UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997 Commission File Number 1-6986
New Mexico 85-0019030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Alvarado Square 87158
Albuquerque, New Mexico (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (505) 241-2700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $5.00 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
----------------
1965 Series, 4.58% Cumulative Preferred Stock ($100 stated value and without
sinking fund)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. YES x/ NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
The total number of shares of the Company's Common Stock outstanding as of
January 31, 1997 was 41,774,083. On such date, the aggregate market value of the
voting stock held by non-affiliates of the Company, as computed by reference to
the New York Stock Exchange composite transaction closing price of $22 5/8 per
share reported by the Wall Street Journal, was $945,138,628.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference into the
indicated part of this report:
Proxy Statement to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A relating to the annual meeting of stockholders
to be held on April 28, 1998--PART III.
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TABLE OF CONTENTS
Page
----
GLOSSARY............................................................... iv
PART I
ITEM 1. BUSINESS....................................................... 1
THE COMPANY.................................................. 1
ELECTRIC OPERATIONS.......................................... 1
Service Area and Customers................................. 1
Power Sales................................................ 2
Sources of Power........................................... 3
Fuel and Water Supply...................................... 4
NATURAL GAS OPERATIONS
Service Area and Customers................................. 7
Natural Gas Supply......................................... 8
Natural Gas Sales.......................................... 9
ENERGY SERVICES BUSINESS UNIT OPERATIONS..................... 10
RATES AND REGULATION......................................... 10
Gas Rates and Regulation................................... 10
Electric Rates and Regulation -NMPUC....................... 12
Electric Rates and Regulation-FERC......................... 13
Proposed Rulemakings....................................... 15
PRC ....................................................... 15
ENVIRONMENTAL FACTORS........................................ 16
ITEM 2. PROPERTIES.................................................... 17
ELECTRIC.................................................... 17
Fossil-Fueled Plants...................................... 18
Nuclear Plant............................................. 18
Other Electric Properties................................. 21
NATURAL GAS................................................ 21
OTHER INFORMATION.......................................... 21
ITEM 3. LEGAL PROCEEDINGS............................................. 21
PVNGS WATER SUPPLY LITIGATION............................... 21
SAN JUAN RIVER ADJUDICATION................................. 22
OTHER PROCEEDINGS........................................... 22
Republic Savings Bank ("RSB") Litigation.................. 22
Four Corners.............................................. 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 23
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY................... 24
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................ 26
ITEM 6. SELECTED FINANCIAL DATA...................................... 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................ 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................ E-1
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.............. E-1
ITEM 11. EXECUTIVE COMPENSATION....................................... E-1
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................. E-1
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... E-1
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K................................................ E-1
SIGNATURES............................................................ E-21
iii
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GLOSSARY
AG................................ New Mexico Attorney General
Anaheim........................... City of Anaheim, California
APPA.............................. Arizona Power Pooling Association
APS............................... Arizona Public Service Company
BHP............................... BHP Minerals International, Inc.
BLM............................... Bureau of Land Management
BTU............................... British Thermal Unit
decatherm......................... 1,000,000 BTUs
DOE............................... United States Department of Energy
EIP............................... Eastern Interconnection Project
El Paso........................... El Paso Electric Company
EPA............................... United States Environmental Protection
Agency
EPNG.............................. El Paso Natural Gas Company
FASB.............................. Financial Accounting Standards Board
Farmington........................ City of Farmington, New Mexico
FERC.............................. Federal Energy Regulatory Commission
Four Corners...................... Four Corners Power Plant
FPPCAC............................ Fuel and Purchased Power Cost
Adjustment Clause
Gathering Company................. Sunterra Gas Gathering Company, a
wholly-owned subsidiary of the
Company
Kv................................ Kilovolt
KW................................ Kilowatt
KWh............................... Kilowatt Hour
Los Alamos........................ The County of Los Alamos, New Mexico
mcf............................... Thousand cubic feet
Meadows........................... Meadows Resources, Inc., a wholly-owned
subsidiary of the Company
M-S-R............................. M-S-R Public Power Agency, a California
public power agency
MW................................ Megawatt
MWh............................... Megawatt Hour
NMED.............................. New Mexico Environment Department
NMPUC............................. New Mexico Public Utility Commission
NRC............................... United States Nuclear Regulatory Commission
OCD............................... New Mexico Oil Conservation Division
PGAC.............................. PNMGS' Purchased Gas Adjustment Clause
PNMGS............................. Public Service Company of New Mexico Gas
Services, a division of the Company
PRC............................... Public Regulation Commission
Processing Company................ Sunterra Gas Processing Company, a
wholly-owned subsidiary of the
Company
PVNGS............................. Palo Verde Nuclear Generating Station
RCRA.............................. Resource Conservation and Recovery Act
Reeves Station.................... Reeves Generating Station
Salt River Project................ Salt River Project Agricultural Improvement
and Power District
SCE............................... Southern California Edison Company
SCPPA............................. Southern California Public Power Authority
SDG&E............................. San Diego Gas and Electric Company
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SEC............................... Securities and Exchange Commission
SJCC.............................. San Juan Coal Company
SJGS.............................. San Juan Generating Station
SPS............................... Southwestern Public Service Company
TNP............................... Texas-New Mexico Power Company
throughput........................ Volumes of gas delivered, whether or not
owned by PNMGS
Tucson............................ Tucson Electric Power Company
UAMPS............................. Utah Associated Municipal Power Systems
USBR.............................. United States Bureau of Reclamation
USEC.............................. United States Enrichment Corporation
Williams.......................... Williams Gas Processing-Blanco, Inc., a
subsidiary of the Williams Field
Services Group, Inc., of Tulsa, Oklahoma
<PAGE>
PART I
ITEM 1. BUSINESS
THE COMPANY
Public Service Company of New Mexico (the "Company") was incorporated in
the State of New Mexico in 1917 and has its principal offices at Alvarado
Square, Albuquerque, New Mexico 87158 (telephone number 505-241-2700). The
Company is a public utility primarily engaged in the generation, transmission,
distribution and sale of electricity and in the transmission, distribution and
sale of natural gas within the State of New Mexico. In addition, in pursuing new
business opportunities, the Company is focusing on energy and utility related
activities under its Energy Services Business Unit. The Company is also
operating the City of Santa Fe's water system. (See PART II, ITEM 7. -
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - OVERVIEW - Competitive Strategy".)
The total population of the area served by one or more of the Company's
utility services is estimated to be approximately 1.3 million, of which 52.1%
live in the greater Albuquerque area.
For the year ended December 31, 1997, the Company derived 63.6% of its
operating revenues from electric operations, 26.0% from natural gas operations
and 10.4% from energy services operations.
As of December 31, 1997, the Company employed 2,789 persons.
Financial information relating to amounts of revenue and operating
income and identifiable assets attributable to the Company's industry segments
is contained in note 13 of the notes to consolidated financial statements.
ELECTRIC OPERATIONS
Service Area and Customers
The Company's electric operations serve four principal markets. Sales to
retail customers and sales to firm-requirements wholesale customers, sometimes
referred to collectively as "system" sales, comprise two of these markets. The
third market consists of other contracted sales to utilities for which the
Company commits to deliver a specified amount of capacity (measured in MW) or
energy (measured in MWh) over a given period of time. The fourth market consists
of economy energy sales made on an hourly basis to utilities at fluctuating,
spot-market rates. Sales to the third and fourth markets are sometimes referred
to collectively as "off-system" sales.
The Company provides retail electric service to a large area of north
central New Mexico, including the cities of Albuquerque, Santa Fe, Rio Rancho,
Las Vegas, Belen and Bernalillo. The Company also provides retail electric
service to Deming in southwestern New Mexico and to Clayton in northeastern New
Mexico. As of December 31, 1997, approximately 349,000 retail electric customers
were served by the Company, the largest of which accounted for approximately
3.8% of the Company's total electric revenues for the year ended December 31,
1997.
The Company holds 20 long-term, non-exclusive franchise agreements for
its electric retail operations, expiring between August 1998 and November 2028.
These franchises are agreements that provide the Company access to public
rights-of-way for placement of the Company's electric facilities. The City of
Albuquerque (the "COA"), Bernalillo County and the City of Las Vegas franchises
expired in 1992, 1997 and 1996, respectively. Customers in the area covered by
the expired franchises represent approximately 40.2%, 8.6% and 1.2%,
respectively, of the Company's 1997 total electric operating revenues, and no
other franchise area represents more than 6.1%. The Company continues to collect
and pay franchise fees to both the COA and the City of Las Vegas. The Company
currently does not pay franchise fees to Bernalillo County. The Company remains
obligated under state law to provide service to customers in the franchise area
even in the absence of a franchise agreement.
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Power Sales
For the years 1993 through 1997, retail KWh sales have grown at a
compound annual rate of approximately 4.7%. The Company's system and off-system
sales (revenues and energy consumption) and system peak demands in summer and
winter are shown in the following tables:
ELECTRIC SALES BY MARKET
(Thousands of dollars)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Retail ............................ $519,504 $507,821 $485,568 $506,286 $471,099
Firm-requirements wholesale ....... $ 10,690 $ 12,359 $ 20,282 $ 22,296 $ 18,468
Other contracted off-system sales.. $118,876 $ 86,689 $ 43,158* $ 54,862* $ 56,214*
Economy energy sales .............. $ 55,768 $ 22,281 $ 17,509* $ 19,663* $ 25,213*
</TABLE>
* Due to the provision for the loss associated with the M-S-R contingent
power purchase contract recognized in 1992, revenues from other contracted
off-system sales and economy energy sales were reduced by a total of $7.3
million, $25.0 million and $20.5 million in 1995, 1994 and 1993,
respectively.
ELECTRIC SALES BY MARKET
(Megawatt hours)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Retail ............................ 6,534,899 6,406,296 6,029,365 5,953,151 5,446,788
Firm-requirements wholesale ....... 278,727 282,534 447,629 489,182 342,137
Other contracted off-system sales.. 3,790,081 2,928,321 594,367 1,403,480 1,450,966
Economy energy sales .............. 2,716,835 1,364,365 1,548,517 1,469,271 1,582,113
</TABLE>
SYSTEM PEAK DEMAND*
(Megawatts)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Summer................... 1,209 1,217 1,247 1,189 1,104
Winter................... 1,142 1,111 1,076 1,040 982
*System peak demand relates to retail and firm-requirements wholesale customers
only.
The Company's wholesale power marketing area continues to increase its
trading activities. During 1997 and 1996, the Company's sales in the off-system
markets accounted for approximately 48.9% and 39.1%, respectively, of its total
KWh sales and approximately 24.8% and 17.3%, respectively, of its total revenues
from energy sales. Of the total off-system sales made in 1997, 47% were
transacted through purchases for resale as compared to 37% in 1996. However, the
Company continues to be committed to increasing its utilization of its major
generation capacity at SJGS, Four Corners and PVNGS. Capacity factors for these
generating stations were 81.4%, 74.8% and 90.6%, respectively, in 1997, as
compared to 80.2%, 75.9% and 89.1%, respectively, in 1996. During 1997, the
Company's major off-system sales contracts in effect were with SDG&E and APPA.
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The SDG&E contract requires SDG&E to purchase 100 MW from the Company
through April 2001. SDG&E has filed three separate complaints with the FERC
against the Company, alleging that certain charges under the 1985 power purchase
agreement were unjust, unreasonable and unduly discriminatory. See PART II, ITEM
7. - "MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - OTHER ISSUES FACING THE COMPANY REGULATORY ISSUES - SDG&E's
Complaints".
The APPA contract requires APPA to purchase varying amounts of power
from the Company through May 2008 and allows APPA to make adjustments to the
purchase amounts subject to certain notice provisions. APPA provided notice that
it was invoking its option to reduce its power demand in 1997. This resulted in
a peak demand in 1997 of 89 MW. APPA invoked the same option to reduce its power
demand in 1998 to 89 MW.
The Company furnished firm-requirements wholesale power in New Mexico in
1997 to the cities of Farmington and Gallup, and TNP. The Company is committed
to provide service to the City of Gallup through April 2003. Average monthly
demands under the City of Gallup contract for 1997 were approximately 26 MW. TNP
may adjust its annual demand between 15 MW and 40 MW with one year's notice and
may terminate service with two years' notice. During 1997, TNP purchased 15 MW
and gave notice that it will continue to purchase 15 MW in 1998. TNP has also
provided notice of its intent to terminate service after 1998. No
firm-requirements wholesale customer accounted for more than 1.1% of the
Company's total electric operating revenues for the year ended December 31,
1997.
Sources of Power
As of December 31, 1997, the total net generation capacity of facilities
owned or leased by the Company was 1,506 MW.
In addition, the Company has a power purchase contract with SPS for up
to 200 MW, expiring in May 2011. The Company may reduce its purchases from SPS
by 25 MW annually upon three years' notice. The Company provided such notice to
reduce the purchase by 25 MW in 1999 and by an additional 25 MW in 2000. Also,
the Company has 39 MW of contingent capacity obtained from El Paso under a
transmission capacity for generation capacity trade arrangement that increases
up to 70 MW from 1998 through 2003. In addition, the Company is interconnected
with various utilities for economy interchanges and mutual assistance in
emergencies. Additionally, the Company has been actively trading in the
wholesale power market and has entered into and anticipates that it will
continue to enter into short-term power purchases to accommodate the trading
activity.
The Company anticipates the need for approximately 100 to 200 MW of
additional capacity in the 1998 through 2000 timeframe. To meet this need, in
1996, the Company entered into a long-term power purchase contract with the
Cobisa-Person Limited Partnership ("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. In
October 1996, the Company filed a request for approval from the NMPUC. The NMPUC
issued a final order approving the application in September 1997. 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 ("RFP") 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.
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<PAGE>
The NMPUC docketed a new case to follow the progress of the RFP and
address the issue of full-cost recovery. The RFP was issued on January 16, 1998.
Proposals are due on March 24, 1998. It is expected that contracts with
successful bidders will be signed by June 6, 1998, in order to facilitate the
NMPUC hearing on full-cost recovery, which has been scheduled for June 15, 1998.
On December 23, 1997, the PLP received FERC approval for "exempt
wholesale generator" status with respect to the gas turbine generating unit, as
defined in Section 32 of the Public Utility Holding Company Act. Under the power
purchase agreement, construction of the gas turbine generating unit was
scheduled to begin in August 1998, with commercial operation and power delivery
scheduled in May 1999. The operation date was originally chosen to satisfy both
resource and transmission needs anticipated for the Company's jurisdictional
load. However, a reduction in the Company's load forecast for 1999 combined with
technical issues concerning one of the candidate gas turbines has lead the
Company and PLP to consider a nine to twelve month delay in the operation date.
In addition to the long-term power purchase contract with the PLP, the
Company is pursuing other options to ensure its additional capacity needs are
met.
Fuel and Water Supply
The percentages of the Company's generation of electricity (on the basis
of KWh) fueled by coal, nuclear fuel and gas and oil, and the average costs to
the Company of those fuels (in cents per million BTU), during the past five
years were as follows:
Coal Nuclear Gas and Oil
------------------- -------------------- --------------------
Percent of Average Percent of Average Percent of Average
---------- ------- ---------- ------- ---------- -------
1993.......... 72.9 164.7 26.7 58.1 0.4 331.7
1994.......... 72.0 162.9 27.8 58.5 0.2 321.7
1995.......... 67.9 168.3 31.9 49.1 0.2 242.2
1996.......... 68.9 159.3 30.4 49.7 0.7 238.2
1997.......... 68.1 152.7 31.1 48.3 0.8 326.6
The estimated generation mix for 1998 is 69.4% coal, 29.7% nuclear and
.9% gas and oil. Due to locally available natural gas and oil supplies, the
utilization of locally available coal deposits and the generally abundant supply
of nuclear fuel, the Company believes that adequate sources of fuel are
available for its generating stations.
Coal
The coal requirements for SJGS are being supplied by SJCC, a
wholly-owned subsidiary of BHP, from certain Federal, state and private coal
leases under a Coal Sales Agreement, pursuant to which SJCC will supply
processed coal for operation of SJGS until 2017. BHP guaranteed the obligations
of SJCC under the agreement, which contemplates the delivery of approximately
107 million tons of coal during its remaining term. Such amount would supply
substantially all the requirements of SJGS through approximately 2017. The
primary sources of coal are a mine adjacent to SJGS and a mine located
approximately 25 miles northeast of SJGS in the La Plata area of northwestern
New Mexico. On September 1, 1995, the parties executed an amendment to the Coal
Sales Agreement. The amendment provides for flexibility in coal sourcing. Mining
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operations are being shifted over time to the La Plata Mine and several other
sources including the expanded La Plata reserves and a new lease contiguous with
the existing San Juan Mine. While the savings in fuel cost over the life of the
contract are continuing to be developed, it is currently estimated that the
Company will save approximately $186 million of coal fuel costs during the
period 1998 through 2005. The average cost of fuel, including ash disposal and
land reclamation costs, for SJGS for the years 1995, 1996 and 1997 was 184.6
cents, 167.0 cents and 164.2 cents, respectively, per million BTU ($35.75,
$32.18 and $31.59 per ton, respectively). For other information related to coal
requirements, see PART II, ITEM 7. - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - OTHER ISSUES FACING THE COMPANY
- - COAL FUEL SUPPLY".
Four Corners is supplied with coal under a fuel agreement between the
owners and BHP, under which BHP agreed to supply all the coal requirements for
the life of the plant. BHP holds a long-term coal mining lease, with options for
renewal, from the Navajo Nation and operates a surface mine adjacent to Four
Corners with the coal supply expected to be sufficient to supply the units for
their estimated useful lives. The average cost of fuel, including ash disposal
and land reclamation costs, for the years 1995, 1996 and 1997 at Four Corners
was 113.4 cents, 125.9 cents and 100.1 cents, respectively, per million BTU
($20.04, $22.90 and $17.77 per ton, respectively). The 1997 reduction in the
average cost of fuel reflects the settlement of certain issues between APS, the
operating agent, and the Navajo Nation regarding the computation of royalties
due on the sales of coal and possessory interest taxes paid by the Four Corners
coal supplier.
Natural Gas
The natural gas used as fuel for the Company's Albuquerque electric
generating plant (Reeves Station) is delivered by PNMGS. (See "NATURAL GAS
OPERATIONS".) In addition to rate changes under filed tariffs, the Company's
cost of gas increases or decreases according to the average cost of the gas
supply.
Nuclear Fuel
The fuel cycle for PVNGS is comprised of the following stages: (1) the
mining and milling of uranium ore to produce uranium concentrates; (2) the
conversion of uranium concentrates to uranium hexafluoride; (3) the enrichment
of uranium hexafluoride; (4) the fabrication of fuel assemblies; (5) the
utilization of fuel assemblies in reactors; and (6) the storage of spent fuel
and the disposal thereof. The Company has made arrangements through contract
flexibilities to obtain quantities of uranium concentrates anticipated to be
sufficient to meet its share of uranium concentrates requirements through 2000.
Existing contracts and options could be utilized to meet 80% of such
requirements in 2001 and 2002 and 50% of requirements from 2003 through 2007.
Spot purchases in the uranium market will be made, as appropriate, in lieu of
any uranium that might be obtained through contract flexibilities and options.
The Company understands that the other PVNGS participants have made comparable
arrangements for their uranium concentrates requirements. The PVNGS
participants, including the Company, contracted for all conversion services
required with options through 1998 and for up to 60% through 2002. The PVNGS
participants, including the Company, also have an enrichment services contract
with USEC which obligates USEC to furnish enrichment services required for the
operation of the three PVNGS units over a term expiring in September 2002, with
options to continue through September 2007. In addition, existing contracts will
provide fuel assembly fabrication services until at least 2003 for each PVNGS
unit, and through contract options, approximately fifteen additional years are
available.
Existing spent fuel pool storage facilities at PVNGS have sufficient
capacity with certain modifications to store all fuel expected to be discharged
from normal operation of all of the PVNGS units through at least the year 2002.
Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the "Waste
Act"), DOE is obligated to accept and dispose of all spent nuclear fuel and
other high-level radioactive wastes generated by all domestic power reactors.
The NRC, pursuant to the Waste Act, also requires operators of nuclear power
reactors to enter into spent fuel disposal contracts with DOE. APS, on its own
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behalf and on behalf of the other PVNGS participants, executed a spent fuel
disposal contract with DOE. Under the Waste Act, DOE was to develop the
facilities necessary for the storage and disposal of spent nuclear fuel and to
have the first such facility in operation by 1998. The facility was to be a
permanent repository, but DOE has announced that such a repository now cannot be
completed before 2010. In July 1996, the United States Court of Appeals for the
District of Columbia Circuit ("D.C. Circuit") ruled that the DOE had an
obligation to start disposing of spent nuclear fuel no later than January 31,
1998. By way of letter dated December 17, 1996, DOE informed contract holders,
including APS, that it would be unable to begin acceptance of spent nuclear fuel
for disposal in a repository or interim storage facility by January 31, 1998. In
November 1997, the D.C. Circuit issued a writ of mandamus precluding DOE from
excusing its own delay on the grounds that DOE has not yet prepared a permanent
repository or interim storage facility. Several bills have been introduced in
Congress contemplating the construction of a central interim storage facility
which could be available in the latter part of the current decade; however,
there is resistance to certain features of these bills both in Congress and the
Administration.
Facility funding is a further complication. While all nuclear utilities
pay into a nuclear waste fund an amount calculated on the basis of the output of
their respective plants, the annual Congressional appropriations for the
permanent repository have been for amounts less than the amounts paid into the
waste fund (the balance of which is being used for other purposes) and,
according to DOE spokespersons, may now be at a level less than needed to
achieve a 2010 operational date for a permanent repository. No funding will be
available for a central interim facility until one is authorized by Congress.
APS indicated that it has storage capacity in existing fuel storage
pools at PVNGS which, with certain modifications, could accommodate all fuel
expected to be discharged from normal operation of PVNGS through about 2002, and
believes it could augment that wet storage with new facilities for on-site dry
storage of spent fuel for an indeterminate period of operation beyond 2002,
subject to obtaining any required governmental approvals. APS currently believes
that spent fuel storage or disposal methods will be available for use by PVNGS
to allow its continued operation beyond 2002.
A low-level radioactive waste facility built in 1995 at the PVNGS site
could store an amount of waste equivalent to 10 years of normal operation of
PVNGS. Although some low-level waste has been stored on-site, APS is currently
shipping low-level waste to off-site facilities. APS currently believes that
interim low-level waste storage methods are or will be available for use by
PVNGS to allow its continued operation and to safely store low-level waste until
a permanent facility is available.
While believing that scientific and financial aspects of the issues of
spent fuel and low-level waste storage and disposal can be resolved
satisfactorily, the Company acknowledges that their ultimate resolution in a
timely fashion will require political resolution and action on national and
regional scales which it is less able to predict.
Water Supply
Water for Four Corners and SJGS is obtained from the San Juan River.
(See ITEM 3. - "LEGAL PROCEEDINGS - SAN JUAN RIVER ADJUDICATION".) BHP holds
rights to San Juan River water and has committed a portion of such rights to
Four Corners through the life of the project. The Company and Tucson have a
contract with the USBR ("USBR Contract") for consumption of 16,200 acre feet of
water per year for SJGS, which contract expires in 2005, and in addition, the
Company was granted the authority to consume 8,000 acre feet of water per year
under a state permit that is held by BHP. The Company is of the opinion that
sufficient water is under contract for SJGS through 2005.
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On January 29, 1993, the U.S. Fish and Wildlife Service proposed a
portion of the San Juan River as critical habitat for two fish species. This
designation may impact uses of the river and its flood plains and will require
certain analysis under the Endangered Species Act of 1973 of all significant
Federal actions. Renewal of the SJGS water contract is considered a significant
Federal action.
Due to extensive lead times required to renew the water rights contract,
the Company formally initiated the renewal and extension process for requesting
rights through the year 2025. The Company is actively conducting an
environmental assessment with the USBR and a biological assessment with the U.S.
Fish and Wildlife Service. These studies are required by the Federal agencies
before the existing water contract can be renewed. In June 1996, the Navajo
Nation requested the USBR to withhold renewal of the USBR Contract due to water
shortages of the Navajo Indian Irrigation Project. Other tribes in the Four
Corners area have also voiced concern to the USBR about the renewal by the
Company of the USBR Contract.
The Company has continued its discussions with the Navajo Nation to
resolve their concerns relating to the Company's proposed renewal of the water
contract with the USBR for SJGS. On March 27, 1997, the Resource Committee of
the Navajo Nation Tribal Council approved an agreement that committed the
parties to good faith negotiations on the water supply for SJGS for a period of
ninety days. The agreement also acknowledged that the water supply issues must
be resolved in connection with the Company's support of the resolution of the
issues raised by BHP concerning the Navajo Nation's proposed selection of
certain mining properties within San Juan and La Plata mines pursuant to the
Navajo-Hopi Land Settlement Act of 1974. (See PART II, ITEM 7. - "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - OTHER
ISSUES FACING THE COMPANY - COAL FUEL SUPPLY".) The Company and counsel for the
Navajo Nation have recently agreed to continue negotiations until April 1, 1998.
The Company is currently unable to predict the outcome of these discussions.
On July 15, 1997, the Company was notified by the USBR that the USBR had
received from the Solicitor of the U.S. Department of Interior a Memorandum
Opinion concluding that the Company's contract extension with the USBR would
require Congressional approval pursuant to Section 11 of the Navajo Indian
Irrigation Project and San Juan-Chama Project Authorization Act of 1962. The
Company intends to pursue such an approval once the contract is negotiated with
the USBR.
Sewage effluent used for cooling purposes in the operation of the PVNGS
units has been obtained under contracts with certain municipalities in the area.
The contracted quantity of effluent exceeds the amount required for the three
PVNGS units. The validity of these effluent contracts is the subject of
litigation in state and Federal courts. (See ITEM 3. - "LEGAL PROCEEDINGS -
PVNGS WATER SUPPLY LITIGATION".)
NATURAL GAS OPERATIONS
Service Area and Customers
The Company's gas operating division, PNMGS, distributes natural gas to
most of the major communities in New Mexico, including Albuquerque and Santa Fe,
serving approximately 410,000 customers as of December 31, 1997. The Albuquerque
metropolitan area accounts for approximately 55.2% of the total sales-service
customers. PNMGS holds long-term, non-exclusive franchises with varying
expiration dates in all incorporated communities requiring franchise agreements.
The Company is currently negotiating with the COA to extend the franchise
agreement which is scheduled to expire on February 28, 1998. PNMGS' customer
base includes both "sales-service" customers and "transportation-service"
customers. Sales-service customers purchase natural gas and receive
transportation and delivery services from PNMGS for which PNMGS receives both
cost-of-gas and cost-of-service revenues. Cost-of-gas revenues collected from
on-system sales-service customers are a recovery of the cost of purchased gas in
accordance with NMPUC rules and regulations and do not affect the net earnings
of the Company. Additionally, PNMGS makes occasional gas sales to off-system
customers. Off-system sales deliveries generally occur at interstate pipeline
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interconnects with PNMGS' system. Transportation-service customers, who procure
gas independently of PNMGS and contract with PNMGS for transportation and
related services, provide PNMGS with cost-of-service revenues only.
Transportation services are provided to gas marketers, producers and end users
for delivery to locations throughout the PNMGS distribution systems, as well as
for delivery to interstate pipelines. PNMGS provided gas transportation
deliveries to approximately 1,000 gas marketers, producers and end users during
1997.
For the twelve months ended December 31, 1997, PNMGS had throughput of
approximately 84.6 million decatherms, including sales of 50.6 million
decatherms to both sales-service customers and off-system customers. No single
"sales-service" customer accounted for more than 2.4% of PNMGS' therm sales in
1997. During 1997, approximately 40.2% of the PNMGS' total gas throughput was
related to transportation gas deliveries. PNMGS' transportation rates are
unbundled, and transportation customers only pay for the service they receive.
PNMGS' total operating revenues for the year ended December 31, 1997, were
approximately $294.8 million. Cost-of-gas revenues, received from sales-service
and off-system customers, accounted for approximately 57.6% of PNMGS' total
operating revenues. Since a major portion of PNMGS' load is related to heating,
levels of therm sales are affected by the weather. Approximately 50.5% of PNMGS'
total therm sales in 1997 occurred in the months of January, February, November
and December.
Natural Gas Supply
During the late 1980's, there were significant changes in the natural
gas industry brought about by Federal and state regulations which dramatically
altered the way gas is bought, transported and sold nationwide. These changes
required PNMGS to reform or terminate certain natural gas purchase contracts
which required PNMGS to take gas in excess of demand. This process resulted in
breach of contract claims from some producers. PNMGS resolved all of the
producer litigation and reformed its supply portfolio so that it better matches
the demands of PNMGS' sales-service customers. These reformations allow PNMGS to
seek new sources of gas supplies through pipeline interconnects which have
created a more flexible and reliable supply portfolio. PNMGS obtains its supply
of natural gas primarily from sources within New Mexico pursuant to contracts
with producers and marketers. These contracts are generally sufficient to meet
PNMGS peak-day demand.
PNMGS serves certain cities which depend on EPNG or Transwestern
Pipeline Company for transportation of gas supplies. Because these cities are
not directly connected to PNMGS transmission facilities, gas transported by
these companies is the sole supply source for those cities. Such transportation
is regulated by FERC. As a result of FERC Order 636, PNMGS' options for
transporting gas to such cities and other portions of its distribution system
have increased.
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Natural Gas Sales
The following table shows gas throughput by customer class*:
GAS THROUGHPUT
(Millions of decatherms)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Residential..................... 30.7 27.4 25.9 27.1 28.0
Commercial...................... 10.6 9.3 8.9 9.8 10.4
Industrial...................... 1.3 2.1 0.7 0.8 0.9
Public authorities.............. 4.2 2.6 2.4 2.5 2.5
Irrigation...................... 1.6 1.4 1.2 1.3 1.3
Sales for resale................ 1.2 0.8 1.3 0.7 1.0
Unbilled........................ (0.2) 1.4 (1.8) (0.3) (0.6)
Transportation**................ 34.0 47.1 69.8 90.2 91.8
Off-system sales................ 1.2 8.0 1.2 - -
---- ----- ----- ----- -----
84.6 100.1 109.6 132.1 135.3
==== ===== ===== ===== =====
The following table shows gas revenues by customer class*:
GAS REVENUES
(Thousands of dollars)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Residential............ $187,563 $129,911 $125,290 $149,439 $149,796
Commercial............. 50,502 33,022 32,328 42,725 44,575
Industrial............. 4,536 5,179 1,873 2,905 3,369
Public authorities..... 17,577 8,018 7,939 9,969 9,694
Irrigation............. 5,041 3,252 3,077 4,061 4,418
Sales for resale....... 4,465 2,106 3,114 2,462 3,137
Unbilled............... (2,172) 2,678 (2,430) 267 (1,573)
Transportation**....... 14,172 17,215 22,172 27,592 26,729
Liquids................ 4,451 7,608 13,414 16,090 18,724
Processing fees........ - - 5,180 10,638 9,761
Off-system sales....... 1,926 14,352 1,927 - 4
Other.................. 6,708 3,960 4,101 3,362 2,453
-------- -------- -------- -------- --------
$294,769 $227,301 $217,985 $269,510 $271,087
======== ======== ======== ======== ========
* On June 30, 1995, the Company sold substantially all of the gas gathering
and processing assets of the Company and its gas subsidiaries. The above
information reflects the revenues and throughput of the gathering company
and processing company through this date.
** Customer-owned gas.
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ENERGY SERVICES BUSINESS UNIT OPERATIONS
The Company has been conducting non-regulated activities under its
Energy Services Business Unit. This business unit has initiated several business
lines to position the Company for an increasingly competitive market. The Energy
Services Business Unit consists of Energy Marketing, Energy Partners, Water
Services and Phaser Advanced Metering Services. Energy Marketing focuses on the
marketing of natural gas outside of New Mexico. Energy Partners provides energy
management solutions that assist customers in implementing cost effective
procurement, distribution and consumption of energy. Water Services is seeking
opportunities in infrastructure management with a specific focus on the
municipal and Native American markets. The Company currently has a contract with
the City of Santa Fe to operate the Santa Fe water system through the year 2001.
Phaser Advanced Metering Services provides electric meter installation, testing,
service and consulting expertise to energy service providers as well as
commercial and industrial customers. The Energy Services Business Unit is also
pursuing utility related business opportunities in Mexico.
In 1995, the Company filed an application with the NMPUC for
authorization for the creation of three wholly-owned non-utility subsidiaries as
part of the Energy Services Business Unit. The Company sought approval to invest
a maximum of $50 million in the three subsidiaries over time and to enter into
reciprocal loan agreements for up to $30 million with these subsidiaries. In
June 1997, the hearing examiner in this case recommended approval of the
proposed subsidiaries with certain conditions. The Company is currently awaiting
a final order from the NMPUC. (See PART II, ITEM 7, - "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
OVERVIEW - Competitive Strategy".)
RATES AND REGULATION
The Company is subject to the jurisdiction of the NMPUC with respect to
its retail electric and gas rates, service, accounting, issuance of securities,
construction of major new generation and transmission facilities and other
matters. The FERC has jurisdiction over rates and other matters related to
wholesale electric sales.
Gas Rates and Regulation
Gas Rate Case
The NMPUC issued an order in February 1997 requiring the Company to file
a gas rate case. On October 15, 1997, the Company filed its case requesting a
rate increase of $12.6 million. (See PART II, ITEM 7. "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - OTHER ISSUES
FACING THE COMPANY - REGULATORY ISSUES - The 1997 Gas Rate Case".)
PGAC Continuation Filing
Retail gas rate schedules contain a PGAC which provides for timely
recovery of the cost of gas purchased for resale to its sales-service customers.
On November 24, 1997, in a proceeding related to the Company's 1993 PGAC
Continuation Filing, the NMPUC issued a final order approving continued use of
the Company's PGAC. As part of its order, the NMPUC ordered the Company to make
its next PGAC continuation filing no later than two years from the date of the
issuance of its order.
Levelized 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 cost through
the PGAC that would enable the Company to better levelize the price that it
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charges its customers during the winter heating season. On November 3, 1997, the
NMPUC issued an order approving the proposed levelized PGAC. This order allowed
the Company to implement its levelized PGAC mechanism effective December 1,
1997, and granted the Company the necessary authorization to include the cost of
hedging transactions for recovery through its PGAC. The Company had also sought
authority to offer a fixed price option for up to 20,000 customers. At the
hearings, the parties agreed to bifurcate the issue of the fixed price option.
The NMPUC has not yet scheduled a hearing to address the proposed fixed price
option.
NMPUC Order on the Cost of Gas Case
In December 1996, due to rapidly rising gas supply costs, PNMGS
requested a variance from the NMPUC to increase its gas cost factor by more than
10% without a prior mandatory hearing. Pursuant to NMPUC rules, PNMGS
implemented the new gas cost factor with its January 1997 billing cycle. This
increase in gas cost, along with increased gas consumption and longer billing
periods for some customers, resulted in a substantial increase to customers'
bills. The NMPUC denied PNMGS' variance to increase the factor more than 10%
without a hearing and held public hearings to receive public comment and
testimony. The hearings began and concluded in January 1997.
The Company provided testimony regarding the higher gas cost.
The NMPUC issued a final order in this proceeding on February 13, 1997.
In the order, the NMPUC imposed, but suspended, a fine of $2.2 million on the
Company due to an allegedly incorrect gas cost factor (too low) that was filed
in November 1996. In the order, the NMPUC accused the Company of intentionally
filing an inaccurate factor to avoid a hearing, thus impairing the NMPUC's
ability to investigate rising gas prices. In addition, the NMPUC disallowed
collection of $1.6 million of gas costs and ordered an independent audit to be
conducted to review the Company's PGAC factor calculations for the period of
December 1995 through January 1997. The NMPUC also ordered the docketing of two
investigations. The first would be to investigate whether or not the Company
should exit the merchant function of providing gas supplies to customers. The
second would be to investigate the prudence of the Company's portfolio
strategies and purchase practices. In addition, the NMPUC ordered the Company to
file a gas rate case and also ordered the Company to file an electric retail
rate case.
Subsequently, the NMPUC issued an order, partially granting a motion
filed by the Company requesting a rehearing. In the order granting the
rehearing, the NMPUC: (1) withdrew the finding that, because the veracity of the
Company's filings had been brought into question, rate cases for both gas and
electric operations were necessary; however, the requirement for the rate cases
was continued for other reasons; (2) withdrew the requirement that the Company
must pay for NMPUC staff to conduct an independent audit of its gas cost
filings; (3) suspended the imposition of the $2.2 million civil penalty and the
order prohibiting the Company from recovering $1.6 million in gas costs incurred
in December 1996 and (4) left the case open for additional testimony. The
rehearing was held before the NMPUC. The Company believes that it presented
unrebutted evidence that the November 1996 gas cost filing contained no false or
misleading information. The NMPUC has not yet issued a final order in the
proceeding.
Filing Relating to Termination of Gas Merchant Function
As noted above, included 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 related compelling issues.
In March 1997, the Company filed its response. 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 purchase their gas supplies from a third
party and receive transportation service from the Company.
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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, the Company filed a stipulation that outlined
interim measures, known as the Gas Choice Program, to facilitate the choice of
transportation service by small commercial and residential customers for the
winter of 1997-98. The AG opposed the implementation of the stipulation.
In August 1997, the NMPUC entered an order approving the stipulation but
left the docket open so that it could review the implementation of the Gas
Choice Program. The program commenced operations in December 1997. Thus far, the
response has been minimal. In January 1998, the NMPUC convened a workshop to
address the initial results of the Gas Choice Program and to present proposals
to improve customer participation and customer satisfaction. At the workshop,
the NMPUC decided to schedule formal hearings concerning permanent
implementation of a gas choice program during 1998.
Investigation of Gas Supply Procurement Practices
As noted above, included in the February 13 NMPUC order in the cost of
gas case, the NMPUC established a new docket to review the Company's gas
procurement practices and policies. Hearings were held in June 1997. At the
conclusion of the hearing, the NMPUC issued an oral ruling that the Company was
not imprudent in its gas procurement practices for the 1996-97 winter season.
For the current winter heating season, the NMPUC expressed its view that the
Company should utilize appropriate contracting and hedging tools to reach a
reasonable balance between low cost and mitigation of price volatility in its
gas procurement practices. The Company requested that the NMPUC issue a final
written order, but such an order has not yet been entered.
Electric Rates and Regulation - NMPUC
Electric Rate Case
The NMPUC issued an order in May 1997 requiring the Company to file an
electric rate case. On November 3, 1997, the Company filed its electric rate
case. In the filing, the Company stated that although the Company could justify
a $5.0 million rate increase, it would not seek to increase rates, stating that
rate stability is important in preparing for industry restructuring. (See PART
II, ITEM 7. - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - OTHER ISSUES FACING THE COMPANY - REGULATORY ISSUES -
Electric Rate Case".)
