UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6986
PUBLIC SERVICE COMPANY OF NEW MEXICO
(Exact name of registrant as specified in its charter)
New Mexico 85-0019030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Alvarado Square, Albuquerque, New Mexico 87158
(Address of principal executive offices)
(Zip Code)
(505) 848-2700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock--$5.00 par value 41,774,083 shares
Class Outstanding at November 1, 1994
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Report of Independent Public Accountants 3
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Earnings--
Three Months and Nine Months Ended
September 30, 1994 and 1993 4
Consolidated Balance Sheets--
September 30, 1994 and December 31, 1993 5
Consolidated Statements of Cash Flows--
Nine Months Ended September 30, 1994 and 1993 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
Signature 18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Public Service Company of New Mexico:
We have reviewed the accompanying condensed consolidated balance sheet of
Public Service Company of New Mexico (a New Mexico corporation) and
subsidiaries as of September 30, 1994, and the related condensed
consolidated statements of earnings for the three-month and nine-month
periods ended September 30, 1994 and 1993 and the condensed consolidated
statements of cash flows for the nine-month periods ended September 30, 1994
and 1993. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Public Service Company of New
Mexico and subsidiaries as of December 31, 1993 (not presented herein). Our
report dated February 25, 1994, on that statement described the Company's
adoption, effective January 1, 1993, of Statement of Financial Accounting
Standards No. 106, Employers' Accounting for Postretirement Benefits Other
Than Pensions, and No. 109, Accounting for Income Taxes. In our opinion, the
information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1993, 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
November 8, 1994
ITEM 1. FINANCIAL STATEMENTS
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ----------------
1994 1993 1994 1993
---- ---- ---- ----
(In thousands except per share amounts)
Operating revenues:
Electric $175,024 $159,742 $473,548 $441,636
Gas 39,291 39,979 199,669 191,322
Water 4,402 4,030 10,567 10,179
-------- -------- -------- --------
Total operating revenues 218,717 203,751 683,784 643,137
-------- -------- -------- --------
Operating expenses:
Fuel and purchased power 41,413 39,056 105,649 103,891
Gas purchased for resale 12,756 14,176 98,460 90,253
Other operation and maintenance 75,973 73,787 238,498 250,589
Depreciation and amortization 19,047 19,173 55,300 58,414
Taxes, other than income taxes 10,383 9,956 30,015 29,807
Income taxes 15,539 9,708 37,435 15,258
-------- -------- -------- --------
Total operating expenses 175,111 165,856 565,357 548,212
-------- -------- -------- --------
Operating income 43,606 37,895 118,427 94,925
-------- -------- -------- --------
Other income and deductions, net of taxes:
Allowance for equity funds used
during construction - 6 - 18
Other (4,557) 8,722 113 11,823
-------- -------- -------- --------
Net other income and deductions (4,557) 8,728 113 11,841
-------- -------- -------- --------
Income before interest charges 39,049 46,623 118,540 106,766
-------- -------- -------- --------
Interest charges:
Interest on long-term debt 15,978 19,012 49,460 55,094
Other interest charges 1,368 3,766 4,186 10,425
Allowance for borrowed funds used
during construction (86) (101) (246) (311)
-------- -------- -------- --------
Net interest charges 17,260 22,677 53,400 65,208
-------- -------- -------- --------
Net earnings 21,789 23,946 65,140 41,558
Preferred stock dividend requirements 1,538 1,706 4,895 5,129
-------- -------- -------- --------
Net earnings applicable to common stock $ 20,251 $ 22,240 $ 60,245 $ 36,429
======== ======== ======== ========
Average shares of common stock outstanding 41,774 41,774 41,774 41,774
======== ======== ======== ========
Net earnings per share of common stock $ 0.48 $ 0.53 $ 1.44 $ 0.87
======== ======== ======== ========
Dividends paid per share of common stock $ - $ - $ - $ -
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
/TABLE
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1994 1993
------------ -----------
(Unaudited)
(In thousands)
ASSETS
Utility plant $2,555,155 $2,550,166
Accumulated provision for depreciation and amortization (872,975) (846,234)
---------- ----------
Net utility plant 1,682,180 1,703,932
---------- ----------
Other property and investments 35,521 33,966
---------- ----------
Current assets:
Cash 16,856 20,510
Temporary investments, at cost 66,930 47,850
Receivables 117,243 147,223
Income taxes receivable - 10,400
Fuel, materials and supplies 50,876 48,086
Gas in underground storage 8,203 8,599
Other current assets 13,168 11,347
---------- ----------
Total current assets 273,276 294,015
---------- ----------
Deferred charges 175,889 180,276
---------- ----------
$2,166,866 $2,212,189
========== ==========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity:
Common stock $ 208,870 $ 208,870
Additional paid-in capital 470,477 470,149
Excess pension liability, net of tax (2,795) (2,795)
Retained earnings (deficit) since January 1, 1989
(appropriated $3.1 million as of September 30, 1994) (60,604) (120,848)
---------- ----------
Total common stock equity 615,948 555,376
Cumulative preferred stock:
Without mandatory redemption requirements 59,000 59,000
With mandatory redemption requirements 17,975 24,386
Long-term debt, less current maturities 888,212 957,622
---------- ----------
Total capitalization 1,581,135 1,596,384
---------- ----------
Current liabilities:
Short-term debt - -
Accounts payable 70,466 116,905
Current maturities of long-term debt 16,075 18,903
Accrued interest and taxes 58,370 29,992
Other current liabilities 54,227 51,364
---------- ----------
Total current liabilities 199,138 217,164
---------- ----------
Deferred credits 386,593 398,641
---------- ----------
$2,166,866 $2,212,189
========== ==========
The accompanying notes are an integral part of these financial statements.
