PNM RESOURCES INC - 10-K Annual Report

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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, 2003

Commission Registrants, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
- ----------- ----------------------------------- ------------------
333-32170 PNM Resources, Inc. 85-0468296
(A New Mexico Corporation)
Alvarado Square
Albuquerque, New Mexico 87158
(505) 241-2700

1-6986 Public Service Company of New Mexico 85-0019030
(A New Mexico Corporation)
Alvarado Square
Albuquerque, New Mexico 87158
(505) 241-2700

Securities Registered Pursuant To Section 12(b) Of The Act:

Name of Each Exchange
Registrant Title of Each Class on Which Registered
- ---------- ------------------- -----------------------
PNM Resources, Inc. Common Stock, No Par Value New York Stock Exchange

Securities Registered Pursuant To Section 12(g) Of The Act:

Registrant Title of Each Class
- ---------- -------------------
Public Service Company 1965 Series, 4.58% Cumulative Preferred Stock
of New Mexico ($100 stated value without sinking fund)

Indicate by check mark whether each 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 (or for such shorter period that the
registrant was required to file such reports) 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 registrants' 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. __

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). YES |X| NO
--- -----

The total number of shares of Common Stock of PNM Resources, Inc. outstanding
as of January 31, 2004 was 40,258,997.

On June 30, 2003, the aggregate market value of the voting stock held by
non-affiliates of PNM Resources, Inc. as computed by reference to the New York
Stock Exchange composite transaction closing price of $26.75 per share reported
by The Wall Street Journal, was $1,076,401,115.

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 by PNM Resources, Inc. with the Securities and
Exchange Commission pursuant to Regulation 14A relating to the annual meeting of
stockholders of PNM Resources, Inc. to be held on May 18, 2004 - PART III.

This combined Form 10-K represents separate filings by PNM Resources, Inc.
and Public Service Company of New Mexico ("PNM"). Information combined herein
relating to an individual registrant is filed by that registrant on its own
behalf. PNM makes no representations as to the information relating to PNM
Resources, Inc. and its subsidiaries other than PNM. When this combined Form
10-K is incorporated by reference into any filing with the SEC made by PNM, the
portions of this Form 10-K that relate to PNM Resources, Inc. and its
subsidiaries other than PNM are not incorporated by reference therein.

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TABLE OF CONTENTS
Page
GLOSSARY.................................................................... v

PART I
ITEM 1. BUSINESS........................................................... 1
THE COMPANY................................................... 1
COMPANY WEBSITE............................................... 1
UTILITY OPERATIONS............................................ 2
Electric.................................................. 2
Gas....................................................... 3
Transmission.............................................. 4
WHOLESALE OPERATIONS.......................................... 4
Power Sales................................................ 5
CORPORATE AND OTHER...........................................
Sources of Power........................................... 6
Market Reach............................................... 7
Fuel and Water Supply...................................... 7
RATES AND REGULATION.......................................... 8
SEC Ruling/Enron (PUHCA of 1935)..........................
Mandated Regional Transmission Organizations.............. 9
El Paso Electric - Afton Generating Station Matter........ 10
FERC Rulemakings.......................................... 11
Renewable Resources Rulemakings........................... 13
ENVIRONMENTAL MATTERS......................................... 13
COMPETITION................................................... 15
EMPLOYEES..................................................... 15

ITEM 2. PROPERTIES......................................................... 16
ELECTRIC...................................................... 16
Fossil-Fueled Plants...................................... 16
Nuclear Plant............................................. 17
TRANSMISSION AND DISTRIBUTION................................. 18
GAS........................................................... 19
OTHER INFORMATION............................................. 19

ITEM 3. LEGAL PROCEEDINGS.................................................. 19
Navajo Nation Environmental Issues......................... 19
PVNGS Water Supply Litigation.............................. 20
San Juan River Adjudication................................ 20
Former AG&E Manufactured Gas Plant Site.................... 20
Santa Fe Generating Station ("Santa Fe Station")........... 21
Natural Gas Royalties Qui Tam Litigation................... 21
Citizen Suit Under the Clean Air Act....................... 21
California Attorney General Complaint...................... 21
California Antitrust Litigation............................ 21
San Angelo Electric Service Company ("SESCO") Matter....... 21

iii

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 22

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS................................. 25

ITEM 6. SELECTED FINANCIAL DATA.......................................... 26

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.......................... 30

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK................................................. 63

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

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

ITEM 9A. CONTROLS AND PROCEDURES............................................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
MANAGEMENTAND RELATED STOCKHOLDER MATTERS...................E-1

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

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...........................E-1

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.................................................E-2

SIGNATURES.................................................................E-25

iv

GLOSSARY

Act................................... The Clean Air Act Amendments of 1990
Afton................................. Afton Generating Station
Avistar............................... Avistar, Inc., an unregulated
subsidiary of PNM Resources, Inc.
AG.................................... New Mexico Attorney General
AG&E.................................. Albuquerque Gas and Electric Company
Anaheim............................... City of Anaheim, California
APS................................... Arizona Public Service Company
BHP................................... BHP Billiton
BLM................................... Bureau of Land Management
BNCC.................................. BHP Navajo Coal Company
BTU................................... British Thermal Unit
COA................................... City of Albuquerque, New Mexico
Decatherm............................. 1,000,000 BTUs
Delta................................. Delta-Person Limited Partnership, a
New Mexico limited partnership
DOE................................... United States Department of Energy
EIP................................... Eastern Interconnection Project
El Paso............................... El Paso Electric Company
EPA................................... United States Environmental Protection
Agency
Exchange Act.......................... SEC Exchange Act of 1934
FASB.................................. Financial Accounting Standards Board
Farmington............................ City of Farmington, New Mexico
FERC.................................. Federal Energy Regulatory Commission
Four Corners.......................... Four Corners Power Plant
FPL................................... FPL Energy LLC
Gathering Company..................... Sunterra Gas Gathering Company, a
wholly-owned subsidiary of PNM
Resources, Inc.
ISO................................... Independent System Operator
Kv.................................... Kilovolt
KW.................................... Kilowatt
KWh................................... Kilowatt Hour
Lordsburg............................. Lordsburg Generating Station
Los Alamos............................ The County of Los Alamos, New Mexico
MW.................................... Megawatt
MWh................................... Megawatt Hour
NMED.................................. New Mexico Environment Department
NMPUC................................. New Mexico Public Utility Commission
NMWE.................................. New Mexico Wind Energy Center
NOPR.................................. Notice of Proposed Rulemaking
NRC................................... United States Nuclear Regulatory
Commission
NSPS.................................. New Source Performance Standards
NSR................................... New Source Review
OMOI.................................. Office of Market Oversight and
Investigation
PGAC.................................. PNM's Purchased Gas Adjustment Clause

v

PG&E.................................. Pacific Gas and Electric Co.
PPA................................... Power Purchase Agreement
PRC................................... New Mexico Public Regulation
Commission, successor to the NMPUC
Processing Company.................... Sunterra Gas Processing Company, a
wholly-owned subsidiary of PNM
Resources, Inc.
PSD................................... Prevention of Significant Deterioration
PVNGS................................. Palo Verde Nuclear Generating Station
RCRA.................................. Resource Conservation and Recovery Act
RTO................................... Regional Transmission Organization
Reeves Station........................ Reeves Generating Station
Salt River Project.................... Salt River Project Agricultural
Improvement and Power District
SCE................................... Southern California Edison Company
SCPPA................................. Southern California Public Power
Authority
SDG&E................................. San Diego Gas and Electric Company
SEC................................... Securities and Exchange Commission
SJCC.................................. San Juan Coal Company
SJGS.................................. San Juan Generating Station
SO2................................... Sulfur Dioxide
SPS................................... Southwestern Public Service Company
TNP................................... Texas-New Mexico Power Company
Throughput............................ Volumes of gas delivered, whether or
not owned by the Company
Tri-State............................. Tri-State Generation and Transmission
Association, Inc.
Tucson................................ Tucson Electric Power Company
UAMPS................................. Utah Associated Municipal Power Systems
USBR.................................. United States Bureau of Reclamation
USEC.................................. United States Enrichment Corporation
Waste Act............................. Nuclear Waste Policy Act of 1982, as
amended in 1987

vi

PART I

ITEM 1. BUSINESS

THE COMPANY

PNM Resources, Inc. ("Holding Company") was incorporated in the State of
New Mexico on March 3, 2000. The Holding Company's principal subsidiary Public
Service Company of New Mexico ("PNM") was incorporated in the State of New
Mexico on May 9, 1917. This filing for PNM Resources, Inc. and Subsidiaries and
PNM is presented on a combined basis. The Holding Company and PNM have their
principal offices at Alvarado Square, Albuquerque, New Mexico 87158 (telephone
number 505-241-2700). The Holding Company is an investor-owned holding company
of energy and energy-related companies. PNM is a public utility primarily
engaged in the generation, transmission, distribution, sale and marketing of
electricity, and in the transmission, distribution and sale of natural gas
within the State of New Mexico. The business of PNM constitutes substantially
all of the business of the Holding Company and its subsidiaries. Therefore, the
financial results and results of operations of PNM are virtually identical to
the consolidated results of the Holding Company and all its subsidiaries. For
ease of discussion, this report may use the term "Company" when referring to PNM
or when discussing matters of common applicability to the Holding Company and
PNM.

Upon the completion on December 31, 2001 of a one-for-one share exchange
between PNM and the Holding Company, the Holding Company became the parent
company of PNM. Prior to the share exchange, the Holding Company had existed as
a subsidiary of PNM. The new parent company began trading on the New York Stock
Exchange under the same PNM symbol beginning on December 31, 2001.

As it currently operates, the Company's principal business segments,
whose operating results are regularly reviewed by the Company's management, are
Utility Operations and Wholesale Operations ("Wholesale"). Utility Operations
include Electric Services ("Electric"), Gas Services ("Gas") and Transmission
Services ("Transmission"). The Company allocates its business and results
between the Electric and Wholesale segments for financial reporting purposes
based on the asset allocations mandated in the Global Electric Agreement (see
Note 13 - "Commitments and Contingencies - Global Electric Agreement" in the
Notes to Consolidated Financial Statements). Electric consists of the generation
and distribution of electricity for retail electric customers in New Mexico. Gas
consists of the transportation and distribution of natural gas to end-users.
Transmission consists of the transmission of electricity for third parties as
well as for Electric and Wholesale. Wholesale consists of the generation and
sale of electricity into the wholesale market based on three product lines, that
include long-term contracts, forward sales and short-term sales.

Financial information relating to amounts of sales, revenue, net income
and total assets of the Company's reportable segments is contained in "Part II,
Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 - "Segment Information" in the Notes to
Consolidated Financial Statements.

COMPANY WEBSITE

The Company's internet address is http://www.pnm.com. The contents of
this website address are not a part of this Form 10-K. The Company's filings

1

with the SEC, including annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports, filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are accessible
free of charge at http://www.pnm.com as soon as reasonably practicable after the
Company electronically files such material with, or furnishes it to, the SEC,
and, upon request, are available in print from the Company free of charge.
Additionally, the Company's Corporate Governance Principles, code of ethics (Do
the Right Thing-Principles of Business Conduct) and charters of the Company's
Audit and Ethics Committee, Governance and Public Policy Committee, Human
Resources and Compensation Committee and Finance Committee are available on the
Company's website at http://www.pnm.com/governance and such information is
available in print to any shareholder who requests it.

UTILITY OPERATIONS

Electric

The Company provides jurisdictional retail electric service to a large
area of north central New Mexico, including the COA and the City of Santa Fe,
and certain other areas of New Mexico. The largest retail electric customer
served by the Company accounted for approximately 4.9% of the Company's total
retail electric revenues for the year ended December 31, 2003.

For the years 2001 through 2003, retail MWh sales have grown at a
compound annual rate of approximately 0.7%. The Company's system peak demands
for its retail customers and firm requirements customers in the summer and the
winter for the last three years are shown in the following table:

SYSTEM PEAK DEMANDS

(Megawatts)

2003 2002 2001
--------- --------- ---------

Summer............................. 1,661 1,478 1,431
Winter............................. 1,434 1,309 1,353

The Company holds long-term, non-exclusive franchise agreements for its
electric retail operations, which will expire between December 2005 and November
2028. These franchise agreements allow the Company to access public
rights-of-way for placement of the Company's electric facilities. The COA, City
of Santa Fe, Bernalillo County, Sandoval County, San Miguel County, Village of
Bosque Farms, Pueblo de Cochiti, Village of Tijeras, McKinley County and the
City of Las Vegas franchise agreements have expired. The Company remains
obligated under New Mexico state law to provide service to customers in these
franchise areas despite the absence of an effective franchise agreement. The COA
metropolitan area accounted for approximately 54% of the Company's 2003 total
electric utility operating revenues, and no other franchise area represents more
than approximately 9%. The Company continues to collect and pay franchise fees
to the COA, City of Santa Fe, the Town of Cochiti, Village of Bosque Farms,
Village of Tijeras and the City of Las Vegas. The Company currently does not pay
franchise fees to Bernalillo County, Luna County, Sandoval County, McKinley
County, Pueblo de Cochiti and San Miguel County.

2

Gas

Gas operations distributes natural gas to most of the major communities
in New Mexico, including the COA and the City of Santa Fe. The COA metropolitan
area accounted for approximately 43% of the total gas revenues in 2003. No
single sales-service customer accounted for more than 1.1% of the Company's
therm sales in 2003. The Company holds long-term, non-exclusive franchises with
varying expiration dates in all incorporated communities requiring franchise
agreements except for the COA, City of Santa Fe, Aztec, Village of Bosque Farms,
Town of Cochiti Lake, Los Ranchos de Albuquerque and Tatum. The Company remains
obligated to serve these franchise areas pursuant to state law despite the
absence of an effective franchise agreement.

The Company's customer base includes both sales-service customers and
transportation-service customers. Sales-service customers purchase natural gas
and receive transportation and delivery services from the Company for which the
Company receives both cost-of-gas and cost-of-service revenues. Cost-of-gas
revenues collected from sales-service customers are recovered in accordance with
PRC regulations through the Company's PGAC and represent a pass-through of the
Company's cost of natural gas to the customer. Therefore, the Company's
operating results are not affected by an increase or decrease in natural gas
prices. Additionally, the Company makes occasional gas sales to off-system sales
customers. Off-system sales deliveries generally occur at pipeline interconnects
with the Company's system and profits are shared between the Company and its
customers on a 30%/70% sharing basis. A final order was issued in 2001 that
approved an agreement among the parties regarding PNM's hedging strategy and the
implementation of a price management fund program which includes a continuous
monthly balancing account with a carrying charge. This carrying charge has the
effect of keeping PNM whole on gas purchase transactions since it is now
compensated for the time value of money.

The Company had approximately 40 transportation-service customers in
2003, which procure gas for their end users independently of the Company's end
users. Transportation-service customers are gas marketers and producers
contracting with the Company for transportation services to their end users and
for other related services that provide the Company with cost-of-service
revenues only. Transportation services are provided to transportation-service
customers at locations throughout the Company's distribution systems, as well as
points on and off the Company's transmission pipelines. The Company provided gas
transportation deliveries to approximately 1,200 transportation end users during
2003.

In 2003, approximately 53% of the Company's total gas throughput was
related to transportation gas deliveries. The Company's transportation rates are
unbundled, and transportation customers only pay for the service they receive.
In 2003, revenues from transportation customers accounted for approximately 5%
of the Company's total gas revenue. Revenues from sales customers account for
the remaining 95%. Of this percentage, 67% is related to the cost of gas on
which the Company makes no margin. Because a major portion of the Company's load
is related to heating, levels of therm sales are affected by the weather.
Approximately 61% of the Company's total therm sales in 2003 occurred in the
months of January, February, March and December.

The Company obtains its supply of natural gas primarily from sources
within New Mexico by contracting with third party producers and marketers. These

3

contracts are generally sufficient to meet the Company's peak-day demand. The
Company serves certain cities, which depend on El Paso Natural Gas Company or
Transwestern Pipeline Company, for transportation of gas supplies. Because these
cities are not directly connected to the Company'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, the
Company's options for transporting gas to these cities and other portions of its
distribution system have increased.

Transmission

The Company owns or leases 2,902 circuit miles of transmission lines,
interconnected with other utilities in New Mexico, east and south into Texas,
west into Arizona, and north into Colorado and Utah. Due to rapid load growth in
the Company's service territory in recent years and the lack of transmission
development, most of the capacity on this transmission system is fully committed
and there is very little or no additional access available on a firm commitment
basis. These factors result in physical constraints on the system and limit the
ability to wheel power into the Company's service area from outside of New
Mexico.

WHOLESALE OPERATIONS

The Company's Wholesale Operations consist of the generation and sale of
electricity into the wholesale market based on three product lines, which are
long-term contracts, forward sales and short-term sales. Long-term contracts
include sales to firm-requirements and other wholesale customers with multi-year
arrangements. These contracts range from 2 to 17 year terms with an average term
of 7.5 years. Forward sales include third party purchases in the forward market
that range from 1 month to 3 years. These transactions do not qualify as normal
sales and purchases as defined in SFAS 133 and as a result, are marked to
market. Short-term sales generally include spot market, hour ahead, day ahead
and week ahead contracts with terms of 30 days or less. Also included are sales
of any excess generation not required to fulfill PNM's retail load and
contractual commitments. Short-term sales also cover the revenue credit to
retail customers as specified in the Global Electric Agreement (see Note 13 -
"Commitments and Contingencies - Global Electric Agreement" in the Notes to
Consolidated Financial Statements).

The Wholesale Operations strategy calls for increased net asset-backed
energy sales supported by long-term contracts in the wholesale market, whereby
the Company's aggregate net open forward electric sales position, including
short term sales, forward sales and long-term contracts, is covered by its
forecasted excess generation capacity. The net asset-backed sales are actively
monitored by management by the use of stringent risk management policies. The
Company's future growth plans call for approximately 75% of its new generation
portfolio to be committed through long-term contracts, including sales to retail
customers. The 75% threshold is in compliance with the Global Electric
Agreement. Growth will be dependent on market development and on the Company's
ability to generate funds for the Company's future expansion. Although the
current economic environment has led the Company to scale back its expansion
plans, the Company continues to operate in the wholesale market and seek
appropriately priced asset additions. Expansion of the Company's generating
portfolio will depend on the Company's ability to acquire favorably priced
assets at strategic locations and to secure long-term commitments for the
purchase of power from the acquired plants.

4

Power Sales

In 2003, the Company's revenues from the wholesale marketplace stabilized
following the preceding years when volatility was high. The years 2000 and 2001
saw high volatility combined with high power prices. During 2002, power prices
declined significantly due to lower natural gas prices, an average Pacific
Northwest hydro generation year, an increase in new generation coming on-line,
and a shift by various large California utilities to long-term contracts rather
than spot market purchases. The year 2003 continued the trend of 2002, except
that power prices were generally higher due primarily to higher natural gas
prices and abnormally hot summer temperatures in the Southwestern United States.
While price volatility has remained low over the years 2002 and 2003, the
Company has been successful in developing its wholesale power marketing
activities in the Western United States. Management believes this success is due
to its niche business strategy of providing electric power customized to meet
the special needs of its customers. This niche marketing strategy is based on
the Company's net asset-backed methodology, which can help to mitigate the risks
inherent in the Company's wholesale power marketing activities. The Company also
utilizes long-term transactions to enhance its product offerings.

Certain Company generation assets are excluded from retail electric
rates. As a result, the Company developed a wholesale power marketing strategy
to sell the generation from its assets that are excluded from rate base. This
strategy also includes the forward purchase and sale of electricity to take
advantage of market price opportunities in the electric wholesale market. During
2003, 2002 and 2001, the Company's sales in the wholesale electric markets
accounted for approximately 62%, 56% and 64% respectively, of its total MWh
sales. Of the total wholesale electric sales made in 2003, 2002 and 2001, 82%,
77% and 77% respectively were transacted through purchases for resale.

In 1990, the NMPUC established an off-system sales methodology that
provided for a sharing mechanism whereby a certain amount of revenues from
off-system sales were credited to reduce retail cost of service. Off-system
sales above the amounts credited to retail customers accrue to the benefit of
shareholders. Subsequent rate cases continued to utilize this methodology.

In January 2003, the PRC approved the Global Electric Agreement which
sets a rate path through 2007. PNM agreed to decrease retail electric rates by
6.5% in two phases over three years. The first phase of the rate reductions
became effective in September 2003. In addition, certain plant and purchased
power contracts previously excluded from retail rates are now included as
generation resources to serve PNM's New Mexico retail and firm wholesale
requirements customers' load. These resources include San Juan Unit 4 and PNM's
contracts to purchase power from SPS, Tri-State and Delta. PVNGS Unit 3 remains
excluded as are the Lordsburg and Afton plants. (See Note 13 - "Commitments and
Contingencies - Global Electric Agreement" in the Notes to Consolidated
Financial Statements).

The Company has entered into various firm wholesale electric sales
contracts. These contracts contain fixed capacity charges in addition to energy
charges. Capacity charges are fixed monthly payments for a commitment of
resources to service the contract requirements. Energy charges are payments
based on the amount of electricity delivered to the customer intended to
compensate the Company for its variable costs incurred to provide the energy.
The Company's firm-requirements demand was 254 MW in 2003, and is expected to be

5

261 MW in 2004, 252 MW in 2005, 262 MW in 2006 and 267 MW in 2007. No
firm-requirements wholesale customer accounted for more than 7% of the Company's
total electric sales for resale revenues for the year ended December 31, 2003.

CORPORATE AND OTHER

The Holding Company performs substantially all of the corporate
activities of PNM. These activities are billed to PNM on a cost basis to the
extent they are for the corporate management of PNM and these costs are
allocated to the operating segments. The Holding Company's wholly-owned
subsidiary, Avistar, was formed in August 1999 as a New Mexico corporation and
is currently engaged in certain unregulated and non-utility businesses. In
January 2002, Avistar was dividended by PNM to the Holding Company pursuant to
an order from the PRC.

Sources of Power

As of December 31, 2003, the total net generation capacity of facilities
owned or leased by the Company was 1,742 MW, or 2,074 MW including the operating
lease and wind generation facility discussed below. The Company is committed to
increasing the utilization of the major generation capacity at SJGS, Four
Corners and PVNGS. SJGS is operated by the Company. SJGS's equivalent
availability and capacity factor were 82.1% and 77.8% respectively, for the
twelve months ended December 31, 2003, as compared to 89.7% and 85.3%,
respectively for 2002. Capacity factors for Four Corners and PVNGS were 89.8%
and 87.3%, respectively, in 2003, as compared to 73.3% and 94.4%, respectively,
in 2002. Four Corners and PVNGS are operated by APS. (See "Item 2. Properties".)

The Company's Lordsburg and Afton plants became fully operational in
2002. These plants were not built to serve New Mexico retail customers and,
therefore, are not currently included in the rate base. However, it is possible
that these plants may be needed in the future to serve the growing retail load.
If so, these plants would have to be certified by the PRC and would then be
subject to inclusion in the Company's rate base in the following rate case.
These plants were built in furtherance of the Company's ongoing strategy of
increasing generation capacity over time to serve increasing retail load, sales
under long-term contracts and other sales.

In addition to generating its own power, the Company purchases power in
the market. The Company's purchase contract capacity, including the contracts
described below, was 594 MW in 2003 and is expected to be 798 MW in 2004, 653 MW
in 2005, 603 MW in 2006, and 536 MW in 2007. The Company also purchases power in
the forward, day-ahead and real-time market.

In 1996, the Company entered into an operating lease agreement for the
rights to all the output of the Delta gas-fired generating plant for 20 years.
The plant received FERC approval for "exempt wholesale generator" status. The
maximum dependable capacity under the lease is 132 MW. In July 2000, the plant
went into operation. The gas turbine generating unit is operated by Delta and is
located on the Company's retired Person Generating Station site in the COA. The
site for the generating unit was chosen, in part, to provide needed benefits to
the Company's constrained transmission system. Primary fuel for the gas turbine
generating unit is natural gas provided by wholesale gas purchases. In addition,
the unit has the capability to utilize low sulfur fuel oil if natural gas is
neither available nor cost effective.

6

In 2002, the Company entered into an agreement with FPL, a subsidiary of
FPL Group, Inc., to develop a 200 MW wind generation facility in New Mexico. The
Company began receiving commercial power from the project in June 2003. FPL
Energy owns and operates the NMWE, which consists of 136 wind-powered turbines
on a site in eastern New Mexico. The Company has a contract to purchase all the
power generated by the NMWE for 25 years. In 2003, the Company received approval
from the PRC for a voluntary tariff that allows PNM retail customers to buy
wind-generated electricity for a small monthly premium. Power from the facility
is used to service load under the voluntary tariff and as part of the Company's
electric supply mix for meeting retail load. Any wind-generated electricity in
excess of these amounts is sold on the wholesale power market, either within New
Mexico or outside the state.

Market Reach

In addition to owning purchased power contracts, the Company owns firm
transmission capacity to the Mead market hub in the amount of 240 MW, which
serves various wholesale power markets and loads in the greater Las Vegas,
Nevada area, and serves as an injection point for the California ISO. In
addition, the Company owns transmission capacity to serve major load centers in
the Phoenix, Arizona area in the amount of 140 MW.

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 three
years were as follows:

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

2003........... 68.0 163.8 29.5 44.5 2.5 625.2
2002........... 67.7 171.0 30.7 46.1 1.6 505.6
2001........... 66.9 179.6 28.4 45.7 4.7 524.5

The generation mix for 2004 is expected to be 66.8% coal, 29.9% nuclear
and 3.3% 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 into the foreseeable future.

Coal

See Note 13 - "Commitments and Contingencies - Coal Supply" in the Notes
to Consolidated Financial Statements.

Natural Gas

The natural gas used as fuel for the electric generating plant located in
COA (Reeves Station and the Delta operating lease) is procured on the open
market and delivered by Gas through its transportation services. The Company's
Wholesale Operations procures its gas supply independently of Gas but obtains
gas transportation services from Gas.

7

Nuclear Fuel

The Company is one of several participants in PVNGS. See Note 11 -
"Construction Program and Jointly-Owned Plants" in the Notes to Consolidated
Financial Statements. The fuel cycle for PVNGS is comprised of the following
stages:

o mining and milling of uranium ore to produce uranium concentrates;
o conversion of uranium concentrates to uranium hexafluoride;
o enrichment of uranium hexafluoride;
o fabrication of fuel assemblies;
o utilization of fuel assemblies in reactors; and
o storage and disposal of spent nuclear fuel.

The PVNGS participants have contracted for all of PVNGS requirements for
uranium, uranium concentrates and conversion services through 2008. The PVNGS
participants have also contracted for all of PVNGS enrichment services through
2010 and fuel assembly fabrication services until at least 2015.

The plant used by PVNGS for conversion services has been shut down due to
operational problems. It is not currently known when that plant will resume
operations. PVNGS is working to assure that adequate amounts of uranium
hexafluoride are available to support the Unit 3 fall 2004 refueling and
subsequent refueling.

Water Supply

See Note 13 - "Commitments and Contingencies - Water Supply" in the Notes
to Consolidated Financial Statements.

RATES AND REGULATION

PNM is subject to the jurisdiction of the PRC, 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 regarding retail utility services provided in New Mexico. The FERC has
jurisdiction over rates and other matters related to wholesale electric sales
and cost recovery for a portion of its transmission network. The FERC has begun
to take more aggressive action with regard to the exercise of its jurisdictional
authority over wholesale electric sales. In February 2000, in response in part
to the allegations of wrong-doing in the California spot market, the FERC
announced it was establishing the OMOI as one prong of its strategic plan. The
stated purpose of the FERC OMOI is to engage in the vigilant oversight of energy
markets to ensure effective regulation and remediation of market problems, while
vigorously enforcing compliance with the FERC's rules and regulations. The FERC
has moved forward to staff its OMOI and it is now a fully functioning branch of
the FERC.

SEC Ruling/Enron (PUHCA of 1935)

On December 29, 2003, the SEC issued an order affirming an Administrative
Law Judge ("ALJ") decision that Enron was not entitled to an exemption from the
Public Utility Holding Company Act because it had failed to establish that its
utility subsidiary, Portland General Electric ("PGE"), was predominantly
intrastate in character and operates substantially in a single State. In
reaching its decision, the SEC considered a number of factors, including the

8

amount of generating and transmission plant owned, the percentage of gross
revenues earned from out of state operations in the previous three years and the
impact of the holding company on state regulation. PNM Resources has claimed an
exemption from PUHCA since it was established as a holding company. Filings for
continued exemption must be made annually. The Company filed its claim for
exemption on February 27, 2004.

Electric Rates and Regulation

FERC

Mandated Regional Transmission Organizations

With the passage of the Public Utility Regulatory Policies Act of 1978
and the Energy Policy Act of 1992, there has been a significant increase in the
level of competition in the market for the generation and sale of electricity.
Barriers have been reduced for companies wishing to build, own and operate
electric generating facilities. In 1996, the FERC issued Order 888 requiring
electric utilities controlling transmission facilities to file open access
transmission tariffs, which opened the utility transmission systems to wholesale
sellers and buyers of electric energy on a non-discriminatory basis.

Order 888 also encouraged utilities to investigate the formation of ISOs
to operate transmission assets and provided guidance for the formation,
operation and governance of ISOs. In 1999, the FERC issued Order 2000 on RTOs,
which established timelines for transmission-owning entities to join an RTO and
defined the minimum characteristics and functions of an RTO.

PNM, along with other RTOs, originally pursued the formation of an RTO
through Desert STAR, a non-profit organization. Because of the FERC's subsequent
acceptance of a for-profit RTO model and because a for-profit RTO was viewed as
having the proper motivation to efficiently facilitate competitive markets, PNM,
together with the RTOs, in October 2001, filed a request with FERC seeking a
declaratory order. That filing sought an order that a proposed for-profit
transmission company that adopted the procedures and tariff set forth in the
filing would meet the criteria of Order 2000. The proposed company would be a
limited liability company named WestConnect RTO, LLC ("WestConnect"). There were
over 50 intervenors in the WestConnect docket, including the New Mexico Attorney
General, New Mexico Industrial Energy Consumers and the PRC, which filed
comments or concerns regarding WestConnect's declaratory order petition. In
October 2002, the FERC issued its Declaratory Order in the case providing
guidance and conditions under which the proposal for formation of the
WestConnect RTO would be deemed to satisfy the FERC's requirements for RTO
status under its Order 2000. Several parties to the proceeding, including PNM as
a proposed member of WestConnect, filed motions for rehearing and clarification
of the FERC's Declaratory Order. On December 23, 2002, the FERC issued its order
granting in part and denying in part the requests for rehearing and provided
clarification on certain issues raised by the parties in the case. This order on
rehearing provided for certain filings that need to be made by WestConnect's
proposed participants. On January 22, 2003, the WestConnect participants
requested further clarification and rehearing of the FERC's order of December
23, 2002. On September 15, 2003, FERC issued its order granting clarification
and rehearing in part.

In July 2002, the FERC issued a Notice of Proposed Rulemaking, which if
approved, would modify Order 888 by instituting a Standard Market Design ("SMD")
for electric wholesale markets. The WestConnect participants and many other

9

interested parties filed comments that questioned the assumptions supporting the
SMD proposal and objected to many of its provisions. Prior to any additional
action on the SMD proposal, the FERC, issued a "white paper" that expressed
flexibility from the SMD proposal in April 2003. Based on the white paper, the
WestConnect participants are evaluating several options they may pursue in order
to comply with Orders 888 and 2000. As a result of the white paper, technical
conferences are being held throughout the United States. The WestConnect
participants, including PNM, and other interested parties participated in such a
technical conference in September 2003. In addition, the white paper stated that
if it is demonstrated that the costs of implementing any feature of the SMD
outweigh its benefits, the FERC would not require the RTO to implement that
feature. The WestConnect participants and other utilities have authorized a cost
benefit study to be completed to examine the cost/benefit of the various
features of the SMD. The cost/benefit study has commenced with the initial
findings expected to be completed during the first quarter of 2004. The FERC has
not set a schedule for additional proceedings involving the SMD issues as
modified by the white paper.

As part of the cost/benefit evaluation, the WestConnect applicants and
others are studying a phased approach to implementing an RTO. Under the phased
approach, the cost/benefit relation of each phase would be studied to determine
if the benefits for each phase would justify the costs associated with the
implementation of that phase.

Uncertainty continues to exist regarding the FERC's evolving RTO policy.
PNM, together with the WestConnect participants, is continuing to monitor the
various activities and exploring its options.

El Paso Electric - Afton Generating Station Matter

With the Company's construction of Afton, PNM representatives have been
engaged in a FERC proceeding with El Paso to obtain transmission capacity on El
Paso's transmission system to transmit 135 MW of power generated at Afton, north
to PNM's load center. El Paso had originally executed an agreement to transmit
only 30 MW of power on a firm service basis and offered to supply an additional
20 MW of contingent transmission service. At PNM's request in the FERC
proceeding, El Paso filed with the FERC an unexecuted transmission service
agreement to provide 20 MW of contingent transmission service to PNM. In
November 2002, PNM filed a protest with the FERC, challenging El Paso's denial
of PNM's request for the full 135 MW of transmission service. In an order issued
by the FERC in December 2002, FERC ordered the matter to be set for hearing.

In July 2003, El Paso and PNM jointly moved to suspend the procedural
schedule advising that they had reached a settlement in principle that would
resolve all issues in this proceeding.

In November 2003, El Paso and PNM reached agreement on the terms under
which the issues in this proceeding would be settled, and a settlement agreement
("settlement") between El Paso and PNM was filed at the FERC. Under the terms of
the settlement, El Paso will provide PNM with 135 MW of Firm Transmission
Service (as defined in the settlement) from Afton to El Paso's point of
interconnection with PNM at the West Mesa Switching Station. In addition, El
Paso will determine whether it can provide an additional 6 MW of transmission
service without facility upgrades. The settlement provides for 30 MW of the
transmission service to be provided under the existing 30 MW Service Agreement

10

under the El Paso Open Access Transmission Tariff ("OATT"), and the remaining
105 MW of transmission service (subject to increase to 111 MW) to be provided in
accordance with the rates, terms and conditions of El Paso's OATT, except as
specified in the settlement. Additionally, the settlement specifies that the 105
MW of service is generation dependent, under the terms of the settlement.

The FERC Commission Trial Staff filed comments in support of the
settlement stating it achieves a reasonable resolution of the issue for the
customer's benefit. Peoples Energy Resources Company, LLC ("Peoples Energy"),
which had previously tried but was unsuccessful in an attempt to intervene in
this proceeding, filed comments opposing the settlement arguing that it violates
the FERC's policy on non-discriminatory, open access transmission because the
settlement provides PNM with generation dependent transmission service that is
different from the services available to all transmission customers under El
Paso's OATT. PNM filed reply comments in opposition to the Peoples Energy
comments. The FERC Commission Trial Staff also filed reply comments to People's
Energy comments arguing that since Peoples' Energy is not a party to the
proceeding, the settlement should be certified as an uncontested settlement.

On December 17, 2003, the FERC ALJ issued a Certification of Uncontested
Settlement stating that the settlement provides a reasonable solution to the
issues in the proceeding. He also advised the FERC that a non-party (i.e.,
Peoples Energy) raised policy issues with the settlement that may influence
whether it should be adopted, even though it is uncontested. On February 11,
2004, the FERC approved the settlement.

FERC Rulemakings

Over the past couple of years, the FERC has issued numerous rulemakings
that have an impact on the wholesale energy business. PNM has followed the
rulemakings and either has or will submit comments either individually or in
conjunction with the Edison Electric Institute ("EEI") or the American Gas
Association ("AGA"). The WestConnect members have also followed these
rulemakings, attended workshops and commented on the rulemakings, which affect
the member companies, including PNM. One rulemaking of particular interest to
PNM is the SMD rule, in which the FERC is attempting to remedy what it sees as
undue discrimination in the provision of interstate transmission services, and
to ensure just and reasonable rates for electric energy within and among
regional power markets. The proposed rule would put all transmission customers,
including bundled retail customers, under new pro forma transmission rates for
new transmission service. All transmission would be operated under independent
transmission providers (including RTOs) and congestion management would be
handled under locational marginal pricing with tradable congestion revenue
rights. See "Mandated Regional Transmission Organization" above for further
discussion.

In addition, the FERC has issued final rules in other pending rulemakings
that PNM monitored and participated in, either alone or in conjunction with the
WestConnect participants. These FERC rules likewise have an impact on the
wholesale energy business and participants in the wholesale energy markets,
including PNM. The FERC issued its final rule on standardized generator
interconnection procedures, which requires electric utilities that own or
control electric transmission facilities to set out standard procedures and a
standard agreement for interconnecting generators larger than 20 MW, and to make
such revisions as necessary to its OATT to comply with the requirements of the
new rule. In October 2003, the FERC issued an order delaying the effective date

11

of its final rule until January 20, 2004, and delaying the date for companies to
make their compliance filings to the same date. PNM has made its compliance
filing and will continue to monitor the implementation of the requirements.

In November 2003, the FERC issued two orders amending blanket sales
certificates to establish what it termed market behavior rules for resellers of
natural gas and electricity. The orders apply to all holders of blanket market
certificates, which allow them to engage in the resale of natural gas or
electricity in interstate commerce, including PNM. The orders require all
holders of blanket market certificates to comply with the FERC's rules for
engaging in wholesale sales in interstate commerce as a condition of their
market based rate authority. The orders establish rules that prohibit certain
market conduct that the FERC deemed to be market manipulation, and established
reporting and record keeping requirements. The order required holders of blanket
market certificates to notify the FERC whether they report transaction
information to publishers of electric or natural gas price indices. PNM complied
with the notification requirement under the order and has been, and continues to
be, in compliance with the requirements of the market behavior rules.

In November 2003, the FERC issued its final rule adopting standards of
conduct for electric and natural gas transmission providers. The final rule
expands on the FERC's prior orders establishing standards of conduct and
combines the prior electric and natural gas standards so that there is now one
standard for both electric and natural gas transmission providers. The revised
standards of conduct generally continue the requirement of transmission
providers, including PNM, to treat all transmission customers, affiliated or
non-affiliated, on a non-discriminatory basis, and prohibits transmission
providers from operating their system to preferentially benefit an energy or
marketing affiliate. The rule became effective on February 9, 2004, and all
entities are to be in compliance by June 1, 2004. The FERC's order established a
requirement for transmission providers to make a filing, indicating whether they
believe they are in compliance with the final rule by February 9, 2004, and if
not, identify a plan and schedule for implementing the requirements of the final
rule, and the projected costs to come into compliance. PNM made the required
February 9, 2004 compliance filing stating that under its current organizational
structure, it is in compliance with the FERC order and the accompanying
regulations as currently drafted.

In cases involving several regional utilities, the FERC in November 2001
announced a new test it was planning to use as a screen to determine if
applicants for market based rate ("MBR") authority could potentially exercise
horizontal generation based market power. For those applicants that failed the
screen, known as the supply margin assessment ("SMA") screen, the FERC would
deny the MBR application or condition its approval with certain mitigation
requirements to address the market power concern. After motions for rehearing
and concerns expressed by industry groups, including EEI, the FERC did not
immediately implement the SMA screen. In December 2003, the FERC staff issued a
White Paper that contained alternatives to the SMA screen test and FERC held a
technical conference wherein market participants had an opportunity to provide
comments on the staff White Paper. The Company participated in the comments
filed by EEI identifying concerns with the SMA screen and proposed alternatives.
FERC has not, to date, revised its SMA screen to be applied to make market power
determinations in MBR applications. The Company will be making its three-year
market power study as part of its application to renew its MBR authority in
March 2004. The Company is unable to predict at this time whether FERC will move
forward to change its SMA screen or if PNM's MBR authority will be granted or
conditionally renewed.

12

PRC

Renewable Resources Rulemakings

The PRC issued a Renewable Resources Rule in December 2002 to encourage
the development of renewable energy in New Mexico. The rule includes a provision
requiring the use of a minimum of 5% renewable energy by January 1, 2006, with
the minimum amount to increase 1% per year for each year until a renewable
portfolio standard of 10% is reached in the year 2011. The rule also provides
that each kilowatt hour of electricity generated by solar technology will count
as three KWhs and each kilowatt hour generated by bio-mass, geothermal landfill
gas, or fuel cell sources will count as two KWhs. All remaining sources of
renewable energy, including wind and hydroelectric technologies, will count as
one KWh for each KWh generated. The rule also requires utilities to offer a
voluntary renewable energy tariff. El Paso Electric filed an appeal with the New
Mexico Supreme Court seeking to reverse the final order. PNM did not join the
appeal. PNM expects the appeal will be withdrawn as a result of legislation
passed by the New Mexico Legislature in 2004.

The New Mexico Legislature has passed legislation that would establish a
mandatory renewable energy portfolio standard similar to the structure
established by the PRC in its rulemaking. Senate Bill 43, the Renewable Energy
Act, would provide for streamlined proceedings for utilities to get approval of
procurement plans and would require the PRC to establish a reasonable cost
threshold for the procurement of renewable energy to prevent excessive costs
being added to rates. Under the bill, if renewable energy cannot be acquired
under the threshold, the mandate would be suspended. The bill provides certainty
to utilities and protection for customers. PNM has collaborated with
environmental groups, the PRC, the Governor's office, other state agencies,
consumer groups, and renewable energy producers in drafting the bill. The bill
would require the PRC to revise its rule to eliminate any inconsistencies with
the new law. The Governor signed the bill on March 4, 2004. It becomes effective
May 19, 2004.

Gas Rates and Regulation

Gas Rate Case

See Note 13 - "Commitments and Contingencies - Gas Rate Case" in the
Notes to Consolidated Financial Statements.

ENVIRONMENTAL MATTERS

The Company, in common with other electric and gas utilities, is subject
to stringent laws and regulations for protection of the environment by local,
state, Federal and tribal authorities. In addition, PVNGS is subject to the
jurisdiction of the NRC, which has the 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 liabilities under these
laws and regulations can be material and, in some instances, may be imposed
without regard to fault, or may be imposed for past acts, whether or not such
acts may have been lawful at the time they occurred. (See "Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies - Contingent Liabilities -
Environmental Issues" for a discussion of applicable accounting policies.)

13

The Clean Air Act

On July 1, 1999, the EPA published its final regional haze regulations.
The purpose of the regional haze regulations is to address regional haze
visibility impairment in the 156 Class 1 areas in the nation, which consist of
national parks, wilderness areas and other similar areas. The final rule calls
for all states to establish goals and emission reduction strategies for
improving visibility in all the Class 1 areas. The Company cannot predict at
this time what the impact of the implementation of the regional haze rule will
be on the Company's coal-fired power plant operations. Potentially, additional
SO2 emission reductions could be required in the 2013-2018 timeframe. The nature
and cost of compliance with these potential requirements cannot be determined at
this time. However, the Company does not anticipate any material adverse impact
on the Company's financial condition or results of operations.

Person Station

The Company, in compliance with a Corrective Action Directive issued by
the NMED, determined that groundwater contamination existed in the deep and
shallow groundwater at the Company's Person Station site. The Company is
required to delineate the extent of the contamination and remediate the
contaminants in the groundwater at the Person Station site. The extent of
shallow and deep groundwater contamination was assessed and the results were
reported to the NMED. The Company has received the renewal of the RCRA
post-closure care permit for the facility. Remedial actions for the shallow and
deep groundwater were incorporated into the new permit. The Company has
installed and is operating a pump and treatment system for the shallow
groundwater. The renewed RCRA post-closure care permit allows remediation of the
deep groundwater contamination through natural attenuation. The Company's
current estimate to decommission its retired fossil-fueled plants (discussed
below) includes approximately $3.7 million in additional expenses to complete
the groundwater remediation program at Person Station. The remediation program
continues on schedule.

Retired Fossil-Fueled Plant Decommissioning Costs

The Company's retired fossil-fueled generating stations, Person, Prager
and Santa Fe Stations, have incurred dismantling and reclamation costs as they
are decommissioned. The Company's decommissioning costs for these fossil-fueled
generating stations is projected to be approximately $24 million stated in 2002
dollars (of which $19.0 million has already been expended).

New Source Review Rules

See Note 13 - "Commitments and Contingencies" in the Notes to
Consolidated Financial Statements.

Citizen Suit Under the Clean Air Act

See Note 13 - "Commitments and Contingencies" in the Notes to
Consolidated Financial Statements.

14

COMPETITION

Under current law, the Company is not in any direct retail competition
with any other regulated electric and gas utility, except for sales of natural
gas. Nevertheless, the Company is subject to varying degrees of competition in
certain territories adjacent to or within the areas it serves with other
utilities in its region as well as with rural electric cooperatives and
municipal utilities.

The Company's wholesale operations is involved in the generation and sale
of electricity into the wholesale market. It is subject to competition from
regional utilities with similar opportunities to generate and sell energy at
market-based prices and larger trading entities that do not own or operate
generating assets. The Company believes that it is well positioned to compete in
this market due to its long history in the marketplace, its niche product
offerings, and stringent risk management practices. The Company's energy
marketers are operationally trained and maintain effective marketing
relationships with its competitors and counterparties. Additionally, the Company
has maintained an investment-grade rating despite turbulent wholesale markets,
which enables the Company to fully participate in the marketplace.

EMPLOYEES

As of December 31, 2003, the Company had 2,637 full-time employees. The
following table sets forth the number of employees by business segment as of
December 31, 2003:

Number
----------
Corporate (1)................................... 496
Electric Services............................... 1,041
Transmission Services........................... 58
Gas Services.................................... 495
Wholesale Operations............................ 531
Corporate and Other............................. 16
----------
Total........................................ 2,637
==========

(1) These employees resided at the Holding Company level at December 31,
2003.

The number of employees of the Company who are represented by unions or
other collective bargaining groups include (i) Electric, 239; (ii) Gas, 55; and
(iii) Wholesale, 336.