Fossil-Fueled Plant Decommissioning Costs
The Company's six owned or partially owned, in service and retired,
fossil-fueled generating stations are expected to incur dismantling and
reclamation costs as they are decommissioned. The Company's share of
decommissioning costs for all of its fossil-fueled generating stations is
projected to be approximately $149.0 million stated in 1997 dollars, including
approximately $24.0 million (of which $14.4 million has already been expended)
for Person, Prager and Station Fe Stations which have been retired.
The Company is currently recovering estimated decommissioning costs for
its in-service fossil-fueled generating facilities through rates charged to its
NMPUC retail customers.
New Mexico Industrial Energy Consumers ("NMIEC")
On April 22, 1997, NMIEC filed a petition for declaratory order with the
NMPUC. In its petition, NMIEC states that the Company has interrupted service to
NMIEC members taking service under the Experimental Incremental Interruptible
Power Rate ("EIIPR") during off-peak periods and such interruptions violate the
terms of the EIIPR. The interruptions resulted from a scheduled maintenance for
the Company's 345 Kv line connected to the Four Corners. NMIEC alleges that its
members have suffered economic harm from losses in production due to such
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<PAGE>
interruptions. The petition requests, among other things: (i) clarification of
the EIIPR to determine that EIIPR customers are entitled to be treated the same
as all other customers with similar consumption when system emergency
curtailments occur during the off-peak hours; (ii) determination that the
Company's practice of interrupting EIIPR customers during off-peak hours is
discriminatory and (iii) the Company to discontinue such practice of
interrupting EIIPR customers. The Company, in a filing with the NMPUC, stated
that it unintentionally misapplied the tariff and as a result, filed an
amendment to its EIIPR tariff to clarify the language regarding off-peak
interruptions. The NMPUC has not issued a ruling on NMIEC's petition.
City of Gallup ("Gallup") Complaint
On January 7, 1998, Gallup, Gallup Joint Utilities and the Pittsburg &
Midway Coal Mining Co. ("Pitt-Midway") filed a joint complaint and petition
("Complaint") for declaratory order regarding service status and abandonment of
facilities with the NMPUC. The Complaint asserts, among other things, that the
Company has wrongfully kept Pitt-Midway as an obligated customer of the Company
and will not allow Gallup to serve Pitt-Midway, and that the Company has not
promptly pursued the sale of a transmission line to Pitt-Midway pursuant to
contractual obligations. The Complaint seeks interim relief in the form of an
interim declaratory order stating: (i) Pitt-Midway is no longer an obligated
customer of the Company for services at the mine and that Pitt-Midway is not
obligated to continue payment of the Company's industrial service rate; (ii)
Gallup is entitled to serve Pitt-Midway with electric power or alternatively,
that Gallup can serve the mine at rates approved by the NMPUC; (iii) abandonment
of the power line and related facilities by the NMPUC is not necessary; (iv) the
Company allows the wheeling of power purchased by Gallup from APS over its
transmission system and (v) the Company enters into an interconnection agreement
with Gallup.
As ordered by the NMPUC, the Company filed its brief on February 23,
1998. The Company believes that it continues to maintain the jurisdictional
rights to serve Pitt-Midway until the advent of retail open access and beyond if
the Company can supply energy at the lowest cost.
Electric Rates and Regulation - FERC
FERC Order
FERC Order 889, effective January 3, 1997, requires public utilities to
install and operate an Open Access Same-time Information System and comply with
certain standards of conduct among employees in transmission operations and
wholesale power marketing, designed to prevent employees of a public utility or
its affiliates engaged in wholesale marketing functions from obtaining
preferential access to transmission-related information or from engaging in
unduly discriminatory business practices regarding access to transmission
service. In January 1997, the Company filed with the FERC its Standards of
Conduct report in compliance with provisions of Order 889, and amended its
filing in September 1997 in compliance with Order 889-A. The amended filing
updates the status of the Company's efforts to separate wholesale merchant
functions from transmission operation and reliability functions. In December
1997, FERC approved a series of orders aimed at further clarification of the
functional separation of utilities' transmission and wholesale merchant
functions, and to neutralize utilities' incentive to favor their own generation.
FERC is now focusing on what procedures should be followed, in the
absence of Federal legislation on reliability issues, to address the effect of
new reliability standards on jurisdictional electric transmission service.
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FPPCAC
The Company's firm-requirements wholesale customers have a FPPCAC which
has an approximate 30-day time lag in implementation for billing purposes. The
Company's FPPCAC for its firm-requirement wholesale customers had been at
variance with the filed FERC tariffs. As a result, the Company filed a petition
with FERC on October 28, 1993, to permit deviation from the filed FERC tariffs
for the period of July 1985 through January 1993. The Company's filing indicated
that the four firm-requirements wholesale customers benefited during that time
period relative to the energy costs they would have been billed under the
application of the filed FERC tariffs. The four affected customers concur with
the Company's position and have filed a certificate of concurrence with FERC.
Discussions regarding the Company's filing with FERC staff have occurred, but at
this time no formal response has been given to the Company. The Company has no
indication when a formal response will be received; however, the Company does
not anticipate any material adverse impact on the Company's financial condition
or results of operations as a result of this issue.
Transmission Rate Case Settlement
In April 1996, the Company filed a transmission rate case at the FERC
which requested a change in rates for its firm and non-firm transmission
customers. Prior to the scheduled hearings in the case, the Company and the firm
transmission customers were able to reach a negotiated settlement. A stipulation
on the settlement reached by the parties was filed with the FERC on December 16,
1996. In accordance with the stipulated agreement, the Company will refund
approximately $3.7 million of revenues it collected from its firm transmission
customers. In addition, the Company's firm wholesale transmission service
revenues were reduced by approximately $1.6 million beginning in 1997. The
stipulation was certified by the Administrative Law Judge to the FERC on January
22, 1997. The Company anticipates that the FERC will take action on the
stipulation but cannot currently predict a timeframe for such action. The
Company does not anticipate any material adverse impact on the Company's
financial condition or results of operations from the settlement agreement.
Independent System Operator ("ISO")
In January 1998, the Company entered into a Development Agreement with
other transmission service providers and users to form an ISO in the Southwest.
The Development Agreement has a one year term and is separated into two phases.
The first phase will define the operating, pricing, planning and legal
parameters of the ISO by July 31, 1998. The second phase, which is expected to
be completed by December 31, 1998, will develop the By-laws, Articles of
Incorporation and various tariffs and agreements required. Over thirty entities
are participating in the development process including investor owned utilities,
generation and transmission cooperatives, government entities, private
corporations and other interested groups. FERC Order 888, issued in 1996,
encourages utilities to investigate the formation of such ISOs and provides
criteria under which the formation, operation and governance of ISOs would be
reviewed.
The proposed ISO, named the Desert Southwest Transmission and
Reliability operator ("Desert STAR"), would be empowered to serve as a
transmission security monitor, handle transmission service reservations,
transmission service scheduling and accounting, manage relief of congestion of
the transmission grid, procure ancillary services required for transmission
system operation and operate a grid-wide Open Access Same-time Information
System. Desert STAR would be governed by an independent board.
The Company is currently unable to predict the ultimate timing of the
formation or the ultimate outcome of the proposed ISO.
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Proposed Rulemakings
On June 5, 1995, the NMPUC issued a Notice of Inquiry ("NOI") seeking
comments on whether and how NMPUC Rule 450, which governs affiliate
transactions, should be revised. On June 3, 1996, the NMPUC issued its Notice of
Proposed Rulemaking and Order on the NOI proposing certain amendments to NMPUC
Rule 450 and seeking comments and suggested language changes to its proposed
amendments by August 5, 1996. The proposed amendments would, in effect, limit
the Company's non-utility business ventures. The Company vigorously opposed
these limitations and filed its comments and suggested language changes with the
NMPUC. The Company contends that many of the proposed amendments are unwarranted
or prohibited under the New Mexico Public Utility Act. To date, the NMPUC has
not acted on the comments or suggested language changes the Company and other
commentors requested.
On February 16, 1998, the NMPUC issued a Notice of Proposed Rulemaking
(the "Notice") which, if adopted would require additional information to be
disclosed on customer bills. The Notice proposes the following: (i) each
electric utility shall separately state in its bills to customers the portions
of its rates which are attributable to generation, transmission and distribution
functions; (ii) if a rate case is pending on the effective date of this rule,
the NMPUC shall order the utility to propose this information consistent with
its rate filing or as the NMPUC may otherwise direct; (iii) the NMPUC staff
shall determine the portions of a utility's rates which are attributable to
generation, transmission and distribution functions; this information shall be
included in customer bills within 60 days of service by the utility, unless the
utility files proposed revisions; (iv) a bill insert shall describe the
different functional components of electric service; thereafter, the insert
shall be included in customer bills no less than every six months; (v) the
proposed rule applies to every investor-owned, rural electric cooperative, or
municipal electric utility operating in New Mexico that is subject to the
jurisdiction of the NMPUC and (vi) the rule, either proposed or as modified,
shall not be adopted prior to April 20, 1998. The Company is currently
evaluating the Notice. Comments are due March 20, 1998.
PRC
In 1996, New Mexico voters approved an amendment to the state
constitution which will replace the present State Corporation Commission ("SCC")
and the NMPUC with a single, elected five member regulatory authority. The new
PRC will be responsible for overseeing registration of all New Mexico
corporations, as well as regulating insurers, transportation and
telecommunications companies, oil and gas pipelines, and gas, electric, water
and sewer public utilities operating in the state. During the 1998 legislative
session, House Bill 74, which combines the regulatory authority of the NMPUC and
the SCC into the five member elected PRC effective January 1, 1999, passed both
houses and is awaiting signature by the Governor. The bill establishes the
organizational structure of the PRC, prescribes appropriate campaign practices,
and establishes a code of conduct for commissioners, but otherwise leaves the
existing regulatory framework for utilities, telecommunications, insurance and
motor carriers in place. Incumbent NMPUC commissioners are not eligible to run
unless they resign, although incumbent SCC commissioners may run for the PRC
without resigning. The new commissioners will be elected by district in the
November 1998 general election.
For other rates and regulation issues facing the Company, see PART II,
ITEM 7. - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - OVERVIEW - OTHER ISSUES FACING THE COMPANY REGULATORY
ISSUES".
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ENVIRONMENTAL FACTORS
The Company, in common with other electric and gas utilities, is subject
to stringent regulations for protection of the environment by state, Federal and
tribal authorities. In addition, PVNGS is subject to the jurisdiction of the
NRC, which has authority to issue permits and licenses and to regulate nuclear
facilities in order to protect the health and safety of the public from
radioactive hazards and to conduct environmental reviews pursuant to the
National Environmental Policy Act. The Company believes that it is in
compliance, in all material respects, with the environmental laws. The Company
does not currently expect that material expenditures for environmental control
facilities will be required to meet environmental regulations in 1998 and 1999.
However, in order to achieve operational efficiencies, the Company began a
retrofit environmental project at SJGS in 1997, which will cost the Company
approximately $40 million. This project is scheduled to be completed in January
1999.
The Clean Air Act
The Clean Air Act Amendments of 1990 (the "Act") impose stringent limits
on emissions of sulfur dioxide and nitrogen oxides from fossil-fueled electric
generating plants. The Act is intended to reduce air contamination from every
sizeable source of air pollution in the nation. Electric utilities with
fossil-fueled generating units will be affected particularly by the section of
the Act which deals with acid rain. To be in compliance with the Act, many
utilities will be faced with installing expensive sulfur dioxide removal
equipment, securing low sulfur coal, buying sulfur dioxide emission allowances,
or a combination of these. Due to the existing air pollution control equipment
on the coal-fired SJGS and Four Corners, the Company believes that it will not
be faced with any material capital expenditures in order to be in compliance
with the acid rain provisions (both sulfur dioxide and nitrogen dioxide) of the
Act. SJGS and Four Corners have installed flow monitoring equipment and have
completed certification testing of their continuous emission monitoring
equipment. Certification testing data was submitted to the EPA in 1995, as
required. Under other provisions of the Act, the Company will be required to
obtain operating permits for its coal- and gas-fired generating units and to pay
annual fees associated with the operating permit program. The New Mexico
operating permit program was approved by the EPA in November 1994. Operating
permit applications were submitted to the state in 1995. As of this date, the
Company has not received operating permits for its coal- or gas-fired generating
units. The Company has been negotiating the terms and conditions of the permits
with the regulatory agencies and expects to have operating permits issued by the
second quarter of 1998.
The Act established the Grand Canyon Visibility Transport Commission
("Commission") and charged it with assessing adverse impacts on visibility at
the Grand Canyon. The Commission broadened its scope to assess visibility
impairment in mandatory Class I areas (parks and wilderness areas) located in
the Colorado Plateau. The Commission submitted its findings and recommendations
to the EPA in June 1996.
The Commission's recommendations regarding stationary sources are to:
(i) implement existing Clean Air Act requirements through the year 2000; (ii)
establish stationary source emission targets as regulatory triggers; (iii)
develop a plan for allocating trading credits under a regulatory program
emissions cap; (iv) review compliance with targets and establish incentives; (v)
complete source attribution studies and (vi) develop an improved monitoring and
accounting system.
The Commission did not recommend any additional emission reductions for
point sources. The recommendations include monitoring the impact of existing
Clean Air Act requirements on emission reductions and the resulting effect on
visibility, setting regional targets for SO2 emissions from stationary sources
for the year 2000 and developing a regulatory program to implement if the
targets are exceeded. The regulatory program will most likely include a
market-based trading of emissions allowances. The targets and the regulatory
program have not yet been developed; however, the Company does not expect a
material adverse effect on the Company's financial condition or results of
operations.
16
<PAGE>
In a related matter, the EPA proposed regional haze regulations in 1997.
These proposed regulations address visibility impairment in Class I areas. The
EPA has stated that it considered the Commission's recommendations in the
formulation of the proposed regulations. The inclusion of the Commission's
recommendations in the proposed regulations is not obvious. The Company is
attempting to have the Commission's recommendations included in the final
regional haze regulations.
In July 1997, the EPA issued its final rules revising the National
Ambient Air Quality Standards for ozone and particulate matter. The EPA is now
involved in developing implementation plans for these revised standards. The
nature of and cost of the impacts of these revisions to the standards, if any,
to the Company's operations cannot be determined at this time; however, the
Company does not anticipate any material adverse impact on the Company's
financial condition or results of operations.
For other environmental issues facing the Company, see PART II, ITEM 7.
- - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - OTHER ISSUES FACING THE COMPANY - ENVIRONMENTAL ISSUES - Electric
Operations and ENVIRONMENTAL ISSUES - Gas Operations".
ITEM 2. PROPERTIES
Substantially all of the Company's utility plant is mortgaged to secure
its first mortgage bonds. (See PART II, ITEM 7. - "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL
RESOURCES - Capital Requirements and Liquidity and Financing Capability".)
ELECTRIC
The Company's ownership and capacity in electric generating stations in
commercial service as of December 31, 1997, were as follows:
Total Net
Generation
Type Name Location Capacity (MW)
---- ---- -------- -------------
Nuclear....... PVNGS (a) Wintersburg, Arizona 390 *
Coal.......... SJGS (b) Waterflow, New Mexico 750
Coal.......... Four Corners (c) Fruitland, New Mexico 192
Gas/Oil....... Reeves Albuquerque, New Mexico 154
Gas/Oil....... Las Vegas Las Vegas, New Mexico 20
-----
1,506
=====
* For load and resource purposes, the Company has notified the NMPUC that it
recognizes the maximum dependable capacity rating for PVNGS to be 381 MW.
- -----------------
(a) The Company is entitled to 10.2% of the power and energy generated
by PVNGS. The Company has a 10.2% ownership interest in Unit 3 and
has leasehold interests in Units 1 and 2.
(b) SJGS Units 1, 2 and 3 are 50% owned by the Company; SJGS Unit 4 is
38.457% owned by the Company.
(c) Four Corners Units 4 and 5 are 13% owned by the Company.
17
<PAGE>
Fossil-Fueled Plants
SJGS is located in northwestern New Mexico, and consists of four units
operated by the Company. Units 1, 2, 3 and 4 at SJGS have net rated capacities
of 316 MW, 312 MW, 488 MW and 498 MW, respectively. SJGS Units 1 and 2 are owned
on a 50% shared basis with Tucson. Unit 3 is owned 50% by the Company, 41.8% by
SCPPA and 8.2% by Tri-State Generation and Transmission Association, Inc. Unit 4
is owned 38.457% by the Company, 28.8% by M-S-R, 10.04% by Anaheim, 8.475% by
Farmington, 7.2% by Los Alamos and 7.028% by UAMPS. The Company's net aggregate
ownership in SJGS is 750 MW.
In July 1996, the Company and other SJGS participants signed an
agreement to convert the existing flue gas desulfurization (SO2 removal) system
at the SJGS into a much simpler and cost effective limestone system. The
conversion project will cost the Company approximately $40 million and is
scheduled to be completed in January 1999.
The Company also owns 192 MW of net rated capacity derived from its 13%
interest in Units 4 and 5 of Four Corners located in northwestern New Mexico on
land leased from the Navajo Nation and adjacent to available coal deposits.
Units 4 and 5 at Four Corners are jointly owned with SCE, APS, Salt River
Project, Tucson and El Paso and are operated by APS.
Four Corners and a portion of the facilities adjacent to SJGS are
located on land held under easements from the United States and also under
leases from the Navajo Nation, the enforcement of which leases might require
Congressional consent. The risk with respect to the enforcement of these
easements and leases is not deemed by the Company to be material. However, the
Company is dependent in some measure upon the willingness and ability of the
Navajo Nation to protect these properties.
The Company owns 154 MW of generation capacity at Reeves Station in
Albuquerque, New Mexico, and 20 MW of generation capacity at Las Vegas Station
in Las Vegas, New Mexico. These stations are used primarily for peaking and
transmission support.
Nuclear Plant
The Company's Interest in PVNGS
The Company is participating in the three 1,270 MW units of PVNGS, also
known as the Arizona Nuclear Power Project, with APS (the operating agent), Salt
River Project, El Paso, SCE, SCPPA and The Department of Water and Power of the
City of Los Angeles. The Company has a 10.2% undivided interest in PVNGS, with
its interests in Units 1 and 2 held under leases. In September 1992, the Company
purchased approximately 22% of the beneficial interests in the PVNGS Units 1 and
2 leases for approximately $17.5 million. The Company's ownership and leasehold
interests in PVNGS amount to 130 MW per unit, or a total of 390 MW. PVNGS Units
1, 2 and 3 were declared in commercial service by the Company in January 1986,
September 1986 and January 1988, respectively. Commercial operation of PVNGS
requires full power operating licenses which were granted by the NRC.
Maintenance of these licenses is subject to NRC regulation.
During 1997, PVNGS was operated at a capacity factor of 90.6% which was
the highest yearly capacity factor attained at the plant. This capacity factor
was primarily attributable to record setting low refueling outage days.
18
<PAGE>
Steam Generator Tubes
APS, as the operating agent of PVNGS, has encountered tube cracking in
the steam generators. In March 1993, PVNGS Unit 2 steam generators experienced a
tube rupture. APS's recent analysis indicates that it will be economically
desirable for the owners of PVNGS to replace the Unit 2 steam generators in
approximately ten years. The recent analysis indicates that around 2003, the
steam generators will not be able to maintain full power output because of the
number of tubes that will have been plugged. Tube plugging, which effectively
removes the tube from service, is the normal course of action to handle a
cracked tube. The PVNGS participants, including the Company, would face lost
revenue and increased expense due to reduced power output from the steam
generator and longer inspections of the steam generators during outages. After a
detailed analysis and assessment, the PVNGS participants, including the Company,
made the decision during the last quarter of 1997 to fabricate a spare set of
steam generators. The cost of the new steam generators to the Company, including
installation costs, will be approximately $18.7 million in 1997 dollars. APS
expects that the replacement will be performed in conjunction with a normal
refueling outage in order to limit additional incremental outage time to
approximately 70 days.
APS has taken, and will continue to take, remedial actions that it
believes have slowed further tube degradation. The steam generator tubes in each
unit continue to be inspected in conjunction with their respective outages. APS
currently believes that the PVNGS steam generators in Units 1 and 3 are capable
of operating for their designed life of forty years; although, at some point,
long-term economic considerations may warrant examination of possible steam
generator replacement.
Sale and Leaseback Transactions of PVNGS Units 1 and 2
In eleven transactions consummated in 1985 and 1986, the Company sold
and leased back its entire 10.2% interest in PVNGS Units 1 and 2, together with
portions of the Company's undivided interest in certain PVNGS common facilities.
In each transaction, the Company sold interests to an owner trustee under an
owner trust agreement with an institutional equity investor. The owner trustees,
as lessors, leased the interests to the Company under lease agreements having
initial terms expiring January 15, 2015 (with respect to the Unit 1 leases) or
January 15, 2016 (with respect to the Unit 2 leases). Each lease provides an
option to the Company to extend the term of the lease as well as a repurchase
option. The lease expense for the Company's PVNGS leases is approximately $66.3
million per year. Throughout the terms of the leases, the Company continues to
have full and exclusive authority and responsibility to exercise and perform all
of the rights and duties of a participant in PVNGS under the Arizona Nuclear
Power Project Participation Agreement and retains the exclusive right to sell
and dispose of its 10.2% share of the power and energy generated by PVNGS Units
1 and 2. The Company also retains responsibility for payment of its share of all
taxes, insurance premiums, operating and maintenance costs, costs related to
capital improvements and decommissioning and all other similar costs and
expenses associated with the leased facilities. In 1992, the Company purchased
approximately 22% of the beneficial interests in the PVNGS Units 1 and 2 leases
for $17.5 million. For accounting purposes, this transaction was originally
recorded as a purchase with the Company recording approximately $158.3 million
as utility plant and $140.8 million as long-term debt on the Company's
consolidated balance sheet. In connection with the $30 million retail rate
reduction stipulated with the NMPUC in 1994, the Company wrote down the
purchased beneficial interests in PVNGS Units 1 and 2 leases to $46.7 million.
In March 1995, the Company retired approximately $130 million of PVNGS lease
obligation bonds ("LOBs").
In October 1996, the Company purchased $200 million of the PVNGS LOBs
and another $28.9 million in December 1997. The bonds are held as an investment
on the Company's books. For rating agency purposes, the PVNGS LOBs are included
in the calculation of the debt to equity ratio and various financial coverage
ratios. The purchase of the $228.9 million of PVNGS LOBs is treated by the
rating agencies as a defeasance of the bonds, thereby resulting in an
improvement to certain financial coverage ratios.
19
<PAGE>
Each lease describes certain events, "Events of Loss" or "Deemed Loss
Events", the occurrence of which could require the Company to, among other
things, (i) pay the lessor and the equity investor, in return for such
investor's interest in PVNGS, cash in the amount provided in the lease and (ii)
assume debt obligations relating to the PVNGS lease. The "Events of Loss"
generally relate to casualties, accidents and other events at PVNGS, which would
severely adversely affect the ability of the operating agent, APS, to operate,
and the ability of the Company to earn a return on its interests in, PVNGS. The
"Deemed Loss Events" consist mostly of legal and regulatory changes (such as
changes in law making the sale and leaseback transactions illegal, or changes in
law making the lessors liable for nuclear decommissioning obligations). The
Company believes the probability of such "Events of Loss" or "Deemed Loss
Events" occurring is remote. Such belief is based on the following reasons: (i)
to a large extent, prevention of "Events of Loss" and some "Deemed Loss Events"
is within the control of the PVNGS participants, including the Company, and the
PVNGS operating agent, through the general PVNGS operational and safety
oversight process and (ii) with respect to other "Deemed Loss Events", which
would involve a significant change in current law and policy, the Company is
unaware of any pending proposals or proposals being considered for introduction
in Congress or any state legislative or regulatory body that, if adopted, would
cause any such events.
PVNGS Decommissioning Funding
The Company has a program for funding its share of decommissioning costs
for PVNGS. Under a portion of this program, the Company makes a series of annual
deposits under agreements approved by the NMPUC to an external non-qualified
trust which are applied towards an investment in life insurance policies on
certain current and former employees. The remaining portion of the nuclear
decommissioning funding program is invested in equities in qualified and
non-qualified trusts. The results of the 1995 decommissioning cost study
indicated that the Company's share of the PVNGS decommissioning costs will be
approximately $162.6 million (in 1997 dollars).
Pursuant to NMPUC approval, the Company funded an additional $2.1
million and $12.5 million in 1997 and 1996, respectively, into the qualified and
non-qualified trust funds. The estimated market value of the trusts, including
the net cash value of the current life insurance policies, at the end of 1997
was approximately $30.9 million.
PVNGS Liability and Insurance Matters
The PVNGS participants have insurance for public liability payments
resulting from nuclear energy hazards to the full limit of liability under
Federal law. This potential liability is covered by primary liability insurance
provided by commercial insurance carriers in the amount of $200 million and the
balance by an industry-wide retrospective assessment program. The maximum
assessment per reactor under the retrospective rating program for each nuclear
incident occurring at any nuclear power plant in the United States is
approximately $79.3 million, subject to an annual limit of $10 million per
incident. Based upon the Company's 10.2% interest in the three PVNGS units, the
Company's maximum potential assessment per incident for all three units is
approximately $24.3 million, with an annual payment limitation of $3 million per
incident. The insureds under this liability insurance include the PVNGS
participants and "any other person or organization with respect to his legal
responsibility for damage caused by the nuclear energy hazard". 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.
The PVNGS participants maintain "all-risk" (including nuclear hazards)
insurance for nuclear property damage to, and decontamination of, property at
PVNGS in the aggregate amount of approximately $2.75 billion as of January 1,
1998, a substantial portion of which must be applied to stabilization and
decontamination. The Company has also secured insurance against portions of the
increased cost of generation or purchased power and business interruption
resulting from certain accidental outages of any of the three PVNGS units if the
20
<PAGE>
outage exceeds 17 weeks. The Company is a member of two industry mutual
insurers. These mutual insurers provide both the "all-risk" and increased cost
of generation insurance to the Company. In the event of adverse losses
experienced by these insurers, the Company is subject to an assessment. The
Company's maximum share of any assessment is approximately $4.3 million per
year.
Other Electric Properties
As of December 31, 1997, the Company owned, jointly owned or leased
2,803 circuit miles of electric transmission lines, 5,352 miles of distribution
overhead lines, 3,392 cable miles of underground distribution lines (excluding
street lighting) and 227 substations.
NATURAL GAS
The natural gas property as of December 31, 1997, consisted primarily of
natural gas storage, transmission and distribution systems. Provisions for
storage made by the Company include ownership and operation of an underground
storage facility located near Albuquerque, New Mexico. The transmission systems
consisted of approximately 1,277 miles of pipe with appurtenant compression
facilities. The distribution systems consisted of approximately 10,332 miles of
pipe.
On June 21, 1996, the Company entered into a purchase agreement with the
DOE for the purchase of approximately 130 miles of transmission pipe for $3.1
million for the transmission of natural gas to Los Alamos and to certain other
communities in northern New Mexico. The purchase is subject to the DOE providing
right-of-way satisfactory to the Company. The acquisition by the Company was
approved by the NMPUC in December 1996. Right-of-way resolution is expected to
be completed sometime in 1998.
OTHER INFORMATION
The electric and gas transmission and distribution lines are generally
located within easements and rights-of-way on public, private and Indian lands.
The Company leases interests in PVNGS Units 1 and 2 and related property, EIP
and associated equipment, data processing, communication, office and other
equipment, office space, utility poles (joint use), vehicles and real estate.
The Company also owns and leases service and office facilities in Albuquerque
and in other operating divisions throughout its service territory.
ITEM 3. LEGAL PROCEEDINGS
PVNGS WATER SUPPLY LITIGATION
The Company understands that a summons served on APS in 1986 required
all water claimants in the Lower Gila River Watershed of Arizona to assert any
claims to water on or before January 20, 1987, in an action pending in the
Maricopa County Superior Court. PVNGS is located within the geographic area
subject to the summons and the rights of the PVNGS participants, including the
Company, to the use of groundwater and effluent at PVNGS are potentially at
issue in this action. APS, as the PVNGS project manager, filed claims that
dispute the court's jurisdiction over the PVNGS participants' groundwater rights
and their contractual rights to effluent relating to PVNGS and, alternatively,
seek confirmation of such rights. APS's claims dispute the court's jurisdiction
over APS's groundwater rights with respect to PVNGS, and alternatively, seek
confirmation of such rights. In 1992, the Arizona Supreme Court heard oral
argument on certain issues in this matter which are pending on interlocutory
appeal. Issues important to APS's claims were remanded to the trial court for
further action and the trial court certified its decision for interlocutory
appeal to the Arizona Supreme Court. In September 1994, the Arizona Supreme
Court granted review of the trial court decision. No trial date concerning the
water rights claims of APS has been set in this matter.
21
<PAGE>
Although the foregoing matters remain subject to further evaluation, APS
expects that the described litigation will not have a material adverse impact on
the operation of PVNGS. In addition, the Company believes that the ultimate
outcome of this matter will not have a material adverse effect on the Company's
financial condition or results of operation.
SAN JUAN RIVER ADJUDICATION
In 1975, the State of New Mexico filed an action entitled State of New
Mexico v. United States, et al., in the District Court of San Juan County, New
Mexico, to adjudicate all water rights in the "San Juan River Stream System".
The Company was made a defendant in the litigation in 1976. The action was
expected to adjudicate water rights used at Four Corners and at SJGS. (See ITEM
1. "BUSINESS - ELECTRIC OPERATIONS - Fuel and Water Supply - Water Supply".) The
Company cannot at this time anticipate the effect, if any, of any water rights
adjudication on the present arrangements for water at SJGS and Four Corners. It
is the Company's understanding that final resolution of the case cannot be
expected for several years.
OTHER PROCEEDINGS
Republic Savings Bank ("RSB") Litigation
On July 1, 1996, in a 7-2 decision in the case of United States v.
Winstar Corporation, the United States Supreme Court ruled that the Federal
government had breached its contractual obligations with certain thrifts in
refusing to recognize the accounting practices of supervisory goodwill and
capital credits. Contracts had been negotiated with certain Federal agencies
providing for the purchase of failing thrifts on the condition that supervisory
goodwill and capital credits be recognized for purposes of determining
compliance with regulatory capital requirements. When Congress enacted the
Financial Institutions Reform, Recovery and Enforcement Act in 1989, these
accounting practices were prohibited, thus driving otherwise healthy thrifts out
of compliance with the capital requirements. Many, including RSB, were taken
over and liquidated as a result.
Meadows owns directly a 100% ownership interest in Republic Holding
Company ("RHC"), and RSB was a wholly-owned subsidiary of RHC. Meadows and RHC
have pending before the United States Court of Federal Claims a lawsuit filed in
1992, alleging similar contractual arrangements to those at issue in the Winstar
case. The Federal government has filed a counterclaim alleging breach by RHC of
its obligation to maintain RSB's net worth and has moved to dismiss Meadows'
claim for lack of standing.
RSB was the thrift organized upon the acquisition of Citizens Federal
Savings and Loan Association and Fireside Federal Savings and Loan Association,
both Illinois corporations, in 1985. The plaintiffs invested $17 million of new
capital in the failing institutions. The Federal regulators expressly promised
that approximately $23 million of supervisory goodwill created by the
transaction could be accounted for as an intangible asset to be counted toward
regulatory capital. Additionally, the regulators promised to allow a $3 million
cash contribution by the Federal Savings and Loan Insurance Corporation to be
recorded as a direct credit to regulatory capital. In 1992, the Office of Thrift
Supervision placed RSB in receivership and appointed the RTC as receiver. In
November 1992, RTC sold RSB as a going concern for a premium of nearly $1
million, with approximately $215.5 million in assets and $203.9 million in
liabilities.
The RSB case has been held in abeyance pending the ruling by the Supreme
Court. The Company believes that the Winstar decision establishes the Federal
government's liability to Meadows and RHC in the RSB litigation and the amount
of damages owed as a result will be vigorously litigated. It is premature to
estimate the amount of recovery, if any, by Meadows and RHC.
22
<PAGE>
Four Corners
The Company owns a 13% ownership interest in Units 4 and 5 of Four
Corners located in northwestern New Mexico on land leased from the Navajo
Nation. In July 1995, the Navajo Nation enacted the Navajo Nation Air Pollution
Prevention and Control Act, the Navajo Nation Safe Drinking Water Act and the
Navajo Nation Pesticide Act (collectively, the "Acts"). By letter dated October
12, 1995, the Four Corners participants requested the United States Secretary of
the Interior (the "Secretary") to resolve their dispute with the Navajo Nation
regarding whether or not the Acts apply to operation of Four Corners. The Four
Corners participants subsequently filed a lawsuit in the District Court of the
Navajo Nation (the "Court"), Window Rock District, seeking, among other things,
a declaratory judgment that: (i) the Four Corners leases and Federal easements
preclude the application of the Acts to the operation of Four Corners and (ii)
the Navajo Nation and its agencies and courts lack adjudicatory jurisdiction to
determine the enforceability of the Acts as applied to Four Corners. On October
18, 1995, the Navajo Nation and the Four Corners participants agreed to
indefinitely stay the proceedings referenced above so that the parties may
attempt to resolve the dispute without litigation, and have requested that the
Secretary and the Court stay these proceedings. The Company is unable to predict
the outcome of this matter but does not anticipate any material adverse impact
on the Company's financial condition or results of operation.
For a discussion of other legal proceedings, see PART II, ITEM 7. -
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - OTHER ISSUES FACING THE COMPANY - REGULATORY ISSUES - Electric Rate
Case and The 1995 Gas Rate Case Appeal".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
23
<PAGE>
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY
Executive officers, their ages, offices held with the Company in the past
five years and initial effective dates thereof, were as follows on December 31,
1997, except as otherwise noted:
<TABLE>
<CAPTION>
Name Age Office Initial Effective Date
---- --- ------ ----------------------
<S> <C> <C> <C>
B. F. Montoya....... 62 President and Chief Executive Officer August 1, 1993
J. E. Sterba........ 42 Executive Vice President and Chief Operating Officer March 11, 1997
Senior Vice President, Bulk Power Services December 6, 1994
Senior Vice President, Corporate Development December 7, 1993
Senior Vice President, Asset Restructuring April 6, 1993
Senior Vice President, Retail Electric and Water January 29, 1991
Services
M. D. Christensen... 49 Senior Vice President, New Mexico Retail Services November 3, 1997
Senior Vice President, Customer Service and Public January 9, 1996
Affairs
Vice President, Public Affairs December 7, 1993
Vice President, Communications July 22, 1991
R. J. Flynn......... 55 Senior Vice President, Electric Services December 1, 1994
M. H. Maerki........ 57 Senior Vice President and Chief Financial Officer December 7, 1993
Senior Vice President, Administration and Chief March 2, 1993
Financial Officer
Senior Vice President and Chief Financial Officer June 1, 1988
P. T. Ortiz......... 47 Senior Vice President, General Counsel and Secretary December 6, 1994
Senior Vice President, Regulatory Policy, General December 7, 1993
Counsel and Secretary
Senior Vice President, Public Policy, General March 2, 1993
Counsel and Secretary
Senior Vice President, General Counsel and Corporate February 4, 1992
Secretary
W. J. Real.......... 49 Senior Vice President, Gas Services December 6, 1994
Senior Vice President, Utility Operations December 7, 1993
Senior Vice President, Customer Service and March 2, 1993
Operations
Executive Vice President, Gas Operations June 19, 1990
R. B. Ridgeway...... 39 Senior Vice President, Energy Services December 14, 1996
Vice President, Corporate Planning August 10, 1996
Director, Corporate Strategy July 2, 1994
Consultant, Competitive Analysis October 5, 1992
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Name Age Office Initial Effective Date
---- --- ------ ----------------------
<S> <C> <C> <C>
J. A. Zanotti....... 58 Senior Vice President, Human Resources January 9, 1996
Vice President, Human Resources March 2, 1993
Senior Vice President, Human Resources and July 26, 1990
Communications
</TABLE>
All officers are elected annually by the board of directors of the
Company.
All of the above executive officers have been employed by the Company
and/or its subsidiaries for more than five years in executive or management
positions, with the exception of B. F. Montoya and R. J. Flynn. Prior to
employment with the Company, B. F. Montoya was employed with Pacific Gas and
Electric Company ("PG&E") since 1989. In 1991, he was promoted to Senior Vice
President and General Manager of the Gas Supply Business Unit of PG&E. Prior to
his employment with PG&E, B. F. Montoya spent 31 years in the Civil Engineer
Corps of the U.S. Navy, performing a wide range of management and
utility-related assignments. B. F. Montoya achieved the rank of Rear Admiral
when he became Commander, Naval Facilities Engineering Command and Chief of
Civil Engineers. R. J. Flynn has a 30-year history in the utility industry
working with PG&E. Since 1989, R. J. Flynn held the position of Regional Vice
President, responsible for all gas and electric utility operations in the San
Joaquin Valley.
25
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange.
Ranges of sales prices of the Company's common stock, reported as composite
transactions (Symbol: PNM), and dividends declared on common stock for 1997 and
1996, by quarters, are as follows:
Range of
Quarter Ended Sales Prices Dividends
------------- ----------------
High Low per Share
---- --- ---------
1997:
December 31 ......................... 23 15/16 18 7/8 $0.17
September 30 ........................ 19 9/16 17 3/4 $0.17
June 30 ............................. 18 5/8 15 3/4 $0.17
March 31 ............................ 20 1/2 17 1/4 $0.17
-----
Fiscal Year ...................... 23 15/16 15 3/4 $0.68
=====
1996:
December 31 ......................... 19 7/8 18 1/8 $0.12
September 30 ........................ 20 3/8 19 $0.12
June 30 ............................. 20 1/2 17 1/4 $0.12
March 31 ............................ 18 3/4 17 3/8 $0.12
-----
Fiscal Year ...................... 20 1/2 17 1/4 $0.48
=====
On January 31, 1998, there were 17,512 holders of record of the Company's
common stock.
On December 9, 1997, the Company's Board of Directors ("Board") declared
a quarterly cash dividend of 17 cents per share of common stock payable February
20, 1998 to shareholders of record as of February 2, 1998. The Company
reinstated its common stock dividend in May 1996.
The Board set the dividend payout ratio below the industry average to
allow for dividend growth in the future and to sustain financial flexibility for
the Company to respond to potential opportunities in the evolving energy
marketplace. The Board had not declared cash dividends on common stock since
1989. In establishing its new dividend policy, the Board weighed the Company's
current financial position and its future business plan, as well as the
regulatory and business climate in New Mexico. Future dividend declaration will
be reviewed for action by the Board. The payment of future dividends will depend
on earnings, the financial condition of the Company, market conditions and other
factors.
Cumulative Preferred Stock
While isolated sales of the Company's cumulative preferred stock have
occurred in the past, the Company is not aware of any active trading market for
its cumulative preferred stock. Quarterly cash dividends were paid on each
series of the Company's cumulative preferred stock at their stated rates during
1997 and 1996.
