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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998 Commission File Number 1 - 6986
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 87158
Albuquerque, New Mexico (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (505) 241-2700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $5.00 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
--------------
1965 Series, 4.58% Cumulative Preferred Stock ($100 stated
value and without sinking fund)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The total number of shares of the Company's Common Stock outstanding as of
January 31, 1999 was 41,774,083. On such date, the aggregate market value of the
voting stock held by non-affiliates of the Company, as computed by reference to
the New York Stock Exchange composite transaction closing price of $18 13/16 per
share reported by the Wall Street Journal, was $785,874,936.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference into the
indicated part of this report:
Proxy Statement to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A relating to the annual meeting of stockholders
to be held on June 8, 1999 - PART III.
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TABLE OF CONTENTS
Page
----
GLOSSARY............................................................. iv
PART I
ITEM 1. BUSINESS.................................................... 1
THE COMPANY............................................... 1
ELECTRIC OPERATIONS....................................... 1
Service Area and Customers.............................. 1
Power Sales............................................. 2
Sources of Power........................................ 3
Fuel and Water Supply................................... 5
NATURAL GAS OPERATIONS.................................... 7
Service Area and Customers.............................. 7
Natural Gas Supply...................................... 8
Natural Gas Sales....................................... 9
ENERGY SERVICES BUSINESS UNIT OPERATIONS.................. 10
RATES AND REGULATION...................................... 10
Gas Rates and Regulation................................ 11
Electric Rates and Regulation........................... 12
Proposed Rulemakings.................................... 13
ENVIRONMENTAL FACTORS..................................... 14
ITEM 2. PROPERTIES.................................................. 17
ELECTRIC.................................................. 17
Fossil-Fueled Plants.................................... 17
Nuclear Plant........................................... 18
Other Electric Properties............................... 22
NATURAL GAS............................................... 23
OTHER INFORMATION......................................... 23
ITEM 3. LEGAL PROCEEDINGS........................................... 23
PVNGS WATER SUPPLY LITIGATION............................. 23
SAN JUAN RIVER ADJUDICATION............................... 23
OTHER PROCEEDINGS......................................... 24
Republic Savings Bank ("RSB") Litigation................ 24
Purported Navajo Environmental Regulation............... 25
Nuclear Decommissioning Trust........................... 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 26
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY................. 27
ii
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS............................... 29
ITEM 6. SELECTED FINANCIAL DATA..................................... 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................... 31
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK............................................... 48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................... E-1
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY............. E-1
ITEM 11. EXECUTIVE COMPENSATION...................................... E-1
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ E-1
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. E-1
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K............................................... E-1
SIGNATURES............................................................ E-24
iii
GLOSSARY
AG........................... New Mexico Attorney General
Anaheim...................... City of Anaheim, California
APPA......................... Arizona Power Pooling Association
APS.......................... Arizona Public Service Company
BHP.......................... BHP Minerals International, Inc.
BLM.......................... Bureau of Land Management
BTU.......................... British Thermal Unit
decatherm.................... 1,000,000 BTUs
DOE.......................... United States Department of Energy
EIP.......................... Eastern Interconnection Project
El Paso...................... El Paso Electric Company
EPA.......................... United States Environmental Protection Agency
EPNG......................... El Paso Natural Gas Company
FASB......................... Financial Accounting Standards Board
Farmington................... City of Farmington, New Mexico
FERC......................... Federal Energy Regulatory Commission
Four Corners................. Four Corners Power Plant
FPPCAC....................... Fuel and Purchased Power Cost Adjustment Clause
Gathering Company............ Sunterra Gas Gathering Company, a wholly-owned
subsidiary of the Company
Kv........................... Kilovolt
KW........................... Kilowatt
KWh.......................... Kilowatt Hour
Los Alamos................... The County of Los Alamos, New Mexico
mcf.......................... Thousand cubic feet
Meadows...................... Meadows Resources, Inc., a wholly-owned
subsidiary of the Company
M-S-R........................ M-S-R Public Power Agency, a California public
power agency
MW........................... Megawatt
MWh.......................... Megawatt Hour
NMED......................... New Mexico Environment Department
NMPUC........................ New Mexico Public Utility Commission
NRC.......................... United States Nuclear Regulatory Commission
OCD.......................... New Mexico Oil Conservation Division
PGAC......................... PNMGS' Purchased Gas Adjustment Clause
PNMGS........................ Public Service Company of New Mexico Gas
Services, a division of the Company
PRC.......................... New Mexico Public Regulation Commission
Processing Company........... Sunterra Gas Processing Company, a wholly-owned
subsidiary of the Company
PVNGS........................ Palo Verde Nuclear Generating Station
RCRA......................... Resource Conservation and Recovery Act
Reeves Station............... Reeves Generating Station
iv
Salt River Project........... Salt River Project Agricultural Improvement and
Power District
SCE.......................... Southern California Edison Company
SCPPA........................ Southern California Public Power Authority
SDG&E........................ San Diego Gas and Electric Company
SEC.......................... Securities and Exchange Commission
SJCC......................... San Juan Coal Company
SJGS......................... San Juan Generating Station
SPS.......................... Southwestern Public Service Company
TNP.......................... Texas-New Mexico Power Company
throughput................... Volumes of gas delivered, whether or not owned
by PNMGS
Tucson....................... Tucson Electric Power Company
UAMPS........................ Utah Associated Municipal Power Systems
USBR......................... United States Bureau of Reclamation
USEC......................... United States Enrichment Corporation
Williams..................... Williams Gas Processing-Blanco, Inc., a
subsidiary of the Williams Field Services
Group, Inc., of Tulsa, Oklahoma
v
PART I
ITEM 1. BUSINESS
THE COMPANY
Public Service Company of New Mexico (the "Company") was incorporated in
the State of New Mexico in 1917 and has its principal offices at Alvarado
Square, Albuquerque, New Mexico 87158 (telephone number 505-241-2700). The
Company is a public utility primarily engaged in the generation, transmission,
distribution and sale of electricity and in the transmission, distribution and
sale of natural gas within the State of New Mexico. In addition, in pursuing new
business opportunities, the Company is focusing on energy and utility related
activities under its Energy Services Business Unit. The Company is also
operating the City of Santa Fe's water system. (See PART II, ITEM 7. -
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - OVERVIEW Competitive Strategy".)
The total population of the area served by one or more of the Company's
utility services is estimated to be approximately 1.3 million, of which 52.9%
live in the greater Albuquerque area.
For the year ended December 31, 1998, the Company derived 76.5% of its
operating revenues from electric operations, 23.4% from natural gas operations
and .1% from energy services operations.
As of December 31, 1998, the Company employed 2,717 persons.
Financial information relating to amounts of revenue, net income and
total assets of the Company's reportable segments is contained in note 13 of the
notes to consolidated financial statements.
ELECTRIC OPERATIONS
Service Area and Customers
The Company's electric operations serve four principal markets. Sales to
retail customers and sales to firm-requirements wholesale customers, sometimes
referred to collectively as "system" sales, comprise two of these markets. The
third market consists of other contracted sales to utilities for which the
Company commits to deliver a specified amount of capacity (measured in MW) or
energy (measured in MWh) over a given period of time. The fourth market consists
of economy energy sales made on an hourly basis at fluctuating, spot-market
rates. Sales to the third and fourth markets are sometimes referred to
collectively as "off-system" sales.
The Company provides retail electric service to a large area of north
central New Mexico, including the cities of Albuquerque, Santa Fe, Rio Rancho,
Las Vegas, Belen and Bernalillo. The Company also provides retail electric
service to Deming in southwestern New Mexico and to Clayton in northeastern New
Mexico. As of December 31, 1998, approximately 358,000 retail electric customers
were served by the Company, the largest of which accounted for approximately
3.4% of the Company's total electric revenues for the year ended December 31,
1998.
1
The Company holds 20 long-term, non-exclusive franchise agreements for
its electric retail operations, expiring between July 1, 1999, and November
2028. These franchises are agreements that provide the Company access to public
rights-of-way for placement of the Company's electric facilities. The City of
Albuquerque (the "COA"), Bernalillo County and the Town of Cochiti Lake
franchises expired in 1992, 1997 and 1998, respectively. Customers in the area
covered by the expired franchises represent approximately 35.1%, 7.7% and .02%,
respectively, of the Company's 1998 total electric operating revenues, and no
other franchise area represents more than 5.4%. The Company continues to collect
and pay franchise fees to both the COA and the Town of Cochiti Lake. The Company
currently does not pay franchise fees to Bernalillo County. The Company remains
obligated under state law to provide service to customers in the franchise area
even in the absence of a franchise agreement.
Power Sales
For the years 1994 through 1998, retail KWh sales have grown at a
compound annual rate of approximately 3.2%. The Company's system and off-system
sales (revenues and energy consumption) and system peak demands in summer and
winter are shown in the following tables:
ELECTRIC SALES BY MARKET
(Thousands of dollars)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Retail.............................. $536,417 $519,504 $507,821 $485,568 $506,286
Firm-requirements wholesale......... $ 10,708 $ 10,690 $ 12,359 $ 20,282 $ 22,296
Other contracted off-system sales... $142,115 $118,876 $ 86,689 $ 43,158* $ 54,862*
Economy energy sales................ $122,156 $ 55,768 $ 22,281 $ 17,509* $ 19,663*
* Due to the provision for the loss associated with the M-S-R contingent
power purchase contract recognized in 1992, revenues from other
contracted off-system sales and economy energy sales were reduced by a
total of $7.3 million and $25.0 million in 1995 and 1994, respectively.
ELECTRIC SALES BY MARKET
(Megawatt hours)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Retail.............................. 6,739,874 6,534,899 6,406,296 6,029,365 5,953,151
Firm-requirements wholesale......... 278,615 278,727 282,534 447,629 489,182
Other contracted off-system sales... 4,033,931 3,790,081 2,928,321 594,367 1,403,480
Economy energy sales................ 4,469,769 2,716,835 1,364,365 1,548,517 1,469,271
SYSTEM PEAK DEMAND*
(Megawatts)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Summer............................ 1,313 1,209 1,217 1,247 1,189
Winter............................ 1,135 1,142 1,111 1,076 1,040
*System peak demand relates to retail and firm-requirements wholesale
customers only.
2
The Company's wholesale power marketing area continues to increase its
trading activities. During 1998 and 1997, the Company's sales in the off-system
markets accounted for approximately 54.8% and 48.9%, respectively, of its total
KWh sales and approximately 32.6% and 24.8%, respectively, of its total revenues
from energy sales. Of the total off-system sales made in 1998, 67% were
transacted through purchases for resale as compared to 47% in 1997. However, the
Company continues to be committed to increasing its utilization of its major
generation capacity at SJGS, Four Corners and PVNGS. Capacity factors for these
generating stations were 81.8%, 87.2% and 92.5%, respectively, in 1998, as
compared to 81.4%, 74.8% and 90.6%, respectively, in 1997. During 1998, the
Company's major off-system sales contracts in effect were with SDG&E and APPA.
The SDG&E contract requires SDG&E to purchase 100 MW from the Company
through April 2001. SDG&E has filed four separate complaints with the FERC
against the Company, alleging that certain charges under the 1985 power purchase
agreement were unjust, unreasonable and unduly discriminatory. See PART II, ITEM
7. - "MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - OTHER ISSUES FACING THE COMPANY - SAN DIEGO GAS AND ELECTRIC
("SDG&E") COMPLAINTS".
The APPA contract requires APPA to purchase varying amounts of power
from the Company through May 2008 and allows APPA to make adjustments to the
purchase amounts subject to certain notice provisions. APPA provided notice that
it was invoking its option to reduce its power demand in 1998. This resulted in
a peak demand in 1998 of 89 MW. APPA invoked the same option to reduce its peak
demand in 1999 to 74 MW.
The Company furnished firm-requirements wholesale power in New Mexico in
1998 to the City of Gallup and TNP. The Company is committed to provide service
to the City of Gallup through April 2003. Average monthly demands under the City
of Gallup contract for 1998 were approximately 27 MW. During 1998, TNP purchased
15 MW. Service to TNP terminated December 31, 1998. No firm-requirements
wholesale customer accounted for more than 1.0% of the Company's total electric
operating revenues for the year ended December 31, 1998.
Sources of Power
As of December 31, 1998, the total net generation capacity of facilities
owned or leased by the Company was 1,506 MW. The Company anticipates an increase
of 15 MW in the Company's share of capacity at the SJGS during 1999 as a result
of a new, more efficient SO2 removal system.
In addition to generation capacity, the Company purchases power in the
market. The Company has a power purchase contract with SPS which originally
provided for the purchase of up to 200 MW, expiring in May 2011. The Company may
reduce its purchases from SPS by 25 MW annually upon three years' notice. The
Company provided such notice to reduce the purchase by 25 MW in 1999 and by an
additional 25 MW in 2000. The Company has 39 MW of contingent capacity obtained
from El Paso under a transmission capacity for generation capacity trade
arrangement that increases up to 70 MW from 1999 through 2003. In addition, the
Company is interconnected with various utilities for economy interchanges and
mutual assistance in emergencies. The Company has been actively trading in the
wholesale power market and has entered into and anticipates that it will
continue to enter into power purchases to accommodate its trading activity.
3
The Company anticipates the need for approximately 100 to 200 MW of
additional capacity in the 1999 through 2000 timeframe. To meet projected
capacity needs, in 1996, the Company entered into a long-term power purchase
agreement ("PPA") with Cobisa-Person Limited Partnership ("PLP") to purchase
approximately 100 MW of unit contingent peaking capacity from a gas turbine
generating unit for a period of 20 years, with an option to renew for an
additional five years. In September 1997, the NMPUC approved the Company's and
PLP's applications for the project. In December 1997, PLP also received FERC
approval for "exempt wholesale generator" status with respect to the gas turbine
generating unit. In March 1998, the Company and PLP executed amendments to the
PPA and to the associated site lease and interconnection agreement, and executed
a new water use lease. The PPA was amended to change the maximum capacity the
Company was obligated to take to 132 MW and to change the commercial operation
date from May 1999 to May 2000. The gas turbine generating unit will be
constructed and operated by PLP and will be located on the Company's retired
Person Generating Station site in Albuquerque, New Mexico. The site for the
generating unit was chosen, in part, to provide needed benefits to the Company's
constrained transmission system. Primary fuel for the gas turbine generating
unit will be natural gas, which will be provided by the Company. In addition,
the unit will have the capability to utilize low sulfur fuel oil in the event
natural gas is not available.
In the September 1997 NMPUC order, the NMPUC approved the project
application and a stipulated settlement agreement ("Stipulation") which had been
entered into earlier among the Company, PLP and the NMPUC staff to resolve
certain issues raised in this proceeding. The Stipulation included, among other
things, a provision wherein the Company committed, in cooperation with the NMPUC
staff, to the development and evaluation of a request for proposal ("RFP") for
the purchase of approximately 5 MW of capacity from solar generation resources.
The Company was not obligated to build such a unit or commit to such a solar
power purchase agreement prior to the NMPUC approval of a full-cost recovery
mechanism.
By order dated October 27, 1998, the NMPUC approved the Company's
implementation of a rate rider to collect a 0.5 percent surcharge on all retail
electric bills to pay for solar and other renewable resource projects. Under the
NMPUC's order, one-half of the monies collected under the rider will be used to
purchase or acquire resources the Company had pursued through the solar RFP
process, while the other half of the monies will be used for other renewable
resource projects.
In November 1998, the NMPUC adopted a rule that establishes a "renewable
energy development program" and requires New Mexico utilities to collect
voluntary contributions to a renewable energy fund from their customers. The
stated purpose of the rule is to support research, development, demonstration
and deployment of renewable energy resources. Funds collected by each utility
are to be spent by it on projects approved by the PRC based upon the
recommendations of a Renewable Energy Advisory Board which will be appointed by
the PRC. The Company has requested the PRC to exempt it from the rule on the
grounds that the rule is more than satisfied by the renewable resource program
and 0.5 percent surcharge specifically approved for the Company by the NMPUC in
October 1998. The Company's request is pending.
In addition to the long-term power purchase contract with the PLP, the
Company is pursuing other options to ensure its additional capacity needs are
met.
4
Fuel and Water Supply
The percentages of the Company's generation of electricity (on the basis
of KWh) fueled by coal, nuclear fuel and gas and oil, and the average costs to
the Company of those fuels (in cents per million BTU), during the past five
years were as follows:
Coal Nuclear Gas and Oil
-------------------- -------------------- --------------------
Percent of Average Percent of Average Percent of Average
---------- ------- ---------- ------- ---------- -------
1994...... 72.0 162.9 27.8 58.5 0.2 321.7
1995...... 67.9 168.3 31.9 49.1 0.2 242.2
1996...... 68.9 159.3 30.4 49.7 0.7 238.2
1997...... 68.1 152.7 31.1 48.3 0.8 326.6
1998...... 68.2 155.3 30.8 46.5 1.0 324.6
The estimated generation mix for 1999 is 69.0% coal, 30.0% nuclear and
1.0% gas and oil. Due to locally available natural gas and oil supplies, the
utilization of locally available coal deposits and the generally abundant supply
of nuclear fuel, the Company believes that adequate sources of fuel are
available for its generating stations.
Coal
The coal requirements for the SJGS are being supplied by SJCC, a
wholly-owned subsidiary of BHP, from certain Federal, state and private coal
leases under a Coal Sales Agreement, pursuant to which SJCC will supply
processed coal for operation of the SJGS until 2017. BHP guaranteed the
obligations of SJCC under the agreement, which contemplates the delivery of
approximately 100 million tons of coal during its remaining term. Such amount
would supply substantially all the requirements of the SJGS through
approximately 2017. The primary sources of coal for current operations are a
mine adjacent to the SJGS and a mine located approximately 25 miles northeast of
the SJGS in the La Plata area of northwestern New Mexico. The Coal Sales
Agreement contemplated that additional coal resources would be required during
the remaining term of the agreement. The Company is currently in discussions
with SJCC regarding alternatives for coal resource selection. The average cost
of fuel, including ash disposal and land reclamation costs, for the SJGS for the
years 1996, 1997 and 1998 was 167.0 cents, 164.2 cents and 168.8 cents,
respectively, per million BTU ($32.18, $31.59 and $32.16 per ton, respectively).
For other information related to coal requirements, see PART II, ITEM 7.
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - OTHER ISSUES FACING THE COMPANY - COAL FUEL SUPPLY".
Four Corners is supplied with coal under a fuel agreement between the
owners and BHP, under which BHP agreed to supply all the coal requirements for
the life of the plant. BHP holds a long-term coal mining lease, with options for
renewal, from the Navajo Nation and operates a surface mine adjacent to Four
Corners with the coal supply expected to be sufficient to supply the units for
their estimated useful lives. The average cost of fuel, including ash disposal
and land reclamation costs, for the years 1996, 1997 and 1998 at Four Corners
was 125.9 cents, 100.1 cents and 99.2 cents, respectively, per million BTU
($22.90 , $17.77 and $17.64 per ton, respectively). The reductions in the
average cost of fuel for 1997 and 1998 reflect the settlement of certain issues
between APS, the operating agent, and the Navajo Nation regarding the
computation of royalties due on the sales of coal and possessory interest taxes
paid by the Four Corners coal supplier.
5
Natural Gas
The natural gas used as fuel for the Company's Albuquerque electric
generating plant (Reeves Station) is delivered by PNMGS. (See "NATURAL GAS
OPERATIONS".) In addition to rate changes under filed tariffs, the Company's
cost of gas increases or decreases according to the average cost of the gas
supply.
Nuclear Fuel
The fuel cycle for PVNGS is comprised of the following stages: (1) the
mining and milling of uranium ore to produce uranium concentrates; (2) the
conversion of uranium concentrates to uranium hexafluoride; (3) the enrichment
of uranium hexafluoride; (4) the fabrication of fuel assemblies; (5) the
utilization of fuel assemblies in reactors; and (6) the storage of spent fuel
and the disposal thereof. The Company made arrangements through contract
flexibilities to obtain quantities of uranium concentrates anticipated to be
sufficient to meet its share of uranium concentrates requirements through 2000.
Existing contracts and options could be utilized to meet 80% of such
requirements in 2001 and 2002 and 50% of requirements from 2003 through 2007.
Spot purchases in the uranium market will be made, as appropriate, in lieu of
any uranium that might be obtained through contract flexibilities and options.
The Company understands that the other PVNGS participants have made comparable
arrangements for their uranium concentrates requirements.
The PVNGS participants, including the Company, contracted for all
conversion services required with options through 1999 and for up to 60% through
2002. The PVNGS participants, including the Company, contracted for all
enrichment services required for 1999 under an existing contract with USEC and a
new contract for enrichment services with Urenco Limited. Under the
arrangements, USEC will provide 80% of the requirements and Urenco Limited will
provide 20% of the requirements through September 2002, with an option with USEC
to renew the service contract through September 2007. In addition, existing
contracts will provide fuel assembly fabrication services until at least 2003
for each PVNGS unit, and through contract options, approximately fifteen
additional years are available.
Water Supply
Water for Four Corners and SJGS is obtained from the San Juan River.
(See ITEM 3. - "LEGAL PROCEEDINGS - SAN JUAN RIVER ADJUDICATION".) BHP holds
rights to San Juan River water and committed a portion of such rights to Four
Corners through the life of the project. The Company and Tucson have a contract
with the USBR ("USBR Contract") for consumption of 16,200 acre feet of water per
year for the SJGS, which contract expires in 2005, and in addition, the Company
was granted the authority to consume 8,000 acre feet of water per year under a
state permit that is held by BHP. The Company is of the opinion that sufficient
water is under contract for the SJGS through 2005.
In January 1993, the U.S. Fish and Wildlife Service proposed a portion
of the San Juan River as critical habitat for two fish species. This designation
may impact uses of the river and its flood plains and will require certain
analysis under the Endangered Species Act of 1973 of all significant Federal
actions. Renewal of the SJGS water contract is considered a significant Federal
action.
6
Due to extensive lead times required to renew the water rights contract,
the Company formally initiated the renewal and extension process for requesting
rights through the year 2025. The Company is actively conducting an
environmental assessment with the USBR and a biological assessment with the U.S.
Fish and Wildlife Service. These studies are required by the Federal agencies
before the existing water contract can be renewed. In June 1996, the Navajo
Nation requested that the USBR withhold renewal of the USBR Contract due to
water shortages of the Navajo Indian Irrigation Project. Other tribes in the
Four Corners area also voiced concern to the USBR about the renewal by the
Company of the USBR Contract.
Although discussions are continuing with the USBR, the status of
discussions with the Navajo Nation is uncertain due to transition in the tribal
government as the result of the last tribal elections. The Company is actively
involved in the San Juan River Recovery Implementation Program to mitigate any
concerns with the taking of the negotiated water supply from a river that
contains endangered species and critical habitat.
In July 1997, the Company was notified by the USBR that the USBR had
received from the Solicitor of the U.S. Department of Interior a memorandum
opinion concluding that the Company's contract extension with the USBR would
require Congressional approval pursuant to Section 11 of the Navajo Indian
Irrigation Project and San Juan-Chama Project Authorization Act of 1962. The
Company intends to pursue such approval once the contract is negotiated with the
USBR.
Sewage effluent used for cooling purposes in the operation of the PVNGS
units is obtained under contracts with certain municipalities in the area. The
contracted quantity of effluent exceeds the amount required for the three PVNGS
units. The validity of these effluent contracts is the subject of litigation in
state court. (See ITEM 3. - "LEGAL PROCEEDINGS - PVNGS WATER SUPPLY
LITIGATION".)
NATURAL GAS OPERATIONS
Service Area and Customers
The Company's gas operating division, PNMGS, distributes natural gas to
most of the major communities in New Mexico, including Albuquerque and Santa Fe,
serving approximately 419,000 customers as of December 31, 1998. The Albuquerque
metropolitan area accounts for approximately 55.5% of the total sales-service
customers. PNMGS holds long-term, non-exclusive franchises with varying
expiration dates in all incorporated communities requiring franchise agreements
except for the COA. This franchise with the COA expired on January 28, 1998. The
Company is currently engaged in discussions regarding renewal of the franchise.
PNMGS' customer base includes both sales-service customers and
transportation-service customers. Sales-service customers purchase natural gas
and receive transportation and delivery services from PNMGS for which PNMGS
receives both cost-of-gas and cost-of-service revenues. Cost-of-gas revenues
collected from on-system sales-service customers are recovered in accordance
with PRC rules and regulations and do not affect the net earnings of the
Company. Additionally, PNMGS makes occasional gas sales to off-system customers.
Off-system sales deliveries generally occur at interstate pipeline interconnects
with PNMGS' system. Transportation-service customers, who procure gas
independently of PNMGS and contract with PNMGS for transportation and related
services, provide PNMGS with cost-of-service revenues only. Transportation
services are provided to gas marketers, producers and end users for delivery to
locations throughout the PNMGS distribution systems, as well as for delivery to
interstate pipelines. PNMGS provided gas transportation deliveries to
approximately 1,266 gas marketers, producers and end users during 1998.
7
For the twelve months ended December 31, 1998, PNMGS had throughput of
approximately 85.7 million decatherms, including sales of 49.2 million
decatherms to both sales-service customers and off-system customers. No single
sales-service customer accounted for more than 2.4% of PNMGS' therm sales in
1998. During 1998, approximately 42.5% of the PNMGS' total gas throughput was
related to transportation gas deliveries. PNMGS' transportation rates are
unbundled, and transportation customers only pay for the service they receive.
PNMGS' total operating revenues for the year ended December 31, 1998, were
approximately $256.0 million. Cost-of-gas revenues, received from sales-service
and off-system customers, accounted for approximately 52.6% of PNMGS' total
operating revenues. Since a major portion of PNMGS' load is related to heating,
levels of therm sales are affected by weather. Approximately 45.8% of PNMGS'
total therm sales in 1998 occurred in the months of January, February, November
and December.
Natural Gas Supply
PNMGS obtains its supply of natural gas primarily from sources within
New Mexico pursuant to contracts with producers and marketers. These contracts
are generally sufficient to meet PNMGS peak-day demand. PNMGS serves certain
cities which depend on EPNG or Transwestern Pipeline Company for transportation
of gas supplies. Because these cities are not directly connected to PNMGS
transmission facilities, gas transported by these companies is the sole supply
source for those cities. Such transportation is regulated by FERC. As a result
of FERC Order 636, PNMGS' options for transporting gas to such cities and other
portions of its distribution system have increased.
8
Natural Gas Sales
The following table shows gas throughput by customer class*:
GAS THROUGHPUT
(Millions of decatherms)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Residential............ 30.3 30.7 27.4 25.9 27.1
Commercial............. 10.4 10.6 9.3 8.9 9.8
Industrial............. 1.5 1.3 2.1 0.7 0.8
Public authorities..... 3.4 4.2 2.6 2.4 2.5
Irrigation............. 1.9 1.6 1.4 1.2 1.3
Sales for resale....... 1.2 1.2 0.8 1.3 0.7
Unbilled............... (1.3) (0.2) 1.4 (1.8) (0.3)
Transportation**....... 36.4 34.0 47.1 69.8 90.2
Off-system sales....... 1.9 1.2 8.0 1.2 -
---- ---- ----- ----- -----
85.7 84.6 100.1 109.6 132.1
==== ==== ===== ===== =====
The following table shows gas revenues by customer class*:
GAS REVENUES
(Thousands of dollars)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Residential............... $161,153 $187,563 $129,911 $125,290 $149,439
Commercial................ 42,680 50,502 33,022 32,328 42,725
Industrial................ 4,887 4,536 5,179 1,873 2,905
Public authorities........ 12,610 17,577 8,018 7,939 9,969
Irrigation................ 5,780 5,041 3,252 3,077 4,061
Sales for resale.......... 3,596 4,465 2,106 3,114 2,462
Unbilled.................. (955) (2,172) 2,678 (2,430) 267
Transportation**.......... 13,464 14,172 17,215 22,172 27,592
Liquids................... 1,463 4,451 7,608 13,414 16,090
Processing fees........... - - - 5,180 10,638
Off-system sales.......... 3,816 1,926 14,352 1,927 -
Other..................... 7,481 6,708 3,960 4,101 3,362
-------- -------- -------- -------- --------
$255,975 $294,769 $227,301 $217,985 $269,510
======== ======== ======== ======== ========
* On June 30, 1995, the Company sold substantially all of the gas gathering
and processing assets of the Company and its gas subsidiaries. The above
information reflects the revenues and throughput of the gathering company
and processing company through this date.
** Customer-owned gas.
9
Energy Services Business Unit Operations
The Company has been conducting energy services activities under its
Energy Services Business Unit. This business unit has initiated several business
lines to position the Company for an increasingly competitive market. The Energy
Services Business Unit consists of Energy Partners, Pathways Integration
formerly known as Water Services and Phaser Advanced Metering Services. Energy
Partners provides energy management solutions that assist customers in
implementing cost effective procurement, distribution and consumption of energy.
Pathways Integration is seeking opportunities in infrastructure management with
a specific focus on the municipal and Native American markets. The Company
currently has a contract with the City of Santa Fe to operate the Santa Fe water
system through the year 2001. Phaser Advanced Metering Services provides
electric meter installation, testing service and consulting expertise to energy
service providers as well as commercial and industrial customers. On August 4,
1998, the Company adopted a plan to discontinue the natural gas trading
operations of its Energy Marketing business segment of the Energy Services
Business Unit. (See PART II, ITEM 7. - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - RESULTS OF OPERATIONS
Discontinued Operations".) The Energy Services Business Unit is also pursuing
energy and transmission business opportunities in Mexico.
In December 1998, the NMPUC issued a final order approving the Company's
request to form and invest in three wholly-owned subsidiaries. Under the final
order, the Company is allowed to invest a maximum of $50 million in the three
subsidiaries, subject to the availability of the Company's retained earnings and
to enter into reciprocal loan agreements for up to $30 million. While the
terminology of "available unappropriated retained earnings" quoted in the order
is subject to interpretation, the Company believes it currently has sufficient
retained earnings to make the investments.
If the Electric Industry Restructuring Act of 1999 is passed (see PART
II, ITEM 7. - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - OTHER ISSUES FACING THE COMPANY - ELECTRIC INDUSTRY
RESTRUCTURING ACT OF 1999"), the Company is planning to seek shareholder and
other regulatory approvals to form a holding company; however, the Company still
intends to move forward during the interim period to form and invest in the
three wholly-owned subsidiaries to achieve competitive business strategies.
RATES AND REGULATION
The Company is subject to the jurisdiction of the PRC, the successor of
the NMPUC effective January 1, 1999, with respect to its retail electric and gas
rates, service, accounting, issuance of securities, construction of major new
generation and transmission facilities and other matters. The FERC has
jurisdiction over rates and other matters related to wholesale electric sales.
10
Gas Rates and Regulation
The 1995 Gas Rate Case Appeal
In 1995, the Company filed a request for a $13.3 million increase in its
retail natural gas sales and transportation rates. On February 13, 1997, the
NMPUC issued a final order in the gas rate case, ordering a rate decrease of
approximately $6.9 million. The Company filed an appeal with the Supreme Court
regarding the NMPUC's final order. The Company is awaiting a decision by the
Supreme Court, but is unable to predict the timing or the ultimate outcome.
While the appeal is pending, the NMPUC's final order remains in effect.
