================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1995 Commission File Number 1-6986 Public Service Company of New Mexico (Exact name of Registrant as specified in its charter) New Mexico 85-0019030 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Alvarado Square 87158 Albuquerque, New Mexico (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (505) 241-2700 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $5.00 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: (Title of Class) 1965 Series, 4.58% Cumulative Preferred Stock ($100 stated value and without sinking fund) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES x/ NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| The total number of shares of the Company's Common Stock outstanding as of January 31, 1996 was 41,774,083. On such date, the aggregate market value of the voting stock held by non-affiliates of the Company, as computed by reference to the New York Stock Exchange composite transaction closing price of $17 7/8 per share reported by the Wall Street Journal, was $746,711,733. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following document are incorporated by reference into the indicated part of this report: Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A relating to the annual meeting of stockholders to be held on April 30, 1996--PART III. ================================================================================ TABLE OF CONTENTS Page ---- GLOSSARY................................................................... iv PART I ITEM 1. BUSINES........................................................... 1 THE COMPANY..................................................... 1 ELECTRIC OPERATIONS............................................. 1 Service Area and Customers.................................. 1 Power Sales................................................. 2 Sources of Power............................................ 3 Fuel and Water Supply....................................... 4 NATURAL GAS OPERATIONS.......................................... 6 Service Area and Customers.................................. 6 Natural Gas Supply.......................................... 7 Natural Gas Sales........................................... 8 RATES AND REGULATION............................................ 9 FPPCAC...................................................... 9 Fossil-Fueled Plant Decommissioning Costs................... 9 Energy and Utility Related Subsidiaries..................... 9 Gas Rate Case............................................... 10 PGAC Continuation Filing.................................... 10 Consolidation Issues........................................ 10 Legislative Action............................................ 11 ENVIRONMENTAL FACTORS........................................... 11 ITEM 2. PROPERTIES......................................................... 12 ELECTRIC...................................................... 12 Fossil-Fueled Plants........................................ 12 Nuclear Plant............................................... 13 Other Electric Properties................................... 14 NATURAL GAS................................................... 15 OTHER INFORMATION............................................. 15 ITEM 3. LEGAL PROCEEDINGS.................................................. 15 PVNGS WATER SUPPLY LITIGATION................................. 15 SAN JUAN RIVER ADJUDICATION................................... 16 PVNGS PROPERTY TAXES.......................................... 16 OTHER PROCEEDINGS............................................. 16 Federal Deposit Insurance Corporation ("FDIC") Litigation... 16 Four Corners................................................ 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 18 SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY........................ 19 ii PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................................... 21 ITEM 6. SELECTED FINANCIAL DATA............................................ 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................... 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ F-1 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................... E-1 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.................... E-1 ITEM 11. EXECUTIVE COMPENSATION............................................. E-1 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................... E-1 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... E-1 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...................................................... E-1 SIGNATURES..................................................................E-21 iii GLOSSARY AG ..................................... New Mexico Attorney General Anaheim................................. City of Anaheim, California APPA.................................... Arizona Power Pooling Association APS..................................... Arizona Public Service Company BCD..................................... Bellamah Community Development BHP..................................... BHP Minerals International, Inc. BLM..................................... Bureau of Land Management BTU..................................... British Thermal Unit Century................................. Century Power Corporation decatherm............................... 1,000,000 BTUs DOE..................................... United States Department of Energy EIP..................................... Eastern Interconnection Project El Paso................................. El Paso Electric Company EPA..................................... United States Environmental Protection Agency EPNG.................................... El Paso Natural Gas Company Farmington.............................. City of Farmington, New Mexico FERC.................................... Federal Energy Regulatory Commission Four Corners............................ Four Corners Power Plant FPPCAC.................................. Fuel and Purchased Power Cost Adjustment Clause Gathering Company....................... Sunterra Gas Gathering Company, a wholly-owned subsidiary of the Company Kv ..................................... Kilovolt KW...................................... Kilowatt KWh..................................... Kilowatt Hour Los Alamos.............................. The County of Los Alamos, New Mexico mcf..................................... Thousand cubic feet Meadows................................. Meadows Resources, Inc., a wholly-owned subsidiary of the Company M-S-R................................... M-S-R Public Power Agency, a California public power agency MW ..................................... Megawatt MWh..................................... Megawatt Hour NMED.................................... New Mexico Environment Department NMPUC................................... New Mexico Public Utility Commission NRC..................................... United States Nuclear Regulatory Commission OCD..................................... New Mexico Oil Conservation Division OLE..................................... Ojo Line Extension PGAC.................................... PNMGS' Purchased Gas Adjustment Clause Plains.................................. Plains Electric Generation and Transmission Cooperative, Inc. PNMGS................................... Public Service Company of New Mexico Gas Services, a division of the Company Processing Company...................... Sunterra Gas Processing Company, a wholly-owned subsidiary of the Company PVNGS................................... Palo Verde Nuclear Generating Station Reeves Station.......................... Reeves Generating Station Salt River Project...................... Salt River Project Agricultural Improvement and Power District SCE..................................... Southern California Edison Company SCPPA................................... Southern California Public Power Authority SDG&E................................... San Diego Gas and Electric Company iv SJCC.................................... San Juan Coal Company SJGS.................................... San Juan Generating Station SPS..................................... Southwestern Public Service Company TNP..................................... Texas-New Mexico Power Company throughput.............................. Volumes of gas delivered, whether or not owned by PNMGS Tucson.................................. Tucson Electric Power Company UAMPS................................... Utah Associated Municipal Power Systems USEC.................................... United States Enrichment Corporation Williams................................ Williams Gas Processing-Blanco, Inc., a subsidiary of the Williams Field Services Group, Inc., of Tulsa, Oklahoma v PART I ITEM 1. BUSINESS THE COMPANY Public Service Company of New Mexico (the "Company") was incorporated in the State of New Mexico in 1917 and has its principal offices at Alvarado Square, Albuquerque, New Mexico 87158 (telephone number 505-241-2700). The Company is a public utility primarily engaged in the generation, transmission, distribution and sale of electricity and in the transmission, distribution and sale of natural gas within the State of New Mexico. The Company is also engaged in the operation and management of the City of Santa Fe's water system and in the development of new business activities in the energy and utility related services area (see PART II, ITEM 7. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OVERVIEW -- Preparation for the Changes") . On June 30, 1995, the Company consummated the sale of substantially all of the gas gathering and processing assets of the Company and its gas subsidiaries to Williams. On July 3, 1995, the Company consummated the sale of the Company's water division to the City of Santa Fe. (See note 12 of the notes to consolidated financial statements.) The total population of the area served by one or more of the Company's utility services is estimated to be approximately 1.2 million, of which 55% live in the greater Albuquerque area. For the year ended December 31, 1995, the Company derived 72.3% of its utility operating revenues from electric operations, 26.9% from natural gas operations and .8% from water operations. As of December 31, 1995, the Company employed 2,626 persons. Financial information relating to amounts of revenue and operating income and identifiable assets attributable to the Company's industry segments is contained in note 13 of the notes to consolidated financial statements. ELECTRIC OPERATIONS Service Area and Customers The Company's electric operations serve four principal markets. Sales to retail customers and sales to firm-requirements wholesale customers, sometimes referred to collectively as "system" sales, comprise two of these markets. The third market consists of other contracted sales to utilities for which the Company commits to deliver a specified amount of capacity (measured in MW) or energy (measured in MWh) over a given period of time. The fourth market consists of economy energy sales made on an hourly basis to utilities at fluctuating, spot-market rates. Sales to the third and fourth markets are sometimes referred to collectively as "off-system" sales. The Company provides retail electric service to a large area of north central New Mexico, including the cities of Albuquerque, Santa Fe, Rio Rancho, Las Vegas, Belen and Bernalillo. The Company also provides retail electric service to Deming in southwestern New Mexico and to Clayton in northeastern New Mexico. As of December 31, 1995, approximately 333,000 retail electric customers were served by the Company, the largest of which accounted for approximately 3.6% of the Company's total electric revenues for the year ended December 31, 1995. 1 The Company holds 23 long-term, non-exclusive franchise agreements for its electric retail operations, expiring between August 1996 and November 2028. The City of Albuquerque (the "City") franchise expired in early 1992. Customers in the area covered by the City franchise represent approximately 46% of the Company's 1995 total electric operating revenues, and no other franchise area represents more than 6.9%. These franchises are agreements that provide the Company access to public rights-of-way for placement of the Company's electric facilities. The Company remains obligated under state law to provide service to customers in the franchise area even in the absence of a franchise agreement with the City. (See PART II, ITEM 7. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OTHER ISSUES FACING THE COMPANY - -- ALBUQUERQUE FRANCHISE ISSUES".) Power Sales For the years 1991 through 1995, retail KWh sales have grown at a compound annual rate of approximately 4.1%. The Company's system and off-system sales (revenues and energy consumption) and system peak demands in summer and winter are shown in the following tables: ELECTRIC SALES BY MARKET (Thousands of dollars) 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- Retail .......................... $485,568 $506,286 $471,099 $455,387 $444,594 Firm-requirements wholesale ..... $ 20,282 $ 22,296 $ 18,468 $ 20,173 $ 22,390 Other contracted off-system sales $ 43,158+ $ 54,862+ $ 56,214+ $ 62,348 $ 55,581 Economy energy sales ............ $ 17,509+ $ 19,663+ $ 25,213+ $ 40,770 $ 29,665 ELECTRIC SALES BY MARKET (Megawatt hours) 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- Retail .................... 6,029,365 5,953,151 5,446,788 5,358,246 5,139,954 Firm-requirements wholesale 447,629 489,182 342,137 322,177 308,390 Other contracted off-system sales .................. 594,367 1,403,480 1,450,966 1,198,250 1,223,212 Economy energy sales ...... 1,548,517 1,469,271 1,582,113 2,164,991 1,559,939 - ----------- + Due to the provision for the loss associated with the M-S-R contingent power purchase contract recognized in 1992, revenues from other contracted off-system sales and economy energy sales were reduced by a total of $7.3 million, $25.0 million and $20.5 million in 1995, 1994 and 1993, respectively. SYSTEM PEAK DEMAND* (Megawatts) 1995 1994 1993 1992 1991 --------- --------- --------- --------- -------- Summer.................... 1,247 1,189 1,104 1,053 1,018 Winter.................... 1,076 1,040 982 992 955 - ----------- * System peak demand relates to retail and firm-requirements wholesale customers only. 2 During 1995 and 1994, the Company's sales in the off-system markets accounted for approximately 24.9% and 30.8%, respectively, of its total KWh sales and approximately 11.8% and 15.8% (before reduction of revenues from the M-S-R contingent power purchase contract, which were accounted for in the determination of the provision for loss recorded in 1992), respectively, of its total revenues from energy sales. During 1995, the Company's major off-system sale contracts in effect were with SDG&E and APPA. The SDG&E contract requires SDG&E to purchase 100 MW from the Company through April 2001. On October 27, 1993, SDG&E filed a complaint with the FERC against the Company, alleging that certain charges under this 1985 power purchase agreement are unjust, unreasonable and unduly discriminatory. SDG&E is requesting that the FERC investigate the rates charged under the agreement. The relief, if granted, would reduce annual demand charges paid by SDG&E by up to $11 million per year from the date of the ruling through April 2001, and could require a refund of up to approximately $14 million. The Company responded to the complaint on December 8, 1993, and SDG&E and the Company filed subsequent pleadings. The FERC has not issued a ruling in the case and has not indicated when or if the complaint will be considered. The Company believes that the complaint is without merit, and the Company intends to vigorously resist the complaint. The APPA contract requires APPA to purchase varying amounts of power from the Company through May 2008 and allows APPA to make adjustments to the purchase amounts subject to certain notice provisions. APPA provided notice that it was invoking its option to reduce the power demand in 1995, resulting in a peak demand of 89 MW. The Company furnished firm-requirements wholesale power in New Mexico in 1995 to the cities of Farmington and Gallup, TNP and Plains. Plains terminated its contract for 10 MW in 1995. The Company is committed to provide service to the City of Gallup through April 2003. Average monthly demands under the City of Gallup contract for 1995 were approximately 26 MW. TNP is currently purchasing 36 MW but has provided notice that it will reduce its purchase to 15 MW for 1996 and 1997. TNP may adjust its annual demand between 15 MW and 40 MW with one year's notice and may terminate service with two years' notice. No firm-requirements wholesale customer accounted for more than 1.6% of the Company's total electric operating revenues for the year ended December 31, 1995. Sources of Power As of December 31, 1995, the total net generation capacity of facilities owned or leased by the Company was 1,506 MW. In addition, the Company has a power purchase contract with SPS for up to 200 MW from May 1995 through May 2011. The Company may reduce its purchases from SPS by 25 MW annually upon three years' notice. The Company provided such notice in 1995 to reduce the purchase by 25 MW in 1999. Also, the Company has 39 MW of contingent capacity obtained from El Paso under a transmission capacity for generation capacity trade arrangement that increases to 70 MW from 1998 through 2003. In addition, the Company is interconnected with various utilities for economy interchanges and mutual assistance in emergencies. The Company anticipates the need for approximately 100 to 200 MW of additional generating capacity in the 1998 through 2000 timeframe, and is currently pursuing its options to meet these capacity needs. 3 Fuel and Water Supply The percentages of the Company's generation of electricity (on the basis of KWh) fueled by coal, nuclear fuel and gas and oil, and the average costs to the Company of those fuels (in cents per million BTU), during the past five years were as follows: Coal Nuclear Gas and Oil ------------------- ------------------- ------------------- Percent of Average Percent of Average Percent of Average ---------- ------- ---------- ------- ---------- ------- 1991............ 67.1 167.9 32.9 67.9 -- 216.5 1992............ 69.2 161.7 30.5 59.8 0.3 239.7 1993............ 72.9 164.7 26.7 58.1 0.4 331.7 1994............ 72.0 162.9 27.8 58.5 0.2 321.7 1995............ 67.9 168.3 31.9 49.1 0.2 242.2 The estimated generation mix for 1996 is 71.5% coal, 28.4% nuclear and 0.1% gas and oil. Due to locally available natural gas and oil supplies, the utilization of locally available coal deposits and the generally abundant supply of nuclear fuel, the Company believes that adequate sources of fuel are available for its generating stations. Coal The coal requirements for 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 SJGS until 2017. BHP guaranteed the obligations of SJCC under the agreement, which contemplates the delivery of approximately 121 million tons of coal during its remaining term. Such amount would supply substantially all the requirements of SJGS through approximately 2017. The primary sources of coal are a mine adjacent to SJGS and a mine located approximately 25 miles northeast of SJGS in the La Plata area of northwestern New Mexico. The Company is currently discussing with SJCC alternatives for securing both short and long term fuel resource requirements which at this time are uncommitted. As a part of this discussion, the Company is also negotiating other issues which may result in modifications to certain Coal Sales Agreement terms and provisions which include but are not limited to cost recovery and pricing. On September 1, 1995, the parties executed an amendment to the Coal Sales Agreement. The amendment provides for flexibility in coal sourcing. Mining operations are being shifted over time to the La Plata Mine and several newly introduced sources including expanded La Plata reserves and a new lease contiguous with the existing San Juan Mine. While the savings in fuel cost over the life of the contract are continuing to be developed, it is currently estimated that the Company will save approximately $200 million of coal fuel costs during the period 1996 through 2004. The average cost of fuel, including ash disposal and land reclamation costs, for SJGS for the years 1993, 1994 and 1995 was 177.4 cents, 172.1 cents and 184.6 cents, respectively, per million BTU ($34.59, $33.62 and $35.75 per ton, respectively). Four Corners is supplied with coal under a fuel agreement between the owners and BHP, under which BHP agreed to supply all the coal requirements for the life of the plant. BHP holds a long-term coal mining lease, with options for renewal, from the Navajo Nation and operates a strip mine adjacent to Four Corners with the coal supply expected to be sufficient to supply the units for their estimated useful lives. The average cost of fuel, including ash disposal and land reclamation costs, for the years 1993, 1994 and 1995 at Four Corners was 114.9 cents, 125.8 cents and 113.4 cents, respectively, per million BTU ($20.11, $22.03 and $20.04 per ton, respectively). 