26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands except per share amounts and ratios)
<S> <C> <C> <C> <C> <C>
Total Operating Revenues .............. $1,135,267 $ 883,386 $ 808,465 $ 904,711 $ 873,878
Net Earnings (Loss) ................... $ 80,995 $ 72,580 $ 75,562 $ 80,318 $ (61,486)*
Earnings (Loss) per Common Share:
Basic............................... $ 1.92 $ 1.72 $ 1.72 $ 1.77 $ (1.64)*
Diluted............................. $ 1.91 $ 1.71 $ 1.72 $ 1.77 $ (1.64)*
Total Assets .......................... $2,313,732 $2,230,314 $2,035,669 $2,203,265 $2,212,189
Preferred Stock with Mandatory Redemption
Requirements ....................... - - - $ 17,975 $ 24,386
Long-Term Debt, including Current
Maturities ........................ $ 714,345 $ 728,889 $ 728,989 $ 900,595 $ 976,525
Common Stock Data:
Market price per common share at
year end ....................... $ 23.688 $ 19.625 $ 17.625 $ 13.00 $ 11.25
Book value per common share at
year end ........................ $ 19.26 $ 18.06 $ 16.82 $ 15.11 $ 13.29
Average number of common shares
outstanding ..................... 41,774 41,774 41,774 41,774 41,774
Cash dividend declared per
common share .................... $ 0.68 $ 0.48 - - -
Return on Average Common Equity........ 10.2 % 9.8 % 10.7 % 12.4 % (10.7)%
Capitalization:
Common stock equity ................ 52.5 % 50.4 % 48.6 % 39.2 % 34.4 %
Preferred stock:
Without mandatory redemption
requirements .................. 0.8 0.9 0.9 3.7 3.6
With mandatory redemption
requirements .................. - - - 1.1 1.5
Long-term debt, including current
maturities ..................... 46.7 48.7 50.5 56.0 60.5
----- ----- ----- ----- -----
100% 100% 100% 100% 100%
===== ===== ===== ===== =====
</TABLE>
- -----------
* Includes the write-down of the 22% beneficial interests in the
PVNGS Units 1 and 2 leases purchased by the Company, the write-off
of certain regulatory assets and other deferred costs and the
write-off of certain PVNGS Units 1 and 2 common costs, aggregating
$108.2 million, net of taxes ($2.59 per share).
The selected financial data should be read in conjunction with the
consolidated financial statements, the notes to consolidated financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations.
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's assessment of the Company's financial
condition and the significant factors affecting the results of operations. This
discussion should be read in conjunction with the Company's consolidated
financial statements.
OVERVIEW
Restructuring the Electric Utility Industry
Competition and restructuring of the electric utility industry continue
to be key issues facing the Company. Efforts to advance and determine the
eventual form of industry restructuring continued during 1997.
At the state level, the Company proposed in April 1997 that the NMPUC
reconvene the proceedings involving the NMPUC's Notice of Inquiry into the
restructuring of the electric industry, in an attempt to arrive at consensus
legislation to be presented to the 1998 session of the New Mexico Legislature.
In May 1997, the NMPUC issued an order accepting the Company's proposal for a
collaborative effort, and the proposal for a series of meetings to be held among
all interested parties. The parties held several meetings in which the Company
actively participated. However, in September 1997, the collaborative process to
draft legislation was declared at an impasse due to disagreement on issues
regarding the divestiture of generation and energy service units from electric
distribution and transmission systems, and the recoverability of stranded costs.
Although the parties could not reach agreement, the Company filed its
own proposal for industry restructuring in September 1997 with both the NMPUC,
and the Water, Utilities and Natural Resources Committee ("WUNR") of the New
Mexico Legislature.
The Company's proposal called for an immediate rate reduction of $10
million per year for residential customers from the effective date of proposed
legislation until open access without the need for a rate case. The proposal
also called for full retail competition no later than January 1, 2001. Other
parts 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 natural gas. Other services, usually associated with
distribution, 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 for PVNGS Unit 3 which
was previously excluded from New Mexico jurisdictional rates. However, the
Company would recover all fixed costs associated with PVNGS Units 1 and 2
through a non-bypassable "wires charge" from 2001 to 2016. The proposal also
called for certain credits to stranded costs which would effectively shorten the
time period for recovery. The Company currently estimates that if the market
clearing price for power, which represents the cost of generation at the plant,
fell to 3.0 cents/KWh, it may incur an after-tax write-off of approximately $176
million related to its fossil fuel generation if the Company assumes this risk.
The Company's proposal was supported by various parties to the collaborative
process, including Enron Corporation, the New Mexico Retail Association, SPS,
the United States Executive Agencies and the International Brotherhood of
Electrical Workers. However, the Company's proposal was not adopted by the WUNR
and not introduced during the1998 legislative session. The WUNR declined to
recommend any restructuring legislation as a committee bill during the 1998
legislative session.
On January 22, 1998, the NMPUC submitted its own report to the New
Mexico Legislature related to restructuring of the electric utility industry.
The following key points were included in the report: (i) PVNGS and Plains
Escalante Generating Station are the most debated issues in deregulation because
of their potential stranded costs; (ii) stranded costs, if determined to be
lawful, should be verified by the NMPUC or its successor, the PRC; (iii) market
power issues may be addressed through functional separation or partial or
complete divestiture of generation, transmission and distribution; (iv)
unbundling is necessary to understand the disparities among various electricity
providers; (v) despite an abundance of natural resources to fuel generation
facilities, New Mexico customers pay more for electricity because of costs
28
<PAGE>
associated with generation plants; (vi) on average, New Mexico residential
customers pay more for electricity than regional and national residential
customers and (vii) system reliability must be maintained or enhanced, and
customers must be educated and environmental protections should be promoted. In
addition, sample legislation was attached to the report, giving either the NMPUC
or the PRC authority to conclude matters relating to electric industry
restructuring. The report was issued as a result of a NMPUC case and, with the
issuance of the report, the case was closed. The NMPUC's draft legislation was
not introduced during the 1998 legislative session. House Memorial 27, the only
measure dealing with restructuring, passed the House. Memorial 27 stated the
intent of the legislature to address the issue of electric industry
restructuring in the 1999 session and declared that the NMPUC does not have
statutory authority to implement restructuring at this time. The Memorial 27 did
not require concurrence by the Senate; however, an identical Senate Memorial was
not acted upon by the full Senate prior to adjournment.
In a related matter, in 1996, the NMPUC ordered all utilities under its
jurisdiction to file their estimates of stranded costs, absent any recovery
method being adopted, based on the Texas Public Utility Commission Economic Cost
Over Market ("ECOM") model. The Company, in its filing, presented two
methodologies: (i) using the ECOM model, the Company's stranded cost estimates
run from $657 million for a 1998 full retail access case to $119 million for a
2002 full retail access case and (ii) using a second methodology, based upon the
difference between the Company's costs of existing generation and the costs of
new combined cycle and combustion turbine units to serve the same load, the
Company's costs above the level of new gas units, in 1997 dollars, were
estimated at $748 million for a 1998 full retail access case to $327 million for
a 2002 full retail access case. The Company advised the NMPUC that the results
of the ECOM model are highly sensitive to various assumptions, primarily
projections of future gas prices. This information was addressed in the NMPUC's
report submitted to the New Mexico Legislature.
At the Federal level, legislation was introduced in the United States
Congress in 1996 to allow retail competition by the year 2000. Since then, a
number of bills have been drafted for potential introduction in Congress. It is
anticipated that these bills will be heavily lobbied by utilities, industrials,
power marketers, generators, environmental groups, consumer groups and state
regulators.
The FERC issued Order 888 in 1996, requiring utilities that own
transmission facilities to file open access tariffs to make available
transmission services to affiliates and non-affiliates at fair and
nondiscriminatory rates. Order 888 also states that public utilities will be
allowed to seek recovery of legitimate and verifiable stranded costs from
departing customers as a result of wholesale competition. The FERC indicated
that it will provide for the recovery of retail stranded costs only if state
regulators lack the legal authority to address those costs at the time retail
wheeling is required. The FERC also stated that it would permit stranded cost
recovery under wholesale all-requirements contracts. However, upon
reconsideration, FERC determined that it will serve as the primary forum for
deciding stranded cost recovery cases if a non-jurisdictional municipal utility
annexes territory currently served by a local retail utility. This move by FERC
filled a jurisdictional gap that could have arisen since municipal utilities are
not necessarily subject to state commission jurisdiction.
Although it is currently unable to predict the ultimate outcome of
possible retail competition initiatives, the Company has been and will continue
to be active at both the state and Federal levels in the public policy debates
on the restructuring of the electric utility industry. The Company will continue
to work with customers, regulators, legislators and other interested parties to
find solutions that bring benefits from competition while recognizing past
commitments.
Competitive Strategy
The Company's strategy for dealing with competition includes ongoing
cost reductions, increased productivity, pursuit of growth opportunities,
seeking to improve credit ratings to investment grade and strengthening of
customer relations. To accomplish these objectives, the Company continues to
maintain the focus on its core business and is aggressively pursuing its efforts
to expand its energy and utility related business into carefully targeted
markets for new businesses opportunities.
29
<PAGE>
The restructuring of the utility industry, coupled with today's renewed
emphasis on energy conservation and environmental protection, is fueling a
growing demand for energy, water and wastewater management services. In pursuing
new business opportunities, the Company is focusing on energy and utility
related activities under its Energy Services Business Unit. These activities
will provide energy marketing and energy management services, the marketing of
natural gas outside of New Mexico, management services for water and wastewater
systems and utility related management and operations services for Federal
installations and other large commercial institutions. The Company is currently
operating the City of Santa Fe's water system. The Energy Services Business Unit
is also pursuing utility related business opportunities in Mexico.
In June 1995, the Company filed an application with the NMPUC for
authorization for the creation of three wholly-owned non-utility subsidiaries as
part of the Energy Services Business Unit. The Company sought approval to invest
a maximum of $50 million in the three subsidiaries over time and to enter into
reciprocal loan agreements for up to $30 million with these subsidiaries. In
June 1997, the NMPUC hearing examiner issued a recommended decision for
approval, with a number of conditions. The recommendation indicated that any
capital infusion or financial assistance to its proposed subsidiaries beyond the
requested $50 million and reciprocal loans exceeding more than $30 million with
these subsidiaries will require prior approval from the NMPUC. The
recommendation also directed that all investments made in the subsidiaries and
their operations should not adversely affect the Company's ratepayers. The
Company is currently awaiting the NMPUC's final order in this case.
The Company does not anticipate an earnings contribution from the Energy
Services Business Unit over the next few years. However, the Company believes
that successful operation of the Energy Services Business Unit activities will
better position the Company in an increasingly competitive utility environment.
LIQUIDITY AND CAPITAL RESOURCES
Capital Requirements and Liquidity
Total capital requirements include construction expenditures as well as
other major capital requirements, including retirement of long-term debt,
long-term debt sinking funds and cash dividend requirements for both common and
preferred stock. The main focus of the Company's construction program is
upgrading generating systems, upgrading and expanding the electric and gas
transmission and distribution systems and purchasing nuclear fuel. Total capital
requirements and construction expenditures for 1997 were $173.9 million and
$128.2 million, respectively. Projections for total capital requirements and
construction expenditures for 1998 are $218.9 million and $141.3 million,
respectively. Such projections for the years 1998 through 2002 are $940.3
million and $563.2 million, respectively. The projected capital requirements do
not include the planned refinancing of $140 million of taxable first mortgage
bonds or the planned refinancing of PVNGS Lease Obligation Bonds ("LOBs")
discussed below. These estimates are under continuing review and subject to
on-going adjustment. In conjunction with the upgrading of generating systems,
the Company began a retrofit environmental project at SJGS which is scheduled to
be completed in January 1999. The project will cost the Company approximately
$40 million. The Company's anticipated savings in fuel and operating expense are
estimated to be approximately $10 million per year over the life of the plant.
The Company's construction expenditures for 1997 were entirely funded
through cash generated from operations. The Company currently anticipates that
internal cash generation will be sufficient to meet capital requirements for the
years 1998 through 2002. To cover the difference in the amounts and timing of
cash generation and cash requirements, the Company intends to use short-term
borrowings under its liquidity arrangements.
At the end of 1997, the Company had $130.0 million of available
liquidity arrangements, consisting of $100.0 million from a secured revolving
credit facility ("Facility"), $15.0 million from an accounts receivable
securitization and $15.0 million in local lines of credit. The Facility will
expire in June 1998 and the Company intends to replace the facility with a
five-year $300 million senior unsecured revolving credit facility ("Revolver").
30
<PAGE>
In November 1997, the Company requested NMPUC approval to enter into the
Revolver. In addition, the Company intends to borrow $140 million from the
Revolver to retire all of its outstanding taxable first mortgage bonds. The
Company also requested authority to exchange the first mortgage bonds currently
collateralizing the outstanding $575 million of tax-exempt pollution control
revenue bonds with senior unsecured notes ("SUNs"). After completion of these
transactions, the 1947 Indenture of Mortgage and Deed of Trust would be
extinguished, resulting in more administrative, financial and strategic
flexibility for the Company. The extinguishment of the mortgage requires the
consent of one party which has not yet consented and may not consent. Due to
concern about the consent, the Company also requested NMPUC authority to leave
an amended mortgage in place. Among other modifications, the mortgage would be
amended such that only $111 million of tax-exempt pollution control revenue
bonds would have the benefit of the lien. The property under the lien would be
reduced and no future bonds could be issued under the mortgage. The SUNs are
planned to be issued under an indenture containing a restriction on liens
(except in certain limited circumstances) and certain other covenants and
restrictions. With the exception of the $111 million of tax-exempt pollution
control revenue bonds secured by first mortgage bonds, the SUNs will be the
senior debt of the Company. On February 16, 1998, the NMPUC issued an order
approving these transactions. The Company is anticipating completion of these
transactions in mid-March 1998.
As of December 31, 1997, the Company had approximately $18.2 million in
cash and temporary investments.
Financing Capability
The Company's ability to finance its construction program at a
reasonable cost and to provide for other capital needs is largely dependent upon
its ability to earn a fair return on equity, results of operations, credit
ratings, regulatory approvals and financial market conditions. Financing
flexibility is enhanced by providing a high percentage of total capital
requirements from internal sources and having the ability, if necessary, to
issue long-term securities, and to obtain short-term credit. Standard & Poor's
Corp. and Moody's Investors Services, Inc. currently maintain the Company's
credit ratings at one level below investment grade. Duff & Phelps Credit Rating
Co. currently maintains an investment grade rating for the Company's first
mortgage bonds, but continues to rate all other securities of the Company below
investment grade. The Company may face limited credit markets and higher
financing costs as a result of its securities being rated below investment
grade.
One impact of the Company's current ratings, together with covenants in
the Company's PVNGS Units 1 and 2 lease agreements (see PART I, ITEM 2. -
"PROPERTIES - Nuclear Plant"), is to limit the Company's ability, without
consent of the owner participants and bondholders in the lease transactions: (i)
to enter into any merger or consolidation, or (ii) except in connection with
normal dividend policy, to convey, transfer, lease or dividend more than 5% of
its assets in any single transaction or series of related transactions. The
Facility imposes similar restrictions regardless of credit ratings.
The issuance of first mortgage bonds by the Company is subject to
earnings and bondable property provisions of the Company's first mortgage bond
indenture. The Company also has the capability under the mortgage indenture,
without regard to the earnings test but subject to other conditions, to issue
first mortgage bonds on the basis of certain previously retired bonds. At
December 31, 1997, based on the earnings test, the Company could have issued
approximately $463 million of additional first mortgage bonds, assuming an
annual interest rate of 7.34 percent. The Company's restated articles of
incorporation limit the amount of preferred stock which may be issued. Assuming
a preferred stock dividend rate of 7.24 percent, the Company could have issued
$525 million of preferred stock as of year-end.
Financing Activities
In February 1997, the Company refinanced $190 million of pollution
control revenue bonds issued by the City of Farmington, all maturing in April
2022. The effect of the refinancing resulted in a decrease in interest charges
of approximately $1.1 million in 1997. On December 1, 1997, the Company
converted $137.3 million of variable rate pollution control revenue bonds to
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<PAGE>
fixed rates. Of the total, $100 million of City of Farmington bonds were
converted to a fixed rate of 5.80% and $37.3 million of Maricopa County, Arizona
Pollution Control Corporation bonds were converted to a fixed rate of 5.75%. The
City of Farmington bonds mature on April 1, 2022, and the Maricopa County,
Arizona Pollution Control Corporation bonds mature on November 1, 2022.
In December 1997, the Company purchased $28.9 million of PVNGS LOBs,
10.15% Series. Although the LOBs are off-balance sheet debt, these outstanding
bonds have been included in the calculation of the Company's debt to
capitalization ratio as well as various financial coverage ratios by the major
rating agencies. The purchase of the LOBs will not only improve these ratios,
but will also increase earnings in the form of interest income.
The Company is currently preparing to request NMPUC approval to issue up
to $443 million in fixed income securities to refinance the $208 million in LOBs
remaining in the public markets and the $219 million in LOBs held by the Company
as an investment. Under a stipulated agreement with the NMPUC, any savings
generated from the refinancing will be split 40% to the Company's customers and
60% to shareholders. The Company hopes to complete the transaction during the
second quarter of 1998.
Other than the financing activities discussed above, the Company
currently has no requirements for long-term financing during the period of 1998
through 2002. However, during this period, the Company could enter into further
long-term financings for the purpose of strengthening its balance sheet and
reducing its cost of capital. The Company's continuing program of retiring or
repurchasing long-term debt provided a net increase in earnings of approximately
$9.7 million, before taxes, during 1997.
The Company continues to evaluate its investment and debt retirement
options to optimize its financing strategy and earnings potential.
Dividends
The Company resumed the payment of cash dividends on common stock in May
1996. The Company's board of directors ("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.
Capital Structure
The Company's capitalization, including current maturities of long-term
debt, at December 31 is shown below:
1997 1996 1995
---- ---- ----
Common Equity........................... 52.5% 50.4% 48.6%
Preferred Stock......................... 0.8 0.9 0.9
Long-term Debt.......................... 46.7 48.7 50.5
----- ----- -----
Total Capitalization*................ 100.0% 100.0% 100.0%
===== ===== =====
* Total capitalization does not include as debt the present
value of the Company's lease obligations for PVNGS Units 1 and
2 and EIP.
RESULTS OF OPERATIONS
Basic earnings per share of common stock were $1.92, $1.72 and $1.72 for
1997, 1996 and 1995, respectively. Earnings in 1997 increased substantially
above the 1996 level due to increased electric gross margin and interest income.
The sales of the gas gathering and processing assets and the Company's water
division in 1995 had a significant positive earnings effect in 1995 and impacted
1996 earnings by reducing operating margin, reducing operating expenses,
reducing interest charges and increasing investment income.
32
<PAGE>
Electric gross margin (operating revenues less fuel and purchased power
expense) increased $20.1 million in 1997 from 1996 as a result of retail load
growth and increased off-system sales margin as a result of continued
improvement in wholesale power market conditions.
Electric gross margin increased $23.3 million in 1996 from 1995 as a
result of retail load growth and warmer than normal weather and increased
off-system sales margin as a result of improved wholesale power market
conditions.
Gas gross margin (operating revenues less gas purchased for resale)
increased $1.3 million in 1997 over 1996 resulting from 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. This was offset by a
reduced per therm rate per the NMPUC's final order and lower off-system sales
margin.
Gas gross margin in 1996 was unchanged from 1995. Higher off-system
sales margin and higher retail sales margin as a result of cooler than normal
weather in 1996 were offset by the absence of the gas gathering and processing
margin in 1996 due to the sale of the gas gathering and processing assets in
1995.
The increase in the Energy Services Business Unit operating revenues and
gas purchased for resale in 1997 was due to the Company's first full year of
natural gas marketing operations outside of New Mexico. Gross margin decreased
$4.6 million in 1997 from 1996 due mainly to a negative margin from the gas
marketing operations as a result of unusual weather conditions on the West Coast
and elsewhere around the country contributing to the volatility in natural gas
prices during the fourth quarter of 1997. The Company does not anticipate an
earnings contribution from the Energy Services Business Unit over the next few
years.
Other operation and maintenance expenses ("O&M") increased $13.2 million
in 1997 from 1996 due to the following: (i) higher operating expenses of $4.3
million related to the Energy Services Business Unit's operations; (ii) higher
distribution expense of $4.2 million as a result of increased maintenance and
service enhancement efforts; (iii) higher production expenses of $4.3 million
resulting from the write-off of obsolete inventory and undistributed stores
expense at PVNGS and a severance pay accrual at SJGS; (iv) higher customer
related service expenses of $2.9 million resulting from the Company's customer
enhancement program; (v) higher sales expense of $2.0 million and (vi) higher
transmission expense of $1.1 million. Offsetting these increases were lower
maintenance expense at Four Corners due to a scheduled maintenance outage in
1996, lower gas and oil production expense, and lower administrative and general
("A&G") labor and benefit expense.
Other O&M decreased $.3 million in 1996 from 1995 due to the following:
(i) lower production expenses of $7.9 million as a result of reduced scheduled
maintenance outages in 1996, decreased down time in 1996 for refueling outages
and lower property taxes in 1996; (ii) a decrease of $6.3 million in gas
production and products extraction expense resulting from the gas assets sale in
June 1995; (iii) lower pension and benefit costs of $4.2 million as a result of
an adjustment to the retirees' health care costs and (iv) a decrease in water
division expense of $3.0 million resulting from the sale of the Company's water
division in July 1995. These decreases were offset by higher A&G expense of
$21.0 million due to increased labor, increased office supplies and expense and
higher outside services expenses.
Depreciation and amortization expenses increased $4.6 million in 1997 as
a result of additional utility plant and an adjustment recorded in 1996 for the
over amortization of certain intangible utility plant.
Depreciation and amortization expenses decreased $2.7 million in 1996
from 1995 as a result of the sale of the Company's water division and gas assets
in 1995 and an adjustment recorded in 1996 for the over amortization of certain
intangible utility plant.
33
<PAGE>
Net other income and deductions increased $11.9 million from a year ago
and decreased $18.8 million in 1996 from 1995. Significant 1997 items, net of
taxes, included interest income of $14.3 million resulting from the investment
in the PVNGS LOBs and settlement of litigation. Significant 1996 items, net of
taxes, included the following: (i) a regulatory liability of $10.1 million; (ii)
a $1.7 million write-down of certain assets related to the Company's natural gas
vehicle program and (iii) an additional accrual of $1.0 million for
environmental liabilities associated with the 1995 gas assets sale. Offsetting
these decreases were a curtailment gain of $8.0 million related to the change of
the Company's defined benefit pension plan and higher interest income of $7.6
million as a result of increased temporary investments in 1996 and the purchase
of the PVNGS LOBs.
Significant 1995 items, net of taxes, included the following: (i) a gain
of $12.8 million recognized from the gas assets sale; (ii) a gain of $6.4
million recognized from the sale of the Company's water division; (iii) a $2.6
million adjustment to the carrying costs related to gas take-or-pay settlement
amounts; (iv) a $1.9 million insurance recovery and (v) a $1.4 million
adjustment to reclamation reserves for certain mining operations. Offsetting
these increases were: (i) additional regulatory reserves of $4.8 million and
(ii) write-downs of $1.8 million for various non-utility properties.
Net interest charges increased $1.5 million in 1997 due to increased
short-term borrowings for the purchase of the $200 million of PVNGS LOBs in
October 1996 and interest accruals on the balance due customers related to the
gain associated with the 1995 gas asset sale.
Net interest charges decreased $3.2 million in 1996 from 1995 as a
result of the retirement of $132.7 million of PVNGS LOBs in March 1995. Offsets
to the 1996 decrease were higher short-term interest charges resulting from
short-term borrowings for the purchase of the PVNGS LOBs and an interest
assessment from the Internal Revenue Service.
Preferred stock dividend requirements decreased $3.1 million in 1996 as
a result of the retirement of $64 million of preferred stock in August 1995.
OTHER ISSUES FACING THE COMPANY
REGULATORY ISSUES
Electric Rate Case
The NMPUC issued an order in May 1997, requiring the Company to file an
electric rate case by September 1, 1997, if the collaborative process failed to
reach consensus on an industry restructuring plan by August 1, 1997. In
September 1997, the collaborative process was declared at an impasse. On October
21, 1997, the collaborative process was formally ended without a consensus (see
"Restructuring the Electric Utility Industry" discussed above). As a result, on
November 3, 1997, the Company filed its electric rate case. In the filing, the
Company stated that although the Company could justify a $5.0 million rate
increase, it would not seek to increase rates, stating that rate stability is
important in preparing for industry restructuring.
In the Company's proposal for restructuring filed with the NMPUC and the
WUNR, the Company had offered to reduce residential and small commercial
customers rates by $10.0 million per year during the transition period, with
another $5.0 million rate reduction upon the advent of full open access. The
Company stated that these substantial rate reduction commitments in the context
of industry restructuring may need to be modified if an additional rate
reduction results from this rate case.
The NMPUC has scheduled public hearings for the rate case to begin on
April 15, 1998. The Company anticipates a final order from the NMPUC during
1998. The Company is currently unable to predict the ultimate outcome of this
case.
34
<PAGE>
In conjunction with the Company's electric rate case filing, the Company
requested the New Mexico Supreme Court ("Supreme Court") to issue an order
disqualifying and removing the Chairman of the NMPUC from participating in this
case. This request was based on his prior involvement in Company cases while he
was with the AG's office and in private practice. The Company stated that
because of positions taken by the Chairman in past cases, the Company's due
process rights for a fair hearing would be violated. The Supreme Court has
established a briefing schedule and will hear oral arguments on April 13, 1998.
Pending the decision, the Supreme Court has issued a stay prohibiting the
Chairman from participating in the electric rate case.
The 1995 Gas Rate Case Appeal
In 1995, the Company filed a request for a $13.3 million increase in its
retail natural gas sales and transportation rates. On February 13, 1997, the
NMPUC issued a final order in the gas rate case, 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 strongly
disagrees with the NMPUC's final order. The Company and the AG filed appeals
with the Supreme Court. The Company is awaiting a decision by the Supreme Court,
but is unable to predict the timing or the ultimate outcome. While the appeal is
pending, the NMPUC's final order remains in effect.
The 1997 Gas Rate Case
By order issued in February 1997, as subsequently modified in April
1997, in a proceeding related to the cost of gas, the NMPUC ordered the Company
to file a new gas rate case. On October 15, 1997, the Company completed the
filing of the case, requesting a rate increase of $12.6 million. Also, the
Company filed a motion for clarification and request for variance voluntarily
disclosing that it had not performed and filed a study of fuel and unaccounted
for gas usage in its system as required by the NMPUC in a 1990 order. The
Company explained that it is currently performing such a study and only seeks a
variance until the current study is completed. The NMPUC has scheduled public
hearings for this case to begin on March 23, 1998.
The NMPUC staff and intervenors in the rate case filed their testimony
on February 16, 1998. The NMPUC staff recommended an increase of $2.5 million to
current rates while the AG recommended a decrease of $4.9 million. Both
recommendations are significantly lower than the Company's request for a $12.6
million rate increase. Other parties to the case recommended certain adjustments
to the Company's proposed rate increase. The Company is currently reviewing all
testimony and will file its rebuttal testimony on March 13, 1998. The Company
anticipates a final order from the NMPUC during 1998. The Company is currently
unable to predict the ultimate outcome of this case.
Investigation Relating to Amount of Fuel and Unaccounted for Gas Costs Passed
through the PGAC
In connection with the motion for clarification filed in the 1997 gas
rate case concerning the study of fuel and unaccounted for gas, the NMPUC staff
requested that the NMPUC docket an investigation into the amount of fuel and
unaccounted for gas costs that have passed through the Company's PGAC. The NMPUC
staff is concerned that a 1995 reduction in the rate for fuel and unaccounted
for gas collected from transportation customers may have unfairly shifted costs
to sales customers. The NMPUC staff's motion seeks an investigation into the
amount of fuel and unaccounted for gas associated with the Company's
transmission and distribution systems, the actual amount of fuel and unaccounted
for gas that should have been allocated to sales customers beginning in July
1995 and the amount, if any, of improper cost shifting that may have occurred as
the result of the 1995 reduction. The Company has responded that it is not
opposed to the requested investigation and believes that the results of the
investigation will demonstrate that there has been no significant cost shifting
resulting from the reduction in the factor charged to transportation customers.
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<PAGE>
City of Albuquerque Retail Pilot Load Aggregation Program
In September 1997, the COA filed a petition with the NMPUC to institute
a Retail Pilot Load Aggregation Program that would run from January 1, 1998
through December 31, 1998. The petition requests that the NMPUC provide: (i) an
expedited registration/certification process; (ii) an NMPUC order compelling
transmission (by the Company) on behalf of 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.
In January 1998, hearings on this case were conducted. At the hearings,
the Company stated its position as follows: (i) the Company believes that only
the New Mexico Legislature has the authority to order retail competition or a
pilot on retail access; (ii) several pilots have already been conducted in other
states and the key implementation issues to be addressed in a transition to a
competitive environment have already been identified and (iii) if state
legislation were passed regarding electric industry restructuring, a pilot as a
component of that legislation could be useful to test the enabling systems and
infrastructure necessary to implement that legislation on a small scale prior to
implementation of full scale open access. The Company also identified numerous
problems with the COA proposed pilot program, as it is not structured to provide
benefits to anyone other than COA.
The NMPUC staff presented an alternative proposal to the COA pilot
proposal, which was for a larger pilot that included a broader mix of customer
classes. At the hearing, the COA was receptive to the proposal and suggested
that it be run coincidentally with COA's pilot. The NMPUC staff also proposed
that the NMPUC order a separate proceeding to identify what stranded costs,
transition costs and administrative costs would be incurred by the Company in
connection with a pilot and the proper methodology for quantifying any
appropriate recovery.
The Company believes it is entitled to recover all of its costs, less
avoided production costs, if a pilot is pursued, but has moved to dismiss this
case for lack of jurisdiction by the NMPUC and lack of standing to file the case
by the COA. The NMPUC has not ruled on the motion. The NMPUC has not issued an
order on this case. Once an order is issued, the Company will review the
findings and will evaluate its options at that time.
SDG&E's Complaints
The Company has a contract with SDG&E which requires SDG&E to purchase
100 MW from the Company through April 2001. In 1993, SDG&E filed a complaint
with the FERC against the Company, alleging that certain charges under the 1985
power purchase agreement were unjust, unreasonable and unduly discriminatory. In
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.
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 $27 to $31 million as of
December 31, 1997. The Company believes that all three of the complaints are
without merit and intends to vigorously resist all three complaints.
36
<PAGE>
NATURAL GAS MARKETING ACTIVITIES
The Company is currently marketing natural gas in wholesale markets
outside of New Mexico in its Energy Services Business Unit. As of December 31,
1997, the Company served over 120 end-user 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 currently
extends through June 1999.
In 1997, the Company relied on physical commodity contracts to mitigate
its price risk exposure. Reliance on physical commodity contracts subjects the
Company to market, liquidity, performance and other risks that can have negative
impacts on margins. In 1997, the Company experienced margin losses of $4.4
million on sales of approximately $115 million related to its gas marketing
activities. Although the Company attempts to manage the risks associated with
its fixed price physical contracts in terms of contract volumes and prices, net
open positions exist. To the extent these net open positions exist, the Company
is exposed to the risk of fluctuating market prices which may result in future
losses to the Company.
During 1997, the Company did not use derivative financial instruments to
manage its price risk exposure in the marketing of natural gas. However, the
Company anticipates using derivative financial instruments beginning in 1998.
The Company measures the risk in the Company's commodity portfolio 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 gains and losses. The Company also monitors compliance with policies
approved by the Board relating to its trading activities.
THE IMPACT OF THE YEAR 2000 ISSUE
The Company is continuing to assess the impact of the Year 2000 issue on
its reporting systems, equipment and operations. The Year 2000 issue is the
result of computer programs being written using two digits rather than four to
define the applicable year. As a result, the computer systems could recognize
the year 2000 as the year 1900. This could result in a system failure or
miscalculations causing disruptions of operations. Equipment that contains
embedded chips may also be affected by the Year 2000 issue. Equipment affected
may range from hand held calculators, elevators, routers, transformers and
generators.
The Company plans to use both internal and external resources to have
its critical systems Year 2000 compliant by mid-1999. The Company is currently
replacing two major software systems which are projected to be completed during
1998 and will be Year 2000 compliant. However, the Company anticipates that the
conversion of certain non-critical systems may not be completed until late 1999.
In addition, certain portions of the project could be delayed if new hardware or
software upgrades are not available on time. As part of the Year 2000 project,
the Company also plans to inquire of other companies with which it transacts
business regarding their Year 2000 compliance issues in order to identify any
potential adverse impact to the Company.
The Company is in the process of assessing the cost to resolve the
impact of the Year 2000 issue on its operations, and anticipates to complete its
assessment by the end of 1998. The Company believes that if modifications,
conversions and replacements are not completed timely, the Year 2000 issue could
have a material adverse impact on the Company's operations.
ENVIRONMENTAL ISSUES
The Company is committed to complying with all applicable environmental
regulations. Environmental issues have presented and will continue to present a
challenge to the Company. The Company has evaluated the potential impacts of the
following environmental issues and believes, after consideration of established
reserves, that the ultimate outcome of these environmental issues will not have
a material adverse effect on the Company's financial condition or results of
operations.
37
<PAGE>
Electric Operations
Santa Fe Station
The Company and the NMED have conducted investigations of the
groundwater contamination detected beneath the former Santa Fe Generating
Station site to determine the source of the contamination. The Company has been
and is continuing to cooperate with the NMED regarding site investigations and
remedial planning pursuant to a Settlement Agreement between the Company and the
NMED. In June 1996, the Company received a letter from the NMED, indicating that
the NMED believes the Company is the source of gasoline contamination in a
municipal well supplying the City of Santa Fe and groundwater underlying the
Santa Fe Station. Further, the NMED letter stated that the Company was required
to proceed with interim remediation of the contamination pursuant to the New
Mexico Water Quality Control Commission ("NMWQCC") regulations. In July 1996,
the Company filed an appeal with the NMWQCC protesting the determination and
directives contained in the NMED's June 1996 letter. Subsequently, negotiation
meetings were conducted between the Company and the NMED for a resolution of the
groundwater contamination issue.
On October 3, 1996, the Company and the NMED signed an Amendment to the
Settlement Agreement concerning the groundwater contamination underlying the
site. As part of the Amendment, the Company agreed to spend approximately $1.2
million ("Settlement Amount") for certain costs related to sampling, monitoring,
and development and implementation of a remediation plan.
The amended Settlement Agreement does not, however, provide the Company
with a full and complete release from potential further liability for
remediation of the groundwater contamination. After the Company has expended the
Settlement Amount, if the NMED can establish through binding arbitration that
the Santa Fe Station is the source of the contamination, the Company could be
required to perform further remediation that is determined to be necessary. The
Company continues to dispute any contention that the Santa Fe Station is the
source of the groundwater contamination and believes that insufficient data
exists to identify the sources of groundwater contamination. The Company has
completed an aquifer characterization report and a groundwater quality report
associated with the 40 day reactivation of the adjacent Santa Fe supply well in
July and August of 1996. These reports strongly suggest the groundwater
contamination does not originate from the Santa Fe Station site and has been
drawn under the site by the pumping of the Santa Fe supply well. In addition,
other urban wells in Santa Fe are likely to be vulnerable to contamination from
off-site sources.
The Company and the NMED, with the cooperation of the City of Santa Fe,
have chosen a remediation plan proposed by a remediation contractor. The City of
Santa Fe, the Company and the NMED have entered into a Memorandum of
Understanding concerning the chosen remediation plan and the operation of the
municipal well adjacent to the Santa Fe Station site in connection with carrying
out that plan. Construction of the remediation system under the plan is expected
to commence in the second quarter of 1998. The system is expected to be in
operation early in the third quarter of 1998.
Person Station
The Company, in compliance with the NMED's Corrective Action Directive,
determined that groundwater contamination exists in the deep and shallow
groundwater at the Person Station site. The Company is required to delineate the
extent of the contamination and remediate the contaminants in the groundwater at
the Person Station site. The extent of the contaminant plume in the deep
groundwater was assessed and results were reported to the NMED. The Company
currently is involved with the process to renew the RCRA post-closure care
permit for the facility. Remedial actions for the deep groundwater will be
incorporated into the new permit. The Company has proposed a monitoring program
in conjunction with natural attenuation processes as the most cost effective
approach for the deep groundwater remediation. The Company's current estimate to
decommission its retired fossil-fueled plants includes approximately $6.3
million in additional expenses to complete the groundwater remediation program
at Person Station. As part of the financial assurance requirement of the Person
Station Hazardous Waste Permit, the Company established a trust fund. The
current value of the trust fund at December 31, 1997, was $7.3 million. The
remediation program continues on schedule.
38
<PAGE>
Gas Operations
Gas Wellhead Pit Remediation
The New Mexico Oil Conservation Commission issued an order, effective on
January 14, 1993, that affects the gas gathering facilities located in the San
Juan Basin in northwestern New Mexico. The BLM has issued a similar order. The
order prohibits the further discharge of fluids associated with the production
of natural gas into unlined earthen pits in specified areas (designated as
"vulnerable areas") in the San Juan Basin. The order also required the
submission of closure plans for the pits where further discharge was prohibited.
The Company has complied with the orders and has submitted and received approval
for pit closures from the OCD and the BLM.
These gas gathering facilities were sold to Williams on June 30, 1995.
As a part of the purchase and sale agreement, the Company agreed to cease
discharge to unlined earthen pits in designated vulnerable areas and to retain
the responsibility for pit closures for a stated period of time and to a stated
dollar amount. The Company has assessed the pits in accordance with OCD/BLM
directives, and is now in the process of closing pits and remediating them, if
necessary, at wellhead locations within the designated vulnerable areas. The
Company has submitted a groundwater management plan to the OCD and has received
approval of the plan, and is proceeding with delineation of groundwater
contamination and, as necessary, cleanup, in accordance with the approved plan.
The Company will address soil and groundwater contamination within the dollar
and time limitations imposed by the purchase and sale agreement with Williams,
and in accordance with the requirements of the OCD.
In March 1995, the Jicarilla Apache Tribe ("Jicarilla") enacted an
ordinance directing that unlined surface impoundments located within
environmentally sensitive areas be remediated and closed by December 1996, and
that all other unlined surface impoundments on Jicarilla lands be remediated and
closed by December 1998. In 1995, the Company received a claim for
indemnification by Williams, the purchaser of the Company's gas gathering and
processing assets, for the environmental work required to comply with the
Jicarilla ordinance. The Company submitted a closure/remediation plan to the
Jicarillas, which was approved. The Company's remediation work pursuant to the
plan commenced in mid-1996, and the costs of remediation are being charged
against the $10.6 million indemnification cap contained in the purchase and sale
agreement between the Company and Williams. The Company met the requirement for
closing and remediating pits within the environmentally sensitive area by
December 1996, and anticipates closing and remediating all other pits associated
with the gas gathering and processing assets by the December 1998 deadline
specified in the ordinance.
