  ultimate  outcome  of  the  case  but  believes  that  the  FDIC's
contentions  are without merit and currently  believes that the outcome will not
result in a material  adverse  impact on the Company's  results of operations or
financial condition.

Four Corners

       The  Company  owns a 13%  ownership  interest  in  Units  4 and 5 of Four
Corners  located  in  northwestern  New  Mexico on land  leased  from the Navajo
Nation.  APS is the operating agent. In July 1995, the Navajo Nation enacted the
Navajo Nation Air Pollution  Prevention  and Control Act, the Navajo Nation Safe
Drinking  Water Act and the  Navajo  Nation  Pesticide  Act  (collectively,  the
"Acts").  By letter  dated  October  12,  1995,  the Four  Corners  participants
requested  the United  States  Secretary of the Interior  (the  "Secretary")  to
resolve their dispute with the Navajo Nation  regarding  whether or not the Acts
apply to operation of Four Corners. The Four Corners  participants  subsequently
filed a lawsuit in the District Court of the Navajo Nation (the "Court"), Window
Rock District, seeking, among other things, a declaratory judgment that: (i) the
Four Corners leases and Federal  easements  preclude the application of the Acts
to the  operation of Four  Corners;  and (ii) the Navajo Nation and its agencies
and courts lack adjudicatory jurisdiction to determine the enforceability of the
Acts as applied to Four Corners.  On October 18, 1995, the Navajo Nation and the
Four Corners participants agreed to indefinitely stay the proceedings referenced
above so that the parties may attempt to resolve the dispute without litigation,
and have requested that the Secretary and the Court stay these proceedings.  The
Company is unable to predict the outcome of this matter.

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

       None.


                                       18


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,
1995, except as otherwise noted:


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

B. F. Montoya......  60 President and Chief Executive Officer     August 1, 1993
M. P. Bourque......  48 Senior Vice President, Energy Services  December 6, 1994
                        Senior Vice President, Marketing and    December 7, 1993
                            Customer Services
                        Senior Vice President, Marketing and       March 2, 1993
                           Energy Management
                        Senior Vice President, Gas Management      June 19, 1990
                           Services
M. D. Christensen..  47 Senior Vice President, Customer Service  January 9, 1996
                           and Public Affairs
                        Vice President, Public Affairs          December 7, 1993
                        Vice President, Communications             July 22, 1991
R. J. Flynn........  53 Senior Vice President, Electric         December 1, 1994
                           Services
M. H. Maerki.......  55 Senior Vice President and Chief         December 7, 1993
                           Financial Officer
                        Senior Vice President, Administration      March 2, 1993
                           and Chief Financial Officer
                        Senior Vice President and Chief             June 1, 1988
                           Financial Officer
P. T. Ortiz........  45 Senior Vice President, General          December 6, 1994
                           Counsel and Secretary
                        Senior Vice President, Regulatory       December 7, 1993
                           Policy, General Counsel and 
                           Secretary
                        Senior Vice President, Public Policy,      March 2, 1993
                           General Counsel and Secretary
                        Senior Vice President, General          February 4, 1992
                           Counsel and Corporate Secretary
                        Senior Vice President and General       October 14, 1991
                           Counsel
W. J. Real.........  47 Senior Vice President, Gas Services     December 6, 1994
                        Senior Vice President, Utility          December 7, 1993
                           Operations
                        Senior Vice President, Customer            March 2, 1993
                           Service and Operations
                        Executive Vice President, Gas              June 19, 1990
                           Operations 
J. E. Sterba.......  40 Senior Vice President, Bulk Power       December 6, 1994
                           Services
                        Senior Vice President, Corporate        December 7, 1993
                           Development
                        Senior Vice President, Asset               April 6, 1993
                           Restructuring
                        Senior Vice President, Retail           January 29, 1991
                           Electric and Water Services
                        Senior Vice President, Business        September 1, 1988
                           Development Group, Electric 
                           and Water Operations


                                             19


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

J. A. Zanotti...... 55 Senior Vice President, Human Resources    January 9, 1996
                       Vice President, Human Resources             March 2, 1993
                       Senior Vice President, Human Resources      July 26, 1990
                             and Communications
- -----------

       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 P. T. Ortiz, M. D. Christensen,  B. F. Montoya
and R. J. Flynn. Prior to employment with the Company,  P. T. Ortiz was employed
by U S WEST Communications  during the period of January 1988 to October 1991 as
Chief Counsel- New Mexico. The principal business of U S WEST  Communications is
telecommunications.  Prior to employment with the Company, M. D. Christensen was
employed with Southern  California  Gas. During the period 1990 through 1991, M.
D.  Christensen  was Vice  President of Planning.  Prior to employment  with the
Company,  B. F.  Montoya was  employed  with  Pacific Gas and  Electric  Company
("PG&E")  since 1989.  In 1991,  he was  promoted to Senior Vice  President  and
General Manager of the Gas Supply Business Unit of PG&E. Prior to his employment
with PG&E, B. F. Montoya spent 31 years in the Civil  Engineer Corps of the U.S.
Navy, performing a wide range of management and utility-related  assignments. B.
F. Montoya  achieved the rank of Rear  Admiral when he became  Commander,  Naval
Facilities  Engineering Command and Chief of Civil Engineers.  R. J. Flynn has a
30-year  history in the utility  industry  working with PG&E.  Since 1989, R. J.
Flynn held the position of Regional Vice President,  responsible for all gas and
electric utility operations in the San Joaquin Valley.


                                       20


                                     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) for 1995 and 1994, by quarters, are as follows:


                                                                   Range of
Quarter Ended                                                     Sales Prices
                                                                 High      Low
                                                                 ----      ---
1995:
   December 31..............................................  18 1/4     16 1/8
   September 30.............................................  16 3/8     13 3/4
   June 30..................................................  14 1/4     12 3/8
   March 31.................................................  13 7/8     12 1/4
      Fiscal Year...........................................  18 1/4     12 1/4
1994:
   December 31..............................................  13 1/2     11 5/8
   September 30.............................................  12 5/8     11 1/4
   June 30..................................................  13 3/8     11 3/8
   March 31.................................................  13 5/8     11
      Fiscal Year...........................................  13 5/8     11

       On January 31, 1996, there were 20,382 holders of record of the Company's
common stock.

Cumulative Preferred Stock

       While isolated  sales of the Company's  cumulative  preferred  stock have
occurred in the past,  the Company is not aware of any active trading market for
its  cumulative  preferred  stock.  Quarterly  cash  dividends were paid on each
series of the Company's  cumulative preferred stock at their stated rates during
1995 and 1994.

       For a discussion of dividend  restrictions  on the  Company's  common and
preferred stock and the 1995 preferred stock redemption, see note 4 of the notes
to consolidated financial statements and ITEM 7. --"MANAGEMENT'S  DISCUSSION AND
ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF  OPERATIONS  --  LIQUIDITY  AND
CAPITAL RESOURCES -- Financing Capability and Dividend Restrictions".


                                       21


ITEM 6.  SELECTED FINANCIAL DATA




                                            1995           1994            1993             1992           1991
                                         -----------    -----------    -----------      -----------    -----------
                                                           (In thousands except per share amounts and ratios)
                                                                                                

Total Operating Revenues*............... $   808,465    $   904,711    $   873,878      $   851,953    $   857,168
Net Earnings (Loss)..................... $    75,562    $    80,318    $   (61,486)**   $  (104,255)+  $    22,960
Earnings (Loss) per Common                                                     
   Share................................ $      1.72    $      1.77    $     (1.64)**   $     (2.67)+  $      0.32
Total Assets............................ $ 2,035,669    $ 2,203,265    $ 2,212,189      $ 2,375,582    $ 2,344,332
Preferred Stock with Mandatory
   Redemption Requirements..............          --    $    17,975    $    24,386      $    25,700    $    26,982
Long-Term Debt, less Current
   Maturities........................... $   728,843    $   752,063    $   957,622      $   911,252    $   786,279
Common Stock Data:
   Market price per common
      share at year end................. $    17.625    $     13.00    $     11.25      $    12.375    $      9.75
   Book value per common share
      at year end....................... $     16.82    $     15.11    $     13.29      $     15.00    $     17.69
   Average number of common
      shares outstanding................      41,774         41,774         41,774           41,774         41,774
Return on Average Common                                                                           
   Equity...............................        10.7%          12.4%         (10.7)%          (15.0)%          1.8%
Capitalization:
   Common stock equity..................        48.6%          43.2%          34.8%            38.6%          45.8%
   Preferred stock:
      Without mandatory
        redemption requirements.........         0.9            4.1            3.7              3.6            3.7
      With mandatory redemption
        requirements....................          --            1.2            1.5              1.6            1.7
   Long-term debt, less current
      maturities........................        50.5           51.5           60.0             56.2           48.8
                                         ------------   ------------   ------------     ------------   ------------
                                               100.0%         100.0%         100.0%           100.0%         100.0%
                                         ============   ============   ============     ============   ============


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

*    The Company changed its method of accounting for unbilled revenues in 1992.

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

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

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



                                       22


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

Competitive Electric Market

     The  electric  utility  industry  is  currently   undergoing  a  period  of
fundamental  change intended to promote a competitive  environment in the retail
and wholesale energy marketplaces.  Legislators and regulators at both the state
and Federal level are considering whether, and how, to promote competition among
suppliers  of  electricity  and  how to  provide  customers  with  choice  among
suppliers.

     At the Federal level, the FERC promulgated a Notice of Proposed Rule Making
("Mega-NOPR")  in March 1995,  which  proposes to require  utilities to unbundle
their  generation  and   transmission   services  and  to  provide  open  access
transmission.  The  Mega-NOPR  also  supplemented  a prior NOPR  concerning  the
appropriate  treatment of stranded asset costs  associated  with the transition.
Specifically,  the FERC  stated  that  recovery  of  legitimate  and  verifiable
stranded  asset costs is critical to the  successful  transition of the electric
utility industry from a tightly  regulated  cost-of-service  industry to an open
transmission access,  competitively priced industry. The Company in its response
to the Mega-NOPR supported the FERC initiative toward open access  transmission,
but  requested  that all  transmission  asset  owners,  including  municipal and
Federal,  be  subject to the same  requirements  in order to  establish  a level
playing field for all participants in the electric utility industry. The Company
also agreed with the FERC  regarding  the  proposed  recovery of stranded  asset
costs.  A final  decision on the Mega-NOPR is expected in the middle of 1996. On
January 22, 1996, a U.S. Senate bill, "Electricity  Competition Act of 1996" was
introduced,  providing a national framework for a competitive  electric industry
by no later than the year 2010. The bill provides for recovery of stranded asset
costs. On February 14, 1996, the Council of Economic Advisors issued an economic
report to Congress in which it  cautioned  that  electric  industry  competition
should ensure competitive  benefits to all power buyers and should not aggravate
pollution  or cause  supply  cuts to the poor.  The report  favors  recovery  of
stranded  asset costs borne by all parties on whose  behalf the  stranded  costs
were   incurred,   including   customers   that   switch  to  other   suppliers.
Representative Dan Schaeffer,  Chairman of the Energy  Subcommittee of the House
of  Commerce  Committee,  has  announced  that he plans to conduct  hearings  on
electric industry  restructuring,  possibly  beginning this summer.  The Company
does not expect  Congressional  legislation  to pass this year,  but does expect
Congressional interest to continue next year.

     In November  1995,  after three years of study,  the  Integrated  Water and
Resource  Planning  Committee of the New Mexico State  Legislature (the "IWRPC")
issued a resolution  reporting its findings on the advantages and  disadvantages
of retail  wheeling and  alternative  restructuring  schemes  applicable  to the
electric power industry in New Mexico.  The IWRPC's  recommendation  stated that
any proposed  restructuring  (i) must benefit all ratepayers in the state,  (ii)
must maintain and possibly encourage the financial health and economic viability
of each of the state's utilities,  (iii) must provide for appropriate protection
from unfair or advantaged  competition from utilities or others from outside the
state, and (iv) must share equitably any costs,  including stranded asset costs,
among the  varied  interests  benefitted.  The IWRPC also  recommended  that the
NMPUC, under legislative direction and guidance, should monitor and evaluate the
electric power industry and applicable  market influences and factors and report
its  findings,   conclusions  and   recommendations  to  the  New  Mexico  State
Legislature  for  legislative  approval  and action,  as  necessary,  before any
proposed restructuring may be implemented. The resolution further indicated that

                                       23


this  continuing  evaluation  was necessary  because of continuing  changes even
though  restructuring  and retail  wheeling  are not  justified or in the public
interest  at  this  time.  The  IWRPC  resolution  was  presented  to  the  full
Legislature as a Senate Joint Memorial.  It was unanimously passed by the Senate
and the House.

     In  November  1995,  the NMPUC  issued a Notice of  Inquiry  regarding  the
restructuring of regulation of the electric utility industry in New Mexico.  The
NMPUC is seeking input on a variety of questions related to competition,  retail
wheeling  and state vs.  Federal  jurisdiction.  The Company in its February 15,
1996 response  stated that it believes that: (i) competition and customer choice
may be beneficial to all affected  interests in New Mexico if done appropriately
and (ii) in order to achieve restructuring,  there must be cooperative state and
Federal action to avoid  prolonged  uncertainty  and  litigation,  as well as to
avert   inconsistent  state  actions  that  would  inhibit  the  development  of
competitive markets and restrict the benefits that they may provide. The Company
proposed  a  five-year  period  to  accomplish  the  transition  to  a  workable
competitive  market.  The Company  also  stated  that it supports  action by the
United  States  Congress  to  clarify   boundaries  between  state  and  Federal
jurisdiction  over the  electric  utility  industry,  and to ensure  that retail
wheeling  can be  implemented  in a manner that  ensures  fair  competition  and
provides utilities the opportunity to recover all stranded asset costs.

     Although it is uncertain as to the ultimate outcome of possible open access
or retail wheeling  initiatives,  the Company will continue to be active at both
the state and Federal levels in the public policy debate on the restructuring of
the  electric  utility  industry.  By working  with  customers,  regulators  and
legislators,  the Company  believes that an agreement  will be reached that will
protect the interests of stockholders as well as offer the potential benefits of
a competitive marketplace to all customers.

Uncertainties

     The future  structure of the industry,  the form and timing of  competition
and the method of regulation in a competitive  environment remain uncertain.  If
retail wheeling is implemented,  it is possible that, based on other deregulated
industries' experiences,  retail energy prices could drop significantly.  Should
that  be  the  case,  the  value  of  a  utility's   assets  could  be  affected
significantly in the transition to a more competitive  market from a traditional
rate regulated environment.  Currently, the Company's generation costs are above
those of  neighboring  utilities to the north and east of the Company's  service
territory.

     The Company believes that the 1994 electric retail rate reduction  improved
its competitive  position,  but recognizes that lower cost producers may have an
advantage if the  regulatory  framework  changes  significantly  towards  retail
wheeling.   The  Company's  owned  nuclear   capacity  is  currently  valued  at
approximately  $900 per KW. If the  Company  were  required  to value its leased
nuclear  capacity at the same level as its owned nuclear  capacity,  it would be
valued at approximately $180 million versus approximately $560 million. If there
were no provision for the recovery of stranded asset costs, the Company would be
required to charge against earnings approximately $380 million.

Preparation for the Changes

     In order to mitigate the exposures  associated with a competitive  electric
market and transition into this changing  environment,  the Company  established
the  following  strategic  plan in 1995:  (i) secure  financial  flexibility  by
retiring debt,  (ii) control  operation and  maintenance  costs,  (iii) focus on
maximizing shareholder value for the nuclear generation assets, and (iv) develop
new business  opportunities  in the energy and utility  related area. As part of
this plan, the Company restructured its operation into four distinctive business
units, each targeted at a specific segment of its customer base with emphasis on
being  more  customer  oriented  and  responsive  to  the  changing  competitive
environment. The four business units are as follows: (i) Electric Services, (ii)
Gas Services, (iii) Bulk Power Services and (iv) Energy Services.


                                       24


     In order to maximize value of the nuclear  generation assets, the Company's
board of directors  (the  "Board"),  at its December 5, 1995 meeting,  confirmed
that it is in the best interest of the Company at this time to focus its efforts
and resources on maximizing shareholder value from PVNGS as an asset (leased and
owned) of the Company rather than  disposing of it. Growth in the region,  rapid
growth  in  the  Company's  own  local  service  territory  and  the  continuous
improvement  in the operating  performance  of the plant were all factors in the
change of approach.  The Board stated that the Company no longer considers it to
be a goal to dispose of its interests in PVNGS.

     In  conjunction  with the  development of new business  opportunities,  the
Company focused on three energy and utility related  activities under its Energy
Services Unit. These activities will provide energy marketing,  alternative fuel
vehicle services and energy management services focused on residential and small
customers,  management  services  for water and  wastewater  systems and utility
related  management and operation  services for Federal  installations and other
large commercial institutions. The Company believes that successful operation of
these ventures will better position the Company in an  increasingly  competitive
utility  environment.  The  Company is  currently  seeking  NMPUC  approval  for
investment  in energy  and  utility  related  subsidiaries  under the  Company's
general  diversification  plan. The NMPUC Staff filed a motion in September 1995
to have the case dismissed.  On January 31, 1996, the hearing examiner  assigned
to the case recommended  that the NMPUC deny the Staff's motion.  On February 5,
1996,  the Staff filed a motion  seeking to have the Company  file an  immediate
report on its  non-regulated  activities  being  conducted  without  prior NMPUC
approval;  explain why NMPUC approval is not required; and explain why sanctions
should not be  considered  if approval is required.  On February  19, 1996,  the
Company  filed its  response  describing  its  non-utility  (energy  and utility
related) activities and presenting the legal authority  demonstrating that prior
NMPUC  approval  is not  required.  The  Company  currently  cannot  predict the
ultimate outcome of this proceeding but intends to vigorously defend against any
allegation that it is in violation of any legal requirements.

