-----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, RE1P7wMcKs/sOGTiI32ekmkUdQWo2iRz4eyjtzyHT+cZk8B9bL4bayyONbpEyqMC u2f+lLTc7Ae7Y3lKm4cv1A== /in/edgar/work/20000814/0000081023-00-000024/0000081023-00-000024.txt : 20000921 0000081023-00-000024.hdr.sgml : 20000921 ACCESSION NUMBER: 0000081023-00-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC SERVICE CO OF NEW MEXICO CENTRAL INDEX KEY: 0000081023 STANDARD INDUSTRIAL CLASSIFICATION: [4931 ] IRS NUMBER: 850019030 STATE OF INCORPORATION: NM FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06986 FILM NUMBER: 700112 BUSINESS ADDRESS: STREET 1: ALVARADO SQUARE, MS2706 CITY: ALBUQUERQUE STATE: NM ZIP: 87158 BUSINESS PHONE: 5058482700 10-Q 1 0001.txt TEXT OF 6-30-00 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934 For the period ended June 30, 2000 -------------- - OR - [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _________________ Commission file number 1-6986 ------ PUBLIC SERVICE COMPANY OF NEW MEXICO ------------------------------------ (Exact name of registrant as specified in its charter) New Mexico 85-0019030 ---------- ----------- (State or other jurisdiction of (I.R.S. Employer Incorporation of organization) Identification No.) Alvarado Square, Albuquerque, New Mexico 87158 ---------------------------------------------- (Address of principal executive offices) (Zip Code) (505) 241-2700 -------------- (Registrant's telephone number, including area code) ------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock-$5.00 par value 39,535,699 shares ---------------------------- ----------------- Class Outstanding at August 1, 2000 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES INDEX Page No. PART I. FINANCIAL INFORMATION: Report of Independent Public Accountants.......................... 3 ITEM 1. FINANCIAL STATEMENTS Consolidated Statements of Earnings - Three Months and Six Months Ended June 30, 2000 and 1999.......... 4 Consolidated Balance Sheets - June 30, 2000 and December 31, 1999............................... 5 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2000 and 1999........................... 7 Notes to Consolidated Financial Statements........................ 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................................. 53 PART II. OTHER INFORMATION: ITEM 1. LEGAL PROCEEDINGS........................................... 54 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................. 57 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 58 Signature ......................................................... 59 2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Public Service Company of New Mexico: We have reviewed the accompanying condensed consolidated balance sheet of Public Service Company of New Mexico (a New Mexico corporation) and subsidiaries as of June 30, 2000 and the related condensed consolidated statements of earnings for the three-month and six-month periods ended June 30, 2000 and 1999, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2000 and 1999. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet and statement of capitalization of Public Service Company of New Mexico and subsidiaries as of December 31, 1999, and the related consolidated statements of earnings, capitalization and cash flows for the year then ended (not presented separately herein), and in our report dated January 26, 2000, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1999, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Albuquerque, New Mexico August 11, 2000 3 ITEM 1. FINANCIAL STATEMENTS
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) Three Months Ended Six Months Ended June 30, June 30, -------------------- ------------------- 2000 1999 2000 1999 --------- -------- -------- -------- (In thousands, except per share amounts) Operating Revenues: Electric ............................... $273,184 $212,864 $499,580 $397,306 Gas .................................... 54,514 48,319 149,060 133,183 Unregulated businesses ................. 1,343 188 1,692 3,700 -------- -------- -------- -------- Total operating revenues ............. 329,041 261,371 650,332 534,189 -------- -------- -------- -------- Operating Expenses: Cost of energy sold .................... 180,394 107,954 348,117 218,363 Energy production costs ................ 35,906 35,207 71,548 69,401 Administrative and general ............. 33,562 35,361 65,758 72,266 Depreciation and amortization .......... 22,633 23,345 46,642 46,426 Transmission and distribution costs .... 14,795 15,236 30,076 29,513 Taxes, other than income taxes ......... 8,465 8,848 16,131 18,169 Income taxes............................ 5,632 6,173 13,459 15,736 -------- -------- -------- -------- Total operating expenses ............. 301,387 232,124 591,731 469,874 -------- -------- -------- -------- Operating income ..................... 27,654 29,247 58,601 64,315 -------- -------- -------- -------- Other Income and Deductions, Net of Tax... 6,753 6,313 14,258 12,412 -------- -------- -------- -------- Income before interest charges ....... 34,407 35,560 72,859 76,727 -------- -------- -------- -------- Interest Charges: Interest on long-term debt ............. 15,676 16,688 31,457 33,402 Other interest charges ................. 745 700 1,464 2,023 -------- -------- -------- -------- Net interest charges ................. 16,421 17,388 32,921 35,425 -------- -------- -------- -------- Net Earnings from Continuing Operations 17,986 18,172 39,938 41,302 Cumulative Effect of a Change in Accounting Principle, Net of Tax ....... -- -- -- 3,541 -------- -------- -------- -------- Net Earnings ............................. 17,986 18,172 39,938 44,843 Preferred Stock Dividend Requirements .... 147 146 293 293 -------- -------- -------- -------- Net Earnings Applicable to Common Stock $ 17,839 $ 18,026 $ 39,645 $ 44,550 ======== ======== ======== ======== Net Earnings per Common Share: Basic .................................. $ 0.45 $ 0.44 $ 1.00 $ 1.08 ======== ======== ======== ======== Diluted ................................ $ 0.45 $ 0.44 $ 1.00 $ 1.08 ======== ======== ======== ======== Dividends Paid per Share of Common Stock.. $ 0.20 $ 0.20 $ 0.40 $ 0.40 ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. 4
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, December 31, 2000 1999 ----------- ---------- (Unaudited) ASSETS (In thousands) - ------ Utility Plant: Electric plant in service .............................. $1,976,764 $1,976,009 Gas plant in service ................................... 485,558 483,819 Common plant in service and plant held for future use .. 69,300 69,273 ---------- ---------- 2,531,622 2,529,101 Less accumulated depreciation and amortization ......... 1,119,723 1,077,576 ---------- ---------- 1,411,899 1,451,525 Construction work and progress ......................... 139,233 104,934 Nuclear fuel, net of accumulated amortization of $20,140 and $20,832 ................................. 25,782 25,923 ---------- ---------- Net utility plant .................................... 1,576,914 1,582,382 ---------- ---------- Other Property and Investments: Other investments ...................................... 477,571 483,008 Non-utility property, net of accumulated depreciation of $1,466 and $1,261 ............................... 3,804 4,439 ---------- ---------- Total other property and investments ................. 481,375 487,447 ---------- ---------- Current Assets: Cash and cash equivalents .............................. 84,060 120,399 Accounts receivables, net of allowance for uncollectible accounts of $8,935 and $12,504 ....... 173,221 147,746 Other receivables ...................................... 59,962 68,911 Inventories ............................................ 33,951 33,064 Regulatory assets ...................................... 8,749 24,056 Other current assets ................................... 59,164 11,862 ---------- ---------- Total current assets ................................. 419,107 406,038 ---------- ---------- Deferred Charges: Regulatory assets ...................................... 211,550 195,898 Prepaid benefit costs .................................. 17,121 16,126 Other deferred charges ................................. 47,203 35,377 ---------- ---------- Total current assets ................................. 275,874 247,401 ---------- ---------- $2,753,270 $2,723,268 ========== ==========
5
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, December 31, 2000 1999 ---------- ----------- (Unaudited) CAPITALIZATION AND OTHER LIABILITIES (In thousands) - ------------------------------------ Capitalization: Common stockholders' equity: Common stock ............................................... $ 197,678 $ 203,517 Additional paid-in capital ................................. 440,371 453,393 Accumulated other comprehensive income, net of tax ......... 1,790 2,352 Retained earnings .......................................... 251,768 227,829 ---------- ---------- Total common stockholders' equity ....................... 891,607 887,091 Minority interest ............................................. 12,482 12,771 Cumulative preferred stock without mandatory Redemption requirements .................................. 12,800 12,800 Long-term debt, less current maturities ....................... 953,792 988,489 ---------- ---------- Total capitalization .................................... 1,870,681 1,901,151 ---------- ---------- Current Liabilities: Accounts payable .............................................. 149,406 150,645 Accrued interest and taxes .................................... 33,210 34,237 Other current liabilities ..................................... 122,091 60,948 ---------- ---------- Total current liabilities ............................... 304,707 245,830 ---------- ---------- Deferred Credits: Accumulated deferred income taxes ............................... 151,421 153,179 Accumulated deferred investment tax credits ..................... 49,425 50,996 Regulatory liabilities .......................................... 82,711 88,497 Regulatory liabilities related to accumulated deferred income tax .................................................... 15,091 15,091 Accrued postretirement benefit costs ............................ 10,623 8,945 Other deferred credits .......................................... 268,611 259,579 ---------- ---------- Total deferred credits ....................................... 577,882 576,287 ---------- ---------- Commitments and Contingencies ..................................... -- -- ---------- ---------- $2,753,270 $2,723,268 ========== ==========
The accompanying notes are an integral part of these financial statements. 6
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, ---------------------- 2000 1999 --------- --------- (In thousands) Cash Flows From Operating Activities: Net earnings .................................................... $ 39,938 $ 44,843 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization ............................... 51,930 52,064 Gain on cumulative effect of a change in accounting principle -- (5,862) Other, net .................................................. 8,469 1,031 Changes in certain assets and liabilities: Accounts receivables ...................................... (25,475) (230) Other assets .............................................. 7,714 5,364 Accounts payable .......................................... (1,239) (21,639) Other liabilities ......................................... 15,533 12,104 --------- --------- Net cash flows provided from operating activities ......... 96,870 87,675 --------- --------- Cash Flows From Investing Activities: Utility plant additions ......................................... (50,365) (38,932) Return on PVNGS lease obligation bonds .......................... 8,636 9,029 Other investing ................................................. (23,311) 24,112 --------- --------- Net cash flows used from investing activities ............. (65,040) (5,791) --------- --------- Cash Flows From Financing Activities: Repayments ...................................................... (32,800) (47,744) Common stock repurchase ......................................... (18,854) (17,651) Dividends paid .................................................. (16,227) (16,739) Other financing ................................................. (288) (369) --------- --------- Net cash flows used in financing activities ............... (68,169) (82,503) --------- --------- Decrease in Cash and Cash Equivalents ............................. (36,339) (619) Beginning of Period ............................................... 120,399 61,280 --------- --------- End of Period ..................................................... $ 84,060 $ 60,661 ========= ========= Supplemental Cash Flow Disclosures: Interest paid ................................................... $ 32,854 $ 34,645 ========= ========= Income taxes paid, net .......................................... $ 20,423 $ 24,425 ========= =========
The accompanying notes are an integral part of these financial statements. 7 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Accounting Policies and Responsibilities for Financial Statements In the opinion of management of Public Service Company of New Mexico (the "Company"), the accompanying interim consolidated financial statements present fairly the Company's financial position at June 30, 2000 and December 31, 1999, the consolidated results of its operations for the three months ended June 30, 2000 and the consolidated statements of cash flows for the three months ended March 31, 2000. These statements are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission ("SEC"). Accordingly, they are unaudited, and certain information and footnote disclosures normally included in the Company's annual consolidated financial statements have been condensed or omitted, as permitted under the applicable rules and regulations. Readers of these statements should refer to the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 1999, which are included on the Company's Annual Report on Form 10-K for the year ended December 31, 1999. The results of operations presented in the accompanying financial statements are not necessarily representative of operations for an entire year. Certain amounts in the 1999 consolidated financial statements and notes have been reclassified to conform to the 2000 financial statement presentation. (2) Segment Information The Company has three principal business segments. The utility segment consists of three major business lines that include the Electric Service Business Unit ("Distribution"), Transmission Service Business Unit ("Transmission") and Natural Gas Distribution and Transmission Business Unit ("Gas"). The Generation business segment includes the Company's physical electric generation operations as well as the Company's electric trading operations. The unregulated segment consists of the operations of Avistar, Inc. and certain corporate administrative functions. Intersegment revenues are determined based on a formula mutually agreed upon between affected segments and are not based on market rates. Intersegment revenues are eliminated for consolidated purposes. 8 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (2) Segment Information (Continued) Summarized financial information by business segment for the three months and six months ended June 30, 2000 and 1999 is as follows:
Utility ---------------------------------------------------- Distribution Transmission Gas Total Generation Unregulated Consolidated ------------ ------------ --- ----- ---------- ----------- ------------ (In thousands) Three Months Ended: - ------------------ 2000: Operating revenues: External customers............. $126,141 $ 4,002 $ 54,514 $ 184,657 $ 143,041 $ 1,343 $ 329,041 Intersegment revenues.......... - 7,064 - 7,064 78,869 - 85,933 Depreciation and amortization..... 5,849 2,104 4,515 12,468 10,159 6 22,633 Interest income (loss)............ 350 (3) 110 457 9,743 2,171 12,371 Net interest charges.............. 3,332 1,051 2,881 7,264 8,887 270 16,421 Income tax expense (benefit) From continuing operations...... 6,504 531 (427) 6,608 6,853 (3,776) 9,685 Operating income (loss)........... 13,488 1,976 1,961 17,425 16,669 (6,440) 27,654 Segment net income (loss)......... 10,093 897 (836) 10,154 12,959 (5,127) 17,986 Total assets...................... 545,500 200,276 442,892 1,188,668 1,449,638 120,659 2,758,965 Gross property additions.......... 9,454 2,638 6,475 18,567 9,438 2,335 30,340 1999: Operating revenues: External customers............. $133,191 $ 3,736 $ 48,319 $ 185,246 $ 75,937 $ 188 $ 261,371 Intersegment revenues.......... - 7,450 - 7,450 79,198 - 86,648 Depreciation and amortization..... 5,670 2,062 4,722 12,454 10,370 521 23,345 Interest income................... 5 - 195 200 10,170 2,146 12,516 Net interest charges.............. 3,887 1,245 3,060 8,192 8,955 241 17,388 Income tax expense (benefit) from continuing operations...... 6,864 605 (294) 7,175 6,053 (2,918) 10,310 Operating income (loss)........... 14,689 2,244 2,599 19,532 13,489 (3,774) 29,247 Segment net income (loss)......... 10,540 978 (639) 10,879 11,746 (4,453) 18,172 Total assets...................... 555,843 185,096 397,856 1,138,795 1,247,029 162,996 2,548,820 Gross property additions.......... 6,165 3,231 5,493 14,889 6,207 585 21,681
9 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (2) Segment Information (Continued) Summarized financial information by business segment for the three months and six months ended June 30, 2000 and 1999 is as follows:
Utility ---------------------------------------------------- Distribution Transmission Gas Total Generation Unregulated Consolidated ------------ ------------ --- ----- ---------- ----------- ------------ (In thousands) Six Months Ended: - ---------------- 2000: Operating revenues: External customers............. $248,250 $ 7,813 $149,060 $405,123 $243,517 $ 1,692 $650,332 Intersegment revenues.......... - 13,861 - 13,861 154,691 - 168,552 Depreciation and amortization..... 12,306 4,207 9,881 26,394 20,237 11 46,642 Interest income................... 390 3 247 640 19,522 3,436 23,598 Net interest charges.............. 6,705 2,148 5,735 14,588 17,787 546 32,921 Income tax expense (benefit) From continuing operations...... 11,940 999 3,299 16,238 12,666 (6,518) 22,386 Operating income (loss)........... 25,477 3,879 10,079 39,435 30,475 (11,309) 58,601 Segment net income (loss)......... 18,557 1,699 4,664 24,920 24,329 (9,311) 39,938 Total assets...................... 545,500 200,276 442,892 1,188,668 1,449,638 120,659 2,758,965 Gross property additions.......... 17,458 4,479 11,212 33,149 17,216 2,834 53,199 1999: Operating revenues: External customers............. $262,374 $ 7,512 $133,183 $403,069 $127,420 $ 3,700 $534,189 Intersegment revenues.......... - 14,900 - 14,900 157,168 - 172,068 Depreciation and amortization..... 11,323 4,125 9,404 24,852 20,533 1,041 46,426 Interest income................... 16 3 395 414 20,447 3,510 24,371 Net interest charges.............. 7,940 2,546 6,229 16,715 18,209 501 35,425 Income tax expense (benefit) from continuing operations...... 12,816 1,308 2,856 16,980 11,285 (4,395) 23,870 Operating income (loss)........... 28,005 4,696 10,928 43,629 27,050 (6,364) 64,315 Cumulative effect of a change in accounting principle, net of tax - - - - 3,541 - 3,541 Segment net income (loss)......... 19,685 2,108 3,976 25,769 25,780 (6,706) 44,843 Total assets...................... 555,843 185,096 397,856 1,138,795 1,247,029 162,996 2,548,820 Gross property additions.......... 13,004 5,055 10,665 28,724 10,208 890 39,822
10 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (3) Comprehensive Income
Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (In thousands) Net Earnings .................................... $ 17,986 $ 18,172 $ 39,938 $ 44,843 -------- -------- -------- -------- Other Comprehensive Income, net of tax: Unrealized gain (loss) on securities: Unrealized holding gains arising during the period .............................. 614 384 1,940 1,672 Less reclassification adjustment for gains included in net income .......... (1,153) (1,339) (2,503) (2,161) -------- -------- -------- -------- Total Other Comprehensive Income (Loss) ...... (539) (955) (563) (489) -------- -------- -------- -------- Total Comprehensive Income ...................... $ 17,447 $ 17,217 $ 39,375 $ 44,354 ======== ======== ======== ========
The Company's investments held in grantor trusts for nuclear decommissioning and certain retirement benefits are classified as available-for-sale, and accordingly unrealized holding gains and losses are recognized as a component of comprehensive income. Realized gains and losses are included in earnings. All components of comprehensive income are recorded, net of any tax benefit or expense. A deferred asset or liability is established for the resulting temporary difference. (4) Financial Instruments The Company uses derivative financial instruments in limited instances to manage risk as it relates to changes in natural gas and electric prices and adverse market changes for investments held by the Company's various trusts. The Company also uses certain derivative instruments for bulk power electricity trading purposes in order to take advantage of favorable price movements and market timing activities in the wholesale power markets. The Company is exposed to credit losses in the event of non-performance or non-payment by counterparties. The Company uses a credit management process to assess and monitor the financial conditions of counterparties. The Company's credit risk with its largest counterparty as of June 30, 2000 was $33.7 million. 11 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (4) Financial Instruments (Continued) Natural Gas Contracts Pursuant to an order issued by the NMPUC, predecessor to the PRC, the Company has previously entered into swaps to hedge certain portions of natural gas supply contracts in order to protect the Company's natural gas customers from the risk of adverse price fluctuations in the natural gas market. The financial impact of all hedge gains and losses from swaps flowed through the Company's purchased gas adjustment clause and are fully recoverable by the Company. As a result, earnings were not affected by gains or losses generated by these instruments. The Company hedged 40% of its natural gas deliveries during the 1998-1999 heating season. Less than 15.5% of the 1998-1999 heating season portfolio was hedged using financial hedging contracts. The Company hedged a portion of its 1999-2000 heating season gas supply portfolio through the use of both physical and financial hedging tools. Less than 9.1% of the Company's 1999-2000 heating season portfolio was hedged using financial hedging contracts. The 1999-2000 heating season hedges were completed in January 2000. The Company intends to hedge its 2000-2001 heating season gas supply portfolio through the use of financial hedging tools. Pursuant to an agreement with the PRC, the Company will limit its hedging strategy to a cost of $5 million. Fuel Hedging Subsequent to June 30, 2000, the Company's Generation Operations commenced a program to reduce its exposure to fluctuations in prices for gas and oil purchases used as a fuel source for some of its generation. The Generation Operations purchased futures contracts for a portion of its anticipated natural gas needs in the third quarter and fourth quarter. The futures contracts cap the Company's natural gas purchase prices at $3.70 to $3.99 per MMBTU and have a notional principal $4.5 million. Simultaneously, a delivery location basis swap was purchased for quantities corresponding to the futures quantities to protect against price differential changes at the specific delivery points. The financial instruments will settle in the third quarter and fourth quarter. The Company will account for these transactions as hedges; accordingly, gains and losses related to these transactions will be deferred and recognized in earnings as an adjustment to its cost of fuel. 12 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (4) Financial Instruments (Continued) Electricity Trading Contracts To take advantage of market opportunities associated with the purchase and sale of electricity, the Company's wholesale power operation periodically enters into derivative financial instrument contracts. In addition, the Company enters into forward physical contracts and physical options. The Company generally accounts for these financial instruments as trading activities under the accounting guidelines set forth under The Emerging Issues Task Force ("EITF") Issue No. 98-10. Although at times, the Company may enter into contracts that it may designate as hedges. As a result, all open contracts are marked to market at the end of each period. The physical contracts are subsequently recognized as revenues or purchased power when the actual physical delivery occurs. The Company implemented EITF Issue No. 98-10 as of January 1, 1999 and recorded as a cumulative effect of a change in accounting principle a gain of approximately $3.5 million, net of taxes, or $0.09 per common share, on net open physical electricity purchases and sales commitments considered to be trading activities. Through June 30, 2000, the Company's wholesale electric trading operations settled trading contracts for the sale of electricity that generated $42.2 million of electric revenues by delivering 1,286 million KWh. The Company purchased $40.5 million or 1,236 million KWh of electricity to support these contractual sale and other open market sales opportunities. As of June 30, 2000, the Company had open trading contract positions to buy $34.1 million and to sell $41.2 million of electricity. At June 30, 2000, the Company had a gross mark-to-market gain (asset position) on these trading contracts of $51.7 million and gross mark-to-market loss (liability position) of $65.6 million, with net mark-to-market loss (liability position) of $13.8 million. Although the Company has classified these contracts as trading, the Company expects to cover its net open contract positions with its own excess generating capacity which is not marked-to-market. The mark-to-market valuation is recognized in earnings each period. 13 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (4) Financial Instruments (Continued) Hedge of Trust Assets The Company has about $44 million invested in domestic stocks in various trusts for nuclear decommissioning, executive retirement and retiree medical benefits. The Company uses financial derivatives based on the Standard & Poor's ("S&P") 500 Index to limit potential loss on these investments due to adverse market fluctuations. The options are structured as a collar, protecting the portfolio against losses beyond a certain amount and balancing the cost of that downside protection by foregoing gains above a certain level. If the S&P 500 Index is within the specified range when the option contract expires, the Company will not be obligated to pay, nor will the Company have the right to receive cash. In February 2000, certain contracts were terminated. The Company recognized a realized gain of $2.4 million (pre-tax) on these terminations. Subsequently, the Company entered into similar contracts which expire on June 15, 2001. For the three months ended June 30, 2000, the Company recorded net unrealized gains of $1.2 million (pre-tax) and for the six months ended June 30, 2000, the Company recorded net unrealized losses of $0.5 million (pre-tax) on the market value of its options. The net effect of the collar instruments for the six months ended June 30, 2000 was a net pre-tax gain of $1.9 million. 14 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (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 for June 30 (in thousands, except per share data):
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ------- ------- ------- ------- Basic: Net Earnings from Continuing Operations ............... $17,986 $18,172 $39,938 $41,302 Cumulative Effect of a Change in Accounting Principle, net of tax .............................. -- -- -- 3,541 ------- ------- ------- ------- Net Earnings .......................................... 17,986 18,172 39,938 44,843 Preferred Stock Dividend Requirements ................. 147 146 293 293 ------- ------- ------- ------- Net Earnings Applicable to Common Stock ............... $17,839 $18,026 $39,645 $44,550 ======= ======= ======= ======= Average Number of Common Shares Outstanding ........... 39,536 40,852 39,754 41,307 ======= ======= ======= ======= Net Earnings per Common Share: Earnings from continuing operations ................. $ 0.45 $ 0.44 $ 1.00 $ 0.99 Cumulative effect of a change in accounting principle ......................................... -- -- -- 0.09 ------- ------- ------- ------- Net Earnings per Common Share (Basic) ................. $ 0.45 $ 0.44 $ 1.00 $ 1.08 ======= ======= ======= ======= Diluted: Net Earnings Applicable to Common Stock Used in basic calculation ........................... $17,839 $18,026 $39,645 $44,550 ======= ======= ======= ======= Average Number of Common Shares Outstanding ........... 39,536 40,852 39,754 41,307 Diluted effect of common stock equivalents (a) ........ 61 86 45 65 ------- ------- ------- ------- Average common and common equivalent shares Outstanding ......................................... 39,597 40,938 39,799 41,372 ======= ======= ======= ======= Net Earnings per Common Share: Earnings from continuing operations ................. $ 0.45 $ 0.44 $ 1.00 $ 0.99 Cumulative effect of a change in accounting principle ......................................... -- -- -- 0.09 ------- ------- ------- ------- Net Earnings per Share of Common Stock (Diluted) ...... $ 0.45 $ 0.44 $ 1.00 $ 1.08 ======= ======= ======= ======= (a) Excludes the effect of average anti-dilutive common stock equivalents related to out of-the-money options of 141,660 and 43,756 for the three months ended 2000 and 1999, respectively and 162,066 and 59,749 for the six months ended 2000 and 1999, respectively.
