UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1998
--------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-6986
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PUBLIC SERVICE COMPANY OF NEW MEXICO
(Exact name of registrant as specified in its charter)
New Mexico 85-0019030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Alvarado Square, Albuquerque, New Mexico 87158
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(Address of principal executive offices)
(Zip Code)
(505) 241-2700
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock--$5.00 par value 41,774,083 shares
----------------------------- -------------------------------
Class Outstanding at October 31, 1998
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Report of Independent Public Accountants............................. 3
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Earnings -
Three Months and Nine Months Ended September 30, 1998 and 1997....... 4
Consolidated Statements of Comprehensive Income -
Three Months and Nine Months Ended September 30, 1998 and 1997....... 5
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997............................. 6
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997........................ 7
Notes to Consolidated Financial Statements........................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 10
PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS............................................. 21
ITEM 5. OTHER INFORMATION............................................. 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................. 27
Signature ............................................................. 28
2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Public Service Company of New Mexico:
We have reviewed the accompanying consolidated balance sheet of Public Service
Company of New Mexico (a New Mexico corporation) and subsidiaries as of
September 30, 1998, and the related consolidated statements of earnings and
comprehensive income for the three-month and nine-month periods ended September
30, 1998 and 1997, and the consolidated statements of cash flows for the
nine-month periods ended September 30, 1998 and 1997. These financial statements
are the responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Public Service Company of New
Mexico and subsidiaries as of December 31, 1997 (not presented herein), and, in
our report dated February 10, 1998, we expressed an unqualified opinion on that
statement. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1997, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
October 30, 1998
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Operating revenues:
Electric $280,662 $213,159 $636,817 $540,810
Gas 39,321 41,391 195,826 218,465
Energy Services 455 49 833 49
-------- -------- -------- --------
Total operating revenues 320,438 254,599 833,476 759,324
-------- -------- -------- --------
Operating expenses:
Fuel and purchased power 124,739 77,343 238,642 176,798
Gas purchased for resale 13,591 17,198 105,501 126,244
Cost of sales and projects - Energy Services 304 43 713 43
Other operation and maintenance 86,025 81,517 249,785 235,254
Depreciation and amortization 20,516 20,839 62,532 61,772
Taxes, other than income taxes 9,208 9,618 27,553 27,863
Income taxes 18,609 12,889 38,636 32,525
-------- -------- -------- --------
Total operating expenses 272,992 219,447 723,362 660,499
-------- -------- -------- --------
Operating income 47,446 35,152 110,114 98,825
-------- -------- -------- --------
Other income and deductions, net of taxes: 4,406 2,732 12,159 9,849
-------- -------- -------- --------
Income before interest charges 51,852 37,884 122,273 108,674
-------- -------- -------- --------
Interest charges:
Interest on long-term debt 13,659 11,394 34,215 35,078
Other interest charges 3,537 1,904 11,344 7,561
-------- -------- -------- --------
Net interest charges 17,196 13,298 45,559 42,639
-------- -------- -------- --------
Net earnings from continuing operations 34,656 24,586 76,714 66,035
Discontinued operations, net of tax:
Loss from operations of gas marketing (1,320) (267) (7,386) (1,253)
Estimated loss on disposal of gas marketing, including
provision for operating losses during phase-out period (1,347) - (1,347) -
-------- -------- -------- --------
Net earnings 31,989 24,319 67,981 64,782
Preferred stock dividend requirements 147 147 440 440
-------- -------- -------- --------
Net earnings applicable to common stock $ 31,842 $ 24,172 $ 67,541 $ 64,342
======== ======== ======== ========
Average shares of common stock outstanding 41,774 41,774 41,774 41,774
======== ======== ======== ========
Net earnings (loss) per share of common stock:
Earnings from continuing operations $ 0.83 $ 0.59 $ 1.83 $ 1.57
Loss from discontinued operations (0.03) (0.01) (0.18) (0.03)
Estimated loss on disposal of gas marketing (0.03) - (0.03) -
-------- -------- -------- --------
Net earnings per common share (Basic) $ 0.76 $ 0.58 $ 1.62 $ 1.54
======== ======== ======== ========
Net earnings per common share (Diluted) $ 0.76 $ 0.58 $ 1.60 $ 1.53
======== ======== ======== ========
Dividends paid per share of common stock $ 0.20 $ 0.17 $ 0.57 $ 0.46
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- --------------------
1998 1997 1998 1997
--------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Net Earnings $ 31,989 $ 24,319 $ 67,981 $ 64,782
--------- -------- -------- --------
Other Comprehensive Income, net of tax (note 3):
Unrealized gain (loss) on securities:
Unrealized holding gains (losses) arising during the
period, net of reclassification adjustment (748) 776 (606) 1,437
Minimum pension liability adjustment - - - 262
--------- -------- -------- --------
Total other comprehensive income (loss) (748) 776 (606) 1,699
--------- -------- -------- --------
Total Comprehensive Income $ 31,241 $ 25,095 $ 67,375 $ 66,481
========= ======== ======== ========
</TABLE>
5
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
(In thousands)
ASSETS
Utility plant $ 2,618,990 $ 2,576,236
Accumulated provision for depreciation
and amortization (1,033,778) (1,003,086)
----------- -----------
Net utility plant 1,585,212 1,573,150
----------- -----------
Other property and investments 520,300 311,763
----------- -----------
Current assets:
Cash 2,305 8,705
Temporary investments, at cost 70,592 9,490
Receivables 209,276 216,305
Fuel, materials and supplies 32,796 33,664
Gas in underground storage 3,434 13,158
Other current assets 5,011 4,509
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Total current assets 323,414 285,831
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Deferred charges 159,345 149,811
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$ 2,588,271 $ 2,320,555
=========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity:
Common stock $ 208,870 $ 208,870
Additional paid-in capital 465,729 469,073
Accumulated other comprehensive income
(loss), net of tax (120) 486
Retained earnings since January 1, 1989 171,665 129,188
----------- -----------
Total common stock equity 846,144 807,617
Minority interest 13,405 -
Cumulative preferred stock without mandatory
redemption requirements 12,800 12,800
Long-term debt, less current maturities 1,008,596 713,995
----------- -----------
Total capitalization 1,880,945 1,534,412
----------- -----------
Current liabilities:
Short-term debt 45,155 114,100
Accounts payable 127,800 154,501
Dividends payable 8,501 7,248
Current maturities of long-term debt - 350
Accrued interest and taxes 51,123 24,161
Other current liabilities 29,380 26,102
----------- -----------
Total current liabilities 261,959 326,462
----------- -----------
Deferred credits 445,367 459,681
----------- -----------
$ 2,588,271 $ 2,320,555
=========== ===========
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
--------------------
1998 1997
-------- --------
(In thousands)
Cash Flows From Operating Activities:
Net earnings $ 67,981 $ 64,782
Adjustments to reconcile net earnings to net cash
flows from operating activities:
Depreciation and amortization 71,676 70,895
Accumulated deferred investment tax credit (3,327) (3,357)
Accumulated deferred income tax (2,546) 5,696
Net loss on market sensitive portfolio 2,260 -
Changes in certain assets and liabilities:
Receivables 13,905 31,756
Fuel, materials and supplies 10,591 (5,121)
Deferred charges 499 (11,968)
Accounts payable (26,714) (21,290)
Accrued interest and taxes 26,962 10,943
Deferred credits (2,534) 5,679
Other 637 (3,466)
Other, net (2,781) 10,259
-------- --------
Net cash flows from operating activities 156,609 154,808
-------- --------
Cash Flows From Investing Activities:
Utility plant additions (89,828) (83,790)
Purchase of PVNGS lease debt (58,000) -
Purchase of PVNGS lease debt - Capital Trust (157,701) -
Return of principal PVNGS lease debt 11,337 5,018
Increase in nuclear decommissioning trust (2,675) (23,000)
Increase in other property and investments (5,700) (2,181)
Increase in temporary investments, net (61,102) (13,453)
-------- --------
Net cash flows from investing activities (363,669) (117,406)
-------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of senior unsecured notes 429,383 -
Net repayments of other short-term borrowings (211,826) (30,600)
Redemption of first mortgage bonds (140,206) -
Short-term borrowings for first mortgage
bonds redemption 140,206 -
Proceeds from minority interest in Capital Trust 13,405 -
Repayments of other long-term debt - (14,970)
Bond redemption premium and costs (5,399) (2,466)
Trust borrowing for nuclear decommissioning 2,675 23,000
Exercise of employee stock options (3,340) (241)
Dividends paid (24,238) (19,625)
-------- --------
Net cash flows from financing activities 200,660 (44,902)
-------- --------
Decrease in cash (6,400) (7,500)
Cash at beginning of period 8,705 11,125
-------- --------
Cash at end of period $ 2,305 $ 3,625
======== ========
Supplemental Cash Flow Disclosures:
Interest paid $ 35,239 $ 42,583
======== ========
Income taxes paid, net $ 35,118 $ 29,250
======== ========
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) General Accounting Policy
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary for a fair presentation of the
consolidated financial statements. The significant accounting policies followed
by Public Service Company of New Mexico (the "Company") are set forth in note
(1) of notes to the Company's consolidated financial statements in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 Form
10-K") filed with the Securities and Exchange Commission ("SEC").
(2) Senior Unsecured Notes and Indenture
In March 1998, the Company replaced the first mortgage bonds collateralizing
$463 million of tax-exempt pollution control revenue bonds ("PCBs") with senior
unsecured notes ("SUNs") which were issued under a new senior unsecured note
indenture. Also during March 1998, the Company retired $140 million principal
amount of first mortgage bonds. While first mortgage bonds continue to serve as
collateral for PCBs in the outstanding principal amount of $111 million, the
lien of the mortgage was substantially reduced to cover only the Company's
ownership interest in the Palo Verde Nuclear Generating Station ("PVNGS").
Coincident with the above transactions, the Company established a five-year,
$300 million unsecured revolving credit facility to replace the Company's $100
million secured revolving credit facility. Funds borrowed through this facility
were used to retire the $140 million principal amount of first mortgage bonds.
In August 1998, the Company issued and sold $435 million of SUNs in two series,
the 7.10% Series A due August 1, 2005, in the principal amount of $300 million,
and the 7.50% Series B due August 1, 2018, in the principal amount of $135
million. These SUNs were issued under an indenture similar to the indenture
under which the SUNs were issued in March 1998, and it is expected that future
long-term debt financings will be similarly issued. The net proceeds from the
sale of the SUNs were loaned to PVNGS Capital Trust ("Capital Trust"), a special
purpose entity established for the purpose of purchasing PVNGS lease debt
associated with the sale and leaseback portions of the Company's interest in
PVNGS Units 1 and 2 ("Lease Debt") (see Note 4).
8
<PAGE>
(3) Other Comprehensive Income
The Company adopted as of January 1, 1998, Statement of Financial Accounting
Standards Board ("SFAS") No. 130, "Reporting Comprehensive Income". This
statement requires the reporting of certain changes in the common stock equity
section of the balance sheet as other comprehensive income.
Minimum Accumulated
Unrealized Pension Other
Gains on Liability Comprehensive
Securities Adjustment Income
---------- ---------- -------------
(In thousands)
Beginning Balance at January 1, 1998 $3,213 $(2,727) $ 486
Changes during nine month period (606) - (606)
------ ------- ------
Ending Balance at September 30, 1998 $2,607 $(2,727) $ (120)
====== ======= ======
The Company has two external trusts for funding its executive retirement program
and its share of decommissioning obligations for PVNGS, respectively. The trust
funds are invested partially in fixed income securities and domestic stock,
which are classified as available-for-sale. The Company reflects the unrealized
gains or losses on the investments for the executive retirement program and the
decommissioning trust for PVNGS Unit 3 in other comprehensive income. Such gains
or losses related to the PVNGS Units 1 and 2 trust investments are reflected in
the decommissioning reserve account. All prior periods have been restated for
comparability purposes.