4 Natural Gas The natural gas used as fuel for the Company's Albuquerque electric generating plant (Reeves Station) is delivered by PNMGS. (See "NATURAL GAS OPERATIONS".) In addition to rate changes under filed tariffs, the Company's cost of gas increases or decreases according to the average cost of the gas supply. Nuclear Fuel The fuel cycle for PVNGS is comprised of the following stages: (1) the mining and milling of uranium ore to produce uranium concentrates, (2) the conversion of uranium concentrates to uranium hexafluoride, (3) the enrichment of uranium hexafluoride, (4) the fabrication of fuel assemblies, (5) the utilization of fuel assemblies in reactors, and (6) the storage of spent fuel and the disposal thereof. The Company has made arrangements through contract flexibilities to obtain quantities of uranium concentrates anticipated to be sufficient to meet its share of uranium concentrates requirements through 2000. The Company's existing contracts and options could be utilized to meet 75% of such requirements in 2001 and 2002 and 40% of requirements from 2003 through 2007. The Company understands that other PVNGS participants have made arrangements for the uranium concentrate requirements through 2000. Their existing contracts and options could be utilized to meet 80% of requirements in 1998 and 1999 and 70% of requirements from 2000 through 2006. The PVNGS participants, including the Company, contracted for all conversion services required through 2000 with options for up to 70% through 2002. The PVNGS participants, including the Company, also have an enrichment services contract with USEC which obligates USEC to furnish enrichment services required for the operation of the three PVNGS units over a term expiring in September 2002, with options to continue through September 2007. Existing spent fuel storage facilities at PVNGS have sufficient capacity with certain modifications to store all fuel expected to be discharged from normal operation of all of the PVNGS units through at least the year 2005. Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the "Waste Act"), DOE is obligated to accept and dispose of all spent nuclear fuel and other high-level radioactive wastes generated by all domestic power reactors. The NRC, pursuant to the Waste Act, also requires operators of nuclear power reactors to enter into spent fuel disposal contracts with DOE. APS, on its own behalf and on behalf of the other PVNGS participants, executed a spent fuel disposal contract with DOE. The Waste Act also obligates DOE to develop the facilities necessary for the permanent disposal of all spent fuel generated and to be generated by domestic power reactors and to have the first such facility in operation by 1998 under prescribed procedures. In November 1989, DOE reported that such a permanent disposal facility will not be in operation until 2010. As a result, under DOE's current criteria for shipping allocation rights, PVNGS's spent fuel shipments to the DOE permanent disposal facility would begin in approximately 2025. In addition, APS believes that on-site storage of spent fuel may be required beyond the life of the PVNGS Units. APS currently believes that alternative interim spent fuel storage methods are or will be available on-site or off-site for use by PVNGS to allow its continued operation beyond 2005 and to safely store spent fuel until DOE's scheduled shipments from PVNGS begin. Currently, low-level radioactive waste is being stored on-site. A new low-level waste facility was built in 1995 on the PVNGS site. The new facility has the capability to store an amount of waste equivalent to 10 years of normal operation of PVNGS. APS, the operating agent of PVNGS, is currently evaluating its options of shipping low-level waste to facilities that have reopened or continuing to store the waste in the new facility. While believing that scientific and financial aspects of the issues with respect to spent fuel and low-level waste can be resolved satisfactorily, APS acknowledges that their ultimate resolution in a timely fashion will require political resolve and action on national and regional scales which it is less able to predict. 5 Water Supply Water for Four Corners and SJGS is obtained from the San Juan River. (See ITEM 3. -- "LEGAL PROCEEDINGS -- SAN JUAN RIVER ADJUDICATION".) BHP holds rights to San Juan River water and 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 United States Bureau of Reclamation for consumption of 16,200 acre feet of water per year for SJGS, which contract expires in 2005, and in addition, the Company was granted the authority to consume 8,000 acre feet of water per year under a state permit that is held by BHP. The Company is of the opinion that sufficient water is under contract for SJGS until 2005. On January 29, 1993, the U.S. Fish and Wildlife Service proposed a portion of the San Juan River as critical habitat for two fish species. This designation may impact uses of the river and its flood plains and will require certain analysis under the Endangered Species Act of 1973 of all significant Federal actions. Renewal of the SJGS water contract is considered a significant Federal action. Due to extensive lead times required to renew the water rights contract, the Company has formally initiated the renewal and extension process for requesting rights through the year 2025. The Company is actively conducting an environmental assessment with the Bureau of Reclamation and a biological assessment with the U.S. Fish and Wildlife Service. These studies are required by the Federal agencies before the existing water contract can be renewed. The Company is currently unable to predict the outcome of these matters. Sewage effluent used for cooling purposes in the operation of the PVNGS units has been obtained under contracts with certain municipalities in the area. The contracted quantity of effluent exceeds the amount required for the three PVNGS units. The validity of these effluent contracts is the subject of litigation in state and Federal courts. (See ITEM 3. -- "LEGAL PROCEEDINGS -- PVNGS WATER SUPPLY LITIGATION".) NATURAL GAS OPERATIONS On June 30, 1995, the Company, Gathering Company and Processing Company sold substantially all of their gas gathering and processing facilities. The Company believes that the sale allows the Company to focus on providing gas transportation and retail gas services to New Mexico gas consumers while maintaining its flexibility in accessing competitively priced, reliable and secure gas supplies. (See PART II, ITEM 7. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OTHER ISSUES FACING THE COMPANY -- SALE OF GAS GATHERING AND PROCESSING ASSETS".) Service Area and Customers The Company's gas operating division, PNMGS, distributes natural gas to most of the major communities in New Mexico, including Albuquerque and Santa Fe, serving approximately 393,000 customers as of December 31, 1995. The Albuquerque metropolitan area accounts for approximately 54.7% of the total sales-service customers. PNMGS holds long-term, non-exclusive franchises with varying expiration dates in all incorporated communities requiring franchise agreements. PNMGS completed franchise negotiations with the City of Santa Fe extending the franchise through October 25, 2020. PNMGS' customer base includes both "sales-service" customers and "transportation-service" customers. Sales-service customers purchase natural gas and receive transportation and delivery services from PNMGS for which PNMGS receives both cost-of-gas and cost-of-service revenues. Cost-of-gas revenues collected from sales-service customers are a recovery of the cost of purchased gas in accordance with NMPUC rules and regulations and, in that sense, do not affect the net earnings of the Company. 6 Transportation-service customers, who procure gas independently of PNMGS and contract with PNMGS for transportation and related services, provide PNMGS with cost-of-service revenues only. Transportation services are provided to gas marketers generally for delivery to locations throughout the PNMGS distribution systems, to natural gas producers generally for delivery to interstate pipelines and directly to end-users. PNMGS provided gas transportation deliveries to approximately 1,200 gas marketers and producers during 1995. For the twelve months ended December 31, 1995, PNMGS had throughput of approximately 110 million decatherms, including sales of 37.3 million decatherms to sales-service customers. No single "sales-service" customer accounted for more than 1.5% of PNMGS' therm sales in 1995. During 1995, approximately 63.7% of the PNMGS' total gas throughput was related to transportation gas deliveries. PNMGS' transportation rates are unbundled, and transportation customers only pay for the amount of transportation service they receive. PNMGS' total operating revenues for the year ended December 31, 1995, were approximately $218.0 million. Cost-of-gas revenues, received from sales-service customers, accounted for approximately 39.7% of PNMGS' total operating revenues. Since a major portion of PNMGS' load is related to heating, levels of therm sales are affected by the weather. Approximately 44.2% of PNMGS' total therm sales in 1995 occurred in the months of January, February, November and December. Natural Gas Supply During the late 1980's, there were significant changes in the natural gas industry brought about by Federal and state regulations which dramatically altered the way gas is bought, transported and sold nationwide. These changes required PNMGS to reform or terminate certain natural gas purchase contracts which required PNMGS to take gas in excess of demand. This process resulted in breach of contract claims from some producers. PNMGS has been able to resolve substantially all of the producer litigation and reform its supply portfolio so that it better matches the demands of PNMGS' sales-service customers. These reformations have also allowed PNMGS to seek new sources of gas supplies through pipeline interconnects which have created a more flexible and reliable supply portfolio. PNMGS obtains its supply of natural gas primarily from sources within New Mexico pursuant to contracts with producers and marketers. These contracts are generally sufficient to meet the PNMGS's peak-day demand. PNMGS serves certain cities which depend on EPNG or Transwestern Pipeline Company for transportation of gas supplies. Because these cities are not directly connected to PNMGS's transmission facilities, gas transported by these companies is the sole supply source for those cities. Such transportation is regulated by FERC. As a result of FERC Order 636, PNMGS' options for transporting gas to such cities and other portions of its distribution system have increased. 