COAL FUEL SUPPLY
The coal requirements for SJGS are being supplied by SJCC, a wholly
owned subsidiary of BHP, from certain Federal, state and private coal leases
under a Coal Sales Agreement, pursuant to which SJCC will supply processed coal
for operation of SJGS until 2017. 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 Federal 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 was 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.
In 1996, the Company was notified by BHP, fuel supplier to SJGS, that
the Navajo Nation has proposed to select certain properties within the San Juan
and La Plata Mines (the "mining properties") pursuant to the Navajo-Hopi Land
Settlement Act of 1974 (the "Act"). The mining properties are operated by BHP
under leases from the BLM and comprise a portion of the fuel supply for SJGS. An
39
<PAGE>
administrative appeal by BHP is pending. In the appeal, BHP expressed concern
that transfer of the mining properties to the Navajo Nation may subject the
mining operations to taxation and additional regulation by the Navajo Nation,
both of which could increase the price of coal that might potentially be passed
on to SJGS through the existing Coal Sales Agreement. A stay of all actions by
the BLM has been ordered by the Interior Board of Land Appeals pending
resolution of the issues on appeal. The Company is monitoring closely the appeal
and other developments on this issue and will continue to assess potential
impacts to SJGS and the Company's operations. Currently, the Company is unable
to predict the ultimate outcome of this matter but does not believe it will have
a material adverse effect on the Company's financial condition or results of
operations.
ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION
As described in note 3 to the consolidated financial statements, the
Company is subject to the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 71, Accounting for the Effects of Certain Types of
Regulation. In the event the Company determines that it no longer meets the
criteria for following SFAS No. 71, the accounting impact would be an
extraordinary, non-cash charge to operations of an amount that could be
material. Criteria that may give rise to the discontinuance of SFAS No. 71
include: (1) increasing competition that restricts the Company's ability to
establish prices to recover specific costs and (2) a significant change in the
manner in which rates are set by regulators from cost-based regulation to
another form of regulation. The Company periodically reviews these criteria to
ensure that the continuing application of SFAS No. 71 is appropriate. Based on a
current evaluation of the various factors and conditions that are expected to
impact future cost recovery, the Company believes that its regulatory assets
(net of related regulatory liabilities), including those related to generation,
are probable of future recovery.
ACCOUNTING STANDARDS
Environmental Remediation Liabilities. Effective January 1, 1997, the
Company adopted the provisions of the American Institute of Certified Public
Accountants' Statement of Position ("SOP") 96-1, Environmental Remediation
Liabilities. This Statement provides authoritative guidance for recognition,
measurement, display and disclosure of environmental remediation liabilities in
financial statements. The Company previously recorded environmental liabilities
of $24.0 million for its retired fossil-fueled plants. Approximately $14.4
million of the $24.0 million has been expended through December 31, 1997. The
adoption of SOP 96-1 did not have a material impact on the Company's financial
position or results of operations.
Nuclear Plant Decommissioning. The staff of the SEC has questioned
certain of the current accounting practices of the electric utility industry
regarding the recognition, measurement and classification of decommissioning
costs for nuclear generating stations in financial statements of electric
utilities. In response to these questions, the FASB has added a project to its
agenda to review the accounting for closure and removal costs, including
decommissioning of nuclear power plants. If current electric utility industry
accounting practices for nuclear power plant decommissioning are changed, the
annual provision for decommissioning could increase relative to 1996, and the
estimated cost for decommissioning could be recorded as a liability (rather than
as accumulated depreciation), with recognition of an increase in the cost of the
related nuclear power plant. The Company does not believe that such changes, if
required, would have a material adverse effect on results of operations.
Reporting Comprehensive Income and Disclosure about Segments of an
Enterprise and Related Information. During 1997, FASB issued SFAS No. 130,
Reporting Comprehensive Income and SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information. These statements are not effective until
1998. SFAS No. 130 requires the reporting and display of comprehensive income
and its components in financial statements. The objective of this statement is
to report a measure of all changes in equity that resulted from transactions and
other economic events of the period other than transactions with owners.
Comprehensive income is the total of net income and all other nonowner changes
in equity. SFAS No. 131 requires a public company to report selected information
about its reportable operating segments in annual and interim condensed
financial statements. This statement introduces a new model for segment
reporting, called the "management approach" for identifying operating segments.
Operating segments are components of an enterprise for which discrete financial
information is available, that is evaluated regularly by the chief operating
decision-maker within a company in order to make operating decisions and assess
performance.
40
<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; (x) weather conditions and (xi) failure to 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.
41
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Page
----
Management's Responsibility for Financial Statements ................... F-1
Report of Independent Public Accountants ............................... F-2
Financial Statements:
Consolidated Statements of Earnings .................................. F-3
Consolidated Statements of Retained Earnings (Deficit) ............... F-4
Consolidated Balance Sheets .......................................... F-5
Consolidated Statements of Cash Flows ................................ F-6
Consolidated Statements of Capitalization ............................ F-7
Notes to Consolidated Financial Statements ........................... F-8
Supplementary Data:
Quarterly Operating Results .......................................... F-36
Comparative Operating Statistics ..................................... F-37
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Public Service Company of New Mexico (the "Company")
is responsible for the preparation and presentation of the accompanying
consolidated financial statements. The consolidated financial statements have
been prepared in conformity with generally accepted accounting principles and
include amounts that are based on informed estimates and judgments of
management. Management maintains a system of internal accounting controls which
it believes is adequate to provide reasonable assurance that assets are
safeguarded, transactions are executed in accordance with management
authorization and the financial records are reliable for preparing the
consolidated financial statements. The system of internal accounting controls is
supported by written policies and procedures, by a staff of internal auditors
who conduct comprehensive internal audits and by the selection and training of
qualified personnel. The board of directors, through its audit committee
comprised entirely of outside directors, meets periodically with management,
internal auditors and the Company's independent auditors to discuss auditing,
internal control and financial reporting matters. To ensure their independence,
both the internal auditors and independent auditors have full and free access to
the audit committee. The independent auditors, Arthur Andersen LLP, are engaged
to audit the Company's consolidated financial statements in accordance with
generally accepted auditing standards.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Public Service Company of New Mexico:
We have audited the accompanying consolidated balance sheets and statements of
capitalization of Public Service Company of New Mexico (a New Mexico
corporation) and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of earnings, retained earnings (deficit), and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Public Service Company of New
Mexico and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
February 10, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31,
------------------------------------
1997 1996 1995
---------- --------- ---------
(In thousands except per share amounts)
<S> <C> <C> <C>
Operating Revenues:
Electric $ 722,438 $ 645,639 $ 584,284
Gas 294,769 227,301 217,985
Energy Services 118,060 10,446 -
Water - - 6,196
----------- ---------- ----------
Total operating revenues 1,135,267 883,386 808,465
----------- ---------- ----------
Operating Expenses:
Fuel and purchased power 235,508 178,807 140,752
Gas purchased for resale 169,758 103,574 94,299
Gas purchased for resale and other - Energy Services 121,728 9,485 -
Other operation expenses 273,692 263,432 257,627
Maintenance and repairs 52,629 49,694 55,809
Depreciation and amortization 82,702 78,116 80,865
Taxes, other than income taxes 36,871 34,864 35,531
Income taxes 38,334 39,395 30,194
----------- ---------- ----------
Total operating expenses 1,011,222 757,367 695,077
----------- ---------- ----------
Operating income 124,045 126,019 113,388
----------- ---------- ----------
Other Income and Deductions:
Other 21,548 2,367 40,707
Income tax expense (8,384) (1,099) (20,599)
----------- ---------- ----------
Net other income and deductions 13,164 1,268 20,108
----------- ---------- ----------
Income before interest charges 137,209 127,287 133,496
----------- ---------- ----------
Interest Charges:
Interest on long-term debt 46,670 49,009 52,637
Other interest charges 9,544 5,698 5,297
----------- ---------- ----------
Net interest charges 56,214 54,707 57,934
----------- ---------- ----------
Net Earnings 80,995 72,580 75,562
Preferred Stock Dividend Requirements 586 586 3,714
----------- ---------- ----------
Net Earnings Available for Common Stock $ 80,409 $ 71,994 $ 71,848
=========== ========== ==========
Average Number of Common Shares Outstanding 41,774 41,774 41,774
=========== ========== ==========
Net Earnings per Common Share (Basic) $ 1.92 $ 1.72 $ 1.72
=========== ========== ==========
Net Earnings per Common Share (Diluted) $ 1.91 $ 1.71 $ 1.72
=========== ========== ==========
Dividends Paid per Share of Common Stock $ 0.63 $ 0.36 $ -
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
Year Ended December 31,
-------------------------------------
1997 1996 1995
---------- ---------- ----------
(In thousands)
Balance at Beginning of Year $ 77,185 $ 25,243 $ (46,006)
Net earnings 80,995 72,580 75,562
Redemption of cumulative preferred stock - - (599)
Dividends:
Cumulative preferred stock (586) (586) (3,714)
Common stock (28,406) (20,052) -
----------- ---------- ----------
Balance at End of Year $ 129,188 $ 77,185 $ 25,243
=========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
As of December 31,
-----------------------
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
Utility Plant, at original cost except PVNGS:
Electric plant in service $1,958,912 $1,918,238
Gas plant in service 441,045 424,827
Energy services plant in service - 1,241
Common plant in service 43,415 40,005
Plant held for future use 551 639
----------- -----------
2,443,923 2,384,950
Less accumulated depreciation and amortization 1,003,086 937,228
----------- -----------
1,440,837 1,447,722
Construction work in progress 104,497 76,038
Nuclear fuel, net of accumulated amortization of
$21,263 and $20,413 27,816 28,933
----------- -----------
Net utility plant 1,573,150 1,552,693
----------- -----------
Other Property and Investments:
Non-utility property, net of accumulated depreciation
of $2,146 and $1,774 4,502 3,434
Other investments, at cost 300,438 250,834
----------- -----------
Total other property and investments 304,940 254,268
----------- -----------
Current Assets:
Cash 8,705 11,125
Temporary investments, at cost 9,490 9,128
Receivables, net of allowance for uncollectible
accounts of $783 and $709 216,305 197,025
Income taxes receivable - 18,825
Fuel, materials and supplies, at average cost 33,664 41,260
Gas in underground storage, at average cost 13,158 2,679
Other current assets 4,509 6,632
----------- -----------
Total current assets 285,831 286,674
----------- -----------
Deferred charges 149,811 136,679
----------- -----------
$2,313,732 $2,230,314
=========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity:
Common stock outstanding--41,774 shares $ 208,870 $ 208,870
Additional paid-in capital 469,073 470,358
Excess pension liability, net of tax (2,727) (2,102)
Retained earnings since January 1, 1989 129,188 77,185
----------- -----------
Total common stock equity 804,404 754,311
Cumulative preferred stock without mandatory
redemption requirements 12,800 12,800
Long-term debt, less current maturities 713,995 713,919
----------- -----------
Total capitalization 1,531,199 1,481,030
----------- -----------
Current Liabilities:
Short-term debt 114,100 100,400
Accounts payable 154,501 130,661
Dividends payable 7,248 5,159
Current maturities of long-term debt 350 14,970
Accrued interest and taxes 24,161 23,356
Other current liabilities 26,102 25,477
----------- -----------
Total current liabilities 326,462 300,023
----------- -----------
Deferred Credits:
Accumulated deferred investment tax credits 57,823 62,258
Accumulated deferred income taxes 121,353 110,266
Other deferred credits 276,895 276,737
----------- -----------
Total deferred credits 456,071 449,261
----------- -----------
Commitments and Contingencies
$2,313,732 $2,230,314
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------
1997 1996 1995
--------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings $ 80,995 $ 72,580 $ 75,562
Adjustments to reconcile net earnings to net cash flows
from operating activities:
Depreciation and amortization 94,924 90,458 92,588
Accumulated deferred investment tax credit (4,436) (4,476) (4,830)
Accumulated deferred income taxes 11,080 31,436 1,622
Gain on sale of utility property - (309) (39,050)
Write-down of natural gas vehicle program - 2,810 1,445
Curtailment gain on defined benefit pension plan - (13,316) -
Changes in certain assets and liabilities:
Receivables 4,554 (83,416) 795
Fuel, materials and supplies (2,883) 5,795 (26,505)
Deferred charges (11,190) 5,190 6,731
Accounts payable 23,808 36,930 (11,527)
Accrued interest and taxes 805 (3,500) (1,218)
Deferred credits 2,455 12,655 29,185
Other (371) (9,279) 5,645
Other, net 13,381 22,343 17,671
--------- ---------- ---------
Net cash flows from operating activities 213,122 165,901 148,114
--------- ---------- ---------
Cash Flows From Investing Activities:
Utility plant additions (128,371) (103,087) (107,666)
Increase in nuclear decommissioning trust (23,000) - -
Return of principal of PVNGS lease obligation bonds 5,018 - -
Utility plant sales - 333 206,482
Other property sales - 702 (801)
Net increase in other property and investments (6,814) (14,706) -
Escrow for purchase of PVNGS lease obligation bonds (28,900) (208,446) -
Decrease (increase) in temporary investments, net (363) 86,844 (21,451)
--------- ---------- ---------
Net cash flows from investing activities (182,430) (238,360) 76,564
--------- ---------- ---------
Cash Flows From Financing Activities:
Redemption of PVNGS lease obligation bonds - - (132,663)
Redemptions and repurchases of preferred stock - - (64,175)
Bond redemption premium and costs (3,693) (5,158) (505)
Proceeds from (repayments of) asset securitization (13,900) 100,400 18,758
Repayments of long-term debt (14,970) (326) (57,768)
Trust borrowing for nuclear decommissioning 23,000 - -
Increase in short-term debt 4,600 - -
Exercise of employee stock options (1,285) - -
Dividends paid (26,864) (15,560) (5,126)
--------- ---------- ---------
Net cash flows from financing activities (33,112) 79,356 (241,479)
--------- ---------- ---------
Increase (Decrease) in Cash (2,420) 6,897 (16,801)
Cash at Beginning of Year 11,125 4,228 21,029
--------- ---------- ---------
Cash at End of Year $ 8,705 $ 11,125 $ 4,228
========= ========== =========
Supplemental cash flow disclosures:
Interest paid $ 57,302 $ 55,480 $ 63,366
========= ========== =========
Income taxes paid, net of refunds $ 20,175 $ 31,617 $ 52,405
========= ========== =========
</TABLE>
Cash consists of currency on hand and demand deposits.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
----------- -----------
(In thousands)
Common Stock Equity:
<S> <C> <C>
Common Stock, par value $5 per share $ 208,870 $ 208,870
Additional paid-in capital 469,073 470,358
Excess pension liability, net of tax (2,727) (2,102)
Retained earnings since January 1, 1989 129,188 77,185
----------- -----------
Total common stock equity 804,404 754,311
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Shares
Outstanding at Current
Stated December 31, Redemption
Value 1997 Price
------------ ------------------ ------------
<S> <C> <C> <C> <C> <C>
Cumulative Preferred Stock:
Without mandatory redemption requirements:
1965 Series, 4.58% $100.00 128,000 $102.00 12,800 12,800
================== ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Long-Term Debt:
Issue and Final Maturity Interest Rates
---------------
First mortgage bonds:
1997 5 7/8% - 14,650
1999 through 2002 7 1/4% to 8 1/8% 42,556 42,876
2005 through 2007 8 1/8% to 9 1/8% 43,276 43,276
2008 9% 54,374 54,374
Pollution control revenue bonds:
2007 through 2026 5.7% to 6 1/2% 574,345 537,045
2022 Variable rate - 37,300
----------- -----------
Total first mortgage bonds 714,551 729,521
Other, including unamortized premium
and (discount), net (206) (632)
----------- -----------
Total long-term debt 714,345 728,889
Less current maturities 350 14,970
----------- -----------
Long-term debt, less current maturities 713,995 713,919
----------- -----------
Total Capitalization $1,531,199 $1,481,030
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies
Organization
Public Service Company of New Mexico (the "Company") is an
investor-owned utility company engaged in the generation, transmission,
distribution and sale of electricity. The Company provides retail electric
service to a large area of north central New Mexico, including the cities of
Albuquerque, Santa Fe, Rio Rancho, Las Vegas, Belen and Bernalillo. The City of
Albuquerque (the "COA"), Bernalillo County and the City of Las Vegas franchises
expired in 1992, 1997 and 1996, respectively. Customers in the area covered by
the expired franchises represent approximately 40.2%, 8.6% and 1.2%,
respectively, of the Company's 1997 total electric operating revenues, and no
other franchise area represents more than 6.1%. The Company continues to collect
and pay franchise fees to both the COA and the City of Las Vegas. The Company
currently does not pay franchise fees to Bernalillo County. The Company remains
obligated under state law to provide service to customers in the franchise area
even in the absence of a franchise agreement. The Company also provides retail
electric service to Deming in southwestern New Mexico and to Clayton in
northeastern New Mexico. The Company is also engaged in the transmission,
distribution and sale of natural gas within the State of New Mexico. The Company
distributes natural gas to most of the major communities in New Mexico,
including Albuquerque and Santa Fe. In addition, in pursuing new business
opportunities, the Company is focusing on energy and utility related activities
under its Energy Services Business Unit. These activities will provide energy
marketing and energy management services, the marketing of natural gas outside
of New Mexico, management services for water and wastewater systems and utility
related management and operation services for Federal installations and other
large commercial institutions. The Company is also operating the City of Santa
Fe's water system.
Systems of Accounts
The Company maintains its accounts for utility operations primarily in
accordance with the uniform systems of accounts prescribed by the Federal Energy
Regulatory Commission ("FERC") and the National Association of Regulatory
Utility Commissioners, and adopted by the New Mexico Public Utility Commission
("NMPUC").
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and subsidiaries in which it owns a majority voting interest. All
significant intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual recorded amounts could differ from those estimated.
Utility Plant
Utility plant, with the exception of Palo Verde Nuclear Generating
Station ("PVNGS") Unit 3 and the Company's purchased 22% beneficial interests in
the PVNGS Units 1 and 2 leases, is stated at original cost, which includes
capitalized payroll-related costs such as taxes, pension and other fringe
benefits, administrative costs and an allowance for funds used during
construction. Utility plant includes certain electric assets not subject to
regulation. The results of operations of such electric assets are included in
operating income.
F-8
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies (Continued)
It is Company policy to charge repairs and minor replacements of
property to maintenance expense and to charge major replacements to utility
plant. Gains or losses resulting from retirements or other dispositions of
operating property in the normal course of business are credited or charged to
the accumulated provision for depreciation.
Depreciation and Amortization
Provision for depreciation and amortization of utility plant is made at
annual straight-line rates approved by the NMPUC. The average rates used are as
follows:
1997 1996 1995
---- ---- ----
Electric plant ................ 3.33% 3.32% 3.32%
Gas plant ..................... 3.23% 3.27% 3.21%
Common plant .................. 7.60% 7.00% 9.61%
Effective January 1, 1995, electric plant depreciation rates were revised
and include a provision for the recovery of fossil-fueled plant decommissioning
costs approved by the NMPUC in 1994. Gas plant depreciation rates were approved
by the NMPUC and revised in March 1997.
The provision for depreciation of certain equipment is charged to
clearing accounts and subsequently allocated to operating expenses or
construction projects based on the use of the equipment. Depreciation of
non-utility property is computed on the straight-line method. Amortization of
nuclear fuel is computed based on the units of production method.
Nuclear Decommissioning
The Company accounts for nuclear decommissioning costs on a
straight-line basis over the estimated useful life of the facilities. Such
amounts are based on the net present value of expenditures estimated to be
required to decommission the plant.
Fuel and Purchased Power Cost Adjustment Clause ("FPPCAC")
The Company uses the deferral method of accounting for fuel and
purchased power costs for its firm-requirements wholesale customers. Such
amounts are reflected in subsequent periods under a FPPCAC approved by the FERC.
Purchased Gas Adjustment Clause ("PGAC")
The Company uses the deferral method of accounting for gas purchase
costs which are settled in subsequent periods under gas adjustment clauses.
Future recovery of these costs is subject to approval by the NMPUC.
F-9
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies (Continued)
Amortization of Debt Discount, Premium and Expense
Discount, premium and expense related to the issuance of long-term debt
are amortized over the lives of the respective issues. In connection with the
retirement of long-term debt, such amounts associated with resources subject to
NMPUC regulation are amortized over the lives of the respective issues. Amounts
associated with the Company's firm-requirements wholesale customers and its
resources excluded from NMPUC retail rates are recognized immediately as expense
or income as they are incurred.
Income Taxes
The Company reports income tax expense in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
SFAS No. 109 requires deferred income taxes for temporary differences between
financial and income tax reporting to be recorded using the liability method.
Deferred income taxes are computed using the statutory tax rates scheduled to be
in effect when the temporary differences reverse. Current NMPUC jurisdictional
rates include the tax effects of the majority of these temporary differences
(normalization). Recovery of reversing temporary differences previously
accounted for under the flow-through method is also included in rates charged to
customers. For regulated operations, any changes in tax rates applied to
accumulated deferred income taxes may not be immediately recognized because of
ratemaking and tax accounting provisions contained in the Tax Reform Act of
1986. Items accorded flow-through treatment under NMPUC orders, deferred income
taxes and the future ratemaking effects of such taxes, as well as corresponding
regulatory assets and liabilities, are recorded in the financial statements.
Accounting Standards
Environmental Remediation Liabilities. Effective January 1, 1997, the
Company adopted the provisions of The American Institute of Certified Public
Accountants Statement of Position ("SOP") 96-1, Environmental Remediation
Liabilities. This Statement provides authoritative guidance for recognition,
measurement, display and disclosure of environmental remediation liabilities in
financial statements. The Company previously recorded environmental liabilities
of $24.0 million for its retired fossil-fueled plants. Approximately $14.4
million of the $24.0 million has been expended as of December 31, 1997. The
adoption of SOP 96-1 did not have a material impact on the Company's financial
position or results of operations.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. In June 1996, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities. This Statement establishes,
among other things, new criteria for determining whether a transfer of financial
assets should be accounted for as a sale or as a pledge of collateral in a
secured borrowing. SFAS No. 125 also establishes new accounting requirements for
pledged collateral. SFAS No. 125 is effective for all transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, is to be applied prospectively, and earlier or retroactive application is
not permitted.
F-10
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies (Continued)
Nuclear Plant Decommissioning. The staff of the Securities and Exchange
Commission has questioned certain of the current accounting practices of the
electric utility industry regarding the recognition, measurement and
classification of decommissioning costs for nuclear generating stations in
financial statements of electric utilities. In response to these questions, the
FASB has added a project to its agenda to review the accounting for closure and
removal costs, including decommissioning of nuclear power plants. If current
electric utility industry accounting practices for nuclear power plant
decommissioning are changed, the annual provision for decommissioning could
increase relative to 1997, and the estimated cost for decommissioning could be
recorded as a liability (rather than as accumulated depreciation), with
recognition of an increase in the cost of the related nuclear power plant. The
Company does not believe that such changes, if required, would have a material
adverse effect on results of operations.
Risk Management Activities
The Company's Board of Directors ("Board") approved a Corporate policy
statement regarding risk management activities. The Company is exposed to market
risk from changes in certain energy related commodity prices. Although the
Company is allowed to enter into certain derivative transactions to manage the
volatility relating to the price exposure, the Company did not use derivative
financial instruments to hedge this price risk exposure during 1997. Because
market prices of certain energy commodities depend on a number of unpredictable
factors, such as weather, the Company is currently managing the resulting
volatility using commodities contracts. Beginning in 1998, the Company is
planning to use derivative financial instruments, including exchange-traded
financial futures, options, swaps and other derivative financial instruments as
part of an overall risk-management strategy. These instruments are to be used
only as a means of hedging exposure to price and interest-rate risk connected to
anticipated transactions or existing assets and liabilities. The Company does
not intend to open a derivative position for speculative purposes.
Once the Company enters into derivative transactions, deferral (hedge)
accounting will be applied only if the derivative financial instrument reduces
the risk of the underlying hedged item and is designated at inception as a hedge
with respect to the hedged item. Additionally, the derivative must result in
payoffs that are expected to be inversely correlated to those of the hedged
item. Correlation will be assessed monthly and measured on a rolling three month
average. If a derivative instrument ceases to meet the criteria for deferral or
settlement accounting, any subsequent gains and losses will be recognized in
income. If a hedging instrument is sold or terminated prior to maturity, gains
and losses will continue to be deferred until the hedged item is recognized in
income.
Performance Stock Plan
The Company continues to apply Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized for this plan.
F-11
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(2) Risks and Uncertainties
Competition and restructuring of the electric utility industry continue
to be key issues facing the Company. Efforts to advance and determine the
eventual form of industry restructuring continued during 1997.
At the state level, the Company proposed in April 1997 that the NMPUC
reconvene the proceedings involving the NMPUC's Notice of Inquiry into the
restructuring of the electric industry, in an attempt to arrive at consensus
legislation to be presented to the 1998 session of the New Mexico Legislature.
In May 1997, the NMPUC issued an order accepting the Company's proposal for a
collaborative effort, and the proposal for a series of meetings to be held among
all interested parties. The parties held several meetings in which the Company
actively participated. However, in September 1997, the collaborative process to
draft legislation was declared at an impasse due to disagreement on issues
regarding the divestiture of generation and energy service units from electric
distribution and transmission systems, and the recoverability of stranded costs.
Although the parties could not reach agreement, the Company filed its
own proposal for industry restructuring in September 1997 with both the NMPUC,
and the Water, Utilities and Natural Resources Committee ("WUNR") of the New
Mexico Legislature.
The Company's proposal called for an immediate rate reduction of $10
million per year for residential customers from the effective date of proposed
legislation until open access without the need for a rate case. The proposal
also called for full retail competition no later than January 1, 2001. Other
parts 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 natural gas. Other services, usually associated with
distribution, 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 for PVNGS Unit 3 which
was previously excluded from New Mexico jurisdictional rates. However, the
Company would recover all fixed costs associated with PVNGS Units 1 and 2
through a non-bypassable "wires charge" from 2001 to 2016. The proposal also
called for certain credits to stranded costs which would effectively shorten the
time period for recovery. The Company currently estimates that if the market
clearing price for power, which represents the cost of generation at the plant,
fell to 3.0 cents/KWh, it may incur an after-tax write-off of approximately $176
million related to its fossil fuel generation if the Company assumes this risk.
The Company's proposal was supported by various parties to the collaborative
process, including Enron Corporation, the New Mexico Retail Association,
Southwestern Public Service Company ("SPS"), the United States Executive
Agencies and the International Brotherhood of Electrical Workers. However, the
Company's proposal was not adopted by the WUNR and not introduced during the
1998 legislative session. The WUNR declined to recommend any restructuring
legislation as a committee bill during the 1998 legislative session.
On January 22, 1998, the NMPUC submitted its own report to the New Mexico
Legislature related to restructuring of the electric utility industry. The
following key points were included in the report: (i) PVNGS and Plains Escalante
Generating Station are the most debated issues in deregulation because of their
potential stranded costs; (ii) stranded costs, if determined to be lawful,
should be verified by the NMPUC or its successor, the Public Regulation
Commission ("PRC"); (iii) market power issues may be addressed through
functional separation or partial or complete divestiture of generation,
transmission and distribution; (iv) unbundling is necessary to understand the
disparities among various electricity providers; (v) despite an abundance of
natural resources to fuel generation facilities, New Mexico customers pay more
for electricity because of costs associated with generation plants; (vi) on
average, New Mexico residential customers pay more for electricity than regional
and national
F-12
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(2) Risks and Uncertainties (Continued)
residential customers and (vii) system reliability must be maintained or
enhanced, and customers must be educated and environmental protections should be
promoted. In addition, sample legislation was attached to the report, giving
either the NMPUC or the PRC authority to conclude matters relating to electric
industry restructuring. The report was issued as a result of a NMPUC case and,
with the issuance of the report, the case was closed.
The NMPUC's draft legislation was not introduced during the 1998
legislative session. House Memorial 27, the only measure dealing with
restructuring, passed the House. Memorial 27 stated the intent of the
legislature to address the issue of electric industry restructuring in the 1999
session and declared that the NMPUC does not have statutory authority to
implement restructuring at this time. The Memorial 27 did not require
concurrence by the Senate; however, an identical Senate Memorial was not acted
upon by the full Senate prior to adjournment.
In a related matter, in 1996, the NMPUC ordered all utilities under its
jurisdiction to file their estimates of stranded costs, absent any recovery
method being adopted, based on the Texas Public Utility Commission Economic Cost
Over Market ("ECOM") model. The Company, in its filing, presented two
methodologies: (i) using the ECOM model, the Company's stranded cost estimates
run from $657 million for a 1998 full retail access case to $119 million for a
2002 full retail access case and (ii) using a second methodology, based upon the
difference between the Company's costs of existing generation and the costs of
new combined cycle and combustion turbine units to serve the same load, the
Company's costs above the level of new gas units, in 1997 dollars, were
estimated at $748 million for a 1998 full retail access case to $327 million for
a 2002 full retail access case. The Company advised the NMPUC that the results
of the ECOM model are highly sensitive to various assumptions, primarily
projections of future gas prices. This information was addressed in the NMPUC's
report submitted to the New Mexico Legislature.
F-13
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(3) Regulatory Assets and Liabilities
The Company is subject to the provisions of SFAS No. 71, Accounting for
the Effects of Certain Types of Regulation, on operations regulated by the
NMPUC. Regulatory assets represent probable future revenue to the Company
associated with certain costs which will be recovered from customers through the
ratemaking process. Regulatory liabilities represent probable future reductions
in revenues associated with amounts that are to be credited to customers through
the ratemaking process. Regulatory assets and liabilities reflected in the
Consolidated Balance Sheets as of December 31 relate to the following:
1997 1996
---- ----
(In thousands)
Deferred Income Taxes ............................$ 70,968 $ 71,682
Gas Take-or-Pay Costs ............................ 19,953 36,335
PGAC ............................................. 16,006 28,873
Gas Imputed Revenues ............................. 12,823 10,362
Loss on Reacquired Debt .......................... 8,869 7,850
Gas Reservation Fees ............................. 7,029 7,029
Gas Retirees' Health Care Costs .................. 6,345 4,437
Deferred Customer Expense on Gas Assets Sale ..... 5,260 5,260
Proposed Transmission Line Costs ................. 2,903 3,111
EPNG Risk Sharing Surcharge ...................... 2,196 -
Gas Rate Case Costs .............................. 1,571 1,571
Other ............................................ 118 598
--------- ---------
Subtotal .................................... 154,041 177,108
--------- ---------
Deferred Income Taxes ............................ (53,132) (56,961)
Gas Regulatory Reserve ........................... (27,881) (24,614)
Customer Gain on Gas Assets Sale ................. (11,856) (22,230)
PVNGS Prudence Audit ............................. (6,561) (6,937)
Revenue Subject to Refund ........................ (3,896) (3,594)
Settlement Due Customers ......................... (3,743) (4,072)
EPNG Risk Sharing Surcharge ...................... (2,196) -
Other ............................................ (723) -
Gain on Reacquired Debt .......................... (546) (559)
--------- ---------
Subtotal (110,534) (118,967)
--------- ---------
Net Regulatory Assets .......................$ 43,507 $ 58,141
========= =========
As of December 31, 1997, substantially all of the Company's regulatory
assets and regulatory liabilities are being recovered in rates charged to
customers or have been addressed in a regulatory proceeding. If a portion of the
Company's operations under the NMPUC jurisdiction becomes no longer subject to
the provisions of SFAS No. 71, a write off of related regulatory assets and
liabilities would be required, unless some form of transition cost recovery
(refund) continues through rates established and collected for the Company's
remaining regulated operations. Based on a current evaluation of the various
factors and conditions that are expected to impact future cost recovery, the
Company believes that its regulatory assets are probable of future recovery.
F-14
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(3) Regulatory Assets and Liabilities (Continued)
Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of.
This statement imposes a stricter criterion for regulatory assets by requiring
that such assets be probable of future recovery at each balance sheet date.
Based on the current regulatory structure in which the Company operates,
adoption of this standard did not have a material impact on the Company's
financial position or results of operations. However, the Company's ability to
meet the criterion may change in the future as competitive factors influence
wholesale and retail pricing in this industry.
(4) Capitalization
Changes in common stock, additional paid-in capital and cumulative
preferred stock are as follows:
<TABLE>
<CAPTION>
Cumulative
Preferred Stock
----------------------
Without Mandatory
Redemption
Common Stock Requirements
------------------------- ----------------------
Additional Aggregate
Number Aggregate Paid-In Number Stated
of Shares Par Value Capital of Shares Value
--------- --------- ------- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995
and 1996 41,774,083 $ 208,870 $ 470,358 128,000 $ 12,800
Exercise of stock options (1,285)
------------ ----------- ----------- --------- ----------
Balance at December 31, 1997 41,774,083 $ 208,870 $ 469,073 128,000 $ 12,800
============ =========== =========== ========= ==========
</TABLE>
Common Stock
The number of authorized shares of common stock with par value of $5 per
share is 80 million shares.
On December 9, 1997, the Company's Board declared a quarterly cash
dividend of 17 cents per share of common stock payable February 20, 1998 to
shareholders of record as of February 2, 1998. The Company resumed the payment
of cash dividends on common stock starting in May 1996. 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.
On September 16, 1996, the Company implemented a dividend reinvestment
and stock purchase plan for investors, including customers and employees. The
plan, called PNM Direct, also includes safekeeping services and automatic
investment features. The Company's stock is purchased in the open market to meet
plan requirements.
F-15
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(4) Capitalization (Continued)
Cumulative Preferred Stock
The number of authorized shares of cumulative preferred stock is 10
million shares. The Company has 128,000 shares, 1965 Series, 4.58%, stated value
of $100 per share, of cumulative preferred stock outstanding. The 1965 Series
does not have a mandatory redemption requirement but may be redeemable at 102%
of the par value with accrued dividends. The holders of the 1965 Series are
entitled to payment before holders of common stock in the event of any
liquidation or dissolution or distribution of assets of the Company. In
addition, the 1965 Series is not entitled to a sinking fund and cannot be
converted into any other class of stock of the Company. The Company's restated
articles of incorporation limit the amount of preferred stock which may be
issued. The earnings test in the Company's restated articles of incorporation
currently allows for the issuance of preferred stock.
Long-Term Debt
Substantially all utility plant is pledged to secure the Company's first
mortgage bonds. A portion of certain series of long-term debt will be redeemed
serially prior to their due dates. The issuance of first mortgage bonds by the
Company is subject to earnings coverage and bondable property provisions of the
Company's first mortgage bond indenture. The Company also has the capability
under the mortgage indenture to issue first mortgage bonds on the basis of
certain previously retired bonds and earnings.
The aggregate amounts (in thousands) of maturities for 1998 through
2002 on long-term debt outstanding at December 31, 1997 are as follows:
1998 ................................................ $ 350
1999 ................................................ $ 12,030
2000 ................................................ $ 1,050
2001 ................................................ $ 16,038
2002 ................................................ $ 15,900
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).
The effect of the refinancing resulted in a decrease in interest charges of
approximately $1.1 million in 1997.
F-16
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(4) Capitalization (Continued)
On December 1, 1997, the Company converted $137.3 million of pollution
control revenue bonds from variable rate to fixed rates. Of the total, $100
million of City of Farmington bonds (Pollution Control Revenue Refunding Bonds,
$40 million 1997 Series A, $37 million 1997 Series B, and $23 million 1997
Series C) were converted to a fixed rate of 5.80% and $37.3 million of Maricopa
County, Arizona Pollution Control Corporation bonds (Pollution Control Revenue
Refunding Bonds, $37.3 million 1992 Series A) were converted to a fixed rate of
5.75%. The City of Farmington bonds mature on April 1, 2022, and the Maricopa
County, Arizona Pollution Control Corporation bonds mature on November 1, 2022.
Revolving Credit Facility and Other Credit Facilities
At December 31, 1997, the Company has a $100 million revolving credit
facility (the "Facility") with an expiration date of June 30, 1998. The Company
must pay commitment fees of 3/10% per year on the total amount of the Facility.
The Company expects to renew the Facility before its expiration date with a
five-year $300 million senior unsecured revolving credit facility ("Revolver").
The Company also has a $100 million credit facility, which expires on May 20,
2001, and is collateralized by the Company's electric and gas customer accounts
receivable and certain amounts being recovered from gas customers relating to
certain gas contract settlements. As of December 31, 1997, the Company had $130
million of available liquidity arrangements, consisting of $100 million from the
Facility, $15 million from the accounts receivable securitization, and $15
million from local lines of credit.
In November 1997, the Company requested NMPUC approval to enter into
the Revolver. In addition, the Company intends to borrow $140 million from the
Revolver to retire all of its outstanding taxable first mortgage bonds. The
Company also requested authority to exchange the first mortgage bonds currently
collateralizing the outstanding $575 million of tax-exempt pollution control
revenue bonds with senior unsecured notes ("SUNs").
After completion of these transactions, the 1947 Indenture of Mortgage
and Deed of Trust would be extinguished, resulting in more administrative,
financial and strategic flexibility for the Company. The extinguishment of the
mortgage requires the consent of one party which has not yet consented and may
not consent. Due to concern about the consent, the Company also requested NMPUC
authority to leave an amended mortgage in place. Among other modifications, the
mortgage would be amended such that only $111 million of tax-exempt pollution
control revenue bonds would have the benefit of the lien. The property under the
lien would be reduced and no future bonds could be issued under the mortgage.
The SUNs are planned to be issued under an indenture containing a restriction on
liens (except in certain limited circumstances) and certain other covenants and
restrictions. With the exception of the $111 million of tax-exempt pollution
control revenue bonds secured by first mortgage bonds, the SUNs will be the
senior debt of the Company. On February 16, 1998, the NMPUC issued an order
approving these transactions. The Company is anticipating completion of these
transactions in mid-March 1998.
F-17
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(4) Capitalization (Continued)
Off-Balance Sheet Items
In October 1996, the Company purchased $200 million of the PVNGS Lease
Obligation Bonds ("LOBs") at a premium with accrued interest and on December 30,
1997, the Company purchased $28.9 million of 10.15% Series PVNGS LOBs at a
premium with accrued interest.
Although the PVNGS LOBs are off-balance sheet debt, these bonds are
included in the calculation of the Company's debt to capitalization ratio as
well as various financial coverage ratios by the major rating agencies. The
purchase of the PVNGS LOBs is treated by the rating agencies as a defeasance of
the bonds thereby resulting in an improvement to these ratios. The purchase of
the PVNGS LOBs has also increased earnings in the form of interest income.
Fair Value of Financial Instruments
The estimated fair value of the Company's financial instruments
(including current maturities) at December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Long-Term Debt ............................... $ 714,345 $ 743,524 $ 728,889 $ 731,358
Decommissioning Trust Debt.................... $ 23,000 $ 23,000 $ - $ -
Investment in PVNGS LOBs ..................... $ 237,774 $ 236,049 $ 212,979 $ 211,327
Decommissioning Trust......................... $ 51,857 $ 53,900 $ 25,641 $ 25,600
Fossil-Fueled Plant Decommissioning Trust..... $ 7,245 $ 7,273 $ 6,785 $ 6,785
Rabbi Trust................................... $ 10,080 $ 15,218 $ 10,087 $ 13,991
</TABLE>
Fair value is based on market quotes provided by the Company's investment
bankers.