(4) Capital Trust
In August 1998, Capital Trust, a special purpose entity, was established to
purchase the Lease Debt associated with the Company's PVNGS Units 1 and 2 sale
and leaseback transactions. In August 1998, the Company loaned approximately
$420 million to Capital Trust using the proceeds from the SUNs issued in August
1998. In addition, the Company invested approximately $13 million in Capital
Trust. Capital Trust is consolidated with the Company for financial reporting
purposes and all intercompany transactions are eliminated. Capital Trust's
income from the investments in the Lease Debt is included in other income and
deductions, net of taxes, in the consolidated statement of earnings.
(5) Discontinued Operations
On August 4, 1998, the Company adopted a plan to discontinue the gas trading
operations of its Energy Services Business Unit. The Company anticipates that
the business will be disposed of by the end of 1998. Accordingly, the gas
marketing operations of its Energy Services Business Unit are reported as
discontinued operations. As of September 30, 1998, the estimated loss on the
disposal of the gas marketing segment was $1.3 million net of tax, including a
provision for anticipated operating losses prior to disposal. As a result of
subsequent changes in market conditions and the settlements in November 1998 of
all its gas contracts and associated obligations, the Company will record an
additional loss in the fourth quarter of 1998.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's 1997 Form 10-K PART II, ITEM 7. - "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" discussed
management's assessment of the Company's financial condition, results of
operations and other issues facing the Company. The following discussion and
analysis by management focuses on those factors that had a material effect on
the Company's financial condition and results of operations during the nine
months ended September 30, 1998 and 1997. It should be read in conjunction with
the Company's consolidated financial statements. Trends and contingencies of a
material nature are discussed to the extent known and considered relevant.
LIQUIDITY AND CAPITAL RESOURCES
The estimated capital requirements for 1998 of $218.9 million include utility
construction expenditures of $141.3 million and other cash requirements for
long-term debt sinking funds, purchase of $58 million of the lease debt on May
1, 1998, associated with the Palo Verde Nuclear Generating Station ("PVNGS")
Units 1 and 2 sale/leaseback transactions ("Lease Debt") and dividend payments
for both common and preferred stock. These projected capital requirements do not
include funds for the retirement of $140 million of first mortgage bonds
completed in March 1998, or the refinancing of the Lease Debt through the
issuance of $435 million of senior unsecured notes ("SUNs") completed in August
1998. During the first nine months of this year, the Company spent approximately
$172.0 million for capital requirements and anticipates spending approximately
$46.9 million over the remainder of 1998. The Company expects that these cash
requirements will be met primarily through internally generated cash. However,
to cover the difference in the amounts and timing of cash generation and cash
requirements, the Company intends to utilize short-term borrowings under its
liquidity arrangements. These estimates are under continuing review and subject
to on-going adjustment.
In August 1998, the Company issued and sold $435 million of SUNs in two series.
Approximately $420 million from the proceeds of the issuance of the SUNs was
loaned to PVNGS Capital Trust ("Capital Trust"), a special purpose entity
established for the purpose of purchasing the Lease Debt held by the Company as
well as the Lease Debt publicly held. As a result, the Company received
approximately $288 million for its investment in Lease Debt. Using the proceeds,
the Company paid off outstanding short-term debt of $258 million and invested
the remainder in temporary investments, which resulted in improved liquidity for
the Company. The Company's leverage ratios remain essentially unchanged since
the Company's various ratios have effectively reflected the Lease Debt as debt
components of the calculation in the past. As of September 30, 1998, the Company
had $45.2 million in short-term debt and $70.6 million in temporary investments.
10
<PAGE>
RESULTS OF OPERATIONS
Net earnings increased $7.7 million ($.18 per share) and $3.2 million ($.08 per
share) for the quarter and nine months ended September 30, 1998, respectively,
over the corresponding periods last year.
The following discussion highlights significant items which affected the results
of operations for the quarter and nine months ended September 30, 1998 and 1997.
Continuing Operations
Electric gross margin (electric operating revenues less fuel and purchased power
expense) increased $20.1 million and $34.2 million for the quarter and nine
months ended September 30, 1998, respectively, over the corresponding periods a
year ago. These increases were attributable to increased off-system sales in the
wholesale energy market. During the current quarter, sales of electricity in the
wholesale power market increased $58.3 million, or 92.1 percent, over the same
period a year ago to $121.6 million. This favorable event was largely
attributable to record demand for power in the wholesale market during the
summer months of 1998 that resulted from hotter than normal temperatures on the
West Coast and elsewhere around the country. In response to the large demand for
power, the Company purchased 58.7 percent more power from the spot market and
generated 6.5 percent more power from its own generating plants than the same
quarter a year ago. The Company does not believe that the favorable results
during the current quarter are necessarily indicative of future operating
results.
Gas gross margin (gas operating revenues less gas purchased for resale)
increased $1.5 million for the quarter ended September 30, 1998, over the
corresponding period a year ago as a result of increased residential sales and a
one-time write-off of customer gas costs in 1997. However, gas gross margin for
the nine months ended September 30, 1998, decreased $1.9 million from the
corresponding period a year ago as a result of changes in the rate structure
resulting from a 1997 gas rate order.
Other operation and maintenance ("O&M") expenses increased $4.5 million and
$14.5 million for the quarter and nine months ended September 30, 1998,
respectively, over the corresponding periods a year ago due to higher production
maintenance costs associated with scheduled outages at the San Juan Generating
Station and PVNGS, increased pension and benefit expenses resulting from changes
in the Company's pension plan, increased regulatory commission expenses and
increases in the Energy Services Business Unit's operating expenses.
Operating income taxes increased $5.7 million and $6.1 million for the quarter
and nine months ended September 30, 1998, respectively, over the same periods
last year as a result of higher pre-tax income in the current periods.
Other income and deductions, net of taxes, increased $1.7 million and $2.3
million for the quarter and nine months ended September 30, 1998, respectively,
over the corresponding periods a year ago due to the recording of interest
income from Capital Trust, offset by the settlement of a litigated case in 1997.
11
<PAGE>
Net interest charges increased $3.9 million and $2.9 million for the quarter and
nine months ended September 30, 1998, respectively, over the same periods last
year due to the issuance of the SUNs in August 1998, offset by the retirement of
$140 million of first mortgage bonds in March 1998. Because the Company used
short-term borrowings to retire these bonds, interest charges on short-term debt
also increased.
Discontinued Operations
On August 4, 1998, the Company made the decision to discontinue the gas trading
operations of its Energy Services Business Unit by the end of 1998. As a result,
the Company has made a provision for an estimated loss, net of taxes, of $1.3
million on the disposal of the gas marketing segment, including a provision for
anticipated operating losses prior to disposal. As a result of subsequent
changes in market conditions and the settlements in November 1998 of all its gas
contracts and associated obligations, the Company will record an additional loss
in the fourth quarter of 1998.
Losses from operations of discontinued operations, net of taxes, increased $1.1
million and $6.1 million for the quarter and nine months ended September 30,
1998, respectively, from the corresponding periods a year ago as a result of
increased gas trading losses and the recording of the gas marketing portfolio
losses.
OTHER ISSUES FACING THE COMPANY
Electric Rate Case
As previously reported, in November 1997, the Company filed its electric rate
case pursuant to a NMPUC order. (See PART 1, ITEM 2. "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - OTHER ISSUES
FACING THE COMPANY - "Electric Rate Case" in the 1997 Form 10-K.)
In conjunction with the rate case, the Company and a number of parties, many of
whom were involved in the case, have been negotiating a settlement agreement to
resolve the case and provide a proposal for legislation for open access and
electric competition for the Company's retail customers. While these
negotiations have progressed with parties representing a diverse set of
interests, no agreement has been reached and the Company is unable to predict
the outcome at this time. It is anticipated, however, that any agreement would
likely contain the following provisions, among others things: (i) retail open
access to customers in 2001; (ii) a reduction of current retail rates by an
amount in the range of $30 million; (iii) the institution of a rate freeze for a
period of approximately three to six years that would enable the recovery of a
level of strandable costs dependent on the effectiveness and efficiency of the
Company's operations; and (iv) the Company's absorbing a portion of anticipated
strandable costs that would result in a write-off. The amount of the write-off,
if negotiations are successful, has yet to be determined.
12
<PAGE>
If a stipulation is filed, the NMPUC could approve it as filed, modify it or
reject it and issue an order in the rate case. However, even if the NMPUC
approves the stipulation, legislation that would open the power market to
competition would have to be enacted in order for the stipulation to be fully
implemented.
If a stipulation is not agreed upon, the Company anticipates that a final order
in the rate case will be issued during the fourth quarter of 1998 (See PART 1.
ITEM 2. - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - OTHER ISSUES FACING THE COMPANY - Electric Rate Case" in
the quarterly report on Form 10-Q for the quarter ended June 30, 1998.)
The Company is currently unable to predict the ultimate outcome of the rate case
or actions by the NMPUC or the New Mexico State Legislature.
Residential Electric, Incorporated ("REI")
On October 9, 1998, REI, a new entity incorporated in the state of New Mexico
for the purpose of supplying electricity to retail customers, which is not
related to the Company, filed the following with the NMPUC: (i) an application
for a certificate of convenience and necessity and an advice notice, requesting
authority to provide electric services within the metropolitan areas of
Albuquerque, Rio Rancho and Santa Fe; and (ii) an application and complaint
seeking the unbundling of distribution and transmission facilities of the
Company and the use of these facilities by REI to deliver its power supplies to
retail customers. Included in the filing were the submission of a motion for a
procedural and case management order and a brief discussing legal principles
based on NMPUC orders in other cases.
REI requested that the NMPUC act on its filings in an extremely expedited manner
and filed legal arguments as to why the NMPUC should do so. The brief cited many
holdings, conclusions and quotes from recent NMPUC orders, several of which are
on appeal by the Company with the New Mexico Supreme Court ("Supreme Court").
The brief stated that because the filings are based upon legal principles which
have been fully heard and litigated in previous NMPUC cases, the process should
be expedited and the relief they seek in these cases should be summarily
granted. REI seeks a final order from the NMPUC by the end of 1998.
On October 19, 1998, the NMPUC issued an order requiring the Company to respond
to the complaint on or before November 2, 1998. Also, on October 19, 1998, the
NMPUC ordered that a public hearing be held on November 16, 1998 for the purpose
of hearing and receiving testimony to determine whether the authorization sought
in REI's application should be granted and the proposed rates should be
approved. On October 27, 1998, the Company filed a motion to dismiss both
proceedings in the belief that the relief sought cannot be lawfully granted.
Alternatively, the Company requested that the short procedural schedule awarded
by the NMPUC be vacated or substantially expanded to give the Company and other
interested parties adequate time to prepare their cases. The Company filed its
response with the NMPUC on November 2, 1998 and asserted once again that the
proposals were not authorized under New Mexico law and that the Company needed
much more time to adequately prepare its case.
13
<PAGE>
On November 9, 1998, the Company filed a request for procedural due process and
for adequate time to prepare testimony and prepare for hearing. The AG filed the
testimony of two expert witnesses stating their need for more time and
procedural due process. In addition, El Paso Electric Company ("EPE") filed a
motion to vacate the procedural schedule, insisting that the timeframe imposed
by the NMPUC was insufficient for procedural due process.
