UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-6986
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PUBLIC SERVICE COMPANY OF NEW MEXICO
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(Exact name of registrant as specified in its charter)
New Mexico 85-0019030
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Alvarado Square, Albuquerque, New Mexico 87158
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(Address of principal executive offices)
(Zip Code)
(505) 241-2700
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(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock--$5.00 par value 41,774,083 shares
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Class Outstanding at October 29, 1997
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PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Report of Independent Public Accountants......................... 3
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Earnings--
Three Months and Nine Months Ended September 30, 1997 and 1996... 4
Consolidated Balance Sheets--
September 30, 1997 and December 31, 1996......................... 5
Consolidated Statements of Cash Flows--
Nine Months Ended September 30, 1997 and 1996.................... 6
Notes to Consolidated Financial Statements....................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 8
PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS............................................ 16
ITEM 5. OTHER INFORMATION............................................ 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 19
Signature ............................................................. 20
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Public Service Company of New Mexico:
We have reviewed the accompanying condensed consolidated balance sheet of Public
Service Company of New Mexico (a New Mexico corporation) and subsidiaries as of
September 30, 1997, and the related condensed consolidated statements of
earnings for the three-month and nine-month periods ended September 30, 1997 and
1996, and the condensed consolidated statements of cash flows for the nine-month
periods ended September 30, 1997 and 1996. These financial statements are the
responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Public Service Company of New
Mexico and subsidiaries as of December 31, 1996 (not presented herein), and, in
our report dated February 13, 1997, we expressed an unqualified opinion on that
statement. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1996, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
October 29, 1997
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<PAGE>
ITEM 1. FINANCIAL STATEMENTS
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Operating revenues:
Electric $ 213,159 $ 180,214 $ 540,810 $ 486,754
Gas 41,391 30,478 218,465 163,301
Energy Services 31,421 65 64,260 203
---------- ---------- ---------- ----------
Total operating revenues 285,971 210,757 823,535 650,258
---------- ---------- ---------- ----------
Operating expenses:
Fuel and purchased power 77,343 47,786 176,798 128,359
Gas purchased for resale 17,198 9,855 126,244 75,511
Gas purchased for resale - energy marketing 30,364 22 63,859 69
Other operation and maintenance 82,992 80,906 237,658 232,388
Depreciation and amortization 20,841 19,835 61,778 58,420
Taxes, other than income taxes 9,634 9,079 27,923 26,907
Income taxes 12,714 10,862 31,703 32,371
---------- ---------- ---------- ----------
Total operating expenses 251,086 178,345 725,963 554,025
---------- ---------- ---------- ----------
Operating income 34,885 32,412 97,572 96,233
---------- ---------- ---------- ----------
Other income and deductions, net of taxes: 2,732 644 9,849 2,497
---------- ---------- ---------- ----------
Income before interest charges 37,617 33,056 107,421 98,730
---------- ---------- ---------- ----------
Interest charges:
Interest on long-term debt 11,394 12,101 35,078 36,304
Other interest charges 1,904 1,015 7,561 2,496
---------- ---------- ---------- ----------
Net interest charges 13,298 13,116 42,639 38,800
---------- ---------- ---------- ----------
Net earnings 24,319 19,940 64,782 59,930
Preferred stock dividend requirements 147 147 440 440
---------- ---------- ---------- ----------
Net earnings applicable to common stock $ 24,172 $ 19,793 $ 64,342 $ 59,490
========== ========== ========== ==========
Average shares of common stock outstanding 41,774 41,774 41,774 41,774
========== ========== ========== ==========
Net earnings per share of common stock $ 0.58 $ 0.47 $ 1.54 $ 1.42
========== ========== ========== ==========
Dividends paid per share of common stock $ 0.17 $ 0.12 $ 0.46 $ 0.24
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
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</TABLE>
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
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(Unaudited)
(In thousands)
ASSETS
Utility plant $ 2,549,532 $ 2,489,921
Accumulated provision for depreciation
and amortization (993,149) (937,228)
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Net utility plant 1,556,383 1,552,693
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Other property and investments 272,429 254,268
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Current assets:
Cash 3,625 11,125
Temporary investments, at cost 22,580 9,128
Receivables 187,905 197,025
Income taxes receivable - 18,825
Fuel, materials and supplies 42,720 41,260
Gas in underground storage 6,340 2,679
Other current assets 6,355 6,632
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Total current assets 269,525 286,674
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Deferred charges 150,359 136,679
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$ 2,248,696 $ 2,230,314
============= ============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity:
Common stock $ 208,870 $ 208,870
Additional paid-in capital 470,118 470,358
Excess pension liability, net of tax (1,840) (2,102)
Retained earnings since January 1, 1989 127,324 77,185
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Total common stock equity 804,472 754,311
Cumulative preferred stock without mandatory
redemption requirements 12,800 12,800
Long-term debt, less current maturities 713,989 713,919
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Total capitalization 1,531,261 1,481,030
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Current liabilities:
Short-term debt 92,800 100,400
Accounts payable 109,401 130,661
Dividends payable 147 5,159
Current maturities of long-term debt 350 14,970
Accrued interest and taxes 34,299 23,356
Other current liabilities 21,716 25,477
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Total current liabilities 258,713 300,023
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Deferred credits 458,722 449,261
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$ 2,248,696 $ 2,230,314
============= ============
The accompanying notes are an integral part of these financial statements.
