-----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, GfT+GSgy/yqhPCWAA+Dga9n6PClgO8YOHKG8Bb0aqnVIvxnCQNCebbwdIvrz055O NGsjaPOBxl1qtH9zNOoUew== 0000081023-99-000003.txt : 19990309 0000081023-99-000003.hdr.sgml : 19990309 ACCESSION NUMBER: 0000081023-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990308 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-K SEC ACT: SEC FILE NUMBER: 001-06986 FILM NUMBER: 99559732 BUSINESS ADDRESS: STREET 1: ALVARADO SQUARE, MS2706 CITY: ALBUQUERQUE STATE: NM ZIP: 87158 BUSINESS PHONE: 5058482700 10-K 1 TEXT OF 1998 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1998 Commission File Number 1 - 6986 PUBLIC SERVICE COMPANY OF NEW MEXICO (Exact name of Registrant as specified in its charter) New Mexico 85-0019030 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Alvarado Square 87158 Albuquerque, New Mexico (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (505) 241-2700 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, $5.00 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: (Title of Class) -------------- 1965 Series, 4.58% Cumulative Preferred Stock ($100 stated value and without sinking fund) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The total number of shares of the Company's Common Stock outstanding as of January 31, 1999 was 41,774,083. On such date, the aggregate market value of the voting stock held by non-affiliates of the Company, as computed by reference to the New York Stock Exchange composite transaction closing price of $18 13/16 per share reported by the Wall Street Journal, was $785,874,936. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following document are incorporated by reference into the indicated part of this report: Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A relating to the annual meeting of stockholders to be held on June 8, 1999 - PART III. ================================================================================ TABLE OF CONTENTS Page ---- GLOSSARY............................................................. iv PART I ITEM 1. BUSINESS.................................................... 1 THE COMPANY............................................... 1 ELECTRIC OPERATIONS....................................... 1 Service Area and Customers.............................. 1 Power Sales............................................. 2 Sources of Power........................................ 3 Fuel and Water Supply................................... 5 NATURAL GAS OPERATIONS.................................... 7 Service Area and Customers.............................. 7 Natural Gas Supply...................................... 8 Natural Gas Sales....................................... 9 ENERGY SERVICES BUSINESS UNIT OPERATIONS.................. 10 RATES AND REGULATION...................................... 10 Gas Rates and Regulation................................ 11 Electric Rates and Regulation........................... 12 Proposed Rulemakings.................................... 13 ENVIRONMENTAL FACTORS..................................... 14 ITEM 2. PROPERTIES.................................................. 17 ELECTRIC.................................................. 17 Fossil-Fueled Plants.................................... 17 Nuclear Plant........................................... 18 Other Electric Properties............................... 22 NATURAL GAS............................................... 23 OTHER INFORMATION......................................... 23 ITEM 3. LEGAL PROCEEDINGS........................................... 23 PVNGS WATER SUPPLY LITIGATION............................. 23 SAN JUAN RIVER ADJUDICATION............................... 23 OTHER PROCEEDINGS......................................... 24 Republic Savings Bank ("RSB") Litigation................ 24 Purported Navajo Environmental Regulation............... 25 Nuclear Decommissioning Trust........................... 25 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 26 SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY................. 27 ii PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................... 29 ITEM 6. SELECTED FINANCIAL DATA..................................... 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 31 ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK............................................... 48 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. F-1 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................... E-1 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY............. E-1 ITEM 11. EXECUTIVE COMPENSATION...................................... E-1 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................ E-1 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. E-1 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................................... E-1 SIGNATURES............................................................ E-24 iii GLOSSARY AG........................... New Mexico Attorney General Anaheim...................... City of Anaheim, California APPA......................... Arizona Power Pooling Association APS.......................... Arizona Public Service Company BHP.......................... BHP Minerals International, Inc. BLM.......................... Bureau of Land Management BTU.......................... British Thermal Unit decatherm.................... 1,000,000 BTUs DOE.......................... United States Department of Energy EIP.......................... Eastern Interconnection Project El Paso...................... El Paso Electric Company EPA.......................... United States Environmental Protection Agency EPNG......................... El Paso Natural Gas Company FASB......................... Financial Accounting Standards Board Farmington................... City of Farmington, New Mexico FERC......................... Federal Energy Regulatory Commission Four Corners................. Four Corners Power Plant FPPCAC....................... Fuel and Purchased Power Cost Adjustment Clause Gathering Company............ Sunterra Gas Gathering Company, a wholly-owned subsidiary of the Company Kv........................... Kilovolt KW........................... Kilowatt KWh.......................... Kilowatt Hour Los Alamos................... The County of Los Alamos, New Mexico mcf.......................... Thousand cubic feet Meadows...................... Meadows Resources, Inc., a wholly-owned subsidiary of the Company M-S-R........................ M-S-R Public Power Agency, a California public power agency MW........................... Megawatt MWh.......................... Megawatt Hour NMED......................... New Mexico Environment Department NMPUC........................ New Mexico Public Utility Commission NRC.......................... United States Nuclear Regulatory Commission OCD.......................... New Mexico Oil Conservation Division PGAC......................... PNMGS' Purchased Gas Adjustment Clause PNMGS........................ Public Service Company of New Mexico Gas Services, a division of the Company PRC.......................... New Mexico Public Regulation Commission Processing Company........... Sunterra Gas Processing Company, a wholly-owned subsidiary of the Company PVNGS........................ Palo Verde Nuclear Generating Station RCRA......................... Resource Conservation and Recovery Act Reeves Station............... Reeves Generating Station iv Salt River Project........... Salt River Project Agricultural Improvement and Power District SCE.......................... Southern California Edison Company SCPPA........................ Southern California Public Power Authority SDG&E........................ San Diego Gas and Electric Company SEC.......................... Securities and Exchange Commission SJCC......................... San Juan Coal Company SJGS......................... San Juan Generating Station SPS.......................... Southwestern Public Service Company TNP.......................... Texas-New Mexico Power Company throughput................... Volumes of gas delivered, whether or not owned by PNMGS Tucson....................... Tucson Electric Power Company UAMPS........................ Utah Associated Municipal Power Systems USBR......................... United States Bureau of Reclamation USEC......................... United States Enrichment Corporation Williams..................... Williams Gas Processing-Blanco, Inc., a subsidiary of the Williams Field Services Group, Inc., of Tulsa, Oklahoma v PART I ITEM 1. BUSINESS THE COMPANY Public Service Company of New Mexico (the "Company") was incorporated in the State of New Mexico in 1917 and has its principal offices at Alvarado Square, Albuquerque, New Mexico 87158 (telephone number 505-241-2700). The Company is a public utility primarily engaged in the generation, transmission, distribution and sale of electricity and in the transmission, distribution and sale of natural gas within the State of New Mexico. In addition, in pursuing new business opportunities, the Company is focusing on energy and utility related activities under its Energy Services Business Unit. The Company is also operating the City of Santa Fe's water system. (See PART II, ITEM 7. - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - OVERVIEW Competitive Strategy".) The total population of the area served by one or more of the Company's utility services is estimated to be approximately 1.3 million, of which 52.9% live in the greater Albuquerque area. For the year ended December 31, 1998, the Company derived 76.5% of its operating revenues from electric operations, 23.4% from natural gas operations and .1% from energy services operations. As of December 31, 1998, the Company employed 2,717 persons. Financial information relating to amounts of revenue, net income and total assets of the Company's reportable segments is contained in note 13 of the notes to consolidated financial statements. ELECTRIC OPERATIONS Service Area and Customers The Company's electric operations serve four principal markets. Sales to retail customers and sales to firm-requirements wholesale customers, sometimes referred to collectively as "system" sales, comprise two of these markets. The third market consists of other contracted sales to utilities for which the Company commits to deliver a specified amount of capacity (measured in MW) or energy (measured in MWh) over a given period of time. The fourth market consists of economy energy sales made on an hourly basis at fluctuating, spot-market rates. Sales to the third and fourth markets are sometimes referred to collectively as "off-system" sales. The Company provides retail electric service to a large area of north central New Mexico, including the cities of Albuquerque, Santa Fe, Rio Rancho, Las Vegas, Belen and Bernalillo. The Company also provides retail electric service to Deming in southwestern New Mexico and to Clayton in northeastern New Mexico. As of December 31, 1998, approximately 358,000 retail electric customers were served by the Company, the largest of which accounted for approximately 3.4% of the Company's total electric revenues for the year ended December 31, 1998. 1 The Company holds 20 long-term, non-exclusive franchise agreements for its electric retail operations, expiring between July 1, 1999, and November 2028. These franchises are agreements that provide the Company access to public rights-of-way for placement of the Company's electric facilities. The City of Albuquerque (the "COA"), Bernalillo County and the Town of Cochiti Lake franchises expired in 1992, 1997 and 1998, respectively. Customers in the area covered by the expired franchises represent approximately 35.1%, 7.7% and .02%, respectively, of the Company's 1998 total electric operating revenues, and no other franchise area represents more than 5.4%. The Company continues to collect and pay franchise fees to both the COA and the Town of Cochiti Lake. The Company currently does not pay franchise fees to Bernalillo County. The Company remains obligated under state law to provide service to customers in the franchise area even in the absence of a franchise agreement. Power Sales For the years 1994 through 1998, retail KWh sales have grown at a compound annual rate of approximately 3.2%. The Company's system and off-system sales (revenues and energy consumption) and system peak demands in summer and winter are shown in the following tables:
ELECTRIC SALES BY MARKET (Thousands of dollars) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Retail.............................. $536,417 $519,504 $507,821 $485,568 $506,286 Firm-requirements wholesale......... $ 10,708 $ 10,690 $ 12,359 $ 20,282 $ 22,296 Other contracted off-system sales... $142,115 $118,876 $ 86,689 $ 43,158* $ 54,862* Economy energy sales................ $122,156 $ 55,768 $ 22,281 $ 17,509* $ 19,663*
* Due to the provision for the loss associated with the M-S-R contingent power purchase contract recognized in 1992, revenues from other contracted off-system sales and economy energy sales were reduced by a total of $7.3 million and $25.0 million in 1995 and 1994, respectively.
ELECTRIC SALES BY MARKET (Megawatt hours) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Retail.............................. 6,739,874 6,534,899 6,406,296 6,029,365 5,953,151 Firm-requirements wholesale......... 278,615 278,727 282,534 447,629 489,182 Other contracted off-system sales... 4,033,931 3,790,081 2,928,321 594,367 1,403,480 Economy energy sales................ 4,469,769 2,716,835 1,364,365 1,548,517 1,469,271
SYSTEM PEAK DEMAND* (Megawatts) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Summer............................ 1,313 1,209 1,217 1,247 1,189 Winter............................ 1,135 1,142 1,111 1,076 1,040 *System peak demand relates to retail and firm-requirements wholesale customers only. 2 The Company's wholesale power marketing area continues to increase its trading activities. During 1998 and 1997, the Company's sales in the off-system markets accounted for approximately 54.8% and 48.9%, respectively, of its total KWh sales and approximately 32.6% and 24.8%, respectively, of its total revenues from energy sales. Of the total off-system sales made in 1998, 67% were transacted through purchases for resale as compared to 47% in 1997. However, the Company continues to be committed to increasing its utilization of its major generation capacity at SJGS, Four Corners and PVNGS. Capacity factors for these generating stations were 81.8%, 87.2% and 92.5%, respectively, in 1998, as compared to 81.4%, 74.8% and 90.6%, respectively, in 1997. During 1998, the Company's major off-system sales contracts in effect were with SDG&E and APPA. The SDG&E contract requires SDG&E to purchase 100 MW from the Company through April 2001. SDG&E has filed four separate complaints with the FERC against the Company, alleging that certain charges under the 1985 power purchase agreement were unjust, unreasonable and unduly discriminatory. See PART II, ITEM 7. - "MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - OTHER ISSUES FACING THE COMPANY - SAN DIEGO GAS AND ELECTRIC ("SDG&E") COMPLAINTS". The APPA contract requires APPA to purchase varying amounts of power from the Company through May 2008 and allows APPA to make adjustments to the purchase amounts subject to certain notice provisions. APPA provided notice that it was invoking its option to reduce its power demand in 1998. This resulted in a peak demand in 1998 of 89 MW. APPA invoked the same option to reduce its peak demand in 1999 to 74 MW. The Company furnished firm-requirements wholesale power in New Mexico in 1998 to the City of Gallup and TNP. The Company is committed to provide service to the City of Gallup through April 2003. Average monthly demands under the City of Gallup contract for 1998 were approximately 27 MW. During 1998, TNP purchased 15 MW. Service to TNP terminated December 31, 1998. No firm-requirements wholesale customer accounted for more than 1.0% of the Company's total electric operating revenues for the year ended December 31, 1998. Sources of Power As of December 31, 1998, the total net generation capacity of facilities owned or leased by the Company was 1,506 MW. The Company anticipates an increase of 15 MW in the Company's share of capacity at the SJGS during 1999 as a result of a new, more efficient SO2 removal system. In addition to generation capacity, the Company purchases power in the market. The Company has a power purchase contract with SPS which originally provided for the purchase of up to 200 MW, expiring in May 2011. The Company may reduce its purchases from SPS by 25 MW annually upon three years' notice. The Company provided such notice to reduce the purchase by 25 MW in 1999 and by an additional 25 MW in 2000. The Company has 39 MW of contingent capacity obtained from El Paso under a transmission capacity for generation capacity trade arrangement that increases up to 70 MW from 1999 through 2003. In addition, the Company is interconnected with various utilities for economy interchanges and mutual assistance in emergencies. The Company has been actively trading in the wholesale power market and has entered into and anticipates that it will continue to enter into power purchases to accommodate its trading activity. 3 The Company anticipates the need for approximately 100 to 200 MW of additional capacity in the 1999 through 2000 timeframe. To meet projected capacity needs, in 1996, the Company entered into a long-term power purchase agreement ("PPA") with Cobisa-Person Limited Partnership ("PLP") to purchase approximately 100 MW of unit contingent peaking capacity from a gas turbine generating unit for a period of 20 years, with an option to renew for an additional five years. In September 1997, the NMPUC approved the Company's and PLP's applications for the project. In December 1997, PLP also received FERC approval for "exempt wholesale generator" status with respect to the gas turbine generating unit. In March 1998, the Company and PLP executed amendments to the PPA and to the associated site lease and interconnection agreement, and executed a new water use lease. The PPA was amended to change the maximum capacity the Company was obligated to take to 132 MW and to change the commercial operation date from May 1999 to May 2000. The gas turbine generating unit will be constructed and operated by PLP and will be located on the Company's retired Person Generating Station site in Albuquerque, New Mexico. The site for the generating unit was chosen, in part, to provide needed benefits to the Company's constrained transmission system. Primary fuel for the gas turbine generating unit will be natural gas, which will be provided by the Company. In addition, the unit will have the capability to utilize low sulfur fuel oil in the event natural gas is not available. In the September 1997 NMPUC order, the NMPUC approved the project application and a stipulated settlement agreement ("Stipulation") which had been entered into earlier among the Company, PLP and the NMPUC staff to resolve certain issues raised in this proceeding. The Stipulation included, among other things, a provision wherein the Company committed, in cooperation with the NMPUC staff, to the development and evaluation of a request for proposal ("RFP") for the purchase of approximately 5 MW of capacity from solar generation resources. The Company was not obligated to build such a unit or commit to such a solar power purchase agreement prior to the NMPUC approval of a full-cost recovery mechanism. By order dated October 27, 1998, the NMPUC approved the Company's implementation of a rate rider to collect a 0.5 percent surcharge on all retail electric bills to pay for solar and other renewable resource projects. Under the NMPUC's order, one-half of the monies collected under the rider will be used to purchase or acquire resources the Company had pursued through the solar RFP process, while the other half of the monies will be used for other renewable resource projects. In November 1998, the NMPUC adopted a rule that establishes a "renewable energy development program" and requires New Mexico utilities to collect voluntary contributions to a renewable energy fund from their customers. The stated purpose of the rule is to support research, development, demonstration and deployment of renewable energy resources. Funds collected by each utility are to be spent by it on projects approved by the PRC based upon the recommendations of a Renewable Energy Advisory Board which will be appointed by the PRC. The Company has requested the PRC to exempt it from the rule on the grounds that the rule is more than satisfied by the renewable resource program and 0.5 percent surcharge specifically approved for the Company by the NMPUC in October 1998. The Company's request is pending. In addition to the long-term power purchase contract with the PLP, the Company is pursuing other options to ensure its additional capacity needs are met. 4 Fuel and Water Supply The percentages of the Company's generation of electricity (on the basis of KWh) fueled by coal, nuclear fuel and gas and oil, and the average costs to the Company of those fuels (in cents per million BTU), during the past five years were as follows: Coal Nuclear Gas and Oil -------------------- -------------------- -------------------- Percent of Average Percent of Average Percent of Average ---------- ------- ---------- ------- ---------- ------- 1994...... 72.0 162.9 27.8 58.5 0.2 321.7 1995...... 67.9 168.3 31.9 49.1 0.2 242.2 1996...... 68.9 159.3 30.4 49.7 0.7 238.2 1997...... 68.1 152.7 31.1 48.3 0.8 326.6 1998...... 68.2 155.3 30.8 46.5 1.0 324.6 The estimated generation mix for 1999 is 69.0% coal, 30.0% nuclear and 1.0% gas and oil. Due to locally available natural gas and oil supplies, the utilization of locally available coal deposits and the generally abundant supply of nuclear fuel, the Company believes that adequate sources of fuel are available for its generating stations. Coal The coal requirements for the SJGS are being supplied by SJCC, a wholly-owned subsidiary of BHP, from certain Federal, state and private coal leases under a Coal Sales Agreement, pursuant to which SJCC will supply processed coal for operation of the SJGS until 2017. BHP guaranteed the obligations of SJCC under the agreement, which contemplates the delivery of approximately 100 million tons of coal during its remaining term. Such amount would supply substantially all the requirements of the SJGS through approximately 2017. The primary sources of coal for current operations are a mine adjacent to the SJGS and a mine located approximately 25 miles northeast of the SJGS in the La Plata area of northwestern New Mexico. The Coal Sales Agreement contemplated that additional coal resources would be required during the remaining term of the agreement. The Company is currently in discussions with SJCC regarding alternatives for coal resource selection. The average cost of fuel, including ash disposal and land reclamation costs, for the SJGS for the years 1996, 1997 and 1998 was 167.0 cents, 164.2 cents and 168.8 cents, respectively, per million BTU ($32.18, $31.59 and $32.16 per ton, respectively). For other information related to coal requirements, see PART II, ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - OTHER ISSUES FACING THE COMPANY - COAL FUEL SUPPLY". Four Corners is supplied with coal under a fuel agreement between the owners and BHP, under which BHP agreed to supply all the coal requirements for the life of the plant. BHP holds a long-term coal mining lease, with options for renewal, from the Navajo Nation and operates a surface mine adjacent to Four Corners with the coal supply expected to be sufficient to supply the units for their estimated useful lives. The average cost of fuel, including ash disposal and land reclamation costs, for the years 1996, 1997 and 1998 at Four Corners was 125.9 cents, 100.1 cents and 99.2 cents, respectively, per million BTU ($22.90 , $17.77 and $17.64 per ton, respectively). The reductions in the average cost of fuel for 1997 and 1998 reflect the settlement of certain issues between APS, the operating agent, and the Navajo Nation regarding the computation of royalties due on the sales of coal and possessory interest taxes paid by the Four Corners coal supplier. 5 Natural Gas The natural gas used as fuel for the Company's Albuquerque electric generating plant (Reeves Station) is delivered by PNMGS. (See "NATURAL GAS OPERATIONS".) In addition to rate changes under filed tariffs, the Company's cost of gas increases or decreases according to the average cost of the gas supply. Nuclear Fuel The fuel cycle for PVNGS is comprised of the following stages: (1) the mining and milling of uranium ore to produce uranium concentrates; (2) the conversion of uranium concentrates to uranium hexafluoride; (3) the enrichment of uranium hexafluoride; (4) the fabrication of fuel assemblies; (5) the utilization of fuel assemblies in reactors; and (6) the storage of spent fuel and the disposal thereof. The Company made arrangements through contract flexibilities to obtain quantities of uranium concentrates anticipated to be sufficient to meet its share of uranium concentrates requirements through 2000. Existing contracts and options could be utilized to meet 80% of such requirements in 2001 and 2002 and 50% of requirements from 2003 through 2007. Spot purchases in the uranium market will be made, as appropriate, in lieu of any uranium that might be obtained through contract flexibilities and options. The Company understands that the other PVNGS participants have made comparable arrangements for their uranium concentrates requirements. The PVNGS participants, including the Company, contracted for all conversion services required with options through 1999 and for up to 60% through 2002. The PVNGS participants, including the Company, contracted for all enrichment services required for 1999 under an existing contract with USEC and a new contract for enrichment services with Urenco Limited. Under the arrangements, USEC will provide 80% of the requirements and Urenco Limited will provide 20% of the requirements through September 2002, with an option with USEC to renew the service contract through September 2007. In addition, existing contracts will provide fuel assembly fabrication services until at least 2003 for each PVNGS unit, and through contract options, approximately fifteen additional years are available. Water Supply Water for Four Corners and SJGS is obtained from the San Juan River. (See ITEM 3. - "LEGAL PROCEEDINGS - SAN JUAN RIVER ADJUDICATION".) BHP holds rights to San Juan River water and committed a portion of such rights to Four Corners through the life of the project. The Company and Tucson have a contract with the USBR ("USBR Contract") for consumption of 16,200 acre feet of water per year for the SJGS, which contract expires in 2005, and in addition, the Company was granted the authority to consume 8,000 acre feet of water per year under a state permit that is held by BHP. The Company is of the opinion that sufficient water is under contract for the SJGS through 2005. In January 1993, the U.S. Fish and Wildlife Service proposed a portion of the San Juan River as critical habitat for two fish species. This designation may impact uses of the river and its flood plains and will require certain analysis under the Endangered Species Act of 1973 of all significant Federal actions. Renewal of the SJGS water contract is considered a significant Federal action. 6 Due to extensive lead times required to renew the water rights contract, the Company formally initiated the renewal and extension process for requesting rights through the year 2025. The Company is actively conducting an environmental assessment with the USBR and a biological assessment with the U.S. Fish and Wildlife Service. These studies are required by the Federal agencies before the existing water contract can be renewed. In June 1996, the Navajo Nation requested that the USBR withhold renewal of the USBR Contract due to water shortages of the Navajo Indian Irrigation Project. Other tribes in the Four Corners area also voiced concern to the USBR about the renewal by the Company of the USBR Contract. Although discussions are continuing with the USBR, the status of discussions with the Navajo Nation is uncertain due to transition in the tribal government as the result of the last tribal elections. The Company is actively involved in the San Juan River Recovery Implementation Program to mitigate any concerns with the taking of the negotiated water supply from a river that contains endangered species and critical habitat. In July 1997, the Company was notified by the USBR that the USBR had received from the Solicitor of the U.S. Department of Interior a memorandum opinion concluding that the Company's contract extension with the USBR would require Congressional approval pursuant to Section 11 of the Navajo Indian Irrigation Project and San Juan-Chama Project Authorization Act of 1962. The Company intends to pursue such approval once the contract is negotiated with the USBR. Sewage effluent used for cooling purposes in the operation of the PVNGS units is obtained under contracts with certain municipalities in the area. The contracted quantity of effluent exceeds the amount required for the three PVNGS units. The validity of these effluent contracts is the subject of litigation in state court. (See ITEM 3. - "LEGAL PROCEEDINGS - PVNGS WATER SUPPLY LITIGATION".) NATURAL GAS OPERATIONS Service Area and Customers The Company's gas operating division, PNMGS, distributes natural gas to most of the major communities in New Mexico, including Albuquerque and Santa Fe, serving approximately 419,000 customers as of December 31, 1998. The Albuquerque metropolitan area accounts for approximately 55.5% of the total sales-service customers. PNMGS holds long-term, non-exclusive franchises with varying expiration dates in all incorporated communities requiring franchise agreements except for the COA. This franchise with the COA expired on January 28, 1998. The Company is currently engaged in discussions regarding renewal of the franchise. PNMGS' customer base includes both sales-service customers and transportation-service customers. Sales-service customers purchase natural gas and receive transportation and delivery services from PNMGS for which PNMGS receives both cost-of-gas and cost-of-service revenues. Cost-of-gas revenues collected from on-system sales-service customers are recovered in accordance with PRC rules and regulations and do not affect the net earnings of the Company. Additionally, PNMGS makes occasional gas sales to off-system customers. Off-system sales deliveries generally occur at interstate pipeline interconnects with PNMGS' system. Transportation-service customers, who procure gas independently of PNMGS and contract with PNMGS for transportation and related services, provide PNMGS with cost-of-service revenues only. Transportation services are provided to gas marketers, producers and end users for delivery to locations throughout the PNMGS distribution systems, as well as for delivery to interstate pipelines. PNMGS provided gas transportation deliveries to approximately 1,266 gas marketers, producers and end users during 1998. 7 For the twelve months ended December 31, 1998, PNMGS had throughput of approximately 85.7 million decatherms, including sales of 49.2 million decatherms to both sales-service customers and off-system customers. No single sales-service customer accounted for more than 2.4% of PNMGS' therm sales in 1998. During 1998, approximately 42.5% of the PNMGS' total gas throughput was related to transportation gas deliveries. PNMGS' transportation rates are unbundled, and transportation customers only pay for the service they receive. PNMGS' total operating revenues for the year ended December 31, 1998, were approximately $256.0 million. Cost-of-gas revenues, received from sales-service and off-system customers, accounted for approximately 52.6% of PNMGS' total operating revenues. Since a major portion of PNMGS' load is related to heating, levels of therm sales are affected by weather. Approximately 45.8% of PNMGS' total therm sales in 1998 occurred in the months of January, February, November and December. Natural Gas Supply PNMGS obtains its supply of natural gas primarily from sources within New Mexico pursuant to contracts with producers and marketers. These contracts are generally sufficient to meet PNMGS peak-day demand. PNMGS serves certain cities which depend on EPNG or Transwestern Pipeline Company for transportation of gas supplies. Because these cities are not directly connected to PNMGS transmission facilities, gas transported by these companies is the sole supply source for those cities. Such transportation is regulated by FERC. As a result of FERC Order 636, PNMGS' options for transporting gas to such cities and other portions of its distribution system have increased. 8 Natural Gas Sales The following table shows gas throughput by customer class*: GAS THROUGHPUT (Millions of decatherms) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Residential............ 30.3 30.7 27.4 25.9 27.1 Commercial............. 10.4 10.6 9.3 8.9 9.8 Industrial............. 1.5 1.3 2.1 0.7 0.8 Public authorities..... 3.4 4.2 2.6 2.4 2.5 Irrigation............. 1.9 1.6 1.4 1.2 1.3 Sales for resale....... 1.2 1.2 0.8 1.3 0.7 Unbilled............... (1.3) (0.2) 1.4 (1.8) (0.3) Transportation**....... 36.4 34.0 47.1 69.8 90.2 Off-system sales....... 1.9 1.2 8.0 1.2 - ---- ---- ----- ----- ----- 85.7 84.6 100.1 109.6 132.1 ==== ==== ===== ===== ===== The following table shows gas revenues by customer class*: GAS REVENUES (Thousands of dollars) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Residential............... $161,153 $187,563 $129,911 $125,290 $149,439 Commercial................ 42,680 50,502 33,022 32,328 42,725 Industrial................ 4,887 4,536 5,179 1,873 2,905 Public authorities........ 12,610 17,577 8,018 7,939 9,969 Irrigation................ 5,780 5,041 3,252 3,077 4,061 Sales for resale.......... 3,596 4,465 2,106 3,114 2,462 Unbilled.................. (955) (2,172) 2,678 (2,430) 267 Transportation**.......... 13,464 14,172 17,215 22,172 27,592 Liquids................... 1,463 4,451 7,608 13,414 16,090 Processing fees........... - - - 5,180 10,638 Off-system sales.......... 3,816 1,926 14,352 1,927 - Other..................... 7,481 6,708 3,960 4,101 3,362 -------- -------- -------- -------- -------- $255,975 $294,769 $227,301 $217,985 $269,510 ======== ======== ======== ======== ======== * On June 30, 1995, the Company sold substantially all of the gas gathering and processing assets of the Company and its gas subsidiaries. The above information reflects the revenues and throughput of the gathering company and processing company through this date. ** Customer-owned gas. 9 Energy Services Business Unit Operations The Company has been conducting energy services activities under its Energy Services Business Unit. This business unit has initiated several business lines to position the Company for an increasingly competitive market. The Energy Services Business Unit consists of Energy Partners, Pathways Integration formerly known as Water Services and Phaser Advanced Metering Services. Energy Partners provides energy management solutions that assist customers in implementing cost effective procurement, distribution and consumption of energy. Pathways Integration is seeking opportunities in infrastructure management with a specific focus on the municipal and Native American markets. The Company currently has a contract with the City of Santa Fe to operate the Santa Fe water system through the year 2001. Phaser Advanced Metering Services provides electric meter installation, testing service and consulting expertise to energy service providers as well as commercial and industrial customers. On August 4, 1998, the Company adopted a plan to discontinue the natural gas trading operations of its Energy Marketing business segment of the Energy Services Business Unit. (See PART II, ITEM 7. - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - RESULTS OF OPERATIONS Discontinued Operations".) The Energy Services Business Unit is also pursuing energy and transmission business opportunities in Mexico. In December 1998, the NMPUC issued a final order approving the Company's request to form and invest in three wholly-owned subsidiaries. Under the final order, the Company is allowed to invest a maximum of $50 million in the three subsidiaries, subject to the availability of the Company's retained earnings and to enter into reciprocal loan agreements for up to $30 million. While the terminology of "available unappropriated retained earnings" quoted in the order is subject to interpretation, the Company believes it currently has sufficient retained earnings to make the investments. If the Electric Industry Restructuring Act of 1999 is passed (see PART II, ITEM 7. - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - OTHER ISSUES FACING THE COMPANY - ELECTRIC INDUSTRY RESTRUCTURING ACT OF 1999"), the Company is planning to seek shareholder and other regulatory approvals to form a holding company; however, the Company still intends to move forward during the interim period to form and invest in the three wholly-owned subsidiaries to achieve competitive business strategies. RATES AND REGULATION The Company is subject to the jurisdiction of the PRC, the successor of the NMPUC effective January 1, 1999, with respect to its retail electric and gas rates, service, accounting, issuance of securities, construction of major new generation and transmission facilities and other matters. The FERC has jurisdiction over rates and other matters related to wholesale electric sales. 10 Gas Rates and Regulation The 1995 Gas Rate Case Appeal In 1995, the Company filed a request for a $13.3 million increase in its retail natural gas sales and transportation rates. On February 13, 1997, the NMPUC issued a final order in the gas rate case, ordering a rate decrease of approximately $6.9 million. The Company filed an appeal with the Supreme Court regarding the NMPUC's final order. The Company is awaiting a decision by the Supreme Court, but is unable to predict the timing or the ultimate outcome. While the appeal is pending, the NMPUC's final order remains in effect. The 1997 Gas Rate Case In October 1997, the Company filed a gas rate case in compliance with a NMPUC order. In April 1998, an uncontested stipulation settling the 1997 gas rate case was filed with the NMPUC. After a hearing on the stipulation held in May 1998, the NMPUC issued a final order in August 1998, accepting the stipulation with certain modifications. The order approved a program where customers could choose between two cost of service rate options (either a $9.00 monthly fee with a higher volumetric cost of service charge or a $14.56 monthly fee with a lower volumetric cost of service charge). This option program became effective with the December 1998 billing cycle. Subsequent to the NMPUC's denial of the AG's request for rehearing, the AG appealed the order to the Supreme Court in October 1998. However, the AG did not request a stay and therefore the NMPUC's order remains in effect. PGAC Continuation Filing The Company's retail gas rate tariffs contain a PGAC that provides timely recovery for the cost of gas purchased for resale to its sales-service customers. On November 24, 1997, in a proceeding related to the Company's 1993 PGAC continuation filing, the NMPUC issued a final order approving continued use of the Company's PGAC. As part of this order, the Company is required to make its next PGAC continuation filing no later than November 23, 1999. Levelized PGAC In July 1997, the Company submitted a request with the NMPUC seeking approval to modify the method by which it recovers its gas cost through the PGAC. The new method would enable the Company to levelize the price it charges its customers during the winter heating season. In November 1997, the NMPUC approved the proposed "levelized" PGAC. The order allowed the Company to implement the levelized PGAC mechanism effective December 1, 1997, and granted the Company authorization to include the cost of hedging transactions for recovery through its PGAC. NMPUC Order on the Cost of Gas Case The NMPUC issued a final order in a proceeding that commenced in December 1996 and related to an investigation initiated because of the significant increase in the cost of gas the Company billed its sales-service customers. In its initial order, the NMPUC disallowed collection of $1.6 million of gas costs and imposed but suspended a civil penalty of $2.2 million due to an allegedly incorrect gas cost factor filed by the Company which the order found misled the NMPUC. Subsequently, the NMPUC granted a request for rehearing filed by the Company. In September 1998, the NMPUC issued its final order, withdrawing: (i) the portion of the initial order which had stated that the Company deliberately misled the NMPUC; (ii) the imposition of the $2.2 million civil penalty; and (iii) the disallowance of the $1.6 million of gas costs imposed by the initial order. 11 Gas Choice In February 1997, the NMPUC ordered the Company to make a filing addressing the terms and conditions under which the Company would consider exiting the merchant function (the sale of gas to its sales-service customers). Through the use of working groups, a stipulation was filed with the NMPUC which outlined interim measures, known as the Gas Choice Program, to facilitate the choice of suppliers by small commercial and residential customers for the winter of 1997-98. This stipulation was approved in August 1997. Modifications to the program, including the ability to recover implementation costs, were incorporated in a supplemental stipulation approved by the NMPUC in July 1998. Electric Rates and Regulation For electric rates and regulation regarding "Electric Rate Case", "Residential Electric, Incorporated ("REI"), "City of Albuquerque ("COA") Retail Pilot Load Aggregation Program" and "City of Gallup ("Gallup") Complaint", see PART II, ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - OTHER ISSUES FACING THE COMPANY - NMPUC REGULATORY ISSUES". Fossil-Fueled Plant Decommissioning Costs The Company's six owned or partially owned, in service and retired, fossil-fueled generating stations are expected to incur dismantling and reclamation costs as they are decommissioned. The Company's share of decommissioning costs for all of its fossil-fueled generating stations is projected to be approximately $153.5 million stated in 1998 dollars, including approximately $24.0 million (of which $15.5 million has already been expended) for Person, Prager and Santa Fe Stations which have been retired. The Company is currently recovering estimated decommissioning costs for its in-service fossil-fueled generating facilities through rates charged to its PRC retail customers. New Mexico Industrial Energy Consumers ("NMIEC") In April 1997, NMIEC filed a petition for declaratory order with the NMPUC. In its petition, NMIEC stated that the Company interrupted service to NMIEC members taking service under the Experimental Incremental Interruptible Power Rate ("EIIPR") during off-peak periods and such interruptions violate the terms of the EIIPR. The interruptions resulted from a scheduled maintenance for the Company's 345 kV line connected to Four Corners. NMIEC alleges that its members have suffered economic harm from losses in production due to such interruptions. The petition requests, among other things: (i) clarification of the EIIPR to determine that EIIPR customers are entitled to be treated the same as all other customers with similar consumption when system emergency curtailments occur during the off-peak hours; (ii) determination that the Company's practice of interrupting EIIPR customers during off-peak hours is discriminatory; and (iii) the Company to discontinue such practice of interrupting EIIPR customers. The Company, in a filing with the NMPUC, stated that it unintentionally misapplied the tariff and as a result, filed an amendment to its EIIPR tariff to clarify the language regarding off-peak interruptions. The PRC has not issued a ruling on NMIEC's petition. 