The Company believes that the NMPUC is without authority to provide the relief
sought by REI in both filings and that the schedule ordered by the NMPUC
deprives the Company of procedural due process by not giving the Company a fair
opportunity to present its case. The Company is evaluating its legal remedies
and fully intends to vigorously defend its interests.
City of Gallup ("Gallup") Complaint
As previously reported, in January 1998, Gallup, Gallup Joint Utilities and the
Pittsburg & Midway Coal Mining Co. ("Pitt-Midway") filed a joint complaint and
petition ("Complaint") with the NMPUC for a declaratory order regarding service
status and abandonment of facilities. The Complaint sought an interim
declaratory order stating: (i) Pitt-Midway is no longer an obligated customer of
the Company; (ii) Gallup is entitled to serve Pitt-Midway; (iii) abandonment of
the power line and related facilities by the NMPUC is not necessary; (iv) the
Company must wheel power purchased by Gallup from other suppliers over the
Company's transmission system; and (v) the Company must enter into an
interconnection agreement with Gallup. As ordered by the NMPUC, the Company
filed its brief on jurisdiction and interim relief issues in February 1998 and
awaited further NMPUC action. (See PART I, ITEM 1. BUSINESS - "RATES AND
REGULATION - Electric Rates and Regulation - NMPUC" in the 1997 Form 10-K.)
On September 11, 1998, the NMPUC issued a final order stating that evidentiary
proceedings were unnecessary and Pitt-Midway is not, as a matter of law,
obligated to be a customer of the Company, and ordered the Company to: (i) wheel
power on behalf of Gallup pursuant to its existing contractual obligations under
the PNM-City of Gallup agreement, commencing on or before October 1, 1998; (ii)
deliver power, commencing on or before October 1, 1998, to Gallup at a specified
substation, pursuant to its obligations under the PNM-City of Gallup agreement;
and (iii) transfer ownership of a specified transmission line, on or before
October 1, 1998, to Pitt-Midway, pursuant to its obligations under a 1975
agreement.
On September 21, 1998, the Company filed a motion with the Supreme Court
requesting an emergency stay of the NMPUC order pending its appeal of the
NMPUC's final order. The Company believes that the issues are complex, that the
NMPUC was premature in issuing a final order without evidentiary proceedings and
that the NMPUC has exceeded its jurisdiction and has attempted to preempt
Federal Energy Regulatory Commission ("FERC") authority.
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On September 25, 1998, the NMPUC, Gallup, Gallup Joint Utilities and Pitt-Midway
(the "appellees") filed a joint motion with the Supreme Court to extend the time
to respond to the Company's Supreme Court motion and stated that the NMPUC
agreed not to enforce its order until October 15, 1998. On September 28, 1998,
the Company filed a response to the joint motion, agreeing to the extension of
time to respond, if the NMPUC order would not be effective until October 15,
1998.
On October 7, 1998, the Supreme Court issued an order denying the Company's
motion for stay and remanding the matter back to the NMPUC for consideration of
the matters raised by the Company in its motion. The Supreme Court also ordered
that the petitioners' (Gallup, Gallup Joint Utilities, and Pitt-Midway) joint
motion to extend the order was moot. On October 16, 1998, the NMPUC issued a
procedural order setting a hearing date on the remanded issues for October 23,
1998.
On October 23, 1998, hearings commenced and continued on October 27 and 28,
1998. In the hearings, the Company presented evidence of FERC's exclusive
jurisdiction and that the NMPUC was also without authority to modify or enforce
contractual matters at issue between the parties. The Company submitted proposed
findings of fact and conclusions of law on November 5, 1998.
On September 25, 1998, the Company also filed a petition for declaratory order
and expedited action at the FERC, seeking that FERC determine that: (i) the
authority to order wholesale wheeling and interconnection, including the type
ordered by the NMPUC, is subject to FERC's exclusive jurisdiction; (ii) the
NMPUC's order is procedurally and substantively inconsistent with the Federal
law and requirements; (iii) if the contested contractual issues between the
Company and Gallup are a concurrent jurisdiction issue, they should be handled
in the FERC forum, not the NMPUC; and (iv) under the PNM-Gallup contract, the
Company has a requirement to provide service to only the four delivery points
delineated in the contract, and absent a separate agreement, the Company has no
contractual duty to deliver to the specified substation for Gallup, as ordered
by the NMPUC. On October 1, 1998, FERC issued a notice of filings setting a
deadline for interventions and for Gallup's response which has since been
extended to November 16, 1998. To date, EPE and Edison Electric Institute have
intervened in the FERC proceeding and are supportive of the Company's position.
The Company is currently unable to predict the ultimate outcome of this case and
the effects thereof.
City of Albuquerque ("COA") Retail Pilot Load Aggregation Program
As previously reported, the COA filed a petition in 1997 with the NMPUC to
institute a Retail Pilot Load Aggregation Program. The NMPUC Staff presented an
alternative to the COA pilot proposal, which proposed a larger pilot that would
include a broader mix of customer classes. 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 program and the proper methodology for quantifying any
appropriate recovery. Hearings were held in April 1998. (See PART I, ITEM 2. -
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - OTHER ISSUES FACING THE COMPANY - The City of Albuquerque Retail
Pilot Load Aggregation Program" in the quarterly report on Form 10-Q for the
quarter ended March 31, 1998.)
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On August 24, 1998, the NMPUC issued an order requiring the Company to implement
a retail pilot program for a one year period commencing with the first billing
cycle in December 1998.
The Company currently estimates that the annual revenue loss resulting from the
pilot and the system installation/implementation costs for this pilot program
would be approximately $5.3 million and $1.0 million, respectively, depending on
the rates for the pilot program, which have not yet been determined. The Company
believes that this revenue loss will be partially offset by either reduced fuel
costs or by increased off-system sales.
The order defers any decision on recovery of stranded costs in connection with
the pilot program. Although the NMPUC did lay out certain principles regarding
the recoverability of stranded costs, the Company must demonstrate that it has
mitigated any revenue loss from this pilot program through the sales of power in
the off-system markets that would have otherwise been used to serve pilot
program participants.
On September 9, 1998, the Company filed a motion with the NMPUC for rehearing.
In the filing, the Company requested a delay in implementation of the pilot
program to allow reasonable time for installation of the necessary systems to
accommodate the pilot program, including time for supplier notification and
customer education. The Company also requested that the NMPUC reconsider its
determination that it has jurisdiction to order the pilot program. In addition,
the Company requested that the NMPUC stay, pending review of such an order by
the Supreme Court , the effect of the order and of any order on rehearing that
would require the Company to participate in a pilot program.
The NMPUC ordered a rehearing but not on the question of its jurisdiction. It
restricted rehearing to issues on the pilot program's implementation date, the
rates to be charged and cost recovery. This rehearing was held October 5, 1998.
At the conclusion of the hearing, the NMPUC ordered the Company, COA, and NMPUC
Staff to meet for the purpose of formulating a work plan which was prepared and
submitted by the parties on October 21, 1998. The NMPUC also took the rehearing
matters under advisement and has not yet taken action on the work plan filed by
the parties.
On October 28, 1998, the Company filed a notice of appeal with the Supreme
Court, of the NMPUC's partial denial of rehearing on the jurisdictional
question. On October 30, 1998, the Company filed a motion with the Supreme Court
requesting that the Supreme Court conclude that the NMPUC's ruling on the
jurisdictional questions is a final order capable of proper appeal. The Company
simultaneously filed with the Supreme Court a motion for stay arguing that the
NMPUC lacks authority in the matter. The Supreme Court is not expected to rule
on the Company's requests for some time.
The Company is currently unable to predict the ultimate outcome of this case.
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The Year 2000 Issue
Background
The Year 2000 issue is a consequence of computer programs ("Information
Technology Systems" or "IT Systems") being written using two digits rather than
four digits 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 ("Embedded Systems") may also be affected by the Year
2000 issue. Equipment affected may include hand held meter reading devices,
distribution and transmission control systems, elevators, routers and generator
controls.
The Company has adopted a plan to address the Year 2000 issue for internal
systems and external dependencies ("Year 2000 Project"). The Year 2000 Project
is comprised of eight phases: (1) Awareness; (2) Inventory; (3) Assessment; (4)
Planning and Scheduling; (5) Repair; (6) Testing; (7) Re-Integration/Deployment;
and (8) Company-Wide Testing.
State of Readiness
In early 1998, the Company established the following dates as goals for
completion of each phase:
Phase Targeted
Year 2000 Project Phase Completion Dates
----------------------- ----------------
Awareness Phase 06/01/98
Inventory Phase 06/26/98
Assessment Phase 08/28/98
Planning and Scheduling Phase 10/30/98
Repair Phase 04/02/99
Testing Phase 05/28/99
Re-Integration/Deployment Phase 07/02/99
Company-Wide Testing Phase 10/01/99
The Awareness Phase of the Company's Year 2000 Project has been completed. The
Inventory Phase for IT Systems and Embedded Systems is behind the targeted
completion date, but is substantially complete. The Assessment Phase is
estimated to be more than 40% complete and is expected to be completed by the
end of 1998, which is later than the targeted completion date for that phase.
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Work has been performed in all other phases of the Year 2000 Project, except in
the Company-Wide Testing Phase. However, until completion of the Assessment
Phase, the Company is unable to reliably estimate the completion status of each
of those phases. Work in the Company-Wide Testing Phase will commence when all
segments of a process have completed remediation. A segment is the portion of a
process that receives input from and/or sends output to another segment of a
process.
At the inception of the Year 2000 Project, there were several projects then
underway to upgrade and replace some IT Systems and Embedded Systems. One result
of those projects was to make the systems Year 2000 compliant. Due in part to
the status of those projects, and the fact that the Year 2000 issue affects each
area of the Company in different ways, the Year 2000 Project is at varying
stages of completion throughout the Company.
Several IT Systems known to be noncompliant have already been remediated. Other
IT Systems that are determined to be noncompliant will be remediated according
to schedules established during the Planning and Scheduling Phase of the Year
2000 Project. Most of the Company's mission critical systems are in the
operations areas and are a combination of both IT Systems and Embedded Systems.
While the Company can, in many instances, perform the necessary test and
remediation functions on the IT portion of these systems, the Company does not
generally possess the required equipment and skills necessary to test and
remediate the embedded portion of these systems at the microchip level and must
therefore rely upon manufacturers or suppliers to assist in remediating
noncompliant systems. Where necessary, the Company has contracted with vendors
to assist with the assessment, remediation and testing work required in this
area.
The Company is participating in the Year 2000 program sponsored by the Electric
Power Research Institute ("EPRI"). The program involves utilities sharing Year
2000 compliance information about specific embedded systems, test protocols,
data and results and project management ideas. EPRI is also assisting in
coordinating communications between the electric power industry and
manufacturers and suppliers.
Costs
The Company currently estimates that the Year 2000 Project will cost at least
$16.4 million from October 1998 through the completion of the Year 2000 Project.
Of this amount, $11.7 million will be new expenditures and $4.7 million will be
internally incurred operation and maintenance expenses. The estimate does not
include the cost of upgrades and replacements of the systems that were
undertaken independent of the Year 2000 issue where the projects have not been
accelerated to address the Year 2000 issue, even though one result is that those
systems will be Year 2000 compliant. The Company's estimate is under continuous
review as the Year 2000 Project proceeds. As of September 30, 1998, the Company
has incurred approximately $2.8 million for the Year 2000 Project.
