NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) Accounting Policies and Responsibility for Financial Statements

In the opinion of the management of PNM Resources, Inc. (the "Holding Company") and Subsidiaries and Public Service Company of New Mexico ("PNM") and Subsidiaries, (collectively, the "Company") the accompanying unaudited interim consolidated financial statements present fairly the Company's financial position at September 30, 2003 and December 31, 2002, the consolidated results of its operations and comprehensive income for the three months and nine months ended September 30, 2003 and 2002 and the consolidated statements of cash flows for the nine months ended September 30, 2003 and 2002. These financial statements are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission ("SEC"). Accordingly, they are unaudited, and certain information and note disclosures normally included in the Company's annual consolidated financial statements have been condensed or omitted, as permitted under the applicable rules and regulations. Readers of these financial statements should refer to the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2002, that are included in the Company's Annual Reports on Form 10-K for the year ended December 31, 2002 and as updated by the Company's Current Reports on Form 8-K dated June 12, 2003. The results of operations presented in the accompanying financial statements are not necessarily representative of operations for an entire year.

Presentation

The Notes to Consolidated Financial Statements of the Company are presented on a combined basis. The business of PNM constitutes substantially all of the business of PNM Resources, Inc. and 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 discussion purposes, this report will use the term "Company" when discussing matters of common applicability to the Holding Company and PNM. 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.

Certain amounts in the 2002 consolidated financial statements and notes have been reclassified to conform to the 2003 financial statement presentation.

Regulatory Accounting

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

PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

reflect the effects of regulatory decisions in its financial statements. In accordance with SFAS 71, the Company has deferred certain costs and recorded certain liabilities pursuant to the rate actions of the United States Federal Energy Regulatory Commission ("FERC") and the New Mexico Public Regulation Commission ("PRC") and its predecessor. 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 in the period in which recovery is determined to no longer be probable.

As of December 31, 1999, the Company discontinued the application of SFAS 71 to 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 the Financial Accounting Standards Board ("FASB") FASB Statement No. 71" ("SFAS 101"). Due to the repeal of the Restructuring Act (see Note 5 - "Commitments and Contingencies - Global Electric Agreement"), the Company re-applied the accounting requirements of SFAS 71 to the generation portion of its business as of January 28, 2003.

Asset Retirement Obligations ("ARO")

The Company adopted the provisions of Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), on January 1, 2003 and accordingly identified certain AROs that are subject to the standard. These obligations included 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, However, an ARO liability for transmission and distribution assets will not be recognized until the assets' useful life and settlement date become known and are material. The Company did not identify any material AROs associated with the transmission and distribution assets, because the majority of these assets have an indeterminable useful life and settlement date.

Previously, the Company had recognized decommissioning costs for its fossil fuel and nuclear generation facilities ratably over approved cost recovery periods. Upon implementation of the standard, 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 of $37.4 million, net of related income taxes. 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 adopting SFAS 143 are based on the Company's interpretation of the standard and its 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.

PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Pro forma net income and earnings per share have not been presented for the nine months ended September 30, 2002 or the years ended December 31, 2002, 2001 and 2000 because the pro forma application of SFAS 143 would result in pro forma net income and earnings per share not materially different from the amounts previously reported for those periods.

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

                                        September 30, 2003
                                        ------------------
                                           (In thousands)

Upon adoption at January 1, 2003.......    $    42,201
Liabilities incurred...................              -
Liabilities settled....................              -
Accretion expense......................          2,691
Revisions to estimate..................              -
                                           --------------
                                           $    44,892
                                           ==============

Stock Options

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.

SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. The Company has elected to retain its current method of accounting as described above, and has adopted the disclosure requirements of SFAS 123 only.

(Intentionally left blank)

PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

At September 30, 2003, the Company had three stock-based employee compensation plans. Options continue to be granted under only two of these plans. 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 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):

                                                  Three Months Ended        Nine Months Ended
                                                     September 30,            September 30,
                                                  2003          2002         2003        2002
                                               -----------  -----------  -----------  ----------
Net earnings.................................    $16,568      $17,650      $82,334     $53,463
Deduct:  Total stock-based employee
   compensation expense determined
   under fair value based method for all
   awards, net of related tax effects........       (490)      (1,091)      (1,560)     (3,302)
                                               -----------  -----------  -----------  ----------
Pro forma net earnings.......................    $16,078      $16,559      $80,774     $50,161
                                               ===========  ===========  ===========  ==========
Earnings per share:
    Basic - as reported......................    $  0.41      $  0.45      $  2.08     $  1.37
                                               ===========  ===========  ===========  ==========
    Basic - pro forma........................    $  0.40      $  0.42      $  2.04     $  1.28
                                               ===========  ===========  ===========  ==========
    Diluted - as reported....................    $  0.41      $  0.45      $  2.06     $  1.35
                                               ===========  ===========  ===========  ==========
    Diluted - pro forma......................    $  0.39      $  0.42      $  2.02     $  1.27
                                               ===========  ===========  ===========  ==========

(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 Inc. ("Avistar").

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 5 - 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.

PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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.

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 unregulated fleet. Both regulated and unregulated generation is jointly dispatched and sold exclusively for the benefit of shareholders.

Long-term contracts include sales to firm-requirements wholesale customers with multi-year arrangements. These contracts range from 2 to 17 years with an average of 7.5 years. Forward sales include sales of excess generation and 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 Statement of Financial Accounting Standards No. SFAS 133, "Accounting for Derivative Instruments and Hedging Activites", as amended ("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.

PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 transferred by way of a dividend to the Holding Company pursuant to an order from the PRC.

(Intentionally left blank)

                                                                       Utility
                                         -------------------------------------------------------------------
                                            Electric        Gas       Transmission  Eliminations    Total
                                         ------------- ------------- -------------- ------------ -----------
                                                                     (In thousands)
2003:
Operating revenues:
   External customers..................     $154,746      $ 47,938        $ 8,920     $     -     $ 211,604
   Intersegment revenues...............            -             -          6,447      (4,349)        2,098
Depreciation and amortization..........       15,910         5,613          2,689           -        24,212
Interest income........................        6,666           685            170           -         7,521
Interest charges.......................        6,023         3,566          1,724           -        11,313
Total income tax expense (benefit).....       19,971        (3,244)         1,810           -        18,537
Operating income (loss)................       22,262        (1,333)         4,210           -        25,139
Segment net income (loss)..............       22,296        (4,950)         2,748           -        20,094

Total assets...........................    1,302,254       444,742        254,063           -     2,001,059
Gross property additions...............       20,095        11,973         15,378           -        47,446

                                                         Corporate
                                           Wholesale     and Other    Consolidated
                                         ------------- ------------- ---------------
                                                      (In thousands)
2003:
Operating revenues:
   External customers..................     $ 173,532       $   25        $385,161
   Intersegment revenues...............           635       (2,733)              -
Depreciation and amortization..........         3,579        1,469          29,260
Interest income........................         1,638        1,632          10,791
Interest charges.......................         4,191        1,549          17,053
Total income tax expense (benefit).....         5,066      (14,597)          9,006
Operating income.......................         9,287        1,455          35,881
Segment net income (loss)..............         6,263       (9,789)         16,568

Total assets...........................       397,052      683,545       3,081,656
Gross property additions...............         3,794        5,366          56,606

                                                                       Utility
                                         -------------------------------------------------------------------
                                            Electric        Gas       Transmission  Eliminations    Total
                                         ------------- ------------- -------------- ------------ -----------
                                                                     (In thousands)

2002:
Operating revenues:
   External customers..................     $ 150,670      $ 36,244        $ 5,693     $     -    $ 192,607
   Intersegment revenues...............             -           691          8,779      (8,603)         867
Depreciation and amortization..........        14,871         5,160          2,158           -       22,189
Interest income........................         6,559           (60)            56           -        6,555
Interest charges.......................         7,029         3,493          1,563           -       12,085
Total income tax expense (benefit).....        16,315        (3,505)         1,212           -       14,022
Operating income (loss)................        19,068        (1,825)         3,457           -       20,700
Segment net income (loss)..............        16,086        (5,419)         1,813           -       12,480

Total assets...........................     1,658,113       441,370        203,862           -    2,303,345
Gross property additions...............        20,234         5,696          3,498           -       29,428

                                                         Corporate
                                           Wholesale     and Other    Consolidated
                                         ------------- ------------- ---------------
                                                      (In thousands)
2002:
Operating revenues:
   External customers....................    $ 81,733        $  335      $ 274,675
   Intersegment revenues.................           -          (867)             -
Depreciation and amortization............       2,417         1,174         25,780
Interest income..........................       1,501         3,170         11,226
Interest charges.........................       3,768           (97)        15,756
Total income tax expense (benefit).......       1,826        (8,497)         7,351
Operating income.........................       4,537         3,898         29,135
Segment net income.......................       1,258         3,912         17,650

Total assets.............................     371,571       232,382      2,907,298
Gross property additions.................       4,918         4,542         38,888

                                                                       Utility
                                         -------------------------------------------------------------------
                                            Electric        Gas       Transmission  Eliminations    Total
                                         ------------- ------------- -------------- ------------ -----------
                                                                     (In thousands)
2003:
Operating revenues:
   External customers..................    $ 414,881     $ 268,200      $ 15,794       $    -    $ 698,875
   Intersegment revenues...............            -             -        24,636      (24,636)           -
Depreciation and amortization..........       47,488        16,553         7,348            -       71,389
Interest income........................       22,722         1,794           228            -       24,744
Interest charges.......................       19,375        10,355         4,803            -       34,533
Total income tax expense (benefit).....       26,743          (263)        3,052            -       29,532
Operating income.......................       54,404         9,356         9,194            -       72,954
Cumulative effect of a change
  in accounting principle, net of tax..       25,092             -             -            -       25,092
Segment net income (loss)..............       65,901          (402)        4,658            -       70,157

Total assets...........................    1,302,254       444,742       254,063            -    2,001,059
Gross property additions...............       51,066        33,206        26,707            -      110,979

                                                         Corporate
                                           Wholesale     and Other    Consolidated
                                         ------------- ------------- ---------------
                                                      (In thousands)
2003:
Operating revenues:
   External customers...................   $ 414,051       $   137   $ 1,113,063
   Intersegment revenues................       1,535        (1,535)            -
Depreciation and amortization...........      10,639         4,456        86,484
Interest income.........................       4,233         2,991        31,968
Interest charges........................      11,352         7,165        53,050
Total income tax expense (benefit)......      10,559       (14,401)       25,690
Operating income........................      24,518         1,749        99,221
Cumulative effect of a change
  in accounting principle, net of tax...      12,330             -        37,422
Segment net income (loss)...............      28,441       (16,264)       82,334

Total assets............................     397,052       683,545     3,081,656
Gross property additions................       9,176         9,179       129,334