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<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
---------------------
1997 1996
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(In thousands)
Cash Flows From Operating Activities:
Net earnings $ 64,782 $ 59,930
Adjustments to reconcile net earnings to net cash
flows from operating activities:
Depreciation and amortization 70,895 67,706
Accumulated deferred investment tax credit (3,357) (3,498)
Accumulated deferred income tax 5,696 (1,599)
Changes in certain assets and liabilities:
Receivables 31,756 9,509
Fuel, materials and supplies (5,121) 4,771
Deferred charges (11,968) 5,246
Accounts payable (21,290) (10,192)
Accrued interest and taxes 10,943 4,890
Deferred credits 5,679 (4,860)
Other (3,466) (8,400)
Other, net 10,259 11,875
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Net cash flows from operating activities 154,808 135,378
--------- ---------
Cash Flows From Investing Activities:
Utility plant additions (83,790) (66,385)
Increase in nuclear decommissioning trust (23,000) -
Return of principal PVNGS LOBs 5,018 -
Increase in other property and investments (2,181) (14,230)
Escrow for purchase of PVNGS lease obligation bonds - (218,090)
Temporary investments, net (13,453) 62,654
--------- ---------
Net cash flows from investing activities (117,406) (236,051)
--------- ---------
Cash Flows From Financing Activities:
Bond redemption premium and costs (2,466) (295)
Repayments of other long-term debt (14,970) (326)
Trust borrowing for nuclear decommissioning 23,000 -
Net increase (decrease) in short-term debt (30,600) 114,000
Exercise of employee stock options (241) (1,395)
Dividends paid (19,625) (10,409)
--------- ---------
Net cash flows from financing activities (44,902) 101,575
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Increase (decrease) in cash (7,500) 902
Cash at beginning of period 11,125 4,228
--------- ---------
Cash at end of period $ 3,625 $ 5,130
========= =========
Supplemental Cash Flow Disclosures:
Interest paid $ 42,583 $ 39,949
========= =========
Income taxes paid, net $ 29,250 $ 30,617
========= =========
The accompanying notes are an integral part of these financial statements.
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<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) General Accounting Policy
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary for a fair presentation of the
consolidated financial statements. The significant accounting policies followed
by Public Service Company of New Mexico (the "Company") are set forth in note
(1) of notes to the Company's consolidated financial statements in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 Form
10-K") filed with the Securities and Exchange Commission ("SEC").
(2) Nuclear Decommissioning Costs
The Company's share of the Palo Verde Nuclear Generating Station ("PVNGS")
decommissioning costs will be approximately $162.6 million in 1997 dollars. The
Company makes regular payments under agreements approved by the New Mexico
Public Utility Commission ("NMPUC") to external tax qualified and non-qualified
trusts over the estimated useful life of each unit. A portion of the
non-qualified trust funds is invested in life insurance policies. The remaining
trust funds are invested primarily in equities, a municipal bond fund and a
money market fund. Decommissioning costs are charged to expense over the license
term and decommissioning costs for Units 1 and 2 are currently recovered in
rates. As of September 30, 1997, the nuclear decommissioning trusts had net
assets with a market value of $30.0 million.
(3) Refinancing
On February 21, 1997, the Company completed the refinancing of $190 million of
pollution control revenue bonds issued by the City of Farmington, all maturing
in April 2022. The $60 million 1978 Series A Pollution Control Revenue Bonds and
the $40 million 1979 Series A Pollution Control Revenue Bonds were refinanced as
variable rate bonds (Pollution Control Revenue Refunding Bonds, $40 million 1997
Series A, $37 million 1997 Series B and $23 million 1997 Series C). The initial
variable rates were 3.35% for $40 million 1997 Series A and $37 million 1997
Series B, and 3.30% for $23 million 1997 Series C. The remaining $90 million
1979 Series A Pollution Control Revenue Bonds were refinanced with a fixed rate
of 6.375% (Pollution Control Revenue Refunding Bonds, 1997 Series D).
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's 1996 Form 10-K PART II, ITEM 7. -- "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" discussed
management's assessment of the Company's financial condition, results of
operations and other issues facing the Company. The following discussion and
analysis by management focuses on those factors that had a material effect on
the Company's financial condition and results of operations during the first
nine months of 1997 and 1996. It should be read in conjunction with the
Company's consolidated financial statements. Trends and contingencies of a
material nature are discussed to the extent known and considered relevant.
LIQUIDITY AND CAPITAL RESOURCES
The previously estimated capital requirements for 1997 of $214.0 million
included utility construction expenditures, purchases of PVNGS Lease Obligation
Bonds ("LOBs") and cash dividend requirements for both common and preferred
stock. The capital requirements for 1997 have been revised downward to $200.0
million. The Company spent approximately $103.4 million for capital requirements
during the first nine months of 1997 and anticipates spending approximately
$96.6 million, including $40.0 million associated with the purchase of PVNGS
LOBs, during the fourth quarter of 1997. The Company expects that these cash
requirements will be met primarily through internally generated cash. However,
to cover the differences in the amounts and timing of cash generation and cash
requirements, the Company intends to utilize short-term borrowings under its
liquidity arrangements. At September 30, 1997, the Company had $70.0 million of
short-term borrowings against its liquidity arrangements and had $150 million in
unused liquidity capacity. Included in this capacity were $100 million under a
secured revolving credit facility ("Facility"), $30 million of the credit
facility collateralized by the Company's utility customer accounts receivable
and certain amounts being recovered from gas customers relating to certain gas
contract settlements and $20 million under local lines of credit. The Facility
will expire in June 1998 and the Company expects to replace the Facility before
its expiration date, as discussed below.