The 1997 Gas Rate Case
In October 1997, the Company filed a gas rate case in compliance with a
NMPUC order. In April 1998, an uncontested stipulation settling the 1997 gas
rate case was filed with the NMPUC. After a hearing on the stipulation held in
May 1998, the NMPUC issued a final order in August 1998, accepting the
stipulation with certain modifications. 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 a lower volumetric cost of service charge). This option program became
effective with the December 1998 billing cycle. Subsequent to the NMPUC's denial
of the AG's request for rehearing, the AG appealed the order to the Supreme
Court in October 1998. However, the AG did not request a stay and therefore the
NMPUC's order remains in effect.
PGAC Continuation Filing
The Company's retail gas rate tariffs contain a PGAC that provides
timely recovery for the cost of gas purchased for resale to its sales-service
customers. On November 24, 1997, in a proceeding related to the Company's 1993
PGAC continuation filing, the NMPUC issued a final order approving continued use
of the Company's PGAC. As part of this order, the Company is required to make
its next PGAC continuation filing no later than November 23, 1999.
Levelized PGAC
In July 1997, the Company submitted a request with the NMPUC seeking
approval to modify the method by which it recovers its gas cost through the
PGAC. The new method would enable the Company to levelize the price it charges
its customers during the winter heating season. In November 1997, the NMPUC
approved the proposed "levelized" PGAC. The order allowed the Company to
implement the levelized PGAC mechanism effective December 1, 1997, and granted
the Company authorization to include the cost of hedging transactions for
recovery through its PGAC.
NMPUC Order on the Cost of Gas Case
The NMPUC issued a final order in a proceeding that commenced in
December 1996 and related to an investigation initiated because of the
significant increase in the cost of gas the Company billed its sales-service
customers. In its initial order, the NMPUC disallowed collection of $1.6 million
of gas costs and imposed but suspended a civil penalty of $2.2 million due to an
allegedly incorrect gas cost factor filed by the Company which the order found
misled the NMPUC. Subsequently, the NMPUC granted a request for rehearing filed
by the Company. In September 1998, the NMPUC issued its final order,
withdrawing: (i) the portion of the initial order which had stated that the
Company deliberately misled the NMPUC; (ii) the imposition of the $2.2 million
civil penalty; and (iii) the disallowance of the $1.6 million of gas costs
imposed by the initial order.
11
Gas Choice
In February 1997, the NMPUC ordered the Company to make a filing
addressing the terms and conditions under which the Company would consider
exiting the merchant function (the sale of gas to its sales-service customers).
Through the use of working groups, a stipulation was filed with the NMPUC which
outlined interim measures, known as the Gas Choice Program, to facilitate the
choice of suppliers by small commercial and residential customers for the winter
of 1997-98. This stipulation was approved in August 1997. Modifications to the
program, including the ability to recover implementation costs, were
incorporated in a supplemental stipulation approved by the NMPUC in July 1998.
Electric Rates and Regulation
For electric rates and regulation regarding "Electric Rate Case",
"Residential Electric, Incorporated ("REI"), "City of Albuquerque ("COA") Retail
Pilot Load Aggregation Program" and "City of Gallup ("Gallup") Complaint", see
PART II, ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - OTHER ISSUES FACING THE COMPANY - NMPUC REGULATORY
ISSUES".
Fossil-Fueled Plant Decommissioning Costs
The Company's six owned or partially owned, in service and retired,
fossil-fueled generating stations are expected to incur dismantling and
reclamation costs as they are decommissioned. The Company's share of
decommissioning costs for all of its fossil-fueled generating stations is
projected to be approximately $153.5 million stated in 1998 dollars, including
approximately $24.0 million (of which $15.5 million has already been expended)
for Person, Prager and Santa Fe Stations which have been retired. The Company is
currently recovering estimated decommissioning costs for its in-service
fossil-fueled generating facilities through rates charged to its PRC retail
customers.
New Mexico Industrial Energy Consumers ("NMIEC")
In April 1997, NMIEC filed a petition for declaratory order with the
NMPUC. In its petition, NMIEC stated that the Company interrupted service to
NMIEC members taking service under the Experimental Incremental Interruptible
Power Rate ("EIIPR") during off-peak periods and such interruptions violate the
terms of the EIIPR. The interruptions resulted from a scheduled maintenance for
the Company's 345 kV line connected to Four Corners. NMIEC alleges that its
members have suffered economic harm from losses in production due to such
interruptions. The petition requests, among other things: (i) clarification of
the EIIPR to determine that EIIPR customers are entitled to be treated the same
as all other customers with similar consumption when system emergency
curtailments occur during the off-peak hours; (ii) determination that the
Company's practice of interrupting EIIPR customers during off-peak hours is
discriminatory; and (iii) the Company to discontinue such practice of
interrupting EIIPR customers. The Company, in a filing with the NMPUC, stated
that it unintentionally misapplied the tariff and as a result, filed an
amendment to its EIIPR tariff to clarify the language regarding off-peak
interruptions. The PRC has not issued a ruling on NMIEC's petition.
12
Independent System Operator ("ISO")
In January 1998, the Company entered into a development agreement with
other transmission service providers and users to form an ISO in the Southwest.
The development agreement initially had a one year term, since extended to
December 31, 1999. The development agreement calls for the development to be
separated into two phases. The first phase will define the operating, pricing,
planning and legal parameters of the ISO. The second phase will develop the
by-laws, articles of incorporation and various tariffs and agreements required.
Over fifty entities are participating in the development process including
investor owned utilities, generation and transmission cooperatives, government
entities, private corporations and other interested groups. FERC Order 888,
issued in 1996, encourages utilities to investigate the formation of such ISOs
and provides criteria under which the formation, operation and governance of
ISOs would be reviewed.
The proposed ISO, named the Desert Southwest Transmission and
Reliability operator ("Desert STAR"), is envisioned to include the following
functions: (i) transmission security monitoring; (ii) handling of transmission
service reservations, transmission service scheduling and accounting and
managing relief of congestion of the transmission grid; (iii) procurement of
ancillary services required for transmission system operation; and (iv)
operation of a grid-wide Open Access Same-time Information System. Desert STAR
would be governed by an independent board. The Company is currently unable to
predict the ultimate timing of the formation or the ultimate outcome of the
proposed ISO.
Proposed Rulemakings
Net Metering Rule
In September 1998, the NMPUC issued a notice of proposed rulemaking
seeking comments on a "net metering" rule. "Net metering" refers to the
measurement of the difference between the electricity that is supplied by a
utility and the electricity that is generated by a customer's generator and fed
back into the utility's system. The stated purpose of the proposed net metering
rule was to actively promote the use of small-scale, customer-owned and other
renewable energy resources, distributed generation and alternative technology
energy resources and facilities. Comments on the proposed rule were submitted by
numerous parties, including the Company. On November 30, 1998, the NMPUC
promulgated a net metering rule as NMPUC Rule 571. On December 31, 1998, the
NMPUC denied the motions for rehearing filed by the Company and other parties,
but limited the application of the rule to customer generation resources of up
to one megawatt. On January 8, 1999, the Company and other parties refiled their
motions for rehearing with the PRC. On January 12, 1999, the PRC granted the
motions for rehearing and suspended Rule 571, effective immediately. A hearing
has been scheduled for April 19, 1999, to receive oral arguments.
Renewable Resources Rule
In September 1998, the NMPUC issued a notice of proposed rulemaking
regarding a "renewable energy fund" rule. The stated purpose of the rule was to
support research, development, demonstration and deployment of renewable energy
resources by requiring all utilities to bill their electric customers a 0.5
percent surcharge on their electric bills and also by allowing customers to make
voluntary contributions to a renewable energy fund. Comments on the proposed
rule were submitted by numerous parties, including the Company. On November 24,
13
1998, the NMPUC promulgated a "renewable energy development program" as NMPUC
Rule 572. Rule 572 differed materially from the originally proposed rule in that
it was limited solely to the collection of voluntary contributions. No parties
appealed the promulgation of Rule 572 and the rule is currently in effect.
On February 10, 1999, the Company filed with the PRC an application for a
variance from the voluntary collection requirements of Rule 572. The basis for
the variance request was that the Company already has in place a renewable
energy resource program that is as good as or better than the renewable energy
development program contained in Rule 572 (See "Sources of Power" above.) The
Company's application for a variance is pending at this time.
ENVIRONMENTAL FACTORS
The Company, in common with other electric and gas utilities, is subject
to stringent regulations for protection of the environment by local, state,
Federal and tribal authorities. In addition, PVNGS is subject to the
jurisdiction of the NRC, which has authority to issue permits and licenses and
to regulate nuclear facilities in order to protect the health and safety of the
public from radioactive hazards and to conduct environmental reviews pursuant to
the National Environmental Policy Act. The Company believes that it is in
compliance, in all material respects, with the environmental laws. The Company
does not currently expect that material expenditures for environmental control
facilities will be required to meet environmental regulations in 1999 and 2000.
However, in order to achieve operational efficiencies, the Company began a
retrofit environmental project at SJGS in 1997. This project was completed in
January 1999 and cost the Company approximately $40 million.
The Clean Air Act
The Clean Air Act Amendments of 1990 (the "Act") impose stringent limits
on emissions of sulfur dioxide and nitrogen oxides from fossil-fueled electric
generating plants. The Act is intended to reduce air contamination from every
sizeable source of air pollution in the nation. Electric utilities with
fossil-fueled generating units will be affected particularly by the section of
the Act which deals with acid rain. To comply with the Act, many utilities will
be faced with installing expensive sulfur dioxide removal equipment, securing
low sulfur coal, buying sulfur dioxide emission allowances, or a combination of
these. Due to the existing air pollution control equipment on the coal-fired
SJGS and Four Corners, the Company believes that it will not be faced with any
material capital expenditures in order to comply with the acid rain provisions
(both sulfur dioxide and nitrogen dioxide) of the Act. SJGS and Four Corners
have installed flow monitoring equipment and have completed certification
testing of their continuous emission monitoring equipment. Under Title V of the
Act, the Company is required to obtain operating permits for its coal- and
gas-fired generating units and to pay annual fees associated with the operating
permit program. The New Mexico operating permit program was approved by the EPA
in November 1994. The Company received operating permits for SJGS and Reeves
Station in August 1998 and March 1998, respectively.
The Act established the Grand Canyon Visibility Transport Commission
("Commission") and charged it with assessing adverse impacts on visibility at
the Grand Canyon. The Commission broadened its scope to assess visibility
impairment in mandatory Class I areas (parks and wilderness areas) located in
the Colorado Plateau. The Commission submitted its findings and recommendations
to the EPA in June 1996.
14
The Commission's recommendations regarding stationary sources are to:
(i) implement existing Clean Air Act requirements through the year 2000; (ii)
establish stationary source emission targets as regulatory triggers; (iii)
develop a plan for allocating trading credits under a regulatory program
emissions cap; (iv) review compliance with targets and establish incentives; (v)
complete source attribution studies; and (vi) develop an improved monitoring and
accounting system.
The Commission did not recommend any additional emission reductions for
point sources. The recommendations include monitoring the impact of existing
Clean Air Act requirements on emission reductions and the resulting effect on
visibility, setting regional targets for SO2 emissions from stationary sources
for the year 2000 and developing a regulatory program to implement if the
targets are exceeded. The regulatory program will include a market-based trading
of emissions allowances. The Western Regional Air Partnership ("WRAP") has been
established as the follow-up organization to the Commission and has been
directed to implement the Commission recommendations. Currently, the WRAP is
actively working to implement the recommendations. The targets and the
regulatory program have not yet been developed; however, the Company does not
expect a material adverse effect on the Company's financial condition or results
of operations.
In a related matter, the EPA proposed regional haze regulations in 1997.
These proposed regulations address visibility impairment in Class I areas. The
EPA has stated that it considered the Commission's recommendations in the
formulation of the proposed regulations. In June 1998, the Western Governors
Association ("WGA") submitted a document to the EPA discussing how the
Commission recommendations could be directly incorporated into the proposed
regional haze rule. The EPA re-opened the comment period on the proposed
regional haze rule in order to allow all interested parties an opportunity to
comment on the WGA document. The Company provided comments on the WGA document.
The final regional haze regulations are expected to be promulgated in 1999.
In July 1997, the EPA issued its final rules revising the National
Ambient Air Quality Standards for ozone and particulate matter. The EPA is now
involved in developing implementation plans for these revised standards. The
nature and cost of the impacts of these revisions to the standards, if any, to
the Company's operations cannot be determined at this time. However, the Company
does not anticipate any material adverse impact on the Company's financial
condition or results of operations.
Santa Fe Generating Station ("Santa Fe Station")
The Company and the NMED have conducted investigations of the gasoline
and chlorinated solvent groundwater contamination detected beneath the former
Santa Fe Station site to determine the source of the contamination pursuant to a
1992 Settlement Agreement ("Settlement Agreement") between the Company and the
NMED. In June 1996, the Company received a letter from the NMED, indicating that
the NMED believes the Company is the source of gasoline contamination in a
municipal well supplying the City of Santa Fe and of groundwater underlying the
Santa Fe Station site. Further, the NMED letter stated that the Company was
required to proceed with interim remediation of the contamination pursuant to
the New Mexico Water Quality Control Commission regulations.
In October 1996, the Company and the NMED signed an amendment to the
Settlement Agreement concerning the groundwater contamination underlying the
site. As part of the amendment, the Company agreed to spend approximately $1.2
million for certain costs related to sampling, monitoring, and the development
and implementation of a remediation plan.
15
The amended Settlement Agreement does not, however, provide the Company
with a full and complete release from potential further liability for
remediation of the groundwater contamination. After the Company has expended the
settlement amount, if the NMED can establish through binding arbitration that
the Santa Fe Station is the source of the contamination, the Company could be
required to perform further remediation that is determined to be necessary. The
Company continues to dispute any contention that the Santa Fe Station is the
source of the groundwater contamination and believes that insufficient data
exists to identify the sources of groundwater contamination. The Company's
aquifer characterization and groundwater quality reports compiled from 1996 to
1999 strongly suggest the groundwater contamination does not originate from the
Santa Fe Station site and has been drawn under the site by the pumping of the
Santa Fe supply well.
The Company and the NMED, with the cooperation of the City of Santa Fe,
jointly selected a remediation plan proposed by a remediation contractor. The
City of Santa Fe, the Company and the NMED entered into a memorandum of
understanding concerning the selected remediation plan and the operation of the
municipal well adjacent to the Santa Fe Station site in connection with carrying
out that plan. Construction of a new Santa Fe well and booster station has been
completed. The new system began operation on October 5, 1998, to treat
groundwater produced by the Santa Fe well to drinking water standards for
municipal distribution and the stimulation of naturally occurring bioremediation
of groundwater contamination beneath the Santa Fe Station site.
Person Station
The Company, in compliance with a Corrective Action Directive issued by
the NMED, determined that groundwater contamination exists in the deep and
shallow groundwater at the Person Station site. The Company is required to
delineate the extent of the contamination and remediate the contaminants in the
groundwater at the Person Station site. The extent of shallow and deep
groundwater contamination was assessed and the results were reported to the
NMED. The Company currently is involved with the process to renew the RCRA
post-closure care permit for the facility. Remedial actions for the shallow and
deep groundwater will be incorporated into the new permit. The Company has
installed and is operating a pump and treat system for the shallow groundwater.
The Company has proposed a monitoring program in conjunction with natural
attenuation processes as the most cost effective approach for the deep
groundwater remediation. The Company's current estimate to decommission its
retired fossil-fueled plants includes approximately $5.0 million in additional
expenses to complete the groundwater remediation program at Person Station. As
part of the financial assurance requirement of the Person Station Hazardous
Waste Permit, the Company established a trust fund. The current value of the
trust fund at December 31, 1998, was $7.7 million. The remediation program
continues on schedule.
Pit Closure and Remediation
In 1995, the Jicarilla Apache Tribe ("Jicarilla") enacted an ordinance
directing that unlined surface impoundments located within environmentally
sensitive areas be remediated and closed by December 1996, and that all other
unlined surface impoundments on Jicarilla lands be remediated and closed by
December 1998. In 1995, the Company received a claim for indemnification by
Williams, the purchaser of the Company's gas gathering and processing assets,
for the environmental work required to comply with the Jicarilla ordinance. The
Company submitted a closure/remediation plan to the Jicarillas' environmental
protection office, which was approved. The Company's remediation work pursuant
to the plan commenced in 1996, and the costs of remediation are being charged
against the $10.6 million indemnification cap contained in the purchase and sale
agreement between the Company and Williams. The Company completed remediation
and closed pits within the environmentally sensitive area in 1996, and completed
remediation and closure of all other pits on the Jicarilla Apache Reservation
associated with the sale of gas gathering and processing assets by the December
1998 deadline specified in the ordinance.
16
ITEM 2. PROPERTIES
The Company's owned interests in PVNGS are mortgaged to secure its
remaining first mortgage bonds. (See PART II, ITEM 7. "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND
CAPITAL RESOURCES - Financing Activities".)
ELECTRIC
The Company's ownership and capacity in electric generating stations in
commercial service as of December 31, 1998, were as follows:
Total Net
Generation
Type Name Location Capacity (MW)
---- ---- -------- -------------
Nuclear........ PVNGS (a) Wintersburg, Arizona 390*
Coal........... SJGS (b) Waterflow, New Mexico 750
Coal........... Four Corners (c) Fruitland, New Mexico 192
Gas/Oil........ Reeves Albuquerque, New Mexico 154
Gas/Oil........ Las Vegas Las Vegas, New Mexico 20
-----
1,506
=====
* For load and resource purposes, the Company has notified the NMPUC that it
recognizes the maximum dependable capacity rating for PVNGS to be 381 MW.
-----------------
(a) The Company is entitled to 10.2% of the power and energy generated
by PVNGS. The Company has a 10.2% ownership interest in Unit 3 and
has leasehold interests in approximately 7.9% of Units 1 and 2 and
an ownership interest in approximately 2.3% of Units 1 and 2.
(b) SJGS Units 1, 2 and 3 are 50% owned by the Company; SJGS Unit 4 is
38.457% owned by the Company.
(c) Four Corners Units 4 and 5 are 13% owned by the Company.
Fossil-Fueled Plants
SJGS is located in northwestern New Mexico, and consists of four units
operated by the Company. Units 1, 2, 3 and 4 at SJGS have net rated capacities
of 316 MW, 312 MW, 488 MW and 498 MW, respectively. SJGS Units 1 and 2 are owned
on a 50% shared basis with Tucson. Unit 3 is owned 50% by the Company, 41.8% by
SCPPA and 8.2% by Tri-State Generation and Transmission Association,
Inc.("Tri-State'). Unit 4 is owned 38.457% by the Company, 28.8% by M-S-R,
10.04% by Anaheim, 8.475% by Farmington, 7.2% by Los Alamos and 7.028% by UAMPS.
17
In July 1996, the Company and other SJGS participants signed an
agreement to convert the existing flue gas desulfurization (SO2 removal) system
at the SJGS into a much simpler and cost effective limestone system. The
conversion project was completed in January 1999 and cost the Company
approximately $40 million.
The Company also owns 192 MW of net rated capacity derived from its 13%
interest in Units 4 and 5 of Four Corners located in northwestern New Mexico on
land leased from the Navajo Nation and adjacent to available coal deposits.
Units 4 and 5 at Four Corners are jointly owned with SCE, APS, Salt River
Project, Tucson and El Paso and are operated by APS.
Four Corners and a portion of the facilities adjacent to SJGS are
located on land held under easements from the United States and also under
leases from the Navajo Nation. The enforcement of these leases could require
Congressional consent. The Company does not deem the risk with respect to the
enforcement of these easements and leases to be material. However, the Company
is dependent in some measure upon the willingness and ability of the Navajo
Nation to protect these properties.
The Company owns 154 MW of generation capacity at Reeves Station in
Albuquerque, New Mexico, and 20 MW of generation capacity at Las Vegas Station
in Las Vegas, New Mexico. These stations are used primarily for peaking and
transmission support.
Nuclear Plant
The Company's Interest in PVNGS
The Company is participating in the three 1,270 MW units of PVNGS, also
known as the Arizona Nuclear Power Project, with APS (the operating agent), Salt
River Project, El Paso, SCE, SCPPA and The Department of Water and Power of the
City of Los Angeles. The Company has a 10.2% undivided interest in PVNGS, with
portions of its interests in Units 1 and 2 held under leases. During 1998, PVNGS
was operated at a capacity factor of 92.5% which was the highest yearly capacity
factor attained at the plant. This capacity factor was primarily attributable to
record setting low refueling outage days.
Nuclear Safety Performance Rating on PVNGS
On April 8, 1998, APS received its latest Systematic Assessment of
Licensee Performance ("SALP") rating from the NRC on the operations of the PVNGS
units. The SALP reports rate safety performance at nuclear plants in four
functional areas: (i) plant operations; (ii) maintenance; (iii) engineering; and
(iv) plant support. Ratings of category 1, 2, or 3 are assigned, reflecting
"superior," "good" or "adequate" performance. PVNGS was rated as "superior" in
maintenance, engineering and plant support categories, and was rated as "good"
in the area of plant operations.
Steam Generator Tubes
APS, as the operating agent of PVNGS, has encountered tube cracking in
the steam generators and has taken, and will continue to take, remedial actions
that it believes have slowed the rate of tube degradation. The projected service
life of steam generators is reassessed periodically and these analyses indicate
that it will be economically desirable to replace the Unit 2 steam generators
between 2003 and 2008. In 1997, the PVNGS participants, including the Company,
entered into a contract for the fabrication of two replacement steam generators.
The cost of the new steam generators to the Company will be approximately $9.1
million. These generators will be used as replacements if performance of
existing generators deteriorates to less than acceptable levels. The generators
are expected to be on site in 2002. The Company's share of installation costs
will be approximately $8.4 million.
18
Based on latest available data, APS estimates that the Unit 1 and Unit 3
steam generators should operate for the license periods (until 2025 and 2027,
respectively), although APS will continue its normal periodic assessment of
these generators.
Sale and Leaseback Transactions of PVNGS Units 1 and 2
In 1985 and 1986, the Company entered into a total of eleven sale and
lease back transactions under which it sold and leased back its entire 10.2%
interest in PVNGS Units 1 and 2, together with portions of the Company's
undivided interest in certain PVNGS common facilities. The leases under each of
the sale and leaseback transactions have initial lease terms expiring January
15, 2015 (with respect to the Unit 1 leases) or January 15, 2016 (with respect
to the Unit 2 leases). Each of the leases allows the Company to extend the term
of the lease as well as containing a repurchase option. The lease expense for
the Company's PVNGS leases is approximately $66.3 million per year. Throughout
the terms of the leases, the Company continues to have full and exclusive
authority and responsibility to exercise and perform all of the rights and
duties of a participant in PVNGS under the Arizona Nuclear Power Project
Participation Agreement and retains the exclusive right to sell and dispose of
its 10.2% share of the power and energy generated by PVNGS Units 1 and 2. The
Company also retains responsibility for payment of its share of all taxes,
insurance premiums, operating and maintenance costs, costs related to capital
improvements and decommissioning and all other similar costs and expenses
associated with the leased facilities. In 1992, the Company purchased
approximately 22% of the beneficial interests in the PVNGS Units 1 and 2 leases
for $17.5 million. The related ownership interests were subsequently reacquired
by the Company. For accounting purposes, this transaction was originally
recorded as a purchase with the Company recording approximately $158.3 million
as utility plant and $140.8 million as long-term debt on the Company's
consolidated balance sheet. (See PART II, ITEM 7. - "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND
CAPITAL RESOURCES - Financing Activities".) In connection with the $30 million
retail rate reduction stipulated with the NMPUC in 1994, the Company wrote down
the purchased beneficial interests in PVNGS Units 1 and 2 leases to $46.7
million.
Each lease describes certain events, "Events of Loss" or "Deemed Loss
Events", the occurrence of which could require the Company to, among other
things, (i) pay the lessor and the equity investor, in return for such
investor's interest in PVNGS, cash in the amount provided in the lease and (ii)
assume debt obligations relating to the PVNGS lease. The "Events of Loss"
generally relate to casualties, accidents and other events at PVNGS, which would
severely adversely affect the ability of the operating agent, APS, to operate,
and the ability of the Company to earn a return on its interests in, PVNGS. The
"Deemed Loss Events" consist mostly of legal and regulatory changes (such as
changes in law making the sale and leaseback transactions illegal, or changes in
law making the lessors liable for nuclear decommissioning obligations). The
Company believes the probability of such "Events of Loss" or "Deemed Loss
Events" occurring is remote. Such belief is based on the following reasons: (i)
to a large extent, prevention of "Events of Loss" and some "Deemed Loss Events"
is within the control of the PVNGS participants, including the Company, and the
PVNGS operating agent, through the general PVNGS operational and safety
19
oversight process and (ii) with respect to other "Deemed Loss Events", which
would involve a significant change in current law and policy, the Company is
unaware of any pending proposals or proposals being considered for introduction
in Congress, except as described below under "PVNGS Liability and Insurance
Matters", or any state legislative or regulatory body that, if adopted, would
cause any such events.
PVNGS Decommissioning Funding
The Company has a program for funding its share of decommissioning costs
for PVNGS. Under a portion of this program, the Company made a series of annual
deposits under agreements approved by the NMPUC to an external non-qualified
trust which were applied pursuant to a split dollar agreement between the
Company and its employees towards an investment in whole life insurance policies
on certain current and former employees. The program for investment in life
insurance policies has been terminated (see ITEM 3. - "LEGAL PROCEEDINGS - OTHER
PROCEEDINGS - Nuclear Decommissioning Trust"). The remaining portion of the
nuclear decommissioning funding program is invested in equities in qualified and
non-qualified trusts. The results of the 1998 decommissioning cost study
indicated that the Company's share of the PVNGS decommissioning costs excluding
spent fuel disposal will be approximately $155.4 million (in 1998 dollars).
Pursuant to NMPUC approval, the Company funded an additional $3.0
million, $2.1 million and $12.5 million in 1998, 1997 and 1996, respectively,
into the qualified and non-qualified trust funds. The estimated market value of
the trusts, including the net cash value of the life insurance policies, at the
end of 1998 was approximately $40 million.
The NRC has recently amended its rules on financial assurance
requirements for the decommissioning of nuclear power plants. The amended rules
became 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 PRC jurisdictional rates, but the costs of PVNGS Unit 3
are excluded from PRC jurisdictional rates. The Company will be filing a report
with the NRC through APS, the operating agent of PVNGS, at the end of March
1999, concerning decommissioning funding assurance, and believes that it will
continue to be allowed to use the external sinking fund method as the sole
financial assurance method for Unit 3.
Nuclear Spent Fuel and Waste Disposal
Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987
(the "Waste Act"), DOE is obligated to accept and dispose of all spent nuclear
fuel and other high-level radioactive wastes generated by all domestic power
reactors. The NRC, pursuant to the Waste Act, requires operators of nuclear
power reactors to enter into spent fuel disposal contracts with DOE. APS, on its
own behalf and on behalf of the other PVNGS participants, executed a spent fuel
disposal contract with DOE. Under the Waste Act, DOE was to develop the
facilities necessary for the storage and disposal of spent nuclear fuel and to
have the first such facility in operation by 1998. That facility was to be a
permanent repository. DOE announced that such a repository now cannot be
completed before 2010.
20
In response to lawsuits filed over DOE's obligation to accept used
nuclear fuel, the United States Court of Appeals for the D.C. Circuit ("D.C.
Circuit") has ruled that DOE had an obligation to begin accepting used nuclear
fuel in 1998. However, the D.C. Circuit refused to issue an order compelling DOE
to begin moving used fuel. Instead, the D.C. Circuit ruled that any damages to
utilities should be sought under the standard contract signed between DOE and
utilities, including APS, the operating agent of PVNGS. The United States
Supreme Court has refused to grant review of the D.C. Circuit's decisions. In
July 1998, APS filed a petition for review regarding DOE's obligation to begin
accepting spent nuclear fuel.
APS has capacity in existing fuel storage pools at PVNGS which, with
certain modifications, could accommodate all fuel expected to be discharged from
normal operation of PVNGS through 2002, and believes it could augment that wet
storage with new facilities for on-site dry storage of spent fuel for an
indeterminate period of operation beyond 2002, subject to obtaining any required
governmental approvals. The Company currently estimates that it will incur
approximately $41 million (in 1998 dollars) over the life of PVNGS for its share
of the costs related to the on-site interim storage of spent nuclear fuel. The
Company accrues these costs as a component of fuel expense, meaning the charges
are accrued as the fuel is burned. During 1998, the Company expensed
approximately $12 million for on-site interim nuclear fuel storage costs related
to nuclear fuel burned prior to 1999. APS currently believes that spent fuel
storage or disposal methods will be available for use by PVNGS to allow its
continued operation beyond 2002.
A low-level radioactive waste facility built in 1995 at the PVNGS site
could store an amount of waste equivalent to 10 years of normal operation of
PVNGS. Although some low-level waste has been stored on-site, APS is currently
shipping low-level waste to off-site facilities. APS currently believes that
interim low-level waste storage methods are or will be available for use by
PVNGS to allow its continued operation and to safely store low-level waste until
a permanent facility is available.
While believing that scientific and financial aspects of the issues of
spent fuel and low-level waste storage and disposal can be resolved
satisfactorily, the Company acknowledges that their ultimate resolution in a
timely fashion will require political resolution and action on national and
regional scales which it is less able to predict.
PVNGS Liability and Insurance Matters
The PVNGS participants have insurance for public liability resulting
from nuclear energy hazards to the full limit of liability under Federal law.
This potential liability is covered by primary liability insurance provided by
commercial insurance carriers in the amount of $200 million and the balance by
an industry-wide retrospective assessment program. If losses at any nuclear
power plant covered by the program exceed the accumulated funds, the Company
could be assessed retrospective premium adjustments. The maximum assessment per
reactor under the program for each nuclear incident is approximately $88
million, subject to an annual limit of $10 million per incident. Based upon the
Company's 10.2% interest in the three PVNGS units, the Company's maximum
potential assessment per incident for all three units is approximately $26.9
million, with an annual payment limitation of $3 million per incident. The
21
insureds under this liability insurance include the PVNGS participants and "any
other person or organization with respect to his legal responsibility for damage
caused by the nuclear energy hazard". If the funds provided by this
retrospective assessment program prove to be insufficient, Congress could impose
revenue raising measures on the nuclear industry to pay claims.
The 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.
The PVNGS participants maintain "all-risk" (including nuclear hazards)
insurance for nuclear property damage to, and decontamination of, property at
PVNGS in the aggregate amount of $2.75 billion as of January 1, 1999, a
substantial portion of which must be applied to stabilization and
decontamination. The Company has also secured insurance against portions of the
increased cost of generation or purchased power and business interruption
resulting from certain accidental outages of any of the three units if the
outages exceeds 17 weeks. The insurance coverage discussed in this section is
subject to certain policy conditions and exclusions. The Company is a member of
an industry mutual insurer. This mutual insurer provides both the "all-risk" and
increased cost of generation insurance to the Company. In the event of adverse
losses experienced by this insurer, the Company is subject to an assessment. The
Company's maximum share of any assessment is approximately $3.3 million per
year.
Other Electric Properties
As of December 31, 1998, the Company owned, jointly owned or leased
2,803 circuit miles of electric transmission lines, 5,370 miles of distribution
overhead lines, 3,497 cable miles of underground distribution lines (excluding
street lighting) and 188 substations.