                                                                       Utility
                                         -------------------------------------------------------------------
                                            Electric        Gas       Transmission  Eliminations    Total
                                         ------------- ------------- -------------- ------------ -----------
                                                                     (In thousands)
2002:
Operating revenues:
   External customers..................   $ 414,426      $ 189,413      $ 17,504       $    -     $ 621,343
   Intersegment revenues...............           -          1,136        24,214      (23,684)        1,666
Depreciation and amortization..........      44,509         15,257         6,479            -        66,245
Interest income........................      22,567             21            70            -        22,658
Interest charges.......................      20,338         10,128         4,483            -        34,949
Total income tax expense...............      28,675            466         3,334            -        32,475
Operating income.......................      51,206          9,524         9,812            -        70,542
Segment net income.....................      43,755            711         5,090            -        49,556

Total assets...........................   1,658,113        441,370       203,862            -     2,303,345
Gross property additions...............     106,055         23,274         9,771            -       139,100

                                                         Corporate
                                           Wholesale     and Other    Consolidated
                                         ------------- ------------- ---------------
                                                      (In thousands)
2002:
Operating revenues:
   External customers..................   $ 204,087       $ 1,252      $ 826,682
   Intersegment revenues...............           -        (1,666)             -
Depreciation and amortization..........       6,179         3,352         75,776
Interest income........................       4,052         6,078         32,788
Interest charges.......................      10,903          (281)        45,571
Total income tax expense (benefit).....      (1,987)       (3,356)        27,132
Operating income.......................       5,867         4,862         81,271
Segment net income (loss)..............      (3,033)        6,940         53,463

Total assets...........................     371,571       232,382      2,907,298
Gross property additions...............      19,693         7,847        166,640

(3) 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.

                                                          September 30, 2003
                                  --------------------------------------------------------------------
                                   Amortized Cost     Unrealized        Unrealized       Fair Value
                                                         Gains            Losses
                                  ---------------- ----------------  ---------------  ----------------
                                                            (In thousands)
Available-for-sale:
Equity securities..............        $ 40,237          $ 8,383            $(650)          $47,970
Municipal bonds................          18,637            1,352              (11)           19,978
U.S. Government securities.....           4,856              458              (21)            5,293
Corporate bonds................              12                -                -                12
Other investments..............           4,697                -               (9)            4,688
                                  ---------------- ----------------  ---------------  ----------------
                                       $ 68,439         $ 10,193            $(691)          $77,941
                                  ================ ================  ===============  ================

                                                           December 31, 2002
                                  --------------------------------------------------------------------
                                   Amortized Cost     Unrealized        Unrealized       Fair Value
                                                         Gains            Losses
                                  ---------------- ----------------  ---------------  ----------------
                                                            (In thousands)
Available-for-sale:
Equity securities..............         $32,643          $ 4,134         $ (1,514)          $35,263
Mortgage-backed securities.....          33,145              410              (93)           33,462
Corporate bonds................          32,466              438              (19)           32,885
Municipal bonds................          21,229            1,394              (24)           22,599
U.S. Government securities.....          12,725              702                -            13,427
Other investments..............          14,716                -                -            14,716
                                  ---------------- ----------------  ---------------  ----------------
                                       $146,924          $ 7,078         $ (1,650)         $152,352
                                  ================ ================  ===============  ================

(Intentionally left blank)

                                           Amortized Cost     Fair Value
                                           ---------------- ----------------
                                                   (In thousands)

Within 1 year.............................       $ 1,513          $ 1,503
After 1 year through 5 years..............         2,584            2,652
After 5 years through 10 years............         2,545            2,670
Over 10 years.............................        17,135           18,721
Equity securities.........................        40,237           47,970
Other investments.........................         4,425            4,425
                                           ---------------- ----------------
                                                 $68,439          $77,941
                                           ================ ================

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. The short-term investment balance was fully redeemed in the nine months ended September 30, 2003 and included in proceeds from sales.

                                  Three Months Ended      Nine Months Ended
                                    September 30,           September 30,
                               ----------------------  -----------------------
                                  2003        2002         2003        2002
                               ---------- -----------  ----------  -----------
                                 (In thousands)
Proceeds from sales...........   9,147      55,754      113,131      161,870
Gross realized gains..........     752         317        5,508        2,226
Gross realized losses.........    (532)     (2,738)      (3,169)      (6,675)

Natural Gas Contracts

Pursuant to a 1997 order issued by the New Mexico Public Utility Commission, the predecessor to the PRC, the Company previously entered into swaps 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 swaps 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.

PNM purchased gas options, a type of hedge, to protect its natural gas customers from the risk of price fluctuations 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 monthly allotments of $1.2 million.

PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

PNM purchased gas options, a type of hedge, 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 will recover 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.

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. Some of these contracts do not qualify for normal purchase and sale designation pursuant to SFAS 133, and are marked to market as required by SFAS 133.

For the three months ended September 30, 2003, the Company's Wholesale Operations settled forward contracts for the sale of electricity that generated $65.5 million of electric revenues by delivering 1.1 million megawatt hours ("MWh"). The Company purchased $59.8 million or 1.0 million MWh of electricity to support these contractual sales and other open market sales opportunities. For the three months ended September 30, 2002, the Company's Wholesale Operations settled forward contracts for the sale of electricity that generated $10.7 million of electric revenues by delivering 0.2 million MWh. The Company purchased $19.5 million or 0.3 million MWh of electricity to support these contractual sales and other open market sales opportunities.