15 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (6) Commitments and Contingencies 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 was unable to generate appropriate bills for certain of its customers through the first quarter of 1999 and was unable to analyze delinquent accounts until November 1999. As a result of the delay of normal collection activities, the Company incurred a significant increase in delinquent accounts, many of which occurred with customers that no longer have active accounts with the Company. As a result, the Company significantly increased its bad debt accrual throughout 1999. The following is a summary of the allowance for doubtful accounts for the six months ended June 30, 2000 and the year ended December 31, 1999: June 30, December 31, 2000 1999 ---------- ------------ Allowance for doubtful accounts, beginning of year.......................................... $12,504 $ 836 Bad debt accrual................................... 1,636 11,496 Less: Write-off (adjustments) of uncollectible Accounts......................................... 5,205 (172) ---------- ------------ Allowance for doubtful accounts, end of period .... $ 8,935 $12,504 ========== ============ The Company continues to analyze its delinquent accounts resulting from the new customer billing system implementation problems and expects to write off a significant portion upon completion of its analysis. Based upon information available at June 30, 2000, the Company believes the allowance for doubtful accounts is adequate for potential uncollectible accounts. 16 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (6) Commitments and Contingencies (Continued) There are various claims and lawsuits pending against the Company and certain of its subsidiaries. The Company is also subject to Federal, state and local environmental laws and regulations, and is currently participating in the investigation and remediation of certain sites. In addition, the Company has periodically entered into financial commitments in connection with business operations. It is not possible at this time for the Company to determine fully the effect of all litigation on its consolidated financial statements. However, the Company has recorded a liability where such litigation can be estimated and where an outcome is considered probable. The Company does not expect that any known lawsuits, environmental costs and commitments will have a material adverse effect on its financial condition or results of operations. (7) New and Proposed Accounting Standards Decommissioning: 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 February 2000, the Financial Accounting Standards Board ("FASB") issued an exposure draft regarding Accounting for Obligations Associated with the Retirement of Long-Lived Assets ("Exposure Draft"). The Exposure Draft requires the recognition of a liability for an asset retirement obligation at fair value. In addition, present value techniques used to calculate the liability must use a credit adjusted risk-free rate. Subsequent remeasures of the liability would be recognized using an allocation approach. The Company has not yet determined the impact of the Exposure Draft. EITF Issue 99-14, Recognition of Impairment Losses on Firmly Committed Executory Contracts: The EITF has added an issue to its agenda to address impairment of leased assets. A significant portion of the Company's nuclear generating assets are held under operating leases. Based on the alternative accounting methods being explored by the EITF, the related financial impact of the future adoption of EITF Issue No. 99-14 should not have a material adverse effect on results of operations. However, a complete evaluation of the financial impact from the future adoption of EITF Issue No. 99-14 will be undeterminable until EITF deliberations are completed and stranded cost recovery issues are resolved. 17 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (7) New and Proposed Accounting Standards (Continued) Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, ("SFAS 133"): SFAS 133 establishes accounting and reporting standards requiring derivative instruments to be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 also 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. In June 1999, FASB issued SFAS 137 to amend the effective date for the compliance of SFAS 133 to January 1, 2001. In June 2000, the FASB issued SFAS 138 that provides certain amendments to SFAS 133. The amendments, among other things, expand the normal sales and purchases exception to contracts that implicitly or explicitly permit net settlement and contracts that have a market mechanism to facilitate net settlement. The expanded exception excludes a significant portion of the Company's contracts that previously would have required valuation under SFAS 133. The Company is in the process of reviewing and identifying all financial instruments currently existing in the Company in compliance with the provisions of SFAS 133 and SFAS 138. As a result of the SFAS 138 amendment to SFAS 133, the Company does not believe that the impact of SFAS 133 will be material as most of the Company's derivative instruments result in physical delivery or are marked-to-market under EITF 98-10. (8) Subsequent Events Asset Acquisition and Related Agreements The Company and Tri-State Generation and Transmission Association, Inc. ("Tri-State") entered into an asset sale agreement dated September 9, 1999, pursuant to which Tri-State has agreed to sell to the Company certain assets to be acquired by Tri-State as the result of Tri-State's merger with Plains Electric Generation and Transmission Cooperative ("Plains") consisting primarily of transmission assets, a fifty percent interest in an inactive power plant located near Albuquerque, and an office building. The purchase price was originally $13.2 million, subject to adjustment at the time of closing, with the transaction to close in two phases. On July 1, 2000, the first phase was completed, and the Company acquired the 50 percent ownership in the inactive power plant and the office building. The second phase relating to the transmission assets is expected to close by the end of 2000. 18 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (8) Subsequent Events (Continued) In addition, on July 1, 2000, the Company advanced $11.8 million to a former Plains cooperative member as part of an agreement for the Company to become the cooperative's power supplier. Approximately $4.3 million of this advance represents an inducement for entering into a 10 year power sales agreement. Accordingly, the Company will expense this amount in the third quarter as a business development cost. The remaining $7.5 million will be repaid over 10 years. If the cooperative terminates the contract early, the whole $11.8 million advance must be repaid to the Company. Power Purchase Agreement On October 4, 1996, the Company entered into a power purchase contract for the rights to the output of a new gas-fired-generating plant located in Albuquerque, NM. On July 13, 2000, the plant went into operation. The power purchase contract provides the Company an additional 132 megawatts of electricity on demand to help meet peak needs for twenty years with an option to renew the contract for an additional five years. Under the terms of the contract, the Company will pay a monthly capacity charge, which is subject to adjustment for inflation. The energy purchase price under the contract is based on cost plus a margin. Stock Repurchase On August 8, 2000, the Company's Board of Directors approved a plan to repurchase up to $35 million of the Company's common stock through the end of the first quarter of 2001. 19 ITEM 2. 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 and PART II, ITEM 1. - Legal Proceedings. Trends and contingencies of a material nature are discussed to the extent known and considered relevant. OVERVIEW 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 provides energy and utility-related activities through its wholly-owned subsidiary, Avistar, Inc. ("Avistar"). UTILITY OPERATIONS ELECTRIC BUSINESS UNIT The Company provides jurisdictional retail electric service to a large area of north central New Mexico, including the cities of Albuquerque and Santa Fe, and certain other areas of New Mexico. As of June 30, 2000 and 1999 and December 31, 1999, approximately 366,000, 360,000 and 361,000, respectively, retail electric customers were served by the Company. The Company owns or leases 2,781 circuit miles of transmission lines, interconnected east into Texas, west into Arizona, and north into Colorado and Utah. Due to rapid load growth in recent years, most of the capacity on this transmission system is fully committed and there is no additional access available on a firm commitments basis. These factors, together with significant physical constraints in the system, limit the ability to wheel power into the Company's service area from outside the state. NATURAL GAS BUSINESS UNIT The Company's gas operations distribute natural gas to most of the major communities in New Mexico, including Albuquerque and Santa Fe, serving approximately 429,000, 422,000 and 426,000 customers as of June 30, 2000 and 1999 and December 31, 1999, respectively. The Company's customer base includes both sales-service customers and transportation-service customers. Sales-service customers purchase natural gas and receive transportation and delivery services from the Company for which the Company receives both cost-of-gas and cost-of-service revenues. Additionally, the Company makes occasional gas sales to off-system customers. Off-system sales deliveries generally occur at interstate pipeline interconnects with the Company's system. Transportation-service customers, who procure gas independently of the Company and contract with the Company for transportation and related services, are billed cost-of-service revenues only. 20 The Company 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 the Company's peak-day demand. The following table shows gas revenues by customer class: GAS REVENUES (Thousands of dollars) Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 -------- -------- -------- -------- Retail .................. 30,551 30,504 93,639 85,297 Commercial .............. 8,238 7,234 24,931 23,917 Transportation*.......... 2,947 3,139 6,931 6,971 Other ................... 12,778 7,442 23,559 16,998 -------- -------- -------- -------- $ 54,514 $ 48,319 $149,960 $133,183 ======== ======== ======== ======== The following table shows gas throughput by customer class: GAS THROUGHPUT (Thousands of decatherms) Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ------ ------ ------ ------ Retail ........... 3,689 4,386 14,920 18,695 Commercial ....... 1,519 1,612 5,155 6,366 Transportation* .. 10,663 10,547 19,674 18,386 Other ............ 3,075 1,889 4,962 4,332 ------ ------ ------ ------ 18,946 18,434 44,711 47,779 ====== ====== ====== ====== *Customer-owned gas GENERATION OPERATIONS The Company's generation operations serve four principal markets. Sales to the Company's utility operations to cover jurisdictional electric demand and sales to firm-requirements wholesale customers, sometimes referred to collectively as "system" sales, comprise two of these markets. Intercompany sales to the Utility Operations are priced using internally developed transfer pricing and are not 21 based on market rates. The third market consists of other contracted sales to utilities for which the Generation Operations commits to deliver a specified amount of capacity (measured in megawatts-MW) or energy (measured in megawatt hours-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 following table shows electric revenues by customer class: ELECTRIC REVENUES (Thousands of dollars) Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ---------- --------- ---------- --------- Jurisdictional sales................ $ 78,869 $ 79,197 $ 154,691 $ 157,168 Firm-requirement wholesale.......... 1,890 1,739 3,625 3,452 Other contracted off-system sales... 65,696 42,376 128,504 73,772 Economy energy sales................ 86,912 28,862 122,626 46,550 Other*.............................. (11,456) 2,960 (11,238) 3,646 ---------- --------- ---------- --------- $ 221,911 $ 155,134 $ 398,208 $ 284,588 ========== ========= ========== ========= The following table shows electric sales by customer class: ELECTRIC SALES BY MARKET (Megawatt hours) Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 --------- --------- --------- ----------- Jurisdictional sales................ 1,721,661 1,660,189 3,376,811 3,260,199 Firm-requirement wholesale.......... 46,835 44,790 94,756 87,875 Other contracted off-system sales... 1,471,743 1,839,141 3,514,741 2,861,601 Other............................... 1,427,082 793,465 2,699,750 1,689,820 --------- --------- --------- ----------- 4,667,321 4,337,585 9,686,058 7,899,495 ========= ========= ========= =========== * Includes mark-to-market gains/(losses). See footnote (4) in Notes to Consolidated Financial Statements. The Generation Operations has ownership interests in certain generating facilities located in New Mexico, including Four Corners Power Plant, a coal fired unit, and San Juan Generating Station, a coal fired unit. In addition, the Company has ownership and leasehold interests in Palo Verde Nuclear Generating Station ("PVNGS") located in Arizona. These generation assets are used to supply retail and wholesale customers. The Generation Operations also owns Reeves 22 Generating Station, a gas and oil fired unit and Las Vegas Generating Station, a gas and oil fired unit that are used solely for reliability purposes or to generate electricity for the wholesale market during peak demand periods in the Generation Operations' wholesale power markets. As of June 30, 2000 and 1999 and December 31, 1999, the total net generation capacity of facilities owned or leased by the Generation Operations was 1,521 MW. On July 13, 2000, the Company commenced a 20 year power purchase agreement for an additional 132 MW (see footnote 8 to the Consolidated Financial Statements). In addition to generation capacity, the Generation Operations purchases power in the open market. The Generation Operations is also interconnected with various utilities for economy interchanges and mutual assistance in emergencies. The Generation Operations has been actively trading in the wholesale power market and has entered into and anticipates that it will continue to enter into power purchase agreements to accommodate its trading activity. AVISTAR The Company's wholly-owned subsidiary, Avistar, was formed in August 1999 as a New Mexico corporation and is currently engaged in certain unregulated, non-utility businesses, including energy and utility-related services previously operated by the Company. The PRC authorized the Company to invest up to $50 million in equity in Avistar and to enter into a reciprocal loan agreement for up to an additional $30 million. The Company has currently invested $25 million in Avistar. In February 2000, Avistar invested $3 million in AMDAX.com, a start-up company which plans to provide an on-line auction service to bring together electricity buyers and sellers in the deregulated electric power market. 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. New Mexico's Electric Utility Industry Restructuring Act of 1999 (the "Restructuring Act") that was enacted into law in April 1999, begins to open the state's electric power market to customer choice beginning in 2002. The Restructuring Act gives schools, residential and small business customers the opportunity to choose among competing power suppliers beginning in January 2002. Competition will be expanded to include all customers starting in July 2002. Rural electric cooperatives and municipal electric systems have the option not to participate in the competitive market. Residential and small business customers who do not select a power supplier in the open market can buy their electricity through their local utility through a "standard offer" whereby the local distribution utility will procure power supplies through a process approved by the PRC. The local distribution utility system and related services such as billing and metering will continue to be regulated by the PRC, while transmission services and wholesale power sales will remain subject to Federal regulation. 23 The Restructuring Act does not require utilities to divest their generating plants, but requires unregulated activities to be separated from the regulated activities through creation of at least two separate corporations. The law also provides for recovery of at least half of stranded costs. Recovery of more than half is allowable if certain tests specified in the laws are met. Stranded costs are defined in the law to include nuclear decommissioning costs, regulatory assets, leases and other costs recognized under existing regulation. Stranded costs will be recovered from customers over a five-year period. Utilities will also be allowed to recover through 2007 all transition costs reasonably incurred to comply with the new law (see "Stranded Costs" and "Transition Costs" below). The PRC is authorized under the Restructuring Act to extend this date by one year. The Company plans to reorganize its operations by forming a holding company structure as a means of achieving the corporate and asset separation required by the Restructuring Act. The proposed holding company will be called Manzano Corporation ("Manzano"). The Company's plan for a holding company structure will separate the Company into two subsidiaries. Shareholders approved the holding company structure and related share exchange in June 2000. If the Company receives all necessary regulatory and other approvals, all of the Company's electric and gas distribution and transmission assets and certain related liabilities will be transferred to a newly created subsidiary. After this asset transfer, this subsidiary will acquire the name "Public Service Company of New Mexico" (for purposes of this discussion, the subsidiary will be referred to as "UtilityCo") and the corporation formerly named Public Service Company of New Mexico will be renamed Manzano Energy Corporation (for purposes of this discussion, the subsidiary will be referred to as "Energy"). Energy will continue to own the Company's existing electric generation and certain other unregulated, competitive assets after completion of the transfer of the regulated business to the newly created utility subsidiary. UtilityCo, Energy and Avistar will be wholly-owned subsidiaries of Manzano. The Company has filed its transition plan with the PRC pursuant to the Restructuring Act in three parts. In November 1999, the Company filed the first two parts of the transition plan with the PRC. Part one, which has been approved, requested approval to create Manzano and UtilityCo as wholly-owned shell subsidiaries of the Company. Part two of the Company's transition plan requested that all PRC approvals necessary for the Company to implement the formation of the holding company structure, the share exchange and the separation plan. The part two hearing is currently scheduled for August 21, 2000. The balance of the schedule for the PRC proceeding has not yet been established. Accordingly, the Company's management cannot predict when implementation of the separation plan could occur. The PRC has ordered that separation must occur by August 2001. On May 31, 2000, the Company filed with the PRC part three of the transition plan requesting approval for the recovery of stranded costs and other expenses associated with the transition to a 24 competitive market, UtilityCo's rates for retail distribution services, the procurement of power supplies for customers who do not select a power supplier and other issues required to be considered under the Restructuring Act (see "Other Issues Facing the Company - The Restructuring Act and the Formation of Holding Company"). 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 earnings from their current levels. The reasons for the downward pressure include possible limits on return on equity, the potential disallowance of some stranded costs and the potential loss of certain customers in a competitive environment. Under a holding company structure, the regulated businesses (natural gas and electric transmission and distribution) will be grouped under a separate company and will focus on the core utility business in New Mexico. The unregulated businesses under the Restructuring Act (power production, bulk power marketing and energy services) will aggressively pursue efforts to expand energy marketing and utility related businesses into carefully targeted markets in an effort to increase shareholder value. The Company believes that successful operation 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. 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. In addition to the continued power trading operations, the Company will further focus on opportunities in the marketplace where excess capacity is disappearing and mid- to long-term market demands are growing. The Company's current business plan includes a 300% increase in sales and a doubling of its generating capacity through the construction or acquisition of additional power generation assets in its surrounding region of operations over the next five to seven years. Such growth will be dependent upon the Company's ability to generate $400 to $600 million to fund the Company's expansion. There can be no assurance that these competitive businesses, particularly the generation business, will be successful or, if unsuccessful, that they will not have a direct or indirect adverse effect on the Company. 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 continue to be considered this year. Issues such as stranded cost recovery, market power, utility regulation reform, the role of states, subsidies, consumer protections and environmental concerns are expected to be at the forefront of the Congressional 25 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 with the FERC having 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 retail competition in New Mexico, 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. 26 RESULTS OF OPERATIONS The following discussion is based on the financial information presented in Footnote 2 of the Consolidated Financial Statements. The table below sets forth the operating results as percentages of total operating revenues for each business segment.