                         LIQUIDITY AND CAPITAL RESOURCES

Capital Requirements

     Total capital  requirements  include  construction  expenditures as well as
other major  capital  requirements,  including  retirement  of  long-term  debt,
preferred  stock and long-term  debt sinking funds and preferred  stock dividend
requirements. The main focus of the construction program is upgrading generating
systems,   upgrading  and  expanding  the  electric  and  gas  transmission  and
distribution  systems,  and purchasing nuclear fuel. Total capital  requirements
for 1995 and  projections  for 1996-2000 are $367.4 million and $676.8  million,
respectively.  These  estimates  are under  continuing  review  and  subject  to
on-going adjustment.

     The Company  currently  anticipates  that internal cash  generation will be
sufficient to meet capital  requirements  during 1996 through 2000. To cover the
difference in the amounts and timing of cash  generation and cash  requirements,
the  Company  intends  to  utilize  short-term  borrowings  under its  liquidity
arrangements.

Liquidity and Financing

     The  Company's  construction  expenditures  for 1995 were  entirely  funded
through  cash  generated  from  operations.   In  addition  to  cash  flow  from
operations,  the Company received  approximately $206.5 million from the sale of
gas gathering and processing  assets and the Company's  water  division.  During
1995, the Company retired approximately $133 million of PVNGS LOBs, redeemed, at
par,  $64  million  of the  Company's  cumulative  preferred  stock and  retired
approximately  $58  million of other  long-term  debt.  At the end of 1995,  the
Company had $96 million of temporary investments and no short-term borrowings.

                                       25


In addition, at year-end 1995, the Company had available liquidity  arrangements
of $151 million,  consisting of a $100 million secured revolving credit facility
("Facility"),  $40  million  credit  facility  collateralized  by the  Company's
electric customer accounts receivable (the "Accounts  Receivable  Facility") and
$11 million in local lines of credit. On January 30, 1996, the Company requested
NMPUC approval to increase the capacity of the Accounts  Receivable  Facility up
to $100 million by including in the  collateral  pool the Company's gas accounts
receivable and certain  amounts being  recovered from gas customers  relating to
certain gas  contract  settlements.  The  Facility  will expire in June 1998 and
includes a maximum allowed debt to  capitalization  ratio of 70%. As of December
31, 1995, such ratio was 65%.

     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. All of the Company's securities are
rated below  investment  grade by  Standard & Poor's  Corp.,  Moody's  Investors
Service and Fitch Investors  Service,  Inc.,  which may result in limited credit
markets being available  and/or higher  financing  costs to the Company.  Duff &
Phelps Credit Rating Co.  maintains an investment grade rating for the Company's
first  mortgage  bonds,  but  continues  to  rate  all  other  of the  Company's
securities below investment grade.

Financing Capability and Dividend Restrictions

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

     The issuance of first  mortgage bonds by the Company is subject to earnings
coverage  and bondable  property  provisions  of the  Company's  first  mortgage
indenture.  The Company also has the  capability  under the mortgage  indenture,
without  regard to the earnings test but subject to other  conditions,  to issue
first  mortgage  bonds on the basis of  certain  previously  retired  bonds.  At
December 31, 1995,  based on the earnings  test,  the Company  could have issued
approximately  $124 million of  additional  first  mortgage  bonds,  assuming an
annual  interest  rate of 9.25  percent.  The  Company's  restated  articles  of
incorporation limit the amount of preferred stock which may be issued.  Assuming
a preferred  stock dividend rate of 9.75 percent,  the Company could have issued
$381 million of preferred stock as of year-end.

     The Company  currently has no requirements  for long-term  financing during
the period of 1996 through 2000. 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.  The Company  currently plans to retire  approximately  $90
million of long-term debt in 1996.

     The Company has not declared  dividends  on its common stock since  January
1989 and  anticipates  announcing a dividend plan sometime before the end of the
second quarter of 1996. The Company's  board of directors  reviews the Company's
dividend  policy on a continuing  basis.  The resumption of common  dividends is
dependent upon a number of factors including earnings and financial condition of
the  Company  and market  conditions.  The  deficit  in  retained  earnings  was
eliminated during 1995.


                                       26


Capital Structure:

     The Company's capitalization,  including short-term debt, at December 31 is
shown below:


                                                        1995    1994     1993
                                                        ----    ----     ----
 
Common Equity......................................     48.6%   39.2%    34.4%
Preferred Stock....................................      0.9     4.8      5.2
Long-term Debt (including current maturities) .....     50.5    56.0     60.4
                                                        ----    ----     ----
                                                  
   Total Capitalization*...........................    100.0%  100.0%   100.0%
                                                       =====   =====    ===== 
                            

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

     *   Total  capitalization  does  not  include  the  present  value  of  the
         Company's lease obligations for PVNGS Units 1 and 2 and EIP as debt but
         does  include,  for  1994  and  1993,  the  debt  associated  with  the
         beneficial interests in certain PVNGS Units 1 and 2 leases purchased by
         the Company, which were retired in March 1995.

                              RESULTS OF OPERATIONS

     Net earnings per common share in 1995 were $1.72,  compared to net earnings
of $1.77 per common  share in 1994 and a loss of $1.64 per common share in 1993.
The loss  experienced  in 1993 was due to the  Company  recording  an  after-tax
charge of $108.2 million to earnings resulting from the write-down in connection
with the Company's $30 million retail electric rate reduction.

     The financial  performance  of the excluded  resources has been improved by
the PVNGS Unit 3 write-down and the provision for loss associated with the M-S-R
power purchase  contract recorded in 1992. The gains from the sale of generating
facilities to Anaheim recorded in August 1993 and to UAMPS recorded in June 1994
have also improved the financial performance of the excluded resources.

     A number of items  contributed to the $3.5 million decrease in net earnings
of the excluded  resources as compared with 1994 results.  The most  significant
item was the  UAMPS  gain  recorded  in June  1994.  Operating  results  for the
excluded  resources  for all these  periods  reflect the  allocation of interest
charges  based on the  average  investment  in excluded  net utility  plant as a
percent of total utility plant for the period.

     Selected  financial  information for the excluded  resources for 1995, 1994
and 1993 is shown below:


                                       1995            1994           1993
                                    -----------     -----------    -----------
                                                  (In thousands)

Operating revenues..................$    35,317     $    39,227    $    42,517
Operating income ...................$     2,372     $     2,358    $     2,034
Net earnings (loss).................$    (1,710)    $     1,838    $    (2,099)
Net utility plant at year-end.......$   133,757     $   133,697    $   159,387

     The following discussion  highlights other significant items which affected
the results of operations in 1995,  1994 and 1993, and certain items expected to
impact future earnings.

     Electric gross margin (electric  operating revenues less fuel and purchased
power expense)  decreased $37.9 million in 1995 due to the retail rate reduction
implemented in late 1994, reduced off-system sales as a result of the expiration
of three sales contracts and generally poor wholesale  power market  conditions.
Partially  offsetting  such  decreases  was  the  increase  in  retail  revenues
resulting from retail sales growth.

                                       27


     Electric  gross margin  increased  $32.3  million in 1994 compared to 1993,
$23.2  million of which was due to an increase in  jurisdictional  energy sales.
This  increase was  partially  due to warmer  weather and a  difference  of $6.7
million  between the  estimated  unbilled  revenues  reported in 1993 and actual
unbilled revenues in 1994.

     Gas gross margin (gas  operating  revenues  less gas  purchased for resale)
decreased $16.4 million from a year ago due to a decrease of $5.5 million in gas
deliveries  resulting from warmer than normal weather in 1995 and reduced margin
of $11.7 as a result of the gas  gathering  and  processing  assets sale in June
1995.  Gas gross  margin  decreased  $5.1  million in 1994 from 1993.  Principal
factors were the write-off of certain  deferred charges relating to costs of gas
and a decrease in gas  deliveries  resulting from a warmer than normal winter in
1994.

     Other operation and maintenance expenses ("O&M") decreased $12.3 million in
1995 due to the following: (i) a $2.1 million decrease in PVNGS O&M expense as a
result of a reduction in scheduled  maintenance  outage hours and lower property
taxes in the current  period,  (ii)  decreased Four Corners O&M expenses of $2.0
million  resulting from a maintenance  outage of Unit 4 in 1994, (iii) decreased
SJGS O&M expenses of $1.7 million resulting from lower maintenance  outage hours
in 1995,  (iv) a decrease in gas production and products  extraction  expense of
$6.2 million  resulting from the gas assets sale in June 1995, (v) a decrease in
injuries  and damages  expense of $4.5  million as a result of the  recording of
workers' compensation liability in 1994, (vi) lower office supplies and expenses
of $3.0 million as a result of a decrease in temporary  office labor and postage
expense and (vii) a decrease in water O&M expense of $2.1 million resulting from
the sale of the  Company's  water  division in July 1995.  Such  decreases  were
partially offset by (i) higher  administrative and general labor expense of $4.7
million,  (ii) higher  employee  benefit  expense of $2.7 million  caused by the
retroactive  deferral  of the gas  operation's  retirees  health  care costs for
regulatory  purposes  recorded in 1994 and (iii) higher  production O&M expenses
for the gas and oil-fired plants of $1.7 million  resulting from the maintenance
outages in 1995.

     Other O&M  expenses  decreased  $5.1  million  in 1994 from 1993 due to the
following:  (i) a $10.6  million  decrease  as a result  of the  Company's  1993
severance program, (ii) a deferral of gas operation's retirees health care costs
of $2.8  million for  regulatory  purposes and (iii) lower  electric  regulatory
commission expense of $2.1 million.  Offsetting such decrease was the following:
(i)  increased  pension  and  retirees  health care cost of $3.0  million,  (ii)
increased electric  distribution  expense of $3.6 million due to weather-related
outages and increased tree trimming activity, (iii) increased generating station
maintenance  expense of $2.4 million and (iv)  increased  workers'  compensation
liability of $2.2 million.

     Depreciation and amortization  expenses  increased $6.7 million from a year
ago as a result of the  implementation of new depreciation rates approved by the
NMPUC in November 1994.

     Other,  under the caption  Other  Income and  Deductions,  increased  $44.2
million  from a  year  ago  and  increased  $9.3  million  in  1994  from  1993.
Significant  1995 items, net of taxes,  included the following:  (i) the gain of
$12.8  million  recognized  from the sale of the gas  gathering  and  processing
assets,  (ii) the gain of $6.4 million recognized from the sale of the Company's
water division,  (iii) an after-tax accrual of $2.6 million of income pertaining
to the carrying costs related to gas take-or-pay settlement amounts, (iv) income
of $1.9 million for insurance recovery and (v) income of $1.4 million related to
adjusting   reclamation  reserves  for  certain  mining  operations.   Partially
offsetting  such  increases  were: (i)  additional  regulatory  reserves of $4.8
million and (ii) write-downs of $1.8 million for various non-utility properties.

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

                                       28


     Significant 1993 items, net of taxes, included the following:  (i) the gain
of $7.5 million  recognized  from the sale of an  investment,  (ii) the gain and
associated  tax benefits of $7.6 million from the sale of generating  facilities
to Anaheim and (iii) tax benefits of $3.2  million  from the Federal  income tax
rate change  which  allows the Company to utilize  its net  operating  loss at a
higher tax rate.  Partially  offsetting  such  increases  were:  (i)  additional
provisions for legal and litigation  expenses of $5.7 million,  (ii) a write-off
of $4.6  million of other  deferred  costs,  (iii)  PVNGS  decommissioning  fund
adjustment of $2.8 million and (iv) a write-off of $2.1 million  resulting  from
costs associated with refunding certain  pollution control and EIP bonds,  which
represents the amount related to FERC  firm-requirement  wholesale customers and
resources excluded from New Mexico jurisdictional rates.

     Net interest  charges  decreased  $12.7  million in 1995 as a result of the
retirement of $130 million of PVNGS LOBs in March 1995 and the retirement of $45
million of first  mortgage  bonds in April 1994. In 1994,  net interest  charges
decreased  $15.2  million  compared  to 1993.  Major  factors  were:  (i)  lower
short-term borrowings in 1994, (ii) the refinancing of $182 million of pollution
control  revenue bonds in January ($46 million) and September  ($136 million) of
1993 and (iii) the  retirement of $45 million of first  mortgage  bonds in April
1994.

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

                         OTHER ISSUES FACING THE COMPANY

TRANSMISSION ISSUES

OLE Transmission Project

     OLE, a proposed 345 Kv transmission line connecting the existing Ojo 345 Kv
line to the Norton  Station in northern  New Mexico,  was  designed to provide a
needed improvement to the northern New Mexico  transmission  system and to allow
greater  delivery of power into the Company's two largest  service  territories,
the greater  Albuquerque  area and the Santa  Fe/Las  Vegas area.  OLE has faced
considerable  opposition by persons concerned  primarily about the environmental
impacts of the project.

     The Company filed in 1991 for NMPUC  approval for  construction  of OLE. On
November 20, 1995, the NMPUC issued a final order  disapproving the project.  On
December 20, 1995, the Company filed a limited  Motion for Rehearing,  accepting
the NMPUC's determination that the OLE routing should not be pursued but seeking
reconsideration  of  various  parts of the  final  order  which  discuss  system
planning  and  reliability  matters.  The NMPUC took no action on the  Company's
request which in effect deemed it denied.  The Company has elected not to appeal
the NMPUC order or denial of rehearing.  The Company has incurred  approximately
$17  million  for the OLE project  and has  established  accounting  reserves as
deemed  appropriate.  The  Company  intends to seek  recovery  of these costs as
legitimate and prudent costs in future appropriate proceedings.

Transmission Right-of-Way

     The Company  has  easements  for  right-of-way  with the Navajo  Nation for
portions of several  transmission  lines that deliver the  Company's  generation
resources  to the  Albuquerque  metropolitan  area.  One grant of  easement  for
approximately  4.2 miles of  right-of-way  for two parallel 345 Kv  transmission
lines  expired  in 1993.  Prior to the  expiration,  the  Company  had  numerous
unsuccessful  negotiation meetings with the Navajo Nation for the renewal of the
long-term  grant.  In 1994, the Navajo Nation  adopted a Civil Trespass  Statute
providing for civil penalties, damages and other remedies, including removal, to
be imposed for  unconsented or unauthorized  use of Navajo Nation lands.  During


                                       29





1995,  the Company  reached a tentative  agreement  with the Navajo Nation for a
twenty-year  renewal of the transmission  easement and a resolution of all other
transmission  right-of-way  issues.  Prior to the  execution  of the  agreement,
another agency of the Navajo Nation  notified the Company that it was contesting
certain  water  rights  at  the  SJGS,  which  has  delayed  resolution  of  the
transmission  right-of-way issues. The Company continues to work with the Navajo
Nation to resolve this conflict.

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

Transmission Disputes

     The Company receives approximately $14.0 million annually for the provision
of firm  transmission  service to several  customers.  Most of these  customers,
through various  actions,  have initiated  formal FERC  investigations  into the
transmission  service  billing  units  and  transmission  rates  charged  by the
Company. If these various allegations and requested rate reductions are approved
by the FERC, the Company's  revenues for transmission  services could be reduced
by  as  much  as $9  million  annually.  The  Company  has  responded  to  these
allegations and has requested that the FERC dismiss the complaints.  The Company
is currently  awaiting the FERC decision.  In a related FERC filing, the Company
committed  to file,  on or before  April 1,  1996,  a rate  change for all firm,
point-to-point  and network  service  transmission  customers,  including  those
customers  that  have  filed  the  pending  complaints.   Although  the  Company
anticipates a reduction in rates resulting from the filing, the Company does not
anticipate any material adverse impact on the Company's  financial  condition or
results of operations.

SALE OF GAS GATHERING AND PROCESSING ASSETS

     As part of the Company's announced action plan in 1993 to focus on its core
utility business,  the Company, in 1994, entered into an agreement with Williams
for the  sale of  substantially  all of the  assets  of  Gathering  Company  and
Processing Company and for the sale of Northwest and Southeast gas gathering and
processing facilities of the Company.

     The sales transaction  provides for three 10-year  contracts,  each with an
option to renew for an additional  5-year term, with Williams for  competitively
priced  gathering  and  processing  services.  The purchase  and sale  agreement
contains   contractual   requirements   for  the  Company  to  address   various
environmental deficiencies identified as retained liabilities.  It also contains
environmental  representations  and  warranties and  indemnification  provisions
whereby the Company  indemnifies  Williams for a five-year  period after closing
for breaches of the  environmental  representations  and  warranties and against
third party claims to a maximum of $10.6  million.  After the $10.6  million cap
has  been  reached,  or  after  the  expiration  of the  five-year  post-closing
indemnification period,  whichever comes first, Williams indemnifies the Company
against further  environmental  expenditures  related to the properties sold. On
June 30, 1995,  following  NMPUC  approval,  the Company and Williams closed the
sale of the assets. As a result,  the Company and its gas subsidiaries  received
$154 million from Williams and recognized an after-tax gain of $12.8 million, or
31 cents per share.  Under the NMPUC approval,  the Company recorded a liability
of approximately $35 million,  representing an estimate of a portion of the gain
resulting from the sale,  which will be credited to the Company's gas customers'
bills over five years.  After  completion  of the fifth year,  the amount of the
gain  will be  recalculated  to  reflect  actual  expenses  associated  with the
transaction  which were  appropriately  and legitimately  incurred.  Such amount
should include amounts  expended to indemnify  Williams as described  above. Any
resulting  differences  will be refunded or billed to customers  over a one year
period.

                                       30


     As a result of the gas assets  sales,  the  operations of the Company's two
wholly-owned gas subsidiaries,  Gathering Company and Processing  Company,  have
been substantially discontinued, effective June 30, 1995.

