Fitch Affirms P.S. Co. Of New Mexico's Rtgs; Outlk Positive.

Business Editors

NEW YORK--(BUSINESS WIRE)--March 20, 2002

Fitch Ratings has affirmed the ratings of Public Service Company of New Mexico (PSNM) as follows: senior unsecured pollution control notes and senior unsecured notes 'BBB-'; Sale-Leaseback Obligation Bonds BB+; and, Preferred Stock 'BB-'. The ratings are removed from Rating Watch Negative, where they were placed in November 2000 following the announcement of the company's planned merger with Western Resources. The Rating Outlook is Positive.

The ratings and positive outlook reflect the relatively predictable cash flow from PSNM's utility operations, above-industry-average sales growth, and notable balance sheet improvement in recent years. Since 1996, PSNM has reduced outstanding sale-leaseback obligation debt from $395 million to $166 million, significantly reducing fixed costs. The debt retirements and growth in retained earnings, lowered PSNM's debt-to-total capitalization ratio to 53% as of December 31, 2001 compared to 61% and at the end of 1996 and 54% at the December 31, 2000. Credit quality also benefits from the extension of cost-of-service regulation under SB 266 through 2006. The extension of cost-of-service regulation under SB 266 from January 1, 2002 to January 1, 2007 is a positive development that will result in greater cash flow stability vis-a-vis a competitive environment, while providing additional time for PSNM to recover its potential stranded costs. There is some concern that the termination of PSNM's rate agreement at year -end 2002 will trigger a rate review, later this year, which could adversely effect credit quality measures. However, even under a relatively stringent rate-reduction scenario, the utility's underlying earnings and cash coverage ratios would remain within the rating category.

Fitch's primary credit concern is PSNM's planned expansion of its wholesale energy marketing and trading business (EM&T) and the associated increase in business risk. PSNM management plans to significantly expand its existing wholesale EM&T operation, and could add up to 1,800 mWs of merchant generating capacity at a cost of over $1 billion during 2002-2006. Most of the financing required for PSNM's EM&T business will be provided by internal sources of capital. Given the relatively modest external financing requirements, Fitch expects debt as a percentage of total capital (including short-term and off balance sheet obligations) to remain in the mid-50% range for the next several years. PSNM has two projects under construction. The 135 mW Afton Generating Station is expected to begin commercial operation October 2002, and 70 mWs at the Lordsburg plant will begin operation around mid-2002.

Under SB 266, PSNM will continue to operate as a fully integrated electric utility until open access begins, but is permitted to develop wholesale generation outside the purview of the New Mexico Public Regulation Commission (PRC). New Mexico's amended restructuring law allows recovery of 50%-100% of PSNM's stranded costs through a five-year, non-bypassable competition transition charge to commence with implementation of open access.

In December 2001, the PRC approved a settlement allowing the activation of a holding company structure. At the end of 2001, PSNM capitalized PNM Resources (PNM) with $127 million of equity. PSNM and its former unregulated business, Avistar, are now direct subsidiaries of PNM.