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999 Three Months Ended June 30, 2000 Utility ------------------------------------ Electric Gas Generation ----------------- ----------------- ---------------- Operating revenues: External customers.................... 130,142 99.86% 54,514 100.00% 143,042 64.46% Intersegment revenues................. 177 0.14% - - 78,869 35.54% ------- -------- -------- ------- ------- ------- Total Revenues........................ 130,319 100.00% 54,514 100.00% 221,911 100.00% ------- -------- -------- ------- ------- ------- Cost of energy sold..................... 1,132 0.87% 30,097 55.21% 149,165 67.22% Intercompany trans. price............... 78,869 60.52% 0.00% 177 0.08% ------- -------- -------- ------- ------- ------- Total fuel costs...................... 80,001 61.39% 30,097 55.21% 149,342 67.30% ------- -------- -------- ------- ------- ------- Gross Margin............................ 50,318 38.61% 24,417 44.79% 72,569 32.70% ------- -------- -------- ------- ------- ------- Administrative and other costs.......... 8,428 6.47% 9,393 17.23% 4,397 1.98% Energy production costs................. 212 0.16% 421 0.77% 35,273 15.90% Depreciation and amortization........... 7,953 6.10% 4,515 8.28% 10,159 4.58% Transmission and distribution costs..... 8,002 6.14% 6,777 12.43% 16 0.01% Taxes other than income taxes........... 3,165 2.43% 1,832 3.36% 2,567 1.16% Income taxes............................ 7,094 5.44% (482) (0.88)% 3,488 1.57% ------- -------- -------- ------- ------- ------- Total non-fuel operating expenses..... 34,854 26.75% 22,456 41.19% 55,900 25.19% ------- -------- -------- ------- ------- ------- Operating income........................ $15,464 11.87% $ 1,961 3.60% $16,669 7.51% ------- -------- -------- ------- ------- -------
Three Months Ended June 30, 1999 Utility ------------------------------------ Electric Gas Generation ----------------- ----------------- ---------------- Operating revenues: External customers..................... 136,927 99.87% 48,319 100.00% 75,937 48.95% Intersegment revenues.................. 176 0.13% - 0.00% 79,197 51.05% ------- ------- -------- ------- -------- ------- Total revenues......................... 137,103 100.00% 48,319 100.00% 155,134 100.00% ------- ------- -------- ------- -------- ------- Cost of energy sold...................... 1,118 0.82% 20,423 42.27% 86,413 55.70% Intercompany trans. price................ 79,197 57.76% - 0.00% 176 0.11% ------- ------- -------- ------- -------- ------- Total fuel costs....................... 80,315 58.58% 20,423 42.27% 86,589 55.82% ------- ------- -------- ------- -------- ------- Gross Margin............................. 56,788 41.42% 27,896 57.73% 68,545 44.18% ------- ------- -------- ------- -------- ------- Administrative and other costs........... 11,116 8.11% 11,270 23.32% 6,851 4.42% Energy production costs.................. 653 0.48% 363 0.75% 34,191 22.04% Depreciation and amortization............ 7,733 5.64% 4,722 9.77% 10,369 6.68% Transmission and distribution costs...... 7,780 5.67% 7,444 15.41% 12 0.01% Taxes other than income taxes............ 4,918 3.59% 1,675 3.47% 2,306 1.49% Income taxes............................. 7,655 5.58% (177) (0.37)% 1,327 0.86% ------- ------- -------- ------- -------- ------- Total non-fuel operating expenses...... 39,855 29.07% 25,297 52.35% 55,056 35.49% ------- ------- -------- ------- -------- ------- Operating income......................... $16,933 12.35% $ 2,599 5.38% $ 13,489 8.70% ------- ------- -------- ------- -------- -------
27 UTILITY OPERATIONS Electric Business Unit - Operating revenues declined $6.8 million (4.9%) for the period to $130.3 million due to the implementation of the rate order in late July 1999 (which lowered rates by $8.8 million quarter over quarter - see Other Issues Facing the Company - Electric Rate Case). Lower rates were partially offset by increased retail electricity delivery of 1.72 million MWh compared to 1.66 million MWh delivered last period, a 3.7% improvement. The gross margin, or operating revenues minus cost of energy sold, decreased $6.5 million reflecting a decrease in gross margin as a percentage of revenues of 2.8%. This decline reflects the rate reduction discussed above. The Company's generation operations exclusively provide power to the Company's electric business unit. Intercompany purchases for the generation operations are priced using internally developed transfer pricing and are not based on market rates. Rates for electric service are based on a rate of return that includes certain generation assets that are part of generation operations. Administrative and general costs decreased $2.7 million (24.2%) for the period. This decrease is due to reduced Year 2000 ("Y2K") compliance costs, reduced costs related to implementing a customer billing system and lower associated bad debt accruals. As a percentage of revenues, administrative and other decreased to 6.5% from 8.1% for the period ended June 30, 2000 and 1999, respectively primarily as a result of reduced costs. Depreciation and amortization increased $0.2 million (2.8%) for the period. The increase is due to the impact of amortizing the costs of a new customer billing system. Depreciation and amortization as a percentage of revenues increased from 5.6% to 6.1% reflecting a slight increase in expense and the decrease in retail energy revenues. Transmission and distribution costs increased $0.2 million (2.9%) for the quarter. As a percentage of revenues, transmission and distribution costs increased from 5.7% to 6.1%. This increase was primarily the result of the decrease in retail energy revenues. Gas Business Unit - Operating revenues increased $6.2 million (12.8%) for the period to $54.5 million. This increase was driven by a 10.2% increase in the average rate charges per decatherm due to higher gas prices despite a warm spring. Warmer than normal temperature resulted in a 2.8% volume decrease. Residential and commercial volume decreased 13.2% while customers other than residential and commercial volume increased 10.5%. This growth was primarily attributed to industrial customers such as the Company's power generating business whose demand increased due to the warm spring. The gross margin, or operating revenues minus cost of energy sold, decreased $3.5 million (12.5%). This decrease is due to lower volume. 28 Administrative and general costs decreased $1.9 million (16.7%). This decrease is mainly due to reduced Y2K compliance costs, customer billing system costs and lower associated bad debt accruals. Depreciation and amortization decreased $0.2 million (4.4%). Transmission and distribution expenses decreased $0.7 million (9.0%) for the period. The decrease is primarily due to reduced Y2K compliance costs. GENERATION OPERATIONS Operating revenues grew $66.8 million (43.0%) for the period to $221.9 million. This increase in wholesale electricity sales reflects strong regional wholesale electric prices caused by an unseasonably warm spring, limited power generation capacity due to various plant outages in the Western states and increasing natural gas prices. These factors contributed to unusually high wholesale prices which are expected to continue through the summer months but which the Company does not believe to be sustainable in the long-term (see Other Issues Facing the Company - Effects of Certain Events on Future Revenues). The Company delivered wholesale (bulk) power of 2.95 million MWh of electricity this period compared to 2.68 million MWh delivered last year, an increase of 10.0%. Wholesale revenues to third-party customers increased from $75.9 million to $143.0 million, an 88.4% increase. Wholesale sale revenues were negatively impacted by the $13 million dollar unrealized mark-to-market loss the Company recorded relating to its power trading contracts (see Note 4 of the Notes of the Consolidated Financial Statements). The gross margin, or operating revenues minus cost of energy sold, increased $4.0 million (5.9%). However, gross margin as a percentage of revenues decreased 11.5%. This decline reflects higher fuel and purchased power costs due to higher wholesale sales volumes and market prices. Administrative and general costs decreased $2.5 million (35.8%) for the period. This decrease is due to lower legal costs related to a lawsuit involving the Company's decommissioning trust, and a PVNGS interruption and liability insurance refund. As a percentage of revenues, administrative and other decreased to 2.0% from 4.4% for the period ended June 30, 2000 and 1999, respectively primarily as a result of reduced costs. Energy production costs increased $1.1 million (3.2%) for the period. These costs are generation related. The increase is due to higher maintenance costs of $0.5 million primarily due to a scheduled outage at Four Corners Unit 4 in April and May 2000 and higher San Juan operations costs of $0.6 million. As a percentage of revenues, energy production costs decreased from 22.0% to 15.9%. The decrease is primarily due to a significant increase in energy sales. 29 UNREGULATED BUSINESSES Avistar contributed $1.3 million in revenues for the period compared to $0.2 million in the comparable prior year period in accordance with its completed contract revenue recognition policy as it received final acceptance on certain contracts. Operating losses for Avistar decreased from $1.4 million in the prior year to $0.5 million in the current year, primarily due to increased revenues. CONSOLIDATED Corporate administrative and general costs increased $5.0 million for the period. This increase was due to higher legal costs, bonus accruals due to increased earnings and other administrative costs, partially offset by reduced Y2K compliance costs. Other income and deductions, net of taxes, increased $0.4 million for the period to $6.8 million due to net gains on certain corporate investments which include the corporate hedge. In 1999, other income and deductions included a one-time net gain of $1.2 million from closing down certain coal mine reclamation activities. Net interest charges decreased $1.0 million for the period to $16.4 million primarily as a result of the retirement of $31.6 million of senior unsecured notes in June and August 1999 and $32.8 million in January 2000. The Company's consolidated income tax expense was $9.7 million, a decrease of $0.6 million for the quarter. The Company's income tax effective rate decreased from 36.2% to 35.1% due to the reversal of deferred income taxes accrued at prior rates in accordance with ratemaking provisions. The Company's net earnings from continuing operations for the quarter ended June 30, 2000, were $18.0 million compared to $16.9 million (excluding the one-time gain of $1.2 million, net of taxes, related to mine closure activities) for the quarter ended June 30, 1999, a 6.1% increase. Earnings per share from continuing operations on a diluted basis were $0.45 compared to $0.41 (excluding the one-time gain) for the quarter ended June 30, 2000 and 1999, respectively. Diluted weighted average shares outstanding were 39.6 million and 40.9 million in 2000 and 1999, respectively. The decrease reflects the common stock repurchase program in 1999 and 2000. Despite the fact that 2000 results were negatively impacted by the electric rate reduction and the mark-to-market loss on the Company's power trading activities, net earnings per share from continuing operations increased due to expansion of the Company's wholesale electricity business and the common stock repurchase program. 30 Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999 The table below sets forth the operating results as percentages of total operating revenues for each business segment.
Six Months Ended June 30, 1999 Utility ---------------------------------- Electric Gas Generation ---------------- ---------------- ----------------- Operating revenues: External customers..................... 256,063 99.86% 149,060 100.00% 243,517 61.15% Intersegment revenues.................. 353 0.14% - - 154,691 38.85% ------- ------- ------- ------- -------- ------- Total Revenues......................... 256,416 100.00% 149,060 100.00% 398,208 100.00% ------- ------- ------- ------- -------- ------- Cost of energy sold...................... 2,265 0.88% 87,930 58.99% 257,922 64.77% Intercompany trans. price................ 154,691 60.33% - 0.00% 353 0.09% ------- ------- ------- ------- -------- ------- Total fuel costs....................... 156,956 61.21% 87,930 58.99% 258,275 64.86% ------- ------- ------- ------- -------- ------- Gross Margin............................. 99,460 38.79% 61,130 41.01% 139,933 35.14% ------- ------- ------- ------- -------- ------- Administrative and other costs........... 17,494 6.82% 19,306 12.95% 8,694 2.18% Energy production costs.................. 628 0.24% 789 0.53% 70,131 17.61% Depreciation and amortization............ 16,512 6.44% 9,881 6.63% 20,237 5.08% Transmission and distribution costs...... 15,874 6.19% 14,178 9.51% 24 0.01% Taxes other than income taxes............ 6,495 2.53% 3,808 2.55% 5,334 1.34% Income taxes............................. 13,101 5.11% 3,089 2.07% 5,038 1.27% ------- ------- ------- ------- -------- ------- Total non-fuel operating expenses...... 70,104 27.34% 51,051 34.25% 109,458 27.49% ------- ------- ------- ------- -------- ------- Operating income......................... $29,356 11.45% $10,079 6.76% $ 30,475 7.65% ------- ------- ------- ------- -------- -------
Six Months Ended June 30, 1999 Utility ------------------------------------ Electric Gas Generation ----------------- ----------------- --------------- Operating revenues: External customers.................... 269,886 99.87% 133,183 100.00% 127,420 44.77% Intersegment revenues................. 354 0.13% - 0.00% 157,168 55.23% -------- ------- -------- ------- -------- ------- Total revenues........................ 270,240 100.00% 133,183 100.00% 284,588 100.00% -------- ------- -------- ------- -------- ------- Cost of energy sold..................... 2,235 0.83% 68,680 51.57% 147,448 51.81% Intercompany trans. Price............... 157,168 58.16% - 0.00% 354 0.12% -------- ------- -------- ------- -------- ------- Total fuel costs...................... 159,403 58.99% 68,680 51.57% 147,802 51.94% -------- ------- -------- ------- -------- ------- Gross Margin............................ 110,837 41.01% 64,503 48.43% 136,786 48.06% -------- ------- -------- ------- -------- ------- Administrative and other costs.......... 21,940 8.12% 22,723 17.06% 14,324 5.03% Energy production costs................. 1,171 0.43% 722 0.54% 67,508 23.72% Depreciation and amortization........... 15,448 5.72% 9,404 7.06% 20,533 7.21% Transmission and distribution costs..... 15,392 5.70% 14,100 10.59% 21 0.01% Taxes other than income taxes........... 9,784 3.62% 3,298 2.48% 4,845 1.70% Income taxes............................ 14,401 5.33% 3,329 2.50% 2,505 0.88% -------- ------- -------- ------- -------- ------- Total non-fuel operating expenses..... 78,136 28.91% 53,576 40.23% 109,736 38.56% -------- ------- -------- ------- -------- ------- Operating income........................ $ 32,701 12.10% $ 10,927 8.20% $ 27,050 9.50% -------- ------- -------- ------- -------- -------
31 UTILITY OPERATIONS Electric Business Unit - Operating revenues declined $13.8 million (5.1%) for the period to $256.4 million due to the implementation of the rate order in late July 1999 (which lowered rates by $18.5 million year-over-year) and unfavorable price mix due to mild weather conditions, partially offset by increased retail electricity delivery of 3.38 million MWh compared to 3.26 million MWh delivered in the prior year period, a 3.6% improvement. The gross margin, or operating revenues minus cost of energy sold, decreased $11.4 million reflecting a decrease in gross margin as a percentage of revenues of 2.2%. This decline reflects the rate reduction discussed above. The Company's generation operations exclusively provide power to the Company's electric business unit. Intercompany purchases for the generation operations are priced using internally developed transfer pricing and are not based on market rates. Rates for electric service are based on a rate of return that includes certain generation assets that are part of generation operations. Administrative and general costs decreased $4.4 million (20.3%) for the period. This decrease is due to reduced Y2K compliance costs, customer billing system costs and lower associated bad debt accruals. As a percentage of revenues, administrative and other decreased to 6.8% from 8.1% for the six months ended June 30, 2000 and 1999, respectively primarily as a result of reduced costs. Depreciation and amortization increased $1.1 million (6.9%) for the period. The increase is due to the impact of amortizing the costs of a new customer billing system. Depreciation and amortization as a percentage of revenues increased from 5.7% to 6.4% reflecting an increase in expense and the decrease in retail energy sales. Transmission and distribution costs increased $0.5 million (3.1%) for the year. As a percentage of revenues, transmission and distribution costs increased from 5.7% to 6.2%. This increase was primarily the result of the decrease in retail energy sales. Gas Business Unit - Operating revenues increased $15.9 million (11.9%) for the period to $149.1 million. This increase was driven by a 19.4% increase in the average rate charges per decatherm due to strong gas prices despite a mild winter and warm spring, which resulted in a 6.4% volume decrease. Residential and commercial customers volume decreased 19.9% while customers other than residential and commercial volume increased 8.4%. This growth was primarily attributed to industrial customers such as the Company's power generating business whose demand increased due to the warm spring. The gross margin, or operating revenues minus cost of energy sold, decreased $3.4 million (5.2%). This decrease is due to lower volume. 32 Administrative and general costs decreased $3.4 million (15.0%). This decrease is mainly due to reduced Y2K compliance costs, customer billing system costs and lower associated bad debt accruals. GENERATION OPERATIONS Operating revenues grew $113.6 million (39.9%) for the period to $398.2 million. The Company delivered wholesale (bulk) power of 6.31 million MWh or electricity this period compared to 4.64 million MWh delivered last year, an increase of 36.0% (see Results of Operations - Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999 for a discussion of factors affecting results in the second quarter of 2000). The gross margin, or operating revenues minus cost of energy sold, decreased $3.1 million reflecting a decrease in gross margin as a percentage of revenues of 12.9%. This decline reflects higher fuel and purchased power costs due to higher wholesale sales volumes and scheduled outages at the Company's San Juan coal generation facility and Four Corners Plant. Administrative and general costs decreased $5.6 million (39.3%) for the period. This decrease is due to lower legal costs related to a lawsuit involving the Company's decommissioning trust and a PVNGS interruption and liability insurance refund. As a percentage of revenues, administrative and other decreased to 2.2% from 5.0% for the six months ended June 30, 2000 and 1999, respectively primarily as a result of reduced costs. Energy production costs increased $2.6 million (3.9%) for the period. These costs are generation related. The increase is due to higher maintenance costs of $3.1 million due to scheduled outages at San Juan Unit 3 and Four Corners Unit 4, partially offset by lower operations expenses of $1.0 million due to lower PVNGS employee costs as a result of additional employee incentive and retiree healthcare costs in the prior year and additional PVNGS billings in 1999 for 1998 expenses. As a percentage of revenues, energy production costs decreased from 23.7% to 17.6%. The decrease is primarily due to a significant increase in energy sales and continued cost control. UNREGULATED BUSINESSES Avistar contributed $1.7 million in revenues for the period compared to $3.7 million in the comparable prior year period due to lower business volumes. Operating losses for Avistar decreased from $1.9 million in the prior year to $1.7 million in the current year. 33 CONSOLIDATED Corporate administrative and general costs increased $8.9 million for the period. This increase was due to higher legal costs, bonus accruals due to increased earnings and other administrative costs, partially offset by reduced Y2K compliance costs. Other income and deductions, net of taxes, increased $1.8 million for the period to $14.3 million due to net gains on certain corporate investments which include the corporate hedge. In 1999, other income and deductions included a one-time net gain of $1.2 million from closing down certain coal mine reclamation activities. Net interest charges decreased $2.5 million for the period to $32.9 million primarily as a result of the retirement of $31.6 million of senior unsecured notes in June and August 1999 and $32.8 million in January 2000. The Company's consolidated income tax expense, before the cumulative effect of an accounting change, was $22.4 million, a decrease of $1.5 million for the year. The Company's income tax effective rate, before the cumulative effect of the accounting change, decreased from 36.6% to 35.9% due to the reversal of deferred income taxes accrued at prior rates in accordance with ratemaking provisions. The Company's net earnings from continuing operations for the year-to-date period ended June 30, 2000, were $39.9 million compared to $40.1 million (excluding the one-time gain of $1.2 million, net of taxes, related to mine closure activities) for the year-to-date period ended June 30, 1999. Earnings per share from continuing operations excluding the cumulative effect of the accounting change on a diluted basis were $1.00 compared to $0.96 (excluding the one-time gain) for the year-to-date period ended June 30, 1999. Diluted weighted average shares outstanding were 40.0 million and 41.4 million in 2000 and 1999, respectively. The decrease reflects the common stock repurchase program in 1999 and 2000. Despite the fact that 2000 results were negatively impacted by the electric rate reduction and the mark-to-market loss on the Company's power trading activities, net earnings per share from continuing operations increased due to expansion of the Company's wholesale electricity business and the common stock repurchase program. Cumulative Effect of a Change in Accounting Principle - Effective January 1, 1999, the Company adopted EITF Issue No. 98-10. The effect of the initial application of the new standard is reported as a cumulative effect of a change in accounting principle. As a result, the Company recorded additional earnings, net of taxes, of approximately $3.5 million, or $0.09 per common share in 1999, to recognize the gain on net open physical electricity purchase and sales commitments considered to be trading activities. 34 LIQUIDITY AND CAPITAL RESOURCES At June 30, 2000, the Company had working capital of $114.4 million including cash and cash equivalents of $84.1 million. This is a decrease in working capital of $45.8 million from December 31, 1999. This decrease is primarily the result of a decrease in cash and cash equivalents of $36.3 million due to the common stock and senior unsecured notes repurchases (see "Financing Activities" and "Stock Repurchase" below) and the net liability of $13.8 million recorded related to the mark-to-market valuation of the Company's energy trading contracts and the reduction in income tax receivable due to the application of prior year overpayments to the current year liability, partially offset by an increase in accounts receivable (see discussion below). Cash generated from operating activities was $96.9 million, an increase of $9.2 million from 1999. This increase was primarily the result of the recovery of purchased gas adjustments from utility customers, the decreased income tax receivable, the collection of miscellaneous accounts receivable and the timing of accounts payable payments, partially offset by an increase in accounts receivable. Accounts receivable increased significantly as a result of increased wholesale electricity sales and was partially offset by a decrease in utility customer accounts receivable. This decrease in utility customer accounts receivable is primarily a result of seasonal volume declines. The Company continues to have a significant amount of delinquent accounts resulting from the new customer billing system implementation in November 1998 (see Other Issues Facing the Company - Implementation of New Billing System). Cash used for investing activities was $65.0 million in the six months ended June 30, 2000 compared to $5.8 million for the six months ended June 30, 1999. This increased spending reflects $17.9 million relating to the acquisition of transmission assets (see "Acquisition of Certain Assets and Related Agreements"), plant improvements of $5 million at the Company's Reeves Power Station, and the 1999 liquidation of insurance-based investments in the nuclear decommissioning trust of $26.6 million (see financing activities for the payment of decommissioning debt of $26.6 million for the six months ended June 30, 1999). Cash used for financing activities was $68.2 million in the six months ended June 30, 2000 compared to $82.5 million for the six months ended June 30, 1999. This decrease is the result of $26.6 million of loan repayments associated with nuclear decommissioning trust activities in 1999, partially offset by increased senior unsecured notes repurchases at a cost of $32.8 million in 2000 compared to $21.1 million in 1999. Capital Requirements 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 35 transmission and distribution systems and purchasing nuclear fuel. Projections for total capital requirements and construction expenditures for 2000 are $250.9 million and $219.1 million, respectively. Such projections for the years 2000 through 2004 are $1.2 billion and $1.1 billion, respectively. These estimates are under continuing review and subject to on-going adjustment (see Competitive Strategy above). The Company's construction expenditures for the six months ended June 30, 2000 were entirely funded through cash generated from operations. The Company currently anticipates that internal cash generation and current debt capacity will be sufficient to meet capital requirements for the years 2000 through 2004 assuming the Company receives a reasonable recovery of its stranded costs (see "Stranded Costs" below). 