The carrying amounts reflected on the consolidated balance sheets
approximate fair value for cash, temporary investments, and receivables and
payables due to the short period of maturity.
F-18
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(5) Earnings Per Share
In 1997, the Company adopted SFAS No. 128, Earnings per Share. As a
result, dual presentation of basic and diluted earnings per share has been
presented in the Consolidated Statement of Earnings. The following
reconciliation illustrates the impact on the share amounts of potential common
shares and the earnings per share amounts:
Per-Share
Income Shares Amount
-------- ------ ---------
(In thousands except per
share amounts)
December 31, 1997
Net Earnings $80,995
Less: Preferred stock dividends (586
-------
Basic Earnings per Share
Net earnings available for common stock 80,409 41,774 $1.92
Options issued 217
------- ------
Diluted Earnings per Share
Net earnings available for common stock $80,409 41,991 $1.91
======= ====== =====
December 31, 1996
Net Earnings $72,580
Less: Preferred stock dividends (586
-------
Basic Earnings per Share
Net earnings available for common stock 71,994 41,774 $1.72
Options issued 332
------- ------
Diluted Earnings per Share
Net earnings available for common stock $71,994 42,106 $1.71
======= ====== =====
December 31, 1995
Net Earnings $75,562
Less: Preferred stock dividends (3,714)
-------
Basic earnings per share
Net earnings available for common stock 71,848 41,774 $1.72
Options issued - 103
------- ------
Diluted earnings per share
Net earnings available for common stock $71,848 41,877 $1.72
======= ====== =====
The adoption of SFAS No. 128 did not have an impact on previously
reported earnings per share (basic).
F-19
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(6) Income Taxes
Income taxes consist of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Current Federal income tax .................................. $ 32,911 $ 14,815 $ 45,940
Current state income tax .................................... 9,859 2,847 5,864
Deferred Federal income tax ................................. 8,781 22,372 (3,212)
Deferred state income tax ................................... (397) 4,936 7,031
Amortization of accumulated investment tax credits .......... (4,436) (4,476) (4,442)
Recognition of accumulated deferred investment tax credits
relating to sales of utility property ..................... - - (388)
--------- --------- ---------
Total income taxes ....................................... $ 46,718 $ 40,494 $ 50,793
========= ========= =========
Charged to operating expenses ............................... $ 38,334 $ 39,395 $ 30,194
Charged to other income and deductions ..................... 8,384 1,099 20,599
--------- --------- ---------
Total income taxes....................................... $ 46,718 $ 40,494 $ 50,793
========= ========= =========
</TABLE>
The Company's provision for income taxes differed from the Federal
income tax computed at the statutory rate for each of the years shown. The
differences are attributable to the following factors:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Federal income tax at statutory rates ........................ $ 44,700 $ 39,576 $ 44,224
Investment tax credits ....................................... (4,436) (4,476) (4,442)
Depreciation of flow-through items ........................... 519 519 723
Gains on the sale and leaseback of PVNGS
Units 1 and 2 ............................................. (527) (527) (527)
State income tax ............................................. 5,963 5,192 7,146
Gains on sale of utility property ............................ - - 3,090
Other ........................................................ 499 210 579
---------- ---------- ---------
Total income taxes ........................................ $ 46,718 $ 40,494 $ 50,793
========== ========== =========
</TABLE>
F-20
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(6) Income Taxes (Continued)
Deferred income taxes result from certain temporary differences between
the recognition of income and expense for tax and financial reporting purposes,
as described in note 1. The major sources of these differences for which
deferred taxes have been provided and the tax effects of each are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Deferred fuel costs ..................................... $(9,133) $ 8,234 $ (3,990)
Depreciation and cost recovery .......................... 6,390 18,048 12,730
Loss provision for the M-S-R power purchase contract .... - - 3,497
Contributions in aid of construction .................... (3,185) (4,053) (4,308)
Alternative minimum tax in excess of regular tax ....... 12,482 (1,052) (26,002)
Net operating losses utilized ........................... - - 55,217
PVNGS decommissioning ................................... (1,512) 537 (2,321)
Gains on sale of utility property ....................... - - (29,868)
Contribution to 401(h) plan ............................. 3,181 (510) (885)
Regulatory liability .................................... - (6,651) -
Curtailment gain ....................................... - 5,272 -
Transmission project cost ............................... - 4,898 (3,177)
Other ................................................... 161 2,585 2,926
------- ------- --------
Net deferred taxes provided .......................... $ 8,384 $27,308 $ 3,819
======= ======= ========
</TABLE>
The components of the net accumulated deferred income tax liability
were:
1997 1996
---- ----
(In thousands)
Deferred Tax Assets:
Alternative minimum tax credit carryforward ........ $ 55,198 $ 67,681
Nuclear decommissioning ............................. 18,226 16,303
Regulatory liabilities .............................. 50,689 54,430
Other ............................................... 46,079 48,944
-------- --------
Total deferred tax assets ........................ $170,192 $187,358
======== ========
Deferred Tax Liabilities:
Depreciation ........................................ $182,641 $179,430
Investment tax credit ............................... 57,823 62,258
Fuel costs .......................................... 23,905 33,038
Regulatory assets ................................... 68,524 69,151
Other ............................................... 16,475 16,005
Total deferred tax liabilities ................... 349,368 359,882
-------- --------
Accumulated deferred income taxes, net ................ $179,176 $172,524
======== ========
F-21
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(6) Income Taxes (Continued)
The following table reconciles the change in the net accumulated
deferred income tax liability to the deferred income tax expense included in the
consolidated statement of earnings for the period:
Net change in deferred income tax liability per above table ..... $ 6,652
Change in tax effects of income tax related regulatory
assets and liabilities ....................................... (3,114)
Tax effect of excess pension liability .......................... 410
--------
Deferred income tax expense for the period ...................... $ 3,948
========
The Company has no net operating loss carryforwards as of December 31,
1997.
(7) Employee and Post-Retirement Benefits
Pension Plan
The Company and its subsidiaries have a pension plan covering
substantially all of their employees, including officers. The plan is
non-contributory and provides for benefits to be paid to eligible employees at
retirement based primarily upon years of service with the Company and the
average of their highest annual base salary for three consecutive years. The
Company's policy is to fund actuarially-determined contributions. Contributions
to the plan reflect benefits attributed to employees' years of service to date
and also for services expected to be provided in the future. Plan assets
primarily consist of common stock, fixed income securities, cash equivalents and
real estate. The components of pension cost (in thousands) are as follows:
1997 1996 1995
---- ---- ----
Service cost ........................... $ 6,535 $ 8,540 $ 6,770
Interest cost .......................... 19,592 20,546 18,332
Actual return on plan assets ........... (69,069) (31,211) (42,148)
Net amortization and deferral .......... 44,513 9,577 23,295
-------- --------- --------
Net periodic pension cost .............. 1,571 7,452 6,249
Curtailment gain ....................... - (13,317) -
-------- --------- --------
Total pension expense (income) ......... $ 1,571 $ (5,865) $ 6,249
======== ========= ========
In December 1996, the Company's Board approved changes to the Company's
defined benefit pension plan and implementation of a defined contribution plan
no later than January 1, 1998. As a result, the Company recorded a curtailment
gain of approximately $13.3 million in the consolidated financial statements for
the year ended December 31, 1996.
F-22
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(7) Employee and Post-Retirement Benefits (Continued)
The following sets forth the plan's funded status and amounts (in
thousands) at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Vested benefits ......................................................... $ 267,021 $ 233,687
Non-vested benefits ..................................................... 30,658 13,470
---------- ----------
Accumulated benefit obligation .......................................... 297,679 247,157
Effect of future compensation levels .................................... - 11,894
Projected benefit obligation ............................................ 297,679 259,051
Fair value of plan assets ............................................... 330,550 273,981
---------- ----------
Projected benefit obligation less than plan assets ...................... (32,871) (14,930)
Unrecognized prior service cost ......................................... (146) (180)
Net unrecognized loss from past experience different from assumed and 14,828 (5,814)
the effects of changes in assumptions ................................
Unamortized asset at transition, being amortized through the year 2002... 4,650 5,814
---------- ----------
Accrued pension asset ................................................... $ (13,539) $ (15,110)
========== ==========
</TABLE>
The weighted average discount rate used to measure the projected
benefit obligation was 7.75% for 1997 and 1996, and the expected long-term rate
of return on plan assets was 8.75% for 1997 and 1996. The rate of increase in
future compensation levels based on age-related scales was not applicable for
1997 and 4.1% for 1996.
Other Postretirement Benefits
The Company provides medical and dental benefits to eligible retirees.
Currently, retirees are offered the same benefits as active employees after
reflecting Medicare coordination. The components of postretirement benefit cost
(in thousands) are as follows:
1997 1996 1995
---- ---- ----
Service cost ................................ $1,300 $1,449 $1,869
Interest cost ............................... 4,452 4,478 4,962
Actual return on plan assets ................ (6,076) (1,208) (2,726)
Transition obligation amortization .......... 1,817 1,817 1,817
Net amortization and deferral ............... 4,192 (159) 2,498
------ ------ ------
Total postretirement benefit expense ........ $5,685 $6,377 $8,420
====== ====== ======
F-23
<PAGE>
(7) Employee and Post-Retirement Benefits (Continued)
The following sets forth the plan's funded status and amounts (in
thousands) at December 31:
1997 1996
---- ----
Accumulated benefit obligations for:
Retirees ............................................. $ 26,664 $ 25,237
Fully eligible employees ............................. 16,079 15,375
Active employees ..................................... 16,341 17,787
-------- --------
Accumulated benefit obligation .......................... 59,084 58,399
Fair value of plan assets ............................... 33,159 20,930
-------- --------
Funded status ........................................... (25,925) (37,469)
Net unrecognized (gain) loss............................. (4,033) 2,416
Unrecognized transition obligation (being amortized
through the year 2012) .............................. 27,256 29,074
-------- --------
Accrued postretirement liability ........................ $ (2,702) $ (5,979)
======== ========
Plan assets consist primarily of domestic common stock, fixed income
securities and cash equivalents.
The weighted average discount rate used to measure the projected benefit
obligation was 7.25% and 7.75% for 1997 and 1996, respectively, and the expected
long-term rate of return on plan assets was 8.75% for 1997 and 1996. The health
care cost trend rate was 8.0% for 1997, 1996 and 1995. The effect of a 1%
increase in the health care trend rate assumption would increase the accumulated
postretirement benefit obligation as of December 31, 1997 by approximately $10.5
million and the aggregate service and interest cost components of net periodic
postretirement benefit cost for 1997 by approximately $1.2 million. The health
care cost trend rate was expected to decrease to 5.0% by 2010 and to remain at
that level thereafter.
Executive Retirement Program
The Company has an executive retirement program for a group of
management employees. The program was intended to attract, motivate and retain
key management employees. The Company's projected benefit obligation for this
program, as of December 31, 1997, was $19.2 million, of which the accumulated
and vested benefit obligation was $19.2 million. As of December 31, 1997, the
Company has recognized an additional liability of $2.7 million for the amount of
unfunded accumulated benefits in excess of accrued pension costs. The net
periodic pension cost for 1997, 1996 and 1995 was $2.2 million, $2.1 million and
$2.0 million, respectively. In 1989, the Company established an irrevocable
grantor trust in connection with the executive retirement program. Under the
terms of the trust, the Company may, but is not obligated to, provide funds to
the trust, which was established with an independent trustee, to aid it in
meeting its obligations under such program. Marketable securities in the amount
of approximately $10.1 million (fair market value of $15.2 million) are
presently in trust. No additional funds have been provided to the trust since
1989.
F-24
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(7) Employee and Post-Retirement Benefits (Continued)
Stock Option Plans
The Company's Performance Stock Plan is a non-qualified stock option
plan, covering a group of management employees. Options are granted at the fair
market value of the shares on the date of the grant. Options granted through
December 31, 1995, vested on June 30, 1996, have an exercise term of up to 10
years. All subsequent awards granted after December 31, 1995, vest three years
from the grant date of the awards. The maximum number of options authorized are
five million shares through December 31, 2000.
In addition, the Company has a Director Retainer Plan which provides for
payment of the Directors' annual retainer in the form of cash, restricted stock
or stock options. The number of options granted in 1997 under the Director
Retainer Plan was 12,000 shares with an exercise price of $6.625. No options
under the Director Retainer Plan were exercised during 1997.
The number of option shares outstanding as of December 31, 1997 was 16,000.
The fair value of each option grant is determined on the date of grant
using the Black-Scholes option-pricing model with the following average
assumptions used for grants in 1995, 1996 and 1997, respectively: dividend yield
of 2.7%, 2.4% and 3.0%; expected volatility of 20%, 18% and 20%, risk-free
interest rates of 5.5%, 5.59% and 5.69%; and expected lives of four years.
A summary of the status of the Company's stock option plans at December
31, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 846,787 $18.48 508,986 $17.625 -- --
Granted 312,707 $23.03 390,228 $19.48 508,986 $17.625
Exercised 98,211 $17.62 51,286 $17.625 -- --
Forfeited 13,998 $19.62 1,141 $17.625 -- --
--------- ------- -------
Outstanding at end of year 1,047,285 $19.85 846,787 $18.48 508,986 $17.625
========= ======= =======
Options exercisable at year-end 362,348 456,559 --
Weighted-average fair value of
options granted during the year $4.71 $3.56 $3.49
</TABLE>
F-25
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(7) Employee and Post-Retirement Benefits (Continued)
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ ---------------------------
Weighted-
Average
Remaining Weighted
Range of Number Weighted Average Number Average
Exercise Outstanding Contractual Exercise Exercisable at Exercise
Prices at 12/31/97 Life Prices 12/31/97 Prices
-------- ----------- ----------- -------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$ 5.50 -
$6.625 16,000 9.75 years $ 6.344 4,000 $ 5.50
$ 17.625
$ 23.6875 1,031,285 8.93 years $20.06 358,348 $17.625
--------- --------- ---------- ------- ------- -------
$ 5.50 -
$ 23.6875 1,047,285 8.95 years $19.858 362,348 $17.491
========= =======
</TABLE>
Had compensation cost for the Company's performance stock plan been
determined consistent with SFAS No. 123, Accounting for Stock-Based
Compensation, the effect on the Company's pro forma net earnings and pro forma
earnings per share would be as follows:
1997 1996 1995
---- ---- ----
(In thousands except per share amounts)
Net Earnings:
(Available for common) As Reported $80,409 $71,994 $71,848
Pro Forma $80,018 $70,952 $71,848
Basic EPS: As Reported $ 1.92 $ 1.72 $ 1.72
Pro Forma $ 1.92 $ 1.70 $ 1.72
Diluted EPS: As Reported $ 1.91 $ 1.71 $ 1.72
Pro Forma $ 1.90 $ 1.70 $ 1.72
F-26
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(8) Construction Program and Jointly-Owned Plants
It is estimated that the Company's construction expenditures for 1998
will be approximately $141.3 million, including expenditures on jointly-owned
projects. The Company's proportionate share of expenses for the jointly-owned
plants is included in operating expenses in the consolidated statements of
earnings.
At December 31, 1997, the Company's interests and investments in
jointly-owned generating facilities are:
<TABLE>
<CAPTION>
Construction
Plant in Accumulated Work in Composite
Station (Fuel Type) Service Depreciation Progress Interest
------------------- ------- ------------ -------- --------
(In thousands)
<S> <C> <C> <C> <C>
San Juan Generating Station (Coal).......... $ 725,308 $ 341,237 $ 21,679 46.3%
Palo Verde Nuclear Generating
Station (Nuclear)*........................ $ 190,649 $ 40,434 $ 16,537 10.2%
Four Corners Power Plant Units 4 and 5
(Coal) .................................. $ 118,305 $ 55,703 $ 3,812 13.0%
</TABLE>
* Includes the Company's interest in PVNGS Unit 3, the Company's interest
in common facilities for all PVNGS units and the 22% beneficial
interests in the PVNGS Units 1 and 2 leases.
San Juan Generating Station ("SJGS")
The Company operates and jointly owns SJGS. At December 31, 1997, SJGS
Units 1 and 2 are owned on a 50% shared basis with Tucson Electric Power
Company, Unit 3 is owned 50% by the Company, 41.8% by Southern California Public
Power Authority and 8.2% by Tri-State Generation and Transmission Association,
Inc. Unit 4 is owned 38.457% by the Company, 28.8% by M-S-R Public Power Agency,
California public power agency ("M-S-R"), 10.04% by the City of Anaheim,
California, 8.475% by the City of Farmington, 7.2% by the County of Los Alamos,
and 7.028% by Utah Associated Municipal Power Systems.
Palo Verde Nuclear Generating Station
The Company has a 10.2% undivided interest in PVNGS. Commercial
operation commenced in 1986 for Unit 1 and Unit 2 and 1988 for Unit 3. In 1985
and 1986, the Company completed sale and leaseback transactions for its
undivided interests in Units 1 and 2 and certain related common facilities.
In 1992, the Company purchased approximately 22% of the beneficial
interests in the PVNGS Units 1 and 2 leases for approximately $17.5 million,
recording $158.3 million as utility plant and $140.8 million as long-term debt.
In 1993, such utility plant was written down to $46.7 million in conjunction
with an electric retail rate reduction.
F-27
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(8) Construction Program and Jointly-Owned Plants (Continued)
The PVNGS participants have insurance for public liability payments
resulting from nuclear energy hazards to the full limit of liability under
Federal law. This potential liability is covered by primary liability insurance
provided by commercial insurance carriers in the amount of $200 million and the
balance by an industry-wide retrospective assessment program. The maximum
assessment per reactor under the retrospective rating program for each nuclear
incident occurring at any nuclear power plant in the United States is
approximately $79.3 million, subject to an annual limit of $10 million per
incident. Based upon the Company's 10.2% interest in the three PVNGS units, the
Company's maximum potential assessment per incident for all three units is
approximately $24.3 million, with an annual payment limitation of $3 million per
incident. The insureds under this liability insurance include the PVNGS
participants and "any other person or organization with respect to his legal
responsibility for damage caused by the nuclear energy hazard". 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.
The PVNGS participants maintain "all-risk" (including nuclear hazards)
insurance for nuclear property damage to, and decontamination of, property at
PVNGS in the aggregate amount of approximately $2.75 billion as of January 1,
1998, a substantial portion of which must be applied to stabilization and
decontamination. The Company has also secured insurance against portions of the
increased cost of generation or purchased power and business interruption
resulting from certain accidental outages of any of the three PVNGS units if the
outage exceeds 17 weeks. The Company is a member of two industry mutual
insurers. These mutual insurers provide both the "all-risk" and increased cost
of generation insurance to the Company. In the event of adverse losses
experienced by these insurers, the Company is subject to an assessment. The
Company's maximum share of any assessment is approximately $4.3 million per
year.
The Company has a program for funding its share of decommissioning costs
for PVNGS. Under a portion of this program, the Company makes a series of annual
deposits under agreements approved by the NMPUC to an external non-qualified
trust which are applied towards an investment in life insurance policies on
certain current and former employees. The remaining portion of the nuclear
decommissioning funding program is invested in equities in qualified and
non-qualified trusts. The results of the 1995 decommissioning cost study
indicated that the Company's share of the PVNGS decommissioning costs will be
approximately $162.6 million (in 1997 dollars).
Pursuant to NMPUC approval, the Company funded an additional $2.1
million and $12.5 million in 1997 and 1996, respectively, into the qualified and
non-qualified trust funds. The estimated market value of the trusts, including
the net cash value of the current life insurance policies, at the end of 1997
was approximately $30.9 million.
(9) Long-Term Power Contracts
The Company had two long-term contracts for the purchase of electric
power. Under a contract with M-S-R, which expired in early 1995, the Company was
obligated to pay certain minimum amounts and a variable component representing
the expenses associated with the energy purchased and debt service costs
associated with capital improvements. Total payments under this contract
amounted to approximately $14 million for 1995.
F-28
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(9) Long-Term Power Contracts (Continued)
The Company has a power purchase contract with SPS for up to 200 MW,
expiring in May 2011. The Company may reduce its purchases from SPS by 25 MW
annually upon three years' notice. The Company provided such notice to reduce
the purchase by 25 MW in 1999 and by an additional 25 MW in 2000. Also, the
Company has 39 MW of contingent capacity obtained from El Paso Electric Company
under a transmission capacity for generation capacity trade arrangement that
increases to 70 MW from 1998 through 2003. In addition, the Company is
interconnected with various utilities for economy interchanges and mutual
assistance in emergencies.
The Company anticipates the need for approximately 100 to 200 MW of
additional capacity in the 1998 through 2000 timeframe. To meet this need, in
1996, the Company entered into a long-term power purchase contract with the
Cobisa-Person Limited Partnership ("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. In
October 1996, the Company filed a request for approval from the NMPUC. The NMPUC
issued a final order approving the application in September 1997. 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 ("RFP") 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.
The NMPUC docketed a new case to follow the progress of the RFP and
address the issue of full-cost recovery. The RFP was issued on January 16, 1998.
Proposals are due on March 24, 1998. It is expected that contracts with
successful bidders will be signed by June 6, 1998 in order to facilitate the
NMPUC hearing on full-cost recovery, which has been scheduled for June 15, 1998.
On December 23, 1997, the PLP received FERC approval for "exempt
wholesale generator" status with respect to the gas turbine generating unit, as
defined in Section 32 of the Public Utility Holding Company Act. Under the power
purchase agreement, construction of the gas turbine generating unit is expected
to begin in August 1998, with commercial operation and power delivery scheduled
in May 1999. The operation date was originally chosen to satisfy both resource
and transmission needs anticipated for the Company's jurisdictional load.
However, a reduction in the Company's load forecast for 1999 combined with
technical issues concerning one of the candidate gas turbines has lead the
Company and PLP to consider a nine to twelve month delay in the operation date.
In addition to the long-term power purchase contract with the PLP, the
Company is pursuing other options to ensure its additional capacity needs are
met.
F-29
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(10) Lease Commitments
The Company leases Units 1 and 2 of PVNGS, certain transmission
facilities, office buildings and other equipment under operating leases. The
lease expense for PVNGS is $66.3 million per year over base lease terms expiring
in 2015 and 2016. Prior to 1992, the aggregate lease expense for the PVNGS
leases was $84.6 million per year over the base lease terms; however, this
amount was reduced by the purchase of approximately 22% of the beneficial
interests in the PVNGS Units 1 and 2 leases (see note 8). Each PVNGS lease
contains renewal and fair market value purchase options at the end of the base
lease term. Covenants in the Company's PVNGS Units 1 and 2 lease agreements
limit the Company's ability, without consent of the owner participants and
bondholders in the lease transactions, (i) to enter into any merger or
consolidation, or (ii) except in connection with normal dividend policy, to
convey, transfer, lease or dividend more than 5% of its assets in any single
transaction or series of related transactions.
Future minimum operating lease payments (in thousands) at December 31, 1997
are:
1998 ....................................................$ 79,436
1999 .................................................... 79,068
2000 .................................................... 78,711
2001 .................................................... 78,528
2002 .................................................... 78,425
Later years ............................................. 950,979
----------
Total minimum lease payments ......................... $1,345,147
==========
Operating lease expense, inclusive of PVNGS leases, was approximately
$80.8 million in 1997, $80.3 million in 1996 and $80.0 million in 1995.
Aggregate minimum payments to be received in future periods under noncancelable
subleases are approximately $5.9 million.
(11) Environmental Issues and Retired Fossil-Fueled Plant Decommissioning Costs
The Company is committed to complying with all applicable environmental
regulations. Environmental issues have presented and will continue to present a
challenge to the Company. The Company has evaluated the potential impacts of the
following environmental issues and believes, after consideration of established
reserves, that the ultimate outcome of these environmental issues will not have
a material adverse effect on the Company's financial condition or results of
operations.
Electric Operations
Santa Fe Station
The Company and the New Mexico Environment Department ("NMED") have
conducted investigations of the groundwater contamination detected beneath the
former Santa Fe Generating Station site to determine the source of the
contamination. The Company has been and is continuing to cooperate with the NMED
regarding site investigations and remedial planning pursuant to a Settlement
Agreement between the Company and the NMED. In June 1996, the Company received a
letter from the NMED, indicating that the NMED believes the Company is the
source of gasoline contamination in a municipal well supplying the City of Santa
Fe and groundwater underlying the Santa Fe Station. Further, the NMED letter
F-30
<PAGE>
(11) Environmental Issues and Retired Fossil-Fueled Plant Decommissioning
Costs (Continued)
stated that the Company was required to proceed with interim remediation of the
contamination pursuant to the New Mexico Water Quality Control Commission
("NMWQCC") regulations. In July 1996, the Company filed an appeal with the
NMWQCC protesting the determination and directives contained in the NMED's June
1996 letter. Subsequently, negotiation meetings were conducted between the
Company and the NMED for a resolution of the groundwater contamination issue.
On October 3, 1996, the Company and the NMED signed an Amendment to the
Settlement Agreement concerning the groundwater contamination underlying the
site. As part of the Amendment, the Company agreed to spend approximately $1.2
million ("Settlement Amount") for certain costs related to sampling, monitoring,
and development and implementation of a remediation plan.
The amended Settlement Agreement does not, however, provide the Company
with a full and complete release from potential further liability for
remediation of the groundwater contamination. After the Company has expended the
Settlement Amount, if the NMED can establish through binding arbitration that
the Santa Fe Station is the source of the contamination, the Company could be
required to perform further remediation that is determined to be necessary. The
Company continues to dispute any contention that the Santa Fe Station is the
source of the groundwater contamination and believes that insufficient data
exists to identify the sources of groundwater contamination. The Company has
completed an aquifer characterization report and a groundwater quality report
associated with the 40 day reactivation of the adjacent Santa Fe supply well in
July and August of 1996. These reports strongly suggest the groundwater
contamination does not originate from the Santa Fe Station site and has been
drawn under the site by the pumping of the Santa Fe supply well. In addition,
other urban wells in Santa Fe are likely to be vulnerable to contamination from
off-site sources.
The Company and the NMED, with the cooperation of the City of Santa Fe,
have chosen a remediation plan proposed by a remediation contractor. The City of
Santa Fe, the Company and the NMED have entered into a Memorandum of
Understanding concerning the chosen remediation plan and the operation of the
municipal well adjacent to the Santa Fe Station site in connection with carrying
out that plan. Construction of the remediation system under the plan is expected
to commence in the second quarter of 1998. The system is expected to be in
operation early in the third quarter of 1998.
Person Station
The Company, in compliance with the NMED's Corrective Action Directive,
determined that groundwater contamination exists in the deep and shallow
groundwater at the Person Station site. The Company is required to delineate the
extent of the contamination and remediate the contaminants in the groundwater at
the Person Station site. The extent of the contaminant plume in the deep
groundwater was assessed and results were reported to the NMED. The Company
currently is involved with the process to renew the Resource Conservation and
Recovery Act post-closure care permit for the facility. Remedial actions for the
deep groundwater will be incorporated into the new permit. The Company has
proposed a monitoring program in conjunction with natural attenuation processes
as the most cost effective approach for the deep groundwater remediation. The
Company's current estimate to decommission its retired fossil-fueled plants
includes approximately $6.3 million in additional expenses to complete the
groundwater remediation program at Person Station. As part of the financial
assurance requirement of the Person Station Hazardous Waste Permit, the Company
established a trust fund. The current value of the trust fund at December 31,
1997, was $7.3 million. The remediation program continues on schedule.
F-31
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(11) Environmental Issues and Retired Fossil-Fueled Plant Decommissioning
Costs (Continued)
Gas Operations
Gas Wellhead Pit Remediation
The New Mexico Oil Conservation Commission issued an order, effective on
January 14, 1993, that affects the gas gathering facilities located in the San
Juan Basin in northwestern New Mexico. The Bureau of Land Management ("BLM") has
issued a similar order. The order prohibits the further discharge of fluids
associated with the production of natural gas into unlined earthen pits in
specified areas (designated as "vulnerable areas") in the San Juan Basin. The
order also required the submission of closure plans for the pits where further
discharge was prohibited. The Company has complied with the orders and has
submitted and received approval for pit closures from the New Mexico Oil
Conservation Division ("OCD") and the BLM.
These gas gathering facilities were sold to Williams Gas
Processing-Blanco, Inc., a subsidiary of the Williams Field Services Group,
Inc., of Tulsa, Oklahoma ("Williams") on June 30, 1995. As a part of the
purchase and sale agreement, the Company agreed to cease discharge to unlined
earthen pits in designated vulnerable areas and to retain the responsibility for
pit closures for a stated period of time and to a stated dollar amount. The
Company has assessed the pits in accordance with OCD/BLM directives, and is now
in the process of closing pits and remediating them, if necessary, at wellhead
locations within the designated vulnerable areas. The Company has submitted a
groundwater management plan to the OCD and has received approval of the plan,
and is proceeding with delineation of groundwater contamination and, as
necessary, cleanup, in accordance with the approved plan. The Company will
address soil and groundwater contamination within the dollar and time
limitations imposed by the purchase and sale agreement with Williams, and in
accordance with the requirements of the OCD.
In March 1995, the Jicarilla Apache Tribe ("Jicarilla") enacted an
ordinance directing that unlined surface impoundments located within
environmentally sensitive areas be remediated and closed by December 1996, and
that all other unlined surface impoundments on Jicarilla lands be remediated and
closed by December 1998. In 1995, the Company received a claim for
indemnification by Williams, the purchaser of the Company's gas gathering and
processing assets, for the environmental work required to comply with the
Jicarilla ordinance. The Company submitted a closure/remediation plan to the
Jicarillas, which was approved. The Company's remediation work pursuant to the
plan commenced in mid-1996, and the costs of remediation are being charged
against the $10.6 million indemnification cap contained in the purchase and sale
agreement between the Company and Williams. The Company met the requirement for
closing and remediating pits within the environmentally sensitive area by
December 1996, and anticipates closing and remediating all other pits associated
with the gas gathering and processing assets by the December 1998 deadline
specified in the ordinance.
F-32
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(12) Asset Sales
In 1995, the Company and its subsidiaries sold certain non-strategic gas
assets for approximately $154 million to Williams, recognizing an after-tax gain
of $12.8 million. This gain was adjusted to $11.8 million in 1996 due to an
accrual for additional gas environmental costs. Under the NMPUC order approving
the sale, the Company is required to share approximately $35 million from the
sale with customers, which is being credited to the customer's bills over five
years. After completion of the fifth year, the amount of gain will be
recalculated to include actual expenses specified in the agreement, subject to
NMPUC review. As of December 31, 1997, the Company has a remaining balance of
$11.9 million for future years credit to its customers. However, as a result of
the increase in estimated sales expense, the Company proposed in another NMPUC
case to retain $7.2 million of the $11.9 million until all actual expenses have
been accumulated. The NMPUC has not issued an order on the Company's proposal.
In addition, the Company, in 1995, sold its water division to the City of Santa
Fe for $51.2 million (exclusive of current assets netted against current
liabilities), recognizing an after-tax gain of $6.4 million. The Company,
through its Energy Services Business Unit, has a contract with the City of Santa
Fe to operate the Santa Fe water systems through the year 2001.
F-33
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(13) Segment Information
The Company primarily operates in three business segments, as indicated
below. A description of each of the Company's three segments and their products,
services and markets served is included in Part I of this Annual Report on Form
10-K. Corporate administrative expenses are allocated to segments based upon the
nature of the expense.
Summarized financial information by business segment for 1997, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
Energy
Electric* Gas Services** Other Total
---------- -------- -------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
1997:
Operating revenues $ 722,438 $294,769 $118,060 $ - $1,135,267
Operating expenses excluding income taxes 576,521 263,738 132,629 - 972,888
---------- -------- -------- -------- ----------
Pre-tax operating income (loss) 145,917 31,031 (14,569) - 162,379
Operating income tax (benefit) 36,446 7,587 (5,732) 33 38,334
---------- -------- -------- -------- ----------
Operating income (loss) $ 109,471 $ 23,444 $ (8,837) $ (33) $ 124,045
========== ======== ======== ======== ==========
Depreciation and amortization expense $ 68,089 $ 14,587 $ 26 $ - $ 82,702
========== ======== ======== ======== ==========
Construction expenditures $ 96,963 $ 31,408 $ - $ - $ 128,371
========== ======== ======== ======== ==========
Identifiable assets:
Net utility plant $1,276,927 $296,223 $ - $ - $1,573,150
Other 509,007 183,097 40,479 7,999 740,582
---------- -------- -------- -------- ----------
Total assets $1,785,934 $479,320 $ 40,479 $ 7,999 $2,313,732
========== ======== ======== ======== ==========
1996:
Operating revenues $ 645,639 $227,301 $ 10,446 $ - $ 883,386
Operating expenses excluding income taxes 509,804 191,922 16,246 - 717,972
---------- -------- -------- -------- ----------
Pre-tax operating income (loss) 135,835 35,379 (5,800) - 165,414
Operating income tax (benefit) 32,422 8,927 (2,296) 342 39,395
---------- -------- -------- -------- ----------
Operating income (loss) $ 103,413 $ 26,452 $ (3,504) $ (342) $ 126,019
========== ======== ======== ======== ==========
Depreciation and amortization expense $ 64,817 $ 13,122 $ 177 $ - $ 78,116
========== ======== ======== ======== ==========
Construction expenditures $ 76,572 $ 26,497 $ 18 $ - $ 103,087
========== ======== ======== ======== ==========
Identifiable assets:
Net utility plant $1,270,141 $281,348 $ 1,204 $ - $1,552,693
Other 449,478 202,725 13,618 11,800 677,621
---------- -------- -------- -------- ----------
Total assets $1,719,619 $484,073 $ 14,822 $ 11,800 $2,230,314
========== ======== ======== ======== ==========
</TABLE>
F-34
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
(13) Segment Information (Continued)
<TABLE>
<CAPTION>
Electric* Gas Other Total
---------- -------- ------- ----------
(In thousands)
<S> <C> <C> <C> <C>
1995:
Operating revenues $ 584,284 $217,985 $ 6,196 $ 808,465
Operating expenses excluding income taxes 470,824 190,128 3,931 664,883
---------- -------- ------- ----------
Pre-tax operating income 113,460 27,857 2,265 143,582
Operating income tax 24,884 4,313 997 30,194
---------- -------- ------- ----------
Operating income $ 88,576 $ 23,544 $ 1,268 $ 113,388
========== ======== ======= ==========
Depreciation and amortization expense $ 63,047 $ 17,248 $ 570 $ 80,865
========== ======== ======= ==========
Construction expenditures $ 76,610 $ 26,315 $ 4,741 $ 107,666
========== ======== ======= ==========
Identifiable assets:
Net utility plant $1,298,103 $276,218 $ 113 $1,574,434
Other 327,547 125,387 8,301 461,235
---------- -------- ------- ----------
Total assets $ 1,625,60 $401,605 $ 8,414 $2,035,669
========== ======== ======= ==========
</TABLE>
*Includes the resources excluded from NMPUC retail rates regulation.
**Energy Services began operations in 1996.
On June 30, 1995, the Company sold substantially all of the gas
gathering and processing assets of the Company and its gas subsidiaries and on
July 3, 1995, the Company sold its water division (see note 12).
F-35
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
QUARTERLY OPERATING RESULTS
The unaudited operating results by quarters for 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
1997:
Operating Revenues ...........................$ 298,822 $238,742 $285,971 $311,732
Operating Income .............................$ 36,693 $ 25,994 $ 34,885 $ 26,473
Net Earnings ................................$ 24,896 $ 15,567 $ 24,319 $ 16,213
Net Earnings per Share (basic)................$ 0.59 $ 0.37 $ 0.58 $ 0.38
Net Earnings per share (diluted)..............$ 0.59 $ 0.37 $ 0.57 $ 0.38
1996:
Operating Revenues ...........................$ 241,904 $197,597 $210,757 $233,128
Operating Income .............................$ 38,475 $ 25,346 $ 32,412 $ 29,786
Net Earnings (1)..............................$ 26,448 $ 13,542 $ 19,940 $ 12,650
Net Earnings per Share (basic) (1)............$ 0.63 $ 0.32 $ 0.47 $ 0.30
Net Earnings per Share (diluted) (1)..........$ 0.62 $ 0.32 $ 0.47 $ 0.30
</TABLE>
In the opinion of management of the Company, all adjustments (consisting
of normal recurring accruals) necessary for a fair statement of the results of
operations for such periods have been included.
- -------------
(1) During the quarter ended December 31, 1996, the Company made a provision
for loss of $10.0 million, net of tax ($.24 per common share), as a result
of the gas rate order, pending the outcome of the appeal. In addition, the
Company recorded an after-tax curtailment gain of $8.0 million ($.19 per
common share) related to the change of the Company's defined benefit
pension plan.
F-36
<PAGE>
<TABLE>
<CAPTION>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
COMPARATIVE OPERATING STATISTICS
1997 1996 1995 1994 1993
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Electric Service
Energy Sales--KWh (in thousands):
Residential 1,976,434 1,892,290 1,795,371 1,786,292 1,683,213
Commercial 2,841,831 2,698,087 2,578,243 2,534,507 2,398,725
Industrial 1,556,264 1,505,801 1,434,974 1,268,208 1,145,369
Other ultimate customers 160,370 310,118 220,777 364,144 219,481
---------- ---------- ---------- --------- ---------
Total sales to ultimate customers 6,534,899 6,406,296 6,029,365 5,953,151 5,446,788
Sales for resale 6,785,643 4,575,220 2,590,513 3,361,933 3,375,216
---------- ---------- ---------- --------- ---------
Total KWh sales 13,320,542 10,981,516 8,619,878 9,315,084 8,822,004
========== ========== ========== ========= =========
Electric Revenues (in thousands):
Residential $ 184,813 $ 177,220 $ 168,633 $ 172,559 $ 163,131
Commercial 237,629 226,146 218,222 229,851 218,263
Industrial 86,927 83,651 79,964 79,729 74,157
Other ultimate customers 10,135 20,804 18,749 24,147 15,548
---------- ---------- ---------- --------- ---------
Total revenues to ultimate customers 519,504 507,821 485,568 506,286 471,099
Sales for resale 185,334 121,329 80,949* 96,821* 99,895*
---------- ---------- ---------- --------- ---------
Total revenues from energy sales 704,838 629,150 566,517 603,107 570,994
Miscellaneous electric revenues 17,600 16,489 17,767 18,687 18,734
---------- ---------- ---------- --------- ---------
Total electric revenues $ 722,438 $ 645,639 $ 584,284 $ 621,794 $ 589,728
========== ========== ========== ========= =========
Customers at Year End:
Residential 311,314 304,900 296,821 287,369 278,357
Commercial 36,942 36,292 35,390 34,336 33,568
Industrial 363 375 374 384 381
Other ultimate customers 637 632 598 599 576
---------- ---------- ---------- --------- ---------
Total ultimate customers 349,256 342,199 333,183 322,688 312,882
Sales for Resale 66 56 37 42 37
---------- ---------- ---------- --------- ---------
Total customers 349,322 342,255 333,220 322,730 312,919
========== ========== ========== ========= =========
Reliable Net Capability--KW 1,506,000 1,506,000 1,506,000 1,506,000 1,541,000
Coincidental Peak Demand--KW 1,209,000 1,217,000 1,247,000 1,189,000 1,104,000
Average Fuel Cost per Million BTU $ 1.2319 $ 1.2735 $ 1.3177 $ 1.3488 $ 1.3844
BTU per KWh of Net Generation 10,927 10,768 10,811 10,817 11,036
Water Service **
Water Sales--Gallon (in thousands) - - 1,616,544 3,366,388 3,414,950
Revenues (in thousands) - - $ 6,196 $ 13,407 $ 13,063
Customers at Year End - - 23,752 23,452 22,743
- ------------------------
</TABLE>
* Due to the provision for the loss associated with the M-S-R contingent
power purchase contract recognized in 1992, operating revenues were
reduced by $7.3 million, $25.0 million and $20.5 million for 1995, 1994
and and 1993, respectively.