(Intentionally left blank)

15

ITEM 2. PROPERTIES

ELECTRIC

PNM's ownership and capacity in electric generating stations in
commercial service as of December 31, 2003 were as follows:

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

Coal............... SJGS (a) Waterflow, New Mexico 765
Coal............... Four Corners (b) Fruitland, New Mexico 192
Gas/Oil............ Reeves Albuquerque, New Mexico 154
Gas/Oil............ Las Vegas (c) Las Vegas, New Mexico 20
Gas/Oil............ Afton La Mesa, New Mexico 141
Gas................ Lordsburg Lordsburg, New Mexico 80
Nuclear............ PVNGS (d) Wintersburg, Arizona 390 (e)
-------
1,742
Delta Operating Lease (f) 132
New Mexico Wind Energy Center (g) 200
-------
2,074
=======

(a) SJGS Units 1, 2 and 3 are 50% owned by PNM; SJGS Unit 4 is 38.5%
owned by the Company.
(b) Four Corners Units 4 and 5 are 13% owned by PNM.
(c) The Company anticipates the closure of the Las Vegas generating
station in 2005.
(d) PNM is entitled to 10.2% of the power and energy generated by
PVNGS. PNM has a 10.2% ownership interest in Unit 3 and has
leasehold interests in approximately 7.9% of Units 1 and 2 and an
ownership interest in approximately 2.3% of Units 1 and 2.
(e) For load and resource purposes, the Company has notified the PRC
that it recognizes the maximum dependable capacity rating for
PVNGS to be 381 MW.
(f) The Company has an operating lease for the rights to all output
of a gas fired generating plant with maximum dependable capacity
of 132 MW. The agreement expires in June 2020.
(g) The Company has a contract to purchase all the power generated by
the New Mexico Wind Energy Center for 25 years, expiring July
2028.

Fossil-Fueled Plants

SJGS is located in northwestern New Mexico, and consists of four units
operated by PNM. Units 1, 2, 3 and 4 at SJGS have net rated capacities of 327
MW, 316 MW, 497 MW and 507 MW, respectively. SJGS Units 1 and 2 are owned on a
50% shared basis with Tucson. SJGS Unit 3 is owned 50% by the Company, 41.8% by
SCPPA and 8.2% by Tri-State. SJGS Unit 4 is owned 38.457% by the Company, 28.8%
by M-S-R, 10.04% by Anaheim, 8.475% by Farmington, 7.2% by Los Alamos and 7.028%
by UAMPS.

16

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

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

The Company owns 154 MW of generation capacity at Reeves Station in COA
and 20 MW of generation capacity at Las Vegas Station in Las Vegas, New Mexico.
During 2002, the Company added Afton, a 141 MW gas or oil fired combustion
turbine plant in La Mesa, New Mexico, and Lordsburg, an 80 MW of gas fired
combustion turbine generator in Lordsburg, New Mexico. In addition, the Company
has 132 MW of generation capacity in COA under an operating lease. These power
sources are used primarily for peaking and transmission support. During times of
excess capacity, resources have been used to augment the Company's wholesale
power trading activities.

Nuclear Plant

The Company's Interest in PVNGS

The Company is participating in the three 1,270 MW units of PVNGS, also
known as the Arizona Nuclear Power Project, with APS (the operating agent), Salt
River Project, El Paso, SCE, SCPPA and the Department of Water and Power of the
City of Los Angeles. The Company has a 10.2% undivided interest in PVNGS, with
portions of its interests in Units 1 and 2 held under leases.

Nuclear Safety Performance Rating on PVNGS

In 2000, the NRC began using a new, objective oversight process that is
more focused on safety. The new process includes objective performance
thresholds based on insights from safety studies and 30 years of plant operating
experience in the United States. It is more timely to move from the 18 to
24-month time lag of the previous oversight process for assessing plant
performance to a quarterly review. The NRC also hopes the process will be more
accessible to, and readily understood by, the public. In its most recent review,
PVNGS had all 38 indicators green (the best possible of the four indicator
levels).

Sale and Leaseback Transactions of PVNGS Units 1 and 2

In 1985 and 1986, the Company entered into a total of eleven sale and
lease back transactions with owner trusts under which it sold and leased back
its entire 10.2% interest in PVNGS Units 1 and 2, together with portions of the
Company's undivided interest in certain PVNGS common facilities. The leases
under each of the sale and leaseback transactions have initial lease terms
expiring either on January 15, 2015 (with respect to the Unit 1 leases) or on
January 15, 2016 (with respect to the Unit 2 leases). Each of the leases allows

17

the Company to extend the term of the lease and includes 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 its responsibility to pay its share of all
taxes, insurance premiums, operating and maintenance costs, costs related to
capital improvements and decommissioning and all other similar costs and
expenses associated with the leased facilities. In 1992, the Company purchased
approximately 22% of the beneficial interests in the PVNGS Units 1 and 2 leases
through the purchase of ownership interest in the trusts which held the leases.
The related ownership interests were subsequently reacquired by the Company when
the Company's trust ownership was collapsed and the Company assumed direct
ownership. In connection with the $30 million retail rate reduction approved by
the NMPUC in 1994, the Company wrote down the purchased beneficial interests in
PVNGS Units 1 and 2 leases to $46.7 million.

Each lease describes certain events, "Events of Loss" or "Deemed Loss
Events", the occurrence of which could require the Company to, among other
things, (i) pay the lessor and the equity investor, in return for the investor's
interest in PVNGS, cash in the amount provided in the lease and (ii) assume debt
obligations relating to the PVNGS lease. The "Events of Loss" generally relate
to casualties, accidents and other events at PVNGS, which would severely,
adversely affect the ability of the operating agent, APS, to operate, and the
ability of the Company to earn a return on its interests in, PVNGS. The "Deemed
Loss Events" consist mostly of legal and regulatory changes (such as changes in
law making the sale and leaseback transactions illegal, or changes in law making
the lessors liable for nuclear decommissioning obligations). The Company
believes that the probability of such "Events of Loss" or "Deemed Loss Events"
occurring is remote for 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 in any state
legislative or regulatory body that, if adopted, would cause any of those
events.

Other PVNGS Matters

See Note 13 in the Notes to Consolidated Financial Statements for
information on PVNGS Decommissioning Funding, Nuclear Spent Fuel and Waste
Disposal and PVNGS Liability and Insurance Matters.

TRANSMISSION AND DISTRIBUTION

As of December 31, 2003, the Company owned, jointly owned or leased,
2,902 circuit miles of electric transmission lines, 4,232 miles of distribution
overhead lines, 4,093 cable miles of underground distribution lines (excluding
street lighting) and 249 substations.

18

GAS

The natural gas properties as of December 31, 2003, consisted primarily
of natural gas storage, transmission and distribution systems. Provisions for
storage made by the Company include ownership and operation of an underground
storage facility located near Albuquerque, New Mexico. The transmission systems
consisted of approximately 1,543 miles of pipe with appurtenant compression
facilities. The distribution systems consisted of approximately 11,553 miles of
pipe.

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 areas throughout its service territory.

ITEM 3. LEGAL PROCEEDINGS

Navajo Nation Environmental Issues

Four Corners is located on the Navajo Reservation and is held under an
easement granted by the federal government as well as a lease from the Navajo
Nation. APS is the Four Corners operating agent and PNM owns a 13% ownership
interest in Units 4 and 5 of Four Corners.

In July 1995, the Navajo Nation enacted the Navajo Nation Air Pollution
Prevention and Control Act, the Navajo Nation Safe Drinking Water Act, and the
Navajo Nation Pesticide Act (collectively, the "Navajo Acts"). The Navajo Acts
purport to give the Navajo Nation Environmental Protection Agency authority to
promulgate regulations covering air quality, drinking water, and pesticide
activities, including those activities that occur at Four Corners. On October
17, 1995, the Four Corners participants filed a lawsuit in the District Court of
the Navajo Nation, Window Rock District, challenging the applicability of the
Navajo Nation as to Four Corners. The Court has stayed these proceedings
pursuant to a request by the parties, and the parties are seeking to negotiate a
settlement.

In February 1998, the EPA issued regulations identifying those Clean Air
Act provisions for which it is appropriate to treat Native American tribes in
the same manner as states. The EPA has announced that it has not yet determined
whether the Clean Air Act would supersede pre-existing binding agreements
between the Navajo Nation and the Four Corners participants that could limit the
Navajo Nation's environmental regulatory authority over Four Corners. The
Company believes that the Clean Air Act does not supersede these pre-existing
agreements. The Company cannot currently predict the outcome of this matter.

In April 2000, the Navajo Tribal Council approved operating permit
regulations under the Navajo Nation Air Pollution Prevention and Control Act.
The Four Corners participants believe that the regulations fail to recognize
that the Navajo Nation did not intend to assert jurisdiction over Four Corners.
On July 12, 2000, each of the Four Corners participants filed a petition with
the Navajo Supreme Court for review of the operating permit regulations. Those

19

proceedings have been stayed, pending the settlement negotiations mentioned
above. The Company cannot currently predict the outcome of this matter.

PVNGS Water Supply Litigation

The Company understands that a summons served on APS in 1986 required all
water claimants in the Lower Gila River Watershed of Arizona to assert any
claims to water on or before January 20, 1987, in an action pending in the
Maricopa County Superior Court. PVNGS is located within the geographic area
subject to the summons and the rights of the PVNGS participants, including the
Company, to the use of groundwater and effluent at PVNGS are potentially at
issue in this action. APS, as the PVNGS project manager, filed claims that
dispute the court's jurisdiction over the PVNGS participants' groundwater rights
and their contractual rights to effluent relating to PVNGS and, alternatively,
seek confirmation of those rights. In November 1999, the Arizona Supreme Court
issued a decision confirming that certain groundwater rights may be available to
the federal government and Indian tribes. In addition, the Arizona Supreme Court
issued a decision in September 2000 affirming the lower court's criteria for
resolving groundwater claims. Litigation on both these issues will continue in
the trial court. No trial date concerning the PVNGS participants water rights
claims has been set in this matter. Although this matter remains subject to
further evaluation, the Company expects that the described litigation will not
have a material adverse impact on its financial position, results of operations
or liquidity.

San Juan River Adjudication

In 1975, the State of New Mexico filed an action entitled "State of New
Mexico v. United States, et al.", in the District Court of San Juan County, New
Mexico, to adjudicate all water rights in the "San Juan River Stream System".
The Company was made a defendant in the litigation in 1976. The action is
expected to adjudicate water rights used at Four Corners and at SJGS (See Note
13 - "Commitment and Contingencies - Water Supply" in the Notes to Consolidated
Financial Statements). Recently, the Navajo Nation and various parties announced
a preliminary settlement of the Nation's reserved surface water rights.
Discussions are still ongoing and Congressional legislation as well as other
approvals will be required to implement the settlement, if it is finalized. 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 PNM's understanding that final resolution of the case cannot be expected for
several years. PNM is unable to predict the ultimate outcome.

Former AG&E Manufactured Gas Plant Site

On December 8, 1999, PNM received a letter from the NMED notifying PNM
that it had been designated as a "responsible person" under the New Mexico Water
Quality Control abatement regulations. PNM submitted an abatement plan to
investigate alleged contamination detected in the vicinity of a former
manufactured gas plant ("MGP") owned and operated by AG&E in southeast
Albuquerque. The contamination identified in the December 8 letter was described
as "tar" and "Volatile Organic Compounds." PNM agreed to conduct voluntary
abatement.

By letter dated November 30, 2000, the NMED conditionally approved PNM's
voluntary stage 1 abatement plan. PNM submitted its voluntary stage 1 abatement
plan report ("Report") on October 12, 2001. Completion of remedial activities
occurred in the second quarter 2003.

20

Santa Fe Generating Station ("Santa Fe Station")

See Note 13 - "Commitments and Contingencies - Santa Fe Generating
Station" in the Notes to Consolidated Financial Statements.

Natural Gas Royalties Qui Tam Litigation

See Note 13 - "Commitments and Contingencies - Natural Gas Royalties Qui
Tam Litigation" in the Notes to Consolidated Financial Statements.

Citizen Suit Under the Clean Air Act

See Note 13 - "Commitments and Contingencies - Citizen Suit Under the
Clean Air Act" in the Notes to Consolidated Financial Statements.

California Attorney General Complaint

See Note 13 - "Commitments and Contingencies - Western United States
Wholesale Power Market - California Attorney General Complaint" in the Notes to
Consolidated Financial Statements.

California Antitrust Litigation

See Note 13 - "Commitments and Contingencies - Western United States
Wholesale Power Market - California Antitrust Litigation" in the Notes to
Consolidated Financial Statements.

San Angelo Electric Service Company ("SESCO") Matter

See Note 13 - "Commitments and Contingencies - San Angelo Electric
Service Company ("SESCO") Matter" in the Notes to Consolidated Financial
Statements.

(Intentionally left blank)

21

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

None.

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF PNM RESOURCES

Executive officers, their ages, offices held with PNM Resources since
December 31, 2001 (effective date of the Holding Company):

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

J. E. Sterba........... 48 Chairman, President and Chief Executive
Officer December 31, 2001

R. J. Flynn............ 61 Executive Vice President and Chief
Operating Officer July 23, 2002
Executive Vice President, Electric and Gas
Services December 31, 2001

A. A. Cobb............. 56 Senior Vice President, Peoples Services and
Development December 31, 2001

J. R. Loyack........... 40 Senior Vice President and Chief
Financial Officer January 1, 2003
Vice President, Controller and
Chief Accounting Officer December 31, 2001

M. H. Maerki*.......... 64 Senior Vice President, Corporate Strategy
and Development and President and
Chief Executive Officer, Avistar, Inc. January 1, 2003
Senior Vice President and Chief Financial
Officer and President and Chief
Executive Officer, Avistar, Inc. December 31, 2001

P. T. Ortiz............ 54 Senior Vice President, General Counsel and
Secretary December 31, 2001

E. Padilla, Jr......... 50 Senior Vice President, Bulk Power
Marketing and Development December 31, 2001

W.J. Real.............. 55 Senior Vice President, Public Policy July 23, 2002
Executive Vice President, Power Production
and Marketing December 31, 2001

T. G. Sategna.......... 50 Vice President and Corporate Controller, October 31,2003
Controller, Utility Operations August 22, 2002
Controller, Electric and Gas December 31, 2001

(See Public Service Company of New Mexico on pages 23-24 for prior positions
held).

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

* As of February 27, 2004, M. H. Maerki retired from the company.

22

EXECUTIVE OFFICERS OF PUBLIC SERVICE COMPANY OF NEW MEXICO

Executive officers, their ages, offices held with Public Service Company
of New Mexico in the past five years, (or other companies if less than five
years with PNM) and initial effective dates thereof, except as otherwise noted:

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

J. E. Sterba........... 48 Chairman, President and Chief Executive
Officer October 1, 2000
President and Chief Executive Officer June 6, 2000
President March 1, 2000
Executive Vice President, USEC, Inc. December 31, 1998
Executive Vice President and Chief
Operating Officer (of the Company) March 11, 1997
Senior Vice President, Bulk Power Services
(of the Company) December 6, 1994

R. J. Flynn............ 61 Executive Vice President and Chief
Operating Officer July 23, 2002
Executive Vice President, Electric and Gas
Services January 18, 1999
Senior Vice President, Electric Services December 1, 1994

A. A. Cobb............. 56 Senior Vice President, Peoples Services and
Development September 11, 2001
Global Human Resources Officer,
Clientlogic November 22, 1999
Executive Vice President, Human
Resources, Aames Financial February 2, 1999
Senior Vice President, Human Resources,
Aames Financial November 1, 1996

J. R. Loyack........... 40 Senior Vice President and Chief
Financial Officer January 1, 2003
Vice President, Controller and
Chief Accounting Officer July 19, 1999
Director, Financial Reporting,
Union Pacific Corporation October 1, 1998

P. T. Ortiz............ 54 Senior Vice President, General Counsel
and Secretary August 10, 1999
Senior Vice President and General Counsel January 18, 1999
Senior Vice President, Regulatory Policy,
General Counsel and Secretary December 7, 1993

23

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

M. H. Maerki*........... 64 Senior Vice President, Corporate Strategy
and Development and President and
Chief Executive Officer, Avistar, Inc. January 1, 2003
Senior Vice President and Chief Financial
Officer, and President and Chief
Executive Officer, Avistar, Inc. eptember 14, 2001
Senior Vice President and Chief Financial
Officer December 7, 1993

E. Padilla, Jr.......... 50 Senior Vice President, Bulk Power
Marketing and Development February 8, 2000
Vice President, Bulk Power Marketing
and Development December 14, 1996

W. J. Real.............. 55 Senior Vice President, Public Policy July 23, 2002
Executive Vice President, Power
Production and Marketing January 18, 1999
Senior Vice President, Gas Services December 6, 1994

T. G. Sategna........... 50 Vice President and Corporate Controller October 31, 2003
Controller, Utility Operations August 22, 2002
Controller, Electric and Gas Services May 4, 2000
Assistant Controller June 4, 1993

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

The President is elected annually by the Holding Company Board of
Directors. All other officers are elected annually by the Board of
Directors of PNM.

* As of February 27, 2004, M. H. Maerki retired from the company.

(Intentionally left blank)

24

PART II

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

The Company's common stock is traded on the New York Stock Exchange.
Ranges of sales prices of the Company's common stock, reported as composite
transactions (Symbol: PNM), and dividends declared on the common stock for 2003
and 2002, by quarters, are as follows:

Range of
Quarter Ended Sales Prices
---------------------- -------------------------- Dividends
High Low Per Share
-------------------------- -----------
2003
December 31 ....................... 29.47 26.29 $0.23
September 30 ...................... 28.97 25.31 0.23
June 30 ........................... 27.85 21.85 0.23
March 31 .......................... 23.99 18.95 0.23
-----
Fiscal Year ..................... 29.47 18.95 $0.92
=====

2002
December 31 ....................... 24.67 17.47 $0.22
September 30 ...................... 24.33 17.25 0.22
June 30 ........................... 30.55 23.30 0.22
March 31 .......................... 30.76 25.33 0.22
-----
Fiscal Year ..................... 30.76 17.25 $0.88
=====

On December 17, 2003, the Company's Board of Directors ("Board") declared
a quarterly cash dividend of $0.23 per share of common stock payable
February 13, 2004 to the Company's shareholders of record as of February
2, 2004.

On January 31, 2004, there were 14,762 holders of record of the Company's
common stock.

On February 17, 2004, the Holding Company's board of directors approved a
4.3% increase in the common stock dividend. The increase raised the quarterly
dividend to $0.24 per share, for an indicated annual dividend of $0.96 per
share.

See "Part II. Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition - Liquidity and Capital Resources -
Dividends," for a discussion on the payment of future dividends.

See Part III. Item 12, Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters".

25

Cumulative Preferred Stock

Although isolated sales of PNM's cumulative preferred stock have occurred
in the past, PNM is not aware of any active trading market for its cumulative
preferred stock. Quarterly cash dividends were paid on PNM's cumulative
preferred stock at the stated rates during 2003 and 2002.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data and comparative operating statistics 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.

PNM RESOURCES INC. AND SUBSIDIARIES

2003 2002 2001 2000 1999
------------- ------------- ------------- ------------ -------------
(In thousands except per share amounts and ratios)

Total Operating Revenues............................. $1,455,714 $1,118,694 $2,254,178 $1,526,835 $1,121,362
Earnings from Continuing Operations.................. $ 58,552 $ 63,686 $ 149,847 $ 100,360 $ 79,028
Net Earnings......................................... $ 95,173 $ 63,686 $ 149,847 $ 100,360 $ 82,569
Earnings per Common Share:
Continuing Operations.............................. $ 1.47 $ 1.63 $ 3.83 $ 2.54 $ 1.93
Basic.............................................. $ 2.39 $ 1.63 $ 3.83 $ 2.54 $ 2.01
Diluted............................................ $ 2.37 $ 1.61 $ 3.77 $ 2.53 $ 2.01
Cash Flow Data:
Net cash flows provided from operating activities.. $ 228,692 $ 97,359 $ 327,346 $ 239,515 $ 213,045
Net cash flows used in investing activities........ $ (101,567) $ (200,427) $ (407,014) $ (157,500) $ (55,886)
Net cash flows generated (used)
by financing activities......................... $ (118,133) $ 78,362 $ 385 $ (94,723) $ (98,040)
Total Assets......................................... $3,378,629 $3,247,227 $3,127,602 $3,092,494 $2,911,731
Long-Term Debt, including current maturities......... $ 987,210 $ 980,092 $ 953,884 $ 953,823 $ 988,489
Common Stock Data:
Market price per common share at year end.......... $ 28.100 $ 23.820 $ 27.950 $ 26.813 $ 16.250
Book value per common share at year end............ $ 27.09 $ 24.90 $ 25.87 $ 23.42 $ 21.79
Average number of common shares outstanding........ 39,747 39,118 39,118 39,487 41,038
Cash dividend declared per common share............ $ 0.92 $ 0.88 $ 0.80 $ 0.80 $ 1.00
Return on Average Common Equity.................... 9.3% 6.4% 15.5% 11.1% 9.4%
Capitalization:
Common stock equity................................ 51.9% 49.5% 50.8% 48.6% 46.7%
Preferred stock without mandatory redemption
Requirements..................................... 0.6 0.7 0.6 0.7 0.7
Long-term debt, less current maturities............ 47.5 49.8 48.6 50.7 52.6
------------- ------------- -------------- ------------ -------------
100.00% 100.00% 100.00% 100.00% 100.00%
============= ============= ============== ============ =============

26

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES

2003 2002 2001 2000 1999
------------- ------------- ------------- ------------ -------------
(In thousands except per share amounts and ratios)

Total Operating Revenues...................... $1,455,403 $1,117,290 $2,254,178 $1,526,835 $1,121,362
Earnings from Continuing Operations........... $ 59,978 $ 62,216 $ 150,433 $ 100,360 $ 79,028
Net Earnings.................................. $ 96,013 $ 61,630 $ 149,847 $ 100,360 $ 82,569
Earnings per Common Share:
Continuing Operations....................... N/A N/A $ 3.83 $ 2.54 $ 1.93
Basic....................................... N/A N/A $ 3.83 $ 2.54 $ 2.01
Diluted..................................... N/A N/A $ 3.77 $ 2.53 $ 2.01
Total Assets.................................. $3,299,304 $3,074,768 $3,127,602 $3,092,494 $2,911,731
Long-Term Debt, including current maturities.. $ 987,210 $ 953,940 $ 953,884 $ 953,823 $ 988,489
Cash dividend declared per common share..... N/A N/A $ 0.80 $ 0.80 $ 1.00

(Intentionally left blank)

27

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO
COMPARATIVE OPERATING STATISTICS

2003 2002 2001 2000 1999
--------------- -------------- -------------- -------------- -------------
Utility Operations Sales:
Energy Sales--KWh (in thousands):

Residential............................... 2,405,488 2,298,542 2,197,889 2,171,945 2,027,589
Commercial................................ 3,379,147 3,254,576 3,213,208 3,133,996 2,981,656
Industrial................................ 1,346,940 1,612,723 1,603,266 1,544,367 1,559,155
Other ultimate customers.................. 221,137 240,665 240,934 238,635 235,183
--------------- -------------- -------------- -------------- -------------
Total KWh sales......................... 7,352,712 7,406,506 7,255,297 7,088,943 6,803,583
=============== ============== ============== ============== =============
Gas Throughput--Decatherms (in thousands):
Residential............................... 27,416 29,627 27,848 28,810 32,121
Commercial................................ 10,810 12,009 10,421 9,859 11,106
Industrial................................ 485 749 3,920 5,038 2,338
Other..................................... 5,510 4,807 4,355 6,426 6,538
--------------- -------------- -------------- -------------- -------------
Total gas sales......................... 44,221 47,192 46,544 50,133 52,103
Transportation throughput................. 50,756 44,889 51,395 44,871 40,161
--------------- -------------- -------------- -------------- -------------
Total gas throughput.................... 94,977 92,081 97,939 95,004 92,264
=============== ============== ============== ============== =============
Revenues (in thousands):
Electric Revenues:
Residential............................... $ 203,710 $ 197,174 $ 187,600 $ 186,133 $ 184,088
Commercial................................ 252,876 247,800 242,372 238,243 238,830
Industrial................................ 67,388 82,009 82,752 79,671 85,828
Other ultimate customers.................. 14,069 14,942 14,795 14,618 13,777
--------------- -------------- -------------- -------------- -------------
Total revenues to ultimate customers.... 538,043 541,925 527,519 518,665 522,523
Transmission revenues..................... 19,453 23,150 26,553 16,855 15,519
Miscellaneous electric revenues........... 5,807 5,014 5,154 3,163 2,826
--------------- -------------- -------------- -------------- -------------
Total electric revenues................. $ 563,303 $ 570,089 $ 559,226 $ 538,683 $ 540,868
--------------- -------------- -------------- -------------- -------------
Gas Revenues:
Residential............................... $ 226,799 $ 176,284 $ 221,409 $ 203,208 $ 160,311
Commercial................................ 72,269 53,734 65,654 56,283 39,311
Industrial................................ 2,820 2,872 27,519 24,206 8,550
Other..................................... 37,473 26,781 36,495 37,360 26,168
--------------- -------------- -------------- -------------- -------------
Revenues from gas sales................... 339,361 259,671 351,077 321,057 234,340
Transportation............................ 18,906 17,735 20,188 14,163 12,390
--------------- -------------- -------------- -------------- -------------
Total gas revenues...................... $ 358,267 $ 277,406 $ 371,265 $ 335,220 $ 246,730
--------------- -------------- -------------- -------------- -------------
Total Utility Revenues............. $ 921,570 $ 847,495 $ 930,491 $ 873,903 $ 787,598
=============== ============== ============== ============== =============

28

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO
COMPARATIVE OPERATING STATISTICS

2003 2002 2001 2000 1999
--------------- -------------- -------------- -------------- -------------
Utility Customers at Year End:
Electric:

Residential............................... 358,099 345,588 340,656 332,332 321,949
Commercial................................ 42,391 41,092 40,065 39,525 38,435
Industrial................................ 296 311 377 371 375
Other ultimate customers.................. 822 796 924 625 625
--------------- -------------- -------------- -------------- -------------
Total ultimate customers................ 401,608 387,787 382,022 372,853 361,384
Sales for Resale.......................... 72 76 79 81 83
--------------- -------------- -------------- -------------- -------------
Total customers......................... 401,680 387,863 382,101 372,934 361,467
=============== ============== ============== ============== =============
Gas:
Residential............................... 421,104 411,642 404,753 398,623 390,428
Commercial................................ 34,645 35,194 32,894 32,626 32,116
Industrial................................ 46 58 50 50 51
Other..................................... 2,983 3,664 3,528 3,612 3,688
Transportation............................ 40 27 34 32 32
--------------- -------------- -------------- -------------- -------------
Total customers......................... 458,818 450,585 441,259 434,943 426,315
=============== ============== ============== ============== =============
Wholesale Operations Sales:
Energy Sales--MWh:
Long-term contracts....................... 2,719,432 844,168 1,463,031 330,003 1,185,916
Forward sales............................. 3,237,525 - - - -
Short-term sales.......................... 5,531,019 7,269,242 10,596,004 10,213,725 8,585,705
--------------- -------------- -------------- -------------- -------------
Total sales to ultimate customers....... 11,487,976 8,113,410 12,059,035 10,543,728 9,771,621
=============== ============== ============== ============== =============
Revenues (in thousands):
Long-term contracts....................... $ 147,447 $ 58,546 $ 77,250 $ 87,731 $ 66,353
Forward sales............................. 151,543 3,575 (2,572) (14,768) (2,300)
Short-term sales.......................... 234,843 207,674 1,247,471 577,811 260,856
--------------- -------------- -------------- -------------- -------------
Total wholesale revenues................ $ 533,833 $269,795 $1,322,149 $ 650,774 $ 324,909
=============== ============== ============== ============== =============
Customers at Year End:
Wholesale................................... 72 76 79 81 83
=============== ============== ============== ============== =============
Generation Statistics:
Reliable Net Capability--KW................. 1,742,000 1,734,000 1,521,000 1,521,000 1,521,000
Coincidental Peak Demand--KW................ 1,661,000 1,456,000 1,397,000 1,368,000 1,291,000
Average Fuel Cost per Million BTU........... $ 1.4120 $ 1.3910 $ 1.6007 $ 1.3827 $ 1.3169
BTU per KWh of Net Generation............... 10,854 10,568 10,549 10,547 10,490

29

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

The Management's Discussion and Analysis of Financial Condition and
Results of Operations for PNM Resources, Inc. ("Holding Company") and
Subsidiaries and Public Service Company of New Mexico ("PNM") and Subsidiaries
is presented on a combined basis. The Holding Company performs substantially all
of the corporate activities of PNM. These activities are billed to PNM on a cost
basis to the extent they are for the corporate management of PNM and are
allocated to the operating segments. In January 2002, Avistar and certain
inactive subsidiaries were dividended by PNM to the Holding Company pursuant to
an order from the PRC. The business of PNM constitutes substantially all of the
business of the Company. Therefore, the results of operations of PNM are
virtually identical to the consolidated results of the Holding Company and all
its subsidiaries. For discussion purposes, this report will use the term
"Company" when discussing matters of common applicability to the Holding Company
and Subsidiaries and PNM. Readers of Management's Discussion and Analysis of
Financial Condition and Results of Operations should assume that the information
presented applies to consolidated results of operations of both the Holding
Company and its subsidiaries, including PNM, except where the context or
references clearly indicate otherwise. Discussions regarding specific
contractual obligations generally reference the company that is legally
obligated. In the case of contractual obligations of PNM, these obligations are
consolidated with the Holding Company and its subsidiaries under GAAP. Broader
operational discussions refer to the Company.

The following is management's assessment of the Company's financial
condition and the significant factors affecting the results of operations. This
discussion should be read in conjunction with the Company's consolidated
financial statements and related notes. Trends and contingencies of a material
nature are discussed to the extent known.

OVERVIEW

The Holding Company is an investor-owned holding company of energy and
energy related companies. Its principal subsidiary, PNM, is an integrated public
utility primarily engaged in the generation, transmission and distribution of
electricity; transmission, distribution and sale of natural gas within the State
of New Mexico; and the sale and marketing of electricity in the Western United
States.

COMPETITIVE STRATEGY

The Company is positioned as a "merchant utility," primarily operating as
a regulated energy service provider. The Company is also engaged in the sale and
marketing of electricity in the competitive energy marketplace. As a utility,
PNM has an obligation to serve its customers under the jurisdiction of the PRC.
As a wholesale electricity provider, PNM markets excess production from the
utility, as well as unregulated generation, into a competitive marketplace. As
part of its electric wholesale power operation, it purchases wholesale
electricity in the open market for future resale or to provide energy to retail
customers in New Mexico when the Company's generation assets cannot satisfy
demand. The wholesale operations utilize a net asset-backed strategy, whereby

30

the Company's aggregate net open position for the sale of electricity is covered
by the Company's forecasted excess generation capabilities.

As it currently operates, the Company's principal business segments,
whose operating results are regularly reviewed by the Company's management, are
Utility Operations and Wholesale Operations ("Wholesale"). Utility Operations
include Electric Services ("Electric"), Gas Services ("Gas") and Transmission
Services ("Transmission"). These segments model the resource allocations as
mandated in the Global Electric Agreement (see Note 13 - "Commitments and
Contingencies - Global Electric Agreement" in the Notes to Consolidated
Financial Statements). Electric consists of the distribution and generation of
electricity for retail electric customers in New Mexico. Gas includes the
transportation and distribution of natural gas to end-users. Transmission
consists of the transmission of electricity to third parties as well as to
Electric and Wholesale. Wholesale consists of the generation and sale of
electricity into the wholesale market based on three product lines, that include
long-term contracts, forward sales and short-term sales.

The Utility Operations strategy is directed at supplying reasonably
priced and reliable energy to retail customers through customer-driven
operational excellence, high quality customer service, cost efficient processes,
and improved overall organizational performance.

The Wholesale Operations strategy calls for increased net asset-backed
energy sales supported by long-term contracts and the wholesale market, whereby
the Company's aggregate net open forward electric sales position, including
short term sales, forward sales and long-term contracts, is covered by its
forecasted excess generation capacity. The net asset-backed sales are actively
monitored by management by the use of stringent risk management policies. The
Company's future growth plans call for approximately 75% of its new generation
portfolio to be committed through long-term contracts as required by the Global
Electric Agreement. Growth will be dependent on market development and on the
Company's ability to generate funds for the Company's future expansion. Although
the current economic environment has led the Company to scale back its expansion
plans, the Company will continue to operate in the wholesale market and seek
reasonably priced asset additions. Expansion of the Company's generating
portfolio will depend on the Company's ability to acquire favorably priced
assets at strategic locations and to secure long-term commitments for the
purchase of power from the acquired plants.

OVERALL OUTLOOK

Earnings growth in 2003 was primarily due to the addition of new
long-term power contracts, coupled with customer growth in the Company's Utility
Operations and the Company's ongoing cost control efforts. The gains made in the
Company's Wholesale Operations more than offset a retail electric rate reduction
that took effect in September and a reduction in gas utility revenues due to
warmer weather in 2003.

Wholesale Operations was the biggest contributor to the Company's
earnings growth in 2003, aided by a more stable price environment. The Company
continued to grow its wholesale sales by adding long-term contracts to ensure a
reliable and sustainable revenue source to support its Wholesale Operations. In
2003, the Company added more than 330 MW's of new long-term contracts, of which

31

contracts for 57 MW's were added in late 2003 or do not commence until 2004. In
addition, the Company added 200 MW of generating capacity in 2003 to support
retail and enhance wholesale operations. These developments allowed the Company
to improve its velocity, the Company's ability to repurchase and remarket
previously sold capacity. The Company's velocity ratio, which is defined as
total electric wholesale and retail sales divided by total output of its
generation plants, increased to 1.9 in 2003 from 1.6 in 2002. These gains were
partially offset by extended scheduled outages and unplanned outages at SJGS and
PVNGS and the associated increases in purchase power costs.

Retail Operations also contributed to the Company's earnings growth with
increased load growth of 3% in Electric and 2% in Gas. The Company benefited
from improved efficiencies and cost cutting measures, including lower power
production costs. On an operations and maintenance expense ("O&M") per revenue
unit of sale basis, the Company's O&M costs decreased significantly from $0.0172
in 2002 to $0.0154 in 2003. The year 2003 was one of the warmest in recent New
Mexico history. The warmer temperatures increased retail electric sales during
the summer months but significantly reduced demand for natural gas during the
colder months.

Certain developments affecting the Company, and which will have a more
meaningful impact on its operating results in 2004 are as follows:

o On January 13, 2004, PRC approved a $22 million revenue increase for
the Company's gas utility. Increased rates for commercial customers
took effect immediately, while the increase for residential customers
will begin April 1, 2004.
o On December 22, 2003, the Company entered into an agreement to
provide an Arizona municipal utility with up to 35 MW of power. The
ten year contract is expected to produce about $6.5 million in
revenues for the Company in 2004.
o In the fourth quarter of 2003, the coal mine operations that supply
SJGS reached commercial operation status. In addition, the mine
completed on schedule its first long-wall mine change-over to a new
area of the coal seam. Coal costs in 2003 were significantly lower
than in 2002, and although coal costs cannot be predicted with
certainty, the Company currently estimates that coal costs will
remain lower in 2004 than average 2002 levels.

In 2004, the Company intends to continue its efforts to expand its
wholesale business by building on existing relationships and forming new
relationships with long-term contract customers. The Company expects its 2004
earnings to benefit from higher gas rates, forecasted lower fuel costs from the
new SJGS underground mine and planned productivity improvements. Other factors
that will be critical to achieving earnings goals in 2004 include continued
stable wholesale market prices and improved plant performance.

32

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

Consolidated

The Company's net earnings for the year ended December 31, 2003 were
$95.2 million or $2.37 per diluted share of common stock, a 49.5% increase in
net earnings compared to $63.7 million or $1.61 per diluted share of common
stock in 2002. This increase primarily reflects the cumulative effect of a
change in accounting principle for the adoption of SFAS 143 of $37.4 million,
net of income taxes, and improved operating performance. This increase was
partially offset by the write-off of transition costs of $16.7 million, net of
income taxes, that resulted from the repeal of electric deregulation in New
Mexico in the first quarter of 2003 and a write-off of $16.6 million, net of
income taxes, for costs related to long-term debt refinancing.

The following discussion is based on the methodology that the Company's
management uses for making operating decisions and assessing performance of its
various business activities. As such, these statements report operating results
without regard to the effect of accounting or regulatory changes, and similar
one-time items not related to normal operations. See Note 2 - "Segment
Information" in the Notes to Consolidated Financial Statements for additional
information regarding these results and the consolidated financial statements.

In addition, adjustments related to EITF Issue 02-03 "Issues Related to
Accounting for Contracts Involved in Energy Trading and Risk Management
Activities" and 03-11 "Reporting Realized Gains and Losses on Derivative
Instruments that are subject to FASB statement No. 133 and Not Held for Trading
Purposes" are excluded. These accounting pronouncements require a net
presentation of trading gains and losses and realized gains and loss for certain
non-trading derivatives. Management evaluates wholesale operations on a gross
presentation basis due to its net-asset-backed marketing strategy and the
importance it places on velocity.

Corporate costs, income taxes and non-operating items are discussed only
on a consolidated basis and are in conformity with the presentation in the
consolidated financial statements.

(Intentionally left blank)

33

Utility Operations

Electric

The table below sets forth the operating results for Electric.

Year Ended
December 31,
-----------------------------------
2003 2002 Variance
---------------- ---------------- -------------
(In thousands)

Operating revenues: $543,850 $ 546,939 $(3,089)
Less: Cost of energy....................... 204,610 194,138 10,472
Intersegment energy transfer........ (32,474) (29,155) (3,319)
---------------- --------------- -------------
Gross margin............................... 371,714 381,956 (10,242)
---------------- --------------- -------------
Energy production costs.................... 107,683 113,257 (5,574)
Distribution O&M........................... 19,249 19,987 (738)
Customer related expense................... 15,524 17,372 (1,848)
Administrative and general................. 5,362 5,408 (46)
---------------- --------------- -------------
Total non-fuel O&M....................... 147,818 156,024 (8,206)
Corporate allocation....................... 65,071 52,878 12,193
Depreciation and amortization.............. 63,428 59,654 3,774
Taxes other than income taxes.............. 17,937 18,251 (314)
Income taxes............................... 20,873 26,779 (5,906)
---------------- --------------- -------------
Total non-fuel operating expenses........ 315,127 313,586 1,541
---------------- --------------- -------------
Operating income........................... $ 56,587 $ 68,370 $(11,783)
---------------- --------------- -------------

The following table shows electric revenues by customer class and average
customers:

Electric Retail Revenues

Year Ended
December 31,
2003 2002 Variance
------------- ------------- --------------
(In thousands)
Residential................ $ 203,710 $ 197,174 $ 6,536
Commercial................. 252,876 247,800 5,076
Industrial................. 67,388 82,009 (14,621)
Other...................... 19,876 19,956 (80)
------------- ------------- --------------
$ 543,850 $546,939 $(3,089)
============= ============= ==============
Average customers.......... 396,303 384,478 11,825
============= ============= ==============

34

The following table shows electric sales by customer class:

Electric Sales

Year Ended
December 31,
2003 2002 Variance
------------- ------------- --------------
(Megawatt hours)
Residential............... 2,405,488 2,298,542 106,946
Commercial................ 3,379,147 3,254,576 124,571
Industrial................ 1,346,940 1,612,723 (265,783)
Other..................... 247,255 267,070 (19,815)
------------- ------------- --------------
7,378,830 7,432,911 (54,081)
============= ============= ==============

Operating revenues decreased $3.1 million or 0.6% over the prior year
period primarily due to the transfer of a significant customer from retail to
wholesale electric rates in the first quarter of 2003 and a 4% retail electric
rate reduction, which became effective in September 2003. Rates will decrease
again by 2.5% in September 2005 and remain at that level through 2007. The
customer transfer reduced retail revenues $14.3 million. The rate reduction
resulted in a decrease in revenues of approximately $6.9 million. These
decreases were partially offset by average customer growth of approximately
3.1%. After adjusting 2002 MWh sales for the transfer of the significant
customer from retail to wholesale for comparative purposes, retail electric MWh
sales increased due to customer growth.

The gross margin, or operating revenues minus cost of energy sold and
intersegment energy transfer, decreased $10.2 million or 2.7% over the prior
year period. This decrease is due primarily to the rate decrease, an increase in
cost of energy due to outages at Palo Verde Nuclear Generating Station ("PVNGS")
Unit 2 during the fourth quarter of 2003 for a steam-generator replacement
project, and the customer transfer described above of $12.8 million. These
decreases were partially offset by customer growth and lower cost of generation.

Total non-fuel O&M expenses decreased $8.2 million or 5.3% over the prior
year period. Energy production costs decreased $5.6 million or 4.9% primarily
due to 2002 outages at the Four Corners Power Plant ("Four Corners") and Reeves
Generating Station ("Reeves"), which did not recur in 2003, for $1.3 million and
$1.0 million, respectively and reduced PVNGS plant maintenance costs of $0.5
million due to increased capitalized expenditures related to the steam-generator
replacement project. Customer-related expense decreased $1.8 million or 10.6%
due to decreased bad debt expense as a result of continued collection efforts
and the favorable outcome of a customer bankruptcy proceeding. Depreciation and
amortization increased $3.8 million or 6.3% due to a higher depreciable plant
base for new service delivery. In addition, lower energy production costs
related to decreased decommissioning expenses of $2.7 million were mostly offset
by an increase in depreciation expense of $2.2 million for the change in
accounting for costs related to asset retirement obligations as required by SFAS
143

35

Gas

The table below sets forth the operating results for Gas.

Year Ended
December 31,
--------------------------------
2003 2002 Variance
--------------- -------------- ---------------
(In thousands)

Operating revenues....................... $358,267 $277,406 $ 80,861
Less: Cost of energy..................... 228,345 144,333 84,012
--------------- -------------- ---------------
Gross margin............................. 129,922 133,073 (3,151)
--------------- -------------- ---------------
Energy production costs.................. 1,930 1,937 (7)
Transmission and distribution O&M........ 29,515 29,306 209
Customer related expense................. 16,832 16,607 225
Administrative and general............... 2,040 2,943 (903)
--------------- -------------- ---------------
Total non-fuel O&M..................... 50,317 50,793 (476)
Corporate allocation..................... 40,363 33,516 6,847
Depreciation and amortization............ 22,186 20,673 1,513
Taxes other than income taxes............ 6,886 7,716 (830)
Income taxes............................. (1,281) 2,703 (3,984)
--------------- -------------- ---------------
Total non-fuel operating expenses...... 118,471 115,401 3,070
--------------- -------------- ---------------
Operating income......................... $ 11,451 $ 17,672 $ (6,221)
--------------- -------------- ---------------

The following table shows gas revenues by customer and average customers:

Gas Revenues

Year Ended
December 31,
2003 2002 Variance
------------- ------------- --------------
(In thousands)
Residential............... $226,799 $176,284 $ 50,515
Commercial................ 72,269 53,734 18,535
Industrial................ 2,820 2,872 (52)
Transportation*........... 18,906 17,735 1,171
Other..................... 37,473 26,781 10,692
------------- ------------- --------------
$358,267 $277,406 $ 80,861
============= ============= ==============
Average customers......... 452,328 443,396 8,932
============= ============= ==============

*Customer-owned gas.

36

The following table shows gas throughput by customer class:

Gas Throughput

Year Ended
December 31,
2003 2002 Variance
------------- ------------- --------------
(Thousands of decatherms)
Residential............... 27,416 29,627 (2,211)
Commercial................ 10,810 12,009 (1,199)
Industrial................ 485 749 (264)
Transportation*........... 50,756 44,889 5,867
Other..................... 5,510 4,807 703
------------- ------------- --------------
94,977 92,081 2,896
============= ============= ==============

*Customer-owned gas.

Operating revenues increased $80.9 million or 29.2% over the prior year
period to $358.3 million, primarily because of higher natural gas prices in 2003
as compared to 2002. PNM purchases natural gas in the open market and resells it
at cost of purchase to its retail gas distribution customers. As a result,
increases or decreases in gas revenues driven by gas costs do not impact the
Company's consolidated gross margin or earnings.

The gross margin, or operating revenues minus cost of energy sold,
decreased $3.2 million or 2.4% over the prior year period. This decrease is due
mainly to the expiration in January 2003 of a rate rider for the recovery of
certain costs of $4.1 million. The price decrease was offset by an increase in
volume. Transportation throughput increased by 5.9 million decatherms, or 13.1%
driven by gas pipe line extensions, increasing off-system sales. Despite
customer growth of 2.0%, volume from other customers decreased 3.0 million
decatherms, or 6.3% caused by warmer weather in 2003. In January 2004, the PRC
approved a cost of service gas rate increase, which will improve gas earnings by
approximately $22 million annually. The Company estimates that approximately
two-thirds of this increase will be realized in 2004 earnings due to a delay in
implementing the residential increase until April 2004.

Total non-fuel O&M expenses decreased $0.5 million or 0.9% over the prior
year period. Administrative and general costs decreased $0.9 million or 30.7%
primarily due to lower consulting costs of $1.0 million. Depreciation and
amortization increased $1.5 million or 7.3% due to a higher depreciable plant
base for new service delivery and transportation gas line extensions. Taxes
other than income taxes decreased $0.8 million or 10.8% due to a decrease in
property tax of $0.2 million as a result of a change in assessed values and a
decrease in PRC supervision and lower inspection fees of $0.6 million.

37

Transmission

The table below sets forth the operating results for Transmission.

Year Ended
December 31,
-----------------------------------
2003 2002 Variance
----------------- -------------- --------------
(In thousands)
Operating revenues:

External customers..................... $ 19,453 $ 23,150 $ (3,697)
Intersegment revenues.................. 32,499 31,950 549
----------------- --------------- --------------
Total revenues......................... 51,952 55,100 (3,148)
Less: Cost of energy..................... 4,255 3,888 367
----------------- --------------- --------------
Gross margin............................. 47,697 51,212 (3,515)
----------------- --------------- --------------
Energy production costs.................. 1,051 690 361
Transmission O&M......................... 12,347 14,531 (2,184)
Customer related expense................. 19 9 10
Administrative and general............... 1,610 2,216 (606)
----------------- --------------- --------------
Total non-fuel O&M..................... 15,027 17,446 (2,419)
Corporate allocation..................... 5,387 4,703 684
Depreciation and amortization............ 10,104 8,741 1,363
Taxes other than income taxes............ 2,583 2,464 119
Income taxes............................. 3,179 4,699 (1,520)
----------------- --------------- --------------
Total non-fuel operating expenses...... 36,280 38,053 (1,773)
----------------- --------------- --------------
Operating income......................... $ 11,417 $ 13,159 $ (1,742)
----------------- --------------- --------------

Operating revenues decreased $3.1 million or 5.7% over the prior year
period primarily due to lower demand for wheeling of $7.4 million to California
from Arizona as a result of lower demand in the California market, partially
offset by increased demand for wheeling in New Mexico of $1.7 million and $2.3
million in new 2003 contract revenue. This contract was not renewed for 2004.
Cost of energy represents purchased transmission to support transmission
offerings. This cost and the resulting gross margin do not fully represent cost
of services as these purchases are incidental to the services provided.