For the nine months ended September 30, 2003, the Company's Wholesale Operations settled forward contracts for the sale of electricity that generated $125.3 million of electric revenues by delivering 2.5 million MWh. The Company purchased $120.8 million or 2.5 million MWh of electricity to support these contractual sales and other open market sales opportunities. For the nine months ended September 30, 2002, the Company's Wholesale Operations settled forward contracts for the sale of electricity that generated $31.3 million of electric revenues by delivering 0.8 million MWh. The Company purchased $55.4 million or 1.0 million MWh of electricity to support these contractual sales and other open market sales opportunities.

As of September 30, 2003, the Company had open contract positions to buy $42.5 million and to sell $42.3 million of electricity. At September 30, 2003, the Company had a gross mark-to-market gain (asset position) on these forward contracts of $4.8 million and a gross mark-to-market loss (liability position) of $4.6 million, with a net mark-to-market gain (asset position) of $184 thousand 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.

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

PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

accounts for these derivative 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 September 30, 2003, the Company had open forward positions classified as normal sales of electricity of $201.2 million and normal purchases of electricity of $124.9 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 an 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 September 30, 2003 and December 31, 2002 was $23.9 million and $18.7 million, respectively.

Forward Starting Interest Rate Swaps

PNM had $46 million of tax-exempt bonds outstanding that were callable at a premium beginning December 15, 2002, and an additional $136 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.

Corporate and Pension Hedge

The Company has approximately $296 million invested in domestic stocks and approximately $35 million invested in international stocks in various trusts for nuclear decommissioning, pension plan, executive retirement and retiree medical benefits. The trusts for nuclear decommissioning and the executive retirement plan are included on the balance sheet in other investments. The Company uses financial derivatives based on the Standard & Poor's ("S&P") 500 Index to limit potential loss on these investments due to adverse market fluctuations. The options are structured as a collar, protecting the portfolio against losses beyond a certain amount and balancing the cost of that downside protection by foregoing gains above a certain level. If the S&P 500 Index is

PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

within the specified range when the option contract expires, the Company will not be obligated to pay, nor will the Company have the right to receive cash. In the second quarter of 2003, the Company entered into certain S&P 500 Index contracts, which will expire on December 19, 2003 and March 19, 2004. The range of the floor and ceiling of the collar relative to a December 31, 2002 S&P 500 Index of 880 is -3.4% for a floor and 16.7% to 21.0% for a ceiling. For the three months and nine months ended September 30, 2003, the change in the market value of the corporate options was not significant.

(4) Earnings Per Share

In accordance with SFAS No. 128, "Earnings per Share" ("SFAS 128"), 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 for the periods ended September 30 (in thousands except per share amounts):

                                                      Three Months Ended         Nine Months Ended
                                                         September 30,             September 30,
                                                    ------------------------ ------------------------
                                                       2003         2002        2003         2002
                                                    -----------  ----------- -----------  -----------
Basic:
Net Earnings before cumulative effect of a
   change in accounting principle..................   $16,568      $17,650     $44,912      $53,463
Cumulative effect of a change in
   accounting principle, net of tax of $24,524.....         -            -      37,422            -
                                                    -----------  ----------- -----------  -----------
Net Earnings.......................................   $16,568      $17,650     $82,334      $53,463
                                                    ===========  =========== ===========  ===========
Average Number of Common Shares
   Outstanding.....................................    40,239       39,118      39,578       39,118
                                                    ===========  =========== ===========  ===========
Net Earnings per Share of Common Stock (Basic)         $ 0.41       $ 0.45      $ 2.08       $ 1.37
                                                    ===========  =========== ===========  ===========
Earnings before cumulative effect of a
   change in accounting principle..................      0.41         0.45        1.13         1.37
Cumulative effect of a change in
   accounting principle, net of tax of $0.62.......         -            -        0.95            -
                                                    -----------  ----------- -----------  -----------
Net Earnings per Share of Common Stock (Basic)         $ 0.41       $ 0.45      $ 2.08       $ 1.37
                                                    ===========  =========== ===========  ===========

                                                        Three Months Ended     Nine Months Ended
                                                           September 30,          September 30,
                                                       --------------------- ----------------------
                                                          2003       2002       2003        2002
                                                       ---------- ---------- ----------  ----------
Diluted:
Net Earnings Before Cumulative Effect of a
   Change in Accounting Principle....................    $16,568    $17,650    $44,912     $53,463
Cumulative Effect of a Change in
   Accounting Principle, net of tax of $24,524.......          -          -     37,422           -
                                                       ---------- ---------- ----------  ----------
Net Earnings.........................................    $16,568    $17,650    $82,334     $53,463
                                                       ========== ========== ==========  ==========
Average Number of Common Shares
   Outstanding.......................................     40,239     39,118     39,578      39,118
Dilutive Effect of Common Stock
   Equivalents (a)...................................        467        207        358         366
                                                       ---------- ---------- ----------  ----------
Average Common and Common
   Equivalent Shares Outstanding.....................     40,706     39,325     39,936      39,484
                                                       ========== ========== ==========  ==========
Net Earnings per Share of Common Stock
   (Diluted).........................................     $ 0.41     $ 0.45     $ 2.06      $ 1.35
                                                       ========== ========== ==========  ==========
Earnings Before Cumulative Effect of a
   Change in Accounting Principle....................       0.41       0.45       1.12        1.35
Cumulative Effect of a Change in
   Accounting Principle, net of tax of  $0.61........          -          -       0.94           -
                                                       ---------- ---------- ----------  ----------
Net Earnings per Share of Common Stock
   (Diluted).........................................     $ 0.41     $ 0.45     $ 2.06      $ 1.35
                                                       ========== ========== ==========  ==========

(a) Excludes the effect of average anti-dilutive common stock equivalents related to out-of-the-money options of 50,000 and 1,881,588 for the three months ended and 876,061 and 718,745 for the nine months ended September 30, 2003 and 2002, respectively.

