-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EC850naBIOWZ8N3ZFOPOuN0/+byV4pZcLyzOER0WguS0vvhYWP1/bGsURvVoVcgE JGLjK04LhJq/4j7GRWITJg== 0000081023-96-000016.txt : 19961101 0000081023-96-000016.hdr.sgml : 19961101 ACCESSION NUMBER: 0000081023-96-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961031 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC SERVICE CO OF NEW MEXICO CENTRAL INDEX KEY: 0000081023 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 850019030 STATE OF INCORPORATION: NM FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06986 FILM NUMBER: 96651211 BUSINESS ADDRESS: STREET 1: ALVARADO SQUARE, MS2706 CITY: ALBUQUERQUE STATE: NM ZIP: 87158 BUSINESS PHONE: 5058482700 10-Q 1 FORM 10-Q FOR QUARTER ENDED 09/30/96 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended September 30, 1996 ----------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to 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, Albuquerque, New Mexico 87158 ---------------------------------------------- (Address of principal executive offices) (Zip Code) (505) 241-2700 -------------- (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock--$5.00 par value 41,774,083 shares ----------------------------- ------------------------------- Class Outstanding at October 31, 1996 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES INDEX Page No. PART I. FINANCIAL INFORMATION: Report of Independent Public Accountants.......................... 3 ITEM 1. FINANCIAL STATEMENTS Consolidated Statements of Earnings-- Three Months and Nine Months Ended September 30, 1996 and 1995.... 4 Consolidated Balance Sheets-- September 30, 1996 and December 31, 1995.......................... 5 Consolidated Statements of Cash Flows-- Nine Months Ended September 30, 1996 and 1995..................... 6 Notes to Consolidated Financial Statements........................ 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 8 PART II. OTHER INFORMATION: ITEM 5. OTHER INFORMATION............................................. 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................. 17 Signature .............................................................. 18 -2- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Public Service Company of New Mexico: We have reviewed the accompanying condensed consolidated balance sheet of Public Service Company of New Mexico (a New Mexico corporation) and subsidiaries as of September 30, 1996, and the related condensed consolidated statements of earnings for the three-month and nine-month periods ended September 30, 1996 and 1995, and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 1996 and 1995. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Public Service Company of New Mexico and subsidiaries as of December 31, 1995 (not presented herein), and, in our report dated February 13, 1996, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1995, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Albuquerque, New Mexico October 29, 1996 -3- ITEM 1. FINANCIAL STATEMENTS PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
Three Months Ended Nine Months Ended September 30 September 30 ------------------------ ----------------------- 1996 1995 1996 1995 ---------- --------- --------- ---------- (In thousands except per share amounts) Operating revenues: Electric $ 180,214 $ 168,115 $ 486,754 $ 446,421 Gas 30,543 27,410 163,504 164,736 Water 0 61 0 6,196 --------- --------- --------- ---------- Total operating revenues 210,757 195,586 650,258 617,353 --------- --------- --------- ---------- Operating expenses: Fuel and purchased power 47,786 40,980 128,359 105,769 Gas purchased for resale 9,877 7,480 75,580 71,476 Other operation and maintenance 80,906 71,641 232,388 230,889 Depreciation and amortization 19,835 19,767 58,420 61,019 Taxes, other than income taxes 9,079 8,321 26,907 26,859 Income taxes 10,862 12,663 32,371 27,852 --------- --------- --------- ---------- Total operating expenses 178,345 160,852 554,025 523,864 --------- --------- --------- ---------- Operating income 32,412 34,734 96,233 93,489 --------- --------- --------- ---------- Other income and deductions, net of taxes: 644 7,510 2,497 22,203 --------- --------- --------- ---------- Income before interest charges 33,056 42,244 98,730 115,692 --------- --------- --------- ---------- Interest charges: Interest on long-term debt 12,101 12,215 36,304 40,606 Other interest charges 1,015 1,060 2,496 4,514 --------- --------- --------- ---------- Net interest charges 13,116 13,275 38,800 45,120 --------- --------- --------- ---------- Net earnings 19,940 28,969 59,930 70,572 Preferred stock dividend requirements 147 495 440 3,567 --------- --------- --------- ---------- Net earnings applicable to common stock $ 19,793 $ 28,474 $ 59,490 $ 67,005 ========= ========= ========= ========== Average shares of common stock outstanding 41,774 41,774 41,774 41,774 ========= ========= ========= ========== Net earnings per share of common stock $ 0.47 $ 0.68 $ 1.42 $ 1.60 ========= ========= ========= ========== Dividends paid per share of common stock $ 0.12 $ - $ 0.24 $ - ========= ========= ========= ========== The accompanying notes are an integral part of these financial statements.
-4- PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, December 31, 1996 1995 ------------ ---------- (Unaudited) (In thousands) ASSETS Utility plant $2,478,017 $2,467,161 Accumulated provision for depreciation and amortization (924,842) (892,727) ----------- ----------- Net utility plant 1,553,175 1,574,434 ----------- ----------- Other property and investments 264,561 33,433 ----------- ----------- Current assets: Cash 5,130 4,228 Temporary investments, at cost 33,318 95,972 Receivables 122,926 127,642 Income taxes receivable - 4,792 Fuel, materials and supplies 42,149 44,660 Gas in underground storage 3,172 5,431 Other current assets 7,373 7,186 ----------- ----------- Total current assets 214,068 289,911 ----------- ----------- Deferred charges 134,891 137,891 ----------- ----------- $2,166,695 $2,035,669 =========== =========== CAPITALIZATION AND LIABILITIES Capitalization: Common stock equity: Common stock $ 208,870 $ 208,870 Additional paid-in capital 468,961 470,358 Excess pension liability, net of tax (2,101) (1,623) Retained earnings since January 1, 1989 74,708 25,243 ----------- ----------- Total common stock equity 750,438 702,848 Cumulative preferred stock without mandatory redemption requirements 12,800 12,800 Long-term debt, less current maturities 712,271 728,843 ----------- ----------- Total capitalization 1,475,509 1,444,491 ----------- ----------- Current liabilities: Short-term debt 114,000 - Accounts payable 83,530 93,666 Dividends payable 293 147 Current maturities of long-term debt 16,440 146 Accrued interest and taxes 31,746 26,856 Other current liabilities 35,918 44,552 ----------- ----------- Total current liabilities 281,927 165,367 ----------- ----------- Deferred credits 409,259 425,811 ----------- ----------- $2,166,695 $2,035,669 =========== =========== The accompanying notes are an integral part of these financial statements. -5- PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30 ------------------- 1996 1995 -------- -------- (In thousands) Cash Flows From Operating Activities: Net earnings $ 59,930 $ 70,572 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization 74,871 73,429 Gain on sale of plant and property - (39,055) Accumulated deferred investment tax credit (3,498) (3,866) Accumulated deferred income tax (1,599) (36,450) Changes in certain assets and liabilities: Receivables 9,509 35,285 Fuel, materials and supplies 4,771 (29,871) Deferred charges 5,246 10,754 Accounts payable (10,192) (46,990) Accrued interest and taxes 4,890 45,366 Deferred credits (4,860) 24,384 Other (8,400) 4,043 Other, net 4,710 6,927 ---------- -------- Net cash flows from operating activities 135,378 114,528 ---------- -------- Cash Flows From Investing Activities: Utility plant additions (66,385) (76,884) Utility plant sales - 205,968 Other property additions (14,230) (26) Escrow for purchase of PVNGS lease obligation bonds (218,090) - Net decrease (increase) in temporary investments 62,654 (1,793) ---------- -------- Net cash flows from investing activities (236,051) 127,265 ---------- -------- Cash Flows From Financing Activities: Redemptions of PVNGS lease obligation bonds - 132,663) Redemptions and repurchases of preferred stock - (64,175) Bond redemption premium and costs (295) (373) Proceeds from asset securitization - 18,758 Repayments of other long-term debt (326) (57,768) Net increase in short-term debt 114,000 - Exercise of employee stock options (1,395) - Dividends paid (10,409) (4,943) ---------- -------- Net cash flows from financing activities 101,575 241,164) ---------- -------- Increase in cash 902 629 Cash at beginning of period 4,228 21,029 ---------- -------- Cash at end of period $ 5,130 $ 21,658 ========== ======== Supplemental Cash Flow Disclosures: Interest paid $ 39,949 $ 52,576 ========== ======== Income taxes paid, net $ 30,617 $ 38,205 ========== ======== The accompanying notes are an integral part of these financial statements. -6- PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) General Accounting Policy In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the consolidated financial statements. The significant accounting policies followed by Public Service Company of New Mexico (the "Company") are set forth in note (1) of notes to the Company's consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K") filed with the Securities and Exchange Commission ("SEC"). (2) Palo Verde Nuclear Generating Station ("PVNGS") Lease Obligation Bonds ("LOBs") On October 17, 1996, the Company purchased $200 million of PVNGS LOBs at a premium with accrued interest. In purchasing the LOBs, the Company utilized $118 million of its cash and borrowed $100 million against the credit facility collateralized by the Company's utility customer accounts receivable and certain amounts being recovered from gas customers relating to certain gas contract settlements ("Accounts Receivable Facility"). Although the PVNGS LOBs are off-balance sheet debt, these bonds have been included in the calculation of the Company's debt to capitalization ratio as well as various financial coverage ratios by the major rating agencies. The purchase of the LOBs will not only improve these ratios, but will also increase earnings in the form of interest income. (3) PNM Direct Plan 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. Initially, the Company's stock will be purchased in the open market to meet plan requirements. -7- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's 1995 Form 10-K PART II, ITEM 7. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" discussed management's assessment of the Company's financial condition, results of operations and other issues facing the Company. The following discussion and analysis by management focuses on those factors that had a material effect on the Company's financial condition and results of operations during the three months and nine months ended September 30, 1996 and 1995. It should be read in conjunction with the Company's consolidated financial statements. Trends and contingencies of a material nature are discussed to the extent known and considered relevant. Liquidity and Capital Resources The capital requirements for 1996 were originally projected at $207 million, including a discretionary cash outlay for debt retirement of $90 million. During the second quarter, the Company revised its capital requirements to $317 million to reflect the anticipated third quarter purchase of $200 million of PVNGS LOBs and the postponement of the planned debt retirement of $90 million. In September 1996, the New Mexico Public Utility Commission ("NMPUC") granted the Company's request for the purchase of up to $300 million of PVNGS LOBs and Eastern Interconnection Project secured facility bonds over the next three years. On October 17, 1996, the Company purchased $200 million of PVNGS LOBs at a premium with accrued interest. In purchasing the LOBs, the Company borrowed $100 million against the Accounts Receivable Facility and utilized $118 million of its cash. The Company spent approximately $66 million for its utility construction expenditures during the first nine months of 1996 and anticipates it will spend approximately $44 million for additional construction expenditures during the remaining period of 1996. The Company expects that such cash requirements are to be met primarily through internally generated cash. However, to cover differences in the amounts and timing of cash generation and cash requirements, the Company utilizes short-term borrowings under its liquidity arrangements. At September 30, 1996, the Company had $97 million of available liquidity arrangements, consisting of $89 million from the $100 million revolving credit facility ("Facility") and $8 million from the $11 million in local lines of credit. The Facility will expire in June 1998 and includes a maximum allowed debt to capitalization ratio of 70%. As of September 30, 1996, such ratio was 62.1%. In July 1996, the Company requested NMPUC approval to refinance the $23 million 1984 Series A Pollution Control Revenue Bonds and the $77 million 1977 Series Pollution Control Revenue Refunding Bonds. The NMPUC issued an order on October 7, 1996, approving the refinancings. On October 9, 1996, the Company filed a case to refinance an additional $65 million of 1978 Series A Pollution Control Revenue Bonds. A hearing was held on October 30. If approved, the Company expects to refinance the entire $165 million of pollution control bonds before year end with either fixed or variable rate bonds. -8- As of September 30, 1996, the Company had approximately $33.3 million in temporary investments. The Company continues to evaluate its investment and debt retirement options to optimize its financing strategy and earnings potential. Credit Rating and Dividends In September 1996, Moody's Investors Service ("Moody's") and Standard & Poor's Corporation ("S&P") upgraded the Company's credit ratings to one level below investment grade in response to the Company's announcement of the planned purchase of $200 million of PVNGS LOBs. The purchase represents the latest step in the Company's efforts to improve its debt to capitalization ratio and reduce fixed costs. The positive rating outlook by Moody's anticipates the Company's purchase of an additional $100 million of PVNGS LOBs over the next three years, above-average growth in energy demand within the Company's service territory, and gradual transition to retail competition in New Mexico. S&P indicated that "ratings could be raised during the next several years if the Company can meet several major challenges, including the threat of retail wheeling, relatively high electric production costs, above-average retail electric rates, potential further write downs of high cost nuclear generation, and the need for satisfactory Palo Verde operating performance". The Company resumed the payment of cash dividends on common stock starting in May 1996. On October 8, 1996, the Company's board of directors ("Board") declared a quarterly cash dividend of 12 cents per common share, payable November 22, 1996, to shareholders of record as of November 1, 1996. The Board reviews the Company's dividend policy on a continuing basis. The declaration of common dividends is dependent upon a number of factors including earnings and financial condition of the Company and market conditions. RESULTS OF OPERATIONS Net earnings applicable to common stock decreased $8.7 million ($.21 per share) and $7.5 million ($.18 per share) for the quarter and nine months ended September 30, 1996, respectively, from the corresponding periods last year. The following discussion highlights significant items which affected the results of operations for the quarter and nine months ended September 30, 1996 and 1995. Electric gross margin (electric operating revenues less fuel and purchased power expense) increased $5.3 million and $17.7 million for the quarter and nine months ended September 30, 1996, respectively, from the corresponding periods a year ago. These increases were attributable to retail load growth and warmer than normal weather in 1996 and increased off-system sales margin due to the Company's aggressive marketing strategies aided by the warmer than normal weather. Gas gross margin (gas operating revenues less gas purchased for resale) decreased $5.3 million for the nine months ended September 30, 1996 from the corresponding period a year ago. The main contributor to this decrease was the effect of the sale of gas gathering and processing assets in 1995, which was partially offset by increased off-system sales margin. -9- The sale of the Company's water division in July 1995 resulted in a decrease in the current year's operating revenues by $6.2 million for the nine months ended September 30, 1996. Other operation and maintenance ("O&M") expenses increased $9.3 million for the quarter over the corresponding period a year ago due to increases in (i) office supplies and expense and outside services of $4.3 million, (ii) labor expense of $3.6 million, (iii) distribution O&M expenses of $1.8 million, and (iv) transmission O&M expenses of $1.1 million. Such increases were offset by a $2.0 million reduction in O&M associated with the PVNGS Units 1 and 2 leases as a result of a the change in the Arizona property tax law. Other O&M expenses for the nine months ended September 30, 1996 increased $1.5 million from the corresponding period last year. The various 1996 expense increases were significantly offset by the reduction in O&M expenses of $9.9 million resulting from the sales of the water division and gas gathering and processing assets in 1995. Depreciation and amortization expenses decreased $2.6 million for the nine months ended September 30, 1996 from the corresponding period a year ago as a result of the sale of the Company's water division and gas assets in 1995 and an adjustment recorded in the second quarter of 1996 for the over amortization of certain intangible utility plant. Operating income taxes for the quarter ended September 30, 1996 decreased $1.8 million from the corresponding period a year ago due mainly to decreased pre-tax earnings for the current quarter. Operating income taxes for nine months ended September 30, 1996 increased $4.5 million over the corresponding period a year ago due mainly to increased pre-tax earnings for the current nine months. Other income and deductions, net of taxes, for the quarter and nine months ended September 30, 1996 decreased $6.9 million and $19.7 million, respectively, from the corresponding periods a year ago. Significant items, net of taxes, for the 1995 quarter included the gain of $6.8 million from the sale of the Company's water division in July 1995. In addition, year-to-date 1995 included, net of tax, (i) the gain of $13.1 million from the gas assets sale in June 1995, (ii) an accrual of $2.6 million of income pertaining to the carrying costs related to gas take-or-pay settlement amounts and (iii) income of $1.4 million related to adjusting reclamation reserves for certain mining operations. Offsetting such decreases were an additional 1995 regulatory reserve of $1.5 million and an after-tax write off of debt retirement costs of $.9 million. Net interest charges decreased $6.3 million for the nine months ended September 30, 1996 from the corresponding period a year ago as a result of the retirement of $132.7 million PVNGS LOBs in March 1995. Preferred stock dividend requirements decreased $3.1 million for the nine months ended September 30, 1996 from the corresponding period a year ago due to the retirement of $64 million of preferred stock in August 1995. -10- OTHER ISSUES FACING THE COMPANY Restructuring the Electric Industry in New Mexico As previously reported, the electric utility industry is currently undergoing a period of fundamental change intended to promote a competitive environment in the retail and wholesale energy marketplaces. Legislators and regulators at both the state and Federal level are considering whether, and how, to promote competition among suppliers of electricity and how to provide customers with choice among suppliers. (See ITEM 7. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OVERVIEW -- Competitive Electric Market" in the 1995 Form 10-K.) The Integrated Water and Resource Planning Committee of the New Mexico State Legislature (the "IWRPC") has been holding ongoing hearings during 1996 which continue to focus on the issues related to restructuring of the electric industry in New Mexico. The Company has participated extensively in these hearings and, at the invitation of the IWRPC, submitted draft legislation to be used as a starting point for the various parties to consider regarding the electric industry restructuring. The draft legislation would allow an electric utility to recover all of its prudently incurred transition costs, and also provides a path for business flexibility. The office of New Mexico Attorney General's ("AG") has testified that retail competition should not be introduced at this time but, if it is, there should be independent ownership of generation and transmission and distribution, due to market power concerns. To date, the IWRPC has not articulated a formal position on either the Company's proposed legislation or any other restructuring proposals for the restructuring of the electric industry in New Mexico. In addition, the NMPUC has begun a series of workshop meetings in its "Investigation of Restructuring of Regulation of the Electric Industry in New Mexico". The Company has actively participated in these workshops and has presented the Company's position on various matters related to industry restructuring. The Company has provided data and analysis in the areas of market structure, calculation and collection of stranded costs, market power, potential changes in Company structure and issues related to the transition phase. The Company continues to provide information and analysis to the NMPUC in this ongoing matter. The Company is currently unable to predict the ultimate outcome of this proceeding and the timing of the electric industry restructuring in New Mexico. Santa Fe Station As previously reported, the New Mexico Environment Department ("NMED") has been conducting an investigation of groundwater contamination detected beneath the former Santa Fe Generating Station ("Santa Fe Station") site to determine the source of the contamination. The Company has been and is continuing to cooperate with the NMED site investigation pursuant to a settlement agreement ("Settlement Agreement") between the Company and the NMED. On June 24, 1996, the Company received a letter from the NMED, indicating that the NMED believes that the Company is the source of the gasoline contamination in a municipal well supplying the City of Santa Fe and the groundwater underlying the Santa Fe Station. Further, the NMED letter stated that the Company was required to -11- proceed with the interim remediation of the contamination pursuant to the New Mexico Water Quality Control Commission ("NMWQCC") regulations. (See PART I, ITEM 2. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OTHER ISSUES FACING THE COMPANY -- Santa Fe Station" in the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1996.) On July 24, 1996, the Company filed an appeal with the NMWQCC regarding the determinations and directives contained in the NMED's June 24, 1996 letter. As a result of ongoing negotiations being conducted between the Company and the NMED for a resolution of the groundwater contamination issue, the Company and the NMED filed a joint motion to stay the appeal. The motion was granted by the NMWQCC on September 10, 1996. On October 3, 1996, the Company and the NMED signed an amendment to the Settlement Agreement concerning the groundwater contamination. As part of the amendment, the Company agreed to spend approximately $1.2 million ("Settlement Amount") for certain costs related to sampling, monitoring, and development and implementation of a remediation plan. The remediation plan is to be developed jointly by the Company and the NMED. Since the contamination affects a municipal well supplying the City of Santa Fe, the cooperation of the City of Santa Fe will also be sought in the development of the plan. The amended Settlement Agreement does not, however, provide the Company with a full and complete release from potential 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. Coal Fuel Supply In July 1996, the Company was notified by BHP Minerals International, Inc. ("BHP"), fuel supplier to the SJGS, that the Navajo Nation has proposed to select certain properties within the San Juan and La Plata Mines (the "mining properties') pursuant to the Navajo-Hopi Land Settlement Act of 1974 (the "Act"). The mining properties are operated by BHP under leases from the Bureau of Land Management ("BLM") and comprise a portion of the fuel supply for SJGS. An administrative appeal by BHP is pending. In the appeal, BHP has 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 costs to the coal price that might potentially be passed on to SJGS through the existing coal sales agreement. A stay of all actions by the BLM has been ordered by the Interior Board of Land Appeals pending resolution of the issues on appeal. The Company is monitoring closely the appeal and other developments on this issue and will continue to assess potential impacts to SJGS and the Company's operations. Currently, the Company is unable to predict the outcome of this matter or its possible impact on the Company's results of operations. -12- Decommissioning Trust Funds The Company has a program for funding its share of decommissioning costs for PVNGS. Under this program, the Company makes a series of annual deposits to an external trust over the estimated useful life of each unit with the trust funds being invested under a plan which allows the accumulation of funds largely on a tax-deferred basis through the use of life insurance policies on certain current and former employees. A decommissioning cost study performed in 1995 indicated that the Company's share of the PVNGS decommissioning costs will be approximately $147.5 million (stated in 1995 dollars). The Company determined that a supplemental investment program would be needed as a result of cost increases identified in a 1992 study and the lower than anticipated performance of the existing program. In 1995, the Company filed a request for permission from the NMPUC to establish a qualified tax advantaged trust for PVNGS Units 1 and 2. Due to Internal Revenue Service regulations, PVNGS Unit 3 will remain in a non-qualified trust. The NMPUC granted the Company's request. (See PART II, ITEM 7. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OTHER ISSUES FACING THE COMPANY" in the 1995 Form 10-K.) Pursuant to NMPUC approval, in March and September 1996, the Company funded an additional $12.5 million into qualified and non-qualified trusts. The estimated market value of the trusts at the end of December 1996 is estimated to be approximately $25.6 million, including the cash surrender value of the current insurance policies. Gas Rate Case As previously reported, in August 1995, the Company filed a request for a $13.3 million increase for its retail natural gas sales and transportation rates. The NMPUC Staff and intervenors in the case filed their testimony in January 1996. The NMPUC Staff recommended a $2.5 million rate decrease and the AG recommended a $13.2 million rate decrease. (See PART II, ITEM 7. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OTHER ISSUES FACING THE COMPANY -- GAS RATE CASE" in the 1995 Form 10-K.) On August 29, 1996, the hearing examiner in the case issued a recommended decision, proposing a rate decrease of approximately $.5 million. The proposed rate decrease reflects the recovery of certain regulatory assets and the postponement of recovery of other regulatory assets to future proceedings. The NMPUC's final order in the case is expected in November 1996. The Company is currently unable to predict the ultimate outcome of this proceeding. Albuquerque Franchise Issues As previously reported, the Company's non-exclusive electric service franchise with the City of Albuquerque ("the City") expired in 1992. The franchise agreement provided for the Company's use of City rights-of-way for placement of electric service facilities. The Company provides service to the area which contributed 46% of the Company's total 1995 electric operating revenues. The absence of a franchise does not change the Company's right and obligation to serve those customers under state law. -13- In 1991, the NMPUC issued an order concluding, among other things, that the City could bid for services to its own facilities (Albuquerque municipal loads generated approximately $16.6 million in annual revenue for 1995), but not for service to other customers. However, the New Mexico Supreme Court ("Court") ruled that a city can negotiate rates for its citizens in addition to its own facility uses. The Court also ruled that any contracts with utilities for electric rates are a matter of statewide concern and subject to approval, disapproval or modification by the NMPUC. In addition, the Court reaffirmed the NMPUC's exclusive power to designate providers of utility service within a municipality and confirmed that municipal franchises are not licenses to serve but rather provide access to public rights-of-way. During 1992, representatives of the Company and the City had numerous meetings in attempts to resolve the franchise renewal issue. Since that time, no meetings have been held. The City continues to maintain its options by advocating industry restructuring and monitoring the municipalization activities of the City of Las Cruces. A measure designed to start municipalization activities in Albuquerque was defeated by the City Council. The Company continues to collect and pay franchise fees to the City. (See PART II, ITEM 7. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OTHER ISSUES FACING THE COMPANY -- ALBUQUERQUE FRANCHISE ISSUES" in the 1995 Form 10-K.) In an article in the October 25, 1996, Albuquerque Journal, it was reported that the Mayor of the City had met with two NMPUC Commissioners about his concern that State efforts regarding retail wheeling were proceeding too slowly and that he was evaluating the City's options to implement Article XV of the City Charter requiring competitive bids for electric franchises. The Company has taken the position that the NMPUC does not have authority to order retail wheeling and, as previously reported, the Legislature in 1996 unanimously adopted Senate Joint Memorial 42, which stated that retail wheeling is not in the public interest at this time although recognizing that industry restructuring must continue to be studied. In a related matter, the New Mexico Supreme Court on September 13, 1996, agreed to decide the question of whether or not State law allows condemnation of electric utilities in the case involving the attempt by the City of Las Cruces to condemn El Paso Electric Company's ("EPE") distribution system and related facilities serving Las Cruces. On August 21, 1996, the Federal Magistrate Court ruled that the City of Las Cruces had failed to prove that condemnation would not materially impair service by EPE to customers outside Las Cruces. This case continues in the New Mexico Supreme Court. Although the Company believes that State law does not allow condemnation of electric utilities, it cannot, at this time, predict the outcome of this case or its possible effects on the City of Albuquerque franchise issues. -14- PART II -- OTHER INFORMATION ITEM 5. OTHER INFORMATION Purchase of 100 MW Contingent Peaking Capacity On October 4, 1996, the Company entered into a long-term power purchase contract with the Cobisa-Person Limited Partnership ("PLP") to purchase approximately 100 MW of unit contingent peaking capacity for a period of 20 years, with an option to renew for an additional five years. The PLP is a partnership of subsidiaries of Cobisa Corporation of Houston, Texas and U.S. Generating Company of Bethesda, Maryland. The gas turbine generating unit will be located on the Company's