Total non-fuel O&M expenses decreased $2.4 million or 13.9% over the
prior year period. Transmission O&M decreased $2.2 million or 15.0% due to a
decrease in lease costs of $3.3 million for the EIP transmission line, a portion
of which was repurchased in April 2003, offset by increased maintenance costs
incurred for reliability purposes. Depreciation and amortization increased $1.4
million or 15.6% primarily due to the purchase of additional transmission lines.

38

Wholesale

The table below sets forth the operating results for Wholesale.

Year Ended
December 31,
----------------------------------
2003 2002 Variance
--------------- -------------- ---------------
(In thousands)
Operating revenues:

External sales........................... $548,847 $ 343,780 $205,067
Intersegment sales....................... 1,535 - 1,535
--------------- --------------- ---------------
Total revenues........................... 550,382 343,780 206,602
Less: Cost of energy....................... 414,550 262,517 152,033
Intersegment energy transfer........ 32,474 29,155 3,319
--------------- --------------- ---------------
Gross margin............................... 103,358 52,108 51,250
--------------- --------------- ---------------
Energy production costs.................... 29,919 32,507 (2,588)
Transmission and distribution O&M.......... 59 45 14
Customer related expense................... 711 754 (43)
Administrative and general................. 8,390 3,199 5,191
--------------- --------------- ---------------
Total non-fuel O&M....................... 39,079 36,505 2,574
Corporate allocation....................... 5,673 4,023 1,650
Depreciation and amortization.............. 14,230 8,808 5,422
Taxes other than income taxes.............. 3,263 2,619 644
Income taxes............................... 10,116 (3,245) 13,361
--------------- --------------- ---------------
Total non-fuel operating expenses........ 72,361 48,710 23,651
--------------- --------------- ---------------
Operating income........................... $ 30,997 $ 3,398 $ 27,599
--------------- --------------- ---------------

The following table shows revenues by customer class:

Wholesale Revenues

Year Ended
December 31,
2003 2002 Variance
------------- ------------- --------------
(In thousands)
Long-term contracts....... $147,447 $58,546 $88,901
Forward sales*............ 166,557 77,560 88,997
Short-term sales.......... 234,843 207,674 27,169
Intersegment sales........ 1,535 - 1,535
------------- ------------- --------------
$550,382 $343,780 $206,602
============= ============= ==============

*Includes mark-to-market gains/(losses).

39

The following table shows sales by customer class:

Wholesale Sales

Year Ended
December 31,
2003 2002 Variance
-------------- -------------- --------------
(Megawatt hours)
Long-term contracts....... 2,719,432 844,169 1,875,263
Forward sales............. 3,597,325 1,336,745 2,260,580
Short-term sales.......... 5,531,019 7,269,240 (1,738,221)
-------------- -------------- --------------
11,847,776 9,450,154 2,397,622
============== ============== ==============

Operating revenues increased $206.6 million or 60.1% over the prior year
period to $550.4 million. This increase in wholesale electric sales primarily
reflects additional long-term contract sales and more stable wholesale market
conditions. The Company sold wholesale (bulk) power of 11.8 million MWh of
electricity for the year ended December 31, 2003, compared to 9.5 million MWh
for 2002.

The gross margin, or operating revenues minus cost of energy sold and
intersegment energy transfer, increased $51.3 million or 98.4% over the prior
year period. A higher gross margin was achieved primarily by additional
long-term sales under new and existing contracts, a return to more stable market
prices and improved market liquidity. The addition of 273 MW of long-term
contracts added $37.4 million or 72.9% of the total gross margin increase for
the year. In December 2003 and January 2004, the Company added an additional 57
MW of long-term contracts. In addition, long-term contract margin increased due
to the transfer of a significant customer from retail to wholesale. Forward
sales margin increased $14.3 million or 27.9% of the total gross margin increase
reflecting higher prices. The average price realized by the Company on its
forward sales was $46 per MWh in 2003, compared to $37 per MWh in 2002.
Liquidity returning to the market helped drive improvement of forward sales, as
the Company had velocity of 1.9 vs. 1.6 a year ago. Short-term sales margin
decreased $0.4 million or 0.8% of total gross margin due to lower volume from
retail growth, increased long-term sales contracts and fewer available resources
caused by a significant outage schedule in 2003, mostly offset by higher prices.
The average price realized by the Company on its short-term sales was $42 per
MWh in 2003, compared to $29 per MWh in 2002. Overall open market sales (forward
and short-term sales) averaged $44 per MWh in 2003 versus $33 per MWh in 2002.
This increase was partially offset by increased purchased power costs resulting
fromthe 2003 outage schedule, which reduced availability of generation for
wholesale sales. In addition, the Company had to buy power in the open market at
higher prices to cover its contractual obligations, which resulted in increased
purchased power costs of $20.5 million. The Company had a favorable change in
the unrealized mark-to-market position of the forward sales portfolio of $1.0
million period-over-period ($3.5 million gain in 2003 versus $2.5 million gain
in 2002).

Total non-fuel O&M expenses increased $2.6 million or 7.1% over the prior
year period. Energy production costs decreased $2.6 million or 8.0% primarily
due to decreased decommissioning costs of $3.1 million and prior period,
non-recurring engineering costs of $4.0 million related to the start-up of the

40

Afton plant. These cost decreases were offset by increases of $2.3 million for
the operation of the new Afton and Lordsburg gas fired facilities and $1.8
million due to increased Palo Verde Unit 3 outages. Administrative and general
costs increased $5.2 million or 162.3% primarily due to transportation and
storage costs of $1.2 million turbines that will be utilized in future
construction for merchant plant growth and increased pension and benefits costs
of $4.0 million at SJGS and PVNGS. Depreciation and amortization increased $5.4
million or 61.6% primarily due to the addition of Lordsburg and Afton, which
added $3.6 million of depreciation expense and an increase of $1.6 million for
the change in accounting for asset retirement obligations as required by SFAS
143. Taxes other than income taxes increased $0.6 million or 24.6% primarily due
to increased property taxes from the addition of Afton and Lordsburg.

Corporate and Other

Corporate administrative and general expenses, which represent costs that
are driven primarily by corporate-level activities, is allocated to the business
segments and is presented in the corporate allocation line item in the segment
statements. These costs increased $19.7 million or 22.4% over the prior year
period to $107.9 million. This increase was due to increased pension and
benefits expense of $17.9 million, resulting from lower prior-year returns on
pension investments and increasing healthcare costs. Consulting expenses
increased $1.5 million primarily for Sarbanes-Oxley Act compliance and other
strategic corporate initiatives.

Taxes other than income decreased $2.5 million, or 79.6% over the prior
year period due to the favorable resolution of certain outstanding tax issues
and a decrease in social security taxes from lower payroll costs.

Consolidated

Other Income and Deductions

Other income increased $4.3 million or 9.0% over the prior year period
reflecting higher year-over-year returns on investments of $6.3 million, and an
increase in the equity component of AFUDC of $2.6 million. These increases were
offset by decreased interest income of $4.5 million due to the redemption of
short-term investments early in 2003. Cash from the redemption of these
investments was primarily used for the Company's retirement of the EIP long-term
debt, debt refinancing, repayment of short-term debt and pension funding (see
"Liquidity" below).

Other deductions increased $33.8 million over the prior year period
primarily due to a charge of $16.7 million in 2003 for the write-off of
transition costs due to the repeal of deregulation in New Mexico and a write-off
of $16.6 million for costs related to long-term debt refinancing (see "Financing
Activities" below).

Interest Expense

Interest expense increased $4.8 million or 7.8% over the prior year
period primarily due to decreased capitalized interest of $3.9 million from the
completion of the Afton and Lordsburg gas-fired plants in southern New Mexico.
Higher average short term borrowing levels also contributed to the increase.

41

Income Taxes

The Company's consolidated income tax expense before the cumulative
effect of a change in accounting principle was $27.9 million for the year ended
December 31, 2003, compared to $33.0 million for the prior year period. The
decrease was due to the impact of lower pre-tax earnings. The Company's
effective income tax rates for the years ended December 31, 2003 and 2002 were
32.05% and 33.95%, respectively. The decrease in the effective tax rate,
year-over-year, was due to an increase in permanent tax differences, resulting
from AFUDC and research and development credits in 2003.

Cumulative Effect of a Change in Accounting Principle

Effective January 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations"
("SFAS 143"). The effect of the initial application of the new standard is
reported as a cumulative effect of a change in accounting principle. As a
result, the Company recorded income, net of income taxes, of approximately $37.4
million, or $0.93 per diluted common share, representing amounts expensed in
prior years for its asset retirement obligations in excess of the actual legal
obligations as established under the new accounting standard.

In 2003, the Company changed its valuation date for its pension and post
retirement benefits plans from September 30 to December 31 to better reflect the
actual plan balances as of the Company's year end balance sheet date. The effect
of the change in the pension plans' valuation date is reported as a cumulative
effect of a change in accounting principle. The Company recorded additional
expense, net of income taxes, of approximately $0.8 million, or $0.02 per
diluted common share reflecting the effect of changing the valuation date.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Consolidated

The Company's net earnings available to common shareholders for the year
ended December 31, 2002 were $63.7 million, a 57.5% decrease in net earnings
from $149.8 million in 2001. This decrease primarily reflected the slowdown in
the wholesale electric market, where both prices and market liquidity were
significantly lower than the prior year. Despite the slowdown in the wholesale
electric market, PNM's electric utility operations recorded a gross margin
growth of 4.5%. This growth came from a combination of load growth and
utilization of lower cost generation demonstrating the balance that the
regulated utility can provide in the Company's "merchant utility" strategy.

The following discussion is based on the methodology that the Company's
management uses for making operating decisions and assessing performance of its
various business activities. As such, these statements report operating results
without regard to the effect of accounting or regulatory changes, and similar

42

one-time items not related to normal operations. See Note 2 - "Segment
Information" in the Notes to Consolidated Financial Statements for
reconciliation between these results and the consolidated financial statements.

Corporate costs, income taxes and non-operating items are discussed only
on a consolidated basis and are in conformity with the presentation in the
consolidated financial statements.

Electric

The table below sets forth the operating results for Electric.

Year Ended December 31,
---------------------------------
2002 2001 Variance
-------------- -------------- -------------
(In thousands)

Operating revenues....................... $ 546,939 $532,673 $14,266
Less: Cost of energy..................... 194,138 189,055 5,083
Energy transfer................... (29,155) (21,999) (7,156)
-------------- -------------- --------------
Gross margin............................. 381,956 365,617 16,339
-------------- -------------- --------------
Energy production costs.................. 113,257 120,353 (7,096)
Distribution O&M......................... 19,987 20,712 (725)
Customer related expense................. 17,372 19,388 (2,016)
Administrative and general............... 5,408 8,398 (2,990)
-------------- -------------- --------------
Total non-fuel O&M..................... 156,024 168,851 (12,827)
Corporate allocation..................... 52,878 54,488 (1,610)
Depreciation and amortization............ 59,654 59,352 302
Taxes other than income taxes............ 18,251 16,272 1,979
Income taxes............................. 26,779 13,788 12,991
-------------- -------------- --------------
Total non-fuel operating expenses...... 313,586 312,751 835
-------------- -------------- --------------
Operating income......................... $ 68,370 $52,866 $15,504
-------------- -------------- --------------

The following table shows electric revenues by customer class and average
customers:

Electric Revenues

Year Ended
December 31,
--------------------------------
2002 2001 Variance
-------------- -------------- --------------
(In thousands)
Residential.............. $ 197,174 $ 187,600 $9,574
Commercial............... 247,800 242,372 5,428
Industrial............... 82,009 82,752 (743)
Other.................... 19,956 19,949 7
-------------- -------------- --------------
$ 546,939 $ 532,673 $14,266
============== ============== ==============
Average customers........ 384,478 377,589 6,889
============== ============== ==============

43

The following table shows electric sales by customer class:

Electric Sales
(Megawatt hours)

Year Ended
December 31,
--------------------------------
2002 2001 Variance
--------------- -------------- ---------------
(In thousands)
Residential.............. 2,298,542 2,197,889 100,653
Commercial............... 3,254,576 3,213,208 41,368
Industrial............... 1,612,723 1,603,266 9,457
Other.................... 267,070 265,668 1,402
--------------- -------------- ---------------
7,432,911 7,280,031 152,880
=============== ============== ===============

Operating revenues increased $14.3 million or 2.7% for the period to
$546.9 million. Retail electricity delivery grew 2.4% to 7.4 million MWh in 2002
compared to 7.3 million MWh delivered in the prior year, resulting in increased
revenues of $14.3 million year-over-year. This volume increase was the result of
a weather-driven increase in consumption and continued customer growth. Year
over year, customer growth was 1.8%.

The gross margin, or operating revenues minus cost of energy sold,
increased $16.3 million or 4.5%, which reflects the increased energy sales and
the utilization of lower cost purchased power to serve jurisdictional needs
based on a change in negotiated contract rates. Electric exclusively purchases
transmission services from Transmission. These intercompany revenues and
expenses are eliminated in the consolidated results.

Total non-fuel O&M decreased $12.8 million or 7.6%. Energy production
costs decreased $7.1 million or 5.9% for the period reflecting the benefits of
$2.0 million for the acceleration into 2001 of a planned outage at SJGS,
decreased costs of $3.0 million for planned outages at SJGS and an adjustment of
$3.1 million to prior year PVNGS billings from Arizona Public Service Company,
the operator of PVNGS. These cost decreases were partially offset by costs of
$1.2 million for planned and unplanned outages at Four Corners. Distribution
costs decreased $0.7 million or 3.5% primarily due to maintenance performed in
2001 to improve system reliability, which did not recur in 2002. Customer
related expense decreased $2.0 million or 10.4% due to lower bad debt expense as
a result of collection improvements and the absence of losses from the
bankruptcy of a significant customer in 2001. Administrative and other costs
decreased $3.0 million or 35.6% due to an adjustment of $1.4 million to prior
year SJGS participant billings and lower labor due to the transfer of employees
from Electric to Corporate. Taxes other than income increased $2.0 million or
12.2% reflecting adjustments recorded in the prior year for favorable audit
outcomes by certain tax authorities.

44

Gas

The table below sets forth the operating results for Gas.

Year Ended December 31,
---------------------------------
2002 2001 Variance
--------------- -------------- ---------------
(In thousands)

Operating revenues......................... $277,406 $371,265 $ (93,859)
Cost of energy............................. 144,333 237,143 (92,810)
--------------- -------------- ---------------
Gross margin............................... 133,073 134,122 (1,049)
--------------- -------------- ---------------
Energy production costs.................... 1,937 1,946 (9)
Distribution O&M........................... 29,306 31,064 (1,758)
Customer related expense................... 16,607 19,814 (3,207)
Administrative and general................. 2,943 6,736 (3,793)
--------------- -------------- ---------------
Total non-fuel O&M....................... 50,793 59,560 (8,767)
Corporate allocation....................... 33,516 30,908 2,608
Depreciation and amortization.............. 20,673 20,362 311
Taxes other than income taxes.............. 7,716 6,768 948
Income taxes............................... 2,703 1,867 836
--------------- -------------- ---------------
Total non-fuel operating expenses........ 115,401 119,465 (4,064)
--------------- -------------- ---------------
Operating income........................... $ 17,672 $14,657 $ 3,015
--------------- -------------- ---------------

The following table shows gas revenues by customer and average customers:

Gas Revenues

Year Ended
December 31,
--------------------------------
2002 2001 Variance
-------------- -------------- --------------
(In thousands)
Residential............... $ 176,284 $ 221,409 $(45,125)
Commercial................ 53,734 65,654 (11,920)
Industrial................ 2,872 27,519 (24,647)
Transportation*........... 17,735 20,188 (2,453)
Other..................... 26,781 36,495 (9,714)
-------------- -------------- --------------
$ 277,406 $ 371,265 $(93,859)
============== ============== ==============
Average customers......... 443,396 434,591 8,805
============== ============== ==============

45

The following table shows gas throughput by customer class:

Gas Throughput

Year Ended
December 31,
--------------------------------
2002 2001 Variance
-------------- --------------- --------------
(Thousands of decatherms)
Residential.............. 29,627 27,848 1,779
Commercial............... 12,009 10,421 1,588
Industrial............... 749 3,920 (3,171)
Transportation*.......... 44,889 51,395 (6,506)
Other.................... 4,807 4,355 452
-------------- --------------- --------------
92,081 97,939 (5,858)
============== =============== ==============

* Customer owned gas

Operating revenues decreased $93.9 million or 25.3% for the period to
$277.4 million, primarily because of lower natural gas prices in 2002 as
compared to 2001. PNM purchases natural gas in the open market and resells it at
cost of purchase to its retail gas distribution customers. As a result,
increases or decreases in gas revenues driven by gas costs do not impact the
Company's consolidated gross margin or earnings.

The gross margin, or operating revenues minus cost of energy sold,
decreased $1.0 million or 0.8%. This decrease is due mainly to lower consumption
of gas for electric generation of $6.0 million partially offset by a 2.0% growth
in customer base of $5.0 million.

Total non-fuel O&M decreased $8.8 million or 14.7%. Distribution costs
decreased $1.8 million or 5.7% primarily due to maintenance performed in 2001 to
improve system reliability, which did not recur in 2002. Customer related
expense decreased $3.2 million or 16.2% due to lower bad debt expense because of
collection improvements and the absence of losses from the bankruptcy of a
significant customer in 2001. Administrative and other costs decreased $3.8
million due to lower amortization costs of $1.2 million for SFAS 106 deferred
costs (which were fully amortized in 2001), and lower consulting expenses of
$0.5 million in connection with cost control and process improvement initiatives
in 2001 and lower legal expenses of $0.5 million for routine business matters.
Taxes other than income taxes increased $0.9 million or 14.0% due to the absence
of favorable audit outcomes by certain tax authorities recognized in 2001.

46

Transmission

The table below sets forth the operating results for Transmission.

Year Ended December 31,
-----------------------------------
2002 2001 Variance
---------------- ---------------- --------------
(In thousands)
Operating revenues

External customers................... $ 23,150 $26,553 $(3,403)
Intersegment revenues................ 31,950 31,273 677
---------------- ---------------- --------------
Total revenues..................... 55,100 57,826 (2,726)
Cost of energy......................... 3,888 5,102 (1,214)
---------------- ---------------- --------------
Gross margin........................... 51,212 52,724 (1,512)
---------------- ---------------- --------------
Energy production costs................ 690 924 (234)
Transmission O&M ...................... 14,531 17,141 (2,610)
Customer related expense............... 9 - 9
Administrative and general............. 2,216 2,155 61
---------------- ---------------- --------------
Total non-fuel O&M................... 17,446 20,220 (2,774)
---------------- ---------------- --------------
Corporate allocation................... 4,703 4,596 107
Depreciation and amortization.......... 8,741 7,328 1,413
Taxes other than income taxes.......... 2,464 2,252 212
Income taxes........................... 4,699 5,442 (743)
---------------- ---------------- --------------
Total non-fuel operating expenses.... 38,053 39,838 (1,785)
---------------- ---------------- --------------
Operating income....................... $ 13,159 $12,886 $ 273
---------------- ---------------- --------------

Operating revenues decreased $2.7 million or 4.7% and gross margin
decreased $1.5 million or 2.9% primarily due to a decrease in third party sales
of the Company's transmission capacity due to the slowdown in the wholesale
market.

Total non-fuel O&M decreased $2.8 million or 13.7%. Transmission costs
decreased $2.6 million or 15.2% primarily due to maintenance performed in 2001
to improve system reliability, which did not recur in 2002. Depreciation and
amortization increased $1.4 million or 19.3% for the year due to the purchase of
transmission plant assets in early 2002.

47

Wholesale

The table below sets forth the operating results for Wholesale.

Year Ended December 31,
----------------------------------
2002 2001 Variance
---------------- --------------- ----------------
(In thousands)

Operating revenues......................... $ 343,780 $1,411,500 $(1,067,720)
Less: Cost of energy...................... 262,517 1,127,970 (865,453)
Energy Transfer................. 29,155 21,999 7,156
---------------- --------------- ----------------
Gross margin............................... 52,108 261,531 (209,423)
---------------- --------------- ----------------
Energy production costs.................... 32,507 29,232 3,275
Transmission and distribution O&M.......... 45 77 (32)
Customer related expense................... 754 821 (67)
Administrative and general................. 3,199 4,748 (1,549)
---------------- --------------- ----------------
Total non-fuel O&M....................... 36,505 34,878 1,627
Corporate allocation....................... 4,023 4,042 (19)
Depreciation and amortization.............. 8,808 5,774 3,034
Taxes other than income taxes.............. 2,619 2,498 121
Income taxes............................... (3,245) 78,102 (81,347)
---------------- --------------- ----------------
Total non-fuel operating expenses........ 48,710 125,294 (76,584)
---------------- --------------- ----------------
Operating income........................... $ 3,398 $ 136,237 $ (132,839)
---------------- --------------- ----------------

The following table shows revenues by customer class:

Wholesale Revenues

Year Ended
December 31,
--------------------------------
2002 2001 Variance
-------------- -------------- -----------------
(In thousands)
Long-term contracts........ $ 58,546 $ 77,250 $ (18,704)
Forward sales.............. 77,560 86,779 (9,219)
Short-term sales........... 207,674 1,247,471 (1,039,797)
-------------- -------------- -----------------
$343,780 $1,411,500 $(1,067,720)
============== ============== =================

(Intentionally left blank)

48

The following table shows sales by customer class:

Wholesale Sales

Year Ended
December 31,
--------------------------------
2002 2001 Variance
-------------- --------------- --------------
(Megawatt hours)
Long-term contracts......... 844,169 1,463,031 (618,862)
Forward sales............... 1,336,745 537,665 799,080
Other merchant sales........ 7,269,240 10,596,004 (3,326,764)
-------------- --------------- --------------
9,450,154 12,596,700 (3,146,546)
============== =============== ==============

Operating revenues declined $1.1 billion or 75.6% for the year to $343.8
million. This decrease in wholesale electricity sales primarily reflects the
slowdown in the wholesale electric market, which resulted from steep declines in
wholesale prices and market liquidity as compared to the prior year period.

The significantly higher wholesale pricing in 2001 was driven by
increased demand in California, a lack of generating assets to serve the market
and the impact of warm weather. By contrast, 2002 saw relatively mild weather in
the West, an abundance of low cost hydropower and weak economic conditions in
the region. As a result, the average price realized by the Company fell to
approximately $31 per MWh in 2002 versus $108 per MWh in 2001.

The decline in merchant sales volumes reflect the reduction in market
participants in the wholesale market caused by bankruptcy, reduced credit
quality of firms in the market and firms exiting the wholesale market. There are
also significant unresolved legal, political and regulatory issues that had a
dampening effect on activity in the marketplace. As a result, the Company's spot
market and short-term sales declined significantly in 2002. The Company
delivered wholesale (bulk) power of 9.5 million MWh of electricity for the year
ended December 31, 2002, compared to 12.6 million MWh for the same period in
2001.

The gross margin, or operating revenues minus cost of energy sold,
decreased $209.4 million or 80.1%. Lower margins were created primarily by weak
pricing, less price volatility and lower market liquidity. In addition,
unexpected outages at Four Corners reduced availability of power for wholesale
sales. These lower margins were partially offset by a favorable change in the
mark-to-market position of the marketing portfolio of $55.3 million
year-over-year ($29.5 million gain in 2002 versus $25.8 million loss in 2001). A
majority of the gain in 2002 represents the reversal of previously recognized
mark-to-market losses.

Total non-fuel O&M increased $1.6 million or 4.7%. Energy production
costs increased $3.3 million or 11.2% for the period due to costs of $4.0
million related to the future expansion of Afton. This cost increase was
partially offset by decreased costs of $0.5 million for planned outages at SJGS.
Depreciation and amortization expense increased $3.0 million or 52.5% for the
period due to a higher depreciable plant base.

49

Corporate and Other

Corporate administrative and general costs, which represent costs that
are driven primarily by corporate-level activities, decreased $3.7 million or
4.0% for the period to $88.2 million. This decrease was due to lower bonus
expense of $11.9 million in 2002 resulting from lower earnings projections. This
decrease was partially offset by higher labor costs of $8.2 million resulting
from a transfer of employees from operations to corporate.

Consolidating Non-Operating

Other Income and Deductions

Other income decreased by $3.8 million or 7.3% reflecting lower
year-over-year returns on investments reflecting market conditions.

Other deductions decreased $55.0 million or 81.7% primarily due to
charges in 2001 that did not recur in 2002. In 2001, the Company recognized
charges for the write-off of an Avistar investment of $13.1 million, the
write-off of non-recoverable coal mine decommissioning costs of $13.0 million,
non-recoverable regulatory costs of $11.1 million, a contribution to the PNM
Foundation of $5.0 million, and certain costs related to the Company's now
terminated acquisition of Western Resources' electric utility operations of
$18.0 million. In 2002, the Company recognized a gain from the reversal of a
reserve of $2.4 million to reflect the early, successful resolution of the
litigation stemming from the terminated Western Resources transaction and a
charge of $4.8 million for the cancellation of a transmission line project.

Income Taxes

The Company's consolidated income tax expense was $33.0 million for the
year ended December 31, 2002, compared to $81.1 million for the year ended
December 31, 2001. The decrease was due to the impact of lower earnings and a
decline in the effective tax rate. The Company's effective income tax rates for
the years ended December 31, 2002 and 2001 were 33.95% and 35.02%, respectively.
The decrease in the effective rate year over year was due to the reduction in
earnings in 2002 without a corresponding reduction in permanent tax benefits and
the recognition of certain affordable housing and research and development
credits in 2002.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with Generally
Accepted Accounting Principles ("GAAP") requires management to select and apply
accounting policies that best provide the framework to report the Company's
results of operations and financial position. The selection and application of
those policies require management to make difficult subjective or complex
judgments concerning reported amounts of revenue and expenses during the
reporting period and the reported amounts of assets and liabilities at the date
of the financial statements. The judgments and uncertainties inherent in this
process affect the application of those policies. As a result, there exists the
likelihood that materially different amounts would be reported under different
conditions or using different assumptions. Management has identified the

50

following accounting policies that it deems critical to the portrayal of the
Company's financial condition and results and that involve significant
subjectivity. Management believes that its selection and application of these
policies best represent the operating results and financial position of the
Company. The following discussion provides information on the processes utilized
by management in making judgments and assumptions as they apply to its critical
accounting policies.

Revenue Recognition

Operating revenues are recorded as services are rendered to customers.
The Company's Utility Operations records unbilled revenues representing the
estimated amount customers will be billed for services rendered between the
meter-reading dates in a particular month and the end of that month. The
unbilled revenues estimate is reversed in the following month. To the extent the
estimated amount differs from the amount subsequently billed, revenues will be
affected. At December 31, 2003 and 2002, unbilled revenues in the consolidated
balance sheet included estimates of $58.6 million and $58.5 million,
respectively, from the Company's Utility Operations.

Regulatory Assets and Liabilities

The Company is subject to the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" ("SFAS No. 71"). Accordingly, the Company has recorded assets and
liabilities on its balance sheet resulting from the effects of the ratemaking
process, which would not be recorded under GAAP for non-regulated entities.
Regulatory assets represent incurred costs that have been deferred because they
are probable of future recovery in customer rates. Regulatory liabilities
generally represent probable future reductions in revenue or refunds to
customers. The Company's continued ability to meet the criteria for application
of SFAS No. 71 may be affected in the future by competitive forces and
restructuring in the electric industry. In the event that SFAS No. 71 no longer
applied to all, or a separable portion, of Company's operations, the related
regulatory assets and liabilities would be written off unless an appropriate
regulatory recovery mechanism is provided.

Substantially all of the Company's regulatory assets and regulatory
liabilities are reflected in rates charged to retail customers or have been
addressed in a regulatory proceeding. To the extent that the Company concludes
that the recovery of a regulatory asset is no longer probable due to regulatory
treatment, the effects of competition or other factors, the amount would be
recorded as a charge to earnings as recovery is no longer probable. The Company
regularly assesses whether its regulatory assets are probable of future recovery
by considering factors such as applicable regulatory environment changes, recent
rate orders to other regulated entities in the same jurisdiction, anticipated
future regulatory decisions and their impact, developments in the ratemaking
process and the ability to recover costs.

As the Company's electric rates are fixed, the opportunity to recover
increased costs and the costs of new investment in facilities through rates
during the five-year rate freeze period is also limited. As a result, the
Company defers certain costs based on its expectation that it will recover these
costs in future rate cases. If future recovery of these costs ceases to be
probable, the Company would be required to record a charge in current period
earnings for the portion of the costs that were not recoverable.

51

Asset Impairment

The Company evaluates its tangible long-lived assets for impairment
whenever indicators of impairment exist pursuant to Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS 144"). These
potential impairment triggers would include fluctuating market conditions as a
result of industry deregulation; planned and scheduled customer purchase
commitments; future market penetration; fluctuating market prices (resulting
from changing fuel costs, other economic conditions, etc.); weather patterns,
and other market trends. Accounting rules require that if the sum of the
undiscounted expected future cash flows from a company's asset (without interest
charges that will be recognized as expenses when incurred), is less than the
carrying value of the asset, an asset impairment must be recognized in the
financial statements. The amount of impairment recognized is the difference
between the fair value of the asset and the carrying value of the asset.

The Company determined that no triggering events occurred during the
period in regards to its generation assets. At December 31, 2003, the Company
analyzed three turbines, which are currently in storage, with a combined
carrying value of approximately $79.1 million. These assets were intended for
planned build-outs that have been delayed or canceled. Based on the Company's
various plans to make these turbines operational, the Company concluded that it
will fully recover its investment. The Company expects to begin construction
utilizing these assets over the next several years. If the Company were unable
to realize these plans, the Company would be forced to recognize a loss with
respect to the carrying value of these assets depending on prevailing market
conditions. The Company will continue to analyze the turbines for impairment in
accordance with SFAS 144.

Pension Plan

The Company and its subsidiaries maintain a qualified defined benefit
pension plan ("pension plan"), which covers eligible non-union and union
employees including officers. The pension plan was frozen at the end of 1997
with regard to new participants, salary levels and benefits. The Company's
policy is to fund actuarially-determined contributions.

The Company's expense for its pension plan approximated $2.4 million for
the year ended December 31, 2003, and is calculated based upon a number of
actuarial assumptions, including an expected long-term rate of return on the
pension plan assets of 9%. In developing the expected long-term rate of return
assumption, the Company evaluated input from its actuaries and its investment
consultant, including their review of asset class return expectations as well as
long-term inflation assumptions. This long-term rate of return assumption
compares to the historical 10-year compounded return of 9.86% through the end of
December 2003. The expected long-term rate of return on the pension plan assets
is based on an asset allocation assumption of 58% with equity managers, 22% with
fixed income managers, and 20% with alternative investments that are primarily
real estate, private equity, and absolute return strategies. The pension plan's
actual asset allocation as of December 31, 2003 was 65% with equity managers,
25% with fixed income managers, and 10% with alternative investments. The
Company reviews the actual asset allocation and periodically rebalances the

52

asset allocation to the targeted allocation. The Company continues to believe
that 9% is a reasonable long-term rate of return on the pension plan's assets,
despite the recent market upturn in which the pension plan assets had a gain of
21.0% for the twelve months ended December 31, 2003. The Company will continue
to evaluate its actuarial assumptions, including expected rate of return, at
least annually, and will adjust as necessary.

The Company bases its determination of pension expense or income on a
market-related valuation of assets, which reduces year-to-year volatility. If
investment return is outside a range of 5% to 13% (expected long-term rate of
return plus or minus 4%), this market-related valuation recognizes the portion
of return that is outside the range over a five-year period from the year in
which the return occurs. Since the market-related value of assets recognizes the
portion of return that is outside the range over a five-year period, the future
value of assets will be impacted as previously deferred returns are recorded.

The discount rate that the Company utilizes for determining future
pension obligations is based on a review of long-term high-grade bonds and
management's expectation. As a result of this review, the Company adjusted the
rate to 6.5% at December 31, 2003 from 6.75% at September 30, 2002. Based on an
expected rate of return on the pension plan assets of 9%, a discount rate of
6.5% and various other assumptions, it is estimated that the pension income for
the pension plan will approximate $0.7 million in fiscal year 2004 and $1.4
million in fiscal year 2005. Future actual pension income or expense will depend
on future investment performance, changes in future discount rates and various
other factors related to the populations participating in the Company's pension
plans.

Lowering the pension plan's expected long-term rate of return on pension
assets by 0.5% (from 9% to 8.5%) would have raised pension expense for fiscal
year 2003 by approximately $1.8 million. Lowering the discount rate by 0.5%
would have increased pension expense for fiscal year 2003 by approximately $2.6
million.

The value of the pension plan assets has increased from $326.5 million at
December 31, 2002 to $425.7 million at December 31, 2003 including $48.9 million
of contributions during 2003. The Company does not expect to make any
contributions for the 2004 plan year.

Self-Insurance

The Company self-insures for certain losses related to general liability,
workers' compensation and automobile claims. The Company maintains insurance
with third-party insurers in excess of the Company's self-insured retentions to
limit the Company's exposure per occurrence or accident, as applicable. The
Company's self-insurance liabilities reflect the estimated ultimate cost of
claims incurred as of the balance sheet date. The estimated liabilities are not
discounted and are established based upon claims filed, estimated claims
incurred but not reported, and analyses of industry and historical data.

Beginning January 1, 2004, the Company began to self-insure certain
health care costs of its employees. The Company self-insures for certain medical
and dental benefits for active employees and retirees under the benefit
programs. The Company maintains stop-loss insurance with third-party insurers in
excess of the Company's self-insured retentions to limit the Company's exposure
per participant, as applicable.

53

Management reviews the amounts recorded for these liabilities on a
quarterly basis to ensure that they are appropriate. While management believes
that these estimates are reasonable based on the information available, the
Company's financial results could be impacted if actual trends, including the
severity or frequency of claims or fluctuations in premiums, differ from the
Company's estimates.

Contingent Liabilities

There are various claims and lawsuits pending against the Company and
certain of its subsidiaries. The Company has recorded a liability when the
effect of litigation can be estimated and where an outcome is considered
probable. Management's estimates are based on its knowledge of the relevant
facts at the time of the issuance of the Company's consolidated financial
statements. Subsequent developments could materially alter management's
assessment of a matter's probable outcome and the estimate of liability.

Environmental Issues

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

See "Item 7A. Quantitative and Qualitative Disclosure About Market Risk -
Interest Rate Risk" for discussion regarding the Company's accounting policies
and sensitivity analysis for the Company's financial instruments and derivative
energy and other derivative contracts. See also "Financing Activities" below for
additional discussion regarding the Company's accounting policies for forward
interest swaps.

EFFECTS OF CERTAIN EVENTS ON FUTURE REVENUES

The Company's long-term contracts to supply power expire from 2006
through 2013. The ability of the Company to renew these contracts at terms
comparable to those currently in place is dependent upon prevailing market
conditions at the time of negotiations. Currently, the Company has a long-term
firm commitment contract of 114 MW set to expire in 2006. The contract is priced
significantly above current market prices; however, the Company believes that it
will be able to significantly mitigate any revenue loss due to a rising forward
market.

54

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2003, the Company had cash and short-term investments of
$12.7 million compared to $83.3 million in cash and short-term investments at
December 31, 2002.

Cash provided by operating activities for the year ended December 31,
2003 was $228.7 million compared to $97.4 million for the year ended December
31, 2002. This increase in cash flows was due to increased profitability in the
Company's wholesale power operations, higher gas sales volumes and lower tax
payments. Also contributing to the increase were payments in 2002 which did not
recur in 2003. The Company did not make its first quarter 2001 estimated federal
income tax payment of $32.0 million until January 2002 because of an extension
granted by the IRS to taxpayers in several counties in New Mexico as a result of
wildfires in 2000. In addition, the Company made payments in 2002 of $36.0
million for the termination of the surface coal contract and $23.2 million to
secure a long-term wholesale contract. This increase in operating cash flows was
offset by higher wholesale electric prices and volume and higher gas prices in
the current year. The Company's Gas working capital is negatively affected by
the timing difference in gas purchases and collections. The Company pays for gas
in the month following purchase. Recovery of gas costs has typically taken up to
three months. The negative effect of this mismatch in cash flows was greater in
2003 due to the increase in gas prices. The increase in accounts receivable also
reflects higher wholesale electric prices in 2003. In addition, electric retail
collections decreased due to the rate reduction.

Cash used for investing activities was $101.6 million in 2003 compared to
$200.4 million in 2002. Cash used in 2002 for investing activities included
construction expenditures for new generating plants of $67.4 million. Payments
for combustion turbines were $11.1 million in 2003 compared to $30.0 million in
2002. Cash used for investing activities in 2003 also included the purchase of
certain long-term debt underlying leased assets in the open market for $6.7
million (see "Liquidity" below). The cash used for investing activities in 2003
was largely offset by the redemption of short-term investments of $80.3 million
in 2003 at the Holding Company level as compared to $45.6 million in 2002 at
PNM. These redemptions were primarily used for the Company's retirement of the
EIP long-term debt underlying the lease assets, repayment of short-term debt,
debt refinancing and pension funding.

Cash used for financing activities was $118.1 million in 2003 compared to
cash generated by financing activities of $78.4 million in 2002. Financing
activities in 2003 primarily consisted of the retirement of long-term debt of
$26.1 million, costs associated with the refunding and refinancing of long-term
debt of $55.3 million and short-term debt repayments of $24.1 million. In 2002,
the Company had short-term borrowings of $115.0 million for short-term liquidity
needs.

Pension and Other Post-Retirement Benefits

In May 2003, the board of directors approved the use of Holding Company
stock in the funding of the Company's pension plan as well as its retiree
medical trust. Corporate plan sponsors may make contributions of common stock to
their defined benefit plans of up to 10% of the value of the portfolio without
Department of Labor ("DOL") approval, provided that the contribution does not
otherwise constitute a prohibited transaction under the Employee Retirement

55

Income Security Act ("ERISA"). In June 2003, a contribution of 1,121,495 shares
of Holding Company common stock (approximately $28.9 million in market value)
was made to the Company's pension plan. The shares of Holding Company common
stock were sold over a period of time and there were no shares of common stock
remaining in the defined benefit trust on December 31, 2003. Due to the
appreciation in stock value, the net proceeds realized by the pension plan from
the sale of Holding Company common stock was $31.0 million.

Capital Requirements

Total capital requirements include construction expenditures as well as
other major capital requirements and cash dividend requirements for both common
and preferred stock. The main focus of the Company's current construction
program is upgrading generation systems, upgrading and expanding the electric
and gas transmission and distribution systems and purchasing nuclear fuel. To
preserve a strong financial position, the Company announced in 2002 its plans to
delay capital expenditures for previously planned generation expansion.
Projections for total capital requirements for 2004 are $172 million and
projections for construction expenditures for 2004 are $154 million. Total
capital requirements are projected to be $720 million and construction
expenditures are projected to be $624 million for 2004-2008. These estimates are
under continuing review and subject to on-going adjustment. This projection
excludes any generation fleet expansion capital, including any plans for the
utilization of the turbines in storage. The Company continues to look for
appropriately priced generation acquisition and expansion opportunities to
support retail electric load growth, the continued expansion of its long-term
contract business and to supplement its natural transmission position in the
Southwest and West.

In the year ended December 31, 2003, the Company utilized cash generated
from operations and cash on hand, as well as its liquidity arrangements, to
cover its capital requirements and construction expenditures. The Company
anticipates that internal cash generation and current debt capacity will be
sufficient to meet all of its capital requirements and construction expenditures
for the years 2004 through 2008. To cover the difference in the amounts and
timing of cash generation and cash requirements, the Company intends to use
short-term borrowings under its current and future liquidity arrangements.

Liquidity

As of March 1, 2004, PNM had $413.0 million of liquidity arrangements.
The liquidity arrangements consist of $300.0 million from an unsecured revolving
credit facility ("Credit Facility"), $90.0 million from an accounts receivable
securitization program ("AR Securitization") and $23.0 million in local lines of
credit. PNM entered into a new revolving credit facility on November 21, 2003,
which increased borrowing capacity from $195.0 million to $300.0 million. This
facility will mature November 21, 2006. As of March 1, 2004, there were no
borrowings against the Credit Facility, PNM was using $60.0 million of the AR
Securitization capacity and no borrowings under its local lines of credit. PNM
had $50.0 million of commercial paper outstanding as of March 1, 2004. In
addition, the Holding Company has $15.0 million in local lines of credit with no
usage at December 31, 2003 or March 1, 2004.

56

On April 8, 2003, the Company entered into the AR Securitization
providing for the securitization of PNM's retail electric service accounts
receivable and retail gas services accounts receivable. The total capacity under
the AR Securitization is $90.0 million. Under the AR Securitization, PNM will
periodically sell its accounts receivable, principally retail receivables, to a
bankruptcy remote subsidiary, PNM Receivables Corp, which in turn pledges an
undivided interest in the receivables to an unaffiliated conduit commercial
paper issuer.

On April 1, 2003, PNM exercised its early buyout option related to a 60%
interest in the EIP transmission line and related facilities held under lease.
Through the exercise of the early buyout option, PNM was able to retire all
$26.2 million of secured facility bonds, which were issued to originally finance
the sale-leaseback transaction. The secured facility bonds had previously been
disclosed as off balance sheet lease obligations in the notes to the Company's
financial statements. The Company will continue to exclude approximately $4.0
million of lease obligations relating to the 40% interest the Company does not
own from the consolidated balance sheet.

On June 12, 2003, the Holding Company and PNM each filed universal shelf
registration statements with the SEC for a combination of debt and equity
securities for $500.0 million and $285.0 million, respectively. The PNM shelf
registration statement when combined with a previously filed shelf registration
statement, provides $500.0 million of capacity. The PNM and Holding Company
shelf registration statements were declared effective June 28, 2003 and August
28, 2003, respectively. On September 9, 2003, PNM issued and sold $300.0 million
of debt under its shelf registration statement (see "Financing Activities"
below). As of December 31, 2003, the Holding Company and PNM had remaining
unissued securities registered under the shelf registration statements of $500.0
million and $200.0 million, respectively.

On August 27, 2003, the Company entered into an unrated private issuance
commercial paper program. The Company will periodically issue up to $50.0
million in unrated commercial paper for the shorter of 120 days or the maturity
of the Company's Credit Facility. The commercial paper is unsecured and the
proceeds will be used to reduce revolving credit borrowings. The Company's
Credit Facility serves as a backstop for the outstanding commercial paper.

The Company's ability to access the capital markets, if required, at a
reasonable cost and to provide for other capital needs is largely dependent upon
its ability to earn a fair return on equity, its results of operations, its
credit ratings, obtaining required regulatory approvals and financial and
wholesale 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.

PNM's credit outlook is considered stable by Moody's Investor Services,
Inc. ("Moody's") and Standard and Poor's Ratings Services ("S&P"). The Company
is committed to maintaining or improving its investment grade ratings. On June
13, 2003, S&P improved PNM's business position to a five from its previous
position of six. On February 27, 2004, S&P upgraded PNM's ratings on its senior
unsecured notes ("SUNs") to "BBB" with a stable outlook and its preferred stock
to "BB+". On March 9, 2004, Moody's upgraded PNM's SUNs, senior unsecured
pollution control revenue bonds and $300 million 3 year credit facility to
"Baa2" and its preferred stock "Ba1". Fitch rated PNM's SUNs and senior

57

unsecured pollution control revenue bonds "BBB-" and its preferred stock "BB-"
at December 31, 2003. Beginning in 2004, Fitch will no longer be rating PNM
debt. Investors are cautioned that a security rating is not a recommendation to
buy, sell or hold securities, that it is subject to revision or withdrawal at
any time by the assigning rating organization, and that each rating should be
evaluated independently of any other rating.

Off Balance Sheet Arrangements

The Company's off balance sheet arrangements consist primarily of
operating lease obligations for PVNGS Units 1 and 2, EIP and the Delta operating
lease. The total capitalization in relation to these obligations was $179.4
million as of December 31, 2003 and $195.8 million as of December 31, 2002 (see
"Commitments and Contractual Obligations" below).

Commitments and Contractual Obligations

The following tables show the Company's long-term obligations and
commitments as of December 31, 2003.

Payments Due
-----------------------------------------------------------------------
(In thousands)
Less than After
Contractual Obligations Total 1 year 2-3 years 4-5 years 5 years
- ----------------------------------- -------------- ------------ ------------ ------------- ------------

Short-Term Debt (a)................ $ 125,918 $ 125,918 $ - $ - $ -
Long-Term Debt..................... 987,210 407 814 300,170 685,819
Operating Leases................... 425,540 29,068 62,266 65,796 268,410
Purchased Power Agreements......... 203,282 27,733 50,870 35,233 89,446
Coal Contract (b).................. 1,395,926 109,309 192,456 182,359 911,802
-------------- ------------ ------------ ------------- ------------
Total Contractual Cash
Obligations..................... $3,137,876 $ 292,435 $ 306,406 $ 583,558 $1,955,477
============== ============ ============ ============= ============

(a) Represents the actual outstanding balance of the various credit
facilities as of December 31, 2003. (b) Assumes normal deliveries under
the coal contract. If no deliveries are made, certain minimum
payments may be required under the coal contract.

Amount of Commitment Expiration Per Period
------------------------------------------------------------------------
(In thousands)
Total
Other Commercial Amounts After
Commitments Committed 1 year 2-3 years 4-5 years 5 years
- -------------------------------- --------------- ------------ ------------ ------------ -------------

Short-Term Debt (c)............. $ 335,500 $ - $ 335,500 $ - $ -
Local Lines of Credit........... 38,500 38,500 - - -
Letters of Credit............... 4,500 4,500 - - -
--------------- ------------ ------------ ------------ -------------
Total Commercial
Commitments.................. $ 378,500 $ 43,000 $ 335,500 $ - $ -
=============== ============ ============ ============ =============

58

(c) Represents the unused borrowing capacity of the various credit
facilities less outstanding letters of credit of $4.5 million as
of December 31, 2003.

PNM leases interests in Units 1 and 2 of PVNGS, certain transmission
facilities, office buildings and other equipment under operating leases. The
lease expense for PVNGS is $66.3 million per year over base lease terms expiring
in 2015 and 2016. In 1998, PNM established PVNGS Capital Trust ("Capital Trust")
for the purpose of acquiring all the debt underlying the PVNGS leases. PNM
consolidates Capital Trust in its consolidated financial statements. The
purchase was funded with the proceeds from the issuance of $435 million of SUNs,
which were loaned to Capital Trust. Capital Trust then acquired and now holds
the debt component of the PVNGS leases. For legal and regulatory reasons, the
PVNGS lease payment continues to be recorded and paid gross with the debt
component of the payment returned to PNM through Capital Trust. As a result, the
net cash outflows for the PVNGS lease payment were $14.2 million for the year
ended December 31, 2003. The table above reflects the net lease payment.