ENVIRONMENTAL ISSUES

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

Electric Operations

Person Station

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

Santa Fe Station

     The  NMED  has  been  conducting  an   investigation   of  the  groundwater
contamination detected beneath the Santa Fe Station site to determine the source
of the  contamination.  The Company has been and is continuing to cooperate with
the NMED site  investigation  pursuant  to a  settlement  agreement  between the
Company and the NMED. In May 1995,  the Company  received a letter from the NMED
indicating that the NMED had made a determination  that Santa Fe Station was the
source  of  gasoline-contaminated  groundwater  at the  site and  vicinity.  The
Company contested the NMED's determination and believes insufficient data exists
to definitely identify the sources of groundwater contamination.  A minimum site
assessment ("MSA") of the two former underground storage tank sites at the Santa
Fe Station site was conducted by the Company under the settlement agreement. The
MSA report indicated that the Santa Fe Station site does not appear to have been
a source of gasoline  contamination.  The MSA report has been  submitted  to the
NMED and is currently pending NMED review.

Albuquerque Electric Service Center

     Trenching  work at the electric  service center  revealed oil  contaminated
soil in an area of the service  center where used oil in drums were stored.  The
trenched  area  bisects a small  portion of the storage  area,  indicating  that
potentially  the area could be underlain  with  contaminated  soil.  The Company
requested  a  laboratory   analysis  on  the  soil  to  determine  the  type  of
contamination.  The Company may be required to assess soil and  groundwater  for
contamination  as well as remediate  extensive  volumes of soil in the area. The
Company currently cannot predict the outcome of the analysis, to what extent the
soil was contaminated or the costs of the remediation, if any.


                                       31


     In addition,  leaking  underground  fuel lines,  which have been  replaced,
caused soil and  groundwater  contamination  in the  vicinity  of the leak.  The
Company  proposed a quarterly  sampling plan to the NMED for the site.  The NMED
has expressed  concerns  regarding  the  placement of  monitoring  wells and the
relatively  high levels of residual  contamination  remaining in the soil at the
site. Based on the recent analysis of the groundwater sampling, the contaminated
soil  does not  appear to be a  continual  recharge  source  to the  groundwater
contamination.  The  NMED  may  require  additional  monitoring  wells  and soil
remediation work at the site.

Gas Operations

Air Permits

     In 1994, following an environmental audit performed in conjunction with the
Company's  sale of certain gas  assets,  which  audit  brought to light  certain
discrepancies regarding required air permits associated with certain natural gas
facilities,  the  Company  met with the NMED to discuss the nature of the permit
discrepancies and to propose methods and schedules to resolve the discrepancies.

     The Company submitted in 1994 its permit  modification  application for the
Lybrook Gas Processing Plant ("Lybrook"). The Lybrook permit has now been issued
to Williams, the purchaser of the gas assets.

     The Company submitted an air permit  modification  application for the Kutz
Canyon Gas  Processing  Plant  ("Kutz") in the first quarter of 1995. In October
1995,  the Company  received a Notice of  Violation  ("NOV")  from the NMED with
specified corrective actions on the permit discrepancies in the Kutz air permit.
In January 1996,  the Company  accepted a settlement  offer for the NOV from the
NMED in the amount of $15,000.  The Company cannot predict when the final permit
will be issued by the NMED or whether additional requirements will be imposed by
the NMED as conditions for issuance of the permit.

Gas Wellhead Pit Remediation

     The New  Mexico  Oil  Conservation  Commission  ("NMOCC")  issued an order,
effective on January 14, 1993, that affects the gas gathering facilities,  which
were sold to Williams, located in the San Juan Basin in northwestern New Mexico.
The  order  prohibits  the  further  discharge  of  fluids  associated  with the
production of natural gas into unlined  earthen pits in certain  specified areas
of the San Juan Basin.  The order also required the  submission of closure plans
for the closure of pits in which production  fluids were previously  discharged.
The BLM has issued a similar ruling.  The Company has complied with such rulings
and submitted  and received  approval of the pit closure plans from the OCD, the
Energy Minerals and Natural Resources Department, as well as the BLM.

     The Company has received  letters and directives from the OCD directing the
Company to determine if certain unlined  discharge pits have  contributed to the
groundwater  contamination  plumes  that were  identified  at those  sites.  The
Company is currently  assessing the sites in accordance  with the OCD directive.
The  Company  continues  to  assess  unlined  pits in  accordance  with  the OCD
directive and is addressing potential  groundwater  contamination issues as they
arise during the assessment process.

     On March 3, 1995,  the  Jicarilla  Apache  Tribe  ("Jicarilla")  enacted an
ordinance   directing   that  unlined   surface   impoundments   located  within
environmentally  sensitive  areas be remediated and closed by December 1996, and
that all other unlined surface  impoundments on Jicarilla's  lands be remediated
and  closed  by  December   1998.   The   Company  has   received  a  claim  for
indemnification  by Williams for the environmental  work required to comply with
the Jicarilla ordinance. The Company has submitted a closure/remediation plan to
the Jicarilla,  which has been approved,  and the Company anticipates initiating
the remediation  process in the spring of 1996. The costs of remediation will be
charged against the $10.6 million  indemnification cap contained in the purchase


                                       32


and sale  agreement  between  the  Company and  Williams.  The Company  does not
anticipate that the claim for  indemnification  will have any material impact on
the Company's financial condition or results of operations.

GAS RATE CASE

     On  August  28,  1995,  the  Company  filed a request  for a $13.3  million
increase in its retail natural gas sales and  transportation  rates. NMPUC Staff
and intervenors in the case filed their testimony on January 16, 1996. The Staff
recommended a $2.5 million rate decrease and the AG  recommended a $14.7 million
rate decrease.  The major issues in the case center around the Company's request
to recover certain costs  associated with reservation  fees,  discounts given to
large and industrial  transportation  customers and losses incurred to reacquire
debt. The Company  anticipates  that it will have deferred as regulatory  assets
approximately  $22 million related to these items through July 1, 1996, the date
when rates are anticipated to go into effect. The Company will file its rebuttal
testimony  on  February  23,  1996 and  hearings  will  begin on March 4,  1996.
Although  the Company  cannot  predict the  ultimate  outcome of this case,  the
Company believes that it has meritorious  claims and will vigorously  pursue the
recovery of these assets.

ALBUQUERQUE FRANCHISE ISSUES

     The Company's  non-exclusive  electric  service  franchise with the City of
Albuquerque (the "City") expired in 1992. The franchise  agreement  provided for
the  Company's  use of City  rights-of-way  for  placement  of electric  service
facilities.  The Company provides  service to the area which  contributed 46% of
the Company's total 1995 electric operating revenues. The absence of a franchise
does not change the  Company's  right and  obligation  to serve those  customers
under state law.

     In 1991, the NMPUC issued an order concluding, among other things, that the
City could bid for services to its own facilities  (Albuquerque  municipal loads
generated  approximately  $16.6 million in annual revenue for 1995), but not for
service to other  customers.  However,  the New Mexico  Supreme Court  ("Court")
ruled that a city can  negotiate  rates for its  citizens in addition to its own
facility  uses.  The Court also  ruled that any  contracts  with  utilities  for
electric  rates are a matter of  statewide  concern  and  subject  to  approval,
disapproval or modification by the NMPUC. In addition,  the Court reaffirmed the
NMPUC's  exclusive  power to  designate  providers of utility  service  within a
municipality  and confirmed that municipal  franchises are not licenses to serve
but rather provide access to public rights-of-way.

     During  1992,  representatives  of the  Company  and the City had  numerous
meetings in attempts to resolve the franchise renewal issue. Since that time, no
meetings  have  been  held.  The City  continues  to  maintain  its  options  by
advocating industry restructuring and monitoring the municipalization activities
of the  City  of Las  Cruces.  A  measure  designed  to  start  municipalization
activities  in  Albuquerque  was  defeated  by the  City  Council.  The  Company
continues to collect and pay franchise fees to the City.

PVNGS NUCLEAR DECOMMISSIONING

Decommissioning Costs and Trust Funds

     The Company has a program  for funding its share of  decommissioning  costs
for PVNGS. Under this program,  the Company makes a series of annual deposits to
an  external  trust fund over the  estimated  useful  life of each unit with the
trust funds being invested under a plan which allows the  accumulation  of funds
largely on a tax-deferred  basis through the use of life  insurance  policies on
certain current and former  employees.  The results of the 1995  decommissioning
study indicate that the Company's share of the PVNGS  decommissioning costs will
be  approximately  $145.6  million,  a decrease from $157.8 million based on the
previous 1992 study (both amounts are stated in 1995 dollars).


                                       33


     The Company has determined that a supplemental  investment  program will be
needed as a result of both cost  increases  identified in the 1992 study and the
lower than  anticipated  performance of the existing  program.  On September 29,
1995, the Company filed a request for  permission  from the NMPUC to establish a
qualified tax advantaged  trust for PVNGS Units 1 and 2. Due to Internal Revenue
Service ("IRS") regulations, PVNGS Unit 3 will remain in a non-qualified trust.

     The  Company,  on February 7, 1996,  filed a motion for interim  relief for
establishment  of a qualified  trust  pending  final NMPUC  action.  The interim
request  was  necessary  in order  to meet  the  March  15  deadline  under  IRS
requirements  for the  qualified  trust to be effective for the current year. On
February 19, 1996, the NMPUC granted this request.

     The market value of the existing trust at the end of 1995 was approximately
$12.4 million,  which includes the cash surrender value of the current insurance
policies.

Decommissioning Costs of Nuclear Power Plants

     In February 1996, the Financial  Accounting Standards Board ("FASB") issued
an Exposure Draft on the  accounting  for closure and removal  costs,  including
decommissioning,  of nuclear power plants.  If current electric utility industry
accounting  practices for nuclear power plant  decommissioning are changed,  the
annual  provision  for  decommissioning  could  increase  relative to 1995,  and
estimated  costs for  decommissioning  could be recorded as a liability  (rather
than as accumulated  depreciation),  with recognition of an increase in the cost
of related  nuclear power plants.  The Company is unable to predict the ultimate
outcome of this project.

PVNGS PROPERTY TAXES

     On June 29, 1990,  an Arizona  state tax law was  enacted,  effective as of
December 31, 1989, which adversely  impacted the Company's earnings in the years
of 1990 through 1995 by approximately $5 million per year,  before income taxes.
On December 20, 1990,  the PVNGS  participants,  including the Company,  filed a
lawsuit in the Arizona Tax Court,  a division of the  Maricopa  County  Superior
Court,  against the Arizona Department of Revenue, the Treasurer of the State of
Arizona,  and various  Arizona  counties,  claiming,  among other  things,  that
portions of the new tax law are  unconstitutional.  In December  1992, the court
granted  summary  judgment to the taxing  authorities,  holding  that the law is
constitutional.  The PVNGS  participants  appealed  this decision to the Arizona
Court of Appeals.  On November 21, 1995,  the Arizona  Court of Appeals ruled in
favor of the PVNGS participants. Due to the significance of this decision, it is
anticipated  that the case will be  further  pursued  through  the  courts.  The
Company cannot currently predict the ultimate outcome of this matter.

EL PASO

     El Paso,  one of the  joint  owners  of PVNGS  and Four  Corners,  has been
operating under Chapter 11 of the Bankruptcy  Code since 1992.  After the failed
merger  transaction with Central and South West Corporation,  in September 1995,
El Paso filed with the  bankruptcy  court a revised  plan  whereby,  among other
things, certain issues would be resolved,  including its assumption of the joint
facilities operating agreements.  The revised plan, as amended, was confirmed by
order of the Bankruptcy  Court on January 9, 1996. The order approves an amended
Assumption and Cure Agreement  between El Paso and all participants at PVNGS. As
a part of its plan, El Paso also assumed agreements at Four Corners and paid all
sums  outstanding  under the  agreements.  In addition,  El Paso assumed various
transmission  agreements  with the  Company.  Currently,  there are no remaining
claims by the Company to be resolved in connection with the bankruptcy.  El Paso
emerged from bankruptcy on February 12, 1996.


                                       34


ACCOUNTING STANDARDS

SFAS No.  121,  Accounting  for the  Impairment  of  Long-Lived  Assets  and for
Long-Lived Assets to Be Disposed Of

     In March 1995, the FASB issued Statement of Financial  Accounting  Standard
("SFAS") No. 121. This statement  requires  companies to review their long-lived
assets for impairment whenever events or changes in circumstances  indicate that
the  carrying  amount of such assets may not be  recoverable.  SFAS No. 121 also
requires all regulatory  assets,  which must have a high probability of recovery
to be  initially  established,  must  continue  to meet  that  high  probability
standard to avoid being written off. However, if written off, a regulatory asset
can be restored if, through  regulatory  actions,  it again becomes  probable of
recovery.  The adoption of SFAS No. 121 had no impact on the Company's financial
condition or results of operations.

PVNGS -- STEAM GENERATOR TUBES

     APS, as the operating agent of PVNGS,  has encountered tube cracking in the
steam generators and has taken, and will continue to take, remedial actions that
it believes have slowed further tube  degradation.  The steam generator tubes in
each unit continue to be inspected in conjunction with their respective outages.
APS  currently  believes  that the PVNGS steam  generators  in Units 1 and 3 are
capable of operating for their designed life of forty years,  although,  at some
point,  long-term economic  considerations  may warrant  examination of possible
steam generator  replacement.  APS's ongoing  analyses  indicate that it will be
economically  desirable  for APS to replace the Unit 2 steam  generators,  which
have been most affected by tube cracking, in five to ten years. APS expects that
the steam generator  replacement can be accomplished within financial parameters
established before replacement was a consideration. Based on APS's analyses, the
Company  believes that its share of the  replacement  costs (in 1995 dollars and
including  installation  and  replacement  power costs)  would be between  $10.5
million and $17.5 million,  most of which would be incurred after the year 2000.
APS expects that the replacement would be performed in conjunction with a normal
refueling  outage  in order  to  limit  additional  incremental  outage  time to
approximately  50  days.  APS  believes  that  replacement  of the  Unit 2 steam
generators within five to ten years will be economically desirable.  The Company
is evaluating this and other options in regards to this issue.

     All of the PVNGS units were  operating  at full power at December  31, 1995
and are  expected to continue  operating  at full  power,  except for  scheduled
(mid-cycle or refueling) outages.  Last year, PVNGS had three refueling outages,
one for each of the three units.

                                       35


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 (Loss)..........................     F-3
   Consolidated Statements of Retained Earnings (Deficit)..............     F-4
   Consolidated Balance Sheets.........................................     F-5
   Consolidated Statements of Cash Flows...............................     F-6
   Consolidated Statements of Capitalization...........................     F-7
   Notes to Consolidated Financial Statements..........................     F-8
Supplementary Data:
   Quarterly Operating Results.........................................    F-34
   Comparative Operating Statistics....................................    F-35

              MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS

         The management of Public  Service  Company of New Mexico 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


                    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, 1995 and 1994, and the related
consolidated  statements of earnings (loss),  retained earnings  (deficit),  and
cash flows for each of the three years in the period  ended  December  31, 1995.
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, 1995 and 1994, and the results of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 1995 in conformity with generally accepted accounting principles.

As explained in notes 1 and 7 to the financial statements,  effective January 1,
1993, the Company adopted Statement of Financial  Accounting  Standards No. 106,
Employer's Accounting for Postretirement  Benefits Other Than Pensions,  and No.
109, Accounting for Income Taxes.

                                                     ARTHUR ANDERSEN LLP

Albuquerque, New Mexico
  February 13, 1996



                                       F-2


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                   CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)


                                                     Year Ended December 31,
                                               ---------------------------------
                                                  1995        1994       1993
                                                  ----        ----       ----
                                         (In thousands except per share amounts)
Operating Revenues:
   Electric.....................................$ 584,284  $ 621,794  $ 589,728
   Gas..........................................  217,985    269,510    271,087
   Water........................................    6,196     13,407     13,063
                                                ---------  ---------  ---------

Total operating revenues........................  808,465    904,711    873,878
                                                ---------  ---------  ---------
Operating Expenses:
   Fuel and purchased power.....................  140,752    140,411    140,674
   Gas purchased for resale.....................   94,299    129,381    125,940
   Other operation expenses.....................  257,627    264,391    274,023
   Maintenance and repairs......................   55,809     61,386     56,821
   Depreciation and amortization................   80,865     74,137     77,326
   Taxes, other than income taxes...............   35,531     39,717     40,089
   Income taxes.................................   30,194     44,210     25,721
                                                ---------  ---------  ---------
      Total operating expenses..................  695,077    753,633    740,594
                                                ---------  ---------  ---------
      Operating income..........................  113,388    151,078    133,284
                                                ---------  ---------  ---------
Other Income and Deductions:
   Write-down of the PVNGS Units 1 and 2 
      leases, regulatory assets and other  
      deferred costs............................       --         --   (178,954)
   Other........................................   40,707     (3,512)   (12,792)
   Income tax benefit (expense).................  (20,599)     3,339     82,799
                                                ---------  ---------  ---------
      Net other income and deductions...........   20,108       (173)  (108,947)
                                                ---------  ---------  ---------
      Income before interest charges............  133,496    150,905     24,337
                                                ---------  ---------  ---------
Interest Charges:
   Interest on long-term debt...................   52,637     65,511     72,525
   Other interest charges.......................    5,297      5,341     13,719
   Allowance for borrowed funds used during
       construction.............................       --       (265)      (421)
                                                ---------  ---------  ---------
      Net interest charges......................   57,934     70,587     85,823
                                                ---------  ---------  ---------
Net Earnings (Loss).............................   75,562     80,318    (61,486)
Preferred Stock Dividend Requirements...........    3,714      6,433      6,829
                                                ---------  ---------  ---------
Net Earnings (Loss) Available for Common Stock..$  71,848  $  73,885    (68,315)
                                                =========  =========    ======= 
                                                 
Average Number of Common Shares Outstanding.....   41,774     41,774     41,774
                                                =========  =========    ======= 
                                                  
Net Earnings (Loss) per Share of Common Stock...$    1.72  $    1.77    $ (1.64)
                                                =========  =========    ======= 