Acquisition of Certain Assets of Plains Electric Generation and Transmission
Cooperative, Inc. ("Plains")
In July 1998, the Company and Tri-State made a non-binding joint proposal
in response to the request for proposals issued by Plains in May 1998. The
proposal was subsequently selected as a finalist by Plains. The Company and
Tri-State submitted a binding offer in September 1998, and Plains subsequently
announced that it would be entering into exclusive negotiations with the Company
and Tri-State regarding the joint proposal. It is now contemplated that Plains
will merge with Tri-State, with Tri-State being the surviving entity. Tri-State
will then sell certain assets to the Company consisting primarily of
transmission assets and the Plains headquarters building in Albuquerque. In
addition, the Company may have the opportunity to become the power supplier of
50 MW to one of Plains' member cooperatives. Once the final transactions are
negotiated, the transactions will be submitted to various state and Federal
regulatory agencies for approval. Closing of the transactions will depend on the
timing of regulatory and other approvals.
22
NATURAL GAS
The natural gas properties as of December 31, 1998, consisted primarily
of natural gas storage, transmission and distribution systems. Provisions for
storage made by the Company include ownership and operation of an underground
storage facility located near Albuquerque, New Mexico. The transmission systems
consisted of approximately 1,338 miles of pipe with appurtenant compression
facilities. The distribution systems consisted of approximately 10,566 miles of
pipe.
On June 21, 1996, the Company entered into a purchase agreement with the
DOE for the purchase of approximately 130 miles of transmission pipe for $3.1
million for the transmission of natural gas to Los Alamos and to certain other
communities in northern New Mexico. The purchase is subject to the DOE providing
right-of-way satisfactory to the Company. The acquisition by the Company was
approved by the NMPUC in December 1996. Right-of-way resolution is expected to
be completed by the second quarter of 1999.
OTHER INFORMATION
The electric and gas transmission and distribution lines are generally
located within easements and rights-of-way on public, private and Indian lands.
The Company leases interests in PVNGS Units 1 and 2 and related property, EIP
and associated equipment, data processing, communication, office and other
equipment, office space, utility poles (joint use), vehicles and real estate.
The Company also owns and leases service and office facilities in Albuquerque
and in other operating divisions throughout its service territory.
ITEM 3. LEGAL PROCEEDINGS
PVNGS WATER SUPPLY LITIGATION
The Company understands that a summons served on APS in 1986 required
all water claimants in the Lower Gila River Watershed of Arizona to assert any
claims to water on or before January 20, 1987, in an action pending in the
Maricopa County Superior Court. PVNGS is located within the geographic area
subject to the summons and the rights of the PVNGS participants, including the
Company, to the use of groundwater and effluent at PVNGS are potentially at
issue in this action. APS, as the PVNGS project manager, filed claims that
dispute the court's jurisdiction over the PVNGS participants' groundwater rights
and their contractual rights to effluent relating to PVNGS and, alternatively,
seek confirmation of such rights. Issues important to the claims are pending in
an interlocutory appeal to the Arizona Supreme Court. No trial date concerning
the water rights claims has been set in this matter. Although the foregoing
remains subject to further evaluation, APS expects that the described litigation
will not have a material adverse impact on the operation of PVNGS.
SAN JUAN RIVER ADJUDICATION
In 1975, the State of New Mexico filed an action entitled State of New
Mexico v. United States, et al., in the District Court of San Juan County, New
Mexico, to adjudicate all water rights in the "San Juan River Stream System".
The Company was made a defendant in the litigation in 1976. The action is
expected to adjudicate water rights used at Four Corners and at SJGS. (See ITEM
1. "BUSINESS - ELECTRIC OPERATIONS - Fuel and Water Supply - Water Supply".) The
Company cannot at this time anticipate the effect, if any, of any water rights
adjudication on the present arrangements for water at SJGS and Four Corners. It
is the Company's understanding that final resolution of the case cannot be
expected for several years and is unable to predict the ultimate outcome.
23
OTHER PROCEEDINGS
Republic Savings Bank ("RSB") Litigation
On July 1, 1996, in a 7-2 decision in the case of United States v.
Winstar Corporation, the United States Supreme Court ruled that the Federal
government had breached its contractual obligations with certain thrifts in
refusing to recognize the accounting practices of supervisory goodwill and
capital credits. Contracts had been negotiated with certain Federal agencies
providing for the purchase of failing thrifts on the condition that supervisory
goodwill and capital credits be recognized for purposes of determining
compliance with regulatory capital requirements. When Congress enacted the
Financial Institutions Reform, Recovery and Enforcement Act in 1989, these
accounting practices were prohibited, thus driving otherwise healthy thrifts out
of compliance with the capital requirements. Many, including RSB, were taken
over and liquidated as a result.
Meadows owns directly a 100% ownership interest in Republic Holding
Company ("RHC"), and RSB was a wholly-owned subsidiary of RHC. Meadows and RHC
have pending before the United States Court of Federal Claims a lawsuit filed in
1992, alleging similar contractual arrangements to those at issue in the Winstar
case. The Federal government has filed a counterclaim alleging breach by RHC of
its obligation to maintain RSB's net worth and has moved to dismiss Meadows'
claim for lack of standing.
RSB was the thrift organized upon the acquisition of Citizens Federal
Savings and Loan Association and Fireside Federal Savings and Loan Association,
both Illinois corporations, in 1985. The plaintiffs invested $17 million of new
capital in the failing institutions. The Federal regulators expressly promised
that approximately $23 million of supervisory goodwill created by the
transaction could be accounted for as an intangible asset to be counted toward
regulatory capital. Additionally, the regulators promised to allow a $3 million
cash contribution by the Federal Savings and Loan Insurance Corporation to be
recorded as a direct credit to regulatory capital. In 1992, the Office of Thrift
Supervision placed RSB in receivership and appointed the RTC as receiver. In
November 1992, RTC sold RSB as a going concern for a premium of nearly $1
million, with approximately $215.5 million in assets and $203.9 million in
liabilities.
The RSB case has been held in abeyance pending the ruling by the United
States Supreme Court. The Company believes that the Winstar decision establishes
the Federal government's liability to Meadows and RHC in the RSB litigation and
the amount of damages owed as a result will be vigorously litigated.
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 the Winstar case. 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 severely critical 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 court has
ordered the parties to appoint representatives to develop a process for
settlement of the cases and has assigned a judge to assist with the process. It
is premature to estimate the amount of recovery, if any, by Meadows and RHC.
24
Purported Navajo Environmental Regulation
Four Corners is located on the Navajo Reservation and is held under
easement granted by the Federal government as well as leases from the Navajo
Nation. APS is the operating agent and the Company owns a 13% ownership interest
in Units 4 and 5 of Four Corners. In July 1995, the Navajo Nation enacted the
Navajo Nation Air Pollution Prevention and Control Act, the Navajo Nation Safe
Drinking Water Act and the Navajo Nation Pesticide Act (collectively, the
"Acts"). Pursuant to the Acts, the Navajo Nation Environmental Protection Agency
is authorized to promulgate regulations covering air quality, drinking water and
pesticide activities, including those that occur at Four Corners. By letter
dated October 12, 1995, the Four Corners participants requested the United
States Secretary of the Interior (the "Secretary") to resolve their dispute with
the Navajo Nation regarding whether or not the Acts apply to operation of Four
Corners. The Four Corners participants subsequently filed a lawsuit in the
District Court of the Navajo Nation (the "Court"), Window Rock District, seeking
a declaratory judgment that: (i) the Four Corners leases and Federal easements
preclude the application of the Acts to the operation of Four Corners and (ii)
the Navajo Nation and its agencies and courts lack adjudicatory jurisdiction to
determine the enforceability of the Acts as applied to Four Corners. In October
1995, the Navajo Nation and the Four Corners participants agreed to indefinitely
stay the proceedings so that the parties may attempt to resolve the dispute
without litigation, and the Secretary and the Court stayed these proceedings
pursuant to a request by the parties. The Company is unable to predict the
outcome of this matter.
In February 1998, the EPA issued regulations specifying provisions of the
Clean Air Act for which it is appropriate to treat Indian tribes in the same
manner as states. The EPA indicated that it believes that the Clean Air Act
generally would supersede pre-existing binding agreements that may limit the
scope of tribal authority over reservations. APS and the Company have filed
appeals, which have been consolidated, in the D.C. Circuit Court of Appeals to
contest EPA's authority under the regulations. The Navajo Nation has intervened
in the consolidated appeal. The Navajo Nation is a tribe which could potentially
assert its status as a state under the Act pursuant to the EPA rule in
question.. In the consolidated appeal, the Company's interests as operator and
joint owner of the SJGS, owner of other facilities located on reservations
located in New Mexico, and joint owner of Four Corners are involved. The Company
cannot predict the outcome of the consolidated appeal.
Nuclear Decommissioning Trust
On March 31 and April 21, 1998, the Company and the trustee of the
Company's master decommissioning trust filed a civil complaint and an amended
complaint, respectively, against several companies and individuals for the
under-performance of a corporate owned life insurance program. The program,
which was approved by the NMPUC and set up in a trust in 1987, was used to fund
a portion of the Company's nuclear decommissioning obligations for its 10.2%
interest in PVNGS. In January 1999, the life insurance program was terminated,
and the life insurance policies have been surrendered by the trust in exchange
for the cash surrender value of the policies.
25
In the lawsuit, the Company asserts various tort, contract and equity
theories against the defendants. The Company is seeking, among other things,
damages in an amount that represents the difference between what the defendants
represented that the life insurance program would achieve and the amount that
the Company's experts currently project that the life insurance program will
achieve. On May 29, 1998, the defendants filed a notice of removal to the
Federal District Court. On June 26, 1998, the Company and trustee filed a motion
to remand the proceeding back to State District Court. Several defendants filed
answers and motions to dismiss the lawsuit with the Federal District Court. A
defendant counterclaimed for indemnity based on its engagement contract with the
Company, claiming that if it had injured the trustee, then the Company must pay
the damages. On July 17, 1998, the Company denied liability under the
counterclaim and set forth numerous defenses. On November 5, 1998, the Federal
District Court granted the Company's and trustee's motion remanding the
proceeding back to State District Court. Discovery is currently proceeding. The
Company is currently unable to predict the ultimate outcome or amount of
recovery, if any.
For a discussion of other legal proceedings, see PART II, ITEM 7. -
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - OTHER ISSUES FACING THE COMPANY - NMPUC REGULATORY ISSUES".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
26
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY
Executive officers, their ages, offices held with the Company in the past
five years and initial effective dates thereof, were as follows on December 31,
1998, except as otherwise noted:
Name Age Office Initial Effective Date
---- --- ------ ----------------------
B. F. Montoya........ 63 President and Chief Executive Officer August 1, 1993
J. E. Sterba......... 43 Executive Vice President and Chief Operating Officer March 11, 1997
Senior Vice President, Bulk Power Services December 6, 1994
Senior Vice President, Corporate Development December 7, 1993
Senior Vice President, Asset Restructuring April 6, 1993
Senior Vice President, Retail Electric and Water January 29, 1991
Services
M. D. Christensen.... 50 Senior Vice President, New Mexico Retail Services November 3, 1997
Senior Vice President, Customer Service and Public January 9, 1996
Affairs
Vice President, Public Affairs December 7, 1993
Vice President, Communications July 22, 1991
R. J. Flynn.......... 56 Senior Vice President, Electric Services December 1, 1994
M. H. Maerki......... 58 Senior Vice President and Chief Financial Officer December 7, 1993
Senior Vice President, Administration and Chief March 2, 1993
Financial Officer
Senior Vice President and Chief Financial Officer June 1, 1988
P. T. Ortiz.......... 48 Senior Vice President, General Counsel and Secretary December 6, 1994
Senior Vice President, Regulatory Policy, General December 7, 1993
Counsel and Secretary
Senior Vice President, Public Policy, General March 2, 1993
Counsel and Secretary
Senior Vice President, General Counsel and Corporate February 4, 1992
Secretary
W. J. Real........... 50 Senior Vice President, Gas Services December 6, 1994
Senior Vice President, Utility Operations December 7, 1993
Senior Vice President, Customer Service and March 2, 1993
Operations
Executive Vice President, Gas Operations June 19, 1990
27
Name Age Office Initial Effective Date
---- --- ------ ----------------------
R. B. Ridgeway....... 40 Senior Vice President, Energy Services December 14, 1996
Vice President, Corporate Planning August 10, 1996
Director, Corporate Strategy July 2, 1994
Consultant, Competitive Analysis October 5, 1992
J. A. Zanotti........ 59 Senior Vice President, Human Resources January 9, 1996
Vice President, Human Resources March 2, 1993
Senior Vice President, Human Resources and July 26, 1990
Communications
- ---------------------
J.E. Sterba resigned as an executive vice president and chief operating
officer of the Company, effective December 31, 1998.
J.A. Zanotti resigned as a senior vice president, Human Resources of the
Company, effective July 31, 1998.
All officers are elected annually by the board of directors of the
Company.
All of the above executive officers have been employed by the Company
and/or its subsidiaries for more than five years in executive or management
positions, with the exception of R. J. Flynn. R. J. Flynn has a 30-year history
in the utility industry working with Pacific Gas and Electric Company. Since
1989, R. J. Flynn held the position of Regional Vice President, responsible for
all gas and electric utility operations in the San Joaquin Valley.
28
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange.
Ranges of sales prices of the Company's common stock, reported as composite
transactions (Symbol: PNM), and dividends declared on common stock for 1998 and
1997, by quarters, are as follows:
Range of
Quarter Ended Sales Prices
------------- ------------------ Dividends
High Low per Share
------ ----- ---------
1998
December 31 ......................... 23 5/16 17 3/8 $ - *
September 30 ........................ 23 3/16 19 1/16 0.20
June 30 ............................. 24 3/4 20 15/16 0.20
March 31 ............................ 24 11/16 22 1/8 0.20
-----
Fiscal Year ...................... 24 3/4 17 3/8 $0.60
=====
1997
December 31 ......................... 23 15/16 18 7/8 $0.17
September 30 ........................ 19 9/16 17 3/4 0.17
June 30 ............................. 18 5/8 15 3/4 0.17
March 31 ............................ 20 1/2 17 1/4 0.17
-----
Fiscal Year ...................... 23 15/16 15 3/4 $0.68
=====
*On January 18, 1999, the Company's Board of Directors ("Board") declared
a quarterly cash dividend of 20 cents per share of common stock payable
February 19, 1999, to shareholders of record as of February 1, 1999.
On January 31, 1999, there were 16,390 holders of record of the Company's
common stock.
The Board set the dividend payout ratio below the industry average to
allow for dividend growth in the future and to sustain financial flexibility for
the Company to respond to potential opportunities in the evolving energy
marketplace. In establishing its new dividend policy, the Board weighed the
Company's current financial position and its future business plan, as well as
the regulatory and business climate in New Mexico. Future dividend declaration
will be reviewed for action by the Board. The payment of future dividends will
depend on earnings, the financial condition of the Company, market conditions
and other factors, including in particular, the outcome of the pending electric
rate case proceedings. (See PART II, ITEM 7. - "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - OTHER ISSUES FACING
THE COMPANY - NMPUC REGULATORY ISSUES - Electric Rate Case".)
Cumulative Preferred Stock
While isolated sales of the Company's cumulative preferred stock have
occurred in the past, the Company is not aware of any active trading market for
its cumulative preferred stock. Quarterly cash dividends were paid on the
Company's cumulative preferred stock at the stated rates during 1998 and 1997.
29
ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- -----------
(In thousands except per share amounts and ratios)
Total Operating Revenues $1,092,445 $1,020,521 $ 873,778 $ 808,465 $ 904,711
Earnings from Continuing Operations $ 95,119 $ 86,497 $ 72,969 $ 75,562 $ 80,318
Net Earnings $ 82,682 $ 80,995 $ 72,580 $ 75,562 $ 80,318
Earnings per Common Share:
Continuing Operations $ 2.27 $ 2.05 $ 1.73 $ 1.72 $ 1.77
Basic $ 1.97 $ 1.92 $ 1.72 $ 1.72 $ 1.77
Diluted $ 1.95 $ 1.91 $ 1.71 $ 1.72 $ 1.77
Total Assets $2,576,788 $2,320,555 $2,230,314 $2,035,669 $2,203,265
Preferred Stock with Mandatory Redemption
Requirements - - - - $ 17,975
Long-Term Debt, including Current Maturities $1,008,614 $ 714,345 $ 728,889 $ 728,989 $ 900,595
Common Stock Data:
Market price per common share at year end $ 20.438 $ 23.688 $ 19.625 $ 17.625 $ 13.000
Book value per common share at year end $ 20.63 $ 19.26 $ 18.06 $ 16.82 $ 15.11
Average number of common shares outstanding 41,774 41,774 41,774 41,774 41,774
Cash dividend declared per common share $ 0.60* $ 0.68 $ 0.48 - -
Return on Average Common Equity 9.9% 10.2% 9.8% 10.7% 12.4%
Capitalization:
Common stock equity 45.4% 52.6% 50.4% 48.6% 39.2%
Preferred stock:
Without mandatory redemption requirements 0.7 0.8 0.9 0.9 3.7
With mandatory redemption requirements - - - - 1.1
Long-term debt, less current maturities 53.9 46.6 48.7 50.5 56.0
------------ ----------- ----------- ----------- -----------
100.0% 100.0% 100.0% 100.0% 100.0%
============ =========== =========== =========== ===========
Due to the discontinuance of the natural gas trading operations of its
Energy Services Business Unit (see note 12 of the notes to consolidated
financial statements), certain prior year amounts have been restated.
*On January 18, 1999, the Company's Board declared a quarterly cash
dividend of 20 cents per share of common stock payable February 19,
1999, to shareholders of record as of February 1, 1999.
- ----------
The selected financial data should be read in conjunction with the
consolidated financial statements, the notes to consolidated financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's assessment of the Company's financial
condition and the significant factors affecting the results of operations. This
discussion should be read in conjunction with the Company's consolidated
financial statements.
OVERVIEW
Restructuring the Electric Utility Industry
Introduction of competitive market forces and restructuring of the
electric utility industry in New Mexico continue to be key issues facing the
Company. During 1998, in conjunction with the electric rate case, the Company
and other interested parties put significant efforts into negotiating a
settlement agreement which would have resolved the rate case and produced a
proposal for legislation for open access and electric competition for the
Company's customers (see "Electric Rate Case" below). However, efforts failed
due to various unresolved issues among the parties.
Senator Michael Sanchez, chairman of the New Mexico Legislative Interim
Committee on Utilities and Telecommunications, introduced a senate bill,
Electric Industry Restructuring Act of 1999, in the 1999 New Mexico Legislature
on February 5, 1999. The bill includes provisions for the protection of the
residential and small business customers during the transition period and also
includes provisions to preserve the financial integrity of the state's electric
utilities by giving reasonable opportunity to recover stranded costs. (See
"ELECTRIC INDUSTRY RESTRUCTURING ACT OF 1999" below.)
At the Federal level, there are a number of proposals on electric
restructuring being considered with no concrete timing for definitive actions.
It is expected that previously introduced restructuring bills will be
re-introduced this year. Issues such as stranded cost recovery, market power,
utility regulations reform, the role of states, subsidies, consumer protections
and environmental concerns are expected to be at the forefront of the
Congressional debate. In addition, the FERC has stated that if Congress mandates
electric retail access, it should leave the details of the program to the states
and the FERC has the authority to order the necessary transmission access for
the delivery of power for the states' retail access programs.
Although it is unable to predict the ultimate outcome of possible retail
competition initiatives, the Company has been and will continue to be active at
both the state and Federal levels in the public policy debates on the
restructuring of the electric utility industry. The Company will continue to
work with customers, regulators, legislators and other interested parties to
find solutions that bring benefits from competition while recognizing the
importance of reimbursing utilities for past commitments.
Competitive Strategy
The restructuring of the electric utility industry will provide new
opportunities; however, the Company anticipates that it will experience downward
pressure on the Company's utility earnings from their current levels. The
reasons for the downward pressure include possible limits on return on equity,
disallowance of some stranded costs and the potential loss of certain customers
in a competitive environment.
31
To better position itself for competition, the Company adopted a new
internal corporate structure in January 1999. With the new corporate structure,
the regulated businesses will be separated from the other business activities
which the Company anticipates will be unregulated in the future. The Company's
realignment of its business structure was approved by the Board in January 1999.
If the Electric Industry Restructuring Act of 1999 is passed, the Company is
planning to seek shareholder and other regulatory approvals to form a holding
company by January 2001. Under a holding company structure, the regulated
businesses (natural gas and electric transmission and distribution) will be
grouped under a separate company (wires and pipes company) and would focus on
the core utility business in New Mexico. The proposed unregulated businesses
(power production, bulk power marketing and energy services) would aggressively
pursue their efforts to expand energy marketing and utility related businesses
into carefully targeted markets in an effort to increase shareholders' value.
The Company believes that successful operations of its proposed unregulated
business activities under a holding company structure will better position the
Company in an increasingly competitive utility environment
The Company's bulk power operations have contributed significant
earnings to the Company in recent years as a result of increased off-system
sales due, in part, to favorable weather conditions experienced in the
Southwest. The Company plans to expand its wholesale power trading functions
which could include an expansion of its generation portfolio. The Company
continuously evaluates its physical asset acquisition strategies to ensure an
optimal mix of base-load generation, peaking generation and purchased power in
its power portfolio. Under the proposed senate bill, the generation assets of
the Company's electric operations would be separated from the regulated
businesses. Depending upon the aspects of the legislation that are ultimately
enacted into law, an expansion of the Company's generation assets might occur
without a regulatory approval process. In addition to the continued power
trading operations, the Company will further focus on opportunities in the
market place where excess capacity is disappearing and mid- to long-term market
demands are growing.
The Company's competitive businesses, through its Energy Services
Business Unit, will continue to seek opportunities in the area of water and
wastewater management services and utility related management and operations
services for Federal installations and other large commercial institutions. In
order to focus on profitable ventures, the Company made a decision to exit the
unsuccessful natural gas trading business in August 1998 and completely disposed
of its natural gas trading operations in December 1998. The Company's Energy
Services Business Unit currently operates the City of Santa Fe's water system
and is expanding such services to other communities, including Indian tribes.
The Company is expanding its utility related services such as providing metering
services, energy and process optimization solutions and energy consulting
services in the deregulated energy markets in the Southwest. The Company is also
pursuing business opportunities to serve mid-sized utilities, including
cooperatives, municipalities and others with cost effective billing and
collection services. The Company intends to move forward during the interim
period to form and invest in the three wholly-owned subsidiaries to achieve
competitive business strategies. The Company does not anticipate an earnings
contribution from its Energy Services Business Unit over the next few years.
32
LIQUIDITY AND CAPITAL RESOURCES
Capital Requirements and Liquidity
Total capital requirements include construction expenditures as well as
other major capital requirements and cash dividend requirements for both common
and preferred stock. The main focus of the Company's construction program is
upgrading generating systems, upgrading and expanding the electric and gas
transmission and distribution systems and purchasing nuclear fuel. Total capital
requirements and construction expenditures for 1998 were $161.6 million and
$128.8 million, respectively. Projections for total capital requirements and
construction expenditures for 1999 are $176 million and $145 million,
respectively. Such projections for the years 1999 through 2003 are $769 million
and $609 million, respectively. These estimates are under continuing review and
subject to on-going adjustment.
The Company's construction expenditures for 1998 were entirely funded
through cash generated from operations. The Company currently anticipates that
internal cash generation will be sufficient to meet capital requirements for the
years 1999 through 2003. To cover the difference in the amounts and timing of
cash generation and cash requirements, the Company intends to use short-term
borrowings under its liquidity arrangements.
At the end of February 1999, the Company had $405 million of available
liquidity arrangements, consisting of $300 million from a senior unsecured
revolving credit facility ("Credit Facility"), $80 million from an accounts
receivable securitization and $25 million in local lines of credit. The Credit
Facility will expire in March 2003.
As of December 31, 1998, the Company had approximately $61.3 million in
cash and temporary investments and $26.6 million in short-term borrowings.
Financing Capability
The Company's ability to finance its construction program at a
reasonable cost and to provide for other capital needs is largely dependent upon
its ability to earn a fair return on equity, results of operations, credit
ratings, regulatory approvals and financial market conditions. Financing
flexibility is enhanced by providing a high percentage of total capital
requirements from internal sources and having the ability, if necessary, to
issue long-term securities, and to obtain short-term credit. Standard & Poor's
Corp. and Moody's Investors Services, Inc. currently maintain the Company's
credit ratings at one level below investment grade. Duff & Phelps Credit Rating
Co. currently maintains an investment grade rating for the Company's first
mortgage bonds, but continues to rate all other securities of the Company below
investment grade. The Company may face limited credit markets and higher
financing costs as a result of its securities being rated below investment
grade. As a result of the recently issued unfavorable NMPUC orders which have
been appealed to the New Mexico Supreme Court ("Supreme Court") (see "Electric
Rate Case" and "Residential Electric, Incorporated ("REI")" in NMPUC REGULATORY
ISSUES below), the major rating agencies put the Company on a credit watch list
for a possible downgrade.
33
Covenants in the Company's PVNGS Units 1 and 2 lease agreements (see PART
I, ITEM 2. - "PROPERTIES Nuclear Plant") limit the Company's ability, without
consent of the owner participants in the lease transactions: (i) to enter into
any merger or consolidation, or (ii) except in connection with normal dividend
policy, to convey, transfer, lease or dividend more than 5% of its assets in any
single transaction or series of related transactions. The Facility imposes
similar restrictions regardless of credit ratings.
Financing Activities
By written consents executed in March 1998, the holders of more than 75%
of the outstanding first mortgage bonds approved certain revisions to the
mortgage to allow the Company more flexibility with respect to property
releases, as well as with respect to covenants and administrative requirements
under the mortgage. 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, in 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 PVNGS.
Coincident with the above transactions, the Company established a
five-year, $300 million Credit Facility to replace the Company's $100 million
secured revolving credit facility. Funds borrowed through this Credit 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. Approximately $420 million from the proceeds from the sale of the SUNs
were loaned to PVNGS Capital Trust ("Capital Trust"), a special purpose entity
established in August 1998, for the purpose of purchasing PVNGS lease debt
("Lease Debt") held by the Company as well as Lease Debt publicly held. The
Capital Trust currently holds all the outstanding Lease Debt, and all the
publicly-held lease obligation bonds have been retired. As a result, the Company
received approximately $288 million from Capital Trust for its investment in
Lease Debt and paid off its outstanding short-term debt. In addition, the
Company invested approximately $13.4 million in Capital Trust in August 1998.
In 1999, the Company intends to request PRC authority to issue $11.5
million in tax-exempt PCBs in connection with the retrofit of the pollution
control facilities at the SJGS.
The Company currently has no other requirements for long-term financings
during the period of 1999 through 2003. However, during this period, the Company
could enter into long-term financings for the purpose of strengthening its
balance sheet and reducing its cost of capital. The Company continues to
evaluate its investment and debt retirement options to optimize its financing
strategy and earnings potential. No additional first mortgage bonds may be
issued under the Company's mortgage. The amount of SUNs that may be issued is
not limited by the SUNs indenture. However, debt to capital requirements in
certain of the Company's financial instruments would ultimately restrict the
Company's ability to issue SUNs.
34
Dividends
The Company resumed the payment of cash dividends on common stock in May
1996. The Company's board of directors reviews the Company's dividend policy on
a continuing basis. The declaration of common dividends is dependent upon a
number of factors including earnings and financial condition of the Company, the
Supreme Court's decisions on the Company's various regulatory cases currently
pending (see "NMPUC REGULATORY ISSUES" below) and market conditions.
Capital Structure
The Company's capitalization, including current maturities of long-term
debt, at December 31 is shown below:
1998 1997 1996
---- ---- ----
Common Equity............................ 45.4% 52.6% 50.4%
Preferred Stock.......................... 0.7 0.8 0.9
Long-term Debt........................... 53.9* 46.6 48.7
----- ----- -----
Total Capitalization**................ 100.0% 100.0% 100.0%
===== ===== =====
* Increase was due to the issuance of $435 million of SUNs in August 1998.
** Total capitalization does not include as debt the present value ($161
million as of December 31, 1998) of the Company's lease obligations
for PVNGS Units 1 and 2 and EIP.
RESULTS OF OPERATIONS
Basic earnings per share from continuing operations were $2.27, a 10.7
percent increase over the $2.05 earned in 1997 and a 31.2 percent increase over
the $1.73 earned in 1996. Total basic earnings per share including discontinued
operations were $1.97, $1.92 and $1.72 for 1998, 1997 and 1996, respectively.
Continuing Operations
Electric gross margin (operating revenues less fuel and purchased power
expense) increased $38.2 million in 1998 over 1997 as a result of the success in
wholesale power marketing operations. Electric gross margin for 1997 increased
$20.1 million over 1996 as a result of retail load growth and increased
wholesale marketing activities. Wholesale power sales exceeded retail sales for
the second year in a row in 1998. Sales for resale totaled 8.8 million MWh in
1998, up approximately 2.0 million MWh over 1997 and 4.2 million MWh over 1996.
An unusually hot summer in Arizona and California contributed, in part, to the
profitable bulk power operations in 1998; however, the success of the Company's
bulk power operation was also attributable to the location of the Company's
assets in the Southwest. The favorable results of the Company's bulk power
operations are not necessarily indicative of future operating results.
Gas gross margin (operating revenues less gas purchased for resale)
decreased $3.8 million in 1998 from 1997 as a result of warmer weather
conditions in 1998. Such margin increased $1.3 million in 1997 over 1996 due to
the implementation of a higher fixed monthly customer charge (access fee) in
February 1997 pursuant to a gas rate order.
35
Other operation and maintenance ("O&M") expenses increased $23.9 million
in 1998 over 1997 due to: (i) the recording of expenses associated with PVNGS
spent fuel disposal costs; (ii) increased maintenance activities at SJGS; (iii)
increased 401(k) benefit expense; (iv) increased O&M expense for Energy
Services; and (v) increased expenses associated with the Year 2000 program. Such
O&M expenses in 1997 increased $9.4 million over 1996 due to: (i) a write-off of
obsolete inventory and undistributed stores expense at PVNGS; (ii) higher
distribution expense for increased maintenance and service enhancement efforts;
(iii) increased customer service related and sales expense; and (iv) a severance
accrual at the SJGS.
Depreciation and amortization expenses increased $3.4 million in 1998 due
to increased utility plant and a write-off of certain unamortized computer
software costs. Such expenses increased $4.6 million in 1997 as a result of
additional utility plant and an adjustment recorded in 1996 for the over
amortization of certain intangible utility plant.
Net other income and deductions increased $9.5 million over a year ago as
a result of the investment income from Capital Trust, proceeds from a litigation
settlement and the reversal of a gas rate case reserve. Net other income and
deductions in 1997 increased $11.9 million over 1996 due to higher interest
income from the investment in PVNGS Lease Obligation Bonds ("PVNGS LOBs") and a
1996 reserve for matters related to a gas rate case, offset by a curtailment
gain resulting from the change in the Company's pension plan in 1996.
Net interest charges increased $7.0 million in 1998 due to the issuance
of $435 million of SUNs and increased short-term borrowings for the retirement
of $140 million of first mortgage bonds. Net interest charges for 1997 increased
$1.5 million over 1996 due to short-term borrowings for the purchase of the $200
million of PVNGS LOBs in late 1996.