PNM's other significant operating lease obligations include the EIP, a
leased interest in transmission line with annual lease payments of $2.9 million
(see "Financing Activities" below), and an operating lease for the entire output
of Delta, a gas fired generating plant in Albuquerque, New Mexico, with imputed
annual lease payments of $6.0 million.

The Company's off-balance sheet obligations are limited to PNM's
operating leases and certain financial instruments related to the purchase and
sale of energy (see below). The present value of PNM's operating lease
obligations for PVNGS Units 1 and 2, EIP and the Delta operating lease was
$179.4 million as of December 31, 2003.

PNM has entered into various long-term power purchase agreements ("PPAs")
obligating it to buy electricity for aggregate fixed payments of $203.3 million
plus the cost of production and a return. These contracts expire December 2005
through December 2020. In addition, PNM is obligated to sell electricity for
$191.5 million in fixed payments plus the cost of production and a return. These
contracts expire through May 2013. PNM's marketing portfolio as of December 31,
2003 included open forward contract positions to buy $30.6 million of
electricity and to sell $28.6 million of electricity. In addition, PNM had open
forward contract positions classified as normal sales of electricity under the
derivative accounting rules of $153.3 million and normal purchases of
electricity of $64.1 million.

PNM contracts for the purchase of gas to serve its retail customers.
These contracts are short-term in nature, supplying the gas needs for the
current heating season and the following off-season months. The price of gas is
a pass-through, whereby PNM recovers 100% of its cost of gas.

Contingent Provisions of Certain Obligations

The Holding Company and PNM have a number of debt obligations and other
contractual commitments that contain contingent provisions. Some of these, if
triggered, could affect the liquidity of the Company. The Holding Company or PNM
could be required to provide security, immediately pay outstanding obligations
or be prevented from drawing on unused capacity under certain credit agreements

59

if the contingent requirements were to be triggered. The most significant
consequences resulting from these contingent requirements are detailed in the
discussion below.

PNM's master purchase agreement for the procurement of gas for its retail
customers contains a contingent requirement that could require PNM to provide
security for its gas purchase obligations if the seller were to reasonably
believe that PNM was unable to fulfill its payment obligations under the
agreement.

The master agreement for the sale of electricity in the Western Systems
Power Pool ("WSPP") contains a contingent requirement that could require PNM to
provide security if its debt were to fall below investment grade rating. The
WSPP agreement also contains a contingent requirement, commonly called a
material adverse change ("MAC") provision, which could require PNM to provide
security if a material adverse change in its financial condition or operations
were to occur.

PNM's committed Credit Facility contains a "ratings trigger," for pricing
purposes only. If PNM is downgraded or upgraded by the ratings agencies, the
result would be an increase or decrease in interest cost, respectively. PNM's
committed Credit Facility contains a MAC provision which, if triggered, could
prevent PNM from drawing on its unused capacity under the Credit Facility. In
addition, the Credit Facility contains a contingent requirement that requires
PNM to maintain a debt-to-capital ratio, inclusive of off-balance sheet debt, of
less than 65% as well as maintenance of an earnings before interest, taxes,
depreciation and amortization ("EBITDA")/interest coverage ratio of three times.
If PNM's debt-to-capital ratio, inclusive of off-balance sheet debt, were to
exceed 65% or its interest coverage ratio falls below 3.0, PNM could be required
to repay all borrowings under the Credit Facility, be prevented from drawing on
the unused capacity under the Credit Facility, and be required to provide
security for all outstanding letters of credit issued under the Credit Facility.

If a contingent requirement were to be triggered under the Credit
Facility resulting in an acceleration of the outstanding loans under the Credit
Facility, a cross-default provision in the PVNGS leases could occur if the
accelerated amount is not paid. If a cross-default provision is triggered, the
lessors have the ability to accelerate their rights under the leases, including
acceleration of all future lease payments.

Financing Activities

Pursuant to PRC approval, on September 9, 2003, PNM issued and sold
$300.0 million aggregate principal amount of its senior unsecured notes with a
4.40% interest rate that mature September 15, 2008. The transaction closed on
September 17, 2003 and the proceeds were used to retire $268.4 million of
long-term debt that would otherwise have matured in August 2005, pay the
transaction costs, and improve working capital. All other long-term debt of PNM
matures in 2016 or later. The premium paid to refinance the long-term debt was
$23.9 million of which $16.6 million was charged against earnings based on prior
regulatory agreements. The remaining balance was capitalized as loss on
reacquired debt and will be amortized over the life of the new debt.

60

On May 13, 2003, the Company priced $182.0 million of tax exempt
pollution control bonds. The bonds were priced at an initial interest rate of
2.75%. The bond sale closed on May 23, 2003. By April 1, 2004, $146.0 million of
bonds will need to be remarketed and $36.0 million of bonds will need to be
remarketed by July 1, 2004. A portion of the proceeds were used to redeem the
$46.0 million of pollution control bonds, which became callable on December 15,
2002. The remaining $136.0 million was used to redeem $136.0 million of
pollution control bonds in August 2003. The Company had previously entered into
various forward swaps in 2001 and 2002, to hedge the interest rate on the
refinancing (see Note 6 - "Fair Value of Financial Instruments - Forward
Starting Interest Rate Swaps" in the Notes to Consolidated Financial
Statements).

The Company could enter into other long-term financings or hedging
transactions for the purpose of strengthening its balance sheet, funding growth
and reducing its cost of capital. The Company continues to evaluate its
investment and debt retirement options to optimize its financing strategy and
earnings potential. No additional first mortgage bonds may be issued under PNM's
mortgage. The amount of SUNs that may be issued is not limited by the SUNs
indenture. However, debt-to-capital requirements in certain of PNM's financial
instruments and regulatory agreements would ultimately limit the amount of
additional debt PNM would issue.

Dividends

The Holding Company's board of directors regularly reviews the dividend
policy. The declaration of common dividends is dependent upon a number of
factors including the ability of the Holding Company's subsidiaries to pay
dividends. Currently, PNM is the Holding Company's primary source of dividends.
As part of the order approving the formation of the Holding Company, the PRC
placed certain restrictions on the ability of PNM to pay dividends to the
Holding Company. PNM cannot pay dividends that will cause its debt rating to go
below investment grade. PNM also cannot pay dividends in any year, as determined
on a rolling four-quarter basis, in excess of net earnings for that year without
prior PRC approval. PNM has dividended all eligible amounts under the pre-2003
agreement to its parent. In January 2003, with the signing of the Global
Electric Agreement, the PRC modified the PNM dividend restriction to allow PNM
to dividend earnings as well as equity contributions made by the Holding Company
back to the Holding Company. Additionally, PNM has various financial covenants,
which limit the transfer of assets, whether through dividends or other means.

In addition, the ability of the Holding Company to declare dividends is
dependent upon the extent to which cash flows will support dividends, the
availability of earnings, its financial circumstances and performance, the
effect of regulatory decisions and legislative activities, future growth plans,
the related capital requirements, standard business considerations and market
and economic conditions generally.

Consistent with the PRC's holding company order, PNM paid dividends of
$49.6 million to the Holding Company for the year ended December 31, 2003.

61

On February 17, 2004, the Holding Company's board of directors approved a
4.3% increase in the common stock dividend. The increase raised the quarterly
dividend to $0.24 per share, for an indicated annual dividend of $0.96 per
share.

Capital Structure

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

December 31,
2003 2002
--------------- --------------

Common Equity...................... 51.9% 49.5%
Preferred Stock.................... 0.6 0.7
Long-term Debt..................... 47.5 49.8
--------------- --------------
Total Capitalization*........... 100.0% 100.0%
=============== ==============

* Total capitalization does not include as debt the present value of
PNM's operating lease obligations for PVNGS Units 1 and 2, EIP and
the Delta operating lease which was $179.4 million as of December 31,
2003 and $195.8 million as of December 31, 2002.

OTHER ISSUES FACING THE COMPANY

See Note 13 - "Commitments and Contingencies" in the Notes to
Consolidated Financial Statements.

NEW AND PROPOSED ACCOUNTING STANDARDS

See Note 18 - "New and Proposed Accounting Standards" in the Notes to
Consolidated Financial Statements.

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

Statements made in this filing that relate to future events or the
Company's expectations, projections, estimates, intentions, goals, targets and
strategies are made pursuant to the Private Securities Litigation Reform Act of
1995. Readers are cautioned that all forward-looking statements are based upon
current expectations and are subject to risk and uncertainties. The Company
assumes no obligation to update this information.

Because actual results may differ materially from expectations,
projections, estimates, goals and targets, the Company cautions readers not to
place undue reliance on these forward-looking statements. Future financial
results will be affected by a number of factors, including interest rates,
weather, fuel costs, changes in supply and demand in the market for electric
power, wholesale power prices, market liquidity, the competitive environment in
the electric and natural gas industries, the performance of generating units and
transmission system, state and federal regulatory and legislative decisions and
actions, the recoverability of regulatory assets, the outcome of legal
proceedings, changes in applicable accounting principles and the performance of
state, regional and national economies.

62

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company uses derivative financial instruments to manage risk as it
relates to changes in natural gas and electric prices, changes in interest rates
and, historically, adverse market changes for investments held by the Company's
various trusts. Additionally, the Company uses derivative instruments based on
certain financial composite indices as part of its enhanced cash management
program. The Company also uses certain derivative instruments for wholesale
power marketing transactions in order to take advantage of favorable price
movements and market timing activities in the wholesale power markets. The
following additional information is provided.

Risk Management

The Company controls the scope of its various forms of risk through a
comprehensive set of policies and procedures and oversight by senior level
management and the Holding Company Board of Directors. The Board's Finance
Committee sets the risk limit parameters. The Risk Management Committee ("RMC"),
comprised of corporate and business segment officers and other managers,
oversees all of the activities, which include commodity price, credit, equity,
interest rate and business risks. The RMC has oversight for the ongoing
evaluation of the adequacy of the risk control organization and policies. The
Company has a risk control organization, headed by the Director of Financial
Risk Management ("Risk Manager"), which is assigned responsibility for
establishing and enforcing the policies, procedures and limits and evaluating
the risks inherent in proposed transactions, on an enterprise-wide basis.

The RMC's responsibilities specifically include: establishment of a
general policy regarding risk exposure levels and activities in each of the
business segments; recommendation of the types of instruments permitted;
authority to establish a general policy regarding counterparty exposure and
limits; authorization and delegation of transaction limits; review and approval
of controls and procedures; review and approval of models and assumptions used
to calculate mark-to-market and risk exposure; authority to approve and open
brokerage and counterparty accounts; review of hedging and risk activities; and
quarterly reporting to the Finance Committee and the Board of Directors on these
activities.

The RMC also proposes Value at Risk ("VAR") limits to the Finance
Committee. The Finance Committee ultimately sets the aggregate VAR limits.

It is the responsibility of each business segment to create its own
control procedures and policies within the parameters established by the Finance
Committee. The RMC reviews and approves these policies, which are created with
the assistance of the Corporate Controller, Director of Internal Audit and the
Risk Manager. Each business segment's policies address the following controls:
authorized risk exposure limits; authorized instruments and markets; authorized
personnel; policies on segregation of duties; policies on mark-to-market
accounting; responsibilities for deal capture; confirmation procedures;
responsibilities for reporting results; statement on the role of derivative
transactions; and limits on individual transaction size (nominal value).

63

To the extent an open position exists, fluctuating commodity prices can
impact financial results and financial position, either favorably or
unfavorably. As a result, the Company cannot predict with certainty the impact
that its risk management decisions may have on its businesses, operating results
or financial position.

Commodity Risk

Marketing and procurement of energy often involves market risks
associated with managing energy commodities and establishing open positions in
the energy markets, primarily on a short-term basis. These risks fall into three
different categories: price and volume volatility, credit risk of counterparties
and adequacy of the control environment. PNM routinely enters into forward
contracts and options to hedge purchase and sale commitments, fuel requirements
and to enhance returns and minimize the risk of market fluctuations on the
Wholesale Operations.

The Company's Wholesale Operations, including long-term contracts,
forward sales and short-term sales, are managed through a net asset-backed
marketing strategy, whereby PNM's aggregate net open forward contract position
is covered by its forecasted excess generation capabilities. PNM is exposed to
market risk if its generation capabilities were disrupted or if its retail load
requirements were greater than anticipated. If PNM were required to cover all or
a portion of its net open contract position, it would have to meet its
commitments through market purchases.

Under the derivative accounting rules and the related accounting rules
for energy contracts, the Company accounts for its various financial derivative
instruments for the purchase and sale of energy differently based on
management's intent when entering into the contract. Energy contracts which meet
the definition of a derivative under SFAS 133 and do not qualify for a normal
purchase or sale designation are recorded on the balance sheet at fair market
value at each period end. The changes in fair market value are recognized in
earnings unless specific hedge accounting criteria are met. Should an energy
transaction qualify as a hedge under SFAS 133, fair market value changes from
year to year are recognized on the balance sheet with a corresponding charge to
other comprehensive income. Gains or losses are recognized when the hedged
transaction settles. Derivatives that meet the normal sales and purchases
exceptions within SFAS 133 as amended, are not marked to market but rather
recorded in results of operations when the underlying transaction settles.

(Intentionally left blank)

64

The following table shows the net fair value of mark-to-market energy
contracts included in the balance sheet:

December 31,
2003 2002
------------- -------------
(In thousands)
Mark-to-Market Energy Contracts:

Current asset...................................... $ 2,098 $ 4,531
Long-term asset.................................... 1,359 267
------------- -------------
Total mark-to-market assets................... 3,457 4,798
------------- -------------
Current liability.................................. (1,941) (5,725)
Long-term liability................................ (1,083) -
------------- -------------
Total mark-to-market liabilities.............. (3,024) (5,725)
------------- -------------
Net fair value of mark-to-market energy contracts.... $ 433 $(927)
============= =============

The mark-to-market energy portfolio positions represent net assets at
December 31, 2003 and represent net liabilities at December 31, 2002 after
netting all applicable open purchase and sale contracts.

The market prices used to value PNM's mark-to-market energy portfolio are
based on closing exchange prices and broker quotations. As of December 31, 2003
and December 31, 2002, PNM did not have any outstanding contracts that were
valued using methods other than quoted prices. The Company did not change its
methods for valuing its mark-to-market energy portfolio in 2003 as compared to
2002.

The following table provides detail of changes in the Company's
mark-to-market energy portfolio net asset or liability balance sheet position
from one period to the next:

Twelve Months Ended
December 31,
2003 2002
--------------- -------------
(In thousands)
Sources of Fair Value Gain/(Loss)
Fair value at beginning of year.............. $ (927) $(30,440)
Amount realized on contracts delivered
during period............................. (2,113) 26,336
Changes in fair value........................ 3,473 3,177
--------------- -------------
Net fair value at end of period.............. $ 433 $ (927)
=============== =============
Net change recorded as mark-to-market........ $ 1,360 $29,513
=============== =============

65

The following table provides the maturity of the net assets/(liabilities)
of the Company, giving an indication of when these mark-to-market amounts will
settle and generate/(use) cash. The following values were determined using
broker quotes:

Fair Value at December 31, 2003

Maturities
------------------------------------------------------
Less than
1 year 1-3 Years Total
------------------ --------------- ----------------
(In thousands)
$ 157 $ 276 $ 433

As of December 31, 2003, a decrease in market pricing of PNM's
mark-to-market energy portfolio by 10% would have resulted in a decrease in net
earnings of less than 1%. Conversely, an increase in market pricing of this
portfolio by 10% would have resulted in an increase in net earnings of less than
1%.

The Company assesses the risk of these long-term contracts and wholesale
sales activities using the VAR method to maintain the Company's total exposure
within management-prescribed limits. The Company utilizes the
variance/covariance model of VAR, which is a probabilistic model that measures
the risk of loss to earnings in market sensitive instruments. The
variance/covariance model relies on statistical relationships to analyze how
changes in different markets can affect a portfolio of instruments with
different characteristics and market exposure. VAR models are relatively
sophisticated. The quantitative risk information, however, is limited by the
parameters established in creating the model. The instruments being evaluated
may trigger a potential loss in excess of calculated amounts if changes in
commodity prices exceed the confidence level of the model used. The VAR
methodology employs the following critical parameters: volatility estimates,
market values of open positions, appropriate market-oriented holding periods and
seasonally adjusted correlation estimates. The Company's portfolio VAR
calculation considers the Company's forward position for the preceding eighteen
months. The mark-to-market VAR is calculated through the contract periods. The
Company uses a holding period of three days as the estimate of the length of
time that will be needed to liquidate the positions. The volatility and the
correlation estimates measure the impact of adverse price movements both at an
individual position level as well as at the total portfolio level. The
two-tailed confidence level established is 99%. For example, if VAR is
calculated at $10.0 million, it is estimated at a 99% confidence level that if
prices move against PNM's positions, the Company's pre-tax gain or loss in
liquidating the portfolio would not exceed $10.0 million in the three days that
it would take to liquidate the portfolio.

The Company's VAR is regularly monitored by the Company's RMC. The RMC
has put in place procedures to ensure that increases in VAR are reviewed and, if
deemed necessary, acted upon to reduce exposures. The VAR represents an estimate
of the potential gains or losses that could be recognized on PNM's wholesale
power marketing portfolios given current volatility in the market, and is not
necessarily indicative of actual results that may occur, since actual future
gains and losses will differ from those estimated. Actual gains and losses may
differ due to actual fluctuations in market rates, operating exposures, and the
timing thereof, as well as changes to PNM's wholesale power marketing portfolios
during the year.

66

The Company accounts for the sale of electric generation in excess of its
retail needs or the purchase of power for retail needs as normal purchases and
sales under SFAS 133. Transactions that do not meet the normal purchase or sale
exception or the definition of a hedge under SFAS 133 are accounted for as
energy marketing contracts and comprise PNM's mark-to-market portfolio. The VAR
for the mark-to-market portfolio was $56 thousand at December 31, 2003. The
Company also calculates a portfolio VAR for the preceding 18 months, which in
addition to its mark-to-market portfolio includes all contracts designated as
normal sales and purchases, hedges, and its estimated excess generation assets.
This excess is determined using average peak forecasts for the respective block
of power in the forward market. The Company's portfolio VAR was $9.2 million at
December 31, 2003.

The following table shows the high, average and low market risk as
measured by VAR on the Company's mark-to-market portfolio:

Twelve Months Ended
December 31, 2003
Period
High Average Low End
---------- ------------ ------------ -----------
(In thousands)
Three day holding period, 99%

two-tailed confidence level.......... $ 727 $ 122 $ 1 $56
One day holding period, 99%
two-tailed confidence level.......... $ 420 $ 70 $ - $32
Ten day holding period, 95%
two-tailed confidence level.......... $1,012 $ 170 $ 1 $78

Credit Risk

PNM is exposed to credit losses in the event of non-performance or
non-payment by counterparties. The Company uses a credit management process to
assess and monitor the financial conditions of counterparties. Credit exposure
is also regularly monitored by the RMC. The Company provides for losses due to
market and credit risk. PNM's credit risk with its largest counterparty as of
December 31, 2003 was $23.5 million.

67

The following table provides information related to PNM's credit exposure
as of December 31, 2003. The Company does not hold any credit collateral as of
December 31, 2003. The table further delineates that exposure by the credit
worthiness (credit rating) of the counterparties and provides guidance as to the
concentration of credit risk to individual counterparties PNM may have. Also
provided is an indication of the maturity of a company's credit risk by credit
ratings of the counterparties.

Schedule of Wholesale Operations Credit Risk Exposure
December 31, 2003

(b) Net
Net Number of Exposure of
Credit Counter- Counter-
Risk parties parties
Rating (a) Exposure >10% >10%
- ---------------------------------- ------------ ---------- -------------
(Dollars in thousands)

Investment grade.................. $46,799 2 $23,536
Non-investment grade.............. 162 - -
Split rating...................... 43 - -
Internal ratings
Investment grade............... 71 - -
Non-investment grade........... 18,678 1 7,055
------------ -------------
Total..................... $65,753 $30,591
============ =============

(a) Rating - Included in "Investment Grade" are counterparties with a minimum
S&P rating of BBB- or Moody's rating of Baa3. If the counterparty has
provided a guarantee by a higher rated entity (e.g., its parent),
determination is based on the rating of its guarantor. The "Internal
Ratings - Investment Grade" includes those counterparties that are
internally rated as investment grade in accordance with the guidelines
established in the Company's credit policy.

(b) The Net Credit Risk Exposure is the net credit exposure to PNM from its
Wholesale Operations. This includes long-term contracts, forward sales
and short-term sales. The exposure captures the net amounts due to PNM
from receivables/payables for realized transactions, delivered and
unbilled revenues, and mark-to-market gains/losses (pursuant to contract
terms). Exposures are offset according to legally binding netting
arrangements and reduced by credit collateral. Credit collateral includes
cash deposits, letters of credit and performance bonds received from
counterparties. Amounts are presented before those reserves that are
determined on a portfolio basis.

68

Maturity of Credit Risk Exposure
As of December 31, 2003

Less than Total Net
Rating 2 Years 2-5 Years Exposure
- --------------------------- -------------- -------------- --------------
(In thousands)

Investment grade........... $34,795 $12,004 $46,799
Non-investment grade....... 162 - 162
Split rating............... 43 - 43
Internal ratings
Investment grade........ 71 - 71
Non-investment grade.... 18,678 - 18,678
-------------- -------------- --------------
Total.............. $53,749 $12,004 $65,753
============== ============== ==============

Natural Gas Supply Contracts

PNM hedges certain portions of natural gas supply contracts in order to
protect its retail customers from adverse price fluctuations in the natural gas
market. The financial impact of all hedge gains and losses, including the
related costs of the program, is recoverable through the purchased gas
adjustment clause. As a result, earnings are not affected by gains and losses
generated by these instruments.

Interest Rate Risk

As of December 31, 2003 the Company had liquidated its investment
portfolio of fixed-rate government obligations and corporate securities.

PNM has long-term debt which subjects it to the risk of loss associated
with movements in market interest rates. The majority of the Company's long-term
debt is fixed-rate debt, and therefore, does not expose the Company's earnings
to a major risk of loss due to adverse changes in market interest rates.
However, the fair value of all long-term debt instruments would increase by
approximately 3.25% or $33.2 million if interest rates were to decline by 50
basis points from their levels at December 31, 2003. As of December 31, 2003,
the fair value of PNM's long-term debt was $1,029 million as compared to a
book-value of $987 million. In general, an increase in fair value would impact
earnings and cash flows if PNM were to re-acquire all or a portion of its debt
instruments in the open market prior to their maturity.

During the twelve months ended December 31, 2003, PNM contributed cash of
$20.0 million and approximately $28.9 million in Holding Company common shares
for plan year 2002 and 2003 to the trust for the Company's pension plan. In
addition, the Company contributed cash of approximately $6.2 million to other
post retirement benefits for plan year 2003. The securities held by the trusts
had an estimated fair value of $563.7 million as of December 31, 2003, of which
approximately 29% were fixed-rate debt securities that subject the Company to

69

risk of loss of fair value with movements in market interest rates. If rates
were to increase by 50 basis points from their levels at December 31, 2003, the
decrease in the fair value of the securities would be 2.8% or $4.6 million. PNM
does not currently recover or return through rates any losses or gains on these
securities. The Company, therefore, is at risk for shortfalls in its funding of
its obligations due to investment losses. The Company does not believe that
long-term market returns over the period of funding will be less than required
for the Company to meet its obligations. However, this belief is based on
assumptions about future returns that are inherently uncertain.

Equity Market Risk

PNM contributes to trusts established to fund its share of the
decommissioning costs of PVNGS and pension and other post-retirement benefits.
The trusts hold certain equity securities as of December 31, 2003. These equity
securities also expose the Company to losses in fair value. Approximately 63% of
the securities held by the various trusts were equity securities as of December
31, 2003. The Company is currently implementing a change in the asset allocation
in the pension portfolio, which will reduce the domestic equity exposure from
55% to 47.5%. Similar to the debt securities held for funding decommissioning
and certain pension and other post-retirement costs, PNM does not recover or
earn a return through rates on any losses or gains on these equity securities.

In 2001, the Company implemented an enhanced cash management strategy
using derivative instruments based on the S&P 100, S&P 500, and Nasdaq composite
indices. The strategy is designed to capitalize on high market volatility or
benefit from market direction. An investment manager is utilized to execute the
program. The risk related to the program is carefully managed by the RMC and has
VAR and stop-loss limits established. Trades are typically closed-out before the
end of a reporting period and within the same day of execution. In January 2004,
the Company terminated the use of this derivative trading strategy for the
enhanced cash management program.

(Intentionally left blank)

70

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX

Page

Management's Responsibility for Financial Statements..................... F-1
Independent Auditors' Report (PNM Resources, Inc.)....................... F-3
Independent Auditors' Report (Public Service Company of New Mexico)...... F-4
Financial Statements:
PNM Resources, Inc. and Subsidiaries
Consolidated Statements of Earnings............................... F-5
Consolidated Statements of Retained Earnings...................... F-6
Consolidated Balance Sheets....................................... F-7
Consolidated Statements of Cash Flows............................. F-9
Consolidated Statements of Capitalization......................... F-11
Consolidated Statements of Comprehensive Income (Loss)............ F-12
Public Service Company of New Mexico and Subsidiaries
Consolidated Statements of Earnings............................... F-13
Consolidated Statements of Retained Earnings...................... F-14
Consolidated Balance Sheets....................................... F-15
Consolidated Statements of Cash Flows............................. F-17
Consolidated Statements of Capitalization......................... F-19
Consolidated Statements of Comprehensive Income (Loss)............ F-20
Notes to Consolidated Financial Statements............................ F-21
Supplementary Data:
Quarterly Operating Results........................................... F-89
Independent Auditors' Report on Schedules............................. F-91
Schedule I Condensed Financial Information of Parent Company.......... F-91
Schedule II Valuation and Qualifying Accounts......................... F-95

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS

The accompanying financial statements of PNM Resources, Inc. and its
subsidiaries and Public Service Company of New Mexico and its subsidiaries, a
wholly owned subsidiary of PNM Resources, Inc., have been prepared in conformity
with accounting principles generally accepted in the United States of America.

The integrity and objectivity of data in these financial statements and
accompanying notes, including estimates and judgments related to matters not
concluded by year-end, are the responsibility of management as is all other
information in this Annual Report. Management devotes ongoing attention to
review and appraisal of its system of internal controls. This system is designed

F-1

to provide reasonable assurance, at an appropriate cost, that PNM Resources,
Inc.'s and Public Service Company of New Mexico's assets are protected, that
transactions and events are recorded properly and that financial reports are
reliable. The system is augmented by a staff of corporate auditors; careful
attention to selection and development of qualified financial personnel; and
programs to further timely communication and monitoring of policies, standards
and delegated authorities.

The Audit and Ethics Committee of the Board of Directors of PNM
Resources, Inc., composed entirely of outside directors who meet the
independence criteria established by the NYSE, meets regularly with the
financial managers, the corporate auditors and the independent auditors to
review the work of each. The independent auditors and corporate auditors have
free access to the Committee, without management representatives present, to
discuss the results of their audits and their comments on the adequacy of
internal controls and the quality of financial reporting.

(Intentionally left blank)

F-2

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
PNM Resources, Inc.

We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of PNM Resources, Inc. and subsidiaries (the
"Company") as of December 31, 2003 and 2002, and the related consolidated
statements of earnings, retained earnings, comprehensive income (loss), and cash
flows for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2003
and 2002, and results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 143, Accounting for
Asset Retirement Obligations, effective January 1, 2003. As discussed in Note 9
to the consolidated financial statements, during 2003, the Company changed the
actuarial valuation measurement date for the pension plan and other
post-retirement benefit plans from September 30 to December 31.

/s/ DELOITTE & TOUCHE LLP

Omaha, Nebraska
March 8, 2004

F-3

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of Public Service Company of New Mexico and
subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related
consolidated statements of earnings, retained earnings, comprehensive income
(loss), and cash flows for each of the three years in the period ended December
31, 2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2003
and 2002, and results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 143, Accounting for
Asset Retirement Obligations, effective January 1, 2003. As discussed in Note 9
to the consolidated financial statements, during 2003, the Company changed the
actuarial valuation measurement date for the pension plan and other
post-retirement benefit plans from September 30 to December 31.

/s/ DELOITTE & TOUCHE LLP

Omaha, Nebraska
March 8, 2004

F-4

PNM RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS

Year Ended December 31,
--------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
(In thousands, except per share amounts)
Operating Revenues: (notes 1 and 2)

Electric.............................................. $ 1,097,136 $ 839,884 $ 1,881,375
Gas................................................... 358,267 277,406 371,265
Other................................................. 311 1,404 1,538
--------------- --------------- ---------------
Total operating revenues........................... 1,455,714 1,118,694 2,254,178
--------------- --------------- ---------------
Operating Expenses:
Cost of energy sold................................... 802,731 499,751 1,438,646
Administrative and general............................ 158,706 146,231 155,392
Energy production costs............................... 140,584 149,528 152,455
Depreciation and amortization......................... 115,649 102,409 96,936
Transmission and distribution costs................... 60,070 63,870 69,001
Taxes, other than income taxes........................ 31,310 34,244 30,302
Income taxes (notes 1 and 8).......................... 28,072 20,887 88,769
--------------- --------------- ---------------
Total operating expenses........................... 1,337,122 1,016,920 2,031,501
--------------- --------------- ---------------
Operating income................................... 118,592 101,774 222,677
--------------- --------------- ---------------
Other Income and Deductions (note 16):
Other income.......................................... 52,705 48,360 52,147
Other deductions...................................... (46,153) (12,306) (67,257)
Income tax (expense) benefit (notes 1 and 8)......... 183 (12,144) 7,706
--------------- --------------- ---------------
Net other income and deductions.................... 6,735 23,910 (7,404)
--------------- --------------- ---------------
Earnings before interest charges................... 125,327 125,684 215,273
--------------- --------------- ---------------
Interest Charges:
Interest on long-term debt (note 4)................... 59,429 56,409 62,716
Other interest charges................................ 6,760 5,003 2,124
--------------- --------------- ---------------
Net interest charges............................... 66,189 61,412 64,840
--------------- --------------- ---------------

Preferred Stock Dividend Requirements of Subsidiary..... 586 586 586
--------------- --------------- ---------------
Net Earnings Before Cumulative Effect of Changes in
Accounting Principles................................. 58,552 63,686 149,847
Cumulative Effect of Changes in Accounting Principles
Net of Tax of $23,999 (notes 9, 12 and 17)............ 36,621 - -
--------------- --------------- ---------------
Net Earnings............................................ $ 95,173 $ 63,686 $ 149,847
=============== =============== ===============
Net Earnings per Common Share (note 7):
Basic................................................ $ 2.39 $ 1.63 $ 3.83
Diluted.............................................. $ 2.37 $ 1.61 $ 3.77
=============== =============== ===============
Dividends Paid per Share of Common Stock................ $ 0.91 $ 0.86 $ 0.80
=============== =============== ===============

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

F-5

PNM RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

Year Ended December 31,
--------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
(In thousands)

Balance at Beginning of Year............................ $ 444,651 $ 415,388 $ 296,843
Net earnings.......................................... 95,173 63,686 149,847
Dividends (note 4):
Common stock....................................... (36,755) (34,423) (31,302)
--------------- --------------- ---------------

Balance at End of Year.................................. $ 503,069 $ 444,651 $ 415,388
=============== =============== ===============

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

F-6

PNM RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS

As of December 31,
-------------------------------
2003 2002
--------------- -------------
(In thousands)
Utility Plant: (notes 1, 11 and 13)

Electric plant in service................................................... $2,419,162 $2,301,673
Gas plant in service........................................................ 630,949 615,907
Common plant in service and plant held for future use....................... 48,735 79,987
--------------- -------------
3,098,846 2,997,567
Less accumulated depreciation and amortization.............................. 1,063,645 1,102,443
--------------- -------------
2,035,201 1,895,124
Construction work in progress............................................... 133,317 173,248
Nuclear fuel, net of accumulated amortization of $15,995 and $16,568........ 25,917 26,832
--------------- -------------

Net utility plant........................................................ 2,194,435 2,095,204
--------------- -------------
Other Property and Investments:
Investment in lessor notes (notes 5 and 6).................................. 330,339 350,479
Other investments (notes 1 and 6)........................................... 114,273 92,225
Non-utility property, net of accumulated depreciation of $1,755 and $1,750.. 1,455 1,528
--------------- -------------
Total other property and investments..................................... 446,067 444,232
--------------- -------------
Current Assets:
Cash and cash equivalents................................................... 12,694 3,702
Accounts receivables, net of allowance for uncollectible accounts
of $9,284 and $15,575................................................... 68,258 46,914
Unbilled revenues (note 1).................................................. 82,899 88,438
Other receivables........................................................... 47,042 53,052
Inventories (note 1)........................................................ 40,799 37,230
Regulatory assets (note 3).................................................. 15,436 1,061
Short-term investments (notes 1 and 6)...................................... - 79,630
Other current assets........................................................ 38,835 32,753
--------------- -------------
Total current assets..................................................... 305,963 342,780
--------------- -------------
Deferred charges:
Regulatory assets (note 3).................................................. 215,416 196,283
Prepaid retirement cost (note 9)............................................ 85,782 39,665
Other deferred charges...................................................... 130,966 129,063
--------------- -------------
Total deferred charges................................................... 432,164 365,011
--------------- -------------
$3,378,629 $3,247,227
=============== =============

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

F-7

PNM RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES

As of December 31,
-------------------------------
2003 2002
--------------- --------------
(In thousands)

Capitalization:
Common stockholders' equity:

Common stock outstanding 40,259 and 39,118 shares, no par value (note 4).. $ 647,722 $ 624,119
Accumulated other comprehensive loss, net of tax (note 1)................. (73,487) (94,721)
Retained earnings......................................................... 503,069 444,651
--------------- --------------
Total common stockholders' equity...................................... 1,077,304 974,049
Minority interest (notes 1 and 5)........................................... - 11,760
Cumulative preferred stock without mandatory redemption
requirements (note 4)..................................................... 12,800 12,800
Long-term debt (note 4)..................................................... 987,210 980,092
--------------- --------------
Total capitalization..................................................... 2,077,314 1,978,701
--------------- --------------
Current Liabilities:
Short-term debt............................................................. 125,918 150,000
Accounts payable............................................................ 86,155 90,355
Accrued interest and taxes (notes 1 and 8).................................. 23,477 46,189
Other current liabilities................................................... 110,031 99,019
--------------- --------------
Total current liabilities................................................ 345,581 385,563
--------------- --------------
Deferred Credits:
Accumulated deferred income taxes (notes 1 and 8)........................... 250,098 139,732
Accumulated deferred investment tax credits (notes 1 and 8)................. 38,462 41,583
Regulatory liabilities (note 3)............................................. 316,384 279,952
Asset retirement obligations (note 12)...................................... 46,416 -
Minimum pension liability................................................... 128,825 141,175
Accrued post-retirement benefit cost (note 9)............................... 20,638 17,335
Other deferred credits (note 14)............................................ 154,911 263,186
--------------- --------------
Total deferred credits................................................... 955,734 882,963
--------------- --------------
Commitments and Contingencies (note 13)....................................... - -
--------------- --------------
$3,378,629 $3,247,227
=============== ==============

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

F-8

PNM RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,
----------------------------------------------
2003 2002 2001
-------------- -------------- --------------
(In thousands)
Cash Flows From Operating Activities:

Net earnings................................................... $ 95,173 $ 63,686 $149,847
Adjustments to reconcile net earnings to net cash flows
from operating activities:
Depreciation and amortization.............................. 144,854 115,415 106,768
Allowance for equity funds used during construction........ (2,589) - -
Accumulated deferred income tax............................ 90,175 44,138 (36,066)
Transition costs write-off................................. 16,720 - -
Loss on reacquired debt.................................... 16,576 - -
Cumulative effect of a change in accounting principle...... (60,620) - -
Asset write-offs........................................... - 4,817 36,496
Merger costs............................................... - (2,436) 17,975
Net unrealized losses on trading and investment contracts.. (1,360) (29,513) 26,172
Wholesale credit reserve................................... (2,433) - (5,406)
Other, net................................................. - 2,083 (4,297)
Changes in certain assets and liabilities:
Accounts receivables..................................... (21,344) 2,830 36,297
Unbilled revenues........................................ 5,539 3,936 22,765
Accrued post-retirement benefit costs.................... (14,962) (18,986) 2,873
Other assets............................................. (5,972) (41,152) 17,841
Accounts payable......................................... (7,317) 34,597 (91,378)
Accrued interest and taxes............................... (22,712) (25,833) 35,133
Other liabilities........................................ (1,036) (56,223) 12,326
-------------- -------------- --------------
Net cash flows from operating activities............... 228,692 97,359 327,346
-------------- -------------- --------------
Cash Flows From Investing Activities:
Utility plant additions........................................ (167,701) (229,629) (253,899)
Nuclear fuel additions......................................... (9,503) (10,596) (10,945)
Redemption of available-for-sale investments................... 80,291 76,633 (150,000)
Combustion turbine payments.................................... (11,136) (29,975) -
Bond purchase.................................................. (6,675) (5,572) -
Return of principal PVNGS lessor notes......................... 18,360 17,531 16,674
Merger acquisition costs....................................... - - (11,567)
Other.......................................................... (5,203) (18,819) 2,723
-------------- -------------- --------------
Net cash flows from investing activities............... (101,567) (200,427) (407,014)
-------------- -------------- --------------

F-9

PNM RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,
----------------------------------------------
2003 2002 2001
-------------- -------------- --------------
(In thousands)
Cash Flows From Financing Activities:

Short-term borrowings (repayments), net (note 4)............ (24,082) 115,000 35,000
Long-term debt borrowings................................... 483,882 - -
Long-term debt repayments................................... (476,572) - -
Premium on long-term debt refinancing....................... (23,905) - -
Refund costs of pollution control bonds..................... (31,427) - -
Exercise of employee stock options (note 10)................ (9,639) (2,412) (2,179)
Dividends paid.............................................. (36,702) (34,226) (31,876)
Other....................................................... 312 - (560)
-------------- -------------- --------------
Net cash flows from financing activities........ (118,133) 78,362 385
-------------- -------------- --------------
Increase (Decrease) in Cash and Cash Equivalents.............. 8,992 (24,706) (79,283)
Beginning of Year............................................. 3,702 28,408 107,691
-------------- -------------- --------------
End of Year................................................... $ 12,694 $ 3,702 $ 28,408
============== ============== ==============
Supplemental Cash Flow Disclosures:
Interest paid, net of capitalized interest.................. $ 69,046 $ 53,041 $ 62,216
============== ============== ==============
Income taxes paid (refunded), net........................... $(23,154) $ 13,541 $ 72,146
============== ============== ==============
Non Cash Transactions:
Long-term debt assumed for transmission line................ $ - $ 26,152 $ -
============== ============== ==============
Pension contribution of PNM Resources, Inc. common shares... $ 28,950 $ - $ -
============== ============== ==============

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

F-10

PNM RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION

As of December 31,
---------------------------------
2003 2002
--------------- --------------
(In thousands)
Common Stock Equity:

Common Stock, no par value (note 4).................................. $ 647,722 $ 624,119
Accumulated other comprehensive income, net of tax (note 1).......... (73,487) (94,721)
Retained earnings.................................................... 503,069 444,651
--------------- --------------
Total common stock equity........................................ 1,077,304 974,049
--------------- --------------
Minority Interest (notes 1 and 5)........................................ - 11,760
--------------- --------------
Cumulative Preferred Stock: (note 4)
Without mandatory redemption requirements:
1965 Series, 4.58% with a stated value of $100.00 and a
current redemption price of $102.00. Outstanding shares
at December 31, 2003 and 2002 were 128,000...................... 12,800 12,800
--------------- --------------
Long-Term Debt: (note 4)
Issue and Final Maturity
First Mortgage Bonds, Pollution Control Revenue Bonds:
5.7% due 2016................................................... 65,000 65,000
6.375% due 2022................................................. - 46,000
--------------- --------------
Total First Mortgage Bonds 65,000 111,000
--------------- --------------
Senior Unsecured Notes, Pollution Control Revenue Bonds:
6.30% due 2016................................................ 77,045 77,045
5.75% due 2022................................................ 37,300 37,300
5.80% due 2022................................................ 100,000 100,000
6.375% due 2022................................................. 90,000 90,000
6.375% due 2023................................................. - 36,000
6.40% due 2023................................................ - 100,000
6.30% due 2026................................................ 23,000 23,000
6.60% due 2029................................................ 11,500 11,500
2.75% due 2033................................................. 46,000 -
2.75% due 2033................................................. 100,000 -
2.75% due 2038................................................. 36,000 -
--------------- --------------
Total Senior Unsecured Notes, Pollution Control Revenue Bonds... 520,845 474,845
--------------- --------------
Senior Unsecured Notes:
7.10% due 2005.................................................. - 268,420
4.40% due 2008.................................................. 300,000 -
7.50% due 2018.................................................. 100,025 100,025
EIP debt............................................................ - 26,152
Other, including unamortized discounts.............................. 1,340 (350)
--------------- --------------
Total long-term debt........................................ 987,210 980,092
--------------- --------------
Total Capitalization..................................................... $ 2,077,314 $ 1,978,701
=============== ==============

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

F-11

PNM RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Year Ended December 31,
--------------------------------------------
2003 2002 2001
------------- -------------- -------------
(In thousands)

Net Earnings.............................................................. $95,173 $ 63,686 $149,847
------------- -------------- -------------
Other Comprehensive Income (Loss):
Unrealized gain (loss) on securities:
Unrealized holding gains arising during the period,
net of tax expense of $1,256, $853 and $46....................... 1,916 1,303 70
Reclassification adjustment for losses included in net income,
net of tax benefit of $440, $602 and $345........................ (672) (919) (526)

Minimum pension liability adjustment, net of tax expense (benefit)
of $6,284, $(36,085) and $(18,912)............................ 9,589 (55,061) (28,858)

Mark-to-market adjustment for certain derivative transactions:
Initial implementation of SFAS 133 designated cash flow hedges,
net of tax expense of $4,029..................................... - - 6,148
Change in fair market value of designated cash flow hedges,
net of tax expense (benefit) of $6,816, $(6,790) and $226........ 10,401 (10,361) 345
Reclassification adjustment for losses included in net income,
net of tax benefit of $450 and $4,029............................ - (687) (6,148)
------------- -------------- -------------
Total Other Comprehensive Income (Loss)................................... 21,234 (65,725) (28,969)
------------- -------------- -------------
Total Comprehensive Income (Loss)......................................... $116,407 $(2,039) $120,878
============= ============== =============

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

F-12

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

Year Ended December 31,
--------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
(In thousands, except per share amounts)
Operating Revenues: (notes 1 and 2)

Electric................................................. $1,097,136 $ 839,884 $1,881,375
Gas...................................................... 358,267 277,406 371,265
Other.................................................... - - 1,538
--------------- --------------- ---------------
Total operating revenues.............................. 1,455,403 1,117,290 2,254,178
--------------- --------------- ---------------
Operating Expenses:
Cost of energy sold...................................... 802,711 498,941 1,438,646
Administrative and general............................... 160,200 140,500 155,392
Energy production costs.................................. 140,584 149,528 152,455
Depreciation and amortization............................ 113,921 101,689 96,936
Transmission and distribution costs...................... 61,169 63,870 69,001
Taxes, other than income taxes........................... 29,670 31,333 30,302
Income taxes (notes 1 and 8)............................. 28,262 22,774 88,769
--------------- --------------- ---------------
Total operating expenses.............................. 1,336,517 1,008,635 2,031,501
--------------- --------------- ---------------
Operating income...................................... 118,886 108,655 222,677
--------------- --------------- ---------------
Other Income and Deductions (note 16):
Other income............................................. 48,755 40,446 52,147
Other deductions......................................... (39,625) (15,059) (67,257)
Income tax (expense) benefit (notes 1 and 8)............ (2,328) (10,096) 7,706
--------------- --------------- ---------------
Net other income and deductions....................... 6,802 15,291 (7,404)
--------------- --------------- ---------------
Earnings before interest charges...................... 125,688 123,946 215,273
--------------- --------------- ---------------
Interest Charges:
Interest on long-term debt (note 4)...................... 59,013 56,409 62,716
Other interest charges................................... 6,697 5,321 2,124
--------------- --------------- ---------------
Net interest charges.................................. 65,710 61,730 64,840
--------------- --------------- ---------------
Net Earnings Before Cumulative Effect of Changes in
Accounting Principles................................... 59,978 62,216 150,433

Cumulative Effect of Changes in Accounting Principles,
Net of tax of $23,999 (notes 9, 12 and 17).............. 36,621 - -
--------------- --------------- ---------------
Net Earnings Before Preferred Stock Dividends.............. 96,599 62,216 150,433
Preferred Stock Dividend Requirements...................... 586 586 586
--------------- --------------- ---------------
Net Earnings............................................... $ 96,013 $ 61,630 $ 149,847
=============== =============== ===============

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

F-13

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

Year Ended December 31,
--------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
(In thousands)

Balance at Beginning of Year............................. $256,157 $288,388 $296,843
Net earnings before preferred stock dividends.......... 96,599 62,216 150,433
Dividends (note 4):
Cumulative preferred stock.......................... (586) (586) (586)
Common stock........................................ - - (31,302)
Dividends to Parent (note 4):
Assets.............................................. - (34,880) -
Cash................................................ (49,581) (58,981) (127,000)
--------------- --------------- ---------------

Balance at End of Year................................... $302,589 $256,157 $288,388
=============== =============== ===============

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

F-14

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS

As of December 31,
-------------------------------
2003 2002
-------------- ---------------
(In thousands)
Utility Plant: (notes 1, 11 and 13)

Electric plant in service................................................ $2,419,162 $2,301,048
Gas plant in service..................................................... 630,949 615,907
Common plant in service and plant held for future use.................... 10,997 18,137
-------------- ---------------
3,061,108 2,935,092
Less accumulated depreciation and amortization........................... 1,055,251 1,098,353
-------------- ---------------
2,005,857 1,836,739
Construction work in progress............................................ 120,340 159,435
Nuclear fuel, net of accumulated amortization of $15,995 and $16,568..... 25,917 26,832
-------------- ---------------