As of September 30, 1997, the Company had approximately $22.6 million in
temporary investments. The Company continues to evaluate its investment and debt
retirement options to optimize its financing strategy and earnings potential.
In November 1997, the Company expects to request NMPUC approval to enter into a
five-year $300 million senior unsecured revolving credit facility ("Revolver").
The Revolver would replace the Company's existing $100 million Facility. The
Company intends to use borrowings from the Revolver to retire all $140 million
of its outstanding taxable first mortgage bonds. In addition, in the November
filing, the Company also expects to request authority to exchange the first
mortgage bonds currently collateralizing the outstanding tax-exempt pollution
control revenue bonds of approximately $575 million with senior unsecured notes
("SUNs"). One of the conditions to such exchange is the requirement that the
SUNs will be rated the same as the first mortgage bonds by Moody's Investors
Services and Standard & Poor's Ratings Services. After the Company has completed
these transactions, the 1947 Indenture of Mortgage and Deed of Trust will be
extinguished. The SUNs, which will be issued under an indenture containing a
restriction on liens (except in certain limited circumstances) and certain other
covenants and restrictions, will be the senior debt of the Company. Although the
Company believes it will be successful in consummating this transaction, there
can be no assurance that it will be completed as planned.
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<PAGE>
Dividends
On October 7, 1997, the Company's board of directors ("Board") declared a
quarterly cash dividend of 17 cents per common share, payable November 21, 1997,
to the common stockholders of record as of November 3, 1997. The Company's Board
reviews the Company's dividend policy on a continuing basis. The declaration of
common dividends is dependent upon a number of factors including earnings and
financial condition of the Company and market conditions.
RESULTS OF OPERATIONS
Net earnings applicable to common stock increased $4.4 million ($.11 per share)
and $4.9 million ($.12 per share) for the quarter and nine months ended
September 30, 1997, respectively, over the corresponding periods last year.
The following discussion highlights significant items which affected the results
of operations for the quarter and nine months ended September 30, 1997 and 1996.
Electric gross margin (electric operating revenues less fuel and purchased power
expense) increased $3.4 million and $5.6 million for the quarter and nine months
ended September 30, 1997, respectively, over the corresponding periods a year
ago. These increases were attributable to retail customer growth and increased
off-system sales margin in the current periods.
Gas gross margin (gas operating revenues less gas purchased for resale)
increased $3.6 million and $4.4 million for the quarter and nine months ended
September 30, 1997, respectively, over the corresponding periods a year ago.
Contributing to these increases was the implementation of a higher fixed monthly
customer charge (access fee) starting February 1997 pursuant to the NMPUC's
final order in the gas rate case; however, as a result of the final order, which
also reduced the per therm rate applied to customers' consumption, gas gross
margin for the fourth quarter of this year is expected to be lower than a year
ago.
The increase in Energy Services operating revenues and gas purchased for resale
reflects the out of state activities related to the buying, selling,
transporting and storing of natural gas by the Company's Energy Services
Business Unit. (See "OTHER ISSUES FACING THE COMPANY-- Wholesale Marketing
Activities" for further discussion.)
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<PAGE>
Other operation and maintenance ("O&M") expenses increased $2.1 million for the
quarter over the corresponding period a year ago. For the nine months ended
September 30, 1997, O&M expenses increased $5.3 million over the corresponding
period last year due to increases in expenses related to computers, customer
service, production and distribution. Such increases were offset by lower
electric maintenance expenses of $4.2 million resulting from lower scheduled
maintenance outages at the PVNGS, San Juan Generating Station ("SJGS") and Four
Corners Generating Station ("Four Corners").
Other income and deductions, net of taxes, increased $2.1 million and $7.4
million for the quarter and nine months ended September 30, 1997, respectively,
over the corresponding periods a year ago due to increased interest income from
the investment in the PVNGS LOBs and settlement of a litigated case in June
1997.
Net interest charges increased $3.8 million for the nine months ended September
30, 1997, over the same period last year due to increased short-term borrowings
for the purchase of the $200 million of PVNGS LOBs and interest accruals on the
balance due customers related to the gain associated with the 1995 gas asset
sale.
OTHER ISSUES FACING THE COMPANY
Collaborative Effort on the Electric Industry Restructuring
As previously reported, pursuant to the July 1, 1997 NMPUC order, the Company
and interested parties, including a number of customer organizations, an
industrial energy users group, the state Attorney General ("AG"), the staff of
the NMPUC, power marketers, environmental groups and regulated utility companies
resumed collaborative process discussions for drafting proposed legislation on
restructuring the electric industry for the 1998 state legislative session. The
NMPUC ordered a Final Report on the collaborative process to be filed no later
than September 15, 1997, and the NMPUC was to report the results of the
collaborative process to the Water, Utilities and Natural Resources Committee of
the New Mexico Legislature (the "Committee") charged with studying the electric
industry restructuring in New Mexico. (See Part I, Item 2. -- "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
OTHER ISSUES FACING THE COMPANY-- Collaborative Effort on the Electric Industry
Restructuring" in the Company's quarterly report on Form 10-Q for the quarter
ended June 30, 1997.)