12 Independent System Operator ("ISO") In January 1998, the Company entered into a development agreement with other transmission service providers and users to form an ISO in the Southwest. The development agreement initially had a one year term, since extended to December 31, 1999. The development agreement calls for the development to be separated into two phases. The first phase will define the operating, pricing, planning and legal parameters of the ISO. The second phase will develop the by-laws, articles of incorporation and various tariffs and agreements required. Over fifty entities are participating in the development process including investor owned utilities, generation and transmission cooperatives, government entities, private corporations and other interested groups. FERC Order 888, issued in 1996, encourages utilities to investigate the formation of such ISOs and provides criteria under which the formation, operation and governance of ISOs would be reviewed. The proposed ISO, named the Desert Southwest Transmission and Reliability operator ("Desert STAR"), is envisioned to include the following functions: (i) transmission security monitoring; (ii) handling of transmission service reservations, transmission service scheduling and accounting and managing relief of congestion of the transmission grid; (iii) procurement of ancillary services required for transmission system operation; and (iv) operation of a grid-wide Open Access Same-time Information System. Desert STAR would be governed by an independent board. The Company is currently unable to predict the ultimate timing of the formation or the ultimate outcome of the proposed ISO. Proposed Rulemakings Net Metering Rule In September 1998, the NMPUC issued a notice of proposed rulemaking seeking comments on a "net metering" rule. "Net metering" refers to the measurement of the difference between the electricity that is supplied by a utility and the electricity that is generated by a customer's generator and fed back into the utility's system. The stated purpose of the proposed net metering rule was to actively promote the use of small-scale, customer-owned and other renewable energy resources, distributed generation and alternative technology energy resources and facilities. Comments on the proposed rule were submitted by numerous parties, including the Company. On November 30, 1998, the NMPUC promulgated a net metering rule as NMPUC Rule 571. On December 31, 1998, the NMPUC denied the motions for rehearing filed by the Company and other parties, but limited the application of the rule to customer generation resources of up to one megawatt. On January 8, 1999, the Company and other parties refiled their motions for rehearing with the PRC. On January 12, 1999, the PRC granted the motions for rehearing and suspended Rule 571, effective immediately. A hearing has been scheduled for April 19, 1999, to receive oral arguments. Renewable Resources Rule In September 1998, the NMPUC issued a notice of proposed rulemaking regarding a "renewable energy fund" rule. The stated purpose of the rule was to support research, development, demonstration and deployment of renewable energy resources by requiring all utilities to bill their electric customers a 0.5 percent surcharge on their electric bills and also by allowing customers to make voluntary contributions to a renewable energy fund. Comments on the proposed rule were submitted by numerous parties, including the Company. On November 24, 13 1998, the NMPUC promulgated a "renewable energy development program" as NMPUC Rule 572. Rule 572 differed materially from the originally proposed rule in that it was limited solely to the collection of voluntary contributions. No parties appealed the promulgation of Rule 572 and the rule is currently in effect. On February 10, 1999, the Company filed with the PRC an application for a variance from the voluntary collection requirements of Rule 572. The basis for the variance request was that the Company already has in place a renewable energy resource program that is as good as or better than the renewable energy development program contained in Rule 572 (See "Sources of Power" above.) The Company's application for a variance is pending at this time. ENVIRONMENTAL FACTORS The Company, in common with other electric and gas utilities, is subject to stringent regulations for protection of the environment by local, state, Federal and tribal authorities. In addition, PVNGS is subject to the jurisdiction of the NRC, which has authority to issue permits and licenses and to regulate nuclear facilities in order to protect the health and safety of the public from radioactive hazards and to conduct environmental reviews pursuant to the National Environmental Policy Act. The Company believes that it is in compliance, in all material respects, with the environmental laws. The Company does not currently expect that material expenditures for environmental control facilities will be required to meet environmental regulations in 1999 and 2000. However, in order to achieve operational efficiencies, the Company began a retrofit environmental project at SJGS in 1997. This project was completed in January 1999 and cost the Company approximately $40 million. The Clean Air Act The Clean Air Act Amendments of 1990 (the "Act") impose stringent limits on emissions of sulfur dioxide and nitrogen oxides from fossil-fueled electric generating plants. The Act is intended to reduce air contamination from every sizeable source of air pollution in the nation. Electric utilities with fossil-fueled generating units will be affected particularly by the section of the Act which deals with acid rain. To comply with the Act, many utilities will be faced with installing expensive sulfur dioxide removal equipment, securing low sulfur coal, buying sulfur dioxide emission allowances, or a combination of these. Due to the existing air pollution control equipment on the coal-fired SJGS and Four Corners, the Company believes that it will not be faced with any material capital expenditures in order to comply with the acid rain provisions (both sulfur dioxide and nitrogen dioxide) of the Act. SJGS and Four Corners have installed flow monitoring equipment and have completed certification testing of their continuous emission monitoring equipment. Under Title V of the Act, the Company is required to obtain operating permits for its coal- and gas-fired generating units and to pay annual fees associated with the operating permit program. The New Mexico operating permit program was approved by the EPA in November 1994. The Company received operating permits for SJGS and Reeves Station in August 1998 and March 1998, respectively. The Act established the Grand Canyon Visibility Transport Commission ("Commission") and charged it with assessing adverse impacts on visibility at the Grand Canyon. The Commission broadened its scope to assess visibility impairment in mandatory Class I areas (parks and wilderness areas) located in the Colorado Plateau. The Commission submitted its findings and recommendations to the EPA in June 1996. 14 The Commission's recommendations regarding stationary sources are to: (i) implement existing Clean Air Act requirements through the year 2000; (ii) establish stationary source emission targets as regulatory triggers; (iii) develop a plan for allocating trading credits under a regulatory program emissions cap; (iv) review compliance with targets and establish incentives; (v) complete source attribution studies; and (vi) develop an improved monitoring and accounting system. The Commission did not recommend any additional emission reductions for point sources. The recommendations include monitoring the impact of existing Clean Air Act requirements on emission reductions and the resulting effect on visibility, setting regional targets for SO2 emissions from stationary sources for the year 2000 and developing a regulatory program to implement if the targets are exceeded. The regulatory program will include a market-based trading of emissions allowances. The Western Regional Air Partnership ("WRAP") has been established as the follow-up organization to the Commission and has been directed to implement the Commission recommendations. Currently, the WRAP is actively working to implement the recommendations. The targets and the regulatory program have not yet been developed; however, the Company does not expect a material adverse effect on the Company's financial condition or results of operations. In a related matter, the EPA proposed regional haze regulations in 1997. These proposed regulations address visibility impairment in Class I areas. The EPA has stated that it considered the Commission's recommendations in the formulation of the proposed regulations. In June 1998, the Western Governors Association ("WGA") submitted a document to the EPA discussing how the Commission recommendations could be directly incorporated into the proposed regional haze rule. The EPA re-opened the comment period on the proposed regional haze rule in order to allow all interested parties an opportunity to comment on the WGA document. The Company provided comments on the WGA document. The final regional haze regulations are expected to be promulgated in 1999. In July 1997, the EPA issued its final rules revising the National Ambient Air Quality Standards for ozone and particulate matter. The EPA is now involved in developing implementation plans for these revised standards. The nature and cost of the impacts of these revisions to the standards, if any, to the Company's operations cannot be determined at this time. However, the Company does not anticipate any material adverse impact on the Company's financial condition or results of operations. Santa Fe Generating Station ("Santa Fe Station") The Company and the NMED have conducted investigations of the gasoline and chlorinated solvent groundwater contamination detected beneath the former Santa Fe Station site to determine the source of the contamination pursuant to a 1992 Settlement Agreement ("Settlement Agreement") between the Company and the NMED. In June 1996, the Company received a letter from the NMED, indicating that the NMED believes the Company is the source of gasoline contamination in a municipal well supplying the City of Santa Fe and of groundwater underlying the Santa Fe Station site. Further, the NMED letter stated that the Company was required to proceed with interim remediation of the contamination pursuant to the New Mexico Water Quality Control Commission regulations. In October 1996, the Company and the NMED signed an amendment to the Settlement Agreement concerning the groundwater contamination underlying the site. As part of the amendment, the Company agreed to spend approximately $1.2 million for certain costs related to sampling, monitoring, and the development and implementation of a remediation plan. 15 The amended Settlement Agreement does not, however, provide the Company with a full and complete release from potential further liability for remediation of the groundwater contamination. After the Company has expended the settlement amount, if the NMED can establish through binding arbitration that the Santa Fe Station is the source of the contamination, the Company could be required to perform further remediation that is determined to be necessary. The Company continues to dispute any contention that the Santa Fe Station is the source of the groundwater contamination and believes that insufficient data exists to identify the sources of groundwater contamination. The Company's aquifer characterization and groundwater quality reports compiled from 1996 to 1999 strongly suggest the groundwater contamination does not originate from the Santa Fe Station site and has been drawn under the site by the pumping of the Santa Fe supply well. The Company and the NMED, with the cooperation of the City of Santa Fe, jointly selected a remediation plan proposed by a remediation contractor. The City of Santa Fe, the Company and the NMED entered into a memorandum of understanding concerning the selected remediation plan and the operation of the municipal well adjacent to the Santa Fe Station site in connection with carrying out that plan. Construction of a new Santa Fe well and booster station has been completed. The new system began operation on October 5, 1998, to treat groundwater produced by the Santa Fe well to drinking water standards for municipal distribution and the stimulation of naturally occurring bioremediation of groundwater contamination beneath the Santa Fe Station site. Person Station The Company, in compliance with a Corrective Action Directive issued by the NMED, determined that groundwater contamination exists in the deep and shallow groundwater at the Person Station site. The Company is required to delineate the extent of the contamination and remediate the contaminants in the groundwater at the Person Station site. The extent of shallow and deep groundwater contamination was assessed and the results were reported to the NMED. The Company currently is involved with the process to renew the RCRA post-closure care permit for the facility. Remedial actions for the shallow and deep groundwater will be incorporated into the new permit. The Company has installed and is operating a pump and treat system for the shallow groundwater. The Company has proposed a monitoring program in conjunction with natural attenuation processes as the most cost effective approach for the deep groundwater remediation. The Company's current estimate to decommission its retired fossil-fueled plants includes approximately $5.0 million in additional expenses to complete the groundwater remediation program at Person Station. As part of the financial assurance requirement of the Person Station Hazardous Waste Permit, the Company established a trust fund. The current value of the trust fund at December 31, 1998, was $7.7 million. The remediation program continues on schedule. Pit Closure and Remediation In 1995, the Jicarilla Apache Tribe ("Jicarilla") enacted an ordinance directing that unlined surface impoundments located within environmentally sensitive areas be remediated and closed by December 1996, and that all other unlined surface impoundments on Jicarilla lands be remediated and closed by December 1998. In 1995, the Company received a claim for indemnification by Williams, the purchaser of the Company's gas gathering and processing assets, for the environmental work required to comply with the Jicarilla ordinance. The Company submitted a closure/remediation plan to the Jicarillas' environmental protection office, which was approved. The Company's remediation work pursuant to the plan commenced in 1996, and the costs of remediation are being charged against the $10.6 million indemnification cap contained in the purchase and sale agreement between the Company and Williams. The Company completed remediation and closed pits within the environmentally sensitive area in 1996, and completed remediation and closure of all other pits on the Jicarilla Apache Reservation associated with the sale of gas gathering and processing assets by the December 1998 deadline specified in the ordinance. 16 ITEM 2. PROPERTIES The Company's owned interests in PVNGS are mortgaged to secure its remaining first mortgage bonds. (See PART II, ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES - Financing Activities".) ELECTRIC The Company's ownership and capacity in electric generating stations in commercial service as of December 31, 1998, were as follows: Total Net Generation Type Name Location Capacity (MW) ---- ---- -------- ------------- Nuclear........ PVNGS (a) Wintersburg, Arizona 390* Coal........... SJGS (b) Waterflow, New Mexico 750 Coal........... Four Corners (c) Fruitland, New Mexico 192 Gas/Oil........ Reeves Albuquerque, New Mexico 154 Gas/Oil........ Las Vegas Las Vegas, New Mexico 20 ----- 1,506 ===== * For load and resource purposes, the Company has notified the NMPUC that it recognizes the maximum dependable capacity rating for PVNGS to be 381 MW. ----------------- (a) The Company is entitled to 10.2% of the power and energy generated by PVNGS. The Company has a 10.2% ownership interest in Unit 3 and has leasehold interests in approximately 7.9% of Units 1 and 2 and an ownership interest in approximately 2.3% of Units 1 and 2. (b) SJGS Units 1, 2 and 3 are 50% owned by the Company; SJGS Unit 4 is 38.457% owned by the Company. (c) Four Corners Units 4 and 5 are 13% owned by the Company. Fossil-Fueled Plants SJGS is located in northwestern New Mexico, and consists of four units operated by the Company. Units 1, 2, 3 and 4 at SJGS have net rated capacities of 316 MW, 312 MW, 488 MW and 498 MW, respectively. SJGS Units 1 and 2 are owned on a 50% shared basis with Tucson. Unit 3 is owned 50% by the Company, 41.8% by SCPPA and 8.2% by Tri-State Generation and Transmission Association, Inc.("Tri-State'). Unit 4 is owned 38.457% by the Company, 28.8% by M-S-R, 10.04% by Anaheim, 8.475% by Farmington, 7.2% by Los Alamos and 7.028% by UAMPS. 17 In July 1996, the Company and other SJGS participants signed an agreement to convert the existing flue gas desulfurization (SO2 removal) system at the SJGS into a much simpler and cost effective limestone system. The conversion project was completed in January 1999 and cost the Company approximately $40 million. The Company also owns 192 MW of net rated capacity derived from its 13% interest in Units 4 and 5 of Four Corners located in northwestern New Mexico on land leased from the Navajo Nation and adjacent to available coal deposits. Units 4 and 5 at Four Corners are jointly owned with SCE, APS, Salt River Project, Tucson and El Paso and are operated by APS. Four Corners and a portion of the facilities adjacent to SJGS are located on land held under easements from the United States and also under leases from the Navajo Nation. The enforcement of these leases could require Congressional consent. The Company does not deem the risk with respect to the enforcement of these easements and leases to be material. However, the Company is dependent in some measure upon the willingness and ability of the Navajo Nation to protect these properties. The Company owns 154 MW of generation capacity at Reeves Station in Albuquerque, New Mexico, and 20 MW of generation capacity at Las Vegas Station in Las Vegas, New Mexico. These stations are used primarily for peaking and transmission support. Nuclear Plant The Company's Interest in PVNGS The Company is participating in the three 1,270 MW units of PVNGS, also known as the Arizona Nuclear Power Project, with APS (the operating agent), Salt River Project, El Paso, SCE, SCPPA and The Department of Water and Power of the City of Los Angeles. The Company has a 10.2% undivided interest in PVNGS, with portions of its interests in Units 1 and 2 held under leases. During 1998, PVNGS was operated at a capacity factor of 92.5% which was the highest yearly capacity factor attained at the plant. This capacity factor was primarily attributable to record setting low refueling outage days. Nuclear Safety Performance Rating on PVNGS On April 8, 1998, APS received its latest Systematic Assessment of Licensee Performance ("SALP") rating from the NRC on the operations of the PVNGS units. The SALP reports rate safety performance at nuclear plants in four functional areas: (i) plant operations; (ii) maintenance; (iii) engineering; and (iv) plant support. Ratings of category 1, 2, or 3 are assigned, reflecting "superior," "good" or "adequate" performance. PVNGS was rated as "superior" in maintenance, engineering and plant support categories, and was rated as "good" in the area of plant operations. Steam Generator Tubes APS, as the operating agent of PVNGS, has encountered tube cracking in the steam generators and has taken, and will continue to take, remedial actions that it believes have slowed the rate of tube degradation. The projected service life of steam generators is reassessed periodically and these analyses indicate that it will be economically desirable to replace the Unit 2 steam generators between 2003 and 2008. In 1997, the PVNGS participants, including the Company, entered into a contract for the fabrication of two replacement steam generators. The cost of the new steam generators to the Company will be approximately $9.1 million. These generators will be used as replacements if performance of existing generators deteriorates to less than acceptable levels. The generators are expected to be on site in 2002. The Company's share of installation costs will be approximately $8.4 million. 18 Based on latest available data, APS estimates that the Unit 1 and Unit 3 steam generators should operate for the license periods (until 2025 and 2027, respectively), although APS will continue its normal periodic assessment of these generators. Sale and Leaseback Transactions of PVNGS Units 1 and 2 In 1985 and 1986, the Company entered into a total of eleven sale and lease back transactions under which it sold and leased back its entire 10.2% interest in PVNGS Units 1 and 2, together with portions of the Company's undivided interest in certain PVNGS common facilities. The leases under each of the sale and leaseback transactions have initial lease terms expiring January 15, 2015 (with respect to the Unit 1 leases) or January 15, 2016 (with respect to the Unit 2 leases). Each of the leases allows the Company to extend the term of the lease as well as containing a repurchase option. The lease expense for the Company's PVNGS leases is approximately $66.3 million per year. Throughout the terms of the leases, the Company continues to have full and exclusive authority and responsibility to exercise and perform all of the rights and duties of a participant in PVNGS under the Arizona Nuclear Power Project Participation Agreement and retains the exclusive right to sell and dispose of its 10.2% share of the power and energy generated by PVNGS Units 1 and 2. The Company also retains responsibility for payment of its share of all taxes, insurance premiums, operating and maintenance costs, costs related to capital improvements and decommissioning and all other similar costs and expenses associated with the leased facilities. In 1992, the Company purchased approximately 22% of the beneficial interests in the PVNGS Units 1 and 2 leases for $17.5 million. The related ownership interests were subsequently reacquired by the Company. For accounting purposes, this transaction was originally recorded as a purchase with the Company recording approximately $158.3 million as utility plant and $140.8 million as long-term debt on the Company's consolidated balance sheet. (See PART II, ITEM 7. - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES - Financing Activities".) In connection with the $30 million retail rate reduction stipulated with the NMPUC in 1994, the Company wrote down the purchased beneficial interests in PVNGS Units 1 and 2 leases to $46.7 million. Each lease describes certain events, "Events of Loss" or "Deemed Loss Events", the occurrence of which could require the Company to, among other things, (i) pay the lessor and the equity investor, in return for such investor's interest in PVNGS, cash in the amount provided in the lease and (ii) assume debt obligations relating to the PVNGS lease. The "Events of Loss" generally relate to casualties, accidents and other events at PVNGS, which would severely adversely affect the ability of the operating agent, APS, to operate, and the ability of the Company to earn a return on its interests in, PVNGS. The "Deemed Loss Events" consist mostly of legal and regulatory changes (such as changes in law making the sale and leaseback transactions illegal, or changes in law making the lessors liable for nuclear decommissioning obligations). The Company believes the probability of such "Events of Loss" or "Deemed Loss Events" occurring is remote. Such belief is based on the following reasons: (i) to a large extent, prevention of "Events of Loss" and some "Deemed Loss Events" is within the control of the PVNGS participants, including the Company, and the PVNGS operating agent, through the general PVNGS operational and safety 19 oversight process and (ii) with respect to other "Deemed Loss Events", which would involve a significant change in current law and policy, the Company is unaware of any pending proposals or proposals being considered for introduction in Congress, except as described below under "PVNGS Liability and Insurance Matters", or any state legislative or regulatory body that, if adopted, would cause any such events. PVNGS Decommissioning Funding The Company has a program for funding its share of decommissioning costs for PVNGS. Under a portion of this program, the Company made a series of annual deposits under agreements approved by the NMPUC to an external non-qualified trust which were applied pursuant to a split dollar agreement between the Company and its employees towards an investment in whole life insurance policies on certain current and former employees. The program for investment in life insurance policies has been terminated (see ITEM 3. - "LEGAL PROCEEDINGS - OTHER PROCEEDINGS - Nuclear Decommissioning Trust"). The remaining portion of the nuclear decommissioning funding program is invested in equities in qualified and non-qualified trusts. The results of the 1998 decommissioning cost study indicated that the Company's share of the PVNGS decommissioning costs excluding spent fuel disposal will be approximately $155.4 million (in 1998 dollars). Pursuant to NMPUC approval, the Company funded an additional $3.0 million, $2.1 million and $12.5 million in 1998, 1997 and 1996, respectively, into the qualified and non-qualified trust funds. The estimated market value of the trusts, including the net cash value of the life insurance policies, at the end of 1998 was approximately $40 million. The NRC has recently amended its rules on financial assurance requirements for the decommissioning of nuclear power plants. The amended rules became effective on November 23, 1998. The NRC has indicated that the amendments respond to the potential rate deregulation in the power generating industry and NRC concerns regarding whether decommissioning funding assurance requirements will need to be modified. The amended rules provide that a licensee may use an external sinking fund as the exclusive financial assurance mechanism if the licensee recovers estimated total decommissioning costs through cost of service rates or through a "non-bypassable charge". Other mechanisms are prescribed, including prepayment, if the requirements for exclusive reliance on the external sinking fund mechanism are not met. The Company currently relies on the external sinking fund mechanism to meet the NRC financial assurance requirements for its interests in PVNGS Units 1, 2 and 3. The costs of PVNGS Units 1 and 2 are currently included in PRC jurisdictional rates, but the costs of PVNGS Unit 3 are excluded from PRC jurisdictional rates. The Company will be filing a report with the NRC through APS, the operating agent of PVNGS, at the end of March 1999, concerning decommissioning funding assurance, and believes that it will continue to be allowed to use the external sinking fund method as the sole financial assurance method for Unit 3. Nuclear Spent Fuel and Waste Disposal Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the "Waste Act"), DOE is obligated to accept and dispose of all spent nuclear fuel and other high-level radioactive wastes generated by all domestic power reactors. The NRC, pursuant to the Waste Act, requires operators of nuclear power reactors to enter into spent fuel disposal contracts with DOE. APS, on its own behalf and on behalf of the other PVNGS participants, executed a spent fuel disposal contract with DOE. Under the Waste Act, DOE was to develop the facilities necessary for the storage and disposal of spent nuclear fuel and to have the first such facility in operation by 1998. That facility was to be a permanent repository. DOE announced that such a repository now cannot be completed before 2010. 20 In response to lawsuits filed over DOE's obligation to accept used nuclear fuel, the United States Court of Appeals for the D.C. Circuit ("D.C. Circuit") has ruled that DOE had an obligation to begin accepting used nuclear fuel in 1998. However, the D.C. Circuit refused to issue an order compelling DOE to begin moving used fuel. Instead, the D.C. Circuit ruled that any damages to utilities should be sought under the standard contract signed between DOE and utilities, including APS, the operating agent of PVNGS. The United States Supreme Court has refused to grant review of the D.C. Circuit's decisions. In July 1998, APS filed a petition for review regarding DOE's obligation to begin accepting spent nuclear fuel. APS has capacity in existing fuel storage pools at PVNGS which, with certain modifications, could accommodate all fuel expected to be discharged from normal operation of PVNGS through 2002, and believes it could augment that wet storage with new facilities for on-site dry storage of spent fuel for an indeterminate period of operation beyond 2002, subject to obtaining any required governmental approvals. The Company currently estimates that it will incur approximately $41 million (in 1998 dollars) over the life of PVNGS for its share of the costs related to the on-site interim storage of spent nuclear fuel. The Company accrues these costs as a component of fuel expense, meaning the charges are accrued as the fuel is burned. During 1998, the Company expensed approximately $12 million for on-site interim nuclear fuel storage costs related to nuclear fuel burned prior to 1999. APS currently believes that spent fuel storage or disposal methods will be available for use by PVNGS to allow its continued operation beyond 2002. A low-level radioactive waste facility built in 1995 at the PVNGS site could store an amount of waste equivalent to 10 years of normal operation of PVNGS. Although some low-level waste has been stored on-site, APS is currently shipping low-level waste to off-site facilities. APS currently believes that interim low-level waste storage methods are or will be available for use by PVNGS to allow its continued operation and to safely store low-level waste until a permanent facility is available. While believing that scientific and financial aspects of the issues of spent fuel and low-level waste storage and disposal can be resolved satisfactorily, the Company acknowledges that their ultimate resolution in a timely fashion will require political resolution and action on national and regional scales which it is less able to predict. PVNGS Liability and Insurance Matters The PVNGS participants have insurance for public liability resulting from nuclear energy hazards to the full limit of liability under Federal law. This potential liability is covered by primary liability insurance provided by commercial insurance carriers in the amount of $200 million and the balance by an industry-wide retrospective assessment program. If losses at any nuclear power plant covered by the program exceed the accumulated funds, the Company could be assessed retrospective premium adjustments. The maximum assessment per reactor under the program for each nuclear incident is approximately $88 million, subject to an annual limit of $10 million per incident. Based upon the Company's 10.2% interest in the three PVNGS units, the Company's maximum potential assessment per incident for all three units is approximately $26.9 million, with an annual payment limitation of $3 million per incident. The 21 insureds under this liability insurance include the PVNGS participants and "any other person or organization with respect to his legal responsibility for damage caused by the nuclear energy hazard". If the funds provided by this retrospective assessment program prove to be insufficient, Congress could impose revenue raising measures on the nuclear industry to pay claims. The NRC has also recently announced that it has provided a report to Congress, making certain recommendations, with respect to the Federal law referred to above, which provides for payment of public liability claims in case of a catastrophic accident involving a nuclear power plant. One of the recommendations by the NRC would be that Congress consider amending the law to provide that the maximum a nuclear utility can be assessed per reactor per incident per year be doubled to $20 million. The $88 million maximum retrospective assessment per reactor per incident would be unchanged under the NRC proposal. The NRC also recommended that Congress investigate whether the $200 million now available from the private insurance market for liability claims per reactor can be increased to keep pace with inflation. The Company cannot predict whether or not Congress will act on the NRC's recommendations. However, if adopted, certain of the recommendations could possibly trigger "Deemed Loss Events" under the Company's PVNGS leases, absent waiver by the lessors. The PVNGS participants maintain "all-risk" (including nuclear hazards) insurance for nuclear property damage to, and decontamination of, property at PVNGS in the aggregate amount of $2.75 billion as of January 1, 1999, a substantial portion of which must be applied to stabilization and decontamination. The Company has also secured insurance against portions of the increased cost of generation or purchased power and business interruption resulting from certain accidental outages of any of the three units if the outages exceeds 17 weeks. The insurance coverage discussed in this section is subject to certain policy conditions and exclusions. The Company is a member of an industry mutual insurer. This mutual insurer provides both the "all-risk" and increased cost of generation insurance to the Company. In the event of adverse losses experienced by this insurer, the Company is subject to an assessment. The Company's maximum share of any assessment is approximately $3.3 million per year. Other Electric Properties As of December 31, 1998, the Company owned, jointly owned or leased 2,803 circuit miles of electric transmission lines, 5,370 miles of distribution overhead lines, 3,497 cable miles of underground distribution lines (excluding street lighting) and 188 substations. Acquisition of Certain Assets of Plains Electric Generation and Transmission Cooperative, Inc. ("Plains") In July 1998, the Company and Tri-State made a non-binding joint proposal in response to the request for proposals issued by Plains in May 1998. The proposal was subsequently selected as a finalist by Plains. The Company and Tri-State submitted a binding offer in September 1998, and Plains subsequently announced that it would be entering into exclusive negotiations with the Company and Tri-State regarding the joint proposal. It is now contemplated that Plains will merge with Tri-State, with Tri-State being the surviving entity. Tri-State will then sell certain assets to the Company consisting primarily of transmission assets and the Plains headquarters building in Albuquerque. In addition, the Company may have the opportunity to become the power supplier of 50 MW to one of Plains' member cooperatives. Once the final transactions are negotiated, the transactions will be submitted to various state and Federal regulatory agencies for approval. Closing of the transactions will depend on the timing of regulatory and other approvals. 22 NATURAL GAS The natural gas properties as of December 31, 1998, consisted primarily of natural gas storage, transmission and distribution systems. Provisions for storage made by the Company include ownership and operation of an underground storage facility located near Albuquerque, New Mexico. The transmission systems consisted of approximately 1,338 miles of pipe with appurtenant compression facilities. The distribution systems consisted of approximately 10,566 miles of pipe. On June 21, 1996, the Company entered into a purchase agreement with the DOE for the purchase of approximately 130 miles of transmission pipe for $3.1 million for the transmission of natural gas to Los Alamos and to certain other communities in northern New Mexico. The purchase is subject to the DOE providing right-of-way satisfactory to the Company. The acquisition by the Company was approved by the NMPUC in December 1996. Right-of-way resolution is expected to be completed by the second quarter of 1999. OTHER INFORMATION The electric and gas transmission and distribution lines are generally located within easements and rights-of-way on public, private and Indian lands. The Company leases interests in PVNGS Units 1 and 2 and related property, EIP and associated equipment, data processing, communication, office and other equipment, office space, utility poles (joint use), vehicles and real estate. The Company also owns and leases service and office facilities in Albuquerque and in other operating divisions throughout its service territory. ITEM 3. LEGAL PROCEEDINGS PVNGS WATER SUPPLY LITIGATION The Company understands that a summons served on APS in 1986 required all water claimants in the Lower Gila River Watershed of Arizona to assert any claims to water on or before January 20, 1987, in an action pending in the Maricopa County Superior Court. PVNGS is located within the geographic area subject to the summons and the rights of the PVNGS participants, including the Company, to the use of groundwater and effluent at PVNGS are potentially at issue in this action. APS, as the PVNGS project manager, filed claims that dispute the court's jurisdiction over the PVNGS participants' groundwater rights and their contractual rights to effluent relating to PVNGS and, alternatively, seek confirmation of such rights. Issues important to the claims are pending in an interlocutory appeal to the Arizona Supreme Court. No trial date concerning the water rights claims has been set in this matter. Although the foregoing remains subject to further evaluation, APS expects that the described litigation will not have a material adverse impact on the operation of PVNGS. SAN JUAN RIVER ADJUDICATION In 1975, the State of New Mexico filed an action entitled State of New Mexico v. United States, et al., in the District Court of San Juan County, New Mexico, to adjudicate all water rights in the "San Juan River Stream System". The Company was made a defendant in the litigation in 1976. The action is expected to adjudicate water rights used at Four Corners and at SJGS. (See ITEM 1. "BUSINESS - ELECTRIC OPERATIONS - Fuel and Water Supply - Water Supply".) The Company cannot at this time anticipate the effect, if any, of any water rights adjudication on the present arrangements for water at SJGS and Four Corners. It is the Company's understanding that final resolution of the case cannot be expected for several years and is unable to predict the ultimate outcome. 23 OTHER PROCEEDINGS Republic Savings Bank ("RSB") Litigation On July 1, 1996, in a 7-2 decision in the case of United States v. Winstar Corporation, the United States Supreme Court ruled that the Federal government had breached its contractual obligations with certain thrifts in refusing to recognize the accounting practices of supervisory goodwill and capital credits. Contracts had been negotiated with certain Federal agencies providing for the purchase of failing thrifts on the condition that supervisory goodwill and capital credits be recognized for purposes of determining compliance with regulatory capital requirements. When Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act in 1989, these accounting practices were prohibited, thus driving otherwise healthy thrifts out of compliance with the capital requirements. Many, including RSB, were taken over and liquidated as a result. Meadows owns directly a 100% ownership interest in Republic Holding Company ("RHC"), and RSB was a wholly-owned subsidiary of RHC. Meadows and RHC have pending before the United States Court of Federal Claims a lawsuit filed in 1992, alleging similar contractual arrangements to those at issue in the Winstar case. The Federal government has filed a counterclaim alleging breach by RHC of its obligation to maintain RSB's net worth and has moved to dismiss Meadows' claim for lack of standing. RSB was the thrift organized upon the acquisition of Citizens Federal Savings and Loan Association and Fireside Federal Savings and Loan Association, both Illinois corporations, in 1985. The plaintiffs invested $17 million of new capital in the failing institutions. The Federal regulators expressly promised that approximately $23 million of supervisory goodwill created by the transaction could be accounted for as an intangible asset to be counted toward regulatory capital. Additionally, the regulators promised to allow a $3 million cash contribution by the Federal Savings and Loan Insurance Corporation to be recorded as a direct credit to regulatory capital. In 1992, the Office of Thrift Supervision placed RSB in receivership and appointed the RTC as receiver. In November 1992, RTC sold RSB as a going concern for a premium of nearly $1 million, with approximately $215.5 million in assets and $203.9 million in liabilities. The RSB case has been held in abeyance pending the ruling by the United States Supreme Court. The Company believes that the Winstar decision establishes the Federal government's liability to Meadows and RHC in the RSB litigation and the amount of damages owed as a result will be vigorously litigated. RSB filed a motion for partial summary judgment on the issue of liability under its breach of contract claim based on the United States Supreme Court's decision in the Winstar case. The Federal government filed a cross motion for summary judgment and opposed RSB's motion. On December 22, 1997, the judge entered an opinion, addressing eleven issues common to the question of governmental liability in a number of cases including the RSB case, ruling in favor of the plaintiffs on all issues and severely critical of the government's litigation tactics. The judge ordered the Federal government to show cause within sixty days as to why the motions for summary judgment on contract liability issues of RSB and plaintiffs in similar cases should not be granted. The Federal government timely filed its response to the show cause order and RSB filed its reply. Decision on summary judgment is still pending. The court has ordered the parties to appoint representatives to develop a process for settlement of the cases and has assigned a judge to assist with the process. It is premature to estimate the amount of recovery, if any, by Meadows and RHC. 24 Purported Navajo Environmental Regulation Four Corners is located on the Navajo Reservation and is held under easement granted by the Federal government as well as leases from the Navajo Nation. APS is the operating agent and the Company owns a 13% ownership interest in Units 4 and 5 of Four Corners. In July 1995, the Navajo Nation enacted the Navajo Nation Air Pollution Prevention and Control Act, the Navajo Nation Safe Drinking Water Act and the Navajo Nation Pesticide Act (collectively, the "Acts"). Pursuant to the Acts, the Navajo Nation Environmental Protection Agency is authorized to promulgate regulations covering air quality, drinking water and pesticide activities, including those that occur at Four Corners. By letter dated October 12, 1995, the Four Corners participants requested the United States Secretary of the Interior (the "Secretary") to resolve their dispute with the Navajo Nation regarding whether or not the Acts apply to operation of Four Corners. The Four Corners participants subsequently filed a lawsuit in the District Court of the Navajo Nation (the "Court"), Window Rock District, seeking a declaratory judgment that: (i) the Four Corners leases and Federal easements preclude the application of the Acts to the operation of Four Corners and (ii) the Navajo Nation and its agencies and courts lack adjudicatory jurisdiction to determine the enforceability of the Acts as applied to Four Corners. In October 1995, the Navajo Nation and the Four Corners participants agreed to indefinitely stay the proceedings so that the parties may attempt to resolve the dispute without litigation, and the Secretary and the Court stayed these proceedings pursuant to a request by the parties. The Company is unable to predict the outcome of this matter. In February 1998, the EPA issued regulations specifying provisions of the Clean Air Act for which it is appropriate to treat Indian tribes in the same manner as states. The EPA indicated that it believes that the Clean Air Act generally would supersede pre-existing binding agreements that may limit the scope of tribal authority over reservations. APS and the Company have filed appeals, which have been consolidated, in the D.C. Circuit Court of Appeals to contest EPA's authority under the regulations. The Navajo Nation has intervened in the consolidated appeal. The Navajo Nation is a tribe which could potentially assert its status as a state under the Act pursuant to the EPA rule in question.. In the consolidated appeal, the Company's interests as operator and joint owner of the SJGS, owner of other facilities located on reservations located in New Mexico, and joint owner of Four Corners are involved. The Company cannot predict the outcome of the consolidated appeal. Nuclear Decommissioning Trust On March 31 and April 21, 1998, the Company and the trustee of the Company's master decommissioning trust filed a civil complaint and an amended complaint, respectively, against several companies and individuals for the under-performance of a corporate owned life insurance program. The program, which was approved by the NMPUC and set up in a trust in 1987, was used to fund a portion of the Company's nuclear decommissioning obligations for its 10.2% interest in PVNGS. In January 1999, the life insurance program was terminated, and the life insurance policies have been surrendered by the trust in exchange for the cash surrender value of the policies. 25 In the lawsuit, the Company asserts various tort, contract and equity theories against the defendants. The Company is seeking, among other things, damages in an amount that represents the difference between what the defendants represented that the life insurance program would achieve and the amount that the Company's experts currently project that the life insurance program will achieve. On May 29, 1998, the defendants filed a notice of removal to the Federal District Court. On June 26, 1998, the Company and trustee filed a motion to remand the proceeding back to State District Court. Several defendants filed answers and motions to dismiss the lawsuit with the Federal District Court. A defendant counterclaimed for indemnity based on its engagement contract with the Company, claiming that if it had injured the trustee, then the Company must pay the damages. On July 17, 1998, the Company denied liability under the counterclaim and set forth numerous defenses. On November 5, 1998, the Federal District Court granted the Company's and trustee's motion remanding the proceeding back to State District Court. Discovery is currently proceeding. The Company is currently unable to predict the ultimate outcome or amount of recovery, if any. For a discussion of other legal proceedings, see PART II, ITEM 7. - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - OTHER ISSUES FACING THE COMPANY - NMPUC REGULATORY ISSUES". ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 26 SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY Executive officers, their ages, offices held with the Company in the past five years and initial effective dates thereof, were as follows on December 31, 1998, except as otherwise noted:
Name Age Office Initial Effective Date ---- --- ------ ---------------------- B. F. Montoya........ 63 President and Chief Executive Officer August 1, 1993 J. E. Sterba......... 43 Executive Vice President and Chief Operating Officer March 11, 1997 Senior Vice President, Bulk Power Services December 6, 1994 Senior Vice President, Corporate Development December 7, 1993 Senior Vice President, Asset Restructuring April 6, 1993 Senior Vice President, Retail Electric and Water January 29, 1991 Services M. D. Christensen.... 50 Senior Vice President, New Mexico Retail Services November 3, 1997 Senior Vice President, Customer Service and Public January 9, 1996 Affairs Vice President, Public Affairs December 7, 1993 Vice President, Communications July 22, 1991 R. J. Flynn.......... 56 Senior Vice President, Electric Services December 1, 1994 M. H. Maerki......... 58 Senior Vice President and Chief Financial Officer December 7, 1993 Senior Vice President, Administration and Chief March 2, 1993 Financial Officer Senior Vice President and Chief Financial Officer June 1, 1988 P. T. Ortiz.......... 48 Senior Vice President, General Counsel and Secretary December 6, 1994 Senior Vice President, Regulatory Policy, General December 7, 1993 Counsel and Secretary Senior Vice President, Public Policy, General March 2, 1993 Counsel and Secretary Senior Vice President, General Counsel and Corporate February 4, 1992 Secretary W. J. Real........... 50 Senior Vice President, Gas Services December 6, 1994 Senior Vice President, Utility Operations December 7, 1993 Senior Vice President, Customer Service and March 2, 1993 Operations Executive Vice President, Gas Operations June 19, 1990
27
Name Age Office Initial Effective Date ---- --- ------ ---------------------- R. B. Ridgeway....... 40 Senior Vice President, Energy Services December 14, 1996 Vice President, Corporate Planning August 10, 1996 Director, Corporate Strategy July 2, 1994 Consultant, Competitive Analysis October 5, 1992 J. A. Zanotti........ 59 Senior Vice President, Human Resources January 9, 1996 Vice President, Human Resources March 2, 1993 Senior Vice President, Human Resources and July 26, 1990 Communications
- --------------------- J.E. Sterba resigned as an executive vice president and chief operating officer of the Company, effective December 31, 1998. J.A. Zanotti resigned as a senior vice president, Human Resources of the Company, effective July 31, 1998. All officers are elected annually by the board of directors of the Company. All of the above executive officers have been employed by the Company and/or its subsidiaries for more than five years in executive or management positions, with the exception of R. J. Flynn. R. J. Flynn has a 30-year history in the utility industry working with Pacific Gas and Electric Company. Since 1989, R. J. Flynn held the position of Regional Vice President, responsible for all gas and electric utility operations in the San Joaquin Valley. 28 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the New York Stock Exchange. Ranges of sales prices of the Company's common stock, reported as composite transactions (Symbol: PNM), and dividends declared on common stock for 1998 and 1997, by quarters, are as follows: Range of Quarter Ended Sales Prices ------------- ------------------ Dividends High Low per Share ------ ----- --------- 1998 December 31 ......................... 23 5/16 17 3/8 $ - * September 30 ........................ 23 3/16 19 1/16 0.20 June 30 ............................. 24 3/4 20 15/16 0.20 March 31 ............................ 24 11/16 22 1/8 0.20 ----- Fiscal Year ...................... 24 3/4 17 3/8 $0.60 ===== 1997 December 31 ......................... 23 15/16 18 7/8 $0.17 September 30 ........................ 19 9/16 17 3/4 0.17 June 30 ............................. 18 5/8 15 3/4 0.17 March 31 ............................ 20 1/2 17 1/4 0.17 ----- Fiscal Year ...................... 23 15/16 15 3/4 $0.68 ===== *On January 18, 1999, the Company's Board of Directors ("Board") declared a quarterly cash dividend of 20 cents per share of common stock payable February 19, 1999, to shareholders of record as of February 1, 1999. On January 31, 1999, there were 16,390 holders of record of the Company's common stock. The Board set the dividend payout ratio below the industry average to allow for dividend growth in the future and to sustain financial flexibility for the Company to respond to potential opportunities in the evolving energy marketplace. In establishing its new dividend policy, the Board weighed the Company's current financial position and its future business plan, as well as the regulatory and business climate in New Mexico. Future dividend declaration will be reviewed for action by the Board. The payment of future dividends will depend on earnings, the financial condition of the Company, market conditions and other factors, including in particular, the outcome of the pending electric rate case proceedings. (See PART II, ITEM 7. - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - OTHER ISSUES FACING THE COMPANY - NMPUC REGULATORY ISSUES - Electric Rate Case".) Cumulative Preferred Stock While isolated sales of the Company's cumulative preferred stock have occurred in the past, the Company is not aware of any active trading market for its cumulative preferred stock. Quarterly cash dividends were paid on the Company's cumulative preferred stock at the stated rates during 1998 and 1997. 29 ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ----------- (In thousands except per share amounts and ratios) Total Operating Revenues $1,092,445 $1,020,521 $ 873,778 $ 808,465 $ 904,711 Earnings from Continuing Operations $ 95,119 $ 86,497 $ 72,969 $ 75,562 $ 80,318 Net Earnings $ 82,682 $ 80,995 $ 72,580 $ 75,562 $ 80,318 Earnings per Common Share: Continuing Operations $ 2.27 $ 2.05 $ 1.73 $ 1.72 $ 1.77 Basic $ 1.97 $ 1.92 $ 1.72 $ 1.72 $ 1.77 Diluted $ 1.95 $ 1.91 $ 1.71 $ 1.72 $ 1.77 Total Assets $2,576,788 $2,320,555 $2,230,314 $2,035,669 $2,203,265 Preferred Stock with Mandatory Redemption Requirements - - - - $ 17,975 Long-Term Debt, including Current Maturities $1,008,614 $ 714,345 $ 728,889 $ 728,989 $ 900,595 Common Stock Data: Market price per common share at year end $ 20.438 $ 23.688 $ 19.625 $ 17.625 $ 13.000 Book value per common share at year end $ 20.63 $ 19.26 $ 18.06 $ 16.82 $ 15.11 Average number of common shares outstanding 41,774 41,774 41,774 41,774 41,774 Cash dividend declared per common share $ 0.60* $ 0.68 $ 0.48 - - Return on Average Common Equity 9.9% 10.2% 9.8% 10.7% 12.4% Capitalization: Common stock equity 45.4% 52.6% 50.4% 48.6% 39.2% Preferred stock: Without mandatory redemption requirements 0.7 0.8 0.9 0.9 3.7 With mandatory redemption requirements - - - - 1.1 Long-term debt, less current maturities 53.9 46.6 48.7 50.5 56.0 ------------ ----------- ----------- ----------- ----------- 100.0% 100.0% 100.0% 100.0% 100.0% ============ =========== =========== =========== ===========
Due to the discontinuance of the natural gas trading operations of its Energy Services Business Unit (see note 12 of the notes to consolidated financial statements), certain prior year amounts have been restated. *On January 18, 1999, the Company's Board declared a quarterly cash dividend of 20 cents per share of common stock payable February 19, 1999, to shareholders of record as of February 1, 1999. - ---------- The selected financial data should be read in conjunction with the consolidated financial statements, the notes to consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's assessment of the Company's financial condition and the significant factors affecting the results of operations. This discussion should be read in conjunction with the Company's consolidated financial statements. OVERVIEW Restructuring the Electric Utility Industry Introduction of competitive market forces and restructuring of the electric utility industry in New Mexico continue to be key issues facing the Company. During 1998, in conjunction with the electric rate case, the Company and other interested parties put significant efforts into negotiating a settlement agreement which would have resolved the rate case and produced a proposal for legislation for open access and electric competition for the Company's customers (see "Electric Rate Case" below). However, efforts failed due to various unresolved issues among the parties. Senator Michael Sanchez, chairman of the New Mexico Legislative Interim Committee on Utilities and Telecommunications, introduced a senate bill, Electric Industry Restructuring Act of 1999, in the 1999 New Mexico Legislature on February 5, 1999. The bill includes provisions for the protection of the residential and small business customers during the transition period and also includes provisions to preserve the financial integrity of the state's electric utilities by giving reasonable opportunity to recover stranded costs. (See "ELECTRIC INDUSTRY RESTRUCTURING ACT OF 1999" below.) At the Federal level, there are a number of proposals on electric restructuring being considered with no concrete timing for definitive actions. It is expected that previously introduced restructuring bills will be re-introduced this year. Issues such as stranded cost recovery, market power, utility regulations reform, the role of states, subsidies, consumer protections and environmental concerns are expected to be at the forefront of the Congressional debate. In addition, the FERC has stated that if Congress mandates electric retail access, it should leave the details of the program to the states and the FERC has the authority to order the necessary transmission access for the delivery of power for the states' retail access programs. Although it is unable to predict the ultimate outcome of possible retail competition initiatives, the Company has been and will continue to be active at both the state and Federal levels in the public policy debates on the restructuring of the electric utility industry. The Company will continue to work with customers, regulators, legislators and other interested parties to find solutions that bring benefits from competition while recognizing the importance of reimbursing utilities for past commitments. Competitive Strategy The restructuring of the electric utility industry will provide new opportunities; however, the Company anticipates that it will experience downward pressure on the Company's utility earnings from their current levels. The reasons for the downward pressure include possible limits on return on equity, disallowance of some stranded costs and the potential loss of certain customers in a competitive environment. 31 To better position itself for competition, the Company adopted a new internal corporate structure in January 1999. With the new corporate structure, the regulated businesses will be separated from the other business activities which the Company anticipates will be unregulated in the future. The Company's realignment of its business structure was approved by the Board in January 1999. If the Electric Industry Restructuring Act of 1999 is passed, the Company is planning to seek shareholder and other regulatory approvals to form a holding company by January 2001. Under a holding company structure, the regulated businesses (natural gas and electric transmission and distribution) will be grouped under a separate company (wires and pipes company) and would focus on the core utility business in New Mexico. The proposed unregulated businesses (power production, bulk power marketing and energy services) would aggressively pursue their efforts to expand energy marketing and utility related businesses into carefully targeted markets in an effort to increase shareholders' value. The Company believes that successful operations of its proposed unregulated business activities under a holding company structure will better position the Company in an increasingly competitive utility environment The Company's bulk power operations have contributed significant earnings to the Company in recent years as a result of increased off-system sales due, in part, to favorable weather conditions experienced in the Southwest. The Company plans to expand its wholesale power trading functions which could include an expansion of its generation portfolio. The Company continuously evaluates its physical asset acquisition strategies to ensure an optimal mix of base-load generation, peaking generation and purchased power in its power portfolio. Under the proposed senate bill, the generation assets of the Company's electric operations would be separated from the regulated businesses. Depending upon the aspects of the legislation that are ultimately enacted into law, an expansion of the Company's generation assets might occur without a regulatory approval process. In addition to the continued power trading operations, the Company will further focus on opportunities in the market place where excess capacity is disappearing and mid- to long-term market demands are growing. The Company's competitive businesses, through its Energy Services Business Unit, will continue to seek opportunities in the area of water and wastewater management services and utility related management and operations services for Federal installations and other large commercial institutions. In order to focus on profitable ventures, the Company made a decision to exit the unsuccessful natural gas trading business in August 1998 and completely disposed of its natural gas trading operations in December 1998. The Company's Energy Services Business Unit currently operates the City of Santa Fe's water system and is expanding such services to other communities, including Indian tribes. The Company is expanding its utility related services such as providing metering services, energy and process optimization solutions and energy consulting services in the deregulated energy markets in the Southwest. The Company is also pursuing business opportunities to serve mid-sized utilities, including cooperatives, municipalities and others with cost effective billing and collection services. The Company intends to move forward during the interim period to form and invest in the three wholly-owned subsidiaries to achieve competitive business strategies. The Company does not anticipate an earnings contribution from its Energy Services Business Unit over the next few years. 32 LIQUIDITY AND CAPITAL RESOURCES Capital Requirements and Liquidity Total capital requirements include construction expenditures as well as other major capital requirements and cash dividend requirements for both common and preferred stock. The main focus of the Company's construction program is upgrading generating systems, upgrading and expanding the electric and gas transmission and distribution systems and purchasing nuclear fuel. Total capital requirements and construction expenditures for 1998 were $161.6 million and $128.8 million, respectively. Projections for total capital requirements and construction expenditures for 1999 are $176 million and $145 million, respectively. Such projections for the years 1999 through 2003 are $769 million and $609 million, respectively. These estimates are under continuing review and subject to on-going adjustment. The Company's construction expenditures for 1998 were entirely funded through cash generated from operations. The Company currently anticipates that internal cash generation will be sufficient to meet capital requirements for the years 1999 through 2003. To cover the difference in the amounts and timing of cash generation and cash requirements, the Company intends to use short-term borrowings under its liquidity arrangements. At the end of February 1999, the Company had $405 million of available liquidity arrangements, consisting of $300 million from a senior unsecured revolving credit facility ("Credit Facility"), $80 million from an accounts receivable securitization and $25 million in local lines of credit. The Credit Facility will expire in March 2003. As of December 31, 1998, the Company had approximately $61.3 million in cash and temporary investments and $26.6 million in short-term borrowings. Financing Capability The Company's ability to finance its construction program at a reasonable cost and to provide for other capital needs is largely dependent upon its ability to earn a fair return on equity, results of operations, credit ratings, regulatory approvals and financial market conditions. Financing flexibility is enhanced by providing a high percentage of total capital requirements from internal sources and having the ability, if necessary, to issue long-term securities, and to obtain short-term credit. Standard & Poor's Corp. and Moody's Investors Services, Inc. currently maintain the Company's credit ratings at one level below investment grade. Duff & Phelps Credit Rating Co. currently maintains an investment grade rating for the Company's first mortgage bonds, but continues to rate all other securities of the Company below investment grade. The Company may face limited credit markets and higher financing costs as a result of its securities being rated below investment grade. As a result of the recently issued unfavorable NMPUC orders which have been appealed to the New Mexico Supreme Court ("Supreme Court") (see "Electric Rate Case" and "Residential Electric, Incorporated ("REI")" in NMPUC REGULATORY ISSUES below), the major rating agencies put the Company on a credit watch list for a possible downgrade. 33 Covenants in the Company's PVNGS Units 1 and 2 lease agreements (see PART I, ITEM 2. - "PROPERTIES Nuclear Plant") limit the Company's ability, without consent of the owner participants in the lease transactions: (i) to enter into any merger or consolidation, or (ii) except in connection with normal dividend policy, to convey, transfer, lease or dividend more than 5% of its assets in any single transaction or series of related transactions. The Facility imposes similar restrictions regardless of credit ratings. Financing Activities By written consents executed in March 1998, the holders of more than 75% of the outstanding first mortgage bonds approved certain revisions to the mortgage to allow the Company more flexibility with respect to property releases, as well as with respect to covenants and administrative requirements under the mortgage. In March 1998, the Company replaced the first mortgage bonds collateralizing $463 million of tax-exempt pollution control revenue bonds ("PCBs") with senior unsecured notes ("SUNs") which were issued under a new senior unsecured note indenture. Also, in March 1998, the Company retired $140 million principal amount of first mortgage bonds. While first mortgage bonds continue to serve as collateral for PCBs in the outstanding principal amount of $111 million, the lien of the mortgage was substantially reduced to cover only the Company's ownership interest in PVNGS. Coincident with the above transactions, the Company established a five-year, $300 million Credit Facility to replace the Company's $100 million secured revolving credit facility. Funds borrowed through this Credit Facility were used to retire the $140 million principal amount of first mortgage bonds. In August 1998, the Company issued and sold $435 million of SUNs in two series. Approximately $420 million from the proceeds from the sale of the SUNs were loaned to PVNGS Capital Trust ("Capital Trust"), a special purpose entity established in August 1998, for the purpose of purchasing PVNGS lease debt ("Lease Debt") held by the Company as well as Lease Debt publicly held. The Capital Trust currently holds all the outstanding Lease Debt, and all the publicly-held lease obligation bonds have been retired. As a result, the Company received approximately $288 million from Capital Trust for its investment in Lease Debt and paid off its outstanding short-term debt. In addition, the Company invested approximately $13.4 million in Capital Trust in August 1998. In 1999, the Company intends to request PRC authority to issue $11.5 million in tax-exempt PCBs in connection with the retrofit of the pollution control facilities at the SJGS. The Company currently has no other requirements for long-term financings during the period of 1999 through 2003. However, during this period, the Company could enter into long-term financings for the purpose of strengthening its balance sheet and reducing its cost of capital. The Company continues to evaluate its investment and debt retirement options to optimize its financing strategy and earnings potential. No additional first mortgage bonds may be issued under the Company's mortgage. The amount of SUNs that may be issued is not limited by the SUNs indenture. However, debt to capital requirements in certain of the Company's financial instruments would ultimately restrict the Company's ability to issue SUNs. 34 Dividends The Company resumed the payment of cash dividends on common stock in May 1996. The Company's board of directors reviews the Company's dividend policy on a continuing basis. The declaration of common dividends is dependent upon a number of factors including earnings and financial condition of the Company, the Supreme Court's decisions on the Company's various regulatory cases currently pending (see "NMPUC REGULATORY ISSUES" below) and market conditions. Capital Structure The Company's capitalization, including current maturities of long-term debt, at December 31 is shown below: 1998 1997 1996 ---- ---- ---- Common Equity............................ 45.4% 52.6% 50.4% Preferred Stock.......................... 0.7 0.8 0.9 Long-term Debt........................... 53.9* 46.6 48.7 ----- ----- ----- Total Capitalization**................ 100.0% 100.0% 100.0% ===== ===== ===== * Increase was due to the issuance of $435 million of SUNs in August 1998. ** Total capitalization does not include as debt the present value ($161 million as of December 31, 1998) of the Company's lease obligations for PVNGS Units 1 and 2 and EIP. RESULTS OF OPERATIONS Basic earnings per share from continuing operations were $2.27, a 10.7 percent increase over the $2.05 earned in 1997 and a 31.2 percent increase over the $1.73 earned in 1996. Total basic earnings per share including discontinued operations were $1.97, $1.92 and $1.72 for 1998, 1997 and 1996, respectively. Continuing Operations Electric gross margin (operating revenues less fuel and purchased power expense) increased $38.2 million in 1998 over 1997 as a result of the success in wholesale power marketing operations. Electric gross margin for 1997 increased $20.1 million over 1996 as a result of retail load growth and increased wholesale marketing activities. Wholesale power sales exceeded retail sales for the second year in a row in 1998. Sales for resale totaled 8.8 million MWh in 1998, up approximately 2.0 million MWh over 1997 and 4.2 million MWh over 1996. An unusually hot summer in Arizona and California contributed, in part, to the profitable bulk power operations in 1998; however, the success of the Company's bulk power operation was also attributable to the location of the Company's assets in the Southwest. The favorable results of the Company's bulk power operations are not necessarily indicative of future operating results. Gas gross margin (operating revenues less gas purchased for resale) decreased $3.8 million in 1998 from 1997 as a result of warmer weather conditions in 1998. Such margin increased $1.3 million in 1997 over 1996 due to the implementation of a higher fixed monthly customer charge (access fee) in February 1997 pursuant to a gas rate order. 35 Other operation and maintenance ("O&M") expenses increased $23.9 million in 1998 over 1997 due to: (i) the recording of expenses associated with PVNGS spent fuel disposal costs; (ii) increased maintenance activities at SJGS; (iii) increased 401(k) benefit expense; (iv) increased O&M expense for Energy Services; and (v) increased expenses associated with the Year 2000 program. Such O&M expenses in 1997 increased $9.4 million over 1996 due to: (i) a write-off of obsolete inventory and undistributed stores expense at PVNGS; (ii) higher distribution expense for increased maintenance and service enhancement efforts; (iii) increased customer service related and sales expense; and (iv) a severance accrual at the SJGS. Depreciation and amortization expenses increased $3.4 million in 1998 due to increased utility plant and a write-off of certain unamortized computer software costs. Such expenses increased $4.6 million in 1997 as a result of additional utility plant and an adjustment recorded in 1996 for the over amortization of certain intangible utility plant. Net other income and deductions increased $9.5 million over a year ago as a result of the investment income from Capital Trust, proceeds from a litigation settlement and the reversal of a gas rate case reserve. Net other income and deductions in 1997 increased $11.9 million over 1996 due to higher interest income from the investment in PVNGS Lease Obligation Bonds ("PVNGS LOBs") and a 1996 reserve for matters related to a gas rate case, offset by a curtailment gain resulting from the change in the Company's pension plan in 1996. Net interest charges increased $7.0 million in 1998 due to the issuance of $435 million of SUNs and increased short-term borrowings for the retirement of $140 million of first mortgage bonds. Net interest charges for 1997 increased $1.5 million over 1996 due to short-term borrowings for the purchase of the $200 million of PVNGS LOBs in late 1996. Discontinued Operations On August 4, 1998, the Company adopted a plan to discontinue the gas trading operations in its Energy Services Business Unit. The gas trading business was completely disposed of by the end of 1998. Accordingly, the Company recorded a loss of $5.1 million, net of tax. In addition, losses from operations of the discontinued segment, net of tax were $7.4 million in 1998 compared to $5.5 million in 1997. (See note 12 of the notes to consolidated financial statements.) OTHER ISSUES FACING THE COMPANY ELECTRIC INDUSTRY RESTRUCTURING ACT OF 1999 Senate Bill 428, sponsored by Senator Michael Sanchez, was introduced in the 1999 New Mexico Legislature on February 5, 1999. Under the proposed bill, customer choice of power supplier would be available to schools, residential customers and small business customers in New Mexico beginning January 1, 2001, and to all customers beginning January 1, 2002. Transmission and distribution services along with related services such as meter reading and billing would remain subject to the PRC jurisdiction. This bill would not require a public utility to divest itself of any of its assets owned or leased. However, before January 1, 2001, a public utility would be required to organize into at least two corporations, dividing regulated from unregulated services through either the creation of separate affiliated companies under a holding company or through the creation of separate non-affiliated corporations. 36 If enacted, the bill would require all public utilities operating in New Mexico to submit a transition plan to the PRC no later than March 1, 2000, to be approved no later than December 1, 2000. The transition plan would include proposed tariffs for transmission and distribution services, together with proposed standard offer service tariffs for residential and small business customers who do not select a power supplier. The plan would also include proposals for effectively separating the utilities' regulated and non-regulated business activities. The bill recognizes that electric utilities should be permitted a reasonable opportunity to recover an appropriate amount of the costs incurred previously in providing electric service ("stranded costs"). Stranded costs include plant decommissioning costs, regulatory assets, lease and lease-related costs and other costs recognized under cost-of-service regulation. Utilities would be allowed to recover no less than 50 percent of such costs through a nonbypassable charge on all customer bills for five years after implementation of customer choice. The PRC could authorize a utility to recover up to 100 percent of its stranded costs if the PRC finds that recovery of more than 50 percent: (i) is in the public interest; (ii) is necessary to maintain the financial integrity of the public utility; (iii) is necessary to continue adequate and reliable service; and (iv) will not cause an increase in rates to residential or small business customers during the transition period. Utilities would also be allowed to recover in full any costs incurred in implementing full open access ("transition costs"). Those transition costs would be recovered through 2007 by means of a separate wires charge. Due to uncertainties in the bill regarding the amounts of recovery and calculation of stranded costs, the Company is currently unable to determine what financial impact the bill, if enacted, will have on the Company. Other significant provisions of the bill include: (i) customers would be allowed to prepay their allotted share of stranded costs prior to the implementation of choice for that customer class; (ii) the PRC would adopt and enforce codes of conduct to protect customer privacy and prevent such anticompetitive practices as cross-subsidization or favoritism of non-regulated energy suppliers by regulated affiliates; and (iii) a system benefit charge of $0.0003 per KWh would be added to customer bills to fund no less than $500,000 annually for low income energy assistance programs, and no more than $4 million a year for renewable energy projects, in addition to other public interest programs. The bill provides for penalties of up to $2 million for each violation of the Act. The bill also requires licensing for competitive power suppliers, which is defined to include providers of energy-related services. The Company's primary concerns with the proposed bill revolve around the treatment of stranded cost recovery. The Company intends to work with the bill's sponsor, interested parties, and the Legislature as a whole to address its concerns and to maximize the chances for passage of restructuring legislation which is beneficial to the State as a whole. It is the Company's position that this bill goes a long way in properly balancing the interests involved, and, in that respect, provides a good vehicle for the passage of restructuring legislation in this session. On February 28, 1999, the full Senate passed the bill with various amendments by a vote of 32-6. The Bill has been assigned to both the Business and Industry Committee and the Appropriation and Finance Committee in the State House of Representatives ("House") for consideration. The House has a similar competing bill, House Bill 865, that has been assigned to the House Judiciary Committee and the House Appropriation and Finance Committee. No hearings have been scheduled on House Bill 865. The most significant difference between the two bills is the size of the proposed subsidy for renewable energy technology. The House bill earmarks approximately $20 million a year for renewable technology, compared to $4 million designated in Senate Bill 428. However, it is likely that, like the Company, other parties will continue to seek to amend various provisions of the bill. Given the Legislature's past reluctance to implement retail competition, the Company is unable to predict whether or not legislation will pass or what its provisions are likely to be. 37 NMPUC REGULATORY ISSUES Electric Rate Case On November 30, 1998, the NMPUC issued a final order in the Company's electric rate case. In the final order, the NMPUC ordered the Company to reduce its rates for certain cost of service items and for the revaluation of its generation resources based on a so-called "market-based price" and further stated that recovery of stranded costs is illegal. The NMPUC's order would require the Company to reduce rates in 1999 by $60.2 million, by $25.6 million in 2000 and by an additional $25.6 million in 2001. If the order is implemented and the Company is required to collect its generation costs at a rate lower than its embedded cost of generation with no recovery of stranded costs, the Company could be required to record a pre-tax accounting loss of up to $540 million. On December 14, 1998, the Company filed a notice of appeal with the Supreme Court, requesting a stay of the final order pending appeal. The Company argued that it met the standard for a stay in that there is a likelihood the Company will prevail on the merits and irreparable harm would occur to the Company if the stay were not granted and no irreparable harm would occur to opponents or the public by granting the stay. The Supreme Court granted the Company's motion for a stay of the final order on December 16, 1998, prohibiting any further actions or proceedings until further order of the Supreme Court. On December 23, 1998, the NMPUC filed a motion with the Supreme Court, requesting the Supreme Court reverse its order so that an immediate $61 million rate cut could be granted to the Company's customers or, in the alternative, allow an immediate rate reduction of approximately $37 million, which is the amount the NMPUC said it would have ordered if it had not revalued generation assets. On January 13, 1999, the Supreme Court rejected the NMPUC's motion and affirmed the stay on the electric rate case order indefinitely until the merits of the case are decided. In addition, the Supreme Court combined the electric rate case and the REI case (see below). On March 1, 1999, after hearing oral arguments including arguments by the PRC supporting the NMPUC order, the Supreme Court took under advisement the appeal of the NMPUC order on the Company's electric rate case and the writ petition regarding the rate case (see below). The Supreme Court continued the stay preventing implementation of the NMPUC rate reduction, pending its decision. Residential Electric, Incorporated ("REI") In October 1998, REI, a new entity incorporated in the state of New Mexico for the purpose of supplying electricity to retail customers, filed the following with the NMPUC: (i) an application for a certificate of convenience and necessity and an advice notice, requesting authority to provide electric services within the metropolitan areas of Albuquerque, Rio Rancho and Santa Fe; and (ii) an application and complaint seeking the unbundling of distribution and transmission facilities of the Company and the use of these facilities by REI to deliver its power supplies to retail customers. Included in the filing were a motion for a procedural and case management order and a brief discussing legal principles based on NMPUC orders in other cases. 38 Hearings were held at the NMPUC in November 1998. Subsequently, the NMPUC held oral arguments on November 23, 1998, in lieu of briefs, and took the matter under advisement. The NMPUC issued its order approving REI's requests on November 30, 1998. On December 29, 1998, the Company and the AG each filed their respective notices of appeal of the REI decision at the Supreme Court. In a related matter, a bipartisan group of legislators, the local business manager of the International Brotherhood of Electrical Workers, and a member of the Company's shareholder alliance filed a petition on December 21, 1998, at the Supreme Court seeking a writ of mandamus (the "writ proceeding") declaring the rate case order and the REI order as a violation of the separation of powers clause of the State constitution and prohibiting their enforcement, and requesting a stay of the REI order. The Supreme Court granted a stay with respect to the REI order and held a hearing on the issues on January 13, 1999. At the hearing, the Supreme Court ordered the consolidation of the Company's rate case appeal, the Company's REI appeals, and the writ proceeding, and continued the stays. On March 1, 1999, after hearing oral arguments, the Supreme Court granted the writ of mandamus, overturning the REI order, finding that the NMPUC had overstepped its authority and departed from the principles that have guided regulatory policy in New Mexico since 1941. City of Albuquerque ("COA") Retail Pilot Load Aggregation Program The COA filed a petition with the NMPUC in September 1997 to institute a Retail Pilot Load Aggregation Program (the "pilot") wherein COA would serve as a load aggregator, and the pilot would consist mainly of COA facility loads. Hearings on COA's pilot proposal were held in January 1998. The Company opposed the program from the outset stating, among other things, that only the New Mexico Legislature has the authority to order retail competition or a pilot on retail access and that the pilot being proposed by COA would provide very little useful information on retail access. The NMPUC issued an order in August 1998 requiring the Company to implement a 16 MW retail pilot program for a one year period starting in December 1998. In November 1998, the NMPUC issued an order requiring the Company to begin pilot enrollment by January 12, 1999, and to implement the pilot on or before March 1, 1999. The Company filed a motion for stay with the Supreme Court, arguing that the NMPUC lacks authority to order retail competition through a pilot program. On December 15, 1998, oral arguments were held at the Supreme Court and the Supreme Court issued an order, staying the NMPUC's order on the pilot. City of Gallup ("Gallup") Complaint In January 1998, Gallup, Gallup Joint Utilities and the Pittsburg & Midway Coal Mining Co. ("Pitt-Midway") filed a joint complaint and petition ("Complaint") with the NMPUC for a declaratory order regarding service status and abandonment of facilities. The Complaint sought an interim declaratory order stating: (i) Pitt-Midway is no longer an obligated customer of the Company; (ii) Gallup is entitled to serve Pitt-Midway; (iii) abandonment of the power line and related facilities by the NMPUC is not necessary; (iv) the Company must wheel power purchased by Gallup from other suppliers over the Company's transmission system; and (v) the Company must enter into an interconnection agreement with Gallup. 39 In September 1998, the NMPUC issued a final order without conducting a hearing, stating that Pitt-Midway is not, as a matter of law, obligated to be a customer of the Company, and ordered that the Company start on or before October 1, 1998 to: (i) wheel power on behalf of Gallup pursuant to existing contractual obligations under an agreement; (ii) deliver power to Gallup at a specified substation pursuant to a contract agreement; and (iii) transfer ownership of a specified transmission line to Pitt-Midway pursuant to a 1975 agreement. The Company strongly disagreed with the NMPUC's decision and filed, in September 1998, a motion with the Supreme Court, requesting an emergency stay of the NMPUC order pending its appeal of the order. The Company believes that the issues are complex, that the NMPUC was premature in issuing a final order without evidentiary proceedings and that the NMPUC has exceeded its jurisdiction and has attempted to preempt FERC authority. The Supreme Court denied the Company's request and remanded the matter back to the NMPUC for consideration of matters raised by the Company. The Company also filed a petition for declaratory order at the FERC regarding several jurisdictional issues in the NMPUC's order. The remanded issues were reheard at the NMPUC during October 1998. On November 30, 1998, the NMPUC issued its "final order on remand", which essentially reaffirmed its earlier position and order. The Company filed a supplement to its September 1998 petition for declaratory order at FERC to add the NMPUC's "final order on remand" to its previously filed information. On December 15, 1998, the Company also filed a supplement to its notice of appeal at the Supreme Court to add the "final order on remand" to the record. The Company worked diligently with Gallup to meet obligations of the final order on remand. However, Gallup notified the Company that it was terminating negotiations until all the pending issues were resolved at the FERC and the Supreme Court. The Company maintains its position that the FERC has exclusive jurisdiction over any wholesale transactions, including wholesale power sales to Gallup, interconnection agreements and wholesale power wheeling on behalf of Gallup. The Company also believes that the NMPUC orders disregarded New Mexico law with the respect to municipal boundary limitations. On February 17, 1999, the Company filed its brief-in-chief in this matter at the Supreme Court. The Company is currently unable to predict the ultimate outcome of this case and the effects thereof. SAN DIEGO GAS AND ELECTRIC COMPANY ("SDG&E") COMPLAINTS The Company has a 100 MW power sales contract with SDG&E that began in June 1988 and extends through April 2001. In 1993, 1996 and 1997, SDG&E filed three separate and similar complaints with the FERC, alleging that certain charges under the power sales agreement were unjust, unreasonable and unduly discriminatory. In each of the complaints, SDG&E requested the FERC to investigate the charges under the agreements. The Company filed responses to each of the complaints, denying the allegations made by SDG&E, and requested the FERC dismiss each complaint. The Company has estimated that if the relief sought by SDG&E is granted for all three complaints, the annual demand charges paid by SDG&E would be significantly reduced from the date of the ruling through April 2001, and could result in a refund of approximately $41.6 million as of December 31, 1998. 