/TABLE
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
-----------------
1994 1993
---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $65,140 $41,558
Adjustments to reconcile net earnings to net cash
flows from operating activities:
Depreciation and amortization 67,229 72,583
Allowance for equity funds used during construction - (18)
Gain on sale of utility property (6,576) (7,350)
Gain on sale of other property and investments - (12,450)
Reserves for bad debts 526 -
Accumulated deferred investment tax credit (6,084) (7,496)
Accumulated deferred income tax (2,226) (11,758)
Changes in certain assets and liabilities:
Receivables 39,855 9,386
Fuel, materials and supplies (2,394) 4,457
Deferred charges 4,869 31,252
Accounts payable (46,422) (110,529)
Accrued interest and taxes 28,378 20,628
Deferred credits (10,624) (6,954)
Other 3,268 674
Other, net 9,937 8,330
------- -------
Net cash flows from operating activities 144,876 32,313
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility plant additions (80,122) (65,723)
Utility plant sales 39,562 49,302
Other property additions (1,715) (5,847)
Other property sales - 18,588
Temporary investments, net (19,080) (30,465)
------- -------
Net cash flows from investing activities (61,355) (34,145)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions and repurchases of preferred stock (7,384) (600)
Redemption of first mortgage bonds (45,000) -
Bond refinancing costs - (10,272)
Bond redemption premium and costs (2,418) -
Proceeds from long-term debt - 60,475
Repayments of other long-term debt (27,292) (4,706)
Net decrease in short-term debt - (51,550)
Dividends paid (5,081) (5,100)
------- -------
Net cash flows from financing activities (87,175) (11,753)
------- -------
Decrease in cash (3,654) (13,585)
Cash at beginning of period 20,510 21,080
------- -------
Cash at end of period $16,856 $ 7,495
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $56,104 $59,647
======= =======
Income taxes paid $ 7,000 $10,978
======= =======
The accompanying notes are an integral part of these financial statements.
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) General Accounting Policy
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary for a fair
presentation of the consolidated financial statements. The accounting
policies followed by Public Service Company of New Mexico (the "Company") are
set forth in note (1) of notes to the Company's consolidated financial
statements in the Company's Annual Report on Form 10-K for the year ended
December 31, 1993 (the "1993 Form 10-K") filed with the Securities and
Exchange Commission.
(2) First Mortgage Bond Redemption
On April 20, 1994, the Company redeemed its $45 million 10 1/8% series first
mortgage bonds prior to scheduled maturity. The premium paid for the early
redemption and the unamortized issuance expense were approximately $1.9
million and $.2 million, respectively. Approximately $.5 million of these
amounts was written off with the remainder being deferred for future
recovery, which is consistent with past New Mexico Public Utility Commission
("NMPUC") treatment of similar costs.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's 1993 Form 10-K PART II, ITEM 7.--"MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" discusses
management's assessment of the Company's financial condition, results of
operations and other issues facing the Company. The following discussion
supplements the 1993 Form 10-K discussion and should be read in conjunction
with the consolidated financial statements presented herein and in the 1993
Form 10-K.
The January 12, 1994 Stipulation
As previously reported, on January 12, 1994, the Company and the NMPUC staff
and primary intervenor groups entered into a stipulation which addresses
retail electric prices, generation assets and certain financial concerns of
the Company. The Company filed the stipulation with the NMPUC, recommending
that electric retail rates be reduced by $30 million. The stipulation is
subject to NMPUC approval. (See PART II, ITEM 7.-- "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--January 12,
1994 Stipulation" in the 1993 Form 10-K.)
On July 20, 1994, the NMPUC issued a procedural order on the Company's
application for approval of the stipulation and ordered a public hearing to
be held in September 1994. Public hearings were held as scheduled and the
Company anticipates a final order during the fourth quarter of 1994.