On September 12, 1997, the facilitators declared that the collaborative process
had reached an impasse among the parties. However, the Company filed a proposal
for electric industry restructuring on September 15, 1997, with both the NMPUC
and the Committee. This plan was a joint submission by various parties to the
collaborative process including the Company, Enron Corporation and the New
Mexico Retail Association. It was also supported by Southwestern Public Service
Company, United States Executive Agencies and the International Brotherhood of
Electrical Workers.
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<PAGE>
The Company's proposal called for an immediate rate reduction of $10 million per
year from the effective date of proposed legislation (July 1998) until open
access (January 1, 2001) for residential customers without the need for a rate
case. The proposal also called for full retail competition no later than January
1, 2001. Part of the Company's proposal included an offer to create a regulated
distribution wires and pipes company dedicated only to the delivery of
electricity and gas. Other services, usually associated with delivery, such as
meter reading, billing, and customer services would be provided through
competitive markets. The Company offered to assume the risk of stranded cost
recovery on all fossil fuel generation and on all generation previously excluded
from New Mexico jurisdictional rates but would recover all fixed costs
associated with PVNGS Units 1 and 2 through a non-bypassable "wires charge" from
2001 to 2016. The Company currently estimates if the market clearing price for
power fell to 3.0 cents/kWh, it may incur an after-tax write-off of
approximately $205 million related to its fossil fuel generation if the Company
assumes this risk.
The Committee will further consider possible legislation in its last meeting,
scheduled for November 20, 1997, before the legislative session.
On September 22, 1997, the NMPUC extended the deadline for the Company's
electric rate case to October 15, 1997, to allow continued discussions on
industry restructuring. On October 7, 1997, the Company filed a verified
petition for Writ of Mandamus with the New Mexico Supreme Court ("Supreme
Court") and requested the Supreme Court to stay the NMPUC's order requiring the
Company to file a rate case by October 15, 1997. On October 20, 1997, the
Supreme Court denied the Company's petition for Writ of Mandamus and request for
stay. On October 21, 1997, the NMPUC ordered the Company to file its electric
rate case by November 3, 1997.
City of Albuquerque Retail Pilot Load Aggregation Program
On September 11, 1997, the City of Albuquerque ("COA") filed a petition with the
NMPUC to institute a Retail Pilot Load Aggregation Program for the period
January 1, 1998 through December 31, 1998. The petition requests the NMPUC to
provide (i) an expedited registration/certification process, (ii) an NMPUC order
compelling transmission on behalf of the COA, (iii) derivation of retail rates
exclusive of the Company's production costs, (iv) arbitration assistance to
facilitate a "true-up" or reconciliation of any over or under recovered costs
and (v) arbitration assistance to accommodate metering, billing and collection
processes. On September 18, 1997, the NMPUC held a prehearing meeting. At the
meeting, the Company stated that the COA's petition seeks to invoke NMPUC
jurisdiction that does not exist. The NMPUC issued a procedural schedule
requiring a formal hearing. The Company filed to vacate the NMPUC's schedule on
grounds that the COA's petition was an informal complaint and the NMPUC's rules
did not allow for hearings based on this informal complaint. The NMPUC has not
responded to the Company's and COA's filings at this time. The Company, however,
did state that it was willing to work with the COA to design a pilot program.
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<PAGE>
Gas Rate Case Appeal
As previously reported, on February 13, 1997, the NMPUC issued a final order in
the Company's gas rate case filed in August 1995, ordering a rate decrease of
approximately $6.9 million. In the order, the NMPUC disallowed, among other
things, the recovery of certain regulatory assets. The Company had requested a
$13.3 million increase in its retail natural gas sales and transportation rates.
The Company strongly disagrees with the NMPUC's final order and has appealed its
case to the Supreme Court. The AG also filed a notice of appeal of the gas rate
case in March 1997. In June 1997, the Company and the AG filed their
briefs-in-chief with the Supreme Court, challenging certain aspects of the
order. (See PART I, ITEM 2. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OTHER ISSUES FACING THE COMPANY
- -- GAS RATE CASE" in the quarterly report on Form 10-Q for the quarter ended
June 30, 1997.)
Response briefs and reply briefs have been filed. Oral arguments will be held
before the Supreme Court on November 12, 1997. The Company is unable to predict
the date that the Supreme Court will subsequently issue its decision. While the
appeal is pending, the NMPUC's final order remains in effect.
New Gas Rate Case
By order issued on February 13, 1997, as subsequently modified on April 2, 1997,
in a proceeding related to the cost of gas, the NMPUC ordered the Company to
file a new gas services rate case. On October 15, 1997, the Company completed
the filing of the case, requesting a rate increase of $12.6 million. In
addition, the Company proposed a "Defined Target Mechanism" for its purchased
gas adjustment tariffs. The Defined Target Mechanism provides for a sharing of
gas cost gains and losses between shareholders and customers within a four
percent band above and below a benchmark based principally on market indexes.
The NMPUC has tentatively scheduled hearings for February 1998. The Company
anticipates a decision within the nine-month time frame prescribed by state law,
which expires in mid-August 1998. On October 24, 1997, a number of intervenors
in the case filed a joint motion with the NMPUC to reject the Company's rate
case filing, alleging that the Company's filing was incomplete and not in
compliance with the NMPUC's rules and the NMPUC's final order in the last gas
rate case regarding certain rate design issues. The Company strongly disagrees
with the joint motion and is currently preparing its response to the joint
motion. The NMPUC has not acted on the joint motion at this time.