Net utility plant..................................................... 2,152,114 2,023,006
-------------- ---------------
Other Property and Investments:
Investment in lessor notes (notes 5 and 6)............................... 330,339 350,479
Other investments (notes 1 and 6)........................................ 91,273 78,344
Non-utility property..................................................... 966 966
-------------- ---------------
Total other property and investments.................................. 422,578 429,789
-------------- ---------------
Current Assets:
Cash and cash equivalents................................................ 11,607 3,094
Accounts receivables, net of allowance for uncollectible accounts
of $9,284 and $15,575............................................... 68,258 46,914
Unbilled revenue (note 1)................................................ 82,899 88,438
Intercompany receivable.................................................. - 4,593
Other receivables........................................................ 45,814 52,783
Inventories (note 1)..................................................... 40,791 37,228
Regulatory assets (note 3)............................................... 15,436 1,061
Other current assets..................................................... 28,089 22,872
-------------- ---------------
Total current assets.................................................. 292,894 256,983
-------------- ---------------
Deferred charges:
Regulatory assets (note 3)............................................... 215,416 196,242
Prepaid retirement cost (note 9)......................................... 85,782 39,665
Other deferred charges................................................... 130,520 129,083
-------------- ---------------
Total deferred charges................................................ 431,718 364,990
-------------- ---------------
$3,299,304 $3,074,768
============== ===============

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

F-15

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES

As of December 31,
---------------------------------
2003 2002
---------------- ---------------
(In thousands)
Capitalization:
Common Stockholder's Equity:

Common stock outstanding 39,118 shares (note 4)..................... $ 195,589 $ 195,589
Paid-in capital..................................................... 556,608 430,043
Accumulated other comprehensive loss, net of tax (note 1)........... (73,487) (94,130)
Retained earnings................................................... 302,589 256,157
---------------- ---------------
Total common stockholders' equity................................ 981,299 787,659
Minority interest (notes 1 and 5)..................................... - 11,760
Cumulative preferred stock without mandatory redemption
requirements (note 4)............................................... 12,800 12,800
Long-term debt (note 4)............................................... 987,210 953,940
---------------- ---------------
Total capitalization............................................... 1,981,309 1,766,159
---------------- ---------------
Current Liabilities:
Short-term debt....................................................... 124,900 150,000
Intercompany debt..................................................... - 28,436
Accounts payable...................................................... 78,313 88,101
Intercompany accounts payable......................................... 73,571 34,468
Accrued interest and taxes (notes 1 and 8)............................ 8,879 36,450
Other current liabilities............................................. 83,823 87,701
---------------- ---------------
Total current liabilities.......................................... 369,486 425,156
---------------- ---------------
Deferred Credits:
Accumulated deferred income taxes (notes 1 and 8)..................... 246,282 142,520
Accumulated deferred investment tax credits (notes 1 and 8)........... 38,462 41,583
Regulatory liabilities (note 3)....................................... 316,384 279,952
Asset retirement obligations (note 12)................................ 46,416 -
Minimum pension liability............................................. 128,825 141,175
Accrued post-retirement benefit cost (note 9)......................... 20,638 17,335
Other deferred credits (note 14)...................................... 151,502 260,888
---------------- ---------------
Total deferred credits............................................. 948,509 883,453
---------------- ---------------
Commitments and Contingencies (note 13)................................. - -
---------------- ---------------
$ 3,299,304 $ 3,074,768
================ ===============

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

F-16

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,
----------------------------------------------
2003 2002 2001
-------------- -------------- --------------
(In thousands)
Cash Flows From Operating Activities:

Net earnings.......................................................... $ 96,013 $ 61,630 $149,847
Adjustments to reconcile net earnings to net cash flows
from operating activities:
Depreciation and amortization..................................... 143,940 114,695 106,768
Allowance for equity funds used during construction............... (2,551) - -
Accumulated deferred income tax................................... 82,799 46,207 (36,066)
Transition costs write-off........................................ 16,720 - -
Loss on reacquired debt........................................... 16,576 - -
Cumulative effect of a change in accounting principle............. (60,620) - -
Asset write-offs.................................................. - 4,817 36,496
Merger costs...................................................... - (2,436) 17,975
Net unrealized (gains) losses on trading and investment contracts. (1,360) (29,513) 26,172
Wholesale credit reserve.......................................... (2,433) - (5,406)
Other, net........................................................ - 3,924 (4,297)
Changes in certain assets and liabilities:
Accounts receivables............................................ (21,344) 2,830 36,297
Unbilled revenues............................................... 5,539 3,936 22,765
Accrued post-retirement benefit costs........................... (14,962) (18,986) 2,873
Other assets.................................................... (3,716) (93,863) 27,792
Accounts payable................................................ (12,905) 30,510 (91,378)
Accrued interest and taxes...................................... (27,572) (35,572) 35,133
Other liabilities............................................... (20,225) (27,785) 11,740
-------------- -------------- --------------
Net cash flows from operating activities.................. 193,899 60,394 336,711
-------------- -------------- --------------

Cash Flows From Investing Activities:
Utility plant additions............................................... (159,322) (209,225) (253,899)
Nuclear fuel additions................................................ (9,503) (10,596) (10,945)
Redemption of available-for-sale investments.......................... - 45,621 (45,000)
Combustion turbine payments........................................... (11,136) (29,975) -
Eastern Interconnect Project buyout................................... (36,925) - -
Return of principal PVNGS lessor notes................................ 18,360 17,531 16,674
Merger acquisition costs.............................................. - - (11,567)
Other................................................................. (3,697) (2,122) 3,392
-------------- -------------- --------------
Net cash flows from investing activities.................. (202,223) (188,766) (301,345)
-------------- -------------- --------------

F-17

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,
-----------------------------------------------
2003 2002 2001
-------------- ------------- ---------------
(In thousands)
Cash Flows From Financing Activities:

Short-term borrowings (repayments), net.................... (25,100) - -
Long-term debt borrowings.................................. 483,780 115,000 35,000
Long-term debt repayments.................................. (450,420) - -
Premium on long-term debt refinancing...................... (23,905) - -
Refund costs of pollution control bonds.................... (31,427) - -
Equity contribution from parent............................ 126,053 - -
Exercise of employee stock options (note 10)............... - - (2,179)
Dividends paid............................................. (49,581) (58,981) (158,302)
Other...................................................... (223) 108 (548)
Change in intercompany accounts............................ (12,340) 58,311 -
-------------- -------------- --------------
Net cash flows from financing activities....... 16,837 114,438 (126,029)
-------------- -------------- --------------
Increase (Decrease) in Cash and Cash Equivalents............. 8,513 (13,934) (90,663)
Beginning of Year............................................ 3,094 17,028 107,691
-------------- -------------- --------------
End of Year.................................................. $ 11,607 $ 3,094 $ 17,028
============== ============== ==============
Supplemental Cash Flow Disclosures:
Interest paid, net of capitalized interest................. $ 67,500 $ 53,350 $ 62,216
============== ============== ==============
Income taxes paid (refunded), net.......................... $ (5,084) $ 9,901 $ 72,146
============== ============== ==============
Non Cash Transactions:
Non-cash dividends to parent............................... $ - $ 34,880 $ -
============== ============== ==============

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

F-18

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

As of December 31,
---------------------------------
2003 2002
--------------- ---------------
(In thousands)
Common Stock Equity:

Common stock outstanding, par value $5 per share (note 4).............. $ 195,589 $ 195,589
Paid-in capital........................................................ 556,608 430,043
Accumulated other comprehensive income, net of tax (note 1)............ (73,487) (94,130)
Retained earnings...................................................... 302,589 256,157
--------------- --------------
Total equity....................................................... 981,299 787,659
--------------- --------------
Minority Interest (notes 1 and 5).......................................... - 11,760
--------------- --------------
Cumulative Preferred Stock: (note 4)
Without mandatory redemption requirements:
1965 Series, 4.58% with a stated value of $100.00 and a
current redemption price of $102.00. Outstanding shares
at December 31, 2003 and 2002 were 128,000........................ 12,800 12,800
--------------- --------------
Long-Term Debt: (note 4)
Issue and Final Maturity
First Mortgage Bonds, Pollution Control Revenue Bonds:
5.7% due 2016...................................................... 65,000 65,000
6.375% due 2022.................................................... - 46,000
--------------- --------------
Total First Mortgage Bonds 65,000 111,000
--------------- --------------
Senior Unsecured Notes, Pollution Control Revenue Bonds:
6.30% due 2016.................................................. 77,045 77,045
5.75% due 2022.................................................. 37,300 37,300
5.80% due 2022.................................................. 100,000 100,000
6.375% due 2022................................................... 90,000 90,000
6.375% due 2023................................................... - 36,000
6.40% due 2023.................................................. - 100,000
6.30% due 2026.................................................. 23,000 23,000
6.60% due 2029.................................................. 11,500 11,500
2.75% due 2033................................................... 46,000 -
2.75% due 2033................................................... 100,000 -
2.75% due 2038................................................... 36,000 -
--------------- --------------
Total Senior Unsecured Notes, Pollution Control Revenue Bonds..... 520,845 474,845
--------------- --------------
Senior Unsecured Notes:
7.10% due 2005.................................................... - 268,420
4.40% due 2008..................................................... 300,000 -
7.50% due 2018.................................................... 100,025 100,025
Other, including unamortized discounts................................ 1,340 (350)
--------------- --------------
Total long-term debt.......................................... 987,210 953,940
--------------- --------------
Total Capitalization....................................................... $ 1,981,309 $ 1,766,159
=============== ==============

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

F-19

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Year Ended December 31,
--------------------------------------------
2003 2002 2001
------------- -------------- -------------
(In thousands)

Net Earnings............................................................. $96,013 $61,630 $149,847
------------- -------------- -------------
Other Comprehensive Income (Loss):

Unrealized gain (loss) on securities:
Unrealized holding gains arising from the period,
net of tax expense of $1,545, $563 and $46...................... 2,357 861 70
Reclassification adjustment for gains included in net income,
net of tax benefit of $440, $602 and $345....................... (672) (919) (526)

Minimum pension liability adjustment, net of tax expense (benefit)
of $6,284, $(36,085) and $(18,912).................................. 9,589 (55,061) (28,858)

Mark-to-market adjustment for certain derivative transactions:
Initial implementation of SFAS 133 designated cash flow hedges,
net of tax expense of $4,029.................................... - - 6,148
Change in fair market value of designated cash flow hedges,
net of tax expense (benefit) of $6,140, $(6,113) and $226....... 9,369 (9,328) 345
Reclassification adjustment for losses included in net income,
net of tax benefit of $450 and $4,029........................... - (687) (6,148)
------------- -------------- -------------
Total Other Comprehensive Income (Loss).................................. 20,643 (65,134) (28,969)
------------- -------------- -------------
Total Comprehensive Income (Loss)........................................ $116,656 $(3,504) $120,878
============= ============== =============

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

F20

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003, 2002 and 2001

(1) Summary of the Business and Significant Accounting Policies

Nature of Business

PNM Resources, Inc. (the "Holding Company") is an investor-owned holding
company of energy and energy related businesses. Its principal subsidiary,
Public Service Company of New Mexico ("PNM"), is an integrated public utility
primarily engaged in the generation, transmission, distribution and sale and
marketing of electricity; transmission, distribution and sale of natural gas
within the State of New Mexico and the sale and marketing of electricity in the
Western United States. The business of PNM constitutes substantially all of the
business of Holding Company and its subsidiaries. Therefore, the financial
results and results of operations of PNM are virtually identical to the
consolidated results of the Holding Company and its subsidiaries. For ease of
discussion, these notes may use the term "Company" when referring to PNM or when
discussing matters of common applicability to the Holding Company and PNM. In
addition, the Holding Company provides energy and utility related services under
its wholly-owned subsidiary, Avistar, Inc. ("Avistar").

Upon the completion on December 31, 2001, of a one-for-one share exchange
between PNM and the Holding Company, the Holding Company became the parent
company of PNM. Prior to the share exchange, the Holding Company had existed as
a subsidiary of PNM. The new parent company began trading on the New York Stock
Exchange under the same PNM symbol beginning on December 31, 2001.

Presentation

The Notes to Consolidated Financial Statements of the Company are
presented on a combined basis. The Holding Company assumed substantially all of
the corporate activities of PNM on December 31, 2001. These activities are
billed to PNM on a cost basis to the extent they are for the corporate
management of PNM and are allocated to the operating segments. In January 2002,
Avistar and certain inactive subsidiaries of PNM were transferred by way of a
dividend to the Holding Company pursuant to an order from the New Mexico Public
Regulation Commission ("PRC"). Readers of the Notes to Consolidated Financial
Statements should assume that the information presented applies to the
consolidated results of operations and financial position of both the Holding
Company and its subsidiaries and PNM, except where the context or references
clearly indicate otherwise. Discussions regarding specific contractual
obligations generally reference the company that is legally obligated. In the
case of contractual obligations of PNM, these obligations are consolidated with
the Holding Company and its subsidiaries under generally accepted accounting
principles ("GAAP"). Broader operational discussions refer to the Company.

Accounting Principles

The Company maintains its accounting records in accordance with the
uniform system of accounts prescribed by the Federal Energy Regulatory
Commission ("FERC") and the National Association of Regulatory Utility
Commissioners, and adopted by the New Mexico Public Regulation Commission
("PRC").

F-21

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

The Company's accounting policies conform to the provisions of Statement
of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" ("SFAS 71"). SFAS 71 requires a rate-regulated entity to
reflect the effects of certain regulatory decisions in its financial statements.
In accordance with SFAS 71, the Company has deferred certain costs and recorded
certain liabilities pursuant to the rate actions of the FERC, and the PRC and
its predecessor. These "regulatory assets" and "regulatory liabilities" are
enumerated and discussed in Note 3.

The Company discontinued the application of SFAS 71 as of December 31,
1999, for the generation portion of its business effective with the passage of
the Electric Utility Industry Restructuring Act of 1999 ("Restructuring Act") in
accordance with Statement of Financial Accounting Standards No. 101, "Accounting
for the Discontinuation of Application of FASB Statement No. 71" ("SFAS 101").
In October 2002, the Company and several other parties signed the Global
Electric Agreement that provided for a five-year rate path for the Company's New
Mexico jurisdictional customers beginning in September of 2003 (see Note 13 for
further discussion). In response to the Global Electric Agreement, the New
Mexico Legislature repealed the Restructuring Act. As a result, the Company
re-applied SFAS 71 to its generation portion of its business during the first
quarter of 2003 as a result of the PRC approving the Global Electric Agreement
in January 2003.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and subsidiaries in which it owns a majority voting interest. Corporate
administrative and general expenses, which represent costs that are driven
primarily by corporate level activities, are allocated to the business segments.
There were no other significant intercompany transactions between the Holding
Company and PNM in 2003 and 2002, except for the common dividend, consolidation
of PVNGS capital trust and minority interest described in Note 5. All
significant intercompany transactions and balances have been eliminated.

The Company adopted Statement of Financial Accounting Standards No. 150
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150"). SFAS 150 established standards for
classifying and measuring certain financial instruments with characteristics of
both liabilities and equity. Under SFAS 150, issuers are required to classify as
liabilities a financial instrument that is within its scope as a liability
because that financial instrument embodies an obligation of the issuer. SFAS 150
is effective for financial instruments entered into or modified after May 31,
2003. The FASB has indefinitely deferred the classification and measurement
provisions and adoption of SFAS 150 in relation to limited life entities. Upon
adoption, the Company reclassified approximately $10 million from minority
interest to other deferred credits on its consolidated balance sheets at
December 31, 2003.

F-22

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Financial Statement Preparation

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

Cash and Cash Equivalents

All liquid investments with maturities of three months or less at the
date of purchase are considered cash equivalents.

Utility Plant

Utility plant is stated at cost, which includes capitalized
payroll-related costs such as taxes, pension and other fringe benefits,
administrative costs, an allowance for funds used during construction and any
carrying value adjustment as deemed appropriate.

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 regulated property
in the normal course of business are credited or charged to the accumulated
provision for depreciation.

Allowance For Funds Used During Construction ("AFUDC")

As provided by the uniform systems of accounts, AFUDC is charged to
utility plant. AFUDC represents the cost of borrowed funds (allowance for
borrowed funds used during construction) and a return on other funds (allowance
for equity funds used during construction).

The calculation of AFUDC should be performed if its subsequent inclusion
in allowable costs for rate-making purposes is probable. In 2003, PNM recorded
$3.9 million of AFUDC on certain construction projects. PNM did not record AFUDC
on construction projects in 2002 and 2001.

Capitalized Interest

SFAS 34, "Capitalization of Interest Costs," requires that interest cost
be capitalized as part of the historical cost of acquiring certain assets and is
calculated using only the cost of borrowing. Under GAAP, interest can only be
capitalized on non-SFAS 71 assets. PNM capitalizes interest on its generation
projects not included in rate base that are under construction and software

F-23

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

costs. The interest cost to be capitalized is theoretically that portion of
interest expense that could have been avoided if construction expenditures were
not made. The rate used for capitalization is the rate for borrowings specific
to the project. If there are no specific borrowings, the weighted average
borrowing rate for the Company is used. PNM has not borrowed any funds
specifically for any projects; therefore interest was being capitalized at the
overall weighted average borrowing rate of 6.4%. PNM's capitalized interest was
$1.2 million and $6.4 million in 2003 and 2002, respectively. No interest was
capitalized in 2001.

Inventories

Inventory consists principally of materials and supplies, natural gas
held in storage for eventual resale, and coal held for use in electric
generation.

Generally, materials and supplies include the costs of transmission,
distribution and generating plant materials. Materials and supplies are charged
to inventory when purchased and are expensed or capitalized as appropriate when
issued. Materials and supplies are valued using an average costing method.
Obsolete materials and supplies are immediately expensed when identified.

Gas in underground storage is valued using a weighted average inventory
method. Withdrawals are charged to sales service customers through the Purchased
Gas Adjustment Clause ("PGAC"). Adjustments to gas in underground storage due to
migration are charged to the PGAC and are based on a PRC pre-approved percentage
of injections.

Coal is valued using a rolling weighted average costing method that is
updated based on the current period cost per tons. Periodic aerial surveys are
performed and any material adjustments are recorded as identified.

Inventories consisted of the following at December 31, (in thousands).

2003 2002
------------- -------------

Coal................................. $11,282 $12,678
Gas in underground storage........... 4,295 2,001
Materials and supplies............... 25,222 22,551
------------- -------------
$40,799 $37,230
============= =============

Investments

The Company's investments are comprised of U.S., state, and municipal
government obligations and corporate securities. Investments with maturities of
less than one year are considered short-term and are carried at fair value. All
investments are held in the Company's name and are in the custody of major
financial institutions. The specific identification method is used to determine

F-24

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

the cost of securities disposed of, with realized gains and losses reflected in
other income and expense. At December 31, 2003 and 2002, all of the Company's
investments were classified as available for sale. Unrealized gains and losses
on these investments are included in other comprehensive income, net of any
related tax effect.

Revenue Recognition

The Company's Utility Operations record electric and gas operating
revenues in the period of delivery, which includes estimated amounts for service
rendered but unbilled at the end of each accounting period.

The determination of the energy sales to individual customers is based on
the reading of their meters, which occurs on a systematic basis throughout the
month. At the end of each month, amounts of energy delivered to customers since
the date of the last meter reading are estimated and the corresponding unbilled
revenue is estimated. Unbilled electric revenue is estimated based on the daily
generation volumes, estimated customer usage by class, weather factors, line
losses and applicable customer rates based on regression analyses reflecting
historical trends and experience.

The Company purchases gas on behalf of sales-service customers while
other marketers or producers purchase gas on behalf of transportation-service
customers. The Company collects a cost of service revenue for the
transportation, delivery, and customer service provided to these customers.
Sales-service tariffs are subject to the terms of the PGAC while transportation
service customers are metered and billed on the last day of the month.
Therefore, the Company estimates unbilled decatherms and records cost of service
and PGAC revenues for sales-service customers only.

The Company's Wholesale Operations revenues are recognized in the month
the energy is delivered to the customer and are based on the actual amounts
supplied to the customer. However, in accordance with the Western Systems Power
Pool contract, these revenues are billed in the month subsequent to their
delivery. Consequently, wholesale revenues for the last month in any reporting
period are unbilled when reported.

These electricity sales are recorded as operating revenues while the
electricity purchases are recorded as costs of energy sold. These amounts were
recorded on a gross basis, because the Company does not act as an agent or
broker for these merchant energy contracts but takes title and has the risks and
rewards of ownership. Effective October 1, 2003, non-normal derivative contracts
that are net settled or "booked-out" are recorded net in operating revenues. A
book-out is the unplanned netting of off-setting purchase and sale transactions.
A book-out is a transmission mechanism to reduce congestion on the transmission
system or administrative burden (see further discussion in Financial Instruments
in this same footnote). Specifically, adopting EITF Issue 03-11 "Reporting Gains
and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, and Not Held for
Trading Purposes" ("EITF 03-11") affected the comparability of 2003 Consolidated

F-25

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Financial Statements to those of prior years. The Consolidated Statements of
Income for 2002 and 2001 were not reclassified.

The Company enters into merchant energy contracts to take advantage of
market opportunities associated with the purchase and sale of electricity.
Unrealized gains and losses resulting from the impact of price movements on the
Company's derivative energy contracts that are not designated normal purchases
and sales or hedges are recognized as adjustments to Wholesale Operations
operating revenues. The market prices used to value these transactions reflect
management's best estimate considering various factors including closing
exchange and over-the-counter quotations, time value and volatility factors
underlying the commitments.

Depreciation and Amortization

Provision for depreciation and amortization of utility plant is made
based upon rates approved by the PRC. The average rates used are as follows:

2003 2002 2001
----------- ---------- ----------

Electric plant.................. 3.33% 3.42% 3.39%
Gas plant....................... 2.96% 3.02% 3.21%
Common plant.................... 8.38% 7.34% 6.92%

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

Decommissioning Costs

Accounting for decommissioning costs for nuclear and fossil-fuel
generation involves significant estimates related to costs to be incurred many
years in the future after plant closure. Changes in these estimates could
significantly impact the Company's financial position, results of operation and
cash flows. The Company owns and leases nuclear and fossil-fuel facilities that
are within and outside of its retail service areas. The Company adopted the
accounting requirements of Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS 143") on January 1, 2003
(see Note 12). Under SFAS 143, the Company is only required to recognize and
measure decommissioning liabilities for tangible long-lived assets for which a
legal obligation exists. Adoption of the statement changed the Company's method
of accounting for both nuclear generation decommissioning and fossil-fuel
generation decommissioning. Nuclear decommissioning costs are based on
site-specific estimates of the costs for removing all radioactive and other
structures at the site. PVNGS Unit 3 is currently excluded from the Company's
retail rates base while Units 1 and 2 are included in the Company's retail
rates. The Company collects a provision for ultimate decommissioning of Units 1
and 2 in its rates and recognizes a corresponding expense and liability for

F-26

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

these amounts. Fossil-fuel decommissioning costs are also approved by the PRC as
a component of the Company's depreciation rates. The Company believes that it
will continue to be able to collect for its legal asset retirement obligations
for nuclear and fossil-fuel generation activities included in the ratemaking
process.

In addition, the Company has a contractual obligation with the PVNGS
participants to fund separately the nuclear decommissioning at a level in excess
of what the Company has identified as its legal asset retirement obligation
under SFAS 143. The contractual funding obligation is based on a site-specific
estimate prepared by a third party. The Company's most recent site-specific
estimates for nuclear decommissioning costs were developed in 2001, using 2001
cost factors, and are based on prompt dismantlement decommissioning, reflecting
the costs of removal discussed above, with such removal occurring shortly after
operating license expiration. The Company's share of the contractual funding
obligation through the end of the licensing terms is approximately $201 million
(measured in 2001 dollars). The estimates are subject to change based on a
variety of factors, including cost escalation, changes in technology applicable
to nuclear decommissioning and changes in federal, state or local regulations.
The operating licenses for PVNGS Units 1, 2 and 3 will expire in 2025, 2026, and
2027, respectively. The Company does not have a similar contractual funding
obligation related to its fossil-fuel plants.

Amortization of Debt Acquisition Costs

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

Financial Instruments

Effective January 1, 1999, the Company adopted EITF Issue No. 98-10 which
requires that energy trading contracts be marked-to-market (measured at fair
value determined as of the balance sheet date with the gains and losses included
in earnings).

The Company implemented SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"), as amended, on January 1,
2001. SFAS 133, as amended, establishes accounting and reporting standards
requiring derivative instruments to be recorded in the balance sheet as either
an asset or liability measured at their fair value. SFAS 133, as amended, also
requires that changes in the derivatives' fair value be recognized currently in
earnings unless specific hedge accounting or normal purchase and sale criteria
are met. Special accounting for qualifying hedges allows derivative gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the

F-27

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

effectiveness of transactions that receive hedge accounting. SFAS 133, as
amended, provides that the effective portion of the gain or loss on a derivative
instrument designated and qualifying as a cash flow hedging instrument be
reported as a component of other comprehensive income and be reclassified into
earnings in the same period or periods during which the hedged forecasted
transaction affects earnings. The results of hedge ineffectiveness and the
change in fair value of a derivative that an entity has chosen to exclude from
hedge effectiveness are required to be presented in current earnings. All energy
contracts marked-to-market under EITF 98-10 were subject to mark-to-market
accounting upon adoption of SFAS 133.

On October 25, 2002, the EITF reached a final consensus on EITF 02-3
"Issues Related to Accounting for Contracts Involved in Energy Trading and Risk
Management Activities", EITF 98-10 "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities" and Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133") that rescinded EITF 98-10 and required that all energy contracts
held for trading purposes be presented on a net margin basis in the statement of
earnings. The rescission of EITF 98-10 requires that energy contracts which do
not meet the definition of a derivative under SFAS 133 no longer be marked to
market and recognized in current earnings. As a result, all contracts which were
marked to market under EITF 98-10 and must now be accounted for under the
accrual method and written back to cost with any difference included as a
cumulative effect of a change in accounting principle in the period of adoption.
This transition provision was effective January 1, 2003. The rescission of EITF
98-10 did not have a material impact on the Company's financial condition or
results of operations as all contracts previously marked to market under the
definition provided in EITF 98-10 also met the definition of a derivative under
SFAS 133 and are properly recorded at fair value with gains and losses recorded
in earnings. The Company reviewed its energy contract portfolio to determine
whether its contracts meet the definition of trading activities under EITF 02-3.
As a result, the Company has reclassified those contracts previously accounted
for under EITF 98-10 to a net margin basis for the fiscal years ended December
31, 2002 and 2001. The Company will not report revenues and cost of energy sold
on a net margin basis on a prospective basis as a result of the application of
EITF 02-3 as none of the Company's marketing activities meet the definitions of
trading activities as prescribed by EITF 02-3. For the years ended December 31,
2002 and 2001, wholesale purchases of $74.0 million and $89.4 million were
netted with electric revenues in the consolidated statement of earnings (see
Note 2).

Statement of Financial Accounting Standards No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149") was
effective for all electricity contracts entered into by the Company or modified
after June 30, 2003. Under SFAS 149, the Company treats all forward electric
purchases and sales contracts subject to unplanned netting or book-out by the
transmission provider as derivative instruments subject to mark-to-market
accounting, unless the contract qualifies for the normal exception by meeting
SFAS 149's definition of a capacity contract. Under this definition, the
contract cannot permit net settlement, the seller must have the resources to
serve the contract and the buyer must be a load serving entity. Upon adoption,
SFAS 149 did not have a material impact on the Company's financial condition or
results of operation.

F-28

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

EITF 03-11 was effective for the Company on October 1, 2003. EITF 03-11
gives guidance on whether realized gains and losses on derivative contracts not
held for trading purposes should be reported on a net or gross basis and
concludes such classification is a matter of judgment that depends on the
relevant facts and circumstances. The Company nets all realized gains and losses
on non-normal derivative transactions that do not physically deliver and that
are offset by similar transactions during settlement. For the year ended
December 31, 2003, wholesale purchases of $15.0 million were netted with
electric revenues in the consolidated statement of earnings (see Note 2).

Stock Based Compensation

The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Compensation cost for stock options,
if any, is measured as the excess of the quoted market price of the Company's
stock at the date of grant over the exercise price of the granted stock option.
Restricted stock is recorded as compensation cost over the requisite vesting
periods based on the market value on the date of grant.

At December 31, 2003, the Company had three stock-based employee
compensation plans of which stock options continue to be granted under only two
of the plans. These plans are described more fully in Note 10. Had compensation
expense for the Company's stock options been recognized based on the fair value
on the grant date under the methodology prescribed by SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), the effect on the Company's pro
forma net earnings and pro forma earnings per share would be as follows (in
thousands, except per share data):

Year Ended December 31,
------------------------------------------
2003 2002 2001
------------- ------------ -------------

Net earnings:.................................. $95,173 $63,686 $149,847
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects.................. (2,200) (4,402) (3,351)
------------- ------------ -------------
Pro forma net earnings......................... $92,973 $59,284 $146,496
============= ============ =============
Earnings per share:
Basic - as reported........................ $ 2.39 $ 1.63 $ 3.83
============= ============ =============
Basic - pro forma.......................... $ 2.34 $ 1.52 $ 3.74
============= ============ =============
Diluted - as reported...................... $ 2.37 $ 1.61 $ 3.77
============= ============ =============
Diluted - pro forma........................ $ 2.32 $ 1.50 $ 3.69
============= ============ =============

F-29

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) reports a measure for
accumulated changes in equity of the Company that results from transactions and
other economic events other than transactions with shareholders. The following
table sets forth the changes in each component of accumulated other
comprehensive income (loss):

Mark-to-
Unrealized market for Accumulated
gain (loss) Minimum certain other
on pension Derivative comprehensive
securities liability transactions income (loss)
------------ ------------ ------------ --------------

Balance at December 31, 2000 $ (1,518) $ 1,545 $ - $ 27
Period change in:
Minimum pension liability adjustment................. - 28,858 - 28,858
Unrealized holding gains arising from the period..... (70) - - (70)
Reclassification adjustment for losses included in
net income........................................ 526 - - 526
Initial implementation of SFAS 133 designated
cash flow hedges................................... - - 6,148 6,148
Change in fair market value of designated cash
flow hedges........................................ - - (345) (345)
Reclassification adjustment for losses included
in net income...................................... - - (6,148) (6,148)
------------ ------------ ------------ --------------
Balance at December 31, 2001 (1,062) 30,403 (345) 28,996

Period change in:
Minimum pension liability adjustment................. - 55,061 - 55,061
Unrealized holding gains arising from the period..... (1,303) - - (1,303)
Reclassification adjustment for losses included in
net income........................................ 919 - - 919
Change in fair market value of designated cash
flow hedges........................................ - - 10,361 10,361
Reclassification adjustment for losses included
in net income...................................... - - 687 687
------------ ------------ ------------ --------------
Balance at December 31, 2002 (1,446) 85,464 10,703 94,721

Period change in:
Minimum pension liability adjustment................. - (9,589) - (9,589)
Unrealized holding gains arising from the period .... (1,916) - - (1,916)
Reclassification adjustment for losses included in
net income........................................ 672 - - 672
Change in fair market value of designated cash
flow hedges........................................ - - (10,401) (10,401)
------------ ------------ ------------ --------------
Balance at December 31, 2003 $ (2,690) $ 75,875 $ 302 $ 73,487
============ ============ ============ ==============

F-30

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Income Taxes

The Company accounts for income taxes in accordance with the provisions
of SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), which uses the
asset and liability method for accounting for income taxes. Under SFAS 109,
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying value of existing assets and liabilities and their respective tax
basis. Current PRC approved rates include the tax effects of the majority of
these differences. SFAS No. 109 requires that rate-regulated enterprises record
deferred income taxes for temporary differences accorded flow-through treatment
at the direction of a regulatory commission. The resulting deferred tax assets
and liabilities are recorded at the expected cash flow to be reflected in future
rates. Because the PRC has consistently permitted the recovery of previously
flowed-through tax effects, the Company has established regulatory liabilities
and assets offsetting such deferred tax assets and liabilities. Items accorded
flow-through treatment under PRC orders, deferred income taxes and the future
ratemaking effects of such taxes, as well as corresponding regulatory assets and
liabilities, are recorded in the financial statements.

Asset Impairment

The Company evaluates its tangible long-lived assets in relation to their
future undiscounted cash flows to assess recoverability in accordance with SFAS
144. Impairment testing of power generation assets is performed periodically in
response to changes in market conditions. The Company considers its power
generation assets used to supply jurisdictional and wholesale markets as a
combined group due to its joint dispatch of these assets. Generation assets used
primarily for reliability purposes are evaluated separately as a group. The
Company did not recognize any impairment on its long-lived assets for the years
2001 through 2003.

Change in Presentation

Certain prior year amounts have been reclassified to conform to the 2003
financial statement presentation.

(2) Segment Information

The Holding Company is an investor-owned holding company of energy and
energy related businesses. Its principal subsidiary, PNM, is an integrated
public utility primarily engaged in the generation, transmission and
distribution of electricity; transmission, distribution and sale of natural gas
within the State of New Mexico; and the sale and marketing of electricity in the
Western United States. In addition, the Holding Company provides energy and
technology related services through its wholly owned subsidiary, Avistar.

F-31

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

As it currently operates, the Company's principal business segments,
whose operating results are regularly reviewed by the Company's management, are
Utility Operations and Wholesale Operations ("Wholesale"). Utility Operations
include Electric Services ("Electric"), Gas Services ("Gas") and Transmission
Services ("Transmission"). In 2003, the Company began allocating its business
and results between the Electric and Wholesale segments for financial reporting
purposes based on the assets allocations as mandated in the Global Electric
Agreement (see Note 13 - Commitments and Contingencies - Global Electric
Agreement). Certain prior period amounts have been reclassified to conform to
the current year presentation. In addition, Transmission was reclassified from
Electric and disclosed as its own business segment during the second quarter of
2003.

The following segment presentation is based on the methodology that the
Company's management uses for making operating decisions and assessing
performance of its various business activities. As such, the following
presentation reports operating results without regard to the effect of
accounting or regulatory changes and similar one-time items not related to
normal operations. Reconciliation to the consolidated financial statements is
provided.

In addition, adjustments related to EITF Issue 02-03 "Issues Related to
Accounting for Contracts Involved in Energy Trading and Risk Management
Activities" and 03-11 "Reporting Realized Gains and Losses on Derivative
Instruments that are subject to FASB statement No. 133 and Not Held for Trading
Purposes" are excluded. These accounting pronouncements require a net
presentation of trading gains and losses and realized gains and loss for certain
non-trading derivatives. Management evaluates wholesale operations on a gross
presentation basis due to its net asset-backed marketing strategy and the
importance it places on the Company's ability to repurchase and remarket
previously sold capacity. The Company has publicly referred to this as
"velocity".

UTILITY OPERATIONS

Electric

Electric consists of the distribution and generation of electricity for
retail electric customers in New Mexico. The Company provides retail electric
service to a large area of north central New Mexico, including the cities of
Albuquerque and Santa Fe, and certain other areas of New Mexico. Customer rates
for retail electric service are set by the PRC based on the provisions of the
Global Electric Agreement.

Gas

Gas distributes natural gas to most of the major communities in New
Mexico, including two of New Mexico's three largest metropolitan areas,
Albuquerque and Santa Fe. The Company's customer base includes both
sales-service customers and transportation-service customers. PNM purchases
natural gas in the open market and resells it at cost to its distribution
customers. As a result, increases or decreases in gas revenues resulting from
wholesale gas price fluctuations do not impact the Company's consolidated gross
margin or earnings.

F-32

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Transmission

The Company owns or leases transmission lines, interconnected with other
utilities in New Mexico and south and east into Texas, west into Arizona, and
north into Colorado and Utah. Transmission revenues consist of sales to third
parties as well as to Electric and Wholesale.

WHOLESALE OPERATIONS

Wholesale consists of the generation and sale of electricity into the
wholesale market based on three product lines that include long-term contracts,
forward sales and short-term sales. The source of these sales is supply created
by selling the unused capacity of jurisdictional assets as well as the capacity
of the Company's wholesale, plants excluded from retail rates. Both regulated
and unregulated generation is jointly dispatched in order to improve
reliability, provide the most economic power to retail customers and maximize
profits on any wholesale transactions.

Long-term contracts include sales to firm-requirements and other
wholesale customers with multi-year arrangements. These contracts range from 2
to 17 years with an average of 7.5 years. Forward sales include third party
purchases in the forward market that range from 1 month to 3 years. These
transactions do not qualify as normal sales and purchases as defined in SFAS
133, and thus are generally marked to market. Short-term sales generally include
spot market, hour ahead, day ahead and week ahead contracts with terms of 30
days or less. Also included in short-term sales are sales of any excess
generation not required to fulfill PNM's retail load and contractual
commitments. Short-term sales also cover the revenue credit to retail customers
as specified in the Global Electric Agreement.

CORPORATE AND OTHER

The Holding Company performs substantially all of the corporate
activities of PNM. These activities are billed to PNM on a cost basis to the
extent they are for the corporate management of PNM and are allocated to the
operating segments. The Holding Company's wholly-owned subsidiary, Avistar, was
formed in August 1999 as a New Mexico corporation and is currently engaged in
certain unregulated and non-utility businesses. In January 2002, Avistar was
dividended by PNM to the Holding Company pursuant to an order from the PRC.

F-33

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Summarized financial information by business segment for the year ended
December 31, 2003 is as follows:

Utility
-----------------------------------------------------------------------------------
Electric Gas Transmission Eliminations Total
--------------- --------------- ---------------- ----------------- --------------
(In thousands)
2003:
Operating revenues:

External customers.................... $ 543,850 $ 358,267 $ 19,453 $ - $ 921,570
Intersegment revenues................. - - 32,499 (32,499) -
Depreciation and amortization............ 63,428 22,186 10,104 - 95,718
Interest income.......................... 28,703 2,437 (34) - 31,106
Interest charges......................... 24,737 13,406 6,566 - 44,709
Total income tax expense (benefit)....... 34,649 (84) 3,233 - 37,798
Operating income......................... 56,587 11,451 11,417 - 79,455
Segment net income (loss)................ 51,435 (128) 4,933 - 56,240

Total assets............................. 1,429,291 509,111 275,301 - 2,213,703
Gross property additions................. 74,922 45,616 33,901 - 154,439

Corporate
Wholesale and Other Consolidated
--------------- --------------- ----------------
(In thousands)
2003:
Operating revenues:
External customers.................... $ 548,847 $ (14,703) (a) $1,455,714
Intersegment revenues................. 1,535 (1,535) -
Depreciation and amortization............ 14,230 5,701 115,649
Interest income.......................... 5,493 3,922 40,521
Interest charges......................... 15,562 5,918 66,189
Total income tax expense (benefit)....... 12,725 (22,634) (b) 27,889
Operating income......................... 30,997 8,140 118,592
Segment net income (loss)................ 19,416 (17,104) (b) 58,552

Total assets............................. 425,372 739,554 3,378,629
Gross property additions................. 14,620 8,145 177,204

(a) Reflects EITF 03-11 impact, under which wholesale revenues and the
associated cost of energy of $15.0 million are reclassified to a net
margin basis in accordance with GAAP.
(b) Includes $9.5 million write-off of transition costs, net of tax benefit of
$7.2 million, due to the repeal of deregulation in New Mexico, and the
$10.0 million write-off related to refinancing of long-term debt, net of
tax benefit of $6.6 million, reduced consolidated net earnings.

F-34

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Summarized financial information by business segment for the year ended
December 31, 2002 is as follows:

Utility
------------------------------------------------------------------------------------
Electric Gas Transmission Eliminations Total
--------------- --------------- ---------------- ------------------ --------------
(In thousands)
2002:
Operating revenues:

External customers.................... $ 546,939 $ 277,406 $ 23,150 $ - $ 847,495
Intersegment revenues................. - - 31,950 (31,950) -
Depreciation and amortization............ 59,654 20,673 8,741 - 89,068
Interest income.......................... 30,790 436 29 - 31,255
Interest charges......................... 27,509 13,546 5,988 - 47,043
Total income tax expense (benefit)....... 37,482 3,755 4,475 - 45,712
Operating income......................... 68,370 17,672 13,159 - 99,201
Segment net income....................... 57,194 5,731 6,827 - 69,752

Total assets............................. 1,442,104 563,395 224,637 - 2,230,136
Gross property additions................. 134,483 46,676 15,472 - 196,631

Corporate
Wholesale and Other Consolidated
--------------- --------------- ----------------
(In thousands)
2002:
Operating revenues:
External customers................... $ 343,780 $ (72,581) (a) $1,118,694
Intersegment revenues................ - - -
Depreciation and amortization............ 8,808 4,533 102,409
Interest income.......................... 4,946 8,753 44,954
Interest charges......................... 8,348 6,021 61,412
Total income tax expense (benefit)....... (1,613) (11,068) (b,c) 33,031
Operating income (loss).................. 3,398 (825) (b) 101,774
Segment net income (loss)................ (2,461) (3,605) (c) 63,686

Total assets............................. 380,436 636,655 3,247,227
Gross property additions................. 23,190 20,404 240,225

(a) Reflects EITF 02-3 impact, under which wholesale revenues and the
associated cost of energy of $74.0 million are reclassified to a net
margin basis in accordance with GAAP.
(b) Includes re-alignment costs due to the negative impact on the wholesale
market uncertainty of $5.3 million, net of tax benefit of $3.5 million,
and severance costs due to a workforce reduction of $0.9 million, net of
tax benefit of $0.6 , which reduced consolidated operating income and net
earnings.
(c) The Company recognized a $1.5 million gain, net of tax expense of $1.0
million, from the reversal of a reserve due to the successful resolution
of litigation stemming from the terminated Western Resources transaction,
which was offset by a $2.7 write-off, net of tax benefit of $1.9 million,
of a transmission line project.

F-35

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Summarized financial information by business segment for the year ended
December 31, 2001 is as follows:

Utility
-----------------------------------------------------------------------------------
Electric Gas Transmission Eliminations Total
--------------- --------------- ----------------- ---------------- -------------
(In thousands)
2001:
Operating revenues:

External customers...................... $ 532,673 $371,265 $ 26,553 $ - $ 930,491
Intersegment revenues................... - - 31,273 (31,273) -
Depreciation and amortization.............. 59,352 20,362 7,328 - 87,042
Interest income............................ 33,751 596 24 - 34,371
Interest charges........................... 31,828 11,807 4,582 - 48,217
Total income tax expense (benefit)......... 24,986 1,605 4,475 - 31,066
Operating income........................... 52,866 14,657 12,886 - 80,409
Segment net income......................... 38,124 2,451 6,828 - 47,403

Total assets............................... 1,751,481 524,130 209,504 - 2,485,115
Gross property additions................... 159,223 48,978 18,067 - 226,268

Corporate
Wholesale and Other Consolidated
--------------- --------------- -----------------
2001: (In thousands)
Operating revenues:
External customers...................... $1,411,500 $ (87,813) (a) $ 2,254,178
Intersegment revenues................... - - -
Depreciation and amortization.............. 5,774 4,120 96,936
Interest income............................ 5,234 9,137 48,742
Interest charges........................... 17,063 (440) 64,840
Total income tax expense (benefit)......... 79,404 (29,407) (b) 81,063
Operating income........................... 136,237 6,031 222,677
Segment net income (loss).................. 121,161 (18,717) (b) 149,847

Total assets............................... 377,585 264,902 3,127,602
Gross property additions................... 23,631 14,945 264,844

(a) Reflects EITF 02-3 impact, under which wholesale revenues and the
associated cost of energy of $89.4 million are reclassified to a net
margin basis in accordance with GAAP.
(b) Includes a Company contribution of $3.0 million, net of tax benefit of
$2.0 million, to the PNM Foundation, a $7.9 million write-off, net of tax
benefit of $5.1 million, of nonrecoverable coal mine decommissioning
costs, the $7.8 million write-off, net of tax benefit of $5.2 million, of
impaired Avistar investments, and the costs associated with the terminated
acquisition of Western Resources of $10.9 million, net of tax benefit of
$7.1 million, reduced consolidated net earnings.

F-36

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

(3) Regulatory Assets and Liabilities

The Company is subject to the provisions of SFAS 71 with respect to
operations regulated by the PRC and the FERC. Regulatory assets represent
probable future recovery of previously incurred costs, which will be collected
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:

2003 2002
------------- --------------
(In thousands)
Assets:
Current:

PGAC.................................................. $10,416 $ 941
Gas Take-or-Pay Costs................................. 5,020 120
------------- --------------
Subtotal........................................... 15,436 1,061
------------- --------------
Deferred:
Mine Reclamation Costs................................ 92,521 100,877
Deferred Income Taxes................................. 70,576 69,029
Financing Costs....................................... 26,368 -
Transition Costs...................................... - 16,720
Loss on Reacquired Debt............................... 20,936 7,345
Other................................................. 5,015 2,312
------------- --------------
Total Deferred Assets.............................. 215,416 196,283
------------- --------------
Total Assets....................................... 230,852 197,344
------------- --------------
Liabilities:
Deferred:
Asset retirement obligation........................... (27,976) -
Deferred Income Taxes................................. (35,974) (38,941)
Cost of Removal....................................... (235,992) (227,933)
Unrealized loss on PVNGS decommissioning trust........ (6,479) (3,813)
Gain on Reacquired Debt............................... (1,351) (1,503)
PVNGS Prudence Audit.................................. (4,306) (4,682)
Settlement due Customers.............................. (1,242) (1,325)
Other................................................. (3,064) (1,755)
------------- --------------
Total Deferred Liabilities......................... (316,384) (279,952)
------------- --------------
Net Regulatory Liabilities......................... $ (85,532) $(82,608)
============= ==============

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

F-37

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

these regulatory assets and regulatory liabilities, except for mine reclamation
costs, deferred income taxes, interest rate hedging costs, and unrealized loss
on PVNGS decommissioning trust.

In 2001, the Company wrote off $11.1 million of regulatory assets of
which $8.1 million related to non-recoverable transition costs and $3.0 million
for other non-recoverable regulatory assets. See Note 13 - "Commitments and
Contingencies - Global Electric Agreement" regarding 2003 write-off of
transition costs.

In August 2001, the Company signed an agreement with San Juan Coal
Company ("SJCC") and Tucson Electric Power Company ("Tucson") to replace two
surface mining operations with a single underground mine located adjacent to the
SJGS. The Company recorded a regulatory asset of $113 million for the estimated
costs anticipated to close the surface mining operation. In 2001, the Company
wrote off $13.0 million for the portion of coal mine decommissioning costs
associated with the Company's FERC firm requirements customers and a portion of
SJGS Unit 4. The Company will recover the remaining $100 million of costs
associated with coal mine decommissioning that are attributed to New Mexico
retail customers pursuant to its Global Electric Agreement which provides for a
17-year recovery of these costs beginning in September 2003. In 2003, the
Company completed a comprehensive review of these costs and costs related to the
decommissioning of the current underground mine and made adjustments to the
liability and the related regulatory asset based on the resulting changes in
estimate (see Note 12).