retired Person Generating Station site located in Albuquerque, New Mexico and will be constructed and operated by PLP. Depending on the timing of NMPUC and Federal Energy Regulatory Commission ("FERC") approvals and securing of necessary permits, construction could start in August 1998 with commercial operation beginning by May 1999. The Company believes that locating additional peaking capacity in the Albuquerque area will not only add 100 MW of support for the already constrained transmission system, but will also meet growing power demands in central New Mexico. On October 11, 1996, the Company filed a request for approval from the NMPUC. Gas Transmission Pipeline As previously reported, in May 1996, the Company submitted a bid for acquiring the gas transmission pipeline from the Department of Energy ("DOE") which had issued a request for proposal for the sale of 130 miles of transmission pipeline. The Company currently leases the pipeline from the DOE for transmission of natural gas to certain customers in northern New Mexico, including the county of Los Alamos and Los Alamos National Laboratory. (See PART I, ITEM 2. -- "PROPERTIES --NATURAL GAS" in the 1995 Form 10-K.) On June 21, 1996, the DOE accepted the Company's proposal to purchase the DOE pipeline for $3.1 million, subject to the successful negotiations of the transfer and transitional transportation agreements. The acquisition by the Company is subject to the approval of the NMPUC and the DOE providing right-of-way satisfactory to the Company. Hearings are scheduled for November 25, 1996. The Company is currently working with the DOE to resolve the right-of-way issue associated with the purchase. FERC Rate Filings As previously reported, in April 1996, the Company filed a notice of change in rates for its firm transmission service for all point-to-point and network customers on the Company's high voltage transmission system. The Company also requested changes for services provided to two customers which receive integration and transmission service for power purchased from a third party. In addition, the Company requested that this filing be consolidated with complaint proceedings submitted by the affected customers. The Company submitted the same cost support in the open access tariff and anticipates that the FERC will determine rates for its open access tariff filing based on the results of the rate change proceeding. (See PART I, ITEM 5. -- "OTHER INFORMATION -- FERC Rate Filings" in the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1996.) -15- Hearings in the cases were scheduled to begin October 21, 1996. However, due to on-going settlement negotiations among the parties, the Administrative Law Judge has granted a two week delay in the case. If there is no settlement reached among the parties, hearings are scheduled to begin November 4, 1996. Although the Company anticipates a reduction in the existing rates resulting from the hearings or any settlement of the cases, the Company does not anticipate any material adverse impact on the Company's financial condition or results of operations. Disclosure Regarding Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 (the "Act") provides a new "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful, cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the statement. Accordingly, the Company hereby identifies the following important factors which could cause the Company's actual financial results to differ materially from any such results which might be projected, forecasted, estimated or budgeted by the Company in forward-looking statements: (i) adverse actions of utility regulatory commissions, (ii) utility industry restructuring, (iii) failure to recover stranded assets, (iv) failure to obtain new customers or retain existing customers, (v) inability to carry out marketing and sales plans, (vi) adverse impacts resulting from environmental regulations, (vii) loss of favorable fuel supply contracts, (viii) failure to obtain water rights and rights-of-way, (ix) operational and environmental problems at generating stations, and (x) failure to maintain adequate transmission capacity. Many of the foregoing factors discussed have been addressed in the Company's previous filings with the SEC pursuant to the Securities Exchange Act of 1934. The foregoing review of factors pursuant to the Act should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to the effective date of the Act. -16- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits: 10.69* Refunding Agreement No. 3 dated as of September 27, 1996 between Public Service Company of New Mexico, The Owner Participant named therein, State Street Bank and Trust Company, as Owner Trustee, The Chase Manhattan Bank, as Indenture Trustee, and First PV Funding Corporation 15.0 Letter Re: Unaudited Interim Financial Information 27 Financial Data Schedule 99.21* 1996 Supplemental Indenture dated as of September 27, 1996 to Trust Indenture, Mortgage, Security Agreement and 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 *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. In addition to those exhibits shown above, the Company hereby incorporates the following exhibit pursuant to Exchange Act Rule 12b-32 and Regulation S-K, Section 10, paragraph (d), by reference to the filing set forth below: Description Filed as Exhibit By-laws of Public Service Company of 3.2 to Annual Report of the New Mexico With All Amendments to and Registrant on Form 10-K for fiscal including December 5, 1994 year ended December 31, 1994 b. Reports on Form 8-K: None. -17- Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PUBLIC SERVICE COMPANY OF NEW MEXICO ------------------------------------ (Registrant) Date: October 31, 1996 /s/ Donna M. Burnett ------------------------------------ Donna M. Burnett Corporate Controller and Chief Accounting Officer (Officer duly authorized to sign this report) -18- EX-10 2 EXHIBIT 10.69 TO THE 9-30-96 FORM 10-Q REFUNDING AGREEMENT NO. 3 REFUNDING AGREEMENT NO. 3 dated as of September 27, 1996 (this "Refunding Agreement") between PUBLIC SERVICE COMPANY OF NEW MEXICO, a New Mexico corporation ("PNM"), the corporation identified on Schedule I hereto as the Owner Participant (the "Owner Participant"), STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company ("State Street"), not in its individual capacity but solely as owner trustee (the "Owner Trustee") under the Trust Agreement dated as of December 16, 1985 (the "Trust Agreement") with the Owner Participant, THE CHASE MANHATTAN BANK, a New York banking corporation (formerly known as "Chemical Bank") ("Chase"), not in its individual capacity, but solely as lease indenture trustee (the "Indenture Trustee") under the Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 16, 1985 (as heretofore supplemented, the "Lease Indenture") with the Owner Trustee and FIRST PV FUNDING CORPORATION, a Delaware corporation ("Funding Corporation"). R E C I T A L S A. PNM, the Owner Participant, the Owner Trustee, the Indenture Trustee and Funding Corporation are party to the Participation Agreement dated as of December 16, 1985 (as heretofore amended, the "Participation Agreement"). State Street is the successor as owner trustee to The First National Bank of Boston ("FNB"), the owner trustee originally designated in and party to the Participation Agreement and the other Transaction Documents (such term and the other capitalized terms used in this Refunding Agreement without definition being defined as provided in Section 1 below) to which FNB was party in its capacity as owner trustee. B. Funding Corporation, PNM and Chase (formerly known as "Chemical Bank") are parties to the Collateral Trust Indenture dated as of December 16, 1985 (as heretofore supplemented and amended, the "Collateral Trust Indenture"). C. Pursuant to Section 8(a) hereof, the Owner Trustee has determined to effect a partial prepayment of a portion of one of the Notes as specified in Schedule I hereto (the "Prepayment") on the Closing Date (as defined below). The Note subject to Prepayment is hereinafter called the "Subject Note". D. Funding Corporation has determined to effect a partial optional redemption of the securities outstanding under the Collateral Trust Indenture (the "Redemption"). Funding Corporation intends to redeem (i) $32,256,000 of its 10.30% Lease Obligation Bonds Series 1986A, Due January 15, 2014 (the "Series [3][MFS-1] A Bonds") and (ii) $167,744,000 of its 10.15% Lease Obligation Bonds, Series 1986B, Due January 15, 2016 (the "Series B Bonds"). E. The Owner Trustee shall obtain the funds necessary for the Prepayment (i) by issuing and selling to PNM an Additional Note under the Lease Indenture (the "Issuance and Sale") in the amount and on the terms specified in the form of note included as part of Exhibit A hereto (the "1996 Refunding Note") and (ii) from the payment by PNM of Supplemental Rent (pursuant to Section 3(b)(ii) of the Facility Lease) to the Owner Trustee in the amount equal to the prepayment premium (the prepayment price less principal being prepaid and accrued interest thereon) to be paid in connection with the Prepayment. The purchase price for the 1996 Refunding Note (the "Purchase Price") will equal the principal amount thereof plus interest accrued thereon from July 15, 1996. F. Funding Corporation shall obtain certain of the funds necessary for the Redemption from (a) the proceeds of (i) the prepayment price of the portion of the Subject Note being prepaid and (ii) the prepayment prices being simultaneously paid in connection with the prepayment in part of the other Pledged Lessor Notes listed on Schedule II hereto other than the Subject Note (the "Transaction Lessor Notes") and (b) amounts paid by PNM pursuant to Section 4(c) of this Agreement and similar provisions of the refunding agreements relating to the other Transaction Lessor Notes. G. The Owner Trustee, as directed and authorized by the Owner Participant, wishes to cause the Issuance and Sale in order to effect the Prepayment and to provide a portion of the funds needed to effect the Redemption. H. Section 3.5(1)(i) of the Lease Indenture provides that Additional Notes may be issued for the purpose of refunding any previously issued series of Notes, in whole or in part. Section 10.1(viii) of the Lease Indenture provides that the Indenture Trustee and the Owner Trustee may, without the consent of the Holders of Notes Outstanding, execute a supplemental indenture to evidence the issuance of and to provide the terms of Additional Notes to be issued under the Lease Indenture in accordance with the terms thereof. Subject to the conditions set forth herein, the Owner Trustee and Indenture Trustee intend to execute a 1996 Supplemental Indenture to the Lease Indenture, dated as of September 27, 1996 (the "1996 