7 Natural Gas Sales The following table shows gas throughput by customer class**: GAS THROUGHPUT (Millions of decatherms) 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ Residential ............ 25.9 27.1 28.0 27.1 26.2 Commercial ............. 8.9 9.8 10.4 10.6 11.4 Industrial ............. 0.7 0.8 0.9 0.7 0.8 Public authorities...... 2.4 2.5 2.5 4.2 4.9 Irrigation ............. 1.2 1.3 1.3 1.1 1.4 Sales for resale........ 2.5 0.7 1.0 2.0 1.4 Unbilled ............... (1.8) (0.3) (0.6) 0.6 -- Transportation* ........ 69.8 90.2 91.8 73.6 62.6 Spot market sale ....... -- -- -- 0.9 1.6 ------ ------ ------ ------ ------ 109.6 132.1 135.3 120.8 110.3 ====== ====== ====== ====== ====== The following table shows gas revenues by customer class**: GAS REVENUES (Thousands of dollars) 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- Residential .......... $ 125,290 $ 149,439 $ 149,796 $ 125,313 $ 137,436 Commercial ........... 32,328 42,725 44,575 37,222 46,676 Industrial ........... 1,873 2,905 3,369 2,063 2,754 Public authorities.... 7,939 9,969 9,694 12,313 17,711 Irrigation ........... 3,077 4,061 4,418 2,713 4,495 Sales for resale ..... 4,999 2,462 3,137 4,460 3,848 Unbilled ............. (2,430) 267 (1,573) 716 -- Transportation* ...... 22,172 27,592 26,729 18,753 16,997 Liquids .............. 13,414 16,090 18,724 26,427 30,500 Processing fees ...... 5,180 10,638 9,761 6,795 5,819 Spot market sales..... 42 -- 4 1,410 1,771 Other ................ 4,101 3,362 2,453 4,974 9,062 --------- --------- --------- --------- --------- $ 217,985 $ 269,510 $ 271,087 $ 243,159 $ 277,069 ========= ========= ========= ========= ========= - -------------------- * Customer-owned gas ** On June 30, 1995, the Company sold substantially all of the gas gathering and processing assets of the Company and its gas subsidiaries. The above information reflects the revenues and throughput of the gathering company and processing company through this date. 8 RATES AND REGULATION The Company is subject to the jurisdiction of the NMPUC with respect to its retail electric and gas rates, service, accounting, issuance of securities, construction of major new generation and transmission facilities and other matters. The FERC has jurisdiction over rates and other matters related to wholesale electric sales. FPPCAC The Company's firm-requirements wholesale customers have a FPPCAC which has an approximate 30-day time lag in implementation of the FPPCAC for billing purposes. The Company's FPPCAC for its firm-requirement wholesale customers had been at variance with the filed FERC tariffs. As a result, the Company filed a petition with FERC on October 28, 1993 to request deviation from the filed FERC tariffs for the period of July 1985 through January 1993. The Company's filing indicated that the four firm-requirements wholesale customers benefitted during that time period relative to the energy costs they would have been billed under the application of the filed FERC tariffs. The four affected customers concur with the Company's position and have filed a certificate of concurrence with FERC. Discussions regarding the Company's filing with FERC staff have occurred, but at this time no formal response has been given to the Company. The Company has no indication of when a formal response will be received; however, the Company does not anticipate any material adverse impact on the Company's financial condition or results of operations as a result of this issue. Fossil-Fueled Plant Decommissioning Costs The Company's six owned or partially owned, in service and retired, fossil-fueled generating stations are expected to incur dismantling and reclamation costs as they are decommissioned. The Company's share of decommissioning costs for all of its fossil-fueled generating stations is projected to be approximately $141 million stated in 1995 dollars, including approximately $24.0 million (of which $12.1 million has already been expended) for Person, Prager and Santa Fe Stations which have been retired. The Company is currently recovering estimated decommissioning costs from NMPUC retail customers through its depreciation rates. Depreciation amounts for the retired generating units are not being recovered. Energy and Utility Related Subsidiaries On June 23, 1995, the Company filed an application for authorization for the creation of three wholly-owned subsidiaries to: (i) manage and operate water and wastewater systems; (ii) pursue energy marketing, alternative fuel vehicle services and energy management services; and (iii) pursue utility management services and related energy management services for Federal installations and large commercial customers. The Company sought approval to invest a maximum of $50 million in the three subsidiaries over time and to enter into reciprocal loan agreements for up to $30 million with these subsidiaries. The NMPUC Staff filed a motion on September 20, 1995 to have the case dismissed. On January 31, 1996, the hearing examiner assigned to the case recommended that the NMPUC deny the Staff's motion. On February 5, 1996, the Staff filed a motion seeking to have the Company file an immediate report on its non-regulated activities being conducted without prior NMPUC approval; explain why NMPUC approval is not required; and explain why sanctions should not be considered if approval is required. On February 19, 1996, the Company filed its response describing its non-utility (energy and utility related) activities and presenting the legal authority demonstrating that prior NMPUC approval is not required. The Company currently cannot predict the ultimate outcome of this proceeding but intends to vigorously defend against any allegation that it is in violation of any legal requirements. 9 Gas Rate Case On August 28, 1995, the Company filed a request for a $13.3 million increase in its retail natural gas sales and transportation rates. NMPUC Staff and intervenors in the case filed their testimony on January 16, 1996. The Staff recommended a $2.5 million rate decrease and the AG recommended a $14.7 million rate decrease. The major issues in the case center around the Company's request to recover certain costs associated with reservation fees, discounts given to large and industrial transportation customers and losses incurred to reacquire debt. The Company anticipates that it will have deferred as regulatory assets approximately $22 million related to these items through July 1, 1996, the date when rates are anticipated to go into effect. The Company will file its rebuttal testimony on February 23, 1996 and hearings will begin on March 4, 1996. Although the Company cannot predict the ultimate outcome of this case, the Company believes that it has meritorious claims and will vigorously pursue the recovery of these assets. PGAC Continuation Filing Retail gas rate schedules contain a PGAC which provides for timely recovery of the cost of gas purchased for resale to its sales-service customers. On April 20, 1993, PNMGS filed its application requesting authority to continue the use of its PGAC. An item included in this application was a request to recover reservation fees as a cost of gas through the PGAC. On October 26, 1995, the Hearing Examiner issued a Recommended Decision allowing, among other items, the continued use of the PGAC but recommended that reservation fees not be recoverable through the PGAC. PNMGS filed an exception to the portion of the Recommended Decision relating to reservation fees. PNMGS is awaiting final NMPUC approval. PNMGS is attempting to recover these same reservation fees in the ongoing general rate proceeding (see "Gas Rate Case" above). On February 19, 1996, the NMPUC issued an order requiring PNMGS to file supplemental testimony regarding the volatile nature of its gas costs. In a related proceeding, the NMPUC on September 18, 1995, issued a Notice of Inquiry seeking comments as to whether the NMPUC rule that governs the operation of PGACs should be amended. In November 1995, the Company joined with the NMPUC Staff and the AG in recommending that such rule be substantially rewritten. Consolidation Issues Pursuant to a prior NMPUC order, the Company filed an application in December 1993 for NMPUC approval to combine certain customer service functions of its gas and electric utility divisions in order to achieve more efficient operations and to improve service to customers. At the same time, the Company filed a separate request for a declaratory order from the NMPUC confirming that the Company's realignment of senior corporate officers' responsibilities during 1993 complies with a 1984 NMPUC order placing certain organizational restrictions on the operation of the gas and electric divisions. In 1994, the NMPUC consolidated the two proceedings. In January 1995, the Company and the staff of the NMPUC entered into a stipulation regarding the consolidated cases. The stipulation provides for the approval of the consolidation of certain customer service functions of the gas and electric divisions, as proposed by the Company. The stipulation also provides for the dismissal of the declaratory order proceeding without a determination that the Company's 1993 or 1994 organizational structure was either in compliance or not in compliance with the 1984 NMPUC order. In May 1995, the NMPUC issued its final order approving the stipulation. In its order, the NMPUC stated that it was explicitly not ruling at this time on whether the Company's 1993-1994 organization has harmed the public interest. The NMPUC also approved the phase-in of consolidation of certain customer services for one year. During this period, the Company is required to submit semi-annual reports to the NMPUC on the costs and savings of customer service consolidation. 