Dividends Paid per Share of Common Stock........$      --  $      --    $    --
                                                =========  =========    ======= 




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

                                       F-3


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)


                                                     Year Ended December 31,
                                               ---------------------------------
                                               1995        1994          1993
                                               ----        ----          ----
                                                       (In thousands)
                                  
Balance at Beginning of Year.................$(46,006)   $(120,848)   $ (52,533)
Net earnings (loss)..........................  75,562       80,318      (61,486)
Redemption of cumulative preferred stock.....    (599)         957           --
Cumulative preferred stock dividends.........  (3,714)      (6,433)      (6,829)
                                             --------    ---------    --------- 

Balance at End of Year.......................$ 25,243    $ (46,006)   $(120,848)
                                             ========    =========    ========= 




































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

                                       F-4


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
                                                              December 31,
                                                         -----------------------
                                                          1995           1994
                                                          ----           ----
                                                             (In thousands)
Utility Plant, at original cost except PVNGS:
   Electric plant in service.............................$1,871,897  $1,783,962
   Gas plant in service..................................   421,607     537,762
   Water plant in service................................        --      63,048
   Common plant in service...............................    35,222      49,049
   Plant held for future use.............................       639         894
                                                         ----------  ---------- 
                                                          2,329,365   2,434,715
   Less accumulated depreciation and amortization........   892,727     890,905
                                                         ----------  ----------
                                                          1,436,638   1,543,810
   Construction work in progress.........................   106,892     119,308
   Nuclear fuel, net of accumulated amortization of 
      $26,395 and $35,333 ...............................    30,904      33,569
                                                         ----------  ----------
      Net utility plant.................................. 1,574,434   1,696,687
                                                         ----------  ----------
Other Property and Investments:
   Non-utility property, net of accumulated  
      depreciation of $1,547 and $1,328..................     4,063       5,752
   Other investments.....................................    29,370      28,771
                                                         ----------  ---------- 
      Total other property and investments...............    33,433      34,523
                                                         ----------  ---------- 
Current Assets:
   Cash..................................................     4,228      21,029
   Temporary investments, at cost........................    95,972      74,521
   Receivables...........................................   127,642     129,048
   Income taxes receivable...............................     4,792       4,182
   Fuel, materials and supplies, at average cost.........    44,660      51,068
   Gas in underground storage, at average cost...........     5,431       8,744
   Other current assets..................................     7,186       9,549
                                                         ----------  ----------
        Total current assets.............................   289,911     298,141
                                                         ----------  ----------
Deferred charges.........................................   137,891     173,914
                                                         ----------  ---------- 
                                                         $2,035,669  $2,203,265
                                                         ==========  ==========

                         CAPITALIZATION AND LIABILITIES
Capitalization:
   Common stock equity:
      Common stock outstanding-- 41,774,083 shares.......$  208,870  $  208,870
      Additional paid-in capital.........................   470,358     469,648
      Excess pension liability, net of tax...............    (1,623)     (1,106)
      Retained earnings (deficit) since January 1, 1989..    25,243     (46,006)
                                                         -----------  ----------
        Total common stock equity........................   702,848     631,406
   Cumulative preferred stock without mandatory 
        redemption requirements..........................    12,800      59,000
   Cumulative preferred stock with mandatory 
        redemption requirements..........................        --      17,975
   Long-term debt, less current maturities...............   728,843     752,063
                                                         -----------  ----------
        Total capitalization............................. 1,444,491   1,460,444
                                                         -----------  ----------
Current Liabilities:
   Short-term debt.......................................        --          --
   Accounts payable......................................    93,666     105,213
   Current maturities of long-term debt..................       146     148,532
   Accrued interest and taxes............................    26,856      28,073
   Other current liabilities.............................    44,699      43,662
                                                         -----------  ----------
        Total current liabilities........................   165,367     325,480
                                                         -----------  ----------
Deferred Credits:
   Accumulated deferred investment tax credits...........    66,734      71,564
   Accumulated deferred income taxes.....................    78,829      77,207
   Other deferred credits................................   280,248     268,570
                                                         -----------  ----------
        Total deferred credits...........................   425,811     417,341
                                                         -----------  ----------
Commitments and Contingencies (notes 2 through 12)
                                                         $2,035,669  $2,203,265
                                                         ==========  ==========
   The accompanying notes are an integral part of these financial statements.

                                       F-5


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                             Year Ended December 31,
                                                      ----------------------------------
                                                         1995        1994        1993
                                                         ----        ----        ----

                                                                  (In thousands)
                                                                           
Cash Flows From Operating Activities:
   Net earnings (loss)................................$  75,562  $  80,318    $(61,486)
   Adjustments to reconcile net earnings (loss) to 
      net cash flows from operating activities:
      Depreciation and amortization...................   93,125     90,656      95,415
      Accumulated deferred investment tax credit......   (4,830)    (6,898)     (8,321)
      Accumulated deferred income taxes...............    1,622     23,069     (63,393)
      Gain on sale of utility property................  (39,050)    (6,576)     (7,350)
      Gain on sale of other property and investments..       --         --     (12,394)
      Write-down of the PVNGS Units 1 & 2 leases, 
        regulatory assets and other deferred costs....       --         --     178,954
      Changes in certain assets and liabilities:
        Receivables...................................      795     23,868     (12,551)
        Fuel, materials and supplies..................  (26,505)    (3,126)      3,222
        Deferred charges..............................    6,731      8,427      20,936
        Accounts payable..............................  (11,527)   (11,893)    (53,973)
        Accrued interest and taxes....................   (1,218)    (1,919)        631
        Deferred credits..............................   29,185     (5,418)     (7,137)
        Other.........................................    7,090     (3,604)     10,571
      Other, net......................................   16,095     14,160      14,181
                                                         ------     ------      ------
           Net cash flows from operating activities...  147,075    201,064      97,305
                                                        -------    -------      ------
Cash Flows From Investing Activities:
   Utility plant additions............................ (106,627)  (119,284)   (100,784)
   Utility plant sales................................  206,482     39,562      49,302
   Other property additions...........................     (801)    (1,307)     (2,554)
   Other property sales...............................       --         --      19,912
   Temporary investments, net.........................  (21,451)   (26,671)    (47,665)
                                                        -------    -------     ------- 
           Net cash flows from investing activities...   77,603   (107,700)    (81,789)
                                                         ------   --------     ------- 
Cash Flows From Financing Activities:
   Redemptions of PVNGS lease obligation bonds ....... (132,663)        --          --
   Redemptions and repurchases of preferred stock.....  (64,175)    (7,711)       (600)
   Redemption of first mortgage bonds.................       --    (45,000)         --
   Bond refinancing costs.............................       --         --      (8,960)
   Bond redemption premium and costs..................     (505)    (2,732)         --
   Proceeds from asset securitization.................   18,758         --      60,475
   Repayments of long-term debt.......................  (57,768)   (31,002)     (8,842)
   Net decrease in short-term debt....................       --         --     (51,550)
   Dividends paid.....................................   (5,126)    (6,400)     (6,609)
                                                         ------     ------      ------ 
           Net cash flows from financing activities... (241,479)   (92,845)    (16,086)
                                                       --------    -------     ------- 
Increase (Decrease) in Cash...........................  (16,801)       519        (570)
Cash at Beginning of Year.............................   21,029     20,510      21,080
                                                      ---------  ---------  ----------
Cash at End of Year...................................$   4,228  $  21,029  $   20,510
                                                      =========  =========  ==========
Supplemental cash flow disclosures:
   Interest paid......................................$  63,366  $  70,720  $   83,248
                                                      =========  =========  ==========
   Income taxes paid..................................$  52,405  $  20,000  $   13,978
                                                      =========  =========  ==========



Cash consists of currency on hand and demand deposits.

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

                                       F-6


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CAPITALIZATION


                                                                                  December 31,
                                                                            ----------------------
                                                                               1995        1994
                                                                            ----------  ----------
                                                                                (In thousands)
                                                                                      
Common Stock Equity:
   Common Stock, par value $5 per share.................................... $  208,870  $  208,870
   Additional paid-in capital..............................................    470,358     469,648
   Excess pension liability, net of tax....................................     (1,623)     (1,106)
   Retained earnings (deficit) since January 1, 1989.......................     25,243     (46,006)
                                                                            ----------- ----------
        Total common stock equity..........................................    702,848     631,406
                                                                            ----------- ----------





                                                   Shares
                                                 Outstanding
                                                    at          Current
                                      Stated     December 31,   Redemption
                                       Value        1995          Price
                                     --------    ------------   ----------
                                                                                 
Cumulative Preferred Stock:
   Without mandatory redemption
      requirements:
      1965 Series, 4.58%...........     $100        128,000       $102.00       12,800       13,000
      8.48% Series.................      100             --            --           --        20,000
      8.80% Series.................      100             --            --           --        26,000
                                                    -------       -------      -------    ----------  
                                                    128,000                     12,800        59,000
                                                    =======                    -------    ---------- 
   With mandatory redemption
      requirements:
      8.75% Series.................      100             --            --           --        17,975
      Redeemable within one year...                      --                         --            --
                                                    -------                    -------    ----------
                                                         --                         --        17,975
                                                    =======                    -------    ----------




Long-Term Debt:
Issue and Final Maturity                      Interest Rates
- ------------------------                      ----------------
                                                                                        
   First mortgage bonds:
      1997...............................                5 7/8%                 14,650        14,650
      1999 through 2002..................      7 1/4% to 8 1/8%                 43,063        43,272
      2004 through 2007..................      8 1/8% to 9 1/8%                 43,421        43,421
      2008...............................                9    %                 54,374        54,374
      Pollution control revenue bonds:
      2008 through 2023..................        5.9% to 7 3/4%                537,045       537,045
      2022...............................        Variable rate                  37,300        37,300
                                          
                                                                            ----------    ----------
        Total first mortgage bonds.......                                      729,853       730,062
   Lease obligation bonds of First PV
      Funding
      Corporation:
      Funding Corporation:
      1996 through 2016..................       8.95% to 10.3%                      --       132,663
   Asset securitization..................                                           --        38,805
   Other, including unamortized
      premium and (discount), net........                                         (864)         (935)
                                                                            ----------    ----------
        Total long-term debt.............                                      728,989       900,595
   Less current maturities...............                                          146       148,532
                                                                            ----------    ----------
        Long-term debt, less current
        maturities.......................                                      728,843       752,063
                                                                            ----------    ----------
Total Capitalization.....................                                   $1,444,491    $1,460,444
                                                                            ==========    ==========




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

                                       F-7


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 1995, 1994 and 1993

(1)     Summary of Significant Accounting Policies

Systems of Accounts

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

Organization

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

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 amounts  reported in the financial  statements  and
accompanying notes. Actual recorded amounts could differ from those estimated.

Utility Plant

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


                                       F-8


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

(1)    Summary of Significant Accounting Policies (Continued)

       PVNGS Unit 3 and the Company's purchased 22% beneficial  interests in the
PVNGS Units 1 and 2 leases were written down in 1992 and 1993, respectively,  to
their net realizable  value to reflect a permanent  impairment to their original
costs.

       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:


                                          1995           1994          1993
                                      -------------   -----------   -----------

Electric plant........................        3.32%         3.01%         2.98%
Gas plant.............................        3.21%         3.15%         3.12%
Water plant (1).......................           --         2.68%         2.62%
Common plant (2)......................           --         4.94%         4.90%

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

       Effective January 1, 1995,  depreciation rates were revised and include a
provision for the recovery of fossil-fueled plant decommissioning costs approved
by the NMPUC in 1994 (see note 11).

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

Nuclear Decommissioning

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

Fuel and Purchased Power Adjustment Clause ("FPPCAC")

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


                                       F-9


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

(1)    Summary of Significant Accounting Policies (Continued)

Purchased Gas Adjustment Clause ("PGAC")

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

Amortization of Debt Discount, Premium and Expense

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

Income Taxes

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

Accounting for Stock-Based Compensation

       The Company has a stock option plan for certain  selected key  employees.
The Company accounts for this plan under Accounting Principles Board Opinion No.
25,  Accounting for Stock Issued to Employees,  under which no compensation cost
has been recognized (see note 7).

Accounting for the Impairment of Long-Lived  Assets and for Long-Lived Assets to
Be Disposed Of

       In March 1995,  the FASB issued SFAS No.  121.  This  statement  requires
companies to review their  long-lived  assets for impairment  whenever events or
changes in  circumstances  indicate that the carrying  amount of such assets may
not be recoverable. SFAS No. 121 also requires all regulatory assets, which must
have a high probability of recovery to be initially  established,  must continue
to meet that high probability  standard to avoid being written off. However,  if
written off, a regulatory asset can be restored if, through regulatory  actions,
it again  becomes  probable  of  recovery.  The  adoption of SFAS No. 121 had no
impact on the Company's financial condition or results of operations.



                                      F-10


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

(2)    Risks and Uncertainties

Competitive Electric Market

     The  electric  utility  industry  is  currently   undergoing  a  period  of
fundamental  change intended to promote a competitive  environment in the retail
and wholesale energy marketplaces.  Legislators and regulators at both the state
and Federal level are considering whether, and how, to promote competition among
suppliers  of  electricity  and  how to  provide  customers  with  choice  among
suppliers.

     At the Federal level, the FERC promulgated a Notice of Proposed Rule Making
("Mega-NOPR")  in March 1995,  which  proposes to require  utilities to unbundle
their  generation  and   transmission   services  and  to  provide  open  access
transmission.  The  Mega-NOPR  also  supplemented  a prior NOPR  concerning  the
appropriate  treatment of stranded asset costs  associated  with the transition.
Specifically,  the FERC  stated  that  recovery  of  legitimate  and  verifiable
stranded  asset costs is critical to the  successful  transition of the electric
utility industry from a tightly  regulated  cost-of-service  industry to an open
transmission access,  competitively priced industry. The Company in its response
to the Mega-NOPR supported the FERC initiative toward open access  transmission,
but  requested  that all  transmission  asset  owners,  including  municipal and
Federal,  be  subject to the same  requirements  in order to  establish  a level
playing field for all participants in the electric utility industry. The Company
also agreed with the FERC  regarding  the  proposed  recovery of stranded  asset
costs.  A final  decision on the Mega-NOPR is expected in the middle of 1996. On
January 22, 1996, a U.S. Senate bill, "Electricity Competition Act of 1996", was
introduced,  providing a national framework for a competitive  electric industry
by no later than the year 2010. The bill provides for recovery of stranded asset
costs. On February 14, 1996, the Council of Economic Advisors issued an economic
report to Congress in which it  cautioned  that  electric  industry  competition
should ensure competitive  benefits to all power buyers and should not aggravate
pollution  or cause  supply  cuts to the poor.  The report  favors  recovery  of
stranded  asset costs borne by all parties on whose  behalf the  stranded  costs
were   incurred,   including   customers   that   switch  to  other   suppliers.
Representative Dan Schaeffer,  Chairman of the Energy  Subcommittee of the House
of  Commerce  Committee,  has  announced  that he plans to conduct  hearings  on
electric industry  restructuring,  possibly  beginning this summer.  The Company
does not expect  Congressional  legislation  to pass this year,  but does expect
Congressional interest to continue next year.


                                      F-11


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

(2)  Risks and Uncertainties (Continued)

     In November  1995,  after three years of study,  the  Integrated  Water and
Resource  Planning  Committee of the New Mexico State  Legislature (the "IWRPC")
issued a resolution  reporting its findings on the advantages and  disadvantages
of retail  wheeling and  alternative  restructuring  schemes  applicable  to the
electric power industry in New Mexico.  The IWRPC's  recommendation  stated that
any proposed  restructuring  (i) must benefit all ratepayers in the state,  (ii)
must maintain and possibly encourage the financial health and economic viability
of each of the state's utilities,  (iii) must provide for appropriate protection
from unfair or advantaged  competition from utilities or others from outside the
state, and (iv) must share equitably any costs,  including stranded asset costs,
among the  varied  interests  benefitted.  The IWRPC also  recommended  that the
NMPUC, under legislative direction and guidance, should monitor and evaluate the
electric power industry and applicable  market influences and factors and report
its  findings,   conclusions  and   recommendations  to  the  New  Mexico  State
Legislature  for  legislative  approval  and action,  as  necessary,  before any
proposed restructuring may be implemented. The resolution further indicated that
this  continuing  evaluation  was necessary  because of continuing  changes even
though  restructuring  and retail  wheeling  are not  justified or in the public
interest  at this time.  The  Committee  resolution  was  presented  to the full
Legislature as a Senate Joint Memorial.  It was unanimously passed by the Senate
and the House.

     In  November  1995,  the NMPUC  issued a Notice of  Inquiry  regarding  the
restructuring of regulation of the electric utility industry in New Mexico.  The
NMPUC is seeking input on a variety of questions related to competition,  retail
wheeling  and state vs.  Federal  jurisdiction.  The Company in its February 15,
1996 response  stated that it believes that: (i) competition and customer choice
may be beneficial to all affected  interests in New Mexico if done appropriately
and (ii) in order to achieve restructuring,  there must be cooperative state and
Federal action to avoid  prolonged  uncertainty  and  litigation,  as well as to
avert   inconsistent  state  actions  that  would  inhibit  the  development  of
competitive markets and restrict the benefits that they may provide. The Company
proposed  a  five-year  period  to  accomplish  the  transition  to  a  workable
competitive  market.  The Company  also  stated  that it supports  action by the
United  States  Congress  to  clarify   boundaries  between  state  and  Federal
jurisdiction  over the  electric  utility  industry,  and to ensure  that retail
wheeling  can be  implemented  in a manner that  ensures  fair  competition  and
provide utilities the opportunity to recover all stranded asset costs.

     Although it is uncertain as to the ultimate outcome of possible open access
or retail wheeling  initiatives,  the Company will continue to be active at both
the state and Federal levels in the public policy debate on the restructuring of
the  electric  utility  industry.  By working  with  customers,  regulators  and
legislators,  the Company  believes that an agreement  will be reached that will
protect the interests of stockholders as well as offer the potential benefits of
a competitive marketplace to all customers.