Sale of Gas Gathering and Processing Assets
As previously reported, on February 12, 1994, an agreement was executed with
Williams Gas Processing-Blanco, Inc. ("Williams"), a subsidiary of the
Williams Field Service Group, Inc., for the sale of substantially all of the
assets of Sunterra Gas Gathering Company and Sunterra Gas Processing Company
(the "Processing Company"), wholly-owned subsidiaries of the Company, and for
the sale of Northwest and Southwest gas gathering and processing facilities
of the Company. The agreement provides for a cash selling price of $155
million, subject to certain adjustments. (See PART II, ITEM 7.--
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Sale of Gas Gathering and Processing Assets" in the 1993 Form 10-
K.) Consummation of the sale is subject to NMPUC approval. The Company
filed its application for approval with the NMPUC on May 20, 1994.
A prehearing conference was held on July 7, 1994, and the discovery process
began. Hearings are scheduled to begin January 10, 1995. In the meantime,
the Company and intervenors have held several meetings to settle certain
issues surrounding the sale and are attempting to reach a stipulated
agreement for NMPUC approval. The Company will continue to meet and work
with the intervenors for a possible settlement prior to the hearings.
Sale of Sangre de Cristo Water Company ("SDCW")
As previously reported, on February 28, 1994, the Company and the City of
Santa Fe (the "City") executed a purchase and sale agreement for the
Company's water division for approximately $48 million. (See PART II, ITEM
7.--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Sale of SDCW" in the 1993 Form 10-K.) Prehearing conferences
were held on June 22, 1994 and August 26, 1994. The NMPUC staff and
intervenors filed their respectable testimonies on October 28, 1994. The
NMPUC staff recommended that the Company retain the estimated after-tax gain
of $6 million for the sale. Hearings have been scheduled to begin December
12, 1994. The Company does not expect any major opposition to the sale. The
Company currently expects that the closing will be in the first quarter of
1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently estimates a total of $191 million for its capital
requirements for 1994. The Company expects that such cash requirements are
to be met primarily through internally-generated cash. Through September 30,
1994, the Company generated approximately $145 million in cash flow from its
operating activities. However, to cover differences in the amounts and
timing of cash generation and cash requirements, the Company intends to
utilize short-term borrowings under its liquidity arrangements, which consist
of a $100 million secured revolving credit facility ("Facility"), an
additional $40 million credit facility collateralized by the Company's
electric customer accounts receivable and $11 million in local lines of
credit. The Company had no borrowings under such liquidity arrangements as
of September 30, 1994.
The Facility has an expiration date of June 13, 1995 and contains a provision
that could prevent additional borrowings in the event of material adverse
change in the condition (financial or otherwise), results of operations,
assets, business or prospects of the Company. In respect to the total debt
to total capitalization test under the Facility and the letter of credit
issued to support certain pollution control bonds, the Company is allowed to
exclude from the calculation of total capitalization up to $200 million in
pre-tax write-offs resulting from the Company's restructuring efforts. The
Company was allowed to exclude, from the calculation, approximately $180
million in pre-tax write-offs resulting from the stipulation signed in
January 1994. The maximum allowed ratio of the Company's total debt to total
capitalization under the Facility and the letter of credit is 72%. As of
September 30, 1994, such ratio was 65.64%.
As previously reported, on July 5, 1994, the Company filed with the NMPUC for
authorization to retire up to approximately $134 million of First PV Funding
Corporation Lease Obligation Bonds ("LOBs"). The Company anticipates either
using cash proceeds from the proposed sales of its water company and certain
gas gathering and processing assets, or other available cash including
potential short-term borrowings, to retire such debt. Hearings have not yet
been scheduled. The Company is currently unable to predict when the NMPUC
will act on its request to retire LOBs. The Company will continue to assess
market conditions and alternative investment opportunities before any debt
retirement is implemented. (See PART II, ITEM 2.--"MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND
CAPITAL RESOURCES" in the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 1994.)
RESULTS OF OPERATIONS
The performance of the excluded resources has been improved by the PVNGS Unit
3 write-down and the provision for loss associated with the M-S-R Public
Power Agency, a California public power agency ("M-S-R"), power purchase
contract recorded in 1992. In addition, the gains from the sale of
generating facilities to the City of Anaheim, California, recorded in August
1993 and Utah Associated Municipal Power Systems ("UAMPS") in June 1994 have
contributed positively to the net earnings of the excluded resources.