** On July 3, 1995, the Company sold its water utility division (see note
12 to the consolidated financial statements). Water Service's
comparative operating statistics for 1995 are through this date.
F-37
<PAGE>
<TABLE>
<CAPTION>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
COMPARATIVE OPERATING STATISTICS
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Gas Throughput--Decatherms (in thousands)
PNMGS:
Residential 30,755 27,387 25,865 27,139 28,031
Commercial 10,644 9,310 8,864 9,767 10,428
Industrial 1,280 2,136 661 831 923
Public authorities 4,153 2,591 2,411 2,465 2,473
Irrigation 1,593 1,418 1,245 1,272 1,259
Sales for resale 1,233 3,094 1,266 680 1,041
Off-system sales 1,179 5,745 1,176 - -
Unbilled (202) 1,405 (1,764) (309) (636)
---------- --------- --------- --------- ---------
PNMGS sales 50,635 53,086 39,724 41,845 43,519
Transportation throughput 33,975 47,010 49,136 43,135 46,059
---------- --------- --------- --------- ---------
PNMGS throughput 84,610 100,096 88,860 84,980 89,578
Gathering Company:
Spot market sales - - 39 - -
Transportation throughput - - 20,695 47,091 45,754
---------- --------- --------- --------- ---------
Total throughput 84,610 100,096 109,594 132,071 135,332
========== ========= ========= ========= =========
Gas Revenues (in thousands)
PNMGS:
Residential $ 187,563 $ 129,911 $ 125,290 $ 149,439 $ 149,796
Commercial 50,502 33,022 32,328 42,725 44,575
Industrial 4,536 5,179 1,873 2,905 3,369
Public authorities 17,577 8,018 7,939 9,969 9,694
Irrigation 5,041 3,252 3,077 4,061 4,418
Sales for resale 4,465 2,106 3,114 2,462 3,137
Off-system sales 1,926 14,352 1,885 - -
Imbalance penalties 1,273 1,231 1,786 944 -
Unbilled (2,172) 2,678 (2,430) 267 (1,573)
---------- --------- --------- --------- ---------
Revenues from gas sales 270,711 199,749 174,862 212,772 213,416
Transportation 14,172 17,215 18,532 19,742 19,376
Liquids 4,451 7,608 12,782 14,551 18,214
Other 5,435 2,729 3,606 4,705 3,576
---------- --------- --------- --------- ---------
PNMGS operating revenues 294,769 227,301 209,782 251,770 254,582
Gathering Company:
Spot market sales - - 42 - 4
Transportation - - 3,640 7,850 7,353
Imbalance penalties - - 418 26 -
Processing Company:
Liquids revenue - - 632 (621) (311)
Processing fees - - 3,471 10,485 9,459
---------- --------- --------- --------- ---------
Total operating revenues $ 294,769 $ 227,301 $ 217,985 $ 269,510 $ 271,087
========== ========= ========= ========= =========
Customers at Year End
PNMGS:
Residential 375,032 367,025 358,822 348,715 337,768
Commercial 31,560 30,757 30,493 30,139 30,151
Industrial 50 54 59 57 72
Public authorities 2,735 2,462 2,444 2,463 1,958
Irrigation 1,027 1,076 886 899 951
Sales for resale 3 3 2 3 3
Transportation 31 36 38 43 37
----------- ---------- ---------- --------- ---------
PNMGS customers 410,438 401,413 392,744 382,319 370,940
Gathering Company:
Off-system sales - - - - 1
Transportation - - - 21 21
Processing Company - - - 32 25
----------- ---------- ---------- --------- ---------
Total customers 410,438 401,413 392,744 382,372 370,987
=========== ========== ========== ========= =========
</TABLE>
On June 30, 1995, the Company sold substant the gas gathering and processing
assets of the Company and its gas subsidiaries (see note 12 to the notes to
consolidated financial statements). Comparative operating statistics for
Gathering Company and Processing Company are through this date.
F-38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Reference is hereby made to "Election of Directors" in the Company's
Proxy Statement relating to the annual meeting of stockholders to be held on
April 28, 1998 (the "1998 Proxy Statement"), to PART I, SUPPLEMENTAL ITEM -
"EXECUTIVE OFFICERS OF THE COMPANY" and "Other Matters" - "Section 16(a)
Beneficial Ownership Reporting Compliance" in the 1998 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Reference is hereby made to "Executive Compensation" in the 1998 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is hereby made to "Voting Information", "Election of Directors"
and "Stock Ownership of Certain Executive Officers" in the 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is hereby made to the 1998 Proxy Statement for such
disclosure, if any, as may be required by this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) - 1. See Index to Financial Statements under Item 8.
(a) - 2. Financial Statement Schedules for the years 1997, 1996,
and 1995 are omitted for the reason that they are not
required or the information is otherwise supplied.
(a) - 3-A. Exhibits Filed:
Exhibit
No. Description
------- -----------
10.11.1 Amendment No. 1 to the Early Purchase and Participation Agreement
between Public Service Company of New Mexico and M-S-R Public Power
Agency, executed as of December 16, 1987, for San Juan Unit 4
(refiled).
E-1
Exhibit
No. Description
------- -----------
10.25.1** Second Restated and Amended Public Service Company of New Mexico
Executive Medical Plan as amended on December 28, 1995.
10.67 New Mexico Public Service Commission Order dated July 30, 1987, and
Exhibit 1 thereto, in NMPUC Case No. 2004, regarding the PVNGS
decommissioning trust fund (refiled).
10.68.1 Amendment Number One to the Master Decommissioning Trust Agreement
for Palo Verde Nuclear Generating Station dated January 27, 1997,
between Public Service Company of New Mexico and Mellon Bank, N.A.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
- -----------
** 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.
(a) - 3-B. Exhibits Incorporated By Reference:
In addition to those Exhibits shown above, the Company hereby
incorporates the following Exhibits pursuant to Exchange Act Rule 12b-32 and
Regulation S-K section 10, paragraph (d) by reference to the filings set forth
below:
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession
<S> <C> <C> <C>
2.1 Purchase and Sale Agreement By and Among Public 4-(b) to Registration Statement 2-99990
Service Company of New Mexico, Sunterra Gas No. 2-99990 of the Company.
Gathering Company, Sunterra Gas Processing
(Sellers) and Williams Gas Processing - Blanco,
Inc. (Buyer).
2.1.1 First Amendment to Purchase and Sale Agreement 2.1.1 to Annual Report of the 1-6986
By and Among Public Service Company of New Registrant on Form 10-K
Mexico, Sunterra Gas Gathering Company, for fiscal year
Sunterra Gas Processing Company (Sellers) and ended December 31, 1994.
Williams Gas Processing - Blanco, Inc. (Buyer)
</TABLE>
E-2
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
<S> <C> <C> <C>
2.1.2 Second Amendment to Purchase and Sale Agreement 2.1.2 to Annual Report of the 1-6986
By and Among Public Service Company of New Registrant on Form 10-K
Mexico, Sunterra Gas Gathering Company, for fiscal year
Sunterra Gas Processing Company (Sellers) and ended December 31, 1994.
Williams Gas Processing-Blanco, Inc. (Buyer)
2.2 Agreement to Purchase and Sell Between City of 4-(b) to Registration Statement 2-99990
Santa Fe, New Mexico and Public No. 2-9990 of the Company.
Service Company of New Mexico.
2.2.1 First Amendment to Agreement to Purchase and 2.2.1 to Annual Report of the 1-6986
Sell Between the City of Santa Fe, New Mexico Registrant on Form 10-K for
and Public Service Company of New Mexico. fiscal year ended December 31,
1994.
2.2.2 Second Amendment to Agreement to Purchase and 2.2.2 to Annual Report of the 1-6986
Sell Between the City of Santa Fe, New Mexico Registrant on Form 10-K for
and Public Service Company of New Mexico. fiscal year ended December 31,
1994.
2.2.3 Third Amendment to Agreement to Purchase and 2.2.3 to Annual Report of the 1-6986
Sell Between the City of Santa Fe, New Mexico Registrant on Form 10-K for
and Public Service Company of New Mexico. fiscal year ended December 31,
1994.
2.2.4 Fourth Amendment to Agreement to Purchase and 2.2.4 to Annual Report of the 1-6986
Sell Between the City of Santa Fe, New Mexico Registrant on Form 10-K for
and Public Service Company of New Mexico. fiscal year ended December 31,
1994.
2.2.5 Fifth Amendment to Agreement to Purchase and 2.2.5 to Annual Report of the 1-6986
Sell Between the City of Santa Fe, New Mexico Registrant on Form 10-K for
and Public Service Company of New Mexico. fiscal year ended December 31,
1994.
2.2.6 Sixth Amendment to Agreement to Purchase and 2.2.6 to Annual Report of the 1-6986
Sell Between the City of Santa Fe, New Mexico Registrant on Form 10-K for
and Public Service Company of New Mexico. fiscal year ended December 31,
1994.
2.2.7 Seventh Amendment to Agreement to Purchase 2.2.7 to the Company's Quarterly 1-6986
and Sell Between the City of Santa Fe, Report on Form 10-Q
New Mexico and Public Service for the quarter ended June 30,
Company of New Mexico. 1995.
Articles of Incorporation and By-laws
3.1 Restated Articles of Incorporation of the 4-(b) to Registration Statement 2-99990
Company, as amended through May 10, 1985. No. 2-99990 of the Company.
</TABLE>
E-3
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
<S> <C> <C> <C>
3.2 By-laws of Public Service Company of New Mexico 3.2 to Annual Report of the 1-6986
With All Amendments to and including December Registrant on Form 10-K for the
5, 1994. fiscal year ended December 31,
1994.
Instruments Defining the Rights of Security Holders, Including Indentures
4.1 Indenture of Mortgage and Deed of Trust 4-(d) to Registration Statement 2-99990
dated as of June 1, 1947, between the No. 2-99990 of the Company.
Company and The Bank of New York (formerly
Irving Trust Company), as Trustee,
together with the Ninth Supplemental
Indenture dated as of January 1, 1967, the
Twelfth Supplemental Indenture dated as of
September 15, 1971, the Fourteenth
Supplemental Indenture dated as of December 1,
1974 and the Twenty-second Supplemental
Indenture dated as of October 1, 1979 thereto
relating to First Mortgage Bonds of the Company.
4.2 Portions of sixteen supplemental indentures to 4-(e) to Registration Statement 2-99990
the Indenture of Mortgage and Deed of Trust No. 2-99990 of the Company.
dated as of June 1, 1947, between the Company
and The Bank of New York (formerly Irving Trust
Company), as Trustee, relevant to the
declaration or payment of dividends or the
making of other distributions on or the
purchase by the Company of shares of the
Company's Common Stock.
Material Contracts
10.1 Supplemental Indenture of Lease dated as of 4-D to Registration Statement 2-26116
July 19, 1966 between the Company and other No. 2-26116 of the Company.
participants in the Four Corners Project and
the Navajo Indian Tribal Council.
10.1.1 Amendment and Supplement No. 1 to Supplemental 10.1.1 to Annual Report of the 1-6986
and Additional Indenture of Lease dated Registrant on Form 10-K for
April 25, 1985 between the Navajo Tribe of fiscal year ended December 31,
Indians and Arizona Public Service Company, El 1995.
Paso Electric Company, Public Service Company
of New Mexico, Salt River Project Agricultural
Improvement and Power District, Southern
California Edison Company, and Tucson Electric
Power Company (refiled).
</TABLE>
E-4
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
<S> <C> <C> <C>
10.2 Fuel Agreement, as supplemented, dated as of 4-H to Registration Statement 2-35042
September 1, 1966 between Utah Construction & No. 2-35042 of the Company.
Mining Co. and the participants in the Four
Corners Project including the Company.
10.3 Fourth Supplement to Four Corners Fuel 10.3 to Annual Report of the 1-6986
Agreement No. 2 effective as of January 1, Registrant on Form 10-K for
1981, between Utah International Inc. and fiscal year ended December 31,
participants in the Four Corners 1991.
Project, including the Company.
10.4 Contract between the United States and the 5-L to Registration Statement 2-41010
Company dated April 11, 1968, for furnishing No. 2-41010 of the Company.
water.
10.4.1 Amendatory Contract between the United 5-R to Registration Statement 2-60021
States and the Company dated September for No. 2-60021 of the Company.
29, 1977, for furnishing water.
10.5 Co-Tenancy Agreement between the Company and 5-O to Registration Statement 2-44425
Tucson Gas & Electric Company dated No. 2-44425 of the Company.
February 15, 1972, pertaining to the San Juan
generating plant.
10.5.3 Modification No. 4 dated October 25, 1984 and 10.5.3 to Annual Report of 1-6986
Modification No. 5 dated July 1, 1985 to Registrant on Form 10-K for
Co-Tenancy Agreement between the Company and fiscal year ended December 31,
Tucson Electric Power Company (refiled). 1995.
10.5.5 Modification No. 8 to San Juan Project 10.5.5 to the Company's 1-6986
Co-Tenancy Agreement between Public Service Quarterly Report on Form 10-Q
Company of New Mexico and Tucson Electric Power for the quarter ended March 31,
Company dated September 15, 1993. 1994.
10.5.6 Modification No. 9 to San Juan Project 10.5.6 to the Company's 1-6986
Co-Tenancy Agreement between Public Service Quarterly Report on Form 10-Q
Company of New Mexico and Tucson Electric Power for the quarter ended March 31,
Company dated January 12, 1994. 1994.
10.5.7 Modification No. 10 to San Juan Project 10.5.7 to Annual Report of the 1-6986
Co-Tenancy Agreement between Public Service Registrant on Form 10-K for
Company of New Mexico and Tucson Electric Power fiscal year ended December 31,
Company dated November 30, 1995. 1995.
10.7 San Juan Project Operating Agreement between 5-S to Registration Statement 2-50338
the Company and Tucson No. 2-50338 of the Company.
Gas & Electric Company, executed
December 21, 1973.
</TABLE>
E-5
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
<S> <C> <C> <C>
10.7.1 Modification No. 4 dated October 25, 1984 and 10.7.1 to Annual Report of 1-6986
Modification No. 5 dated July 1, 1985 to San Registrant on Form 10-K for
Juan Project Operating Agreement between the fiscal year ended December 31,
Company and Tucson Electric Power Company 1995.
(refiled).
10.7.3 Modification No. 8 to San Juan Project 10.7.3 to the Company's 1-6986
Operating Agreement between Public Service Quarterly Report on Form 10-Q
Company of New Mexico and Tucson Electric Power for the quarter ended March 31,
Company dated September 15, 1993. 1994.
10.7.4 Modification No. 9 to San Juan Project 10.7.4 to the Company's 1-6986
Operating Agreement between Public Service Quarterly Report on Form 10-Q
Company of New Mexico and Tucson Electric Power for the quarter ended March 31,
Company dated January 12, 1994. 1994.
10.7.5 Modification No. 10 dated November 30, 1995 to 10.7.5 to Annual Report of the 1-6986
San Juan Project Operating Agreement between Registrant on Form 10-K for
Public Service Company of New Mexico and Tucson fiscal year ended December 31,
Electric Power Company. 1995.
10.8 Arizona Nuclear Power Project Participation 5-T to Registration Statement 2-50338
Agreemen among the Company and Arizona Public No. 2-50338 of the Company.
Service Company, Salt River Project Agricultural
Improvement and Power District, Tucson Gas &
Electric Company and El Paso Electric Company,
dated August 23, 1973.
10.8.1 Amendments No. 1 through No. 6 to Arizona 10.8.1 to Annual Report of the 1-6986
Nuclear Power Project Participation Agreement. Registrant on Form 10-K for
fiscal year ended December 31,
1991.
10.8.2 Amendment No. 7 effective April 1, 1982, to the 10.8.2 to Annual Report of the 1-6986
Arizona Nuclear Power Project Participation Registrant on Form 10-K for
Agreement (refiled). fiscal year ended December 31,
1991.
10.8.3 Amendment No. 8 effective September 12, 1983, 10.58 to Annual Report of the 1-6986
to the Arizona Nuclear Power Project Registrant on Form 10-K for
Participation Agreement. (refiled) fiscal year ended December 31,
1993.
10.8.4 Amendment No. 9 to Arizona Nuclear Power 10.8.4 to Annual Report of the 1-6986
Project Participation Agreement dated as of Registrant on Form 10-K for
June 12, 1984 (refiled). fiscal year ended December 31,
1994.
10.8.5 Amendment No. 10 dated as of November 21, 1985 10.8.5 to Annual Report of the 1-6986
and Amendment No. 11 dated as of June 13, 1986 Registrant on Form 10-K for
and effective January 10, 1987 to Arizona fiscal year ended December 31,
Nuclear Power Project Participation Agreement 1994.
(refiled).
</TABLE>
E-6
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
<S> <C> <C> <C>
10.8.7 Amendment No. 12 to Arizona Nuclear Power 19.1 to the Company's Quarterly 1-6986
Project Participation Agreement dated June 14, Report on Form 10-Q for the
1988, and effective August 5, 1988. quarter ended September 30, 1990.
10.8.8 Amendment No. 13 to the Arizona Nuclear Power 10.8.10 to Annual Report of 1-6986
Project Participation Agreement dated April 4, Registrant on Form 10-K for the
1990, and effective June 15, 1991 fiscal year ended December 31,
1990.
10.9 Coal Sales Agreement executed August 18, 1980 10.9 to Annual Report of the 1-6986
among San Juan Coal Company, the Company and Registrant on Form 10-K for
Tucson Electric Power Company, together with fiscal year ended December 31,
Amendments No. One, Two, Four, and Six thereto. 1991.
10.9.1 Amendment No. Three to Coal Sales Agreement 10.9.1 to Annual Report of the 1-6986
dated April 30, 1984 among San Juan Coal Registrant on Form 10-K for
Company, the Company and Tucson Electric Power fiscal year ended December 31,
Company. 1994 (confidentiality treatment
was requested at the time of
filing the Annual Report of the
Registrant on Form 10-K for
fiscal year ended December 31,
1984; exhibit was not filed
therewith based on the same
confidentiality request).
10.9.2 Amendment No. Five to Coal Sales Agreement 10.9.2 to Annual Report of the 1-6986
dated May 29, 1990 among San Juan Coal Registrant on Form 10-K for
Company, the Company and Tucson fiscal year ended December 31,
Electric Power Company. 1991 (confidentiality
treatment was requested as to
portions of this exhibit, and
such portions were omitted from
the exhibit filed and were filed
separately with the Securities
and Exchange Commission).
10.9.3 Amendment No. Seven to Coal Sales Agreement, 19.3 to the Company's Quarterly 1-6986
dated as of July 27, 1992 among San Juan Coal Report on Form 10-Q for the
Company, the Company and Tucson Electric Power quarter ended September 30, 1992
Company. (confidentiality treatment was
requested as to portions of this
exhibit, and such portions were
omitted from the exhibit filed
and were filed separately with
the Securities and Exchange
Commission).
</TABLE>
E-7
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
<S> <C> <C> <C>
10.9.4 First Supplement to Coal Sales Agreement, 19.4 to the Company's Quarterly 1-6986
dated July 27, 1992 among San Juan Coal Report on Form 10-Q for the
Company, the Company and Tucson quarter ended September 30, 1992
Electric Power Company. (confidentiality treatment was
requested as to portions of
this exhibit, and such portions
were omitted from the exhibit
as of filed and were filed
separately with the Securities
and Exchange Commission).
10.9.5 Amendment No. Eight to Coal Sales Agreement, 10.9.5 to Annual Report of the 1-6986
dated as of September 1, 1995, among San Juan Registrant on Form 10-K for
Coal Company, the Company and Tucson Electric fiscal year ended December 31,
Power Company. 1995.
10.9.6 Amendment No. Nine to Coal Sales Agreement, 10.9.6 to Annual Report of the 1-6986
dated as of December 31, 1995, among San Juan Registrant on Form 10-K for
Coal Company, the Company and Tucson Electric fiscal year ended December 31,
Power Company. 1997.
10.11 San Juan Unit 4 Early Purchase and 10.11 to the Company's Quarterly 1-6986
Participation Agreement dated as of Report on Form 10-Q for the
September 26, 1983 between the Company and quarter ended March 31, 1994.
M-S-R Public Power Agency, and Modification
No. 2 to the San Juan Project Agreements dated
December 31, 1983. (refiled)
10.12 Amended and Restated San Juan Unit 4 Purchase 10.12 to Annual Report of the 1-6986
and Participation Agreement dated as of Registrant on Form 10-K for
December 28, 1984 between the Company and the fiscal year ended December 31,
Incorporated County of Los Alamos (refiled). 1994.
10.14 Participation Agreement among the Company, 10.14 to Annual Report of the 1-6986
Tucson Electric Power Company and certain Registrant on Form 10-K for
financial institutions relating to the San Juan fiscal year ended December 31,
Coal Trust dated as of December 31, 1981 1992.
(refiled).
10.16 Interconnection Agreement dated November 23, 10.16 to Annual Report of the 1-6986
1982, between the Company and Southwestern Registrant on Form 10-K for
Public Service Company (refiled). fiscal year ended December 31,
1992.
10.18* Facility Lease dated as of December 16, 1985 10.18 to Annual Report of the 1-6986
between The First National Bank of Boston, as Registrant on Form 10-K for
Owner Trustee, and Public Service Company of fiscal year ended December 31,
New Mexico together with Amendments No. 1, 2 1995.
and 3 thereto. (refiled).
</TABLE>
E-8
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
<S> <C> <C> <C>
10.18.4* Amendment No. 4 dated as of March 8, 1995, to 10.18.4 to the Company's Quarter 1-6986
Facility Lease between Public Service Report on Form 10-Q for the
Company of New Mexico and the First quarter ended March 31, 1995.
National Bank of Boston, dated as of
December 16, 1985.
10.19 Facility Lease dated as of July 31, 1986, 10.19 to Annual Report of the 1-6986
between the First National Bank of Boston, as Registrant on Form 10-K for
Owner Trustee, and Public Service Company of fiscal year ended December 31,
New Mexico together with Amendments No. 1, 2 1997.
and 3 thereto (refiled).
10.20* Facility Lease dated as of August 12, 1986, 10.20 to Annual Report of th 1-6986
between The First National Bank of Boston, as Registrant on Form 10-K for
Owner Trustee, and Public Service Company of fiscal year ended December 31,
New Mexico together with Amendments No. 1 and 2 1997.
thereto (refiled).
10.20.3 Amendment No. 3 dated as of March 8, 1995, to 10.20.3 to the Company's 1-6986
Facility Lease between Public Service Company Quarterly Report on Form 10-Q
of New Mexico and the First National Bank of for the quarter ended March 31,
Boston, dated as of August 12, 1986. 1995.
10.21 Facility Lease dated as of December 15, 1986, 10.21 to Annual Report of the 1-6986
between The First National Bank of Boston, as Registrant on Form 10-K for
Owner Trustee, and Public Service Company of fiscal year ended December 31,
New Mexico (Unit 1 Transaction) together 1997.
with Amendment No. 1 thereto (refiled).
10.22 Facility Lease dated as of December 15, 1986, 10.22 to Annual Report of the 1-6986
between The First National Bank of Boston, as Registrant on Form 10-K for
Owner Trustee, and Public Service Company of fiscal year ended December 31,
New Mexico (Unit 2 Transaction) together 1997.
with Amendment No. 1 thereto (refiled).
10.23** Restated and Amended Public Service Company of 19.5 to the Company's Quarterly 1-6986
New Mexico Accelerated Management Performance Report on Form 10-Q for the
Plan (1988). (August 16, 1988.) quarter ended September 30, 1988.
10.23.1** First Amendment to Restated and Amended Public 19.6 to the Company's Quarterly 1-6986
Service Company of New Mexico Accelerated Report on Form 10-Q for the
Management Performance Plan (1988).(August 30, quarter ended September 30, 1988.
1988.)
10.23.2** Second Amendment to Restated and Amended Public 10.26.2 to Annual Report of the 1-6986
Service Company of New Mexico Accelerated Registrant on Form 10-K for
Management Performance Plan (1988). fiscal year ended December 31,
(December 29, 1989). 1989.
</TABLE>
E-9
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
<S> <C> <C> <C>
10.24** Management Life Insurance Plan (July 1985) of 10.24 to Annual Report of the 1-6986
the Company (refiled). Registrant on Form 10-K for
fiscal year ended December 31,
1995.
10.27 Amendment No. 2 dated as of April 10, 1987, to 10.53 to Annual Report of the 1-6986
the Facility Lease dated as of August 12, 1986, Registrant on Form10-K for
between The First National Bank of Boston, as fiscal year ended December 31,
Owner Trustee, and Public Service Company of 1987.
New Mexico. (Unit 2 Transaction.) (This is an
amendment to a Facility Lease which is
substantially similar to the Facility Lease
filed as Exhibit 28.1 to the Company's Current
Report on Form 8-K dated August 18, 1986.)
10.31** Executive Retention Agreements. 10.42 to Annual Report of the 1-6986
Registrant on Form 10-K for
fiscal year ended December 31,
1990.
10.32** Supplemental Employee Retirement Agreements 19.4 to the Company's Quarterly 1-6986
dated August 4, 1989. Report on Form 10-Q for the
quarter ended September 30, 1989.
10.33** Supplemental Employee Retirement Agreement 10.47 to Annual Report of the 1-6986
dated March 6, 1990. Registrant on Form 10-K for
fiscal year ended December 31,
10.34 Settlement Agreement between Public Service 10.48 to Annual Report of the 1-6986
Company of New Mexico and Creditors of Meadows Registrant on Form 10-K for
Resources, Inc. dated November 2, 1989. fiscal year ended December 31,
1989.
10.34.1 First amendment dated April 24, 1992 to the 19.1 to the Company's Quarterly 1-6986
Settlement Agreement dated November Report on Form 10-Q for the
2, 1989 among Public Service Company quarter ended September 30, 1992.
of New Mexico, the lender parties thereto
and collateral agent.
10.35 Amendment dated April 11, 1991 among Public 19.1 to the Company's Quarterly 1-6986
Service Company of New Mexico, certain banks Report on Form 10-Q for the
and Chemical Bank and Citibank, N.A., as agents quarter ended September 30, 1991.
for the banks.
10.36 San Juan Unit 4 Purchase and Participation 19.2 to the Company's Quarterly 1-6986
Agreement Public Service Company of New Mexico Report on Form 10-Q for the
and the City of Anaheim, California dated quarter ended March 31, 1991.
April 26, 1991.
</TABLE>
E-10
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
<S> <C> <C> <C>
10.36.1 Second stipulation in the matter of application 10.38 to Annual Report of the 1-6986
of Public Service Company of New Mexico for Registrant on Form 10-K for
NMPSC approval to sell a 10.04% undivided fiscal year ended December 31,
interest in San Juan Generating Station Unit 1992.
4 to the City of Anaheim, California, and
for related orders and approvals.
10.37** Executive Retention Plan. 10.37 to Annual Report of the 1-6986
Registrant on Form 10-K for
fiscal year ended December 31,
1991.
10.38 Restated and Amended San Juan Unit 4 Purchase 10.2.1 to the Company's 1-6986
and Participation Agreement between Public Quarterly Report on Form 10-Q
Service Company of New Mexico and Utah for the quarter ended
Associated Municipal Power Systems. September 30, 1993.
10.39 Purchase agreement dated February 7, 1992 10.39 to Annual Report of the 1-6986
between Burnham Leasing Corporation and Public Registrant on Form 10-K for
Service Company of New Mexico. fiscal year ended December 31,
1991.
10.40** First Restated and Amended Public Service 99.1 to Registration Statement 333-03303
Company of New Mexico Director Retainer Plan. No. 333-03303 filed May 8, 1996.
10.41 Waste Disposal Agreement, dated as of July 27, 19.5 to the Company's Quarterly 1-6986
1992 among San Juan Coal Company, the Company Report on Form 10-Q for the
and Tucson Electric Power Company. quarter ended September 30, 1992
(confidentiality treatment
was requested as to portions
of this exhibit, and such
portions were omitted from
the exhibit and were filed
separately with the
Securities and Exchange
Commission).
10.42 Stipulation in the matter of the application of 10.42 to Annual Report of the 1-6986
Gas Company of New Mexico for an order Registrant on Form 10-K for
authorizing recovery of MDL costs through Rate fiscal year ended December 31,
Rider Number 8. 1992.
10.43** Description of certain Plans which include 10.43 to Annual Report of the 1-6986
executive officers as participants. Registrant on Form 10-K for
fiscal year ended December 31,
1992.
10.44** Public Service Company of New Mexico-Non-Union 10.44 to Annual Report of the 1-6986
Voluntary Separation Program. Registrant on Form 10-K for
fiscal year ended December 31,
1992.
</TABLE>
E-11
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
<S> <C> <C> <C>
10.44.1** First Amendment dated April 6, 1993 to the 19.2 to the Company's Quarterly 1-6986
First Restated and Amended Public Service Report on Form 10-Q for the
Company of New Mexico Non-Union quarter ended March 31, 1993.
Severance Pay Plan dated August 1, 1992.
10.45** First Restated and Amended Public Service 99.1 to Registration Statement 333-03289
Company of New Mexico Performance Stock Plan. No. 333-03289 filed May 8, 1996.
10.45.1** First Amendment to the First Restated and 10.45.1 to the Company's 1-6986
Amended Public Service Company of New Mexico Quarterly Report on Form 10-Q
Performance Stock Plan dated August 12, 1997. for the quarter ended September
10.46** Public Service Company of New Mexico Asset 10.1 to the Company's Quarterly 1-6986
Sales Incentive Plan. Report on Form 10-Q for the
quarter ended June 30, 1993.
10.46.1** Amendment No. 1 to the Public Service Company 10.46.1 to the Company's 1-6986
of New Mexico Asset Sales Incentive Plan dated Quarterly Report on Form 10-Q
August 1, 1994. for the quarter ended June 30,
1994.
10.47** Compensation Arrangement with Chief Executive 10.3 to the Company's Quarterly 1-6986
Officer. Report on Form 10-Q for the
quarter ended June 30, 1993.
10.47.1** Pension Service Adjustment Agreement for 10.3.1 to the Company's 1-6986
Benjamin F. Montoya. Quarterly Report on Form 10-Q
for the quarter ended
September 30, 1993.
10.47.2** Severance Agreement for Benjamin F. Montoya. 10.3.2 to the Company's 1-6986
Quarterly Report on Form 10-Q
for the quarter ended
September 30, 1993.
10.47.3** Executive Retention Agreement for Benjamin F. 10.3.3 to the Company's 1-6986
Montoya. Quarterly Report on Form 10-Q
for the quarter ended
September 30, 1993.
10.48** Public Service Company of New Mexico OBRA `93 10.4 to the Company's Quarterly 1-6986
Retirement Plan. Report on Form 10-Q for the
quarter ended September 30,
1993
10.49** Employment Contract By and Between the Public 10.49 to Annual Report of the 1-6986
Service Company of New Mexico and Roger J. Registrant on Form 10-K for
Flynn. fiscal year ended December 31,
1994.
</TABLE>
E-12
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
<S> <C> <C> <C>
10.50** Public Service Company of New Mexico 10.50 to Annual Report of the 1-6986
Section 415 Plan. Registrant on Form 10-K for
fiscal year ended December 31,
1993.
10.51** First Amendment to the Public Service Company 10.51 to Annual Report of the 1-6986
of New Mexico Executive Retention Plan. Registrant on Form 10-K for
fiscal year ended December 31,
1993.
10.51.1** Second Amendment to the Public Service Company 10.51.1 to the Company's 1-6986
of New Mexico Executive Retention Plan. Quarterly Report on Form 10-Q
for the quarter ended June 30,
10.52 Memorandum of Agreement between the Navajo 10.52 to the Company's Quarterly 1-6986
Nation and Public Service Company Report on Form 10-Q for the
of New Mexico (Nine-Mile Transmission quarter ended June 30, 1997.
R-O-W)
10.53 January 12, 1994 Stipulation. 10.53 to Annual Report of the 1-6986
Registrant on Form 10-K for
fiscal year ended December 31,
1993.
10.54** Employment, Retirement and Release Agreement By 10.54 to Annual Report of the 1-6986
and Between the Public Service Company of New Registrant on Form 10-K for
Mexico and William M. Eglinton. fiscal year ended December 31,
1993.
10.54.1** Health Care and Retirement Benefit Agreement By 10.54.1 to the Company's 1-6986
and Between the Public Service Company of New Quarterly Report on Form 10-Q
Mexico and John T. Ackerman dated February 1, for the quarter ended March 31,
1994. 1994.
10.57 U.S. $100,000,000 Revolving Credit Agreement 10.57 to Annual Report of the 1-6986
Dated as of December 14, 1993 Among Public Registrant on Form 10-K for
Service Company of New Mexico and certain Banks fiscal year ended December 31,
Herein (Banks) and Chemical Bank and 1993.
Citibank, N.A. (Co-Agents)
10.56.1 Amended and Restated Receivables Purchase 10.56.1 to the Company's 1-6986
Agreement dated May 20, 1996, between Public Quarterly Report on Form 10-Q
Service Company of New Mexico, Citibank and for the quarter ended June 30,
Citicorp North America, Inc. and Amended 1996.
Restated Collection Agent Agreement dated May
20, 1996, between Public Service Company of New
Mexico, Corporate Receivables Corporation and
Citibank, N.A.
</TABLE>
E-13
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
<S> <C> <C> <C>
10.57.1 Amendment No. 1, dated June 7, 1995 to the U.S. 10.57.1 to the Company's 1-6986
$100,000,000 Revolving Credit Agreement Dated Quarterly Report on Form 10-Q
as of December 14, 1993 Among Public Service for the quarter ended June 30,
Company of New Mexico and certain Banks 1995.
Herein (Banks) and Chemical Bank and Citibank,
N.A.(Co-Agents)
10.59* Amended and Restated Lease dated as of 10.59 to Annual Report of the 1-6986
September 1, 1993, between The First National Registrant on Form 10-K for
Bank of Boston, Lessor, and the Company, fiscal year nded December 31,
Lessee. (EIP Lease) 1993.
10.60 Reimbursement Agreement, dated as of 4.5 to Registration Statement 33-65418
November 1, 1992 between Public Service Company No. 33-65418 of the Company.
of New Mexico and Canadian Imperial Bank of
Commerce, New York Agency.
10.60.1 Amendment No. 1 dated as of July 1, 1994, to 10.60.1 to the Company's 1-6986
the Reimbursement Agreement dated as of Quarterly Report on Form 10-Q
November 1, 1992 between Public Service Company for the quarter ended June 30,
of New Mexico and Canadian Imperial Bank 1994.
of Commerce, New York Agency.
10.60.2 Amendment No. 2 dated as of October 1, 1995, to 10.60.2 to the Company's 1-6986
the Reimbursement Agreement dated as of Quarterly Report on Form 10-Q
November 1, 1992 between Public Service Company for the quarter ended September
of New Mexico and Canadian Imperial Bank 30, 1995.
of Commerce, New York Agency.
10.61 Participation Agreement dated as of June 30, 10.61 to Annual Report of the 1-6986
1983 among Security Trust Company, as Trustee, Registrant on Form 10-K for the
Company, Tucson Electric Power Company and fiscal year ended December 31,
certain financial institutions relating 1993.
to the San Juan Coal Trust. (refiled)
10.62 Agreement of the Company pursuant to 10.62 to Annual Report of the 1-6986
Item 601(b)(4)(iii) of Regulation SK. (refiled) Registrant on Form 10-K for
fiscal year ended December 31,
1993.
10.63 A Stipulation regarding sale of certain natural 10.63 to Current Report on 1-6986
gas gathering and processing assets. Form 8-K dated January 26, 1995.
10.64** Results Pay 10.64 to the Company's Quarterly 1-6986
Report on Form 10-Q for the
quarter ended March 31, 1995.
</TABLE>
E-14
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
<S> <C> <C> <C>
10.65 Agreement for Contract Operation and 10.64 to the Company's Quarterly 1-6986
Maintenance of the City of Santa Fe Water Report on Form 10-Q for the
Supply Utility System, dated July 3, 1995. quarter ended June 30, 1995.
10.66 Stipulation regarding negotiated agreement with 10.50 to Annual Report of the 1-6986
intervenors to settle all outstanding issues Registrant on Form 10-K for
regarding recovery of payments GCNM made to fiscal year ended December 31,
settle gas take-or-pay contracts and pricing 1994.
disputes.
10.68 Master Decommissioning Trust Agreement for Palo 10.68 to the Company's Quarterly 1-6986
Verde Nuclear Generating Station dated March Report on Form 10-Q for the
15, 1996, between Public Service Company of quarter ended March 31, 1996.
New Mexico and Mellon Bank, N.A.
10.69* Refunding Agreement No. 3 dated as 10.69 to the Company's 1-6986
of September 27, 1996 between Public Quarterly Report on Form
Service Company of New Mexico, The 10-Q for the quarter ended
Owner Participant named therein, September 30, 1996.
State Street Bank and Trust Company,
as Owner Trustee, The Chase Manhattan,
Bank, as Indenture Trustee, and First PV
Funding Corporation.
10.70** Employment Termination and Release Agreement 10.70 to Annual Report of the 1-6986
for M. Phyllis Bourque. Registrant on Form 10-K for the
fiscal year ended December 31,
1997.
10.71*** Reimbursement Agreement, dated as of February 10.71 to the Company's Quarterly 1-6986
1, 1997, between Public Service Report on Form 10-Q for the
Company of New Mexico and the Bank quarter ended March 31, 1997.
named therein.
Additional Exhibits
22 Certain subsidiaries of the registrant. 22 to Annual Report of the 1-6986
Registrant on Form 10-K for
fiscal year ended December
31, 1992.
</TABLE>
E-15
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
<S> <C> <C> <C>
99.1 Collateral Trust Indenture dated as of December 99.1 to Annual Report of the 1-6986
16, 1985 among First PV Funding Corporation, Registrant on Form 10-K for
Public Service Company of New Mexico and fiscal year ended December 31,
Chemical Bank, as Trustee together with 1995.