                                      F-12


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

(2)  Risks and Uncertainties (Continued)

Uncertainties

     The future  structure of the industry,  the form and timing of  competition
and the method of regulation in a competitive  environment remain uncertain.  If
retail wheeling is implemented,  it is possible that, based on other deregulated
industries' experiences,  retail energy prices could drop significantly.  Should
that  be  the  case,  the  value  of  a  utility's   assets  could  be  affected
significantly in the transition to a more competitive  market from a traditional
rate regulated environment.  Currently, the Company's generation costs are above
those of  neighboring  utilities to the north and east of the Company's  service
territory.

     The Company believes that the 1994 electric retail rate reduction  improved
its competitive  position,  but recognizes that lower cost producers may have an
advantage if the  regulatory  framework  changes  significantly  towards  retail
wheeling.   The  Company's  owned  nuclear   capacity  is  currently  valued  at
approximately  $900 per KW. If the  Company  were  required  to value its leased
nuclear  capacity at the same level as its owned nuclear  capacity,  it would be
valued at approximately $180 million versus approximately $560 million. If there
were no provision for the recovery of stranded asset costs, the Company would be
required to charge against earnings approximately $380 million.

Preparation for the Changes

     In order to mitigate the exposures  associated with a competitive  electric
market and transition into this changing  environment,  the Company  established
the  following  strategic  plan in 1995:  (i) secure  financial  flexibility  by
retiring debt,  (ii) control  operation and  maintenance  costs,  (iii) focus on
maximizing shareholder value for the nuclear generation assets, and (iv) develop
new business  opportunities  in the energy and utility  related area. As part of
this plan, the Company restructured its operation into four distinctive business
units, each targeted at a specific segment of its customer base with emphasis on
being  more  customer  oriented  and  responsive  to  the  changing  competitive
environment. The four business units are as follows: (i) Electric Services, (ii)
Gas Services, (iii) Bulk Power Services and (iv) Energy Services.

     In order to maximize value of the nuclear  generation assets, the Company's
board of directors  (the  "Board"),  at its December 5, 1995 meeting,  confirmed
that it is in the best interest of the Company at this time to focus its efforts
and resources on maximizing shareholder value from PVNGS as an asset (leased and
owned) of the Company rather than  disposing of it. Growth in the region,  rapid
growth  in  the  Company's  own  local  service  territory  and  the  continuous
improvement in the operating performance of the plant this year were all factors
in the change of approach. The Board stated that the Company no longer considers
it to be a goal to dispose of its interests in PVNGS.


                                      F-13


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

(2)  Risks and Uncertainties (Continued)

     On December 30, 1994,  the Company filed a petition for  declaratory  order
with the NMPUC. In the petition,  the Company  requested,  among other things, a
declaratory  order that its  corporate  reorganization  into four main  business
units was in compliance with NMPUC regulations and previous orders and otherwise
lawful.  Subsequently,  on June 23, 1995, the Company filed an  application  for
authorization for the creation of three wholly-owned subsidiaries to: (i) manage
and  operate  water  and  wastewater  systems,  (ii)  pursue  energy  marketing,
alternative  fuel vehicle  services and energy  management  services;  and (iii)
pursue utility  management  services and related energy management  services for
federal  installations  and  large  commercial  customers.  The  Company  sought
approval to invest a maximum of $50 million in the three  subsidiaries over time
and to enter into  reciprocal  loan  agreements for up to $30 million with these
subsidiaries.  The NMPUC Staff filed a motion on September  20, 1995 to have the
case dismissed.  On January 31, 1996, the hearing examiner  assigned to the case
recommended  that the NMPUC deny the Staff's  motion.  On February 5, 1996,  the
Staff filed a motion seeking to have the Company file an immediate report on its
non-regulated  activities being conducted without prior NMPUC approval;  explain
why NMPUC  approval is not  required;  and explain why  sanctions  should not be
considered if approval is required.  On February 19, 1996, the Company filed its
response  describing its non-utility (energy and utility related) activities and
presenting the legal  authority  demonstrating  that prior NMPUC approval is not
required.  The Company  currently  cannot  predict the ultimate  outcome of this
proceeding but intends to vigorously defend against any allegation that it is in
violation of any legal requirements.


                                      F-14


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

(3)  Regulatory Assets and Liabilities

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


                                                         1995         1994
                                                     ----------    ----------
                                                             (in thousands)

Deferred Income Taxes................................$  71,094     $  77,020
Gas Take-or-Pay Costs................................   50,870        64,858
Gas Imputed Revenues.................................    8,113         4,529
Loss on Reacquired Debt..............................    6,377         7,360
Gas Reservation Fees.................................    5,622         2,805
Gas Retirees' Health Care Costs......................    4,437         2,776
Gas Rate Case Costs..................................    1,100            --

Purchased Gas Adjustment Clause......................      931         2,868
Fuel and Purchased Power Cost Adjustment Clause......      121         1,224
                                                     ---------     ---------
     Subtotal........................................  148,665       163,440
                                                     ---------     ---------

Deferred Income Taxes................................  (60,815)      (64,877)
Customer Gain on Gas Assets Sale.....................  (31,559)           --
PVNGS Prudence Audit.................................   (7,313)       (7,688)
Settlement Due Customers.............................   (4,101)       (5,049)
Gain on Reacquired Debt..............................     (669)         (842)
Revenue Subject to Refund............................     (382)           --
                                                     ---------     ---------
     Subtotal                                         (104,839)      (78,456)
                                                     ---------     ---------
     Net Regulatory Assets...........................$  43,826     $  84,984
                                                     =========     =========



     If a portion  of the  Company's  operations  under  the NMPUC  jurisdiction
becomes  no longer  subject  to the  provisions  of SFAS No.  71, a write off of
related regulatory assets and liabilities would be required, unless some form of
transition  cost  recovery  (refund)  continues  through rates  established  and
collected for the Company's remaining regulated operations.


                                      F-15


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

(4)  Capitalization

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




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

                                                                                                    
Balance at December 31, 1993.....   41,774,083   $    208,870   $   470,149    590,000  $    59,000      243,861  $   24,386
   Redemption of preferred stock.           --             --          (501)        --           --      (64,111)     (6,411)
                                    ----------   ------------   -----------    -------  -----------     --------  ---------- 
Balance at December 31, 1994.....   41,774,083        208,870       469,648    590,000       59,000      179,750      17,975
   Redemption of preferred stock.           --             --           710   (462,000)     (46,200)    (179,750)    (17,975)
                                    ----------   ------------   -----------    -------  -----------     --------  ---------- 
Balance at December 31, 1995.....   41,774,083   $    208,870   $   470,358    128,000  $    12,800           --          --
                                    ==========   ============   ===========    =======  ===========     ========  ==========        



Common Stock

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

       The Company has not declared  dividends on its common stock since January
1989 and  anticipates  announcing a dividend plan sometime before the end of the
second quarter of 1996. The Company's  board of directors  reviews the Company's
dividend  policy on a continuing  basis.  The resumption of common  dividends is
dependent upon a number of factors including earnings and financial condition of
the  Company  and market  conditions.  The  deficit  in  retained  earnings  was
eliminated during 1995.

Cumulative Preferred Stock

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

       On August 7, 1995, the Company redeemed, at par, all of its 8.48% Series,
8.80% Series and 8.75% Series of cumulative  preferred  stock  outstanding as of
July 6, 1995. The redemption  price of $64 million  included  accrued  dividends
through the redemption date.

Long-Term Debt

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


                                      F-16


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

(4)    Capitalization (Continued)

       On March 8, 1995, $121 million of PVNGS Lease  Obligation  Bonds ("LOBs")
were retired.  The retired LOBs consisted of $58 million of 10.30% LOBs due 2014
retired  at a price  of 100% of par and $63  million  of  10.15%  LOBs  due 2016
retired at a price of 97.8% of par. Additionally,  $4.4 million and $4.8 million
of LOBs due 1996 and 1997 at interest  rates of 9.125% and 8.95%,  respectively,
were retired at par on March 22, 1995. In  conjunction  with these  retirements,
the Company wrote off $1.5 million of net costs  related to these  transactions.
The  retirement of the LOBs,  which were the Company's  highest cost debt,  will
save the Company  approximately  $11 million annually in interest expense over a
five year period.

       The aggregate  amounts (in thousands) of maturities for 1996 through 2000
on long-term debt outstanding at December 31, 1995 are as follows:


1996.......................................................... $       146
1997.......................................................... $    16,470
1998.......................................................... $     4,275
1999.......................................................... $    16,185
2000.......................................................... $     5,460


Fair Value of Financial Instruments

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

                                      1995                  1994
                               -----------------     -------------------
                               Carrying     Fair     Carrying     Fair
                                Amount     Value      Amount      Value
                                ------     -----      ------      -----
                                             (In thousands)

Long-Term Debt.................$728,989   $730,337   $900,595   $805,000
Redeemable Preferred Stock.....      --         --   $ 17,975   $ 15,638

       Estimates are based on market quotes provided by the Company's investment
bankers.


                                      F-17


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

(5)    Revolving Credit Facility and Other Credit Facilities

       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.

       At December 31, 1995,  the Company had a $100 million  secured  revolving
credit facility (the  "Facility")  with an expiration date of June 30, 1998. The
Company  must pay  commitment  fees of 3/8% per year on the total  amount of the
Facility. The Company also has a $40 million credit facility,  collateralized by
the Company's  electric customer accounts  receivable (the "Accounts  Receivable
Facility")  with an  expiration  date of December 20, 1998. On January 30, 1996,
the Company  requested  NMPUC  approval to increase the capacity of the Accounts
Receivable  Facility up to $100 million by including in the collateral  pool the
Company's gas accounts  receivable and certain  amounts being recovered from gas
customers relating to certain gas contract settlements.  This would increase the
Company's liquidity arrangements up to $211 million from $151 million, including
local lines of credit of $11 million.  As of December  31,  1995,  there were no
borrowings  outstanding under the Facility,  the Accounts Receivable Facility or
any of the local lines of credit.


                                      F-18


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

(6)    Income Taxes

       Income taxes consist of the following components:

                                                      1995      1994     1993
                                                      ----      ----     ----
                                                            (In thousands)
 
Current Federal income tax...........................$45,940  $24,243  $ 12,502
Current State income tax.............................  5,864       --        --
Deferred Federal income tax.......................... (3,212)  15,449   (52,827)
Deferred State income tax............................  7,031    8,077    (8,433)
Amortization of accumulated investment tax credits... (4,442)  (4,701)   (5,036)
Recognition of accumulated deferred investment tax
   credits relating to sales of utility property ....   (388)  (2,197)   (3,284)
                                                      ------   ------   ------- 
   Total income taxes................................$50,793  $40,871  $(57,078)
                                                     =======  =======  ======== 

Charged to operating expenses........................$30,194  $44,210  $ 25,721
Charged (credited) to other income and deductions.... 20,599   (3,339)  (82,799)
                                                      ------   ------   ------- 

   Total income taxes ...............................$50,793  $40,871  $(57,078)
                                                     =======  =======  ======== 


       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:

                                                       1995     1994      1993
                                                       ----     ----      ----

                                                            (In thousands)

Federal income tax at statutory rates................$44,224  $42,417  $(41,497)
Investment tax credits............................... (4,442)  (4,701)   (5,036)
Depreciation of flow-through items...................    723    1,112     1,719
Gains on the sale and leaseback of PVNGS 
   Units 1 and 2.....................................   (527)    (527)     (514)
State income tax.....................................  7,146    5,222    (5,585)
Gains on sale of utility property....................  3,090   (2,139)   (3,169)
Federal income tax rate change to 35%................     --       --    (2,527)
Other................................................    579     (513)     (469)
                                                     -------  -------  ---------
   Total income taxes ...............................$50,793  $40,871  $(57,078)
                                                     =======  =======  ======== 




                                      F-19


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

(6)    Income Taxes (Continued)

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




                                                                     1995           1994           1993
                                                                 -------------  ------------  --------------
                                                                               (In thousands)

                                                                                                
Deferred fuel costs.............................................    $   (3,990)    $  (1,945)      $   4,549
Depreciation and cost recovery..................................        12,730        22,118          17,668
Loss provision for the M-S-R power purchase contract............         3,497         5,632           6,335
Contributions in aid of construction............................        (4,308)       (5,055)         (4,491)
Alternative minimum tax in excess of regular tax................       (26,002)      (24,100)        (13,808)
Net operating losses utilized ..................................        55,217        35,077          15,067
PVNGS decommissioning...........................................        (2,321)       (2,445)         (3,962)
Write-down of interests in PVNGS Units 1 and 2..................            --            --         (51,585)
Hedge loss write-off............................................            --            --          (3,908)
Loss on reacquired debt write-off...............................            --            --          (5,561)
Gains on sale of utility property...............................       (29,868)       (8,421)        (11,321)
Contribution to 401(h) plan.....................................          (885)        1,204          (3,226)
Reserve for litigation..........................................            --            --          (1,979)
OLE Transmission Project........................................        (3,177)         (792)           (929)
Other...........................................................         2,926         2,253          (4,109)
                                                                 -------------   -----------      ---------- 

   Net deferred taxes provided.................................. $       3,819   $    23,526      $  (61,260)
                                                                 =============   ===========      ========== 

 


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

                                                         1995           1994
                                                     ------------   ------------
                                                           (In thousands)
Deferred Tax Assets:
   Net operating losses.............................. $        --   $     51,199
   Alternative minimum tax credit carryforward.......      66,628         40,626
   Nuclear decommissioning...........................      14,023         11,703
   Regulatory liabilities............................      60,070         64,877
   Other.............................................      45,403         41,446
                                                     ------------   ------------
      Total deferred tax assets......................$    186,124   $    209,851
                                                     ------------   ------------

Deferred Tax Liabilities:
   Depreciation......................................$    168,562   $    175,068
   Investment tax credit.............................      66,734         71,564
   Fuel costs........................................      24,804         28,794
   Regulatory assets.................................      70,348         77,020
   Other.............................................       1,239          6,176
                                                     ------------   ------------
      Total deferred tax liabilities.................     331,687        358,622
                                                     ------------   ------------
Accumulated deferred income taxes, net...............$    145,563   $    148,771
                                                     ============   ============





                                      F-20


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

(6)    Income Taxes (Continued)

       The Company has no net operating  loss  carryforwards  as of December 31,
1995.

       The Company defers  investment tax credits  related to utility assets and
amortizes them over the estimated  useful lives of those assets.  Investment tax
credits related to non-utility assets have been flowed through in earlier years.

(7)    Employee and Post-Employment Benefits

Pension Plan

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


                                          1995         1994          1993
                                       -----------  -----------   -----------

Service cost...........................$     6,770  $     8,121   $     7,263
Interest cost..........................     18,332       17,589        16,849
Actual loss (return) on plan assets....    (42,148)       1,079       (18,148)
Net amortization and deferral..........     23,295      (18,731)         (878)
                                       -----------  -----------   ----------- 
Net periodic pension cost..............      6,249        8,058         5,086
Curtailment loss.......................         --           --         1,657
                                       -----------  -----------   ----------- 
Total pension expense..................$     6,249  $     8,058   $     6,743
                                       ===========  ===========   ===========






                                      F-21


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

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

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


                                                        1995          1994
                                                    ------------  ------------

Vested benefits.................................... $    222,501  $    183,364
Non-vested benefits................................       10,556         8,071
                                                    ------------  ------------
Accumulated benefit obligation.....................      233,057       191,435
Effect of future compensation levels...............       46,889        36,581
                                                    ------------  ------------
Projected benefit obligation.......................      279,946       228,016
Fair value of plan assets..........................      246,670       208,751
                                                    ------------  ------------
Projected benefit obligation in excess of assets...       33,276        19,265
Unrecognized prior service cost....................         (214)         (248)
Net unrecognized loss from past experience 
   different from assumed and the effects of 
   changes in assumptions..........................      (41,185)      (27,183)
Unamortized asset at transition, being amortized 
   through the year 2002...........................        6,978         8,142
                                                    ------------  ------------
Accrued pension asset.............................. $     (1,145)  $       (24)
                                                    ============   =========== 

       The weighted average discount rate used to measure the projected  benefit
obligation was 7.50% and 8.25% for 1995 and 1994, respectively, and the expected
long-term rate of return on plan assets was 8.75% for 1995 and 1994. The rate of
increase in future  compensation levels based on age-related scales was 4.1% for
1995 and 1994.

Other Postretirement Benefits

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


                                               1995         1994        1993
                                            ----------    --------   ----------


Service cost................................$    1,869    $  1,389   $    1,175
Interest cost...............................     4,962       3,250        2,974
Actual loss (return) on plan assets.........    (2,726)        100          (56)
Transition obligation amortization..........     1,817       1,817        1,857
Net amortization and deferral...............     2,498        (295)          --
                                            ----------    --------   ----------
Net periodic postretirement benefit cost....     8,420       6,261        5,950
Curtailment loss............................        --          --        4,295
                                            ----------    --------   ----------
Total postretirement benefit expense........$    8,420    $  6,261   $   10,245
                                            ==========    ========   ==========






                                      F-22


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

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

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


                                                        1995           1994
                                                   ------------  -------------
Accumulated benefit obligations for:
   Retirees....................................... $     29,088  $      32,085
   Fully eligible employees.......................        7,144          1,848
   Active employees...............................       39,854         27,387
                                                    -----------   ------------
Accumulated benefit obligation....................       76,086         61,320
Fair value of plan assets.........................       15,600          8,559
                                                    -----------   ------------
Funded status.....................................      (60,486)       (52,761)
Net unrecognized loss.............................       22,196         15,310
Unrecognized transition obligation (being 
   amortized through the year 2012)...............       30,891         32,708
                                                    -----------   ------------
Accrued postretirement liability..................  $    (7,399)  $     (4,743)
                                                    ===========   ============ 


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

       The weighted average discount rate used to measure the projected  benefit
obligation was 7.5% and 8.25% for 1995 and 1994, respectively,  and the expected
long-term  rate of return on plan assets was 8.75% for 1995 and 1994. The health
care  cost  trend  rate  was  8.0%,  7.5%  and 6.0%  for  1995,  1994 and  1993,
respectively.  The  effect  of a 1%  increase  in the  health  care  trend  rate
assumption would increase the accumulated  postretirement  benefit obligation as
of December 31, 1995 by  approximately  $11.8 million and the aggregate  service
and interest  cost  components of net periodic  postretirement  benefit cost for
1995 by approximately $1.2 million. The health care cost trend rate was expected
to decrease to 6.0% by 2010 and to remain at that level thereafter.