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. Liquidity At August 1, 2000, the Company had $175 million of available liquidity arrangements, consisting of $150 million from a senior unsecured revolving credit facility ("Credit Facility"), and $25 million in local lines of credit. The Credit Facility will expire in March 2003. There were no outstanding borrowings as of August 1, 2000. 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. The Company's rating outlook by Standard and Poor's ("S&P") is described as "stable". S&P has rated the Company's senior unsecured debt and bank loan credit "BBB-". The Company's rating outlook by Moody's Investors Services, Inc ("Moody's") is "developing". Moody's has rated the Company's senior unsecured notes and senior unsecured pollution control revenue bonds "Baa3"; and preferred stock "ba1". The EIP lease obligation is also rated "Ba1". Duff & Phelps Credit Rating Co. ("DCR") rates the Company' senior unsecured notes and senior unsecured pollution control revenue bonds "BBB-", the Company's EIP lease obligation "BB+" and the Company's preferred stock "BB-". Investors are cautioned that a security rating is not a recommendation to buy, sell or hold securities, that it may be subject to revision or withdrawal at any time by the assigning rating organization, and that each rating should be evaluated independently of any other rating. Future rating actions for the Company's securities will depend in large part on the actions of the PRC relating to numerous restructuring issues, including the 36 Company's proposed plan to separate the utility into a generation business and a distribution and transmission business as required by the Restructuring Act ("Proposed Plan"). The Company believes that based on its Proposed Plan (see "Proposed Holding Company Plan" below), that UtilityCo and PowerCo will both receive investment grade credit ratings, however, such ratings will be contingent upon many factors that have yet to be determined. DCR announced that assuming the Company implements its Proposed Plan, it would expect to issue investment grade ratings for UtilityCo, and PowerCo's rating would "border investment grade". DCR cautioned that ratings for UtilityCo and PowerCo were highly conditional upon reaching assumptions provided by the Company. Covenants in the Company's Palo Verde Nuclear Generating Station Units 1 and 2 lease agreements 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 Credit Facility imposes similar restrictions regardless of credit ratings. Financing Activities In January 2000, the Company reacquired $34.7 million of its 7.5% senior unsecured notes through open market purchases at a cost of $32.8 million. On October 28, 1999, tax-exempt pollution control revenue bonds of $11.5 million with an interest rate of 6.60% were issued to partially reimburse the Company for expenditures associated with its share of a recently completed upgrade of the emission control system at SJGS. The Company currently has no requirements for long-term financings during the period of 2000 through 2004 except as part of its Proposed Plan (see "Proposed Holding Company Plan" below). 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. Proposed Holding Company Plan On April 18, 2000, the Company filed as an exhibit on Form 8-K, unaudited pro forma financial statements of PowerCo and UtilityCo that give effect to the Company's Proposed Plan. The Proposed Plan was part of the Company's part three filing with the PRC. The Proposed Plan is subject to regulatory and other 37 approvals as well as market, economic and business conditions. As such, the Proposed Plan may be subject to significant changes before implementation and the pro forma financial statements as filed in the Form 8-K may require revision to reflect the final plan of separation pursuant to the Restructuring Act. The Proposed Plan assumes that the Asset Transfer will be accomplished as follows: Manzano will make an equity contribution to UtilityCo of $425 million of regulated assets. These assets will be transferred through a dividend from PowerCo to Manzano. UtilityCo will then acquire the remaining regulated assets from PowerCo through the following transactions: (i) by way of an exchange offer, as described below, an assumption of PowerCo's (formerly the Company's) outstanding public Senior Unsecured Notes ("SUNs") and preferred stock, (ii) the proceeds (approximately $253 million) from the issuance of commercial paper and newly-issued UtilityCo SUNs, and (iii) the assumption of $334 million of certain related liabilities. All transactions are expected to be completed simultaneously. The current holders of PowerCo's public SUNs will be offered the opportunity to exchange their approximately $368 million of existing SUNs for $368 million of SUNs issued by UtilityCo with like terms and conditions. The current holders of PowerCo's preferred stock will be offered the opportunity to exchange their approximately $12.8 million of preferred stock for preferred stock issued by UtilityCo with like terms and conditions. Although there are other alternatives to finance the acquisition of the regulated assets from PowerCo, based on current market, economic and business conditions, the Company currently believes that the foregoing transactions represent the most advantageous way to effect the Asset Transfer. However, the structure of Proposed Plan is subject to change as the regulatory approval process continues and is ultimately resolved. Stock Repurchase In March 1999, the Company's board of directors approved a plan to repurchase up to 1,587,000 shares of the Company's outstanding common stock with maximum purchase price of $19.00 per share. In December 1999, the Company's board of directors authorized the Company to repurchase up to an additional $20.0 million of the Company's common stock. As of December 31, 1999, the Company repurchased 1,070,700 shares of its previously outstanding common stock at a cost of $18.8 million. From January 2, 2000 through March 31, 2000, the Company repurchased an additional 1,167,684 shares of its outstanding common stock at a cost of $18.9 million. The Company has repurchased all shares authorized in March 1999 and December 1999 by the Board of Directors. On August 8, 2000, the Company's Board of Directors approved a plan to repurchase up to $35 million of the Company's common stock through the end of the first quarter of 2001. 38 Acquisition of Certain Assets and Related Agreements The Company and Tri-State Generation and Transmission Association, Inc. ("Tri-State") entered into an asset sale agreement dated September 9, 1999, pursuant to which Tri-State has agreed to sell to the Company certain assets to be acquired by Tri-State as the result of Tri-State's merger with Plains Electric Generation and Transmission Cooperative ("Plains") consisting primarily of transmission assets, a fifty percent interest in an inactive power plant located near Albuquerque, and an office building. The purchase price was originally $13.2 million, subject to adjustment at the time of closing, with the transaction to close in two phases. On July 1, 2000, the first phase was completed, and the Company acquired the 50 percent ownership in the inactive power plant and the office building. The second phase relating to the transmission assets is expected to close by the end of 2000. In addition, on July 1, 2000, the Company advanced $11.8 million to a former Plains cooperative member as part of an agreement for the Company to become the cooperative's power supplier. Approximately $4.3 million of this advance represents an inducement for entering into a 10 year power sales agreement. Accordingly, the Company will expense this amount in the third quarter as a business development cost. The remaining $7.5 million will be repaid over 10 years. If the cooperative terminates the contract early, the whole $11.8 million advance must be repaid to the Company. Dividends 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 the extent to which cash flows will support dividends, the availability of retained earnings, the financial circumstances and performance of the Company, the PRC's decisions on the Company's various regulatory cases currently pending, the effect of deregulating generation markets and market economic conditions generally. In addition, the ability to recover stranded costs in deregulation, future growth plans and the related capital requirements and standard business considerations will also affect the Company's ability to pay dividends. In addition, following the separation as required by the Restructuring Act, the ability of the proposed holding company, Manzano, to pay dividends will depend initially on the dividends and other distributions that UtilityCo and PowerCo pay to the holding company. 39 Capital Structure The Company's capitalization, including current maturities of long-term debt is shown below: June 30, December 31, 2000 1999 -------- ------------ Common Equity.............................. 48.3% 47.3% Preferred Stock............................ 0.7 0.7 Long-term Debt............................. 51.0 52.0 ----- ----- Total Capitalization*................... 100.0% 100.0% ===== ===== * Total capitalization does not include as debt the present value ($139 million as of June 30, 2000 and $147 million as of December 31, 999) of the Company's lease obligations for PVNGS Units 1 and 2 and EIP. 40 OTHER ISSUES FACING THE COMPANY THE RESTRUCTURING ACT AND THE Formation of Holding Company The Restructuring Act requires that assets and activities subject to the PRC jurisdiction, primarily electric and gas distribution, and transmission assets and activities (collectively, the "Regulated Business"), be separated from competitive businesses, primarily electric generation and service and certain other energy services (collectively, the "Deregulated Competitive Businesses"). Such separation is required to be accomplished through the creation of at least two separate corporations. The Company has decided to accomplish the mandated separation by the formation of a holding company and the transfer of the Regulated Businesses to a newly-created, wholly-owned subsidiary of the holding company, subject to various approvals. The holding company structure is expressly authorized by the Restructuring Act. Corporate separation of the Regulated Business from the Deregulated Competitive Businesses must be completed by August 1, 2001. Completion of corporate separation will require a number of regulatory approvals by, among others, the PRC, the Federal Energy Regulatory Commission, Nuclear Regulatory Commission and the Securities and Exchange Commission. In June 2000, shareholders approved the separation and related share exchange; however, completion of corporate separation will also require certain other consents. Completion may also entail significant restructuring activities with respect to the Company's existing liquidity arrangements and the Company's publicly-held senior unsecured notes of which $368 million were outstanding as of June 30, 2000. Holders of the Company's senior unsecured notes, $100 million at 7.5% and $268.4 million at 7.1%, may be offered the opportunity to exchange their securities for similar senior unsecured notes of the newly created regulated business (see "Liquidity and Capital Resources - Financing Activities and Proposed Holding Company Plan" above). Stranded Costs The Restructuring Act recognizes that electric utilities should be permitted a reasonable opportunity to recover an appropriate amount of the costs previously incurred in providing electric service to their customers ("stranded costs"). Stranded costs represent all costs associated with generation related assets, currently in rates, in excess of the expected competitive market price and include plant decommissioning costs, regulatory assets, and lease and lease-related costs. Utilities will be allowed to recover no less than 50% of stranded costs through a non-bypassable charge on all customer bills for five years after implementation of customer choice. The PRC could authorize a utility to recover up to 100% of its stranded costs if the PRC finds that recovery of more than 50%: (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 41 residential or small business customers during the transition period. The Restructuring Act also allows for the recovery of nuclear decommissioning costs by means of a separate wires charge over the life of the underlying generation assets (see NRC Prefunding below). Approximately $99 million of costs associated with the Deregulated Competitive Business were established as regulatory assets. The Company expects to recover these regulatory assets along with other stranded costs associated with the Deregulated Competitive Business through its stranded costs recovery. As a result, these regulatory assets continue to be classified as regulatory assets, although the Company has discontinued Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71) and adopted Statement of Financial Accounting Standards No. 101, "Regulated Enterprises--Accounting for the Discontinuance of Application of FASB Statement 71." Stranded costs include other operating costs in excess of the established regulatory assets. On May 31, 2000, the Company filed with the PRC its proposal to recover its stranded costs. These costs, excluding nuclear decommissioning costs, total a present value of $691.6 million. In addition, stranded costs associated with decommissioning the Company's portion of the Palo Verde nuclear plant total an additional present value of $44.4 million. This amount considers the effect of expected earnings on PNM's qualified nuclear decommissioning trusts. The calculation of stranded costs is subject to a number of highly sensitive assumptions, including the date of open access, appropriate discount rates and projected market prices, among others. The Company believes that the Restructuring Act if properly applied provides an opportunity for recovery of a reasonable amount of stranded costs. If regulatory orders do not provide for a reasonable recovery, the Company is prepared to vigorously pursue judicial remedies. Final determination and quantification of stranded cost recovery has not been made by the PRC. The determination will have an impact on the recoverability of the related assets and may have a material effect on the future financial results and position of the Company. Transition Cost Recovery In addition, the Restructuring Act authorizes utilities to recover in full any prudent and reasonable costs incurred in implementing full open access ("transition costs"). These transition costs will be recovered through 2007 by means of a separate wires charge. The PRC may extend this date by up to one year. The Company is still evaluating its expected transition costs and has not made a final determination of those costs. The Company, however, currently estimates that these costs will be approximately $46 million, including allowances for certain costs which are non-deductible for income tax purposes. Transition costs for which the Company will seek recovery include professional fees, financing costs including underwriting fees, consents relating to the transfer of assets, management information system changes including billing system changes and public and customer education and communications. Recoverable 42 transition costs are currently being capitalized and will be amortized over the recovery period to match related revenues. Recovery of any transition costs which are not deemed recoverable by the PRC may be vigorously pursued through all remedies available to the Company with the ultimate outcome uncertain. Costs not recoverable will be expensed when incurred unless these costs are otherwise permitted to be capitalized under current and future accounting rules. If the amount of non-recoverable transition costs is material, the resulting charge to earnings may have a material effect on the future financial results and position of the Company. Deregulated Competitive Businesses The Deregulated Competitive Businesses which would be retained by the Company include the Company's interests in generation facilities, including PVNGS, Four Corners, and SJGS, together with the pollution control facilities which have been financed with pollution control revenue bonds. Based on the Proposed Plan, approximately $586 million in pollution control revenue bonds would remain as obligations of the generation subsidiary, as would certain other of the Company's long-term obligations. The Deregulated Competitive Businesses would not be subject to regulation by the PRC. The Company will continue its Deregulated Competitive Business following the restructuring, which will be subject to market conditions. Following the separation as required by the Restructuring Act, in support of its wholesale trading operations, the Company is targeting to double its generating capacity and triple its sales volume. Avistar, the Company's current non-regulated subsidiary, provides services in the areas of utility management for municipalities and other communities, remote metering and development of energy conservation and supply projects for federal government facilities. The Company does not anticipate an earnings contribution from Avistar over the next few years. NRC Prefunding Pursuant to NRC rules on financial assurance requirements for the decommissioning of nuclear power plant, the Company has a program for funding its share of decommissioning costs for PVNGS through a sinking fund mechanism (see "PVNGS Decommissioning Funding"). The NRC rules on financial assurance became effective on November 23, 1998. The amended rules provide that a licensee may use an external sinking fund as the exclusive financial assurance mechanism if the licensee recovers estimated decommissioning costs through cost of service rates or a "non-bypassable charge". Other mechanisms are prescribed, such as prepayment, surety methods, insurance and other guarantees, to the extent that the requirements for exclusive reliance on the fund mechanism are not met. 43 The Restructuring Act allows for the recoverability of 50% up to 100% of stranded costs including nuclear decommissioning costs (see "Stranded Costs"). The Restructuring Act specifically identifies nuclear decommissioning costs as eligible for separate recovery over a longer period of time than other stranded costs if the PRC determines a separate recovery mechanism to be in the public interest. In addition, the Restructuring Act states that it is not requiring the PRC to issue any order which would result in loss of eligibility to exclusively use external sinking fund methods for decommissioning obligations pursuant to Federal regulations. If the Company is unable to meet the requirements of the NRC rules permitting the use of an external sinking fund because it is unable to recover all of its estimated decommissioning costs through a non-bypassable charge, the Company may have to pre-fund or find a similarly capital intensive means to meet the NRC rules. There can be no assurance that such an event will not negatively affect the funding of the Company's growth plans. In addition, as part of the determination and quantification of the stranded costs related to the decommissioning, the Company estimated its future decommissioning costs. If the Company's estimate proves to be less than the actual costs of decommissioning, any cost in excess of the amount allowed through stranded cost recovery may not be recoverable. Such excess costs, if any, will also be subject to the pre-funding requirements discussed above. Competition Under current law, the Company is not in direct retail competition with any other regulated electric and gas utility. Nevertheless, the Company is subject to varying degrees of competition in certain territories adjacent to or within areas it serves that are also currently served by other utilities in its region as well as cooperatives, municipalities, electric districts and similar types of government organizations. The Restructuring Act opens the state's electric power market to customer choice for certain customers beginning in January 2002 and the balance of customers by July 2002. As a result, the Company may face competition from companies with greater financial and other resources. There can be no assurance that the Company will not face competition in the future that would adversely affect its results. It is the current intention to have the Company's Deregulated Competitive Businesses engage primarily in energy-related businesses that will not be regulated by state or Federal agencies that currently regulate public utilities (other than the FERC and NRC). These competitive businesses, including the generation business, will encounter competition and other factors not previously experienced by the Company, and may have different, and perhaps greater, investment risks than those involved in the regulated business that will be engaged in by the Regulated Businesses. Specifically, the passage of the Restructuring Act and deregulation in the electric utility industry generally 44 are likely to have an impact on the price and margins for electric generation and thus, the return on the investment in electric generation assets. In response to competition and the need to gain economies of scale, electricity producers will need to control costs to maintain margins, profitability and cash flow that will be adequate to support investments in new technology and infrastructure. The Company will have to compete directly with independent power producers, many of whom will be larger in scale, thus creating a competitive advantage for those producers due to scale efficiencies. The Company's current business plan includes a 300% increase in sales achieved by doubling power generation assets in its surrounding region of operations through construction or acquisition over the next five to seven years. Such growth will be dependent upon the Company's ability to generate $400 to $600 million to fund the deregulated competitive expansion. There can be no assurance that these Deregulated Competitive Businesses, particularly the generation business, will be successful or, if unsuccessful, that they will not have a direct or indirect adverse effect on the Company. Implementation of New 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 was unable to generate appropriate bills for all its customers through the first quarter of 1999 and was unable to analyze delinquent accounts until November 1999. As a result of the delay of normal collection activities, the Company incurred a significant increase in delinquent accounts, many of which occurred with customers that no longer have active accounts with the Company. As a result, the Company significantly increased its bad debt accrual throughout 1999. The following is a summary of the allowance for doubtful accounts during for the three months ended June 30, 2000 and year ended December 31, 1999: June 30, December 31, 2000 1999 --------- ----------- (In thousands) Allowance for doubtful accounts, beginning of year........................................... $ 12,504 $ 836 Bad debt accrual.................................... 1,636 11,496 Less: Write off (adjustments) of uncollectible accounts.......................................... 5,205 (172) --------- ----------- Allowance for doubtful accounts, end of period ..... $ 8,935 $ 12,504 ========= =========== The Company is still analyzing its delinquent accounts resulting from the new customer billing system implementation problems and expects to write off a significant portion upon completion of its analysis. Based upon information available at June 30, 2000, the Company believes the allowance for doubtful accounts is adequate for management's estimate of potential uncollectible accounts. 