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Risks
The Company is connected to one of the three major electric grids for North
America. That electric grid known as the Western Interconnection connects
utilities throughout the western portion of North America. The stability and
reliability of the operations of each utility on any of the electric grids is,
to a certain extent, dependent upon these interconnections. A major disturbance
within a grid can have an immediate effect throughout the grid. Even though the
Company addresses the Year 2000 issue for its systems, it could still encounter
difficulties due to the state of readiness of another utility on the Western
Interconnection. There is a likelihood of at least minor disruptions on the grid
as a result of the Year 2000 issue. The Company has been in contact with
utilities with which the Company is directly connected on the grid, as well as
the Western Systems Coordinating Council, and will be working with those
parties.
The Company's natural gas operations rely upon timely receipt of natural gas
from gas transporters and suppliers. The ability of those transporters and
suppliers to continue to provide an uninterrupted and adequate supply of gas
also may be dependent upon their Year 2000 readiness and is critical to the
operations of the Company's gas operations. The Company is working with each of
its primary transporters and suppliers to determine their Year 2000 readiness
and to jointly develop contingency plans.
The continuation of the Company's operations is also dependent upon a number of
significant suppliers and service providers. The Company is working with these
parties to determine their Year 2000 readiness and to jointly develop
contingency plans. The Company is working with its fuel suppliers to ensure that
an uninterrupted and adequate fuel supply exists for its power generation
operations. Disruption in the services from third party telecommunications
providers would impair the Company's ability to operate its electric
transmission and distribution and natural gas distribution operations. The
Company is working on how to assess the Year 2000 readiness of these third party
telecommunications providers.
The goal of the Company has been to make its mission critical systems Year 2000
compliant by mid-1999. However, as the Company must rely on outside vendors for
the remediation of a portion of its mission critical systems, there is a
probability that remediation and testing will not be completed on some of these
systems until after this date. If a delay past mid-1999 is anticipated, then
specific contingency plans will be developed. The Company anticipates that the
conversion of certain non-critical systems may not be completed until late 1999.
The Company believes that if remediation of its mission critical IT Systems and
Embedded Systems is not completed timely, the Year 2000 issue could have a
material adverse impact on the Company's operations.
Due to the general uncertainty inherent in the Year 2000 issue, resulting, in
part, from the uncertainty of the Year 2000 readiness of interconnected
utilities, natural gas transporters and suppliers and significant suppliers and
service providers, the Company is unable to determine at this time whether the
consequences of Year 2000 failures or disruptions will have a material adverse
impact on the Company's results of operations, liquidity or financial condition.
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Contingency Plans
The Company is in the process of reviewing its existing contingency and business
continuity plans for applicability to the Year 2000 Project and will enhance or
replace these plans as required. New plans specific to the Year 2000 Project
will be developed if these issues have not been previously addressed. The
Company has begun developing high level contingency plans that respond to
problems unique to the Year 2000 issue. At this time, pending further
investigation and discussions with interconnected utilities, natural gas
transporters and suppliers, and significant suppliers and service providers, the
Company is unable to define what it believes to be the most probable worst case
scenario. Once the Company has assessed the Year 2000 compliance of those
parties, it believes that it will be able to identify the most probable worst
case scenario and further refine its contingency plans.
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. Words
such as "estimates," "expects," "anticipates," "plans," "believes," "projects,"
and similar expressions identify forward-looking statements. 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 costs; (iv) the inability of the Company to successfully compete
outside its traditional regulated market; (v) regional economic conditions,
which could affect customer growth; (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) the cost of debt and equity
capital; (xi) weather conditions; and (xii) technical developments in the
utility industry.
The costs of the Company's Year 2000 Project and the dates on which the Company
believes it will complete the phases of the Project are based upon management's
best estimates, which were derived using numerous assumptions regarding future
events, including the continued availability of certain resources, third-party
remediation plans, and other factors. There can be no assurance that these
estimates will prove to be accurate and actual results could differ materially
from those currently anticipated. Specific factors that could cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in Year 2000 issues, the ability to identify, assess,
remediate and test all relevant computer codes and embedded technology, and
similar uncertainties.
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.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Spent Nuclear Fuel and Waste Disposal
As previously reported, in November 1997, the United States Court of Appeals for
the District of Columbia Circuit ("D.C. Circuit") issued a writ of mandamus in a
case involving Northern States Power ("NSP") precluding the Department of Energy
("DOE") from excusing its delay in accepting spent fuel nuclear fuel by January
31, 1998. (See PART I, ITEM 1. - BUSINESS - "ELECTRIC OPERATIONS - Fuel and
Water Supply - Nuclear Fuel" in the 1997 Form 10-K.) On May 5, 1998, the D.C.
Circuit issued a ruling refusing to order DOE to begin moving spent nuclear
fuel.
On July 24, 1998, Arizona Public Service Company ("APS"), as the operating agent
of PVNGS and holder of a standard contract with the DOE, filed a petition for
review with the D.C. Circuit, requesting that the D.C. Circuit explicitly
confirm that its previous rulings in the NSP case apply to all standard contract
holders, regardless of whether they were parties to that case. APS also made the
filing to preclude DOE from being able to argue at some future time that APS did
not meet the 180 day time provisions of Section 119 of the Nuclear Waste Policy
Act for challenging DOE's failure to begin accepting spent nuclear fuel on
January 31, 1998. APS' case was subsequently consolidated into two similar
cases.
On August 18, 1998, the D.C. Circuit issued an order requiring APS to show cause
why its case should not be dismissed for the reasons stated in orders which had
been issued in other similar cases. In those orders, the court stated that DOE
could not argue that its delay was "unavoidable" and that standard contract
holders must seek damages under the terms of the standard contract.
Because of recent certiorari petitions for United States Supreme Court review of
the NSP case filed by DOE and others, APS has filed a joint motion along with
other affected parties with the D.C. Circuit for enlargement of time in which to
respond to the court's August 18, 1998 show cause order. This request to wait
was also supported by the government. On September 16, 1998, the D.C. Circuit
granted APS' motion and will hold the case in abeyance pending the outcome of
the certiorari petitions before the United States Supreme Court.
Nuclear Decommissioning Trust
In March and April 1998, the Company and the trustee of the Company's master
decommissioning trust filed a civil complaint and an amended complaint,
respectively, asserting various tort, contract and equity theories against
several companies and individuals for the under-performance of a life insurance
program. The program, which was approved by the NMPUC and set up in a trust in
1987, is a type of corporate owned life insurance, and is used to fund a portion
of the Company's nuclear decommissioning obligations for its 10.2% interest in
PVNGS. (See PART II, ITEM 1, - "LEGAL PROCEEDINGS - "Nuclear Decommissioning
Trust" in the quarterly report on Form 10-Q for the quarter ended June 30,
1998.)
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A motion filed by one of the defendants to dismiss the trustee was denied. On
November 5, 1998, the U. S. District Court granted the Company's motion to
remand the case to state district court in Santa Fe County, New Mexico. The
Company is currently unable to predict the ultimate outcome or amount of
recovery, if any.
Republic Savings Bank ("RSB") Litigation
As previously reported, Meadows Resources, Inc. ("Meadows"), a wholly owned
subsidiary of the Company, and Republic Holding Company ("RHC"), wholly owned by
Meadows, have pending before the United States Court of Federal Claims a lawsuit
filed in 1992, alleging that the government breached contractual arrangements by
refusing to recognize supervisory goodwill and capital credits regarding its
thrifts. The Federal government filed a counterclaim alleging breach by RHC of
its obligation to maintain RSB's net worth and moved to dismiss Meadows' claim
for lack of standing. (See PART I, ITEM 3. - "LEGAL PROCEEDINGS-OTHER
PROCEEDINGS-Republic Savings Bank ("RSB") Litigation" in the 1997 Form 10-K.)
RSB filed a motion for partial summary judgment on the issue of liability under
its breach of contract claim based on the United States Supreme Court's decision
in United States v. Winstar. The Federal government filed a cross motion for
summary judgment and opposed RSB's motion. On December 22, 1997, the judge
entered an opinion, addressing eleven issues common to the question of
governmental liability in a number of cases including the RSB case, ruling in
favor of the plaintiffs on all issues and expressing severe criticism of the
government's litigation tactics. The judge ordered the Federal government to
show cause within sixty days as to why the motions for summary judgment on
contract liability issues of RSB and plaintiffs in similar cases should not be
granted. The Federal government timely filed its response to the show cause
order and RSB filed its reply. Decision on summary judgment is still pending.
The Company is currently unable to predict the ultimate outcome or amount of
recovery, if any.
ITEM 5. OTHER INFORMATION
Acquisition of Certain Assets of Plains Electric Generation and Transmission
Cooperative, Inc. ("Plains")
As previously reported, in July 1998, the Company and Tri-State Generation and
Transmission Association, a Denver based cooperative ("Tri-State"), made a
non-binding joint proposal in response to the request for proposals issued by
Plains in May 1998. (See PART II, ITEM 5.-OTHER INFORMATION - " Joint Proposal
for Acquisition of Plains' Assets" in the quarterly report on Form 10-Q for the
quarter ended June 30, 1998. The proposal was subsequently selected as a
finalist by Plains. The Company and Tri-State submitted a binding offer in
September 1998. On October 15, 1998, Plains announced that it would be entering
into exclusive negotiations with the Company and Tri-State regarding the joint
proposal. Under the proposal, Plains will sell certain assets to the Company and
the remaining assets would be acquired by Tri-State through merger. Also,
Plains' thirteen member cooperatives will have the opportunity to become members
of Tri-State or purchase wholesale electric power from the Company. Once the
final transactions are negotiated and approved by the cooperatives and the
Plains board of trustees, the transactions will be submitted to various state
and Federal regulatory agencies for approval. Closing of the transaction will
depend on the timing of regulatory and other approvals.
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NMPUC Order on the Cost of Gas
As previously reported, the NMPUC issued a final order on February 13, 1997,
regarding the increase in gas costs during December 1996. In the order, the
NMPUC imposed, but suspended, a civil penalty of $2.2 million on the Company due
to an alleged incorrect low gas cost factor 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 purchase gas adjustment clause factor calculations for the period of
December 1995 through January 1997.
Subsequently, the NMPUC issued an order, partially granting a motion filed by
the Company requesting a rehearing. In the order, 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. (See PART I,
ITEM 1. BUSINESS - "RATES AND REGULATION--Gas Rates and Regulation - NMPUC Order
on the Cost of Gas Case and Investigation of Gas Supply Procurement Practices"
in the 1997 Form 10-K.)
On September 11, 1998, the NMPUC issued a final order in this proceeding
withdrawing the portion of the February 13, 1997 order finding that the Company
had deliberately misled the NMPUC and withdrawing the $2.2 million civil penalty
and the disallowance of $1.6 million of gas costs imposed in the initial order.
Investigation of Gas Supply Procurement Practices
As previously reported, as part of the February 13, 1997 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 (See PART 1, ITEM 1. BUSINESS - "RATES AND REGULATION - Gas Rates
and Regulation - Investigation of Gas Supply Procurement Practices" in the 1997
Form 10-K).
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On September 21, 1998, the NMPUC issued a final written order, stating that the
Company was not imprudent in its gas procurement practices for the 1996-97
winter heating season.
The 1997 Gas Rate Case
As previously reported, in October 1997, the Company filed its gas rate case
with the NMPUC pursuant to the above-referenced February 13, 1997 order. In its
filing, the Company requested a rate increase of $12.6 million. The NMPUC Staff
recommended a rate increase of $2.5 million and the Attorney General ("AG")
requested a rate decrease of $4.9 million.