Filing Relating to Termination of Gas Merchant Function
As previously reported, in the February 13 order in the cost of gas case, the
NMPUC ordered the Company to make a separate filing addressing the terms and
conditions under which the Company would consider exiting the merchant function
and to identify any compelling issues that should be brought to the attention of
the NMPUC relating to exiting the merchant function. Since the cost of gas is
passed through to customers, the Company does not make a profit on this service.
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<PAGE>
In March 1997, the Company filed its response in NMPUC Case No. 2760. In the
filing, the Company asserted that all customers should have the option to choose
their natural gas supplier, advocating that, ultimately, customer choice should
dictate whether the Company's gas operation retains its merchant function.
Currently, all customers may choose to become transportation customers on the
Company's distribution system, but nearly all residential and most small
commercial customers receive bundled sales service. In June 1997, the Company
formed a working group, consisting of customers, the AG, the NMPUC staff, the
Company and gas marketers, to determine what is needed to increase competition
and more fully develop supplier choice for sales customers. As a result, on June
30, 1997, the Company filed a Stipulation entered into with some of the working
group participants that outlined interim measures to facilitate the choice of
transportation service by small commercial and residential customers to be in
place by next winter. The Company has also proposed that long-term solutions to
issues raised by the working group be addressed by the working group on the
Company's new gas rate case. The NMPUC staff and AG opposed the Stipulation,
principally based on concerns with proper gas cost allocation. A hearing was
held with the NMPUC on the Stipulation on July 17, 1997, but was recessed until
August 1, 1997 to enable the parties to attempt resolution of the contested
issues. (See Part I, Item 2. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OTHER ISSUES FACING THE COMPANY
- -- Filing Relating to Termination of Gas Merchant Function" in the Company's
quarterly report on Form 10-Q for the quarter ended June 30, 1997.)
The hearing was resumed on August 1, 1997. Based on several changes in the
Stipulation, only the AG opposed the implementation of the Stipulation. On
August 18, 1997, the NMPUC entered an order adopting and approving the
Stipulation. In addition, the NMPUC ordered the docket not be closed so that it
could review the implementation of the Gas Choice program. In its order, the
NMPUC stated that after the first year of the program, marketers should have the
option of sending their own bills. The Company sought rehearing of the NMPUC's
order for the limited purpose of requesting the NMPUC to strike the statement
relating to marketers sending their own bills. The AG also sought rehearing on
these and other grounds. On October 6, 1997, the NMPUC issued an order
withdrawing the statement regarding billing after August 1998.
The Gas Choice program as it pertains to sale or transportation of gas should
not affect the Company's financial condition or results of operations. In
addition, pursuant to the NMPUC order issued on August 18, 1997, the Company has
the right to request recovery of any prudently incurred costs associated with
the implementation of the Gas Choice program.
Purchased Gas Adjustment Clause ("PGAC")
On July 3, 1997, the Company submitted a filing with the NMPUC seeking approval
to modify the method pursuant to which it recovers its gas costs through the
PGAC. After discussions with interested parties, on September 15, 1997, the
Company filed an amended application modifying its original proposed gas cost
recovery mechanism. This mechanism would enable the Company to better levelize
the price that it charges its customers during the winter heating season. In
addition, the Company sought authority to offer a fixed priced option for up to
20,000 customers. This option provides one fixed price which will remain in
effect for up to one year, regardless of market conditions. The NMPUC has set a
hearing for October 28, 1997, but has deferred the hearing on the fixed price
option at this time. Based on this, the Company may not be able to offer a fixed
price option this year. The Company expects the new levelized mechanism to be in
place for the upcoming winter heating season if approved by the NMPUC. Hearings
were held before the NMPUC on October 28, 1997. At the hearings, the parties to
the case agreed to bifurcate the fixed price option and requested the NMPUC set
a schedule that would allow a final order to be issued regarding the fixed price
option in the second quarter of 1998. As a result, the Company will not be able
to offer the proposed fixed price option this year. The NMPUC indicated that its
final order regarding the Company's proposed levelized price mechanism will be
issued on November 3, 1997.
-13-
<PAGE>
Coal Supply
The coal requirements for SJGS are being supplied by San Juan Coal Company
("SJCC"), a wholly owned subsidiary of BHP Minerals International, Inc., from
certain Federal, state and private coal leases under a Coal Sales Agreement,
pursuant to which SJCC will supply processed coal for operation of SJGS until
2017. The primary sources of coal are a mine adjacent to SJGS and a mine located
approximately 25 miles northeast of SJGS in the La Plata area of northwestern
New Mexico. During the third quarter of 1997, the Company was notified by SJCC
of certain audit exceptions identified by the Minerals Management Service for
the period 1986 through 1997. These exceptions pertain to the valuation of coal
for purposes of calculating the Federal coal royalty. Primary issues include
whether coal processing and transportation costs should be included in the base
value of La Plata coal for royalty determination. In addition, the Company has
been notified of claims by a private royaltyholder involving royalty valuation
at the La Plata Mine. The Company is currently assessing the potential impact to
the Company and the validity of the audit exceptions and claims.