Operating results for the excluded resources for the quarters and nine months
ended September reflect the allocation of interest charges based on average
investment for the period. Prior year results have been restated to reflect
such change for comparability purposes. Selected financial information for
the excluded resources is shown below:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1994 1993 1994 1993
---- ---- ---- ----
(In thousands)
Operating revenues $ 10,729 $ 10,415 $ 30,233 $ 33,803
Operating income $ 1,422 $ 380 $ 760 $ 1,781
Net earnings (loss) $ 67 $ 3,883 $ (222) $ 912
Net utility plant at end of period $131,413* $163,392 $131,413* $163,392
* Decrease is a result of the sale of 35MW of San Juan Generating Station
("SJGS") Unit 4 to UAMPS.
Electric gross margin (electric operating revenues less fuel and purchased
power expense) increased $12.9 million and $30.2 million for the quarter and
nine months ended September 30, 1994, respectively, from the corresponding
periods a year ago. Such increase results primarily from an increase in
jurisdictional energy sales of 145.5 million KWh, or $10.1 million for the
quarter, and 314.5 million KWh, or $20.5 million for the nine months ended
September 30, 1994, due to warmer weather than a year ago and customer
growth. Also, gross margin attributable to the excluded resources and firm-
requirements wholesale customers contributed $1.6 million and $.7 million to
the current quarter and year-to-date results, respectively. In addition, a
difference between the estimated unbilled revenues reported in the fourth
quarter of 1993 and actual unbilled revenues increased the gross margin by
$6.7 million for the nine months ended September 30, 1994.
Other operation and maintenance expenses increased $2.2 million for the
quarter due mainly to: (i) recording of workers' compensation liability of
$2.2 million; (ii) an increase in distribution expense of $2.0 million
resulting mainly from weather-related outages and increased tree trimming
activity; (iii) an increase in office supplies and expenses of $1.2 million
due largely to higher computer charges; and (iv) an increase in employee
benefit expenses of $.9 million. Such increases were partially offset by a
deferral of gas operation's retiree health care cost of $2.4 million for
regulatory purposes and decreased administrative and general labor expense of
$1.5 million.
Other operation and maintenance expenses for the nine months ended September
30, 1994 decreased $12.1 million from the corresponding period a year ago
primarily due to the effect of the Company's 1993 severance program of $22.7
million and the above mentioned deferred retiree health care cost of $2.4
million. Such amounts were partially offset by (i) an increase in PVNGS
maintenance expense of $3.0 million due mainly to the Unit 2 mid-cycle outage
and a longer than expected outage of Unit 3, which were partially reduced by
lower PVNGS operation expense of $.5 million resulting mainly from the
reclassification of property taxes between non-leased and leased units; (ii)
an increase in pension and retirees health care costs of $2.8 million due to
lowering the discount rate; (iii) recording of workers' compensation
liability of $2.2 million; (iv) increased SJGS maintenance expense of $1.7
million resulting from two scheduled outages in 1994 as compared to only one
in 1993; (v) increase in electric distribution expense of $1.7 million; and
(vi) increased office supplies and expenses of $1.4 million.
Operating income taxes for the quarter and nine months ended September 30,
1994 increased $5.8 million and $22.2 million, respectively, over the
corresponding periods a year ago, due primarily to increased pre-tax earnings
for the current periods.
Other, under the caption, Other Income and Deductions, for the quarter and
nine months ended September 30, 1994 decreased $13.3 million and $11.7
million, respectively, from the corresponding periods a year ago.
Significant items for the quarter included the following, net of taxes: (i)
an additional 1994 provision for legal expenses of $1.8 million; (ii) an
additional 1994 write off of $1.8 million relating to gas take-or-pay
settlement payments which are not recoverable through rates; (iii) a gain of
$5.6 million from the sale of generating facilities to Anaheim in the third
quarter of 1993; (iv) the tax benefit of $2.0 million related to sharing the
Anaheim gain with jurisdictional customers; (v) tax benefits of $2.5 million
in the third quarter of 1993 due to the Federal tax rate change which allowed
the Company to utilize its net operating loss at a higher tax rate; and (vi)
tax benefits of $1.4 million in the third quarter of 1993 resulting from the
settlement of the IRS examination of the years 1990 and 1991. Partially
offsetting such decreases was a write-off of $2.1 million in the third
quarter of 1993 resulting from costs associated with refunding certain
pollution control bonds, which could not be deferred for regulatory purposes.