In April 1998, an uncontested stipulation settling the 1997 gas rate case was
filed with the NMPUC. The stipulation provided for a restructuring of
residential rates, including a decrease in the monthly access fee from $14.56 to
$9.00 with an offsetting increase in the variable rate for gas consumption. The
stipulation also established a mechanism for the recovery of certain costs
incurred by the Company in settlement of past gas supply contracts. Recovery of
these costs would be partially offset by revenues stemming from off-system gas
sales. After a hearing on the stipulation held in May 1998, the NMPUC issued a
final order on August 7, 1998, accepting the stipulation with certain
modifications. See PART II, ITEM 5. OTHER INFORMATION - "The 1997 Gas Rate Case"
in the quarterly reports on Form 10-Q for the quarters ended March 31 and June
30, 1998.)
The order approved a program where customers could choose between two cost of
service rate options (either a $9.00 monthly fee with a higher volumetric cost
of service charge or a $14.56 monthly fee with lower volumetric cost of service
charge). This option program becomes effective with the December 1998 billing
cycle. The order also approved the recovery of costs accrued for certain rate
discounts. The AG filed a request for rehearing with the NMPUC and that request
was denied by the inaction of the NMPUC on September 28, 1998. On October 27,
1998, the AG appealed the order to the Supreme Court. The AG did not request a
stay and therefore the NMPUC's order remains in effect. The Company is reviewing
the AG's appeal.
Fixed Price Option
As previously reported, in July 1997, the Company requested that the NMPUC grant
the Company authority to offer a fixed price option to up to 20,000 gas
customers. The issue of the fixed price option was bifurcated from the Company's
request for the levelized gas cost recovery mechanism. (See PART 1, ITEM 1.
BUSINESS - "RATES AND REGULATION - Gas Rates and Regulation - Levelized PGAC" in
the 1997 Form 10-K.)
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On September 8, 1998, the Company filed a motion with the NMPUC, withdrawing its
request for offering a fixed price option. On October 27, 1998, a public
workshop was conducted to address, among other things, the need for the offering
of a fixed price option by the Company. The NMPUC is expected to rule on the
motion prior to the end of the year.
Cobisa-Person Limited Partnership ("PLP")
As previously reported, as part of the final order concerning the project for
the purchase of unit contingent peaking capacity from PLP, the NMPUC approved a
stipulation between the Company and the NMPUC staff to develop and evaluate a
Request for Proposal for 5 MW of solar capacity. (See PART II, ITEM 5. OTHER
INFORMATION - "Cobisa-Person Limited Partnership ("PLP")" in the quarterly
report on Form 10-Q for the quarter ended March 31, 1998.)
On October 27, 1998, the NMPUC issued a final order approving the Company's
acquisition of a minimum of 5 MW of solar power through ownership or a purchase
power contract. The order allows the Company to recover the full cost of the
solar power through a surcharge on all electric customers' bills. The new
charge, equal to one-half of one percent of each customer's bill, is to be
divided equally between paying for the solar project and acquiring additional
solar or other renewable energy resources.
Palo Verde Nuclear Generating Station
PVNGS Liability and Insurance Matters
As previously reported, 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 assessment
program for each nuclear incident occurring at any nuclear power plant in the
United States had been approximately $79.3 million, subject to an annual limit
of $10 million per incident. (See PART I, ITEM 2. - PROPERTIES - "ELECTRIC -
Nuclear Plant - PVNGS Liability and Insurance Matters" in the 1997 Form 10-K).
The Nuclear Regulatory Commission ("NRC") has recently revised the maximum
retrospective assessment, based on the rate of inflation, to approximately $88
million per reactor per incident, still 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
$26.9 million, with an annual payment limitation of approximately $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.
25
<PAGE>
The NRC has also recently announced that it has provided a report to Congress,
making certain recommendations, with respect to the Federal law referred to
above, which provides for payment of public liability claims in case of a
catastrophic accident involving a nuclear power plant. One of the
recommendations by the NRC would be that Congress consider amending the law to
provide that the maximum a nuclear utility can be assessed per reactor per
incident per year be doubled to $20 million. The $88 million maximum
retrospective assessment per reactor per incident would be unchanged under the
NRC proposal. The NRC also recommended that Congress investigate whether the
$200 million now available from the private insurance market for liability
claims per reactor can be increased to keep pace with inflation. The Company
cannot predict whether or not Congress will act on the NRC's recommendations.
However, if adopted, certain of the recommendations could possibly trigger
"Deemed Loss Events" under the Company's PVNGS leases, absent waiver by the
lessors. (See PART I, ITEM 2 - PROPERTIES - "ELECTRIC - Nuclear Plant - Sale and
Leaseback Transactions of PVNGS Units 1 and 2" in the 1997 Form 10-K).
PVNGS Decommissioning Funding
As previously reported, 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). 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. (See PART I, ITEM
2 - "PROPERTIES - ELECTRIC - Nuclear Plant - PVNGS Decommissioning Funding" in
the 1997 Form 10-K.)
The NRC has recently amended its rules on financial assurance requirements for
the decommissioning of nuclear power plants. The amended rules will become
effective on November 23, 1998. The NRC has indicated that the amendments
respond to the potential rate deregulation in the power generating industry and
NRC concerns regarding whether decommissioning funding assurance requirements
will need to be modified. The amended rules provide that a licensee may use an
external sinking fund as the exclusive financial assurance mechanism if the
licensee recovers estimated total decommissioning costs through cost of service
rates or through a "non-bypassable charge". Other mechanisms are prescribed,
including prepayment, if the requirements for exclusive reliance on the external
sinking fund mechanism are not met.
The Company currently relies on the external sinking fund mechanism to meet the
NRC financial assurance requirements for its interests in PVNGS Units 1, 2 and
3. The costs of PVNGS Units 1 and 2 are currently included in NMPUC
jurisdictional rates, but the costs of PVNGS Unit 3 are excluded from NMPUC
jurisdictional rates. The Company is in the process of evaluating the impact of
the amended NRC rules and what actions might be required.
26
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
3.1* Restated Articles of Incorporation of the Company, as amended
through May 10, 1985
3.2* By-laws of Public Service Company of New Mexico With All
Amendments to and including December 5, 1994
10.32.1** First Amendment to the Supplemental Employee Retirement
Agreement
10.76 PVNGS Capital Trust-Variable Rate Trust Notes-PVNGS Note
Agreement dated as of July 31, 1998
15.0 Letter Re: Unaudited Interim Financial Information
27 Financial Data Schedule
* The Company hereby incorporates the exhibits by reference pursuant to
Exchange Act Rule 12b-32 and Regulation S-K, Section 10, paragraph
(d).
** Designates each management contract or compensatory plan or
arrangement required to be identified pursuant to paragraph 3 of Item
14 (a) of Form 10-K.
b. Reports on Form 8-K:
Report dated August 24, 1998 and filed September 15, 1998 relating to Retail
Pilot Load Program.
27
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PUBLIC SERVICE COMPANY OF NEW MEXICO
------------------------------------
(Registrant)
Date: November 12, 1998 /s/ Donna M. Burnett
-----------------------------------
Donna M. Burnett
Corporate Controller and
Chief Accounting Officer
(Officer duly authorized to
sign this report)
28
<PAGE>
FIRST AMENDMENT TO THE
SUPPLEMENTAL EMPLOYEE RETIREMENT AGREEMENT
THIS FIRST AMENDMENT TO THE SUPPLEMENTAL EMPLOYEE RETIREMENT AGREEMENT
is approved as of the 10th day of August, 1998, by and between Public Service
Company of New Mexico, a New Mexico Corporation ("PNM") and Max Maerki
("Maerki").
WHEREAS, PNM and Maerki entered into a Supplemental Employee Retirement
Agreement ("SERP") on August 4, 1989; and
WHEREAS, on April 22, 1997, PNM amended the Public Service Company of
New Mexico Employees' Retirement Plan (the "Plan"), effective January 1, 1997,
limiting the additional accrual of service and freezing salaries for purposes of
pension calculations under the Plan; and
WHEREAS, Maerki acknowledges the amendment to the Plan and agrees to
incorporate the terms of the amendment in the SERP, effective January 1, 1998;
and
WHEREAS, paragraph 9 of the SERP permits the SERP to be amended by the
consent of both parties.
NOW THEREFORE, PNM and Maerki do hereby amend the SERP by this First
Amendment as follows:
1. Paragraph 1, Supplemental Employee Retirement Benefit, is hereby
amended to read as follows:
1. Supplemental Employee Retirement Benefit. PNM shall grant and pay to
Maerki the following supplemental employee retirement benefits:
(a) benefits equal to the benefit which would be payable to
Maerki under the Retirement Plan, calculated as though Maerki has been
in continuous employment of PNM since February 15, 1974, reduced by
benefits deemed payable to Maerki under the Retirement Plan.
2. Paragraph 2(a), Calculation of Supplemental Retirement Benefits, is
hereby amended and paragraph 2(d) is added to read as follows:
(a) shall be determined based upon the Retirement Plan in
effect on January 1, 1997;
* * * *
<PAGE>
3. Except as herein above amended, PNM and Maerki hereby readopt and
redeclare each and every provision of the SERP.
IN WITNESS WHEREOF, the parties hereto, personally or by their
authorized representatives, have signed this First Amendment to the SERP
effective as of the date specified herein and by execution of this amendment
hereby declare that this amendment fully and accurately represents all the
supplemental retirement benefits agreed upon by PNM and Maerki.