40 In December 1998, the FERC issued an order on the complaints, consolidating all three dockets, conditionally denying the Company's motion to dismiss the complaints made in 1993 and 1996, and denying the motion to dismiss the 1997 complaint. In the order, the FERC stated that it was setting the complaint for a trial-type, evidentiary hearing, but would hold the hearing in abeyance and encouraged the parties to make every effort to reach a settlement before any hearing procedures begin. The FERC indicated that this matter was a good candidate for settlement because the complaint was confined to narrow, specific rate issues. The FERC also provided for a settlement judge to assist the parties in arriving at a settlement. In the event the parties are unable to reach a settlement, a public hearing will be held and the FERC estimated that a final decision would not be issued until October 15, 2001. On December 23, 1998, SDG&E filed a fourth complaint with the FERC, making the same allegations. The Company again filed a response denying the allegations and requesting summary dismissal. If the relief sought by the fourth complaint is granted, the Company would be required to refund an additional $12.5 million plus interest. The refund period covered by the fourth complaint is February 1999 through May 2000. Settlement discussions with SDG&E and the FERC Staff were held with the settlement judge on March 4, 1999. However, the parties were unable to reach settlement on the issues and the complaint cases will be set for public hearing. The Company firmly believes that all four complaints are without merit and intends to vigorously defend its position. The Company cannot predict the outcome of any proceeding to be held at the FERC. NEW CUSTOMER BILLING SYSTEM On November 30, 1998, the Company implemented a new customer billing system. Due to a significant number of problems associated with the implementation of the new billing system, the Company has been unable to send proper bills or bills at all to approximately 10% of its accounts. Under PRC rules and PRC-approved Company rules, the Company is required to issue customer bills on a monthly basis. On February 2, 1999, the Company filed an application for temporary variance, allowing it to send bills for more than one billing cycle and setting forth a process designed to mitigate the impact to customers who receive bills for more than one month of service. The PRC Staff recommended that the PRC grant the Company a variance under certain conditions and docket a formal investigation into the prudency of the selection, analysis, implementation, operational performance and associated costs of the new billing system. On February 16, 1999, the PRC issued an order granting the Company a temporary variance through April 15, 1999, which will allow the Company to issue bills to customers that have been delayed from 60-120 days. The PRC's order also delayed the docketing of a prudence investigation. In accordance with the order, the Company submitted a status report on the billing system problems on March 2, 1999, and is required to continue to provide twice weekly updates to the PRC Staff. In addition, the order stated that the granting of temporary variances shall neither excuse the Company from past or ongoing violations of the New Mexico Public Utility Act ("Utility Act") or PRC rules, nor act as retroactive authorization for actions taken by the Company associated with the implementation of the new billing system. The order further provided that a hearing examiner take evidence on whether the Company has violated or is violating PRC rules, regulations, orders or the Utility Act, and if so, whether sanctions or fines should be imposed. The PRC may impose penalties for violations of the Utility Act or failure to obey any lawful order of the PRC in the amount of $100 to $100,000 for each violation. 41 Because of the problems associated with the Company's new customer billing system, the Company has been estimating revenues, customer accounts receivable and bad debt expense since its implementation in November 1998. The Company's financial, tax and regulatory reports reflect these estimates. The Company has been diligently working with the software manufacturer to resolve the problems in an expeditious manner; however, the Company is currently unable to predict the ultimate timing for the completion of the remediation effort or ultimate regulatory actions regarding these problems or the ultimate impact on the Company. THE YEAR 2000 ISSUE Background The Year 2000 issue is a consequence of computer programs ("Information Technology Systems" or "IT Systems") being written using two digits rather than four digits to define the applicable year. As a result, computer systems could recognize the year 2000 as the year 1900. This could result in a system failure or miscalculations causing disruptions of operations. Equipment that contains embedded chips ("Embedded Systems") may also be affected by the Year 2000 issue. Equipment affected may include such things as hand held meter reading devices, distribution and transmission control systems, elevators, routers and generator controls. The Company has adopted a plan to address the Year 2000 issue for internal systems and external dependencies ("Year 2000 Project"). The Year 2000 Project is comprised of eight phases: (1) Awareness; (2) Inventory; (3) Assessment; (4) Planning and Scheduling; (5) Repair; (6) Testing; (7) Re-Integration/Deployment; and (8) Company-Wide Testing. State of Readiness In early 1998, the Company established completion date goals for each of the eight phases. Those goals were established at a point when the Company was still in the early stages of evaluating the extent of the effort required company-wide to complete the Year 2000 Project. Those goals and the estimated status of each phase as of February 28, 1999, are set out below: Phase Targeted Estimated Status of Year 2000 Project Phase Completion Dates Completion* ----------------------- ---------------- ------------------- Awareness Phase 06/01/98 Completed Inventory Phase 06/26/98 97% Assessment Phase 08/28/98 81% Planning and Scheduling Phase 10/30/98 61% Repair Phase 04/02/99 32% Testing Phase 05/28/99 11% Re-Integration/Deployment Phase 07/02/99 6% Company-Wide Testing Phase 10/01/99 2% * The stated percentages represent the status of completion as of February 28, 1999, of all of the Company's IT Systems and Embedded Systems, including mission critical systems. For purposes of this presentation, "mission critical systems" include systems whose failures could cause an interruption in the supply of electricity or gas to the Company's customers, could interfere with the Company's ability to communicate with customers, or could interfere with the Company's cashflow. 42 The estimated status of any of the eight phases may be adjusted upon completion of the Assessment Phase on the basis of information then available to the Company. However, until completion of the Assessment Phase, the Company is unable to reliably estimate the completion status of each of those phases. Work in the Company-Wide Testing Phase commences when all segments of a process have completed remediation. A segment is the portion of a process that receives input from and/or sends output to another segment of a process. At the inception of the Year 2000 Project, there were several projects then underway to upgrade and replace some IT Systems and Embedded Systems. One result of those projects was to make the systems Year 2000 compliant. Due, in part, to the status of those projects and the fact that the Year 2000 issue affects each area of the Company in different ways, the Year 2000 Project is at varying stages of completion throughout the Company. Several IT Systems known to be noncompliant have already been remediated. Other IT Systems that are determined to be noncompliant will be remediated according to schedules established during the Planning and Scheduling Phase of the Year 2000 Project. Most of the Company's mission critical systems are in the operations areas and are a combination of both IT Systems and Embedded Systems. While the Company can, in many instances, perform the necessary test and remediation functions on the IT portion of these systems, the Company does not generally possess the required equipment and skills necessary to test and remediate the embedded portion of these systems at the microchip level and must, therefore, rely upon manufacturers or suppliers to assist in remediating noncompliant systems. Where necessary, the Company has contracted with vendors to assist with the assessment, remediation and testing work required in this area. The Company is participating in the Year 2000 program sponsored by the Electric Power Research Institute ("EPRI"). The program involves utilities sharing Year 2000 compliance information about specific embedded systems, test protocols, data and results and project management ideas. EPRI is also assisting in coordinating communications between the electric power industry and manufacturers and suppliers. Costs The Company currently estimates that during 1999, the Year 2000 Project will generate incremental expenditures of approximately $12.6 million. An additional $2.7 million of payroll cost will be transferred from other operations and maintenance expenses. In the year 2000, the Company will incur additional expenditures associated with the steps necessary to finalize the Year 2000 Project and document results. The estimate does not include the cost of upgrades and replacements of the systems that were undertaken independent of the Year 2000 issue where the projects have not been accelerated to address the Year 2000 issue, even though one result is that those systems will be Year 2000 compliant. The Company's estimate is under continuous review as the Year 2000 Project proceeds. During 1998, the Company incurred approximately $5.3 million of costs for the Year 2000 Project. 43 Risks The Company is connected to one of the three major electric grids for North America. That electric grid known as the Western Interconnection connects utilities throughout the western portion of North America. The stability and reliability of the operations of each utility on any of the electric grids is, to a certain extent, dependent upon these interconnections. A major disturbance within a grid can have an immediate effect throughout the grid. Even though the Company addresses the Year 2000 issue for its systems, it could still encounter difficulties due to the state of readiness of another utility on the Western Interconnection. There is a likelihood of at least minor disruptions on the grid as a result of the Year 2000 issue. The Company is working with the Western Systems Coordinating Council ("WSCC"), as well as with the utilities with which the Company is directly connected on the grid. The Company will participate in the initiatives of WSCC in connection with grid stability. The Company's natural gas operations rely upon timely receipt of natural gas from gas transporters and suppliers. The ability of those transporters and suppliers to continue to provide an uninterrupted and adequate supply of gas also may be dependent upon their Year 2000 readiness and is critical to the operations of the Company's gas operations. The Company is working with each of its primary transporters and suppliers to determine their Year 2000 readiness and to jointly develop contingency plans. The continuation of the Company's operations is also dependent upon a number of significant suppliers and service providers. The Company is working with these parties to determine their Year 2000 readiness and to jointly develop contingency plans. The Company is working with its fuel suppliers to ensure that an uninterrupted and adequate fuel supply exists for its power generation operations. Disruption in the services from third party telecommunications providers would impair the Company's ability to operate its electric transmission and distribution and natural gas distribution operations. The Company is working on how to assess the Year 2000 readiness of these third party telecommunications providers. The goal of the Company has been to make its mission critical systems Year 2000 compliant by mid-1999. However, because the Company must rely on outside vendors for the remediation of a portion of its mission critical systems, there is a probability that remediation and testing will not be completed on some of these systems until after this date. If a delay past mid-1999 is anticipated, then specific contingency plans will be developed. The Company anticipates that the conversion of certain non-critical systems may not be completed until late 1999. The Company believes that if remediation of its mission critical IT Systems and Embedded Systems is not completed timely, the Year 2000 issue could have a material adverse impact on the Company's operations. Contingency Plans The Company is in the process of reviewing its existing contingency and business continuity plans for applicability to the Year 2000 Project and will enhance or replace these plans as required. New plans specific to the Year 2000 Project will be developed if these issues have not been previously addressed. The Company has begun developing high level contingency plans that respond to problems unique to the Year 2000 issue. 44 The Company currently expects that the most reasonably likely worst case scenario in connection with its electric operations will be voltage variations and some frequency variations around the time of the date rollover to January 1, 2000, and in the following several days. The volume of these events is expected to be greater than during normal operations. The result will be that the Company will not be able to control these variations and maintain system stability to the usual degree. The Company currently believes that existing contingency plans should adequately address this scenario. The operations of only a small number of customers would be sensitive to such variations. The Company does not expect these variations to have a material adverse impact on the Company's operations. It is also possible, but less likely, that there may be intermittent, short duration electric outages occurring during the several days following the date rollover to January 1, 2000. The Company is, nevertheless, developing contingency plans intended to further improve the probability that no interruptions in the delivery of electricity to its customers will occur. These plans are being developed both internally and in conjunction with the WSCC. The WSCC has made certain recommendations for electric operations around the date rollover to January 1, 2000. The Company's contingency plans are consistent with those recommendations. The Company will be establishing a company-wide emergency operations center that will be staffed prior to the date rollover to January 1, 2000, until it is decided that the center is no longer required for Year 2000 contingency planning purposes. The Company will have additional staff present at its power plants and mission critical substations and switching facilities in case there is a need to manually operate any systems or make any repairs. Remote facilities will have backup communications systems in place. The Company currently expects that the most reasonably likely worst case scenario in connection with its gas operations is the loss of electric supply to certain compression and processing facilities belonging to the Company's gas suppliers and transporters. However, the suppliers and transporters have provided the Company with information that indicates that there is adequate natural gas fired compression on their systems to maintain main line pressures. Further they have represented that the primary processing facilities have adequate backup sources of electric generation to operate without interruption. If these facilities incur other unexpected Year 2000 problems, they can bypass the processing facilities and run the gas through dehydrators to dry the gas prior to delivery to the main pipelines. The Company is developing contingency plans intended to further improve the probability that no interruptions of gas supply will occur. In addition to the company-wide emergency operations center, the Company will have employees stationed at mission critical gas interchange points to allow for manual operation if required. Backup communications systems will be in place for remote facilities. Alternate operating procedures will be in place in order to maintain pipeline pressures if any problems are experienced with the backup communications systems. The Company will have additional supply contracts in place to allow for delivery of gas from multiple points in case one or more transporters are unable to deliver the full contracted quantity of gas. Year 2000 Readiness Disclosure The Year 2000 statements in "The Year 2000 Issues" section are Year 2000 Readiness Disclosures pursuant to the Year 2000 Information and Readiness Disclosure Act, Pub. L. No. 105-271, 112 Stat. 2386 (1998). 45 COAL FUEL SUPPLY The coal requirements for the SJGS are being supplied by SJCC, a wholly owned subsidiary of BHP, from certain Federal, state and private coal leases under a Coal Sales Agreement, pursuant to which SJCC will supply processed coal for operation of the SJGS until 2017. The primary sources of coal for current operations are a mine adjacent to the SJGS and a mine located approximately 25 miles northeast of the SJGS in the La Plata area of northwestern New Mexico. In 1997, the Company was notified by SJCC of certain audit exceptions identified by the Federal Minerals Management Service ("MMS") for the period 1986 through 1997. These exceptions pertain to the valuation of coal for purposes of calculating the Federal coal royalty. Primary issues include whether coal processing and transportation costs should be included in the base value of La Plata coal for royalty determination. Administrative appeals of the MMS claims are pending. The Company was notified during the fourth quarter of 1998 that the MMS agreed to a mediation of the claims. It is the Company's understanding that the mediation will occur during 1999. The Company is unable to predict the outcome of this matter and the Company's exposures have not yet been assessed. The Company was also notified of claims by a private royaltyholder involving royalty valuation at the La Plata Mine. During the fourth quarter of 1998, the Company was notified that settlement discussions with the private royaltyholder resulted in potential agreement on all claims. Based on the Company's understanding of the proposed settlement, it does not believe that a material impact will result. In 1996, the Company was notified by SJCC that the Navajo Nation has proposed to select certain properties within the San Juan and La Plata Mines (the "mining properties") pursuant to the Navajo-Hopi Land Settlement Act of 1974 (the "Act"). The mining properties are operated by SJCC under leases from the BLM and comprise a portion of the fuel supply for the SJGS. An administrative appeal by SJCC is pending. In the appeal, SJCC expressed concern that transfer of the mining properties to the Navajo Nation may subject the mining operations to taxation and additional regulation by the Navajo Nation, both of which could increase the price of coal that might potentially be passed on to the SJGS through the existing coal sales agreement. The Company is monitoring closely the appeal and other developments on this issue and will continue to assess potential impacts to the SJGS and the Company's operations. The Company is unable to predict the ultimate outcome of this matter. ACCOUNTING STANDARDS Decommissioning: The Staff of the SEC has questioned certain of the current accounting practices of the electric industry regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in financial statements of electric utilities. In response to these questions, the FASB has a project on its agenda to review the accounting for closure and removal costs, including decommissioning of nuclear power plants. If current electric industry accounting practices for nuclear power plant decommissioning are changed, the estimated cost for decommissioning could be recorded as a liability with recognition of an increase in the cost of the related nuclear power plant. The Company does not believe that such changes, if required, would have a material adverse effect on results of operations. 46 Accounting for Derivative Instruments and Hedging Activities, Statement of Financial Accounting Standards ("SFAS") No. 133: SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivatives' fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows derivative gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. This statement is effective for fiscal years beginning after June 15, 1999, and cannot be applied retroactively. The Company has not yet fully quantified the impacts of adopting SFAS No. 133 on the financial statements. However, it is anticipated that SFAS No. 133 could increase volatility in earnings and other comprehensive income. Accounting for Contracts Involved in Energy Trading and Risk Management Activities (EITF Issue 98-10): In December 1998, the Emerging Issues Task Force ("EITF") of the FASB reached consensus on EITF Issue 98-10. EITF Issue 98-10 requires that energy trading contracts should be marked to market (measured at fair value determined as of the balance sheet date) with the gains and losses included in earnings and separately disclosed in the financial statements or footnotes thereto. EITF Issue 98-10 is effective for fiscal years beginning after December 15, 1998. The effects of initial application of EITF Issue 98-10 will be reported as a cumulative effect of a change in accounting principle. Financial statements for periods prior to initial adoption of EITF Issue 98-10 may not be allowed to be restated. The Company is currently evaluating the Company's energy portfolio to determine which contracts and activities should be considered trading activities. As a result, the Company has not fully quantified potential gains or losses related to these activities. The Company does not believe that the adoption of EITF Issue 98-10 will have a material adverse effect on the results of operations. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful, cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the statement. Words such as "estimates," "expects," "anticipates," "plans," "believes," "projects," and similar expressions identify forward-looking statements. Accordingly, the Company hereby identifies the following important factors which could cause the Company's actual financial results to differ materially from any such results which might be projected, forecasted, estimated or budgeted by the Company in forward-looking statements: (i) adverse actions of utility regulatory commissions; (ii) utility industry restructuring; (iii) failure to recover stranded costs; (iv) the inability of the Company to successfully compete outside its traditional regulated market; (v) regional economic conditions, which could affect customer growth; (vi) adverse impacts resulting from environmental regulations; (vii) loss of favorable fuel supply contracts; (viii) failure to obtain water rights and rights-of-way; (ix) operational and environmental problems at generating stations; (x) the cost of debt and equity capital; (xi) weather conditions; and (xii) technical developments in the utility industry. The costs of the Company's Year 2000 Project and the dates on which the Company believes it will complete the phases of the Project are based upon management's best estimates, which were derived using numerous assumptions regarding future events, including the continued availability of certain resources, third-party remediation plans, and other factors. There can be no assurance that these estimates will prove to be accurate and actual results could differ materially from those currently anticipated. Specific factors that could cause such material differences include, but are not limited to, the availability and cost of personnel trained in Year 2000 issues, the ability to identify, assess, remediate and test all relevant computer codes and embedded technology, and similar uncertainties. 47 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The following discussion regarding the Company's market risk sensitive instruments contains forward-looking information involving risks and uncertainties. The statements regarding potential gains and losses are only estimates of what may occur in the future. Actual future results may differ materially from those estimates presented due to the model characteristics and the risks and uncertainties involved. The Company is potentially exposed to market risk due to changes in interest rates, equity and other investment returns and commodity prices. All of the Company's derivative commodity instruments described below are held for purposes other than trading. The Company's other financial instruments are held both for trading and for other purposes. Interest Rate Risk The Company's interest rate exposure relates primarily to debt financing issued to fund capital requirements including refund of maturing debt securities. Except for the proposed issuance of pollution control revenue bonds of $11.5 million, the Company currently does not have a plan to issue long-term debt within the next five years. The Company's long-term debt obligations are all fixed rate obligations with varying maturities. The Company managed its interest rate risk through the issuance of fixed-rate debt with varying maturities. The table below presents principal cash flows, estimated market values at December 31, 1998, and related weighted average interest rates of the Company's long-term debt by expected maturity dates.
December 31, Estimated Market 1998 1999 2000 2001 2002 Thereafter Total Value ---- ---- ---- ---- ---- ---------- ----- --------- (Dollars in Millions) Pollution Control Revenue Bonds $0 $0 $0 $0 $0 $ 574.3 $ 574.3 $ 594.6 Weighted-Average Interest Rate - - - - - 6.15% 6.15% Senior Unsecured Notes $ 435.0 $ 435.0 $ 447.9 Weighted-Average Interest Rate - - - - - 7.22% 7.22% Total $0 $0 $0 $0 $0 $1,009.3 $1,009.3 $1,042.5
48 Equity and Other Investment Return Risk At December 31, 1998, the Company's equity and other investment return exposure related primarily to corporate owned life insurance ("COLI") policies and equity investments held within the Company's non-qualified and qualified nuclear decommissioning trusts. (See PART II, ITEM 2, - "PROPERTIES - Nuclear Plant - PVNGS Decommissioning Funding") In January 1999, the COLI policies were surrendered for approximately $42.1 million. After repayment of a related bank loan for $26.7 million incurred by the decommissioning trust for the payments of COLI policy premiums and interest charges, the Company invested the remaining $15.4 million in temporary investments within the non-qualified trust. This investment is carried at its market value of $15.4 million. Neither the fair value of these investments nor near-term investment losses from reasonably possible near-term changes in market prices were material to the financial position, results of operations or liquidity of the Company. As of December 31, 1998, the fair value of equity investments held within the trusts was approximately $24.7 million. The Company records the gains or losses resulting from the market changes in those investments. Neither the fair value of these investments nor near-term investment losses from reasonably possible near-term changes in market prices were material to the financial position, results of operations or liquidity of the Company. The Company also has other investment return exposure related to $50 million invested in temporary investments. Neither the fair value of these investments nor the near-term investment losses from reasonably possible near-term changes in market prices are material to the financial position, results of operations or liquidity of the Company. Commodity Price Risk At December 31, 1998, the Company's derivative commodity price exposure relates to "swap" agreements entered into by the Company to hedge the price risks associated with a portion of anticipated 1998-1999 winter-heating season natural gas purchases. These instruments are settled in cash at or prior to expiration. Under these instruments, payments are made or received based on the difference between a fixed and a variable product price. The Company defers the impact of changes in the market value of these instruments until the related transaction is completed. As of December 31, 1998, the Company had outstanding basis swap agreements covering approximately 3 million decatherms of natural gas purchases through March 1999. The Company had unrealized losses of $3.1 million at December 31, 1998, related to the outstanding agreements. Neither the fair value of the derivatives outstanding nor potential, near-term derivative losses from reasonably possible near-term changes in market prices were material to the financial position, results of operations or liquidity of the Company. The risk of gas cost variations under the swap agreements should be mitigated by the PGAC in New Mexico. The Company is evaluating the use of swap agreements for the 1999-2000 winter heating season. 49 Other Commodity Price Risks The Company also has commodity price exposure related to agreements other than derivative financial and commodity instruments and other financial instruments. The Company utilizes contracts of various duration for the forward sale and purchase of natural gas to effectively manage its available natural gas supply portfolio. These agreements contain fixed-priced and variable-price provisions and are settled in physical delivery. The contracts with variable pricing provisions are exposed to fluctuations in prices of natural gas due to unpredictable factors, such as weather, which impacts supply and demand. To reduce price risk caused by market fluctuations, the Company hedges a portion of its purchases as discussed under Commodity Price Risk above. The risk of gas cost variations under the these agreements is mitigated by the PGAC in New Mexico. The Company utilizes contracts of various duration for the forward purchases of coal and uranium to effectively manage its available coal and uranium supply portfolio for the generation of electricity. These agreements contain fixed-price and variable-price provisions and are settled by physical delivery of the commodity. In the normal course of business, the Company utilizes contracts of various duration for the forward sale and purchase of electricity to effectively manage its available generating capacity. Such contracts include forward contracts for wholesale sales of generating capacity and energy during periods when the Company's available power resources are expected to exceed the requirements of its native load customers. It may also include forward contracts for the purchase of wholesale capacity and energy during periods when the anticipated market price of electricity is below the Company's expected incremental power production cost. In addition, for trading purposes, the Company routinely buys and sells electricity in the wholesale market and also writes and purchases option contracts on a limited basis. These forward and option contracts require physical delivery of electricity. The use of these types of physical commodity instruments is designed to allow the Company to manage and hedge its contractual commitments, reduce its exposure relative to the volatility of market prices, and take advantage of selected arbitrage opportunities. The Company structures and modifies its net resource position to capture expected changes in future demand, seasonal market pricing characteristics, overall market sentiment, and price relationships between different time periods. The Company is exposed to the risk that fluctuating market prices of electric power may potentially impact its financial condition, or results of operations. The Company is not currently using mark-to-market accounting. Actual gains and losses are recorded for financial statement purposes after physical delivery. As previously discussed, the requirements of EITF Issue 98-10 are currently being evaluated and will be adopted in the first quarter of 1999. The Company's Risk Management Committee (the "Committee") established policies, procedures, and limits designed to minimize the Company's exposure to electricity commodity price risk. The Committee periodically reviews these policies to ensure they are responsive to changing business conditions. The Company uses a value-at-risk methodology and mark-to-market gains and losses to assess the market risk of the anticipated excess capacity and electricity trading portfolio. These exposures are revalued and reported to the Committee daily. 50 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX Page Management's Responsibility for Financial Statements ................... F-1 Report of Independent Public Accountants ............................... F-2 Financial Statements: Consolidated Statements of Earnings ................................. F-3 Consolidated Statements of Comprehensive Income ..................... F-4 Consolidated Statements of Retained Earnings ........................ F-5 Consolidated Balance Sheets ......................................... F-6 Consolidated Statements of Cash Flows ............................... F-7 Consolidated Statements of Capitalization ........................... F-8 Notes to Consolidated Financial Statements .......................... F-9 Supplementary Data: Quarterly Operating Results ......................................... F-42 Comparative Operating Statistics .................................... F-43 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of Public Service Company of New Mexico (the "Company") is responsible for the preparation and presentation of the accompanying consolidated financial statements. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include amounts that are based on informed estimates and judgments of management. Management maintains a system of internal accounting controls which it believes is adequate to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with management authorization and the financial records are reliable for preparing the consolidated financial statements. The system of internal accounting controls is supported by written policies and procedures, by a staff of internal auditors who conduct comprehensive internal audits and by the selection and training of qualified personnel. The board of directors, through its audit committee comprised entirely of outside directors, meets periodically with management, internal auditors and the Company's independent auditors to discuss auditing, internal control and financial reporting matters. To ensure their independence, both the internal auditors and independent auditors have full and free access to the audit committee. The independent auditors, Arthur Andersen LLP, are engaged to audit the Company's consolidated financial statements in accordance with generally accepted auditing standards. F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Public Service Company of New Mexico: We have audited the accompanying consolidated balance sheets and statements of capitalization of Public Service Company of New Mexico (a New Mexico corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, comprehensive income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Public Service Company of New Mexico and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Albuquerque, New Mexico March 2, 1999 F-2 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31, -------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (In thousands except per share amounts) Operating Revenues: Electric $ 835,204 $ 722,438 $ 645,639 Gas 255,975 294,769 227,301 Energy Services 1,266 3,314 838 ----------- ----------- ----------- Total operating revenues 1,092,445 1,020,521 873,778 ----------- ----------- ----------- Operating Expenses: Fuel and purchased power 310,098 235,508 178,807 Gas purchased for resale 134,755 169,758 103,574 Cost of sales and projects - Energy Services 936 2,631 110 Other operation expenses 293,902 269,013 262,584 Maintenance and repairs 51,666 52,626 49,693 Depreciation and amortization 86,141 82,694 78,115 Taxes, other than income taxes 37,992 36,803 34,837 Income taxes 41,306 41,941 39,650 ----------- ----------- ----------- Total operating expenses 956,796 890,974 747,370 ----------- ----------- ----------- Operating income 135,649 129,547 126,408 ----------- ----------- ----------- Other Income and Deductions: Other 37,672 21,548 2,367 Income tax expense (14,985) (8,384) (1,099) ----------- ----------- ----------- Net other income and deductions 22,687 13,164 1,268 ----------- ----------- ----------- Income before interest charges 158,336 142,711 127,676 ----------- ----------- ----------- Interest Charges: Interest on long-term debt 50,929 46,670 49,009 Other interest charges 12,288 9,544 5,698 ----------- ----------- ----------- Net interest charges 63,217 56,214 54,707 ----------- ----------- ----------- Net Earnings from Continuing Operations 95,119 86,497 72,969 Discontinued Operations, net of tax: Loss from operations of gas marketing (7,386) (5,502) (389) Estimated loss on disposal of gas marketing, including provision for operating losses during phase-out period (5,051) - - ----------- ----------- ----------- Net Earnings 82,682 80,995 72,580 Preferred Stock Dividend Requirements 586 586 586 ----------- ----------- ----------- Net Earnings Available for Common Stock $ 82,096 $ 80,409 $ 71,994 =========== =========== =========== Average Number of Common Shares Outstanding 41,774 41,774 41,774 =========== =========== =========== Net Earnings (Loss) per Common Share: Earnings from continuing operations $ 2.27 $ 2.05 $ 1.73 Loss from discontinued operations (0.18) (0.13) (0.01) Estimated loss on disposal of gas marketing (0.12) - - ----------- ----------- ----------- Net Earnings per Common Share (Basic) $ 1.97 $ 1.92 $ 1.72 =========== =========== =========== Net Earnings per Common Share (Diluted) $ 1.95 $ 1.91 $ 1.71 =========== =========== =========== Dividends Paid per Share of Common Stock $ 0.77 $ 0.63 $ 0.36 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-3 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, --------------------------------- 1998 1997 1996 --------- --------- --------- (In thousands) Net Earnings $ 82,682 $ 80,995 $ 72,580 --------- --------- --------- Other Comprehensive Income, net of tax: Unrealized gain (loss) on securities: Unrealized holding gains arising from the period 1,519 1,529 1,176 Less reclassification adjustment for gains included in net income (673) (672) (347) Minimum pension liability adjustment (205) (626) (478) --------- --------- --------- Total Other Comprehensive Income 641 231 351 --------- --------- --------- Total Comprehensive Income $ 83,323 $ 81,226 $ 72,931 ========= ========= ========= Note: Tax expense for Total Other Comprehensive Income for 1998, 1997 and 1996 was $420, $151, and $230, respectively. The accompanying notes are an integral part of these financial statements. F-4 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Year Ended December 31, ------------------------------------ 1998 1997 1996 ---------- ---------- --------- (In thousands) Balance at Beginning of Year $ 129,188 $ 77,185 $ 25,243 Net earnings 82,682 80,995 72,580 Dividends: Cumulative preferred stock (586) (586) (586) Common stock (25,064) (28,406) (20,052) --------- --------- -------- Balance at End of Year $ 186,220 $ 129,188 $ 77,185 ========== ========== ========= The accompanying notes are an integral part of these financial statements. F-5 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
As of December 31, --------------------------- 1998 1997 ------------ ------------ (In thousands) Utility Plant, at original cost except PVNGS: Electric plant in service $ 1,966,277 $ 1,958,912 Gas plant in service 467,758 441,045 Common plant in service 63,245 43,415 Plant held for future use 551 551 ------------ ------------ 2,497,831 2,443,923 Less accumulated depreciation and amortization 998,175 1,003,086 ------------ ------------ 1,499,656 1,440,837 Construction work in progress 66,677 104,497 Nuclear fuel, net of accumulated amortization of $21,898 and $21,263 27,426 27,816 ------------ ------------ Net utility plant 1,593,759 1,573,150 ------------ ------------ Other Property and Investments: Non-utility property, net of accumulated depreciation of $1,129 and $2,146 4,875 4,502 Other investments 518,959 307,261 ------------ ------------ Total other property and investments 523,834 311,763 ------------ ------------ Current Assets: Cash 2,573 8,705 Temporary investments, at cost 58,707 9,490 Receivables, net of allowance for uncollectible accounts of $836 and $783 197,906 216,305 Income taxes receivable 8,266 - Fuel, materials and supplies, at average cost 33,137 33,664 Gas in underground storage, at average cost 2,537 13,158 Other current assets 4,666 4,509 ------------ ------------ Total current assets 307,792 285,831 ------------ ------------ Deferred charges 151,403 149,811 ------------ ------------ $ 2,576,788 $ 2,320,555 ============ ============ CAPITALIZATION AND LIABILITIES Capitalization: Common stock equity: Common stock outstanding--41,774 shares $ 208,870 $ 208,870 Additional paid-in capital 465,386 469,073 Accumulated other comprehensive income, net of tax 1,127 486 Retained earnings since January 1, 1989 186,220 129,188 ------------ ------------ Total common stock equity 861,603 807,617 Minority interest 13,405 - Cumulative preferred stock without mandatory redemption requirements 12,800 12,800 Long-term debt, less current maturities 1,008,614 713,995 ------------ ------------ Total capitalization 1,896,422 1,534,412 ------------ ------------ Current Liabilities: Short-term debt 26,620 114,100 Accounts payable 113,975 154,501 Dividends payable 147 7,248 Current maturities of long-term debt - 350 Accrued interest and taxes 34,289 24,161 Other current liabilities 28,308 26,102 ------------ ------------ Total current liabilities 203,339 326,462 ------------ ------------ Deferred Credits: Accumulated deferred investment tax credits 54,404 57,823 Accumulated deferred income taxes 144,277 124,054 Other deferred credits 278,346 277,804 ------------ ------------ Total deferred credits 477,027 459,681 ------------ ------------ Commitments and Contingencies $ 2,576,788 $ 2,320,555 ============ ============