Note Supplement"), providing for the issuance under the Lease Indenture of the 1996 Refunding Note as contemplated in the 1996 Note Supplement. The form of the 1996 Note Supplement is attached as Exhibit A hereto. I. Pursuant to the Consent described in Schedule I hereto (the "Consent"), the Owner Participant has consented to the acquisition by PNM of Notes, and by executing this Agreement is willing to consent to the acquisition by PNM of the 1996 Refunding Note on the terms and conditions set forth herein. [3][MFS-1] -2- J. Since the 1996 Refunding Note taken together with the unpaid portion of the Subject Note (as reflected in the Allonge hereinbelow described) exactly corresponds (as to interest rate, maturity and principal amortization) to the Subject Note without giving effect to the Prepayment, PNM and the Owner Participant have agreed that no adjustments pursuant to Section 3(e) of the Lease will be necessary in connection with the Prepayment and/or the issuance of the 1996 Refunding Note. NOW, THEREFORE, in consideration of the premises and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Definitions; Acknowledgment; etc. (a) For purposes hereof, capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to such terms set forth in Appendix A to the Participation Agreement or in the Collateral Trust Indenture, as the case may be. (b) On October 2, 1995 (the "Transfer Date"), FNB transferred to State Street substantially all of the corporate trust business of FNB. State Street is a trust company incorporated in Massachusetts and doing business in the United States of America. State Street has a combined capital and surplus of at least $50,000,000. Pursuant to Section 9.01(d) of the Trust Agreement, on the Transfer Date State Street became the Owner Trustee under the Trust Agreement and, therefore, the other Transaction Documents. State Street acknowledges and agrees that, as of the Transfer Date, it has assumed all of the duties and obligations of FNB under the Trust Agreement and the other Transaction Documents. The parties hereto (other than the Owner Trustee) acknowledge the succession of State Street as Owner Trustee under and in respect of the Transaction Documents. (c) Simultaneously with the execution and delivery of this Agreement, the parties hereto (other than the Owner Participant) will be entering into six other refunding agreements substantially similar to this Agreement (the "Other Refunding Agreements"), one with respect to each of the Transaction Lessor Notes. In the event that the Issuance and Sale contemplated by one or more of the Other Refunding Agreements shall not occur for any reason, the Redemption shall be modified to reduce the respective principal amounts of Series A Bonds and Series B Bonds to be subject to such Redemption such that the principal amount of Subject Bonds (as defined in Section 2(a) below) to be redeemed equals the principal amount of the Prepayment hereunder and the Prepayments under such Other Refunding Agreements in respect of which Issuance and Sales shall simultaneously be occurring. [3][MFS-1] -3- SECTION 2. Agreements of Funding Corporation. (a) On the Closing Date (as defined in Section 6 below), Funding Corporation shall issue a notice of redemption to the Collateral Trust Trustee in the form of Exhibit B hereto (the "Notice of Redemption") with respect to the optional redemption by it of $32,256,000 of Series A Bonds and $167,744,000 of Series B Bonds (collectively, the "Subject Bonds"). The redemption date specified in the Notice of Redemption is October 17, 1996 (the "Redemption Date"). (b) Promptly following the Redemption, Funding Corporation will deliver to the Collateral Trust Trustee a Company Request under the Collateral Trust Indenture to effect adjustments to the Sinking Fund schedules applicable to the Bonds not redeemed as part of the Redemption. SECTION 3. Agreements of Owner Trustee. (a) On the Closing Date, the Owner Trustee will: (i) execute and deliver the 1996 Note Supplement; (ii) execute and deliver the 1996 Refunding Note; (iii) execute and deliver an allonge (the "Allonge") to the Subject Note in the form of Exhibit C hereto; (iv) as required by Section 3.5(4)(b) and (d) of the Lease Indenture, execute and deliver a certificate, request and authorization in the form of Exhibit D hereto (the "Owner Trustee Instrument"); and (v) cause to be delivered an opinion of its counsel in the form of Exhibit E.1 hereto. (b) On the Closing Date, the relevant provisions of this Refunding Agreement shall constitute notice to the Indenture Trustee of the Prepayment. The principal portion of the Purchase Price (the "Amount to be Prepaid" set forth in Schedule I hereto) shall be applied to prepay on the Closing Date the remaining installments of principal of the Subject Note as follows: the "principal amount payable" on each "payment date" specified on Schedule 1 to the Subject Note shall be prepaid by an amount equal to the "principal amount payable" for such date set forth in Schedule 1 to the 1996 Refunding Note. Annexed as Schedule 1 to the Allonge is the replacement schedule to the Subject Note which reflects the application of the proceeds of Prepayment to the remaining installments of the Subject Note. For each date, the sum of (i) the "principal amount payable" set forth on Schedule 1 to the Allonge for such date and (ii) the "principal amount payable" set forth on Schedule 1 to the 1996 Refunding Note for such date equals the "principal amount payable" for such [3][MFS-1] -4- date set forth on Schedule 1 to the Subject Note (without giving effect to the Prepayment or the Allonge). SECTION 4. Agreements of PNM. (a) On the Closing Date, PNM shall acquire the 1996 Refunding Note for an amount equal to the Purchase Price. The Purchase Price shall be paid by wire transfer of immediately available funds to an account at Chase to be designated by Chase on the day immediately preceding the Closing Date (the "Account"). (b) On the Closing Date, PNM shall pay an amount equal to the amount specified in item 7 on Schedule I, such payment to be made for the benefit of the Owner Trustee as Supplemental Rent under Section 3(b)(ii) of the Facility Lease. Such payment shall be made by wire transfer of immediately available funds to the Account. (c) On the Closing Date, PNM shall pay to the Account for the benefit of Funding Corporation an amount which, together with other funds available in the Account, will be sufficient to pay the aggregate redemption price of the Subject Bonds on and as of the Redemption Date (the "Aggregate Redemption Price"). (d) PNM agrees that, upon acquisition by PNM of the 1996 Refunding Note, PNM will not thereafter sell, assign, transfer or otherwise dispose of any portion of the 1996 Refunding Note or any interest therein (i) except in a transaction which is exempt from the registration requirements of the Securities Act of 1933, as amended, (ii) except in a transaction which would not involve either a prohibited transaction (other than an exempt prohibited transaction) or an impermissible delegation of authority within the meaning of the Employee Retirement Income Security Act of 1974, as amended, related provisions of the Internal Revenue Code of 1986, as amended, and implementing regulations (collectively, "ERISA") and (iii) without the consent of the Owner Participant, to any employee benefit plan subject to ERISA. (e) PNM acknowledges and agrees that the acquisition by it of the 1996 Refunding Note shall constitute the purchase and acquisition by PNM of a Note for all purposes of the Consent and reaffirms for the benefit of the Owner Participant, each of its covenants and agreements contained therein. (f) Without the prior written consent of the Owner Participant, PNM agrees that neither it nor any of its Affiliates, as holder of the 1996 Refunding Note, will give or participate in any request, demand, authorization, direction, notice, consent or waiver or other action available to a holder of the 1996 Refunding Note. [3][MFS-1] -5- (g) PNM will continue to satisfy its obligations to pay Rent under the Facility Lease by making cash payments at the time such Rent is due and payable, and in no case shall PNM tender, or be permitted to tender, any portion of the 1996 Refunding Note in satisfaction of its obligations to pay Rent. (h) PNM represents and warrants that on and, as of the Closing Date, (i) PNM has obtained (A) the consent of each Equity Investor to the extent that such consent is required to purchase the 1996 Refunding Note and (B) each other consent that is required under any Participation Agreement and (ii) PNM is legally entitled to purchase and hold the 1996 Refunding Note. SECTION 5. Agreements of the Owner Participant. (a) The Owner Participant agrees that the acquisition by PNM of the 1996 Refunding Note is in conformity with the Consent and will not, therefore, result in a breach by PNM of the Participation Agreement (after giving effect to the amendment to the Participation Agreement set forth in Section 10 hereof). (b) The Owner Participant will make a good faith effort to cooperate with the other parties hereto in connection with the Prepayment, the Redemption and the Issuance and Sale, SUBJECT NEVERTHELESS, to the provisions of the Transaction Documents, the Consent and this Agreement. SECTION 6. Closing. (a) On September 27, 1996 (the "Closing Date"), subject to the satisfaction of the conditions set forth in Section 6(b), the parties hereto shall perform their respective obligations hereunder specified to be performed on or prior to the Closing Date. (b) The obligation of the parties hereto to participate in the Prepayment, the Issuance and Sale and the Redemption shall be subject to the fulfillment on or before the Closing Date of the following conditions precedent (each instrument, document, certificate or opinion to be in form and substance satisfactory to each party hereto): (i) The Owner Trustee shall have delivered to the Indenture Trustee the Owner Trustee Instrument with the authorization and direction subscribed thereon duly executed by the Owner Participant. (ii) (A) The Owner Trustee and the Indenture Trustee shall have entered into the 1996 Supplement, (B) the Owner Trustee shall have executed and delivered (I) the Allonge and (II) the 1996 Refunding Note, (C) the Indenture Trustee shall have authenticated the 1996 Refunding Note and delivered the same to PNM, (D) the Funding Corporation and the Collateral Trust Trustee shall have accepted and [3][MFS-1] -6- countersigned the Allonge and caused the same to be attached to the Subject Note and (E) the Collateral Trust Trustee shall have sufficient funds in the Account to pay the Aggregate Redemption Price. (iii) No Default or Event of Default or Indenture Event of Default shall have occurred and be continuing. (iv) All