Discontinued Operations
On August 4, 1998, the Company adopted a plan to discontinue the gas
trading operations in its Energy Services Business Unit. The gas trading
business was completely disposed of by the end of 1998. Accordingly, the Company
recorded a loss of $5.1 million, net of tax. In addition, losses from operations
of the discontinued segment, net of tax were $7.4 million in 1998 compared to
$5.5 million in 1997. (See note 12 of the notes to consolidated financial
statements.)
OTHER ISSUES FACING THE COMPANY
ELECTRIC INDUSTRY RESTRUCTURING ACT OF 1999
Senate Bill 428, sponsored by Senator Michael Sanchez, was introduced in
the 1999 New Mexico Legislature on February 5, 1999. Under the proposed bill,
customer choice of power supplier would be available to schools, residential
customers and small business customers in New Mexico beginning January 1, 2001,
and to all customers beginning January 1, 2002. Transmission and distribution
services along with related services such as meter reading and billing would
remain subject to the PRC jurisdiction. This bill would not require a public
utility to divest itself of any of its assets owned or leased. However, before
January 1, 2001, a public utility would be required to organize into at least
two corporations, dividing regulated from unregulated services through either
the creation of separate affiliated companies under a holding company or through
the creation of separate non-affiliated corporations.
36
If enacted, the bill would require all public utilities operating in New
Mexico to submit a transition plan to the PRC no later than March 1, 2000, to be
approved no later than December 1, 2000. The transition plan would include
proposed tariffs for transmission and distribution services, together with
proposed standard offer service tariffs for residential and small business
customers who do not select a power supplier. The plan would also include
proposals for effectively separating the utilities' regulated and non-regulated
business activities.
The bill recognizes that electric utilities should be permitted a
reasonable opportunity to recover an appropriate amount of the costs incurred
previously in providing electric service ("stranded costs"). Stranded costs
include plant decommissioning costs, regulatory assets, lease and lease-related
costs and other costs recognized under cost-of-service regulation. Utilities
would be allowed to recover no less than 50 percent of such costs through a
nonbypassable charge on all customer bills for five years after implementation
of customer choice. The PRC could authorize a utility to recover up to 100
percent of its stranded costs if the PRC finds that recovery of more than 50
percent: (i) is in the public interest; (ii) is necessary to maintain the
financial integrity of the public utility; (iii) is necessary to continue
adequate and reliable service; and (iv) will not cause an increase in rates to
residential or small business customers during the transition period. Utilities
would also be allowed to recover in full any costs incurred in implementing full
open access ("transition costs"). Those transition costs would be recovered
through 2007 by means of a separate wires charge. Due to uncertainties in the
bill regarding the amounts of recovery and calculation of stranded costs, the
Company is currently unable to determine what financial impact the bill, if
enacted, will have on the Company.
Other significant provisions of the bill include: (i) customers would be
allowed to prepay their allotted share of stranded costs prior to the
implementation of choice for that customer class; (ii) the PRC would adopt and
enforce codes of conduct to protect customer privacy and prevent such
anticompetitive practices as cross-subsidization or favoritism of non-regulated
energy suppliers by regulated affiliates; and (iii) a system benefit charge of
$0.0003 per KWh would be added to customer bills to fund no less than $500,000
annually for low income energy assistance programs, and no more than $4 million
a year for renewable energy projects, in addition to other public interest
programs. The bill provides for penalties of up to $2 million for each violation
of the Act. The bill also requires licensing for competitive power suppliers,
which is defined to include providers of energy-related services.
The Company's primary concerns with the proposed bill revolve around the
treatment of stranded cost recovery. The Company intends to work with the bill's
sponsor, interested parties, and the Legislature as a whole to address its
concerns and to maximize the chances for passage of restructuring legislation
which is beneficial to the State as a whole. It is the Company's position that
this bill goes a long way in properly balancing the interests involved, and, in
that respect, provides a good vehicle for the passage of restructuring
legislation in this session.
On February 28, 1999, the full Senate passed the bill with various
amendments by a vote of 32-6. The Bill has been assigned to both the Business
and Industry Committee and the Appropriation and Finance Committee in the State
House of Representatives ("House") for consideration. The House has a similar
competing bill, House Bill 865, that has been assigned to the House Judiciary
Committee and the House Appropriation and Finance Committee. No hearings have
been scheduled on House Bill 865. The most significant difference between the
two bills is the size of the proposed subsidy for renewable energy technology.
The House bill earmarks approximately $20 million a year for renewable
technology, compared to $4 million designated in Senate Bill 428. However, it is
likely that, like the Company, other parties will continue to seek to amend
various provisions of the bill. Given the Legislature's past reluctance to
implement retail competition, the Company is unable to predict whether or not
legislation will pass or what its provisions are likely to be.
37
NMPUC REGULATORY ISSUES
Electric Rate Case
On November 30, 1998, the NMPUC issued a final order in the Company's
electric rate case. In the final order, the NMPUC ordered the Company to reduce
its rates for certain cost of service items and for the revaluation of its
generation resources based on a so-called "market-based price" and further
stated that recovery of stranded costs is illegal. The NMPUC's order would
require the Company to reduce rates in 1999 by $60.2 million, by $25.6 million
in 2000 and by an additional $25.6 million in 2001. If the order is implemented
and the Company is required to collect its generation costs at a rate lower than
its embedded cost of generation with no recovery of stranded costs, the Company
could be required to record a pre-tax accounting loss of up to $540 million.
On December 14, 1998, the Company filed a notice of appeal with the
Supreme Court, requesting a stay of the final order pending appeal. The Company
argued that it met the standard for a stay in that there is a likelihood the
Company will prevail on the merits and irreparable harm would occur to the
Company if the stay were not granted and no irreparable harm would occur to
opponents or the public by granting the stay. The Supreme Court granted the
Company's motion for a stay of the final order on December 16, 1998, prohibiting
any further actions or proceedings until further order of the Supreme Court.
On December 23, 1998, the NMPUC filed a motion with the Supreme Court,
requesting the Supreme Court reverse its order so that an immediate $61 million
rate cut could be granted to the Company's customers or, in the alternative,
allow an immediate rate reduction of approximately $37 million, which is the
amount the NMPUC said it would have ordered if it had not revalued generation
assets. On January 13, 1999, the Supreme Court rejected the NMPUC's motion and
affirmed the stay on the electric rate case order indefinitely until the merits
of the case are decided. In addition, the Supreme Court combined the electric
rate case and the REI case (see below).
On March 1, 1999, after hearing oral arguments including arguments by the
PRC supporting the NMPUC order, the Supreme Court took under advisement the
appeal of the NMPUC order on the Company's electric rate case and the writ
petition regarding the rate case (see below). The Supreme Court continued the
stay preventing implementation of the NMPUC rate reduction, pending its
decision.
Residential Electric, Incorporated ("REI")
In October 1998, REI, a new entity incorporated in the state of New
Mexico for the purpose of supplying electricity to retail customers, 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 a
motion for a procedural and case management order and a brief discussing legal
principles based on NMPUC orders in other cases.
38
Hearings were held at the NMPUC in November 1998. Subsequently, the NMPUC
held oral arguments on November 23, 1998, in lieu of briefs, and took the matter
under advisement. The NMPUC issued its order approving REI's requests on
November 30, 1998.
On December 29, 1998, the Company and the AG each filed their respective
notices of appeal of the REI decision at the Supreme Court. In a related matter,
a bipartisan group of legislators, the local business manager of the
International Brotherhood of Electrical Workers, and a member of the Company's
shareholder alliance filed a petition on December 21, 1998, at the Supreme Court
seeking a writ of mandamus (the "writ proceeding") declaring the rate case order
and the REI order as a violation of the separation of powers clause of the State
constitution and prohibiting their enforcement, and requesting a stay of the REI
order. The Supreme Court granted a stay with respect to the REI order and held a
hearing on the issues on January 13, 1999. At the hearing, the Supreme Court
ordered the consolidation of the Company's rate case appeal, the Company's REI
appeals, and the writ proceeding, and continued the stays.
On March 1, 1999, after hearing oral arguments, the Supreme Court granted
the writ of mandamus, overturning the REI order, finding that the NMPUC had
overstepped its authority and departed from the principles that have guided
regulatory policy in New Mexico since 1941.
City of Albuquerque ("COA") Retail Pilot Load Aggregation Program
The COA filed a petition with the NMPUC in September 1997 to institute a
Retail Pilot Load Aggregation Program (the "pilot") wherein COA would serve as a
load aggregator, and the pilot would consist mainly of COA facility loads.
Hearings on COA's pilot proposal were held in January 1998. The Company opposed
the program from the outset stating, among other things, that only the New
Mexico Legislature has the authority to order retail competition or a pilot on
retail access and that the pilot being proposed by COA would provide very little
useful information on retail access. The NMPUC issued an order in August 1998
requiring the Company to implement a 16 MW retail pilot program for a one year
period starting in December 1998. In November 1998, the NMPUC issued an order
requiring the Company to begin pilot enrollment by January 12, 1999, and to
implement the pilot on or before March 1, 1999. The Company filed a motion for
stay with the Supreme Court, arguing that the NMPUC lacks authority to order
retail competition through a pilot program. On December 15, 1998, oral arguments
were held at the Supreme Court and the Supreme Court issued an order, staying
the NMPUC's order on the pilot.
City of Gallup ("Gallup") Complaint
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.
39
In September 1998, the NMPUC issued a final order without conducting a
hearing, stating that Pitt-Midway is not, as a matter of law, obligated to be a
customer of the Company, and ordered that the Company start on or before October
1, 1998 to: (i) wheel power on behalf of Gallup pursuant to existing contractual
obligations under an agreement; (ii) deliver power to Gallup at a specified
substation pursuant to a contract agreement; and (iii) transfer ownership of a
specified transmission line to Pitt-Midway pursuant to a 1975 agreement.
The Company strongly disagreed with the NMPUC's decision and filed, in
September 1998, a motion with the Supreme Court, requesting an emergency stay of
the NMPUC order pending its appeal of the 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 FERC authority. The Supreme Court denied the
Company's request and remanded the matter back to the NMPUC for consideration of
matters raised by the Company. The Company also filed a petition for declaratory
order at the FERC regarding several jurisdictional issues in the NMPUC's order.
The remanded issues were reheard at the NMPUC during October 1998. On
November 30, 1998, the NMPUC issued its "final order on remand", which
essentially reaffirmed its earlier position and order. The Company filed a
supplement to its September 1998 petition for declaratory order at FERC to add
the NMPUC's "final order on remand" to its previously filed information. On
December 15, 1998, the Company also filed a supplement to its notice of appeal
at the Supreme Court to add the "final order on remand" to the record.
The Company worked diligently with Gallup to meet obligations of the
final order on remand. However, Gallup notified the Company that it was
terminating negotiations until all the pending issues were resolved at the FERC
and the Supreme Court.
The Company maintains its position that the FERC has exclusive
jurisdiction over any wholesale transactions, including wholesale power sales to
Gallup, interconnection agreements and wholesale power wheeling on behalf of
Gallup. The Company also believes that the NMPUC orders disregarded New Mexico
law with the respect to municipal boundary limitations. On February 17, 1999,
the Company filed its brief-in-chief in this matter at the Supreme Court. The
Company is currently unable to predict the ultimate outcome of this case and the
effects thereof.
SAN DIEGO GAS AND ELECTRIC COMPANY ("SDG&E") COMPLAINTS
The Company has a 100 MW power sales contract with SDG&E that began in
June 1988 and extends through April 2001. In 1993, 1996 and 1997, SDG&E filed
three separate and similar complaints with the FERC, alleging that certain
charges under the power sales agreement were unjust, unreasonable and unduly
discriminatory. In each of the complaints, SDG&E requested the FERC to
investigate the charges under the agreements. The Company filed responses to
each of the complaints, denying the allegations made by SDG&E, and requested the
FERC dismiss each complaint. The Company has estimated that if the relief sought
by SDG&E is granted for all three complaints, the annual demand charges paid by
SDG&E would be significantly reduced from the date of the ruling through April
2001, and could result in a refund of approximately $41.6 million as of December
31, 1998.
40
In December 1998, the FERC issued an order on the complaints,
consolidating all three dockets, conditionally denying the Company's motion to
dismiss the complaints made in 1993 and 1996, and denying the motion to dismiss
the 1997 complaint. In the order, the FERC stated that it was setting the
complaint for a trial-type, evidentiary hearing, but would hold the hearing in
abeyance and encouraged the parties to make every effort to reach a settlement
before any hearing procedures begin. The FERC indicated that this matter was a
good candidate for settlement because the complaint was confined to narrow,
specific rate issues. The FERC also provided for a settlement judge to assist
the parties in arriving at a settlement. In the event the parties are unable to
reach a settlement, a public hearing will be held and the FERC estimated that a
final decision would not be issued until October 15, 2001. On December 23, 1998,
SDG&E filed a fourth complaint with the FERC, making the same allegations. The
Company again filed a response denying the allegations and requesting summary
dismissal. If the relief sought by the fourth complaint is granted, the Company
would be required to refund an additional $12.5 million plus interest. The
refund period covered by the fourth complaint is February 1999 through May 2000.
Settlement discussions with SDG&E and the FERC Staff were held with the
settlement judge on March 4, 1999. However, the parties were unable to reach
settlement on the issues and the complaint cases will be set for public hearing.
The Company firmly believes that all four complaints are without merit and
intends to vigorously defend its position. The Company cannot predict the
outcome of any proceeding to be held at the FERC.
NEW CUSTOMER BILLING SYSTEM
On November 30, 1998, the Company implemented a new customer billing
system. Due to a significant number of problems associated with the
implementation of the new billing system, the Company has been unable to send
proper bills or bills at all to approximately 10% of its accounts. Under PRC
rules and PRC-approved Company rules, the Company is required to issue customer
bills on a monthly basis.
On February 2, 1999, the Company filed an application for temporary
variance, allowing it to send bills for more than one billing cycle and setting
forth a process designed to mitigate the impact to customers who receive bills
for more than one month of service. The PRC Staff recommended that the PRC grant
the Company a variance under certain conditions and docket a formal
investigation into the prudency of the selection, analysis, implementation,
operational performance and associated costs of the new billing system.
On February 16, 1999, the PRC issued an order granting the Company a
temporary variance through April 15, 1999, which will allow the Company to issue
bills to customers that have been delayed from 60-120 days. The PRC's order also
delayed the docketing of a prudence investigation. In accordance with the order,
the Company submitted a status report on the billing system problems on March 2,
1999, and is required to continue to provide twice weekly updates to the PRC
Staff. In addition, the order stated that the granting of temporary variances
shall neither excuse the Company from past or ongoing violations of the New
Mexico Public Utility Act ("Utility Act") or PRC rules, nor act as retroactive
authorization for actions taken by the Company associated with the
implementation of the new billing system. The order further provided that a
hearing examiner take evidence on whether the Company has violated or is
violating PRC rules, regulations, orders or the Utility Act, and if so, whether
sanctions or fines should be imposed. The PRC may impose penalties for
violations of the Utility Act or failure to obey any lawful order of the PRC in
the amount of $100 to $100,000 for each violation.
41
Because of the problems associated with the Company's new customer
billing system, the Company has been estimating revenues, customer accounts
receivable and bad debt expense since its implementation in November 1998. The
Company's financial, tax and regulatory reports reflect these estimates. The
Company has been diligently working with the software manufacturer to resolve
the problems in an expeditious manner; however, the Company is currently unable
to predict the ultimate timing for the completion of the remediation effort or
ultimate regulatory actions regarding these problems or the ultimate impact on
the Company.
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, 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 such things as 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 completion date goals for each of
the eight phases. Those goals were established at a point when the Company was
still in the early stages of evaluating the extent of the effort required
company-wide to complete the Year 2000 Project. Those goals and the estimated
status of each phase as of February 28, 1999, are set out below:
Phase Targeted Estimated Status of
Year 2000 Project Phase Completion Dates Completion*
----------------------- ---------------- -------------------
Awareness Phase 06/01/98 Completed
Inventory Phase 06/26/98 97%
Assessment Phase 08/28/98 81%
Planning and Scheduling Phase 10/30/98 61%
Repair Phase 04/02/99 32%
Testing Phase 05/28/99 11%
Re-Integration/Deployment Phase 07/02/99 6%
Company-Wide Testing Phase 10/01/99 2%
* The stated percentages represent the status of completion as of
February 28, 1999, of all of the Company's IT Systems and Embedded
Systems, including mission critical systems. For purposes of this
presentation, "mission critical systems" include systems whose
failures could cause an interruption in the supply of electricity or
gas to the Company's customers, could interfere with the Company's
ability to communicate with customers, or could interfere with the
Company's cashflow.
42
The estimated status of any of the eight phases may be adjusted upon
completion of the Assessment Phase on the basis of information then available to
the Company. 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 commences 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 during 1999, the Year 2000 Project
will generate incremental expenditures of approximately $12.6 million. An
additional $2.7 million of payroll cost will be transferred from other
operations and maintenance expenses. In the year 2000, the Company will incur
additional expenditures associated with the steps necessary to finalize the Year
2000 Project and document results. 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. During 1998, the Company incurred approximately $5.3 million
of costs for the Year 2000 Project.
43
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 is working with the Western
Systems Coordinating Council ("WSCC"), as well as with the utilities with which
the Company is directly connected on the grid. The Company will participate in
the initiatives of WSCC in connection with grid stability.
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, because 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.
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.
44
The Company currently expects that the most reasonably likely worst case
scenario in connection with its electric operations will be voltage variations
and some frequency variations around the time of the date rollover to January 1,
2000, and in the following several days. The volume of these events is expected
to be greater than during normal operations. The result will be that the Company
will not be able to control these variations and maintain system stability to
the usual degree. The Company currently believes that existing contingency plans
should adequately address this scenario. The operations of only a small number
of customers would be sensitive to such variations. The Company does not expect
these variations to have a material adverse impact on the Company's operations.
It is also possible, but less likely, that there may be intermittent, short
duration electric outages occurring during the several days following the date
rollover to January 1, 2000.
The Company is, nevertheless, developing contingency plans intended to
further improve the probability that no interruptions in the delivery of
electricity to its customers will occur. These plans are being developed both
internally and in conjunction with the WSCC. The WSCC has made certain
recommendations for electric operations around the date rollover to January 1,
2000. The Company's contingency plans are consistent with those recommendations.
The Company will be establishing a company-wide emergency operations center that
will be staffed prior to the date rollover to January 1, 2000, until it is
decided that the center is no longer required for Year 2000 contingency planning
purposes. The Company will have additional staff present at its power plants and
mission critical substations and switching facilities in case there is a need to
manually operate any systems or make any repairs. Remote facilities will have
backup communications systems in place.
The Company currently expects that the most reasonably likely worst case
scenario in connection with its gas operations is the loss of electric supply to
certain compression and processing facilities belonging to the Company's gas
suppliers and transporters. However, the suppliers and transporters have
provided the Company with information that indicates that there is adequate
natural gas fired compression on their systems to maintain main line pressures.
Further they have represented that the primary processing facilities have
adequate backup sources of electric generation to operate without interruption.
If these facilities incur other unexpected Year 2000 problems, they can bypass
the processing facilities and run the gas through dehydrators to dry the gas
prior to delivery to the main pipelines.
The Company is developing contingency plans intended to further improve
the probability that no interruptions of gas supply will occur. In addition to
the company-wide emergency operations center, the Company will have employees
stationed at mission critical gas interchange points to allow for manual
operation if required. Backup communications systems will be in place for remote
facilities. Alternate operating procedures will be in place in order to maintain
pipeline pressures if any problems are experienced with the backup
communications systems. The Company will have additional supply contracts in
place to allow for delivery of gas from multiple points in case one or more
transporters are unable to deliver the full contracted quantity of gas.
Year 2000 Readiness Disclosure
The Year 2000 statements in "The Year 2000 Issues" section are Year 2000
Readiness Disclosures pursuant to the Year 2000 Information and Readiness
Disclosure Act, Pub. L. No. 105-271, 112 Stat. 2386 (1998).
45
COAL FUEL SUPPLY
The coal requirements for the SJGS are being supplied by SJCC, a wholly
owned subsidiary of BHP, from certain Federal, state and private coal leases
under a Coal Sales Agreement, pursuant to which SJCC will supply processed coal
for operation of the SJGS until 2017. The primary sources of coal for current
operations are a mine adjacent to the SJGS and a mine located approximately 25
miles northeast of the SJGS in the La Plata area of northwestern New Mexico.
In 1997, the Company was notified by SJCC of certain audit exceptions
identified by the Federal Minerals Management Service ("MMS") for the period
1986 through 1997. These exceptions pertain to the valuation of coal for
purposes of calculating the Federal coal royalty. Primary issues include whether
coal processing and transportation costs should be included in the base value of
La Plata coal for royalty determination.
Administrative appeals of the MMS claims are pending.
The Company was notified during the fourth quarter of 1998 that the MMS
agreed to a mediation of the claims. It is the Company's understanding that the
mediation will occur during 1999. The Company is unable to predict the outcome
of this matter and the Company's exposures have not yet been assessed.
The Company was also notified of claims by a private royaltyholder
involving royalty valuation at the La Plata Mine. During the fourth quarter of
1998, the Company was notified that settlement discussions with the private
royaltyholder resulted in potential agreement on all claims. Based on the
Company's understanding of the proposed settlement, it does not believe that a
material impact will result.
In 1996, the Company was notified by SJCC that the Navajo Nation has
proposed to select certain properties within the San Juan and La Plata Mines
(the "mining properties") pursuant to the Navajo-Hopi Land Settlement Act of
1974 (the "Act"). The mining properties are operated by SJCC under leases from
the BLM and comprise a portion of the fuel supply for the SJGS. An
administrative appeal by SJCC is pending. In the appeal, SJCC expressed concern
that transfer of the mining properties to the Navajo Nation may subject the
mining operations to taxation and additional regulation by the Navajo Nation,
both of which could increase the price of coal that might potentially be passed
on to the SJGS through the existing coal sales agreement. The Company is
monitoring closely the appeal and other developments on this issue and will
continue to assess potential impacts to the SJGS and the Company's operations.
The Company is unable to predict the ultimate outcome of this matter.
ACCOUNTING STANDARDS
Decommissioning: The Staff of the SEC has questioned certain of the
current accounting practices of the electric industry regarding the recognition,
measurement and classification of decommissioning costs for nuclear generating
stations in financial statements of electric utilities. In response to these
questions, the FASB has a project on its agenda to review the accounting for
closure and removal costs, including decommissioning of nuclear power plants. If
current electric industry accounting practices for nuclear power plant
decommissioning are changed, the estimated cost for decommissioning could be
recorded as a liability with recognition of an increase in the cost of the
related nuclear power plant. The Company does not believe that such changes, if
required, would have a material adverse effect on results of operations.
46
Accounting for Derivative Instruments and Hedging Activities, Statement
of Financial Accounting Standards ("SFAS") No. 133: SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The Statement requires that changes in the derivatives' fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows derivative gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. This statement is
effective for fiscal years beginning after June 15, 1999, and cannot be applied
retroactively. The Company has not yet fully quantified the impacts of adopting
SFAS No. 133 on the financial statements. However, it is anticipated that SFAS
No. 133 could increase volatility in earnings and other comprehensive income.
Accounting for Contracts Involved in Energy Trading and Risk Management
Activities (EITF Issue 98-10): In December 1998, the Emerging Issues Task Force
("EITF") of the FASB reached consensus on EITF Issue 98-10. EITF Issue 98-10
requires that energy trading contracts should be marked to market (measured at
fair value determined as of the balance sheet date) with the gains and losses
included in earnings and separately disclosed in the financial statements or
footnotes thereto. EITF Issue 98-10 is effective for fiscal years beginning
after December 15, 1998. The effects of initial application of EITF Issue 98-10
will be reported as a cumulative effect of a change in accounting principle.
Financial statements for periods prior to initial adoption of EITF Issue 98-10
may not be allowed to be restated. The Company is currently evaluating the
Company's energy portfolio to determine which contracts and activities should be
considered trading activities. As a result, the Company has not fully quantified
potential gains or losses related to these activities. The Company does not
believe that the adoption of EITF Issue 98-10 will have a material adverse
effect on the results of operations.
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.
47
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discussion regarding the Company's market risk sensitive
instruments contains forward-looking information involving risks and
uncertainties. The statements regarding potential gains and losses are only
estimates of what may occur in the future. Actual future results may differ
materially from those estimates presented due to the model characteristics and
the risks and uncertainties involved.
The Company is potentially exposed to market risk due to changes in
interest rates, equity and other investment returns and commodity prices. All of
the Company's derivative commodity instruments described below are held for
purposes other than trading. The Company's other financial instruments are held
both for trading and for other purposes.
Interest Rate Risk
The Company's interest rate exposure relates primarily to debt financing
issued to fund capital requirements including refund of maturing debt
securities. Except for the proposed issuance of pollution control revenue bonds
of $11.5 million, the Company currently does not have a plan to issue long-term
debt within the next five years. The Company's long-term debt obligations are
all fixed rate obligations with varying maturities. The Company managed its
interest rate risk through the issuance of fixed-rate debt with varying
maturities. The table below presents principal cash flows, estimated market
values at December 31, 1998, and related weighted average interest rates of the
Company's long-term debt by expected maturity dates.
December 31,
Estimated
Market
1998 1999 2000 2001 2002 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- ---------
(Dollars in Millions)
Pollution Control
Revenue Bonds $0 $0 $0 $0 $0 $ 574.3 $ 574.3 $ 594.6
Weighted-Average
Interest Rate - - - - - 6.15% 6.15%
Senior Unsecured
Notes $ 435.0 $ 435.0 $ 447.9
Weighted-Average
Interest Rate - - - - - 7.22% 7.22%
Total $0 $0 $0 $0 $0 $1,009.3 $1,009.3 $1,042.5
48
Equity and Other Investment Return Risk
At December 31, 1998, the Company's equity and other investment return
exposure related primarily to corporate owned life insurance ("COLI") policies
and equity investments held within the Company's non-qualified and qualified
nuclear decommissioning trusts. (See PART II, ITEM 2, - "PROPERTIES - Nuclear
Plant - PVNGS Decommissioning Funding") In January 1999, the COLI policies were
surrendered for approximately $42.1 million. After repayment of a related bank
loan for $26.7 million incurred by the decommissioning trust for the payments of
COLI policy premiums and interest charges, the Company invested the remaining
$15.4 million in temporary investments within the non-qualified trust. This
investment is carried at its market value of $15.4 million. Neither the fair
value of these investments nor near-term investment losses from reasonably
possible near-term changes in market prices were material to the financial
position, results of operations or liquidity of the Company.
As of December 31, 1998, the fair value of equity investments held within
the trusts was approximately $24.7 million. The Company records the gains or
losses resulting from the market changes in those investments. Neither the fair
value of these investments nor near-term investment losses from reasonably
possible near-term changes in market prices were material to the financial
position, results of operations or liquidity of the Company.
The Company also has other investment return exposure related to $50
million invested in temporary investments. Neither the fair value of these
investments nor the near-term investment losses from reasonably possible
near-term changes in market prices are material to the financial position,
results of operations or liquidity of the Company.
Commodity Price Risk
At December 31, 1998, the Company's derivative commodity price exposure
relates to "swap" agreements entered into by the Company to hedge the price
risks associated with a portion of anticipated 1998-1999 winter-heating season
natural gas purchases. These instruments are settled in cash at or prior to
expiration. Under these instruments, payments are made or received based on the
difference between a fixed and a variable product price. The Company defers the
impact of changes in the market value of these instruments until the related
transaction is completed. As of December 31, 1998, the Company had outstanding
basis swap agreements covering approximately 3 million decatherms of natural gas
purchases through March 1999. The Company had unrealized losses of $3.1 million
at December 31, 1998, related to the outstanding agreements. Neither the fair
value of the derivatives outstanding nor potential, near-term derivative losses
from reasonably possible near-term changes in market prices were material to the
financial position, results of operations or liquidity of the Company. The risk
of gas cost variations under the swap agreements should be mitigated by the PGAC
in New Mexico. The Company is evaluating the use of swap agreements for the
1999-2000 winter heating season.
49
Other Commodity Price Risks
The Company also has commodity price exposure related to agreements other
than derivative financial and commodity instruments and other financial
instruments. The Company utilizes contracts of various duration for the forward
sale and purchase of natural gas to effectively manage its available natural gas
supply portfolio. These agreements contain fixed-priced and variable-price
provisions and are settled in physical delivery. The contracts with variable
pricing provisions are exposed to fluctuations in prices of natural gas due to
unpredictable factors, such as weather, which impacts supply and demand. To
reduce price risk caused by market fluctuations, the Company hedges a portion of
its purchases as discussed under Commodity Price Risk above. The risk of gas
cost variations under the these agreements is mitigated by the PGAC in New
Mexico.
The Company utilizes contracts of various duration for the forward
purchases of coal and uranium to effectively manage its available coal and
uranium supply portfolio for the generation of electricity. These agreements
contain fixed-price and variable-price provisions and are settled by physical
delivery of the commodity.
In the normal course of business, the Company utilizes contracts of
various duration for the forward sale and purchase of electricity to effectively
manage its available generating capacity. Such contracts include forward
contracts for wholesale sales of generating capacity and energy during periods
when the Company's available power resources are expected to exceed the
requirements of its native load customers. It may also include forward contracts
for the purchase of wholesale capacity and energy during periods when the
anticipated market price of electricity is below the Company's expected
incremental power production cost. In addition, for trading purposes, the
Company routinely buys and sells electricity in the wholesale market and also
writes and purchases option contracts on a limited basis. These forward and
option contracts require physical delivery of electricity. The use of these
types of physical commodity instruments is designed to allow the Company to
manage and hedge its contractual commitments, reduce its exposure relative to
the volatility of market prices, and take advantage of selected arbitrage
opportunities.
The Company structures and modifies its net resource position to capture
expected changes in future demand, seasonal market pricing characteristics,
overall market sentiment, and price relationships between different time
periods. The Company is exposed to the risk that fluctuating market prices of
electric power may potentially impact its financial condition, or results of
operations. The Company is not currently using mark-to-market accounting. Actual
gains and losses are recorded for financial statement purposes after physical
delivery. As previously discussed, the requirements of EITF Issue 98-10 are
currently being evaluated and will be adopted in the first quarter of 1999.
The Company's Risk Management Committee (the "Committee") established
policies, procedures, and limits designed to minimize the Company's exposure to
electricity commodity price risk. The Committee periodically reviews these
policies to ensure they are responsive to changing business conditions. The
Company uses a value-at-risk methodology and mark-to-market gains and losses to
assess the market risk of the anticipated excess capacity and electricity
trading portfolio. These exposures are revalued and reported to the Committee
daily.