The accompanying notes are an integral part of these financial statements. F-6 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------------ 1998 1997 1996 ---------- ---------- ---------- (In thousands) Cash Flows From Operating Activities: Net earnings $ 82,682 $ 80,995 $ 72,580 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization 98,154 94,924 90,458 Accumulated deferred investment tax credit (3,418) (4,436) (4,476) Accumulated deferred income taxes 18,292 11,080 31,436 Changes in certain assets and liabilities: Receivables 17,009 4,554 (83,416) Fuel, materials and supplies 11,148 (2,883) 5,795 Deferred charges 8,509 (11,190) 5,190 Accounts payable (40,490) 23,808 36,930 Accrued interest and taxes 10,128 805 (3,500) Deferred credits (1,938) 2,455 12,655 Other (1,676) (371) (9,279) Other, net 12,587 13,381 11,528 ---------- ---------- ---------- Net cash flows from operating activities 210,987 213,122 165,901 ---------- ---------- ---------- Cash Flows From Investing Activities: Utility plant additions (128,784) (128,371) (103,087) Purchase of PVNGS lease debt (215,701) - - Increase in nuclear decommissioning trust (3,620) (23,000) - Return of principal of PVNGS lease obligation bonds 11,337 5,018 - Utility plant sales - - 333 Other property sales - - 702 Net increase in other property and investments (4,224) (6,814) (14,706) Escrow for purchase of PVNGS lease obligation bonds - (28,900) (208,446) Decrease (increase) in temporary investments, net (49,216) (363) 86,844 ---------- ---------- ---------- Net cash flows from investing activities (390,208) (182,430) (238,360) ---------- ---------- ---------- Cash Flows From Financing Activities: Proceeds from issuance of senior unsecured notes 892,728 - - Redemption of pollution control revenue bonds (463,345) Redemption of first mortgage bonds (140,206) - - Short-term borrowings for redemption of first mortgage bonds 140,206 - - Proceeds from minority interest in Capital Trust 13,405 - - Bond redemption premium and costs (5,537) (3,693) (5,158) Proceeds from (repayments of) asset securitization - (13,900) 100,400 Repayments of long-term debt - (14,970) (326) Trust borrowing for nuclear decommissioning 3,620 23,000 - Increase (decrease) in short-term debt (231,306) 4,600 - Exercise of employee stock options (3,687) (1,285) - Dividends paid (32,789) (26,864) (15,560) ---------- ---------- ---------- Net cash flows from financing activities 173,089 (33,112) 79,356 ---------- ---------- ---------- Increase (Decrease) in Cash (6,132) (2,420) 6,897 Cash at Beginning of Year 8,705 11,125 4,228 ---------- ---------- ---------- Cash at End of Year $ 2,573 $ 8,705 $ 11,125 ========== ========== ========== Supplemental cash flow disclosures: Interest paid $ 50,109 $ 57,302 $ 55,480 ========== ========== ========== Income taxes paid, net of refunds $ 49,048 $ 20,175 $ 31,617 ========== ========== ==========
Cash consists of currency on hand and demand deposits. The accompanying notes are an integral part of these financial statements. F-7 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31, ------------------------- 1998 1997 ----------- ----------- (In thousands) Common Stock Equity: Common Stock, par value $5 per share $ 208,870 $ 208,870 Additional paid-in capital 465,386 469,073 Accumulated other comprehensive income, net of tax 1,127 486 Retained earnings since January 1, 1989 186,220 129,188 ----------- ----------- Total common stock equity 861,603 807,617 ----------- ----------- Minority Interest 13,405 - ----------- ----------- Cumulative Preferred Stock: Without mandatory redemption requirements: 1965 Series, 4.58% with a stated value of $100.00 and a current redemption price of $102.00. Outstanding shares at December 31, 1998 were 128,000. 12,800 12,800 ----------- ----------- Long-Term Debt: Issue and Final Maturity First Mortgage Bonds (taxable) - 140,206 First Mortgage Bonds, Pollution Control Revenue Bonds: 5.7% due 2016 65,000 65,000 5.75% to 6.4% due 2016 through 2026 - 463,345 6.375% due 2022 46,000 46,000 ----------- ----------- Total First Mortgage Bonds 111,000 714,551 ----------- ----------- Senior Unsecured Notes, Pollution Control Revenue Bonds: 6.30% due 2016 77,045 - 5.75% due 2022 37,300 - 5.80% due 2022 100,000 - 6.375% due 2022 90,000 - 6.375% due 2023 36,000 - 6.40% due 2023 100,000 - 6.30% due 2026 23,000 - ----------- ----------- Total Senior Unsecured Notes, Pollution Control Revenue Bonds 463,345 - ----------- ----------- Senior Unsecured Notes: 7.10% due 2005 300,000 - 7.50% due 2018 135,000 - Other, including unamortized premium and (discounted), net (731) (206) ----------- ----------- Total long-term debt 1,008,614 714,345 Less current maturities - 350 ----------- ----------- Long-term debt, less current maturities 1,008,614 713,995 ----------- ----------- Total Capitalization $1,896,422 $1,534,412 =========== ===========
The accompanying notes are an integral part of these financial statements. F-8 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (1) Summary of Significant Accounting Policies Organization Public Service Company of New Mexico (the "Company") is an investor-owned utility company engaged in the generation, transmission, distribution and sale of electricity. The Company provides retail electric service to a large area of north central New Mexico, including the cities of Albuquerque, Santa Fe, Rio Rancho, Las Vegas, Belen and Bernalillo. The Company also provides retail electric service to Deming in southwestern New Mexico and to Clayton in northeastern New Mexico. The Company is also engaged in the transmission, distribution and sale of natural gas within the State of New Mexico. The Company distributes natural gas to most of the major communities in New Mexico, including Albuquerque and Santa Fe. In addition, the Company provides energy and utility related services under its Energy Services Business Unit. These activities include energy management services, management services for water and wastewater systems and utility related management and operation services. The Company is also operating the City of Santa Fe's water system. Systems of Accounts The Company maintains its accounts for utility operations primarily in accordance with the uniform systems of accounts prescribed by the Federal Energy Regulatory Commission ("FERC") and the National Association of Regulatory Utility Commissioners, and adopted by the New Mexico Public Regulation Commission ("PRC"), the successor of the New Mexico Public Utility Commission ("NMPUC"), effective January 1, 1999. Principles of Consolidation The consolidated financial statements include the accounts of the Company and subsidiaries in which it owns a majority voting interest. All significant intercompany transactions and balances have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual recorded amounts could differ from those estimated. F-9 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (1) Summary of Significant Accounting Policies (Continued) Utility Plant Utility plant, with the exception of Palo Verde Nuclear Generating Station ("PVNGS") Unit 3 and the Company's owned interests in PVNGS Units 1 and 2, is stated at original cost, which includes capitalized payroll-related costs such as taxes, pension and other fringe benefits, administrative costs and an allowance for funds used during construction. Utility plant includes certain electric assets not subject to regulation. The results of operations of such electric assets are included in operating income. It is Company policy to charge repairs and minor replacements of property to maintenance expense and to charge major replacements to utility plant. Gains or losses resulting from retirements or other dispositions of operating property in the normal course of business are credited or charged to the accumulated provision for depreciation. Depreciation and Amortization Provision for depreciation and amortization of utility plant is made at annual straight-line rates approved by the NMPUC. The average rates used are as follows: 1998 1997 1996 ---- ---- ---- Electric plant .................... 3.32% 3.33% 3.32% Gas plant ......................... 3.06% 3.23% 3.27% Common plant ...................... 7.34% 7.60% 7.00% The provision for depreciation of certain equipment is charged to clearing accounts and subsequently allocated to operating expenses or construction projects based on the use of the equipment. Depreciation of non-utility property is computed on the straight-line method. Amortization of nuclear fuel is computed based on the units of production method. Nuclear Decommissioning The Company accounts for nuclear decommissioning costs on a straight-line basis over the estimated useful life of the facilities. Such amounts are based on the present value of expenditures estimated to be required to decommission the plant. F-10 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (1) Summary of Significant Accounting Policies (Continued) Fuel and Purchased Power Cost Adjustment Clause ("FPPCAC") The Company uses the deferral method of accounting for fuel and purchased power costs for its firm-requirements wholesale customers. Such amounts are reflected in subsequent periods under a FPPCAC approved by the FERC. Purchased Gas Adjustment Clause ("PGAC") The Company uses the deferral method of accounting for gas purchase costs which are settled in subsequent periods under gas adjustment clauses. Future recovery of these costs is subject to approval by the PRC. Amortization of Debt Discount, Premium and Expense Discount, premium and expense related to the issuance of long-term debt are amortized over the lives of the respective issues. In connection with the retirement of long-term debt, such amounts associated with resources subject to PRC regulation are amortized over the lives of the respective issues. Amounts associated with the Company's firm-requirements wholesale customers and its resources excluded from PRC retail rates are recognized immediately as expense or income as they are incurred. Income Taxes The Company reports income tax expense in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. SFAS No. 109 requires that deferred income taxes for temporary differences between financial and income tax reporting be recorded using the liability method. Therefore, deferred income taxes are computed using the statutory tax rates scheduled to be in effect when temporary differences reverse. Current PRC jurisdictional rates include the tax effects of the majority of these temporary differences (normalization). Recovery of reversing temporary differences previously accounted for under the flow-through method is also included in rates charged to customers. For regulated operations, any changes in tax rates applied to accumulated deferred income taxes may not be immediately recognized because of ratemaking and tax accounting provisions required by the Internal Revenue Code. Items accorded flow-through treatment under PRC orders, deferred income taxes and the future ratemaking effects of such taxes, as well as corresponding regulatory assets and liabilities, are recorded in the financial statements. F-11 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (1) Summary of Significant Accounting Policies (Continued) New Accounting Standards The Financial Accounting Standards Board ("FASB") issued SFAS No. 130, Reporting Comprehensive Income, SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information and SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, all of which were adopted in 1998. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. The objective of this standard is to report a measure of all changes in equity that result from transactions and other economic events of the period other than transactions with owners. SFAS No. 131 requires a public company to report selected information about its reportable operating segments in annual and interim financial statements. Operating segments are components of an enterprise that engage in business activities that earn revenues and incur expenses, and are evaluated regularly by the chief operating decision maker within a company for making operating decisions and assessing performance. SFAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits other than pensions. This statement requires additional information on changes in the benefit obligations and fair values of plan assets and eliminates certain disclosures that are no longer useful. Nuclear Decommissioning Costs The Staff of the Securities and Exchange Commission ("SEC") has questioned certain of the current accounting practices of the electric industry regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in financial statements of electric utilities. In response to these questions, the FASB has a project on its agenda to review the accounting for closure and removal costs, including decommissioning of nuclear power plants. If current electric industry accounting practices for nuclear power plant decommissioning are changed, estimated cost for decommissioning could be recorded as a liability with recognition of an increase in the cost of the related nuclear power plant. The Company does not believe that such changes, if required, would have a material adverse effect on results of operations. Performance Stock Plan The Company continues to apply Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for this plan. F-12 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (2) Risks and Uncertainties Electric Rate Case On November 30, 1998, the NMPUC issued a final order in the Company's electric rate case. In the final order, the NMPUC ordered the Company to reduce its rates for certain cost of service items and for the revaluation of its generation resources based on a so-called "market-based price" and further stated that recovery of stranded costs is illegal. The NMPUC's order would require the Company to reduce rates in 1999 by $60.2 million, by $25.6 million in each year 2000 and by an additional $25.6 million in 2001. If the order is implemented and the Company is required to collect its generation costs at a rate lower than its embedded cost of generation with no recovery of stranded costs, the Company could be required to record a pre-tax accounting loss of up to $540 million. On December 14, 1998, the Company filed a notice of appeal with the New Mexico Supreme Court ("Supreme Court"), requesting a stay of the final order pending appeal. The Company argued that it met the standard for a stay in that there is a likelihood the Company will prevail on the merits and irreparable harm that would occur to the Company if the stay were not granted and no irreparable harm would occur to opponents or the public by granting the stay. The Supreme Court granted the Company's motion for a stay of the final order on December 16, 1998, prohibiting any further actions or proceedings until further order of the Supreme Court. On December 23, 1998, the NMPUC filed a motion with the Supreme Court, requesting the Supreme Court reverse its order so that an immediate $61 million rate cut could be granted to the Company's customers or, in the alternative, allow an immediate rate reduction of approximately $37 million, which is the amount the NMPUC said it would have ordered if it had not revalued generation assets. On January 13, 1999, the Supreme Court rejected the NMPUC's motion and affirmed the stay on the electric rate case order indefinitely until the merits of the case are decided. On March 1, 1999, after hearing oral arguments including arguments by the PRC supporting the NMPUC order, the Supreme Court took under advisement the appeal of the NMPUC order on the Company's electric rate case and the writ petition regarding the rate case. The Supreme Court continued the stay preventing implementation of the NMPUC rate reduction, pending its decision. F-13 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (2) Risks and Uncertainties (Continued) Electric Industry Restructuring Act of 1999 Senate Bill 428, sponsored by Senator Michael Sanchez, was introduced in the 1999 New Mexico Legislature on February 5, 1999. Under the proposed bill, customer choice of power supplier would be available to schools, residential customers and small business customers in New Mexico beginning January 1, 2001, and to all customers beginning January 1, 2002. Transmission and distribution services along with related services such as meter reading and billing would remain subject to the PRC jurisdiction. This bill would not require a public utility to divest itself of any of its assets owned or leased. However, before January 1, 2001, a public utility would be required to organize into at least two corporations, dividing regulated from unregulated services through either the creation of separate affiliated companies under a holding company or through the creation of separate non-affiliated corporations. If enacted, the bill would require all public utilities operating in New Mexico to submit a transition plan to the PRC no later than March 1, 2000, to be approved no later than December 1, 2000. The transition plan would include proposed tariffs for transmission and distribution services, together with proposed standard offer service tariffs for residential and small business customers who do not select a power supplier. The plan would also include proposals for effectively separating the utilities' regulated and non-regulated business activities. The bill recognizes that electric utilities should be permitted a reasonable opportunity to recover an appropriate amount of the costs incurred previously in providing electric service ("stranded costs"). Stranded costs include plant decommissioning costs, regulatory assets, lease and lease-related costs and other costs recognized under cost-of-service regulation. Utilities would be allowed to recover no less than 50 percent of such costs through a nonbypassable charge on all customer bills for five years after implementation of customer choice. The PRC could authorize a utility to recover up to 100 percent of its stranded costs if the PRC finds that recovery of more than 50 percent: (i) is in the public interest; (ii) is necessary to maintain the financial integrity of the public utility; (iii) is necessary to continue adequate and reliable service; and (iv) will not cause an increase in rates to residential or small business customers during the transition period. Utilities would also be allowed to recover in full any costs incurred in implementing full open access ("transition costs"). Those transition costs would be recovered through 2007 by means of a separate wires charge. Due to uncertainties in the bill regarding the amounts of recovery and calculation of stranded costs, the Company is currently unable to determine what financial impact the bill, if enacted, will have on the Company. F-14 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (2) Risks and Uncertainties (Continued) Other significant provisions of the bill include: (i) customers would be allowed to prepay their allotted share of stranded costs prior to the implementation of choice for that customer class; (ii) the PRC would adopt and enforce codes of conduct to protect customer privacy and prevent such anticompetitive practices as cross-subsidization or favoritism of non-regulated energy suppliers by regulated affiliates; and (iii) a system benefit charge of $0.0003 per KWh would be added to customer bills to fund no less than $500,000 annually for low income energy assistance programs, and no more than $4 million a year for renewable energy projects, in addition to other public interest programs. The bill provides for penalties of up to $2 million for each violation of the Act. The bill also requires licensing for competitive power suppliers, which is defined to include providers of energy-related services. The Company's primary concerns with the proposed bill revolve around the treatment of stranded cost recovery. The Company intends to work with the bill's sponsor, interested parties, and the Legislature as a whole to address its concerns and to maximize the chances for passage of restructuring legislation which is beneficial to the State as a whole. It is the Company's position that this bill goes a long way in properly balancing the interests involved, and, in that respect, provides a good vehicle for the passage of restructuring legislation in this session. On February 28, 1999, the full Senate passed the bill with various amendments by a vote of 32-6. The Bill has been assigned to both the Business and Industry Committee and the Appropriation and Finance Committee in the State House of Representatives ("House") for consideration. The House has a similar competing bill, House Bill 865, that has been assigned to the House Judiciary Committee and the House Appropriation and Finance Committee. No hearings have been scheduled on House Bill 865. The most significant difference between the two bills is the size of the proposed subsidy for renewable energy technology. The House bill earmarks approximately $20 million a year for renewable technology, compared to $4 million designated in Senate Bill 428. However, it is likely that, like the Company, other parties will continue to seek to amend various provisions of the bill. Given the Legislature's past reluctance to implement retail competition, the Company is unable to predict whether or not legislation will pass or what its provisions are likely to be. F-15 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (3) Regulatory Assets and Liabilities The Company is subject to the provisions of SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, on operations regulated by the PRC. Regulatory assets represent probable future revenue to the Company associated with certain costs which will be recovered from customers through the ratemaking process. Regulatory liabilities represent probable future reductions in revenues associated with amounts that are to be credited to customers through the ratemaking process. Regulatory assets and liabilities reflected in the Consolidated Balance Sheets as of December 31 relate to the following: 1998 1997 ---- ---- (In thousands) Deferred Income Taxes ............................$ 71,653 $ 70,968 Loss on Reacquired Debt .......................... 11,108 8,869 Gas Take-or-Pay Costs ............................ 10,740 19,953 Gas Reservation Fees ............................. 7,029 7,029 Gas Imputed Revenues ............................. 6,726 12,823 PGAC ............................................. 5,294 16,006 Deferred Customer Expense on Gas Assets Sale ..... 5,260 5,260 Gas Retirees' Health Care Costs .................. 4,804 6,345 Proposed Transmission Line Costs ................. 2,660 2,903 Gas Rate Case Costs .............................. 1,571 1,571 Other ............................................ 471 118 --------- ---------- Subtotal .................................... 127,316 151,845 --------- ---------- Deferred Income Taxes ............................ (49,971) (53,132) Gas Regulatory Reserve ........................... (21,308) (27,881) Customer Gain on Gas Assets Sale ................. (7,643) (11,856) PVNGS Prudence Audit ............................. (6,185) (6,561) Settlement Due Customers ......................... (3,564) (3,743) Gain on Reacquired Debt .......................... (531) (546) Other ............................................ (773) (723) --------- ---------- Subtotal (89,975) (104,442) --------- ---------- Net Regulatory Assets .......................$ 37,341 $ 47,403 ========= ========= F-16 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (3) Regulatory Assets and Liabilities (Continued) As of December 31, 1998, substantially all of the Company's regulatory assets and regulatory liabilities are being recovered in rates charged to customers or have been addressed in a regulatory proceeding. If a portion of the Company's operations under the PRC jurisdiction becomes no longer subject to the provisions of SFAS No. 71, a write off of related regulatory assets and liabilities would be required, unless some form of transition cost recovery (refund) continues through rates established and collected for the Company's remaining regulated operations. The enactment of the Electric Industry Restructuring Act of 1999 would require the Company to discontinue the application of SFAS No. 71 to certain of the Company's operations; however, discontinuance of the application of SFAS No. 71 would not result in a material adverse impact to the Company. Based on a current evaluation of the various factors and conditions that are expected to impact future cost recovery, the Company believes that its net regulatory assets are probable of future recovery. (4) Capitalization Changes in common stock, additional paid-in capital and cumulative preferred stock are as follows:
Cumulative Preferred Stock -------------------- Without Mandatory Redemption Common Stock Requirements ---------------------- -------------------- Additional Aggregate Number Aggregate Paid-In Number Stated of Shares Par Value Capital of Shares Value --------- --------- ---------- --------- --------- (Dollars in thousands) Balance at December 31, 1996 41,774,083 $ 208,870 $ 470,358 128,000 $ 12,800 Exercise of stock options - - (1,285) - - ----------- ---------- ---------- --------- --------- Balance at December 31, 1997 41,774,083 208,870 469,073 128,000 12,800 Exercise of stock options - - (3,687) - - ----------- ---------- ---------- --------- --------- Balance at December 31, 1998 41,774,083 $ 208,870 $ 465,386 128,000 $ 12,800 =========== ========== ========== ========= =========
Common Stock The number of authorized shares of common stock with par value of $5 per share is 80 million shares. The declaration of common dividends is dependent upon a number of factors including earnings and financial condition of the Company, the Supreme Court decisions on the Company's various regulatory cases and market conditions. F-17 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (4) Capitalization (Continued) On September 16, 1996, the Company implemented a dividend reinvestment and stock purchase plan for investors, including customers and employees. The plan, called PNM Direct, also includes safekeeping services and automatic investment features. The Company's stock is purchased in the open market to meet plan requirements. Cumulative Preferred Stock The number of authorized shares of cumulative preferred stock is 10 million shares. The Company has 128,000 shares, 1965 Series, 4.58%, stated value of $100 per share, of cumulative preferred stock outstanding. The 1965 Series does not have a mandatory redemption requirement but may be redeemable at 102% of the par value with accrued dividends. The holders of the 1965 Series are entitled to payment before holders of common stock in the event of any liquidation or dissolution or distribution of assets of the Company. In addition, the 1965 Series is not entitled to a sinking fund and cannot be converted into any other class of stock of the Company. The Company's restated articles of incorporation limit the amount of preferred stock which may be issued. The earnings test in the Company's restated articles of incorporation currently allows for the issuance of additional preferred stock. Long-Term Debt On March 11, 1998, the Company modified its 1947 Indenture of Mortgage and Deed of Trust; no future bonds can be issued under the mortgage. The first mortgage bonds continue to serve as collateral for the tax-exempt pollution control revenue bonds ("PCBs") in the outstanding principal amount of $111 million. The Company has no long-term debt that matures from 1999 through 2003. In March 1998, the Company replaced the first mortgage bonds collateralizing $463 million of PCBs with senior unsecured notes ("SUNs") which were issued under a new senior unsecured note indenture. Also, in March 1998, the Company retired $140 million principal amount of first mortgage bonds. While first mortgage bonds continue to serve as collateral for PCBs in the outstanding principal amount of $111 million, the lien of the mortgage was substantially reduced to cover only the Company's ownership interest in PVNGS. With the exception of the $111 million of PCBs secured by first mortgage bonds, the SUNs are and will be the senior debt of the Company. In August 1998, the Company issued and sold $435 million of SUNs in two series, the 7.10% Series A due August 1, 2005, in the principal amount of $300 million, and the 7.50% Series B due August 1, 2018, in the principal amount of $135 million. These SUNs were issued under an indenture similar to the indenture under which the SUNs were issued in March 1998, and it is expected that future long-term debt financings will be similarly issued. F-18 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (4) Capitalization (Continued) Revolving Credit Facility and Other Credit Facilities At December 31, 1998, the Company has a $300 million unsecured revolving credit facility (the "Facility") with an expiration date of March 31, 2003. The Company must pay commitment fees of .200% per year on the total amount of the Facility. The Company also has a $100 million credit facility, which expires on May 20, 2001, and is collateralized by the Company's electric and gas customer accounts receivable and certain amounts being recovered from gas customers relating to certain gas contract settlements. In addition, the Company has $25 million in local lines of credit. Fair Value of Financial Instruments The estimated fair value of the Company's financial instruments (including current maturities) at December 31, is as follows:
1998 1997 ---------------------- -------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- --------- -------- (In thousands) Long-Term Debt .............................. $1,008,614 $1,042,557 $ 714,345 $ 743,524 Decommissioning Trust Debt................... $ 26,620 $ 26,620 $ 23,000 $ 23,000 Investment in PVNGS Lessors' Notes........... $ 443,748 $ 459,167 $ - $ - Investment in PVNGS LOBs .................... $ - $ - $ 237,774 $ 236,049 Decommissioning Trust........................ $ 59,803 $ 64,509 $ 51,857 $ 53,900 Fossil-Fueled Plant Decommissioning Trust.... $ 7,676 $ 7,676 $ 7,245 $ 7,273 Rabbi Trust.................................. $ 9,804 $ 17,012 $ 10,080 $ 15,218
Fair value is based on market quotes provided by the Company's investment bankers. The carrying amounts reflected on the consolidated balance sheets approximate fair value for cash, temporary investments, and receivables and payables due to the short period of maturity. F-19 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (5) Earnings Per Share In accordance with SFAS No. 128, Earnings per Share, dual presentation of basic and diluted earnings per share has been presented in the Consolidated Statements of Earnings. The following reconciliation illustrates the impact on the share amounts of potential common shares and the earnings per share amounts: Per-Share Income Shares Amount ------- -------- --------- (In thousands except per share amounts) December 31, 1998 Net Earnings $82,682 Less: Preferred stock dividends (586) -------- Basic Earnings per Share Net earnings available for common stock 82,096 41,774 $1.97 ======= Options issued - 298 -------- -------- Diluted Earnings per Share Net earnings available for common stock $82,096 42,072 $1.95 ======== ======== ======= December 31, 1997 Net Earnings $80,995 Less: Preferred stock dividends (586) -------- Basic Earnings per Share Net earnings available for common stock 80,409 41,774 $1.92 ======= Options issued - 217 -------- -------- Diluted Earnings per Share Net earnings available for common stock $80,409 41,991 $1.91 ======== ======== ======= December 31, 1996 Net Earnings $72,580 Less: Preferred stock dividends (586) -------- Basic Earnings per Share Net earnings available for common stock 71,994 41,774 $1.72 ======= Options issued - 332 -------- -------- Diluted Earnings per Share Net earnings available for common stock $71,994 42,106 $1.71 ======== ======== ======= F-20 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (6) Income Taxes Income taxes consist of the following components: 1998 1997 1996 ---- ---- ---- (In thousands) Current Federal income tax ................... $26,824 $32,911 $14,815 Current state income tax ..................... 10,157 9,859 2,847 Deferred Federal income tax .................. 15,062 8,781 22,372 Deferred state income tax .................... (484) (397) 4,936 Amortization of accumulated investment tax credits ............................... (3,418) (4,436) (4,476) ------- ------- ------- Total income taxes ........................ $48,141 $46,718 $40,494 Charged to operating expenses ................ $41,306 $41,941 $39,650 Charged to other income and deductions ...... 6,835 4,777 844 ------- ------- ------- Total income taxes......................... $48,141 $46,718 $40,494 ======= ======= ======= The Company's provision for income taxes differed from the Federal income tax computed at the statutory rate for each of the years shown. The differences are attributable to the following factors: 1998 1997 1996 ---- ---- ---- (In thousands) Federal income tax at statutory rates ........ $45,788 $44,700 $39,576 Investment tax credits ....................... (3,418) (4,436) (4,476) Depreciation of flow-through items ........... 531 519 519 Gains on the sale and leaseback of PVNGS Units 1 and 2 ............................. 527) (527) (527) State income tax ............................. 6,129 5,963 5,192 Other ........................................ (362) 499 210 ------- ------- ------- Total income taxes ........................ $48,141 $46,718 $40,494 ======= ======= ======= F-21 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (6) Income Taxes (Continued) Deferred income taxes result from certain temporary differences between the recognition of income and expense for tax and financial reporting purposes, as described in note 1. The major sources of these differences for which deferred taxes have been provided and the tax effects of each are as follows: 1998 1997 1996 ---- ---- ---- (In thousands) Deferred fuel costs ...................... $(11,097) $(9,133) $ 8,234 Depreciation and cost recovery ........... 7,526 6,390 18,048 Contributions in aid of construction ..... (2,826) (3,185) (4,053) Alternative minimum tax in excess of regular tax ............................ 21,144 12,482 (1,052) PVNGS decommissioning .................... (618) (1,512) 537 Contribution to 401(h) plan .............. (763) 3,181 (510) Regulatory liability ..................... - - (6,651) Curtailment gain ........................ - - 5,272 Transmission project cost ................ - - 4,898 Other .................................... 1,212 161 2,585 ------- ------- -------- Net deferred taxes provided ........... $14,578 $ 8,384 $ 27,308 ======= ======= ======== The components of the net accumulated deferred income tax liability were: 1998 1997 ---- ---- (In thousands) Deferred Tax Assets: Alternative minimum tax credit carryforward ..... $ 34,055 $55,198 Nuclear decommissioning .......................... 20,062 18,226 Regulatory liabilities ........................... 47,615 50,689 Other ............................................ 45,480 46,079 -------- -------- Total deferred tax assets ..................... $147,212 $170,192 Deferred Tax Liabilities: Depreciation ..................................... $184,462 $182,641 Investment tax credit ............................ 54,404 57,823 Fuel costs ....................................... 12,808 23,905 Regulatory assets ................................ 69,298 68,524 Other ............................................ 24,921 19,176 -------- -------- Total deferred tax liabilities ................ 345,893 352,369 -------- -------- Accumulated deferred income taxes, net .............. $198,681 $181,877 ======== ======== F-22 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (6) Income Taxes (Continued) The following table reconciles the change in the net accumulated deferred income tax liability to the deferred income tax expense included in the consolidated statement of earnings for the period: Net change in deferred income tax liability per above table....... $16,804 Change in tax effects of income tax related regulatory assets and liabilities ......................................... (3,848) Tax effect of excess pension liability............................ 134 Tax effect of mark-to-market on investments available for sale.... (1,930) -------- Deferred income tax expense for the period........................ $11,160 ======== The Company has no net operating loss carryforwards as of December 31, 1998. (7) Employee and Other Postretirement Benefits Pension Plan The Company and its subsidiaries have a pension plan covering substantially all of their employees, including officers. The plan is non-contributory and provides for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Company and the average of their highest annual base salary for three consecutive years. The Company's policy is to fund actuarially-determined contributions. Contributions to the plan reflect benefits attributed to employees' years of service to date and also for services expected to be provided in the future. Plan assets primarily consist of common stock, fixed income securities, cash equivalents and real estate. In December 1996, the Company's Board approved changes to the Company's defined benefit pension plan and the implementation of a defined contribution plan effective January 1, 1998. As a result, the Company recorded a curtailment gain of approximately $13.3 million in the consolidated financial statements for the year ended December 31, 1996. F-23 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (7) Employee and Other Postretirement Benefits (Continued) The following sets forth the pension plan's funded status, components of pension costs and amounts (in thousands) at December 31: Pension Benefits --------------------- 1998 1997 --------- --------- Change in Benefit Obligation: Benefit obligation at beginning of year $297,679 $259,051 Service cost 6,660 6,535 Interest cost 20,101 19,592 Actuarial loss 19,380 25,001 Benefits paid (13,772) (12,500) --------- --------- Benefit obligation at end of period 330,048 297,679 --------- --------- Change in Plan Assets: Fair value of plan assets at beginning of year 330,550 273,981 Actual return on plan assets 13,593 69,069 Employer contribution 185 2,000 Benefits paid (13,772) (12,500) --------- --------- Fair value of plan assets at end of year 330,556 332,550 --------- --------- Funded Status 508 34,871 Unamortized transition assets (3,486) (4,650) Unrecognized net actuarial loss 19,714 (12,828) Unrecognized prior service cost 112 146 --------- --------- Prepaid benefit cost $ 16,848 $ 17,539 ========= ========= Weighted - Average Assumptions as of December 31, Discount rate 6.75% 7.25% Expected return on plan assets 8.50% 8.25% Rate of compensation increase N/A N/A F-24 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (7) Employee and Other Postretirement Benefits (Continued) Pension Benefits ----------------------------------- 1998 1997 1996 ---------- --------- ---------- Components of Net Periodic Benefit Cost: Service cost $ 6,660 $ 6,535 $ 8,540 Interest cost 20,101 19,592 20,546 Expected return on plan assets (26,755) (23,426) (31,211) Amortization of prior service cost (1,130) (1,130) 9,577 ---------- --------- ---------- Net periodic benefit cost (1,124) 1,571 7,452 Curtailment gain - - (13,317) ---------- --------- ---------- Total pension expense (benefit) $ (1,124) $ 1,571 $ (5,865) ========== ========= ========== Other Postretirement Benefits The Company provides medical and dental benefits to eligible retirees. Currently, retirees are offered the same benefits as active employees after reflecting Medicare coordination. The following sets forth the plan's funded status, components of net periodic benefit cost (in thousands) at December 31: Other Benefits ---------------------- 1998 1997 ---------- ---------- Change in Benefit Obligation: Benefit obligation at beginning of year $ 59,084 $ 58,399 Service cost 1,292 1,300 Interest cost 4,501 4,452 Actuarial loss (gain) 9,662 (5,067) ---------- ---------- Benefit obligation at end of period 74,539 59,084 ---------- ---------- Change in Plan Assets: Fair value of plan assets at beginning of year 33,158 20,930 Actual return on plan assets 4,444 6,076 Employer contribution - 6,152 ---------- ---------- Fair value of plan assets at end of year $ 37,602 $ 33,158 ---------- ---------- F-25 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (7) Employee and Other Postretirement Benefits (Continued) Other Benefits ------------------ 1998 1997 -------- --------- Funded Status $(36,937) $(25,926) Unamortized transition assets 6,826 (4,033) Unrecognized prior service cost 25,440 27,257 -------- -------- Accrued benefit cost $ (4,671) $ (2,702) ======== ======== Weighted - Average Assumptions as of December 31, Discount rate 6.75% 7.25% Expected return on plan assets 8.75% 8.75% Rate of compensation increase n/a n/a 1998 1997 1996 -------- --------- -------- Components of Net Periodic Benefit Cost: Service cost $ 1,292 $ 1,300 $ 1,449 Interest cost 4,501 4,452 4,478 Expected return on plan assets (2,943) (1,884) (1,367) Amortization of prior service cost 1,817 1,817 1,817 -------- --------- -------- Net periodic benefit cost $ 4,667 $ 5,685 $ 6,377 ======== ========= ======== The effect of a 1% increase in the health care trend rate assumption would increase the accumulated postretirement benefit obligation as of December 31, 1998, by approximately $13.6 million and the aggregate service and interest cost components of net periodic postretirement benefit cost for 1998 by approximately $1.2 million. The health care cost trend rate is expected to decrease to 5.0% by 2010 and to remain at that level thereafter. F-26 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (7) Employee and Other Postretirement Benefits (Continued) Executive Retirement Program The Company has an executive retirement program for a group of management employees. The program was intended to attract, motivate and retain key management employees. The Company's projected benefit obligation for this program, as of December 31, 1998, was $19.5 million, of which the accumulated and vested benefit obligation was $19.5 million. As of December 31, 1998, the Company has recognized an additional liability of $5.8 million for the amount of unfunded accumulated benefits in excess of accrued pension costs. The net periodic pension cost for 1998, 1997 and 1996 was $2.3 million, $2.2 million and $2.1 million, respectively. In 1989, the Company established an irrevocable grantor trust in connection with the executive retirement program. Under the terms of the trust, the Company may, but is not obligated to, provide funds to the trust, which was established with an independent trustee, to aid it in meeting its obligations under such program. Marketable securities in the amount of approximately $9.8 million (fair market value of $17.0 million) are presently in trust. No additional funds have been provided to the trust since 1989. Stock Option Plans The Company's Performance Stock Plan ("PSP") is a non-qualified stock option plan, covering a group of management employees. Options are granted at the fair market value of the shares on the date of the grant. Options granted through December 31, 1995, vested on June 30, 1996, have an exercise term of up to 10 years. All subsequent awards granted after December 31, 1995, vest three years from the grant date of the awards. The maximum number of options authorized are five million shares through December 31, 2000. In addition, the Company has a Director Retainer Plan ("DRP") which provides for payment of the Directors' annual retainer in the form of cash, restricted stock or stock options. The number of options granted in 1998 under the DRP was 10,000 shares with an exercise price of $12.75. The number of options exercised during 1998 under the DRP was 5,000. The number of options outstanding as of December 31, 1998, was 21,000. The fair value of each option grant is determined on the date of grant using the Black-Scholes option-pricing model with the following average assumptions used for grants in 1996, 1997 and 1998, respectively: dividend yield of 2.4%, 3.0% and 3.75%; expected volatility of 18%, 20% and 26.78%, risk-free interest rates of 5.59%, 5.69% and 4.65%; and expected lives of four years. F-27 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (7) Employee and Other Postretirement Benefits (Continued) A summary of the status of the Company's stock option plans at December 31, and changes during the years then ended is presented below. Prior periods have been restated for comparability purposes.