PUBLIC SERVICE COMPANY OF NEW
MEXICO
Date: 10/21/98 By: /s/ Benjamin F. Montoya
__________ ______________________________
Benjamin F. Montoya
President and CEO
/s/ Max H. Maerki
Date: 10/21/98 ______________________________
__________ Max H. Maerki
Execution Copy
Document No. P-5
PVNGS CAPITAL TRUST
VARIABLE RATE TRUST NOTES
PVNGS NOTE AGREEMENT
Dated as of July 31, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
1. AUTHORIZATION OF ISSUE OF NOTES..........................................1
2. PURCHASE AND SALE OF NOTES...............................................1
3. CONDITIONS OF CLOSING....................................................2
3A. Notes..............................................................2
3B. Representations and Warranties; No Default.........................2
3C. Trust Agreement in Effect..........................................2
3D. No Material Adverse Change.........................................2
3E. Purchase Permitted By Applicable Laws..............................2
3F. Proceedings........................................................2
4. PREPAYMENTS; ADDITIONAL DRAWDOWNS........................................2
4A. Scheduled Mandatory Prepayments....................................3
4B. Unscheduled Mandatory Prepayments..................................3
4C. Optional Prepayments...............................................3
4D. Notice of Optional Prepayment......................................3
4E. Retirement of Notes................................................4
4F. Additional Drawdowns...............................................4
4G. Interest Rebate....................................................4
5. COVENANTS................................................................5
5A. Statements and Other Reports.......................................5
5B. Inspection of Property.............................................5
5C. Existence..........................................................5
5D. Payment of Taxes and Claims........................................5
6. EVENT OF DEFAULT.........................................................5
6A. Acceleration.......................................................6
6B. Other Remedies.....................................................6
6C. Nature of Obligation...............................................6
6D. No Contest; Waiver, etc............................................6
7. REPRESENTATIONS, COVENANTS AND WARRANTIES................................7
7A. Organization.......................................................7
7B. Authorization......................................................7
7C. Actions Pending....................................................7
7D. Title to Properties................................................7
7E. Conflicting Agreements and Other Matters...........................7
7F. Offering of Notes..................................................8
7G. Regulation G, Etc..................................................8
7H. Governmental Consent...............................................8
ii
<PAGE>
Page
----
8. COVENANTS OF THE TRUSTEE IN ITS INDIVIDUAL CAPACITY......................8
9. REPRESENTATIONS AND COVENANTS OF EACH PURCHASER..........................8
9A. Purchase not for Distribution......................................8
9B. No ERISA Funds.....................................................8
9C. Notice of Reset....................................................9
10. DEFINITIONS..............................................................9
11. MISCELLANEOUS...........................................................10
11A. Course of Dealing.................................................10
11B. Persons Deemed Owners.............................................10
11C. Survival of Representations and Warranties; Entire Agreement......10
11D. Successors........................................................10
11E. Disclosure to Other Persons.......................................10
11F. Notices...........................................................11
11G. Limitation of Liability and Trustee's Obligations.................11
11H. Descriptive Headings..............................................11
11I. Governing Law.....................................................11
11J. Counterparts......................................................11
ANNEX
Annex I - Note Information
EXHIBITS
Exhibit A - Form of Note
Schedule I - Principal Prepayment Schedule
Schedule II - Prepayment Premium Schedule
Exhibit B - Form of Notice of Reset
Exhibit C - Sample Interest Rate Reset Calculation
ii
<PAGE>
PVNGS CAPITAL TRUST
c/o The Bank of New York (Delaware)
White Clay Center
Newark, Delaware 19711
Phone: (302) 451-2500
As of July 31, 1998
Public Service Company of New Mexico
Alvarado Square
Albuquerque, New Mexico 87158
Attention of Treasurer
Gentlemen:
PVNGS Capital Trust, a Delaware statutory business trust (the "Trust"),
hereby agrees with Public Service Company of New Mexico, a New Mexico
corporation ("PNM"), as follows:
1. AUTHORIZATION OF ISSUE OF NOTES. The governing instrument of the
Trust (the Amended and Restated Declaration of Trust dated as of July 31, 1998;
hereinafter, the "Trust Agreement") authorizes the Trust to issue notes under
this Agreement, in substantially the form of EXHIBIT A hereto, in an aggregate
principal amount equal to $419,817,809.24. The term "Notes" as used herein shall
include each Note delivered pursuant to any provision of this Agreement and each
Note delivered in substitution or exchange for any such Note. The term
"Purchaser" as used herein shall mean PNM or any registered owner of a Note and
the term "Purchasers" shall mean PNM and all registered owners of Notes, in each
case except as otherwise indicated. Capitalized terms used herein without
definition shall have the respective meanings specified in the Trust Agreement
as in effect on the date hereof.
2. PURCHASE AND SALE OF NOTES. (a) The Trust hereby agrees to sell to
PNM and, subject to the terms and conditions herein set forth, PNM hereby agrees
to purchase from the Trust the Notes more particularly identified in Annex I,
each at a purchase price equal to the principal amount thereof. Each Note shall
bear interest from the "Interest Start Date" as set forth therein. The Trust
will deliver to PNM, at the offices of Winthrop, Stimson, Putnam & Roberts at
One Battery Park Plaza, New York, New York, on August 6, 1998, or on any other
date upon which the Trust and PNM may mutually agree (the "Date of Closing"),
the Notes registered in PNM's name in the denomination or denominations
specified by PNM, against payment of the purchase price thereof.
(b) Each Note corresponds to either one (in the case of Owner Trust No.
1) or two Trust Lessor Notes as follows: the designation given each note under
the caption "Tranche Designation" on Annex I is comprised of a number followed
by a "/" and one or more letters and, in two cases, a number. The letter(s) and
number (if any) following the "/" correspond to the designation given the
corresponding Trust Lessor Notes in Schedules I-A and I-B to the Trust
Agreement. Notwithstanding the foregoing, all Notes are equally general
unsecured obligations of the Trust payable in accordance with their respective
terms and this Agreement.
<PAGE>
3. CONDITIONS OF CLOSING. PNM's obligation to purchase and pay for the
Notes on the date of closing is subject to the satisfaction, on or before the
date of closing, of the following conditions:
3A. Notes. There shall have been delivered to PNM the
appropriate Notes, duly completed and executed by the Regular Trustee on behalf
of the Trust.
3B. Representations and Warranties; No Default. The
representations and warranties of the Trust contained in paragraph 7 shall be
true on and as of the date of closing and there shall exist on the date of
closing no Event of Default.
3C. Trust Agreement in Effect. The Trust Agreement shall be in
full force and effect.
3D. No Material Adverse Change. There shall not have occurred
any condition, event or act which would materially and adversely affect the
property or assets, condition (financial or otherwise) or the activities of the
Trust or the ability of the Trust to repay the Notes or to perform under this
Agreement.
3E. Purchase Permitted By Applicable Laws. The purchase of and
payment for the Notes to be purchased by PNM on the date of closing on the terms
and conditions herein provided (including the use of the proceeds of such Notes
by the Trust) shall not violate any applicable law or governmental regulation
(including, without limitation, section 5 of the Securities Act or Regulations
G, T or X of the Board of Governors of the Federal Reserve System), and shall
not subject PNM to any tax, penalty, liability, or other onerous condition under
or pursuant to any applicable law or governmental regulation, and PNM shall have
received such certificates or other evidence as it may request to establish
compliance with this condition.
3F. Proceedings. All proceedings taken or to be taken in
connection with the transactions contemplated hereby and all documents incident
thereto shall be satisfactory in substance and form to PNM, and PNM shall have
received all such counterpart originals or certified or other copies of such
documents as it may reasonably request.
4. PREPAYMENTS; ADDITIONAL DRAWDOWNS. Each Note shall be subject to
prepayment with respect to the required prepayments specified in paragraphs 4A
and 4B, and also under the circumstances set forth in paragraph 4C. The
principal amount owing on each Note may be increased from time to time under the
circumstances set forth in paragraph 4F. PNM and the Trust shall jointly
maintain a master schedule showing such prepayments and increases (if any) in
respect of the Notes, individually and in the aggregate. Such schedule shall be
updated on the date of each such prepayment or increase.
2
<PAGE>
4A. Scheduled Mandatory Prepayments. Each tranche of Notes
shall be prepaid in accordance with Schedule I attached thereto; provided,
however, that if the payment of principal which is received by the Trust (the
"Actual Principal Payment") on the corresponding Trust Lessor Note tranche
specified on said Schedule I exceeds the principal amortization amount specified
for that date on said Schedule I for such tranche of Notes, the prepayment of
such Notes required to be made on that date shall be increased by an amount
equal to 94% of such excess (but not by an amount greater than the outstanding
principal amount of such tranche of Notes). If the Actual Principal Payment is
less than the principal amortization amount specified for that date on said
Schedule I for such tranche of Notes, the required prepayment shall be reduced
(but not to less than zero) by an amount equal to 94% of the shortfall. In each
instance where there is an increase or reduction in the prepayment amount
specified on said Schedule I, the amount of the increase or reduction, as the
case may be, shall be noted on said Schedule I by the affected Purchasers.
4B. Unscheduled Mandatory Prepayments. Whenever (i) a Trust
Lessor Note (A) is prepaid, in whole or in part, other than in accordance with
its scheduled amortization, or (B) is sold by the Trust or (ii) any other debt
security previously acquired by the Trust (including a Replacement Security as
hereinafter defined) is sold or subject, in whole or in part, to prepayment,
purchase, redemption or other unscheduled payment or distribution, the
corresponding Note shall be prepaid in an amount not less than 94% of the
Accrued Book Value of such Trust Lessor Note or other debt security, or relevant
portion or portions thereof (or, at the option of the Trust, in a greater
amount, up to 100% of the available funds received after deducting therefrom any
interest or premium payable with respect to the affected Note in connection with
the application of such funds) within thirty-five (35) days of the date on which
the Trust receives such funds, at a redemption price equal to the principal
amount of the Notes to be prepaid, together with interest accrued thereon to the
date of redemption, plus the Mandatory Redemption Premium set forth on Schedule
II to such Notes (except in case of a prepayment under clause (i)(A) above, in
which case there shall be no premium); provided, however, that this paragraph 4B
shall not apply, and no redemption shall be required, if: (i) the securities
being sold are replaced by a like principal amount of non-callable debt
securities (the "Replacement Securities") rated at least as high as the
securities they replace, but no lower than A (or a gradation thereof), by both
Moody's Investors Service, Inc. and Standard & Poor's Investor Services, a
division of The McGraw-Hill Companies, Inc. ("Standard & Poor's"), (ii) the time
and amount of debt service payments on such Replacement Securities (without
regard to any reinvestment thereof) will permit debt service payments to be made
in full on the Notes when due without regard to the adjustments permitted by
Section 4A hereof and (iii) no more than 5% of the value of such Replacement
Securities and any other Replacement Securities acquired by the Trust represents
securities of any one issuer or affiliates thereof.
4C. Optional Prepayments. A Note may be prepaid, in whole but
not in part, on any interest payment date occurring on or after the date
specified in Schedule II to such Note at a price equal to the outstanding
principal amount of such Note, together with accrued interest thereon to the
date of redemption, plus the Optional Redemption Premium, if any, set forth on
such Schedule II.
3
<PAGE>
4D. Notice of Optional Prepayment. The Trust shall give the
holder of each Note notice of any prepayment pursuant to Section 4C at least
five days prior to any such prepayment. Any notice given under this Section 4D
may be revoked (and no prepayment shall be required) not less than twenty-four
hours prior to the applicable prepayment.
4E. Retirement of Notes. Except as provided in this Agreement,
the Notes may not be redeemed, prepaid or otherwise retired, in whole or in
part, prior to their stated final maturity.
4F. Additional Drawdowns. In the event that a scheduled
mandatory prepayment of a Note (as contemplated by Section 4A hereof) is reduced
to zero, the amount, if any, that such mandatory prepayment would have been
reduced below zero but for the fact that no reduction below zero is permitted,
shall be treated as an Additional Drawdown as of the mandatory prepayment date
and shall be recorded as such on Schedule I to such Note by the affected
Purchaser. All amounts shown on Schedule I to a particular Note as Additional
Drawdowns, whether because of the reduction alluded to above or because of being
set forth thereon at the time of the issuance of such Note, shall be deemed to
be an increase in the outstanding principal amount of the Note effective as of
the date of such Additional Drawdown. Any Additional Drawdown shall first be
credited to payments of interest then due and owing on the Notes before being
applied to any other purpose. To the extent Additional Drawdowns are credited to
payments of interest on a Note, such interest shall be deemed to be paid and no
longer owing.