       The Company  received NMPUC approval in 1994 for the recovery of the full
accrual amount of Electric  Business Unit's retirees' health care costs expense.
The Company  currently  defers the benefit costs in excess of the  pay-as-you-go
basis  for  PNMGS  ($4.4  million  deferred  as of  December  31,  1995) and has
addressed  the  recovery  of this amount as well as the full  accrual  amount of
retirees'  health care costs related to PNMGS in its general rate case which was
filed in August 1995.

Performance Stock Plan

       In 1993, the Company adopted a nonqualified  stock option plan covering a
group of management  employees.  Options are granted at the fair market value of
the shares on the date of grant. Options granted through December 31, 1995, vest
on June 30, 1996, and have a purchase term of up to 10 years.


                                      F-23


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

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

       The Performance Stock Plan activity for 1993, 1994 and 1995 is summarized
as follows:

                                         Shares                Range of
                                         Subject           Exercise Prices
                                        to Option             Per Share
                                      -------------     ----------------------
Balance at December 31, 1993.......        370,000             $13.75
     Options Granted...............        817,135        $11.50 - $13.00
     Options Cancelled.............             --

Balance at December 31, 1994.......      1,173,542        $11.50 - $13.75
     Options Granted...............        507,238            $17.625
     Options Cancelled.............             --

Balance at December 31, 1995.......      1,664,500        $11.50 - $17.625

     Options may be exercised  following  vesting as described in the plan.  The
aggregate  maximum  number of options  granted under the current plan during its
five-year time frame is two million shares,  subject to certain adjustments.  As
proposed under an amended plan, all subsequent awards granted after December 31,
1995,  shall vest three  years from the grant date of the award and the  maximum
number of options would be increased to five million shares through December 31,
2000.  This amended plan is subject to  shareholder  approval at the next annual
meeting in April 1996.

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, 1995, was $18.5 million,  of which the  accumulated
and vested benefit  obligation  was $17.6 million.  As of December 31, 1995, the
Company has recognized an additional liability of $1.6 million for the amount of
unfunded  accumulated  benefits  in excess of  accrued  pension  costs.  The net
periodic pension cost for 1995, 1994 and 1993 was $2.0 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. Funds in the amount of approximately
$10.5  million (fair market value of $13.0  million) are presently in trust.  No
additional funds have been provided to the trust since 1989.

(8)    Construction Program and Jointly-Owned Plants

     It is estimated that the Company's construction  expenditures for 1996 will
be approximately $123 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.


                                      F-24


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

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

     At  December  31,  1995,  the  Company's   interests  and   investments  in
jointly-owned generating facilities are:




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

                                                                                 
San Juan Generating Station (Coal).... $  729,516   $   308,656        $    5,653          46.3%
Palo Verde Nuclear Generating                                        
   Station (Nuclear)*................. $  189,504   $    38,301        $   15,743          10.2%
Four Corners Power Plant Units 4      
   and 5 (Coal)....................... $  115,729   $    42,179        $    4,316          13.0%

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


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

San Juan Generating Station ("SJGS")

       The Company  operates and jointly owns SJGS.  At December 31, 1995,  SJGS
Units 1 and 2 are  owned  on a 50%  shared  basis  with  Tucson  Electric  Power
Company, Unit 3 is owned 50% by the Company, 41.8% by Southern California Public
Power Authority and 8.2% by Century Power Corporation ("Century").  Century sold
its  remaining   8.2%  interest  to  Tri-State   Generation   and   Transmission
Association,  Inc. Unit 4 is owned 38.457% by the Company, 8.475% by the City of
Farmington, 28.8% by M-S-R Public Power Agency, a California public power agency
("M-S-R"),  7.2% by the  County of Los  Alamos,  10.04% by the City of  Anaheim,
California and 7.028% by Utah Associated Municipal Power Systems.

Palo Verde Nuclear Generating Station

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

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


                                      F-25


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

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

       The PVNGS  participants  have  insurance  for public  liability  payments
resulting  from  nuclear  energy  hazards to the full limit of  liability  under
Federal law. This potential  liability is covered by primary liability insurance
provided by commercial  insurance carriers in the amount of $200 million and the
balance by an  industry  wide  retrospective  assessment  program.  The  maximum
assessment per reactor under the  retrospective  rating program for each nuclear
incident  occurring  at  any  nuclear  power  plant  in  the  United  States  is
approximately  $79.3  million,  subject to an annual  limit of $10  million  per
incident.  Based upon the Company's 10.2% interest in the three PVNGS units, the
Company's  maximum  potential  assessment  per incident is  approximately  $24.3
million,  with an annual  payment  limitation of $3 million.  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".

       The PVNGS participants  maintain  "all-risk"  (including nuclear hazards)
insurance for nuclear  property damage to, and  decontamination  of, property at
PVNGS in the aggregate  amount of  approximately  $2.75 billion as of January 1,
1996, a substantial  portion of which must first be applied to stabilization and
decontamination. The Company has also secured insurance against a portion of the
increased  cost  of  generation  or  purchased   power  resulting  from  certain
accidental  outages of any of the three PVNGS  units if such  outage  exceeds 21
weeks.

       The Company has a program for funding its share of decommissioning  costs
for PVNGS. Under this program,  the Company makes a series of annual deposits to
an  external  trust over the  estimated  useful life of each unit with the trust
funds being invested under a plan which allows the accumulation of funds largely
on a tax-deferred  basis through the use of life  insurance  policies on certain
current  and former  employees.  The results of the 1995  decommissioning  study
indicate that the  Company's  share of the PVNGS  decommissioning  costs will be
approximately  $145.6  million,  a decrease  from  $157.8  million  based on the
previous 1992 study (both amounts are stated in 1995 dollars).

       The Company has determined that a supplemental investment program will be
needed as a result of both cost  increases  identified in the 1992 study and the
lower than  anticipated  performance of the existing  program.  On September 29,
1995, the Company filed a request for  permission  from the NMPUC to establish a
qualified tax advantaged  trust for PVNGS Units 1 and 2. Due to Internal Revenue
Service ("IRS") regulations, PVNGS Unit 3 will remain in a non-qualified trust.

       The Company,  on February 7, 1996,  filed a motion for interim relief for
establishment  of a qualified  trust  pending  final NMPUC  action.  The interim
request  was  necessary  in order  to meet  the  March  15  deadline  under  IRS
requirements  for the  qualified  trust to be effective for the current year. On
February 19, 1996, the NMPUC granted this request.

       The  market  value  of  the  existing  trust  at  the  end  of  1995  was
approximately  $12.4 million,  which  includes the cash  surrender  value of the
current insurance policies.


                                      F-26


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

(9)    Long-Term Power Contracts and Franchises

       The  Company had two  long-term  contracts  for the  purchase of electric
power. Under a contract with M-S-R, which expired in early 1995, the Company was
obligated to pay certain minimum amounts and a variable  component  representing
the  expenses  associated  with the  energy  purchased  and debt  service  costs
associated  with  capital  improvements.  Total  payments  under  this  contract
amounted to approximately  $14 million for 1995 and $42 million in each year for
1994 and 1993.

       The Company has a long-term  contract with  Southwestern  Public  Service
Company  ("SPS") for up to 200 MW of  interruptible  power from May 1995 through
May 2011.  Total payments under this contract  amounted to  approximately  $12.1
million in 1995.  Minimum  payments under the contract  amount to  approximately
$14.0  million for 1996 and 1997.  In addition,  the Company will be required to
pay for any energy purchased under the contract.  The amount of minimum payments
for future  years will  depend on whether the  Company  exercises  its option to
reduce its purchase  obligations  under the contract.  The Company provided such
notice in 1995 to reduce the purchase by 25 MW in 1999.

(10)   Lease Commitments

       The Company  classifies its leases in accordance with generally  accepted
accounting principles.  The Company leases Units 1 and 2 of PVNGS,  transmission
facilities,  office  buildings and other equipment under operating  leases.  The
lease expense for PVNGS is $66.3 million per year over base lease terms expiring
in 2015 and 2016.  Prior to 1992,  the  aggregate  lease  expense  for the PVNGS
leases was $84.6  million  per year over the base  lease  terms;  however,  this
amount was  reduced  by the  purchase  of  approximately  22% of the  beneficial
interests  in the PVNGS  Units 1 and 2 leases  (see note 8).  Each  PVNGS  lease
contains  renewal and fair market value purchase  options at the end of the base
lease term.

       Future  minimum  operating  lease payments (in thousands) at December 31,
1995 are:


1996................................................  $      77,926
1997................................................         77,674
1998................................................         77,563
1999................................................         77,268
2000................................................         77,217
Later years.........................................      1,102,754
                                                      -------------
   Total minimum lease payments.....................  $   1,490,402
                                                      =============


       Operating lease expense, inclusive of PVNGS leases, was approximately $80
million  in 1995,  $79.1  million in 1994 and $80.6  million in 1993.  Aggregate
minimum payments to be received in future periods under noncancelable  subleases
are approximately $7.2 million.


                                      F-27


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

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

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

Electric Operations

Person Station

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

Santa Fe Station

       The  NMED  has  been  conducting  an  investigation  of  the  groundwater
contamination detected beneath the Santa Fe Station site to determine the source
of the  contamination.  The Company has been and is continuing to cooperate with
the NMED site  investigation  pursuant  to a  settlement  agreement  between the
Company and the NMED. In May 1995,  the Company  received a letter from the NMED
indicating that the NMED had made a determination  that Santa Fe Station was the
source  of  gasoline-contaminated  groundwater  at the  site and  vicinity.  The
Company contested the NMED's determination and believes insufficient data exists
to definitely identify the sources of groundwater contamination.  A minimum site
assessment ("MSA") of the two former underground storage tank sites at the Santa
Fe Station site was conducted by the Company under the settlement agreement. The
MSA report indicated that the Santa Fe Station site does not appear to have been
a source of gasoline  contamination.  The MSA report has been  submitted  to the
NMED and is currently pending NMED review.



                                      F-28


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

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

Albuquerque Electric Service Center

       Trenching work at the electric  service center revealed oil  contaminated
soil in an area of the service  center where used oil in drums were stored.  The
trenched  area  bisects a small  portion of the storage  area,  indicating  that
potentially  the entire area could be  underlain  with  contaminated  soil.  The
Company  requested a laboratory  analysis on the soil to  determine  the type of
contamination.  The Company may be required to assess soil and  groundwater  for
contamination  as well as remediate  extensive  volumes of soil in the area. The
Company currently cannot predict the outcome of the analysis, to what extent the
soil was contaminated or the costs of the remediation, if any.

       In addition,  leaking fuel lines,  which have been replaced,  caused soil
and groundwater  contamination in the vicinity of the leak. The Company proposed
a  quarterly  sampling  plan to the NMED for the  site.  The NMED has  expressed
concerns  regarding the placement of monitoring  wells and the  relatively  high
levels of residual contamination remaining in the soil at the site. Based on the
recent  analysis of the groundwater  sampling,  the  contaminated  soil does not
appear to be a continual recharge source to the groundwater  contamination.  The
NMED may require  additional  monitoring  wells and soil remediation work at the
site.

Gas Operations

Air Permits

       In 1994,  following an environmental  audit performed in conjunction with
the Company's  sale of certain gas assets,  which audit brought to light certain
discrepancies regarding required air permits associated with certain natural gas
facilities,  the  Company  met with the NMED to discuss the nature of the permit
discrepancies and to propose methods and schedules to resolve the discrepancies.

       The Company submitted in 1994 its permit modification application for the
Lybrook Gas Processing Plant ("Lybrook"). The Lybrook permit has now been issued
to Williams Gas  Processing-Blanco,  Inc.("Williams"),  the purchaser of the gas
assets.

       The Company submitted an air permit modification application for the Kutz
Canyon Gas  Processing  Plant  ("Kutz") in the first quarter of 1995. In October
1995,  the Company  received a Notice of  Violation  ("NOV")  from the NMED with
specified corrective actions on the permit discrepancies in the Kutz air permit.
In January 1996,  the Company  accepted a settlement  offer for the NOV from the
NMED in the amount of $15,000.  The Company cannot predict when the final permit
will be issued by the NMED or whether additional requirements will be imposed by
the NMED as conditions for issuance of the permit.


                                      F-29


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

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

Gas Wellhead Pit Remediation

       The New Mexico Oil  Conservation  Commission  ("NMOCC")  issued an order,
effective on January 14, 1993, that affects the gas gathering facilities,  which
were sold to Williams, located in the San Juan Basin in northwestern New Mexico.
The  order  prohibits  the  further  discharge  of  fluids  associated  with the
production of natural gas into unlined  earthen pits in certain  specified areas
of the San Juan Basin.  The order also required the  submission of closure plans
for the closure of pits in which production  fluids were previously  discharged.
The Bureau of Land Management  ("BLM") has issued a similar ruling.  The Company
has complied with such rulings and  submitted  and received  approval of the pit
closure plans from the New Mexico Oil Conservation  Division ("OCD"), the Energy
Minerals and Natural Resources Department, as well as the BLM.

       The Company has received  letters and  directives  from the OCD directing
the Company to determine if certain unlined  discharge pits have  contributed to
the groundwater  contamination  plumes that were identified at those sites.  The
Company is currently  assessing the sites in accordance  with the OCD directive.
The  Company  continues  to  assess  unlined  pits in  accordance  with  the OCD
directive and is addressing potential  groundwater  contamination issues as they
arise during the assessment process.

       On March 3, 1995,  the Jicarilla  Apache Tribe  ("Jicarilla")  enacted an
ordinance   directing   that  unlined   surface   impoundments   located  within
environmentally  sensitive  areas be remediated and closed by December 1996, and
that all other unlined surface  impoundments on Jicarilla's  lands be remediated
and  closed  by  December   1998.   The   Company  has   received  a  claim  for
indemnification  by Williams for the environmental  work required to comply with
the Jicarilla ordinance. The Company has submitted a closure/remediation plan to
the Jicarilla,  which has been approved,  and the Company anticipates initiating
the remediation  process in the spring of 1996. The costs of remediation will be
charged against the $10.6 million  indemnification cap contained in the purchase
and sale  agreement  between the Company and Williams (see note 12). The Company
does not anticipate  that the claim for  indemnification  will have any material
impact on the Company's financial condition or results of operations.

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  $141 million  stated in 1995 dollars,  including
approximately  $24.0 million (of which $12.1 million has already been  expended)
for Person, Prager and Santa Fe Stations which have been retired.

       The Company is currently recovering estimated  decommissioning costs from
NMPUC retail customers through its depreciation rates.  Depreciation amounts for
the retired generating units are not being recovered.


                                      F-30


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

(12)   Asset Sales

Sale of Sangre de Cristo Water Company

       In  February  1994,  the  Company  and the City of Santa Fe (the  "City")
executed a purchase and sale agreement for the Company's water division, subject
to NMPUC approval. On May 22, 1995, the NMPUC issued a final order approving the
sale. On July 3, 1995, the closing of the sale was finalized.  As a result,  the
Company  received  $51.2  million  (exclusive of current  assets netted  against
current  liabilities)  from the  sale and  recorded  an  after-tax  gain of $6.4
million, or 15 cents per share. Pursuant to the purchase and sale agreement, the
Company,  through its Energy  Services Unit,  will continue to operate the water
utility up to four years for a fee under a contract with the City.

Sale of Gas Gathering and Processing Assets

       As part of the  Company's  announced  action plan in 1993 to focus on its
core utility  business,  the Company,  in 1994,  entered into an agreement  with
Williams for the sale of  substantially  all of the assets of Gathering  Company
and Processing Company and for the sale of Northwest and Southeast gas gathering
and processing facilities of the Company.

       The sales transaction provides for three 10-year contracts,  each with an
option to renew for an additional  5-year term, with Williams for  competitively
priced  gathering  and  processing  services.  The purchase  and sale  agreement
contains   contractual   requirements   for  the  Company  to  address   various
environmental deficiencies identified as retained liabilities.  It also contains
environmental  representations  and  warranties and  indemnification  provisions
whereby the Company  indemnifies  Williams for a five-year  period after closing
for breaches of the  environmental  representations  and  warranties and against
third party claims to a maximum of $10.6  million.  After the $10.6  million cap
has  been  reached,  or  after  the  expiration  of the  five-year  post-closing
indemnification period,  whichever comes first, Williams indemnifies the Company
against further  environmental  expenditures  related to the properties sold. On
June 30, 1995,  following  NMPUC  approval,  the Company and Williams closed the
sale of the assets. As a result,  the Company and its gas subsidiaries  received
$154 million from Williams and recognized an after-tax gain of $12.8 million, or
31 cents per share.  Under the NMPUC approval,  the Company recorded a liability
of approximately $35 million,  representing an estimate of a portion of the gain
resulting from the sale,  which will be credited to the Company's gas customers'
bills over five years.  After  completion  of the fifth year,  the amount of the
gain  will be  recalculated  to  reflect  actual  expenses  associated  with the
transaction  which were  appropriately  and legitimately  incurred.  Such amount
should include amounts  expended to indemnify  Williams as described  above. Any
resulting  differences  will be refunded or billed to customers  over a one year
period.