50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Page
Management's Responsibility for Financial Statements ................... F-1
Report of Independent Public Accountants ............................... F-2
Financial Statements:
Consolidated Statements of Earnings ................................. F-3
Consolidated Statements of Comprehensive Income ..................... F-4
Consolidated Statements of Retained Earnings ........................ F-5
Consolidated Balance Sheets ......................................... F-6
Consolidated Statements of Cash Flows ............................... F-7
Consolidated Statements of Capitalization ........................... F-8
Notes to Consolidated Financial Statements .......................... F-9
Supplementary Data:
Quarterly Operating Results ......................................... F-42
Comparative Operating Statistics .................................... F-43
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Public Service Company of New Mexico (the "Company")
is responsible for the preparation and presentation of the accompanying
consolidated financial statements. The consolidated financial statements have
been prepared in conformity with generally accepted accounting principles and
include amounts that are based on informed estimates and judgments of
management. Management maintains a system of internal accounting controls which
it believes is adequate to provide reasonable assurance that assets are
safeguarded, transactions are executed in accordance with management
authorization and the financial records are reliable for preparing the
consolidated financial statements. The system of internal accounting controls is
supported by written policies and procedures, by a staff of internal auditors
who conduct comprehensive internal audits and by the selection and training of
qualified personnel. The board of directors, through its audit committee
comprised entirely of outside directors, meets periodically with management,
internal auditors and the Company's independent auditors to discuss auditing,
internal control and financial reporting matters. To ensure their independence,
both the internal auditors and independent auditors have full and free access to
the audit committee. The independent auditors, Arthur Andersen LLP, are engaged
to audit the Company's consolidated financial statements in accordance with
generally accepted auditing standards.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Public Service Company of New Mexico:
We have audited the accompanying consolidated balance sheets and statements of
capitalization of Public Service Company of New Mexico (a New Mexico
corporation) and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of earnings, comprehensive income, retained earnings,
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Public Service Company of New
Mexico and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
March 2, 1999
F-2
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31,
--------------------------------------
1998 1997 1996
----------- ----------- -----------
(In thousands except per share amounts)
Operating Revenues:
Electric $ 835,204 $ 722,438 $ 645,639
Gas 255,975 294,769 227,301
Energy Services 1,266 3,314 838
----------- ----------- -----------
Total operating revenues 1,092,445 1,020,521 873,778
----------- ----------- -----------
Operating Expenses:
Fuel and purchased power 310,098 235,508 178,807
Gas purchased for resale 134,755 169,758 103,574
Cost of sales and projects - Energy Services 936 2,631 110
Other operation expenses 293,902 269,013 262,584
Maintenance and repairs 51,666 52,626 49,693
Depreciation and amortization 86,141 82,694 78,115
Taxes, other than income taxes 37,992 36,803 34,837
Income taxes 41,306 41,941 39,650
----------- ----------- -----------
Total operating expenses 956,796 890,974 747,370
----------- ----------- -----------
Operating income 135,649 129,547 126,408
----------- ----------- -----------
Other Income and Deductions:
Other 37,672 21,548 2,367
Income tax expense (14,985) (8,384) (1,099)
----------- ----------- -----------
Net other income and deductions 22,687 13,164 1,268
----------- ----------- -----------
Income before interest charges 158,336 142,711 127,676
----------- ----------- -----------
Interest Charges:
Interest on long-term debt 50,929 46,670 49,009
Other interest charges 12,288 9,544 5,698
----------- ----------- -----------
Net interest charges 63,217 56,214 54,707
----------- ----------- -----------
Net Earnings from Continuing Operations 95,119 86,497 72,969
Discontinued Operations, net of tax:
Loss from operations of gas marketing (7,386) (5,502) (389)
Estimated loss on disposal of gas marketing,
including provision for operating losses
during phase-out period (5,051) - -
----------- ----------- -----------
Net Earnings 82,682 80,995 72,580
Preferred Stock Dividend Requirements 586 586 586
----------- ----------- -----------
Net Earnings Available for Common Stock $ 82,096 $ 80,409 $ 71,994
=========== =========== ===========
Average Number of Common Shares Outstanding 41,774 41,774 41,774
=========== =========== ===========
Net Earnings (Loss) per Common Share:
Earnings from continuing operations $ 2.27 $ 2.05 $ 1.73
Loss from discontinued operations (0.18) (0.13) (0.01)
Estimated loss on disposal of gas marketing (0.12) - -
----------- ----------- -----------
Net Earnings per Common Share (Basic) $ 1.97 $ 1.92 $ 1.72
=========== =========== ===========
Net Earnings per Common Share (Diluted) $ 1.95 $ 1.91 $ 1.71
=========== =========== ===========
Dividends Paid per Share of Common Stock $ 0.77 $ 0.63 $ 0.36
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
Net Earnings $ 82,682 $ 80,995 $ 72,580
--------- --------- ---------
Other Comprehensive Income, net of tax:
Unrealized gain (loss) on securities:
Unrealized holding gains arising from
the period 1,519 1,529 1,176
Less reclassification adjustment for
gains included in net income (673) (672) (347)
Minimum pension liability adjustment (205) (626) (478)
--------- --------- ---------
Total Other Comprehensive Income 641 231 351
--------- --------- ---------
Total Comprehensive Income $ 83,323 $ 81,226 $ 72,931
========= ========= =========
Note: Tax expense for Total Other Comprehensive Income for 1998, 1997 and 1996
was $420, $151, and $230, respectively.
The accompanying notes are an integral part of these financial statements.
F-4
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Year Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ---------
(In thousands)
Balance at Beginning of Year $ 129,188 $ 77,185 $ 25,243
Net earnings 82,682 80,995 72,580
Dividends:
Cumulative preferred stock (586) (586) (586)
Common stock (25,064) (28,406) (20,052)
--------- --------- --------
Balance at End of Year $ 186,220 $ 129,188 $ 77,185
========== ========== =========
The accompanying notes are an integral part of these financial statements.
F-5
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
As of December 31,
---------------------------
1998 1997
------------ ------------
(In thousands)
Utility Plant, at original cost except PVNGS:
Electric plant in service $ 1,966,277 $ 1,958,912
Gas plant in service 467,758 441,045
Common plant in service 63,245 43,415
Plant held for future use 551 551
------------ ------------
2,497,831 2,443,923
Less accumulated depreciation and amortization 998,175 1,003,086
------------ ------------
1,499,656 1,440,837
Construction work in progress 66,677 104,497
Nuclear fuel, net of accumulated amortization
of $21,898 and $21,263 27,426 27,816
------------ ------------
Net utility plant 1,593,759 1,573,150
------------ ------------
Other Property and Investments:
Non-utility property, net of accumulated
depreciation of $1,129 and $2,146 4,875 4,502
Other investments 518,959 307,261
------------ ------------
Total other property and investments 523,834 311,763
------------ ------------
Current Assets:
Cash 2,573 8,705
Temporary investments, at cost 58,707 9,490
Receivables, net of allowance for uncollectible
accounts of $836 and $783 197,906 216,305
Income taxes receivable 8,266 -
Fuel, materials and supplies, at average cost 33,137 33,664
Gas in underground storage, at average cost 2,537 13,158
Other current assets 4,666 4,509
------------ ------------
Total current assets 307,792 285,831
------------ ------------
Deferred charges 151,403 149,811
------------ ------------
$ 2,576,788 $ 2,320,555
============ ============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity:
Common stock outstanding--41,774 shares $ 208,870 $ 208,870
Additional paid-in capital 465,386 469,073
Accumulated other comprehensive income, net of tax 1,127 486
Retained earnings since January 1, 1989 186,220 129,188
------------ ------------
Total common stock equity 861,603 807,617
Minority interest 13,405 -
Cumulative preferred stock without mandatory
redemption requirements 12,800 12,800
Long-term debt, less current maturities 1,008,614 713,995
------------ ------------
Total capitalization 1,896,422 1,534,412
------------ ------------
Current Liabilities:
Short-term debt 26,620 114,100
Accounts payable 113,975 154,501
Dividends payable 147 7,248
Current maturities of long-term debt - 350
Accrued interest and taxes 34,289 24,161
Other current liabilities 28,308 26,102
------------ ------------
Total current liabilities 203,339 326,462
------------ ------------
Deferred Credits:
Accumulated deferred investment tax credits 54,404 57,823
Accumulated deferred income taxes 144,277 124,054
Other deferred credits 278,346 277,804
------------ ------------
Total deferred credits 477,027 459,681
------------ ------------
Commitments and Contingencies
$ 2,576,788 $ 2,320,555
============ ============
The accompanying notes are an integral part of these financial statements.
F-6
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(In thousands)
Cash Flows From Operating Activities:
Net earnings $ 82,682 $ 80,995 $ 72,580
Adjustments to reconcile net earnings to net cash flows
from operating activities:
Depreciation and amortization 98,154 94,924 90,458
Accumulated deferred investment tax credit (3,418) (4,436) (4,476)
Accumulated deferred income taxes 18,292 11,080 31,436
Changes in certain assets and liabilities:
Receivables 17,009 4,554 (83,416)
Fuel, materials and supplies 11,148 (2,883) 5,795
Deferred charges 8,509 (11,190) 5,190
Accounts payable (40,490) 23,808 36,930
Accrued interest and taxes 10,128 805 (3,500)
Deferred credits (1,938) 2,455 12,655
Other (1,676) (371) (9,279)
Other, net 12,587 13,381 11,528
---------- ---------- ----------
Net cash flows from operating activities 210,987 213,122 165,901
---------- ---------- ----------
Cash Flows From Investing Activities:
Utility plant additions (128,784) (128,371) (103,087)
Purchase of PVNGS lease debt (215,701) - -
Increase in nuclear decommissioning trust (3,620) (23,000) -
Return of principal of PVNGS lease obligation bonds 11,337 5,018 -
Utility plant sales - - 333
Other property sales - - 702
Net increase in other property and investments (4,224) (6,814) (14,706)
Escrow for purchase of PVNGS lease obligation bonds - (28,900) (208,446)
Decrease (increase) in temporary investments, net (49,216) (363) 86,844
---------- ---------- ----------
Net cash flows from investing activities (390,208) (182,430) (238,360)
---------- ---------- ----------
Cash Flows From Financing Activities:
Proceeds from issuance of senior unsecured notes 892,728 - -
Redemption of pollution control revenue bonds (463,345)
Redemption of first mortgage bonds (140,206) - -
Short-term borrowings for redemption of first mortgage bonds 140,206 - -
Proceeds from minority interest in Capital Trust 13,405 - -
Bond redemption premium and costs (5,537) (3,693) (5,158)
Proceeds from (repayments of) asset securitization - (13,900) 100,400
Repayments of long-term debt - (14,970) (326)
Trust borrowing for nuclear decommissioning 3,620 23,000 -
Increase (decrease) in short-term debt (231,306) 4,600 -
Exercise of employee stock options (3,687) (1,285) -
Dividends paid (32,789) (26,864) (15,560)
---------- ---------- ----------
Net cash flows from financing activities 173,089 (33,112) 79,356
---------- ---------- ----------
Increase (Decrease) in Cash (6,132) (2,420) 6,897
Cash at Beginning of Year 8,705 11,125 4,228
---------- ---------- ----------
Cash at End of Year $ 2,573 $ 8,705 $ 11,125
========== ========== ==========
Supplemental cash flow disclosures:
Interest paid $ 50,109 $ 57,302 $ 55,480
========== ========== ==========
Income taxes paid, net of refunds $ 49,048 $ 20,175 $ 31,617
========== ========== ==========
Cash consists of currency on hand and demand deposits.
The accompanying notes are an integral part of these financial statements.
F-7
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
-------------------------
1998 1997
----------- -----------
(In thousands)
Common Stock Equity:
Common Stock, par value $5 per share $ 208,870 $ 208,870
Additional paid-in capital 465,386 469,073
Accumulated other comprehensive income, net of tax 1,127 486
Retained earnings since January 1, 1989 186,220 129,188
----------- -----------
Total common stock equity 861,603 807,617
----------- -----------
Minority Interest 13,405 -
----------- -----------
Cumulative Preferred Stock:
Without mandatory redemption requirements:
1965 Series, 4.58% with a stated value of $100.00 and a
current redemption price of $102.00. Outstanding shares
at December 31, 1998 were 128,000. 12,800 12,800
----------- -----------
Long-Term Debt:
Issue and Final Maturity
First Mortgage Bonds (taxable) - 140,206
First Mortgage Bonds, Pollution Control Revenue Bonds:
5.7% due 2016 65,000 65,000
5.75% to 6.4% due 2016 through 2026 - 463,345
6.375% due 2022 46,000 46,000
----------- -----------
Total First Mortgage Bonds 111,000 714,551
----------- -----------
Senior Unsecured Notes, Pollution Control Revenue Bonds:
6.30% due 2016 77,045 -
5.75% due 2022 37,300 -
5.80% due 2022 100,000 -
6.375% due 2022 90,000 -
6.375% due 2023 36,000 -
6.40% due 2023 100,000 -
6.30% due 2026 23,000 -
----------- -----------
Total Senior Unsecured Notes, Pollution Control
Revenue Bonds 463,345 -
----------- -----------
Senior Unsecured Notes:
7.10% due 2005 300,000 -
7.50% due 2018 135,000 -
Other, including unamortized premium and (discounted), net (731) (206)
----------- -----------
Total long-term debt 1,008,614 714,345
Less current maturities - 350
----------- -----------
Long-term debt, less current maturities 1,008,614 713,995
----------- -----------
Total Capitalization $1,896,422 $1,534,412
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-8
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
Organization
Public Service Company of New Mexico (the "Company") is an
investor-owned utility company engaged in the generation, transmission,
distribution and sale of electricity. The Company provides retail electric
service to a large area of north central New Mexico, including the cities of
Albuquerque, Santa Fe, Rio Rancho, Las Vegas, Belen and Bernalillo. The Company
also provides retail electric service to Deming in southwestern New Mexico and
to Clayton in northeastern New Mexico. The Company is also engaged in the
transmission, distribution and sale of natural gas within the State of New
Mexico. The Company distributes natural gas to most of the major communities in
New Mexico, including Albuquerque and Santa Fe. In addition, the Company
provides energy and utility related services under its Energy Services Business
Unit. These activities include energy management services, management services
for water and wastewater systems and utility related management and operation
services. The Company is also operating the City of Santa Fe's water system.
Systems of Accounts
The Company maintains its accounts for utility operations primarily in
accordance with the uniform systems of accounts prescribed by the Federal Energy
Regulatory Commission ("FERC") and the National Association of Regulatory
Utility Commissioners, and adopted by the New Mexico Public Regulation
Commission ("PRC"), the successor of the New Mexico Public Utility Commission
("NMPUC"), effective January 1, 1999.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and subsidiaries in which it owns a majority voting interest. All significant
intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual recorded amounts could differ from those estimated.
F-9
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies (Continued)
Utility Plant
Utility plant, with the exception of Palo Verde Nuclear Generating
Station ("PVNGS") Unit 3 and the Company's owned interests in PVNGS Units 1 and
2, is stated at original cost, which includes capitalized payroll-related costs
such as taxes, pension and other fringe benefits, administrative costs and an
allowance for funds used during construction. Utility plant includes certain
electric assets not subject to regulation. The results of operations of such
electric assets are included in operating income.
It is Company policy to charge repairs and minor replacements of
property to maintenance expense and to charge major replacements to utility
plant. Gains or losses resulting from retirements or other dispositions of
operating property in the normal course of business are credited or charged to
the accumulated provision for depreciation.
Depreciation and Amortization
Provision for depreciation and amortization of utility plant is made at
annual straight-line rates approved by the NMPUC. The average rates used are as
follows:
1998 1997 1996
---- ---- ----
Electric plant .................... 3.32% 3.33% 3.32%
Gas plant ......................... 3.06% 3.23% 3.27%
Common plant ...................... 7.34% 7.60% 7.00%
The provision for depreciation of certain equipment is charged to
clearing accounts and subsequently allocated to operating expenses or
construction projects based on the use of the equipment. Depreciation of
non-utility property is computed on the straight-line method. Amortization of
nuclear fuel is computed based on the units of production method.
Nuclear Decommissioning
The Company accounts for nuclear decommissioning costs on a
straight-line basis over the estimated useful life of the facilities. Such
amounts are based on the present value of expenditures estimated to be required
to decommission the plant.
F-10
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies (Continued)
Fuel and Purchased Power Cost Adjustment Clause ("FPPCAC")
The Company uses the deferral method of accounting for fuel and
purchased power costs for its firm-requirements wholesale customers. Such
amounts are reflected in subsequent periods under a FPPCAC approved by the FERC.
Purchased Gas Adjustment Clause ("PGAC")
The Company uses the deferral method of accounting for gas purchase costs
which are settled in subsequent periods under gas adjustment clauses. Future
recovery of these costs is subject to approval by the PRC.
Amortization of Debt Discount, Premium and Expense
Discount, premium and expense related to the issuance of long-term debt
are amortized over the lives of the respective issues. In connection with the
retirement of long-term debt, such amounts associated with resources subject to
PRC regulation are amortized over the lives of the respective issues. Amounts
associated with the Company's firm-requirements wholesale customers and its
resources excluded from PRC retail rates are recognized immediately as expense
or income as they are incurred.
Income Taxes
The Company reports income tax expense in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
SFAS No. 109 requires that deferred income taxes for temporary differences
between financial and income tax reporting be recorded using the liability
method. Therefore, deferred income taxes are computed using the statutory tax
rates scheduled to be in effect when temporary differences reverse. Current PRC
jurisdictional rates include the tax effects of the majority of these temporary
differences (normalization). Recovery of reversing temporary differences
previously accounted for under the flow-through method is also included in rates
charged to customers. For regulated operations, any changes in tax rates applied
to accumulated deferred income taxes may not be immediately recognized because
of ratemaking and tax accounting provisions required by the Internal Revenue
Code. Items accorded flow-through treatment under PRC orders, deferred income
taxes and the future ratemaking effects of such taxes, as well as corresponding
regulatory assets and liabilities, are recorded in the financial statements.
F-11
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies (Continued)
New Accounting Standards
The Financial Accounting Standards Board ("FASB") issued SFAS No. 130,
Reporting Comprehensive Income, SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information and SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits, all of which were adopted in
1998.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in financial statements. The objective
of this standard is to report a measure of all changes in equity that result
from transactions and other economic events of the period other than
transactions with owners.
SFAS No. 131 requires a public company to report selected information
about its reportable operating segments in annual and interim financial
statements. Operating segments are components of an enterprise that engage in
business activities that earn revenues and incur expenses, and are evaluated
regularly by the chief operating decision maker within a company for making
operating decisions and assessing performance.
SFAS No. 132 standardizes the disclosure requirements for pensions and
other postretirement benefits other than pensions. This statement requires
additional information on changes in the benefit obligations and fair values of
plan assets and eliminates certain disclosures that are no longer useful.
Nuclear Decommissioning Costs
The Staff of the Securities and Exchange Commission ("SEC") has
questioned certain of the current accounting practices of the electric industry
regarding the recognition, measurement and classification of decommissioning
costs for nuclear generating stations in financial statements of electric
utilities. In response to these questions, the FASB has a project on its agenda
to review the accounting for closure and removal costs, including
decommissioning of nuclear power plants. If current electric industry accounting
practices for nuclear power plant decommissioning are changed, estimated cost
for decommissioning could be recorded as a liability with recognition of an
increase in the cost of the related nuclear power plant. The Company does not
believe that such changes, if required, would have a material adverse effect on
results of operations.
Performance Stock Plan
The Company continues to apply Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized for this plan.
F-12
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(2) Risks and Uncertainties
Electric Rate Case
On November 30, 1998, the NMPUC issued a final order in the Company's
electric rate case. In the final order, the NMPUC ordered the Company to reduce
its rates for certain cost of service items and for the revaluation of its
generation resources based on a so-called "market-based price" and further
stated that recovery of stranded costs is illegal. The NMPUC's order would
require the Company to reduce rates in 1999 by $60.2 million, by $25.6 million
in each year 2000 and by an additional $25.6 million in 2001. If the order is
implemented and the Company is required to collect its generation costs at a
rate lower than its embedded cost of generation with no recovery of stranded
costs, the Company could be required to record a pre-tax accounting loss of up
to $540 million.
On December 14, 1998, the Company filed a notice of appeal with the New
Mexico Supreme Court ("Supreme Court"), requesting a stay of the final order
pending appeal. The Company argued that it met the standard for a stay in that
there is a likelihood the Company will prevail on the merits and irreparable
harm that would occur to the Company if the stay were not granted and no
irreparable harm would occur to opponents or the public by granting the stay.
The Supreme Court granted the Company's motion for a stay of the final order on
December 16, 1998, prohibiting any further actions or proceedings until further
order of the Supreme Court.
On December 23, 1998, the NMPUC filed a motion with the Supreme Court,
requesting the Supreme Court reverse its order so that an immediate $61 million
rate cut could be granted to the Company's customers or, in the alternative,
allow an immediate rate reduction of approximately $37 million, which is the
amount the NMPUC said it would have ordered if it had not revalued generation
assets. On January 13, 1999, the Supreme Court rejected the NMPUC's motion and
affirmed the stay on the electric rate case order indefinitely until the merits
of the case are decided.
On March 1, 1999, after hearing oral arguments including arguments by the
PRC supporting the NMPUC order, the Supreme Court took under advisement the
appeal of the NMPUC order on the Company's electric rate case and the writ
petition regarding the rate case. The Supreme Court continued the stay
preventing implementation of the NMPUC rate reduction, pending its decision.
F-13
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(2) Risks and Uncertainties (Continued)
Electric Industry Restructuring Act of 1999
Senate Bill 428, sponsored by Senator Michael Sanchez, was introduced in
the 1999 New Mexico Legislature on February 5, 1999. Under the proposed bill,
customer choice of power supplier would be available to schools, residential
customers and small business customers in New Mexico beginning January 1, 2001,
and to all customers beginning January 1, 2002. Transmission and distribution
services along with related services such as meter reading and billing would
remain subject to the PRC jurisdiction. This bill would not require a public
utility to divest itself of any of its assets owned or leased. However, before
January 1, 2001, a public utility would be required to organize into at least
two corporations, dividing regulated from unregulated services through either
the creation of separate affiliated companies under a holding company or through
the creation of separate non-affiliated corporations.
If enacted, the bill would require all public utilities operating in New
Mexico to submit a transition plan to the PRC no later than March 1, 2000, to be
approved no later than December 1, 2000. The transition plan would include
proposed tariffs for transmission and distribution services, together with
proposed standard offer service tariffs for residential and small business
customers who do not select a power supplier. The plan would also include
proposals for effectively separating the utilities' regulated and non-regulated
business activities.
The bill recognizes that electric utilities should be permitted a
reasonable opportunity to recover an appropriate amount of the costs incurred
previously in providing electric service ("stranded costs"). Stranded costs
include plant decommissioning costs, regulatory assets, lease and lease-related
costs and other costs recognized under cost-of-service regulation. Utilities
would be allowed to recover no less than 50 percent of such costs through a
nonbypassable charge on all customer bills for five years after implementation
of customer choice. The PRC could authorize a utility to recover up to 100
percent of its stranded costs if the PRC finds that recovery of more than 50
percent: (i) is in the public interest; (ii) is necessary to maintain the
financial integrity of the public utility; (iii) is necessary to continue
adequate and reliable service; and (iv) will not cause an increase in rates to
residential or small business customers during the transition period. Utilities
would also be allowed to recover in full any costs incurred in implementing full
open access ("transition costs"). Those transition costs would be recovered
through 2007 by means of a separate wires charge. Due to uncertainties in the
bill regarding the amounts of recovery and calculation of stranded costs, the
Company is currently unable to determine what financial impact the bill, if
enacted, will have on the Company.
F-14
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(2) Risks and Uncertainties (Continued)
Other significant provisions of the bill include: (i) customers would be
allowed to prepay their allotted share of stranded costs prior to the
implementation of choice for that customer class; (ii) the PRC would adopt and
enforce codes of conduct to protect customer privacy and prevent such
anticompetitive practices as cross-subsidization or favoritism of non-regulated
energy suppliers by regulated affiliates; and (iii) a system benefit charge of
$0.0003 per KWh would be added to customer bills to fund no less than $500,000
annually for low income energy assistance programs, and no more than $4 million
a year for renewable energy projects, in addition to other public interest
programs. The bill provides for penalties of up to $2 million for each violation
of the Act. The bill also requires licensing for competitive power suppliers,
which is defined to include providers of energy-related services.
The Company's primary concerns with the proposed bill revolve around the
treatment of stranded cost recovery. The Company intends to work with the bill's
sponsor, interested parties, and the Legislature as a whole to address its
concerns and to maximize the chances for passage of restructuring legislation
which is beneficial to the State as a whole. It is the Company's position that
this bill goes a long way in properly balancing the interests involved, and, in
that respect, provides a good vehicle for the passage of restructuring
legislation in this session.
On February 28, 1999, the full Senate passed the bill with various
amendments by a vote of 32-6. The Bill has been assigned to both the Business
and Industry Committee and the Appropriation and Finance Committee in the State
House of Representatives ("House") for consideration. The House has a similar
competing bill, House Bill 865, that has been assigned to the House Judiciary
Committee and the House Appropriation and Finance Committee. No hearings have
been scheduled on House Bill 865. The most significant difference between the
two bills is the size of the proposed subsidy for renewable energy technology.
The House bill earmarks approximately $20 million a year for renewable
technology, compared to $4 million designated in Senate Bill 428. However, it is
likely that, like the Company, other parties will continue to seek to amend
various provisions of the bill. Given the Legislature's past reluctance to
implement retail competition, the Company is unable to predict whether or not
legislation will pass or what its provisions are likely to be.
F-15
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(3) Regulatory Assets and Liabilities
The Company is subject to the provisions of SFAS No. 71, Accounting for
the Effects of Certain Types of Regulation, on operations regulated by the PRC.
Regulatory assets represent probable future revenue to the Company associated
with certain costs which will be recovered from customers through the ratemaking
process. Regulatory liabilities represent probable future reductions in revenues
associated with amounts that are to be credited to customers through the
ratemaking process. Regulatory assets and liabilities reflected in the
Consolidated Balance Sheets as of December 31 relate to the following:
1998 1997
---- ----
(In thousands)
Deferred Income Taxes ............................$ 71,653 $ 70,968
Loss on Reacquired Debt .......................... 11,108 8,869
Gas Take-or-Pay Costs ............................ 10,740 19,953
Gas Reservation Fees ............................. 7,029 7,029
Gas Imputed Revenues ............................. 6,726 12,823
PGAC ............................................. 5,294 16,006
Deferred Customer Expense on Gas Assets Sale ..... 5,260 5,260
Gas Retirees' Health Care Costs .................. 4,804 6,345
Proposed Transmission Line Costs ................. 2,660 2,903
Gas Rate Case Costs .............................. 1,571 1,571
Other ............................................ 471 118
--------- ----------
Subtotal .................................... 127,316 151,845
--------- ----------
Deferred Income Taxes ............................ (49,971) (53,132)
Gas Regulatory Reserve ........................... (21,308) (27,881)
Customer Gain on Gas Assets Sale ................. (7,643) (11,856)
PVNGS Prudence Audit ............................. (6,185) (6,561)
Settlement Due Customers ......................... (3,564) (3,743)
Gain on Reacquired Debt .......................... (531) (546)
Other ............................................ (773) (723)
--------- ----------
Subtotal (89,975) (104,442)
--------- ----------
Net Regulatory Assets .......................$ 37,341 $ 47,403
========= =========
F-16
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(3) Regulatory Assets and Liabilities (Continued)
As of December 31, 1998, substantially all of the Company's regulatory
assets and regulatory liabilities are being recovered in rates charged to
customers or have been addressed in a regulatory proceeding. If a portion of the
Company's operations under the PRC jurisdiction becomes no longer subject to the
provisions of SFAS No. 71, a write off of related regulatory assets and
liabilities would be required, unless some form of transition cost recovery
(refund) continues through rates established and collected for the Company's
remaining regulated operations. The enactment of the Electric Industry
Restructuring Act of 1999 would require the Company to discontinue the
application of SFAS No. 71 to certain of the Company's operations; however,
discontinuance of the application of SFAS No. 71 would not result in a material
adverse impact to the Company. Based on a current evaluation of the various
factors and conditions that are expected to impact future cost recovery, the
Company believes that its net regulatory assets are probable of future recovery.
(4) Capitalization
Changes in common stock, additional paid-in capital and cumulative
preferred stock are as follows:
Cumulative
Preferred Stock
--------------------
Without Mandatory
Redemption
Common Stock Requirements
---------------------- --------------------
Additional Aggregate
Number Aggregate Paid-In Number Stated
of Shares Par Value Capital of Shares Value
--------- --------- ---------- --------- ---------
(Dollars in thousands)
Balance at December 31, 1996 41,774,083 $ 208,870 $ 470,358 128,000 $ 12,800
Exercise of stock options - - (1,285) - -
----------- ---------- ---------- --------- ---------
Balance at December 31, 1997 41,774,083 208,870 469,073 128,000 12,800
Exercise of stock options - - (3,687) - -
----------- ---------- ---------- --------- ---------
Balance at December 31, 1998 41,774,083 $ 208,870 $ 465,386 128,000 $ 12,800
=========== ========== ========== ========= =========
Common Stock
The number of authorized shares of common stock with par value of $5 per
share is 80 million shares. The declaration of common dividends is dependent
upon a number of factors including earnings and financial condition of the
Company, the Supreme Court decisions on the Company's various regulatory cases
and market conditions.
F-17
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(4) Capitalization (Continued)
On September 16, 1996, the Company implemented a dividend reinvestment
and stock purchase plan for investors, including customers and employees. The
plan, called PNM Direct, also includes safekeeping services and automatic
investment features. The Company's stock is purchased in the open market to meet
plan requirements.
Cumulative Preferred Stock
The number of authorized shares of cumulative preferred stock is 10
million shares. The Company has 128,000 shares, 1965 Series, 4.58%, stated value
of $100 per share, of cumulative preferred stock outstanding. The 1965 Series
does not have a mandatory redemption requirement but may be redeemable at 102%
of the par value with accrued dividends. The holders of the 1965 Series are
entitled to payment before holders of common stock in the event of any
liquidation or dissolution or distribution of assets of the Company. In
addition, the 1965 Series is not entitled to a sinking fund and cannot be
converted into any other class of stock of the Company. The Company's restated
articles of incorporation limit the amount of preferred stock which may be
issued. The earnings test in the Company's restated articles of incorporation
currently allows for the issuance of additional preferred stock.
Long-Term Debt
On March 11, 1998, the Company modified its 1947 Indenture of Mortgage
and Deed of Trust; no future bonds can be issued under the mortgage. The first
mortgage bonds continue to serve as collateral for the tax-exempt pollution
control revenue bonds ("PCBs") in the outstanding principal amount of $111
million.
The Company has no long-term debt that matures from 1999 through 2003.
In March 1998, the Company replaced the first mortgage bonds
collateralizing $463 million of PCBs with senior unsecured notes ("SUNs") which
were issued under a new senior unsecured note indenture. Also, in 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 PVNGS. With the
exception of the $111 million of PCBs secured by first mortgage bonds, the SUNs
are and will be the senior debt of the Company.
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.
F-18
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(4) Capitalization (Continued)
Revolving Credit Facility and Other Credit Facilities
At December 31, 1998, the Company has a $300 million unsecured revolving
credit facility (the "Facility") with an expiration date of March 31, 2003. The
Company must pay commitment fees of .200% per year on the total amount of the
Facility. The Company also has a $100 million credit facility, which expires on
May 20, 2001, and is collateralized by the Company's electric and gas customer
accounts receivable and certain amounts being recovered from gas customers
relating to certain gas contract settlements. In addition, the Company has $25
million in local lines of credit.