1998 1997 1996 -------------------- --------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Fixed Options Shares Price Shares Price Shares Price - -------------------------------- --------- -------- --------- -------- --------- -------- Outstanding at beginning of year 1,539,214 $17.704 1,619,406 $15.905 1,652,977 $14.457 Granted 10,000 $12.750 312,707 $23.033 390,228 $19.480 Exercised 473,063 $14.663 379,833 $14.453 408,822 $13.691 Forfeited 79,976 $21.194 13,066 $19.450 14,977 $19.625 --------- --------- --------- Outstanding at end of year 996,175 $18.819 1,539,214 $ 17.70 1,619,406 $15.905 ========= ========= ========= Options exercisable at year-end 400,158 861,221 1,244,155 Weighted-average fair value of options granted during the year: PSP N/A $ 4.21 $ 3.56 DRP $7.32 $15.69 $11.50
The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ------------------------------------------ ------------------------- Weighted-Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices at 12/31/98 Life Prices at 12/31/98 Prices -------- ----------- ---------------- -------- ----------- --------- $ 5.50 - $ 12.75 21,000 9.33 years $ 9.381 11,000 $ 6.318 $ 11.50 - $ 23.6875 975,175 7.62 years $ 19.022 389,158 $15.298 --------- ---------- ---------------- -------- ----------- --------- $ 5.50 - $ 23.6875 996,175 7.65 years $ 18.819 400,158 $15.051 ========== ===========
F-28 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (7) Employee and Other Postretirement Benefits (Continued) Had compensation cost for the Company's performance stock plan been determined consistent with SFAS No. 123, Accounting for Stock-Based Compensation, the effect on the Company's pro forma net earnings and pro forma earnings per share would be as follows: 1998 1997 1996 ---- ---- ---- (In thousands except per share amounts) Net Earnings: (Available for common) As Reported $82,096 $80,409 $71,994 Pro Forma $81,554 $80,018 $70,952 Basic EPS: As Reported $ 1.97 $ 1.92 $ 1.72 Pro Forma $ 1.95 $ 1.92 $ 1.70 Diluted EPS: As Reported $ 1.95 $ 1.91 $ 1.71 Pro Forma $ 1.95 $ 1.90 $ 1.70 (8) Construction Program and Jointly-Owned Plants The Company's construction expenditures for 1998 were approximately $128.8 million, including expenditures on jointly-owned projects. The Company's proportionate share of expenses for the jointly-owned plants is included in operating expenses in the consolidated statements of earnings. At December 31, 1998, the Company's interests and investments in jointly-owned generating facilities are:
Construction Plant in Accumulated Work in Composite Station (Fuel Type) Service Depreciation Progress Interest - ----------------------- -------- ------------ ------------ ---------- (In thousands) San Juan Generating Station (Coal)...... $704,890 $310,678 $15,310 46.3% Palo Verde Nuclear Generating Station (Nuclear)..................... $197,369* $ 43,822* $12,156* 10.2% Four Corners Power Plant Units 4 and 5 (Coal).................. $120,492 $ 62,494 $ 1,690 13.0%
- ----------- * Includes the Company's interest in PVNGS Unit 3, the Company's interest in common facilities for all PVNGS units and the Company's owned interests in PVNGS Units 1 and 2. F-29 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (8) Construction Program and Jointly-Owned Plants (Continued) San Juan Generating Station ("SJGS") The Company operates and jointly owns SJGS. At December 31, 1998, SJGS Units 1 and 2 are owned on a 50% shared basis with Tucson Electric Power Company, Unit 3 is owned 50% by the Company, 41.8% by Southern California Public Power Authority ("SCPPA") and 8.2% by Tri-State Generation and Transmission Association, Inc. Unit 4 is owned 38.457% by the Company, 28.8% by M-S-R Public Power Agency, California public power agency ("M-S-R"), 10.04% by the City of Anaheim, California, 8.475% by the City of Farmington, 7.2% by the County of Los Alamos, and 7.028% by Utah Associated Municipal Power Systems. Palo Verde Nuclear Generating Station The Company is participating in the three 1,270 MW units of PVNGS, also known as the Arizona Nuclear Power Project, with Arizona Public Service Company ("APS") (the operating agent), Salt River Project, El Paso Electric Company ("El Paso"), Southern California Edison Company, SCPPA and The Department of Water and Power of the City of Los Angeles. The Company has a 10.2% undivided interest in PVNGS, with portions of its interests in Units 1 and 2 held under leases. During 1998, PVNGS was operated at a capacity factor of 92.5% which was the highest yearly capacity factor attained at the plant. This capacity factor was primarily attributable to record setting low refueling outage days. PVNGS Liability and Insurance Matters The PVNGS participants have insurance for public liability resulting from nuclear energy hazards to the full limit of liability under Federal law. This potential liability is covered by primary liability insurance provided by commercial insurance carriers in the amount of $200 million and the balance by an industry-wide retrospective assessment program. If losses at any nuclear power plant covered by the programs exceed the accumulated funds, the Company could be assessed retrospective premium adjustments. The maximum assessment per reactor under the program for each nuclear incident is approximately $88 million, subject to an annual limit of $10 million per incident. Based upon the Company's 10.2% interest in the three PVNGS units, the Company's maximum potential assessment per incident for all three units is approximately $26.9 million, with an annual payment limitation of $3 million per incident. The insureds under this liability insurance include the PVNGS participants and "any other person or organization with respect to his legal responsibility for damage caused by the nuclear energy hazard". If the funds provided by this retrospective assessment program prove to be insufficient, Congress could impose revenue raising measures on the nuclear industry to pay claims. F-30 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (8) Construction Program and Jointly-Owned Plants (Continued) The United States Nuclear Regulatory Commission ("NRC") has also recently announced that it has provided a report to Congress, making certain recommendations, with respect to the Federal law referred to above, which provides for payment of public liability claims in case of a catastrophic accident involving a nuclear power plant. One of the recommendations by the NRC would be that Congress consider amending the law to provide that the maximum a nuclear utility can be assessed per reactor per incident per year be doubled to $20 million. The $88 million maximum retrospective assessment per reactor per incident would be unchanged under the NRC proposal. The NRC also recommended that Congress investigate whether the $200 million now available from the private insurance market for liability claims per reactor can be increased to keep pace with inflation. The Company cannot predict whether or not Congress will act on the NRC's recommendations. However, if adopted, certain of the recommendations could possibly trigger "Deemed Loss Events" under the Company's PVNGS leases, absent waiver by the lessors. The PVNGS participants maintain "all-risk" (including nuclear hazards) insurance for nuclear property damage to, and decontamination of, property at PVNGS in the aggregate amount of $2.75 billion as of January 1, 1999, a substantial portion of which must be applied to stabilization and decontamination. The Company has also secured insurance against portions of the increased cost of generation or purchased power and business interruption resulting from certain accidental outages of any of the three units if the outages exceeds 17 weeks. The insurance coverage discussed in this section is subject to certain policy conditions and exclusions. The Company is a member of an industry mutual insurer. This mutual insurer provides both the "all-risk" and increased cost of generation insurance to the Company. In the event of adverse losses experienced by this insurer, the Company is subject to an assessment. The Company's maximum share of any assessment is approximately $3.3 million per year. PVNGS Decommissioning Funding The Company has a program for funding its share of decommissioning costs for PVNGS. Under a portion of this program, the Company made a series of annual deposits under agreements approved by the NMPUC to an external non-qualified trust which were applied pursuant to a split dollar agreement between the Company and its employees towards an investment in whole life insurance policies on certain current and former employees. The program for investment in life insurance policies has been terminated. The remaining portion of the nuclear decommissioning funding program is invested in equities in qualified and non-qualified trusts. The results of the 1998 decommissioning cost study indicated that the Company's share of the PVNGS decommissioning costs excluding spent fuel disposal will be approximately $155.4 million (in 1998 dollars). F-31 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (8) Construction Program and Jointly-Owned Plants (Continued) Pursuant to NMPUC approval, the Company funded an additional $3.0 million, $2.1 million and $12.5 million in 1998, 1997 and 1996, respectively, into the qualified and non-qualified trust funds. The estimated market value of the trusts, including the net cash value of the life insurance policies, at the end of 1998 was approximately $40 million. The NRC has recently amended its rules on financial assurance requirements for the decommissioning of nuclear power plants. The amended rules became effective on November 23, 1998. The NRC has indicated that the amendments respond to the potential rate deregulation in the power generating industry and NRC concerns regarding whether decommissioning funding assurance requirements will need to be modified. The amended rules provide that a licensee may use an external sinking fund as the exclusive financial assurance mechanism if the licensee recovers estimated total decommissioning costs through cost of service rates or through a "non-bypassable charge". Other mechanisms are prescribed, including prepayment, if the requirements for exclusive reliance on the external sinking fund mechanism are not met. The Company currently relies on the external sinking fund mechanism to meet the NRC financial assurance requirements for its interests in PVNGS Units 1, 2 and 3. The costs of PVNGS Units 1 and 2 are currently included in PRC jurisdictional rates, but the costs of PVNGS Unit 3 are excluded from PRC jurisdictional rates. The Company will be filing a report with the NRC through APS, the operating agent of PVNGS, at the end of March 1999, concerning decommissioning funding assurance, and believes that it will continue to be allowed to use the external sinking fund method as the sole financial assurance method for Unit 3. Nuclear Spent Fuel and Waste Disposal Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the "Waste Act"), United States Department of Energy ("DOE") is obligated to accept and dispose of all spent nuclear fuel and other high-level radioactive wastes generated by all domestic power reactors. The NRC, pursuant to the Waste Act, requires operators of nuclear power reactors to enter into spent fuel disposal contracts with DOE. APS, on its own behalf and on behalf of the other PVNGS participants, executed a spent fuel disposal contract with DOE. Under the Waste Act, DOE was to develop the facilities necessary for the storage and disposal of spent nuclear fuel and to have the first such facility in operation by 1998. That facility was to be a permanent repository. DOE announced that such a repository now cannot be completed before 2010. In response to lawsuits filed over DOE's obligation to accept used nuclear fuel, the United States Court of Appeals for the D.C. Circuit ("D.C. Circuit") has ruled that DOE had an obligation to begin accepting used nuclear fuel in 1998. However, the D.C. Circuit refused to issue an order compelling DOE to begin moving used fuel. Instead, the D.C. Circuit ruled that any damages to utilities should be sought under the standard contract signed between DOE and utilities, including APS, the operating agent of PVNGS. The United States Supreme Court has refused to grant review of the D.C. Circuit's decisions. In July 1998, APS filed a petition for review regarding DOE's obligation to begin accepting spent nuclear fuel. F-32 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (8) Construction Program and Jointly-Owned Plants (Continued) APS has capacity in existing fuel storage pools at PVNGS which, with certain modifications, could accommodate all fuel expected to be discharged from normal operation of PVNGS through 2002, and believes it could augment that wet storage with the new facilities for on-site dry storage of spent fuel for an indeterminate period of operation beyond 2002, subject to obtaining any required governmental approvals. The Company currently estimates that it will incur approximately $41 million (in 1998 dollars) over the life of PVNGS for its share of the costs related to the on-site interim storage of spent nuclear fuel. The Company accrues these costs as a component of fuel expense, meaning the charges are accrued as the fuel is burned. During 1998, the Company expensed approximately $12 million for on-site interim nuclear fuel storage costs related to nuclear fuel burned prior to 1999. APS currently believes that spent fuel storage or disposal methods will be available for use by PVNGS to allow its continued operation beyond 2002. A low-level radioactive waste facility built in 1995 at the PVNGS site could store an amount of waste equivalent to 10 years of normal operation of PVNGS. Although some low-level waste has been stored on-site, APS is currently shipping low-level waste to off-site facilities. APS currently believes that interim low-level waste storage methods are or will be available for use by PVNGS to allow its continued operation and to safely store low-level waste until a permanent facility is available. While believing that scientific and financial aspects of the issues of spent fuel and low-level waste storage and disposal can be resolved satisfactorily, the Company acknowledges that their ultimate resolution in a timely fashion will require political resolution and action on national and regional scales which it is less able to predict. (9) Long-Term Power Contracts The Company has a power purchase contract with Southwestern Public Service Company ("SPS") which originally provided for the purchase of up to 200 MW, expiring in May 2011. The Company may reduce its purchases from SPS by 25 MW annually upon three years' notice. The Company provided such notice to reduce the purchase by 25 MW in 1999 and by an additional 25 MW in 2000. The Company has 39 MW of contingent capacity obtained from El Paso under a transmission capacity for generation capacity trade arrangement that increases up to 70 MW from 1999 through 2003. In addition, the Company is interconnected with various utilities for economy interchanges and mutual assistance in emergencies. The Company has been actively trading in the wholesale power market and has entered into and anticipates that it will continue to enter into power purchases to accommodate its trading activity. The Company anticipates the need for approximately 100 to 200 MW of additional capacity in the 1999 through 2000 timeframe. To meet projected capacity needs, in 1996, the Company entered into a long-term power purchase F-33 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (9) Long-Term Power Contracts (Continued) agreement ("PPA") with Cobisa-Person Limited Partnership ("PLP") to purchase approximately 100 MW of unit contingent peaking capacity from a gas turbine generating unit for a period of 20 years, with an option to renew for an additional five years. In September 1997, the NMPUC approved the Company's and PLP's applications for the project. In December 1997, PLP also received FERC approval for "exempt wholesale generator" status with respect to the gas turbine generating unit. In March 1998, the Company and PLP executed amendments to the PPA and to the associated site lease and interconnection agreement, and executed a new water use lease. The PPA was amended to change the maximum capacity the Company was obligated to take to 132 MW and to change the commercial operation date from May 1999 to May 2000. The gas turbine generating unit will be constructed and operated by PLP and will be located on the Company's retired Person Generating Station site in Albuquerque, New Mexico. The site for the generating unit was chosen, in part, to provide needed benefits to the Company's constrained transmission system. Primary fuel for the gas turbine generating unit will be natural gas, which will be provided by the Company. In addition, the unit will have the capability to utilize low sulfur fuel oil in the event natural gas is not available. In the September 1997 NMPUC order, the NMPUC approved the project application and a stipulated settlement agreement ("Stipulation") which had been entered into earlier among the Company, PLP and the NMPUC staff to resolve certain issues raised in this proceeding. The Stipulation included, among other things, a provision wherein the Company committed, in cooperation with the NMPUC staff, to the development and evaluation of a request for proposal ("RFP") for the purchase of approximately 5 MW of capacity from solar generation resources. The Company was not obligated to build such a unit or commit to such a solar power purchase agreement prior to the NMPUC approval of a full-cost recovery mechanism. By order dated October 27, 1998, the NMPUC approved the Company's implementation of a rate rider to collect a 0.5 percent surcharge on all retail electric bills to pay for solar and other renewable resource projects. Under the NMPUC's order, one-half of the monies collected under the rider will be used to purchase or acquire resources the Company had pursued through the solar RFP process, while the other half of the monies will be used for other renewable resource projects. In November 1998, the NMPUC adopted a rule that establishes a "renewable energy development program" and requires New Mexico utilities to collect voluntary contributions to a renewable energy fund from their customers. The stated purpose of the rule is to support research, development, demonstration and deployment of renewable energy resources. Funds collected by each utility are to be spent by it on projects approved by the PRC based upon the recommendations of a Renewable Energy Advisory Board which will be appointed by the PRC. The Company has requested the PRC to exempt it from the rule on the grounds that the rule is more than satisfied by the renewable resource program and 0.5 percent surcharge specifically approved for the Company by the NMPUC in October 1998. The Company's request is pending. F-34 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (9) Long-Term Power Contracts (Continued) In addition to the long-term power purchase contract with the PLP, the Company is pursuing other options to ensure its additional capacity needs are met. (10) Lease Commitments The Company leases interests in Units 1 and 2 of PVNGS, certain transmission facilities, office buildings and other equipment under operating leases. The lease expense for PVNGS is $66.3 million per year over base lease terms expiring in 2015 and 2016. Prior to 1992, the aggregate lease expense for the PVNGS leases was $84.6 million per year over the base lease terms; however, this amount was reduced by the purchase of approximately 22% of the beneficial interests in the PVNGS Units 1 and 2 leases (see note 8). The Company has since reacquired the ownership of those specific interests in PVNGS Units 1 and 2. Each PVNGS lease contains renewal and fair market value purchase options at the end of the base lease term. Covenants in the Company's PVNGS Units 1 and 2 lease agreements limit the Company's ability, without consent of the owner participants and bondholders in the lease transactions, (i) to enter into any merger or consolidation, or (ii) except in connection with normal dividend policy, to convey, transfer, lease or dividend more than 5% of its assets in any single transaction or series of related transactions. Future minimum operating lease payments (in thousands) at December 31, 1998 are: 1999 ............................................... $ 79,805 2000 ............................................... 78,974 2001 ............................................... 78,779 2002 ............................................... 78,666 2003 ............................................... 78,663 Later years ........................................ 875,088 ---------- Total minimum lease payments .................... $1,269,975 ========== Operating lease expense, inclusive of PVNGS leases, was approximately $82.6 million in 1998, $80.8 million in 1997 and $80.3 million in 1996. Aggregate minimum payments to be received in future periods under noncancelable subleases are approximately $5.3 million. (11) Environmental Issues The Company is committed to complying with all applicable environmental regulations. Environmental issues have presented and will continue to present a challenge to the Company. The Company has evaluated the potential impacts of the following environmental issues and believes, after consideration of established reserves, that the ultimate outcome of these environmental issues will not have a material adverse effect on the Company's financial condition or results of operations. F-35 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (11) Environmental Issues (Continued) Electric Operations Santa Fe Generating Station ("Santa Fe Station") The Company and the New Mexico Environment Department ("NMED") have conducted investigations of the gasoline and chlorinated solvent groundwater contamination detected beneath the former Santa Fe Station site to determine the source of the contamination pursuant to a 1992 Settlement Agreement ("Settlement Agreement") between the Company and the NMED. In June 1996, the Company received a letter from the NMED, indicating that the NMED believes the Company is the source of gasoline contamination in a municipal well supplying the City of Santa Fe and of groundwater underlying the Santa Fe Station site. Further, the NMED letter stated that the Company was required to proceed with interim remediation of the contamination pursuant to the New Mexico Water Quality Control Commission regulations. In October 1996, the Company and the NMED signed an amendment to the Settlement Agreement concerning the groundwater contamination underlying the site. As part of the amendment, the Company agreed to spend approximately $1.2 million for certain costs related to sampling, monitoring, and the development and implementation of a remediation plan. The amended Settlement Agreement does not, however, provide the Company with a full and complete release from potential further liability for remediation of the groundwater contamination. After the Company has expended the settlement amount, if the NMED can establish through binding arbitration that the Santa Fe Station is the source of the contamination, the Company could be required to perform further remediation that is determined to be necessary. The Company continues to dispute any contention that the Santa Fe Station is the source of the groundwater contamination and believes that insufficient data exists to identify the sources of groundwater contamination. The Company's aquifer characterization and groundwater quality reports complied from 1996 to 1999 strongly suggest the groundwater contamination does not originate from the Santa Fe Station site and has been drawn under the site by the pumping of the Santa Fe supply well. The Company and the NMED, with the cooperation of the City of Santa Fe, jointly selected a remediation plan proposed by a remediation contractor. The City of Santa Fe, the Company and the NMED entered into a memorandum of understanding concerning the selected remediation plan and the operation of the municipal well adjacent to the Santa Fe Station site in connection with carrying out that plan. Construction of a new Santa Fe well and booster station has been completed. The new system began operation on October 5, 1998, to treat groundwater produced by the Santa Fe well to drinking water standards for municipal distribution and the stimulation of naturally occurring bioremediation of groundwater contamination beneath the Santa Fe Station site. F-36 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (11) Environmental Issues (Continued) Person Station The Company, in compliance with a Corrective Action Directive issued by the NMED, determined that groundwater contamination exists in the deep and shallow groundwater at the Person Station site. The Company is required to delineate the extent of the contamination and remediate the contaminants in the groundwater at the Person Station site. The extent of shallow and deep groundwater contamination was assessed and the results were reported to the NMED. The Company currently is involved with the process to renew the Resource Conservation and Recovery Act ("RCRA") post-closure care permit for the facility. Remedial actions for the shallow and deep groundwater will be incorporated into the new permit. The Company has installed and is operating a pump and treat system for the shallow groundwater. The Company has proposed a monitoring program in conjunction with natural attenuation processes as the most cost effective approach for the deep groundwater remediation. The Company's current estimate to decommission its retired fossil-fueled plants includes approximately $5.0 million in additional expenses to complete the groundwater remediation program at Person Station. As part of the financial assurance requirement of the Person Station Hazardous Waste Permit, the Company established a trust fund. The current value of the trust fund at December 31, 1998, was $7.7 million. The remediation program continues on schedule. Gas Operations Pit Closure and Remediation In 1995, the Jicarilla Apache Tribe ("Jicarilla") enacted an ordinance directing that unlined surface impoundments located within environmentally sensitive areas be remediated and closed by December 1996, and that all other unlined surface impoundments on Jicarilla lands be remediated and closed by December 1998. In 1995, the Company received a claim for indemnification by Williams Gas Processing-Blanco, Inc. ("Williams"), the purchaser of the Company's gas gathering and processing assets, for the environmental work required to comply with the Jicarilla ordinance. The Company submitted a closure/remediation plan to the Jicarillas' environmental protection office, which was approved. The Company's remediation work pursuant to the plan commenced in 1996, and the costs of remediation are being charged against the $10.6 million indemnification cap contained in the purchase and sale agreement between the Company and Williams. The Company completed remediation and closed pits within the environmentally sensitive area in 1996, and completed remediation and closure of all other pits on the Jicarilla Apache Reservation associated with the sale of gas gathering and processing assets by the December 1998 deadline specified in the ordinance. F-37 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (12) Discontinued Operations On August 4, 1998, the Company adopted a plan to discontinue the gas trading operations of its Energy Services Business Unit. Accordingly, the gas marketing operations of its Energy Services Business Unit are reported as discontinued operations. Estimated losses on the disposal of the gas marketing segment was $5.1 million (net of income tax benefit of $3.3 million), which includes a provision for anticipated operating losses prior to disposal. Operating results of the discontinued operations prior to the date of discontinuation are shown separately in the accompanying consolidated statements of earnings. Such amounts include income tax benefits related to the losses from discontinued operations of $4.8 million in 1998, $3.6 million in 1997 and $.3 million in 1996. Total sales from the discontinued operations were $159.2 million, $114.7 million and $9.6 million in 1998, 1997 and 1996, respectively. Prior to the decision to discontinue non-utility operations, such total sales and income tax benefits were included in operating revenues and operating expenses in the consolidated statement of earnings. F-38 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (13) Segment Information In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Company's principal business segments are the four regulated business units: Electric Service Business Unit ("Distribution"), Transmission Service Business Unit ("Transmission"), Bulk Power Business Unit ("Generation") and Gas Services Business Unit ("Gas"). The Company's non operating subsidiaries and Energy Services Business Unit are not reportable segments and are included in "Other" for reconciliation purposes. Intersegment revenues are determined based on a formula mutually agreed upon between affected segments and are not based on market rates. Such intersegment items are eliminated for consolidation purposes. Summarized financial information by business segment for 1998, 1997 and 1996 is as follows:
Electric -------------------------------------- Distribution Transmission Generation Gas Other Total ------------ ------------ ---------- -------- -------- ---------- (In thousands) 1998: Operating revenues: External customers $539,972 $ 15,596 $ 279,636 $255,975 $ 1,266 $1,092,445 Intersegment revenues - $ 29,091 $ 362,722 - $ - $ 391,813 Depreciation and amortization $ 23,396 $ 8,527 $ 38,292 $ 15,863 $ 63 $ 86,141 Interest income $ 9,200 $ 4,286 $ 15,001 $ 6,130 $ 424 $ 35,041 Net interest charges $ 16,057 $ 7,547 $ 26,179 $ 13,784 $ (350) $ 63,217 Operating income tax expense (benefit) $ 10,217 $ 2,518 $ 27,632 $ 4,597 $ (3,658) $ 41,306 Segment net income (loss) $ 22,317 $ 6,828 $ 61,949 $ 11,056 $(19,468) $ 82,682 Total assets $583,104 $197,085 $1,328,691 $443,750 $ 24,158 $2,576,788 Gross property additions $ 50,399 $ 9,156 $ 30,969 $ 38,260 - $ 128,784 1997: Operating revenues: External customers $522,835 - $ 199,603 $294,769 $ 3,314 $1,020,521 Intersegment revenues - - $ 370,019 - $ - $ 370,019 Depreciation and amortization $ 21,754 - $ 46,335 $ 14,587 $ 18 $ 82,694 Interest income $ 6,715 - $ 12,714 $ 4,313 $ 34 $ 23,776 Net interest charges $ 15,900 - $ 27,613 $ 12,701 - $ 56,214 Operating income tax expense (benefit) $ 13,890 - $ 22,556 $ 7,587 $ (2,092) $ 41,941 Segment net income (loss) $ 24,496 - $ 51,260 $ 14,602 $ (9,363) $ 80,995 Total assets $607,898 - $1,178,036 $479,320 $ 55,301 $2,320,555 Gross property additions $ 45,302 - $ 51,661 $ 31,408 - $ 128,371
F-39 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1998, 1997 and 1996 (13) Segment Information (Continued)
Electric -------------------------------------- Distribution Transmission Generation Gas Other Total ------------ ------------ ---------- -------- -------- ---------- (In thousands) 1996: Operating revenues: External customers $510,936 - $ 134,703 $227,301 $ 838 $ 873,778 Intersegment revenues - - $ 380,000 - $ - $ 380,000 Depreciation and amortization $ 19,883 - $ 44,934 $ 13,122 $ 176 $ 78,115 Interest income $ 2,386 - $ 5,700 $ 4,420 - $ 12,506 Net interest charges $ 12,346 - $ 30,817 $ 11,544 - $ 54,707 Operating income tax expense (benefit) $ 8,559 - $ 23,863 $ 8,927 $(1,699) $ 39,650 Segment net income (loss) $ 16,800 - $ 52,237 $ 8,909 $(5,366) $ 72,580 Total assets $579,793 - $1,139,827 $484,073 $26,621 $2,230,314 Gross property additions $ 49,221 - $ 27,351 $ 26,497 $ 18 $ 103,087
The Transmission Service Business Unit was established in 1998. Prior to 1998, it was combined with the Bulk Power Business Unit. Prior periods information for the Transmission Service Business Unit is not available. On August 4, 1998, the Company adopted a plan to discontinue the gas trading operations of its Energy Services Business Unit (see note 12). Included in the line item Segment net income (loss) under Other are losses of $18,501, $9,050 and $5,058 for the discontinued operations for 1998, 1997 and 1996, respectively. F-40 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES QUARTERLY OPERATING RESULTS The unaudited operating results by quarters for 1998 and 1997 are as follows:
Quarter Ended -------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- (In thousands except per share amounts) 1998: Operating Revenues ................................$282,560 $230,478 $320,438 $258,969 Operating Income ..................................$ 36,626 $ 26,042 $ 47,446 $ 25,535 Earnings Before Discontinued Operations............$ 25,561 $ 16,497 $ 34,656 $ 18,405 Net Earnings (1)..................................$ 21,214 $ 14,778 $ 31,989 $ 14,701 Net Earnings per share before Discontinued Operations......................................$ 0.61 $ 0.39 $ 0.83 $ 0.44 Net Earnings per Share (basic).....................$ 0.50 $ 0.35 $ 0.77 $ 0.35 Net Earnings per share (diluted)...................$ 0.50 $ 0.35 $ 0.76 $ 0.34 1997: Operating Revenues ................................$285,290 $219,435 $254,600 $261,196 Operating Income ..................................$ 36,893 $ 26,781 $ 35,152 $ 30,721 Earnings before Discontinued Operations............$ 25,096 $ 16,354 $ 24,586 $ 20,461 Net Earnings .....................................$ 24,896 $ 15,567 $ 24,319 $ 16,213 Net Earnings per share before Discontinued Operations.......................................$ 0.60 $ 0.39 $ 0.59 $ 0.48 Net Earnings per Share (basic).....................$ 0.59 $ 0.37 $ 0.58 $ 0.38 Net Earnings per share (diluted)...................$ 0.59 $ 0.37 $ 0.57 $ 0.38
In the opinion of management of the Company, all adjustments (consisting of normal recurring accruals) necessary for a fair statement of the results of operations for such periods have been included. - ------------------- (1) On August 4, 1998, the Company adopted a plan to discontinue the gas trading operations of its Energy Services Business Unit. As a result, estimated losses of $1.4 million ($0.03 per common share) and $3.7 million ($0.09 per common share) for the third quarter and the fourth quarter, respectively, were recognized. (See note 12 of the notes to consolidated financial statements.) In addition, certain prior periods amounts have been restated. F-41
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES COMPARATIVE OPERATING STATISTICS 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- Electric Service Energy Sales--KWh (in thousands): Residential 2,007,852 1,976,434 1,892,290 1,795,371 1,786,292 Commercial 2,888,539 2,841,831 2,698,087 2,578,243 2,534,507 Industrial 1,571,824 1,556,264 1,505,801 1,434,974 1,268,208 Other ultimate customers 271,659 160,370 310,118 220,777 364,144 ----------- ----------- ----------- ----------- ----------- Total sales to ultimate customers 6,739,874 6,534,899 6,406,296 6,029,365 5,953,151 Sales for resale 8,782,315 6,785,643 4,575,220 2,590,513 3,361,933 ----------- ----------- ----------- ----------- ----------- Total KWh sales 15,522,189 13,320,542 10,981,516 8,619,878 9,315,084 =========== =========== =========== =========== =========== Electric Revenues (in thousands): Residential $187,681 $184,813 $177,220 $168,633 $172,559 Commercial 241,968 237,629 226,146 218,222 229,851 Industrial 88,644 86,927 83,651 79,964 79,729 Other ultimate customers 18,124 10,135 20,804 18,749 24,147 ----------- ----------- ----------- ----------- ----------- Total revenues to ultimate customers 536,417 519,504 507,821 485,568 506,286 Sales for resale 274,979 185,334 121,329 80,949 * 96,821 * ----------- ----------- ----------- ----------- ----------- Total revenues from energy sales 811,396 704,838 629,150 566,517 603,107 Miscellaneous electric revenues 23,808 17,600 16,489 17,767 18,687 ----------- ----------- ----------- ----------- ----------- Total electric revenues $835,204 $722,438 $645,639 $584,284 $621,794 =========== =========== =========== =========== =========== Customers at Year End: Residential 319,415 311,314 304,900 296,821 287,369 Commercial 37,652 36,942 36,292 35,390 34,336 Industrial 363 363 375 374 384 Other ultimate customers 665 637 632 598 599 ----------- ----------- ----------- ----------- ----------- Total ultimate customers 358,095 349,256 342,199 333,183 322,688 Sales for Resale 83 66 56 37 42 ----------- ----------- ----------- ----------- ----------- Total customers 358,178 349,322 342,255 333,220 322,730 =========== =========== =========== =========== =========== Reliable Net Capability--KW 1,506,000 1,506,000 1,506,000 1,506,000 1,506,000 Coincidental Peak Demand--KW 1,313,000 1,209,000 1,217,000 1,247,000 1,189,000 Average Fuel Cost per Million BTU $ 1.2433 $ 1.2319 $ 1.2735 $1.3177 $1.3488 BTU per KWh of Net Generation 10,784 10,927 10,768 10,811 10,817 Water Service ** Water Sales--Gallon (in thousands) - - - 1,616,544 3,366,388 Revenues (in thousands) - - - $ 6,196 $13,407 Customers at Year End - - - 23,752 23,452 - ---------------------------------------------------
*Due to the provision for the loss associated with the M-S-R contingent power purchase contract recognized in 1992, operating revenues were reduced by $7.3 million and $25.0 million for 1995 and 1994, respectively **On July 3, 1995, the Company sold its water utility division. Water Service's comparative operating statistics for 1995 are through this date. F-42
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES COMPARATIVE OPERATING STATISTICS 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- Gas Throughput--Decatherms (in thousands) PNMGS: Residential 30,258 30,755 27,387 25,865 27,139 Commercial 10,387 10,644 9,310 8,864 9,767 Industrial 1,553 1,280 2,136 661 831 Public authorities 3,427 4,153 2,591 2,411 2,465 Irrigation 1,869 1,593 1,418 1,245 1,272 Sales for resale 1,205 1,233 3,094 1,266 680 Off-system sales 1,889 1,179 5,745 1,176 - Unbilled (1,343) (202) 1,405 (1,764) (309) --------- --------- --------- --------- --------- PNMGS sales 49,245 50,635 53,086 39,724 41,845 Transportation throughput 36,413 33,975 47,010 49,136 43,135 --------- --------- --------- --------- --------- PNMGS throughput 85,658 84,610 100,096 88,860 84,980 Gathering Company: Spot market sales - - - 39 - Transportation throughput - - - 20,695 47,091 --------- --------- --------- --------- --------- Total throughput 85,658 84,610 100,096 109,594 132,071 ========= ========= ========= ========= ========= Gas Revenues (in thousands) PNMGS: Residential $161,153 $187,563 $129,911 $125,290 $149,439 Commercial 42,680 50,502 33,022 32,328 42,725 Industrial 4,887 4,536 5,179 1,873 2,905 Public authorities 12,610 17,577 8,018 7,939 9,969 Irrigation 5,780 5,041 3,252 3,077 4,061 Sales for resale 3,596 4,465 2,106 3,114 2,462 Off-system sales 3,816 1,926 14,352 1,885 - Imbalance penalties 1,416 1,273 1,231 1,786 944 Unbilled (955) (2,172) 2,678 (2,430) 267 --------- --------- --------- --------- --------- Revenues from gas sales 234,983 270,711 199,749 174,862 212,772 Transportation 13,464 14,172 17,215 18,532 19,742 Liquids 1,463 4,451 7,608 12,782 14,551 Other 6,065 5,435 2,729 3,606 4,705 --------- --------- --------- --------- --------- PNMGS operating revenues 255,975 294,769 227,301 209,782 251,770 Gathering Company: Spot market sales - - - 42 - Transportation - - - 3,640 7,850 Imbalance penalties - - - 418 26 Processing Company: Liquids revenue - - - 632 (621) Processing fees - - - 3,471 10,485 --------- --------- --------- --------- --------- Total operating revenues $255,975 $294,769 $227,301 $217,985 $269,510 ========= ========= ========= ========= ========= Customers at Year End PNMGS: Residential 383,292 375,032 367,025 358,822 348,715 Commercial 32,004 31,560 30,757 30,493 30,139 Industrial 55 50 54 59 57 Public authorities 2,429 2,735 2,462 2,444 2,463 Irrigation 1,078 1,027 1,076 886 899 Sales for resale 3 3 3 2 3 Gas choice 112 - - - - Transportation 29 31 36 38 43 --------- --------- --------- --------- --------- PNMGS customers 419,002 410,438 401,413 392,744 382,319 Gathering Company: Transportation - - - - 21 Processing Company - - - - 32 --------- --------- --------- --------- --------- Total customers 419,002 410,438 401,413 392,744 382,372 ========= ========= ========= ========= =========
- ------------------------------------ On June 30, 1995, the Company sold substantially all of the gas gathering and processing assets of the Company and its gas subsidiaries. Comparative operating statistics for Gathering Company and Processing Company are through this date. F-43 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Reference is hereby made to "Election of Directors" in the Company's Proxy Statement relating to the annual meeting of stockholders to be held on June 8, 1999 (the "1999 Proxy Statement"), to PART I, SUPPLEMENTAL ITEM - "EXECUTIVE OFFICERS OF THE COMPANY" and "Other Matters" "Section 16(a) Beneficial Ownership Reporting Compliance" in the 1999 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION Reference is hereby made to "Executive Compensation" in the 1999 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is hereby made to "Voting Information", "Election of Directors" and "Stock Ownership of Certain Executive Officers" in the 1999 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is hereby made to the 1999 Proxy Statement for such disclosure, if any, as may be required by this item. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) - 1. See Index to Financial Statements under Item 8. (a) - 2. Financial Statement Schedules for the years 1998, 1997, and 1996 are omitted for the reason that they are not required or the information is otherwise supplied. (a) - 3-A. Exhibits Filed: Exhibit No. Description ------- ----------- 10.20.2 Amendment No. 2 dated as of April 10, 1987 to Facility Lease dated as of August 12, 1986, as amended, between The First National Bank of Boston, not in its individual capacity, but solely as Owner Trustee under a Trust Agreement, dated as of August 12, 1986, with MFS Leasing Corp., Lessor and Public Service Company of New Mexico, Lessee (refiled). E-1 Exhibit No. Description ------- ----------- 10.23** Restated and Amended Public Service Company of New Mexico Accelerated Management Performance Plan (1988) (August 16, 1988) (refiled). 10.23.1** First Amendment to Restated and Amended Public Service Company of New Mexico Accelerated Management Performance Plan (1988) (August 30, 1988) (refiled). 10.23.2** Second Amendment to Restated and Amended Public Service Company of New Mexico Accelerated Management Performance Plan (1988) (December 29, 1989) (refiled). 23.1 Consent of Arthur Andersen LLP. 27 Financial Data Schedule. - ---------- ** Designates each management contract or compensatory plan or arrangement required to be identified pursuant to paragraph 3 of Item 14(a) of Form 10 -K. (a) - 3-B. Exhibits Incorporated By Reference: In addition to those Exhibits shown above, the Company hereby incorporates the following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation S-K section 10, paragraph (d) by reference to the filings set forth below:
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession 2.1 Purchase and Sale Agreement By and 4-(b) to Registration Statement 2-99990 Among Public Service Company of No. 2-99990 of the Company. New Mexico, Sunterra Gas Gathering Company, Sunterra Gas Processing (Sellers) and Williams Gas Processing - Blanco, Inc. (Buyer). 2.1.1 First Amendment to Purchase and Sale 2.1.1 to Annual Report of the 1-6986 Agreement By and Among Public Registrant on Form 10-K for Service Company of New Mexico, fiscal year ended December Sunterra Gas Gathering Company, 31, 1994. Sunterra Gas Processing Company (Sellers) and Williams Gas Processing - Blanco, Inc. (Buyer).
E-2
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 2.1.2 Second Amendment to Purchase and 2.1.2 to Annual Report of the 1-6986 Sale Agreement By and Among Public Registrant on Form Service Company of New Mexico, 10-K for fiscal year ended Sunterra Gas Gathering Company, December 31, 1994. Sunterra Gas Processing Company (Sellers) and Williams Gas Processing- Blanco, Inc. (Buyer) 2.2 Agreement to Purchase and Sell Between 4-(b) to Registration Statement 2-99990 City of Santa Fe, New Mexico and No. 2-99990 of the Company. Public Service Company of New Mexico. 2.2.1 First Amendment to Agreement to 2.2.1 to Annual Report of the 1-6986 Purchase and Sell Between the City of Registrant on Form Santa Fe, New Mexico and Public 10-K for fiscal year Service Company of New Mexico. ended December 31, 1994. 2.2.2 Second Amendment to Agreement to 2.2.2 to Annual Report of the 1-6986 Purchase and Sell Between the City of Registrant on Form Santa Fe, New Mexico and Public 10-K for fiscal year ended Service Company of New Mexico. December 31, 1994. 2.2.3 Third Amendment to Agreement to 2.2.3 to Annual Report of the 1-6986 Purchase and Sell Between the City of Registrant on Form Santa Fe, New Mexico and Public 10-K for fiscal year ended Service Company of New Mexico. December 31, 1994. 2.2.4 Fourth Amendment to Agreement to 2.2.4 to Annual Report of the 1-6986 Purchase and Sell Between the City of Registrant on Form Santa Fe, New Mexico and Public 10-K for fiscal year ended Service Company of New Mexico. December 31, 1994. 2.2.5 Fifth Amendment to Agreement to Purchase and 2.2.5 to Annual Report of the 1-6986 Sell Between the City of Santa Fe, New Mexico Registrant on Form 10-K for and Public Service Company of New Mexico. fiscal year ended December 31, 1994. 2.2.6 Sixth Amendment to Agreement to Purchase and 2.2.6 to Annual Report of the 1-6986 Sell Between the City of Santa Fe, New Mexico Registrant on Form 10-K for and Public Service Company of New Mexico. fiscal year ended December 31, 1994. 2.2.7 Seventh Amendment to Agreement to 2.2.7 to the Company's 1-6986 Purchase and Sell Between the City Quarterly Report on Form of Santa Fe, New Mexico and Public 10-Q for the quarter ended June Service Company of New Mexico. 30, 1995.
E-3
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- Articles of Incorporation and By-laws 3.1 Restated Articles of Incorporation of the 4-(b) to Registration Statement 2-99990 Company, as amended through May 10, No. 2-99990 of the Company. 1985. 3.2 By-laws of Public Service Company of 3.2 to Annual Report of the 1-6986 New Mexico With All Amendments to Registrant on Form 10-K for the and including December 5, 1994. fiscal year ended December 31, 1994. Instruments Defining the Rights of Security Holders, Including Indentures 4.1 Indenture of Mortgage and Deed of 4-(d) to Registration Statement 2-99990 Trust dated as of June 1, 1947, between No. 2-99990 of the Company. the Company and The Bank of New York (formerly Irving Trust Company), as Trustee, together with the Ninth Supplemental Indenture dated as of January 1, 1967, the Twelfth Supplemental Indenture dated as of September 15, 1971, the Fourteenth Supplemental Indenture dated as of December 1, 1974 and the Twenty- second Supplemental Indenture dated as of October 1, 1979 thereto relating to First Mortgage Bonds of the Company. 4.2 Portions of sixteen supplemental 4-(e) to Registration Statement 2-99990 indentures to the Indenture of Mortgage No. 2-99990 of the Company. and Deed of Trust dated as of June 1, 1947, between the Company and The Bank of New York (formerly Irving Trust Company), as Trustee, relevant to the declaration or payment of dividends or the making of other distributions on or the purchase by the Company of shares of the Company's Common Stock. 4.3 Fifty-third Supplemental Indenture, dated 4.3 to the Company's Quarterly 1-6986 as of March 11, 1998, supplemental to Report on Form 10-Q for the Indenture of Mortgage and Deed of Trust, quarter ended March 31, 1998. dated as of June 1, 1947, between the Company and The Bank of New York (formerly Irving Trust Company), as trustee.