conditions precedent to the acquisition by PNM of the 1996 Refunding Note specified in the Consent shall have been fulfilled. (v) The Collateral Trust Trustee shall have executed and delivered a Consent and Directive (delivered in its capacity as assignee and pledgee of Funding Corporation and as holder of all Notes) pursuant to which, among other things, it (1) consents to Section 10 hereof, (2) consents and agrees to an amendment to the Extension Letter to reflect the amendment to the Participation Agreement set forth in Section 10 hereof and (3) directs the Indenture Trustee to execute and deliver the 1996 Note Supplement. (vi) The parties shall have received a favorable opinion of counsel from Keleher & McLeod, P.A., New Mexico counsel for PNM, dated the Closing Date and addressing such matters relating to the transactions in connection with the Redemption, the Issuance and Sale and the Prepayment as any party may reasonably have requested. (vii) The parties shall have received a favorable opinion of counsel from Winthrop, Stimson, Putnam & Roberts, special counsel for PNM and counsel for the Funding Corporation, dated the Closing Date and addressing such matters relating to the transactions in connection with the Redemption, the Issuance and Sale and the Prepayment as any party may reasonably have requested. (viii) The parties shall have received favorable opinions of counsel from (1) counsel to the Owner Trustee dated the Closing Date and in the form of Exhibit E.1 hereto, and (2) Winthrop, Stimson, Putnam & Roberts dated the Closing Date and in the form of Exhibit E.2 hereto. (ix) The parties shall have received from the Owner Participant an acceptable opinion of counsel as to the due authorization, execution and delivery of this Agreement by, and the legal, valid and binding effect and enforceability of this Agreement against, the Owner Participant. SECTION 7. Expenses. PNM agrees that the fees, expenses, disbursements and costs of the other parties hereto and the Collateral Trust Trustee reasonably incurred in connection with the Prepayment, the Issuance and Sale and the Redemption are payable by PNM, as Supplemental Rent, as contemplated by Section [3][MFS-1] -7- 14(b) of the Participation Agreement. For purposes of such Section 14(b), PNM acknowledges and agrees that this Agreement and the transactions contemplated hereby and by the Consent are within the intent and scope of Section 14(b)(ii) of the Participation Agreement. SECTION 8. Request and Consent. (a) In accordance with Section 2.01 of the Trust Agreement and Section 3.5(2) of the Lease Indenture, the Owner Participant hereby requests, authorizes and directs the Owner Trustee and the Indenture Trustee (as applicable) to execute, deliver and perform this Agreement, the 1996 Note Supplement, the 1996 Refunding Note, the Allonge and the Owner Trustee Instrument. (b) In accordance with Article X of the Lease Indenture, the Owner Trustee hereby requests that the Indenture Trustee execute and deliver the 1996 Note Supplement and consents to such execution and delivery. SECTION 9. No Adjustment, etc. Anything in the Facility Lease or the other Transaction Documents to the contrary not withstanding, Basic Rent and the schedules to the Facility Lease will not be subject to adjustment to reflect either (i) the inclusion in income as to the Owner Participant of transaction expenses paid by PNM in connection with the Prepayment, the Issuance and Sale and the Redemption or (ii) the current deduction by the Owner Participant (in consequence of the Prepayment) of any portion of previously-incurred transaction expenses presently being amortized on a straight-line basis during the Basic Lease Term. PNM agrees that any net increase in the Owner Participant's Net Economic Return in consequence of the foregoing may be retained by the Owner Participant in connection with any future adjustment under the Facility Lease undertaken with the intent of preserving the Owner Participant's Net Economic Return. SECTION 10. Amendment to Participation Agreement. Section 10(b)(3)(ix) of the Participation Agreement (as amended by Section 2(b) of Amendment No. 1 dated as of July 15, 1986 to the Participation Agreement) is hereby amended and restated in its entirety as follows: "(ix) Notes and Bonds. Except with consent of the Owner Participant, the Lessee will not, and will not permit any of its Affiliates to, (A) acquire any of the Notes or, (B) except in connection with the selection of Bonds for redemption pursuant to the Collateral Trust Indenture (in strict accordance with the provisions of paragraph 3 of the commitment agreement dated the Refunding Date between PNM and the Loan Participant relating to the Lease Obligation Bonds -8- Series 1986A or provisions (identical in all materials respects) of other commitment letters relating to other series of Bonds), any of the Bonds." SECTION 11. Additional Provisions. (a) The following provisions of the Participation Agreement are incorporated herein by this reference, mutatis mutandis, and shall be applicable to and enforceable by the relevant party or parties hereto: Sections 16, 17(b) and 18 (except that the addresses of the parties for receipt of notices, etc., shall be as set forth on Schedule III hereto) and Sections 19(a) through Section 19(h). (b) Notwithstanding Section 19(g) of the Participation Agreement (as incorporated by Section 11(a) hereof), the Consent shall survive the execution, delivery and performance of this Agreement. (c) The recitals contained herein shall be taken as statements of PNM, and the other parties assume no responsibility for the correctness of the same. (d) Chase and State Street are entering into this agreement solely in their respective trust capacities and not in their respective individual capacities. Anything herein to the contrary notwithstanding, all and each of the agreements herein made on the part of each such trustee are made and intended not as personal agreements but are made and intended solely for the purpose of binding the trust estate in respect of which Chase or State Street, as the case may be, is trustee. -9- IN WITNESS WHEREOF, the parties hereto have caused this Refunding Agreement No. 3 to be duly executed by their respective officers thereunto duly authorized. PUBLIC SERVICE COMPANY OF NEW MEXICO By:/s/ Mitch J. Manzec ------------------- Name: Mitch J. Manzec Title: Treasurer MFS LEASING CORP. By:/s/ Kathleen A. Gallo --------------------- Name: Kathleen A. Gallo Title: Treasurer FIRST PV FUNDING CORPORATION By:/s/ Mark a. Ferrucci -------------------- Name: Mark A. Ferrucci Title: President THE CHASE MANHATTAN BANK, as Indenture Trustee By:/s/ Patricia Kelly ------------------ Name: Patricia Kelly Title: Vice President STATE STREET BANK AND TRUST COMPANY, not in its individual capacity but solely as Owner Trustee as aforesaid By:/s/ Patrick Thebado ------------------- Name: Patrick Thebado Title: Assistant Vice President [3][MFS-1] -10- SCHEDULE I to Refunding Agreement No. 3 1. Name of Owner MFS Leasing Corp., a Delaware Participant: corporation 2. Note to be Prepaid: 10.30% Non-Recourse Promissory Note, Fixed Rate Series (Due January 15, 2014), dated July 17, 1986 3. Amount to be Prepaid: $32,256,000 4. Prepayment Premium: $1,993,420.80 5. 1996 Refunding Note: (i) Interest Rate: 10.30% (ii) Principal Amount: $32,256,000 (iii) Stated Maturity of Principal: January 15, 2014 (iv) Interest payable from: July 15, 1996 (v) Interest January 15 and July 15 in each Payment Dates: year, commencing January 15, 1997 (vi) Principal As specified in Exhibit A to Amortization: the 1996 Note Supplement (vii) Optional As specified in Exhibit A to Prepayment: the 1996 Note Supplement (viii) Other terms: As specified in Exhibit A to the 1996 Note Supplement 6. Purchase Price for $32,256,000 plus accrued Refunding Note: interest from July 15, 1996. 7. Supplemental Rent Payment: $1,993,420.80 8. Consent: Consent and Related Agreements dated as of April 22, 1996 [3][MFS-1] Page I-1 Schedule II to Refunding Agreement No. 3 PLEDGED LESSOR NOTES TO BE PREPAID IN PART Collateral Trust Pledged Lessor Notes Reference 1. Non-Recourse Promissory Note, Series A Supplemental Fixed Rate Series (Due Indenture, Schedule 2, January 15, 2014), Item (2)(ix) $34,605,000, dated July 17, 1986, 10.30% 2. Non-Recourse Promissory Note, Series B Supplemental Fixed Rate Series (Due Indenture, Schedule 2, January 15, 2015), Item (2)(iv) $32,873,000, dated November 25, 1986, 10.15% 3. Non-Recourse Promissory Note, Series B Supplemental Fixed Rate Series (Due Indenture, Schedule 2, January 15, 2016), Item (2)(ix) $71,610,000, dated November 25, 1986, 10.15% 4. Non-Recourse Promissory Note, Series B Supplemental Fixed Rate Series (Due Indenture, Schedule 2, January 15, 2016), Item (2)(xv) $40,920,000, dated November 25, 1986, 10.15% 5. Non-Recourse Promissory Note, Series B Supplemental Fixed Rate Series (Due Indenture, Schedule 2, January 15, 2016), Item (2)(xviii) $34,101,000, dated November 25, 1986, 10.15% 6. Non-Recourse Promissory Note, Unit 1 Supplemental Fixed Rate Series (Due Indenture of Pledge, January 15, 2015), Schedule 1, Item $48,640,000, dated December (2)(iii) 17, 1986, 10.15% 7. Non-Recourse Promissory Note, Unit 2 Supplemental Fixed Rate Series (Due Indenture of Pledge, January 15, 2016), Schedule 1, Item $23,229,000, dated December (2)(iii) 17, 1986, 10.15% [3][MFS-1] Page II-1 Schedule III to Refunding Agreement No. 3 ADDRESSES 1. Public Service Company of New Mexico Alvarado Square Albuquerque, New Mexico 87158 Attention of Secretary 2. MFS Leasing Corp. 4500 New Linden Hill Road, Suite 210 Wilmington, Delaware 19808 Attention of President 3. State Street Bank and Trust Company Two International Place, 4th Floor Boston, Massachusetts 02110 Attention of Corporate Trust Department 4. The Chase Manhattan Bank 450 West 33rd Street, 15th Floor New York, New York 10001 Attention of Corporate Trustee Administration 5. First PV Funding Corporation Corporation Trust Center 1209 Orange Street Wilmington, Delaware 19801 Attention of President [3][MFS-1] Page III-1 When Recorded, Return to: Cheryl A. Ikegami SNELL & WILMER One Arizona Center Phoenix, Arizona 85004-0001 1996 SUPPLEMENTAL INDENTURE Dated as of September 27, 1996 To TRUST INDENTURE, MORTGAGE, SECURITY AGREEMENT AND ASSIGNMENT OF RENTS Dated as of December 16, 1985 between STATE STREET BANK AND TRUST COMPANY, not in its individual capacity, but solely as Owner Trustee under a Trust Agreement dated as of December 16, 1985 with MFS LEASING CORP. and THE CHASE MANHATTAN BANK (formerly known as "Chemical Bank"), as Indenture Trustee Original Indenture recorded December 31, 1985 as Instrument No. 85-623277, re-recorded April 17, 1986 as Instrument No. 86- 187652, and confirmed by document recorded April 25, 1986 