The Company is permitted, under SFAS 71, to accrue the estimated cost of
removal and salvage associated with certain of its assets through depreciation
expense. Cost of removal, net of salvage, allowed under rate regulations was
included in accumulated depreciation. The amounts accrued in depreciation are
not associated with AROs recorded in accordance with SFAS 143. With the adoption
of SFAS 143, the Company has reclassified $236.0 million and $227.9 million of
removal costs from accumulated depreciation to regulatory liabilities as of
December 31, 2003 and 2002, respectively.

The Company accounts for its postretirement benefits other than pensions
("OPEB") costs on an accrual basis. Therefore, the Company does not defer any
OPEB costs as regulatory assets.

PNM had $46.0 million of tax-exempt bonds outstanding that were callable
at a premium beginning December 15, 2002, and an additional $136.0 million that
became callable at a premium in August 2003. With the intention of refinancing
these bonds, PNM had hedged the entire planned refinancing by entering into five
forward starting interest rate swaps in the fourth quarter of 2001 and the first
quarter of 2002. The Company received regulatory approval to refund the
tax-exempt bonds on October 29, 2002. The refinancings were completed on May 23,
2003.

The forward starting interest rate swaps were terminated on May 13, 2003
for a cash settlement of $27.1 million. This amount has been capitalized by the
Company as a financing cost and will be amortized over the life of the bonds.

F-38

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

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

(4) Capitalization

Changes in common stock for PNM Resources, Inc. and Subsidiaries are as
follows:

Common Stock
-------------------------------
Number Aggregate
Of Shares Par Value
--------------- --------------
(Dollars in thousands)

Balance at December 31, 2001................... 39,117,799 $ 625,632
Exercise of stock options...................... - (2,412)
Tax benefit from exercise of stock options..... - 899

--------------- --------------
Balance at December 31, 2002................... 39,117,799 624,119
Restricted stock rights........................ - 31
Exercise of stock options...................... - (9,130)
Tax benefit from exercise of stock options..... - 3,637
Pension contribution........................... 1,121,495 28,609
ESPP purchase.................................. 19,703 456

--------------- --------------
Balance at December 31, 2003................... 40,258,997 $ 647,722
=============== ==============

Changes in common stock and additional paid-in capital for Public Service
Company of New Mexico and Subsidiaries are as follows:

Common Stock
-------------------------------
Additional
Number Aggregate Paid-In
Of Shares Par Value Capital
--------------- -------------- ----------------
(Dollars in thousands)

Balance at December 31, 2001............ 39,117,799 $ 195,589 $ 430,043
--------------- -------------- ----------------
Balance at December 31, 2002............ 39,117,799 195,589 430,043
Equity contribution from parent......... - - 126,053
Exercise of stock options............... - - 512

--------------- -------------- ----------------
Balance at December 31, 2003............ 39,117,799 $ 195,589 $ 556,608
=============== ============== ================

F-39

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Common Stock

The number of authorized shares of common stock of the Holding Company is
120 million shares with no par value. The number of shares issued and
outstanding was 40,258,997 and 39,117,799 as of December 31, 2003 and 2002. In
2003, the Holding Company issued 19,703 common shares for the Employee Stock
Purchase Plan for $0.5 million. On June 11, 2003, a contribution of 1,121,495
Holding Company common shares (approximately $28.6 million) was made to the
Company's retirement plan (see Note 9 for further discussion). Also, $6.0
million of stock options, net of taxes, were exercised in 2003. The only change
to common stock of the Holding Company in 2002 was for the exercise of stock
options of $1.5 million, net of taxes.

The declaration of common dividends is dependent upon a number of factors
including the ability of the Holding Company's subsidiaries to pay dividends.
Currently, PNM is the Holding Company's primary source of dividends. As part of
the order approving the formation of the Holding Company, the PRC placed certain
restrictions on the ability of PNM to pay dividends to its parent.

The PRC order imposed the following conditions regarding dividends paid
by PNM to the holding company: PNM can not pay dividends which cause its debt
rating to go below investment grade; and PNM can not pay dividends in any year,
as determined on a rolling four quarter basis, in excess of net earnings without
prior PRC approval. In January 2003, with the signing of the Global Electric
Agreement, the PRC modified the PNM dividend restriction to allow PNM to
dividend earnings as well as equity contributions made by the Holding Company.
Additionally, PNM has various financial covenants which limit the transfer of
assets, through dividends or other means.

In addition, the ability of the Company to declare dividends is dependent
upon the extent to which cash flows will support dividends, the availability of
retained earnings, the financial circumstances and performance, the PRC's
decisions in various regulatory cases currently pending and which may be
docketed in the future, the effect of federal regulatory decisions,
Congressional and legislative acts, and market economic conditions generally.
Conditions imposed by the PRC on holding company formation, future growth plans
and the related capital requirements and standard business considerations may
also affect the Company's ability to pay dividends.

Consistent with the PRC's holding company order, PNM paid cash dividends
of $49.6, $59.0 and $127.0 million to the Holding Company for the years ended
December 31, 2003, 2002 and 2001 respectively.

On February 18, 2003, the Holding Company's board of directors approved a
4.5% increase in the common stock dividend. The increase raised the quarterly
dividend to $0.23 per share, for an indicated annual dividend of $0.92 per
share.

F-40

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

On February 17, 2004, the Holding Company's board of directors approved a
4.3% increase in the common stock dividend. The increase raised the quarterly
dividend to $0.24 per share, for an indicated annual dividend of $0.96 per
share.

Cumulative Preferred Stock

No Holding Company preferred stock is outstanding. The Holding Company's
restated articles of incorporation authorize 10 million shares of preferred
stock, which may be issued without restriction. The number of authorized shares
of PNM cumulative preferred stock is 10 million shares. PNM has 128,000 shares,
1965 Series, 4.58%, par value of $100 per share, of cumulative preferred stock
outstanding. The 1965 Series does not have a mandatory redemption requirement
but may be redeemable at 102% of the par value with accrued dividends. The
holders of the 1965 Series are entitled to payment before the holders of common
stock in the event of any liquidation or dissolution or distribution of assets
of PNM. In addition, the 1965 Series is not entitled to a sinking fund and
cannot be converted into any other class of stock of PNM.

Long-Term Debt

On March 11, 1998, PNM modified its 1947 Indenture of Mortgage and Deed
of Trust so that no future bonds can be issued under the mortgage. While first
mortgage bonds continue to serve as collateral for Pollution Control Bonds
("PCBs") in the outstanding principal amount of $65.0 million, the lien of the
mortgage covers only PNM's ownership interest in PVNGS. Senior unsecured notes
("SUNs"), which were issued under a senior unsecured note indenture, serve as
collateral for PCBs in the outstanding principal amount of $520.8 million. With
the exception of the $65.0 million of PCBs secured by first mortgage bonds, the
SUNs are and will be the senior debt of PNM.

On May 13, 2003, the Company priced $182.0 million of tax-exempt
pollution control bonds at an initial interest rate of 2.75%. The bond sale
closed on May 23, 2003. By April 1, 2004, $146.0 million of bonds will need to
be remarketed and $36.0 million of bonds will need to be remarketed by July 1,
2004. A portion of the proceeds were used to redeem the $46.0 million of
pollution control bonds, which became callable on December 15, 2002. The
remaining $136.0 million was used to redeem $136.0 million of pollution control
bonds in August 2003. The Company had previously entered into various forward
swaps in 2001 and 2002, to hedge the interest rate on the refinancing (see Note
6 - Fair Value of Financial Instruments - Forward Starting Interest Rate Swaps).

The premium paid to refinance the pollution control bonds was $3.6
million. The balance of the unamortized debt issuance costs associated with the
pollution control bonds that were retired was $3.8 million. These amounts were
capitalized as loss on reacquired debt. The portion of unamortized loss on
reacquired debt associated with the FERC firm requirements customers and plant
excluded from ratebase of $1.0 million was written off in conjunction with the

F-41

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

refinancing of the pollution control bonds. The remaining balance will be
amortized over the life of the new bonds and is expected to be recovered through
PRC approved retail rates.

Pursuant to PRC approval, on September 9, 2003, PNM issued and sold
$300.0 million aggregate principal amount of its senior unsecured notes with a
4.40% interest rate that will mature September 15, 2008. The transaction closed
on September 17, 2003 and the proceeds were used to retire $268.4 million of
long-term debt with a 7.10% interest rate that would otherwise have matured in
August 2005, pay the transaction costs, and improve working capital. The premium
paid to refinance the long-term debt was $23.9 million of which $16.6 million
was charged against earnings based on prior regulatory agreements. The remaining
balance was capitalized as loss on reacquired debt and will be amortized over
the life of the new debt.

On December 20, 2002, the Holding Company acquired the equity interest of
the grantor trust that owns 60% of the EIP transmission line and related
facilities held under an operating lease. As a result, the Company capitalized
the 60% interest and $26.2 million of related debt was consolidated on the
Company's balance sheet. This debt was previously disclosed and reported as an
off balance sheet lease obligation. The EIP debt bore interest at the rate of
10.25%, requires semi-annual principal and interest payments and matures on
April 1, 2012. On April 1, 2003, PNM exercised its early buyout option of this
60% interest and related lease. Through the exercise of the early buyout, PNM
was able to retire the $26.2 million of debt. The Company will continue to
exclude $4.0 million of lease obligations relating to the 40% interest that the
Company does not own from the consolidated balance sheet.

Revolving Credit Facility and Other Credit Facilities

At December 31, 2003, PNM had a $300.0 million unsecured revolving credit
facility (the "Facility") with an expiration date of November 21, 2006. PNM must
pay commitment fees of 0.275% per year on the unused amount of the Facility. PNM
must also pay a utilization fee of .125% for all borrowings in excess of 33% of
the committed amount. PNM also had $23.0 million in local lines of credit. In
addition, the Holding Company has a $20.0 million reciprocal borrowing agreement
with PNM and $15.0 million in local lines of credit.

There were $20.0 million in outstanding borrowings bearing interest at an
interest rate of 2.275% under the Facility as of December 31, 2003. On January
20, 2004, this amount was reduced to $10.0 million outstanding at an interest
rate of 2.225%. PNM was in compliance with all covenants under the Facility.

Commercial Paper

On August 27, 2003, the Company entered into an unrated private issuance
commercial paper program. The Company will periodically issue up to $50.0
million in unrated commercial paper for the shorter of 120 days or the maturity
of the Company's Credit Facility. The commercial paper is unsecured and the
proceeds were used to reduce revolving credit borrowings. The Company's Credit

F-42

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Facility serves as a backstop for the outstanding commercial paper. As of
December 31, 2003, $50.0 million was outstanding.

Asset Securitization

On April 8, 2003, PNM entered into a transaction providing for the
securitization of PNM's retail electric service accounts receivable and retail
gas service accounts receivable ("AR Securitization"). The total capacity under
the AR Securitization is $90.0 million. Under the AR Securitization, PNM will
periodically sell its accounts receivable, principally retail receivables, to a
bankruptcy remote subsidiary, PNM Receivables Corp., which in turn pledges an
undivided interest in the receivables to an unaffiliated conduit commercial
paper issuer. This transaction was previously approved by the PRC on December
17, 2002. As of December 31, 2003, the Company had borrowed $54.9 million under
the AR Securitization, which was secured by $114.5 million of accounts
receivable. PNM Receivables Corp. is consolidated in the Company's financial
statements.

(5) Lease Commitments

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

In 1985 and 1986, the Company entered into a total of eleven sale and
lease back transactions with owner trusts under which it sold and leased back
its entire 10.2% interest in PVNGS Units 1 and 2, together with portions of the
Company's undivided interest in certain PVNGS common facilities. In 1998, PNM
established PVNGS Capital Trust ("Capital Trust") for the purpose of acquiring
all the debt underlying the PVNGS leases. PNM consolidates Capital Trust in its
consolidated financial statements. The purchase was funded with the proceeds
from the issuance of $435 million of SUNS (see Note 4), which were loaned to
Capital Trust. Capital Trust then acquired and holds the debt component of the
PVNGS leases. For legal and regulatory reasons, the PVNGS lease payment
continues to be recorded and paid gross with the debt component of the payment
returned to PNM via Capital Trust. As a result, the net cash outflows for the
PVNGS lease payment were $14.2, $13.2 and $12.4 million in 2003, 2002 and 2001,
respectively. The summary of PNM's future minimum operating lease payments below
reflects the net cash outflow related to the PVNGS leases.

PNM's other significant operating lease obligations include a leased
interest in the EIP transmission line with annual lease payments of $2.9 million
and a power purchase agreement for the entire output of a gas-fired generating
plant in Albuquerque, New Mexico, with imputed annual lease payments of $6.0
million.

F-43

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Future minimum operating lease payments (in thousands) at December 31,
2003 are:

2004.......................................... $ 29,068
2005.......................................... 30,724
2006.......................................... 31,542
2007.......................................... 32,426
2008.......................................... 33,370
Later years................................... 268,410
---------------
Total minimum lease payments............... $425,540
===============

Operating lease expense, inclusive of the net PVNGS lease payment, was
approximately $33.4 million in 2003, $34.9 million in 2002 and $32.7 million in
2001. Aggregate minimum payments to be received in future periods under
non-cancelable subleases are approximately $3.6 million.

(6) Fair Value of Financial Instruments

GAAP defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation. Although management uses
its best judgment in estimating the fair value of these financial instruments,
there are inherent limitations in any estimation technique. Therefore, the fair
value estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current transaction. Fair value is based on
market quotes provided by the Company's investment bankers and trust advisors.
The market prices used to value PNM's mark-to-market energy portfolio are based
on closing exchange prices and over-the-counter quotations.

The carrying amounts reflected on the consolidated balance sheets
approximate fair value for cash, temporary instruments, receivables, and
payables due to the short period of maturity. The carrying amount and fair value
of the Company's financial instruments (including current maturities) at
December 31 are:

2003 2002
---------------------------------- -------------------------------
Carrying Amount Fair Value Carrying Fair Value
Amount
---------------- ---------------- --------------- ---------------
(In thousands)

Long-Term Debt....................... $987,210 $1,029,349 $ 980,092 $1,027,435
Investment in PVNGS Lessors' Notes $347,870 $ 424,731 $ 368,010 $ 436,345
Available for sale investments....... $86,456 $ 86,456 $ 152,352 $ 152,352

F-44

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

The Company's available-for-sale securities include assets held in trust
for its share of decommissioning costs of PVNGS and its executive retirement
program. The trusts hold equity and fixed income securities. These amounts are
included in other investments on the balance sheet. The carrying value, gross
unrealized gains and losses and estimated fair value of investments in
available-for-sale securities are as follows:

2003
--------------------------------------------------------------------
Carrying Value Unrealized Unrealized Fair Value
Gains Losses
---------------- ---------------- --------------- ----------------
(In thousands)
Available-for-sale:

Equity securities................... 42,269 13,893 (344) 55,818
U.S. Government securities.......... 4,858 361 (31) 5,188
Corporate bonds..................... 11 - - 11
Municipal bonds..................... 19,250 1,316 (13) 20,553
Other investments................... 4,895 - (9) 4,886
---------------- ---------------- --------------- ----------------
71,283 15,570 (397) 86,456
================ ================ =============== ================

2002
--------------------------------------------------------------------
Carrying Value Unrealized Unrealized Fair Value
Gains Losses
---------------- ---------------- --------------- ----------------
(In thousands)
Available-for-sale:
Mortgage-backed securities.......... $ 32,643 $4,134 $ (1,514) $ 35,263
Equity securities................... 33,145 410 (93) 33,462
U.S. Government securities.......... 32,466 438 (19) 32,885
Corporate bonds..................... 21,229 1,394 (24) 22,599
Municipal bonds..................... 12,725 702 - 13,427
Other investments................... 14,716 - - 14,716
---------------- ---------------- --------------- ----------------
$ 146,924 $7,078 $(1,650) $ 152,352
================ ================ =============== ================

F-45

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

At December 31, 2003, the available-for-sale securities held by the
Company had the following maturities (in thousands):

Carrying Value Fair Value
---------------- ----------------
(In thousands)
Within 1 year............................. $1,513 $1,482
After 1 year through 5 years.............. 2,857 2,889
After 5 years through 10 years............ 2,997 3,126
Over 10 years............................. 17,024 18,518
Equity securities......................... 42,269 55,818
Other investments......................... 4,623 4,623
---------------- ----------------
$71,283 $86,456
================ ================

The proceeds and gross realized gains and losses on the disposition of
available-for-sale investments are shown in the following table. Realized gains
and losses are determined by specific identification of costs of securities
sold. The short-term investment balance was fully redeemed in the year ended
December 31, 2003 and included in proceeds from sales.

2003 2002 2001
------------ ---------------- -------------
(In thousands)
Proceeds from sales............ $123,030 $219,880 $80,943
Gross realized gains........... 7,685 2,537 3,077
Gross realized losses.......... (5,694) (7,624) (7,476)

The Company uses derivative financial instruments to manage risk as it
relates to changes in natural gas and electricity prices, interest rates of
future debt issuances and adverse market changes for investments held by the
Company's various trusts. The Company also uses certain derivative instruments
for wholesale electricity sales in order to take advantage of favorable price
movements and market timing activities in the wholesale power markets.

Natural Gas Contracts

Pursuant to a 1997 order issued by the New Mexico Public Utility
Commission, the predecessor to the PRC, the Company is allowed to hedge certain
portions of natural gas supply contracts to protect the Company's natural gas
customers from the risk of adverse price fluctuations in the natural gas market.
All hedge gains and losses from these hedges are recoverable through the
Company's purchased gas adjustment clause ("PGAC") if deemed prudently incurred
by the PRC. As a result, earnings are not affected by gains or losses generated
by these instruments.

F-46

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

PNM purchased gas options to protect its natural gas customers from the
risk of price fluctuations during the 2003-2004 heating season. PNM expended
$9.5 million to purchase gas options that limit the maximum amount the Company
would pay for gas during the winter heating season. The Company recovered its
actual hedging expenditures as a component of the PGAC during the months of
October 2003 through February 2004 in equal monthly allotments of $1.9 million.

In 2002, PNM purchased gas options to protect its natural gas customers
from the risk of price fluctuation during the 2002-2003 heating season. PNM
expended $6.0 million to purchase options that limit the maximum amount the
Company would pay for gas during the winter heating season. The Company
recovered its actual hedging expenditures as a component of the PGAC during the
months of October 2002 through February 2003 in equal allotments of $1.2
million.

Electricity Contracts

The Company's wholesale operations entered into various forward physical
contracts for the purchase and sale of electricity with the intent to optimize
its net generation position. These contracts do not qualify for normal purchase
and sale designation pursuant to SFAS 133, and are considered derivatives and
marked to market as required by SFAS 133.

For the year ended December 31, 2003, the Company's Wholesale Operations
settled derivative forward contracts for the sale of electricity that generated
$165.9 million of electric revenues by delivering 3.5 million megawatt hours
("MWh"). The Company settled derivative forward contracts for the purchase of
electricity of $157.7 million or 3.5 million MWh of electricity to support these
contractual sales and other open market sales opportunities. For the year ended
December 31, 2002, the Company's Wholesale Operations settled forward contracts
for the sale of electricity that generated $43.9 million of electric revenues by
delivering 1.2 million MWh. The Company settled derivative forward contracts for
the purchase of electricity of $74.5 million or 1.4 million MWh of electricity
to support these contractual sales and other open market sales opportunities.
For the year ended December 31, 2001, the Company's Wholesale Operations settled
derivative forward contracts for the sale of electricity that generated $77.9
million of electric revenues by delivering 2.1 million MWh. The Company settled
derivative forward contracts for the purchase of electricity of $76.7 million or
1.9 million MWh of electricity to support these contractual sales and other open
market sales opportunities.

As of December 31, 2003, the Company had open derivative forward contract
positions to buy $30.6 million and to sell $28.6 million of electricity. At
December 31, 2003, the Company had a gross mark-to-market gain (asset position)
on these derivative forward contracts of $3.4 million and a gross mark-to-market
loss (liability position) of $3.0 million, with a net mark-to-market gain (asset
position) of $0.4 million recorded in other current assets and liabilities,
respectively. The change in mark-to-market valuation is recognized in earnings
each period and is recorded in operating revenues.

F-47

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

The Company's Wholesale Operations also entered into forward physical
contracts for the sale of the Company's electric capacity in excess of its
retail and wholesale firm requirement needs, including reserves. In addition,
the Company entered into forward physical contracts for the purchase of retail
needs, including reserves, when resource shortfalls exist. The Company generally
accounts for these financial instruments as normal sales and purchases as
defined by SFAS 133, as amended. From time to time the Company makes forward
purchases to serve its retail needs when the cost of purchased power is less
than the incremental cost of its generation. At December 31, 2003, the Company
had open forward positions classified as normal sales of electricity of $236.0
million and normal purchases of electricity of $115.6 million, both of which are
not recorded in the financial statements.

The Company's Wholesale Operations, including both firm commitments and
other wholesale sale activities, are managed through a net asset-backed
strategy, whereby the Company's aggregate net open position is covered by its
own excess generation capabilities. The Company is exposed to market risk if its
generation capabilities were disrupted or if its retail load requirements were
greater than anticipated. If the Company were required to cover all or a portion
of its net open contract position, it would have to meet its commitments through
market purchases.

The Company is exposed to credit risk in the event of non-performance or
non-payment by counterparties of its financial and physical derivative
instruments. The Company uses a credit management process to assess and monitor
the financial conditions of counterparties. The Company's credit risk with its
largest counterparty as of December 31, 2003 and December 31, 2002 was $23.5
million and $18.7 million, respectively.

(Intentionally left blank)

F-48

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

(7) Earnings Per Share

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

2003 2002 2001
------------- -------------- --------------
(In thousands, except per share amounts)
Basic:

Net Earnings Before Cumulative Effect of a Change in $ 58,552 $ 63,686 $ 149,847
Accounting Principle.......................................
Cumulative Effect of a Change in Accounting Principle,
net of tax of $23,999...................................... 36,621 - -
------------- -------------- --------------
Net Earnings.................................................. $ 95,173 $ 63,686 $ 149,847
============= ============== ==============
Average Number of Common Shares Outstanding................... 39,747 39,118 39,118
============= ============== ==============
Net Earnings per Share of Common Stock (Basic)................ $ 2.39 $ 1.63 $ 3.83
============= ============== ==============
Earnings Before Cumulative Effect of Changes in
Accounting Principles...................................... 1.47 1.63 3.83
Cumulative Effect of Changes in Accounting Principles,
net of tax................................................. 0.92 - -
------------- -------------- --------------
Net Earnings per Share of Common Stock (Basic)................ $ 2.39 $ 1.63 $ 3.83
============= ============== ==============

Diluted:
Net Earnings Before Cumulative Effect of a Change in
Accounting Principle....................................... $ 58,552 $ 63,686 $ 149,847
Cumulative Effect of a Change in Accounting Principle,
net of tax of $23,999...................................... 36,621 - -
------------- -------------- --------------
Net Earnings.................................................. $ 95,173 $ 63,686 $ 149,847
============= ============== ==============
Average Number of Common Shares Outstanding................... 39,747 39,118 39,118
Diluted Effect of Common Stock Equivalents (a)................ 390 325 613
------------- -------------- --------------
Average Common and Common Equivalent Shares
Outstanding................................................. 40,137 39,443 39,731
============= ============== ==============
Net Earnings per Share of Common Stock (Diluted).............. $ 2.37 $ 1.61 $ 3.77
============= ============== ==============
Earnings Before Cumulative Effect of Changes in
Accounting Principles...................................... 1.46 1.61 3.77
Cumulative Effect of Changes in Accounting Principles,
net of tax................................................. 0.91 - -
------------- -------------- --------------
Net Earnings per Share of Common Stock (Diluted).............. $ 2.37 $ 1.61 $ 3.77
============= ============== ==============

(a) Excludes the effect of average anti-dilutive common stock equivalents
related to out of-the-money options of 871,493 and 1,602,277 for the
years ended December 31, 2003 and 2002, respectively. There were no
anti-dilutive common stock equivalents in 2001.

F-49

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

(8) Income Taxes

Income taxes before cumulative effect of changes in accounting principles
consist of the following components:

2003 2002 2001
------------ ------------ ------------
(In thousands)

Current Federal income tax............................. $ (27,621) $(9,327) $ 97,661
Current state income tax............................... (6,169) (1,780) 21,220
Deferred Federal income tax............................ 52,154 38,413 (28,967)
Deferred state income tax.............................. 12,646 8,856 (5,712)
Amortization of accumulated investment tax credits..... (3,121) (3,131) (3,139)
------------ ------------ ------------

Total income taxes.................................. $27,889 $ 33,031 $ 81,063

Charged to operating expenses.......................... $28,072 $ 20,887 $ 88,769
Charged to other income and deductions................. (183) 12,144 (7,706)
------------ ------------ ------------
Total income taxes.................................. $27,889 $ 33,031 $ 81,063
============ ============ ============

The Company's provision for income taxes, before cumulative effect of
changes in accounting principles, 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:

2003 2002 2001
------------- ------------ ------------
(In thousands)

Federal income tax at statutory rates................. $ 30,459 $ 34,056 $ 81,024
Investment tax credits ............................... (3,121) (3,131) (3,139)
Depreciation of flow-through items.................... 2,033 2,112 2,249
Gains on the sale and leaseback of PVNGS
Units 1 and 2...................................... (527) (527) (527)
Equity income from passive investments................ - - (1,180)
Annual reversal of deferred income taxes accrued
at prior tax rates................................. (1,963) (1,963) (1,963)
Valuation reserve..................................... - - (6,552)
Research and development credit....................... (966) (551) -
Affordable housing credit............................. (969) (947) -
Allowance for funds used during construction.......... (906) - -
State income tax...................................... 4,161 4,715 10,706
Other ................................................ (312) (733) 445
------------- ------------ ------------
Total income taxes................................. $ 27,889 $ 33,031 $ 81,063
============= ============ ============
Effective tax rate.................................... 32.05% 33.95% 35.02%
============= ============ ============

F-50

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

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

2003 2002
------------- -------------
(In thousands)
Deferred Tax Assets:
Nuclear decommissioning costs................... $ 32,181 $ 32,192
Regulatory liabilities related to income taxes . 34,725 37,656
Minimum pension liability....................... 49,692 56,008
Other .......................................... 44,225 57,373
------------- -------------
Total deferred tax assets ................... 160,823 183,229
------------- -------------
Deferred Tax Liabilities:
Depreciation ................................... (245,145) (216,425)
Investment tax credit .......................... (38,462) (41,583)
Regulatory assets related to income taxes....... (69,327) (67,744)
Asset retirement obligations.................... (24,524) -
Other .......................................... (71,925) (38,792)
------------- -------------
Total deferred tax liabilities .............. (449,383) (364,544)
------------- -------------
Net Accumulated deferred income tax liabilities.... $(288,560) $(181,315)
============= =============

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

Net change in deferred income tax liability per above table...................... $107,245
Change in tax effects of income tax related regulatory assets and liabilities.... (4,514)
Tax effect of mark-to-market on investments available for sale................... (10,863)
Tax effect of excess pension liability........................................... (6,316)
Tax effect of cumulative effect of changes in accounting principles.............. (23,999)
Other............................................................................ 126
--------------
Deferred income tax expense for the period.................................... $ 61,679
==============

The Company has no net operating loss carryforwards as of December 31,
2003.

The Company defers investment tax credits related to rate regulated
assets and amortizes them over the estimated useful lives of those assets.

All federal income tax years prior to 2000 are closed. Tax years 2000 and
2001 are currently under examination by the IRS. Although the Company does not
expect any significant adjustments to the tax provision as a result of the IRS
examination, management is unable to determine the final outcome of the IRS
examination at this time.

There are no material differences between the provision for income taxes
and deferred income taxes between the Company and PNM.

F-51

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

(9) Pension and Other Post-retirement Benefits

In 2003, the Company changed the actuarial valuation measurement date for
the pension plan and other post-retirement benefits from September 30 to
December 31 to better reflect the actual pension balances as of the Company's
balance sheet dates and recognized a cumulative effect of a change in accounting
principle of $0.8 million, net of taxes at $0.5 million (see Note 17).

Pension Plan

The Company and its subsidiaries maintain a qualified defined benefit
pension plan which covers eligible union and non-union employees, including
officers. The pension plan was frozen at the end of 1997 with regard to new
participants. The pension 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. Pension plan assets primarily consist of common stock,
fixed income securities, cash equivalents and real estate.

In December 1996, the Board of Directors approved changes to the
Company's pension plan and the implementation of a 401(k) defined contribution
plan effective January 1, 1998. Salaries used in pension plan benefit
calculations were frozen as of December 31, 1997. Additional credited service
can be accrued under the pension plan up to a limit determined by age and years
of service. The Company contributions to the 401(k) plan consist of a
discretionary contribution equal to 3% of eligible compensation, and a
discretionary matching contribution equal to 75% of the first 6% of eligible
compensation contributed by the employee on a before-tax basis. Beginning
January 1, 2004, the Company will make a non-matching contribution ranging from
3% to 10% of eligible compensation based on the eligible employee's age. The
Company contributed $9.0, $9.5 and $9.0 million in the years ended December 31,
2003, 2002 and 2001, respectively.

In January 2002, the Company made an aggregate contribution of $23.5
million to fund pension and other post-retirement benefit plans. An additional
aggregate contribution of $1.1 million was made in September 2002 and $1.5
million in December 2002. On May 13, 2003, the board of directors approved the
use of Holding Company common stock in the funding of the Company's pension plan
as well as its retiree medical trust. Corporate plan sponsors may make
contributions of common stock to their defined benefit plans of up to 10% of the
value of the portfolio without the approval of the United States Department of
Labor ("DOL") provided that the contribution does not otherwise constitute a
prohibited transaction under the Employee Retirement Income Security Act
("ERISA"). On June 11, 2003, a contribution of 1,121,495 Holding Company common
shares (approximately $28.9 million in market value) was made to the Company's
pension plan. The Company does not plan to make any contributions in 2004 to the
pension plan.

F-52

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

The pension plan and other post-retirement benefits have in place a
policy that defines the investment objectives; establishes performance goals of
the asset managers, and provides procedures for the manner in which investments
are to be reviewed. The Plan implements its investments strategies to achieve
the following objectives:

o Maximize the return on assets, commensurate with the risk that the
Corporate Investment Committee deem appropriate to: meet the
obligations of the pension plan and other post-retirement
benefits; minimize the volatility of the pension expense; and
account for contingencies; and

o Generate a rate of return for the total portfolio that equals or
exceeds the actuarial investment rate assumption.

Management is responsible for the determination of the asset target mix
and the rate of return. The Company's current target asset mix was applied to an
investment consultant's asset model to determine the assumption of a 9% rate of
return. The investment consultant's asset model assumption set consists of
forward looking mean returns, standard deviations, and a correlation matrix for
asset classes of interest to institutional clients. The investment consultant's
asset model evaluates asset assumptions on an annual basis and more frequently
when substantial changes in market conditions indicate.

(Intentionally left blank)

F-53

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

The following sets forth the pension plan's funded status, components of
pension costs and amounts (in thousands) at the pension plan measurement date of
December 31, 2003 and September 30, 2002:

Pension Benefits
-----------------------------
2003 2002
-------------- --------------
Change in Projected Benefit Obligation:

Projected benefit obligation at beginning of year.................... $426,885 $373,434
Service cost......................................................... 5,189 5,539
Interest cost........................................................ 28,089 27,238
Actuarial loss....................................................... 26,166 37,632
Benefits paid........................................................ (22,535) (20,518)
Plan change.......................................................... - 3,560
-------------- --------------
Projected benefit obligation at end of period.................... 463,794 426,885
-------------- --------------
Change in Plan Assets:
Fair value of plan assets at beginning of year....................... 319,113 339,838
Actual return on plan assets......................................... 80,126 (20,207)
Contributions........................................................ 48,950 20,000
Benefits paid........................................................ (22,535) (20,518)
-------------- --------------
Fair value of plan assets at end of year......................... 425,654 319,113
-------------- --------------
Funded Status........................................................ (38,140) (107,772)
Unrecognized net actuarial loss...................................... 120,995 144,328
Unrecognized prior service cost...................................... 2,927 3,109
-------------- --------------
Prepaid pension cost............................................. $ 85,782 $ 39,665
============== ==============
The amounts recognized in the Consolidated Balance Sheet consist of:
Prepaid benefit costs................................................ $ 85,782 $ 39,665
Additional minimum liability......................................... (123,922) (147,437)
-------------- --------------
$ (38,140) $ (107,772)
============== ==============
Weighted - Average Assumptions Used to Determine Projected Benefit
Obligation as of December 31, 2003
and September 30, 2002 2003 2002
-------------- --------------
Discount rate........................................................ 6.50% 6.75%
Expected return on plan assets....................................... 9.00% 9.00%

F-54

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Pension Benefits
-----------------------------------------
2003 2002 2001
------------ ------------ ------------
Components of Net Periodic Benefit Cost:

Service cost.............................................. $ 5,189 $ 5,539 $ 5,544
Interest cost............................................. 28,089 27,238 25,758
Expected return on plan assets............................ (35,109) (34,497) (29,488)
Amortization of net loss (gain)........................... 3,910 - (847)
Amortization of transition obligation..................... - - (1,158)
Amortization of prior service cost........................ 317 326 34
------------ ------------ ------------
Net periodic pension benefit cost/(income)............ $2,396 $ (1,394) $ (157)
============ ============ ============
Weighted - Average Assumptions Used to Determine Net
Periodic Benefit Cost as of December 31, 2003
and September 30, 2002 and 2001 2003 2002 2001
------------ ------------ ------------
Discount rate............................................. 6.75% 7.50% 8.25%
Expected return on plan assets............................ 9.00% 9.00% 7.750%
Rate of compensation increase............................. N/A N/A N/A

The following table outlines the asset allocation for the pension plan as
of December 31:

2003 2002
----------- -----------

Equity securities.......... 65% 61%
Debt securities............ 25% 29%
Real estate................ 8% 10%
Other...................... 2% -

The pension plan is currently targeting the following asset allocation
for 2004:

Domestic Equity........... 47.5%
Non-US Equity............. 10.0%
Fixed Income.............. 22.5%
Real Estate............... 5.0%
Private Equity............ 5.0%
Absolute Return........... 10.0%

Other Post-Retirement Benefits

The Company provides medical and dental benefits to eligible retirees.
Currently, retirees are offered the same benefits as active employees after
taking Medicare into consideration. The following sets forth the other
post-retirement benefits' funded status, components of net periodic benefit cost
(in thousands) at the measurement date of December 31, 2003 and September 30,
2002:

F-55

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Other Benefits
------------------------------
2003 2002
------------- ---------------
Change in Benefit Obligation:

Benefit obligation at beginning of year.................. $117,796 $109,408
Service cost............................................. 3,086 2,694
Interest cost............................................ 7,840 8,082
Plan participant's contributions......................... 1,534 795
Amendments............................................... (18,720) (31,960)
Unrecognized actuarial loss.............................. 10,187 32,623
Expected benefit paid.................................... (6,911) (3,846)
------------- ---------------
Benefit obligation at end of period.................. 114,812 117,796
------------- ---------------
Change in Plan Assets:
Fair value of plan assets at beginning of year............ 37,387 40,594
Actual return on plan assets.............................. 11,055 (6,478)
Employer contribution..................................... 7,892 6,322
Participant contribution.................................. 1,534 795
Benefits paid............................................. (6,911) (3,846)
------------- --------------
Fair value of plan assets at end of year.............. 50,957 37,387
------------- --------------
Funded Status............................................. (63,855) (80,409)
Employer contribution after measurement date.............. - 1,538
Unrecognized net transition obligation.................... 16,354 18,171
Unrecognized net actuarial loss........................... 72,987 74,048
Unrecognized prior service cost........................... (48,087) (31,960)
------------- --------------
Accrued post-retirement costs........................ $ (22,601) $ (18,612)
============= ==============
Weighted - Average Assumptions Used to Determine
Projected Benefit Obligation as of December
31, 2003 and September 30, 2002 2003 2002
------------- --------------
Discount rate............................................. 6.50% 6.75%
Expected return on plan assets............................ 9.00% 9.00%

Other Benefits
----------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Components of Net Periodic Benefit Cost:

Service cost........................................ $ 3,086 $ 2,694 $ 2,644
Interest cost....................................... 7,840 8,082 7,906
Expected return on plan assets...................... (4,592) (4,505) (3,412)
Prior service cost amortization..................... (2,593) - -
Amortization of net loss............................ 4,124 1,320 799
Amortization of transition obligation............... 1,817 1,817 1,817
-------------- -------------- --------------
Net periodic post-retirement benefit cost....... $ 9,682 $ 9,408 $ 9,754
============== ============== ==============

F-56

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Weighted - Average Assumptions Used to Determine
Net Periodic Benefit Cost as of December 31, 2003
and September 30, 2002 and 2001 2003 2002 2001
---------- ---------- ----------
Discount rate............................. 6.75% 7.50% 8.25%
Expected return on plan assets:
401 (h) and union VEBA............... 9.00% 9.00% 7.75%
Non-union VEBA....................... 9.00% 7.50% 6.25%
Rate of compensation increase............. N/A N/A N/A

In 2003, the other post-retirement benefits plan was amended to reflect
the changes to the benefit coverage provided to both current and future
retirees. In 2002, the other post-retirement benefits plan was amended to
reflect the charge in cost-sharing provisions of the retiree's contribution made
toward medical costs and the elimination of a tobacco surcharge.

The effect of a 1% increase in the health care trend rate assumption
would increase the accumulated post-retirement benefit obligation as of December
31, 2003, by approximately $9.2 million and the aggregate service and interest
cost components of net periodic post-retirement benefit cost for 2003 by
approximately $2.2 million. The health care cost trend rate is expected to
decrease to 6.0% by 2010 and to remain at that level thereafter.

The following table outlines the asset allocation for the other
post-retirement benefits as of December 31:

2003 2002
------------- --------------
Equity securities.......... 43% 100%
Debt securities............ 57% -

The Company is currently targeting an asset allocation of 50% equity
securities and 50% debt securities in 2004.

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 the plan measurement date of December 31, 2003 and 2002, was
$19.9 million and $19.0 million, respectively. As of December 31, 2003 and 2002,
the Company has recognized an additional minimum liability of $4.7 million and
$4.1 million, respectively, for the amount of unfunded accumulated benefits in
excess of accrued pension costs. The net periodic cost for 2003, 2002 and 2001
was $1.6 million, $1.7 million and $1.7 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 the program.
Marketable securities in the amount of approximately $6.9 million (fair market
value of $7.8 million) are presently in the trust. No additional funds have been
provided to the trust since 1989.

F-57

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

(10) Stock-Based Compensation Plans

The Company's Performance Stock Plan ("PSP") expired on December 31,
2000. The PSP was a non-qualified stock option plan, covering a group of
management employees. Options to purchase shares of the Holding Company's common
stock were granted at the fair market value of the shares at the close of
business on the date of the grant. Options granted through December 31, 1995
vested on June 30, 1996 and have an exercise term of up to 10 years. All
subsequent awards granted between December 31, 1995 and February 2000, vest
three years from the grant date of the awards. All options vest upon death,
disability, retirement, impaction or involuntary termination other than for
cause. Awards granted in December 2000 vest ratably over three years on the
anniversary of the grant date. The maximum number of options authorized that
could be granted through December 31, 2000 was 5.0 million shares of Holding
Company common stock. Although the authority to grant options under the PSP
expired on December 31, 2000, the options that were granted continue to be
effective according to their terms.

A new employee stock incentive plan, the Omnibus Performance Equity Plan
("PEP"), became effective with the formation of the Holding Company on December
31, 2001. The PEP provides for the granting of non-qualified stock options,
incentive stock options, restricted stock rights, performance shares,
performance units and stock appreciation rights to officers and key employees.
The total number of shares of Holding Company common stock subject to all awards
under the PEP may not exceed 2.5 million, subject to adjustment under certain
circumstances defined in the PEP. The number of shares of Holding Company common
stock subject to the grant of restricted stock rights, performance shares and
units and stock appreciation rights is limited to 500,000 shares. Re-pricing of
stock options is prohibited unless specific shareholder approval is obtained. In
2003, 811,900 options were awarded. Under the PEP, 47,157 options were exercised
in 2003. The number of options and restricted stock rights outstanding as of
December 31, 2003 were 1,586,409 and 1,620, respectively.

Stock options may also be provided to non-employee directors of the
Company under the Company's Director Retainer Plan ("DRP"). The number of
options granted in 2003 under the DRP was 40,000 shares with an exercise price
of $24.07 and 10,000 shares with an exercise price of $25.90. Under the DRP
plan, vesting occurs on the date of the next annual meeting after the award.
Under the DRP 1,500 options were exercised in 2003, 4,000 in 2002 and 4,000 in
2001. The number of options outstanding as of December 31, 2003, was 121,500.
Restricted stock issuances were based on the fair market value of the Company's
common stock at the close of business on the date of grant and vest ratably
three years on the anniversary of the grant date. Amendments to the DRP were
approved by the shareholders on July 3, 2001 and the amended plan became the DRP
for the new Holding Company on December 31, 2001. Under the DRP, the maximum
number of authorized shares was 200,000 (including shares previously granted)
through July 1, 2005. The annual retainer is payable in cash and stock options.
The exercise price of stock options granted under the DRP is determined by the
fair market value of the stock at the close of business on the grant date.

F-58

All stock incentives (options, restricted stock and performance shares)
issued to employees are awarded under the initial amount of shares authorized
according to the PEP and DRP plan. Exercised stock options are purchased and
sold on the open-market on the date of exercise.

A summary of the status of the Company's stock option plans at December
31, and changes during the years then ended is presented below.

2003 2002 2001
-------------------------- -------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- --------------------------------------- ------------ ------------ ----------- ------------- ------------- ------------

Outstanding at beginning of year....... 3,510,622 $20.906 2,981,301 $19.100 3,336,221 $19.120
Granted................................ 861,900 $19.833 901,620 $25.745 6,000 $22.610
Exercised.............................. 1,057,725 $17.578 356,132 $18.044 299,951 $19.610
Forfeited.............................. 24,451 $19.963 16,167 $21.390 60,969 $17.961
------------- ------------- -------------
Outstanding at end of year............. 3,290,346 3,510,622 2,981,301
============= ============= =============
Options exercisable at year-end........ 1,528,749 1,525,345 981,197
============= ============= =============
Options available for future grant..... 990,471 1,777,880 2,500,000
============= ============= =============

(Intentionally left blank)

F-59

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

The following table summarizes information about stock options
outstanding at December 31, 2003:

Options Outstanding Options Exercisable
--------------------------------------------- ------------------------------
Weighted-
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices At 12/31/03 Life Prices At 12/31/03 Prices
- ------------------------- --------------- -------------- ------------ --------------- -------------

DRP $ 0 - $27.35 121,500 7.07 years $21.152 76,835 $19.016

PSP $11.50 - $24.313 1,580,817 5.56 years $20.724 1,227,959 $21.039

PEP $ 0 - $28.22 1,588,029 8.45 years $22.665 223,955 $25.803
--------------- ---------------
3,290,346 7.02 years $21.676 1,528,749 $21.635
=============== ===============

The following table summarizes weighted-average fair value of options
granted during the year:

2003 2002 2001
------------ ------------ ------------

EP $4.91 $7.42 $ -
============ ============ ============
DRP $5.14 $7.03 $13.94
============ ============ ============
Total fair market value of all options
granted (in thousands)....................... $1,414 $6,677 $ 83
============ ============ ============

The fair value of each option grant is determined on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:

2003 2002 2001
------------- ------------- -------------

Dividend yield................................. 5.88% 3.43% 3.10%
Expected volatility............................ 45.49% 33.62% 33.99%
Risk-free interest rates....................... 4.00% 4.87% 5.38%
Expected life.................................. 10.0 years 10.0 years 10.0 years

(11) Construction Program and Jointly-Owned Plants

The Company's construction expenditures for 2003 were approximately
$177.2 million, including expenditures on jointly-owned projects. The Company's
proportionate share of operating and maintenance expenses for the jointly-owned
plants is included in operating expenses in the consolidated statements of
earnings.

F-60

F-56

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

At December 31, 2003, 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)...... $693,524 $362,864 $ 4,697 46.30%
Palo Verde Nuclear Generating
Station (Nuclear)*.................... $238,168 $ 62,138 $ 18,787 10.20%
Four Corners Power Plant Units 4
and 5 (Coal) ........................ $120,593 $ 86,079 $ 5,436 13.00%

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

San Juan Generating Station ("SJGS")

The Company operates and jointly owns SJGS. At December 31, 2003, SJGS
Units 1 and 2 are owned on a 50% shared basis with Tucson Electric Power
Company, Unit 3 is owned 50% by the Company, 41.8% by Southern California Public
Power Authority ("SCPPA") and 8.2% by Tri-State Generation and Transmission
Association, Inc. Unit 4 is owned 38.457% by the Company, 28.8% by M-S-R Public
Power Agency, ("M-S-R"), 10.04% by the City of Anaheim, California, 8.475% by
the City of Farmington, 7.2% by the County of Los Alamos, and 7.028% by Utah
Associated Municipal Power Systems.

Palo Verde Nuclear Generating Station ("PVNGS")

The Company is a participant in the three 1,270 MW units of PVNGS, also
known as the Arizona Nuclear Power Project, with Arizona Public Service Company
("APS") (the operating agent), Salt River Project, El Paso Electric Company ("El
Paso"), Southern California Edison Company, SCPPA and The Department of Water
and Power of the City of Los Angeles. The Company has a 10.2% undivided interest
in PVNGS, with portions of its interests in Units 1 and 2 held under leases.
(See Note 12 for additional discussion.)

Four Corners Power Plant ("Four Corners")

The Company is a participant in two 755 MW units of Four Corners with APS
(the operating agent), El Paso, Salt River Project, Southern California Edison
Company, and Tucson Electric Power Company. The Company has a 13% undivided
interest in Units 4 and 5 of Four Corners.

F-61

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

(12) Asset Retirement Obligations

The Company identified the asset retirement obligation ("ARO") liability
on the decommissioning of the Company's nuclear generation facilities and fossil
fuel generation plants. The Company's transmission and distribution facilities
are also subject to SFAS 143. The majority of these assets, however, have an
indeterminable useful life and settlement date. As such, an ARO liability for
transmission and distribution assets would not be recognized until a reasonable
estimate of the fair value of these assets can be made and a settlement date
becomes known. In 2003, the Company did not identify any material AROs
associated with the transmission and distribution assets.