E-4
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 4.4 Indenture (for Senior Notes), dated as of 4.4 to the Company's 1-6986 March 11, 1998, between the Company and The Quarterly Report on Form Chase Manhattan Bank, as Trustee. 10-Q for the quarter ended March 31, 1998. 4.5 First Supplemental Indenture, dated as 4.5 to the Company's 1-6986 of March 11, 1998, supplemental to Quarterly Report on Form Indenture, dated as of March 11, 1998, 10-Q for the quarter ended March between the Company and The Chase 31, 1998. Manhattan Bank, as Trustee. 4.6 Second Supplemental Indenture, dated 4.6 to the Company's Quarterly 1-6986 as of March 11, 1998, supplemental to Report on Form Indenture, dated as of March 11, 1998, 10-Q for the quarter ended March between the Company and The Chase 31, 1998. Manhattan Bank, as Trustee. 4.7 Indenture (for Senior Notes), dated as of 4.1 to Registration 33-53367 August 1, 1998, between the Company Statement No. 33-53367 of the and The Chase Manhattan Bank, as Company. Trustee. 4.8 First Supplemental Indenture, dated 4.3 to the Company's 1-6986 August 1, 1998, supplemental to Current Report on Form 8-K Indenture, dated as of August 1, dated August 7, 1998. 1998, between the Company and the Chase Manhattan Bank, as Trustee. Material Contracts 10.1 Supplemental Indenture of Lease dated as 4-D to Registration Statement No. 2-26116 of July 19, 1966 between the Company 2-26116 of the Company. and other participants in the Four Corners Project and the Navajo Indian Tribal Council. 10.1.1 Amendment and Supplement No. 1 to 10.1.1 to Annual Report of the 1-6986 Supplemental and Additional Indenture of Registrant on Form 10-K for fiscal Lease dated April 25, 1985 between the year ended December 31, 1995. Navajo Tribe of Indians and Arizona Public Service Company, El Paso Electric Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company, and Tucson Electric Power Company (refiled). E-5
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 10.2 Fuel Agreement, as supplemented, dated 4-H to Registration Statement No. 2-35042 as of September 1, 1966 between Utah 2-35042 of the Company. Construction & Mining Co. and the participants in the Four Corners Project including the Company. 10.3 Fourth Supplement to Four Corners Fuel 10.3 to Annual Report of the 1-6986 Agreement No. 2 effective as of January Registrant on Form 10-K for fiscal 1, 1981, between Utah International Inc. year ended December 31, 1991. and the participants in the Four Corners Project, including the Company. 10.4 Contract between the United States and 5-L to Registration Statement No. 2-41010 the Company dated April 11, 1968, for 2-41010 of the Company. furnishing water. 10.4.1 Amendatory Contract between the United 5-R to Registration Statement No. 2-60021 States and the Company dated September 2-60021 of the Company. 29, 1977, for furnishing water. 10.5 Co-Tenancy Agreement between the 5-O to Registration Statement No. 2-44425 Company and Tucson Gas & Electric 2-44425 of the Company. Company dated February 15, 1972, pertaining to the San Juan generating plant. 10.5.3 Modification No. 4 dated October 25, 10.5.3 to Annual Report of 1-6986 1984 and Modification No. 5 dated July Registrant on Form 10-K for fiscal 1, 1985 to Co-Tenancy Agreement year ended December 31, 1995. between the Company and Tucson Electric Power Company (refiled). 10.5.5 Modification No. 8 to San Juan Project 10.5.5 to the Company's Quarterly 1-6986 Co-Tenancy Agreement between Public Report on Form 10-Q for the Service Company of New Mexico and quarter ended March 31, 1994. Tucson Electric Power Company dated September 15, 1993. 10.5.6 Modification No. 9 to San Juan Project 10.5.6 to the Company's Quarterly 1-6986 Co-Tenancy Agreement between Public Report on Form 10-Q for the Service Company of New Mexico and quarter ended March 31, 1994. Tucson Electric Power Company dated January 12, 1994. 10.5.7 Modification No. 10 to San Juan Project 10.5.7 to Annual Report of the 1-6986 Co-Tenancy Agreement between Public Registrant on Form 10-K for fiscal Service Company of New Mexico and year ended December 31, 1995. Tucson Electric Power Company dated November 30, 1995.
E-6
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 10.7 San Juan Project Operating Agreement 5-S to Registration Statement No. 2-50338 between the Company and Tucson 2-50338 of the Company. Gas & Electric Company, executed December 21, 1973. 10.7.1 Modification No. 4 dated October 25, 10.7.1 to Annual Report of 1-6986 1984 and Modification No. 5 dated Registrant on Form 10-K for fiscal July 1, 1985 to San Juan Project year ended December 31, 1995. Operating Agreement between the Company and Tucson Electric Power Company (refiled). 10.7.3 Modification No. 8 to San Juan Project 10.7.3 to the Company's 1-6986 Operating Agreement between Public Quarterly Report on Form 10-Q Service Company of New Mexico and for the quarter ended March Tucson Electric Power Company dated 31, 1994. September 15, 1993. 10.7.4 Modification No. 9 to San Juan Project 10.7.4 to the Company's 1-6986 Operating Agreement between Public Quarterly Report on Form 10-Q Service Company of New Mexico and for the quarter ended March Tucson Electric Power Company dated 31, 1994. January 12, 1994. 10.7.5 Modification No. 10 dated November 30, 10.7.5 to Annual Report of the 1-6986 1995 to San Juan Project Operating Registrant on Form 10-K for Agreement between Public Service fiscal year ended December 31, Company of New Mexico and Tucson 1995. Electric Power Company. 10.8 Arizona Nuclear Power Project 5-T to Registration Statement 2-50338 Participation Agreement among the No. 2-50338 of the Company. Company and Arizona Public Service Company, Salt River Project Agricultural Improvement and Power District, Tucson Gas & Electric Company and El Paso Electric Company, dated August 23, 1973. 10.8.1 Amendments No. 1 through No. 6 to 10.8.1 to Annual Report of the 1-6986 Arizona Nuclear Power Project Registrant on Form 10-K for Participation Agreement. fiscal year ended December 31, 1991. 10.8.2 Amendment No. 7 effective April 1, 10.8.2 to Annual Report of the 1-6986 1982, to the Arizona Nuclear Power Registrant on Form 10-K for Project Participation Agreement (refiled). fiscal year ended December 31, 1991. E-7
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 10.8.3 Amendment No. 8 effective September 12, 10.58 to Annual Report of the 1-6986 1983, to the Arizona Nuclear Power Registrant on Form 10-K for Project Participation Agreement (refiled). fiscal year ended December 31, 1993. 10.8.4 Amendment No. 9 to Arizona Nuclear 10.8.4 to Annual Report of the 1-6986 Power Project Participation Agreement Registrant on Form 10-K for dated as of June 12, 1984 (refiled). fiscal year ended December 31, 1994. 10.8.5 Amendment No. 10 dated as of November 10.8.5 to Annual Report of the 1-6986 21, 1985 and Amendment No. 11 dated as Registrant on Form 10-K for of June 13, 1986 and effective January 10, fiscal year ended 1987 to Arizona Nuclear Power Project December 31, 1994. Participation Agreement (refiled). 10.8.7 Amendment No. 12 to Arizona Nuclear 19.1 to the Company's Quarterly 1-6986 Power Project Participation Agreement Report on Form 10-Q for the dated June 14, 1988, and effective quarter ended September 30, 1990. August 5, 1988. 10.8.8 Amendment No. 13 to the Arizona 10.8.10 to Annual Report of 1-6986 Nuclear Power Project Participation Registrant on Form 10-K for the Agreement dated April 4, 1990, and fiscal year ended December 31, effective June 15, 1991. 1990. 10.9 Coal Sales Agreement executed August 18, 10.9 to Annual Report of the 1-6986 1980 among San Juan Coal Company, Registrant on Form 10-K for the Company and Tucson Electric fiscal year ended December 31, Power Company, together with 1991. Amendments No. One, Two, Four, and Six thereto. 10.9.1 Amendment No. Three to Coal Sales 10.9.1 to Annual Report of the 1-6986 Agreement dated April 30, 1984 among Registrant on Form 10-K for San Juan Coal Company, the Company fiscal year ended December 31, and Tucson Electric Power Company. 1994 (confidentiality treatment was requested at the time of filing the Annual Report of the Registrant on Form 10-K for fiscal year ended December 31, 1984; exhibit was not filed therewith based on the same confidentiality request). E-8
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 10.9.2 Amendment No. Five to Coal Sales 10.9.2 to Annual Report of the 1-6986 Agreement dated May 29, 1990 among Registrant on Form 10-K for San Juan Coal Company, the Company fiscal year ended December 31, and Tucson Electric Power Company. 1991 (confidentiality treatment was requested as to portions of this exhibit, and such portions were omitted from the exhibit filed and were filed separately with the Securities and Exchange Commission). 10.9.3 Amendment No. Seven to Coal Sales 19.3 to the Company's Quarterly 1-6986 Agreement, dated as of July 27, 1992 Report on Form 10-Q for the among San Juan Coal Company, the quarter ended September 30, 1992 Company and Tucson Electric Power (confidentiality treatment was Company. requested as to portions of this exhibit, and such portions were omitted from the exhibit filed and were filed separately with the Securities and Exchange Commission). 10.9.4 First Supplement to Coal Sales 19.4 to the Company's Quarterly 1-6986 Agreement, dated July 27, 1992 among Report on Form 10-Q for the San Juan Coal Company, the Company quarter ended September 30, 1992 and Tucson Electric Power Company. (confidentiality treatment was requested as to portions of this exhibit, and such portions were omitted from the exhibit as of filed and were filed separately with the Securities and Exchange Commission). 10.9.5 Amendment No. Eight to Coal Sales 10.9.5 to Annual Report of the 1-6986 Agreement, dated as of September 1, Registrant on Form 10-K for 1995, among San Juan Coal Company, fiscal year ended December 31, the Company and Tucson Electric 1995. Power Company . E-9
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 10.9.6 Amendment No. Nine to Coal Sales 10.9.6 to Annual Report of the 1-6986 Agreement, dated as of December 31, Registrant on Form 10-K for 1995, among San Juan Coal Company, fiscal year ended December 31, the Company and Tucson Electric Power 1996. Company. 10.11 San Juan Unit 4 Early Purchase and 10.11 to the Company's Quarterly 1-6986 Participation Agreement dated as of Report on Form 10-Q for the September 26, 1983 between the quarter ended March 31, 1994. Company and M-S-R Public Power Agency, and Modification No. 2 to the San Juan Project Agreements dated December 31, 1983 (refiled). 10.11.1 Amendment No. 1 to the Early Purchase 10.11.1 to Annual Report of the 1-6986 and Participation Agreement between Registrant on Form 10-K for Public Service Company of New Mexico fiscal year ended December 31, and M-S-R Public Power Agency, 1997. executed as of December 16, 1987, for San Juan Unit 4 (refiled). 10.12 Amended and Restated San Juan Unit 4 10.12 to Annual Report of the 1-6986 Purchase and Participation Agreement Registrant on Form 10-K for dated as of December 28, 1984 between fiscal year ended December 31, the Company and the Incorporated 1994. County of Los Alamos (refiled). 10.14 Participation Agreement among the 10.14 to Annual Report of the 1-6986 Company, Tucson Electric Power Company Registrant on Form 10-K for and certain financial institutions fiscal year ended relating to the San Juan Coal Trust dated December 31, 1992. as of December 31, 1981 (refiled). 10.16 Interconnection Agreement dated 10.16 to Annual Report of the 1-6986 November 23, 1982, between the Registrant on Form 10-K for Company and Southwestern Public fiscal year ended December 31, Service Company (refiled). 1992. 10.18* Facility Lease dated as of December 16, 10.18 to Annual Report of the 1-6986 1985 between The First National Bank Registrant on Form 10-K for of Boston, as Owner Trustee, and Public fiscal year ended December 31, Service Company of New Mexico 1995. together with Amendments No. 1, 2 and 3 thereto (refiled). E-10
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 10.18.4* Amendment No. 4 dated as of March 8, 10.18.4 to the Company's 1-6986 1995, to Facility Lease between Public Quarter Report on Form Service Company of New Mexico and 10-Q for the quarter ended March the First National Bank of Boston, dated 31, 1995. as of December 16, 1985. 10.19 Facility Lease dated as of July 31, 1986, 10.19 to Annual Report of the 1-6986 between the First National Bank of Registrant on Form 10-K for Boston, as Owner Trustee, and Public fiscal year ended December 31, Service Company of New Mexico 1996. together with Amendments No. 1, 2 and 3 thereto (refiled). 10.20* Facility Lease dated as of August 12, 10.20 to Annual Report of the 1-6986 1986, between The First National Bank Registrant on Form 10-K for of Boston, as Owner Trustee, and Public fiscal year ended December 31, Service Company of New Mexico 1996. together with Amendments No. 1 and 2 thereto (refiled). 10.20.3 Amendment No. 3 dated as of March 8, 10.20.3 to the Company's 1-6986 1995, to Facility Lease between Public Quarterly Report on Form Service Company of New Mexico and 10-Q for the quarter ended March the First National Bank of Boston, 31, 1995. dated as of August 12, 1986. 10.21 Facility Lease dated as of December 15, 10.21 to Annual Report of the 1-6986 1986, between The First National Bank Registrant on Form 10-K of Boston, as Owner Trustee, and Public for fiscal year ended Service Company of New Mexico (Unit 1 December 31, 1996. Transaction) together with Amendment No. 1 thereto (refiled). 10.22 Facility Lease dated as of December 15, 10.22 to Annual Report of the 1-6986 1986, between The First National Bank Registrant on Form 10-K for of Boston, as Owner Trustee, and Public fiscal year ended December 31, Service Company of New Mexico 1996. Unit 2 Transaction) together with Amendment No. 1 thereto (refiled). 10.24** Management Life Insurance Plan (July 10.24 to Annual Report of the 1-6986 1985) of the Company (refiled). Registrant on Form 10-K for fiscal year ended December 31, 1995. E-11
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 10.25.1** Second Restated and Amended Public 10.25.1 to Annual Report for the 1-6986 Service Company of New Mexico Registrant on Form 10-K for Executive Medical Plan as amended on fiscal year ended December 31, December 28, 1995. 1997. 10.27 Amendment No. 2 dated as of April 10, 10.53 to Annual Report of the 1-6986 1987, to the Facility Lease dated as of Registrant on Form10-K for August 12, 1986, between The First fiscal year ended December 31, National Bank of Boston, as Owner 1987. Trustee, and Public Service Company of New Mexico. (Unit 2 Transaction.) (This is an amendment to a Facility Lease which is substantially similar to the Facility Lease filed as Exhibit 28.1 to the Company's Current Report on Form 8-K dated August 18, 1986.) 10.31** Executive Retention Agreements. 10.42 to Annual Report of the 1-6986 Registrant on Form 10-K for fiscal year ended December 31, 1990. 10.32** Supplemental Employee Retirement 19.4 to the Company's Quarterly 1-6986 Agreements dated August 4, 1989. Report on Form 10-Q for the quarter ended September 30, 1989. 10.32.1** First Amendment to the Supplemental 10.32.1 to the Company's 1-6986 Employee Retirement Agreement. Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.33** Supplemental Employee Retirement 10.47 to Annual Report of the 1-6986 Agreement dated March 6, 1990. Registrant on Form 10-K for fiscal year ended December 31, 1989. 10.34 Settlement Agreement between Public 10.48 to Annual Report of the 1-6986 Service Company of New Mexico and Registrant on Form 10-K for Creditors of Meadows Resources, Inc. fiscal year ended December 31, dated November 2, 1989. 1989. 10.34.1 First amendment dated April 24, 1992 to 19.1 to the Company's Quarterly 1-6986 the Settlement Agreement dated Report on Form 10-Q for the November 2, 1989 among Public Service quarter ended September 30, 1992. Company of New Mexico, the lender parties thereto and collateral agent. E-12
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 10.35 Amendment dated April 11, 1991 among 19.1 to the Company's Quarterly 1-6986 Public Service Company of New Mexico, Report on Form 10-Q for the certain banks and Chemical Bank and quarter ended September 30, 1991. Citibank, N.A., as agents for the banks. 10.36 San Juan Unit 4 Purchase and 19.2 to the Company's Quarterly 1-6986 Participation Agreement Public Service Report on Form 10-Q for the Company of New Mexico and the City of quarter ended March 31, 1991. Anaheim, California dated April 26, 1991. 10.36.1 Second stipulation in the matter of 10.38 to Annual Report of the 1-6986 application of Public Service Company Registrant on Form 10-K for of New Mexico for NMPSC approval to fiscal year ended December 31, sell a 10.04% undivided interest in San 1992. Juan Generating Station Unit 4 to the City of Anaheim, California, and for related orders and approvals. 10.37** Executive Retention Plan. 10.37 to Annual Report of the 1-6986 Registrant on Form 10-K for fiscal year ended December 31, 1991. 10.38 Restated and Amended San Juan Unit 4 10.2.1 to the Company's 1-6986 Purchase and Participation Agreement Quarterly Report on Form between Public Service Company of 10-Q for the quarter ended New Mexico and Utah Associated Municipal September 30, 1993. Power Systems. 10.40** First Restated and Amended Public Service 99.1 to Registration Statement 333-03303 Company of New Mexico Director Retainer Plan. No. 333-03303 filed May 8, 1996. 10.41 Waste Disposal Agreement, dated as of 19.5 to the Company's Quarterly 1-6986 July 27, 1992 among San Juan Coal Company, Report on Form 10-Q for the the Company and Tucson Electric Power quarter ended September 30, 1992 Company. (confidentiality treatment was requested as to portions of this exhibit, and such portions were omitted from the exhibit and were filed separately with the Securities and Exchange Commission). 10.42 Stipulation in the matter of the application 10.42 to Annual Report of the 1-6986 of Gas Company of New Mexico for an Registrant on Form 10-K for order authorizing recovery of MDL costs fiscal year ended December 31, through Rate Rider Number 8. 1992. E-13
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 10.43** Description of certain Plans which include 10.43 to Annual Report of the 1-6986 executive officers as participants. Registrant on Form 10-K for fiscal year ended December 31, 1992. 10.44** Public Service Company of New 10.44 to Annual Report of the 1-6986 Mexico-Non-Union Voluntary Registrant on Form 10-K for Separation Program. fiscal year ended December 31, 1992. 10.44.1** First Amendment dated April 6, 1993 to the 19.2 to the Company's Quarterly 1-6986 First Restated and Amended Public Report on Form 10-Q for the Service Company of New Mexico quarter ended March 31, 1993. Non-Union Severance Pay Plan dated August 1, 1992. 10.47** Compensation Arrangement with Chief 10.3 to the Company's Quarterly 1-6986 Executive Officer. Report on Form 10-Q for the quarter ended June 30, 1993. 10.47.1** Pension Service Adjustment Agreement 10.3.1 to the Company's 1-6986 for Benjamin F. Montoya. Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.47.2** Severance Agreement for Benjamin F. 10.3.2 to the Company's 1-6986 Montoya. Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.47.3** Executive Retention Agreement for 10.3.3 to the Company's 1-6986 Benjamin F. Montoya. Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.47.4** First Amendment to the Pension Service 10.47.4 to the Company's 1-6986 Adjustment Agreement for Benjamin F. Quarterly Report on Form 10-Q Montoya. for the quarter ended June 30, 1998. 10.48** Public Service Company of New Mexico 10.4 to the Company's Quarterly 1-6986 OBRA `93 Retirement Plan. Report on Form 10-Q for the quarter ended September 30, 1993. 10.49** Employment Contract By and Between 10.49 to Annual Report of the 1-6986 the Public Service Company of New Mexico Registrant on Form 10-K for and Roger J. Flynn. fiscal year ended December 31, 1994. E-14
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 10.50** Public Service Company of New Mexico 10.50 to Annual Report of the 1-6986 Section 415 Plan. Registrant on Form 10-K for fiscal year ended December 31, 1993. 10.51** First Amendment to the Public Service 10.51 to Annual Report of the 1-6986 Company of New Mexico Executive Registrant on Form 10-K for Retention Plan. fiscal year ended December 31, 1993. 10.51.1** Second Amendment to the Public Service 10.51.1 to the Company's 1-6986 Company of New Mexico Executive Quarterly Report on Form 10-Q Retention Plan. for the quarter ended June 30, 1994. 10.52 Memorandum of Agreement between 10.52 to the Company's Quarterly 1-6986 the Navajo Nation and Public Service Report on Form 10-Q for the Company of New Mexico (Nine-Mile quarter ended June 30, 1997. Transmission R-O-W). 10.53 January 12, 1994 Stipulation. 10.53 to Annual Report of the 1-6986 Registrant on Form 10-K for fiscal year ended December 31, 1993. 10.54.1** Health Care and Retirement Benefit 10.54.1 to the Company's 1-6986 Agreement By and Between the Public Quarterly Report on Form 10-Q Service Company of New Mexico and for the quarter ended March 31, John T. Ackerman dated February 1, 1994. 1994. 10.56.1 Amended and Restated Receivables Purchase 10.56.1 to the Company's 1-6986 Agreement dated May 20, 1996, between Public Quarterly Report on Form 10-Q Service Company of New Mexico, Citibank and for the quarter ended June 30, Citicorp North America, Inc. and Amended 1996. Restated Collection Agent Agreement dated May 20, 1996, between Public Service Company of New Mexico, Corporate Receivables Corporation and Citibank, N.A. 10.59* Amended and Restated Lease dated as of 10.59 to Annual Report of the 1-6986 September 1, 1993, between The First Registrant on Form 10-K for National Bank of Boston, Lessor, and fiscal year ended December 31, the Company, Lessee (EIP Lease). 1993. E-15
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 10.61 Participation Agreement dated as of June 10.61 to Annual Report of the 1-6986 30, 1983 among Security Trust Company, Registrant on Form 10-K for as Trustee, the Company, Tucson Electric fiscal year ended Power Company and certain financial December 31, 1993. institutions relating to the San Juan Coal Trust (refiled). 10.62 Agreement of the Company pursuant to 10.62 to Annual Report of the 1-6986 Item 601(b)(4)(iii) of Regulation S-K Registrant on Form 10-K for (refiled). fiscal year ended December 31, 1993. 10.63 A Stipulation regarding sale of certain 10.63 to Current Report on Form 1-6986 natural gas gathering and processing assets. 8-K dated January 26, 1995. 10.64** Results Pay 10.64 to the Company's Quarterly 1-6986 Report on Form 10-Q for the quarter ended March 31, 1995. 10.65 Agreement for Contract Operation and 10.64 to the Company's Quarterly 1-6986 Maintenance of the City of Santa Fe Report on Form 10-Q for the Water Supply Utility System, dated quarter ended June 30, 1995. July 3, 1995. 10.67 New Mexico Public Service Commission 10.67 to Annual Report of the 1-6986 Order dated July 30, 1987, and Exhibit I Registrant on Form 10-K for thereto, in NMPUC Case No. 2004, fiscal year ended December 31, regarding the PVNGS decommissioning 1997. trust fund (refiled). 10.68 Master Decommissioning Trust Agreement 10.68 to the Company's Quarterly 1-6986 for Palo Verde Nuclear Generating Station Report on Form 10-Q for the dated March 15, 1996, between Public quarter ended March 31, 1996. Service Company of New Mexico and Mellon Bank, N.A. 10.68.1 Amendment Number One to the Master 10.68.1 to Annual Report of the 1-6986 Decommissioning Trust Agreement for Registrant on Form 10-K for Palo Verde Nuclear Generating Station fiscal year ended December 31, dated January 27, 1997, between Public 1997. Service Company of New Mexico and Mellon Bank, N.A. E-16
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 10.69* Refunding Agreement No. 3 dated as 10.69 to the Company's 1-6986 of September 27, 1996 between Public Quarterly Report on Form Service Company of New Mexico, The 10-Q for the quarter ended Owner Participant named therein, September 30, 1996. State Street Bank and Trust Company, as Owner Trustee, The Chase Manhattan, Bank, as Indenture Trustee, and First PV Funding Corporation. 10.72 Revolving Credit Agreement dated as of 10.72 to the Company's Quarterly 1-6986 March 11, 1998, among the Company, Report on Form 10-Q for the the Chase Manhattan Bank, Citibank, quarter ended March 31, 1998. N.A., Morgan Guaranty Trust Company of New York, and Chase Securities, Inc., and the Initial Lenders Named Therein. 10.73 Refunding Agreement No. 8A, dated as 10.73 to the Company's Quarterly 1-6986 of December 23, 1997, among the Report on Form 10-Q for the Company, the Owner Participant Named quarter ended March 31, 1998. Therein, State Street Bank and Trust Company, as Owner Trustee, The Chase Manhattan Bank, as Indenture Trustee, and First PV Funding Corporation. 10.74** Third Restated and Amended Public 10.74 to the Company's Quarterly 1-6986 Service Company of New Mexico Report on Form 10-Q for the Performance Stock Plan. quarter ended March 31, 1998. 10.75** Executive Savings Plan 10.75 to the Company's Quarterly 1-6986 Report on Form 10-Q for the quarter ended June 30, 1998. E-17
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 10.76 PVNGS Capital Trust--Variable Rate 10.76 to the Company's Quarterly 1-6986 Trust Notes--PVNGS Note Agreement Report on Form 10-Q for the dated as of July 31, 1998. quarter ended September 30, 1998. Additional Exhibits 22 Certain subsidiaries of the registrant. 22 to Annual Report of the 1-6986 Registrant on Form 10-K for fiscal year ended December 31, 1992. 99.2* Participation Agreement dated as of 99.2 to Annual Report of the 1-6986 December 16, 1985, among the Owner Registrant on Form 10-K for Participant named therein, First PV fiscal year ended December 31, Funding Corporation. The First National 1995. Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of December 16, 1985 with the Owner Participant), Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 16, 1985 with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions together with Amendment No. 1 dated July 15, 1986 and Amendment No. 2 dated November 18, 1986 (refiled). 99.3 Trust Indenture, Mortgage, Security 99.3 to the Company's Quarterly 1-6986 Agreement and Assignment of Rents Report on Form 10-Q for the dated as of December 16, 1985, between quarter ended March 31, 1996. the First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee together with Supplemental Indentures Nos. 1 and 2 (refiled). 99.3.3 Supplemental Indenture No. 3 dated as 99.3.3 to the Company's 1-6986 of March 8, 1995, to Trust Indenture Quarterly Report on Form 10-Q Mortgage, Security Agreement and for the quarter ended March 31, Assignment of Rents between The First 1995. National Bank of Boston and Chemical Bank dated as of December 16, 1985. E-18
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 99.4* Assignment, Assumption and Further 99.4 to Annual Report of the 1-6986 Agreement dated as of December 16, Registrant on Form 10-K for 1985, between Public Service Company fiscal year ended December 31, of New Mexico and The First National 1995. Bank of Boston, as Owner Trustee (refiled). 99.5 Participation Agreement dated as of July 99.5 to Annual Report of the 1-6986 31, 1986, among the Owner Participant Registrant on Form 10-K for named herein, First PV Funding fiscal year ended December Corporation, The First National Bank of 31, 1996. Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of July 31, 1986, with the Owner Participant), Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of July 31, 1986, with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions together with Amendment No. 1 thereto (refiled). 99.6 Trust Indenture, Mortgage, Security 99.6 to Annual Report of the 1-6986 Agreement and Assignment of Rents Registrant on Form 10-K for dated as of July 31, 1986, between The fiscal year ended December 31, First National Bank of Boston, as Owner 1996. Trustee, and Chemical Bank, as Indenture Trustee together with Supplemental Indenture No. 1 thereto (refiled). 99.7 Assignment, Assumption, and Further 99.7 to Annual Report of the 1-6986 Agreement dated as of July 31, 1986, Registrant on Form 10-K for between Public Service Company of fiscal year ended December 31, New Mexico and The First National Bank 1996. of Boston, as Owner Trustee (refiled). E-19
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 99.8 Participation Agreement dated as of 99.8 to the Company's Quarterly 1-6986 August 12, 1986, among the Owner Report on Form 10-Q for the Participant named therein, First PV quarter ended March 31, 1997. Funding Corporation. The First National Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of August 12, 1986, with the Owner Participant), Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of August 12, 1986, with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions (refiled). 99.8.1* Amendment No. 1 dated as of November 99.8.1 to the Company's 1-6986 18, 1986, to Participation Agreement Quarterly Report on Form 10-Q dated as of August 12, 1986 (refiled). for the quarter ended March 31, 1997. 99.9* Trust Indenture, Mortgage, Security 99.9 to Annual Report of the 1-6986 Agreement and Assignment of Rents Registrant on Form 10-K for dated as of August 12, 1986, between the fiscal year ended December 31, First National Bank of Boston, as Owner 1996. Trustee, and Chemical Bank, as Indenture Trustee together with Supplemental Indenture No. 1 thereto (refiled). 99.9.2 Supplemental Indenture No. 2 dated as 99.9.1 to the Company's 1-6986 of March 8, 1995, to Trust Indenture, Quarterly Report on Form 10-Q Mortgage, Security Agreement and for the quarter ended March 31, Assignment of Rents between The First 1995. National Bank of Boston and Chemical Bank dated as of August 12, 1986. 99.10* Assignment, Assumption, and Further 99.10 to the Company's Quarterly 1-6986 Agreement dated as of August 12, 1986, Report on Form 10-Q for the between Public Service Company of New quarter ended March 31, 1997. Mexico and The First National Bank of Boston, as Owner Trustee (refiled). E-20
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 99.11* Participation Agreement dated as of 99.1 to the Company's Quarterly 1-6986 December 15, 1986, among the Owner Report on Form 10-Q for the Participant named therein, First PV quarter ended March 31, 1997. Funding Corporation, The First National Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of December 15, 1986, with the Owner Participant), Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 15, 1986, with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions (Unit 1 Transaction) (refiled). 99.12 Trust Indenture, Mortgage, Security 99.12 to the Company's Quarterly 1-6986 Agreement and Assignment of Rents Report on Form 10-Q for the dated as of December 15, 1986, between quarter ended March 31, 1997. The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee (Unit 1 Transaction) (refiled). 99.13 Assignment, Assumption and Further 99.13 to the Company's 1-6986 Agreement dated as of December 15, Quarterly Report on Form 1986, between Public Service Company 10-Q for the quarter ended of New Mexico and The First National March 31, 1997. Bank of Boston, as Owner Trustee (Unit 1 Transaction) (refiled). 99.14 Participation Agreement dated as of 99.14 to the Company's 1-6986 December 15, 1986, among the Owner Quarterly Report on Form Participant named therein, First PV 10-Q for the quarter ended Funding Corporation, The First National March 31, 1997. Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of December 15, 1986, with the Owner Participant), Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 15, 1986, with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions (Unit 2 Transaction) (refiled). E-21
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 99.15 Trust Indenture, Mortgage, Security 99.15 to Annual Report of the 1-6986 Agreement and Assignment of Rents dated Registrant on Form 10-K for as of December 31, 1986, between the fiscal year ended December 31, First National Bank of Boston, as Owner 1996. Trustee, and Chemical Bank, as Indenture Trustee (Unit 2 Transaction) (refiled). 99.16 Assignment, Assumption, and Further 99.16 to the Company's Quarterly 1-6986 Agreement dated as of December 15, Report on Form 10-Q for the 1986, between Public Service Company quarter ended March 31, 1997. of New Mexico and The First National Bank of Boston, as Owner Trustee (Unit 2 Transaction) (refiled). 99.17* Waiver letter with respect to "Deemed 99.17 to Annual Report of the 1-6986 Loss Event" dated as of August 18, 1986, Registrant on Form 10-K for between the Owner Participant named fiscal year ended December 31, therein, and Public Service Company of 1996. New Mexico (refiled). 99.18* Waiver letter with respect to Deemed 99.18 to Annual Report of the 1-6986 Loss Event" dated as of August 18, 1986, Registrant on Form 10-K for between the Owner Participant named fiscal year ended December 31, therein, and Public Service Company of 1996. New Mexico (refiled). 99.19 Agreement No. 13904 (Option and 99.19 to Annual Report of the 1-6986 Purchase of Effluent), dated April 23, Registrant on Form 10-K for 1973, among Arizona Public Service fiscal year ended December 31, Company, Salt River Project Agricultural 1996. Improvement and Power District, the Cities of Phoenix, Glendale, Mesa, Scottsdale, and Tempe, and the Town of Youngtown (refiled). 99.20 Agreement for the Sale and Purchase of 99.20 to Annual Report of the 1-6986 Wastewater Effluent, dated June 12, 1981, Registrant on Form 10-K for among Arizona Public Service Company, fiscal year ended December 31, Salt River Project Agricultural 1996. Improvement and Power District and the City of Tolleson, as amended (refiled). E-22
Exhibit No. Description of Exhibit Filed as Exhibit: File No: - ----------- ---------------------- ----------------- -------- 99.21* 1996 Supplemental Indenture dated as of 99.21 to the Company's Quarterly 1-6986 September 27, 1996 to Trust Indenture, Report on Form 10-Q for the Mortgage, Security Agreement and quarter ended September 30, 1996. Assignment of Rents dated as of December 16, 1985 between State Street Bank and Trust Company, as Owner Trustee, and The Chase Manhattan Bank, as Indenture Trustee. 99.22 1997 Supplemental Indenture, dated as of 99.22 to the Company's Quarterly 1-6986 December 23, 1997, to Trust Indenture, Report on Form 10-Q for the Mortgage, Security Agreement and quarter ended March 30, 1998. Assignment of Rents, dated as of August 12, 1986, between State Street Bank and Trust, as Owner Trustee, and The Chase Manhattan Bank, as Indenture Trustee.