Fair Value of Financial Instruments
The estimated fair value of the Company's financial instruments
(including current maturities) at December 31, is as follows:
1998 1997
---------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- --------- --------
(In thousands)
Long-Term Debt .............................. $1,008,614 $1,042,557 $ 714,345 $ 743,524
Decommissioning Trust Debt................... $ 26,620 $ 26,620 $ 23,000 $ 23,000
Investment in PVNGS Lessors' Notes........... $ 443,748 $ 459,167 $ - $ -
Investment in PVNGS LOBs .................... $ - $ - $ 237,774 $ 236,049
Decommissioning Trust........................ $ 59,803 $ 64,509 $ 51,857 $ 53,900
Fossil-Fueled Plant Decommissioning Trust.... $ 7,676 $ 7,676 $ 7,245 $ 7,273
Rabbi Trust.................................. $ 9,804 $ 17,012 $ 10,080 $ 15,218
Fair value is based on market quotes provided by the Company's
investment bankers.
The carrying amounts reflected on the consolidated balance sheets
approximate fair value for cash, temporary investments, and receivables and
payables due to the short period of maturity.
F-19
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(5) Earnings Per Share
In accordance with SFAS No. 128, Earnings per Share, dual presentation
of basic and diluted earnings per share has been presented in the Consolidated
Statements of Earnings. The following reconciliation illustrates the impact on
the share amounts of potential common shares and the earnings per share amounts:
Per-Share
Income Shares Amount
------- -------- ---------
(In thousands except per
share amounts)
December 31, 1998
Net Earnings $82,682
Less: Preferred stock dividends (586)
--------
Basic Earnings per Share
Net earnings available for common stock 82,096 41,774 $1.97
=======
Options issued - 298
-------- --------
Diluted Earnings per Share
Net earnings available for common stock $82,096 42,072 $1.95
======== ======== =======
December 31, 1997
Net Earnings $80,995
Less: Preferred stock dividends (586)
--------
Basic Earnings per Share
Net earnings available for common stock 80,409 41,774 $1.92
=======
Options issued - 217
-------- --------
Diluted Earnings per Share
Net earnings available for common stock $80,409 41,991 $1.91
======== ======== =======
December 31, 1996
Net Earnings $72,580
Less: Preferred stock dividends (586)
--------
Basic Earnings per Share
Net earnings available for common stock 71,994 41,774 $1.72
=======
Options issued - 332
-------- --------
Diluted Earnings per Share
Net earnings available for common stock $71,994 42,106 $1.71
======== ======== =======
F-20
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(6) Income Taxes
Income taxes consist of the following components:
1998 1997 1996
---- ---- ----
(In thousands)
Current Federal income tax ................... $26,824 $32,911 $14,815
Current state income tax ..................... 10,157 9,859 2,847
Deferred Federal income tax .................. 15,062 8,781 22,372
Deferred state income tax .................... (484) (397) 4,936
Amortization of accumulated investment
tax credits ............................... (3,418) (4,436) (4,476)
------- ------- -------
Total income taxes ........................ $48,141 $46,718 $40,494
Charged to operating expenses ................ $41,306 $41,941 $39,650
Charged to other income and deductions ...... 6,835 4,777 844
------- ------- -------
Total income taxes......................... $48,141 $46,718 $40,494
======= ======= =======
The Company's provision for income taxes differed from the Federal
income tax computed at the statutory rate for each of the years shown. The
differences are attributable to the following factors:
1998 1997 1996
---- ---- ----
(In thousands)
Federal income tax at statutory rates ........ $45,788 $44,700 $39,576
Investment tax credits ....................... (3,418) (4,436) (4,476)
Depreciation of flow-through items ........... 531 519 519
Gains on the sale and leaseback of PVNGS
Units 1 and 2 ............................. 527) (527) (527)
State income tax ............................. 6,129 5,963 5,192
Other ........................................ (362) 499 210
------- ------- -------
Total income taxes ........................ $48,141 $46,718 $40,494
======= ======= =======
F-21
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(6) Income Taxes (Continued)
Deferred income taxes result from certain temporary differences between
the recognition of income and expense for tax and financial reporting purposes,
as described in note 1. The major sources of these differences for which
deferred taxes have been provided and the tax effects of each are as follows:
1998 1997 1996
---- ---- ----
(In thousands)
Deferred fuel costs ...................... $(11,097) $(9,133) $ 8,234
Depreciation and cost recovery ........... 7,526 6,390 18,048
Contributions in aid of construction ..... (2,826) (3,185) (4,053)
Alternative minimum tax in excess of
regular tax ............................ 21,144 12,482 (1,052)
PVNGS decommissioning .................... (618) (1,512) 537
Contribution to 401(h) plan .............. (763) 3,181 (510)
Regulatory liability ..................... - - (6,651)
Curtailment gain ........................ - - 5,272
Transmission project cost ................ - - 4,898
Other .................................... 1,212 161 2,585
------- ------- --------
Net deferred taxes provided ........... $14,578 $ 8,384 $ 27,308
======= ======= ========
The components of the net accumulated deferred income tax liability
were:
1998 1997
---- ----
(In thousands)
Deferred Tax Assets:
Alternative minimum tax credit carryforward ..... $ 34,055 $55,198
Nuclear decommissioning .......................... 20,062 18,226
Regulatory liabilities ........................... 47,615 50,689
Other ............................................ 45,480 46,079
-------- --------
Total deferred tax assets ..................... $147,212 $170,192
Deferred Tax Liabilities:
Depreciation ..................................... $184,462 $182,641
Investment tax credit ............................ 54,404 57,823
Fuel costs ....................................... 12,808 23,905
Regulatory assets ................................ 69,298 68,524
Other ............................................ 24,921 19,176
-------- --------
Total deferred tax liabilities ................ 345,893 352,369
-------- --------
Accumulated deferred income taxes, net .............. $198,681 $181,877
======== ========
F-22
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(6) Income Taxes (Continued)
The following table reconciles the change in the net accumulated
deferred income tax liability to the deferred income tax expense included in the
consolidated statement of earnings for the period:
Net change in deferred income tax liability per above table....... $16,804
Change in tax effects of income tax related regulatory
assets and liabilities ......................................... (3,848)
Tax effect of excess pension liability............................ 134
Tax effect of mark-to-market on investments available for sale.... (1,930)
--------
Deferred income tax expense for the period........................ $11,160
========
The Company has no net operating loss carryforwards as of December 31,
1998.
(7) Employee and Other Postretirement Benefits
Pension Plan
The Company and its subsidiaries have a pension plan covering
substantially all of their employees, including officers. The plan is
non-contributory and provides for benefits to be paid to eligible employees at
retirement based primarily upon years of service with the Company and the
average of their highest annual base salary for three consecutive years. The
Company's policy is to fund actuarially-determined contributions. Contributions
to the plan reflect benefits attributed to employees' years of service to date
and also for services expected to be provided in the future. Plan assets
primarily consist of common stock, fixed income securities, cash equivalents and
real estate.
In December 1996, the Company's Board approved changes to the Company's
defined benefit pension plan and the implementation of a defined contribution
plan effective January 1, 1998. As a result, the Company recorded a curtailment
gain of approximately $13.3 million in the consolidated financial statements for
the year ended December 31, 1996.
F-23
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(7) Employee and Other Postretirement Benefits (Continued)
The following sets forth the pension plan's funded status, components
of pension costs and amounts (in thousands) at December 31:
Pension Benefits
---------------------
1998 1997
--------- ---------
Change in Benefit Obligation:
Benefit obligation at beginning of year $297,679 $259,051
Service cost 6,660 6,535
Interest cost 20,101 19,592
Actuarial loss 19,380 25,001
Benefits paid (13,772) (12,500)
--------- ---------
Benefit obligation at end of period 330,048 297,679
--------- ---------
Change in Plan Assets:
Fair value of plan assets at beginning of year 330,550 273,981
Actual return on plan assets 13,593 69,069
Employer contribution 185 2,000
Benefits paid (13,772) (12,500)
--------- ---------
Fair value of plan assets at end of year 330,556 332,550
--------- ---------
Funded Status 508 34,871
Unamortized transition assets (3,486) (4,650)
Unrecognized net actuarial loss 19,714 (12,828)
Unrecognized prior service cost 112 146
--------- ---------
Prepaid benefit cost $ 16,848 $ 17,539
========= =========
Weighted - Average Assumptions as of December 31,
Discount rate 6.75% 7.25%
Expected return on plan assets 8.50% 8.25%
Rate of compensation increase N/A N/A
F-24
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(7) Employee and Other Postretirement Benefits (Continued)
Pension Benefits
-----------------------------------
1998 1997 1996
---------- --------- ----------
Components of Net Periodic Benefit Cost:
Service cost $ 6,660 $ 6,535 $ 8,540
Interest cost 20,101 19,592 20,546
Expected return on plan assets (26,755) (23,426) (31,211)
Amortization of prior service cost (1,130) (1,130) 9,577
---------- --------- ----------
Net periodic benefit cost (1,124) 1,571 7,452
Curtailment gain - - (13,317)
---------- --------- ----------
Total pension expense (benefit) $ (1,124) $ 1,571 $ (5,865)
========== ========= ==========
Other Postretirement Benefits
The Company provides medical and dental benefits to eligible retirees.
Currently, retirees are offered the same benefits as active employees after
reflecting Medicare coordination. The following sets forth the plan's funded
status, components of net periodic benefit cost (in thousands) at December 31:
Other Benefits
----------------------
1998 1997
---------- ----------
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 59,084 $ 58,399
Service cost 1,292 1,300
Interest cost 4,501 4,452
Actuarial loss (gain) 9,662 (5,067)
---------- ----------
Benefit obligation at end of period 74,539 59,084
---------- ----------
Change in Plan Assets:
Fair value of plan assets at beginning of year 33,158 20,930
Actual return on plan assets 4,444 6,076
Employer contribution - 6,152
---------- ----------
Fair value of plan assets at end of year $ 37,602 $ 33,158
---------- ----------
F-25
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(7) Employee and Other Postretirement Benefits (Continued)
Other Benefits
------------------
1998 1997
-------- ---------
Funded Status $(36,937) $(25,926)
Unamortized transition assets 6,826 (4,033)
Unrecognized prior service cost 25,440 27,257
-------- --------
Accrued benefit cost $ (4,671) $ (2,702)
======== ========
Weighted - Average Assumptions as of December 31,
Discount rate 6.75% 7.25%
Expected return on plan assets 8.75% 8.75%
Rate of compensation increase n/a n/a
1998 1997 1996
-------- --------- --------
Components of Net Periodic Benefit Cost:
Service cost $ 1,292 $ 1,300 $ 1,449
Interest cost 4,501 4,452 4,478
Expected return on plan assets (2,943) (1,884) (1,367)
Amortization of prior service cost 1,817 1,817 1,817
-------- --------- --------
Net periodic benefit cost $ 4,667 $ 5,685 $ 6,377
======== ========= ========
The effect of a 1% increase in the health care trend rate assumption
would increase the accumulated postretirement benefit obligation as of December
31, 1998, by approximately $13.6 million and the aggregate service and interest
cost components of net periodic postretirement benefit cost for 1998 by
approximately $1.2 million. The health care cost trend rate is expected to
decrease to 5.0% by 2010 and to remain at that level thereafter.
F-26
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(7) Employee and Other Postretirement Benefits (Continued)
Executive Retirement Program
The Company has an executive retirement program for a group of management
employees. The program was intended to attract, motivate and retain key
management employees. The Company's projected benefit obligation for this
program, as of December 31, 1998, was $19.5 million, of which the accumulated
and vested benefit obligation was $19.5 million. As of December 31, 1998, the
Company has recognized an additional liability of $5.8 million for the amount of
unfunded accumulated benefits in excess of accrued pension costs. The net
periodic pension cost for 1998, 1997 and 1996 was $2.3 million, $2.2 million and
$2.1 million, respectively. In 1989, the Company established an irrevocable
grantor trust in connection with the executive retirement program. Under the
terms of the trust, the Company may, but is not obligated to, provide funds to
the trust, which was established with an independent trustee, to aid it in
meeting its obligations under such program. Marketable securities in the amount
of approximately $9.8 million (fair market value of $17.0 million) are presently
in trust. No additional funds have been provided to the trust since 1989.
Stock Option Plans
The Company's Performance Stock Plan ("PSP") is a non-qualified stock
option plan, covering a group of management employees. Options are granted at
the fair market value of the shares on the date of the grant. Options granted
through December 31, 1995, vested on June 30, 1996, have an exercise term of up
to 10 years. All subsequent awards granted after December 31, 1995, vest three
years from the grant date of the awards. The maximum number of options
authorized are five million shares through December 31, 2000.
In addition, the Company has a Director Retainer Plan ("DRP") which
provides for payment of the Directors' annual retainer in the form of cash,
restricted stock or stock options. The number of options granted in 1998 under
the DRP was 10,000 shares with an exercise price of $12.75. The number of
options exercised during 1998 under the DRP was 5,000. The number of options
outstanding as of December 31, 1998, was 21,000.
The fair value of each option grant is determined on the date of grant
using the Black-Scholes option-pricing model with the following average
assumptions used for grants in 1996, 1997 and 1998, respectively: dividend yield
of 2.4%, 3.0% and 3.75%; expected volatility of 18%, 20% and 26.78%, risk-free
interest rates of 5.59%, 5.69% and 4.65%; and expected lives of four years.
F-27
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(7) Employee and Other Postretirement Benefits (Continued)
A summary of the status of the Company's stock option plans at December
31, and changes during the years then ended is presented below. Prior periods
have been restated for comparability purposes.
1998 1997 1996
-------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- -------------------------------- --------- -------- --------- -------- --------- --------
Outstanding at beginning
of year 1,539,214 $17.704 1,619,406 $15.905 1,652,977 $14.457
Granted 10,000 $12.750 312,707 $23.033 390,228 $19.480
Exercised 473,063 $14.663 379,833 $14.453 408,822 $13.691
Forfeited 79,976 $21.194 13,066 $19.450 14,977 $19.625
--------- --------- ---------
Outstanding at end of year 996,175 $18.819 1,539,214 $ 17.70 1,619,406 $15.905
========= ========= =========
Options exercisable at year-end 400,158 861,221 1,244,155
Weighted-average fair value of
options granted during the year:
PSP N/A $ 4.21 $ 3.56
DRP $7.32 $15.69 $11.50
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Weighted-Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/98 Life Prices at 12/31/98 Prices
-------- ----------- ---------------- -------- ----------- ---------
$ 5.50 -
$ 12.75 21,000 9.33 years $ 9.381 11,000 $ 6.318
$ 11.50 -
$ 23.6875 975,175 7.62 years $ 19.022 389,158 $15.298
--------- ---------- ---------------- -------- ----------- ---------
$ 5.50 -
$ 23.6875 996,175 7.65 years $ 18.819 400,158 $15.051
========== ===========
F-28
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(7) Employee and Other Postretirement Benefits (Continued)
Had compensation cost for the Company's performance stock plan been
determined consistent with SFAS No. 123, Accounting for Stock-Based
Compensation, the effect on the Company's pro forma net earnings and pro forma
earnings per share would be as follows:
1998 1997 1996
---- ---- ----
(In thousands except per
share amounts)
Net Earnings:
(Available for common) As Reported $82,096 $80,409 $71,994
Pro Forma $81,554 $80,018 $70,952
Basic EPS: As Reported $ 1.97 $ 1.92 $ 1.72
Pro Forma $ 1.95 $ 1.92 $ 1.70
Diluted EPS: As Reported $ 1.95 $ 1.91 $ 1.71
Pro Forma $ 1.95 $ 1.90 $ 1.70
(8) Construction Program and Jointly-Owned Plants
The Company's construction expenditures for 1998 were approximately
$128.8 million, including expenditures on jointly-owned projects. The Company's
proportionate share of expenses for the jointly-owned plants is included in
operating expenses in the consolidated statements of earnings.
At December 31, 1998, the Company's interests and investments in
jointly-owned generating facilities are:
Construction
Plant in Accumulated Work in Composite
Station (Fuel Type) Service Depreciation Progress Interest
- ----------------------- -------- ------------ ------------ ----------
(In thousands)
San Juan Generating Station (Coal)...... $704,890 $310,678 $15,310 46.3%
Palo Verde Nuclear Generating
Station (Nuclear)..................... $197,369* $ 43,822* $12,156* 10.2%
Four Corners Power Plant
Units 4 and 5 (Coal).................. $120,492 $ 62,494 $ 1,690 13.0%
- -----------
* Includes the Company's interest in PVNGS Unit 3, the Company's interest
in common facilities for all PVNGS units and the Company's owned
interests in PVNGS Units 1 and 2.
F-29
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(8) Construction Program and Jointly-Owned Plants (Continued)
San Juan Generating Station ("SJGS")
The Company operates and jointly owns SJGS. At December 31, 1998, SJGS
Units 1 and 2 are owned on a 50% shared basis with Tucson Electric Power
Company, Unit 3 is owned 50% by the Company, 41.8% by Southern California Public
Power Authority ("SCPPA") and 8.2% by Tri-State Generation and Transmission
Association, Inc. Unit 4 is owned 38.457% by the Company, 28.8% by M-S-R Public
Power Agency, California public power agency ("M-S-R"), 10.04% by the City of
Anaheim, California, 8.475% by the City of Farmington, 7.2% by the County of Los
Alamos, and 7.028% by Utah Associated Municipal Power Systems.
Palo Verde Nuclear Generating Station
The Company is participating in the three 1,270 MW units of PVNGS, also
known as the Arizona Nuclear Power Project, with Arizona Public Service Company
("APS") (the operating agent), Salt River Project, El Paso Electric Company ("El
Paso"), Southern California Edison Company, SCPPA and The Department of Water
and Power of the City of Los Angeles. The Company has a 10.2% undivided interest
in PVNGS, with portions of its interests in Units 1 and 2 held under leases.
During 1998, PVNGS was operated at a capacity factor of 92.5% which was the
highest yearly capacity factor attained at the plant. This capacity factor was
primarily attributable to record setting low refueling outage days.
PVNGS Liability and Insurance Matters
The PVNGS participants have insurance for public liability resulting from
nuclear energy hazards to the full limit of liability under Federal law. This
potential liability is covered by primary liability insurance provided by
commercial insurance carriers in the amount of $200 million and the balance by
an industry-wide retrospective assessment program. If losses at any nuclear
power plant covered by the programs exceed the accumulated funds, the Company
could be assessed retrospective premium adjustments. The maximum assessment per
reactor under the program for each nuclear incident is approximately $88
million, subject to an annual limit of $10 million per incident. Based upon the
Company's 10.2% interest in the three PVNGS units, the Company's maximum
potential assessment per incident for all three units is approximately $26.9
million, with an annual payment limitation of $3 million per incident. The
insureds under this liability insurance include the PVNGS participants and "any
other person or organization with respect to his legal responsibility for damage
caused by the nuclear energy hazard". If the funds provided by this
retrospective assessment program prove to be insufficient, Congress could impose
revenue raising measures on the nuclear industry to pay claims.
F-30
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(8) Construction Program and Jointly-Owned Plants (Continued)
The United States Nuclear Regulatory Commission ("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.
The PVNGS participants maintain "all-risk" (including nuclear hazards)
insurance for nuclear property damage to, and decontamination of, property at
PVNGS in the aggregate amount of $2.75 billion as of January 1, 1999, a
substantial portion of which must be applied to stabilization and
decontamination. The Company has also secured insurance against portions of the
increased cost of generation or purchased power and business interruption
resulting from certain accidental outages of any of the three units if the
outages exceeds 17 weeks. The insurance coverage discussed in this section is
subject to certain policy conditions and exclusions. The Company is a member of
an industry mutual insurer. This mutual insurer provides both the "all-risk" and
increased cost of generation insurance to the Company. In the event of adverse
losses experienced by this insurer, the Company is subject to an assessment. The
Company's maximum share of any assessment is approximately $3.3 million per
year.
PVNGS Decommissioning Funding
The Company has a program for funding its share of decommissioning costs
for PVNGS. Under a portion of this program, the Company made a series of annual
deposits under agreements approved by the NMPUC to an external non-qualified
trust which were applied pursuant to a split dollar agreement between the
Company and its employees towards an investment in whole life insurance policies
on certain current and former employees. The program for investment in life
insurance policies has been terminated. The remaining portion of the nuclear
decommissioning funding program is invested in equities in qualified and
non-qualified trusts. The results of the 1998 decommissioning cost study
indicated that the Company's share of the PVNGS decommissioning costs excluding
spent fuel disposal will be approximately $155.4 million (in 1998 dollars).
F-31
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(8) Construction Program and Jointly-Owned Plants (Continued)
Pursuant to NMPUC approval, the Company funded an additional $3.0
million, $2.1 million and $12.5 million in 1998, 1997 and 1996, respectively,
into the qualified and non-qualified trust funds. The estimated market value of
the trusts, including the net cash value of the life insurance policies, at the
end of 1998 was approximately $40 million.
The NRC has recently amended its rules on financial assurance
requirements for the decommissioning of nuclear power plants. The amended rules
became 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 PRC jurisdictional rates, but the costs of PVNGS Unit 3
are excluded from PRC jurisdictional rates. The Company will be filing a report
with the NRC through APS, the operating agent of PVNGS, at the end of March
1999, concerning decommissioning funding assurance, and believes that it will
continue to be allowed to use the external sinking fund method as the sole
financial assurance method for Unit 3.
Nuclear Spent Fuel and Waste Disposal
Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the
"Waste Act"), United States Department of Energy ("DOE") is obligated to accept
and dispose of all spent nuclear fuel and other high-level radioactive wastes
generated by all domestic power reactors. The NRC, pursuant to the Waste Act,
requires operators of nuclear power reactors to enter into spent fuel disposal
contracts with DOE. APS, on its own behalf and on behalf of the other PVNGS
participants, executed a spent fuel disposal contract with DOE. Under the Waste
Act, DOE was to develop the facilities necessary for the storage and disposal of
spent nuclear fuel and to have the first such facility in operation by 1998.
That facility was to be a permanent repository. DOE announced that such a
repository now cannot be completed before 2010.
In response to lawsuits filed over DOE's obligation to accept used
nuclear fuel, the United States Court of Appeals for the D.C. Circuit ("D.C.
Circuit") has ruled that DOE had an obligation to begin accepting used nuclear
fuel in 1998. However, the D.C. Circuit refused to issue an order compelling DOE
to begin moving used fuel. Instead, the D.C. Circuit ruled that any damages to
utilities should be sought under the standard contract signed between DOE and
utilities, including APS, the operating agent of PVNGS. The United States
Supreme Court has refused to grant review of the D.C. Circuit's decisions. In
July 1998, APS filed a petition for review regarding DOE's obligation to begin
accepting spent nuclear fuel.
F-32
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(8) Construction Program and Jointly-Owned Plants (Continued)
APS has capacity in existing fuel storage pools at PVNGS which, with
certain modifications, could accommodate all fuel expected to be discharged from
normal operation of PVNGS through 2002, and believes it could augment that wet
storage with the new facilities for on-site dry storage of spent fuel for an
indeterminate period of operation beyond 2002, subject to obtaining any required
governmental approvals. The Company currently estimates that it will incur
approximately $41 million (in 1998 dollars) over the life of PVNGS for its share
of the costs related to the on-site interim storage of spent nuclear fuel. The
Company accrues these costs as a component of fuel expense, meaning the charges
are accrued as the fuel is burned. During 1998, the Company expensed
approximately $12 million for on-site interim nuclear fuel storage costs related
to nuclear fuel burned prior to 1999. APS currently believes that spent fuel
storage or disposal methods will be available for use by PVNGS to allow its
continued operation beyond 2002.
A low-level radioactive waste facility built in 1995 at the PVNGS site
could store an amount of waste equivalent to 10 years of normal operation of
PVNGS. Although some low-level waste has been stored on-site, APS is currently
shipping low-level waste to off-site facilities. APS currently believes that
interim low-level waste storage methods are or will be available for use by
PVNGS to allow its continued operation and to safely store low-level waste until
a permanent facility is available.
While believing that scientific and financial aspects of the issues of
spent fuel and low-level waste storage and disposal can be resolved
satisfactorily, the Company acknowledges that their ultimate resolution in a
timely fashion will require political resolution and action on national and
regional scales which it is less able to predict.
(9) Long-Term Power Contracts
The Company has a power purchase contract with Southwestern Public
Service Company ("SPS") which originally provided for the purchase of up to 200
MW, expiring in May 2011. The Company may reduce its purchases from SPS by 25 MW
annually upon three years' notice. The Company provided such notice to reduce
the purchase by 25 MW in 1999 and by an additional 25 MW in 2000. The Company
has 39 MW of contingent capacity obtained from El Paso under a transmission
capacity for generation capacity trade arrangement that increases up to 70 MW
from 1999 through 2003. In addition, the Company is interconnected with various
utilities for economy interchanges and mutual assistance in emergencies. The
Company has been actively trading in the wholesale power market and has entered
into and anticipates that it will continue to enter into power purchases to
accommodate its trading activity.
The Company anticipates the need for approximately 100 to 200 MW of
additional capacity in the 1999 through 2000 timeframe. To meet projected
capacity needs, in 1996, the Company entered into a long-term power purchase
F-33
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(9) Long-Term Power Contracts (Continued)
agreement ("PPA") with Cobisa-Person Limited Partnership ("PLP") to purchase
approximately 100 MW of unit contingent peaking capacity from a gas turbine
generating unit for a period of 20 years, with an option to renew for an
additional five years. In September 1997, the NMPUC approved the Company's and
PLP's applications for the project. In December 1997, PLP also received FERC
approval for "exempt wholesale generator" status with respect to the gas turbine
generating unit. In March 1998, the Company and PLP executed amendments to the
PPA and to the associated site lease and interconnection agreement, and executed
a new water use lease. The PPA was amended to change the maximum capacity the
Company was obligated to take to 132 MW and to change the commercial operation
date from May 1999 to May 2000. The gas turbine generating unit will be
constructed and operated by PLP and will be located on the Company's retired
Person Generating Station site in Albuquerque, New Mexico. The site for the
generating unit was chosen, in part, to provide needed benefits to the Company's
constrained transmission system. Primary fuel for the gas turbine generating
unit will be natural gas, which will be provided by the Company. In addition,
the unit will have the capability to utilize low sulfur fuel oil in the event
natural gas is not available.
In the September 1997 NMPUC order, the NMPUC approved the project
application and a stipulated settlement agreement ("Stipulation") which had been
entered into earlier among the Company, PLP and the NMPUC staff to resolve
certain issues raised in this proceeding. The Stipulation included, among other
things, a provision wherein the Company committed, in cooperation with the NMPUC
staff, to the development and evaluation of a request for proposal ("RFP") for
the purchase of approximately 5 MW of capacity from solar generation resources.
The Company was not obligated to build such a unit or commit to such a solar
power purchase agreement prior to the NMPUC approval of a full-cost recovery
mechanism.
By order dated October 27, 1998, the NMPUC approved the Company's
implementation of a rate rider to collect a 0.5 percent surcharge on all retail
electric bills to pay for solar and other renewable resource projects. Under the
NMPUC's order, one-half of the monies collected under the rider will be used to
purchase or acquire resources the Company had pursued through the solar RFP
process, while the other half of the monies will be used for other renewable
resource projects.
In November 1998, the NMPUC adopted a rule that establishes a "renewable
energy development program" and requires New Mexico utilities to collect
voluntary contributions to a renewable energy fund from their customers. The
stated purpose of the rule is to support research, development, demonstration
and deployment of renewable energy resources. Funds collected by each utility
are to be spent by it on projects approved by the PRC based upon the
recommendations of a Renewable Energy Advisory Board which will be appointed by
the PRC. The Company has requested the PRC to exempt it from the rule on the
grounds that the rule is more than satisfied by the renewable resource program
and 0.5 percent surcharge specifically approved for the Company by the NMPUC in
October 1998. The Company's request is pending.
F-34
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(9) Long-Term Power Contracts (Continued)
In addition to the long-term power purchase contract with the PLP, the
Company is pursuing other options to ensure its additional capacity needs are
met.
(10) Lease Commitments
The Company leases interests in Units 1 and 2 of PVNGS, certain
transmission facilities, office buildings and other equipment under operating
leases. The lease expense for PVNGS is $66.3 million per year over base lease
terms expiring in 2015 and 2016. Prior to 1992, the aggregate lease expense for
the PVNGS leases was $84.6 million per year over the base lease terms; however,
this amount was reduced by the purchase of approximately 22% of the beneficial
interests in the PVNGS Units 1 and 2 leases (see note 8). The Company has since
reacquired the ownership of those specific interests in PVNGS Units 1 and 2.
Each PVNGS lease contains renewal and fair market value purchase options at the
end of the base lease term. Covenants in the Company's PVNGS Units 1 and 2 lease
agreements limit the Company's ability, without consent of the owner
participants and bondholders in the lease transactions, (i) to enter into any
merger or consolidation, or (ii) except in connection with normal dividend
policy, to convey, transfer, lease or dividend more than 5% of its assets in any
single transaction or series of related transactions.
Future minimum operating lease payments (in thousands) at December 31, 1998
are:
1999 ............................................... $ 79,805
2000 ............................................... 78,974
2001 ............................................... 78,779
2002 ............................................... 78,666
2003 ............................................... 78,663
Later years ........................................ 875,088
----------
Total minimum lease payments .................... $1,269,975
==========
Operating lease expense, inclusive of PVNGS leases, was approximately
$82.6 million in 1998, $80.8 million in 1997 and $80.3 million in 1996.
Aggregate minimum payments to be received in future periods under noncancelable
subleases are approximately $5.3 million.
(11) Environmental Issues
The Company is committed to complying with all applicable environmental
regulations. Environmental issues have presented and will continue to present a
challenge to the Company. The Company has evaluated the potential impacts of the
following environmental issues and believes, after consideration of established
reserves, that the ultimate outcome of these environmental issues will not have
a material adverse effect on the Company's financial condition or results of
operations.
F-35
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(11) Environmental Issues (Continued)
Electric Operations
Santa Fe Generating Station ("Santa Fe Station")
The Company and the New Mexico Environment Department ("NMED") have
conducted investigations of the gasoline and chlorinated solvent groundwater
contamination detected beneath the former Santa Fe Station site to determine the
source of the contamination pursuant to a 1992 Settlement Agreement ("Settlement
Agreement") between the Company and the NMED. In June 1996, the Company received
a letter from the NMED, indicating that the NMED believes the Company is the
source of gasoline contamination in a municipal well supplying the City of Santa
Fe and of groundwater underlying the Santa Fe Station site. Further, the NMED
letter stated that the Company was required to proceed with interim remediation
of the contamination pursuant to the New Mexico Water Quality Control Commission
regulations.
In October 1996, the Company and the NMED signed an amendment to the
Settlement Agreement concerning the groundwater contamination underlying the
site. As part of the amendment, the Company agreed to spend approximately $1.2
million for certain costs related to sampling, monitoring, and the development
and implementation of a remediation plan.
The amended Settlement Agreement does not, however, provide the Company
with a full and complete release from potential further liability for
remediation of the groundwater contamination. After the Company has expended the
settlement amount, if the NMED can establish through binding arbitration that
the Santa Fe Station is the source of the contamination, the Company could be
required to perform further remediation that is determined to be necessary. The
Company continues to dispute any contention that the Santa Fe Station is the
source of the groundwater contamination and believes that insufficient data
exists to identify the sources of groundwater contamination. The Company's
aquifer characterization and groundwater quality reports complied from 1996 to
1999 strongly suggest the groundwater contamination does not originate from the
Santa Fe Station site and has been drawn under the site by the pumping of the
Santa Fe supply well.