Series 1986A Bond Supplemental, Series 1986B
Bond Supplemental, Unit 1Supplemental and
Unit 2 Supplemental thereto (refiled).
99.1.5 1994 Supplemental Indenture dated as of June 8, 99.1.5 to the Company's 1-6986
1994 among First PV Funding Corporation, Public Quarterly Report on Form 10-Q
Service Company of New Mexico, and Chemical for the quarter ended June 30,
Bank, as Trustee. 1994.
99.1.6 1995 Supplemental Indenture among First PV 99.1.6 to the Company's 1-6986
Funding Corporation, Public Service Company of Quarterly Report on Form 10-Q
New Mexico and Chemical Bank, as Trustee dated for the quarter ended March 31,
as of February 14, 1995. 1995.
99.2* Participation Agreement dated as of 99.2 to Annual Report of the 1-6986
December 16, 1985, among the Owner Participant Registrant on Form 10-K for
named therein, First PV Funding Corporation. fiscal year ended December 31,
The First National Bank of Boston, in its 1995.
individual capacity and as Owner Trustee (under
a Trust Agreement dated as of December 16, 1985
with the Owner Participant), Chemical Bank, in
its individual capacity and as Indenture
Trustee (under a Trust Indenture, Mortgage,
Security Agreement and Assignment of Rents
dated as of December 16, 1985 with the Owner
Trustee), and Public Service Company of New
Mexico, including Appendix A definitions
together with Amendment No. 1 dated July 15,
1986 and Amendment No. 2 dated November 18,
1986 (refiled).
99.3 Trust Indenture, Mortgage, Security Agreement 99.3 to the Company's Quarterly 1-6986
and Assignment of Rents dated as of December Report on Form 10-Q for the
16, 1985, between the First National Bank of quarter ended March 31, 1996.
Boston, as Owner Trustee, and Chemical Bank, as
Indenture Trustee together with Supplemental
Indentures Nos. 1 and 2 (refiled).
99.3.3 Supplemental Indenture No. 3 dated as of March 99.3.3 to the Company's 1-6986
8, 1995, to Trust Indenture Mortgage, Security Quarterly Report on Form 10-Q
Agreement and Assignment of Rents between The for the quarter ended March 31,
First National Bank of Boston and Chemical Bank 1995.
dated as of December 16, 1985.
</TABLE>
E-16
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
<S> <C> <C> <C>
99.4* Assignment, Assumption and Further Agreement 99.4 to Annual Report of the 1-6986
dated as of December 16, 1985, between Public Registrant on Form 10-K for
Service Company of New Mexico and The First fiscal year ended December 31,
National Bank of Boston, as Owner Trustee 1995.
(refiled).
99.5 Participation Agreement dated as of July 31, 99.5 to Annual Report of the 1-6986
1986, among the Owner Participant named herein, Registrant on Form 10-K for
First PV Funding Corporation, The First fiscal year ended December 31,
National Bank of Boston, in its individual 1997.
capacity and as Owner Trustee (under a Trust
Agreement dated as of July 31, 1986, with the
Owner Participant), Chemical Bank, in its
individual capacity and as Indenture Trustee
(under a Trust Indenture, Mortgage, Security
Agreement and Assignment of Rents dated as of
July 31, 1986, with the Owner Trustee), and
Public Service Company of New Mexico, including
Appendix A definitions together with Amendment
No. 1 thereto (refiled).
99.6 Trust Indenture, Mortgage, Security Agreement 99.6 to Annual Report of the 1-6986
and Assignment of Rents dated as of July 31, Registrant on Form 10-K for
1986, between The First National Bank of fiscal year ended December 31,
Boston, as Owner Trustee, and Chemical Bank, as 1997.
Indenture Trustee together with Supplemental
Indenture No. 1 thereto (refiled).
99.7 Assignment, Assumption, and Further Agreement 99.7 to Annual Report of the 1-6986
dated as of July 31, 1986, between Public Registrant on Form 10-K for
Service Company of New Mexico and The First fiscal year ended December 31,
National Bank of Boston, as Owner Trustee 1997.
(refiled).
99.8 Participation Agreement dated as of August 12, 99.8 to the Company's Quarterly 1-6986
1986, among the Owner Participant named Report on Form 10-Q for the
therein, First PV Funding Corporation. The quarter ended March 31, 1997.
First National Bank of Boston, in its
individual capacity and as Owner Trustee (under
a Trust Agreement dated as of August 12, 1986,
with the Owner Participant), Chemical Bank, in
its individual capacity and as Indenture
Trustee (under a Trust Indenture, Mortgage,
Security Agreement and Assignment of Rents
dated as of August 12, 1986, with the
Owner Trustee), and Public Service
Company of New Mexico, including Appendix A
definitions (refiled).
</TABLE>
E-17
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
<S> <C> <C> <C>
99.8.1* Amendment No. 1 dated as of November 18, 1986, 99.8.1 to the Company's 1-6986
to Participation Agreement dated as of August Quarterly Report on Form 10-Q
12, 1986 (refiled). for the quarter ended March 31,
1997.
99.9* Trust Indenture, Mortgage, Security Agreement 99.9 to Annual Report of the 1-6986
and Assignment of Rents dated as of August 12, Registrant on Form 10-K for
1986, between the First National Bank of fiscal year ended December 31,
Boston, as Owner Trustee, and Chemical Bank, as 1997.
Indenture Trustee together with Supplemental
Indenture No. 1 thereto (refiled).
99.9.2 Supplemental Indenture No. 2 dated as of March 99.9.1 to the Company's 1-6986
8, 1995, to Trust Indenture, Mortgage, Security Quarterly Report on Form 10-Q
Agreement and Assignment of Rents between The for the quarter ended March 31,
First National Bank of Boston and Chemical Bank 1995.
dated as of August 12, 1986.
99.10* Assignment, Assumption, and Further Agreement 99.10 to the Company's Quarterly 1-6986
dated as of August 12, 1986, between Public Report on Form 10-Q for the
Service Company of New Mexico and The First quarter ended March 31, 1997.
National Bank of Boston, as Owner Trustee
(refiled).
99.11* Participation Agreement dated as of December 99.1 to the Company's Quarterly 1-6986
15, 1986, among the Owner Participant named Report on Form 10-Q for the
therein, First PV Funding Corporation, The quarter ended March 31, 1997.
First National Bank of Boston, in its
individual capacity and as Owner Trustee (under
a Trust Agreement dated as of December 15,
1986, with the Owner Participant), Chemical
Bank, in its individual capacity and as
Indenture Trustee (under a Trust Indenture,
Mortgage, Security Agreement and Assignment of
Rents dated as of December 15, 1986, with the
Owner Trustee), and Public Service Company of
New Mexico, including Appendix A definitions
(Unit 1 Transaction) (refiled).
99.12 Trust Indenture, Mortgage, Security Agreement 99.12 to the Company's Quarterly 1-6986
and Assignment of Rents dated as of Report on Form 10-Q for the
December 15, 1986, between The First National quarter ended March 31, 1997.
Bank of Boston, as Owner Trustee, and Chemical
Bank, as Indenture Trustee (Unit 1 Transaction)
(refiled).
</TABLE>
E-18
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
<S> <C> <C> <C>
99.13 Assignment, Assumption and Further Agreement 99.13 to the Company's Quarterly 1-6986
dated as of December 15, 1986, between Public Report on Form 10-Q for the
Service Company of New Mexico and The First quarter ended March 31, 1997.
National Bank of Boston, as Owner Trustee
(Unit 1 Transaction) (refiled).
99.14 Participation Agreement dated as of 99.14 to the Company's Quarterly 1-6986
December 15, 1986, among the Owner Participant Report on Form 10-Q for the
named therein, First PV Funding Corporation, quarter ended March 31, 1997.
The First National Bank of Boston, in its
individual capacity and as Owner Trustee (under
a Trust Agreement dated as of December 15,
1986, with the Owner Participant), Chemical
Bank, in its individual capacity and as
Indenture Trustee (under a Trust Indenture,
Mortgage, Security Agreement and Assignment of
Rents dated as of December 15, 1986, with the
Owner Trustee), and Public Service Company of
New Mexico, including Appendix A definitions
(Unit 2 Transaction) (refiled).
99.15 Trust Indenture, Mortgage, Security Agreement 99.15 to Annual Report of the 1-6986
and Assignment of Rents dated as of December Registrant on Form 10-K for
31, 1986, between the First National Bank of fiscal year ended December 31,
Boston, as Owner Trustee, and Chemical Bank, as 1997.
Indenture Trustee (Unit 2 Transaction)
(refiled).
99.16 Assignment, Assumption, and Further Agreement 99.16 to the Company's Quarterly 1-6986
dated as of December 15, 1986, between Public Report on Form 10-Q for the
Service Company of New Mexico and The First quarter ended March 31, 1997.
National Bank of Boston, as Owner Trustee
(Unit 2 Transaction) (refiled).
99.17* Waiver letter with respect to "Deemed Loss 99.17 to Annual Report of the 1-6986
Event" dated as of August 18, 1986, between the Registrant on Form 10-K
for Owner Participant named therein, and Public fiscal year ended December 31,
Service Company of New Mexico (refiled). 1997.
99.18* Waiver letter with respect to Deemed Loss 99.18 to Annual Report of the 1-6986
Event" dated as of August 18, 1986, between the Registrant on Form 10-K
for Owner Participant named therein, and Public fiscal year ended December 31,
Service Company of New Mexico (refiled). 1997.
</TABLE>
E-19
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
<S> <C> <C> <C>
99.19 Agreement No. 13904 (Option and Purchase of 99.19 to Annual Report of the 1-6986
Effluent), dated April 23, 1973, among Arizona Registrant on Form 10-K
for Public Service Company, Salt River Project fiscal year ended December 31,
Agricultural Improvement and Power District, 1997.
the Cities of Phoenix, Glendale, Mesa,
Scottsdale, and Tempe, and the Town of
Youngtown (refiled).
99.20 Agreement for the Sale and Purchase of 99.20 to Annual Report of the 1-6986
Wastewater Effluent, dated June 12, 1981, among Registrant on Form 10-K
for Arizona Public Service Company, Salt River fiscal year ended December 31,
Project Agricultural Improvement and Power 1997.
District and the City of Tolleson, as amended
(refiled).
99.21* 1996 Supplemental Indenture dated as of 99.21 to the Company's Quarterly 1-6986
September 27, 1996 to Trust Indenture, Report on Form 10-Q for the
Mortgage, Security Agreement and Assignment of quarter ended September 30, 1996.
Rents dated as of December 16, 1985 between
State Street Bank and Trust Company, as Owner
Trustee, and The Chase Manhattan Bank, as
Indenture Trustee.
</TABLE>
- -----------
* One or more additional documents, substantially identical in all material
respects to this exhibit, have been entered into, relating to one or more
additional sale and leaseback transactions. Although such additional
documents may differ in other respects (such as dollar amounts and
percentages), there are no material details in which such additional
documents differ from this exhibit.
** Designates each management contract or compensatory plan or arrangement
required to be identified pursuant to paragraph 3 of Item 14(a) of Form
10-K.
*** Two additional documents, substantially identical in all material respects
to this exhibit, have been entered into, relating to two additional letters
of credit supporting pollution control revenue refunding bonds. Although
such additional documents may differ in other respects (such as dollar
amounts and percentages), there are no material details in which such
additional documents differ from this exhibit.
(b) Reports on Form 8-K:
None.
E-20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PUBLIC SERVICE COMPANY OF NEW MEXICO
(Registrant)
Date: February 23, 1998 By /s/ B. F. Montoya
-------------------------------------
B. F. Montoya
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C> <C>
/s/ B. F. MONTOYA Principal Executive Officer and February 23, 1998
- ----------------------------------------------- Director
B. F. MONTOYA
President and Chief Executive Officer
/s/ M. H. MAERKI Principal Financial Officer February 23, 1998
- -----------------------------------------------
M. H. Maerki
Senior Vice President and
Chief Financial Officer
/s/ D. M. BURNETT Principal Accounting Officer February 23, 1998
- -----------------------------------------------
D. M. Burnett
Corporate Controller and
Chief Accounting Officer
/s/ J. T. ACKERMAN Chairman of the Board February 23, 1998
- -----------------------------------------------
J. T. Ackerman
/s/ R. G. ARMSTRONG Director February 23, 1998
- -----------------------------------------------
R. G. Armstrong
/s/ J. A. GODWIN Director February 23, 1998
- -----------------------------------------------
J. A. Godwin
/s/ L. H. LATTMAN Director February 23, 1998
- -----------------------------------------------
L. H. Lattman
/s/ M. LUJAN JR. Director February 23, 1998
- -----------------------------------------------
M. Lujan Jr.
/s/ R. U. ORTIZ Director February 23, 1998
- -----------------------------------------------
R. U. Ortiz
/s/ R. M. PRICE Director February 23, 1998
- -----------------------------------------------
R. M. Price
/s/ P. F. ROTH Director February 23, 1998
- -----------------------------------------------
P. F. Roth
</TABLE>
E-21
Amendment No. 1
To The
EARLY PURCHASE AND PARTICIPATION AGREEMENT
Between
Public Service Company of New Mexico
and
M-S-R Public Power Agency
Public Service Company of New Mexico (PNM) and M-S-R Public Power Agency
(M-S-R), collectively referred to as the Parties, executed the San Juan Unit 4
Early Purchase and Participation Agreement (EPPA) on September 26, 1983,
pursuant to which PNM conveyed to M-S-R an undivided 28.8 percent ownership
interest in San Juan Unit 4. Pursuant to Section 4.2.2.2 of the EPPA, the
Parties were to agree on the selection of a municipal bond underwriter to
determine an interest rate to be used in connection with the calculation of the
"levelized debt service cost" component of the Demand Charge calculation. The
purpose of this Amendment No. 1 is to establish a different source for the
needed interest rate other than a municipal bonds underwriter.
Therefore, the Parties agree as follows:
Section 1:
Section 4.2.2.2 of the EPPA is deleted in its entirety and is replaced by the
following:
"4.2.2.2 The annual levelized debt service cost of all Capital
Improvements shall be determined on the assumption that M-S-R borrows money to
pay such costs and repayment is made on a level debt service basis, without
contingency or reserve requirements, over the remaining useful life of the
Capital Improvements (or life of the plant, whichever is less) with levelized
monthly principal and interest payments. The assumed interest rate shall be that
which M-S-R would have paid had tax exempt revenue bonds been issued. Such rate
shall be taken from the "Electric Wholesale" category of the Municipal Bond
Index as published in the Wall Street Journal on the last Friday of each month
(or as may be published on another day if the last Friday is a holiday). If this
index is changed or the publication is discontinued such that it no longer
serves the purposes herein, then the Parties shall choose a replacement interest
rate source."
<PAGE>
Section 2:
Except as otherwise provided in this Amendment No. 1, the provisions of the EPPA
shall remain in full force and effect.
IT WITNESS WHEREOF, the Parties have caused this Amendment No. 1 to be executed
as of the 16th day of December 1987.
PUBLIC SERVICE COMPANY OF NEW MEXICO
By: /s/ J. L. Wilkins
-----------------------------
Its: Senior Vice President
Power Supply
-----------------------------
M-S-R PUBLIC POWER AGENCY
By: /s/ Kenneth H. McKinney
-----------------------------
Its: General Manager
-----------------------------
SECOND RESTATED AND AMENDED
PUBLIC SERVICE COMPANY OF NEW MEXICO
EXECUTIVE MEDICAL PLAN
RECITALS
WHEREAS, the Amended and Restated Medical Reimbursement Plan of Public
Service Company of New Mexico was adopted effective January 1, 1980 (the
"Medical Reimbursement Plan").
WHEREAS, Public Service Company of New Mexico (the "Company") reserved
the right, pursuant to Section 12 of the Medical Reimbursement Plan, to amend,
modify or terminate the Medical Reimbursement Plan at anytime; and
WHEREAS, the Company desires to amend, restate and rename the Medical
Reimbursement Plan as hereinafter set forth.
I. PURPOSE
The Company adopts the Second Restated and Amended Public Service
Company of New Mexico Executive Medical Plan (the "Plan") to provide a select
group of executives of the Company with additional remuneration in the form of
additional medical benefits beyond such benefits otherwise available to such
executives pursuant to other Company provided health benefits.
II. TERM
The Plan, as restated and amended, shall commence on September 1, 1991,
and shall remain in effect until such time as the same is modified, amended or
terminated by the Board of Directors of the Company, pursuant to Article VIII
hereof.
III. ELIGIBILITY
The Plan shall apply only to an executive employee of the Company whose
position with the Company is President of the Company or designated as part of
the Management Committee (a "Participant"). Participation shall continue so long
as the Participant continues to satisfy the eligibility requirements as set
forth in this Article III.
1
<PAGE>
IV. COVERED CHARGES
Subject to the Annual Limitation, the Company shall reimburse or pay on
behalf of a Participant for all covered charges incurred while this Plan is in
effect. Covered charges ("Covered Charges") shall include all expenses incurred
by the Participant, his or her spouse or Dependents, for medical care (as
defined in Section 213(d) of the Internal Revenue Code of 1986, as amended (the
"Code"), which are not otherwise paid for or reimbursed by a health plan
maintained by the Company or any other employer maintained health plan, covering
the Participant and his or her spouse or Dependents. For purposes hereof, a
"health plan" shall include any employer sponsored health and medical plan,
including, but not limited to, insured or self-insured health, medical, dental
or mental health plans, health maintenance organizations or preferred provider
organizations. Notwithstanding the foregoing, Covered Charges shall not include
expenses for transportation pursuant to Code Section 213(d)(1)(B), for insurance
pursuant to Code Section 213(d)(1)(C) and lodging pursuant to Code Section
213(d)(2). For purposes hereof, Dependents shall mean anyone who qualifies as a
Dependent of the Participant pursuant to Code section 152. Any Covered Charges
reimbursable hereunder shall be determined assuming the Participant elected the
option under the Benefit Trust having the smallest annual deductible amount.
V. ANNUAL LIMITATION
The maximum annual amount of Covered Charges incurred during a calendar
year subject to reimbursement hereunder shall not exceed twenty-five hundred
dollars ($2,500) paid to or on limitation for the Participant, his or her spouse
and Dependents. The Annual Limitation shall be determined on a calendar basis,
based upon the date the Covered Charge is incurred (i.e., when the medical
service is provided).
VI. ADMINISTRATION
The Plan shall be administered by the Company or its designee (the
"Plan Administrator") who shall be the "Named Fiduciary" for purposes of the
Employee Retirement Income Security Act of 1974 ("ERISA"). Subject to the
provisions of the Plan, the Plan Administrator shall have sole and exclusive
power, discretion and authority to:
(i) conclusively interpret the provisions of this Plan and decide all
questions of fact arising in its application, including but not limited to, the
right to determine whether an individual satisfies the eligibility requirements
hereunder and the right of a participant to receive benefits and the amount of
those benefits hereunder;
(ii) adopt, amend and rescind rules and regulations relating to this
Plan including the appointment or third party administrators to assist in claims
administration; and
(iii) make any other determinations it deems necessary or advisable.
2
<PAGE>
VII. NOTICE
For the purpose of this Plan, notices and all other communications
provided for in the Plan shall be in writing and shall be deemed to have been
duly given when delivered or mailed by United States registered mail, return
receipt requested, postage prepaid, addressed to the Participant at his or her
last known address and to the Company at Alvarado Square, Albuquerque, New
Mexico 87158, provided that all notices to the Company shall be directed to the
attention of the Manager of the Employee Benefits Department, or to such other
address as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon
receipt.
VIII. AMENDMENT AND TERMINATION
The Company expects to continue the benefits provided hereunder
indefinitely, but reserves the right to amend or modify the Plan including, but
not limited to the right to decrease, increase or discontinue the benefits, and
the Company specifically reserves the right to terminate the Plan at any time,
for any reason, and without prior notice.
XI. MISCELLANEOUS
A. Governing Law. The validity, interpretation, construction and
performance of this Plan shall be governed by the laws of the State of New
Mexico.
B. Withholding. Any payments provided for hereunder shall be paid
subject to any applicable withholding required under federal, state or local
law.
C. No Employment Contract. Notwithstanding anything to the contrary
contained in the Plan, (1) the execution of the Plan shall not create an express
or implied contract of employment for a specified term between the Participant
and the Company and (2) unless otherwise expressly provided in writing, by such
officer as may be specifically designated by the President, the employment
relationship between the a Participant and the Company shall be defined as
"employment at will", where either party, without notice, may terminate the
relationship with or without cause.
D. No Right of Assignment. Neither a Participant nor any person taking
on behalf of a Participant may anticipate, assign or alienate (either at law or
in equity) any benefit provided under the Plan and the Plan Administrator shall
not recognize any such anticipation, assignment or alienation. Furthermore, a
benefit under the Plan is not subject to attachment, garnishment, levy,
execution or other legal or equitable process.
E. Service of Process. The Secretary of the Company shall be an agent
for service of process in matters relating to this Plan.
3
<PAGE>
F. Headings. The headings and subheadings in this Plan are inserted for
convenience and reference only and are not to be used in construing this
instrument or any provision hereof.
G. Gender and Number. Where the context so requires, words in the
masculine gender shall include the feminine and neuter genders, the plural shall
include the singular, and the singular shall include the plural.
H. Validity. The invalidity or unenforceability of any provision of
this Plan shall not affect the validity or enforceability of any other provision
of this Plan, which shall remain in full force and effect.
X. CONTINUATION COVERAGE
A. Continuation Coverage after Termination of Normal Participation.
Each person who is a Qualified Beneficiary shall have the right to elect to
continue coverage under this Plan upon the occurrence of a Qualifying Event that
would otherwise result in such person losing coverage hereunder. Such extended
coverage under the plan is known as "Continuation Coverage."
B. Qualified Beneficiary. A "Qualified Beneficiary" is any person who,
as of the day before a Qualifying event, is (a) an employee of the Company
covered under the Plan as of such day (such persons are Called "Covered
Employees"), (b) the spouse of the Covered Employee, or (c) a dependent of a
Covered Employee. A Covered Employee can be a Qualified Beneficiary only if the
Qualifying Event consists of termination of employment (for any reason other
than gross misconduct). A retiree or other former employee actively
participating in the Plan be reason of a previous period of employment will be
treated as a "Qualified Beneficiary." A person is not a Qualified Beneficiary
if, as of such day, either the individual is covered under the Plan by virtue of
the election of continuation coverage by another person and is not already a
Qualified Beneficiary by reason of a prior Qualifying Event, or is entitled to
Medicare coverage under Title XVIII of the Social Security Act. Furthermore, an
individual who fails to elect Continuation Coverage within the election period
provided in Section F, below, shall not be considered to be a Qualified
Beneficiary.
C. Qualifying Event. Any of the following shall be considered as a
"Qualifying Event":
(i) death of a Covered Employee;
(ii) termination (other than by reason of gross misconduct) of the
Covered Employee's employment;
(iii) divorce or legal separation of a Covered Employee from the
employee's spouse;
4
<PAGE>
(iv) a Covered Employee's becoming eligible to receive Medicare
benefits under title XVIII of the Social Security Act; or
(v) a dependent child of a Covered Employee ceasing to be a
dependent.
In the case of any person treated as a Covered Employee but who is not
a common-law employee, termination of "employment" means termination of the
relationship that originally gave rise to eligibility to participate in the
Plan.
D. Available Benefit. Each person who is eligible to elect to continue
coverage under Article X shall have the right to continue the level of coverage
in effect for the Covered Employee on the day before the Qualifying Event or a
lesser level of coverage than the amount set out in Article V above. If a
Qualified Beneficiary of another group health plan maintained by the Employer is
prevented from receiving a previous level of benefits due to change in plan
benefits or plan termination, such individual will be entitled to elect any
available level of coverage under this Plan.
E. Notice Requirements.
(i) When a Participant becomes covered under this Plan, the Plan
Administrator must inform the Participant (and spouse, if any) in writing of the
rights to continued coverage, as described in Article VII.
(ii) The Company shall give the Plan Administrator written notice
of a Qualifying Event within thirty (30) days of the occurrence thereof.
(iii) Within fourteen (14) days of receipt of the Company's notice,
the Plan Administrator shall furnish each Qualifying Beneficiary with written
notification of the termination of regular coverage under the Plan, as well a
recital of the rights of any such Beneficiary to elect Continuation Coverage, as
required by Code Section 4980B and ERISA Section 601, in accordance with the
terms of this Plan.
(iv) In the case of a Qualifying Event described in Section C.(iii)
or (v) above, a Covered Employee or a Qualified Beneficiary who is a spouse or
dependent of such Participant must notify the Plan Administrator within sixty
(60) days of the occurrence thereof. The Plan Administrator shall give written
notification of Continuation Coverage rights to any Qualified Beneficiary within
fourteen (14) days of receipt of the notice described in this Section E. (iv).
Each Qualified Beneficiary who is determined, under Title II or XVI of
the Social Security Act, to have been disabled at the time of a Qualifying event
described in Section C. (ii) must notify the Plan Administrator of such
determination within 60 days after the date of the determination and within 30
days after the date of any final determination under such title or titles that
the Qualified Beneficiary is no longer disabled.
5
<PAGE>
Notwithstanding any of the foregoing, notification to a Qualified
Beneficiary who is a spouse of a Covered Employee is treated as notification to
all other Qualified Beneficiaries residing with that person at the time
notification is made.
F. Election Period. Any Qualified Beneficiary entitled to Continuation
Coverage shall have 45 days from the date of the Notice required by Section E.,
in the case of occurrence of a Qualifying Event, in which to return a signed
election to the Plan Administrator indicating the choice to continue benefits
under the Plan.
G. Duration of Continuation Coverage
(i) Continuation Coverage shall extend for a period of 18 months
after the date that regular coverage ceased due to occurrence of a Qualifying
Event.
(ii) If a Qualifying Event occurs during the 18 months after the
date of a Qualifying Event described in Section C. (ii) above, the Continuation
Coverage shall extend to the date which is 36 months after the date of the
qualifying event described in Section C. (ii).
(iii) In the case of an event described in Section C. (iv) above
(without regard to whether such event is a Qualifying Event), Continuation
Coverage for Qualified Beneficiaries other than the Covered Employee for such
event or any subsequent Qualifying Event shall not terminate before the close of
the 36-month period beginning on the date the Covered Employee becomes entitled
to benefits under Title XCIII of the Social Security Act.
(iv) In the case of an individual who is determined, under Title II
or XVI of the Social Security Act, to have been disabled at the time of the
Qualifying Event described in Section C. (ii) above, any references in (i) or
(ii) of this Section G to 18 months with respect to such event shall be deemed a
reference to 29 months, but only if the Qualified Beneficiary has provided
notice of such determination in accordance with Section E. (iv) above before the
end of such 18 months.
(v) In no event, however, shall Continuation Coverage extend more
than 36 months beyond the date of the original Qualifying Event.
H. Automatic Termination of Continuation Coverage. Continuation
Coverage shall automatically cease if (i) the Company no longer offers group
health coverage to any of its employees, (ii) the required premium for
continuation coverage is not paid within 30 days of the date due, (iii) an
electing Beneficiary becomes covered under another group health plan, (iv) an
electing Beneficiary becomes eligible to receive benefits under Medicare, or (v)
in the case of a Qualified Beneficiary who is disabled at the time of a
Qualifying Event described in Section C. (ii), the month that begins more than
30 days after the date of the final determination under Title II or XVI of the
Social Security Act that the Qualified Beneficiary is no longer disabled.
6
<PAGE>
I. Premium Requirements
(i) A Qualified Beneficiary who has elected Continuation Coverage
under This Article X must pay a premium of 102% of the applicable premium for
the period of coverage. In the case of an individual described in Section B.
(iv) above, the required premium shall be 105% of the applicable premium for any
month after the 18th month of Continuation Coverage described in Section G. (i)
or (ii). The applicable premium shall be determined by the Plan Administrator,
pursuant to applicable law.
(ii) The required premium for Continuation Coverage may, at the
Qualified Beneficiary's election, be paid in monthly installments.
(iii) Premiums for Continuation Coverage become payable 45 days
after the date on which the Qualified beneficiary makes the initial election for
Continuation Coverage.
XI. CLAIMS PROCEDURES
The Plan Administrator shall make all determinations as to a
Participant's right to a benefit pursuant to the Plan. The Plan Administrator,
within ninety (90) days after receipt of notice of objection to benefits payable
or claim for benefits, shall render a written decision on the objection to the
benefits payable or the claim for benefits. If the objection to benefits payable
or the claim for benefits is denied, either in whole or in part, the decision
shall include:
(i) The specific reason or reasons for the denial;
(ii) An indication of the specific Plan provisions on which the
denial is based;
(iii) A description of any additional material or information
necessary for the claimant to perfect the claim and any explanation of why such
material or information is necessary; and
(iv) An explanation of the Plan's appeal procedure, indicating that
the appeal of the adverse determination must be in writing addressed to the Plan
Administrator, and received within sixty (60) days after the receipt by the
claimant of the Plan Administrator's written denial of benefits. Failure to
perfect an appeal within the 60-day period shall make the decision conclusive.
If the claimant should appeal to the Plan Administrator, he or she, or
his or her duly authorized representative, must do so in writing and may submit,
in writing, whatever issues and comments he or she, or his or her duly
authorized representative, feel are pertinent. The claimant, or his or her duly
authorized representative, may review pertinent Plan documents. The Plan
Administrator shall render a written decision on the question of the benefits
payable or the claim for benefit, setting forth the specific reasons for its
decision including a reference to the plan's provision within sixty (60) days
after receipt of the request for review, unless special circumstances (such as a
hearing) would make the rendering of a decision within the sixty (60) day limit
unfeasible, but in no event shall the Plan Administrator render a decision
respecting a denial for a claim for benefits later than one hundred twenty (120)
days after its receipt of a request for a review.
7
<PAGE>
Any denial by the Plan Administrator of a Participant's claim for
benefits under the Plan shall be stated in writing and such notice shall be
written in a manner that may be understood without legal or actuarial counsel.
XII. RIGHTS OF PERSONS ADVERSELY AFFECTED
The right any PNM employee adversely affected who has incurred charges
for medical expenses between September 1, 1991 and April 30, 1992, which would
have been paid or reimbursed hereunder, but for this Second and Restated
Amendment, shall not have such medical expenses reduced or unpaid and the
Company shall pay any obligation that would have been paid but for this Second
Restated and Amended Plan document. Effective as of May 1, 1992, no employee,
spouse of such employee or dependent of such employee shall have any right to
any medical expense paid or reimbursed pursuant to this Plan unless provided for
in this Second Restated and Amended Plan document.
Date: 28 Dec 1995
---------------------
PUBLIC SERVICE COMPANY
OF NEW MEXICO
By /s/ Benjamin F. Montoya
----------------------------
Chief Executive Officer
65226
8
<PAGE>
BEFORE THE NEW MEXICO PUBLIC SERVICE COMMISSION
IN THE MATTER OF THE IN-SERVICE DATES, )
PERFORMANCE STANDARDS AND RATEMAKING )
TREATMENT FOR DECOMMISSIONING COSTS )
CONCERNING PNM'S PARTICIPATION IN )
THE PALO VERDE NUCLEAR GENERATING ) CASE NO. 2004
STATION, )
)
PUBLIC SERVICE COMPANY OF NEW MEXICO, )
)
Applicant. )
FINAL ORDER APPROVING STIPULATION
---------------------------------
THIS MATTER comes before the New Mexico Public Service Commission
("Commission") upon the Certification of Stipulation issued by Hearing Examiner
Michael Barlow on July 15, 1987, and upon the Stipulation filed on June 2, 1987
by Public Service Company of New Mexico, New Mexico Industrial Energy Consumers,
Attorney General of the State of New Mexico and the New Mexico Public Service
Commission Staff. The Commission having considered the Certification, the
Stipulation, the recorded in this case and being otherwise fully informed in the
premises;
THE COMMISSION FINDS AND CONCLUDES:
1. The Certification of Stipulation of the Hearing Examiner, attached
to this Order as Exhibit 1, and the Stipulation attached to the Certification as
Attachment A, and all findings and conclusions contained in either, whether or
not numbered, are ADOPTED, APPROVED and ACCEPTED as the findings and conclusions
of the Commission.
2. The Stipulation is just, reasonable and in the public interest and
should be approved.
<PAGE>
IT IS THEREFORE ORDERED:
A. The Orders recommended by the Hearing Examiner as set forth in the
Certification of Stipulation attached hereto as Exhibit 1 are incorporated by
reference as if fully set forth herein and are hereby ADOPTED, APPROVED and
ACCEPTED as Orders of the Commission.
B. The decommissioning plan is approved by the Commission, subject to
Commission Staff review and approval of all documents executed by PNM to
implement the plan.
C. All documents executed by PNM to implement the plan shall be filed
with the Commission within seven days of their execution.
D. This Order is effective immediately.
E. A copy of this Order shall be served upon the Commission Staff and
all parties to this case or their counsel.
ISSUED under the Seal of the Commission at Santa Fe, New Mexico this
30th day of July, 1987.
NEW MEXICO PUBLIC SERVICE COMMISSION
---------------------------------------
(Seal) JOSEPH E. SAMORA, JR., CHAIRMAN
---------------------------------------
MARTIN J. BLAKE, COMMISSIONER
---------------------------------------
S. PETER BICKLEY, COMMISSIONER
Final Order
Case No. 2004
2
<PAGE>
BEFORE THE NEW MEXICO PUBLIC SERVICE COMMISSION
-----------------------------------------------
IN THE MATTER OF THE IN-SERVICE DATES, )
PERFORMANCE STANDARDS AND RATEMAKING )
TREATMENT FOR DECOMMISSIONING COSTS )
CONCERNING PNM'S PARTICIPATION IN )
THE PALO VERDE NUCLEAR GENERATING ) Case No. 2004
STATION, )
)
PUBLIC SERVICE COMPANY OF NEW MEXICO, )
)
Applicant. )
CERTIFICATION OF STIPULATION
----------------------------
COMES NOW Michael Barlow, Hearing Examiner in this case, and certifies
the Stipulation on Decommissioning appended hereto as Attachment A to the New
Mexico Public Service Commission pursuant to Rule R14-2(e)(1) of Third Revised
General Order No. 1.
STATEMENT OF THE CASE
- ---------------------
This case was instituted by the Commission with the issuance of its
Order Docketing case. Included in that Order were specifications relating to how
and when Public Service Company of New Mexico ("PNM") should recover its share
of the costs of decommissioning the Palo Verde Nuclear Generating Station
("PVNGS") units. The undersigned was appointed as Hearing Examiner for this case
pursuant to NMSA 1978, Section 62-10-7 (Repl.Pamp. 1984).
The Hearing Examiner issued a Procedural Order which divided this case
into separate phases for in-service dates, performance standards, and
decommissioning costs. On April 21, 1986, the Commission issued its Order
Approving Stipulation which addressed the in-service phase. On May 18, 1987, the
Commission issued a Final order Adopting Recommended Decision which related to
the performance standards phase.
1
CERTIFICATION OF STIPULATION
Case No. 2004
<PAGE>
On June 2, 1987, the decommissioning costs phase of this case came on
for hearing. The following appearances were entered at that hearing:
For PNM:
--------
Kathryn J. Kuhlen, Esq.
For Attorney General of the State of New Mexico ("AG"):
-------------------------------------------------------
Steven S. Michel, Esq.
For Commission Staff:
---------------------
Charles F. Noble, Esq.
No appearance was made by intervenor United State Air Force or for commentor
Texas-New Mexico Power Company.
At the outset of the hearing, the Stipulation on Decommissioning
("Stipulation") was presented. By agreement of the parties, the direct testimony
that had been filed in this case was admitted into evidence for the limited
purpose of providing background information. That prefiled testimony consists of
the following:
For PNM:
--------
Ms. Marilyn Mason-Plunkett
Mr. Billy D. Lackey
Mr. Thomas S. LaGuardia
Mr. John E. Lyons
Mr. Robert B. Starnes
For AG:
-------
Mr. Paul L. Chernick
For Commission Staff:
---------------------
Mr. Domingo Sanchez, III
Mr. John Curl
2
CERTIFICATION OF STIPULATION
Case No. 2004
<PAGE>
Mr. Lackey presented oral testimony explaining and supporting the Stipulation.
Messrs. Sanchez and Curl also testified in support of the agreement.
DISCUSSION
- ----------
As reflected on page 15 of the Stipulation, it was executed by PNM, the
AG, NMIEC and the Commission Staff. Paragraph 2 on page 2 provides that the
Stipulation was entered into by the parties for the purpose of determining a
decommissioning plan for PNM's interest in PVNGS and the appropriate rate
treatment for such decommissioning costs. One party to the proceeding, the
United States Air Force, did not participate in this phase of the case. Tr. 2.
Paragraph 2 also contains the usual language that the Stipulation must
be adopted in its entirety to have any effect. In the case of rejection by the
Committee, the parties have provided that the Stipulation cannot be used as
evidence of factual or legal concessions by any of the parties.
As provided in paragraph 3, an external unqualified sinking fund ("the
Fund") would be utilized to fund PNM's share of decommissioning costs if the
Stipulation is approved. An external sinking fund is one that is established and
funded by periodic deposits in an account which is administered separately from
internal corporate funds. The Fund would be used exclusively for payment of the
decommissioning costs, administrative costs and taxes on income of the Fund.
Mason-Plunkett, pp.7-8.
The Fund cannot be a "qualified" one pursuant to the Tax Reform Act of
1984 because of the sale and subsequent leaseback of PNM's share of PVNGS Units
1 and 2. Therefore, PNM cannot qualify to deduct a certain portion of the
contributions to a decommissioning reserve fund. Lackey, p. 10.
3
CERTIFICATION OF STIPULATION
Case No. 2004
<PAGE>
Paragraph 4 establishes the initial funding based on estimated
decommissioning costs. The parties have agreed that such initial funding would
be based on the total estimated decommissioning costs for the PVNGS units as
determined by an engineering study and based on the DECON mode of
decommissioning. The engineering study was undertaken at the request of the
Arizona Nuclear Power Project ("ANPP") to establish decommissioning costs.
LaGuarda, p. 5. The DECON mode is a Nuclear Regulatory Commission classification
for removal or decontamination of all equipment, structures and portions of a
facility and a site of radioactive contaminants shortly after operations cease.
Mason-Plunkett, p.4. The DECON mode has been chosen by the Engineering and
Operating Committee of ANPP for PVNGS. Mason-Plunkett, p. 6; Tr. 20. The other
decommissioning modes considered were storage and subsequent decontamination
("SAFSTOR") and entombment ("ENTOMB"). Mason-Plunkett, p.5.
The cost of DECON and for the other modes of decommissioning are
summarized below in 1986 dollars:
Unit 1 Unit 2
------ ------
DECON $208,241,300 $194,978,500
ENTOMB 233,645,000 216,823,000
SAFSTOR 237,034,000 224,831,000
LaGuardia, TSL-2, pp.1-3. The actual funding amounts to account for these
decommissioning costs assumes a 5% average cost escalation which is an estimate
of inflation over the period until decommissioning. Lackey, p.5; Tr. 22.