(5) Commitments and Contingencies

PVNGS Liability and Insurance Matters

The Palo Verde Nuclear Generating Station ("PVNGS") 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 million to $15 million per reactor per incident with the Company's annual exposure per incident increasing from $3 million to $4.5 million.

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.

Natural Gas Explosion

On April 25, 2001, a natural gas explosion occurred in Santa Fe, New Mexico. The apparent cause of the explosion was a leak from a PNM gas line near the location. The explosion destroyed a small building and injured two persons who were working in the building. PNM's investigation indicates that the leak was an isolated incident likely caused by a combination of corrosion and increased pressure. PNM also cooperated with an investigation of the incident by the PRC's Pipeline Safety Bureau (the "Bureau"), which issued its report on March 18, 2002. The Bureau's report gave PNM notice of probable violations of the New Mexico Pipeline Safety Act and related regulations. PNM and the Bureau staff entered into a compliance agreement addressing the probable violations and filed it with the PRC for approval on March 4, 2003. PNM agreed to undertake a list of twenty-four corrective actions, including internal policy changes, retraining employees and enhancing gas line monitoring. PNM has also agreed to voluntarily accelerate spending on pipeline replacement by more than $10.0 million and to commit an additional $1.8 million to development and implementation of systems to improve gas line management. The compliance agreement was approved by the PRC on March 25, 2003. No civil penalty was imposed. Two lawsuits against PNM by the injured persons along with several claims for property and business interruption damages have been resolved.

PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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 rate-path 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 on January 28, 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 28, 2003, which did not have a material effect on the Company's financial condition or results of operations.

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 September 30, 2003, the Company had borrowed $35.0 million under the AR Securitization, which was secured by $86.6 million of accounts receivable. PNM Receivables Corp. is consolidated in the Company's financial statements.

Eastern Interconnection Project ("EIP") Purchase

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 finance the sale leaseback transaction which had previously been disclosed as off balance sheet debt in the notes to the Companies' financial statements. The Company will continue to exclude $4.5 million of lease obligations relating to the 40% interest that the Company does not own from the consolidated balance sheet.

PNM RESOURCES, INC. AND SUBSIDIARIES
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(Unaudited)

Financing Activities

On May 13, 2003, the Company priced $182 million of tax-exempt pollution control bonds at a one-year interest rate of 2.75%. The bond sale closed on May 23, 2003. The bonds will need to be remarketed at the end of the one-year interest rate period. A portion of the proceeds were used to refund the $46.0 million of pollution control bonds, which became callable on December 15, 2002. Additionally, the remaining $136.0 million were placed in an escrow account to be used to refund the same amount of pollution control bonds. The remaining $136.0 million of pollution control bonds were redeemed on August 15, 2003. Both of these issuances were previously hedged (see Note 3 - Fair Market 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 the excluded plant of $1.0 million was written off in conjunction with the refinancing of the pollution control bonds. The remaining balance will be amortized over the life of the new bonds.

Pursuant to PRC approval, on September 9, 2003, PNM sold $300.0 million of senior unsecured notes with a coupon of 4.40% 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 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 August 27, 2003, the Company entered into an unrated private issuance commercial paper program. The Company will periodically issue up to $50 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 Facility serves as a backstop for the outstanding commercial paper. As of September 30, 2003, $30.8 million was outstanding.

Pension and Other Post-Retirement Benefits

On May 13, 2003, the board of directors approved the use of Holding Company stock in the funding of the Company's defined benefit 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 retirement plan.

PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Shelf Registrations

On June 12, 2003, the Holding Company and PNM each filed universal shelf registration filings with the SEC for a combination of debt and equity securities for $500.0 million and $285.0 million, respectively. The PNM shelf registration, when combined with a previously filed shelf, provided $500.0 million of capacity. The PNM and Holding Company shelf registrations were declared effective June 28, 2003 and August 28, 2003, respectively. On September 9, 2003, PNM sold $300.0 million of debt under its shelf registration (see "Financing Activities" above). As of September 30, 2003, the Holding Company and PNM had remaining securities registered under the shelf registrations of $500.0 million and $200.0 million, respectively.

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 as discussed below. The cost of service rate increase proposed by PNM was $37.6 million, and was designed to provide PNM's gas utility an opportunity to earn a 12% return on equity. PNM's current return on equity from its gas business is below 3%.

On June 25, 2003, PNM, the PRC Staff, and a group of industrial consumers filed a settlement allowing the Company a $20 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 agreement also allows the Company to collect interest on uncollected regulatory assets over the collection period. The revenue increase and interest collection combined generate approximately $22 million of revenue and a 10.25% return on equity. The settlement rates were proposed to go into effect for bills rendered in November 2003. On November 3, 2003 the PRC rejected the proposed settlement. On November 7, 2003, the Company filed a request for rehearing. In its motion for rehearing, the Company proposed two options for consideration. Under the first option, the Company agreed to delay implementation of the increase for residential customers until April 1, 2004. This delay would reduce revenues that the Company would have collected over the winter heating season by $10.8 million. Under this option new rates for other customer classes would take effect in November. Under the second option, the Company agreed to defer collection of the winter heating season revenues from residential customers until April 2004. During the April 2004 through October 2004 time period, the Company would surcharge residential customers to collect the amounts deferred. The Company then commits to contribute $5.4 million, which would be half of the amount collected through the deferral charge, to assist the Company's low income residential customers winter gas bills over the next three heating seasons. The PRC granted the request for rehearing on the two proposed options on November 13, 2003. A recommended decision is expected in December 2003. The Company is also exploring possible judicial remedies. The Company is unable to predict the ultimate outcome of this matter.