as Instrument No. 86-203240, and Supplemental Indenture No. 1 thereto dated as of July 15, 1986, recorded July 17, 1986 as Instrument No. 86-367467 and Supplemental Indenture No. 2 thereto dated as of November 18, 1986, recorded November 25, 1986, as Instrument No. 86-650769, all in Maricopa County, Arizona Recorder's Office. [3][MFS-1] This 1996 SUPPLEMENTAL INDENTURE dated as of September 27, 1996 to Trust Indenture, Mortgage, Security Agreement and Assignment Of Rents dated as of December 16, 1985, between STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company (State Street), not in its individual capacity, but solely as Owner Trustee (the Owner Trustee) under a Trust Agreement dated as of December 16, 1985, between State Street, whose address is Two International Place, 4th Floor, Boston, Massachusetts 02110, with MFS LEASING CORP., a Delaware corporation (the Trust Agreement), and THE CHASE MANHATTAN BANK (formerly known as "Chemical Bank"), a New York banking corporation (the Indenture Trustee), whose address is 450 West 33rd Street, 15th Floor, New York, New York 10001. W I T N E S S E T H: WHEREAS, the Owner Trustee (as successor owner trustee to The First National Bank of Boston, the owner trustee originally designated in and party to the Trust Agreement) and the Indenture Trustee have entered into a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 16, 1985 (as heretofore amended and supplemented, the Indenture) pursuant to which the Owner Trustee has issued the Fixed Rate Notes; WHEREAS, Section 3.5(1) of the Indenture provides, among other things, that the Fixed Rate Notes may be refunded with, in whole or in part, Additional Notes; WHEREAS, Section 3.5(4) of the Indenture provides, among other things, that the Owner Trustee and the Indenture Trustee may enter into indentures supplemental to the Indenture for, among other things, the purpose of establishing the terms, conditions and designations of Additional Notes; WHEREAS, the Owner Trustee has received an authorization and request from the Owner Participant to issue an Additional Note and, as a result, the Owner Trustee desires to issue an Additional Note to effect a refunding of a portion of the Fixed Rate Note due January 15, 2014 and to enter into this 1996 Supplemental Indenture to establish the terms, conditions and designations of such Additional Note; WHEREAS, Section 10.1(viii) of the Indenture provides that, without the consent of Holders of the Notes Outstanding, the Indenture Trustee may, with the written consent of the Owner Trustee, from time to time and at any time execute a supplement to the Indenture in order to evidence the issuance of and to provide the terms of Additional Notes; [3][MFS-1] Page III-2 WHEREAS, the Owner Trustee desires to amend the Indenture as set forth in Section 3 hereof; WHEREAS, Section 10.2 of the Indenture provides that, upon receipt of a Directive, the Indenture Trustee shall execute a supplement to the Indenture as specified in such Directive; and WHEREAS, the Indenture Trustee has received a Directive directing it to execute this 1996 Supplemental Indenture; NOW, THEREFORE, in consideration of the premises and of other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 6. Definitions. For purposes hereof, capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in Appendix A to the Indenture. SECTION 7. Terms, Conditions and Designations of the Additional Notes. (a) The 1996 Refunding Note. There is hereby created and established a separate series of Notes of the Owner Trustee designated "Nonrecourse Promissory Note, 1996 Refunding Series" herein referred to as the 1996 Refunding Note. The 1996 Refunding Note shall be payable as to principal and bear interest on the principal amount thereof as follows: 1996 Refunding Interest Rate Principal Amount Note Due January 15, 2014 10.30% $32,256,000 The 1996 Refunding Note shall bear interest on the principal amount thereof from time to time Outstanding from the date thereof until paid at the rate of interest set forth therein. The principal amount of the 1996 Refunding Note shall be payable as set forth in Schedule 1 attached thereto. Installments of interest on and principal of (and premium, if any, on) the 1996 Refunding Note shall be due and payable on the dates specified in the 1996 Refunding Note. The 1996 Refunding Note shall be substantially in the form of Exhibit A hereto. SECTION 8. Amendments. (a) Amendment to Section 3.9(a). [3][MFS-1] Page III-3 The following sentence is added at the end of Section 3.9(a) of the Indenture: "In the event that (in accordance with the applicable provisions of a Note), the Owner Trustee determines to prepay a Note in part, the Owner Trustee may apply the principal portion of such prepayment to prepay such remaining installments of principal in such amounts as the Owner Trustee shall identify in its notice of prepayment (such notice of prepayment to be accompanied by an appropriately prepared replacement Schedule I to the Note being prepaid)." (b) Amendment to Section 3.9(c). Anything in Section 3.9(c) of the Indenture and any provision of any Note to the contrary notwithstanding, in the event of the prepayment of a Note, (i) prior notice of such prepayment need not be given if the same Person is both Indenture Trustee and the holder, assignee and pledgee of the Note to be prepaid and (ii) any notice of optional prepayment may be made conditional upon receipt by the Owner Trustee of funds sufficient to pay the prepayment price due in connection with such prepayment. (c) Amendment to Section 4.3. Anything in Section 4.3 of the Indenture to the contrary notwithstanding, at the request of the Owner Trustee, the Indenture Trustee shall not destroy cancelled Notes but shall return the same marked "CANCELLED" to the Owner Trustee. (d) Amendment to Section 1.4. Pursuant to Arizona Revised Statutes, Section 33-404, (i) the beneficiary of the Trust Agreement is MFS Leasing Corp., a Delaware corporation whose address is 4500 New Linden Hill Road, Suite 210, Wilmington, Delaware 19808, Attention of President and (ii) the beneficiaries of this Indenture are (A) Public Service Company of New Mexico, a New Mexico corporation whose address is Alvarado Square, Albuquerque, New Mexico 87158, Attention of Secretary, a Holder of a Note, and (B)(1) First PV Funding Corporation, a Delaware corporation whose address is Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801, Attention of President, and (2) by pledge and assignment, the banking corporation also acting as indenture trustee hereunder the address of which is set forth above, as their respective interests may appear, each a Holder of a Note. Copies of the Trust Agreement and this Indenture are available for inspection at the Indenture Trustee's Office. SECTION 9. Miscellaneous. (a) Effective Date of Supplemental Indenture. [3][MFS-1] Page III-4 This 1996 Supplemental Indenture shall be and become effective upon the execution hereof by the parties hereto. (b) Counterpart Execution. This 1996 Supplemental Indenture may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute but one and the same instrument. (c) Execution as Supplemental Indenture. This 1996 Supplemental Indenture is executed and shall be construed as an indenture supplemental to the Indenture and, as provided in the Indenture, this 1996 Supplemental Indenture forms a part thereof. [3][MFS-1] Page III-5 IN WITNESS WHEREOF, the Owner Trustee and the Indenture Trustee have each caused this 1996 Supplemental Indenture to be duly executed by their respective officers thereunto duly authorized, all as of the date first set forth above. STATE STREET BANK AND TRUST COMPANY, not in its individual capacity, but solely as Owner Trustee under the Trust Agreement dated as of December 16, 1985, with MFS Leasing Corp., By /s/ Eric J. Donaghey -------------------- Name: Eric J. Donaghey Title: Assistant Vice President THE CHASE MANHATTAN BANK, as Indenture Trustee, By:/s/ Patricia Kelly ------------------ Name: Patricia Kelly Title: Vice President [3][MFS-1] Page III-6 COMMONWEALTH OF MASSACHUSETTS ) ) ss.: COUNTY OF SUFFOLK ) On the 27th day of September, 1996, before me personally came Eric J. Donaghey, to me known, who, being by me duly sworn, did acknowledge, depose and say that he resides at ____________, Massachusetts; that he is an Assistant Vice President of STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company described in and which executed the foregoing instrument; and that he signed his name thereto on behalf of said trust company by authority of the Board of Directors of such trust company. --------------------------- Notary Public [NOTARIAL SEAL] Term Expires: [3][MFS-1] STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the 27th day of September, 1996, before me personally came Patricia Kelly, to me known, who, being by me duly sworn, did acknowledge, depose and say that he resides at _________, New York; that she is a Vice President of THE CHASE MANHATTAN BANK, a New York banking corporation, described in and which executed the foregoing instrument; and that he signed his name thereto on behalf of said corporation by authority of the Board of Directors of such corporation. --------------------------- Notary Public [NOTARIAL SEAL] Term Expires: [3][MFS-1] EX-15 3 EXHIBIT 15.0 FOR 9/30/96 FORM 10-Q ARTHUR ANDERSEN ARTHUR ANDERSEN LLP October 29, 1996 Arthur Andersen LLP Suite 400 6501 Americas Parkway NE Albuquerque, NM 87110-5372 (505) 889-4700 Public Service Company of New Mexico: We are aware that Public Service Company of New Mexico has incorporated by reference in its Registration Statement Nos. 33-65418, 333-03303, and 333-03289 its Form 10-Q for the quarter ended September 30, 1996, which includes our report dated October 29, 1996, covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, Arthur Andersen LLP EX-27 4 FDS FOR 3ND QUARTER 10-Q (9-30-96)
UT This schedule contains summary financial information extracted from the Company's Consolidated Statement of Earnings, Consolidated Balance Sheets and Consolidated Statement of Cash Flows for the period ended September 30, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 US DOLLARS 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1 PER-BOOK 1,553,175 264,561 214,068 134,891 0 2,166,695 208,870 466,860 74,708 750,438 0 12,800 712,271 114,000 0 0 16,440 0 0 0 560,746 2,166,695 650,258 34,430 521,654 554,025 96,233 2,497 98,730 38,800 59,930 440 59,490 10,026 36,304 135,378 0 0