4G. Interest Rebate. In the event that a Specified Prepayment
(as hereinafter defined) shall occur, then, on the date of such Specified
Prepayment, the interest paid on the corresponding Note to the owner thereof
during the twelve month period ending on the date of such prepayment (the
"Rebate Period") shall be rebated on or before the date of such Specified
Prepayment by the registered owner of such corresponding Note to the Trust to
the extent (if any) of the excess of (A) the Accrued Book Value of such Trust
Lessor Note over (B) the proceeds of such Specified Prepayment (or the pro rata
portion of such Accrued Book Value in the event that the Trust Lessor Note in
question has been prepaid in part only). In the event that a Note subject to
interest rebate shall have been owned by more than one registered owner during a
Rebate Period, each owner shall contribute to the required rebate pro rata in
accordance with the actual interest actually received by it during such Rebate
Period, however, insofar as the Trust shall be concerned, each such owner shall
be liable for the amount of the rebate in question (and the Trust shall have the
right to offset from amounts due on the Note in respect of which the rebate is
due). In the event that an obligated owner shall fail to contribute as provided
in the immediately preceding sentence, upon payment in full of the required
rebate by one or more other owners, such other owners shall be subrogated to
claims against the defaulting owner. "Specified Prepayment" is (i) any optional
prepayment of principal of Trust Lessor Notes, (ii) any mandatory prepayment of
principal pursuant to the Indenture referenced in the Trust Lessor Note in
question, (iii) any purchase of the Trust Lessor Note pursuant to Section 6.8(b)
of the Indenture referenced in such Trust Lessor Note and (iv) any other
repayment or prepayment of principal of the Trust Lessor Note in question (it
being the intent of the parties hereto that a Specified Prepayment shall not
include the payment of regularly scheduled installments of principal as provided
on such Trust Lessor Note). Anything in this Section 4G to the contrary
notwithstanding, no rebate shall be due (I) to the extent that any excess of (A)
over (B) shall have arisen from the Trust Lessor Note in question not having
been paid when and as contemplated thereby and by the related Lessor Note
Documentation or (II) in connection with any repayment (other than a repayment
in full of the Trust Lessor Note in question) occurring during, or in connection
with, a "Lease Event of Default" of the type specified in Section 15(vii) of any
Facility Lease (Section 15(viii) in the case of the Facility Leases dated as of
August 12, 1986) comprising part of the Lessor Note Documentation relating to
the Trust Lessor Note in question.
4
<PAGE>
5. COVENANTS.
5A. Statements and Other Reports. The Trust will maintain or
cause to be maintained complete and accurate books of account with respect to
all of the receipts, disbursements and transactions of the Trust and will
deliver to the holder of the Notes, with reasonable promptness, such financial
data or information as any such holder may reasonably request.
5B. Inspection of Property. The Trust covenants that it will
permit any Person designated by a Purchaser, upon two (2) Business Days prior
notice to the Regular Trustee, to visit and inspect any of the properties of the
Trust, to examine the books and financial records of the Trust and make copies
thereof or extracts therefrom and to discuss the affairs, finances and accounts
of the Trust with the officers of the Regular Trustee and the Trust's
independent public accountants or other experts which it has retained, all at
such reasonable times during normal business hours of the Regular Trustee and as
often as a Purchaser may reasonably request.
5C. Existence. The Trust will (i) do or cause to be done all
things necessary to preserve and keep in full force and effect the existence and
rights of the Trust and to comply with all laws and government rules,
regulations and orders applicable to the Trust and (ii) at all times maintain,
preserve and protect all franchises, rights, licenses and other authorizations
and preserve all of the property necessary for the conduct of the Trust's
activities.
5D. Payment of Taxes and Claims. The Trust will pay all taxes,
assessments and other governmental charges imposed upon any of the properties or
assets of the Trust before the same become delinquent, and all claims for sums
which have become due and payable and which by law have or may become a Lien or
charge upon any of such properties or assets, provided that no such charge or
claim need be paid if being contested in good faith by appropriate proceedings
promptly initiated and diligently conducted if (i) such proceedings shall
suspend during their pendency the collection thereof from any Person, and (ii)
none of such properties or assets or any interest therein would thereby be
subject to a material risk of being sold, forfeited, confiscated, condemned or
lost.
6. EVENT OF DEFAULT. It shall be an Event of Default if the Trust
defaults in the payment of principal or interest on any Note when the same shall
become due by the terms thereof or by mandatory prepayment or otherwise and such
default shall continue for 5 Business Days; provided, however, that, prior to
the Cross-Over Date, it shall not be an Event of Default under this Agreement,
and the Notes shall not be subject to acceleration, during such time as (i)
PNM's senior unsecured notes are rated B2 or better by Moody's Investors
Service, Inc. or B or better by Standard & Poor's, unless the Trust's failure to
pay extends for more than 180 consecutive days and (ii) the Trust's non-payment
in respect of a Note results from a failure by PNM to pay scheduled installments
of rent under the Lessor Note Documentation relating to the corresponding Trust
Lessor Note. Interest on overdue principal and premium, if any, and (to the
extent permitted by applicable law) any overdue interest on a Note shall be paid
from the due date thereof at the rate per annum equal to 1% plus the then
applicable interest rate on such Note for the period during which any such
principal, premium or interest shall be overdue; provided, however, that
interest on overdue amounts shall be payable only to the extent the Trust shall
have indefeasibly received interest on overdue amounts in respect of the Trust
Lessor Note that corresponds to such Note.
5
<PAGE>
6A. Acceleration. If an Event of Default shall have occurred,
the holder of the Notes may at its option, by notice in writing to the Regular
Trustee, declare all of the Notes held by such holder to be, and all of the
Notes held by such holder shall thereupon be and become, immediately due and
payable together with interest accrued thereon, without presentment, demand,
protest or other notice of any kind, all of which are hereby waived by the
Trust.
6B. Other Remedies. If an Event of Default shall occur and be
continuing, the holder of the Notes may proceed to protect and enforce its
rights under this Agreement and such Notes by exercising such remedies as are
available to such holder in respect thereof under applicable law, either by suit
in equity or by action at law, or both, whether for specific performance of any
covenant or other agreement contained in this Agreement or in aid of the
exercise of any power granted in this Agreement. No remedy conferred in this
Agreement upon the holder of the Notes is intended to be exclusive of any other
remedy, and each and every such remedy shall be cumulative and shall be in
addition to every other remedy conferred herein or now or hereafter existing at
law or in equity or by statute or otherwise. Anything to the contrary in the
foregoing notwithstanding, no remedy which would do other than cause the
liquidation of the assets of the Trust shall be available to a holder of the
Notes.
6C. Nature of Obligation. The obligations of the Trust
hereunder and under the Notes (the "Obligations") are general unsecured,
unsubordinated obligations of the Trust; the holders of the obligations as such
have no interest, beneficial or otherwise, in the property of the Trust. The
Trust will duly and punctually pay, or cause to be paid, the principal of, and
premium, if any, and interest on the Obligations in accordance with the terms
thereof. Anything in this Agreement or in the Trust Agreement to the contrary
notwithstanding (other than Section 11G), the right of any holder of an
obligation to receive payment of the principal of, and premium, if any, and
interest on or after the respective due dates thereof (as the same may be
postponed in accordance with the terms of the Obligations), or to institute suit
for enforcement of any such payment on or after such respective dates, shall not
be impaired or affected without the consent of such Holder.
6D. No Contest; Waiver, etc. Each Purchaser (i) agrees that it
will not, nor will it permit any Affiliate of such Purchaser to, (x) object to
or otherwise contest, in any manner, the eligibility of the Trust under Section
109 of the Bankruptcy Code (or any successor provision) to commence, be the
subject of, or be the debtor in a Chapter 11 or Chapter 7 case under the
Bankruptcy Code including, but without limitation, whether or not the Trust
constitutes a "person", "corporation" or "business trust" within the meaning of
Section 101 of the Bankruptcy Code (or any successor provision), or (y) seek a
dismissal or conversion from Chapter 11 to Chapter 7 of any such case, (ii) to
the extent permitted by applicable law, hereby waives any right it may have
under Sections 1104(a)(1) and (a)(2) of the Bankruptcy Code (or any successor
provision) to seek appointment of a trustee for the Trust except for reasons of
6
<PAGE>
fraud, dishonesty or gross incompetence, misconduct, mismanagement or
irregularity in the management of the affairs of the debtor by current
management (collectively, "Stipulated Cause") and, (iii) to the extent permitted
by applicable law, hereby waives any right it may have under Section 1104(b) of
the Bankruptcy Code (or any successor provision) to seek appointment of an
examiner for the Trust other than to investigate allegations of Stipulated
Cause. Without limiting the generality of Section 11B hereof, each Purchaser
further agrees that it will not sell, assign or transfer any Note unless the
purchaser, assignee or transferee, as the case may be, shall have expressly
agreed to this Section 6D.
7. REPRESENTATIONS, COVENANTS AND WARRANTIES. The Trust represents,
covenants and warrants:
7A. Organization. The Trust is a validly existing business
trust duly created under the laws of the State of Delaware and under the Trust
Agreement, and the Trust has the legal power to own its property and to carry
out the transactions contemplated hereunder.
7B. Authorization. The Trust has the legal capacity to enter
into this Agreement, and to issue the Notes. The execution, delivery and
performance of this Agreement and the issuance of the Notes are within the
powers of the Trust under the Trust Agreement. All action on the part of the
Trust necessary for the authorization, execution, delivery and performance of
all obligations of the Trust under this Agreement and the Notes has been taken.
This Agreement and the Notes have been duly executed and delivered by, and are
the legal, valid and binding obligations of, the Trust, and each is enforceable
against the Trust in accordance with its terms, except as may be limited by
bankruptcy, insolvency or similar laws affecting the enforcement of creditors
rights in general and by general principles of equity, and each is in full force
and effect.
7C. Actions Pending. There is no action, suit, investigation
or proceeding pending or, to the knowledge of the Trust, threatened against the
Regular Trustee, as such, or the Trust, or any properties or rights of the
Regular Trustee, as such, or the Trust, by or before any court, arbitrator or
administrative or governmental body.
7D. Title to Properties. The Trust has good title to its
properties and assets, subject to no Lien of any kind other than the Lien
granted in Section 9.6 of the Trust Agreement.
7E. Conflicting Agreements and Other Matters. The Trust is not
a party to any contract or agreement which might materially and adversely affect
the property or assets of the Trust or the condition (financial or otherwise) of
the Trust or might have a material adverse effect on the ability of the Trust to
perform under this Agreement or to repay the Notes. Neither the execution nor
delivery of this Agreement or the Notes nor fulfillment of nor compliance with
the terms and provisions hereof and thereof will conflict with, or result in a
breach of, the terms, conditions or provisions of, or constitute a default
under, or result in any violation of, or result in the creation of any Lien upon
any of the properties or assets of the Trust pursuant to, the Trust Agreement
(other than the Lien granted in Section 9.6 of the Trust Agreement), any award
of any arbitrator or any agreement, instrument, order, judgment, decree,
statute, law, rule or regulation to which the Trust is subject.
7
<PAGE>
7F. Offering of Notes. Neither the Trust nor any agent acting
on its behalf has, directly or indirectly, offered the Notes or any similar
security of the Trust for sale to, or solicited any offers to buy the Notes or
any similar security of the Trust from, or otherwise approached or negotiated
with respect thereto with, any Person other than PNM and neither the Trustee nor
any agent acting on its behalf has taken or will take any action which would
subject the issuance or sale of the Notes to the provisions of section 5 of the
Securities Act or to the provisions of any securities or blue sky law of any
applicable jurisdiction.
7G. Regulation G, Etc. The Trust does not own or have any
present intention of acquiring any "margin stock" as defined in Regulation G (12
CFR Part 207) of the Board of Governors of the Federal Reserve System (herein
called "margin stock"). None of the proceeds from the sale of the Notes will be
used, directly or indirectly, for the purpose, whether immediate, incidental or
ultimate, of purchasing or carrying any margin stock or for the purpose of
maintaining, reducing or retiring any indebtedness which was originally incurred
to purchase or carry any stock that is currently a margin stock or for any other
purpose which might constitute this transaction a "purpose credit" within the
meaning of such Regulation G. Neither the Trust nor any agent acting on its
behalf has taken or will take any action which might cause this Agreement or the
Notes to violate Regulation G, Regulation T or any other regulation of the Board
of Governors of the Federal Reserve System or to violate the Securities Exchange
Act of 1934, as amended, in each case as in effect now or as the same may
hereafter be in effect.