Previously, the Company had recognized decommissioning costs for its
fossil fuel and nuclear generation facilities ratably over approved cost
recovery periods. Upon implementation of SFAS 143 the net difference between the
amounts determined to represent legal AROs under SFAS 143 and the Company's
previous method of accounting for decommissioning costs, has been recognized as
a cumulative effect of a change in accounting principle, net of related income
taxes (see Note 17). Additionally, certain amounts accrued for nuclear
decommissioning costs over the Company's legal AROs for its nuclear generation
facilities have been reclassified as regulatory liabilities.

The effects of adoption of SFAS 143 standard are based on the Company's
interpretation of the standard and determination of underlying assumptions, such
as the Company's discount rate, estimates of the future costs for
decommissioning and the timing of the removal activities to be performed. Any
changes in these assumptions underlying the required calculations may require
revisions to the estimated ARO when identified.

A reconciliation of the Company's asset retirement obligations is as
follows:

December 31, 2003
-----------------
(In thousands)

Upon adoption at January 1, 2003................ $42,201
Liabilities incurred............................ 623
Liabilities settled............................. -
Accretion expense............................... 3,592
Revisions to estimate........................... -
--------------
$46,416
==============

F-62

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

(13) Commitments and Contingencies

Long-Term Power Contracts

PNM has a power purchase contract with Southwestern Public Service
Company ("SPS"), which originally provided for the purchase of up to 200 MW,
expiring in May 2011. PNM may reduce its purchases from SPS by 25 MW annually
upon three years' notice. PNM provided such notice to reduce the purchase by 25
MW in 1999 and by an additional 25 MW in 2000. PNM also is party to a master
power purchase and sale agreement with SPS, dated August 2, 1999, pursuant to
which PNM has agreed to purchase 72 MW of firm power from SPS from 2002 through
2005. Beginning May 2004, PNM will purchase an additional 45 MW of firm energy
through 2005, increasing to 67 MW in 2006. PNM has 70 MW of contingent capacity
obtained from El Paso under a transmission capacity for generation capacity
trade arrangement through September 2004. Beginning October 2004 and continuing
through June 2005, the capacity amount is 39 MW. PNM holds a purchased power
agreement ("PPA") with Tri-State for 50 MW through June 30, 2010. In addition,
PNM is interconnected with various utilities for economy interchanges and mutual
assistance in emergencies.

In 1996, PNM entered into an operating lease for the rights to all the
output of a new gas-fired generating plant for 20 years. The operating lease's
maximum dependable capacity is 132 MW. In July 2000, the plant went into
operation. The gas turbine generating unit is operated by Delta-Person Limited
Partnership ("Delta") and is located on PNM 's retired Person Generating Station
site in Albuquerque, New Mexico. Primary fuel for the gas turbine generating
unit is natural gas, which is procured by Wholesale on the open market and
delivered by Gas through its transportation services. In addition, the unit has
the capability to utilize low sulfur fuel oil in the event natural gas is not
available or cost effective.

In July 2001, PNM entered into a long-term wholesale power contract with
Texas-New Mexico Power ("TNP") to provide power to serve a portion of TNP`s New
Mexico retail load. The contract, which commenced July 1, 2001, expires December
31, 2006. PNM provided varying amounts of firm power on demand to complement
existing contracts for the first two years of the agreement. As those contracts
expired at the end of 2002, PNM became TNP's sole supplier for its load in New
Mexico. In the last year of the contract, it is estimated that TNP will need 114
MW of firm power.

In December 2002, PNM entered into a 27 month contract to supply 80 MW of
power to U.S. Navy facilities in San Diego, California. PNM began delivering
power under the contract January 1, 2003. The contract runs through March 2005.

In 2002, PNM entered into an agreement with FPL Energy LLC ("FPL"), a
subsidiary of FPL Group, Inc., to develop a 200 MW wind generation facility in
New Mexico. PNM began receiving commercial power from the project in June 2003.
FPL Energy owns and operates the New Mexico Wind Energy Center ("NMWE"), which

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December 31, 2003, 2002 and 2001

consists of 136 wind-powered turbines on a site in eastern New Mexico. PNM has a
contract to purchase all the power generated by the NMWE for 25 years. In 2003,
PNM received approval from the PRC for a voluntary tariff that allows PNM retail
customers to buy wind-generated electricity for a small monthly premium. Power
from the facility not subscribed by PNM retail customers under the voluntary
program is sold on the wholesale market, either within New Mexico or outside the
state.

PNM successfully completed a number of long-term contracts during 2003.
In September 2003, PNM entered into a long-term contract to supply between 15
and 25 MW of power to Overton Power District Number 5 in Southern Nevada. The
contract began October 1, 2003 and runs through December 31, 2007. In October of
2003, PNM completed a five-year contract to sell Salt River 50 megawatts of wind
power and associated renewable energy credits from the NMWE for the third
quarter of each year from 2004 through 2008. In December 2003, PNM completed an
agreement to supply up to 35 megawatts of power to the Mesa, Arizona, municipal
utility. PNM is replacing Ohio-based American Electric Power (AEP) as supplier
under a contract that runs through 2013.

Coal Supply

The coal requirements for the SJGS are being supplied by San Juan Coal
Company ("SJCC"), a wholly-owned subsidiary of BHP Billiton. SJCC holds certain
Federal, state and private coal leases under an underground coal sales agreement
("coal agreement") pursuant to which it will supply processed coal for operation
of the SJGS until 2017. The coal agreement is a cost plus contract. SJCC is
reimbursed for all costs for mining and delivering the coal plus an allocated
portion of administrative costs. In addition, SJCC receives a return on its
investment. BHP Minerals International, Inc. has guaranteed the obligations of
SJCC under the coal agreement. This guarantee is with respect to SJCC's
obligations as defined in the coal agreement and protects against contingencies
such as SJCC non-performance, insolvency, bankruptcy, reorganization,
dissolution, and other corporate or organizational adversities. The coal
agreement contemplates the delivery of approximately 91 million tons of coal
during its remaining term. That amount would supply substantially all the
requirements of the SJGS through approximately 2017.

In August 2001, the Company and Tucson Electric Power Company ("Tucson")
signed the coal agreement with SJCC to replace two surface mining operations
with a single underground mine located adjacent to the plant. The initial
development of the underground mine began in the fourth quarter of 2000. After
the longwall equipment became operational in October 2002, the mine was expected
to achieve full station supply in March of 2003. It did not achieve this
production level until December 2003, necessitating partial coal supply from
existing inventory. Despite geological issues that impeded the underground mine
production rates and efficiencies that were expected, SJGS fuel costs declined
by 3.5% between 2002 and 2003. SJCC and the Company continually review coal cost
projections and work with the Company's mine consultants to incorporate the
experience gained from the first full year mining operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Four Corners Power Plant ("Four Corners") is supplied with coal under a
fuel agreement between the owners and BHP Navajo Coal Company ("BNCC"), under
which BNCC agreed to supply all the coal requirements for the life of the plant.
The current fuel agreement which has been recently extended, expires July 6,
2016. The extension of the agreement did not materially affect the coal cost
forecast. BNCC holds a long-term coal mining lease, with options for renewal,
from the Navajo Nation and operates a surface mine adjacent to Four Corners with
the coal supply expected to be sufficient to supply the units for their
estimated useful lives.

In connection with both the SJGS coal agreement and the Four Corners fuel
agreement, the owners are required to reimburse SJCC and BNCC for the cost of
coal mine decommissioning or reclamation. Final mine reclamation occurs when
mining production activities conclude. The Company considers these costs part of
the cost of delivered coal costs over the life of the respective mine. This
liability is recorded at estimated fair value based on the expected cash
out-flows to be made to reimburse SJCC and BNCC for their reclamation
activities. These cash flows are discounted at a credit adjusted risk-free rate.
The liability is accreted and an appropriate incremental cost is recognized
using the interest method.

In 2003, the Company completed a comprehensive review with the help of an
outside consulting firm of the final reclamation costs for both the surface
mines that previously provided coal to SJGS and the current underground mine
providing coal. Based on this study, the Company revised its estimates of the
final reclamation of the surface mine. In addition, the mining contract with
BNCC supplying Four Corners was renewed until 2016. Previously the Company had
recognized obligations related to these surface mines of $113.9 million. Based
on these changes in estimate, the final cost of reclamation is expected to be
$139.3 million in accreted dollars. In 2002 and 2003, the Company made payments
of $36.6 million and $12.9 million, respectively, against this liability. As of
December 31, 2003, $56.9 million was recognized as the Company's obligation for
reclamation using the fair value method to determine the liability.

In the Global Electric Agreement (see "Global Electric Agreement" below),
the Company was allowed to collect $100 million of surface mine final
reclamation costs over the next 17 years. The Company expects to recover the
remaining amount in a future rate case. In addition, the Company expects to
recover the portion of final underground mine reclamation costs related to New
Mexico ratepayers in future rate cases.

The underground mine began commercial operation in January 2003. The
Company recognized a reclamation liability of $0.6 million related to mining
activities in 2003.

Natural Gas Supply

The Company contracts for the purchase of gas to serve its retail
customers. These contracts are short-term in nature supplying the gas needs for
the current heating season and the following off-season months. The price of gas
is a pass-through, whereby the Company recovers 100% of its cost of gas.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

The natural gas used as fuel by Electric and Wholesale was delivered by
Gas. In the second quarter of 2001, Electric and Wholesale began procuring its
gas supply independent of the Company and contracting with Gas for
transportation services only.

Steam Generator Tubes

APS, as the operating agent of PVNGS, has encountered tube cracking in
the steam generators and has taken, and will continue to take, remedial actions
that it believes have slowed the rate of tube degradation. The projected service
life of steam generators is assessed on an on-going basis. Two replacement steam
generators were installed in Unit 2 during its Fall 2003 refueling outage. The
Company's share of the fabrication and installation costs were approximately
$24.7 million as of December 31, 2003.

The PVNGS participants ("Participants") have approved the purchase of
replacement steam generators for Units 1 and 3. Preliminary work for the
installation of the replacement steam generators has also been approved by the
Participants. These actions will provide the Participants with options regarding
the replacement of steam generators in Unit 1 and Unit 3. Unit 1 could be
replaced as early as Fall 2005, should the Participants choose to do so. The
Company estimates that its portion of the fabrication and installation costs and
associated power upgrade modifications for Units 1 and 3, will be approximately
$46 million over the period 2002-2008 (exclusive of replacement power costs),
should installation of the ordered replacement steam generators be approved.

PVNGS Decommissioning Funding

PNM has a program for funding its share of decommissioning costs for
PVNGS. The nuclear decommissioning funding program is invested in equities and
fixed income instruments in qualified and non-qualified trusts. The results of
the 2001 decommissioning cost study indicated that PNM's share of the PVNGS
decommissioning costs, excluding spent fuel disposal, would be approximately
$201 million (measured in 2001 dollars).

PNM provided an additional $3.1 million, $10.7 million and $6.1 million
funding for the year ended December 31, 2003, 2002 and 2001, respectively, into
the qualified and non-qualified trust funds. The estimated market value of the
trusts for the year ended December 31, 2003 was approximately $78.7 million.

Nuclear Spent Fuel and Waste Disposal

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

The operator of PVNGS has fuel storage pools at PVNGS, which accommodates
fuel from normal operation of PVNGS. To continue to allow full core offload
capability, older fuel is being placed in dry storage casks and removed from the
Units. Through December 31, 2003, the operator of PVNGS has loaded 10 dry
storage casks and placed the casks in the completed dry storage facility. Fuel
from Unit 3 will be removed from the Unit 3 fuel storage pool during the first
quarter of 2004. PNM currently estimates that it will incur approximately $41.0
million (in 2001 dollars) over the life of PVNGS for its share of the fuel costs
related to the on-site interim storage of spent nuclear fuel during the
operating life of the plant. PNM accrues these costs as a component of fuel
expense, meaning that the charges are accrued as the fuel is burned. The Company
has accrued $1.0 million in each of 2003 and 2002 for interim storage costs. The
operator of PVNGS currently believes that spent fuel storage or disposal methods
will be available for use by PVNGS to allow its continued operation. The dry
storage facility has the space to hold all fuel anticipated to be used during
the licensed life of PVNGS.

PVNGS Liability and Insurance Matters

The Participants have financial protection for public liability resulting
from nuclear energy hazards to the full limit of liability under federal law.
This potential liability is covered by primary liability insurance provided by
commercial insurance carriers in the amount of $300.0 million and the balance by
an industry-wide retrospective assessment program. If losses at any nuclear
power plant covered by the programs exceed the primary liability insurance
limit, the Company could be assessed retrospective adjustments. Effective August
20, 2003, the maximum assessment per reactor under the program for each nuclear
incident increases from approximately $88 million to approximately $101 million.
The retrospective assessment is subject to an annual limit of $10.0 million per
reactor per incident. Based upon the Company's 10.2% interest in the three PVNGS
units, the Company's maximum potential assessment per incident for all three
units is approximately $31 million, with an annual payment limitation of
approximately $3 million per incident. If the funds provided by this
retrospective assessment program prove to be insufficient, Congress could impose
revenue-raising measures on the nuclear industry to pay claims.

Possible Price-Anderson Act Changes

Versions of comprehensive energy bills proposed for adoption by Congress
contain provisions that would amend Federal Law (the "Price-Anderson Act")
addressing public liability from nuclear energy hazards in ways that would
increase the annual limit on retrospective assessments (see "PVNGS Liability and
Insurance Matters" above) from $10.0 million to $15.0 million per reactor per
incident with the Company's annual exposure per incident increasing from
approximately $3.0 million to $4.5 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

The Company believes that such changes in applicable law, if enacted,
would not result in a "deemed loss event" being declared by the equity investors
in respect of the Company's sale and leaseback transactions of PVNGS Units 1 and
2.

Global Electric Agreement

On October 10, 2002, PNM announced that it had agreed with the PRC staff,
the New Mexico Attorney General ("AG"), and other consumer groups on a Global
Electric Agreement that provided for joint support for the repeal of a majority
of the New Mexico Electric Utility Industry Restructuring Act of 1999, as
amended ("Restructuring Act"), a fixed rate path, procedures for the Company's
participation in unregulated generating plant activities and other regulatory
issues. The ratepath is effective for services rendered September 1, 2003
through December 31, 2007. Based on the normal time frame for rate proceedings
in New Mexico of ten months, a change in rates would not happen until late 2008.
The Global Electric Agreement was approved by the PRC in January 2003.
Legislation repealing the Restructuring Act and continuing the authorization for
utilities to participate in unregulated generating plant activities for a
limited time according to the Global Electric Agreement was passed by the New
Mexico Legislature and signed into law by the Governor on April 8, 2003. In the
Global Electric Agreement, PNM agreed to forego recovery of the costs incurred
in preparing to transition to a competitive retail market in New Mexico under
the repealed law. This resulted in a charge of $16.7 million, pre-tax, in the
first quarter of 2003. As a result of the repeal of the Restructuring Act, PNM
has re-applied the accounting requirements of SFAS 71 to its regulated
generation activities effective January 2003, which did not have a material
effect on the Company's financial condition or results of operations.

Gas Rate Case

On January 10, 2003, PNM filed a general gas rate case, requesting that
the PRC approve an increase in the service fees charged to its 441,000
natural-gas customers. PNM's proposal would have increased both the set monthly
service fee and the charge tied to monthly usage. Such fees are separate from
the cost of gas charged to customers. The monthly cost of gas charge would not
be affected by the fee increase.

On June 25, 2003, PNM, the PRC Staff, and a group of industrial consumers
filed a settlement allowing the Company a $20.0 million annual revenue increase
in base cost of service rates, a $1.6 million annual increase in miscellaneous
fees and charges and the recovery of $4.4 million in previously approved costs.
The settlement rates were proposed to go into effect for bills rendered in
November 2003. A final order disapproving the settlement was issued on November
3, 2003.

The Company successfully sought rehearing of the final order disapproving
the stipulation. In its request for rehearing, the Company proposed two
alternatives for delaying the residential rate increase. The rehearing was held
on November 25, 2003. As a result of the rehearing, the PRC in January 2004
unanimously approved the stipulation. Under the stipulation, the residential

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

rate increase will go into effect with bills rendered in April 2004. The
approved rates will increase gas revenues approximately $22.0 million annually.
The Company will forego the recovery of any revenue lost as a result of the
delay. All other rate increases go into effect with the first billing cycle
after the date of the final order approving the amended stipulation, January 13,
2004.

Water Supply

Because of New Mexico's arid climate and current drought conditions,
there is a growing concern in New Mexico about the use of water for power
plants. The availability of sufficient water supplies to meet all the needs of
the state, including growth, is a major issue. The Company has secured water
rights in connection with the Afton and Lordsburg plants and water availability
does not appear to be an issue for these plants at this time.

The Four Corners region, in which SJGS and Four Corners are located, has
been experiencing drought conditions that may affect the water supply for the
Company's generation plants. If adequate precipitation is not received in the
watershed that supplies the Four Corners areas, the plants may be affected in
2004 and the future. The United States Bureau of Reclamation ("USBR") has been
requested to approve a supplemental contract for 8,300 acre feet per year for a
one-year term ending December 31, 2004. Environmental approvals are also in the
process of being obtained for the supplemental contract. PNM has also signed a
voluntary shortage sharing agreement with tribes and other water users in the
San Juan Basin for a one-year term ending December 31, 2004. Environmental
approvals for that agreement are pending. A similar agreement was entered into
in 2003. Although PNM does not believe that its operations will be materially
affected by the drought conditions at this time, it cannot forecast the weather
situation or its ramifications, or how regulations and legislation may impact
PNM's situation in the future, should the drought continue.

Western United States Wholesale Power Market

Various circumstances, including electric power supply shortages, weather
conditions, gas supply costs, transmission constraints, and alleged market
manipulation by certain sellers, resulted in the well-publicized "California
energy crisis" and in the bankruptcy filings of the California Power Exchange
("Cal PX") and of Pacific Gas and Electric Company ("PG&E"). However, since the
third quarter of 2001, conditions in the Western wholesale power market have
changed substantially because of regulatory actions, conservation measures, the
construction of additional generation, a decline in natural gas prices relative
to levels reached during the California energy crisis and regional economic
conditions.

As a result of the foregoing conditions in the Western market, the FERC
and other federal and state governmental authorities are conducting
investigations and other proceedings relevant to the Company and other sellers.
The more significant of these in relation to the Company are summarized below.

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PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

California Refund Proceeding

San Diego Gas and Electric Company ("SDG&E") and other California buyers
have filed a complaint with the FERC against sellers into the California
wholesale electric market. Hearings were held in September 2002, and the
administrative law judge ("ALJ") issued the "Proposed Findings on California
Refund Liability" in December 2002, in which it was determined that the Cal ISO
had, for the most part, correctly calculated the amounts of the potential
refunds owed by sellers. The ALJ identified what were termed "ballpark" figures
for the amount of refunds due under the order in an appendix to the proposed
findings document. PNM was identified as having a refund liability of
approximately $4.3 million, while being owed approximately $7 million from the
Cal ISO. Pursuant to the FERC's order, PNM filed, in conjunction with the
competitive supplier group, initial comments in January 2003 to the ALJ's
preliminary findings addressing errors the Company believes the ALJ made in the
proposed findings, and filed reply comments in February 2003.

Prior to the December 2002 ALJ decision, the Ninth Circuit Court of
Appeals ordered the FERC to allow the parties in the case to provide additional
evidence regarding alleged market manipulation by sellers. Several California
parties submitted additional evidence in March 2003 to support their position
that virtually all market participants, including PNM, either engaged in
specific market manipulation strategies or facilitated such strategies. PNM
maintains that it did not engage in improper wholesale activities, and filed
reply evidence in March 2003, denying the allegations against it.

In March 2003, the FERC issued an order substantially adopting the ALJ's
findings in his December 2002 decision, but requiring a change to the formula
used to calculate refunds. The FERC raised concerns that the indices for
California gas prices, a major element in the formula, had been subject to
potential manipulation and were unverifiable. The effect of this change, which
is not yet final, would be to increase PNM's refund liability. In October 2003,
the FERC issued its order on rehearing in which it affirmed its decision to
change the gas price indices used to calculate the refund amounts. This has the
effect of increasing the Company's amount of refund. The precise amounts,
however, will not be certain until the Cal ISO and Cal PX recalculate refund
amounts which FERC required that they do as soon as possible, but no later than
five months after its October 2003 Order. The Company is currently awaiting the
filing of additional refund information by the Cal ISO and Cal PX and is unable
to predict the ultimate outcome of this FERC proceeding, or whether PNM will be
directed to make any refunds as the result of the FERC order.

Pacific Northwest Refund Proceeding

In addition to the California refund proceedings, Puget Sound Energy,
Inc. filed a complaint at the FERC alleging that spot market prices in the
Pacific Northwest wholesale electric market were unjust and unreasonable. In
September 2001, the ALJ issued a recommended decision and declined to order
refunds associated with wholesale electric sales in the Pacific Northwest. In a
ruling similar to the one issued in the California refund proceeding, the FERC

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

allowed additional discovery to take place and the submission of additional
evidence in the case in March 2003. In June 2003, the FERC issued an order
terminating the proceeding and adopting the ALJ's recommendation that no refunds
should be ordered. Several parties in the proceeding filed requests for
rehearing and in November 2003, FERC denied rehearing and reaffirmed its prior
ruling that refunds were not appropriate for spot market sales in the Pacific
Northwest during the first half of 2001. In November 2003, the Port of Seattle
filed an appeal of FERC's order denying rehearing in the Ninth Circuit Court of
Appeals. As a participant in the proceedings before FERC, the Company is also
participating in the appeal proceedings. The Company is unable to predict the
ultimate outcome of this appeal, or whether PNM will ultimately be directed to
make any refunds.

FERC Show Cause Orders

The FERC initiated a market manipulation investigation, partially in
response to the bankruptcy filing of the Enron Corporation ("Enron") and to
allegations that Enron may have engaged in manipulation of portions of the
Western wholesale power market. In connection with that investigation, all
sellers into Western electric and gas markets were required to submit data
regarding short-term transactions in 2000-2001. In March 2003, the FERC staff
issued its final report, which addressed various types of conduct that the FERC
staff believed may have violated market monitoring protocols in the Cal ISO and
Cal PX tariffs. Based on the final report, the FERC issued orders to certain
companies, including Enron, requiring them to show cause why the FERC should not
revoke their authorizations to sell electricity at market-based rates. In
addition, the FERC staff recommended that the FERC issue orders requiring
certain entities to show cause why they should not be required to disgorge
profits associated with conduct deemed to violate the Cal ISO and Cal PX
tariffs, or be subject to other remedial action.

In June 2003, the FERC issued two separate orders to show cause against
PNM and over sixty other companies. In the first order (the "Gaming Practices
Order"), the FERC asserted that certain entities, including PNM, appeared to
have participated in activities that constitute gaming and/or anomalous market
behavior in violation of the Cal ISO and Cal PX tariffs during the period
January 1, 2000 to June 20, 2001. Specifically, PNM is alleged to have engaged
in a practice termed "False Import," which FERC defined as the practice of
exporting power generated by California and then reimported into California in
order to avoid price caps on in-California generation. These allegations are
based primarily on an initial Cal ISO report and the additional evidentiary
submission by California parties. The Cal ISO was ordered to submit additional
information on which the entities subject to the Show Cause Order should
respond. For PNM, the potential disgorgement for alleged "False Import"
transactions covers the period May 1, 2000 to October 1, 2000. After review of
the additional Cal ISO data and consultation with PNM, the FERC trial staff
filed a motion to dismiss PNM from the case in August 2003. In September 2003,
the California parties filed their objection to the dismissal of PNM from the
case. In January 2004, the FERC issued an order granting trial staff's motion to
dismiss PNM from the Gaming Partnerships docket on grounds that FERC staff's
investigation did not reveal that PNM engaged in the practice of "False Import."
As a result, the Company has been dismissed from the Gaming Practices
proceedings.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

In the second order to show cause (the "Gaming Partnerships Order"), the
FERC asserts that certain entities, including PNM, acted in concert with Enron
and other market participants to engage in activities that constitute gaming
and/or anomalous market behavior in violation of the Cal ISO and Cal PX tariffs
during the period January 1, 2000 to June 20, 2001. Specifically, PNM is alleged
to have entered into "partnerships, alliances or other arrangements" with
thirteen of its customers that allegedly may have been used as market
manipulation schemes. The precise basis for certain of the FERC's allegations is
not clear from the Gaming Partnerships Order, although it appears that most
arise out of PNM's provision of "parking and lending" services to the identified
companies. The potential remedies include disgorgement of unjust profits, as
well as non-monetary remedies such as revocation of a seller's market-based rate
authority.

In September 2003, PNM filed its responses to the Gaming Partnerships
Order indicating that it did not engage in the alleged "partnerships, alliances
or other arrangements" with the alleged parties. In October 2003, PNM filed
testimony and exhibits in the case reasserting its response previously filed.
The FERC ALJ has set the case for hearing on June 28, 2004. In January 2004, the
FERC issued an order granting FERC staff's motion to dismiss seven of the
thirteen PNM customers on grounds that there was no evidence to conclude that
these companies used their commercial relationship with PNM to game the
California ISO and PX markets. Of the six remaining PNM customers in the docket,
the FERC staff has filed motions to dismiss or enter into settlement agreements
with five of them. On February 27, 2004, the FERC staff and the California
parties filed their testimony. The FERC staff did not identify any improper
conduct by PNM. The California parties allege that PNM provided false
information regarding parking transactions that allowed other parties to game
the California market. They claim PNM should be required to disgorge unjust
profits that they variously calculate as between approximately $6 million and
$26 million in addition to non-monetary penalties. PNM believes that it has not
engaged in improper conduct and intends to defend itself vigorously against
these allegations. PNM continues to have discussions with the FERC Staff
regarding possible dismissal of the charges against PNM.

Investigation of Anomalous Bidding Behavior and Practices in the Western Markets

In June 2003, the FERC issued an order finding that certain bids into the
Cal ISO and Cal PX markets during the period May 1 through October 1, 2000
appear to have been excessive, in violation of the prohibitions against
anomalous market behavior in the market monitoring protocols of the Cal ISO and
Cal PX tariffs. The order directed the FERC's Office of Market Oversight and
Investigation ("OMOI") to conduct a further investigation into bids in excess of
$250 per MW during that period. In July 2003, PNM received a data request from
OMOI to all sellers into the Cal ISO and Cal PX markets that submitted bids in
excess of $250 per MW to the Cal ISO and Cal PX during the period covered by the
investigation. In July 2003, PNM submitted its response to OMOI's data request,
in which PNM provided justification of its bidding strategies during that
period. In July 2003, PNM joined with other sellers in filing a request for
rehearing of the June 2003 order, challenging the FERC's determination that bids

F-72

above $250 per MW into the Cal ISO and Cal PX markets during the period May 1
through October 1, 2000 were prima facie excessive or in violation of the Cal
ISO and Cal PX tariffs. PNM has received additional requests for information and
data from OMOI, to which PNM responded. The investigation is currently pending
and PNM cannot predict the outcome of OMOI's investigation, but intends to
vigorously defend itself against any allegation of wrongdoing.

California Power Exchange and Pacific Gas and Electric Bankruptcies

In January and February 2001, Southern California Edison ("SCE") and
PG&E, major purchasers of power from the Cal PX and Cal ISO, defaulted on
payments due to Cal PX for power purchased from the Cal PX in 2000. These
defaults caused the Cal PX to seek bankruptcy protection. PG&E subsequently also
sought bankruptcy protection. PNM has filed its proofs of claims in the Cal PX
and PG&E bankruptcy proceedings. Amounts due to PNM from the Cal PX or Cal ISO
for power sold to them in 2000 and 2001 total approximately $7 million. The
Company has provided allowances for the total amount due from the Cal PX and Cal
ISO.

California Attorney General Complaint

In March 2002, the California Attorney General filed a complaint with the
FERC against numerous sellers regarding prices for wholesale electric sales into
the Cal ISO and Cal PX and to the California Department of Water Resources ("Cal
DWR"). PNM was among the sellers identified in this complaint and filed its
answer and motion to intervene. In its answer, PNM defended its pricing and
challenged the theory of liability underlying the California Attorney General's
complaint. In May 2002, the FERC entered an order denying the California
Attorney General's request to initiate a refund proceeding, but directed
sellers, including PNM, to comply with additional reporting requirements with
regard to certain wholesale power transactions. PNM has made filings required by
the May 2002 order. The California Attorney General filed a petition for review
in the United States Court of Appeals for the Ninth Circuit. PNM intervened in
the Ninth Circuit appeal and is participating as a party in that proceeding. The
Ninth Circuit held oral arguments in the case in October 2003. The Company
cannot predict the outcome of this appeal. As addressed below, the California
Attorney General has also threatened litigation against PNM in state court in
California based on similar allegations.

California Attorney General Threatened Litigation

The California Attorney General has filed several lawsuits in California
state court against certain power marketers for alleged unfair trade practices
involving overcharges for electricity. In April 2002, the California Attorney
General notified PNM of his intention to file a complaint in California state
court against PNM concerning PNM's alleged failure to file rates for wholesale
electricity sold in California and for allegedly charging unjust and
unreasonable rates in the California markets. The letter invited PNM to contact
the California Attorney General's office before the complaint was filed, and PNM
has met several times with representatives of the California Attorney General's
office. Further discussions are contemplated. To date, a lawsuit has not been
filed by the California Attorney General and the Company cannot predict the
outcome of this matter.

F-73

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

California Antitrust Litigation

Several class action lawsuits have been filed in California state courts
against electric generators and marketers, alleging that the defendants violated
the law by manipulating the market to grossly inflate electricity prices. Named
defendants in these lawsuits include Duke Energy Corporation ("Duke") and
related entities along with other named sellers into the California market and
numerous other "unidentified defendants." Certain of these lawsuits were
consolidated for hearing in state court in San Diego, California. In May 2002,
the Duke defendants served a cross-claim on PNM. Duke also cross-claimed against
many of the other sellers into California. Duke asked for declaratory relief and
for indemnification for any damages that might ultimately be imposed on Duke.
Several defendants removed the case to federal court in California. The federal
judge has entered an order remanding the matter to state court, but the effect
of that ruling has been stayed pending appeal. PNM has joined with other
cross-defendants in motions to dismiss the cross-claim. The Company believes it
has meritorious defenses but cannot predict the outcome of this matter.

Block Forward Agreement Litigation

In February 2002, PNM was served with a declaratory relief complaint
filed by the State of California in California state court. The state's
declaratory relief complaint seeks a determination that the state is not liable
for its commandeering of certain energy contracts known as "Block Forward
Agreements". The Block Forward Agreements were a form of futures contracts for
the purchase of electricity at below-market prices and served as security for
payment by PG&E and SCE for their electricity purchases through the Cal PX. When
PG&E and SCE defaulted on payment obligations incurred through the Cal PX, the
Cal PX moved to liquidate the Block Forward Agreements to satisfy in part the
obligations owed by PG&E and SCE. Before the Cal PX could liquidate the Block
Forward Agreements, California commandeered them for its own purposes. In March
2001, PNM and other similarly situated sellers of electricity through the Cal PX
filed claims for damages with the California state Victims Compensation and
Government Claims Board ("Victims Claims Board") on the theory that the state,
by commandeering the Block Forward Agreements, had deprived them of security to
which they were entitled under the terms of the Cal PX's tariff. The Victims
Claims Board denied PNM `s claim in March 2002. PNM filed a complaint against
the State of California in California state court in September 2002, seeking
damages for the state's commandeering of the Block Forward Agreements and
requesting judicial coordination with the state's declaratory relief action
filed in February 2002 on the basis that the two actions raise essentially the
same issues. The judge delayed establishing a procedural schedule for the case
pending a determination of the Cal PX's status in the litigation. The judge has
since held that the Cal PX could represent the interests of Cal PX participants
in the litigation. The judge declined to set a procedural schedule because of
his impending retirement. A new judge has now been appointed.

F-74

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

New Source Review Rules

In November 1999, the United States Department of Justice ("DOJ"), at the
request of the Environmental Protection Agency ("EPA"), filed complaints against
seven companies, alleging that the companies over the past 25 years had made
modifications to their plants in violation of the New Source Review ("NSR")
requirements and in some cases the New Source Performance Standard ("NSPS")
regulations, which could result in the requirement to make costly environmental
additions to older power plants. Whether or not the EPA will ultimately prevail
is uncertain at this time. The EPA has reached settlements with several of the
companies sued by the DOJ. In August 2003, in one of the pending enforcement
cases against Ohio Edison Company, a federal district judge in Ohio ruled in
favor of the EPA and against Ohio Edison. The judge accepted the legal theories
advanced by the government and in particular found that eleven construction
projects undertaken by the utility in that case between 1984 and 1998 were
"modifications" of the plants within the meaning of the Clean Air Act, not
"routine maintenance, repair or replacement" ("RMRR"). That case now proceeds to
a remedy phase. By contrast, in a separate federal district court proceeding
against Duke Energy Company, the court has made certain rulings in summary
judgment motions that appeared to potentially validate elements of the industry
position. If the EPA prevails in the position advanced in the pending
litigation, PNM may be required to make significant capital expenditures, which
could have a material adverse effect on the Company's financial position and
results of operations.

No complaint has been filed against PNM by the EPA, and the Company
believes that all of the routine maintenance, repair, and replacement work
undertaken at its power plants was and continues to be in accordance with the
requirements of NSR and NSPS. However, in October 2000, the New Mexico
Environmental Department ("NMED") made an information request of PNM, advising
PNM that the NMED was in the process of assisting the EPA in the EPA's
nationwide effort "of verifying that changes made at the country's utilities
have not inadvertently triggered a modification under the Clean Air Act's
Prevention of Significant Deterioration ("PSD") policies." PNM has responded to
the NMED information request. In late June 2002, PNM received another
information request from the NMED for a list of capital projects budgeted or
completed in 2001 or 2002. PNM has responded to the additional NMED information
request.

The National Energy Policy Development Group released the National Energy
Policy in May 2001 which called for a review of the pending EPA enforcement
actions. As a result of that review, in June 2002, the EPA announced its
intention to pursue steps to increase energy efficiency, encourage emissions
reductions and make improvements and reforms to the NSR program. The EPA
announced that, among other things, the NSR program had impeded or resulted in
the cancellation of projects that would maintain or improve reliability,
efficiency and safety of existing power plants. The EPA's June 2002 announcement
contemplated further rulemakings on NSR-related issues and expressly cautioned
that the announcement was not intended to affect pending NSR enforcement
actions. Thereafter, in December 2002, the EPA promulgated certain long-awaited
revisions to the NSR rules, along with proposals to revise the RMRR exclusion

F-75

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

contained in the regulations. In August 2003, the EPA issued its rule regarding
RMRR. The new RMRR rule clarifies what constitutes RMRR of damaged or worn
equipment, subject to safeguards to assure consistency with the Clean Air Act.
It provides that replacements of equipment are routine only if the new equipment
is (i) identical or functionally equivalent to the equipment being replaced;
(ii) does not cost more than 20% of the replacement value of the unit of which
the equipment is a part; (iii) does not change the basic design parameters of
the unit; and (iv) does not cause the unit to exceed any of its permitted
emissions limits. Legal challenges to the RMRR rule have been filed by several
states; other states have intervened in support of the rule. How such challenges
will ultimately be resolved cannot be predicted but an appellate court order has
stayed the effect of the RMRR rule pending the outcome of the litigation.

Citizen Suit Under the Clean Air Act

Following required notification, the Grand Canyon Trust and the Sierra
Club (collectively "GCT") filed a so-called "citizen suit" in federal district
court in New Mexico against PNM (but not against the other SJGS co-owners) in
May 2002. The suit alleged two violations of the Clean Air Act and related
regulations and permits. First, GCT argued that the plant has violated, and is
currently in violation of, the federal Prevention of Significant Deterioration
("PSD") rules, as well as the corresponding provisions of the New Mexico
Administrative Code, at SJGS Units 3 and 4. Second, GCT alleged that the plant
has "regularly violated" the 20% opacity limit contained in SJGS's operating
permit and set forth in federal and state regulations at Units 1, 3 and 4. The
lawsuit seeks penalties as well as injunctive and declaratory relief. PNM denied
the material allegations in the complaint.

Both sides in the litigation filed motions for partial summary judgment
and the court entered an order granting PNM's motion for summary judgment on the
PSD issues, dismissing that portion of the case against PNM. A trial on certain
preliminary liability issues on the opacity claims was held in November 2003. At
this trial, the plaintiffs presented their case and PNM presented certain
defenses, including that the measurement methods relied on by GCT are
contradicted by other measurement methods or by other qualified scientific data.
On February 2, 2004 the court entered a Memorandum Opinion on PNM's general
defenses. The Memorandum Opinion rejected PNM's arguments concerning the proper
method for determining opacity compliance, but allowed PNM to present evidence
in the next part of the liability trial addressing and defending against
liability for specific alleged opacity violations. A status conference was held
on March 5, 2004. The court advised that the next phase of the liability trial
would likely be scheduled in August or September 2004. A trial on remedy issues,
if necessary, would be scheduled at a later date. PNM was directed to make a
written settlement offer by April 1, 2004 with the plaintiffs directed to
respond by April 16, 2004. The Company believes that it has meritorious defenses
and continues to vigorously dispute the allegations. PNM's corporate policy
continues to be to adhere to high environmental standards as evidenced by its
ISO 14001 certification. The Company is, however, unable to predict the ultimate
outcome of the matter.

F-76

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Archeological Site Disturbance

The Company hired a contractor, Great Southwestern Construction, Inc.
("Great Southwestern"), to conduct certain "climb and tighten" activities on a
number of electric transmission lines in New Mexico between July 2001 and
December 2001. Those lines traverse a combination of federal, state, tribal and
private properties in New Mexico. In late May 2002, the U.S. Forest Service
("USFS") notified PNM that apparent disturbances to archeological sites had been
discovered in and around the rights-of-way for PNM's transmission lines in the
Carson National Forest in New Mexico. Great Southwestern had performed "climb
and tighten" activities on those transmission lines.

PNM has confirmed the existence of the disturbances, as well as
disturbances associated with certain arroyos that may raise issues under section
404 of the Clean Water Act. PNM has given the Corps of Engineers notice
concerning the disturbances in arroyos. The Corps of Engineers has acknowledged
the Company's notice and asked PNM to cooperate in addressing these
disturbances. The USFS verbally instructed PNM to undertake an assessment and
possible related mitigation measures with respect to the archeological sites in
question. PNM contracted for an archeological assessment and a proposed
remediation plan with respect to the disturbances and has provided the
assessment to the USFS and the federal Bureau of Land Management ("BLM"). The
Santa Fe Forest issued a notice of non-compliance to PNM for alleged
non-compliance with the terms and conditions of PNM's special use authorization
relating to maintenance of PNM's power lines on USFS land.

A subsequent preliminary investigation into other transmission lines that
were covered by the "climb and tighten" project indicated that there are
disturbances on lands governed by other federal agencies and Indian tribes. PNM
and Great Southwestern have provided notice of the potential disturbances to
these other agencies and tribes. The Company had been informed that the USFS and
BLM had commenced a criminal investigation into Great Southwestern's activities
on this project. However, the Company received verbal confirmation that the USFS
and the BLM have decided to decline criminal prosecution under the Archeological
Resources Protection Act ("ARPA") against PNM and Great Southwestern. The State
of New Mexico requested information from PNM concerning the location of
potential disturbances on state lands. The Navajo Nation has also requested
further information concerning disturbances on Navajo land, but has provided
written declination of criminal charges under ARPA against PNM and Great
Southwestern. The Navajo Nation has indicated that it may pursue civil damages
under ARPA. PNM and Great Southwestern are seeking the consent of BLM and the
USFS to address impacted drainages under these agencies jurisdiction. PNM has
provided Great Southwestern with notice and a demand for indemnity. Zurich
Insurance, the insurer for Great Southwestern, has denied coverage and indemnity
to PNM for this claim but has agreed to share the cost of a portion of the
investigation of this claim. The Company is unable to predict the outcome of
this matter and cannot estimate with any certainty the potential impact on the
Company's operations.

F-77

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Excess Emissions Reports

As required by law, whenever there are excess emissions from SJGS, due to
such causes as start-up, shutdown, upset, breakdown or certain other conditions,
PNM makes filings with the NMED. For some three years, PNM has been in
discussions with NMED concerning excess emissions reports for the period after
January 1997. During this period, NMED investigated the circumstances of these
excess emissions and whether these emissions involve any violation of applicable
permits and regulations. PNM and NMED have entered into several agreements
tolling the running of the statute of limitations in order to allow NMED to
complete its review of these filings. The present tolling agreement expires July
1, 2004. By letter dated September 12, 2003, the NMED advised PNM that NMED
would not excuse certain of the emissions exceeding the operation permit
emission permits. The NMED also stated that PNM had violated the opacity limits
in the operating permit and articulated a construction of the standards that
NMED would apply in evaluating opacity exceedances. Attached to the September
12, 2003 letter was what was identified as a "draft" compliance order assessing
unspecified civil penalties. The NMED invited PNM to enter into discussions
concerning the contents of the letter and of the draft compliance order and PNM
and NMED have entered into such discussions. The compliance order has not yet
been finalized and no proceeding against PNM has yet been commenced by NMED. PNM
disagrees with the construction of its operating permit that is contained in the
September 12, 2003 letter which represents a construction of the operating
permit never previously advanced by NMED. PNM is unable to predict the outcome
of this matter and cannot estimate the potential impact on the Company's
operations.

Santa Fe Generating Station

PNM and the NMED conducted investigations of the gasoline and chlorinated
solvent groundwater contamination detected beneath PNM's former Santa Fe
Generating Station ("Santa Fe Station") site to determine the source of the
contamination pursuant to a 1992 Settlement Agreement ("Settlement Agreement")
between PNM and the NMED. The Settlement Agreement has been amended on several
occasions to modify the scope of the investigation and remediation activities.
No source of gasoline contamination in the groundwater was identified as
originating from the site.

PNM is of the opinion that the data compiled indicates observed
groundwater contamination originated from off-site sources. However, in August
2003, PNM elected to enter into a fifth amendment ("Fifth Amendment") to the
Settlement Agreement with the NMED to avoid a prolonged legal dispute whereby
PNM agreed to install additional remediation facilities consisting of an
additional extraction well and two additional monitoring wells to address
remaining gasoline contamination in the groundwater at and in the vicinity of
the site. PNM will continue to operate the remediation facilities until the
groundwater is cleaned up to applicable federal standards or until such time as
the NMED determines that additional remediation is not required, whichever is
earlier. The City of Santa Fe, the NMED and PNM entered into an amended

F-78

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Memorandum of Understanding relating to the continued operation of the Santa Fe
Well and the remediation facilities called for under the latest Amended
Settlement Agreement.

The Fifth Amendment notes the continued presence of chlorinated solvents
in the groundwater under the former Santa Fe Generating Station and provides
that once the remediation standards are met, the NMED anticipates that it will
not require PNM to undertake any further investigation or remediation with
respect to chlorinated solvents. In the event that chlorinated solvent
concentrations remain at levels requiring further action, the NMED will not
require PNM to take any further action with respect to the chlorinated solvent
contamination until the NMED has reviewed any new data relating to the
chlorinated solvent contamination and undertaken a good faith investigation into
other potential sources. The NMED has acknowledged that at least a portion of
the chlorinated solvent contamination observed beneath the Santa Fe Generating
Station site has originated from off-site sources. In September 2003, PNM was
verbally informed that the Superfund Oversight Section of the NMED is conducting
an investigation into the chlorinated solvent contamination at the former Santa
Fe Generating Station site, including other possible sources for the chlorinated
solvents in the groundwater. The NMED states that it expects to have the results
of its investigation complete by September of 2004.

Natural Gas Royalties Qui Tam Litigation

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

Currently the parties are engaged in discovery on the issue of whether
the relator meets the requirements for bringing a claim under the False Claims
Act. The Company expects to participate with other defendants in a motion to
dismiss on the ground that the relator does not meet those requirements.

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

F-79

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

Dugan Production Corporation Litigation

In July 2002, Dugan Production Corp. filed a lawsuit in the County of San
Juan, New Mexico, against the SJCC. In September 2002, the SJCC removed the
lawsuit to the United States District Court for the District of New Mexico. The
lawsuit seeks to enjoin the underground mining of coal from a portion of the
land that is to be used for the underground mine. The plaintiff also seeks
monetary damages.

The SJCC, through leases with the federal government and the State of New
Mexico, owns coal interests with respect to the underground mine. The plaintiff,
through leases with the federal government, the State of New Mexico and certain
private parties, claims to own certain oil and gas interests in portions of the
land that is to be used for the underground mine. The plaintiff alleges that the
SJCC's underground coal mining operations have or will interfere with
plaintiff's gas production and result in the dissipation of natural gas that it
otherwise would be entitled to recover. The plaintiff also alleges, and seeks a
declaration by the court, that the rights under its leases are senior and
superior to the rights of the SJCC.

The SJCC has informed the Company that SJCC intends to vigorously dispute
the litigation. In September 2002, the SJCC filed a motion to dismiss the claims
against it on several grounds. Discovery for the lawsuit has not yet started.
The Company cannot predict the ultimate outcome of the litigation or whether the
litigation will adversely affect the amount of coal available, or its price for
SJGS.

Richardson Matter

Another gas leaseholder, Richardson Operating Company ("Richardson"), has
leases in the area of the San Juan Mine and has asserted claims against SJCC.
The Company understands that discussions with Richardson are ongoing, although
no formal litigation has been filed.

Asbestos Cases

The Company was named in 2003 as one of a number of defendants in 21
personal injury lawsuits relating to alleged exposure to asbestos. All of these
cases involve claims of individuals, or their descendents, who worked for
contractors building, or working at, Company power plants. Some of the claims
relate to construction activities during the 1950's and 1960's, while other
claims generally allege exposure during the last 30 years. The Company has never
manufactured, sold or distributed products containing asbestos. All of these
cases involve multiple defendants. The state district judge in six of these
cases recently entered a stay of all proceedings due to the bankruptcy of one of
defendants; however, the plaintiffs in these cases have moved to modify the stay
so that the cases can proceed against the remaining defendants. The Company was
insured by a number of different insurance policies during the time period at

F-80

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

issue in these cases. The Company intends to vigorously defend against these
lawsuits. Although the Company is unable to fully predict the outcome of this
litigation, the Company believes that it has adequate reserves and insurance
coverage such that the outcome of these legal proceedings would not have a
material impact on the financial condition of the Company.