       As a result of the gas assets sales,  the operations of the Company's two
wholly-owned gas subsidiaries,  Gathering Company and Processing  Company,  have
been substantially discontinued, effective June 30, 1995.


                                      F-31


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993

(13)   Segment Information

       The financial information  pertaining to the Company's electric,  gas and
other  operations  for the years ended  December 31, 1995,  1994 and 1993 are as
follows:




                                                             Electric*          Gas           Other          Total
                                                          ---------------   ------------   -----------   --------------
                                                                                (In thousands)
                                                                                                        
1995:
   Operating revenues.....................................$       584,284   $    217,985   $     6,196   $      808,465
   Operating expenses excluding income taxes..............        470,824        190,128         3,931          664,883
                                                          ---------------   ------------   -----------   --------------
   Pre-tax operating income...............................        113,460         27,857         2,265          143,582
   Operating income tax...................................         24,884          4,313           997           30,194
                                                          ---------------   ------------   -----------   --------------
   Operating income.......................................$        88,576   $     23,544   $     1,268   $      113,388
                                                          ===============   ============   ===========   ==============

   Depreciation and amortization expense..................$        63,047   $     17,248   $       570   $       80,865
                                                          ===============   ============   ===========   ==============

   Construction expenditures..............................$        76,610   $     26,315   $     4,741   $      107,666
                                                          ===============   ============   ===========   ==============

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


1994:
   Operating revenues.....................................$       621,794   $    269,510   $    13,407   $      904,711
   Operating expenses excluding income taxes..............        468,519        233,743         7,161          709,423
                                                          ---------------   ------------   -----------   --------------
   Pre-tax operating income...............................        153,275         35,767         6,246          195,288
   Operating income tax...................................         32,998          9,158         2,054           44,210
                                                          ---------------   ------------   -----------   --------------
   Operating income.......................................$       120,277   $     26,609   $     4,192   $      151,078
                                                          ===============   ============   ===========   ==============

Depreciation and amortization expense.....................$        56,003   $     16,847   $     1,287   $       74,137   
                                                          ===============   ============   ===========   ==============   

   Construction expenditures..............................$        80,282   $     31,518   $     8,506   $      120,306
                                                          ===============   ============   ===========   ==============
   
   Identifiable assets:
      Net utility plant...................................$     1,302,467   $    341,232   $    52,988   $    1,696,687
      Other...............................................        307,010        187,748        11,820          506,578
                                                          ---------------   ------------   -----------   --------------

        Total assets......................................$     1,609,477   $    528,980   $    64,808   $    2,203,265
                                                          ===============   ============   ===========   ==============







                                      F-32


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1995, 1994 and 1993



(13)    Segment Information (Continued) 



                                                              Electric*          Gas           Other          Total
                                                         ---------------   ------------   -----------   --------------
                                                                               (In thousands)
                                                                                                        
1993:
   Operating revenues.....................................$       589,728   $    271,087   $    13,063   $      873,878
   Operating expenses excluding income taxes..............        467,659        239,859         7,355          714,873
                                                          ---------------   ------------   -----------   --------------
   Pre-tax operating income...............................        122,069         31,228         5,708          159,005
   Operating income tax...................................         19,184          5,347         1,190           25,721
                                                          ---------------   ------------   -----------   --------------

   Operating income.......................................$       102,885   $     25,881   $     4,518   $      133,284
                                                          ===============   ============   ===========   ==============

   Depreciation and amortization expense..................$        59,298   $     16,859   $     1,169   $       77,326
                                                          ===============   ============   ===========   ==============

   Construction expenditures..............................$        67,886   $     26,593   $     2,847   $       97,326
                                                          ===============   ============   ===========   ==============
   Identifiable assets:
      Net utility plant...................................$     1,324,110   $    333,862   $    45,960   $    1,703,932
      Other...............................................        257,153        240,908        10,196          508,257
                                                          ---------------   ------------   -----------   --------------
        Total assets......................................$     1,581,263   $    574,770   $    56,156   $    2,212,189
                                                          ===============   ============   ===========   ==============




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

* Includes the resources excluded from NMPUC regulation.

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



                                      F-33



              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
                           QUARTERLY OPERATING RESULTS



   The unaudited operating results by quarters for 1995 and 1994 are as follows:



                                                                              Quarter Ended
                                                     ------------------------------------------------------------------
                                                       March 31         June 30        September 30       December 31
                                                     -------------   -------------   ----------------   ---------------
                                                                  (In thousands except per share amounts)
                                                                     -------------   ----------------   ---------------
                                                                                                        
1995:
   Operating Revenues............................... $     230,235   $     191,532   $        195,586   $       191,112
   Operating Income................................. $      33,731   $      25,024   $         34,734   $        19,899
   Net Earnings (1)................................. $      18,184   $      23,419   $         28,969   $         4,990
   Net Earnings per Share (1)....................... $        0.40   $        0.52   $           0.68   $          0.12

1994:
   Operating Revenues............................... $     260,807   $     204,260   $        218,717   $       220,927
   Operating Income................................. $      42,671   $      32,150   $         43,606   $        32,651
   Net Earnings .................................... $      24,103   $      19,248   $         21,789   $        15,178
   Net Earnings per Share .......................... $        0.54   $        0.42   $           0.48   $          0.33




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

(1)      On June 30, 1995, the Company consummated the sale of substantially all
         of the gas gathering and  processing  assets of the Company and its gas
         subsidiaries  to Williams.  The Company  recorded an after-tax  gain of
         $12.8  million,  or 31 cents per share.  On July 3, 1995,  the  Company
         consummated  the sale of the  Company's  water  division to the City of
         Santa Fe. The Company recorded an after-tax gain of $6.4 million, or 15
         cents per share.



                                      F-34


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                        COMPARATIVE OPERATING STATISTICS



                                                     1995           1994           1993             1992             1991
                                                 -------------  -------------  -------------   --------------   --------------
                                                                                                            
Electric Service Energy Sales -- KWh (in thousands):
   Residential..................................     1,795,371      1,786,292      1,683,213        1,650,491        1,606,993
   Commercial...................................     2,578,243      2,534,507      2,398,725        2,353,152        2,299,213
   Industrial...................................     1,434,974      1,268,208      1,145,369        1,087,357        1,025,420
   Other ultimate customers.....................       220,777        364,144        219,481          267,246          208,328
                                                     ---------      ---------      ---------        ---------        ---------

      Total sales to ultimate customers.........     6,029,365      5,953,151      5,446,788        5,358,246        5,139,954
   Sales for resale.............................     2,590,513      3,361,933      3,375,216        3,685,418        3,091,541
                                                     ---------      ---------      ---------        ---------        ---------

      Total KWh sales...........................     8,619,878      9,315,084      8,822,004        9,043,664        8,231,495
                                                     =========      =========      =========        =========        =========

Electric Revenues (in thousands):
   Residential.................................. $     168,633  $     172,559  $     163,131   $      158,190   $      155,162
   Commercial...................................       218,222        229,851        218,263          211,086          207,929
   Industrial...................................        79,964         79,729         74,157           69,590           67,031
   Other ultimate customers.....................        18,749         24,147         15,548           16,521           14,472
                                                     ---------      ---------      ---------        ---------        ---------
      Total revenues to ultimate
        customers...............................       485,568        506,286        471,099          455,387          444,594
   Sales for resale.............................        80,949*        96,821*        99,895*         123,291          107,636
                                                     ---------      ---------      ---------        ---------        ---------
      Total revenues from energy sales..........       566,517        603,107        570,994          578,678          552,230
   Miscellaneous electric revenues..............        17,767         18,687         18,734           17,645           16,256
                                                     ---------      ---------      ---------        ---------        ---------
      Total electric revenues................... $     584,284  $     621,794  $     589,728   $      596,323   $      568,486
                                                 =============  =============  =============   ==============   ==============

Customers at Year End:
   Residential..................................       296,821        287,369        278,357          271,155          264,425
   Commercial...................................        35,390         34,336         33,568           32,504           31,666
   Industrial...................................           374            384            381              386              385
   Other ultimate customers.....................           598            599            576              537              499
                                                     ---------      ---------      ---------        ---------        ---------
      Total ultimate customers..................       333,183        322,688        312,882          304,582          296,975
   Sales for Resale.............................            37             42             37               47               33
                                                     ---------      ---------      ---------        ---------        ---------
      Total customers...........................       333,220        322,730        312,919          304,629          297,008
                                                       =======        =======        =======          =======          =======

Reliable Net Capability-- KW....................     1,506,000      1,506,000      1,541,000        1,591,000        1,591,000
Coincidental Peak Demand-- KW...................     1,247,000      1,189,000      1,104,000        1,053,000        1,018,000
Average Fuel Cost per Million BTU............... $      1.3177  $      1.3488  $      1.3844   $       1.3263   $       1.3696
BTU per KWh of Net Generation...................        10,811         10,817         11,036           11,039           11,086

Water Service**
   Water Sales-- Gallons (in thousands               1,616,544      3,366,388      3,414,950        3,224,271        2,996,587
   Revenues (in thousands)...................... $       6,196  $      13,407  $      13,063   $       12,471   $       11,613
   Customers at Year End........................        23,752         23,452         22,743           22,098           21,522
- ---------


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

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


                                      F-35


              PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

                        COMPARATIVE OPERATING STATISTICS





                                                         1995          1994         1993          1992           1991
                                                      -----------  ------------  -----------  ------------   ------------
                                                                                                       
PNMGS*
Gas Throughput--Decatherms (in thousands) GCNM:
   Residential.......................................      25,865        27,139       28,031        27,063         26,237
   Commercial........................................       8,864         9,767       10,428        10,590         11,375
   Industrial........................................         661           831          923           707            766
   Public authorities................................       2,411         2,465        2,473         4,199          4,951
   Irrigation........................................       1,245         1,272        1,259         1,134          1,374
   Sales for resale..................................       2,442           680        1,041         2,035          1,357
   Unbilled..........................................      (1,764)         (309)        (636)          649             --
                                                          -------       -------      -------       -------        ------- 
   GCNM sales........................................      39,724        41,845       43,519        46,377         46,060
   Transportation throughput.........................      49,136        43,135       46,059        48,674         38,976
                                                          -------       -------      -------       -------        ------- 
   GCNM throughput...................................      88,860        84,980       89,578        95,051         85,036
Gathering Company:
   Spot market sales.................................          39            --           --           858          1,624
   Transportation throughput.........................      20,695        47,091       45,754        24,889         23,631
                                                          -------       -------      -------       -------        ------- 
      Total PNMGS throughput.........................     109,594       132,071      135,332       120,798        110,291
                                                          =======       =======      =======       =======        =======

Gas Revenues (in thousands) GCNM:
   Residential....................................... $   125,290  $    149,439  $   149,796  $    125,313   $    137,436
   Commercial........................................      32,328        42,725       44,575        37,222         46,676
   Industrial........................................       1,873         2,905        3,369         2,063          2,754
                                                          -------       -------      -------       -------        ------- 
   Public authorities................................       7,939         9,969        9,694        12,313         17,711
   Irrigation........................................       3,077         4,061        4,418         2,713          4,495
   Sales for resale..................................       4,999         2,462        3,137         4,460          3,848
   Imbalance penalties...............................       1,786           944           --            --             --
   Unbilled..........................................      (2,430)          267       (1,573)          716             --
                                                          -------       -------      -------       -------        ------- 
   Revenues from gas sales...........................     174,862       212,772      213,416       184,800        212,920
   Transportation....................................      18,532        19,742       19,376        14,861         13,386
   Other.............................................       1,897         2,392        2,453         4,974          9,062
                                                          -------       -------      -------       -------        ------- 
   GCNM gas revenues.................................     195,291       234,906      235,245       204,635        235,368
Gathering Company:
   Spot market sales.................................          42            --            4         1,410          1,771
   Transportation....................................       3,640         7,850        7,353         3,892          3,611
   Imbalance penalties...............................         418            26           --            --             --
Processing Company:
   Sales of liquids..................................      13,414        16,090       18,724        26,427         30,500
   Processing fees...................................       5,180        10,638        9,761         6,795          5,819
                                                          -------       -------      -------       -------        ------- 
      Total PNMGS revenues........................... $   217,985  $    269,510  $   271,087  $    243,159   $    277,069
                                                      ===========  ============  ===========  ============   ============
Customers at Year End
GCNM:
   Residential.......................................     358,822       348,715      337,768       329,385        320,546
   Commercial........................................      30,493        30,139       30,151        29,765         29,608
   Industrial........................................          59            57           72            61             72
   Public authorities................................       2,444         2,463        1,958         2,004          2,153
   Irrigation........................................         886           899          951         1,012          1,043
   Sales for resale..................................           2             3            3             4              7
   Transportation....................................          38            43           37            43             41
                                                          -------       -------      -------       -------        ------- 
   GCNM customers....................................     392,744       382,319      370,940       362,274        353,470

Gathering Company:
   Off-system sales..................................          --            --            1             2             13
   Transportation....................................          --            21           21            16              8
Processing Company...................................          --            32           25            22             21

      Total customers................................     392,744       382,372      370,987       362,314        353,512
                                                          =======       =======      =======       =======        =======



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


                                      F-36


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

       None.
                                    PART III

ITEM 10.        DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

       Reference  is hereby made to  "Election of  Directors"  in the  Company's
Proxy  Statement  relating to the annual meeting of  stockholders  to be held on
April 30, 1996 (the "1996 Proxy  Statement") and to PART I, SUPPLEMENTAL ITEM --
"EXECUTIVE OFFICERS OF THE COMPANY".

ITEM 11.       EXECUTIVE COMPENSATION

       Reference is hereby made to  "Executive  Compensation"  in the 1996 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 1996 Proxy Statement.

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       Reference is hereby made to the 1996 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 1995, 1994,
                    and  1993  are  omitted  for the  reason  that  they  are 
                    not required or the  information  is otherwise  supplied.  

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


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

10.1.1          Amendment and  Supplement No. 1 to  Supplemental  and Additional
                Indenture of Lease dated April 25, 1985 between the Navajo Tribe
                of Indians and Arizona Public Service Company,  El Paso Electric
                Company,  Public  Service  Company  of New  Mexico,  Salt  River
                Project  Agricultural  Improvement and Power District,  Southern
                California  Edison  Company,  and Tucson  Electric Power Company
                (refiled).

10.5.3          Modification No. 4 dated October 25, 1984 and Modification No. 5
                dated July 1, 1985 to Co-Tenancy  Agreement  between the Company
                and Tucson Electric Power Company (refiled).

10.5.7          Modification  No. 10 to San Juan  Project  Co-Tenancy  Agreement
                between Public Service Company of New Mexico and Tucson Electric
                Power Company dated November 30, 1995.


                                       E-1


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

10.7.1          Modification No. 4 dated October 25, 1984 and Modification No. 5
                dated  July 1,  1985 to San  Juan  Project  Operating  Agreement
                between the Company and Tucson Electric Power Company (refiled).

10.7.5          Modification  No. 10 dated November 30, 1995 to San Juan Project
                Operating Agreement between Public Service Company of New Mexico
                and Tucson Electric Power Company.

10.8.5          Amendment No. 10 dated as of November 21, 1985 and Amendment No.
                11 dated as of June 13, 1986 and  effective  January 10, 1987 to
                Arizona Nuclear Power Project Participation Agreement (refiled).

10.9.5          Amendment  No.  Eight  to  Coal  Sales  Agreement,  dated  as of
                September 1, 1995, among San Juan Coal Company,  the Company and
                Tucson Electric Power Company .

10.18*          Facility  Lease dated as of December  16, 1985 between The First
                National Bank of Boston,  as Owner  Trustee,  and Public Service
                Company of New Mexico  together with  Amendments  No. 1, 2 and 3
                thereto. (refiled).

10.24**         Management  Life  Insurance  Plan  (July  1985)  of the  Company
                (refiled).

10.67**         Deferred Compensation Agreement for Jeffry E. Sterba

23.1            Consent of Arthur Andersen LLP.

27              Financial Data Schedule.

99.1            Collateral  Trust  Indenture dated as of December 16, 1985 among
                First PV  Funding  Corporation,  Public  Service  Company of New
                Mexico and Chemical Bank, as Trustee  together with Series 1986A
                Bond  Supplemental,  Series  1986B  Bond  Supplemental,  Unit  1
                Supplemental and Unit 2 Supplemental thereto (refiled).

99.2*           Participation Agreement dated as of December 16, 1985, among the
                Owner Participant named therein,  First PV Funding  Corporation.
                The First National Bank of Boston,  in its  individual  capacity
                and as  Owner  Trustee  (under  a Trust  Agreement  dated  as of
                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 (refiled).

99.4*           Assignment,   Assumption  and  Further  Agreement  dated  as  of
                December 16, 1985,  between Public Service Company of New Mexico
                and  The  First  National  Bank  of  Boston,  as  Owner  Trustee
                (refiled).

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

          *       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.


                                       E-2




         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:

Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession



   Exhibit
     No.                       Description                         Filed As Exhibit:                    File No:

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

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

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

2.2

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

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

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

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




                                                        E-3





   Exhibit
     No.                       Description                         Filed As Exhibit:                    File No:

                                                                                                    


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

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

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


Articles of Incorporation and By-laws

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

Instruments Defining the Rights of Security Holders, Including Indentures

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

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



                                                        E-4





   Exhibit
     No.                       Description                         Filed As Exhibit:                    File No:

                                                                                                    

Material Contracts

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

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

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

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

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

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


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

10.5.6          Modification No. 9 to San Juan Project            10.5.6 to the Company's                 1-6986
                Co-Tenancy Agreement between Public               Quarterly Report on
                Service Company of New Mexico and                 Form 10-Q for the quarter
                Tucson Electric Power Company dated               ended March 31, 1994.
                January 12, 1994.
10.7            San Juan Project Operating Agreement              5-S to Registration                    2-50338
                between the Company and Tucson Gas &              Statement No. 2-50338 of
                Electric Company, executed December 21,           the Company.
                1973.