Significant year-to-date items include the above items as well as the
following, net of taxes: (i) a gain of $7.5 million from the sale of an
investment during the first quarter of 1993 and (ii) a write off of $1.2
million relating to take-or-pay settlement payments in the second quarter of
1994. Partially offsetting such increases were: (i) the gain of $4.4
million from the sale of generating facilities to UAMPS in June 1994; (ii)
the tax benefit of $1.7 million related to sharing the UAMPS gain with
jurisdictional customers; (iii) a decrease in non-operating taxes (other than
income taxes) of $1.3 million due to a reclassification of such taxes; (iv)
a decrease in 1994 legal expenses of $1.1 million; and (v) a write-off of $.5
million of debt redemption costs in 1993.
Interest charges for the quarter and nine months ended September 30, 1994
decreased $5.4 million and $11.8 million, respectively, from the
corresponding periods a year ago. This was due primarily to lower short-term
borrowings in 1994, the refinancing of $182 million of pollution control
revenue bonds in January ($46 million) and September ($136 million) of 1993
and the retirement of $45 million of first mortgage bonds in April 1994.
OTHER ISSUES FACING THE COMPANY
Toxic Substances Control Act ("TSCA")
As previously reported, TSCA requires reporting to the U.S. Environmental
Protection Agency (the "EPA") regarding the manufacturing and processing of
organic chemicals, including natural gas substances produced by the Company
and its gas subsidiary. An inventory of such substances must be submitted to
the EPA every four years. Due to the natural gas industry's interpretation
on when unprocessed natural gas becomes a reportable substance, the Company
and its gas subsidiary did not report TSCA substances to the EPA in prior
reporting years of 1986 and 1990. (See PART II, ITEM 7.--"MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
OTHER ISSUES FACING THE COMPANY--Environmental Issues-Gas--Toxic Substances
Control Act ("TSCA")" in the 1993 Form 10-K.)
The EPA has issued two enforcement notices and proposed penalty assessments
related to failure to provide the requisite update in 1990. The proposed
penalty assessments against the Company and its gas subsidiary are $114,000
($42,000 and $72,000, respectively). The Company initiated informal
settlement negotiations with EPA regional officials. EPA suspended
settlement negotiations with the Company pending review of its enforcement
position. EPA and gas processing industry officials have begun discussions
regarding EPA's assessment of proposed penalties against gas processors for
failing to file inventory update reports. If necessary, administrative
hearings will be scheduled.
TSCA reporting (inventory updating) is again due in 1994. The Company and
its gas subsidiary are preparing to meet applicable reporting requirements
for any such reportable substances to the EPA in 1994. The Company cannot
predict the ultimate outcome of the settlement, but believes that such a
settlement will not have a material impact on the Company's results of
operations or financial condition.
Department of Energy ("DOE") Gas Line Replacement
Gas Company of New Mexico, a division of the Company ("GCNM"), is a
contractor to the DOE for the replacement of a natural gas line for which the
Company has subcontracted the construction work. Work on the line commenced
prior to filing a Notice of Intent ("NOI") for coverage under the Storm Water
General Permit for construction activities with the EPA. The EPA has issued
a "Show Cause" letter for this violation. In addition, the New Mexico
Environment Department ("NMED"), responding to complaints regarding dust and
sediment generation, and upon discovery that the requisite NOI and Storm
Water Pollution Prevention Plan ("SWPPP") had not been prepared, requested
the Company to prepare a corrective action plan to implement a SWPPP and
mitigate existing stream channel discharges.
The Company has responded to these requests on a timely basis and is waiting
to hear whether either the EPA or the NMED intend further enforcement
actions. The Company is unable to predict the ultimate outcome of the
enforcement actions, but believes that such enforcement actions will not have
a material impact on the Company's results of operations or financial
condition.
Diethanolamine ("DEA") Spill
On June 3, 1994, the Processing Company experienced a release of DEA due to
an equipment malfunction. DEA wastes are oilfield exempt wastes which are
not subject to regulation as hazardous wastes under the Resource Conservation
and Recovery Act ("RCRA"). The spill and subsequent removal of DEA-
contaminated soils were reported to the New Mexico Oil Conservation Division
("OCD") which has jurisdiction over such spills and wastes. However, the
release of DEA to the air in amounts that exceed the reportable quantity of
one pound is potentially reportable under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") as amended by the
Superfund Amendments and Reauthorization Act ("SARA"). When it was
discovered in September 1994 that the spill had not been reported under
CERCLA/SARA, measures were taken to contact the appropriate regulatory
authorities. Though it was not clear whether, under the circumstances, the
spill was reportable under CERCLA/SARA, as a precaution, the spill
notification/report was forwarded to the National Response Center on
September 22, 1994. The Company is currently unable to predict what, if any,
enforcement action may ensue; however, the Company does not expect that any
outcome of this issue will have a material adverse effect on the Company's
financial condition or results of operations.