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 water supplies to meet all the needs of the state, including growth, is a major issue. The Company has secured sufficient water rights in connection with the building of 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

PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 approved a supplemental contract for 8,300 acre feet per year for a one-year term ending December 31, 2003, and environmental approvals are in the process of being obtained. A renewal request for 2004 is pending. PNM has also negotiated and 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, 2003. Discussions for a similar agreement in 2004 are underway. 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.

California Refund Proceeding

By order dated June 19, 2001, in response to a complaint filed by San Diego Gas and Electric Company ("SDG&E") and other California buyers against sellers into the California wholesale electric market, the FERC directed one of its administrative law judges ("ALJ") to convene a settlement conference to address potential refunds owed by sellers into the California market. The settlement conference, in which PNM participated, was ultimately unsuccessful, and the ALJ recommended to the FERC that an evidentiary hearing be held to resolve the dispute, suggesting that refunds were due. The estimated refunds, however, were significantly lower than those demanded by California and, in most instances, were offset by the amounts due suppliers from the Cal PX and the California Independent System Operator ("Cal ISO"). The California parties had demanded refunds of approximately $9 billion from power suppliers. Hearings on the refunds were held in September 2002, and the ALJ issued the "Proposed Findings on California Refund Liability" on December 12, 2002, in which it was determined that the Cal ISO had, for the most part, calculated the amounts of the refunds correctly. 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

PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 on January 13, 2003 to the ALJ's preliminary findings addressing errors the Company believes the ALJ made in the proposed findings, and filed reply comments on February 3, 2003. On March 26, 2003, the FERC issued an order substantially adopting the ALJ's findings, 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. On October 16, 2003, 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 16, 2003 Order. The Company 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.

In addition, prior to the December 12, 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 on March 3, 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 on March 20, 2003, denying the allegations against it. PNM cannot predict what effect the FERC's review of this additional evidence will have on its rulings in the refund proceeding or in other proceedings involving wholesale electric transactions in California during the so-called "California energy crisis".

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. On September 24, 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 allowed the submission of additional evidence in the case on March 3, 2003. On June 25, 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 on July 25, 2003, which are currently pending before the FERC. The Company 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 an order by the FERC.

PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

FERC Investigation of "Enron-Like" Trading Practices

The FERC has also 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 have been required to submit data regarding short-term transactions in 2000-2001. PNM made its data submission in April 2002. Subsequently, in May 2002, new Enron documents came to light that raised additional concerns about Enron's trading practices. In light of these new revelations, the FERC issued additional orders in the pending investigation requiring sellers to respond to detailed questions by admitting or denying that they had engaged in trading practices similar to those practiced by Enron and certain other sellers, including so-called "wash" transactions. The FERC issued supplemental requests for data submissions. In its responses to the FERC requests, PNM denied that it had engaged in improper activities such as those identified in Enron's documents and also denied engaging in "wash" transactions. PNM acknowledged that it had engaged in certain activities described in the Enron documents but asserted that its activities were legitimate and not manipulative. Where appropriate, PNM's responses addressed any arguable similarities between any of its wholesale activities and those under investigation by the FERC. In August 2002, the FERC staff issued a preliminary report on its findings, recommending that the FERC initiate formal investigative proceedings directed at three companies and the FERC has done so. The Company was not among the companies named. On March 26, 2003, the FERC staff issued its final report, which addressed various types of conduct that the FERC staff believes may have violated market monitoring protocols in the Cal ISO and Cal PX tariffs. Based on the final report, the FERC has 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. The FERC staff also recommended that PNM and other entities be required to show cause why they should not disgorge profits related to business dealings with Enron and the employment of certain trading strategies deemed to be manipulative.

FERC Show Cause Orders

On June 25, 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. Entities subject to the Gaming Practices Order will have an opportunity to respond to the allegations contained

PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

in the order in a trial-type evidentiary proceeding before an ALJ, and to show cause why they should not be found to have engaged in Gaming Practices in violation of the Cal ISO and Cal PX tariffs. 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. 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 on August 25, 2003. On September 30, 2003, the California parties filed their objection to the dismissal of PNM from the case. PNM believes that it has not engaged in improper conduct and intends to defend itself vigorously against these allegations. The Company cannot predict the outcome of these proceedings.

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 several entities that allegedly may have been used as market manipulation schemes. These entities include Aquila, Inc., Constellation Power Source, Inc., El Paso Merchant Energy, L.P., Idaho Power Company, Koch Energy Trading, Inc., MIECO Inc., Morgan Stanley Capital Group, PECO Energy Company, PacifiCorp, Powerex, Sempra Energy Trading Corporation, TransAlta Energy Marketing (U.S.) Inc. and TransAlta Energy Marketing (California) Inc. 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. On September 2, 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. The FERC ALJ has issued a procedural schedule in the case and on October 3, 2003, PNM filed testimony and exhibits in the case reasserting its response previously filed. The ALJ has set a hearing in the case for April 13, 2004. PNM believes that it has not engaged in improper conduct and intends to defend itself vigorously against these allegations.