10 Legislative Action In the recent legislature session which ended February 15, 1996, the New Mexico Legislature approved a constitutional amendment which would alter the current state regulatory system relating to the electric utility industry in New Mexico. If approved by voters at the next general election in November 1996, the amendment to the state constitution would replace the existing NMPUC and State Corporate Commission with a single, elected regulatory body. Beginning in 1999, the new five-member "Public Regulation Commission" would regulate electric and gas utilities as well as telecommunications, cable TV, insurance, trucking and all other entities presently regulated under current state law. The Company is neutral on this proposed change. ENVIRONMENTAL FACTORS The Company, in common with other electric and gas utilities, is subject to stringent regulations for protection of the environment by both state and Federal authorities. PVNGS is subject to the jurisdiction of the NRC, which has authority to issue permits and licenses and to regulate nuclear facilities in order to protect the health and safety of the public from radioactive hazards and to conduct environmental reviews pursuant to the National Environmental Policy Act. The Company believes that it is in compliance, in all material respects, with the environmental laws. The Company does not currently expect that material expenditures for environmental control facilities will be required in 1996 and 1997. The Clean Air Act The Clean Air Act amendments of 1990 (the "Act") impose stringent limits on emissions of sulfur dioxide and nitrogen oxides from fossil-fueled electric generating plants. The Act is intended to reduce air contamination from every sizeable source of air pollution in the nation. Electric utilities with fossil-fueled generating units will be affected particularly by the section of the Act which deals with acid rain. To be in compliance with the Act, many utilities will be faced with installing expensive sulfur dioxide removal equipment, securing low sulfur coal, buying sulfur dioxide emission allowances, or a combination of these. Due to the existing air pollution control equipment on the coal-fired SJGS and Four Corners, the Company believes that it will not be faced with any material capital expenditures in order to be in compliance with the acid rain provision of the Act. SJGS and Four Corners have installed flow monitoring equipment and have completed certification testing of their continuous emission monitoring equipment. Certification testing data was submitted to the EPA on January 30, 1995, as required. Certification of the monitoring systems by the EPA is expected. Under other provisions of the Act, the Company will be required to obtain operating permits for its coal- and gas-fired generating units and to pay annual fees associated with the operating permit program. The New Mexico operating permit program was approved by the EPA in November 1994. Operating permit applications were submitted to the state in 1995. The state has not issued any operating permits. The Act also established the Grand Canyon Visibility Transport Commission ("Commission") and charged it with assessing adverse impacts on visibility at the Grand Canyon. The Commission broadened its scope to assess visibility impairment in mandatory Class I areas (parks and wilderness areas) located in the Colorado Plateau ("Golden Circle"). The Commission must report to the EPA by June 1996 on its findings and make recommendations regarding what actions, if any, should be pursued in order to remedy the visibility impairment in the Golden Circle. Depending on the recommendations of the Commission, the EPA may require stricter controls on sources that may be contributing to the visibility impairment. Both SJGS and Four Corners are located near the Golden Circle. The exact nature and cost of additional controls, if any, that may be required as a result of the recommendations cannot be estimated at this time. 11 For other environmental issues facing the Company, see PART II, ITEM 7. - -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --OTHER ISSUES FACING THE COMPANY -- ENVIRONMENTAL ISSUES -- Electric Operations and ENVIRONMENTAL ISSUES -- Gas Operations". ITEM 2. PROPERTIES Substantially all of the Company's utility plant is mortgaged to secure its first mortgage bonds. ELECTRIC The Company's electric generating stations in commercial service as of December 31, 1995, were as follows: Total Net Generation Type Name Location Capacity (MW) - ---- ---- -------- ------------- Nuclear.......... PVNGS (a) Wintersburg, Arizona 390* Coal............. SJGS (b) Waterflow, New Mexico 750 Coal............. Four Corners (c) Fruitland, New Mexico 192 Gas/Oil.......... Reeves Albuquerque, New Mexico 154 Gas/Oil.......... Las Vegas Las Vegas, New Mexico 20 ----- 1,506 ===== * For load and resource purposes, the Company has notified the NMPUC that it recognizes the maximum dependable capacity rating for PVNGS to be 375 MW. - ----------------- (a) The Company is entitled to 10.2% of the power and energy generated by PVNGS. The Company has a 10.2% ownership interest in Unit 3 and has leasehold interests in Units 1 and 2. (b) SJGS Units 1, 2 and 3 are 50% owned by the Company; SJGS Unit 4 is 38.457% owned by the Company. (c) Four Corners Units 4 and 5 are 13% owned by the Company. Fossil-Fueled Plants SJGS is located in northwestern New Mexico, and consists of four units operated by the Company. Units 1, 2, 3 and 4 at SJGS have net rated capacities of 316 MW, 312 MW, 488 MW and 498 MW, respectively. SJGS Units 1 and 2 are owned on a 50% shared basis with Tucson. Unit 3 is owned 50% by the Company, 41.8% by SCPPA and 8.2% by Tri-State Generation and Transmission Association, Inc. Unit 4 is owned 38.457% by the Company, 8.475% by Farmington, 28.8% by M-S-R, 7.2% by Los Alamos, 10.04% by Anaheim and 7.028% by UAMPS. The Company's net aggregate ownership in SJGS is 750 MW. In connection with the Company's sale to M-S-R in December 1983 of a 28.8% interest in SJGS Unit 4, the Company agreed to purchase under certain conditions 73.53% (105 MW) of M-S-R's capacity through April 30, 1995. The Company also agreed to market the energy associated with the remaining 26.47% portion of M-S-R's capacity through April 30, 1995. The Company also owns 192 MW of net rated capacity derived from its 13% interest in Units 4 and 5 of Four Corners located in northwestern New Mexico on land leased from the Navajo Nation and adjacent to available coal deposits. Units 4 and 5 at Four Corners are jointly owned with SCE, APS, Salt River Project, Tucson and El Paso and are operated by APS. 12 The Company owns 154 MW of generation capacity at Reeves Station in Albuquerque, New Mexico, and 20 MW of generation capacity at Las Vegas Station in Las Vegas, New Mexico. These stations are used primarily for peaking and transmission support. Nuclear Plant The Company's Interest in PVNGS The Company is participating in the three 1,270 MW units of PVNGS, also known as the Arizona Nuclear Power Project, with APS (the operating agent), Salt River Project, El Paso, SCE, SCPPA and The Department of Water and Power of the City of Los Angeles. The Company has a 10.2% undivided interest in PVNGS, with its interests in Units 1 and 2 held under leases. In September 1992, the Company purchased approximately 22% of the beneficial interests in the PVNGS Units 1 and 2 leases for approximately $17.5 million. The Company's ownership and leasehold interests in PVNGS amount to 130 MW per unit, or a total of 390 MW. PVNGS Units 1, 2 and 3 were declared in commercial service by the Company in January 1986, September 1986 and January 1988, respectively. Commercial operation of PVNGS requires full power operating licenses which were granted by the NRC. Maintenance of these licenses is subject to NRC regulation. During 1995, PVNGS was operated at a capacity factor of 83.6%. This is the highest yearly capacity factor that has been attained at the plant. In addition, PVNGS operating costs declined and the length of refueling outages was significantly reduced. Recently, an independent organization that reviews nuclear plants for safety and effectiveness of operation awarded PVNGS the highest rating possible. Steam Generator Tubes For information concerning steam generator tubes, see PART II, ITEM 7. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OTHER ISSUES FACING THE COMPANY -- PVNGS -- STEAM GENERATOR TUBES". Sale and Leaseback Transactions of PVNGS Units 1 and 2 In eleven transactions consummated in 1985 and 1986, the Company sold and leased back its entire 10.2% interest in PVNGS Units 1 and 2, together with portions of the Company's undivided interest in certain PVNGS common facilities. In each transaction, the Company sold interests to an owner trustee under an owner trust agreement with an institutional equity investor. The owner trustees, as lessors, leased the interests to the Company under lease agreements having initial terms expiring January 15, 2015 (with respect to the Unit 1 leases) or January 15, 2016 (with respect to the Unit 2 leases). Each lease provides an option to the Company to extend the term of the lease as well as a repurchase option. The lease expense for the Company's PVNGS leases is approximately $66.3 million per year. Throughout the terms of the leases, the Company continues to have full and exclusive authority and responsibility to exercise and perform all of the rights and duties of a participant in PVNGS under the Arizona Nuclear Power Project Participation Agreement and retains the exclusive right to sell and dispose of its 10.2% share of the power and energy generated by PVNGS Units 1 and 2. The Company also retains responsibility for payment of its share of all taxes, insurance premiums, operating and maintenance costs, costs related to capital improvements and decommissioning and all other similar costs and expenses associated with the leased facilities. On September 2, 1992, the Company purchased approximately 22% of the beneficial interests in the PVNGS Units 1 and 2 leases for $17.5 million. For accounting purposes, this transaction was recorded as a purchase with the Company recording approximately $158.3 million as utility plant and $140.8 million as long-term debt on the Company's consolidated balance sheet. In connection with the $30 million retail rate reduction, the Company wrote down the purchased beneficial interests in 13 PVNGS Units 1 and 2 leases to $46.7 million. In March 1995, the Company retired approximately $130 million of PVNGS lease obligation bonds ("LOBs"). Each lease describes certain events, "Events of Loss" or "Deemed Loss Events", the occurrence of which could require the Company to, among other things, (i) pay the lessor and the equity investor, in return for such investor's interest in PVNGS, cash in the amount provided in the lease, which amount, primarily because of certain tax consequences, would exceed such equity investor's outstanding equity investment, and (ii) assume debt obligations relating to the PVNGS lease. The "Events of Loss" generally relate to casualties, accidents and other events at PVNGS, which would severely adversely affect the ability of the operating agent, APS, to operate, and the ability of the Company to earn a return on its interests in, PVNGS. The "Deemed Loss Events" consist mostly of legal and regulatory changes (such as changes in law making the sale and leaseback transactions illegal, or changes in law making the lessors liable for nuclear decommissioning obligations). The Company believes the probability of such "Events of Loss" or "Deemed Loss Events" occurring is remote. Such