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




                                                        E-5





   Exhibit
     No.                       Description                         Filed As Exhibit:                    File No:

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

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

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

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

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

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

10.8.7          Amendment No. 12 to Arizona Nuclear               19.1 to the Company's                   1-6986
                Power Project Participation Agreement             Quarterly Report on
                dated June 14, 1988, and effective                Form 10-Q for the quarter
                August 5, 1988.                                   ended September 30, 1990.
10.8.8          Amendment No. 13 to the Arizona                   10.8.10 to Annual Report of             1-6986
                Nuclear Power Project Participation               Registrant on Form 10-K for
                Agreement dated April 4, 1990, and                the fiscal year ended
                effective June 15, 1991.                          December 31, 1990.

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




                                                        E-6





   Exhibit
     No.                       Description                         Filed As Exhibit:                    File No:

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

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

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

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




                                                        E-7





   Exhibit
     No.                       Description                         Filed As Exhibit:                    File No:

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

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

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

10.14           Participation Agreement among the                 10.14 to Annual Report of               1-6986
                Company,  Tucson  Electric  Power                 the  Registrant  on Form 10-K
                Company and certain financial institutions        for 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               1-6986
                November 23, 1982, between the                    the Registrant on Form 10-K
                Company and Southwestern Public                   for fiscal year ended
                Service Company (refiled).                        December 31, 1992.

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

10.19           Facility Lease dated as of July 31, 1986,         28.1 to the Company's                   1-6986
                between The First National Bank of                Quarterly Report on
                Boston, as Owner Trustee, and Public              Form 10-Q for the quarter
                Service Company of New Mexico.                    ended June 30, 1986.

10.19.1         Amendment No. 1 dated as of                       28.5 to the Company's                   1-6986
                November 18, 1986, to Facility Lease              Current Report on Form 8-K
                dated as of July 31, 1986.                        dated November 25, 1986.

10.19.2         Amendment No. 2 dated as of                       10.22.2 to Annual Report of             1-6986
                December 11, 1986, to Facility Lease              the Registrant on Form 10-K
                dated as of July 31, 1986.                        for fiscal year ended
                                                                  December 31, 1986.




                                                        E-8





   Exhibit
     No.                       Description                         Filed As Exhibit:                    File No:

                                                                                                    
10.19.3         Amendment No. 3 dated as of April 8,              10.22.3 to Annual Report of             1-6986
                1987, to Facility Lease dated as of July 31,      the Registrant on Form 10-K
                1986.                                             for fiscal year ended
                                                                  December 31, 1987.

10.20*          Facility Lease dated as of August 12, 1986,       28.1 to the Company's                   1-6986
                between The First National Bank of                Current Report on Form 8-K
                Boston, as Owner Trustee, and Public              dated August 18, 1986.
                Service Company of New Mexico.

10.20.1*        Amendment No. 1 dated as of                       28.9 to the Company                     1-6986
                November 18, 1986, to Facility Lease              Current Report on Form 8-K
                dated as of August 12, 1986.                      dated November 25, 1986.

10.20.2         Amendment No. 2 dated as of                       10.23.2 to Annual Report of             1-6986
                November 25, 1986, to Facility Lease              the Registrant on Form 10-K
                dated as of August 12, 1986.                      for fiscal year ended
                                                                  December 31, 1986.

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

10.21           Facility Lease dated as of December 15,           28.1 to the Company's                   1-6986
                1986, between The First National Bank of          Current Report on Form 8-K
                Boston, as Owner Trustee, and Public              dated December 17, 1986.
                Service Company of New Mexico (Unit 1
                Transaction).

10.21.1         Amendment No. 1 dated as of April 8,              10.24.1 to Annual Report of             1-6986
                1987, to Facility Lease dated as of               the Registrant on Form 10-K
                December 15, 1986.                                for fiscal year ended
                                                                  December 31, 1987.

10.22           Facility Lease dated as of December 15,           28.9 to the Company's                   1-6986
                1986, between The First National Bank of          Current Report on Form 8-K
                Boston, as Owner Trustee, and Public              dated December 17, 1986.
                Service Company of New Mexico (Unit 2
                Transaction).
10.22.1         Amendment No. 1 dated as of April 8,              10.25.1 to Annual Report of             1-6986
                1987, to Facility Lease dated as of               the Registrant on Form 10-K
                December 15, 1986.                                for fiscal year ended
                                                                  December 31, 1987.

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




                                                        E-9





   Exhibit
     No.                       Description                         Filed As Exhibit:                    File No:

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

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

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

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

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

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

10.30           New Mexico Public Service Commission              10.56 to Annual Report of               1-6986
                Order dated July 30, 1987, and Exhibit 1          the Registrant on Form 10-K
                thereto, in NMPUC Case No. 2004,                  for fiscal year ended
                regarding the PVNGS decommissioning               December 31, 1987.
                trust fund.
10.31**         Executive Retention Agreements.                   10.42 to Annual Report of               1-6986
                                                                  the Registrant on Form 10-K
                                                                  for fiscal year ended
                                                                  December 31, 1990.

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




                                                       E-10





   Exhibit
     No.                       Description                         Filed As Exhibit:                    File No:

                                                                                                    

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

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

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

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

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

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

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

10.38           Restated and Amended San Juan Unit 4              10.2.1 to the Company's                 1-6986
                Purchase and Participation Agreement              Quarterly Report on
                between Public Service Company of New             Form 10-Q for the quarter
                Mexico and Utah Associated Municipal              ended September 30, 1993.
                Power Systems.
10.39           Purchase agreement dated February 7,              10.39 to Annual Report of               1-6986
                1992 between Burnham Leasing                      the Registrant on Form 10-K
                Corporation and Public Service Company            for fiscal year ended
                of New Mexico.                                    December 31, 1991.

10.40**         Director Restricted Stock Retainer Plan.          10.40 to Annual Report of               1-6986
                                                                  the Registrant on Form 10-K
                                                                  for fiscal year ended
                                                                  December 31, 1991.




                                                       E-11





   Exhibit
     No.                       Description                         Filed As Exhibit:                    File No:

                                                                                                    
10.40.1**       First Amendment to the Public Service             19.3 to the Company's                   1-6986
                Company of New Mexico Director                    Quarterly Report on
                Restricted Stock Retainer Plan.                   Form 10-Q for the quarter
                                                                  ended March 31, 1993.

10.40.2**       Second Amendment to the Public Service            10.40.2 to the Company's                1-6986
                Company of New Mexico Director                    Quarterly Report on
                Restricted Stock Retainer Plan dated              Form 10-Q for the quarter
                April 27, 1994.                                   ended March 31, 1994.

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

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

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

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

10.44.1**       First Amendment dated April 6, 1993 to            19.2 to the Company's                   1-6986
                the First Restated and Amended Public             Quarterly Report on
                Service Company of New Mexico                     Form 10-Q for the quarter
                Non-Union Severance Pay Plan dated                ended March 31, 1993.
                August 1, 1992.
10.45**         Public Service Company of New Mexico              99.1 to Registration                   33-65418
                Performance Stock Plan.                           Statement No. 33-65418 of
                                                                  the Company.

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




                                                       E-12





   Exhibit
     No.                       Description                         Filed As Exhibit:                    File No:

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

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

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

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

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

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

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

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

10.51**         First Amendment to the Public Service             10.51 to Annual Report of               1-6986
                Company of New Mexico Executive                   the Registrant on Form 10-K
                Retention Plan.                                   for fiscal year ended
                                                                  December 31, 1993.
10.51.1**       Second Amendment to the Public Service            10.51.1 to the Company's                1-6986
                Company of New Mexico Executive                   Quarterly Report on
                Retention Plan.                                   Form 10-Q for the quarter
                                                                  ended June 30, 1994.

10.52**         First Amendment to the Public Service             10.52 to Annual Report of               1-6986
                Company of New Mexico Performance                 the Registrant on Form 10-K
                Stock Plan.                                       for fiscal year ended
                                                                  December 31, 1993.




                                                       E-13





   Exhibit
     No.                       Description                         Filed As Exhibit:                    File No:

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

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

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

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

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

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

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

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

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



                                                       E-14





   Exhibit
     No.                       Description                         Filed As Exhibit:                    File No:

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

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

10.63           A Stipulation regarding sale of certain           10.63 to Current Report on              1-6986
                natural gas gathering and processing              Form 8-K dated January 26,
                assets.                                           1995.
10.64*          Results Pay                                       10.64 to the Company's                  1-6986
                                                                  Quarterly Report on  Form
                                                                  10-Q for the quarter ended
                                                                  March 31, 1995.

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

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

Additional Exhibits

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

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

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


99.2.1*         Amendment No. 1 dated as of July 15,              2.1 to the Company's                    1-6986
                1986, to Participation Agreement dated as         Current Report on Form 8-K
                of December 16, 1985.                             dated July 17, 1986.




                                                       E-15






   Exhibit
     No.                       Description                         Filed As Exhibit:                    File No:

                                                                                                    
99.2.2*         Amendment No. 2 dated as of                       2.1 to the Company's                    1-6986
                November 18, 1986, to  Participation              Current Report on Form 8-K
                Agreement dated as of December 16,                dated November 25, 1986.
                1985.

99.3*           Trustee Indenture, Mortgage, Security             28(b) to the Company's                  1-6986
                Agreement and Assignment to Rents dated           Current Report on Form 8-K
                as of December 16, 1985, between The              dated December 31, 1985.
                First National Bank of Boston, as Owner
                Trustee, and Chemical Bank, as Indenture
                Trustee.

99.3.1*         Supplemental Indenture No. 1 dated as of          28.2 to the Company's                   1-6986
                July 15, 1986, to the Trust Indenture,            Current Report on Form 8-K
                Mortgage, Security Agreement and                  dated July 17, 1986.
                Assignment of Rents dated as of
                December 16, 1985.

99.3.2*         Supplemental Indenture No. 2 dated as of          28.2 to the Company's                   1-6986
                November 18, 1986, to the Trust                   Current Report on Form 8-K
                Indenture, Mortgage, Security Agreement           dated November 25, 1986.
                and Assignment of Rents dated as of
                December 16, 1985.

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

99.5            Participation Agreement dated as of               2.1 to the Company's                    1-6986
                July 31, 1986,  among the Owner                   Quarterly  Report on Participant
                named  therein,  First                            Form  10-Q for the  quarter  
                PV  Funding Corporation. The First                ended June 30, 1986.
                National Bank of Boston, in its individual 
                capacity and as Owner Trustee (under a Trust 
                Agreement dated as of July 31, 1986, with
                the  Owner  Participant),   Chemical  Bank,  
                in  its  individual capacity  and as  
                Indenture  Trustee  (under a Trust  Indenture,
                Mortgage, Security Agreement and Assignment
                of Rents dated as of July 31,  1986,  with the
                Owner  Trustee),  and  Public  Service
                Company of New Mexico, including Appendix 
                A definitions.

99.5.1          Amendment No. 1 dated as of                       28.4 to the Company's                   1-6986
                November 18, 1986, to Participation               Current Report on Form 8-K
                Agreement dated as of July 31, 1986.              dated November 25, 1986.




                                                       E-16






   Exhibit
     No.                       Description                         Filed As Exhibit:                    File No:

                                                                                                    
99.6            Trust Indenture, Mortgage, Security               28.2 to the Company's                   1-6986
                Agreement and Assignment of Rents dated           Quarterly Report on
                as of July 31, 1986, between The First            Form 10-Q for the quarter
                National Bank of Boston, as Owner                 ended June 30, 1986.
                Trustee, and Chemical Bank, as Indenture
                Trustee.

99.6.1          Supplemental Indenture No. 1 dated as of          28.6 to the Company's                   1-6986
                November 18, 1986, to the Trust                   Current Report on Form 8-K
                Indenture, Mortgage, Security Agreement           dated November 25, 1986.
                and Assignments of Rents dated as of
                July 31, 1986.
99.7            Assignment, Assumption, and Further               28.3 to the Company's                   1-6986
                Agreement dated as of July 31, 1986,              Quarterly Report on 
                between Public  Service  Company of New           Form 10-Q for the quarter 
                Mexico and The First National Bank of             ended June 30, 1986.
                Boston, as Owner Trustee.

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

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

99.9*           Trust Indenture, Mortgage, Security               28.2 to the Company's                   1-6986
                Agreement and Assignment of Rents dated           Current Report on Form 8-K
                as of August 12, 1986, between The First          dated August 18, 1986.
                National Bank of Boston, as Owner
                Trustee, and Chemical Bank, as Indenture
                Trustee.

99.9.1*         Supplemental Indenture No. 1 dated as of          28.10 to the Company's                  1-6986
                November 18, 1986, to the Trust                   Current Report on Form 8-K
                Indenture, Mortgage, Security Agreement           dated November 25, 1986.
                and Assignment of Rents dated as of
                August 12, 1986.




                                                       E-17





   Exhibit
     No.                       Description                         Filed As Exhibit:                    File No:

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

99.10*          Assignment, Assumption, and Further               28.3 to the Company's                   1-6986
                Agreement dated as of August 12, 1986,            Current Report on Form 8-K
                between Public Service Company of New             dated August 18, 1986.
                Mexico and The First National Bank of
                Boston, as Owner Trustee.
99.11           Participation Agreement dated as of               2.1 to the Company's                    1-6986
                December 15, 1986, among the Owner                Current Report on Form 8-K
                Participant named therein, First                  dated December 17, 1986.
                PV Funding Corporation, The First
                National Bank of Boston, in its individual
                capacity and as Owner Trustee (under a 
                Trust  Agreement dated as of December 15, 1986,
                with the Owner  Participant),  Chemical
                Bank, in its individual capacity  and as 
                Indenture  Trustee  (under a Trust  Indenture,
                Mortgage, Security Agreement and Assignment
                of Rents dated as of December 15, 1986, 
                with the Owner  Trustee),  and Public Service
                Company of New Mexico,  including Appendix
                A definitions (Unit 1 Transaction).

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

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




                                                       E-18





   Exhibit
     No.                       Description                         Filed As Exhibit:                    File No:

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

99.15           Trust Indenture, Mortgage, Security               28.10 to the Company's                  1-6986
                Agreement and Assignment of Rents dated           Current Report on Form 8-K
                as of December 15, 1986, between the              dated December 17, 1986.
                First National Bank of Boston, as Owner
                Trustee, and Chemical Bank, as Indenture
                Trustee (Unit 2 Transaction).

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

99.17*          Waiver letter with respect to "Deemed             28.12 to the Company's                  1-6986
                Loss Event" dated as of August 18, 1986,          Current Report on Form 8-K
                between the Owner Participant named               dated August 18, 1986.
                therein, and Public Service Company of
                New Mexico.

99.18*          Waiver letter with respect to "Deemed             28.13 to the Company's                  1-6986
                Loss Event" dated as of August 18, 1986,          Current Report on Form 8-K
                between the Owner Participant named               dated August 18, 1986.
                therein, and Public Service Company of
                New Mexico.

99.19           Agreement No. 13904 (Option and                   28.19 to Annual Report of               1-6986
                Purchase of Effluent), dated April 23,            the Registrant on Form 10-K
                1973, among Arizona Public Service                for fiscal year ended
                Company, Salt River Project Agricultural          December 31, 1986.
                Improvement and Power District, the
                Cities of Phoenix, Glendale, Mesa,
                Scottsdale, and Tempe, and the Town of
                Youngtown.




                                                       E-19






   Exhibit
     No.                       Description                         Filed As Exhibit:                    File No:

                                                                                                    
99.20           Agreement for the Sale and Purchase of            28.20 to Annual Report of               1-6986
                Wastewater Effluent, dated June 12, 1981,         the Registrant on Form 10-K
                among Arizona Public Service Company,             for fiscal year ended
                Salt River Project Agricultural                   December 31, 1986.
                Improvement and Power District and the
                City of Tolleson, as amended.


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

 *   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, 1995 and during the period  beginning
January 1, 1996 and ending  February 22, 1996, the Company  filed,  on the dates
indicated, the following reports on Form 8-K.


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

December 8, 1995    December 8, 1995    Palo Verde Nuclear Generating Station

December 21, 1995   December 21, 1995   Ojo Line Extension  Transmission Project




                                      E-20




                                   SIGNATURES

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

                               PUBLIC SERVICE COMPANY OF NEW MEXICO
                                                 (Registrant)

Date: February 22, 1996        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.




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

                                                                                                     
/s/ B. F. MONTOYA                                 Principal Executive Officer and                February 22, 1996
- -------------------------------------------------   Director
B. F. MONTOYA
President and Chief Executive Officer

/s/ M. H. MAERKI                                  Principal Financial Officer                    February 22, 1996
- -------------------------------------------------
M. H. Maerki
Senior Vice President and
Chief Financial Officer

/s/ D. M. BURNETT                                 Principal Accounting Officer                   February 22, 1996
- -------------------------------------------------
D. M. Burnett
Corporate Controller and
Chief Accounting Officer

/s/ J. T. ACKERMAN                                Chairman of the Board                          February 22, 1996
- -------------------------------------------------
J. T. Ackerman

/s/ R. G. ARMSTRONG                               Director                                       February 22, 1996
- -------------------------------------------------
R. G. Armstrong

/s/ J. A. GODWIN                                  Director                                       February 22, 1996
- -------------------------------------------------
J. A. Godwin

/s/ L. H. LATTMAN                                 Director                                       February 22, 1996
- -------------------------------------------------
L. H. Lattman

/s/ M. LUJAN JR.                                  Director                                       February 22, 1996
- -------------------------------------------------
M. Lujan Jr.

/s/ R. U. ORTIZ                                   Director                                       February 22, 1996
- -------------------------------------------------
R. U. Ortiz

/s/ R. M. PRICE                                   Director                                       February 22, 1996
- -------------------------------------------------
R. M. Price

/s/ P. F. ROTH                                    Director                                       February 22, 1996
- -------------------------------------------------
P. F. Roth




                                                       E-21