The Company and the NMED, with the cooperation of the City of Santa Fe,
jointly selected a remediation plan proposed by a remediation contractor. The
City of Santa Fe, the Company and the NMED entered into a memorandum of
understanding concerning the selected remediation plan and the operation of the
municipal well adjacent to the Santa Fe Station site in connection with carrying
out that plan. Construction of a new Santa Fe well and booster station has been
completed. The new system began operation on October 5, 1998, to treat
groundwater produced by the Santa Fe well to drinking water standards for
municipal distribution and the stimulation of naturally occurring bioremediation
of groundwater contamination beneath the Santa Fe Station site.
F-36
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(11) Environmental Issues (Continued)
Person Station
The Company, in compliance with a Corrective Action Directive issued by
the NMED, determined that groundwater contamination exists in the deep and
shallow groundwater at the Person Station site. The Company is required to
delineate the extent of the contamination and remediate the contaminants in the
groundwater at the Person Station site. The extent of shallow and deep
groundwater contamination was assessed and the results were reported to the
NMED. The Company currently is involved with the process to renew the Resource
Conservation and Recovery Act ("RCRA") post-closure care permit for the
facility. Remedial actions for the shallow and deep groundwater will be
incorporated into the new permit. The Company has installed and is operating a
pump and treat system for the shallow groundwater. The Company has proposed a
monitoring program in conjunction with natural attenuation processes as the most
cost effective approach for the deep groundwater remediation. The Company's
current estimate to decommission its retired fossil-fueled plants includes
approximately $5.0 million in additional expenses to complete the groundwater
remediation program at Person Station. As part of the financial assurance
requirement of the Person Station Hazardous Waste Permit, the Company
established a trust fund. The current value of the trust fund at December 31,
1998, was $7.7 million. The remediation program continues on schedule.
Gas Operations
Pit Closure and Remediation
In 1995, the Jicarilla Apache Tribe ("Jicarilla") enacted an ordinance
directing that unlined surface impoundments located within environmentally
sensitive areas be remediated and closed by December 1996, and that all other
unlined surface impoundments on Jicarilla lands be remediated and closed by
December 1998. In 1995, the Company received a claim for indemnification by
Williams Gas Processing-Blanco, Inc. ("Williams"), the purchaser of the
Company's gas gathering and processing assets, for the environmental work
required to comply with the Jicarilla ordinance. The Company submitted a
closure/remediation plan to the Jicarillas' environmental protection office,
which was approved. The Company's remediation work pursuant to the plan
commenced in 1996, and the costs of remediation are being charged against the
$10.6 million indemnification cap contained in the purchase and sale agreement
between the Company and Williams. The Company completed remediation and closed
pits within the environmentally sensitive area in 1996, and completed
remediation and closure of all other pits on the Jicarilla Apache Reservation
associated with the sale of gas gathering and processing assets by the December
1998 deadline specified in the ordinance.
F-37
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(12) Discontinued Operations
On August 4, 1998, the Company adopted a plan to discontinue the gas
trading operations of its Energy Services Business Unit. Accordingly, the gas
marketing operations of its Energy Services Business Unit are reported as
discontinued operations. Estimated losses on the disposal of the gas marketing
segment was $5.1 million (net of income tax benefit of $3.3 million), which
includes a provision for anticipated operating losses prior to disposal.
Operating results of the discontinued operations prior to the date of
discontinuation are shown separately in the accompanying consolidated statements
of earnings. Such amounts include income tax benefits related to the losses from
discontinued operations of $4.8 million in 1998, $3.6 million in 1997 and $.3
million in 1996. Total sales from the discontinued operations were $159.2
million, $114.7 million and $9.6 million in 1998, 1997 and 1996, respectively.
Prior to the decision to discontinue non-utility operations, such total sales
and income tax benefits were included in operating revenues and operating
expenses in the consolidated statement of earnings.
F-38
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(13) Segment Information
In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. The Company's principal business segments
are the four regulated business units: Electric Service Business Unit
("Distribution"), Transmission Service Business Unit ("Transmission"), Bulk
Power Business Unit ("Generation") and Gas Services Business Unit ("Gas"). The
Company's non operating subsidiaries and Energy Services Business Unit are not
reportable segments and are included in "Other" for reconciliation purposes.
Intersegment revenues are determined based on a formula mutually agreed upon
between affected segments and are not based on market rates. Such intersegment
items are eliminated for consolidation purposes.
Summarized financial information by business segment for 1998, 1997 and
1996 is as follows:
Electric
--------------------------------------
Distribution Transmission Generation Gas Other Total
------------ ------------ ---------- -------- -------- ----------
(In thousands)
1998:
Operating revenues:
External customers $539,972 $ 15,596 $ 279,636 $255,975 $ 1,266 $1,092,445
Intersegment revenues - $ 29,091 $ 362,722 - $ - $ 391,813
Depreciation and amortization $ 23,396 $ 8,527 $ 38,292 $ 15,863 $ 63 $ 86,141
Interest income $ 9,200 $ 4,286 $ 15,001 $ 6,130 $ 424 $ 35,041
Net interest charges $ 16,057 $ 7,547 $ 26,179 $ 13,784 $ (350) $ 63,217
Operating income tax expense (benefit) $ 10,217 $ 2,518 $ 27,632 $ 4,597 $ (3,658) $ 41,306
Segment net income (loss) $ 22,317 $ 6,828 $ 61,949 $ 11,056 $(19,468) $ 82,682
Total assets $583,104 $197,085 $1,328,691 $443,750 $ 24,158 $2,576,788
Gross property additions $ 50,399 $ 9,156 $ 30,969 $ 38,260 - $ 128,784
1997:
Operating revenues:
External customers $522,835 - $ 199,603 $294,769 $ 3,314 $1,020,521
Intersegment revenues - - $ 370,019 - $ - $ 370,019
Depreciation and amortization $ 21,754 - $ 46,335 $ 14,587 $ 18 $ 82,694
Interest income $ 6,715 - $ 12,714 $ 4,313 $ 34 $ 23,776
Net interest charges $ 15,900 - $ 27,613 $ 12,701 - $ 56,214
Operating income tax expense (benefit) $ 13,890 - $ 22,556 $ 7,587 $ (2,092) $ 41,941
Segment net income (loss) $ 24,496 - $ 51,260 $ 14,602 $ (9,363) $ 80,995
Total assets $607,898 - $1,178,036 $479,320 $ 55,301 $2,320,555
Gross property additions $ 45,302 - $ 51,661 $ 31,408 - $ 128,371
F-39
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(13) Segment Information (Continued)
Electric
--------------------------------------
Distribution Transmission Generation Gas Other Total
------------ ------------ ---------- -------- -------- ----------
(In thousands)
1996:
Operating revenues:
External customers $510,936 - $ 134,703 $227,301 $ 838 $ 873,778
Intersegment revenues - - $ 380,000 - $ - $ 380,000
Depreciation and amortization $ 19,883 - $ 44,934 $ 13,122 $ 176 $ 78,115
Interest income $ 2,386 - $ 5,700 $ 4,420 - $ 12,506
Net interest charges $ 12,346 - $ 30,817 $ 11,544 - $ 54,707
Operating income tax expense (benefit) $ 8,559 - $ 23,863 $ 8,927 $(1,699) $ 39,650
Segment net income (loss) $ 16,800 - $ 52,237 $ 8,909 $(5,366) $ 72,580
Total assets $579,793 - $1,139,827 $484,073 $26,621 $2,230,314
Gross property additions $ 49,221 - $ 27,351 $ 26,497 $ 18 $ 103,087
The Transmission Service Business Unit was established in 1998. Prior to
1998, it was combined with the Bulk Power Business Unit. Prior periods
information for the Transmission Service Business Unit is not available.
On August 4, 1998, the Company adopted a plan to discontinue the gas
trading operations of its Energy Services Business Unit (see note 12). Included
in the line item Segment net income (loss) under Other are losses of $18,501,
$9,050 and $5,058 for the discontinued operations for 1998, 1997 and 1996,
respectively.
F-40
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
QUARTERLY OPERATING RESULTS
The unaudited operating results by quarters for 1998 and 1997 are as follows:
Quarter Ended
--------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(In thousands except per share amounts)
1998:
Operating Revenues ................................$282,560 $230,478 $320,438 $258,969
Operating Income ..................................$ 36,626 $ 26,042 $ 47,446 $ 25,535
Earnings Before Discontinued Operations............$ 25,561 $ 16,497 $ 34,656 $ 18,405
Net Earnings (1)..................................$ 21,214 $ 14,778 $ 31,989 $ 14,701
Net Earnings per share before Discontinued
Operations......................................$ 0.61 $ 0.39 $ 0.83 $ 0.44
Net Earnings per Share (basic).....................$ 0.50 $ 0.35 $ 0.77 $ 0.35
Net Earnings per share (diluted)...................$ 0.50 $ 0.35 $ 0.76 $ 0.34
1997:
Operating Revenues ................................$285,290 $219,435 $254,600 $261,196
Operating Income ..................................$ 36,893 $ 26,781 $ 35,152 $ 30,721
Earnings before Discontinued Operations............$ 25,096 $ 16,354 $ 24,586 $ 20,461
Net Earnings .....................................$ 24,896 $ 15,567 $ 24,319 $ 16,213
Net Earnings per share before Discontinued
Operations.......................................$ 0.60 $ 0.39 $ 0.59 $ 0.48
Net Earnings per Share (basic).....................$ 0.59 $ 0.37 $ 0.58 $ 0.38
Net Earnings per share (diluted)...................$ 0.59 $ 0.37 $ 0.57 $ 0.38
In the opinion of management of the Company, all adjustments (consisting
of normal recurring accruals) necessary for a fair statement of the results of
operations for such periods have been included.
- -------------------
(1) On August 4, 1998, the Company adopted a plan to discontinue the gas
trading operations of its Energy Services Business Unit. As a result,
estimated losses of $1.4 million ($0.03 per common share) and $3.7 million
($0.09 per common share) for the third quarter and the fourth quarter,
respectively, were recognized. (See note 12 of the notes to consolidated
financial statements.) In addition, certain prior periods amounts have been
restated.
F-41
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
COMPARATIVE OPERATING STATISTICS
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Electric Service Energy Sales--KWh (in thousands):
Residential 2,007,852 1,976,434 1,892,290 1,795,371 1,786,292
Commercial 2,888,539 2,841,831 2,698,087 2,578,243 2,534,507
Industrial 1,571,824 1,556,264 1,505,801 1,434,974 1,268,208
Other ultimate customers 271,659 160,370 310,118 220,777 364,144
----------- ----------- ----------- ----------- -----------
Total sales to ultimate customers 6,739,874 6,534,899 6,406,296 6,029,365 5,953,151
Sales for resale 8,782,315 6,785,643 4,575,220 2,590,513 3,361,933
----------- ----------- ----------- ----------- -----------
Total KWh sales 15,522,189 13,320,542 10,981,516 8,619,878 9,315,084
=========== =========== =========== =========== ===========
Electric Revenues (in thousands):
Residential $187,681 $184,813 $177,220 $168,633 $172,559
Commercial 241,968 237,629 226,146 218,222 229,851
Industrial 88,644 86,927 83,651 79,964 79,729
Other ultimate customers 18,124 10,135 20,804 18,749 24,147
----------- ----------- ----------- ----------- -----------
Total revenues to ultimate customers 536,417 519,504 507,821 485,568 506,286
Sales for resale 274,979 185,334 121,329 80,949 * 96,821 *
----------- ----------- ----------- ----------- -----------
Total revenues from energy sales 811,396 704,838 629,150 566,517 603,107
Miscellaneous electric revenues 23,808 17,600 16,489 17,767 18,687
----------- ----------- ----------- ----------- -----------
Total electric revenues $835,204 $722,438 $645,639 $584,284 $621,794
=========== =========== =========== =========== ===========
Customers at Year End:
Residential 319,415 311,314 304,900 296,821 287,369
Commercial 37,652 36,942 36,292 35,390 34,336
Industrial 363 363 375 374 384
Other ultimate customers 665 637 632 598 599
----------- ----------- ----------- ----------- -----------
Total ultimate customers 358,095 349,256 342,199 333,183 322,688
Sales for Resale 83 66 56 37 42
----------- ----------- ----------- ----------- -----------
Total customers 358,178 349,322 342,255 333,220 322,730
=========== =========== =========== =========== ===========
Reliable Net Capability--KW 1,506,000 1,506,000 1,506,000 1,506,000 1,506,000
Coincidental Peak Demand--KW 1,313,000 1,209,000 1,217,000 1,247,000 1,189,000
Average Fuel Cost per Million BTU $ 1.2433 $ 1.2319 $ 1.2735 $1.3177 $1.3488
BTU per KWh of Net Generation 10,784 10,927 10,768 10,811 10,817
Water Service **
Water Sales--Gallon (in thousands) - - - 1,616,544 3,366,388
Revenues (in thousands) - - - $ 6,196 $13,407
Customers at Year End - - - 23,752 23,452
- ---------------------------------------------------
*Due to the provision for the loss associated with the M-S-R contingent power
purchase contract recognized in 1992, operating revenues were reduced by
$7.3 million and $25.0 million for 1995 and 1994, respectively
**On July 3, 1995, the Company sold its water utility division. Water
Service's comparative operating statistics for 1995 are through this date.
F-42
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
COMPARATIVE OPERATING STATISTICS
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Gas Throughput--Decatherms (in thousands)
PNMGS:
Residential 30,258 30,755 27,387 25,865 27,139
Commercial 10,387 10,644 9,310 8,864 9,767
Industrial 1,553 1,280 2,136 661 831
Public authorities 3,427 4,153 2,591 2,411 2,465
Irrigation 1,869 1,593 1,418 1,245 1,272
Sales for resale 1,205 1,233 3,094 1,266 680
Off-system sales 1,889 1,179 5,745 1,176 -
Unbilled (1,343) (202) 1,405 (1,764) (309)
--------- --------- --------- --------- ---------
PNMGS sales 49,245 50,635 53,086 39,724 41,845
Transportation throughput 36,413 33,975 47,010 49,136 43,135
--------- --------- --------- --------- ---------
PNMGS throughput 85,658 84,610 100,096 88,860 84,980
Gathering Company:
Spot market sales - - - 39 -
Transportation throughput - - - 20,695 47,091
--------- --------- --------- --------- ---------
Total throughput 85,658 84,610 100,096 109,594 132,071
========= ========= ========= ========= =========
Gas Revenues (in thousands)
PNMGS:
Residential $161,153 $187,563 $129,911 $125,290 $149,439
Commercial 42,680 50,502 33,022 32,328 42,725
Industrial 4,887 4,536 5,179 1,873 2,905
Public authorities 12,610 17,577 8,018 7,939 9,969
Irrigation 5,780 5,041 3,252 3,077 4,061
Sales for resale 3,596 4,465 2,106 3,114 2,462
Off-system sales 3,816 1,926 14,352 1,885 -
Imbalance penalties 1,416 1,273 1,231 1,786 944
Unbilled (955) (2,172) 2,678 (2,430) 267
--------- --------- --------- --------- ---------
Revenues from gas sales 234,983 270,711 199,749 174,862 212,772
Transportation 13,464 14,172 17,215 18,532 19,742
Liquids 1,463 4,451 7,608 12,782 14,551
Other 6,065 5,435 2,729 3,606 4,705
--------- --------- --------- --------- ---------
PNMGS operating revenues 255,975 294,769 227,301 209,782 251,770
Gathering Company:
Spot market sales - - - 42 -
Transportation - - - 3,640 7,850
Imbalance penalties - - - 418 26
Processing Company:
Liquids revenue - - - 632 (621)
Processing fees - - - 3,471 10,485
--------- --------- --------- --------- ---------
Total operating revenues $255,975 $294,769 $227,301 $217,985 $269,510
========= ========= ========= ========= =========
Customers at Year End
PNMGS:
Residential 383,292 375,032 367,025 358,822 348,715
Commercial 32,004 31,560 30,757 30,493 30,139
Industrial 55 50 54 59 57
Public authorities 2,429 2,735 2,462 2,444 2,463
Irrigation 1,078 1,027 1,076 886 899
Sales for resale 3 3 3 2 3
Gas choice 112 - - - -
Transportation 29 31 36 38 43
--------- --------- --------- --------- ---------
PNMGS customers 419,002 410,438 401,413 392,744 382,319
Gathering Company:
Transportation - - - - 21
Processing Company - - - - 32
--------- --------- --------- --------- ---------
Total customers 419,002 410,438 401,413 392,744 382,372
========= ========= ========= ========= =========
- ------------------------------------
On June 30, 1995, the Company sold substantially all of the gas gathering and
processing assets of the Company and its gas subsidiaries. Comparative operating
statistics for Gathering Company and Processing Company are through this date.
F-43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Reference is hereby made to "Election of Directors" in the Company's
Proxy Statement relating to the annual meeting of stockholders to be held on
June 8, 1999 (the "1999 Proxy Statement"), to PART I, SUPPLEMENTAL ITEM -
"EXECUTIVE OFFICERS OF THE COMPANY" and "Other Matters" "Section 16(a)
Beneficial Ownership Reporting Compliance" in the 1999 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Reference is hereby made to "Executive Compensation" in the 1999 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is hereby made to "Voting Information", "Election of Directors"
and "Stock Ownership of Certain Executive Officers" in the 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is hereby made to the 1999 Proxy Statement for such disclosure,
if any, as may be required by this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) - 1. See Index to Financial Statements under Item 8.
(a) - 2. Financial Statement Schedules for the years 1998, 1997,
and 1996 are omitted for the reason that they are not
required or the information is otherwise supplied.
(a) - 3-A. Exhibits Filed:
Exhibit
No. Description
------- -----------
10.20.2 Amendment No. 2 dated as of April 10, 1987 to Facility
Lease dated as of August 12, 1986, as amended, between
The First National Bank of Boston, not in its individual
capacity, but solely as Owner Trustee under a Trust
Agreement, dated as of August 12, 1986, with MFS Leasing
Corp., Lessor and Public Service Company of New Mexico,
Lessee (refiled).
E-1
Exhibit
No. Description
------- -----------
10.23** Restated and Amended Public Service Company of New
Mexico Accelerated Management Performance Plan (1988)
(August 16, 1988) (refiled).
10.23.1** First Amendment to Restated and Amended Public Service
Company of New Mexico Accelerated Management Performance
Plan (1988) (August 30, 1988) (refiled).
10.23.2** Second Amendment to Restated and Amended Public Service
Company of New Mexico Accelerated Management Performance
Plan (1988) (December 29, 1989) (refiled).
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
- ----------
** Designates each management contract or compensatory plan or
arrangement required to be identified pursuant to paragraph 3 of
Item 14(a) of Form 10 -K.
(a) - 3-B. Exhibits Incorporated By Reference:
In addition to those Exhibits shown above, the Company hereby
incorporates the following Exhibits pursuant to Exchange Act Rule 12b-32 and
Regulation S-K section 10, paragraph (d) by reference to the filings set forth
below:
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession
2.1 Purchase and Sale Agreement By and 4-(b) to Registration Statement 2-99990
Among Public Service Company of No. 2-99990 of the Company.
New Mexico, Sunterra Gas Gathering
Company, Sunterra Gas Processing
(Sellers) and Williams Gas Processing -
Blanco, Inc. (Buyer).
2.1.1 First Amendment to Purchase and Sale 2.1.1 to Annual Report of the 1-6986
Agreement By and Among Public Registrant on Form 10-K for
Service Company of New Mexico, fiscal year ended December
Sunterra Gas Gathering Company, 31, 1994.
Sunterra Gas Processing Company
(Sellers) and Williams Gas Processing -
Blanco, Inc. (Buyer).
E-2
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
2.1.2 Second Amendment to Purchase and 2.1.2 to Annual Report of the 1-6986
Sale Agreement By and Among Public Registrant on Form
Service Company of New Mexico, 10-K for fiscal year ended
Sunterra Gas Gathering Company, December 31, 1994.
Sunterra Gas Processing Company
(Sellers) and Williams Gas Processing-
Blanco, Inc. (Buyer)
2.2 Agreement to Purchase and Sell Between 4-(b) to Registration Statement 2-99990
City of Santa Fe, New Mexico and No. 2-99990 of the Company.
Public Service Company of New Mexico.
2.2.1 First Amendment to Agreement to 2.2.1 to Annual Report of the 1-6986
Purchase and Sell Between the City of Registrant on Form
Santa Fe, New Mexico and Public 10-K for fiscal year
Service Company of New Mexico. ended December 31, 1994.
2.2.2 Second Amendment to Agreement to 2.2.2 to Annual Report of the 1-6986
Purchase and Sell Between the City of Registrant on Form
Santa Fe, New Mexico and Public 10-K for fiscal year ended
Service Company of New Mexico. December 31, 1994.
2.2.3 Third Amendment to Agreement to 2.2.3 to Annual Report of the 1-6986
Purchase and Sell Between the City of Registrant on Form
Santa Fe, New Mexico and Public 10-K for fiscal year ended
Service Company of New Mexico. December 31, 1994.
2.2.4 Fourth Amendment to Agreement to 2.2.4 to Annual Report of the 1-6986
Purchase and Sell Between the City of Registrant on Form
Santa Fe, New Mexico and Public 10-K for fiscal year ended
Service Company of New Mexico. December 31, 1994.
2.2.5 Fifth Amendment to Agreement to Purchase and 2.2.5 to Annual Report of the 1-6986
Sell Between the City of Santa Fe, New Mexico Registrant on Form 10-K for
and Public Service Company of New Mexico. fiscal year ended December 31,
1994.
2.2.6 Sixth Amendment to Agreement to Purchase and 2.2.6 to Annual Report of the 1-6986
Sell Between the City of Santa Fe, New Mexico Registrant on Form 10-K for
and Public Service Company of New Mexico. fiscal year ended December 31,
1994.
2.2.7 Seventh Amendment to Agreement to 2.2.7 to the Company's 1-6986
Purchase and Sell Between the City Quarterly Report on Form
of Santa Fe, New Mexico and Public 10-Q for the quarter ended June
Service Company of New Mexico. 30, 1995.
E-3
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
Articles of Incorporation and By-laws
3.1 Restated Articles of Incorporation of the 4-(b) to Registration Statement 2-99990
Company, as amended through May 10, No. 2-99990 of the Company.
1985.
3.2 By-laws of Public Service Company of 3.2 to Annual Report of the 1-6986
New Mexico With All Amendments to Registrant on Form 10-K for the
and including December 5, 1994. fiscal year ended December 31,
1994.
Instruments Defining the Rights of Security Holders, Including Indentures
4.1 Indenture of Mortgage and Deed of 4-(d) to Registration Statement 2-99990
Trust dated as of June 1, 1947, between No. 2-99990 of the Company.
the Company and The Bank of New York
(formerly Irving Trust Company), as Trustee,
together with the Ninth Supplemental
Indenture dated as of January 1, 1967, the
Twelfth Supplemental Indenture dated as of
September 15, 1971, the Fourteenth
Supplemental Indenture dated as of December
1, 1974 and the Twenty- second Supplemental
Indenture dated as of October 1, 1979
thereto relating to First Mortgage Bonds of
the Company.
4.2 Portions of sixteen supplemental 4-(e) to Registration Statement 2-99990
indentures to the Indenture of Mortgage No. 2-99990 of the Company.
and Deed of Trust dated as of June 1, 1947,
between the Company and The Bank of New York
(formerly Irving Trust Company), as Trustee,
relevant to the declaration or payment of
dividends or the making of other
distributions on or the purchase by the
Company of shares of the Company's Common
Stock.
4.3 Fifty-third Supplemental Indenture, dated 4.3 to the Company's Quarterly 1-6986
as of March 11, 1998, supplemental to Report on Form 10-Q for the
Indenture of Mortgage and Deed of Trust, quarter ended March 31, 1998.
dated as of June 1, 1947, between the
Company and The Bank of New York
(formerly Irving Trust Company), as
trustee.
E-4
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
4.4 Indenture (for Senior Notes), dated as of 4.4 to the Company's 1-6986
March 11, 1998, between the Company and The Quarterly Report on Form
Chase Manhattan Bank, as Trustee. 10-Q for the quarter ended March
31, 1998.
4.5 First Supplemental Indenture, dated as 4.5 to the Company's 1-6986
of March 11, 1998, supplemental to Quarterly Report on Form
Indenture, dated as of March 11, 1998, 10-Q for the quarter ended March
between the Company and The Chase 31, 1998.
Manhattan Bank, as Trustee.
4.6 Second Supplemental Indenture, dated 4.6 to the Company's Quarterly 1-6986
as of March 11, 1998, supplemental to Report on Form
Indenture, dated as of March 11, 1998, 10-Q for the quarter ended March
between the Company and The Chase 31, 1998.
Manhattan Bank, as Trustee.
4.7 Indenture (for Senior Notes), dated as of 4.1 to Registration 33-53367
August 1, 1998, between the Company Statement No. 33-53367 of the
and The Chase Manhattan Bank, as Company.
Trustee.
4.8 First Supplemental Indenture, dated 4.3 to the Company's 1-6986
August 1, 1998, supplemental to Current Report on Form 8-K
Indenture, dated as of August 1, dated August 7, 1998.
1998, between the Company and the
Chase Manhattan Bank, as Trustee.
Material Contracts
10.1 Supplemental Indenture of Lease dated as 4-D to Registration Statement No. 2-26116
of July 19, 1966 between the Company 2-26116 of the Company.
and other participants in the Four Corners
Project and the Navajo Indian Tribal
Council.
10.1.1 Amendment and Supplement No. 1 to 10.1.1 to Annual Report of the 1-6986
Supplemental and Additional Indenture of Registrant on Form 10-K for fiscal
Lease dated April 25, 1985 between the year ended December 31, 1995.
Navajo Tribe of Indians and Arizona
Public Service Company, El Paso Electric
Company, Public Service Company of
New Mexico, Salt River Project
Agricultural Improvement and Power
District, Southern California Edison
Company, and Tucson Electric Power
Company (refiled).
E-5
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
10.2 Fuel Agreement, as supplemented, dated 4-H to Registration Statement No. 2-35042
as of September 1, 1966 between Utah 2-35042 of the Company.
Construction & Mining Co. and the
participants in the Four Corners Project
including the Company.
10.3 Fourth Supplement to Four Corners Fuel 10.3 to Annual Report of the 1-6986
Agreement No. 2 effective as of January Registrant on Form 10-K for fiscal
1, 1981, between Utah International Inc. year ended December 31, 1991.
and the participants in the Four Corners
Project, including the Company.
10.4 Contract between the United States and 5-L to Registration Statement No. 2-41010
the Company dated April 11, 1968, for 2-41010 of the Company.
furnishing water.
10.4.1 Amendatory Contract between the United 5-R to Registration Statement No. 2-60021
States and the Company dated September 2-60021 of the Company.
29, 1977, for furnishing water.
10.5 Co-Tenancy Agreement between the 5-O to Registration Statement No. 2-44425
Company and Tucson Gas & Electric 2-44425 of the Company.
Company dated February 15, 1972, pertaining
to the San Juan generating plant.
10.5.3 Modification No. 4 dated October 25, 10.5.3 to Annual Report of 1-6986
1984 and Modification No. 5 dated July Registrant on Form 10-K for fiscal
1, 1985 to Co-Tenancy Agreement year ended December 31, 1995.
between the Company and Tucson
Electric Power Company (refiled).
10.5.5 Modification No. 8 to San Juan Project 10.5.5 to the Company's Quarterly 1-6986
Co-Tenancy Agreement between Public Report on Form 10-Q for the
Service Company of New Mexico and quarter ended March 31, 1994.
Tucson Electric Power Company dated
September 15, 1993.
10.5.6 Modification No. 9 to San Juan Project 10.5.6 to the Company's Quarterly 1-6986
Co-Tenancy Agreement between Public Report on Form 10-Q for the
Service Company of New Mexico and quarter ended March 31, 1994.
Tucson Electric Power Company dated
January 12, 1994.
10.5.7 Modification No. 10 to San Juan Project 10.5.7 to Annual Report of the 1-6986
Co-Tenancy Agreement between Public Registrant on Form 10-K for fiscal
Service Company of New Mexico and year ended December 31, 1995.
Tucson Electric Power Company dated
November 30, 1995.
E-6
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
10.7 San Juan Project Operating Agreement 5-S to Registration Statement No. 2-50338
between the Company and Tucson 2-50338 of the Company.
Gas & Electric Company, executed
December 21, 1973.
10.7.1 Modification No. 4 dated October 25, 10.7.1 to Annual Report of 1-6986
1984 and Modification No. 5 dated Registrant on Form 10-K for fiscal
July 1, 1985 to San Juan Project year ended December 31, 1995.
Operating Agreement between the
Company and Tucson Electric Power
Company (refiled).
10.7.3 Modification No. 8 to San Juan Project 10.7.3 to the Company's 1-6986
Operating Agreement between Public Quarterly Report on Form 10-Q
Service Company of New Mexico and for the quarter ended March
Tucson Electric Power Company dated 31, 1994.
September 15, 1993.
10.7.4 Modification No. 9 to San Juan Project 10.7.4 to the Company's 1-6986
Operating Agreement between Public Quarterly Report on Form 10-Q
Service Company of New Mexico and for the quarter ended March
Tucson Electric Power Company dated 31, 1994.
January 12, 1994.
10.7.5 Modification No. 10 dated November 30, 10.7.5 to Annual Report of the 1-6986
1995 to San Juan Project Operating Registrant on Form 10-K for
Agreement between Public Service fiscal year ended December 31,
Company of New Mexico and Tucson 1995.
Electric Power Company.
10.8 Arizona Nuclear Power Project 5-T to Registration Statement 2-50338
Participation Agreement among the No. 2-50338 of the Company.
Company and Arizona Public Service
Company, Salt River Project Agricultural
Improvement and Power District, Tucson
Gas & Electric Company and El Paso
Electric Company, dated August 23, 1973.
10.8.1 Amendments No. 1 through No. 6 to 10.8.1 to Annual Report of the 1-6986
Arizona Nuclear Power Project Registrant on Form 10-K for
Participation Agreement. fiscal year ended December 31,
1991.
10.8.2 Amendment No. 7 effective April 1, 10.8.2 to Annual Report of the 1-6986
1982, to the Arizona Nuclear Power Registrant on Form 10-K for
Project Participation Agreement (refiled). fiscal year ended December 31,
1991.
E-7
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
10.8.3 Amendment No. 8 effective September 12, 10.58 to Annual Report of the 1-6986
1983, to the Arizona Nuclear Power Registrant on Form 10-K for
Project Participation Agreement (refiled). fiscal year ended December 31,
1993.
10.8.4 Amendment No. 9 to Arizona Nuclear 10.8.4 to Annual Report of the 1-6986
Power Project Participation Agreement Registrant on Form 10-K for
dated as of June 12, 1984 (refiled). fiscal year ended December 31,
1994.
10.8.5 Amendment No. 10 dated as of November 10.8.5 to Annual Report of the 1-6986
21, 1985 and Amendment No. 11 dated as Registrant on Form 10-K
for of June 13, 1986 and effective January 10, fiscal year ended
1987 to Arizona Nuclear Power Project December 31, 1994.
Participation Agreement (refiled).
10.8.7 Amendment No. 12 to Arizona Nuclear 19.1 to the Company's Quarterly 1-6986
Power Project Participation Agreement Report on Form 10-Q for the
dated June 14, 1988, and effective quarter ended September 30, 1990.
August 5, 1988.
10.8.8 Amendment No. 13 to the Arizona 10.8.10 to Annual Report of 1-6986
Nuclear Power Project Participation Registrant on Form 10-K for the
Agreement dated April 4, 1990, and fiscal year ended December 31,
effective June 15, 1991. 1990.