Palo Verde Nuclear Generating Station ("PVNGS")
Steam Generator Tubes
As previously reported, tube cracking in the PVNGS steam generators
adversely affected operations in 1993, and will continue to do so in 1994
and probably into 1995, because of the cost of replacement power, reduced
off-system sale incentives, maintenance expense associated with unit
outages and corrective actions required to deal with the issue. (See PART
II, ITEM 7.--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--OTHER ISSUES FACING THE COMPANY--Palo Verde
Nuclear Generating Station--Steam Generator Tubes" in the 1993 Form 10-K
and PART I, ITEM 2 in the Company's quarterly reports on Form 10-Q for the
quarters ended March 31, 1994 and June 30, 1994.)
Arizona Public Service Company ("APS"), as the operating agent for PVNGS,
encountered axial tube cracking in the upper regions of the two steam
generators in Unit 2 and, to a lesser degree, in Unit 3. APS believes that
this form of tube degradation, the location of which is uncommon in the
industry, is due to the susceptibility of tube materials to a combination
of deposits on the tubes and the relatively high temperatures at which all
three units are designed to operate. APS has taken, and will continue to
take, remedial actions that it believes will retard further tube
degradation to acceptable levels. These actions have included chemically
cleaning the Unit 2 and 3 steam generators, and improving the water quality
and reducing the operating temperature in all three units.
All of the PVNGS units are now operating at or near 100% capacity. In
March and October 1994, APS performed mid-cycle inspection outages at Unit
2. The October outage revealed that the number of steam generator tubes
with indications of degradation was well within APS's projections. Unit
2 is scheduled for a refueling and maintenance outage in early 1995. Unit
3 completed a refueling outage in June 1994 and is scheduled for a mid-
cycle inspection outage beginning in November 1994. Unit 1 is scheduled
for a refueling outage beginning in April 1995.
When tube cracks are detected during any outage, the affected tubes are
taken out of service by plugging. That has occurred in a number of tubes
in all three units, particularly in Unit 2, which is by far the most
affected by cracking and plugging. APS expects that the remedial actions
referenced above will slow the rate of plugging to an acceptable level.
APS currently believes that the PVNGS steam generators are capable of
operating for their designed life of forty years; although, at some point
in the future, long-term economic considerations may make steam generator
replacement a desirable option.
A Transmission Right-of-Way
As previously reported, the Company has an easement for right-of-way with the
Navajo Nation (the "Nation") for portions of two transmission lines that
emanate from SJGS and connect with the Four Corners Power Plant and with a
switching station in the Albuquerque area. This easement expired January 17,
1993, and the Company has been attempting to renew the grant. (See PART II,
ITEM 7.--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--OTHER ISSUES FACING THE COMPANY--A Transmission Right-
of-Way" in the 1993 Form 10-K.) The Nation's agreement not to challenge the
Company's use of the easement expired on July 17, 1994.
The Nation informed the Company on August 18, 1994 that as a condition for
continued negotiations on the easement, the Company was required to negotiate
in good faith with the Navajo Tribal Utility Authority ("NTUA") for the sale
of an unrelated transmission facility. The Nation further required the
Company to agree to a certain methodology for valuation of that transmission
facility and for a purchase/sale agreement to be completed by November 18,
1994. The Company agreed to these conditions, but during subsequent
negotiations, the NTUA informed the Company of a potential issue with this
sale involving a third party. The Company is working with the third party to
resolve the issue and the NTUA has informed the Company of its intention to
request an extension for the completion of the agreement.
The Company met with the Nation on September 22, 1994, regarding the
easement. The Nation informed the Company that the offer submitted by the
Company on April 1, 1994 was not acceptable. The Nation offered a proposal
for settlement and asked for the Company's response by October 15, 1994. The
Company did not agree with the Nation's basis for the valuation of the
easement and responded by providing an alternative proposal. The Nation has
requested a meeting on November 16, 1994, to discuss the Company's proposal.
In addition, on October 31, 1994, the Navajo Nation adopted a Civil Trespass
Statute providing for civil penalties, damages and other remedies, including
removal, to be imposed for unconsented or unauthorized use of Navajo Nation
lands. The Company is in the process of evaluating the impact, if any, of
the new statute.
On November 8, 1994, the Navajo Nation elected a new President. The Company
is unable to predict what effect a new administration will have on the
ongoing negotiations.