Investigation of Anomalous Bidding Behavior and Practices in the Western Markets

On June 25, 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. On July 2, 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

PNM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

the investigation. On July 24, 2003, PNM submitted its response to OMOI's data request, in which PNM provided justification of its bidding strategies during that period. On July 25, 2003, PNM joined with other sellers in filing a request for rehearing of the June 25, 2003 order, challenging the FERC's determination that bids 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. The investigation is currently pending and PNM has received additional requests for information and data from OMOI. PNM is responding to OMOI's additional questions. The Company 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. On May 31, 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 31, 2002 order. The California Attorney General filed a request for rehearing contesting the FERC decision. On September 23, 2002, the FERC issued its order denying the California Attorney General's request for rehearing. The California Attorney General has filed a petition for review in the United States Court of Appeals for the Ninth Circuit. PNM has intervened in the Ninth Circuit appeal and is participating as a party in that proceeding. The Ninth Circuit held oral arguments in the case on October 9, 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

PNM RESOURCES, INC. AND SUBSIDIARIES
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(Unaudited)

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.

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

On February 1, 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 filing was an administrative remedy that served as a mandatory prerequisite to filing suit against the state for recovery of damages related to the commandeering of the Block Forward Agreements. The Victims Claims Board denied PNM `s claim on March 22, 2002. PNM filed a complaint against the State of California in California state court on September 20, 2002, seeking damages for the state's commandeering of the Block Forward Agreements and requesting

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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 California state court stayed the proceedings through July 2003 pending resolution of certain related issues before the FERC, but recently lifted the stay to address procedural matters in light of the delay in rulings from the FERC on the related issues. Although the stay was lifted, the judge delayed establishing a procedural schedule for the case pending a determination of the Cal PX's status in the litigation. At a hearing held on October 2, 2003, the judge held that the Cal PX could represent the interests of Cal PX participants in the litigation. However, the judge declined to set a procedural schedule because of his impending retirement and the anticipation that a new judge would be appointed to preside over the hearing.

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, by letter dated October 23, 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.

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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, on June 14, 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, on December 31, 2002, the EPA promulgated certain long-awaited revisions to the NSR rules, along with proposals to revise the RMRR exclusion contained in the regulations. On August 27, 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 and how such challenges will be resolved cannot be predicted.

Citizen Suit Under the Clean Air Act

By letter dated January 9, 2002, counsel for the Grand Canyon Trust and Sierra Club (collectively, "GCT") notified PNM of GCT's intent to file a so-called "citizen suit" under the Clean Air Act, alleging that PNM and co-owners of the SJGS violated the Clean Air Act, and the implemention of federal and state regulations, at SJGS. Pursuant to that notification, on May 16, 2002, the GCT filed suit in federal district court in New Mexico against PNM (but not against the other SJGS co-owners). 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 filed its answer in federal court on June 6, 2002, denying the material allegations in the complaint.

Both sides in the litigation filed motions for partial summary judgment and on May 9, 2003 the court held a hearing on all pending motions. At the conclusion of the hearing, the court denied the summary judgment motions relating to the opacity claims, meaning that the opacity issues will go to trial on the merits. The court took under advisement the summary judgment motions relating to the PSD issues, but thereafter entered an order granting PNM's motion for summary judgment on the PSD issues and dismissing that portion of the case against PNM. A trial date on certain other preliminary liability issues has been established to start on November 17, 2003. On October 8, 2003, the court

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(Unaudited)

entered an order granting in part and denying in part GCT's motion seeking to limit the evidence PNM could present at the November 17 trial. The court excluded evidence PNM wished to present that certain measurement methods relied on by GCT were not proper to measure compliance and that they unlawfully created a more stringent standard. The court will allow PNM, however, to present evidence that specific data relied on by GCT does not meet the standards of other measurement methods and that the measurement methods relied on by GCT are contradicted by other measurement methods or by other qualified scientific data. The court will also allow evidence demonstrating the inaccuracy of the data relied on by GCT or that particular data relied on by GCT should not be considered evidence of a violation for other appropriate reasons. A trial on remaining liability issues, if necessary, and also on remedy issues, if necessary, would be scheduled at a later date. The Company believes that it has meritorious defenses and vigorously disputes the allegations. PNM's corporate policy continues to be to adhere to high environmental standards as evidenced by its ISO 14000 certification. The Company is, however, unable to predict the ultimate outcome of the matter.

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. 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. 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

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(Unaudited)

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. 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.

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 more than two 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 December 31, 2003. 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 letter 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 letter was what was identified as a "draft" compliance order assessing unspecified civil penalties. The September 12 letter invited PNM to enter into discussions concerning the contents of the letter and of the draft compliance order and PNM has advised the NMED that PNM will enter into such discussion. 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 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. No source of gasoline contamination in the groundwater was identified as originating from the site. However, in June 1996, PNM received a letter from the NMED, indicating that the NMED believed that PNM was the source of gasoline contamination in a City of Santa Fe municipal supply well and in groundwater underlying the Santa Fe Station site. Further, the NMED letter stated that PNM was required to proceed with interim remediation of the

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(Unaudited)

contamination pursuant to the New Mexico Water Quality Control Commission regulations. In October 1996, PNM and the NMED signed an amendment to the Settlement Agreement concerning the groundwater contamination underlying the site. As part of the amendment, PNM agreed to spend approximately $1.2 million for certain costs related to sampling, monitoring and the development and implementation of a remediation plan with respect to gasoline contamination in the groundwater.