45 Electric Rate Case On August 25, 1999, the PRC issued an order approving settlement of the Company's electric rate case. The PRC ordered the Company to reduce its electric rates by $34.0 million retroactive to July 30, 1999. In addition, the order includes a rate freeze until retail electric competition is fully implemented in New Mexico or until January 1, 2003. The settlement reduces annual revenues by an estimated $37.0 million based on expected customer growth and will reduce electric distribution operating revenues in the year 2000 by approximately $20 million. As part of the settlement, the Company agreed that certain changes to the language of the retail tariff under which Kirtland Air Force Base ("KAFB") currently takes service be considered in a separate proceeding before the PRC. Hearings on this issue have not yet been scheduled. KAFB has not renewed its power service contract with the Company that expired in December 1999 but continues to purchase retail service from the Company. GAS RATE ORDERS In April 2000, the New Mexico Supreme Court ("Supreme Court") ruled in favor of the Company in overturning a $6.9 million rate reduction imposed on the Company's natural gas utility by the state's former Public Utility Commission ("PUC") in 1997 for its 1995 gas rate case. Although the Supreme Court upheld certain portions of the gas rate case order by the PUC, the Supreme Court vacated the rate order as "unreasonable and unlawful" because certain disallowances ordered by the PUC unreasonably hindered the Company's ability to earn a fair rate of return. The case has been remanded to the PRC. The Company has $19.4 million of reserves at June 30, 2000 related to regulatory assets associated with the rate case order. The Supreme Court order has supported recovery of many of the costs that the Company has included in these reserves. In addition in March 2000, the Supreme Court vacated the PUC's final order in the Company's 1997 gas rate case and remanded it back to the PRC. The Supreme Court specifically rejected portions of the final order requiring the Company to offer residential customers a choice of utility access fees. The Company has negotiated a stipulated settlement agreement with the PRC staff which must be approved by the PRC. The settlement would resolve all issues raised by the Supreme Court's remand through a global settlement. If approved by the PRC, the settlement would add about $1.2 million to PNM revenues in the final quarter of 2000, $4.7 million in 2001, and $3.9 million in 2002. Upon approval, PNM will reverse certain reserves to costs recovered in the settlement 46 that were recorded against earnings at the time of the original regulatory orders, resulting in a one-time gain of $5.4 million. That amount will be collected from customers in rates over the next 13 years. Hearings on the proposed settlement are scheduled to begin August 14. The PRC has said it expects to issue a final decision on the two gas rate cases by the end of September. POWER OUTAGE On March 18, 2000, a power outage, caused by a brush fire which affected three main transmission lines, resulted in a loss of power for a significant portion of the state of New Mexico. The fire was caused by circumstances outside the control of the Company. The power outage caused brownouts and ultimately blacked-out several major communities in the state for up to four hours. The damage to the Company's transmission lines and the interruption to business caused by the fire were not material. The Company has received approximately 1,500 claims for property damage, mainly for small appliances, resulting from the power outage. No lawsuits against the Company have been filed related to this event. The Company has informed claimants that it will not reimburse them for damage on the basis that the Company was not at fault. EFFECTS OF CERTAIN EVENTS ON FUTURE REVENUES Subsequent to June 30, 2000, due to the unusually high price levels experienced in the spring and early summer of this year, the California ISO Board imposed a price cap of $250 per MWh for real time purchases. During the second quarter, regional wholesale electricity prices reached $750 per MWh. In addition to sales to the California PX and ISO markets, the Company sells power to customers in other jurisdictions whose prices are influenced by the California ISO caps. Approximately $28.6 million of wholesale revenues for the three months ended June 30, 2000 represent amounts earned in excess of $250 per MWh on sales to all customers. Price controls, such as those imposed in California, could have a material adverse effect on the Generation Operations' revenue growth. The Company's 100 MW power sale contract with San Diego Gas and Electric Company ("SDG&E") will expire in April of 2001. SDG&E has notified the Company that it will not renew this contract. The Company currently estimates that the net revenue reduction resulting from the expiration of the SDG&E contract will be approximately $20 million annually. In addition, previously reported litigation between the Company and SDG&E regarding prior years' contract pricing has been resolved in the Company's favor. On October 4, 1999, Western Area Power Administration ("Western") filed a petition at the FERC requesting the FERC, on an expedited basis, to order the Company to provide network transmission service to Western under the Company's Open Access Transmission Tariff on behalf of the United States Department of Energy ("DOE") as contracting agent for KAFB. The Company is opposing the Western petition and intends to litigate this matter vigorously. The net revenue reduction to the Company if the DOE replaces the Company as the power supplier to KAFB is estimated to be approximately $7.0 million annually. 47 A further discussion of these and other legal proceedings can be found in PART II, ITEM 1. - "LEGAL PROCEEDINGS" in this Form 10-Q. 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. Additional coal resources will be required. The Company is currently in discussions regarding alternatives. 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 has not yet occurred. The Company is unable to predict the outcome of this matter and the Company's exposures have not yet been assessed. In 1996, the Company was notified by SJCC that the Navajo Nation 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 argued 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 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. 48 FUEL, WATER AND GAS NECESSARY FOR GENERATION OF ELECTRICITY The Company's generation mix for 1999 was 67.6% coal, 31.0% nuclear and 1.4% 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 (see "Coal Fuel Supply" above). Water for Four Corners and SJGS is obtained from the San Juan River. BHP holds rights to San Juan River water and has committed a portion of such rights to Four Corners through the life of the project. The Company and Tucson have a contract with the USBR for consumption of 16,200 acre feet of water per year for the SJGS, which contract expires in 2005. 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. The Company has signed a contract with the Jicarilla Apache Tribe for a twenty-seven year term, beginning in 2006, for replacement of the current USBR contract for 16,200 AF of water. The contract must still be approved by the USBR and is also subject to environmental approvals. 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. The Company believes that it will continue to have adequate sources of water available for its generating stations. The Company 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 the Company's peak-day demand. The Company serves certain cities which depend on EPNG or Transwestern Pipeline Company for transportation of gas supplies. Because these cities are not directly connected to the Company's transmission facilities, gas transported by these companies is the sole supply source for those cities. The Company believes that adequate sources of gas are available for its distribution systems. NEW SOURCE REVIEW RULES The United States Environmental Protection Agency ("EPA") has proposed changes to its New Source Review (NSR) rules that could result in many actions at power plants that have previously been considered routine repair and maintenance activities (and hence not subject to the application of NSR requirements) as now being subject to NSR. The EPA has held stakeholder meetings to obtain the perspective of the various stakeholders (including the electric utility industry, regulatory agencies and environmental groups) on changes to the NSR rules. 49 In November 1999, the Department of Justice at the request of the EPA filed complaints against seven companies alleging the companies over the past 25 years had made modifications to their plants in violation of the NSR requirements, and in some cases the New Source Performance Standards (NSPS) regulations. Whether or not the EPA will prevail is unclear at this time. The EPA has reached a settlement with one of the companies sued by the Justice Department. The Company believes that all of the routine maintenance, repair, and replacement work undertaken at its power plants was and continues to be in accordance with the requirements of NSR and NSPS. The nature and cost of the impacts of EPA's changed interpretation of the application of the NSR and NSPS, together with proposed changes to these regulations, may be significant to the power production industry. However, the Company cannot quantify these impacts with regard to its power plants. If the EPA should prevail with its current interpretation of the NSR and NSPS rules, the Company may be required to make significant capital expenditures which could have a material adverse affect on the Company's financial position and results of operations. COMPLIANCE WITH ENVIRONMENTAL LAWS AND REGULATIONS The normal course of operations of the Company necessarily involves activities and substances that expose the Company to potential liabilities under laws and regulations protecting the environment. Liabilities under these laws and regulations can be material and in some instances may be imposed without regard to fault, or may be imposed for past acts, even though such past acts may have been lawful at the time they occurred. Sources of potential environmental liabilities include (but are not limited to) the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980 and other similar statutes. The Company records its environmental liabilities when site assessments and/or remedial actions are probable and a range of reasonably likely cleanup costs can be estimated. The Company reviews its sites and measures the liability quarterly, by assessing a range of reasonably likely costs for each identified site using currently available information, including existing technology, presently enacted laws and regulations, experience gained at similar sites, and the probable level of involvement and financial condition of other potentially responsible parties. These estimates include costs for site investigations, remediation, operations and maintenance, monitoring and site closure. Unless there is a probable amount, the Company records the lower end of this reasonably likely range of costs (classified as other long-term liabilities at undiscounted amounts). The Company's recorded estimated minimum liability to remediate its identified sites is $8.3 million. The ultimate cost to clean up the Company's identified sites may vary from its recorded liability due to numerous uncertainties inherent in the estimation process, such as: the extent and nature of contamination; the scarcity of reliable data for identified sites; and the time periods over which site remediation is expected to occur. The Company believes that, due to these uncertainties, it is remotely possible that cleanup costs could exceed its recorded liability by up to $21.1 million. The upper limit of this range of costs was estimated using assumptions least favorable to the Company. 50 LABOR UNION NEGOTIATIONS The collective bargaining agreement between the Company and the International Brotherhood of Electrical Workers Local Union 611 ("IBEW") which covers the approximately 654 bargaining unit employees in the regulated and competitive, deregulated operations expired on May 1, 2000, but continued in full force and effect while the parties negotiated. On July 18, 2000 the IBEW gave the Company notice of its intent to terminate the current collective bargaining agreement in 30 days. In an effort to resolve their differences, the Company and the IBEW have requested and have met with a Federal mediator. In addition, the IBEW has filed a charge with the National Labor Relations Board ("NLRB") alleging the Company has bargained in bad faith, and by its actions has committed an unfair labor practice. The Company has received a complaint and offer of settlement issued by the local field office of the NLRB. The offer of settlement is not acceptable to the Company, and the Company will pursue a formal hearing. The Company continues to evaluate options in the event the parties do not achieve a successor agreement. A dispute between the Company and employees representing IBEW that results in a strike could have a material adverse effect on the Company. NAVAJO NATION TAX ISSUES Arizona Public Service Company ("APS"), the operating agent for Four Corners, has informed the Company that in March 1999, APS initiated discussions with the Navajo Nation regarding various tax issues in conjunction with the expiration of a tax waiver, in July 2001, which was granted by the Navajo Nation in 1985. The tax waiver pertains to the possessory interest tax and the business activity tax associated with the Four Corners operations on the reservation. The Company believes that the resolution of these tax issues will require an extended process and could potentially affect the cost of conducting business activities on the reservation. The Company is unable to predict the ultimate outcome of discussions with Navajo Nation regarding these tax issues. NEW AND PROPOSED ACCOUNTING STANDARDS Decommissioning: 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 February 2000, the Financial Accounting Standards Board ("FASB") issued an exposure draft regarding Accounting for Obligations Associated with the Retirement of Long-Lived Assets ("Exposure Draft"). The Exposure Draft 51 requires the recognition of a liability for an asset retirement obligation at fair value. In addition, present value techniques used to calculate the liability must use a credit adjusted risk-free rate. Subsequent remeasures of the liability would be recognized using an allocation approach. The Company has not yet determined the impact of the Exposure Draft. EITF Issue 99-14, Recognition of Impairment Losses on Firmly Committed Executory Contracts: The Emerging Issues Task Force ("EITF") has added an issue to its agenda to address impairment of leased assets. A significant portion of the Company's nuclear generating assets are held under operating leases. Based on the alternative accounting methods being explored by the EITF, the related financial impact of the future adoption of EITF Issue No. 99-14 should not have a material adverse effect on results of operations. However, a complete evaluation of the financial impact from the future adoption of EITF Issue No. 99-14 will be undeterminable until EITF deliberations are completed and stranded cost recovery issues are resolved. Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, ("SFAS 133"): SFAS 133 establishes accounting and reporting standards requiring derivative instruments to be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 also 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. In June 1999, FASB issued SFAS 137 to amend the effective date for the compliance of SFAS 133 to January 1, 2001. In June 2000, the FASB issued SFAS 138 that provides certain amendments to SFAS 133. The amendments, among other things, expand the normal sales and purchases exception to contracts that implicitly or explicitly permit net settlement and contracts that have a market mechanism to facilitate net settlement. The expanded exception excludes a significant portion of the Company's contracts that previously would have required valuation under SFAS 133. The Company is in the process of reviewing and identifying all financial instruments currently existing in the Company in compliance with the provisions of SFAS 133 and SFAS 138. As a result of the SFAS 138 amendment to SFAS 133, the Company does not believe that the impact of SFAS 133 will be material as most of the Company's derivative instruments result in physical delivery or are marked-to-market under EITF 98-10. 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," 52 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 and transition costs; (iv) the inability of the Company to successfully compete outside its traditional regulated market; (v) the success of the Company's growth strategies particularly as it relates to PowerCo; (vi) regional economic conditions, which could affect customer growth; (vii) adverse impacts resulting from environmental regulations; (viii) loss of favorable fuel supply contracts or inability to negotiate new fuel supply contracts; (ix) failure to obtain water rights and rights-of-way; (x) operational and environmental problems at generating stations; (xi) the cost of debt and equity capital; (xii) weather conditions; and (xiii) technical developments in the utility industry. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company uses derivative financial instruments in limited instances to manage risk as it relates to changes in natural gas and electric prices and adverse market changes for investments held by the Company's various trusts. The Company is exposed to credit losses in the event of non-performance or non-payment by counterparties. The Company uses a credit management process to assess and monitor the financial conditions of counterparties. The Company also uses, on a limited basis, certain derivative instruments for bulk power electricity trading purposes in order to take advantage of favorable price movements and market timing activities in the wholesale power markets. Information about market risk is set forth in Note 4 to the Notes to the Consolidated Financial Statements and incorporated by reference. The following additional information is provided. The Company uses value at risk ("VAR") to quantify the potential exposure to market movement on its open contracts and excess generating assets. The VAR is calculated utilizing the variance/co-variance methodology over a three day period within a 99% confidence level. The Company's VAR as of June 30, 2000 from its electric trading contracts and gas purchase contracts was $33.3 million. The significant increase in VAR from the previous quarter is due to high wholesale prices and increased price volatility caused by unseasonably warm weather and limited power generation capacity in the Company's regional markets. The Company's VAR includes contracts on its excess physical generating capacity in addition to open contracts. The Company expects to cover its net open contract positions with its own excess generating capacity (see footnote (4) in NOTES TO CONSOLIDATED FINANCIAL STATEMENTS). In addition, the imposition of a $250 per MWH price cap by the California ISO will influence the VAR in the future (see "ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-EFFECTS OF CERTAIN EVENTS ON FUTURE REVENUES"). The Company's VAR is regularly monitored by the Company's Risk Management Committee which is comprised of senior finance and operations managers. The Risk Management Committee has put in place procedures to ensure that increases in VAR are reviewed and, if deemed necessary, acted upon to reduce exposures. The VAR represents an estimate of the reasonably possible net losses that would be recognized on the portfolio of derivatives assuming hypothetical movements in future market rates, and is not necessarily indicative of actual results that may occur, since actual future gains and losses will differ from those estimated. Actual gains and losses may differ from estimates due to actual fluctuations in market rates, operating exposures, and the timing thereof, as well as changes to the portfolio of derivatives during the year. 53 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The following represents a discussion of legal proceedings that first became a reportable event in the current year or material developments for those legal proceedings previously reported in the Company's 1999 Annual Report on Form 10-K ("Form 10-K"). This discussion should be read in conjunction with Item 3. - Legal Proceedings in the Company's Form 10-K. City of Gallup Complaint As previously reported, in 1998 Gallup, Gallup Joint Utilities and the Pittsburg & Midway Coal Mining Co. ("Pitt-Midway") filed a joint complaint and petition ("Complaint") with the NMPUC (predecessor of the PRC). The Complaint sought an interim declaratory order stating, among other things, that Pitt-Midway is no longer an obligated customer of the Company, Gallup is entitled to serve Pitt-Midway and the Company must wheel power purchased by Gallup from other suppliers over the Company's transmission system. In September 1998, the NMPUC issued an order without conducting a hearing, granting the requests sought in the Complaint. On October 13, 1999, the Supreme Court issued an opinion and order annulling and vacating the NMPUC Order and remanding the NMPUC order to the PRC. On May 2, 2000, the PRC issued an order reactivating the case on remand concluding that in should consider whether any portion of the NMPUC's final order on remand should be readopted consistent with the Supreme Court's opinion and order, and any other issues and requests for relief raised by the parties in the proceedings on remand. The order also assigned the case to the hearing examiner for a recommended decision. Although Gallup and Pitt - Midway subsequently withdrew their request, on June 29, 2000, the hearing examiner recommended dismissal of this case with prejudice. On July 25, 2000, the PRC issued a final order adopting the hearing examiners recommendation. In addition, hearings were held at the FERC in late February, regarding the issue of whether the Company - Gallup Agreement requires the Company to transmit power to Gallup for delivery at the Yah-Ta-Hey Substation. On May 16, 2000, FERC ruled in the Company's favor, which ruling became final June 26, 2000. San Diego Gas and Electric Company ("SDG&E") Complaints As previously reported, SDG&E had filed four separate and similar complaints with the FERC, alleging that certain charges under the Company's 100 MW power sales agreement with SDG&E were unjust, unreasonable and unduly discriminatory. 54 The first two of the complaints were dismissed by the FERC in 1999. On March 23, 2000, SDG&E filed a fifth complaint raising arguments previously made. The FERC consolidated this fifth complaint for consideration with the two remaining SDG&E complaints on the FERC's docket. On June 8, 2000, the Presiding FERC Administrative Law Judge entered an Initial Decision Terminating Proceedings (the "Initial Decision"). The Initial Decision found that SDG&E would be unable to satisfy its burden of proof in the pending complaints because the evidence did not support a finding that the rates at issue were contrary to the public interest. Accordingly, the Administrative Law Judge ordered, subject to review by the FERC on appeal or upon its own motion, that the proceeding be terminated. The result of the Initial Decision was tantamount to a decision on the merits favorable to PNM. On July 20, 2000, the FERC entered its Notice of Finality of Initial Decision stating that the FERC had decided not to initiate review of the Initial Decision and determining that the Initial Decision was a final order of the FERC. Purported Navajo Environmental Regulation As previously reported, 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. 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. In February 1999, the EPA issued regulations under which Federal operating permits for stationary sources in Indian Country can be issued pursuant to Title V of the Clean Air Act. The regulations rely on authority contained in an earlier rule in which the EPA outlined treatment of tribes as states under the Clean Air Act. The Company as a participant in the Four Corners Power Plant ("Four Corners") and as operating agent and joint owner of San Juan Generating Station, and owners of other facilities located on other reservations located in New Mexico, has filed appeals to contest the EPA's authority under the regulations. On July 14, 2000, the United States Court of Appeals for the District of Columbia issued its opinion denying the Company's motion for rehearing of the decision denying claims concerning the interpretation by EPA of tribal authority under the Clean Air Act. The Company is currently evaluating the decision and will have until October 10, 2000 to consider the filing of a petition for writ 55 of certiorari to the United States Supreme Court. The Company cannot predict the outcome of this proceeding or any subsequent determinations by the EPA. There can be no assurance that the outcome of this matter will not have a material impact on the results of operations and financial position of the Company. Texas-New Mexico Power Company ("TNMP") Complaint TNMP filed a complaint against the Company at the Federal Energy Regulatory Commission ("FERC") on March 15, 2000. TNMP alleges that the Company has interpreted its Open Access Transmission Tariff on file with the FERC in an unjust, unreasonable, and unduly discriminatory manner in violation of section 205 of the Federal Power Act with respect to the provision governing the right of an existing firm transmission customer to extend transmission service at the end of its contract term. On June 15, 2000, FERC denied TNP's complaint on the grounds that the Company's interpretation of the OATT provision was not unreasonable. 56 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Annual Meeting The annual meeting of shareholders was held on June 6, 2000. The matters voted on at the meeting and the results were as follows: The approval of the agreement and plan of share exchange under which the Company will reorganize into a holding company structure. Manzano Corporation, a New Mexico corporation formed by the company, will become the parent company and will trade on the New York Stock Exchange under the symbol "MZO." Votes Against Votes for or Withheld Abstentions --------- ----------- ----------- 28,701,001 2,813,624 221,815 The election of the following three nominees to serve as directors until the annual meeting of shareholders in 2003, or until their successors are duly elected and qualified, as follows: Votes Against Director Votes For Or Withheld -------- --------- ----------- Robert G. Armstrong 34,260,237 549,673 Theodore F. Patlovich 33,910,143 899,767 Paul F. Roth 34,252,699 557,211 As reported in the Definitive 14A Proxy Statement filed April 24, 2000, the name of each other director whose term of office as director continues after the meeting is as follows: John T. Ackerman Joyce A. Godwin Manuel Lujan, Jr. Benjamin F. Montoya Robert M. Price Jeffry E. Sterba The approval of the selection by the Company's board of directors of Arthur Andersen LLP as independent auditors for the fiscal year ending December 31, 2000, was voted on, as follows: Votes Against Votes for or Withheld Abstentions --------- ----------- ----------- 34,627,252 107,370 75,287 57 The meeting was adjourned until June 26, 2000 without a vote to adopt a new performance equity plan as reported in the Definitive 14A Proxy Statement filed April 24, 2000. On June 26, 2000, the shareholders approved the Manzano Corporation Omnibus Performance Equity Plan. Votes Against Votes for or Withheld Abstentions --------- ----------- ----------- 21,852,029 10,217,732 401,045 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits: 10.34 Settlement Agreement between Public Service Company of New Mexico and Creditors of Meadows Resources, Inc. dated November 2, 1989 (refiled). 10.34.1 First amendment dated April 24, 1992 to the Settlement Agreement dated November 2, 1989 among Public Service Company of New Mexico, the lender parties thereto and collateral agent (refiled). 