* One or more additional documents, substantially identical in all material respects to this exhibit, have been entered into, relating to one or more additional sale and leaseback transactions. Although such additional documents may differ in other respects (such as dollar amounts and percentages), there are no material details in which such additional documents differ from this exhibit. ** Designates each management contract or compensatory plan or arrangement required to be identified pursuant to paragraph 3 of Item 14(a) of Form 10-K. (b) Reports on Form 8-K: During the quarter ended December 31, 1998 and during the period beginning January 1, 1999 and ending March 8, 1999, the Company filed, on the date indicated, the following report on Form 8-K. Dated: Filed: Relating to: ------ ------ ------------ November 30, 1998 December 18, 1998 Electric Rate Case; Residential Electric, Incorporated; Creation of Three Non-Utility Subsidiaries; City of Albuquerque Retail Pilot Load Aggregation Project; Resignation of Chief Operating Officer E-23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PUBLIC SERVICE COMPANY OF NEW MEXICO (Registrant) Date: March 8, 1999 By /s/ B. F. Montoya ------------------------------------- B. F. Montoya President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Capacity Date --------- -------- ---- /s/ B. F. MONTOYA Principal Executive Officer and March 8, 1999 - ------------------------------------------- Director B. F. MONTOYA President and Chief Executive Officer /s/ M. H. MAERKI Principal Financial Officer March 8, 1999 - ------------------------------------------- M. H. Maerki Senior Vice President and Chief Financial Officer /s/ D. M. BURNETT Principal Accounting Officer March 8, 1999 - ------------------------------------------- D. M. Burnett Vice President, Corporate Controller and Chief Accounting Officer /s/ J. T. ACKERMAN Chairman of the Board March 8, 1999 - ------------------------------------------- J. T. Ackerman /s/ R. G. ARMSTRONG Director March 8, 1999 - ------------------------------------------- R. G. Armstrong /s/ J. A. GODWIN Director March 8, 1999 - ------------------------------------------- J. A. Godwin /s/ L. H. LATTMAN Director March 8, 1999 - ------------------------------------------- L. H. Lattman /s/ M. LUJAN JR. Director March 8, 1999 - ------------------------------------------- M. Lujan Jr. /s/ R. U. ORTIZ Director March 8, 1999 - ------------------------------------------- R. U. Ortiz /s/ R. M. PRICE Director March 8, 1999 - ------------------------------------------- R. M. Price /s/ P. F. ROTH Director March 8, 1999 - ------------------------------------------- P. F. Roth
E-24 EX-10 2 EXHIBIT 10.20.2 TO THE 1998 FORM 10-K When Recorded, Return to: Greg R. Nielsen, Esq. Snell & Wilmer 3100 Valley Bank Center Phoenix, Arizona 85073 CERTAIN RIGHTS OF THE LESSOR UNDER THE FACILITY LEASE AS HERETOFORE AMENDED AND AS AMENDED BY THIS AMENDMENT NO. 2 THERETO HAVE BEEN ASSIGNED TO, AND ARE SUBJECT TO A SECURITY INTEREST IN FAVOR OF, CHEMICAL BANK, AS INDENTURE TRUSTEE UNDER A TRUST INDENTURE, MORTGAGE, SECURITY AGREEMENT AND ASSIGNMENT OF RENTS DATED AS OF AUGUST 12, 1986, AS AMENDED. THIS AMENDMENT NO. 2 HAS BEEN EXECUTED IN SEVERAL COUNTERPARTS. SEE SECTION 3 (e) OF THIS AGREEMENT NO. 2 FOR INFORMATION CONCERNING THE RIGHTS OF HOLDERS OF VARIOUS COUNTERPARTS HEREOF AND OF THE FACILITY LEASE. THIS COUNTERPART IS NOT THE ORIGINAL COUNTERPART. - -------------------------------------------------------------------------------- AMENDMENT NO. 2 Dated as of April 10, 1987 to FACILITY LEASE Dated as of August 12, 1986, as amended between THE FIRST NATIONAL BANK OF BOSTON, not in its individual capacity, but solely as Owner Trustee under a Trust Agreement, dated as of August 12, 1986, with MFS Leasing Corp., Lessor and PUBLIC SERVICE COMPANY OF NEW MEXICO, Lessee - -------------------------------------------------------------------------------- Original Facility Lease recorded August 18, 1986, as Instrument No. 86-439399, amended by Amendment No. 1 thereto recorded November 25, 1986, as Instrument No. 86-650755 all in Maricopa County, Arizona Recorder's Office. - -------------------------------------------------------------------------------- 6091.MFSU1.DEBT.71B:1 AMENDMENT NO. 2, dated as of April 10, 1987 (Amendment No. 2), to the Facility Lease dated as of August 12, 1986, between THE FIRST NATIONAL BANK OF BOSTON, a national banking association, not in its individual capacity, but solely as Owner Trustee under a Trust Agreement, dated as of August 12, 1986, with MFS Leasing Corp. (the Lessor), and PUBLIC SERVICE COMPANY OF NEW MEXICO, a New Mexico corporation (the Lessee). W I T N E S S E T H : WHEREAS, the Lessee and the Lessor have heretofore entered into a Facility Lease dated as of August 12, 1986, as heretofore amended (the Facility Lease), providing for the lease by the Lessor to the Lessee of the Undivided Interest and the Real Property Interest; WHEREAS, the Lessee and the Lessor desire to amend the Facility Lease as set forth in Section 2 hereof; and WHEREAS, the Indenture Trustee has consented to this Amendment No. 2 pursuant to the Request, Instruction and Consent effective on April 10, 1987: 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. For purposes hereof, capitalized terms used herein and not otherwise defined herein or in the recitals shall have the meanings assigned to such terms in Appendix A to the Facility Lease. SECTION 2. Amendment. The definition of "Change in Tax Law" set forth in Appendix A to the Facility Lease is hereby amended to read in its entirety as follows: "Change in Tax Law shall mean any change in the Code or successor legislation enacted by the Ninety-ninth Congress (other than a change in respect of an alternative minimum tax or an add-on minimum tax having the same effect as an alternative minimum tax), or if prior to January 15, 1997 (i) there is enacted any technical correction thereto, or (ii) there are adopted, promulgated, issued or published any proposed, temporary to final Regulations resulting therefrom (regardless of the effective date of such technical corrections or Regulations, but only if such technical corrections or Regulations would affect Net Economic Return); provided, however, that a Change in Tax Law shall occur in the event the provision set forth in Section 1509 (b) of H. R. 3838 as passed by the U.S. House of Representatives on December 17, 1985 and Section 1809 (b) of H. R. 3838 as passed by the U.S. Senate on June 24, 1986 shall fail to be enacted into law in the form therein set forth or, if such provision is so enacted into law. It shall not apply to the Common Facilities." 2 6091.MFSU1.DEBT.71B:1 SECTION 3. Miscellaneous (a) Effective Date of Amendment. The amendment set forth in Section 2 hereof shall be and become effective on and as of December 31, 1985. (b) Counterpart Execution. This Amendment No. 2 may be executed in any number of counterparts and by each of the parties hereto on separate counterparts; all such counterparts shall together constitute but one and the same instrument. (c) Governing Law. This Amendment No. 2 has been negotiated and delivered in the State of New York and shall be governed by, and be construed in accordance with, the laws of the State of New York, except to the extent that pursuant to the law of the State of Arizona such law is mandatorily applicable hereto. (d) Disclosure. Pursuant to Arizona Revised Statutes Section 33-401, the beneficiary of the Trust Agreement is MFS Leasing Corp., a Delaware corporation. The address of the beneficiary is Suite 3030, One Mellon Bank Center, Pittsburgh, PA 15258, Attention: President. A copy of the Trust Agreement is available for inspection at the offices of the Owner Trustee at 100 Federal Street, Boston, Massachusetts 02110, Attention of Corporate Trust Division. (e) Amendment No. 1. The single executed original of this Amendment No. 2 marked "THIS COUNTERPART IS THE ORIGINAL COUNTERPART" and containing the receipt of the Indenture Trustee thereon shall be the "Original" of this Amendment No. 2. To the extent that the Facility Lease constitutes chattel paper, as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction, no security interest in the Facility Lease as amended by this Amendment No. 2 may be created or continued through the transfer or possession of any counterpart of this Amendment No. 2 other than the "Original". 3 6091.MFSU1.DEBT.71B:1 IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment No. 2 to Facility Lease to be duly executed in Boston, Massachusetts, or Albuquerque, New Mexico, as the case may be, by an officer thereunto duly authorized. THE FIRST NATIONAL BANK OF BOSTON, not in its individual capacity, but solely as Owner Trustee under a Trust Agreement, dated as of August 12, 1986, with MFS Leasing Corp. By /s/ James E. Mogavero ----------------------------------- Assistant Cashier PUBLIC SERVICE COMPANY OF NEW MEXICO By ----------------------------------- Vice President and Corporate Controller 6091.MFSU1.DEBT.71B:1 4 IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment No. 2 to Facility Lease to be duly executed in Boston, Massachusetts, or Albuquerque, New Mexico, as the case may be, by an officer thereunto duly authorized. THE FIRST NATIONAL BANK OF BOSTON, not in its individual capacity, but solely as Owner Trustee under a Trust Agreement, dated as of August 12, 1986, with MFS Leasing Corp. By ---------------------------------- Assistant Cashier PUBLIC SERVICE COMPANY OF NEW MEXICO By /s/ B. D. Lackey ---------------------------------- Vice President and Corporate Controller 6091.MFSU1.DEBT.71B:1 5 State of New Mexico ) ) ss: County of Bernalillo ) The foregoing instrument was acknowledged before me this 10th day of April, 1987, by B. D. Lackey, the Vice President and Corporate Controller of PUBLIC SERVICE COMPANY OF NEW MEXICO, a New Mexico corporation, on behalf of the corporation. /s/ -------------------------------------- Notary Public Commonwealth of Massachusetts ) ) ss: County of Suffolk ) The foregoing instrument was acknowledged before me this 10th day of April, 1987 by James E. Mogavero, an Assistant Cashier of THE FIRST NATIONAL BANK OF BOSTON, a national banking association, on behalf of the banking association as trustee under that certain Trust Agreement dated as of August 12, 1986 with MFS Leasing Corp. /s/ -------------------------------------- Notary Public 6091.MFSU1.DEBT.71B:1 6 State of New Mexico ) ) ss: County of Bernalillo ) The foregoing instrument was acknowledged before me this 10th day of April, 1987, by B. D. Lackey, the Vice President and Corporate Controller of PUBLIC SERVICE COMPANY OF NEW MEXICO, a New Mexico corporation, on behalf of the corporation. /s/ -------------------------------------- Notary Public Commonwealth of Massachusetts ) ) ss: County of Suffolk ) The foregoing instrument was acknowledged before me this 10th day of April, 1987 by James E. Mogavero, an Assistant Cashier of THE FIRST NATIONAL BANK OF BOSTON, a national banking association, on behalf of the banking association as trustee under that certain Trust Agreement dated as of August 12, 1986 with MFS Leasing Corp. /s/ Carol Malley -------------------------------------- Notary Public CAROL MALLEY Notary Public My Commission Expires January 28, 1994 6091.MFSU1.DEBT.71B:1 7 EX-10 3 EXHIBIT 10.23 TO THE 1998 FORM 10-K RESTATED and AMENDED PUBLIC SERVICE COMPANY OF NEW MEXICO ACCELERATED MANAGEMENT PERFORMANCE PLAN (1988) - -------------------------------------------------------------------------------- ARTICLE 1 TITLE AND PURPOSE 1.01 Public Service Company of New Mexico ("PNM" or the "Company") established the Public Service Company of New Mexico Accelerated Management Performance Plan (the "Plan") on January 14, 1981. On October 23, 1984, the Plan was amended and restated, and subsequently the October 23, 1984, amended and restated Plan was amended by three amendments. The Company now wishes to further amend that Plan and with such amendment, to fully restate the Plan as amended. 1.02 The purpose of the Plan is to encourage personal growth, to improve productivity and to foster the acceptance of increased responsibility by providing the participating members of each Company's Executive Pay Group with supplemental retirement benefits. 1.03 Participation in the Plan by an Employee pursuant to a Joinder Agreement does not and shall not be deemed to constitute a contract of employment between the Employer Company and the Participating Employee, nor shall any provision hereunder, except as may be expressly stated, restrict the right of the Employer Company to discharge the Participating Employee or restrict the right of the Participating Employee to terminate employment. 1.04 Following the adoption of the Plan certain companies affiliated with PNM have adopted the Plan. ARTICLE 2 DEFINITIONS The following terms as used herein shall have the meanings specified below unless the context otherwise requires. The masculine pronouns, where used, shall include the feminine, and the singular shall, where appropriate, include the plural. 2.01 "Actuarial Equivalent" shall mean a benefit of equivalent value as determined by an independent actuary selected by the Company using assumptions of interest and mortality which reflect his best estimate of future experience for the Plans. Such Actuarial Equivalents may be different from those utilized in the Employees' Retirement Plan. The Company's good faith determination of actuarial equivalents shall be conclusive for all purposes hereunder. 2.02 "Authorized Leave of Absence" means a leave of absence approved by the Plan Administrator. 2.03 "Average Earnings" means Average Earnings as defined in the Employees' Retirement Plan. 2.04 "Board of Directors" means the Board of Directors of an Employer Company. 2.05 "Company" means Public Service Company of New Mexico or any successor thereto, and any company affiliated with Public Service Company of New Mexico which adopts the Plan. 2.06 "Deferred Early Retirement Benefit" means Deferred Early Retirement Benefit as defined in the Employees' Retirement Plan. 2 2.07 "Early Retirement Benefit" means Early Retirement Benefit as defined in the Employees' Retirement Plan. 2.08 "Early Retirement Date" means the date upon which an Employee retires from the service of a Company pursuant to the provisions of Section 6.03 of the Employees' Retirement Plan. 2.09 "Effective Date" of the Plan as amended shall, as to all Participating Employees, be August 1, 1988. The Plan, as amended, shall not adversely or beneficially affect any person not employed on the Effective Date. 2.10 "Employee" shall mean any person employed by a Company who has been designated as a member of such Company's Executive Pay Group. 2.11 "Employees' Retirement Plan" means the Public Service Company of New Mexico Employees' Retirement Plan, as amended from time to time. 2.12 "Employer Company" means the Company employing the Employee who is a Participating Employee. 2.13 "Executive Pay Group" means a management group of employees designated by the President of the Employer Company. 2.14 "Joinder Agreement" shall mean a signed written agreement by an Employee to participate in the Plan in a -form approved by the Plan Administrator. 2.15 "Maximum Performance Credits" shall mean a total of thirty (30) Performance Credits. 2.16 "Normal Retirement Benefit" means the Normal Retirement Benefit as defined in the Employees' Retirement Plan. 3 2.17 "Normal Retirement Date" means the Normal Retirement Date as defined in the Employees' Retirement Plan. 2.18 "Participating Employee" shall mean an Employee who, as of August 1, 1988, had met the eligibility requirements of Article 3 hereof, had executed a Joinder Agreement and had that Joinder Agreement accepted by the Plan Administrator. 2.19 "Performance Credit" means credit earned toward accumulating Maximum Performance Credits. 2.20 "Plan means the Public Service Company of New Mexico Accelerated Management Performance Plan as described herein or as hereafter amended. 2.21 "Plan Administrator" means the person designated by the President of PNM as the Plan Administrator of the Plan. 2.22 "Plan Year" means the fiscal year of the Company. 2.23 "Service Bonus Plan" means the Public Service Company of New Mexico Service Bonus Plan, as amended from time to time. 2.24 "Terminated Participant" means a Participating Employee who: 2.24.1 Before accumulating Maximum Performance Credits and attaining his Early Retirement Date, ceases to be an employee of the Company. 2.24.2 Before accumulating Maximum Performance Credits and attaining his Early Retirement Date, ceases to be a Participating Employee pursuant to a Resolution adopted by the Board of Directors. 4 2.24.3 Dies prior to electing Early Retirement Benefit, Deferred Early Retirement Benefit or Normal Retirement Benefit under the Plan, or 2.24.4 After accumulating Maximum Performance Credits, fails to elect an Early Retirement Benefit or Deferred Early Retirement Benefit for any reason other than deferral, at the specific invitation of the Board of Directors. 2.25 "Year means the period of twelve (12) consecutive calendar months beginning on the first day of the month following the date an Employee became a member of the Executive Pay Group or any anniversary thereof. 2.26 "Year of Service" means each Year of service as defined in the Employees' Retirement Plan. ARTICLE 3 ELIGIBILITY 3.01 Employees Eligible to Be Included in Plan. Only Employees now covered by the Plan are eligible to be Participating Employees. No additional Employees may be added to the Plan. A List of Eligible Employees now in the Plan is attached hereto as Exhibit A. ARTICLE 4 PARTICIPATION 4.01 Each Participating Employee will receive one (1) Performance Credit for each Year of Service plus additional Performance Credit for each Year in accordance with the following schedule: 5 Executive Pay Group Grade Additional Performance Credit for Each Level Year of Membership - ------------- ----------------------------------------------------------- 1985 1990 and prior 1986 1987 1988 1989 and after --------- ---- ---- ---- ---- --------- One 1.00 .80 .60 .40 .20 .00 Two .80 .64 .48 .32 .16 .00 Three .60 .48 .36 .24 .12 .00 Four .40 .32 .24 .16 .08 .00 Performance Credits shall be calculated in monthly increments, on the basis of calendar months. For purposes of determining Years of membership in the Executive Pay Group, service for any part of a calendar month shall be considered one full month's credit. 4.02 Performance Credits during an Authorized Leave of Absence shall be determined by the Plan Administrator, consistent with the Employee Retirement Income Security Act of 1974, as amended. 4.03 No additional Performance Credits will be earned by a Participating Employee after the occurrence of any of the following events: 4.03.1 The death of the Participating Employee. 4.03.2 The Participating Employee becoming a Terminated Participant. 4.04 A Participating Employee who has accumulated the Maximum Performance Credits may, the specific invitation of the Board of Directors, defer electing an Early Retirement Benefit. In such event, the benefits available under this Plan will become payable under Article 5 upon expiration of the deferral period and election of an Early Retirement Benefit or a Deferred Early Retirement Benefit by the Employee. 6 ARTICLE 5 BENEFITS 5.01 Benefit of Employee Prior to Accumulating Maximum Performance Credits. 5.01.1 A Participating Employee, upon termination of employment after attaining his Early Retirement Date but prior to accumulating the Maximum Performance Credits, shall receive an annual benefit for his life in an amount equal to two percent (2%) times his Average Earnings times his Performance Credits, reduced, if he has not attained his Normal Retirement Date, by two and four-tenths percent (2.4) for each Performance Credit less than the Maximum Performance Credits, payable in monthly installments commencing the month in which his Early Retirement Benefit or Deferred Early Retirement Benefit commences and further reduced by the Employees' Early Retirement Benefit or Deferred Early Retirement Benefit, as the case may be, paid under the Employees' Retirement Plan. 5.01.2 A Terminated Participant shall not receive a benefit under the Plan. 5.02 Benefit of Employee Accumulating Maximum Performance Credits. A Participating Employee electing an Early Retirement Benefit or Deferred Early Retirement Benefit upon accumulating Maximum Performance Credits, in lieu of the benefit under Section 5.01 hereinabove, shall receive an annual benefit for his life in an amount equal to the percentage of Average Earnings in accordance with the following schedule, payable in monthly installments commencing the month in which his Early Retirement Benefit or Deferred Early Retirement Benefit commences: Maximum Performance Percentage of Credits Earned Prior to Average Earnings - ------------------------------- ---------------------------------- 01/01/86 65% 01/01/87 64% 01/01/88 63% 01/01/89 62% 01/01/90 61% On or after 01/01/90 60% 7 The benefit hereunder shall be reduced by the Employee's Early Retirement Benefit or Deferred Early Retirement Benefit paid under the Employee's Retirement Plan. 5.03 Method of Distribution: Notwithstanding any other provision of this Plan, the form of payment of benefits hereunder shall be the same as the form of payment of benefits selected by the Participant under the Employee's Retirement Plan. The payment of the Actuarial Equivalent of the life only benefit under the Plan shall relieve the Company of further obligation to such person under the Plan. 5.04 Participating Employees Receiving Benefits. Participating Employees receiving benefits under the Plan as of the Effective Date of the Plan as amended, shall continue to receive benefits under the Plan in effect prior to the Effective Date of the restatement and amendment. ARTICLE 6 SOURCE OF PAYMENTS 6.01 Unfunded Plan. The Plan is an unfunded, nonqualified plan. It is a condition of this Plan, and any Participating Employee herein expressly agrees to look solely to the Employer Company for the payment of benefits under the Plan. Such payments shall be made from funds provided under a trust established by the Employer Company, if any, and the general funds of such Employer Company. The Employee or any other person or persons having or claiming a right to payments hereunder shall rely solely on the unsecured promise of the Employer Company set forth herein. Nothing in this Plan shall be construed to give the Employee or any such person any right, title, interest, or claim in or to any specific asset, fund, reserve, account, or property of any kind whatsoever, owned by the Employer Company or in which the Employer Company may have any right, title or interest now or in the future or against any Company that is not the Employer Company. However, the Employee or any such person shall have the right to enforce a claim against the Employer Company in the same manner as any other unsecured creditor of the Employer Company. 8 6.02 Company Liability. Each Employer Company shall create and credit to a special account on its books such amounts as may be necessary to effectuate and maintain the Plan on a sound actuarial basis. At its own discretion, an Employer Company may purchase such insurance or annuity contracts or other types of investments as it deems desirable in order to accumulate the necessary funds to provide for the future benefit payments under the Plan or may establish one or more trusts for such purpose. Notwithstanding anything to the contrary herein, an Employer Company shall be under no obligation to fund in advance the benefits provided under this Plan nor shall the investment of Employer Company funds credited to a special account established hereunder be restricted in any way and such funds shall be available for any purpose the Employer Company may choose, other than funds contributed a trust established by the Employer Company, if any. ARTICLE 7 FORFEITURES 7.01 Benefits Nonforfeitable. All benefits under Article 5 shall be nonforfeitable, except as provided in Section 7.02. 7.02 Forfeitures for Cause. No benefits shall be payable to the Participating Employee if the Participating Employee fails to elect an Early Retirement Benefit or Deferred Early Retirement Benefit under the Plan upon attaining Maximum Performance Credits, except in the event of deferral of such election at the specific invitation of the Board of Directors. ARTTCLE 8 PLAN ADMINISTRATION 8.01 Administration of Plan. The Board of Directors hereby vests the Plan Administrator with all powers and authority necessary to administer the Plan as herein provided, and with the authority to make such rules and regulations of uniform application as deemed necessary to carry out the provisions of the Plan. The Plan Administrator shall have the exclusive right to interpret the provisions of the Plan and to determine any questions arising thereunder or in connection with the administration thereof. Any decision or action of the Plan Administrator shall be conclusive and binding upon all Participating Employees and Terminated Participants. 9 8.02 Reliance on Reports and Certificates. The Plan Administrator may rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by an actuary, accountant, counsel or other person who may from time to time be employed or engaged for such purposes. ARTICLE 9 AMENDMENT AND TERMINATION 9.01 General. The Board of Directors may at any time amend or terminate the Plan as to such Company, subject to the limitations set forth in section hereof. An amendment or termination shall have no effect upon any other Company until the Board of Directors of such other Company adopts the amendment or termination. 9.02 Restrictions on Amendment or Termination. The Board of Directors, in terminating the Plan or amending the Plan to reduce benefits shall require such Company to: 9.02.1 Continue to make payments to each Participating Employee receiving benefits or who has terminated employment and is entitled to receive benefits as if the Plan had not been amended or terminated. 9.02.2 Pay all benefits theretofore accrued by each Participating Employee who has attained his Early Retirement Date at the date the Plan is terminated or amended to reduce benefits, when such Employee retires as if the Plan had not been amended or terminated, and 9.02.3 Pay each Participating Employee, who has not attained his Early Retirement Date at the date the Plan is terminated or amended to reduce benefits, a benefit, payable when he retires, equal to his Deferred Early Retirement Benefit or Normal Retirement Benefit, for a period of months prior to his Deferred Early Retirement Date or Normal Retirement Date, as the case may be, equal to his Performance Credits in excess of his Years of Service at the date the Plan is terminated or amended to reduce benefits multiplied by twelve (12). 10 9.03 Successors to Business of Company. The obligation of an Employer Company under the Plan shall be binding upon any successor to the business of such Employer Company whether upon sale of all or substantially all of the assets of such Employer Company, merger, consolidation or similar reorganization. A Company shall not sell all or substantially all of its assets or participate in any merger, consolidation or similar reorganization as to which it is not the surviving entity unless the successor to the business of such Company or other surviving entity, by whatever form or manner resulting, shall continue the Plan as to it by executing an appropriate supplementary agreement; and such successor or surviving entity shall thereupon succeed to all the rights, powers and duties of such Company hereunder. The employment of any Employee who has continued in the employ of such successor or surviving entity shall not be deemed to have been terminated or severed for any purpose hereunder. 9.04 Dissolution of a Company. In the event that a Company is dissolved or liquidated by reason of bankruptcy, insolvency or otherwise, without any provision being made for the continuance of this Plan by a successor to the business of such Company, the Plan shall be treated as terminated subject to the rights of Participating Employees of such Company to receive benefits hereunder as provided in Section 9.02, and the Actuarial Equivalent of such benefits, at the option of the person entitled thereto, shall be paid immediately in one lump sum, to the extent permitted by law. ARTICLE 10 MISCELLANEOUS 10.01 No Alienation. The benefits provided hereunder shall not be subject to alienation, assignment, pledge, anticipation, attachment, garnishment, receivership, execution or levy of any kind, including liability for alimony or support payments, and any attempt to cause such benefits to be subjected shall not be recognized, except to the extent as may be required by law. 10.02 Appointment of Person to Receive Payment. If, within one (1) year after written notice from the Employer Company or the Plan Administrator mailed to any person entitled to a payment hereunder at such person's last known address as shown on the Employer Company's records, such person or a legal representative shall not have notified the Plan administrator in person or writing of his or her address, then the Plan Administrator may appoint one or more of the spouse, the blood relatives or the legal representative of such person to receive such amount, including any amount thereafter becoming due to such person (or such person's estate), in the proportions determined by the Plan Administrator. Any action of the Plan Administrator taken hereunder in good faith shall be conclusive and binding upon all persons. 11 10.03 Incapacity of Payee. If the Plan Administrator determines that any person to whom a benefit is payable is legally incapacitated, the Plan Administrator may direct that any payment becoming due to such person (unless claim shall have been made therefor by a duly appointed legal representative) be applied for such person' s benefit, or paid to or applied for the benefit of such person's spouse, children, a parent or other blood relative, or paid to a person with whom such incompetent person resides, and any such payment or application so made shall be a complete discharge of the Employer Company's obligations. 10.04 Construction and Governing Law. In any question or interpretation or other matter of doubt, the Plan Administrator and the Employer Company may rely upon the opinion of counsel for the Employer Company or any other attorney-at-law in the State of New Mexico designated by the Employer Company with the approval of the Board of Directors. The provisions of this Plan shall be construed, administered and enforced as a contract in accordance with the laws of the State of New Mexico. 10.05 Entire Plan. The Plan established on January 14, 1981, and subsequently amended, restated and further amended, is now set forth herein and incorporated in one document with all changes, revisions and modifications merged herein. 12 IN WITNESS WHEREOF, the Company has caused this amended and restated Plan to be adopted as of this 16th day of August 1988. PUBLIC SERVICE COMPANY OF NEW MEXICO By /s/ J. D. Geist ---------------------------------------- Jerry D. Geist Chairman and President ATTEST: /s/ J. B. Mulcock, Jr. - ----------------------------------- Secretary MEADOWS RESOURCES, INC. By /s/ James F. Jennings, Jr. ---------------------------------------- James F. Jennings, Jr. President and Chief Executive Officer ATTEST: - ----------------------------------- Secretary PARAGON RESOURCES, INC. By /s/ J. L. Wilkins ---------------------------------------- Its President ---------------------------------------- ATTEST: /s/ J. B. Mulcock, Jr. - ----------------------------------- Secretary 13 SUNBELT MINING COMPANY, INC. By /s/ A. J. Robison ---------------------------------------- Its President ---------------------------------------- ATTEST: /s/ J. B. Mulcock, Jr. - ----------------------------------- Secretary 14 EXHIBIT A COMPANY: ESBU Donald A. Begley Garth Boyce Larry Edwards William M. Eglinton Eugene W. Fisher Jerry L. Godwin Patrick J. Goodman George W. Gorman Ronald H. Hallford Dennis E. Hines Edward A. Jeffers Olin A. Kane Edward L. King Edward D. Kist Edwin A. Kraft Robert E. Lowry Alfonso R. Lujan Jack D. Maddox Richard L. Martinez Martha A. McDonald Ronald F. Mershon William J. Moye John P. Ortiz Terry L. Othick Daniel J. Peck Don Pierce Billy H. Ransdell Lawrence D. Ratliff Gary R. Sloman Michael C. Slota Jeffry E. Sterba Dale E. Stolz Larry D. Sullivan David K. Summers Charles Thompson Frank M. Van Gundy William R. Watson Jack L. Wilkins Ellen A. Wilson Robert M. Wilson William C. Wygant Ely Yao 15 COMPANY: PARAGON Alfred C. Underwood COMPANY: SUNBELT Terry Bauer Martin A. Clifton Charles E. Hunter COMPANY: MEADOWS Bruno E. Carrara James F. Jennings, Jr. Charlie R. Mollo Roger C. Rankin John H. Von Rusten COMPANY: GCNM John T. Ackerman Richard A. Jordan Ted H. Morse Henry 0. Pocock COMPANY: CORPORATE John P. Bundrant Jerry D. Geist Billy D. Lackey Mitchell J. Marzec James B. Mulcock, Jr. Joellyn K. Murphy Robert S. Murray Fred L. O'Cheskey Albert J. Robison David P. Rusk John H. Smalley Robert B. Starnes Tom C. Wray 16 EX-10 4 EXHIBIT 10.23.1 TO THE 1998 FORM 10-K FIRST AMENDMENT TO RESTATED AND AMENDED PUBLIC SERVICE COMPANY OF NEW MEXICO ACCELERATED MANAGEMENT PERFORMANCE PLAN (1988) AMENDMENT made as of the 30th day of August, 1988, by Public Service Company of New Mexico (PNM), Meadows Resources, Inc., Paragon Resources, Inc., Sunbelt Mining Company, Inc. WHEREAS, under section 9.01 of the Restated and Amended Public Service Company of New Mexico Accelerated Management Performance Plan (the "Plan", each Employer Company reserves the right at any time to amend the Plan, and WHEREAS, each Employer Company desires to amend the Plan, NOW, THEREFORE, each Employer Company does hereby amend the Plan in the manner to the extent hereinafter set forth: 1. Article V is amended by redesignating Sections 5.03 and 5.04 as 5.04 and 5.05 and inserting after Section 5.02 the following new sections: "5.03 Benefit of Employee Electing 1988 Early Retirement Window. 5.03.1 A Participating Employee electing Early Retirement Benefit, Deferred Early Retirement Benefit, or Normal Retirement Benefit under Section 6.20A.1. of the 1988 Early Retirement Window Amendment to the Employee's Retirement Plan shall receive an annual benefit for the life of such person in an amount equal to two percent (2%) times annual rate of base earnings on October 1, 1998, or such other amounts as may be designated by the President and Chairman of PNM, times the total of his Performance Credits on October 31, 1988, plus five additional Performance Credits, not in excess of the Maximum Performance Credits, times a fraction the numerator of which is sixty-two (62) and the denominator of which is sixty (60), payable in monthly installments commencing the month in which the Early Retirement Benefit, Deferred Early Retirement Benefit, or Normal Retirement Benefit commences and reduced by the Employee's Early Retirement Benefit, Deferred Early Retirement Benefit, or Normal Retirement Benefit paid under the Employee's Retirement Plan. 5.03.2 A Participating Employee electing under the 1988 Early Retirement Window to receive an Early Retirement Benefit, Deferred Early Retirement Benefit, or Normal Retirement Benefit under Section 6.20A.2. of the Employee's Retirement Plan shall receive an annual benefit for life of such person in an amount equal to two percent (2%) times his annual rate of base earnings on October 1, 1998, or such other amount as may be designated by the Chairman and President of PNM, times his Performance Credits, reduced, if he has not attained his Normal Retirement Date, by two and four tenths percent (2.4) for each Performance Credit less than the Maximum Performance Credits, payable in monthly installments commencing the month in which the Early Retirement Benefit, Deferred Early Retirement Benefit, or Normal Retirement Benefit commences and further reduced by the Employee's Early Retirement Benefit, Deferred Early Retirement Benefit, or Normal Retirement Benefit paid under the Employee's Retirement Plan." 2 IN WITNESS WHEREOF, Public Service Company of New Mexico, Meadows Resources, Inc., Paragon Resources, Inc., Sunbelt Mining Company, Inc., Sunterra Gas Gathering Company, and Sunterra Gas Processing Company have caused this Amendment to be executed by their respective Presidents and Secretaries the date first above written. PUBLIC SERVICE COMPANY OF NEW MEXICO By /s/ J. D. Geist ---------------------------------------- Jerry D. Geist Chairman and President ATTEST: /s/ J. B. Mulcock, Jr. - ---------------------------------- Secretary 3 MEADOWS RESOURCES, INC. By /s/ James F. Jennings, Jr. ---------------------------------------- James F. Jennings, Jr. President and Chief Executive Officer ATTEST: - ---------------------------------- Secretary PARAGON RESOURCES, INC. By /s/ J. L. Wilkins ---------------------------------------- Its President ATTEST: /s/ J. B. Mulcock, Jr. - ---------------------------------- Secretary SUNBELT MINING COMPANY, INC. By /s/ A. J. Robison ---------------------------------------- Its President ATTEST: /s/ J. B. Mulcock, Jr. - ---------------------------------- Secretary 4 EX-10 5 EXHIBIT 10.23.2 TO THE 1998 FORM 10-K SECOND AMENDMENT TO RESTATED AND AMENDED PUBLIC SERVICE COMPANY OF NEW MEXICO ACCELERATED MANAGEMENT PERFORMANCE PLAN (1988) AMENDMENT made as of the 29th day of December, 1989 by Public Service Company of New Mexico ("PNM"), Meadows Resources, Inc. ("Meadows"), Paragon Resources, Inc. ("Paragon"), and Sunbelt Mining Company, Inc. ("Sunbelt"). (Meadows, Paragon and Sunbelt are referred to herein collectively as the "Affiliates" and singly as "Affiliate"). RECITALS: A. PNM established the Public Service Company of New Mexico Accelerated Management Performance Plan (the "Plan") on January 14, 1981. The Affiliates have adopted the Plan. B. PNM and the Affiliates restated and amended the Plan on October 23, 1984 and again as of August 16, 1988. On August 30, 1988, PNM and the Affiliates amended the August 16, 1988 restated and amended Plan by redesignating Sections 5.03 and 5.04 as Sections 5.04 and 5.05 and by adding a new Section 5.03. C. PNM and the Affiliates desire to amend the August 16, 1988 restated and amended Plan as permitted by Section 9.01 thereof. D. Capitalized terms used herein and not defined shall have the meanings ascribed to them under the August 16, 1988 restated and amended Plan. NOW, THEREFORE, PNM and the Affiliates hereby amend the August 16, 1988 restated and amended Plan as follows: 1. Section 5.04 (formerly Section 5.03) is amended to provide as follows: "5.04 Method of Distribution. Notwithstanding any other provision on this Plan, the form of payment of benefits hereunder shall be the same as the form of annuity benefit selected by the Participant under the Employees' Retirement Plan. The payment of the Actuarial Equivalent of the life only benefit under the Plan shall relieve the Company of further obligation to such person under the Plan." IN WITNESS WHEREOF, PNM and the Affiliates have executed this Amendment on the day and year first above written. PUBLIC SERVICE COMPANY OF NEW MEXICO By: /s/ Jerry D. Geist ----------------------------------------- Jerry D. Geist Chairman and President ATTEST: /s/ J. B. Mulcock, Jr. - ---------------------------------- Secretary MEADOWS RESOURCES, INC. By: /s/ James F. Jennings, Jr. ----------------------------------------- Title: President ----------------------------------------- ATTEST: /s/ J. B. Mulcock, Jr. - ---------------------------------- Asst. Secretary PARAGON RESOURCES, INC. By: /s/ J. B. Mulcock, Jr. ----------------------------------------- Title: President ----------------------------------------- ATTEST: /s/ K. A. Knight - ---------------------------------- Secretary 2 SUNBELT MINING COMPANY, INC. By: /s/ Robert B. Rountree ----------------------------------------- Title: Chairman ----------------------------------------- ATTEST: /s/ J. B. Mulcock, Jr. - ---------------------------------- Secretary 1263T SUBSCRIBED AND SWORN TO before me this 29th day of December, 1989. /s/ Marion H. Lowrey ----------------------------------------- NOTARY PUBLIC My Commission Expires: April 21, 1990 - ---------------------------------- 3 EX-23 6 EXHIBIT 23-1 TO THE 1998 FORM 10-K REPORT ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File No. 33-65418, Registration Statement 333-03289, Registration Statement File No. 333-03303 and Registration Statement File No. 333-53367. Arthur Andersen LLP Albuquerque, New Mexico March 2, 1999 EX-27 7 FDS FOR 1998 FORM 10-K
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 December 31, 1998 and is qualified in its entirety by reference to such financial statements. 0000081023 Public Service Company of New Mexico 1,000 US DOLLARS 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 PER-BOOK 1,593,759 523,834 307,792 151,403 0 2,576,788 208,870 466,513 186,220 861,603 0 12,800 111,000 26,620 897,614 0 0 0 0 0 667,151 2,576,788 1,092,445 48,141 915,490 956,796 135,649 22,687 158,336 63,217 82,682 586 82,096 32,166 15,821 210,987 1.97 1.95
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