EX-99 5 EXHIBIT 99.21 TO THE 9-30-96 FORM 10-Q EXHIBIT A to 1996 SUPPLEMENTAL INDENTURE 1996 REFUNDING NOTE (DUE JANUARY 15, 2014) THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED, SOLD OR OFFERED FOR SALE IN VIOLATION OF SUCH ACT NONRECOURSE PROMISSORY NOTE, 1996 REFUNDING SERIES (DUE JANUARY 15, 2014) Issued at: New York, New York Issue Date: As of July 15, 1996 STATE STREET BANK AND TRUST COMPANY, not in its individual capacity, but solely as Owner Trustee (Owner Trustee) under a Trust Agreement dated as of December 16, 1985 with MFS LEASING CORP. (the Owner Participant), hereby promises to pay to PUBLIC SERVICE COMPANY OF NEW MEXICO, or registered assigns, the principal sum of $32,256,000 (Thirty Two Million Two Hundred Fifty Six Thousand Dollars) on January 15, 2014 together with interest (computed on the basis of a 360-day year of twelve 30- day months) on the aggregate amount of such principal sum remaining unpaid from time to time from the Issue Date of this 1996 Refunding Note until due and payable, in arrears, at the rate of 10.30% per annum. Payments of principal installments of this 1996 Refunding Note shall be made in the "principal amount payable" and on the "payment dates" specified in Schedule 1 hereto, as such Schedule may be revised from time to time in accordance with the Indenture and the terms contained herein. Payments of accrued interest on this 1996 Refunding Note shall be made on January 15 and July 15 in each year, commencing January 15, 1997, to and including the last "payment date" specified in Schedule 1 hereto. Capitalized terms used in this 1996 Refunding Note which are not otherwise defined herein shall have the meanings ascribed thereto in the Indenture (as hereinafter defined). Interest on any overdue principal and premium, if any, and (to the extent permitted by applicable law) any overdue interest, shall be paid, on demand, from the due date thereof at the rate per annum equal to 11.30% (computed on the basis of a 360-day year of twelve 30-day months) for the period during which any such principal, premium or interest shall be overdue. [3][MFS-1] Page III-10 In the event any date on which a payment is due under this 1996 Refunding Note is not a Business Day, then payment thereof may be made on the next succeeding Business Day with the same force and effect as if made on the date on which such payment was due. All payments of principal, premium, if any, and interest to be made by the Owner Trustee hereunder and under the Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 16, 1985, as at any time heretofore or hereafter amended or supplemented in accordance with the provisions thereof (the Indenture), between the Owner Trustee and The Chase Manhattan Bank (formerly known as "Chemical Bank"), as trustee (the Indenture Trustee), shall be made only from the Lease Indenture Estate and the Trust Estate, and the Indenture Trustee shall have no obligation for the payment thereof except to the extent that the Indenture Trustee shall have sufficient income or proceeds from the Lease Indenture Estate to make such payments in accordance with the terms of Article V of the Indenture. The Holder hereof, by its acceptance of this 1996 Refunding Note, agrees that such Holder will look solely to the Trust Estate and the income and proceeds from the Lease Indenture Estate to the extent available for distribution to the Holder hereof as above provided, and that neither the Owner Participant nor, except as expressly provided in the Indenture, the Owner Trustee nor the Indenture Trustee is or shall be personally liable to the Holder hereof for any amounts payable under this 1996 Refunding Note or for any performance to be rendered under the Indenture or any other Transaction Document or for any liability thereunder; provided, however, that in the event the Lessee shall assume all the obligations of the Owner Trustee hereunder and under the Indenture pursuant to Section 3.9(b) of the Indenture, then all the payments to be made under this 1996 Refunding Note shall be made only from payments made by the Lessee under this 1996 Refunding Note in accordance with the Assumption Agreement referred to in said Section 3.9(b) and the Holder of this 1996 Refunding Note agrees that in such event it will look solely to the Lessee for such payment. The Holder hereof, by its acceptance of this 1996 Refunding Note, agrees that each payment received by it hereunder shall be applied in the manner set forth in Section 3.11 of the Indenture. The Holder of this 1996 Refunding Note agrees, by its acceptance hereof, that it will duly note by appropriate means all payments of principal or interest made hereon and that it will not in any event transfer or otherwise dispose of this 1996 Refunding Note unless and until all such notations have been duly made. This 1996 Refunding Note is the 1996 Refunding Note referred to in the Indenture. The Indenture permits the issuance of additional series of Notes, as provided in Section 3.5 of the Indenture, and the several series may be for varying aggregate principal amounts and may have different maturity dates, interest [3][MFS-1] Page III-11 rates, redemption provisions and other terms. The properties of the Owner Trustee included in the Lease Indenture Estate are pledged to the Indenture Trustee to the extent provided in the Indenture as security for the payment of the principal of and premium, if any, and interest on this 1996 Refunding Note and all other Notes issued and outstanding from time to time under the Indenture. Reference is hereby made to the Indenture for a statement of the rights of the Holders of, and the nature and extent of the security for, this 1996 Refunding Note and of the rights of, and the nature and extent of the security for, the Holders of the other Notes and of certain rights of the Owner Trustee, as well as for a statement of the terms and conditions of the trust created by the Indenture, to all of which terms and conditions the Holder hereof agrees by its acceptance of this 1996 Refunding Note. This 1996 Refunding Note is subject to prepayment in whole as contemplated by Section 5.2 of the Indenture and in the circumstances therein described. In addition, this 1996 Refunding Note may, at the option of the Owner Trustee, be prepaid in whole or in part at any time by the Owner Trustee upon the giving by the Owner Trustee of not less than two days' notice (as provided in the Indenture) and at the following prepayment prices (expressed as a percentage of the unpaid principal amount hereof), together with interest accrued to the date fixed for prepayment: Twelve Month Redemption Period Beginning Price January 15, 1996 106.180% January 15, 1997 105.768 January 15, 1998 105.356 January 15, 1999 104.944 January 15, 2000 104.532 January 15, 2001 104.120 January 15, 2002 103.708 January 15, 2003 103.296 January 15, 2004 102.884 January 15, 2005 102.472 January 15, 2006 102.060 January 15, 2007 101.648 January 15, 2008 101.236 January 15, 2009 100.824 January 15, 2010 100.412 and thereafter at the principal amount thereof, together with interest accrued to the date fixed for prepayment. This 1996 Refunding Note is not otherwise subject to optional prepayment in whole or in part. [3][MFS-1] Page III-12 In case an Indenture Event of Default shall occur and be continuing, the unpaid balance of the principal of this 1996 Refunding Note and any other Notes, together with all accrued but unpaid interest thereon, may, subject to certain rights of the Owner Trustee or the Owner Participant contained or referred to in the Indenture, be declared or may become due and payable in the manner and with the effect provided in the Indenture. The lien upon the Lease Indenture Estate is subject to being legally discharged prior to the maturity of this 1996 Refunding Note upon the deposit with the Indenture Trustee of cash or certain securities sufficient to pay this 1996 Refunding Note when due or an assumption of the obligation of the Owner Trustee under this 1996 Refunding Note and the Indenture, in each case in accordance with the terms of the Indenture. There shall be maintained at the Indenture Trustee's Office a register for the purpose of registering transfers and exchanges of Notes in the manner provided in the Indenture. The transfer of this 1996 Refunding Note is registrable, as provided in the Indenture, upon surrender of this 1996 Refunding Note for registration of transfer duly accompanied by a written instrument of transfer duly executed by or on behalf of the registered Holder hereof, together with the amount of any applicable transfer taxes. Prior to the due presentment for registration of transfer of this 1996 Refunding Note, the Owner Trustee and the Indenture Trustee may treat the person in whose name this 1996 Refunding Note is registered as the owner hereof for the purpose of receiving payments of principal of and premium, if any, and interest on this 1996 Refunding Note and for all other purposes whatsoever, whether or not this 1996 Refunding Note be overdue, and neither the Owner Trustee nor the Indenture Trustee shall be affected by notice to the contrary. Principal, premium, if any, and interest shall be payable, in the manner provided in the Indenture, on presentment of this 1996 Refunding Note at the Indenture Trustee's Office, or as otherwise provided in the Indenture. This 1996 Refunding Note shall be governed by, and construed in accordance with, the laws of the State of New York. [3][MFS-1] Page III-13 IN WITNESS WHEREOF, the Owner Trustee has caused this 1996 Refunding Note to be duly executed as of the date hereof. STATE STREET BANK AND TRUST COMPANY, not in its individual capacity, but solely as Owner Trustee under a Trust Agreement dated as of December 16, 1985 with MFS Leasing Corp. By____________________________ Name: Title: This Note is one of the series of Notes referred to therein and in the within-mentioned Indenture. THE CHASE MANHATTAN BANK, as Indenture Trustee By __________________________ Name: Title: [3][MFS-1] Page III-14 SCHEDULE 1 TO THE 1996 REFUNDING NOTE (DUE JANUARY 15, 2014) Schedule of Principal Amortization $32,256,000 Principal Amount Payment Principal Amount Principal Amount Date Payable Paid January 15, 1997 $ 820,000 July 15, 1997 863,000 January 15, 1998 906,000 July 15, 1998 737,000 January 15, 1999 536,000 July 15, 1999 551,000 January 15, 2000 566,000 July 15, 2000 582,000 January 15, 2001 597,000 July 15, 2001 614,000 January 15, 2002 631,000 July 15, 2002 648,000 January 15, 2003 666,000 July 15, 2003 684,000 January 15, 2004 703,000 July 15, 2004 722,000 January 15, 2005 741,000 July 15, 2005 763,000 January 15, 2006 783,000 July 15, 2006 804,000 January 15, 2007 827,000 July 15, 2007 850,000 January 15, 2008 871,000 July 15, 2008 897,000 January 15, 2009 925,000 July 15, 2009 946,000 January 15, 2010 973,000 July 15, 2010 1,006,000 January 15, 2011 1,141,000 July 15, 2011 1,173,000 January 15, 2012 1,205,000 July 15, 2012 1,540,000 January 15, 2013 2,385,000 July 15, 2013 2,507,000 January 15, 2014 1,093,000 ----------- Principal Amount $32,256,000 =========== -----END PRIVACY-ENHANCED MESSAGE-----