15.0 Letter Re: Unaudited Interim Financial Information 27 Financial Data Schedule b. Reports on Form 8-K: Report dated and filed May 23, 2000 reporting New Mexico regulators set new date for Electric Choice. Report dated and filed June 5, 2000 announcing the Company's plan for transitioning to a competitive retail electric power market in New Mexico. Report dated and filed June 8, 2000 reporting PNM shareholders approve Holding Company and Jeff Sterba succeeds Benjamin Montoya as Chief Executive Officer. Report dated and filed June 8, 2000 reporting that PNM declared common and preferred stock dividends. Report dated and filed July 12, 2000 reporting that PNM welcomes Navoapache Electric Cooperative as a wholesale customer. 58 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PUBLIC SERVICE COMPANY OF NEW MEXICO -------------------------------------- (Registrant) Date: August 14, 2000 /s/ John R. Loyack -------------------------------------- John R. Loyack Vice President, Corporate Controller and Chief Accounting Officer (Officer duly authorized to sign this report) 59 EX-10 2 0002.txt EXHIBIT 10-34 SETTLEMENT AGREEMENT AGREEMENT, dated as of November 2, 1989, among Public Service Company of New Mexico, a New Mexico corporation ("PNM"), the lender parties hereto (the "Lenders") and Chemical Bank as agent (the "Agent") and collateral agent (the "Collateral Agent"). Background ---------- A. Meadows Resources, Inc., a New Mexico corporation and a wholly-owned subsidiary of PNM ("Meadows"), certain of the Lenders and the Agent are parties to a Credit Agreement dated as of June 28, 1988 (as amended, overridden and in effect from time to time, the "Credit Agreement"). B. Meadows, the Lenders, the Agent and the Collateral Agent are parties to a Master Collateral Agreement dated as of June 28, 1988 (as amended, overridden and in effect from time to time, the "Master Collateral Agreement"). All terms defined in or by reference in the Master Collateral Agreement and not otherwise defined herein or by reference herein are used herein with the meanings as so defined. C. Meadows, the Lenders, the Agent and the Collateral Agent are parties to a Consent and Override Agreement dated as of May 1, 1989 (as amended and in effect from time to time, the "Consent and Override Agreement"). D. The Agent, the Collateral Agent and the Lenders assert that PNM is liable in respect of the principal, interest, expenses (including without limitation attorneys' fees and expenses) and other amounts due from Meadows (such obligations of Meadows, the "Debt") under the Credit Agreement, the Master Collateral Agreement , the Security Documents and the Existing Agreements. The principal amount of the Debt as of May 1, 1989 (excluding expenses and that portion of the principal amount of the Chemical Note attributable to accrued but unpaid interest on the note of MCB Financial Group, Inc. ("MCB Financial"), dated December 10, 1986, in favor of Chemical Bank) was $127,910,639.00. As of the Effective Time, the amount of such principal outstanding (after giving effect to the payment to the Collateral Agent referred to in paragraph F hereof, but before giving effect to the payments to the Collateral Agent referred to in Sections 1.2 and 3.1(a) hereof) was $63,308,146. E. PNM denies the assertions of the Agent, the Collateral Agent and the Lenders described in paragraph D above and asserts that PNM (i) could not lawfully have guaranteed any indebtedness of Meadows without the prior approval of the New Mexico Public Service Commission, (ii) did not in fact guarantee the Debt and (iii) therefore has no liability in respect of the Debt. PNM further asserts that (i) the Lenders were aware of the applicable New Mexico laws and regulations regarding a guaranty by a utility at the time Meadows incurred the Debt and therefore priced their respective loan transactions with Meadows on a stand-alone basis, (ii) that, given a reasonable period of time in which to dispose of its assets, except for the notes (the "BCD Pledged Notes") of Bellamah Community Development ("Bellamah") pledged by Meadows to the Collateral Agent pursuant to the Note Pledge Agreement, Meadows will be able to pay substantially all of the principal amount of the Debt and (iii) if the BCD Pledged Notes are repaid in full, then such Debt will be fully repaid. F. Prior to the Effective Time, PNM purchased from Meadows for $9,000,000 (the "Exel Payment") the common stock of Exel Limited, a Cayman Islands corporation ("Exel"), owned by Meadows. Meadows retained $3,250,000 from the Exel Payment and remitted the balance thereof to the Collateral Agent, which distributed such balance to the Lenders in accordance with the Consent and Override Agreement. G. In order to avoid the expense and uncertainty of any protracted litigation over the validity of their respective positions, and in an effort to improve the relationship between PNM and the Lenders, PNM, on the one hand, and the Agent, the Collateral Agent and the Lenders, on the other, desire to enter into this Agreement to compromise and settle, on the terms and conditions described herein, all claims, rights and causes of action which each has or may have against the other in respect of the Debt. Terms and Conditions -------------------- NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in reliance upon the mutual undertakings of the parties hereto, PNM, the Agent, the Collateral Agent and the Lenders hereby agree as follows: I. TRANSACTIONS AT EFFECTIVE TIME. Prior to or simultaneously with the execution and delivery of this Agreement by all of the parties hereto (the "Effective Time"), the following shall occur: 1.1 Secretary's Certificate. PNM shall deliver to the Agent, the Collateral Agent and the Lenders a certificate of the Secretary of PNM, dated the date on which the Effective Time occurs, and certifying that (a) attached thereto is a true, correct and complete copy of resolutions duly adopted by the full Board of Directors of PNM, authorizing the execution, delivery and performance of this Agreement by PNM and (b) such resolutions have not been modified, rescinded or amended and are in full force and effect. 1.2 Tax Payment. PNM shall pay to Meadows a tax sharing payment in the amount of $6,500,000 in immediately available funds for immediate payment to the Collateral Agent for distribution to the Lenders in accordance with the Consent and Override Agreement. II. MUTUAL RELEASES. 2.1 PNM Release. Effective as of the Effective Time, the Agent, the Collateral Agent and each Lender hereby release and discharge PNM, Utech Venture Capital Corp. ("Utech"), Exel and each Subsidiary and Affiliate of PNM (excluding Meadows and each Meadows Affiliated (as hereinafter defined)) and all past, present and future shareholders, directors, officers, agents, representatives, attorneys, advisors, employees, successors and assigns of PNM, Utech, Exel and each Subsidiary and Affiliate of PNM (PNM and such individuals (there being no individuals excluded regardless of affiliation with Meadows or any Meadows Affiliate) and non-excluded entities, the "PNM Releases") from any and all actions, causes of action, suits, debts, guaranties, covenants, contracts, agreements, promises, damages, claims and demands whatsoever, under the laws of the United States or of any state, in equity, or otherwise (the "Lender Claims"), which the Agent, the Collateral Agent and such Lender ever had, now have or hereafter can, shall or may have against any one or more of the PNM Releases, with respect to all Lender Claims arising out of or related to the Debt or the circumstances of the incurrence thereof by Meadows, other than any Lender Claim (a) resulting from the failure of PNM to perform its obligations under this Agreement or the breach of any representation or warranty of PNM set forth in this Agreement or in any instrument or document delivered pursuant hereto, (b) against Meadows, Republic Holding Company ("Republic Holding"), Bellamah, any of the Affiliated Subsidiaries or any other direct or indirect Subsidiary of Meadows (each such entity, a "Meadows Affiliate") or (c) in the case of Union Bank, in respect of any letters of credit issued by Union Bank for the account of MCB Financial. 2.2 Agent, Collateral Agent and Lender Releases. Effective as of the Effective Time, PNM hereby releases and discharges the Agent, the Collateral Agent, each Lender and all past, present and future shareholders, directors, officers, agents, representatives, attorneys, advisors, employees, successors and assigns of each of the Agent, the Collateral Agent and such Lender (the Agent, the Collateral Agent, such Lender and such other individuals and entities, the "Lender Releasees") from any and all actions, causes of action, suits, debts, guaranties, covenants, contracts, agreements, promises, damages, claims and demands whatsoever, under the laws of the United States or of any state, in equity, or otherwise (the "PNM Claims"), which PNM ever had, now has or hereafter can, shall or may have against any one or more of the Lender Releasees, with respect to all PNM Claims arising out of or related to the Debt, the circumstances of the incurrence thereof by Meadows or the relationship between any Lender Releasee and Meadows prior to, at the time of or following such incurrence, other than any PNM Claim resulting from the failure of the Agent, the Collateral Agent or such Lender to perform its obligations under this Agreement or the breach of any representation or warranty of the Agent, the Collateral Agent or such Lender set forth in this Agreement or in any instrument or document delivered pursuant hereto. 2.3 Sole Remedy. In the event that any party hereto shall fail to perform its obligations hereunder, the sole remedy for such failure shall be to recover damages for the breach of the provisions of this Agreement requiring such performance. III. PNM DAMAGE PAYMENTS AND RECAPTURE. 3.1 Schedule of Payments. In consideration of the release set forth in Section 2.1 hereof, PNM will make payments to the Collateral Agent for distribution to the Lenders in accordance with the Consent and Override Agreement as set forth below. (a) Contemporaneously with or prior to the Effective Time, PNM will pay in immediately available funds as damages to the Collateral Agent for distribution to the Lenders in accordance with the Consent and Override Agreement the difference between $15,356,520 and the aggregate amount of all payments received and retained by the Lenders on the Debt on or after October 31, 1989 other than proceeds of any sale, assignment or other disposition of all or a portion of (i) Meadows' interest in the Santa Fe County Ranch Resort, (ii) the shares of common stock of Republic Savings Bank, F.S.B. ("Republic Savings"), owned by Republic Holding, (iii) the shares of preferred stock of Republic Savings owned by Meadows or (iv) the shares, rights and interests comprising Meadows' venture capital portfolio (the "Venture Capital Interests"), including without limitation the capital stock of Meadows Ventures, Inc., Pulse Systems, Inc., DH Technology, Inc. and Convex Computers, Inc. owned by Meadows and any warrants and royalty rights relating thereto. (b) No later than December 29, 1989, PNM will pay in immediately available funds as damages to the Collateral Agent for distribution to the Lenders in accordance with the Consent and Override Agreement the difference between $32,856,520 and the aggregate amount of all payments received and retained by the Lenders on the Debt on or after October 31, 1989. (c) No later than March 31, 1990, PNM will pay in immediately available funds as damages to the Collateral Agent for distribution to the Lenders in accordance with the Consent and Override Agreement the difference between ($37,566,520 and the aggregate amount of all payments received and retained by the Lenders on the Debt on or after October 31, 1989. (d) No later than June 30, 1990, PNM will pay in immediately available funds as damages to the Collateral Agent for distribution to the Lenders in accordance with the Consent and Override Agreement the difference between $53,211,520 and the aggregate amount of all payments received and retained by the Lenders on the Debt on or after October 31, 1989. (e) No later than December 31, 1990, PNM will pay in immediately available funds as damages to the Collateral Agent for distribution to the Lenders in accordance with the Consent and Override Agreement the difference between $57,396,520 and the aggregate amount of all payments received and retained by the Lenders on the Debt on or after October 31, 1989. 3.2 Treatment of Certain Amounts; Non-Cash Payments. (a) For purposes of (i) Section 3.1 hereof, all payments received by the Collateral Agent from PNM and used to pay the out-of-pocket expenses (including without limitation attorneys' fees and expenses) of the Agent, the Collateral Agent or the Lenders shall be deemed to have been received and retained by the Lenders and (ii) Sections 3.1 and 3.4 hereof, all sums received, prior to November 2, 1989, by the Collateral Agent from Meadows or from any liquidation of Meadows' assets or other collateral for the Debt and used to pay the out-of-pocket expenses (including without limitation attorneys' fees and expenses) of the Collateral Agent or attorneys' fees and expenses incurred by the Lenders shall not be deemed to have been received and retained by the Lenders. (b) The Agent, the Collateral Agent and the Lenders hereby agree not to accept any payment on the Debt other than in cash without the prior written consent of PNM, except to the extent that any such non-cash payment is, directly or indirectly, a distribution pursuant to a Bankruptcy Case (as hereinafter defined). In the event that any such non-cash distribution is received or proposed to be received on the Debt pursuant to a Bankruptcy Case, the parties hereto will consult in good faith as to appropriate arrangements (and will endeavor to implement any such arrangements in good faith) for protecting, preserving, retaining, managing, realizing on, maintaining and distributing the property so received, in order to effectuate equitably the intent and purpose of the sharing and recapture arrangements contemplated in Section 3.4 hereof. No non-cash distribution received by the Collateral Agent or the Lenders shall be treated as a payment received and retained by the Collateral Agent or the Lenders, except that any net cash proceeds realized, received and retained by the Collateral Agent or the Lenders on such distribution shall be treated as received and retained by the Collateral Agent and the Lenders at the time of such realization and receipt. Unless otherwise agreed to by the parties, the Collateral Agent may hold any such non-cash distribution on behalf of the parties, as their interests may appear, until realization thereon. 3.3 Adjustments. In the event that Meadows, any Meadows Affiliate, any successor to or creditor of Meadows or such Meadows Affiliate, any trustee, receiver, conservator or other person acting on behalf of Meadows, such Meadows Affiliate or the estate, creditors or equity holders of Meadows or such Meadows Affiliate or any regulator of any of the foregoing, shall at any time recover from any Lenders or the Collateral Agent any sums (other than sums received from PNM pursuant to Section 3.1 hereof) treated as having been received and retained by the Lenders or the Collateral Agent under Sections 3.1 and 3.4 hereof or any sums in respect of which the Collateral Agent has made remittances to PNM pursuant to such Section 3.4, (a) the amount of any such recovery will be treated as never having been received and retained by the Lenders and never having been received by the Collateral Agent on the Debt for purposes of such Sections 3.1 and 3.4 and (b) unless such recovery is found by a final, non-appealable order of a court of competent jurisdiction to be due to the misconduct of the Lenders or the Collateral Agent (which misconduct shall not include actions or omissions (x) attributable to the transactions contemplated by this Agreement or any instrument or document executed or delivered in connection with this Agreement at or after the Effective Time and (y) occurring prior to the Effective Time and of which PNM or any Subsidiary or Affiliate thereof (including, without limitation, Meadows and any Meadows Affiliate) had knowledge prior to the Effective Time), PNM will pay promptly, without interest, (i) in the case of any such recovery from the Collateral Agent, to the Collateral Agent or (ii) in the case of any such recovery from any Lenders, to the Collateral Agent for distribution to such Lenders in proportion to the respective amounts of such recoveries from each of such Lenders, in each case an amount equal to the amount, if any, which PNM would have owed under such Section 3.1 as of the date of such recovery if the Lenders had not received and retained the sums recovered (or in the case of recovery of a sum in respect of which a remittance was made to PNM, the amount of such remittance). Any payment by PNM (a) pursuant to clause (b) (i) of the immediately preceding sentence may, notwithstanding anything in the Credit Agreement, the Master Collateral Agreement or the Consent and Override Agreement to the contrary, be retained by the Collateral Agent and not distributed to the Lenders (but only if the Collateral Agent shall have previously distributed, in accordance with the Consent and Override Agreement or this Agreement, as applicable, the sums in respect of which the recovery from the Collateral Agent was made) and (b) pursuant to either clause (b) (i) or clause (b) (ii) of the immediately preceding sentence will be treated as having been received and retained by the Lenders for purposes of such Sections 3.1 and 3.4. To the extent that PNM is not required to make a payment under this Section 3.3 in respect of any such sums recovered from the Collateral Agent or any Lender (other than because of misconduct), the Lenders will make appropriate arrangements in order to share the amount of any such recovery pro rata. 3.4 Recapture. (a) Subject to Sections 3.2, 3.3 and 3.4(b) hereof, if at any time the Agent, the Collateral Agent or the Lenders shall have received and retained $115,540,000 after May 1, 1989 on the Debt from any source, including without limitation payments from PNM under Section 3.1 hereof, the Collateral Agent shall remit promptly to PNM as a refund of a portion of the damages paid by PNM amounts equal to any sums subsequently received by the Collateral Agent in respect of the Debt or of any interest in the residual value of Meadows allocated to the Lenders in connection with the Meadows Restructuring Agreement (as hereinafter defined), but only to the following extent: (a) 100% of the sums so received by the Collateral Agent from any source other than any (i) distribution or other realization (a "Bellamah Distribution") of any nature in respect of Meadows' claims against or direct or indirect equity interest in Bellamah or the obligations of Bellamah under the Guarantee Agreement (as defined in the Credit Agreement), (ii) sale, assignment or other disposition (a "Bellamah Sale") of assets of Bellamah or of such claims, equity interest or obligations or (iii) distribution of Meadows' residual cash on December 31, 1990 and December 31, 1991 (or on such other dates as agreed to by Meadows and the Lenders) as contemplated in any term sheet or agreement then in effect for the restructuring of Meadows' obligations to the Lenders (the "Meadows Restructuring Agreement") and (b) 50% of the sums so received by the Collateral Agent from any Bellamah Distribution or Bellamah Sale, in each case until PNM has been fully reimbursed, without interest, for any payments it has made to the Collateral Agent under Sections 3.1 (b), (c), (d) or (e) or Section 3.3 hereof. Any of the foregoing sums received by the Collateral Agent in respect of the Debt and on account of which the Collateral Agent (i) is required to make payment to PNM pursuant to the immediately preceding sentence shall be paid by the Collateral Agent to PNM and not distributed to the Lenders and (ii) is not required to make such payment to PNM shall be distributed by the Collateral Agent to the Lenders in accordance with the Consent and Override Agreement. (b) Notwithstanding anything in Section 3.4 (a) hereof to the contrary, if the Debt has been fully repaid prior to the time at which PNM has been fully reimbursed in accordance with such Section 3.4 (a), the payment to which PNM would be entitled from the Collateral Agent under such Section 3.4 (a) in respect of sums received by the Collateral Agent on account of a Bellamah Distribution or Bellamah Sale shall be limited so as to ensure that, after giving effect to such payment and the retention by the Collateral Agent of sums in respect thereof pursuant to the second sentence of such Section 3.4 (a), the Lenders receive 50% of the value of such Bellamah Distribution or Bellamah Sale. 3.5 PNM Waiver of Claims in Meadows' Bankruptcy or Reorganization. In the event that Meadows shall voluntarily or involuntarily become the subject of a case under Title 11 of the United States Code (a "Bankruptcy Case"), to the extent that PNM may have or be deemed to have a claim against Meadows in any such Bankruptcy Case, PNM agrees with the Lenders that PNM will waive any such claim but only to the extent that such claim may arise or be deemed to arise in relation to any obligation of or payment by PNM on account of or measured by antecedent debt of Meadows in respect of which antecedent debt payment was made by Meadows between ninety days and one year before the filing of such Bankruptcy Case. IV. REPRESENTATIVES AND WARRANTIES. 4.1 PNM Representations and Warranties. PNM represents and warrants to the Agent, the Collateral Agent and the Lenders that (a) PNM is authorized to execute, deliver and perform this Agreement, (b) PNM's execution, delivery and performance of this Agreement does not violate any law, statute, ordinance, rule, regulation, charter, bylaw or agreement to which PNM is subject or by which PNM is bound, (c) the persons executing and delivering this Agreement and each instrument or document delivered pursuant hereto on PNM's behalf are authorized to do so and (d) this Agreement constitutes the legal, valid and binding obligation of PNM, enforceable against PNM in accordance with its terms. 4.2 Lender Representations and Warranties. Each Lender hereby separately represents and warrants to PNM that (a) such Lender is authorized to execute, deliver and perform this Agreement, (b) such Lender's execution, delivery and performance of this Agreement does not violate any law, statute, ordinance, rule, regulation, charter, bylaw or agreement to which such Lender is subject or by which such Lender is bound, (c) the persons executing and delivering this Agreement and each instrument or document delivered pursuant hereto on such Lender's behalf are authorized to do so, (d) this Agreement constitutes the legal, valid and binding obligation of such Lender, enforceable against such Lender in accordance with its terms and (e) such Lender has not assigned or granted any participation in its portion of the Debt (other than any such participation assigned or granted to another Lender pursuant to the Sharing Agreement dated as of July 28, 1989 among the Lenders). 4.3 Agent and Collateral Agent Representatives and Warranties. Each of the Agent and the Collateral Agent hereby separately represents and warrants to PNM that (a) it is authorized to execute, deliver and perform this Agreement, (b) its execution, delivery and performance of this Agreement does not violate any law, statute, ordinance, rule, regulation, charter, bylaw or agreement to which it is subject or by which it is bound, (c) the persons executing this Agreement and each instrument or document delivered pursuant hereto on its behalf are authorized to do so and (d) this Agreement constitutes the legal, valid and binding obligation of the Agent or the Collateral Agent, as the case may be, enforceable against the Agent or the Collateral Agent, as the case may be, in accordance with its terms. V. LENDER CONSENT AND WAIVER 5.1 Specified Asset Sales. The Lenders agree to waive compliance (a) in the case of the Banks, with all provisions of the Loan Documents and (b) in the case of each Existing Creditor, with all provisions of the Existing Agreements to which such Existing Creditor is a party, in each case to the extent and only to the extent necessary to permit the sale of any of the following assets of Meadows or any Meadows Affiliate for cash at or above the prices listed therefor, free and clear of any and all claims, liens, charges and encumbrances in favor of, or created by or through, the Lenders, so long as the proceeds of any such sales are promptly remitted by Meadows to the Collateral Agent for distribution in accordance with the provisions of this Agreement: Asset Minimum Price ----- ------------- Santa Fe County Ranch Resort $ 7,200,000 (as a whole or in parcels at not less than $4,000 per acre) Venture Capital Interests $ 2,000,000 Frontier First Partners $ 554,000 Common and preferred stock of Republic Savings $ 10,800,000 5.2 Miscellaneous Asset Sales. The Lenders agree to waive compliance (a) in the case of the Banks, with all provisions of the Loan Documents and (b) in the case of each Existing Creditor, with all provisions of the Existing Agreements to which such Existing Creditor is a party, in each case to the extent and only to the extent necessary to permit the sale or disposition of, or other realization on, any asset of Meadows (other than Meadows' claims against or direct or indirect equity interest in Bellamah) not identified in Section 5.1 hereof, including without limitation the preferred stock of Sunbelt Mining Company, Inc. and all of Meadows' artwork, office furnishings and equipment, free and clear of any and all claims, liens, charges and encumbrances in favor of, or created by or through, the Lenders. The Lenders agree that Meadows shall have the right to retain the proceeds of any such sales, dispositions or other realizations subject to the provisions of the Meadows Restructuring Agreement (or any amendments or modifications thereto) relating to the subsequent expenditure and/or distribution of such proceeds by Meadows. VI. MISCELLANEOUS 6.1 Notices. Notices and other communications in connection herewith shall be in writing and shall be delivered (which delivery may be effected by telecopy, facsimile transmission, telex, graphic scanning or other telegraphic communications equipment), mailed or addressed. (a) if to PNM, at Alvarado Square, Albuquerque, New Mexico 87158 (telecopy no. (505) 242-6927) Attention: James B. Mulcock, Jr., Senior Vice President, with copies to (i) Keleher & McLeod, P.A., Public Service Building, P.O. Drawer AA, 414 Silver Avenue, S.W., Albuquerque, New Mexico 87102 (telecopy no. (505) 764-9643), Attention: William B. Keleher, Esq. and (ii) Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, New York, New York 10022 (telecopy no. (212) 735-3596), Attention: Joseph W. Halliday, Esq; and (b) if to the Agent, the Collateral Agent or any Lender, at its address set forth on Schedule 1 hereto, with a copy to Wachtell, Lipton, Rosen & Katz, 299 Park Avenue, New York, New York 10171 (telecopy no. (212) 371-1658), Attention: Harold S. Novikoff, Esq. 6.2 Successors and Assigns. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party, including without limitation the holder of any participation in the Debt assigned or granted by any Lender; and all covenants, promises and agreements by or on behalf of PNM, the Agent, the Collateral Agent or any Lender that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns. 6.3 APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK FOR CONTRACTS MADE AND WHOLLY PERFORMED WITHIN THAT STATE. 6.4 Waivers; Amendments. (a) No waiver of any provision of this Agreement or consent to any departure by PNM, the Agent, the Collateral Agent or any Lender therefrom shall in any event be effective unless the same shall be authorized as provided in Section 6.4 (b) hereof, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on PNM, the Agent, the Collateral Agent or any Lender in any case shall entitle PNM, the Agent, the Collateral Agent or such Lender, as the case may be, to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by PNM, the Agent, the Collateral Agent and the Lenders. 6.5 Counterparts and Signatures. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract. This Agreement shall be deemed executed and delivered by any party hereto if a copy or facsimile of a signature page hereof executed by such party is delivered to the Collateral Agent in accordance with Section 6.1 hereof. 6.6 Headings. Article and section headings used herein are for convenience of reference only and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. 6.7 Entire Settlement. (a) Subject to the next succeeding sentence, this Agreement constitutes the entire settlement and supersedes all other prior agreements and understandings, both written and oral, between the parties hereto with respect to the subject matter hereof. The Lenders will take all steps necessary and appropriate on the part of the Lenders in good faith to consummate the arrangements contemplated by (i) the October 31, 1989 term sheet (the "Meadows Term Sheet") entitled "Restructuring of All Senior and Subordinated Indebtedness (the "Debt") of Meadows Resources, Inc. ("Meadows")" and (ii) paragraph IV of the October 4, 1989 term sheet entitled "Principal Terms of Comprehensive Settlement between Public Service Company of New Mexico ("PNM") and the Lenders (the "Lenders") to Meadows Resources, Inc. ("Meadows"). The Lenders and PNM understand and agree that (i) the Meadows Term Sheet is satisfactory to the Lenders in all material respects, (x) except with respect to certain issues (substantially intercreditor in nature) relating to the uniformity of interest rates on the respective portions of the Debt and (y) so long as the Lenders receive not less than 25% of any residual cash or cash equivalents of Meadows allocated in the manner described in paragraph 1(d) of the Meadows Term Sheet, and (ii) in the event that this Agreement conflicts with any provision of the Meadows Restructuring Agreement relating directly to PNM or its rights or obligations hereunder, the provisions of this Agreement shall control. Notwithstanding the foregoing, the contractual obligations of the Lenders with respect to the terms set forth in the term sheets referred to above shall be only as stated in the definitive documentation executed and delivered by all parties thereto in connection with the evidencing of the arrangements contemplated by such term sheets. (b) The Agent, the Collateral Agent and the Lenders hereby agree to modify the Consent and Override Agreement by deleting Section 2.3(c) thereof in its entirety. Except as otherwise provided in the immediately preceding sentence, the Consent and Override Agreement shall continue in full force and effect in accordance with the provisions thereof. 6.8 Use of Agreement. Neither this Agreement nor any instrument or document delivered in connection herewith, nor any of the terms hereof or thereof, nor any negotiations or proceedings in connection herewith or therewith, nor any actions taken pursuant hereto or thereto, shall constitute or be construed as or be deemed to be evidence of an admission on the part of any party hereto of the truth or falsity of any of the claims or assertions made by any party hereto or the merit, or lack thereof, of any defenses thereto, nor shall this Agreement or any such instrument or document, or any of the terms hereof or thereof, or any negotiations or proceedings in connection herewith or therewith, be offered or received in evidence, or otherwise used in any proceeding, against any party hereto, except with respect to the enforcement of this Agreement. 6.9 Further Assurances. PNM, the Agent, the Collateral Agent and the Lenders shall each from time to time do and perform any other act, and shall each execute, acknowledge, deliver, file, register, deposit and record any and all further instruments, required by law or reasonably requested by any party hereto for the purpose of proper protection, to the satisfaction of such party, of the rights or interests of such party or for the purpose of carrying out the intention of this Agreement. 6.10 Confidentiality. Each party hereto separately agrees that such party and its employees, agents and attorneys shall not, except (a) as may be required by law, regulation or order of government authority or (b) in connection with the enforcement of this Agreement, disclose or communicate the substance or terms of this Agreement to any other person without the prior written consent of all parties hereto, which consent shall not be unreasonably withheld. Each party hereto separately grants to each other party hereto consent to disclose the provisions of this Agreement to such other party's attorneys, financial or lending institutions, outside auditors and regulatory authorities. 6.11 Defense of Certain Proceedings. Promptly upon receipt by the Agent, the Collateral Agent or any Lender of notice of the commencement of any action or proceeding seeking any recovery described in Section 3.3 hereof or challenging the validity or priority of any lien securing the Debt (other than in respect of the BCD Pledged Notes), the Agent, the Collateral Agent or such Lender, as in the case may be, will notify PNM of such commencement (a "commencement Notice"). PNM will be entitled to participate in the defense of any such action or proceeding, and, to the extent that it may elect by written notice delivered to the Agent, the Collateral Agent and the affected Lenders promptly after receiving a Commencement Notice, to assume the defense thereof. In any case, counsel for the Agent, the Collateral Agent, the affected Lenders and, if it chooses to participate in or assume the defense, PNM will be a single law firm selected by the Collateral Agent after consultation with the affected Lenders, such counsel to be reasonably satisfactory to PNM, and PNM shall pay the reasonable fees and expenses of such counsel; provided, however, (i) if PNM shall, within ten days after receiving a Commencement Notice, give notice to the Collateral Agent that PNM has determined not to participate in or assume the defense of any such action or proceeding, the cost of any such defense by the Agent, the Collateral Agent or the Lenders shall not be at the expense of PNM and (ii) if the Collateral Agent after consultation with the Lenders reasonably concludes that there may be legal defenses available to the Agent, the Collateral Agent or the Lenders which are different from or additional to those available to PNM, or that it would be inappropriate for the counsel selected by the Collateral Agent to represent, in respect of a particular legal or factual issue or otherwise, both PNM, on the one hand, and the Agent, the Collateral Agent and the Lenders, on the other, the Collateral may after consultation with the Lenders select additional, separate counsel, but not at the expense of PNM, to represent the Agent, the Collateral Agent and the affected Lenders. The Agent, the Collateral Agent and the Lenders will, to the extent reasonably requested by PNM and at the expense of PNM, cooperate in good faith with PNM in connection with the defense of any such action or proceeding but, in the absence of any such reasonable request, will not be required to participate in any such defense. None of the foregoing shall prevent PNM, the Agent, the Collateral Agent or any Lender from retaining counsel, at its own expense, to represent its individual interests. 6.12 Attorneys' Fees and Expenses. None of the Agent, the Collateral Agent or the Lenders will be obligated to pay any attorneys' fees or expenses of PNM, and, other than as set forth in Section 6.11 hereof, PNM will not be obligated to pay any attorneys' fees and expenses of the Agent, the Collateral Agent or the Lenders, in each case incurred in connection with the negotiation or documentation of this Agreement or any instrument or document prepared or delivered in connection herewith or otherwise in connection with the Debt; provided, however, that such fees and expenses of the Agent, the Collateral Agent and the Lenders may be paid from payments otherwise required to be made by PNM to the Collateral Agent pursuant to this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this agreement as of the day and year first above written. PUBLIC SERVICE COMPANY OF NEW MEXICO By: ---------------------------------- Title: CHEMICAL BANK individually and as Agent and Collateral Agent By: ---------------------------------- Title: THE BANK OF NEW YORK (formerly known as Irving Trust Company By: ---------------------------------- Title: BARCLAYS BANK PLC By: ---------------------------------- Title: UNION BANK By: ---------------------------------- Title: FIRST NATIONAL BANK IN ALBUQUERQUE By: ---------------------------------- Title: DREXEL BURNHAM LAMBERT COMMERCIAL PAPER INCORPORATED By: ---------------------------------- Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: ---------------------------------- Title: FIRST INTERSTATE BANK OF ALBUQUERQUE By: ---------------------------------- Title: FIRST NATIONAL BANK OF BELEN By: ---------------------------------- Title: Schedule 1 Addresses for Notice Name; Address Telecopy Number - -------------- --------------- Chemical Bank (212) 308-3825 277 Park Avenue New York, New York 10172 Attention: William Gullion The Bank of New York (212) 635-7290 One Wall Street New York, New York 10015 Attention: Matthew Gilmartin Barclays Bank PLC (212) 412-5662 Barclays Bank Building 75 Wall Street New York, New York 10265 Attention: Eren Hussein Union Bank (213) 236-4096 445 South Figueroa Street Los Angeles, California 90071 Attention: Philip Flynn First National Bank in Albuquerque (505) 247-2611 40 First Plaza, N.W. Albuquerque, New Mexico 87102 Attention: Melvin Hertz Morgan Guaranty Trust Company (212) 837-5005 of New York 60 Wall Street New York, New York 10260 Attention: Ronald Carleton First Interstate Bank of (505) 766-6376 Albuquerque 320 Gold Avenue, S.W. Albuquerque, New Mexico 87103 Attention: David Prysock First National Bank of Belen (505) 864-5705 Post Office Box 4 Belen, New Mexico 87002 Attention: Tim D. Hargrove Drexel Burnham Lambert (212) 968-9881 Commercial Paper Incorporated 55 Broad Street (2nd Floor) New York, New York 10004 Attention: Taylor Wagenseil EX-10 3 0003.txt EXHIBIT 10-34.1 FIRST AMENDMENT TO SETTLEMENT AGREEMENT FIRST AMENDMENT, dated as of April 24, 1992 (the "Amendment"), to the Settlement Agreement dated as of November 2, 1989 (the "Settlement Agreement") among Public Service Company of New Mexico, a New Mexico corporation ("PNM"), the lender parties thereto (the "Lenders") and Chemical Bank as agent (the "Agent") and collateral agent (the "Collateral Agent"). Background A. PNM, the Lenders, the Agent and the Collateral Agent are parties to the Settlement Agreement. All terms defined in or by preference in the Settlement Agreement and not otherwise defined herein are used herein with the meanings as so defined. B. PNM, the Lenders, the Agent and the Collateral Agent have agreed to amend the Settlement Agreement in the manner hereinafter set forth. Terms and Conditions NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in reliance upon the mutual undertakings of the parties hereto, PNM, the Agent, the Collateral Agent and the Lenders hereby agree as follows: 1. Occurrence of Certain Events. Prior to or simultaneously with the execution and delivery of this Amendment by all parties hereto, (a) Meadows Resources, Inc. ("Meadows"), the Agent, the Collateral Agent and the Lenders shall have executed and delivered an amendment (in the form of Exhibit A attached hereto) to that certain Restructuring Agreement dated as of February 14, 1990 among Meadows, the Agent, the Collateral Agent and the Lenders (the "First Restructuring Agreement Amendment") and PNM shall have consented thereto and (b) PNM shall have delivered to the Agent, the Collateral Agent and the Lenders a certificate of the Assistant Secretary of PNM, dated as of the date hereof, substantially in the form of Exhibit B attached hereto and certifying that (i) attached thereto is a true, correct and complete copy of resolutions duly adopted by the full Board of Directors of PNM, authorizing the execution, delivery and performance of this Amendment by PNM, (ii) such resolutions have not been modified, rescinded or amended and are in full force and effect and (iii) set forth in such certificate is the name, title and true signature of an officer of PNM authorized to execute this Amendment and consent to the First Restructuring Agreement Amendment. 2. Amendments to Settlement Agreement. Effective as of the date (the "Approved Date") upon which an order from the New Mexico Public Service Commission, in its Case No. 2429, approving the transactions contemplated by this Section 2 becomes final and non-appealable, Section 3.4(a) of the Settlement Agreement is hereby amended and restated in its entirety as follows (which amendment and restatement shall be effective as of the Approval Date, it being understood and agreed that the original terms of such Section 3.4(a) (without such amendment and restatement) shall apply to all actions, events and circumstances (including without limitation the remittal of sums by the Collateral Agent to PNM or the Lenders) subject to such original terms and occurring prior to the Approval Date): "(a) Recapture. Subject to Sections 3.2, 3.3 and 3.4 (b) hereof, if at any time the Agent, the Collateral Agent or the Lenders shall have received and retained $115,540,000 after May 1, 1989 on the Debt from any source, including without limitation payments from PNM under Section 3.1 hereof, the Collateral Agent shall remit promptly to PNM as a refund of a portion of the damages paid by PNM amounts equal to any sums subsequently received by the Collateral Agent in respect of the Debt or of any interest in the residual value of Meadows allocated to the Lenders in connection with the Meadows Restructuring Agreement (as hereinafter defined), until PNM has been fully reimbursed without interest, for any payments it has made to the Collateral Agent under Sections 3.1(b), (c), (d) or (e) or Section 3.3 hereof; provided, however, that no remittances shall be made to PNM under this Section 3.4(a) until after the Collateral Agent has received and distributed to the Lenders in accordance with the Consent and Override Agreement (i) the payments contemplated to be made by Meadows pursuant to Section 2 of the First Restructuring Agreement Amendment (as hereinafter defined), (ii) other sums received by the Collateral Agent (up to $100,000 in the aggregate) from any source in respect of the Debt and (iii) if the Bellamah Release (as hereinafter defined) is effected pursuant to Section 4 of the First Settlement Agreement Amendment (as hereinafter defined), the sum of $100, 000 (paid by Meadows and/or the Bellamah Trustee in Bankruptcy (the "Bellamah Trustee")) plus the payments contemplated to be made by Meadows pursuant to clause (e) of the second proviso to such Section 4, which amounts shall be in addition to the sum referred to in the preceding clause (ii), as consideration for the Lenders' consent to the full and complete release (the "Bellamah Release") of (w) the Meadows Interests (as hereinafter defined), (x) the claims of the Lenders, the Collateral Agent and the Agent against Bellamah arising with respect to the Meadows Interests, (y) the Bellamah Obligations (as hereinafter defined) and (z) the claims of the Collateral Agent, the Agent and the Lenders against Dawson Ridge Metropolitan District No. 1 ("Dawson Ridge"), which Bellamah Release (aa) shall include but not be limited to the release of all liens on and security interests in Bellamah and property of Bellamah conveyed by Bellamah to Meadows and collaterally assigned by Meadows to the Collateral Agent and (bb) notwithstanding the foregoing, shall not effect a release of the obligations, if any, of the Bellamah Trustee of the kind (and in the maximum amount) referred to in paragraph 6 of Exhibit C attached hereto; provided, further, that if the Bellamah Release has not theretofore been so effected, the Collateral Agent shall be required so to remit to PNM only fifty percent (50%) of the sums so received by the Collateral Agent from any Bellamah Distribution or Bellamah Sale (each as hereinafter defined), it being understood and agreed that sums so received from Bellamah Distributions and Bellamah Sales and distributed to the Lenders in accordance with the next succeeding sentence shall not reduce the sums which the Collateral Agent is to distribute to the Lenders under clause (ii) of the immediately preceding proviso. Any of the foregoing sums received by the Collateral Agent in respect of the Debt and on account of which the Collateral Agent (i) is required to make payment to PNM pursuant to the immediately preceding sentence shall be paid by the Collateral Agent to PNM and not distributed to the Lenders (ii) is not required to make such payment to PNM shall be distributed by the Collateral Agent to the Lenders in accordance with the Consent and Override Agreement. As used herein, (i) "First Restructuring Agreement Amendment" shall have the meaning specified in that certain First Amendment to Settlement Agreement dated as of April 24, 1992 executed by the parties hereto (the "First Settlement Agreement Amendment"), (ii) "Meadows Interests" shall mean Meadows' claims against and direct and indirect equity interests in Bellamah, (iii) "Bellamah Obligations" shall mean the obligations of Bellamah under the Guarantee Agreement (as defined in the Credit Agreement), (iv) "Bellamah Distribution" shall mean any distribution or other realization of any nature in respect of the Meadows Interests or Bellamah Obligations and (v) "Bellamah Sale" shall mean any sale, assignment or other disposition of assets of Bellamah or of the Meadows Interests or Bellamah Obligations." 3. No Other Amendments. Except as expressly provided in Section 2 hereof, the Settlement Agreement shall continue in full force and effect in accordance with the provisions thereof, and nothing in this Amendment shall, except as expressly provided in such Section 2, limit, impair, constitute or be deemed to constitute a waiver of, or otherwise affect the rights and remedies of PNM, the Agent, the Collateral Agent and the Lenders under the Settlement Agreement. 4. Bellamah Release. Notwithstanding anything in any Loan Document or Existing Agreement to the contrary, the Lenders hereby consent to the Bellamah Release and direct the Collateral Agent and the Agent to execute and deliver (on behalf of the Collateral Agent, the Agent and the Lenders) all documents reasonably requested by PNM or Meadows to effectuate the Bellamah Release; provided, however, that neither the Agent nor the Collateral Agent shall execute and deliver any release (or covenant not to sue) to effectuate the Bellamah Release; unless the form of such release (or covenant) shall have been approved in writing by the Lenders prior to such execution and delivery; provided, further, that prior to or substantially simultaneously with such execution and delivery, (a) the Lenders, the Collateral Agent and the Agent shall have received written releases (or, in the case of Putnam Tax Free High Yield Fund, MFS Managed High Yield Municipal Bond Trust, Eaton Vance High Yield Municipal Trust and their respective assignees (if any) (collectively, the "Dawson Ridge Institutional Investors"), written covenants not to sue), in form and substance reasonably satisfactory to the Collateral Agent, from each of the Bellamah Trustee, Dawson Ridge, and the Dawson Ridge Institutional Investors, (b) the amendments to Section 3.4(a) of the Settlement Agreement as set forth in Section 2 hereof shall have become effective, (c) the Collateral Agent shall have received the $100,000 (in immediately available funds) referred to in clause (iii) of the first proviso to Section 3.4(a) of the Settlement Agreement (as so amended), (d) the Collateral Agent shall have received the amounts referred to in Section 2 of the First Restructuring Agreement Amendment, (e) Meadows shall have paid to the Collateral Agent in immediately available funds an amount (not in excess of $50,000) equal to the legal fees and expenses (i) of the Collateral Agent in connection with the negotiation, execution and delivery of this Amendment, the First Restructuring Agreement Amendment, the Bellamah Release and related documentation and (ii) not reimbursed by Meadows pursuant to clause (b) of Section 2 of the First Restructuring Agreement Amendment and (f) additional settlement arrangements with the Bellamah Trustee and Dawson Ridge, the principal terms of which substantially conform to those described in Exhibit C-1 attached hereto, shall have been consummated. 5. Representations and Warranties. (a) PNM Representations and Warranties. PNM hereby represents and warrants to the Agent, the Collateral Agent and the Lenders that (a) PNM is authorized to execute, deliver and perform this Amendment, (b) PNM's execution, delivery and performance of this Amendment does not violate any law, statute, ordinance, rule, regulation, charter, bylaw or agreement to which PNM is subject or by which PNM is bound, (c) the persons executing and delivering this Amendment and each instrument or document delivered pursuant hereto on PNM's behalf are authorized to do so and (d) this Amendment constitutes the legal, valid and binding obligation of PNM, enforceable against PNM in accordance with its terms. (b) Lender Representations and Warranties. Each Lender hereby separately represents and warrants to PNM that (a) such Lender is authorized to execute, deliver and perform this Amendment, (b) such Lender's execution, delivery and performance of this Amendment does not violate any law, statute, ordinance, rule, regulation, charter, bylaw or agreement to which such Lender is subject or by which such Lender is bound, (c) the persons executing and delivering this Amendment and each instrument or document delivered pursuant hereto on such Lender's behalf are authorized to do so and (d) this Amendment constitutes the legal, valid and binding obligation of such Lender, enforceable against such Lender in accordance with its terms. (c) Agent and Collateral Agent Representations and Warranties. Each of the Agent and the Collateral Agent hereby separately represents and warrants to PNM that (a) it is authorized to execute, deliver and perform this Amendment, (b) the execution, delivery and performance of this Amendment does not violate any law, statute, ordinance, rule, regulation, charter, bylaw or agreement to which it is subject or by which it is bound, (c) the persons executing this Amendment and each instrument or document delivered pursuant hereto on its behalf are authorized to do so and (d) this Amendment constitutes the legal, valid and binding obligation of the Agent or the Collateral Agent, as the case may be, enforceable against the Agent or the Collateral Agent, as the case may be, in accordance with its terms. 6. PNM Waiver. PNM hereby waives all rights and remedies referred to in the second paragraph of that certain letter dated December 31, 1990 from PNM to the Collateral Agent (a copy of which letter is attached hereto as Exhibit D). 7. Notices. Notices and other communications in connection herewith shall be in writing and shall be delivered (which delivery may be affected by telecopy, facsimile transmission, telex, graphic scanning or other telegraphic communications equipment) mailed or addressed. (a) if to PNM, at Alvarado Square, Albuquerque, New Mexico 87158 (telecopy no. (505) 242-6927), Attention: Patrick T. Ortiz, Esq., Senior Vice President and General Counsel, with copies to Keleher & McLeod, P.A.., Public Service Building, P.O. Drawer AA, 414 Silver Avenue, S.W., Albuquerque, New Mexico 87102 (telecopy no. (505) 764-9643), Attention: William B. Keleher, Esq.; and (b) if to the Agent, the Collateral Agent or any Lender, at its address set forth on Schedule 1 hereto, with a copy to Wachtell, Lipton, Rosen & Katz, 299 Park Avenue, New York, New York 10171 (telecopy no. (212) 371-1658), Attention: Harold S. Novikoff, Esq. 8. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK FOR CONTRACTS MADE AND WHOLLY PERFORMED WITHIN THAT STATE. 9. Counterparts and Signatures. This Amendment may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract. This Amendment shall be deemed executed and delivered by any party hereto if a copy or facsimile of a signature page hereof executed by such party is delivered to the Collateral Agent in accordance with Section 7 hereof. 10. Headings. Section headings used herein are for convenience of reference only and are not to affect the construction of, or to be taken into consideration in interpreting, this Amendment. 11. No Third Party Beneficiaries; No Admissions. The agreements set forth herein with respect to the Bellamah Release are solely for the benefit of the parties hereto, and no third party (including without limitation the Bellamah Trustee, Dawson Ridge and the Dawson Ridge Institutional Investors) shall (i) be entitled to rely upon the terms and provisions hereof for any purpose whatsoever or (ii) have any claim whatsoever against any party hereto arising out of any failure or alleged failure of such party to perform its obligations hereunder. Nothing set forth herein or in any exhibit hereto shall constitute an admission of fault or inability on the part of any party hereto with respect to any matters concerning Bellamah or Dawson Ridge. First Amendment to Settlement Agreement Signature Page IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written. PUBLIC SERVICE COMPANY OF NEW MEXICO By: ---------------------------------- Title: CHEMICAL BANK, individually and as Agent and Collateral Agent By: ---------------------------------- Title: THE BANK OF NEW YORK (formerly known as Irving Trust Company By: ---------------------------------- Title: BARCLAYS BANK PLC By: ---------------------------------- Title: UNION BANK By: ---------------------------------- Title: FIRST NATIONAL BANK IN ALBUQUERQUE By: ---------------------------------- Title: DREXEL BURNHAM LAMBERT COMMERCIAL PAPER INCORPORATED By: ---------------------------------- Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: ---------------------------------- Title: UNITED NEW MEXICO BANK (formerly FIRST INTERSTATE BANK OF ALBUQUERQUE) By: ---------------------------------- Title: FIRST NATIONAL BANK OF BELEN By: ---------------------------------- Title: FIRST AMENDMENT TO SETTLEMENT AGREEMENT EXHIBIT A FIRST AMENDMENT TO RESTRUCTURING AGREEMENT FIRST AMENDMENT, dated as of April 24, 1992 (the "Amendment"), to the Restructuring Agreement dated as of February 14, 1990 (the "Restructuring Agreement") among Meadows Resources, Inc., a New Mexico corporation ("Meadows"), the lender parties thereto (the "Lenders") and Chemical Bank as agent (the "Agent") and collateral agent (the "Collateral Agent"). Background A. Meadows, the Lenders, the Agent and the Collateral Agent are parties to the Restructuring Agreement. All terms defined in or by reference in the Restructuring Agreement and not otherwise defined herein are used herein with the meanings as so defined. B. Meadows, the Lenders, the Agent and the Collateral Agent have agreed to amend the Restructuring Agreement in the manner hereinafter set forth. Terms and Conditions NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in reliance upon the mutual undertakings of the parties hereto, Meadows, the Agent, the Collateral Agent and the Lenders hereby agree as follows: 1. Occurrence of Effective Time. Prior to or simultaneously with the execution and delivery of this Amendment by all parties hereto (the "Effective Time"), Public Service Company of New Mexico ("PNM"), the Agent, the Collateral Agent and the Lenders shall have executed and delivered an amendment (in the form of Exhibit A hereto) to that certain Settlement Agreement dated as of November 2, 1989 among PNM, the Agent, the Collateral Agent and the Lenders (the "First Settlement Agreement Amendment"). 2. Certain Payments by Meadows. Upon the date on which an order from the New Mexico Public Service Commission, in its Case No. 2429, approving the transactions contemplated by Section 2 of the First Settlement Agreement Amendment becomes final and non-appealable, Meadows shall pay (a) the sum of $100,000 in immediately available funds to the Collateral Agent for distribution to the Lenders in accordance with the Consent and Override Agreement and (b) to the Collateral Agent in immediately available funds an amount (not in excess of $50,000) equal to the legal fees and expenses of the Collateral Agent in connection with the negotiation, execution and delivery of this Amendment, the First Settlement Agreement Amendment, the Bellamah Release (as defined in the First Settlement Agreement Amendment) and related documentation. Such amounts shall constitute partial consideration for the Bellamah Release. 3. Amendments to Restructuring Agreement. Effective as of the Effective Time, the Restructuring Agreement is hereby amended as follows: (a) Section 2.1(a) of the Restructuring Agreement is amended by deleting the reference to "March 31, 1992" and replacing such reference with "September 30, 1993." (b) Section 2.1(a) (iii) (w) of the Restructuring Agreement is amended by adding after the word "hereof": "or to repay (pursuant to Section 3.6 hereof) amounts owed to PNM under the PNM Loan Agreement (as hereinafter defined)." (c) Section 2.2 of the Restructuring Agreement is amended by deleting the reference to "March 31, 1992" and replacing such reference with "September 30, 1993." (d) Section 2.3 of the Restructuring Agreement is amended by adding the following at the end thereof: "Notwithstanding the foregoing, the Borrower shall be entitled during the calendar year 1992 to use its assets (including without limitation the proceeds of any loans made by PNM to the Borrower pursuant to the PNM Loan Agreement) to fund Liquidation Expenses in an aggregate amount not in excess of $991,000. For purposes of this Section 2.3, the repayment of the principal amount of any borrowings by the Borrower under the PNM Loan Agreement shall not be counted as a use of assets to fund Liquidation Expenses. (e) Section 3.1 is amended by adding the following at the end thereof: "Notwithstanding the foregoing, the Borrower shall be entitled during the calendar year 1992 to use the proceeds of any sales contemplated by this Section 3.1 for any purpose permitted by Section 2.1(a) (iii)." (f) The following Section 3.6 is added at the end of Article III of the Restructuring Agreement: "3.6 PNM Loan Agreement. The Lenders hereby waive compliance (a) in the case of the Banks and the Existing Creditors, with all provisions of the Loan Documents and (b) in the case of each Existing Creditor, with all provisions of the Existing Agreements for which such Existing Creditor is a party, in each case to the extent and only to the extent necessary to permit Meadows to (a) execute, deliver and perform a Loan Agreement (the "PNM Loan Agreement") in the form of Exhibit B (with such changes to the date of such Loan Agreement as may be appropriate) to that certain First Amendment to Restructuring Agreement, dated as of April 24, 1992, executed by the parties hereto, (b) make borrrowings and payments to the extent contemplated under the PNM Loan Agreement and (c) convey to PNM (pursuant to one or more collateral agreements in form and substance reasonably satisfactory to the Collateral Agent) a lien on and security in the assets of Meadows identified in Schedule 2 of the PNM Loan Agreement, in order to secure the obligations of Meadows to PNM thereunder. Meadows agrees to deliver to the Collateral Agent copies of reports required under Section 3(a) of the PNM Loan Agreement, as and when such reports are delivered to PNM." 4. Bellamah Release. Notwithstanding anything in any Loan Document or Existing Agreement to the contrary, the Lenders hereby consent to the Bellamah Release and direct the Collateral Agent and the Agent to execute and deliver (on behalf of the Collateral Agent, the Agent and the Lenders) all documents reasonably requested by PNM or Meadows to effectuate the Bellamah Release; provided, however, that neither the Agent nor the Collateral Agent shall execute and deliver any release (or covenant not to sue) to effectuate the Bellamah Release, unless the form of such release (or covenant) shall have been approved in writing by the Lenders prior to such execution and delivery; provided, further, that prior to or substantially simultaneously with such execution and delivery, (a) the Lenders, the Collateral Agent and the Agent shall have received written releases (or, in the case of Putnam Tax Free High Yield Fund, MFS Managed High Yield Municipal Bond Trust, Eaton Vance High Yield Municipal Trust and their respective assignees (if any) (collectively, the "Dawson Ridge Institutional Investors"), written covenants not to sue), in form and substance reasonably satisfactory to the Collateral Agent, from each of the Bellamah Trustee in Bankruptcy (the "Bellamah Trustee"), the Dawson Ridge Metropolitan District No. 1 ("Dawson Ridge") and the Dawson Ridge Institutional Investors, (b) the amendments to Section 3.4(a) of the Settlement Agreement as set forth in Section 2 of the First Settlement Agreement Amendment shall have become effective, (c) the Collateral Agent shall have received the $100,000 (in immediately available funds) referred to in clause (iii) of the first proviso to Section 3.4(a) of the Settlement Agreement (as so amended), (d) the Collateral Agent shall have received the amounts referred to in Section 2 of this Amendment, (e) Meadows shall have paid to the Collateral Agent in immediately available funds an amount (not in excess of $50,000) equal to the legal fees and expenses (i) of the Collateral Agent in connection with the negotiation, execution and delivery of this Amendment, the First Settlement Agreement Amendment, the Bellamah Release and related documentation and (ii) not reimbursed by Meadows pursuant to clause (b) of Section 2 of this Amendment and (f) additional settlement arrangements with the Bellamah Trustee and Dawson Ridge, the principal terms of which substantially conform to those described in Exhibit C-1 attached hereto, shall have been consummated. 5. Meadows' Waivers. Meadows hereby (i) represents and warrants to the Agent, the Collateral Agent and the Lenders that Meadows has succeeded to all of the rights of North Sandia Partners, Inc. ("NSP") under that certain Incentive Fee Agreement dated as of February 14, 1990 (the "Incentive Fee Agreement") among NSP, the Lenders, the Agent and the Collateral Agent, (ii) waives all rights to Target Level Excess Payments (as defined in the Incentive Fee Agreement) with respect to amounts contemplated to be paid to the Collateral Agent pursuant to Sections 2 and 4 of this Amendment and clause (ii) of the first proviso to Section 3(a) of the Settlement Agreement (as amended by the First Settlement Agreement Amendment) and (iii) waives all rights and remedies referred to in the second paragraph of that certain letter dated December 31, 1990 from Meadows to the Collateral Agent (a copy of which is attached hereto as Exhibit D). 6. Notices. Notices and other communications in connection herewith shall be in writing and shall be delivered (which delivery may be effected by telecopy, facsimile transmission, telex, graphic scanning or other telegraphic communications equipment) mailed to addressed, (a) if to Meadows, at 6400 Uptown Boulevard, Suite 200 West, Albuquerque, New Mexico 87110 (telecopy, no. (505) 883-0724), Attention: M.A. Clifton, with copies to Keleher & Mcleod, P.A., Public Service Building, P.O. Drawer AA, 414 Silver Avenue, S.W., Albuquerque, New Mexico 87102 (telecopy no. (505) 764-9643), Attention: William B. Keleher, Esq.; and (b) if to the Agent, the Collateral Agent or any Lender, at its address set forth on Schedule 1 hereto, with a copy to Wachtell, Lipton, Rosen & Katz, 299 Park Avenue, New York, New York 10171 (telecopy no. (212) 371-1658), Attention: Harold S. Novikoff, Esq. 7. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK FOR CONTRACTS MADE AND WHOLLY PERFORMED WITHIN THAT STATE. 8. Counterparts and Signatures. This Amendment may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract. This Amendment shall be deemed executed and delivered by any party hereto if a copy or facsimile of a signature page hereof executed by such party is delivered to the Collateral Agent in accordance with Section 6 hereof. 9. Headings. Section headings used herein are for convenience of reference only and are not to affect the construction of, or to be taken into consideration in interpreting, this Amendment. 10. No Third Party Beneficiaries; No Admissions. The agreements set forth herein with respect to the Bellamah Release are solely for the benefit of the parties hereto, and no third party (including without limitation the Bellamah Trustee, Dawson Ridge and the Dawson Ridge Institutional Investors) shall (i) be entitled to rely upon the terms and provisions hereof for any purpose whatsoever or (ii) have any claim whatsoever against any party hereto arising out of any failure or alleged failure of such party to perform its obligations hereunder. Nothing set forth herein or in any exhibit hereto shall constitute any admission of fault or liability on the part of any party hereto with respect to any matters concerning Bellamah or Dawson Ridge. First Amendment to Restructuring Agreement Signature Page IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written. MEADOWS RESOURCES, INC. By: ---------------------------------- Title: CHEMICAL BANK, individually and as Agent and Collateral Agent By: ---------------------------------- Title: THE BANK OF NEW YORK (formerly known as Irving Trust Company) By: ---------------------------------- Title: BARCLAYS BANK PLC By: ---------------------------------- Title: UNION BANK By: ---------------------------------- Title: FIRST NATIONAL BANK IN ALBUQUERQUE By: ---------------------------------- Title: DREXEL BURNHAM LAMBERT COMMERCIAL PAPER INCORPORATED By: ---------------------------------- Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: ---------------------------------- Title: UNITED NEW MEXICO BANK (formerly FIRST INTERSTATE BANK OF ALBUQUERQUE) By: ---------------------------------- Title: FIRST NATIONAL BANK OF BELEN By: ---------------------------------- Title: Consent The undersigned hereby consents to the execution and delivery of the foregoing First Amendment to Restructuring Agreement. PUBLIC SERVICE COMPANY OF NEW MEXICO By: ----------------------------------------------- Title FIRST AMENDMENT TO SETTLEMENT AGREEMENT EXHIBIT B ASSISTANT SECRETARY'S CERTIFICATE Pursuant to Section 1 of that certain First Amendment to Settlement Agreement dated as of April 24, 1992 (the "Amendment") to the Settlement Agreement dated as of November 2, 1989 among Public Service Company of New Mexico ("PNM"), the lender parties thereto and Chemical Bank as agent and collateral agent, the undersigned, in her capacity as Assistant Secretary of PNM, hereby certifies as follows: (i) Attached hereto as Exhibit A is a true, correct and complete copy of resolutions (the "Resolutions") duly adopted by the full Board of Directors of PNM, authorizing the execution, delivery and performance of this Amendment by PNM. (ii) the Resolutions have not been modified, rescinded or amended and are in full force and effect and (iii) the following named individual is a duly elected, qualified and acting officer of PNM holding the office set forth below as of the date hereof, and the signature set opposite such individual's name and title is a true and authentic signature. Name Title Signature ---- ----- --------- J.B. Mulcock, Jr. Senior Vice President ------------------------------ ------------------------------ Assistant Secretary Dated as of April 24, 1992 PUBLIC SERVICE COMPANY OF NEW MEXICO CERTIFICATE OF ASSISTANT SECRETARY I, K.A. Knight, do hereby certify that I am the duly elected, qualified and acting Assistant Secretary of Public Service Company of New Mexico, a corporation organized and existing under the laws of the State of New Mexico, and that a meeting of the Board of Directors of said Corporation duly called and held on the 4th day of February, 1992, at which a quorum was present and voting, the following resolutions were unanimously adopted: WHEREAS, by Application (the "Application") filed with the New Mexico Public Service Commission (the "Commission") in Case No. 2429, the Company requested authority from the Commission to make a loan (the "Loan") of up to $750,000 to Meadows Resources, Inc. ("Meadows") for the purpose of funding certain expenses incurred or to be incurred by Meadows in liquidating its business and disposing of its assets; WHEREAS, by its Order Adopting Recommended Decision to Allow Interim Relief, issued on January 6, 1992 (the "Interim Order"), the Commission authorized the Company to make the loan. The Interim Order states, among other things, (i) that if, after final hearing on the Application, the Commission disapproves the Loan, the Company will immediately seek to have Meadows repay the funds advanced by the Company, and (ii) that the Company will have the burden of establishing that its ratepayers have been held harmless from the Loan; WHEREAS, the Loan is to bear interest at a rate equal to the Company's average cost of short-term funds, is to be secured by certain assets of Meadows, is to be repaid from the proceeds received by Meadows from disposition of its assets, and is otherwise to be on terms and conditions that are consistent with the Application and the Interim Order; WHEREAS, Chemical Bank, as Collateral Agent for certain creditors of Meadows ("Chemical Bank"), and perhaps some or all of such creditors, will be requested to consent to the Loan, and the Loan will not be made without such consent. In connection with such request, Chemical Bank may seek amendments to the Settlement Agreement dated as of November 2, 1989, among the Company, the lender parties thereto (the "Lenders") and Chemical Bank (the "Settlement Agreement"); pursuant to the Settlement Agreement the Company is entitled, under circumstances specified therein, to receive "Recapture Payments" from Chemical Bank with respect to damages heretofore paid by the Company to the Lenders in connection with disputes involving indebtedness of Meadows to the Lenders; NOW, THEREFORE, it is HEREBY RESOLVED that the Company be, and it hereby is, authorized and empowered to make the Loan to Meadows, on terms permitted by and subject to the conditions set forth in the Application and the Interim Order. FURTHER RESOLVED, that in connection with the Loan the Company may agree to such amendments to the Settlement Agreement, and may make such other agreements with Chemical Bank and the Lenders, as the proper officers of the Company may determine to be in the best interests of the Company; and FURTHER RESOLVED, that in connection with the Loan, the proper officers of the Company are hereby authorized and empowered on behalf of the Company to do such acts and to execute such agreements and other instruments as they may determine to be appropriate or desirable, and to cause the Company to perform its obligations under such agreements and instruments. I DO FURTHER CERTIFY that the above has not been amended, modified, or rescinded, but remains in full force and effect. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the said Corporation as of the 24th day of April 1992. ----------------------------------- Assistant Secretary FIRST AMENDMENT TO SETTLEMENT AGREEMENT EXHIBIT C Principal Terms of Additional Bellamah and Dawson Ridge Settlement Arrangements 1. Meadows, Crestar Capital Corporation ("Crestar") and all other parties released by the Bellamah Trustee as contemplated in Paragraph 3 below will release all claims they have made in the Bellamah bankruptcy proceedings including, but not limited to, the priority administrative claim filed by Meadows in the amount of $330,000 plus interest. 2. Crestar will assign to the Bellamah Trustee its entire one-half interest in the real property lien on Lakepointe Tract C-7 and its interest in or lien upon all escrowed funds. 3. The parties will execute mutual, global releases, with the Bellamah Trustee releasing Meadows, Crestar, PNM and certain, as yet unidentified, PNM subsidiaries and their affiliates. 4. Meadows/PNM will pay the Bellamah Trustee the cash sum of $1,500,000.00. 5. Meadows and PNM will provide the Bellamah Trustee access, on a reasonable basis, to documents which may be necessary or useful to the Bellamah Trustee in the prosecution of the claims that he will retain against Geist, Jennings, Roundtree, Crocker, Bobb, and Joint Asset Escrow. 6. After the Bellamah Trustee has received the net sum of $3,500,000.00 from the sale of property encumbered by the Meadows liens (the "Meadows Liens") collaterally assigned to the Collateral Agent, the Bellamah Trustee will pay to Meadows (for distribution under amended Section 3.4(a) of the Settlement Agreement) one-half of the net proceeds from additional sales of property encumbered by the Meadows Liens, up to a maximum of $50,000. 7. See attached Exhibit C-1, which is incorporated herein by this reference. FIRST AMENDMENT TO SETTLEMENT AGREEMENT EXHIBIT D PUBLIC SERVICE COMPANY OF NEW MEXICO ALVARADO SQUARE, ALBUQUERQUE, NEW MEXICO 87158 Via Telecopy and Federal Express December 31, 1990 Chemical Bank, as Collateral Agent 277 Park Avenue New York, New York 10172 Attention: William Gullion Gentlemen: Reference is made to (1) the Assignment, Security Agreement and Waiver (the "Security Agreement") dated as of November 2, 1989, among Meadows Resources, Inc. ("Meadows"), the lenders party thereto (the "Lenders") and Chemical Bank, as Agent and Collateral Agent (the "Collateral Agent"), (2) the Settlement Agreement (the "Settlement Agreement") dated as of November 2, 1989, among Public Service Company of New Mexico ("PNM"), the Lenders and the Collateral Agent (3) the Certification and Request made by Meadows pursuant to the Security Agreement on November 7, 1990, for withdrawal of $1,353,779, (4) the Certification and Request made by Meadows pursuant to the Security Agreement on December 21, 1990, for withdrawal of $228,519.75, (5) the Certification and Request made by Meadows pursuant to the Security Agreement on December 27, 1990, for withdrawal of $25,499.50 (the Certifications and Requests referred to in items (3), (4) and (5) are hereinafter referred to collectively as the "Requests"). Pursuant to Section 3.1(a) of the Settlement Agreement, and in reliance upon the objections and reservations set forth in the letter of even date from Meadows to the Collateral Agent, PNM is remitting to the Collateral Agent, PNM is remitting to the Collateral Agent the sum of $1,276,850.52. Said remittance is $878,434.12 more than it would have been had the Collateral Agent honored the Requests. PNM believes that the Requests were properly made and should have been honored. PNM therefore reserves all rights and remedies it may have to recover from each Lender any portion of the $878,434.12 received by such Lender. PNM also reserves all rights and remedies it may have with respect to disbursements made pursuant to Section 5.3 of the Restructuring Agreement dated as of February 14, 1990, among Meadows, the Lenders December 31, 1990 Page Two and the Collateral Agent (the "Restructuring Agreement") and amounts withheld from the Account (as defined in the Security Agreement) on account of claims or possible claims of North Sandia Partners, Inc., to disbursements under said Section 5.3. Very truly yours, Public Service Company of New Mexico By: --------------------------------- J. B. Mulcock, Jr., Senior Vice President FIRST AMENDMENT TO SETTLEMENT AGREEMENT SCHEDULE 1 Chemical Bank 277 Park Avenue New York, New York 10172 Attention: Mr. William Gullion Telecopy: (212) 308-3825 Barclays Bank PLC Barclays Bank Building 75 Wall Street New York, New York 10265 Attention: Les Beck Lauri Novick, Esq. Telecopy: (212) 412-3040 Drexel Burnham Lambert, Inc. 60 Broad Street 60th Floor New York, New York 10004 Attention: Ms. Kathleen Starrs Telecopy: (212) 232-9913 The Bank of New York One Wall Street New York, New York 10015 Attention: Mr. Gerard Hanabergh Telecopy: (212) 635-7290 The Bank of New York Legal Department 123 Main Street White Plains, New York 10602 Attention: Joan Highland, Esq. Telecopy: (914) 684-5573 Morgan Guaranty Trust Company of New York 60 Wall Street New York, New York 10260 Attention: Ms. Jean Robinson Sharon Lindsay, Esq. Telecopy: (212) 648-5005 United New Mexico Bank Special Assets Department 200 Lomas N.W. Albuquerque, New Mexico 87102 Attention: Mr. Scott Blymn Telecopy: (505) 246-2830 First National Bank In Albuquerque 40 First Plaza, N.W. Albuquerque, New Mexico 87102 Attention: Mr. Melvin Hertz David Arnold, Esq. Telecopy: (505) 242-4066 First National Bank of Belen 101 S. Main Belen, New Mexico 87002 Attention: Mr. Tim D. Hargrove Telecopy: (505) 864-5705 Union Bank Energy Capital Services 445 South Figueroa Street Los Angeles, California 90071 Attention: Mr. Philip Flynn Mr. John Edmonston Telecopy: (213) 236-4096 EX-15 4 0004.txt EXHIBIT 15.0 ARTHUR ANDERSEN LLP August 11, 2000 Public Service Company of New Mexico: We are aware that Public Service Company of New Mexico and subsidiaries has incorporated by reference in its Registration Statement No. 33-65418, 333-03289, 333-03303, 333-32170 and 333-53367 its Form 10-Q for the quarter ended June 30, 2000, which includes our report dated August 11, 2000 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, /s/ Arthur Andersen LLP - ----------------------- Arthur Andersen LLP EX-27 5 0005.txt FDS FOR FORM 10-Q (6/30/00)
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 June 30, 2000 and is qualified in its entirety by reference to such financial statements. 0000081023 Public Service Company of New Mexico 1,000 US DOLLARS 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 1 PER-BOOK 1,600,544 481,375 419,107 257,939 0 2,758,965 197,678 442,161 251,768 891,607 0 12,800 111,000 0 842,792 0 0 0 0 0 900,766 2,758,965 650,332 22,386 578,272 591,731 58,601 14,258 72,859 32,921 39,938 293 39,645 15,814 3,319 99,731 1.00 1.00
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