San Angelo Electric Service Company ("SESCO") Matter

In October 2003, the Texas Commission on Environmental Quality ("TCEQ")
requested information from PNM concerning any involvement that PNM had with the
SESCO of San Angelo, Texas. PNM is informed that the TCEQ is conducting a site
investigation of a SESCO facility in San Angelo, Texas pursuant to the Texas
Solid Waste Act and that the SESCO site has been referred to the Superfund Site
Discovery and Assessment Program. The primary concern appears to be
polychlorinated biphenals ("PCBs"). The TCEQ is conducting the site
investigation to determine what remediation activities are required at the SESCO
site and to identify potentially responsible parties ("PRPs"). In January 2004,
PNM submitted its preliminary response to the TCEQ request for information. The
response states that PNM previously had a "requirements" contract with SESCO for
the repair of electric transformers. It appears that a number of transformers
were sent to SESCO for repair. In addition, it appears that PNM sold a number of
retired transformers to SESCO. PNM has not received a response from the TCEQ
concerning the information provided in PNM's response. PNM has not been named as
a PRP for the SESCO site. PNM is unable to predict the outcome of this matter.

Other

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

The Company is involved in various legal proceedings in the normal course
of its business. The associated legal costs for these legal matters are accrued
when incurred. It is also the Company's policy to accrue for legal costs
expected to be incurred in connection with Statement of Financial Accounting
Standards No. 5 "Accounting for Contingencies" ("SFAS 5") legal matters when it
is probable that a SFAS 5 liability has been incurred and the amount of expected
legal costs to be incurred is reasonably estimable. These estimates include
costs for external counsel professional fees.

Risks and Uncertainties

The Company's future results may be affected by various factors outside
of its control, including: changes in regional economic conditions; the outcome
of labor negotiations with unionized employees; fluctuations in fuel, purchased

F-81

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

power and gas prices; the actions of utility regulatory commissions; changes in
law and environmental regulations; the success of its planned generation
expansion; the cost and outcome of litigation and other legal proceedings and
investigations; the performance of generation facilities; changes in accounting
rules and standards; and external factors such as weather and water supply.
Because of pending federal regulatory reforms, the public utility industry is
undergoing a fundamental change. New Mexico has repealed the Electric Utility
Industry Restructuring Act of 1999 and therefore has abandoned its plans to
transform the industry from one of vertically-integrated monopolies to one with
deregulated, competitive generation. However, the FERC has proposed a "Standard
Market Design" ("SMD") to establish rules for a market-based approach for
wholesale transactions over the transmission grid. The FERC's efforts have been
opposed by a number of states, primarily in the West and in the Southeast,
because of concern that the SMD does not adequately take into account regional
differences. Moreover, Congress is currently debating energy legislation which
could affect the FERC's activities. In an attempt to ease concerns, on April 28,
2003, the FERC issued a White Paper on "Wholesale Power Market Platform"
describing changes it intended to make to its SMD proposed rules. The Company's
future results will be impacted by the form of the FERC rules, if adopted; the
costs of complying with rules and legislation that may call for regulatory
reforms for the industry; and the resulting market prices for electricity and
natural gas. In addition, the Company has in place a retail electric rate freeze
through 2007 so that the Company's financial results will depend on its ability
to control costs and grow revenues, and the implications of uncontrollable
factors such as weather, water supply, litigation and economic conditions.

(14) Environmental Issues

The normal course of operations of the Company necessarily involves
activities and substances that expose the Company to potential liabilities under
laws and regulations protecting the environment. Liabilities under these laws
and regulations can be material and in some instances may be imposed without
regard to fault, or may be imposed for past acts, even though the past acts may
have been lawful at the time they occurred. Sources of potential environmental
liabilities include the Federal Comprehensive Environmental Response
Compensation and Liability Act of 1980 and other similar statutes.

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

F-82

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

The Company's recorded minimum liability estimated to remediate its
identified sites was $6.8 million and $8.5 million as of December 31, 2003 and
2002, respectively. The ultimate cost to clean up the Company's identified sites
may vary from its recorded liability due to numerous uncertainties inherent in
the estimation process, such as: the extent and nature of contamination; the
scarcity of reliable data for identified sites; and the time periods over which
site remediation is expected to occur.

For the year ended December 31, 2003, 2002 and 2001, the Company spent
$3.2 million, $0.7 million and $1.7 million, respectively, for remediation. The
majority of the December 31, 2003 environmental liability is expected to be paid
over the next five years, funded by cash generated from operations. Future
environmental obligations are not expected to have a material impact on the
results of operations or financial condition of the Company.

(15) Company Realignment

On August 22, 2002, the Company was realigned due to the changes in the
electric industry and particularly, the negative impact on the Company's
earnings and growth prospects from wholesale market uncertainty. The changes
included consolidation of similar functions. A total of 85 salaried and hourly
employees were notified of their termination as part of the realignment. In
accordance with EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity", the Company incurred
a liability of $8.8 million for severance and other related costs associated
with the involuntary termination of employees, which was charged to operations
in the quarter ended September 30, 2002 and is included in administrative and
general in the consolidated statements of earnings for the year ended December
31, 2002. The Company paid $8.6 million through December 31, 2003.

(Intentionally left blank)

F-83

(16) Other Income and Deductions

The following table details the components of other income and deductions
for PNM Resources, Inc. and subsidiaries:

Year Ended December 31,
-------------------------------------------
2003 2002 2001
------------- ------------ -------------
(In thousands)
Other income:

Investment income................................... $41,826 $44,954 $48,742
AFUDC............................................... 2,589 - -
Gross receipts tax credits.......................... 2,893 - -
Miscellaneous non-operating income.................. 5,397 3,406 3,405
------------- ------------ -------------
$52,705 $48,360 $52,147
============= ============ =============
Other deductions:
Loss on reacquired debt write off................... $16,576 $ - $ -
Transition costs write off.......................... 16,720 - -
Merger costs and related legal costs................ - (2,436) 17,975
Write-off of Avistar investments.................... - - 13,089
Nonrecoverable coal mine decommissioning costs...... - - 12,979
Write-off of regulatory assets...................... - - 11,100
Contribution to PNM Foundation...................... - - 5,000
Transmission line project write-off................. - 4,818 -
Miscellaneous non-operating deductions.............. 12,857 9,924 7,114
------------- ------------ -------------
$46,153 $12,306 $67,257
============= ============ =============

(Intentionally left blank)

F-84

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

The following table details the components of other income and deductions
for Public Service Company of New Mexico and subsidiaries:

Year Ended December 31,
-------------------------------------------
2003 2002 2001
------------- ------------ -------------
(In thousands)
Other income:

Investment income.................................. $38,918 $37,632 $48,742
AFUDC.............................................. 2,551 - -
Gross receipts tax credits......................... 2,548 - -
Miscellaneous non-operating income................. 4,738 2,814 3,405
------------- ------------ -------------
$48,755 $40,446 $52,147
============= ============ =============
Other deductions:
Loss on reacquired debt write-off.................. $16,576 $ - $ -
Transition costs write-off......................... 16,720 - -
Merger costs and related legal costs............... - - 17,975
Write-off of Avistar investments................... - - 13,089
Nonrecoverable coal mine decommissioning costs..... - - 12,979
Write-off of regulatory assets..................... - - 11,100
Contribution to PNM Foundation..................... - - 5,000
Transmission line project write-off................ - 4,818 -
Miscellaneous non-operating deductions............. 6,329 10,241 7,114
------------- ------------ -------------
$39,625 $15,059 $67,257
============= ============ =============

(Intentionally left blank)

F-85

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

(17) Pro Forma Effect of Changes in Accounting Principles

The following table, presented for comparative purposes, shows the
pro-forma effect assuming the adoption of SFAS 143 and the change in measurement
date of the pension and other post-retirement benefit plans applied
retroactively to the Company's earnings.

Year Ended
December 31,
2002 2001
--------------- --------------
(In thousands)

Net Earnings as previously reported......................... $ 63,686 $ 149,847
Change of Pension Measurement Date, net of tax
expense (benefit) of $(167) and $144 (note 9)........... (255) 219
Adoption of Asset Retirement Obligations, net of tax
benefit of $3,048 and $3,088 (note 12)................... 4,651 4,712
--------------- --------------
Net Earnings Available to Common Stock...................... $ 68,082 $ 154,778
=============== ==============
Earnings per Share:
Net Earnings as previously reported......................... $ 1.63 $ 3.83
Change of Pension Measurement Date (note 9)................. (0.01) (0.01)
Adoption of Asset Retirement Obligations,
net of tax of $0.08 and $0.08 (note 12).................. 0.12 0.12
--------------- --------------
Net Earnings Available to Common Stock...................... $ 1.74 $ 3.94
=============== ==============
Diluted Earnings Per Share as previously reported........... $ 1.61 $ 3.77
=============== ==============
Diluted Earnings Per Share net of tax of
$0.08 and $0.07.......................................... $ 1.73 $ 3.88
=============== ==============

(18) New and Proposed Accounting Standards

Financial Accounting Standards Board Interpretation No. 46,
"Consolidation of Variable Interest Entities", an interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements" (revised December
2003) ("FIN 46R"). In January 2003, the Financial Accounting Standards Board
("FASB") issued FIN 46 to address the consolidation of variable interest
entities ("VIEs"). FIN 46 applied immediately to VIEs created after January 31,
2003, and to VIEs in which an enterprise obtains an interest after that date. It
applied in the first fiscal year or interim period beginning after June 15,
2003, to VIEs in which an enterprise holds a variable interest that it acquired
before February 1, 2003. Upon adoption of FIN 46, the Company did not identify
any VIEs for which it is the primary beneficiary or has significant involvement.
In December 2003, the FASB issued FIN 46R to clarify provisions of FIN 46 and
exempt certain entities from its requirements. The Company must apply the
provisions of FIN 46R for special purpose entities (SPEs) created prior to
February 1, 2003, at the end of the annual reporting period ending after
December 15, 2003. The Company evaluated all its interests in entities that may
be deemed SPEs under the provisions of FIN 46R and concluded that no additional

F-86

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

entities need to be consolidated. The Company is required to adopt FIN 46R for
non-SPEs at the end of the first interim reporting period ending after March 15,
2004. The Company is currently evaluating the impact of adopting FIN 46R
applicable to non-SPEs created prior to February 1, 2003 and is unable to
predict its impact on the Company's operating results and financial position at
this time.

Statement of Financial Accounting Standards No. 132 (revised 2003)
"Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS
132(R)"). This statement was issued in December of 2003 and replaces FASB
statement No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132"). SFAS 132(R) addresses disclosure only and
does not change the measurement and recognition provisions of FASB Statement No.
87, "Employers' Accounting for Pensions", Statement No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits", and Statement No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". Additional disclosures to be
included in the annual report include additional information regarding plan
assets, the accumulated benefit obligations (for defined benefit pension plans),
projected benefit payments, estimated expected contributions, assumptions used
in the calculations and the measurement date of the plan (see Note 9 - Pension
and Other Post-retirement Benefits for additional disclosures). Disclosures to
be included in interim reports include the amount of net periodic benefit cost
recognized (showing the components separately) and contributions paid and
expected to be paid during the current fiscal year, if significantly different
from amounts previously disclosed. This statement is effective for fiscal years
ending after December 15, 2003 and interim periods beginning after December 15,
2003. The disclosure regarding estimated future benefit payments shall be
effective for fiscal years ending after June 15, 2004.

EITF 01-8 "Determining Whether an Arrangement Contains a Lease." EITF
01-8 provides guidance on how to determine whether an arrangement contains a
lease that is within the scope of Statement of Financial Accounting Standards
No. 13, "Accounting for Leases" ("SFAS 13"). The guidance is based on whether
the arrangement conveys to the purchaser (lessee) the right to use a specific
asset. A consensus was reached on the accounting for substantial services
provided by the lessor in these arrangements in which these services are not
executory costs as the term is used in SFAS 13. The guidance provides as to when
an arrangement should be reassessed to determine whether it contains a lease and
how to account for these subsequent changes in lease classification. EITF 01-8
must be applied to arrangements agreed to, committed to, modified, or acquired
in business combinations initiated after April 1, 2003. Upon adoption, EITF 01-8
did not have a material impact on the Company's financial condition or results
of operation.

EITF 02-9 "Accounting for Changes That Result in a Transferor Regaining
Control of Financial Assets Sold." EITF 02-9 addresses how to apply the
accounting requirements of paragraph 55 of Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 140"), with respect to beneficial
interests held by the transferor and loans that do not meet the definition of a
security, including whether the transferor should recognize a gain or loss when

F-87

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2003, 2002 and 2001

the provisions of paragraph 55 are applied. Paragraph 55 of SFAS No. 140
requires a transferor to recognize in its financial statements assets previously
accounted for appropriately as having been sold when one or more of the
conditions regarding control of the assets are no longer met. EITF 02-9 must be
applied to events occurring after April 2, 2003. Upon adoption, EITF 02-9 did
not have a material impact on the Company's financial condition or results of
operation.

FASB Staff Position No. 106-1 "Accounting and Disclosure Requirements
Related to Medicare Prescription Drug, Improvement and Modernization Act of 2003
("the Act")" ("FSP 106-1"). The Act introduces a prescription drug benefit under
Medicare ("Medicare Part D") as well as a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. FSP 106-1 permits a sponsor of a postretirement
health care plan that provides a prescription drug benefit to make a one-time
election to defer accounting for the effects of the Act. Authoritative guidance
on accounting for the federal subsidy is pending and could require a change in
previously reported information. Disclosures are required regardless of whether
the sponsor elects deferral. FSP 106-1 is effective for fiscal years or interim
periods ending after December 7, 2003 and interim periods beginning after
December 15, 2003. Because of various uncertainties related to the Company's
response to this litigation and the appropriate accounting methodology for this
event, the Company has elected to defer financial recognition of this
legislation until the FASB issues final accounting guidance. When issued, that
final guidance could require the Company to change previously reported
information. This deferral election is permitted under FSP 106-1.

(Intentionally left blank)

88

PNM RESOURCES, INC. AND SUBSIDIARIES AND
PUBLIC SERVICE COMPANY OF NEW MEXICO
QUARTERLY OPERATING RESULTS

The unaudited operating results by quarters for 2003 and 2002 are as
follows:

Quarter Ended
---------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- ---------------- ----------------- -----------------
(In thousands, except per share amounts)
2003:

Operating Revenues......................... $387,691 $ 340,211 $ 385,161 $ 342,651
Operating Income........................... 33,426 29,914 35,881 19,371
Net Earnings Before Cumulative Effect
of Changes in Accounting Principles...... 10,748 17,596 16,568 13,640
Net Earnings............................... 48,170 (A) 17,596 16,568 (B) 12,839
Net Earnings Per Share (Basic):
Net Earnings Before Cumulative Effect
of Changes in Accounting Principles...... 0.28 0.45 0.41 0.34
Net Earnings............................... 1.23 0.45 0.41 0.32
Net Earnings Per Share (Diluted):
Net Earnings Before Cumulative Effect
of Changes in Accounting Principles...... 0.27 0.44 0.41 0.34
Net Earnings............................... 1.22 0.44 0.41 0.32

2002:
Operating Revenues......................... $301,817 $ 250,189 $ 274,675 $ 292,013
Operating Income........................... 32,687 19,449 29,135 20,503
Net Earnings Before Cumulative Effect
of Changes in Accounting Principles...... 24,803 11,010 17,650 10,223
Net Earnings .............................. 24,803 11,010 17,650 (C) 10,223
Net Earnings Per Share (Basic):
Net Earnings Before Cumulative Effect
of Changes in Accounting Principles...... 0.63 0.28 0.45 0.26
Net Earnings............................... 0.63 0.28 0.45 0.26
Net Earnings Per Share (Diluted):
Net Earnings Before Cumulative Effect
of Changes in Accounting Principles...... 0.63 0.28 0.45 0.26
Net Earnings............................... 0.63 0.28 0.45 0.26

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.

(A) Effective January 1, 2003, the Company adopted SFAS 143, Accounting for
Asset Retirement Obligations. The effect was reported as a cumulative
effect of a change in accounting principle, which increased the Company's
net earnings by approximately $37.4 million, net of tax expense of
approximately $24.5 million, or $0.93 per diluted common share. In the
first quarter of 2003, the Company wrote-off transition costs previously
capitalized in anticipation of deregulation, which decreased the

F-89

Company's net earnings by approximately $9.5 million, net of tax benefit
of $7.2 million, or $0.24 per diluted common share.
(B) In the third quarter of 2003, the Company recognized a loss on reacquired
debt, which decreased the Company's net earnings by $10.0 million, net of
tax benefit of $6.6 million, or $0.25 per diluted common share.
(C) In the third quarter of 2002, the Company was realigned due to changes in
the industry, which decreased the Company's net earnings by $5.3 million,
net of tax benefit of $3.5 million, or $0.14 per diluted common share.

(Intentionally left blank)

F-90

INDEPENDENT AUDITORS' REPORT ON SCHEDULES

To the Board of Directors and Stockholders of PNM Resources, Inc. and Public
Service Company of New Mexico

We have audited the consolidated financial statements of PNM Resources, Inc. and
subsidiaries and Public Service Company of New Mexico and subsidiaries
(collectively, the "Companies") as of December 31, 2003 and 2002, and for each
of the three years in the period ended December 31, 2003, and have issued our
reports thereon dated March 8, 2004 (which reports express unqualified opinions
and include explanatory paragraphs referring to the adoption of Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations, effective January 1, 2003 and the change in actuarial valuation
measurement date for the pension plan and other post-retirement benefits from
September 30 to December 31); such financial statements and reports are included
in this Annual Report on Form 10-K of PNM Resources, Inc. and Public Service
Company of New Mexico. Our audits also included the consolidated financial
statement schedules listed in Item 15. These financial statement schedules are
the responsibility of each of the respective Companies' management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

Omaha, Nebraska
March 8, 2004

F-91

SCHEDULE I

The PNM Resources, Inc. holding company structure was effected through a
one-for-one share exchange between the shareholders of Public Service Company of
New Mexico ("PNM") and PNM Resources, Inc. (the "Holding Company") on December
31, 2001, whereby the shareholders of PNM became shareholders of the Holding
Company and the Holding Company acquired all of PNM's common stock. The Holding
Company has no significant operations other than billings of corporate
activities to PNM on a cost basis and its equity interest in PNM. There were no
material Holding Company operations in 2001; therefore, a statement of earnings
is not presented for 2001.

PNM RESOURCES, INC.
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
BALANCE SHEET

As of December 31,
2003 2002
--------------- ---------------
(In thousands)
Assets

Cash and cash equivalents................................ $ 845 $ -
Intercompany receivables................................. 54,094 48,736
Short-term investments................................... - 79,630
Other current assets..................................... 11,881 10,091
--------------- ---------------
Total current assets.................................. 66,820 138,457
--------------- ---------------
Property, plant and equipment, net of accumulated
depreciation of $8,394 and $5,839...................... 42,321 72,068
Long-term investments.................................... 21,183 -
Investment in subsidiaries............................... 1,047,933 864,152
Other long-term assets................................... 927 15,694
--------------- ---------------
Total long-term assets................................ 1,112,364 951,914
--------------- ---------------
Total Assets.......................................... $1,179,184 $1,090,371
=============== ===============
Liabilities and Shareholder's Equity
Current liabilities...................................... $ 51,493 $ 23,300
Long-term debt........................................... - 26,152
Other long-term liabilities.............................. 6,316 1,737
--------------- ---------------
Total Liabilities..................................... 57,809 51,189
--------------- ---------------
Common stock outstanding 40,259 and 39,118 shares........ 1,033,694 1,010,510
Accumulated other comprehensive income, net of tax....... - (591)
Retained earnings........................................ 87,681 29,263
--------------- ---------------
Total common stockholder's equity..................... 1,121,375 1,039,182
--------------- ---------------
Total Liabilities and Shareholder's Equity............ $1,179,184 $1,090,371
=============== ===============

See notes to the consolidated financial statements.

F-92

PNM RESOURCES, INC.
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF EARNINGS

Year ended December 31,
2003 2002
-------------- ---------------
(In thousands)

Operating revenues.......................... $ 24,999 $ 72,865
Operating expenses.......................... 22,775 79,543
-------------- ---------------
Operating income (loss).................. 2,224 (6,678)
-------------- ---------------
Other income and deductions:
Equity in earnings of subsidiaries.......... 94,105 60,456
Other income................................ 2,600 11,289
Other deductions............................ (5,207) (450)
-------------- ---------------
Net other income and deductions.......... 91,498 71,295

Income before income taxes.................. 93,722 64,617
Income tax (benefit) expense................ (1,451) 931
-------------- ---------------
Net Earnings................................ $ 95,173 $ 63,686
-------------- ---------------

See notes to the consolidated financial statements.

F-93

SCHEDULE I
PNM RESOURCES, INC.
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENT OF CASH FLOWS

Year Ended December 31,
2003 2002
--------------------------------
(In thousands)
Cash Flows From Operating Activities:

Net earnings..................................................... $95,173 $ 63,686
Adjustments to reconcile net earnings to net cash flows
from operating activities:
Depreciation and amortization................................ 1,735 715
Accumulated deferred income tax.............................. 6,213 (2,542)
Equity in earnings of subsidiaries........................... (94,105) (60,456)
Changes in certain assets and liabilities:
Other assets............................................... (1,591) (3,882)
Accounts payable........................................... 4,328 2,579
Other liabilities.......................................... 27,184 22,458
--------------- ---------------
Net cash flows from operating activities............. 38,937 22,558
--------------- ---------------
Cash Flows From Investing Activities:
Property plant and equipment..................................... (9,401) (20,405)
Redemption of short-term investments............................. 80,291 31,012
Cash dividends from subsidiaries................................. 49,581 58,981
Eastern Interconnect Project Sale................................ 36,925 -
Equity Contribution to Subsidiaries.............................. (139,257) -
Other............................................................ (8,207) (18,581)
--------------- ---------------
Net cash flows from investing activities............. 9,932 51,007
--------------- ---------------
Cash Flows From Financing Activities:
Long-term debt repayments........................................ (26,152) -
Exercise of employee stock options (note 10)..................... (9,639) (1,785)
Dividends paid................................................... (36,115) (34,424)
Change in intercompany accounts.................................. 23,592 (48,736)
Other............................................................ 290 -
--------------- ---------------
Net cash flows from financing activities............. (48,024) (84,945)
--------------- ---------------
Increase (Decrease) in Cash and Cash Equivalents................... 845 (11,380)

Beginning of Year.................................................. - 11,380
--------------- ---------------
End of Year........................................................ $ 845 $ -
=============== ===============
Supplemental cash flow disclosures:
Interest paid.................................................... $ 576 $ -
=============== ===============
Income taxes paid (refunded), net................................ $(18,070) $ 3,640
=============== ===============
Non-cash dividends from subsidiaries............................. $ - $ 34,880
=============== ===============
Long-term debt assumed for transmission line..................... $ - $ 26,152
=============== ===============

See notes to the consolidated financial statements.

F-94

SCHEDULE II
PNM RESOURCES, INC.
PUBLIC SERVICE COMPANY OF NEW MEXICO
VALUATION AND QUALIFYING ACCOUNTS

Additions Deductions
---------------------------------- ---------------
Balance at Charged to Charged to
beginning of costs and other Write off Balance at
Description year expenses accounts adjustments end of year
--------------------------------------- -------------- ---------------- -------------- --------------- ---------------
(In thousands)
Allowance for doubtful accounts,
year ended December 31:

2001 $13,279 $ 10,312 $ - $ 5,566 $ 18,025

2002 $18,025 $ (2,450) $ - $ - $ 15,575

2003 $15,575 $ (3,540) $ - $ 2,751 $ 9,284

(A) Allowance for market and credit
volatility year ended December 31:
2001 $ 4,139 $ (1,090) $ - $ - $ 3,049

2002 $ 3,049 $ (616) $ - $ - $ 2,433

2003 $ 2,433 $ (2,433) $ - $ - $ -

(A) Recorded in Other Deferred Credits on
the Consolidated Balance Sheets.

F-95

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

Information has been previously reported as defined in SEC Rule 12b-2.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

The Company's principal executive officer and principal financial officer
have concluded that the Company's disclosure controls and procedures, based on
their evaluation of these disclosure controls and procedures, as of the end of
the period covered by this report, are effective to ensure that material
information relating to the Company, including its consolidated subsidiaries,
was made known to them by others within those entities, particularly during the
period in which the periodic reports are being prepared. There was no change in
the Company's internal control over financial reporting that occurred during the
Company's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Reference is hereby made to "Proposal 1: Election of Directors" in the
Company's Proxy Statement relating to the annual meeting of stockholders to be
held on May 18, 2004 (the "2004 Proxy Statement"), to PART I, SUPPLEMENTAL ITEM
- - "EXECUTIVE OFFICERS OF THE COMPANY", "Other Matters" - "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Code of Ethics" in the 2004
Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

Reference is hereby made to "Executive Compensation", "Retirement Plan
and Related Matters", "Employment Contracts, Termination of Employment and
Change in Control Agreements" and "Director Compensation" in the 2004 Proxy
Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS

Reference is hereby made to "PNM Resources Common Stock Owned by
Executive Officers and Directors", "Ownership of More Than Five Percent of PNM
Resources Common Stock" and "Equity Compensation Plan Information" in the 2004
Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Reference is hereby made to the 2004 Proxy Statement for such disclosure,
if any, as may be required by this item.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Reference is hereby made to "Audit and Ethics Committee Report" and
"Independent Auditor Fees" in the 2004 Proxy Statement.

E-1

PART IV

ITEM 15. 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 2002, 2001, and
2000 are omitted for the reason that they are not
required or the information is otherwise supplied.

(a) - 3-A. Exhibits Filed:

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

10.9.1 Amendment One to Underground Coal Sales Agreement dated
December 15, 2003 among San Juan Coal Company, PNM and Tucson
Electric Coal Company (Confidential treatment was requested for
portions of this exhibit and such portions were omitted from
the exhibit filed and were filed separately with the Securities
and Exchange Commission)

10.23.6** Sixth Amendment dated December 9, 2003 to Restated and
Amended PNM Resources, Inc. Accelerated Management
Performance Plan

10.43.1** 2004 Officer Incentive Plan

10.45.5** Fifth Amendment dated December 9, 2003 to the Service Bonus
Plan

10.48.3** Third Amendment dated December 9, 2003 to the OBRA '93
Retirement Plan

10.50.2** Fourth Amendment dated December 9, 2003 to the PNM Resources,
Inc. Section 415 Plan

10.51** Officer Retention Plan dated October 21, 2003

10.52** PNM Resources, Inc. Executive Spending Account Plan dated
December 9, 2003

10.68.2 Amendment Number Two to the Public Service Company of New
Mexico Master Decommissioning Trust Agreement for Palo Verde
Nuclear Generating Station

10.72 Credit Agreement dated as of November 21, 2003 among PNM, the
Lenders identified therein and Bank of America, N.A. as
administrative agent

E-2

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

10.75** PNM Resources, Inc. Executive Savings Plan dated December 29,
2003

10.83** Retention Bonus Agreement executed October 31, 2003 for Jeffry
Sterba

18.1 Letter from Deloitte & Touche LLP regarding change in
accounting principle for PNM Resources, Inc.

18.2 Letter from Deloitte & Touche LLP regarding change in
accounting principle for Public Service Company of New Mexico

23.1 Consent of Deloitte & Touche LLP for PNM Resources, Inc.

23.2 Consent of Deloitte & Touche LLP for Public Service Company of
New Mexico.

31.1 Chief Executive Officer Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.

31.2 Chief Financial Officer Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.

32.1 Chief Executive Officer Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.

32.2 Chief Financial Officer Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.

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

In addition to those Exhibits shown above, PNM and PNM Resources hereby
incorporate 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:

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

3.1 Restated Articles of Incorporation of PNM 3.1 to the Company's Annual 333-32170
Resources dated February 22, 2002 Report on Form 10-K for the
year ended December 31, 2001

3.1.1 Restated Articles of Incorporation of 3.1.1 to the Company's 1-6986
PNM, as amended through Quarterly Report on Form 10-Q
May 31, 2002 for the quarter ended June 30,
2002

E-3

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

3.2 Bylaws of PNM Resources, Inc. 3.2 to the Company's Annual 333-32170
with all Amendments to and Report on Form 10-K for the
including February 18, 2003 year ended December 31, 2002

3.2.1 By-laws of PNM with All 3.2 to the Company's Report on 1-6986
Amendments to and including Form 10-Q for the fiscal
May 31, 2002 quarter ended June 30, 2002

Instruments Defining the Rights of Security Holders, Including Indentures

4.1 Indenture of Mortgage and Deed of 4-(d) to PNM's 2-99990
Trust dated as of June 1, 1947, between Registration Statement
PNM and The Bank of New York No. 2-99990
(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 PNM

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

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

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

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

E-4

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

4.6.1 Third Supplemental Indenture, dated as of 4.6.1 to PNM's Annual Report on 1-6986
October 1, 1999 to Indenture dated as of March Form 10-K for the fiscal year
11, 1998, between PNM and The Chase Manhattan ended December 31, 1999
Bank, as Trustee

4.6.2 Fourth Supplemental Indenture, dated 4.6.2 to PNM's Quarterly 1-6986
as of May 1, 2003 to Indenture Report on Form 10-Q
dated as of March 11, 1998, between For the quarter ended
PNM and JPMorgan Chase Bank (formerly The Chase June 30, 2003
Manhattan
Bank), as Trustee

4.6.3 Fifth Supplemental Indenture, dated 4.6.3 to PNM's Quarterly 1-6986
as of May 1, 2003 to Indenture Report on Form 10-Q
dated as of March 11, 1998, between For the quarter ended
PNM and JPMorgan Chase Bank, as Trustee June 30, 2003

4.6.4 Sixth Supplemental Indenture, dated 4.6.4 to PNM's Quarterly 1-6986
as of May 1, 2003 to Indenture Report on Form 10-Q
dated as of March 11, 1998, between For the quarter ended
PNM and JPMorgan Chase Bank, as Trustee June 30, 2003

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

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

4.9 Second Supplemental Indenture, dated September 4.7.1 to PNM's Quarterly Report 1-6986
1, 2003, supplemental to Report on Form 10-Q for the
Indenture, dated as of August 1, 1998, quarter ended September 30, 2003
between PNM and JPMorgan Chase Bank (formerly,
The Chase
Manhattan Bank), as Trustee

Material Contracts

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

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

E-5

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

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

10.4.1 Amendatory Contract between the 5-R to PNM's 2-60021
United States and PNM dated Registration Statement
September 29, 1977, for furnishing No. 2-60021
Water

10.5 Water Supply Agreement between 10.5 to PNM's Quarterly 1-6986
the Jicarilla Apache Tribe and Public Report of Form 10-Q for
Service Company of New Mexico, the quarter ended
dated July 20, 2000 September 30, 2001

10.8 Arizona Nuclear Power Project 5-T to PNM's 2-50338
Participation Agreement among PNM Registration Statement
and Arizona Public Service Company, No. 2-50338
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 PNM's Annual 1-6986
Arizona Nuclear Power Project Report on Form 10-K
Participation Agreement for fiscal year ended
December 31, 1991

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

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

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

E-6

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

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

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

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

10.8.9 Amendment No. 14 to the Arizona Nuclear Power 10.8.9 to PNM's Annual Report
Project Participation Agreement effective June on Form 10-K for the fiscal
20, 2000 year ended December 31, 2000

10.9 Underground Coal Sales Agreement, dated August 10.85 to PNM's Quarterly Report 1-6986
31, 2001 among San Juan Coal Company, PNM and on Form 10-Q for the quarter
Tucson Electric Power Company ending September 31, 2001
(Confidential treatment
was requested for portions of
this exhibit, and such
portions were omitted
from this exhibit filed and
were filed separately with
the Securities and Exchange
Commission)

10.9.1 Amendment One to Underground Coal 10.9.1 to PNM's Amended Report 1-6986
Sales Agreement dated December 15, 2003 on Form 10-K for fiscal year
among San Juan Coal Company, PNM and Tucson ended December 31, 2003
Electric Coal Company (Confidential treatment
was requested for portions of
this exhibit, and such
portions were omitted
from this exhibit filed and
were filed separately with
the Securities and Exchange
Commission)

E-7

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

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

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

10.11.3 Amendment No. 3 to the San Juan Unit 4 Early 10.11.3 to PNM's Annual Report 1-6986
Purchase and Participation Agreement between on Form 10-K for fiscal year
Public Service Company of New Mexico and M-S-R ended December 31, 1999
Public Power Agency, dated as of October 27, 1999

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

10.12.1 Amendment No. 1 to the Amended and Restated San 10.12.1 to PNM's Annual Report 1-6986
Juan Unit 4 Purchase and Participation Agreement Form 10-K for fiscal year ended
between Public Service Company of New Mexico and December 31, 1999
M-S-R Public Power Agency, dated as of
October 27, 1999

10.13 Amendment No. 2 to the San Juan Unit 4 Purchase 10.13 to PNM's Annual Report on 1-6986
Agreement and Participation Agreement between Form 10-K for fiscal year ended
Public Service Company of New Mexico and The December 31, 1999
Incorporated County of Los Alamos, New Mexico,
dated October 27, 1999

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

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

E-8

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

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

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

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

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

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

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

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

E-9

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

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

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

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

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

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

10.23.5** Fifth Amendment dated November 27, 2002 to the 10.23.5 to the Company's 333-32170
Restated and Amended PNM Resources, Inc. Annual Report on Form 10-K for
Accelerated Management Plan the fiscal year ended December
31, 2002

10.23.6** Sixth Amendment dated December 9, 2003 to the 10.23.6 to the Company's 333-32170
Restated and Amended Accelerated Management Plan Annual Report on Form 10-K for
the fiscal year ended December
31, 2003

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

10.27 Amendment No. 2 dated as of April 10, 1987, to 10.53 to PNM's Annual Report 1-6986
the Facility Lease dated as of August 12, 1986, on Form 10-K for fiscal year
between The First National Bank of Boston, as ended December 31, 1987
Owner 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)

E-10

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

10.32** Supplemental Employee Retirement Agreement dated 10.32 to PNM's Annual Report 1-6986
August 4, 1989, Between PNM and Max Maerki on Form 10-K for fiscal year
(refiled) ended December 31, 1999

10.32.1** First Amendment to the Supplemental Employee 10.32.1 to PNM's Quarterly 1-6986
Retirement Agreement for Max H. Maerki, as Report on Form 10-Q for the
amended effective August 10, 1998 quarter ended September 30,
1998

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

10.34 Settlement Agreement between Public Service 10.34 to PNM's Quarterly 1-6986
Company of New Mexico and Creditors of Meadows Report on Form 10-Q for
Resources, Inc. dated November 2, 1989 (refiled) quarter ended June 30, 2000

10.34.1 First amendment dated April 24, 1992 to the 10.34.1 to PNM's Quarterly 1-6986
Settlement Agreement dated November 2, 1989 among Report on Form 10-Q for
Public Service Company of New Mexico, the lender quarter ended June 30, 2000
parties thereto and collateral agent (refiled)

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

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

10.36.1 Amendment No. 1 to the San Juan Unit 4 Purchase 10.36.1 to Annual Report PNM's 1-6986
and Participation Agreement between Public on Form 10-K for fiscal year
Service Company of New Mexico and The City of ended
Anaheim, California, dated October 27, 1999 December 31, 1999

E-11

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

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

10.38.1 Amendment No. 1 to the Restated and Amended San 10.38.1 to PNM's Annual Report 1-6986
Juan Unit 4 Purchase And Participation Agreement on Form 10-K for fiscal year
between Public Service Company of New Mexico And ended December 31, 1999
Utah Associated Municipal Power Systems, dated
October 27, 1999

10.40** PNM Resources, Inc. Director Retainer Plan, dated 4.3 to PNM Resources, Inc. 333-03289
December 31, 2001 Post-Effective Amendment No.
1 to Form 8 Registration
Statement filed December 31,
2001

10.40.1** First Amendment dated February 17, 2003 to PNM 10.40.1 to the Company's 333-32170
Resources, Inc. Director Retainer Plan Quarterly Report on Form
10-Q for the quarter ended
March 31, 2003

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

10.43** 2003 Officer Incentive Plan 10.43.2 to the Company's 333-32170
Annual Report on Form 10-K
for the year ended December
31, 2002

10.43.1** 2004 Officer Incentive Plan 10.43.1 to the Company's 333-32170
Annual Report on Form 10-K
for the year ended December
31, 2003

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

10.45** PNM Service Bonus Plan dated October 23, 1984 19.4 to PNM's Quarterly 1-6986
Report on Form 10-Q or the
quarter ended September 30,
1988

E-12

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

10.45.1** First Amendment dated November 20, 1985 to Service 10.11.1 to PNM's Annual 1-6986
Bonus Plan Report on Form 10-K for the
fiscal year ending December
31, 1985

10.45.2** Second Amendment dated December 29, 1989 to Service 10.27.2 to PNM's Annual 1-6986
Bonus Plan Report on Form 10-K for the
fiscal year ending December
31, 1989

10.45.3** Second [Third] Amendment dated December 7, 1998 to 10.45 to PNM's Quarterly 1-6986
Service Bonus Plan Report on Form 10-Q for the
quarter ended March 31, 1999

10.45.4** Fourth Amendment dated November 27, 2002 to PNM 10.45.4 to the Company's 333-32170
Resources, Inc. Service Bonus Plan Annual Report on Form 10-K
for the fiscal year ended
December 31, 2002

10.45.5** Fifth Amendment dated December 9, 2003 to Service 10.45.5 to the Company's 333-32170
Bonus Plan Annual Report on Form 10-K
for the fiscal year ended
December 31, 2003

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

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

10.48.2** Second Amendment dated November 27, 2002 to the PNM 10.48.2 to the Company's 333-32170
Resources, Inc. OBRA '93 Retirement Plan Annual Report on Form 10-K
for the year ended December
31, 2002

10.48.3** Third Amendment dated December 9, 2003 to the OBRA 10.48.3 to the Company's 333-32170
'93 Retirement Plan Annual Report on Form 10-K
for the year ended December
31, 2003

E-13

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

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

10.50** Public Service Company of New Mexico Section 415 10.50 to PNM's Annual Report 1-6986
Plan dated January 1, 1994 on Form 10-K for fiscal year
ended December 31, 1993

10.50.1** First Amendment dated December 7, 1998, Second 10.50.1 to the Company's 333-32170
Amendment dated August 7, 1999 and Third Amendment Annual Report in Form 10-K
dated November 22, 2002 to the PNM Section 415 Plan for the fiscal year ended
December 31, 2002

10.50.2** Fourth Amendment dated December 9, 2003 to the PNM 10.50.2 to the Company's 333-32170
Resources, Inc. Section 415 Plan Annual Report in Form 10-K
for the fiscal year ended
December 31, 2003

10.51** Officer Retention Plan dated October 21, 2003 10.51 to the Company's 333-32170
Annual Report in Form 10-K
for the fiscal year ended
December 31, 2003

10.52** PNM Resources, Inc. Executive Spending Account Plan 10.52 to the Company's 333-32170
dated December 9, 2003 Annual Report on Form 10-K
for the year ended December
31, 2003

10.53 January 12, 1994 Stipulation 10.53 to PNM's Annual Report 1-6986
on Form 10-K for fiscal year
ended December 31, 1993

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

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

E-14

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

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

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

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

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

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

10.72 Credit Agreement dated as of November 21, 2003, 10.72 to PNM's Annual 1-6986
among PNM, the Lenders identified therein and Bank Report on Form 10-K for the
of America, N.A., as administrative agent year ended December 31, 2003

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

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

E-15

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

10.74.1** First Amendment to the Third Restated 10.74.1 to PNM's Quarterly 1-6986
and Amended Public Service Company Report on Form 10-Q for the
of New Mexico Performance Stock Plan quarter ended March 31, 2000
Dated February 7, 2000

10.74.2** Second Amendment to the Third Restated and Amended 10.74.2 to PNM's Annual
Public Service Company of New Mexico Performance Report on Form 10-K for the
Stock Plan, effective December 7, 1998 fiscal year ended December
31, 2000

10.74.3** Third Amendment to the Third Restated and Amended 10.74.3 to PNM's Annual
Public Service Company of New Mexico Performance Report on Form 10-K for the
Stock Plan, effective December 10, 2000 fiscal year ended December 31, 2000

10.74.4** Fourth Amendment to Third Restated and Amended 4.3.5 to PNM Resources' 333-03303
Public Service Company of New Mexico Performance Post-Effective Amendment
Stock Plan dated December 31, 2001 No. 1 to Form 8
Registration Statement
filed December 31, 2001

10.74.5** Fifth Amendment to the Third Restated and Amended 10.74.5 to the Company's 333-32170
PNM Resources, Inc. Performance Stock Plan dated Quarterly Report on Form
September 6, 2002 10-Q for the quarter ended
September 30, 2002

10.75** PNM Resources, Inc. Executive Savings Plan dated 10.75 to PNM Resources and 333-32170
December 29, 2003 PNM's Annual Report on Form
10-K for the fiscal year
ended December 31, 2003

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

E-16

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

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

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

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

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

10.80** Supplemental Employee Retirement 10.80 to PNM's Quarterly 1-6986
Agreement, dated March 14, 2000 for Report on Form 10-Q for the
Patrick T. Ortiz quarter ended March 31, 2000

10.81** Supplemental Employee Retirement 10.81 to PNM's Quarterly 1-6986
Agreement, dated March 22, 2000 for Report on Form 10-Q for the
Jeffry E. Sterba quarter ended March 31, 2000

10.82** PNM Resources, Inc. Omnibus Performance Equity Plan 4.3 to PNM Resources' Form 333-76288
dated 8 Registration Statement
December 31, 2001 filed January 4, 2001

10.83 Retention Bonus Agreement executed October 31, 2003 10.83 to the Company's 333-32170
for Jeffry Sterba Annual Report on Form 10-K
for the year ended December
31, 2003

10.86 Stipulation in the matter of PNM's transition plan 10.86 to the Company's 1-6986
Utility Case No. 3137, dated October 10, 2002 as Annual Report on Form 10-K
amended by Amendment to Stipulated Agreement dated for the year ended December
October 18, 2002 31, 2002

E-17

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

10.87** Long Term Care Insurance Plan effective January 1, 10.87 to the Company's 333-32170
2003 Annual Report on Form 10-K
for the year ended December
31, 2002

10.88** Executive Long Term Disability effective January 1, 10.88 to the Company's 333-32170
2003 Annual Report on Form 10-K
for the year ended December
31, 2002

10.89 Receivables Sale Agreement, dated as of April 8, 10.89 to the Company's 333-32170
2003, between PNM Receivables Corp., as buyer and Quarterly Report on Form
PNM as originator 10-Q for the quarter ended
June 30, 2003

10.90 Receivables Purchase Agreement, dated as of April 10.90 to the Company's 333-32170
8, 2003, among PNM Receivables Corp., as seller, Quarterly Report on Form
PNM, as servicer, EagleFunding Capital Corporation, 10-Q for the quarter ended
as conduit investor, Fleet National Bank, as an June 30, 2003
alternate investor and Fleet Securities, Inc., as
managing agent and deal agent.

21 Certain subsidiaries of PNM Resources 21 to the Company's Annual 333-32170
Report on Form 10-K for the
year ended December 31, 2001

Additional Exhibits

99.2* Participation Agreement dated as of 99.2 to PNM's Annual Report 1-6986
December 16, 1985, among the Owner on Form 10-K for fiscal
Participant named therein, First PV year ended December 31, 1995
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 together with Amendment No. 1 dated July
15, 1986 and Amendment No. 2 dated November 18, 1986
(refiled)

E-18

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

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

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

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

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

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

E-19

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

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

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

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

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

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

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

E-20

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

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

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

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

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

E-21

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

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

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

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

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

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

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

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

E-22

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

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

- -----------
* 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
15(a) of Form 10 -K.

E-23

(b) Reports on Form 8-K:

During the quarter ended December 31, 2003 the Company filed, on the
date indicated, the following reports on Form 8-K.

Report dated and filed November 5, 2003 pursuant to Item 5 of Form 8-K that the
Company announces that regulators reject PNM gas rate settlement.

Report dated and filed December 17, 2003 pursuant to Item 5 of Form 8-K
reporting the Company's Comparative Operating Statistics for the months of
November 2003 and 2002 and the years ended November 2003 and 2002.

E-24

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.

PNM RESOURCES, INC.
(Registrant)

Date: March 10, 2004 By /s/ T. G. SATEGNA
--------------------------------------
T. G. Sategna
Vice President and
Corporate Controller

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/ J. E. STERBA Principal Executive Officer March 10, 2004
- --------------------------------- and Chairman of the Board
J. E. Sterba
Chairman, President and
Chief Executive Officer

/s/ J. R. LOYACK Principal Financial Officer March 10, 2004
- ---------------------------------
J. R. Loyack
Senior Vice President and
Chief Financial Officer

/s/ T. G. SATEGNA Principal Accounting Officer March 10, 2004
- ---------------------------------
T. G. Sategna
Vice President and
Corporate Controller

/s/ A. E. ARCHULETA Director March 10, 2004
- ---------------------------------
A. E. Archuleta

/s/ R. G. ARMSTRONG Director March 10, 2004
- ---------------------------------
R. G. Armstrong

/s/ R. M. CHAVEZ Director March 10, 2004
- ---------------------------------
R. M. Chavez

/s/ J. A. DOBSON Director March 10, 2004
- ---------------------------------
J. A. Dobson

/s/ M. T. PACHECO Director March 10, 2004
- ---------------------------------
M. T. Pacheco

/s/ T. F. PATLOVICH Director March 10, 2004
- ---------------------------------
T. F. Patlovich

/s/ R. M. PRICE Director March 10, 2004
- ---------------------------------
R. M. Price

/s/ B. S. REITZ Director March 10, 2004
- ---------------------------------
B. S. Reitz

/s/ J. B. WOODARD Director March 10, 2004
- ---------------------------------
J. B. Woodard

E-25

SIGNATURES

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

PUBLIC SERVICE COMPANY OF NEW MEXICO
(Registrant)

Date: March 10, 2004 By /s/ T. G. SATEGNA
--------------------------------------
T. G. Sategna
Vice President and
Corporate Controller

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/ J. E. STERBA Principal Executive Officer March 10, 2004
- --------------------------------- and Chairman of the Board
J. E. Sterba
Chairman, President and
Chief Executive Officer

/s/ J. R. LOYACK Principal Financial Officer March 10, 2004
- ---------------------------------
J. R. Loyack
Senior Vice President and
Chief Financial Officer

/s/ T. G. SATEGNA Principal Accounting Officer March 10, 2004
- ---------------------------------
T. G. Sategna
Vice President and
Corporate Controller

/s/ R. J. FLYNN Director March 10, 2004
- ---------------------------------
R. J. Flynn

/s/ W. J. REAL Director March 10, 2004
- ---------------------------------
W. J. Real

/s/ E. PADILLA, JR. Director March 10, 2004
- ---------------------------------
E. Padilla, Jr.

/s/ A. A. COBB Director March 10, 2004
- ---------------------------------
A. A. Cobb

E-26