Pursuant to the terms of the Settlement Agreement, on October 5, 1998, a new remediation system began operation to treat groundwater produced by the Santa Fe well to drinking water standards for municipal distribution and bioremediation of gasoline contamination beneath the Santa Fe Station site. Since the reactivation of the Santa Fe well, the groundwater treatment and bioremediation systems have resulted in a marked reduction in contaminant concentrations at the wellhead. However, contaminant concentrations at the property boundary remain high.

The amended Settlement Agreement did not, however, provide PNM with a full release from potential further liability for remediation of the gasoline contamination in the groundwater. If the NMED continued to assert that PNM was responsible for the gasoline contamination after the specified settlement amount was exhausted, the Settlement Agreement called for binding arbitration on the question of whether PNM was the source of gasoline contamination. Under the terms of the Settlement Agreement, NMED had the burden of proof to establish the Santa Fe Generating Station as the source for the gasoline contamination.

By letter dated August 7, 2002, PNM provided written notice to the NMED and the City of Santa Fe that PNM had satisfied its obligations with respect to the gasoline contamination under the amended Settlement Agreement, and PNM also stated its intention to cease operation, effective October 5, 2002, of the wellhead and bioremediation systems, and to discontinue monitoring and reporting with respect to gasoline contamination at the site. The NMED responded with a written notice of determination dated August 16, 2002, stating that PNM is the responsible party for gasoline contamination at the site and requested that PNM refrain from cessation of operation of the remediation systems, monitoring and reporting. In a meeting held on September 5, 2002, the NMED indicated its intention to file a court action seeking an order invalidating the binding arbitration provisions of the amended Settlement Agreement and a declaratory judgment that PNM is the responsible party for the gasoline contamination at the site. PNM is of the opinion that the data compiled indicates observed groundwater contamination originated from off-site sources. 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 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.

PNM RESOURCES, INC. AND SUBSIDIARIES
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(Unaudited)

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 contaminated 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.

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 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

PNM RESOURCES, INC. AND SUBSIDIARIES
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(Unaudited)

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 in transmission market, 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.

(6) Company Realignment

On August 22, 2002, the Company was realigned because of 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 Emerging Issues Task Force 94-3 ("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. The Company had paid $8.0 million as of September 30, 2003 for such costs and the balance of the liability was $0.8 million.

(Intentionally left blank)

                                                  Three Months Ended              Nine Months Ended
                                                     September 30,                  September 30,
                                             ------------------------------ ------------------------------
                                                 2003            2002           2003            2002
                                             --------------  -------------- -------------- ---------------
                                                                    (In thousands)
Other income:
Interest income.............................     $10,791         $11,226        $31,968         $32,788
Miscellaneous non-operating income..........       4,664           2,575          7,438           6,464
                                             --------------  -------------- -------------- ---------------
                                                  15,455          13,801         39,406          39,252
                                             ==============  ============== ============== ===============
Other deductions:
Loss on reacquired debt write-off...........      16,576               -         16,576               -
Transition costs write-off..................           -               -         16,720               -
Miscellaneous non-operating deductions......       2,185           6,842          7,397          10,234
                                             --------------  -------------- -------------- ---------------
                                                  18,761           6,842         40,693          10,234
                                             ==============  ============== ============== ===============

The following table details the components of other income and deductions for PNM:

                                                  Three Months Ended             Nine Months Ended
                                                    September 30,                  September 30,
                                             ----------------------------- ------------------------------
                                                 2003           2002           2003            2002
                                             -------------- -------------- --------------  --------------
                                                                   (In thousands)
Other income:
Interest income.............................     $10,500        $ 8,884        $30,701         $27,072
Miscellaneous non-operating income..........       4,200          2,471          6,089           3,776
                                             -------------- -------------- --------------  --------------
                                                 $14,700       $ 11,355        $36,790         $30,848
                                             ============== ============== ==============  ==============
Other deductions:
Loss on reacquired debt write-off...........      16,576              -         16,576               -
Transition costs write-off..................           -              -         16,720               -
Miscellaneous non-operating deductions......       2,137          4,691          4,860           8,443
                                             -------------- -------------- --------------  --------------
                                                 $18,713        $ 4,691        $38,156         $ 8,443
                                             ============== ============== ==============  ==============

(8) New and Proposed Accounting Standards

Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities", an interpretation of Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements" ("FIN 46"). In January 2003, the Financial Accounting Standards Board ("FASB") issued FIN 46 to address the consolidation of variable interest entities. FIN 46 applies immediately to variable interest entities created after January 31,

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(Unaudited)

2003, and to variable interest entities in which an enterprise obtains an interest after that date. FIN 46 may also be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. Upon adoption, FIN 46 did not have a material impact on the Company's financial condition or results of operations.

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"). On October 25, 2002, the EITF reached a final consensus on EITF 02-3 that rescinds EITF 98-10 and requires that all energy contracts held for trading purposes be presented on a net margin basis in the statement of earnings. As a result, the Company has reclassified those contracts previously accounted for under EITF 98-10 to a net margin basis under EITF 02-3 for the three months and nine months ended September 30, 2002. The Company will not report revenues and cost of energy sold on a net margin basis on a prospective basis under EITF 02-3, as none of the Company's current marketing activities meet the definition of trading activities as prescribed by EITF 02-3.

The following table details wholesale electric revenues as adjusted under EITF 02-3. Energy trading margin is included in electric operating revenues in the Consolidated Statements of Earnings.