belief is based on the following reasons: (i) to a large extent, prevention of "Events of Loss" and some "Deemed Loss Events" is within the control of the PVNGS participants, including the Company, and the PVNGS operating agent, through the general PVNGS operational and safety oversight process and (ii) with respect to other "Deemed Loss Events," which would involve a significant change in current law and policy, the Company is unaware of any pending proposals or proposals being considered for introduction in Congress or any state legislative or regulatory body that, if adopted, would cause any such events. PVNGS Decommissioning Funding For information concerning PVNGS decommissioning funding, see PART II, ITEM 7. --"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OTHER ISSUES FACING THE COMPANY -- PVNGS NUCLEAR DECOMMISSIONING". PVNGS Liability and Insurance Matters The PVNGS participants have insurance for public liability payments resulting from nuclear energy hazards to the full limit of liability under Federal law. This potential liability is covered by primary liability insurance provided by commercial insurance carriers in the amount of $200 million and the balance by an industry-wide retrospective assessment program. The maximum assessment per reactor under the retrospective rating program for each nuclear incident occurring at any nuclear power plant in the United States is approximately $79.3 million, subject to an annual limit of $10 million per incident. Based upon the Company's 10.2% interest in the three PVNGS units, the Company's maximum potential assessment per incident is approximately $24.3 million, with an annual payment limitation of $3 million. The insureds under this liability insurance include the PVNGS participants and "any other person or organization with respect to his legal responsibility for damage caused by the nuclear energy hazard". The PVNGS participants maintain "all-risk" (including nuclear hazards) insurance for nuclear property damage to, and decontamination of, property at PVNGS in the aggregate amount of approximately $2.75 billion as of January 1, 1996, a substantial portion of which must be applied to stabilization and decontamination. The Company has also secured insurance against a portion of the increased cost of generation or purchased power resulting from certain accidental outages of any of the three PVNGS units if the outage exceeds 21 weeks. Other Electric Properties Four Corners and a portion of the facilities adjacent to SJGS are located on land held under easements from the United States and also under leases from the Navajo Nation, the enforcement of which leases might require Congressional consent. The risk with respect to the enforcement of these easements 14 and leases is not deemed by the Company to be material. However, the Company is dependent in some measure upon the willingness and ability of the Navajo Nation to protect these properties. (See PART II, ITEM 7. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OTHER ISSUES FACING THE COMPANY -- TRANSMISSION ISSUES -- Transmission Right-of-Way".) As of December 31, 1995, the Company owned, jointly owned or leased 2,789 circuit miles of electric transmission lines, 5,279 miles of distribution overhead lines, 3,109 cable miles of underground distribution lines (excluding street lighting) and 225 substations. NATURAL GAS The natural gas property as of December 31, 1995 consisted primarily of natural gas storage, transmission and distribution systems. Provisions for storage made by the Company include ownership and operation of an underground storage facility located near Albuquerque and an agreement with owners of a unitized oil field located near Artesia, New Mexico, in which the Company has injection and redelivery rights. The Company has agreed to terminate the storage agreement with owners of the unitized oil field and plans to withdraw all gas stored in that facility by April 1996. The transmission systems consisted of approximately 1,256 miles of pipe with appurtenant compression facilities. The distribution systems consisted of approximately 9,898 miles of pipe. The Company leases approximately 98 miles of transmission pipe from the DOE for transportation of natural gas to Los Alamos and to certain other communities in northern New Mexico. The lease can be terminated by either party on 30 days written notice, although the Company believes it has the right to use the facility for two years after termination. The DOE has announced plans to sell the pipeline and issued a draft Request for Proposal with a schedule to complete the sale of the pipeline by September 30, 1996. Several right-of-way and regulatory issues remain to be resolved making the scheduled completion date questionable. The Company has been and will continue to be highly involved in the process. OTHER INFORMATION The electric and gas transmission and distribution lines are generally located within easements and rights-of-way on public, private and Indian lands. The Company leases interests in PVNGS Units 1 and 2 and related property, EIP and associated equipment, data processing, communication, office and other equipment, office space, utility poles (joint use), vehicles and real estate. The Company also owns and leases service and office facilities in Albuquerque and in other operating divisions throughout its service territory. ITEM 3. LEGAL PROCEEDINGS PVNGS WATER SUPPLY LITIGATION The validity of the primary effluent contract under which water necessary for the operation of the PVNGS units is obtained was challenged in a suit filed in January 1982 by the Salt River Pima-Maricopa Indian Community (the "community") against the Department of the Interior, the Federal agency alleged to have jurisdiction over the use of the effluent. The PVNGS participants, including the Company, were named as additional defendants in the proceeding, which is before the United States District Court for the District of Arizona. The portion of the action challenging the effluent contract has been stayed until the community litigates certain claims in the same action against the Department of the Interior and other defendants. On October 21, 1988, Federal legislation was enacted conforming to the requirements of a proposed settlement that would terminate this case without affecting the validity of the primary effluent contract. However, certain contingencies are to be performed before the 15 settlement is finalized and the suit is dismissed. One of these contingencies is the approval of the settlement by the court in the Lower Gila River Watershed litigation referred to below. The Company understands that a summons served on APS in early 1986 required all water claimants in the Lower Gila River Watershed of Arizona to assert any claims to water on or before January 20, 1987, in an action pending in the Maricopa County Superior Court. PVNGS is located within the geographic area subject to the summons and the rights of the PVNGS participants to the use of groundwater and effluent at PVNGS are potentially at issue in this action. APS, as the PVNGS project manager, filed claims that dispute the court's jurisdiction over the PVNGS participants' groundwater rights and their contractual rights to effluent relating to PVNGS and, alternatively, seek confirmation of such rights. No trial date has been set in this matter. Although the foregoing matters remain subject to further evaluation, APS expects that the described litigation will not have a material adverse impact on the operation of PVNGS. SAN JUAN RIVER ADJUDICATION In 1975, the State of New Mexico filed an action entitled State of New Mexico v. United States, et al., in the District Court of San Juan County, New Mexico, to adjudicate all water rights in the "San Juan River Stream System". The Company was made a defendant in the litigation in 1976. The action was expected to adjudicate water rights used at Four Corners and at SJGS. (See ITEM 1. "BUSINESS -- ELECTRIC OPERATIONS -- Fuel and Water Supply".) The Company cannot at this time anticipate the effect, if any, of any water rights adjudication on the present arrangements for water at SJGS and Four Corners. It is the Company's understanding that final resolution of the case cannot be expected for several years. PVNGS PROPERTY TAXES On June 29, 1990, an Arizona state tax law was enacted, effective as of December 31, 1989, which adversely impacted the Company's earnings in the years of 1990 through 1995 by approximately $5 million per year, before income taxes. On December 20, 1990, the PVNGS participants, including the Company, filed a lawsuit in the Arizona Tax Court, a division of the Maricopa County Superior Court, against the Arizona Department of Revenue, the Treasurer of the State of Arizona, and various Arizona counties, claiming, among other things, that portions of the new tax law are unconstitutional. In December 1992, the court granted summary judgment to the taxing authorities, holding that the law is constitutional. The PVNGS participants appealed this decision to the Arizona Court of Appeals. On November 21, 1995, the Arizona Court of Appeals ruled in favor of the PVNGS participants. Due to the significance of this decision, it is anticipated that the case will be further pursued through the courts. The Company cannot currently predict the ultimate outcome of this matter. OTHER PROCEEDINGS FederalDeposit Insurance Corporation ("FDIC") Litigation, formerly Resolution Trust Corporation ("RTC") Litigation ("MDL-995") On March 31, 1993, certain individuals ("the New Mexico Plaintiffs"), formerly affiliated with BCD, whose general partners include Meadows, filed suit ("the New Mexico suit") in the United States District Court for the District of New Mexico against numerous parties, including the Company, current and former employees of the Company or Meadows, and MCB Financial Group, Inc., a Delaware corporation ("MCB"), 50% of which stock is owned by Meadows. The New Mexico Plaintiffs did not request any monetary relief against the Company or certain current and former employees of the Company and Meadows but have 16 joined those parties in connection with insurance coverage and bad faith insurance practices alleged against the insurance company which had issued a directors and officers liability policy to various entities, including MCB and BCD. The insurance allegations are made in connection with claims which were then threatened by the RTC, as receiver for Western Savings & Loan Association ("Western"), against the Company and others. The New Mexico Plaintiffs also sued the RTC for a declaration that they are not liable for any claims asserted by the RTC involving Western and BCD. The Company and the current and former