Wholesale Marketing Activities
As previously reported, the Company's strategy for dealing with competition in
the changing market place includes pursuing growth through new business
opportunities. In pursuing new business opportunities, the Company is focusing
on energy and utility related activities under its Energy Services Business
Unit. (See Part II, Item 7. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION -- OVERVIEW -- Competitive
Strategy" in the 1996 Form 10-K.) The Company is also pursuing growth from its
more traditional wholesale power marketing activities.
Under the Bulk Power Services Business Unit, the Company's Wholesale Power
Marketing area is seeking to expand its historical power sales opportunities by
increasing its trading activities in wholesale power markets outside of New
Mexico. As of September 30, 1997, total wholesale power sales are projected to
increase by 30% over 1996 levels. Forty-seven percent of the total off-system
sales made through September 30, 1997, were from off-system power purchases
compared to 37% in all of 1996. The Company plans to continue to grow as a
wholesale power commodity trader in the region.
-14-
<PAGE>
Under the Energy Services Business Unit, the Company's PNM Energy Marketing
("PNMEM") division has been established. PNMEM is currently trading natural gas
in wholesale markets outside of New Mexico. As of September 30, 1997, PNMEM
served over 120 end-use facilities in California and has many industrial and
utility customer commitments throughout the Pacific Northwest, Rocky Mountain
and Mid-continent regions. The gas contract portfolio as of September 30, 1997,
includes fixed-price sale commitments totaling approximately 8.8 million MMBtu.
Most of these commitments are concentrated in the coming winter and spring
months. PNMEM's gas contract portfolio currently extends through June 1999.
The corporate risk management area measures the risk in the Company's commodity
portfolios in accordance with the "value-at-risk" methodology. This methodology
uses forward price curves in the energy markets to estimate the size and
probability of future potential losses. The corporate risk management area also
monitors compliance with policies approved by the Board, relating to its trading
activities. The Company actually manages its risk exposure using physical
commodity contracts.
Year "2000" Computer Programming Issues
As a result of the information processing challenges associated with the
upcoming millennium change, the Company is assessing the impact of the Year 2000
issue on its operations, including the development of cost estimates for, and
the extent of programming changes required to address this issue. It is
anticipated that a substantial portion of the total costs to correct the Year
2000 problem will be incurred over the next two years and will be expensed as
incurred. The Company expects to complete its Year 2000 cost estimates during
1998 and does not expect these costs to have a significant impact on the
Company's ongoing results of operations.
San Diego Gas and Electric Company ("SDG&E")
As previously reported, the Company has a contract with SDG&E which requires
SDG&E to purchase 100 MW from the Company through April 2001. On October 27,
1993, SDG&E filed a complaint with the Federal Energy Regulatory Commission
("FERC") against the Company, alleging that certain charges under the 1985 power
purchase agreement were unjust, unreasonable and unduly discriminatory. On March
18, 1996, SDG&E filed a second complaint with the FERC against the Company,
again alleging that charges under the agreement were unjust, unreasonable and
unduly discriminatory. SDG&E has requested the FERC, in both complaints, to
investigate charges under the agreement. (See PART I, ITEM 1. -- "BUSINESS --
ELECTRIC OPERATIONS -- Sources of Power" in the 1996 Form 10-K.)
On August 22, 1997, SDG&E filed a third complaint with the FERC against the
Company, again alleging that charges under the agreement were unjust,
unreasonable and unduly discriminatory. SDG&E is again requesting that the FERC
investigate charges under the agreement. The Company responded to the third
complaint on September 29, 1997. The relief sought by SDG&E under the third
complaint is similar to that requested under the first and second complaints.
The refund period requested in the third complaint, if granted, would extend for
a fifteen month period beginning October 21, 1997. The FERC has not issued a
ruling on any of the three complaints and has not indicated when or if any of
these complaints will be considered. The relief, as a result of all three
complaints, if granted, would reduce annual demand charges paid by SDG&E by
approximately $11 million per year from the date of the ruling through April
2001, and could result in a refund of approximately $25 to $30 million as of
September 30, 1997. The Company believes that all three of the complaints are
without merit and intends to vigorously resist all three complaints.
-15-
<PAGE>
Disclosure Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful, cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement.
Accordingly, the Company hereby identifies the following important factors which
could cause the Company's actual financial results to differ materially from any
such results which might be projected, forecasted, estimated or budgeted by the
Company in forward-looking statements: (i) adverse actions of utility regulatory
commissions, (ii) utility industry restructuring, (iii) failure to recover
stranded assets, (iv) failure to obtain new customers or retain existing
customers, (v) inability to carry out marketing and sales plans, (vi) adverse
impacts resulting from environmental regulations, (vii) loss of favorable fuel
supply contracts, (viii) failure to obtain water rights and rights-of-way, (ix)
operational and environmental problems at generating stations and (x) failure to
obtain and maintain adequate transmission capacity.
Many of the foregoing factors discussed have been addressed in the Company's
previous filings with the SEC pursuant to the Securities Exchange Act of 1934.