7H. Governmental Consent. Neither the nature of the Trust, nor
any of its activities or properties, nor any relationship between the Regular
Trustee or the Trust and any other Person, nor any circumstance in connection
with the offering, issuance, sale or delivery of the Notes is such as to require
any authorization, consent, approval, exemption or other action by or notice to
or filing with any court or administrative or governmental body in connection
with the execution and delivery of this Agreement.
8. COVENANTS OF THE TRUSTEE IN ITS INDIVIDUAL CAPACITY. The Bank of New
York ("BNY") in its individual capacity covenants that it will, at its own cost
and expense, promptly take such action as may be necessary to duly discharge any
Liens on any part of the properties and assets of the Trust resulting from acts
of or claims against BNY in its individual capacity arising out of events or
conditions not related to or connected with the ownership and administration of
the properties and assets of the Trust or any transaction contemplated by the
Trust Agreement or the Notes.
9. REPRESENTATIONS AND COVENANTS OF EACH PURCHASER.
9A. Purchase not for Distribution. Each Purchaser represents,
and it is specifically understood and agreed, that such Purchaser is not
acquiring the Notes to be purchased by it hereunder with a view to or for sale
in connection with any distribution thereof within the meaning of the Securities
Act.
8
<PAGE>
9B. No ERISA Funds. Each Purchaser represents that no part of
the funds being used by it to pay the purchase price of the Notes being
purchased by it hereunder constitutes assets allocated to any separate account
maintained by the Purchaser in which any employee benefit plan participates to
the extent of 10% or more. For the purpose of this paragraph 9B, the term
"separate account" and "employee benefit plan" shall have the respective meaning
specified in section 3 of ERISA.
9C. Notice of Reset. Not sooner than 120 days and not later
than 60 days prior to each Reset Date (as defined in the Notes) the Purchasers
shall give notice, in the form attached hereto as EXHIBIT B, to each holder of
Class B Securities of the Trust of such Reset Date and of such holder's right to
propose that the Formula Rate be reduced by a factor specified by such holder to
the Purchasers within 30 days of receipt of such notice. So long as Citicorp
North America, Inc. holds any of the Class B Securities of the Trust such notice
shall be sent to:
Citibank, N.A.
Global Energy & Power Group Utilities
399 Park Avenue
4th Floor, Zone 20
New York, New York 10043
and to:
Citicorp North America, Inc.
Asset Finance Group/Risk Manager
399 Park Avenue
6th Floor, Zone 3
New York, New York 10043
or to such other address or addresses as Citicorp North America, Inc. shall
specify to the Purchasers. Attached as EXHIBIT C hereto is a sample interest
rate reset calculation.
10. DEFINITIONS. For the purpose of this Agreement, the terms defined
in the paragraphs above shall have the respective meanings specified therein,
and the following terms shall have the meanings specified below with respect
thereto:
"Business Day" shall mean any day other than a Saturday, a
Sunday or any other day on which banking institutions in New York, New
York, or Albuquerque, New Mexico are authorized or required by law to
close.
"Cross-Over Date" means the date on which the Trust Lessor
Notes first comprised less than 66-2/3% of the assets of the Trust.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
9
<PAGE>
"Event of Default" shall mean the event specified in paragraph
6, provided that there has been satisfied any requirement in connection
with such event for the lapse of time or the happening of any further
condition.
"Lien" shall mean any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any agreement to
give any of the foregoing, any conditional sale or other title
retention agreement, any lease in the nature thereof, and the filing of
or agreement to give any financing statement under the Uniform
Commercial Code of any jurisdiction).
"Person" shall mean and include an individual, a partnership,
a joint venture, a corporation, a company, a trust, an unincorporated
organization and a government or any department or agency thereof.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
11. MISCELLANEOUS.
11A. Course of Dealing. No course of dealing between the Trust
and the holder of the Notes nor any delay in exercising any rights hereunder or
under the Notes shall operate as a waiver of any rights of any holder of the
Notes.
11B. Persons Deemed Owners. The Trust may treat the Person in
whose name any Note is registered on the note register maintained by the Trustee
for that purpose, as the owner and holder of such Note for the purpose of
receiving payment of principal of and premium, if any, and interest on such Note
and for all other purposes whatsoever, whether or not such Note shall be
overdue, and the Regular Trust shall not be affected by notice to the contrary.
No Person may become a registered or beneficial holder of a Note unless (A)(I)
such Person is already a holder or an Affiliate of a holder or (II)(i) the Trust
and each holder of Class B Securities shall have been given at least 10 days
prior written notice of the proposed transfer, (ii) the Trust and each holder of
Class B Securities shall have been provided with any information concerning the
proposed transferee that it shall have reasonably requested, (iii) after giving
effect to such transfer, there shall be no more than twenty holders of Notes
issued pursuant to this Agreement, (iv) such Person is a bank, trust company,
institutional investor or other Person having a net worth (determined in
accordance with generally accepted accounting practices) of at least $25,000,000
and (v) such Person shall have executed an addendum to this Agreement pursuant
to which (x) it makes representations and warranties to the effect set forth in
Sections 9A and 9B and (y) it agrees to be bound as a Purchaser under this
Agreement (including, but without limitation, paragraph 6D hereof) to the same
extent as originally named herein as such and (B) in connection with the
transfer of a Note, the transferor and the transferee shall deliver an opinion
of counsel that the circumstances of such transfer were not such as would
subject the Notes to the provisions of Section 5 of the Securities Act or to the
provisions of any securities or blue sky law of any applicable jurisdiction.
10
<PAGE>
11C. Survival of Representations and Warranties; Entire
Agreement. All representations and warranties contained herein or made in
writing by or on behalf of the Trust in connection herewith shall survive the
execution and delivery of this Agreement and the Notes.
11D. Successors. All covenants and other agreements in this
Agreement contained by or on behalf of either of the parties hereto shall bind
and inure to the benefit of the respective successors in interest of the parties
hereto whether so expressed or not.
11E. Disclosure to Other Persons. The Trust acknowledges that
the holders of the Notes may deliver copies of any financial statements and
other documents delivered to such holder, and disclose any other information
disclosed to such holder, by or on behalf of the Trust in connection with or
pursuant to this Agreement to (i) such holder's directors, officers, employees,
agents and professional consultants, (ii) any federal or state regulatory
authority having jurisdiction over such holder, or (iii) any other Person to
which such delivery or disclosure may be necessary or appropriate (a) in
compliance with any law, rule, regulation or order applicable to such holder,
(b) in response to any subpoena or other legal process, (c) in connection with
any litigation to which such holder is a party or (d) in order to protect such
holder's investment in the Notes.
11F. Notices. All written communications provided for
hereunder shall be sent by first class mail or nationwide overnight delivery
service (with charges prepaid) or by facsimile transmission and (i) if to the
holder of the Notes, addressed to such holder at such address or to the
facsimile number, if applicable, as such holder shall have specified to the
Trustee in writing, and (ii) if to the Trust, addressed to it at the address set
forth above with a copy to the Trust c/o The Bank of New York, 101 Barclay
Street, 21 West , New York, New York 10286, Attention of Corporate Trustee
Administration, or, if applicable, to the facsimile number (212) 815-5915, or at
such other address or facsimile number as the Trustee shall have specified to
the holder of the Notes in writing. Any such written communications sent by
facsimile transmission shall be confirmed promptly in writing sent by first
class mail or nationwide overnight delivery service in the manner provided
above.
11G. Limitation of Liability and Trustee's Obligations. It is
expressly understood and agreed by each Purchaser that, except with respect to
the covenants in Section 8, this Agreement is executed by BNY not in its
corporate and individual capacity but solely as Regular Trustee under the Trust
Agreement in the exercise of the power and authority conferred and vested in it
as Regular Trustee. It is further understood and agreed that, except for a
breach of a covenant in Section 8, BNY shall not be personally liable for any
breach of any representation, warranty or covenant of the Regular Trustee or the
Trust contained herein, in the Notes or in any of the certificates delivered
hereunder and nothing herein contained shall be construed as creating any
liability on BNY in its corporate and individual capacity to make any payment or
to perform any covenant, agreement or undertaking contained herein, all such
liability being expressly waived by each Purchaser, and that each Purchaser
shall look solely to the properties and assets of the Trust for the payment of
any amounts due and payable on account of the Notes and for the payment,
performance, or other satisfaction of this Agreement and any claim against the
Regular Trustee by reason of the transactions contemplated hereby.
11
<PAGE>
11H. Descriptive Headings. The descriptive headings of the
several paragraphs of this Agreement are inserted for convenience only and do
not constitute a part of this Agreement.
11I. Governing Law. This Agreement shall be construed and
enforced in accordance with, and the rights of the parties shall be governed by,
the law of the State of Delaware without giving effect to principles of
conflicts of law.
11J. Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, and it shall not be necessary in making proof of this Agreement to
produce or account for more than one such counterpart.
12
<PAGE>
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this letter and return the same to the
Trust, whereupon this letter shall become a binding agreement between you and
the Trust.
Very truly yours,
PVNGS CAPITAL TRUST
by The Bank of New York,
as Regular Trustee
By: ________________________
Van K. Brown
Assistant Vice President
The foregoing Agreement is
hereby accepted as of the
date first above written.
PUBLIC SERVICE COMPANY
OF NEW MEXICO
By:_______________________
Mitchell J. Marzec
Treasurer
13
<PAGE>
ARTHUR
ANDERSEN
-------------------------------
October 30, 1998 Arthur Andersen LLP
-------------------------------
Suite 400
6501 Americas Parkway NE
Albuquerque, NM 87110-5372
(505) 889-4700
Public Service Company of New Mexico:
We are aware that Public Service Company of New Mexico has incorporated by
reference in its Registration Statement Nos. 33-65418, 333-03289, 333-03303, and
333-53367 its Form 10-Q for the quarter ended September 30, 1998, which includes
our report dated October 30, 1998, covering the unaudited interim financial
information contained therein. Pursuant to Regulation C of the Securities Act of
1933, that report is not considered a part of the registration statement
prepared or certified by our firm or a report prepared or certified by our firm
within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
Arthur Andersen LLP
<PAGE>
<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 September 30, 1998 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000081023
<NAME> Public Service Company of New Mexico
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,585,212
<OTHER-PROPERTY-AND-INVEST> 520,300
<TOTAL-CURRENT-ASSETS> 323,414
<TOTAL-DEFERRED-CHARGES> 159,345
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,588,271
<COMMON> 208,870
<CAPITAL-SURPLUS-PAID-IN> 465,609
<RETAINED-EARNINGS> 171,665
<TOTAL-COMMON-STOCKHOLDERS-EQ> 846,144
0
12,800
<LONG-TERM-DEBT-NET> 111,000
<SHORT-TERM-NOTES> 45,155
<LONG-TERM-NOTES-PAYABLE> 897,596
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 675,576
<TOT-CAPITALIZATION-AND-LIAB> 2,588,271
<GROSS-OPERATING-REVENUE> 833,476
<INCOME-TAX-EXPENSE> 46,618
<OTHER-OPERATING-EXPENSES> 684,726
<TOTAL-OPERATING-EXPENSES> 723,362
<OPERATING-INCOME-LOSS> 110,114
<OTHER-INCOME-NET> 3,426
<INCOME-BEFORE-INTEREST-EXPEN> 122,273
<TOTAL-INTEREST-EXPENSE> 45,559
<NET-INCOME> 67,981
440
<EARNINGS-AVAILABLE-FOR-COMM> 67,541
<COMMON-STOCK-DIVIDENDS> 23,811
<TOTAL-INTEREST-ON-BONDS> 14,162
<CASH-FLOW-OPERATIONS> 156,609
<EPS-PRIMARY> 1.62
<EPS-DILUTED> 1.60
</TABLE>