4
CERTIFICATION OF STIPULATION
Case No. 2004
<PAGE>
PNM's share of the decommissioning costs is based on its 10.2%
participation in PVNGS. The amounts required by PNM are reflected in paragraph 4
of the Stipulation. These costs would be funded through annual levelized
deposits for the remaining useful lives of the units. The useful lives are based
on a forty year operating authority issued by the Nuclear Regulatory Commission.
Tr. 23. Funding would be terminated before the useful lives end if
decommissioning actual occurs earlier and the fund contains sufficient resources
for decommissioning. The Commission has the discretion to docket the appropriate
case to determine the ratemaking treatment for any deficiency in the Fund in the
case of early decommissioning. Tr. 23.
Paragraph 5 sets our the funding requirements of the decommissioning
costs for PVNG's Units 1 and 2. Unit 3 was not included since it is not
in-service yet, but that unit could be brought into the plan by PNM in the
future. Tr. 25. As noted in the last sentence of the paragraph, the levelized
annual deposits would be in the amount of $396,000 per unit. This amount was
computed and reflected on line 10, column 10 of the first page of PNM Exhibit 3.
This is an increase from $365,000 per unit in November 1986 when PNM filed its
testimony. Lackey, p.16. The increase is due to the shorter length of time
available to collect the costs and not a result of increased costs. Tr. 28. The
amount of annual per unit deposit in the Fund can change as noted in paragraph 7
of the Stipulation.
Paragraph 5 provides that PNM will make the 1987 and 1988 contributions
to the Fund upon approval of the Stipulation as well as a partial repayment of
the 1989 contribution, for a total of $2,178,000. The purpose of the prepayments
is to avoid increasing the annual revenue requirement due to a further lapse in
time and to have cash to make the premium payments on the insurance policies
which are discussed later. Tr. 25-26. There is some requirement that the
premiums for the first three or four years of the plan must be paid in cash by
PNM rather than by taking our loans. Tr. 26. The partial prepayment of the 1989
decommissioning contribution in the amount of $594,000 was the result of an
analysis of the amount of cash necessary to pay those premiums. Tr. 27. The
total of the 1987 contribution, the 1988 prepayment and the 1989 partial
repayment would be deposited on or before December 31, 1987. The next deposit
would involve the balance for the 1989 contribution of $198,000 per unit. Tr.
27.
5
CERTIFICATION OF STIPULATION
Case No. 2004
<PAGE>
The administration of the Fund would be accomplished through investment
thereof in the Cost of Money Reduction Plan ("COMReP") as referred to in
paragraph 6 of the Stipulation. COMReP was developed by Financial Marketing
Services, Inc. and would allow PNM to accumulate funds for decommissioning on a
tax-deferred basis by the use of permanent life insurance policies on certain
management and administrative employees. Lyons, p.102. COMReP is explained in
paragraphs 12 through 14 on pages 10 through 12 of the Stipulation. It is also
described in detail in the prefiled testimony of PNM witness Lyons and
summarized on page 9 of his testimony.
As previously noted, PVNGS Unit 3 decommissioning costs are not made a
part of the funding requirements of paragraph 5. However, paragraph 6 provides
that PNM may use COMReP for deposits of Unit 3 decommissioning. If PNM utilizes
COMReP for that unit, the amount to be deposited annually shall be $396,000
which is the same as for the other two units. The paragraph also contains a
requirement that in case PNM elects not to use COMReP for Unit 3, it would file
a proposal for alternative funding which the Commission, Staff or other parties
could contest.
Paragraph 7 contains the requirement that PNM file updates every three
years for decommissioning cost estimates. PNM had originally proposed to file
every five years (Mason-Plunkett, p.16), but the parties agreed with the AG's
position that because of uncertainties in the cost estimates, useful life
estimates, interest projections, tax laws and inflation, review should be more
frequent. Chernick, p.45; Tr. 30. The Stipulation also requires that changes in
the decommissioning cost estimates would be reflected in the rate treatment for
such costs unless they are contested by Staff or intervenors to this case and
disapproved by the Commission. PNM's witness Lackey testified that any increase
or decrease in revenue requirements associated with a change in decommissioning
cost estimates would be subject to Commission approval. Tr. 31.
6
CERTIFICATION OF STIPULATION
Case No. 2004
<PAGE>
In connection with the decommissioning cost estimate updates, PNM would
review the adequacy of the decommissioning funding amounts. If these amounts are
inadequate, PNM would notify the Commission, Staff and the intervenors of the
required change. Finally, paragraph 7 provides for an annual report to be filed
with the Commission on or before March 1 on the performance of the Fund for the
prior year. The Fund would consist of the insurance policies and a side fund
which is discussed later. This report would measure the investment performance
of both components of the Fund. Tr. 32.
Pursuant to paragraph 8, the Fund would be administered by an
independent trustee. It would be administered separate and apart from PNM's
internal funds and used only for PNM's share of decommissioning costs,
administrative costs of the fund and for taxes on the income of the Fund. The
paragraph also defines "decommissioning" and "decommissioning costs"
specifically and in conformity with the trust agreements. Tr. 34. This is
intended to bind the parties and the trustee to a uniform understanding of the
costs that would be paid by the Fund.
Paragraph 9 refers to the appointment of an independent financial
institution to act as trustee for the Fund. At the time of the hearing, PNM
anticipated that this trustee would be First Interstate Bank. Tr. 35. The trust
is to be composed of the COMReP insurance policies and a "side fund". The side
fund is to be composed of all deposits that are not used to purchase insurance
policies or to pay administrative costs and taxes of the fund. Tr. 35.
Paragraph 9 also contains the general provisions for the trust and the
trust agreement. The agreement would be subject to review by the Commission,
Staff and Intervenors and could be contested. The trustee would administer
investments of the side fund while investments in the insurance policy funds
would be handled pursuant to COMReP. Investments would be subject to a "prudent
man rule" and certain investments in such things as PNM securities, other New
Mexico utility securities, securities of other PVNGS participants, and highly
speculative securities would be prohibited. Paragraph 10 provides for the
removal of the trustee and execution of a new trust agreement with the same safe
guards as for the original appointment and trust agreement.
7
CERTIFICATION OF STIPULATION
Case No. 2004
<PAGE>
Pursuant to paragraph 11, PNM could transfer its rights and interest in
the Fund to others. This provision would allow such a transfer if PNM were to
transfer its decommissioning responsibility in PVNGS, presumably with a transfer
of the rights and interests in PVNGS itself, to another utility. Tr. 37-38. Such
a transfer does not apply to sale and leaseback transactions such as those
approved by the Commission for PNM's interests in Units 1 and 2 in Case Nos.
1995 and 2019. Tr. 38.
As previously noted, paragraphs 12 through 14 explain the COMReP plan
and are taken form Mr. Lyon's prefiled testimony. As noted in paragraph 13,
loans may be taken against the insurance policies in order to match the premiums
to be made by the fund and the levelized deposits into the Fund. PNM would pay
the interest on such loans and would be able to deduct up to a maximum of
$50,000 per policy for tax purposes. Tr. 11. Otherwise, those paragraphs are
self-explanatory.
PNM would be required to allocate the decommissioning funds between
Units 1 and 2 in proportion to each units portion of the total decommissioning
costs pursuant to paragraph 15. This is to ensure that PNM will not pay a
majority of the fund to decommissioning one unit to the detriment of the other.
Although PNM has sold all or a portion of its interest in Units 1 and 2, it has
retained the decommissioning obligations so the owners/lessors of the units
should be treated equally and fairly insofar as decommissioning costs are
concerned. Tr. 41.
Paragraph 16 sets out the revenue requirement associated with
decommissioning costs of $646,000 per unit. The decommissioning expense of
$396,000 comes from paragraph 5 of the Stipulation. In order to collect
sufficient funds to have the $396,000 remaining after taxes are paid, a revenue
requirement of $646,000 is necessary because of PNM's combined effective tax
rate of 38.66 percent. Tr. 42. In other words, PNM would pay $250,000 in taxes
on $646,000 which will leave $396,000 for decommissioning purposes. This tax
expense is reflected on line c of the paragraph. Lines b and d thereof represent
the booking of a refund and a deferred tax expense on such refund which offset
each other. Tr. 43.
8
CERTIFICATION OF STIPULATION
Case No. 2004
<PAGE>
The effects of the Inventory methodology on decommissioning revenue
requirements are covered by paragraph 17. Such revenue requirements would be
treated as depreciation expenses for ratemaking purposes for so long as the
Inventory methodology is in effect. This would be true even if the plant is not
in "inventory" and is placed in rate base. Tr. 44-45. The revenue requirements
would be "at-risk" costs for PNM while the plant is inventoried. As advocated by
Staff, decommissioning costs are a cost of removal which is a component of
depreciation. Sanchez, p.5. By treating the decommissioning revenue requirements
"at-risk," the amounts would only be recoverable by PNM through economy sales or
off-system sales pursuant to the Inventory methodology. Tr. 45. The parties have
also agreed that the prepayment of funding requirements will be considered
"at-risk" in the year they are expensed rather than when they are paid. This
would levelize the prepayment amounts provided for in paragraph 5 of the
Stipulation so the entire $2,178,000 would not be "at-risk" only in 1987. Tr.
46.
Book and tax timing differences for the decommissioning expenditures
would be normalized for ratemaking purposes pursuant to paragraph 18. This is an
adaptation of the AG's criticism of PNM proposed method of booking prepaid
taxes. Chernick, pp.21.22. The result is that revenue requirements would be
levelized. While prepaid taxes would be booked and will build up as a rate base
item, that would be offset by a higher revenue requirement and establishment of
the refund payable. Tr. 47.
If tax laws do not change, PNM's witness Lackey testified that there
will be tax savings at the time of decommissioning that will arise from the
payment of decommissioning costs. Tr. 13. Paragraph 19 provides for a priority
for applying any tax savings related to decommissioning expenditures. The order
would be the refund payable account, decommissioning costs and related expenses,
the accumulated deferred income taxes, and refunds to ratepayer relative to
total contributions from ratepayers and shareholders to the costs and taxes of
decommissioning. Shareholders could have contributed to decommissioning if the
plant were not allowed into ratebase by the Commission or if there were
insufficient incentive revenues to recover the at-risk costs. Tr. 14, 50.
9
CERTIFICATION OF STIPULATION
Case No. 2004
<PAGE>
PNM would pay any insufficiency in the fund and tax savings resources
and actual decommissioning costs since PNM is ultimately responsible for such
costs. Paragraph 20; Tr. 50. The ratemaking treatment for such payment by PNM is
reserved by the Stipulation. Finally, pursuant to paragraph 21, any excess funds
after decommissioning costs are paid would to be distributed pursuant to the
priorities established in paragraph 19.
CONCLUSION
- ----------
As stated by Staff witness Curl, the Stipulation is fair, just,
reasonable and in the public interest. Tr. 80. Pursuant to Rule R14-2(e)(2) of
Third Revised General Order No. 1, the Hearing Examiner recommends that the
Commission approve the Stipulation.
The Hearing Examiner recommends that the Commission F I N D and C O N C
L U D E as follows:
1. The Certificate of Stipulation of the Hearing Examiner, attached to
this Order, and the Stipulation appended thereto as Attachment A, and all
findings and conclusions contained in either, whether or not numbered, are
adopted, approved and accepted as findings and conclusions of the Commission.
10
CERTIFICATION OF STIPULATION
Case No. 2004
<PAGE>
2. The Stipulation is just, reasonable and in the public interest and
should be approved. The Hearing Examiner recommends that the Commission ORDER
as follows:
A. The Stipulation on Decommissioning filed in this case and appended
to the Certification of Stipulation as Attachment A is hereby approved and
adopted as an Order of the Commission as if fully set forth herein.
B. This Order is effective immediately.
I S S U E D at Santa Fe, New Mexico this 15th day of July, 1987.
NEW MEXICO PUBLIC SERVICE COMMISSION
------------------------------------
MICHAEL BARLOW
Hearing Examiner
11
<PAGE>
BEFORE THE NEW MEXICO PUBLIC SERVICE COMMISSION
IN THE MATTER OF THE IN-SERVICE DATES, )
PERFORMANCE STANDARDS AND RATEMAKING )
TREATMENT FOR DECOMMISSIONING COSTS )
CONCERNING PNM'S PARTICIPATION IN )
THE PALO VERDE NUCLEAR GENERATING ) CASE NO. 2004
STATION, ) (DECOMMISSIONING
) PHASE)
PUBLIC SERVICE COMPANY OF NEW MEXICO, )
)
Applicant. )
STIPULATION ON DECOMMISSIONING
------------------------------
This Agreement and Stipulation is entered into by and among the
undersigned parties as of the date set forth below.
RECITALS:
---------
WHEREAS, the New Mexico Public Service Commission (the "Commission"),
on December 5, 1985, docketed NMPSC Case No. 2004 to explore the issues of
in-service dates, performance standards and ratemaking treatment for
decommissioning costs concerning the participation by Public Service Company of
New Mexico ("PNM") in Palo Verde Nuclear Generating Station ("PVNGS"); and
WHEREAS, the Commission has separated the three areas of concern into
separate proceedings under the same docket; and
WHEREAS, on November 3, 1986, PNM filed its direct testimony in the
decommissioning phase of NMPSC Case No. 2004; on February 16, 1987, Commission
Staff ("Staff") filed its direct testimony on decommissioning and on February
16, 1987 the Attorney General of the State of New Mexico ("AG") filed its direct
testimony on decommissioning; and
ATTACHMENT A
1
<PAGE>
WHEREAS, the undersigned parties are desirous of entering into an
agreement settling the decommissioning phase of NMPSC Case No. 2004; and
WHEREAS, undersigned parties desire to establish a secure funding
mechanism to provide for the decommissioning of PNM's interest in PVNGS;
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants contained herein, the undersigned parties agree and stipulate
as follows:
AGREEMENT:
----------
1. This Agreement and Stipulation ("Stipulation") is being entered into
for the purpose of settling the decommissioning phase of NMPSC Case No. 2004.
2. This Stipulation is entered into by the parties for the purpose of
determining a decommissioning plan for PNM's interest in PVNGS and the
appropriate rate treatment for PNM's decommissioning costs, and is submitted to
the Commission for its adoption. If the Commission does not adopt this
Stipulation in its entirety, it is agreed that this Stipulation shall have no
further force or effect. If litigation or other proceedings ensue after such
non-adoption by the Commission, this Stipulation may not be used as evidence of
a concession by any party as to any factual or legal issue addressed in this
Stipulation.
3. PNM shall use an external unqualified sinking (reserve) fund (the
"Fund") to fund its share of decommissioning costs for PVNGS. The Fund shall be
established and maintained by periodic deposits made by PNM to a trust account
which shall be segregated from and external to PNM's assets.
4. The estimated decommissioning costs which PNM shall use as the basis
for its initial funding shall be PNM's 10.2 percent share of the total estimated
decommissioning costs for each PVNGS unit as determined in the August 1986
"Decommissioning Cost Estimate for the Palo Verde Nuclear Generating Station,"
prepared for the Arizona Nuclear Power Project ("ANPP") by TLG Engineering, Inc.
(the "TLG Study"), which is stated in 1986 dollars and is based on the DECON
mode of decommissioning, which ANPP has determined to utilize for
decommissioning PVNGS. PNM's share of these estimated costs, in 1986 dollars, is
2
<PAGE>
as follows: $21,241,000 for PVNGS Unit 1; $19,888,000 for PVNGS Unit 2; and
$21,669,000 for PVNGS Unit 3. In order to determine the funding amount, PNM has
assumed an average cost escalation of 5 percent over the estimated time of
decommissioning. The funding shall be made through a series of annual levelized
(except for the first year) deposits to the Fund over the estimated remaining
useful life of each PVNGS unit (through December 31, 2024 with respect to PVNGS
Unit 1, through December 9, 2025 with respect to PVNGS Unit 2, and through March
25, 2027 with respect to PVNGS Unit 3). Funding may be terminated earlier than
these dates in the event decommissioning occurs earlier and the Fund's
resources, together with any other resources received in connection with such
early decommissioning, are adequate to cover the decommissioning costs. PNM
shall notify the Commission prior to making expenditures for decommissioning. In
the event of the decommissioning of a unit earlier than the above-stated
estimated useful life of such unit, the Commission, at its own discretion or
upon the motion of Staff or an intervenor in this case, may docket a case to
determine the proper ratemaking treatment of decommissioning from that point in
time forward.
3
<PAGE>
5. PNM shall begin funding for the decommissioning costs relating to
its interest in PVNGS Units 1 and 2 in 1987. The 1987 funding amount shall
include the 1987 decommissioning contribution, a prepayment of the 1988
decommissioning contribution, and a partial prepayment of the 1989
decommissioning contribution, as follows:
Description Amount
1987 Decommissioning Contribution PVNGS
Units 1 and 2 $ 792,000
Prepayment of 1988 Contribution PVNGS
Units 1 and 2 792,000
Partial Prepayment of 1989 Contribution
PVNGS Units 1 and 2 594,000
Total 1987 Fund Payment $2,178,000
The initial deposit shall be in the amount of $2,178,000, and shall be made on
or before December 31, 1987. No deposit will be made in 1988. In 1989, a deposit
in the amount of $198,000 will be made. Subsequent annual deposits shall be made
in the amount of $396,000 per unit for PVNGS Units 1 and 2, unless changed as
provided for in Paragraph 7.
6. The deposits to the Fund made with respect to PNM's interests in
PVNGS Units 1 and 2 shall be invested in an investment plan known as the Cost of
Money Reduction Plan ("COMReP") designed by Financial Marketing Services, Inc.
PNM shall be permitted to use COMReP for its deposits with respect to PVNGS Unit
3 as well; however, it shall not be required to do so. If the COMReP Plan is
utilized for PNM's share of the decommissioning costs of PVNGS Unit 3, the
annual deposit for PVNGS Unit 3 is estimated to be $396,000 unless changed as
provided for in Paragraph 7. In the event PNM determines not to use COMReP for
its deposits with respect to PVNGS Unit 3, it shall file a report with the
Commission, Staff and intervenors in this case detailing the proposed funding
method it intends to use instead. In such event, the Staff or intervenors shall
have an opportunity to litigate the proposed funding method for PVNGS Unit 3 if
they so desire.
4
<PAGE>
7. Every three years after the date of the final order approving this
Stipulation, PNM shall file with the Commission, copying Staff and intervenors,
an updated decommissioning cost estimate. The rate treatment specified herein
for PNM's estimated decommissioning costs shall apply to any such changed
estimates, unless such estimates are contested by Staff or intervenors in this
case and the Commission disapproves such estimates. The updated cost estimate
shall incorporate any changes in decommissioning technology, revisions of the
cost estimates and changes in the escalation rate. Also at this time, PNM shall
review the adequacy of the decommissioning funding amounts to determine if
adjustments in the funding amount are required to pay all costs of the Fund and
to maintain an adequate asset level in the fund consistent with the earnings
projections then in effect, and, if they are so required, shall change the
amount accordingly and notify the Commission, Staff and intervenors of such
change. In addition, on or before March 1 of every year PNM will file a report
with the Commission, Staff and intervenors in this case, setting forth the
Fund's performance for the prior calendar year and the transactions which
occurred in the prior calendar year.
5
<PAGE>
8. The Fund shall be held by an independent trustee selected by PNM and
administered separately from internal corporate funds. Withdrawals from the Fund
will be used exclusively for payment of PNM's share of the decommissioning costs
for PVNGS, associated administrative costs of the Fund and taxes on taxable
income of the Fund. For this purpose, "decommissioning" and "decommissioning
costs" shall have the following meanings:
"Decommissioning" shall mean the decommissioning and retirement from
service of a PVNGS Unit, and the related possession, maintenance and
disposal of radioactive material used in or produced incident to the
possession and operation of the Unit, including, without limitation,
(i) placement and maintenance of the Unit in a state of protective
storage, (ii) in-place entombment and maintenance of the Unit, (iii)
dismantlement of the Unit, (iv) any other form of decommissioning and
retirement from service required by or acceptable to the NRC and (v)
all activities undertaken incident to the implementation thereof and
to the obtaining of NRC authority therefor, including, without
limitation, maintenance, storage, custody, removal, decontamination,
and disposition of materials, equipment and fixtures, razing of the
Unit, removal and disposition of debris from the PVNGS site, and
restoration of the PVNGS site related to the Unit for unrestricted
use.
"Decommissioning Cost" shall mean all costs, liabilities and expenses
relating or allocable to, or incurred in connection with, the
decommissioning of the Unit, including, without limitation, (i) any
and all costs of activities undertaken to terminate NRC licensing
authority and requirements to own, operate and possess the Unit and to
possess radioactive material used in or produced incident to the
possession and operation of the Unit; and (ii) any and all costs of
activities undertaken, prior to termination of all NRC licensing
authority and requirements with respect to the Unit and the
radioactive material used in or produced incident to the possession
and operation of the Unit, to possess, maintain, and dispose of
radioactive material used in or produced incident to the possession
and operation of the Unit.
9. To establish the Fund, PNM will enter into a trust agreement with an
independent financial institution which will act as trustee of the Fund. The
assets held by the trust will include the COMReP insurance policies and the
"side fund", as further described herein. Any portion of the decommissioning
deposits not used to purchase life insurance contracts pay administrative costs
of the Fund or pay taxes shall be segregated in the side fund. The Trust
Agreement will delineate the purpose of the trust, how the funds in the trust
are to be handled and the duties and responsibilities of the trustee. PNM shall
6
<PAGE>
provide the Commission, Staff and intervenors in this case with a copy of the
executed Trust Agreement. Staff or intervenors shall have the opportunity to
contest the terms of such agreement only on the grounds such terms may be
inconsistent with this Stipulation. Investments of the insurance policy funds
held in the Fund shall be made by the insurance companies selected under the
COMReP plan. Investments of the side fund portion of the Fund shall be made by
the trustee at PNM's direction, separately from the investment of the insurance
policy funds, with the objective of seeking the highest net return on
investments commensurate with levels of investment risk that PNM determines to
be reasonable, with the act of providing sufficient funds to cover the actual
costs of decommissioning when needed. All investment decisions of PNM shall be
made in accordance with the "prudent man rule;" that is, PNM shall use the same
degree of care and diligence as an ordinarily prudent man would use in investing
his own funds in similar circumstances. Investments of side fund monies in the
following shall be prohibited:
a. securities issued by PNM or its affiliates,
b. securities issued by New Mexico utilities or utilities operating
in New Mexico,
c. securities issued by PVNGS participants (as defined by the
Arizona Nuclear Power Project Participation Agreement dated August 23,
1973, as heretofore and hereafter amended),
d. margin purchases,
e. commodity speculation,
f. fixed income securities that are not rated at least "investment
grade" by at least one of the nationally recognized statistical rating
services, and
g. commercial paper that is not rated at least "investment grade"
by at least one of the nationally recognized statistical rating
services.
10. PNM shall be permitted to remove and replace the trustee with or
without cause and to amend or revoke the trust agreement, whether to comply with
changes in the law or otherwise, subject, however, to the restrictions set forth
in this Stipulation. PNM shall provide the Commission, Staff and intervenors in
this case with any new or amended trust agreement. Staff or intervenors shall
have the opportunity to contest the terms of such agreement only on the grounds
such terms may be inconsistent with this Stipulation.
7
<PAGE>
11. Subject to Commission approval, PNM may convey any or all of its
rights and interests in the Fund if the transferee has the requisite power and
authority to enter into and carry out the activities required or contemplated to
be performed by PNM under the trust agreement, and enters into an agreement
satisfactory to the trustee confirming to be bound by all the terms of, and to
undertake all the obligations, contained in the trust agreement. In such an
event, PNM shall be released and discharged of its obligations under the trust
agreement (or that portion of its obligations relating to the interest
conveyed). Staff or intervenors in this case may contest such proposed
transaction.
12. The COMReP investment plan allows PNM to accumulate funds for
decommissioning PNM's interest in the PVNGS units on a tax-deferred basis by the
use of permanent life insurance policies taken on certain employees of PNM and
its affiliates. PNM analyzed several external funding methods and determined,
based on its analysis, that COMReP would produce the lowest amount of revenue
requirements of those methods, due to its utilization of a tax-advantaged build
up of insurance policy cash value. In addition, COMReP is designed to provide
investment flexibility, thus increasing the assurance that adequate funds will
be available for decommissioning. Under the plan, permanent life insurance
policies will be purchased by the trustee on certain management and
administrative employees of PNM and its affiliates, utilizing the deposits made
by PNM to the Fund. The COMReP plan provides that the insured employee will
designate the beneficiary of the "pure" term death benefit of the policies and
that the investment component will be utilized to provide the funding for the
decommissioning of PNM's interest in the PVNGS Units. The portion of PNM's
contributions to the Fund which are applied to obtain the "pure" term death
benefit will replace current pure term death benefits for the selected employees
under existing policies. For ratemaking purposes, this portion of the
contributions shall be treated in the same manner as are other employee benefit
costs.
8
<PAGE>
13. Loans may be taken against the life insurance policies in order to
match the insurance premium payments made by the Fund as closely as possible to
the levelized fund deposits. The proceeds of these loans will be placed in the
side fund and will be used to defer a portion of the annual premium payment to a
later period when additional cash build-up will be utilized to repay the policy
loans. PNM will be obligated to pay the interest expense arising from the policy
loans, which expense, within certain limitations, is tax deductible under
current law. This policy loan feature allows the crediting of policy loan
interest payments to the policies' cash surrender value, which then will accrue
a return on a tax deferred basis. In addition, this feature permits borrowing of
funds for reinvestment purposes, thus allowing flexibility in selecting
alternate investments in changing market environments.
14. In the event of the death of an employee covered under COMReP, the
employee's designated beneficiary will receive the "pure" term death benefit
component and the Fund will receive the balance of the policy death benefit,
representing the investment component. These funds may be reinvested in other
insurance policies, or may be segregated in the side fund and used for other
permissible investments.
15. At the time decommissioning commences with respect to PVNGS Units 1
and 2, the decommissioning funds for such units shall be allocated to each of
such units on the ratio of each unit's estimated cost of decommissioning at such
time to the combined total of the estimated decommissioning costs for those
units.
9
<PAGE>
16. The annual revenue requirements resulting from PNM's
decommissioning expenses relating to its interest in PVNGS Units 1 and 2, based
on annual deposits in the amount of $396,000 per unit, will be $646,000 per
unit, and consist of the following components:
Description Amount
a. Decommissioning Expense $396,000
b. Provision for Refund 250,000
c. Current Tax Expense 250,000
d. Deferred Tax Expense (250,000)
Total Annual Revenue Requirements $646,000
17. The decommissioning revenue requirements relating to PNM's interest
in PVNGS shall be deemed to be "depreciation" expenses for purposes of their
ratemaking treatment pursuant to the inventory Stipulation approved by the
Commission on December 12, 1984, for so long as the Inventorying ratemaking
methodology is in effect with respect to PNM. Consequently, they will be treated
as "at-risk" costs under the Inventory Stipulation. Prepayments of funding
requirements shall be deemed to be "at-risk" in the year in which they are
charged to expense, rather than in the year paid.
10
<PAGE>
18. The undersigned parties agree that book and tax timing differences
arising from PNM's decommissioning expenditures shall be normalized for
ratemaking purposes, which normalization shall have the effect of levelizing
revenue requirements. The accounting entries for years 1 through 38 of funding,
assuming a decommissioning contribution of $396,000, would be as follows (in
thousands):
(a) Decommissioning Contribution 396
Cash 396
To record the contribution to the
decommissioning trust
(b) Provision for Refund (expense account) 250
Refund Payable 250
To record advance payment from
customers for taxes, which is
refundable in future years
(c) Accumulated Deferred Income Taxes 250
Current Tax Expense 250
Deferred Tax Expense 250
Cash 250
To record taxes paid on
$646 of taxable income
19. Any tax savings related to the decommissioning expenditures will be
applied on a unit by unit basis as follows: First, added to the balance in the
Refund Payable account; second, to pay any decommissioning costs and related
administrative expenses in excess of the trust balance; third, to eliminate the
Accumulated Deferred Income Tax balance; and fourth, to be refunded to customers
in proportion to the contribution of ratepayers relative to the total
contribution of ratepayers and shareholders to the costs and associated taxes of
decommissioning.
20. In the event there are insufficient funds from Fund and tax savings
resources to cover the costs of decommissioning, PNM shall provide the
additional funds necessary to cover such costs. The ratemaking treatment of such
additional funds shall be determined by the Commission at such time.
11
<PAGE>
21. In the event there are excess funds in the Fund after covering the
costs of decommissioning, such excess funds shall be combined with any tax
savings and distributed in accordance with Paragraph 19 of this Stipulation.
WHEREFORE, the undersigned parties have executed this Stipulation as of
the 2nd day of June, 1987.
PUBLIC SERIVCE COMPANY ATTORNEY GENERAL OF THE
OF NEW MEXICO STATE OF NEW MEXICO
By By
- ------------------------------------- ------------------------------------
Richard B. Cole, Esq. Steve Michel, Esq.
Kathryn J. Kuhlen, Esq. Assistant Attorney General
P. O. Drawer AA P. O. Drawer 1508
Albuquerque, NM 87103 Santa Fe, NM 87504
NEW MEXICO INDUSTRIAL NEW MEXICO PUBLIC SERVICE
ENERGY CONSUMERS COMMISSION STAFF
By By
- ------------------------------------- ------------------------------------
Lewis O. Campbell, Esq. Charles F. Noble, Esq.
Wayne Shirley, Esq. NM Public Service Commission
Campbell, Rica & Olson 224 E. Palace
P. O. Drawer 965 Santa Fe, NM 87503
Albuquerque, NM 87103
12
<PAGE>
BEFORE THE NEW MEXICO PUBLIC SERVICE COMMISSION
IN THE MATTER OF THE IN-SERVICE DATES, )
PERFORMANCE STANDARDS AND RATEMAKING )
TREATMENT FOR DECOMMISSIONING COSTS )
CONCERNING PNM'S PARTICIPATION IN )
THE PALO VERDE NUCLEAR GENERATING ) CASE NO. 2004
STATION, )
)
PUBLIC SERVICE COMPANY OF NEW MEXICO, )
)
Applicant. )
ERRATA NOTICE
-------------
COMES NOW Michael Barlow, Hearing Examiner in this case, and, pursuant
to Rule R20-7 of Third Revised General Order No. 1, gives notice of the
following typographical errors in the Certification of Stipulation issued on
July 15, 1987:
1. The word "repayment" in the third line of the last paragraph
starting on page 6 is corrected to read "prepayment."
2. The next to last sentence in the second full paragraph on page 10 is
corrected to read: "PNM would pay the interest on such loans and while the
transcript indicates that PNM would be able to deduct up to a maximum of $50,000
per policy for tax purposes (Tr. 11; Tr. 40-41), current tax legislation limits
loans on insurance policies to a maximum of $50,000 per employee for interest
deduction purposes. PNM Exhibit 1, Lyons, p.4, lines 12-15."
I S S U E D at Santa Fe, New Mexico this 28th day of July 1987.
NEW MEXICO PUBLIC SERVICE COMMISSION
-------------------------------------
MICHAEL BARLOW
Hearing Examiner
1
<PAGE>
AMENDMENT NUMBER ONE
TO THE
PUBLIC SERVICE COMPANY OF NEW MEXICO
MASTER DECOMMISSIONING TRUST AGREEMENT
FOR
PALO VERDE NUCLEAR GENERATING STATION
This Amendment Number One to the Public Service Company of New Mexico
Master Decommissioning Trust Agreement for Palo Verde Generating Station (the
"Agreement") made this 27th day of January, 1997 by and between Public Service
Company of New Mexico, a corporation organized and existing under the laws of
the State of New Mexico ("the Company") and Mellon Bank, N.A., a national
banking association having trust power (the "Trustee").
WITNESSETH:
WHEREAS, the Company entered into the Agreement with the Trustee on
March 15, 1996 to satisfy the Company's obligation to accumulate funds for the
payment of its share of Termination Costs for Palo Verde Unit 1, Palo Verde Unit
2 and Palo Verde Unit 3, in accordance with the requirements of Section 8A.7.2
of the ANPP Participation Agreement; and
WHEREAS, it is the intent of the Company to transfer certain Insurance
Policies to the Master Trust and for the Trustee to hold such Insurance
Policies, provide for their segregated safekeeping, and use their proceeds all
in accordance with the terms of the Agreement; and
WHEREAS, Section 2.11 of the Agreement allows the Trustee and the
Company to amend the Agreement consistent with the purposes of the Agreement.
NOW THEREFORE, the Company and the Trustee hereby amend the Agreement
to make provisions necessary for the Trustee to accept such Insurance Policies
as Trustee under the Agreement:
1. The following terms shall be included under Article I,
Section 1.01, and the existing terms renumbered:
(2) "Annual Review" shall mean a review of the Insurance Policies
provided by the Insurance Servicing Agent pursuant to the Service
Agreement once each year for the purpose of determining the gross
insurance outstanding, the policy loans outstanding, interest due
on policy loans, and the cash value of outstanding Insurance
Policies and addressing certain other matters with respect to the
Insurance Policies as are more particularly provided in the
Service Agreement.
(9) "COMRep" shall meant the Cost of Money Reduction Plan, as more
fully described in Exhibit C hereto.
<PAGE>
(15) "Insurance Policies" shall mean the policies of insurance
generally described in Exhibits D and E hereto, initially issued
or to be issued by the insurance companies listed in Exhibit D
hereto, and any additional, supplemental or replacement policies
therefor issued by such insurance companies or other insurance
companies that are transferred to the Master Trust.
(16) "Insurance Servicing Agent" shall mean Financial Marketing
Services, Inc., a Nebraska corporation, and its successors and
assigns under the Service Agreement, and any successor agent
engaged by the Company to perform servicing activities with
respect to the Insurance Policies.
(33) "Service Agreement" shall meant the Service Agreement among
the Insurance Servicing Agent, the Trustee and the Company dated
as of July 31, 1987, with respect to management and servicing of
the Insurance Policies, a copy of which is attached hereto as
Exhibit F, as it may be amended from time to time, and any
replacement agreement entered into by the Trustee and/or the
Company with respect to management and servicing of the Insurance
Policies.
2. The following shall be added after the second sentence of Section 3.05.
"Such report also shall include a statement of the property and funds,
if any, constituting part of the Master Trust in the possession of the
Insurance Servicing Agent on the date of such report, and any Annual
Review, actuarial analysis and outside evaluation of the Insurance
Policies provided by or through the Insurance Servicing Agent as
contemplated by the Service Agreement. Any such information with
respect to the Insurance Policies may be based solely upon the latest
information provided by the Insurance Service Agent pursuant to the
Service Agreement, and the Trustee is not responsible for the accuracy
of any information received from the Insurance Service Agent."
3. The following sentence shall be added to Section 5.04.
"Upon receipt, the Insurance Policies shall be deposited in the Master
Trust, although physical custody thereof shall be released to the
Insurance Servicing Agent pursuant to the Service Agreement."
4. The first clause of Section 5.11 shall be restated as follows:
"To do any and all other acts (including but not limited to, borrowing
or raising money from a lender, including the Trustee or an affiliate)
which the Trustee shall deem proper to effectuate the powers
specifically conferred upon it by this Agreement, provided, however,
that the Trustee may not, in its discretionary exercise of powers, do
any act or knowingly engage in any transactions which would:"
2
<PAGE>
5. The following sentence shall be added after the first sentence of
Article VI.
"Notwithstanding the foregoing, with respect to the Insurance
Policies, the Trustee shall upon the written direction of the Company
pay the premiums on the Insurance Policies; borrow against and pledge
the Insurance Policies as collateral; pay interest and repay prinicpal
on borrowings against the Insurance Policies, surrender the Insurance
Policies; substitute other investments of equivalent value for the
Insurance Policies; and transfer such Insurance Policies to the
Company; and perform such other services with respect to and incident
to the Insurance Policies as are specified in such written direction,
provided that the Company may delegate some or all of such activities
to the Insurance Servicing Agent as more particularly described in the
Service Agreement for ease of administration. The Trustee shall have
no duty to review such Insurance Policies, and has no duty to review
the directions, acts, omissions or overall performance of the Company
or the Insurance Servicing Agent with respect to the Insurance
Policies."
6. The following Section 7.12 shall be added:
"The Trustee shall not be responsible or liable for any losses to the
Master Trust resulting from nationalization, expropriation,
devaluation, seizure, or similar action by any governmental authority,
de facto or de jure; or enactment, promulgation, imposition or
enforcement by any such governmental authority of currency
restrictions, exchange controls, levies or other charges affecting the
Master Trust; or acts of war, terrorism, insurrection or revolution;
or acts of God; or any other similar event beyond the control of the
Trustee or its agents. This Section shall survive the termination of
this Agreement".
7. All other terms and conditions of the Agreement shall remain in full
force and effect.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto, each intending to be legally
bound hereby, have hereunto set their hands and seals as of the day and year
above written.
PUBLIC SERVICE COMPANY OF NEW MEXICO
By: /s/ Max H. Maerki
--------------------------------
Name: Max H. Maerki
Title: Chief Financial Officer
MELLON BANK, N.A.
By:
--------------------------------
Name:
Title:
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 33-65418, Registration Statement File No.
333-10993, Registration Statement 333-03289, and Registration Statement File No.
333-03303.
Arthur Andersen LLP
Albuquerque, New Mexico
February 23, 1998
<TABLE> <S> <C>
<ARTICLE> UT
<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 December 31, 1997 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<NAME> Public Service Company of New Mexico
<CIK> 0000081023
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> Dec-31-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,573,150
<OTHER-PROPERTY-AND-INVEST> 304,940
<TOTAL-CURRENT-ASSETS> 285,831
<TOTAL-DEFERRED-CHARGES> 149,811
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,313,732
<COMMON> 208,870
<CAPITAL-SURPLUS-PAID-IN> 466,346
<RETAINED-EARNINGS> 129,188
<TOTAL-COMMON-STOCKHOLDERS-EQ> 804,404
0
12,800
<LONG-TERM-DEBT-NET> 713,995
<SHORT-TERM-NOTES> 114,100
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 350
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 668,083
<TOT-CAPITALIZATION-AND-LIAB> 2,313,732
<GROSS-OPERATING-REVENUE> 1,135,267
<INCOME-TAX-EXPENSE> 46,718
<OTHER-OPERATING-EXPENSES> 972,888
<TOTAL-OPERATING-EXPENSES> 1,011,222
<OPERATING-INCOME-LOSS> 124,045
<OTHER-INCOME-NET> 13,164
<INCOME-BEFORE-INTEREST-EXPEN> 137,209
<TOTAL-INTEREST-EXPENSE> 56,214
<NET-INCOME> 80,995
586
<EARNINGS-AVAILABLE-FOR-COMM> 80,409
<COMMON-STOCK-DIVIDENDS> 26,318
<TOTAL-INTEREST-ON-BONDS> 46,670
<CASH-FLOW-OPERATIONS> 213,122
<EPS-PRIMARY> 1.92
<EPS-DILUTED> 1.92
</TABLE>