The foregoing review of factors pursuant to the Act should not be construed as
exhaustive or as any admission regarding the adequacy of disclosures made by the
Company prior to the effective date of the Act.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Federal Deposit Insurance Corporation ("FDIC") Litigation, formerly Resolution
Trust Corporation ("RTC") Litigation ("MDL-995")
As previously reported, in April 1996, the Company and representatives of
certain current and former employees of the Company or Meadows Resources, Inc.,
a wholly-owned subsidiary of the Company ("BCD parties") and the FDIC met with a
mediator to continue settlement discussions. The mediation session resulted in
an agreement to settle the case for approximately $5.8 million, approximately
$3.1 million of which would be paid by the Company and the remainder to be paid
by insurance covering the BCD parties. Settlement documents were executed as of
July 3, 1997, and a motion seeking United States District Court ("Court") for
the District of Arizona approval of the settlement was filed on July 23, 1997.
(See PART I, ITEM 3. -- "LEGAL PROCEEDINGS -- OTHER PROCEEDINGS" in the 1996
Form 10-K and PART II, ITEM 1. -- "LEGAL PROCEEDINGS -- Federal Deposit
Insurance Corporation ("FDIC") Litigation, formerly Resolution Trust Corporation
("RTC") Litigation ("MDL-995")" in the Company's quarterly report on Form 10-Q
for the quarter ended June 30, 1997.)
-16-
<PAGE>
On September 11, 1997, the Court entered judgment approving the settlement
without objection. After allowing for extended periods for possible appeal,
which is considered remote, it is expected that authorization to disburse
settlement funds, which were previously placed in escrow, will be provided after
December 10, 1997. After consideration of established reserves, there will be no
material adverse effect on the Company's financial condition or results of
operations. The Company continues to believe that all of the claims made by the
FDIC in this case are without merit but, for business reasons, believes that the
settlement is in the best interest of the Company. The Company did not concede
to any wrongdoing in the settlement.
For a discussion of other legal proceedings, see PART 1, ITEM 2. --
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- OTHER ISSUES FACING THE COMPANY".
ITEM 5. OTHER INFORMATION
Cobisa-Person Limited Partnership ("PLP")
As previously reported, the Company anticipates the need for approximately 100
to 200 MW of additional capacity in the 1998 through 2000 timeframe. To meet
this need, on October 4, 1996, the Company entered into a long-term power
purchase contract with the PLP to purchase approximately 100 MW of unit
contingent peaking capacity from a gas turbine generating unit for a period of
20 years, with an option to renew for an additional five years. The gas turbine
generating unit will be constructed and operated by the PLP and will be located
on the Company's retired Person Generating Station site located in Albuquerque,
New Mexico. The site for the generating unit was chosen, in part, to provide
needed benefits to the Company's constrained transmission system. (See PART I,
ITEM 1. -- "BUSINESS -- ELECTRIC OPERATIONS -- Sources of Power" in the 1996
Form 10-K.)
A hearing before the NMPUC regarding this case was held on August 28, 1997, and
on September 30, 1997, the NMPUC issued a final order approving the application.
The final order also included approval of a stipulated settlement agreement
("Stipulation") which had earlier been entered into among the Company, the PLP
and the NMPUC staff to resolve certain issues raised in this proceeding. The
Stipulation included, among other things, a provision wherein the Company
committed, in cooperation with the NMPUC staff, to the development and
evaluation of a request for proposal for purchase of approximately 5 MW of
capacity from solar generation resources. The Company would not be obligated to
build such a unit or commit to such a power purchase agreement prior to NMPUC
approval of a full-recovery mechanism that would not put the Company at a
competitive disadvantage.
-17-
<PAGE>
Depending on the regulatory timing of the FERC approval and securing of
necessary permits, construction of the gas turbine generating unit could start
in August 1998 with commercial operation beginning by May 1999. The operational
date was chosen to satisfy both resource and transmission needs anticipated for
the Company's jurisdictional load. Certain actions from the FERC will be
required, including approval of PLP's status as an "exempt wholesale generator"
under Section 32 of the Public Utility Holding Company Act.
Four Corners
As previously reported, Four Corners is located on land held under easements
from the Federal government and also under leases from the Navajo Nation.
Arizona Public Service Company ("APS") is the operating agent of the plant and
the Company owns a 13% ownership interest in Units 4 and 5. The lease for Four
Corners contains a waiver until 2001 of the requirement that APS pay certain
taxes to the Navajo Nation. APS and the Navajo Nation have negotiated a
settlement agreement that would settle certain issues regarding this waiver and
other matters, including the computation of royalties due on the sales of coal
and possessory interest taxes paid by the Four Corners coal supplier. (See PART
II, ITEM 5. -- "OTHER INFORMATION -- Four Corners Generating Station ("Four
Corners")" in the Company's quarterly report on Form 10-Q for the quarter ended
March 31, 1997.)
The settlement agreement has been approved by all participants at Four Corners,
the Navajo Nation Tribal Council and the United States Departments of Interior
and Justice. Final execution of the settlement is expected during the fourth
quarter of 1997. Under the agreement, the Company will receive a refund of
approximately $3.1 million (approximately $2.8 million in cash and the remainder
in fuel expense credit during the fourth quarter of 1997) and will be committed
to making certain future payments to the Navajo Nation in lieu of certain taxes
that were in dispute. The payment obligation extends through the term of the
lease and is approximately sixty percent of the previous tax payment made under
protest in escrow by the Company.