The Company continues to assess its options but is not pursuing other
alternatives unless it receives indications that agreement cannot be reached
in a satisfactory manner. The Company is currently unable to predict the
outcome of the negotiations or the costs resulting therefrom; however, the
Company believes that such outcome will not have a material impact on the
Company's results of operations or financial condition.
El Paso Electric Company
As previously reported, the Company is a creditor in the El Paso Electric
Company ("EPE") Chapter 11 bankruptcy proceeding in the Western District of
Texas. (See PART II, ITEM 7.--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--OTHER ISSUES FACING THE
COMPANY--El Paso Electric Company" in the 1993 Form 10-K.) The Company has
intervened in various Federal and state regulatory proceedings relative to
the merger plan of reorganization between EPE and Central & South West
Corporation ("CSW") and continues to monitor proceedings in the bankruptcy.
On September 12, 1994, CSW sent a letter to EPE indicating that certain
events, individually and cumulatively, may constitute a material adverse
effect that, unless such events are timely resolved, could preclude closing
of the proposed merger. CSW cited the decision of the City of Las Cruces
("Las Cruces") to proceed with condemnation of EPE's distribution system
within Las Cruces, potential for losses of other New Mexico customers, on-
going investigation of tube cracking at PVNGS, developments in the Texas
Public Utility Commission merger rate case, and developments at the Federal
Energy Regulatory Commission in connection with "comparable transmission
service" as contributing to the uncertainties. Additionally, CSW indicated
that it would not close the merger transaction until the dispute between EPE
and Las Cruces was favorably and timely resolved. EPE subsequently advised
CSW that EPE did not believe that a failure of any closing condition had
occurred. CSW, however, also indicated that it will continue to use its best
efforts to consummate the proposed merger.
Although EPE has responded that CSW may not impose the conditions referred to
in the September 12 letter, the parties have not resolved the issues raised.
Additionally, the bankruptcy court, on September 20, 1994, ordered a lift of
the stay to permit Las Cruces to proceed in New Mexico state court with
condemnation of the EPE electrical distribution system within Las Cruces
limits. At this time, the Company cannot predict the outcome of the merger
proceeding.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Toxic Substances Control Act
Reference is hereby made to "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--OTHER ISSUES FACING THE
COMPANY--Toxic Substances Control Act ("TSCA")" in PART I, ITEM 2 of this
report.
Department of Energy ("DOE") Gas Line Replacement
Reference is hereby made to "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--OTHER ISSUES FACING THE
COMPANY--Department of Energy ("DOE") Gas Line Replacement" in PART I, ITEM
2 of this report.
Diethanolamine ("DEA") Spill
Reference is hereby made to "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--OTHER ISSUES FACING THE
COMPANY--Diethanolamine ("DEA") Spill" in PART I, ITEM 2 of this report.
Other Proceedings
As previously reported, on April 16, 1993, the Company and certain current
and former employees of the Company or Meadows Resources, Inc., a subsidiary
of the Company ("Meadows'), were named as defendants in an action filed in
the United States District Court for the District of Arizona by the
Resolution Trust Corporation ("RTC"), as receiver for Western Savings & Loan
Association ("Western"). Three of the individuals sued by the RTC have
indemnity agreements with the Company. The claims relate to alleged actions
of the Company's or Meadows' employees in 1987 in connection with a loan
procured by Bellamah Community Development ("BCD"), whose general partners
include Meadows, from Western and the purchase by that partnership of
property owned by Western. The RTC apparently claims that the Company's
liability stems from the actions of a former employee who allegedly acted on
behalf of the Company for the Company's benefit. The RTC is claiming in
excess of $40 million in actual damages from the BCD/Western transactions and
alternatively is claiming damages substantially exceeding that amount on
Arizona racketeering, civil conspiracy and aiding and abetting theories.
These allegations involve claims against the Company for damages to Western
caused by other defendants and from other transactions to which BCD was not
a party. The RTC claims that damages under the Arizona racketeering statute
would be trebled under applicable Arizona law. The RTC may also seek
attorney fees and costs.
On March 3 and 4, 1994, the parties participated in a mediation session aimed
at settling the litigation. The session ended without a settlement. The
mediator is continuing settlement discussions with the parties.
In May 1994, the RTC filed a motion seeking to amend the complaint to allege
against the Company civil conspiracy, common law fraud, negligent
misrepresentation, aiding and abetting breach of fiduciary duties, aiding and
abetting common law fraud, aiding and abetting violation of Federal and
Arizona racketeering laws (all of which claims are already asserted against
the Company's current and former employees named in the suit) and claims
seeking to hold the Company liable on undisclosed principal and unjust
enrichment theories. The Company filed an opposition to the motion and, in
September 1994, the Court denied the RTC's motion to amend. Previously the
Court dismissed the RTC's claims for aiding and abetting violations of the
Federal and Arizona racketeering laws against the Company, the current and
former employees of the Company or Meadows and others.