10.9 Coal Sales Agreement executed August 18, 10.9 to Annual Report of the 1-6986
1980 among San Juan Coal Company, Registrant on Form 10-K for
the Company and Tucson Electric fiscal year ended December 31,
Power Company, together with 1991.
Amendments No. One, Two, Four, and
Six thereto.
10.9.1 Amendment No. Three to Coal Sales 10.9.1 to Annual Report of the 1-6986
Agreement dated April 30, 1984 among Registrant on Form 10-K for
San Juan Coal Company, the Company fiscal year ended December 31,
and Tucson Electric Power Company. 1994 (confidentiality treatment
was requested at the time of
filing the Annual Report of the
Registrant on Form 10-K for
fiscal year ended December 31,
1984; exhibit was not filed
therewith based on the same
confidentiality request).
E-8
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
10.9.2 Amendment No. Five to Coal Sales 10.9.2 to Annual Report of the 1-6986
Agreement dated May 29, 1990 among Registrant on Form 10-K for
San Juan Coal Company, the Company fiscal year ended December 31,
and Tucson Electric Power Company. 1991 (confidentiality treatment
was requested as to portions of
this exhibit, and such portions
were omitted from the exhibit
filed and were filed separately
with the Securities and Exchange
Commission).
10.9.3 Amendment No. Seven to Coal Sales 19.3 to the Company's Quarterly 1-6986
Agreement, dated as of July 27, 1992 Report on Form 10-Q for the
among San Juan Coal Company, the quarter ended September 30, 1992
Company and Tucson Electric Power (confidentiality treatment was
Company. requested as to portions of this
exhibit, and such portions were
omitted from the exhibit filed
and were filed separately with
the Securities and Exchange
Commission).
10.9.4 First Supplement to Coal Sales 19.4 to the Company's Quarterly 1-6986
Agreement, dated July 27, 1992 among Report on Form 10-Q for the
San Juan Coal Company, the Company quarter ended September 30, 1992
and Tucson Electric Power Company. (confidentiality treatment was
requested as to portions of this
exhibit, and such portions were
omitted from the exhibit as of
filed and were filed separately
with the Securities and Exchange
Commission).
10.9.5 Amendment No. Eight to Coal Sales 10.9.5 to Annual Report of the 1-6986
Agreement, dated as of September 1, Registrant on Form 10-K for
1995, among San Juan Coal Company, fiscal year ended December 31,
the Company and Tucson Electric 1995.
Power Company .
E-9
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
10.9.6 Amendment No. Nine to Coal Sales 10.9.6 to Annual Report of the 1-6986
Agreement, dated as of December 31, Registrant on Form 10-K for
1995, among San Juan Coal Company, fiscal year ended December 31,
the Company and Tucson Electric Power 1996.
Company.
10.11 San Juan Unit 4 Early Purchase and 10.11 to the Company's Quarterly 1-6986
Participation Agreement dated as of Report on Form 10-Q for the
September 26, 1983 between the quarter ended March 31, 1994.
Company and M-S-R Public Power
Agency, and Modification No. 2 to the
San Juan Project Agreements dated
December 31, 1983 (refiled).
10.11.1 Amendment No. 1 to the Early Purchase 10.11.1 to Annual Report of the 1-6986
and Participation Agreement between Registrant on Form 10-K for
Public Service Company of New Mexico fiscal year ended December 31,
and M-S-R Public Power Agency, 1997.
executed as of December 16, 1987, for
San Juan Unit 4 (refiled).
10.12 Amended and Restated San Juan Unit 4 10.12 to Annual Report of the 1-6986
Purchase and Participation Agreement Registrant on Form 10-K for
dated as of December 28, 1984 between fiscal year ended December 31,
the Company and the Incorporated 1994.
County of Los Alamos (refiled).
10.14 Participation Agreement among the 10.14 to Annual Report of the 1-6986
Company, Tucson Electric Power Company Registrant on Form 10-K for
and certain financial institutions fiscal year ended
relating to the San Juan Coal Trust dated December 31, 1992.
as of December 31, 1981 (refiled).
10.16 Interconnection Agreement dated 10.16 to Annual Report of the 1-6986
November 23, 1982, between the Registrant on Form 10-K for
Company and Southwestern Public fiscal year ended December 31,
Service Company (refiled). 1992.
10.18* Facility Lease dated as of December 16, 10.18 to Annual Report of the 1-6986
1985 between The First National Bank Registrant on Form 10-K for
of Boston, as Owner Trustee, and Public fiscal year ended December 31,
Service Company of New Mexico 1995.
together with Amendments No. 1, 2 and 3
thereto (refiled).
E-10
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
10.18.4* Amendment No. 4 dated as of March 8, 10.18.4 to the Company's 1-6986
1995, to Facility Lease between Public Quarter Report on Form
Service Company of New Mexico and 10-Q for the quarter ended March
the First National Bank of Boston, dated 31, 1995.
as of December 16, 1985.
10.19 Facility Lease dated as of July 31, 1986, 10.19 to Annual Report of the 1-6986
between the First National Bank of Registrant on Form 10-K for
Boston, as Owner Trustee, and Public fiscal year ended December 31,
Service Company of New Mexico 1996.
together with Amendments No. 1, 2 and 3
thereto (refiled).
10.20* Facility Lease dated as of August 12, 10.20 to Annual Report of the 1-6986
1986, between The First National Bank Registrant on Form 10-K for
of Boston, as Owner Trustee, and Public fiscal year ended December 31,
Service Company of New Mexico 1996.
together with Amendments No. 1 and 2
thereto (refiled).
10.20.3 Amendment No. 3 dated as of March 8, 10.20.3 to the Company's 1-6986
1995, to Facility Lease between Public Quarterly Report on Form
Service Company of New Mexico and 10-Q for the quarter ended March
the First National Bank of Boston, 31, 1995.
dated as of August 12, 1986.
10.21 Facility Lease dated as of December 15, 10.21 to Annual Report of the 1-6986
1986, between The First National Bank Registrant on Form 10-K
of Boston, as Owner Trustee, and Public for fiscal year ended
Service Company of New Mexico (Unit 1 December 31, 1996.
Transaction) together with Amendment No. 1
thereto (refiled).
10.22 Facility Lease dated as of December 15, 10.22 to Annual Report of the 1-6986
1986, between The First National Bank Registrant on Form 10-K for
of Boston, as Owner Trustee, and Public fiscal year ended December 31,
Service Company of New Mexico 1996.
Unit 2 Transaction) together with
Amendment No. 1 thereto (refiled).
10.24** Management Life Insurance Plan (July 10.24 to Annual Report of the 1-6986
1985) of the Company (refiled). Registrant on Form 10-K for
fiscal year ended December 31,
1995.
E-11
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
10.25.1** Second Restated and Amended Public 10.25.1 to Annual Report for the 1-6986
Service Company of New Mexico Registrant on Form 10-K for
Executive Medical Plan as amended on fiscal year ended December 31,
December 28, 1995. 1997.
10.27 Amendment No. 2 dated as of April 10, 10.53 to Annual Report of the 1-6986
1987, to the Facility Lease dated as of Registrant on Form10-K for
August 12, 1986, between The First fiscal year ended December 31,
National Bank of Boston, as Owner 1987.
Trustee, and Public Service Company of
New Mexico. (Unit 2 Transaction.)
(This is an amendment to a Facility
Lease which is substantially similar to
the Facility Lease filed as Exhibit 28.1
to the Company's Current Report on
Form 8-K dated August 18, 1986.)
10.31** Executive Retention Agreements. 10.42 to Annual Report of the 1-6986
Registrant on Form 10-K for
fiscal year ended December 31,
1990.
10.32** Supplemental Employee Retirement 19.4 to the Company's Quarterly 1-6986
Agreements dated August 4, 1989. Report on Form 10-Q for the
quarter ended September 30, 1989.
10.32.1** First Amendment to the Supplemental 10.32.1 to the Company's 1-6986
Employee Retirement Agreement. Quarterly Report on Form 10-Q
for the quarter ended September
30, 1998.
10.33** Supplemental Employee Retirement 10.47 to Annual Report of the 1-6986
Agreement dated March 6, 1990. Registrant on Form 10-K for
fiscal year ended December 31,
1989.
10.34 Settlement Agreement between Public 10.48 to Annual Report of the 1-6986
Service Company of New Mexico and Registrant on Form 10-K for
Creditors of Meadows Resources, Inc. fiscal year ended December 31,
dated November 2, 1989. 1989.
10.34.1 First amendment dated April 24, 1992 to 19.1 to the Company's Quarterly 1-6986
the Settlement Agreement dated Report on Form 10-Q for the
November 2, 1989 among Public Service quarter ended September 30, 1992.
Company of New Mexico, the lender parties
thereto and collateral agent.
E-12
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
10.35 Amendment dated April 11, 1991 among 19.1 to the Company's Quarterly 1-6986
Public Service Company of New Mexico, Report on Form 10-Q for the
certain banks and Chemical Bank and quarter ended September 30, 1991.
Citibank, N.A., as agents for the banks.
10.36 San Juan Unit 4 Purchase and 19.2 to the Company's Quarterly 1-6986
Participation Agreement Public Service Report on Form 10-Q for the
Company of New Mexico and the City of quarter ended March 31, 1991.
Anaheim, California dated April 26, 1991.
10.36.1 Second stipulation in the matter of 10.38 to Annual Report of the 1-6986
application of Public Service Company Registrant on Form 10-K for
of New Mexico for NMPSC approval to fiscal year ended December 31,
sell a 10.04% undivided interest in San 1992.
Juan Generating Station Unit 4 to the City
of Anaheim, California, and for related
orders and approvals.
10.37** Executive Retention Plan. 10.37 to Annual Report of the 1-6986
Registrant on Form 10-K for
fiscal year ended December 31,
1991.
10.38 Restated and Amended San Juan Unit 4 10.2.1 to the Company's 1-6986
Purchase and Participation Agreement Quarterly Report on Form
between Public Service Company of 10-Q for the quarter ended
New Mexico and Utah Associated Municipal September 30, 1993.
Power Systems.
10.40** First Restated and Amended Public Service 99.1 to Registration Statement 333-03303
Company of New Mexico Director Retainer Plan. No. 333-03303 filed May 8, 1996.
10.41 Waste Disposal Agreement, dated as of 19.5 to the Company's Quarterly 1-6986
July 27, 1992 among San Juan Coal Company, Report on Form 10-Q for the
the Company and Tucson Electric Power quarter ended September 30, 1992
Company. (confidentiality treatment was
requested as to portions of this
exhibit, and such portions were
omitted from the exhibit and were
filed separately with the
Securities and Exchange
Commission).
10.42 Stipulation in the matter of the application 10.42 to Annual Report of the 1-6986
of Gas Company of New Mexico for an Registrant on Form 10-K for
order authorizing recovery of MDL costs fiscal year ended December 31,
through Rate Rider Number 8. 1992.
E-13
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
10.43** Description of certain Plans which include 10.43 to Annual Report of the 1-6986
executive officers as participants. Registrant on Form 10-K for
fiscal year ended December 31,
1992.
10.44** Public Service Company of New 10.44 to Annual Report of the 1-6986
Mexico-Non-Union Voluntary Registrant on Form 10-K for
Separation Program. fiscal year ended December 31,
1992.
10.44.1** First Amendment dated April 6, 1993 to the 19.2 to the Company's Quarterly 1-6986
First Restated and Amended Public Report on Form 10-Q for the
Service Company of New Mexico quarter ended March 31, 1993.
Non-Union Severance Pay Plan dated
August 1, 1992.
10.47** Compensation Arrangement with Chief 10.3 to the Company's Quarterly 1-6986
Executive Officer. Report on Form 10-Q for the
quarter ended June 30, 1993.
10.47.1** Pension Service Adjustment Agreement 10.3.1 to the Company's 1-6986
for Benjamin F. Montoya. Quarterly Report on Form 10-Q
for the quarter ended September
30, 1993.
10.47.2** Severance Agreement for Benjamin F. 10.3.2 to the Company's 1-6986
Montoya. Quarterly Report on Form 10-Q
for the quarter ended September
30, 1993.
10.47.3** Executive Retention Agreement for 10.3.3 to the Company's 1-6986
Benjamin F. Montoya. Quarterly Report on Form 10-Q
for the quarter ended September
30, 1993.
10.47.4** First Amendment to the Pension Service 10.47.4 to the Company's 1-6986
Adjustment Agreement for Benjamin F. Quarterly Report on Form 10-Q
Montoya. for the quarter ended June 30,
1998.
10.48** Public Service Company of New Mexico 10.4 to the Company's Quarterly 1-6986
OBRA `93 Retirement Plan. Report on Form 10-Q for the
quarter ended September 30, 1993.
10.49** Employment Contract By and Between 10.49 to Annual Report of the 1-6986
the Public Service Company of New Mexico Registrant on Form 10-K for
and Roger J. Flynn. fiscal year ended December 31,
1994.
E-14
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
10.50** Public Service Company of New Mexico 10.50 to Annual Report of the 1-6986
Section 415 Plan. Registrant on Form 10-K for
fiscal year ended December 31,
1993.
10.51** First Amendment to the Public Service 10.51 to Annual Report of the 1-6986
Company of New Mexico Executive Registrant on Form 10-K for
Retention Plan. fiscal year ended December 31,
1993.
10.51.1** Second Amendment to the Public Service 10.51.1 to the Company's 1-6986
Company of New Mexico Executive Quarterly Report on Form 10-Q
Retention Plan. for the quarter ended June 30,
1994.
10.52 Memorandum of Agreement between 10.52 to the Company's Quarterly 1-6986
the Navajo Nation and Public Service Report on Form 10-Q for the
Company of New Mexico (Nine-Mile quarter ended June 30, 1997.
Transmission R-O-W).
10.53 January 12, 1994 Stipulation. 10.53 to Annual Report of the 1-6986
Registrant on Form 10-K for
fiscal year ended December 31,
1993.
10.54.1** Health Care and Retirement Benefit 10.54.1 to the Company's 1-6986
Agreement By and Between the Public Quarterly Report on Form 10-Q
Service Company of New Mexico and for the quarter ended March 31,
John T. Ackerman dated February 1, 1994. 1994.
10.56.1 Amended and Restated Receivables Purchase 10.56.1 to the Company's 1-6986
Agreement dated May 20, 1996, between Public Quarterly Report on Form 10-Q
Service Company of New Mexico, Citibank and for the quarter ended June 30,
Citicorp North America, Inc. and Amended 1996.
Restated Collection Agent Agreement dated
May 20, 1996, between Public Service Company
of New Mexico, Corporate Receivables
Corporation and Citibank, N.A.
10.59* Amended and Restated Lease dated as of 10.59 to Annual Report of the 1-6986
September 1, 1993, between The First Registrant on Form 10-K for
National Bank of Boston, Lessor, and fiscal year ended December 31,
the Company, Lessee (EIP Lease). 1993.
E-15
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
10.61 Participation Agreement dated as of June 10.61 to Annual Report of the 1-6986
30, 1983 among Security Trust Company, Registrant on Form 10-K
for as Trustee, the Company, Tucson Electric fiscal year ended
Power Company and certain financial December 31, 1993.
institutions relating to the San Juan Coal
Trust (refiled).
10.62 Agreement of the Company pursuant to 10.62 to Annual Report of the 1-6986
Item 601(b)(4)(iii) of Regulation S-K Registrant on Form 10-K for
(refiled). fiscal year ended December 31,
1993.
10.63 A Stipulation regarding sale of certain 10.63 to Current Report on Form 1-6986
natural gas gathering and processing assets. 8-K dated January 26, 1995.
10.64** Results Pay 10.64 to the Company's Quarterly 1-6986
Report on Form 10-Q for the
quarter ended March 31, 1995.
10.65 Agreement for Contract Operation and 10.64 to the Company's Quarterly 1-6986
Maintenance of the City of Santa Fe Report on Form 10-Q for the
Water Supply Utility System, dated quarter ended June 30, 1995.
July 3, 1995.
10.67 New Mexico Public Service Commission 10.67 to Annual Report of the 1-6986
Order dated July 30, 1987, and Exhibit I Registrant on Form 10-K for
thereto, in NMPUC Case No. 2004, fiscal year ended December 31,
regarding the PVNGS decommissioning 1997.
trust fund (refiled).
10.68 Master Decommissioning Trust Agreement 10.68 to the Company's Quarterly 1-6986
for Palo Verde Nuclear Generating Station Report on Form 10-Q for the
dated March 15, 1996, between Public quarter ended March 31, 1996.
Service Company of New Mexico and
Mellon Bank, N.A.
10.68.1 Amendment Number One to the Master 10.68.1 to Annual Report of the 1-6986
Decommissioning Trust Agreement for Registrant on Form 10-K for
Palo Verde Nuclear Generating Station fiscal year ended December 31,
dated January 27, 1997, between Public 1997.
Service Company of New Mexico and
Mellon Bank, N.A.
E-16
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
10.69* Refunding Agreement No. 3 dated as 10.69 to the Company's 1-6986
of September 27, 1996 between Public Quarterly Report on Form
Service Company of New Mexico, The 10-Q for the quarter ended
Owner Participant named therein, September 30, 1996.
State Street Bank and Trust Company,
as Owner Trustee, The Chase Manhattan,
Bank, as Indenture Trustee, and First PV
Funding Corporation.
10.72 Revolving Credit Agreement dated as of 10.72 to the Company's Quarterly 1-6986
March 11, 1998, among the Company, Report on Form 10-Q for the
the Chase Manhattan Bank, Citibank, quarter ended March 31, 1998.
N.A., Morgan Guaranty Trust Company
of New York, and Chase Securities, Inc.,
and the Initial Lenders Named Therein.
10.73 Refunding Agreement No. 8A, dated as 10.73 to the Company's Quarterly 1-6986
of December 23, 1997, among the Report on Form 10-Q for the
Company, the Owner Participant Named quarter ended March 31, 1998.
Therein, State Street Bank and Trust
Company, as Owner Trustee, The Chase
Manhattan Bank, as Indenture Trustee,
and First PV Funding Corporation.
10.74** Third Restated and Amended Public 10.74 to the Company's Quarterly 1-6986
Service Company of New Mexico Report on Form 10-Q for the
Performance Stock Plan. quarter ended March 31, 1998.
10.75** Executive Savings Plan 10.75 to the Company's Quarterly 1-6986
Report on Form 10-Q for the
quarter ended June 30, 1998.
E-17
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
10.76 PVNGS Capital Trust--Variable Rate 10.76 to the Company's Quarterly 1-6986
Trust Notes--PVNGS Note Agreement Report on Form 10-Q for the
dated as of July 31, 1998. quarter ended September 30, 1998.
Additional Exhibits
22 Certain subsidiaries of the registrant. 22 to Annual Report of the 1-6986
Registrant on Form 10-K for
fiscal year ended December 31,
1992.
99.2* Participation Agreement dated as of 99.2 to Annual Report of the 1-6986
December 16, 1985, among the Owner Registrant on Form 10-K for
Participant named therein, First PV fiscal year ended December 31,
Funding Corporation. The First National 1995.
Bank of Boston, in its individual
capacity and as Owner Trustee (under a
Trust Agreement dated as of December 16,
1985 with the Owner Participant),
Chemical Bank, in its individual
capacity and as Indenture Trustee (under
a Trust Indenture, Mortgage, Security
Agreement and Assignment of Rents dated
as of December 16, 1985 with the Owner
Trustee), and Public Service Company of
New Mexico, including Appendix A
definitions together with Amendment No.
1 dated July 15, 1986 and Amendment No.
2 dated November 18, 1986 (refiled).
99.3 Trust Indenture, Mortgage, Security 99.3 to the Company's Quarterly 1-6986
Agreement and Assignment of Rents Report on Form 10-Q for the
dated as of December 16, 1985, between quarter ended March 31, 1996.
the First National Bank of Boston, as
Owner Trustee, and Chemical Bank, as
Indenture Trustee together with
Supplemental Indentures Nos. 1 and 2
(refiled).
99.3.3 Supplemental Indenture No. 3 dated as 99.3.3 to the Company's 1-6986
of March 8, 1995, to Trust Indenture Quarterly Report on Form 10-Q
Mortgage, Security Agreement and for the quarter ended March 31,
Assignment of Rents between The First 1995.
National Bank of Boston and Chemical
Bank dated as of December 16, 1985.
E-18
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
99.4* Assignment, Assumption and Further 99.4 to Annual Report of the 1-6986
Agreement dated as of December 16, Registrant on Form 10-K for
1985, between Public Service Company fiscal year ended December 31,
of New Mexico and The First National 1995.
Bank of Boston, as Owner Trustee
(refiled).
99.5 Participation Agreement dated as of July 99.5 to Annual Report of the 1-6986
31, 1986, among the Owner Participant Registrant on Form 10-K
for named herein, First PV Funding fiscal year ended December
Corporation, The First National Bank of 31, 1996.
Boston, in its individual capacity and
as Owner Trustee (under a Trust
Agreement dated as of July 31, 1986,
with the Owner Participant), Chemical
Bank, in its individual capacity and as
Indenture Trustee (under a Trust
Indenture, Mortgage, Security Agreement
and Assignment of Rents dated as of July
31, 1986, with the Owner Trustee), and
Public Service Company of New Mexico,
including Appendix A definitions
together with Amendment No. 1 thereto
(refiled).
99.6 Trust Indenture, Mortgage, Security 99.6 to Annual Report of the 1-6986
Agreement and Assignment of Rents Registrant on Form 10-K for
dated as of July 31, 1986, between The fiscal year ended December 31,
First National Bank of Boston, as Owner 1996.
Trustee, and Chemical Bank, as Indenture
Trustee together with Supplemental
Indenture No. 1 thereto (refiled).
99.7 Assignment, Assumption, and Further 99.7 to Annual Report of the 1-6986
Agreement dated as of July 31, 1986, Registrant on Form 10-K for
between Public Service Company of fiscal year ended December 31,
New Mexico and The First National Bank 1996.
of Boston, as Owner Trustee (refiled).
E-19
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
99.8 Participation Agreement dated as of 99.8 to the Company's Quarterly 1-6986
August 12, 1986, among the Owner Report on Form 10-Q for the
Participant named therein, First PV quarter ended March 31, 1997.
Funding Corporation. The First National
Bank of Boston, in its individual
capacity and as Owner Trustee (under a
Trust Agreement dated as of August 12,
1986, with the Owner Participant),
Chemical Bank, in its individual
capacity and as Indenture Trustee (under
a Trust Indenture, Mortgage, Security
Agreement and Assignment of Rents dated
as of August 12, 1986, with the Owner
Trustee), and Public Service Company of
New Mexico, including Appendix A
definitions (refiled).
99.8.1* Amendment No. 1 dated as of November 99.8.1 to the Company's 1-6986
18, 1986, to Participation Agreement Quarterly Report on Form 10-Q
dated as of August 12, 1986 (refiled). for the quarter ended March 31,
1997.
99.9* Trust Indenture, Mortgage, Security 99.9 to Annual Report of the 1-6986
Agreement and Assignment of Rents Registrant on Form 10-K for
dated as of August 12, 1986, between the fiscal year ended December 31,
First National Bank of Boston, as Owner 1996.
Trustee, and Chemical Bank, as Indenture
Trustee together with Supplemental
Indenture No. 1 thereto (refiled).
99.9.2 Supplemental Indenture No. 2 dated as 99.9.1 to the Company's 1-6986
of March 8, 1995, to Trust Indenture, Quarterly Report on Form 10-Q
Mortgage, Security Agreement and for the quarter ended March 31,
Assignment of Rents between The First 1995.
National Bank of Boston and Chemical
Bank dated as of August 12, 1986.
99.10* Assignment, Assumption, and Further 99.10 to the Company's Quarterly 1-6986
Agreement dated as of August 12, 1986, Report on Form 10-Q for the
between Public Service Company of New quarter ended March 31, 1997.
Mexico and The First National Bank of
Boston, as Owner Trustee (refiled).
E-20
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
99.11* Participation Agreement dated as of 99.1 to the Company's Quarterly 1-6986
December 15, 1986, among the Owner Report on Form 10-Q for the
Participant named therein, First PV quarter ended March 31, 1997.
Funding Corporation, The First National
Bank of Boston, in its individual
capacity and as Owner Trustee (under a
Trust Agreement dated as of December 15,
1986, with the Owner Participant),
Chemical Bank, in its individual
capacity and as Indenture Trustee (under
a Trust Indenture, Mortgage, Security
Agreement and Assignment of Rents dated
as of December 15, 1986, with the Owner
Trustee), and Public Service Company of
New Mexico, including Appendix A
definitions (Unit 1 Transaction)
(refiled).
99.12 Trust Indenture, Mortgage, Security 99.12 to the Company's Quarterly 1-6986
Agreement and Assignment of Rents Report on Form 10-Q for the
dated as of December 15, 1986, between quarter ended March 31, 1997.
The First National Bank of Boston, as
Owner Trustee, and Chemical Bank, as
Indenture Trustee (Unit 1 Transaction)
(refiled).
99.13 Assignment, Assumption and Further 99.13 to the Company's 1-6986
Agreement dated as of December 15, Quarterly Report on Form
1986, between Public Service Company 10-Q for the quarter ended
of New Mexico and The First National March 31, 1997.
Bank of Boston, as Owner Trustee
(Unit 1 Transaction) (refiled).
99.14 Participation Agreement dated as of 99.14 to the Company's 1-6986
December 15, 1986, among the Owner Quarterly Report on Form
Participant named therein, First PV 10-Q for the quarter ended
Funding Corporation, The First National March 31, 1997.
Bank of Boston, in its individual
capacity and as Owner Trustee (under a
Trust Agreement dated as of December 15,
1986, with the Owner Participant),
Chemical Bank, in its individual
capacity and as Indenture Trustee (under
a Trust Indenture, Mortgage, Security
Agreement and Assignment of Rents dated
as of December 15, 1986, with the Owner
Trustee), and Public Service Company of
New Mexico, including Appendix A
definitions (Unit 2 Transaction)
(refiled).
E-21
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
99.15 Trust Indenture, Mortgage, Security 99.15 to Annual Report of the 1-6986
Agreement and Assignment of Rents dated Registrant on Form 10-K for
as of December 31, 1986, between the fiscal year ended December 31,
First National Bank of Boston, as Owner 1996.
Trustee, and Chemical Bank, as Indenture
Trustee (Unit 2 Transaction) (refiled).
99.16 Assignment, Assumption, and Further 99.16 to the Company's Quarterly 1-6986
Agreement dated as of December 15, Report on Form 10-Q for the
1986, between Public Service Company quarter ended March 31, 1997.
of New Mexico and The First National
Bank of Boston, as Owner Trustee
(Unit 2 Transaction) (refiled).
99.17* Waiver letter with respect to "Deemed 99.17 to Annual Report of the 1-6986
Loss Event" dated as of August 18, 1986, Registrant on Form 10-K for
between the Owner Participant named fiscal year ended December 31,
therein, and Public Service Company of 1996.
New Mexico (refiled).
99.18* Waiver letter with respect to Deemed 99.18 to Annual Report of the 1-6986
Loss Event" dated as of August 18, 1986, Registrant on Form 10-K for
between the Owner Participant named fiscal year ended December 31,
therein, and Public Service Company of 1996.
New Mexico (refiled).
99.19 Agreement No. 13904 (Option and 99.19 to Annual Report of the 1-6986
Purchase of Effluent), dated April 23, Registrant on Form 10-K for
1973, among Arizona Public Service fiscal year ended December 31,
Company, Salt River Project Agricultural 1996.
Improvement and Power District, the
Cities of Phoenix, Glendale, Mesa,
Scottsdale, and Tempe, and the Town of
Youngtown (refiled).
99.20 Agreement for the Sale and Purchase of 99.20 to Annual Report of the 1-6986
Wastewater Effluent, dated June 12, 1981, Registrant on Form 10-K for
among Arizona Public Service Company, fiscal year ended December 31,
Salt River Project Agricultural 1996.
Improvement and Power District and the
City of Tolleson, as amended (refiled).
E-22
Exhibit No. Description of Exhibit Filed as Exhibit: File No:
- ----------- ---------------------- ----------------- --------
99.21* 1996 Supplemental Indenture dated as of 99.21 to the Company's Quarterly 1-6986
September 27, 1996 to Trust Indenture, Report on Form 10-Q for the
Mortgage, Security Agreement and quarter ended September 30, 1996.
Assignment of Rents dated as of December
16, 1985 between State Street Bank and
Trust Company, as Owner Trustee, and
The Chase Manhattan Bank, as Indenture
Trustee.
99.22 1997 Supplemental Indenture, dated as of 99.22 to the Company's Quarterly 1-6986
December 23, 1997, to Trust Indenture, Report on Form 10-Q for the
Mortgage, Security Agreement and quarter ended March 30, 1998.
Assignment of Rents, dated as of August
12, 1986, between State Street Bank and
Trust, as Owner Trustee, and The Chase
Manhattan Bank, as Indenture Trustee.
* One or more additional documents, substantially identical in all material
respects to this exhibit, have been entered into, relating to one or more
additional sale and leaseback transactions. Although such additional
documents may differ in other respects (such as dollar amounts and
percentages), there are no material details in which such additional
documents differ from this exhibit.
** Designates each management contract or compensatory plan or arrangement
required to be identified pursuant to paragraph 3 of Item 14(a) of
Form 10-K.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1998 and during the period
beginning January 1, 1999 and ending March 8, 1999, the Company filed, on the
date indicated, the following report on Form 8-K.
Dated: Filed: Relating to:
------ ------ ------------
November 30, 1998 December 18, 1998 Electric Rate Case; Residential Electric,
Incorporated; Creation of Three
Non-Utility Subsidiaries; City of
Albuquerque Retail Pilot Load
Aggregation Project; Resignation of
Chief Operating Officer
E-23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PUBLIC SERVICE COMPANY OF NEW MEXICO
(Registrant)
Date: March 8, 1999 By /s/ B. F. Montoya
-------------------------------------
B. F. Montoya
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ B. F. MONTOYA Principal Executive Officer and March 8, 1999
- ------------------------------------------- Director
B. F. MONTOYA
President and Chief Executive Officer
/s/ M. H. MAERKI Principal Financial Officer March 8, 1999
- -------------------------------------------
M. H. Maerki
Senior Vice President and
Chief Financial Officer
/s/ D. M. BURNETT Principal Accounting Officer March 8, 1999
- -------------------------------------------
D. M. Burnett
Vice President, Corporate Controller
and Chief Accounting Officer
/s/ J. T. ACKERMAN Chairman of the Board March 8, 1999
- -------------------------------------------
J. T. Ackerman
/s/ R. G. ARMSTRONG Director March 8, 1999
- -------------------------------------------
R. G. Armstrong
/s/ J. A. GODWIN Director March 8, 1999
- -------------------------------------------
J. A. Godwin
/s/ L. H. LATTMAN Director March 8, 1999
- -------------------------------------------
L. H. Lattman
/s/ M. LUJAN JR. Director March 8, 1999
- -------------------------------------------
M. Lujan Jr.
/s/ R. U. ORTIZ Director March 8, 1999
- -------------------------------------------
R. U. Ortiz
/s/ R. M. PRICE Director March 8, 1999
- -------------------------------------------
R. M. Price
/s/ P. F. ROTH Director March 8, 1999
- -------------------------------------------
P. F. Roth
E-24