-18-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
3.1 * Restated Articles of Incorporation of the Company, as amended
through May 10, 1985
3.2 * By-laws of Public Service Company of New Mexico With All
Amendments to and including December 5, 1994
10.45.1** First Amendment to the First Restated and Amended Public Service
Company of New Mexico Performance Stock Plan dated August 12, 1997
15.0 Letter Re: Unaudited Interim Financial Information
27 Financial Data Schedule
* The Company hereby incorporates the exhibits by reference pursuant to
Exchange Act Rule 12b-32 and Regulation S-K, Section 10, paragraph (d).
** Designates each management contract or compensatory plan or arrangement
required to be identified pursuant to paragraph 3 of Item 14 (a) of Form
10-K.
b. Reports on Form 8-K:
None.
-19-
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PUBLIC SERVICE COMPANY OF NEW MEXICO
------------------------------------
(Registrant)
Date: October 30, 1997 /s/ Donna M. Burnett
--------------------------------------------
Donna M. Burnett
Corporate Controller and
Chief Accounting Officer
(Officer duly authorized to sign this report)
-20-
FIRST AMENDMENT TO THE
FIRST RESTATED AND AMENDED
PUBLIC SERVICE COMPANY OF NEW MEXICO
PERFORMANCE STOCK PLAN
THIS FIRST AMENDMENT TO THE FIRST RESTATED AND AMENDED PUBLIC SERVICE
COMPANY OF NEW MEXICO PERFORMANCE STOCK PLAN (the "Plan") is made this 12th day
of August, 1997, by the Public Service Company of New Mexico (the "Company").
Terms used herein shall have the same meaning as in the Plan.
WHEREAS, the Company desires to amend the Plan to grant the authority
to the President of the Company to make decisions regarding Plan participation
and to make adjustments for demotions or promotions with respect to all
employees, except the President;
WHEREAS, Article X of the Plan grants the authority to the Board to
amend the Plan, without shareholder approval, unless required by law or unless
shareholder approval is necessary to satisfy the conditions for exemption from
Section 16(b) of the Exchange Act pursuant to Rule 16b-3 promulgated thereunder;
and
WHEREAS, counsel for the Company has determined that the following
amendment does not require shareholder approval.
NOW THEREFORE, consistent with its authority, the Board hereby causes
the Company to adopt the following Plan Amendment.
1. Section 2.6 is hereby amended in its entirety to read as follows:
"Committee" shall mean the Compensation and Human Resources Committee
of the Board or any such other committee as may be designated by the Board to
administer the Plan, the membership of such committee not being less than two
members of the Board. All Committee members must be "Non-Employee Directors" (as
defined in Rule 16b-3) if required to meet the conditions for exemption of the
Awards under the Plan from Section 16(b) of the Exchange Act.
2. Section 2.20 is hereby amended in its entirety to read as follows:
"Participant" shall mean any employee of the Company, who is selected
from time to time to participate in the Plan. The President's right to
participate in the Plan shall be determined in the sole discretion of the
Committee. Selection of all other employees to participate in the Plan shall be
made by the President, in his or her sole discretion.
<PAGE>
3. A new Section 2.24A shall be added to read as follows:
"President" shall mean the President of the Public Service Company of
New Mexico.
4. Section 7.2d. is hereby amended in its entirety to read as follows:
Adjustments Due to Promotions or Demotions. In the event (i) a
Participant is either promoted or demoted during a calendar year or (ii) an
employee first becomes a Participant during a calendar year, pursuant to Section
2.20, following the effective date of this Plan, the Target Award for such
calendar year shall be increased or decreased based upon the promotion, demotion
or initial participation in the Plan. Decisions regarding the adjustments
pursuant to this Section 7.2d. for the President shall be made by the Committee
in its sole discretion. Adjustments pursuant to this Section 7.2d. for all other
employees shall be made by the President, in his or her sole discretion.
5. A new Section 7.2f is hereby added to read as follows:
f. Award Approvals. All Awards shall be approved by the Board or by the
Committee.
6. The second sentence of Section 12.2 "Compliance with Exchange Act"
shall be amended by inserting the term ", President" immediately after the word
"Committee."
7. Except as amended by this First Amendment, the Plan is otherwise
unchanged.
IN WITNESS WHEREOF, the Company has caused this First Amendment to the
First Restated and Amended Public Service Company of New Mexico Performance
Stock Plan to be executed as of the date and year first above written, effective
for all Performance Based Awards having a Grant Date after December 31, 1996.
PUBLIC SERVICE COMPANY OF
NEW MEXICO
By_______________________________
Benjamin F. Montoya,
President and Chief Executive Officer
57874
ARTHUR
ANDERSEN
-------------------------------
October 29, 1997 Arthur Andersen LLP
-------------------------------
Suite 400
6501 Americas Parkway NE
Albuquerque, NM 87110-5372
(505) 889-4700
Public Service Company of New Mexico:
We are aware that Public Service Company of New Mexico has incorporated by
reference in its Registration Statement Nos. 33-65418, 333-03303, and 333-03289
its Form 10-Q for the quarter ended September 30, 1997 which includes our report
dated October 29, 1997, covering the unaudited interim financial information
contained therein. Pursuant to Regulation C of the Securities Act of 1933, that
report is not considered a part of the registration statement prepared or
certified by our firm or a report prepared or certified by our firm within the
meaning of Sections 7 and 11 of the Act.
Very truly yours,
Arthur Andersen LLP
<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Statement of Earnings, Consolidated Balance Sheets and
Consolidated Statement of Cash Flows for the period ended September 30, 1997 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
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