Subsequent to the Court's denial of the RTC's motion to amend the complaint,
the RTC filed a motion seeking to amend the case management order previously
entered by the Court. The purpose of the motion was to allow the RTC to file
an amended complaint which would include the allegations against the Company
sought by the motion to amend that was denied by the Court in September 1994.
On November 7, 1994, the Court denied this new motion.
The Company continues to investigate all of the claims made by the RTC in
this litigation and is vigorously defending those claims. The Company cannot
predict the ultimate outcome of the case but believes that the RTC's
contentions are without merit and currently believes that the outcome will
not result in a material adverse impact on the Company's result of operations
or financial condition.
ITEM 5. OTHER INFORMATION
Fuel and Purchased Power Cost Adjustment Clause ("FPPCAC")
As previously reported, the Company has an electric FPPCAC covering its
retail customers. The purpose of the monthly adjustment clause factor is to
collect from or refund to its retail customers the difference between actual
fuel and purchased power expense and a previously established base level of
fuel and purchased power expense.
On December 14, 1993, the Company and primary intervenors entered into a
stipulation, agreeing to eliminate the FPPCAC from its retail billings, and
set the base fuel cost as a component of the cost of service effective with
the order in the Company's next general electric rate case. (See PART I, ITEM
1.--"BUSINESS--RATES AND REGULATION--FPPCAC" in the 1993 Form 10-K.)
A public hearing was held on September 21, 1994. On October 26, 1994, the
hearing examiner certified that the stipulation is fair, just and reasonable
and is consistent with the public interest, and recommended the stipulation
be approved and adopted as filed. The elimination of the FPPCAC, if approved
by the NMPUC, would coincide with the implementation of rates under the
proposed $30 million rate reduction.
Although the cost of fuel and the conditions in the off-system sales market
could positively or negatively affect the Company's net earnings, the Company
currently does not believe that the elimination of the FPPCAC would have a
material adverse impact on the Company's results of operation or financial
condition.
Natural Gas Supply Matters
As previously reported, on December 18, 1989, the NMPUC issued an order
approving a stipulation relating to imbalance in GCNM's gas supply and
demand. The stipulation provides for the partial recovery of certain gas
costs arising from the reformation of gas purchase contracts and from claims
by certain producers relating to take-or-pay obligations, contract pricing
and other matters. Under the order, GCNM bears 25% of claims settled for
producers' take-or-pay costs. GCNM will be permitted to recover from its
customers the remaining 75% of all producer take-or-pay costs which were
incurred to settle certain contract disputes with producers. Under other
provisions of the stipulation, GCNM is allowed to recover all prudently
incurred costs from settlements involving certain contract pricing claims.
(See PART 1, ITEM 1.--"RATES AND REGULATION--Natural Gas Supply Matters" in
the 1993 Form 10-K.)
On September 13, 1994, GCNM entered into a negotiated agreement with its
intervenors to settle all outstanding issues regarding recovery of payments
GCNM made to settle gas take-or-pay contracts and pricing disputes. Under
the stipulation, GCNM shall be authorized to recover a total of $43.4 million
of the approximately $48.6 million it sought to recover. As a result of the
stipulation, GCNM wrote off approximately $2.9 million of additional amounts
that will not be recovered. The Company expects a final order from NMPUC
approving the stipulation before the end of year.
New Senior Vice President
On October 26, 1994, the Company's executive committee of the board of
directors approved the selection of Mr. Roger J. Flynn as the Electric
Service Business Unit senior vice-president. Effective December 1, 1994, Mr.
Flynn, a former vice president in charge of Pacific Gas & Electric utility
operations in the San Joaquin Valley in California, will be in charge of the
Company's newly structured business unit. Effective January 1, 1995, the
Company will reorganize into four distinct business units, (Electric Service
Business Unit, Gas Business Unit, Bulk Power Services Group and Energy
Services Business Unit) in a manner which aligns corporate resources with
customer needs and a changing marketplace, while providing for real
performance accountability.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
15.0 Letter Re Unaudited Interim Financial Information
27 Financial Data Schedules
b. Reports on Form 8-K:
None.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PUBLIC SERVICE COMPANY OF NEW MEXICO
(Registrant)
Date: November 10, 1994 /s/ Donna M. Burnett
-----------------------------------
Donna M. Burnett
Corporate Controller and
Chief Accounting Officer