employees of the Company or Meadows counterclaimed against the New Mexico Plaintiffs and cross-claimed against the insurance company and the RTC in connection with insurance coverage and bad faith insurance practices. In addition, the Company and the current and former employees of the Company or Meadows cross-claimed against the RTC, seeking a declaration of non-liability. The RTC moved to transfer the case to the United States District Court for the District of Arizona. On February 7, 1994, an order was entered transferring the case in its entirety. Prior to the transfer, however, the New Mexico magistrate judge issued a proposed order which, if accepted by the district judge, would require the parties to enter into mediation of all the claims. The parties to the New Mexico suit reached agreement on a dismissal without prejudice of the claims remaining in that suit, and on April 22, 1995, the Court entered an order dismissing the case without prejudice. Under the terms of the proposed order of dismissal, a motion for sanctions filed against the RTC by the Company and other parties to the suit (which asserts that RTC engaged in bad faith settlement negotiations) remains pending before the Arizona court. On April 16, 1993, the Company and certain current and former employees of the Company or Meadows were named as defendants in an action filed in the United States District Court for the District of Arizona by the RTC, as receiver for 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 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 is also 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 Company is sued only on the Arizona racketeering claims. The RTC claims that damages under the Arizona racketeering statute would be trebled under applicable Arizona law. The prevailing parties on the Arizona racketeering claims could seek their fees and costs from the parties who do not prevail. 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 17 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. On December 31, 1995, the RTC ceased to exist and its duties and responsibilities were transferred to the FDIC. The FDIC has been substituted for the RTC as plaintiff in MDL-995. The Company and the current and former employees of the Company or Meadows sued by the RTC continued to have settlement negotiations with the RTC during its existence, but those efforts were not successful. Settlement discussions will continue with the FDIC. The Company continues to investigate all of the claims made by the FDIC in this litigation and is vigorously defending those claims. The Company cannot predict the ultimate outcome of the case but believes that the FDIC's contentions are without merit and currently believes that the outcome will not result in a material adverse impact on the Company's results of operations or financial condition. Four Corners The Company owns a 13% ownership interest in Units 4 and 5 of Four Corners located in northwestern New Mexico on land leased from the Navajo Nation. APS is the operating agent. 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"). By letter dated October 12, 1995, the Four Corners participants requested the United States Secretary of the Interior (the "Secretary") to resolve their dispute with the Navajo Nation regarding whether or not the Acts apply to operation of Four Corners. The Four Corners participants subsequently filed a lawsuit in the District Court of the Navajo Nation (the "Court"), Window Rock District, seeking, among other things, a declaratory judgment that: (i) the Four Corners leases and Federal easements preclude the application of the Acts to the operation of Four Corners; and (ii) the Navajo Nation and its agencies and courts lack adjudicatory jurisdiction to determine the enforceability of the Acts as applied to Four Corners. On October 18, 1995, the Navajo Nation and the Four Corners participants agreed to indefinitely stay the proceedings referenced above so that the parties may attempt to resolve the dispute without litigation, and have requested that the Secretary and the Court stay these proceedings. The Company is unable to predict the outcome of this matter. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 18 SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY Executive officers, their ages, offices held with the Company in the past five years and initial effective dates thereof, were as follows on December 31, 1995, except as otherwise noted: Name Age Office Initial Effective Date ---- --- ------ ---------------------- B. F. Montoya...... 60 President and Chief Executive Officer August 1, 1993 M. P. Bourque...... 48 Senior Vice President, Energy Services December 6, 1994 Senior Vice President, Marketing and December 7, 1993 Customer Services Senior Vice President, Marketing and March 2, 1993 Energy Management Senior Vice President, Gas Management June 19, 1990 Services M. D. Christensen.. 47 Senior Vice President, Customer Service January 9, 1996 and Public Affairs Vice President, Public Affairs December 7, 1993 Vice President, Communications July 22, 1991 R. J. Flynn........ 53 Senior Vice President, Electric December 1, 1994 Services M. H. Maerki....... 55 Senior Vice President and Chief December 7, 1993 Financial Officer Senior Vice President, Administration March 2, 1993 and Chief Financial Officer Senior Vice President and Chief June 1, 1988 Financial Officer P. T. Ortiz........ 45 Senior Vice President, General December 6, 1994 Counsel and Secretary Senior Vice President, Regulatory December 7, 1993 Policy, General Counsel and Secretary Senior Vice President, Public Policy, March 2, 1993 General Counsel and Secretary Senior Vice President, General February 4, 1992 Counsel and Corporate Secretary Senior Vice President and General October 14, 1991 Counsel W. J. Real......... 47 Senior Vice President, Gas Services December 6, 1994 Senior Vice President, Utility December 7, 1993 Operations Senior Vice President, Customer March 2, 1993 Service and Operations Executive Vice President, Gas June 19, 1990 Operations J. E. Sterba....... 40 Senior Vice President, Bulk Power December 6, 1994 Services Senior Vice President, Corporate December 7, 1993 Development Senior Vice President, Asset April 6, 1993 Restructuring Senior Vice President, Retail January 29, 1991 Electric and Water Services Senior Vice President, Business September 1, 1988 Development Group, Electric and Water Operations 19 Name Age Office Initial Effective Date ---- --- ------ ---------------------- J. A. Zanotti...... 55 Senior Vice President, Human Resources January 9, 1996 Vice President, Human Resources March 2, 1993 Senior Vice President, Human Resources July 26, 1990 and Communications - ----------- All officers are elected annually by the board of directors of the Company. All of the above executive officers have been employed by the Company and/or its subsidiaries for more than five years in executive or management positions, with the exception of P. T. Ortiz, M. D. Christensen, B. F. Montoya and R. J. Flynn. Prior to employment with the Company, P. T. Ortiz was employed by U S WEST Communications during the period of January 1988 to October 1991 as Chief Counsel- New Mexico. The principal business of U S WEST Communications is telecommunications. Prior to employment with the Company, M. D. Christensen was employed with Southern California Gas. During the period 1990 through 1991, M. D. Christensen was Vice President of Planning. Prior to employment with the Company, B. F. Montoya was employed with Pacific Gas and Electric Company ("PG&E") since 1989. In 1991, he was promoted to Senior Vice President and General Manager of the Gas Supply Business Unit of PG&E. Prior to his employment with PG&E, B. F. Montoya spent 31 years in the Civil Engineer Corps of the U.S. Navy, performing a wide range of management and utility-related assignments. B. F. Montoya achieved the rank of Rear Admiral when he became Commander, Naval Facilities Engineering Command and Chief of Civil Engineers. R. J. Flynn has a 30-year history in the utility industry working with PG&E. Since 1989, R. J. Flynn held the position of Regional Vice President, responsible for all gas and electric utility operations in the San Joaquin Valley. 20 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the New York Stock Exchange. Ranges of sales prices of the Company's common stock, reported as composite transactions (Symbol: PNM) for 1995 and 1994, by quarters, are as follows: Range of Quarter Ended Sales Prices High Low ---- --- 1995: December 31.............................................. 18 1/4 16 1/8 September 30............................................. 16 3/8 13 3/4 June 30.................................................. 14 1/4 12 3/8 March 31................................................. 13 7/8 12 1/4 Fiscal Year........................................... 18 1/4 12 1/4 1994: December 31.............................................. 13 1/2 11 5/8 September 30............................................. 12 5/8 11 1/4 June 30.................................................. 13 3/8 11 3/8 March 31................................................. 13 5/8 11 Fiscal Year........................................... 13 5/8 11 On January 31, 1996, there were 20,382 holders of record of the Company's common stock. Cumulative Preferred Stock While isolated sales of the Company's cumulative preferred stock have occurred in the past, the Company is not aware of any active trading market for its cumulative preferred stock. Quarterly cash dividends were paid on each series of the Company's cumulative preferred stock at their stated rates during 1995 and 1994. For a discussion of dividend restrictions on the Company's common and preferred stock and the 1995 preferred stock redemption, see note 4 of the notes to consolidated financial statements and ITEM 7. --"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES -- Financing Capability and Dividend Restrictions". 21 ITEM 6. SELECTED FINANCIAL DATA 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- (In thousands except per share amounts and ratios) Total Operating Revenues*............... $ 808,465 $ 904,711 $ 873,878 $ 851,953 $ 857,168 Net Earnings (Loss)..................... $ 75,562 $ 80,318 $ (61,486)** $ (104,255)+ $ 22,960 Earnings (Loss) per Common Share................................ $ 1.72 $ 1.77 $ (1.64)** $ (2.67)+ $ 0.32 Total Assets............................ $ 2,035,669 $ 2,203,265 $ 2,212,189 $ 2,375,582 $ 2,344,332 Preferred Stock with Mandatory Redemption Requirements.............. -- $ 17,975 $ 24,386 $ 25,700 $ 26,982 Long-Term Debt, less Current Maturities........................... $ 728,843 $ 752,063 $ 957,622 $ 911,252 $ 786,279 Common Stock Data: Market price per common share at year end................. $ 17.625 $ 13.00 $ 11.25 $ 12.375 $ 9.75 Book value per common share at year end....................... $ 16.82 $ 15.11 $ 13.29 $ 15.00 $ 17.69 Average number of common shares outstanding................ 41,774 41,774 41,774 41,774 41,774 Return on Average Common Equity............................... 10.7% 12.4% (10.7)% (15.0)% 1.8% Capitalization: Common stock equity.................. 48.6% 43.2% 34.8% 38.6% 45.8% Preferred stock: Without mandatory redemption requirements......... 0.9 4.1 3.7 3.6 3.7 With mandatory redemption requirements.................... -- 1.2 1.5 1.6 1.7 Long-term debt, less current maturities........................ 50.5 51.5 60.0 56.2 48.8 ------------ ------------ ------------ ------------ ------------ 100.0% 100.0% 100.0% 100.0% 100.0% ============ ============ ============ ============ ============ - ----------- * The Company changed its method of accounting for unbilled revenues in 1992. ** Includes the write-down of the 22% beneficial interests in the PVNGS Units 1 and 2 leases purchased by the Company, the write-off of certain regulatory assets and other deferred costs and the write-off of certain PVNGS Units 1 and 2 common costs, aggregating $108.2 million, net of taxes ($2.59 per share). + Includes the write-down of the Company's investment in PVNGS Unit 3 and the provision for loss associated with the M-S-R power purchase contract, aggregating $126.2 million, net of taxes ($3.02 per share). The selected financial data should be read in conjunction with the consolidated financial statements, the notes to consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's assessment of the Company's financial condition and the significant factors affecting the results of operations. This discussion should be read in conjunction with the Company's consolidated financial statements. OVERVIEW Competitive Electric Market The electric utility industry is currently undergoing a period of fundamental change intended to promote a competitive environment in the retail and wholesale energy marketplaces. Legislators and regulators at both the state and Federal level are considering whether, and how, to promote competition among suppliers of electricity and how to provide customers with choice among suppliers. At the Federal level, the FERC promulgated a Notice of Proposed Rule Making ("Mega-NOPR") in March 1995, which proposes to require utilities to unbundle their generation and transmission services and to provide open access transmission. The Mega-NOPR also supplemented a prior NOPR concerning the appropriate treatment of stranded asset costs associated with the transition. Specifically, the FERC stated that recovery of legitimate and verifiable stranded asset costs is critical to the successful transition of the electric utility industry from a tightly regulated cost-of-service industry to an open transmission access, competitively priced industry. The Company in its response to the Mega-NOPR supported the FERC initiative toward open access transmission, but requested that all transmission asset owners, including municipal and Federal, be subject to the same requirements in order to establish a level playing field for all participants in the electric utility industry. The Company also agreed with the FERC regarding the proposed recovery of stranded asset costs. A final decision on the Mega-NOPR is expected in the middle of 1996. On January 22, 1996, a U.S. Senate bill, "Electricity Competition Act of 1996" was introduced, providing a national framework for a competitive electric industry by no later than the year 2010. The bill provides for recovery of stranded asset costs. On February 14, 1996, the Council of Economic Advisors issued an economic report to Congress in which it cautioned that electric industry competition should ensure competitive benefits to all power buyers and should not aggravate pollution or cause supply cuts to the poor. The report favors recovery of stranded asset costs borne by all parties on whose behalf the stranded costs were incurred, including customers that switch to other suppliers. Representative Dan Schaeffer, Chairman of the Energy Subcommittee of the House of Commerce Committee, has announced that he plans to conduct hearings on electric industry restructuring, possibly beginning this summer. The Company does not expect Congressional legislation to pass this year, but does expect Congressional interest to continue next year. In November 1995, after three years of study, the Integrated Water and Resource Planning Committee of the New Mexico State Legislature (the "IWRPC") issued a resolution reporting its findings on the advantages and disadvantages of retail wheeling and alternative restructuring schemes applicable to the electric power industry in New Mexico. The IWRPC's recommendation stated that any proposed restructuring (i) must benefit all ratepayers in the state, (ii) must maintain and possibly encourage the financial health and economic viability of each of the state's utilities, (iii) must provide for appropriate protection from unfair or advantaged competition from utilities or others from outside the state, and (iv) must share equitably any costs, including stranded asset costs, among the varied interests benefitted. The IWRPC also recommended that the NMPUC, under legislative direction and guidance, should monitor and evaluate the electric power industry and applicable market influences and factors and report its findings, conclusions and recommendations to the New Mexico State Legislature for legislative approval and action, as necessary, before any proposed restructuring may be implemented. The resolution further indicated that 23 this continuing evaluation was necessary because of continuing changes even though restructuring and retail wheeling are not justified or in the public interest at this time. The IWRPC resolution was presented to the full Legislature as a Senate Joint Memorial. It was unanimously passed by the Senate and the House. In November 1995, the NMPUC issued a Notice of Inquiry regarding the restructuring of regulation of the electric utility industry in New Mexico. The NMPUC is seeking input on a variety of questions related to competition, retail wheeling and state vs. Federal jurisdiction. The Company in its February 15, 1996 response stated that it believes that: (i) competition and customer choice may be beneficial to all affected interests in New Mexico if done appropriately and (ii) in order to achieve restructuring, there must be cooperative state and Federal action to avoid prolonged uncertainty and litigation, as well as to avert inconsistent state actions that would inhibit the development of competitive markets and restrict the benefits that they may provide. The Company proposed a five-year period to accomplish the transition to a workable competitive market. The Company also stated that it supports action by the United States Congress to clarify boundaries between state and Federal jurisdiction over the electric utility industry, and to ensure that retail wheeling can be implemented in a manner that ensures fair competition and provides utilities the opportunity to recover all stranded asset costs. Although it is uncertain as to the ultimate outcome of possible open access or retail wheeling initiatives, the Company will continue to be active at both the state and Federal levels in the public policy debate on the restructuring of the electric utility industry. By working with customers, regulators and legislators, the Company believes that an agreement will be reached that will protect the interests of stockholders as well as offer the potential benefits of a competitive marketplace to all customers. Uncertainties The future structure of the industry, the form and timing of competition and the method of regulation in a competitive environment remain uncertain. If retail wheeling is implemented, it is possible that, based on other deregulated industries' experiences, retail energy prices could drop significantly. Should that be the case, the value of a utility's assets could be affected significantly in the transition to a more competitive market from a traditional rate regulated environment. Currently, the Company's generation costs are above those of neighboring utilities to the north and east of the Company's service territory. The Company believes that the 1994 electric retail rate reduction improved its competitive position, but recognizes that lower cost producers may have an advantage if the regulatory framework changes significantly towards retail wheeling. The Company's owned nuclear capacity is currently valued at approximately $900 per KW. If the Company were required to value its leased nuclear capacity at the same level as its owned nuclear capacity, it would be valued at approximately $180 million versus approximately $560 million. If there were no provision for the recovery of stranded asset costs, the Company would be required to charge against earnings approximately $380 million. Preparation for the Changes In order to mitigate the exposures associated with a competitive electric market and transition into this changing environment, the Company established the following strategic plan in 1995: (i) secure financial flexibility by retiring debt, (ii) control operation and maintenance costs, (iii) focus on maximizing shareholder value for the nuclear generation assets, and (iv) develop new business opportunities in the energy and utility related area. As part of this plan, the Company restructured its operation into four distinctive business units, each targeted at a specific segment of its customer base with emphasis on being more customer oriented and responsive to the changing competitive environment. The four business units are as follows: (i) Electric Services, (ii) Gas Services, (iii) Bulk Power Services and (iv) Energy Services. 24 In order to maximize value of the nuclear generation assets, the Company's board of directors (the "Board"), at its December 5, 1995 meeting, confirmed that it is in the best interest of the Company at this time to focus its efforts and resources on maximizing shareholder value from PVNGS as an asset (leased and owned) of the Company rather than disposing of it. Growth in the region, rapid growth in the Company's own local service territory and the continuous improvement in the operating performance of the plant were all factors in the change of approach. The Board stated that the Company no longer considers it to be a goal to dispose of its interests in PVNGS. In conjunction with the development of new business opportunities, the Company focused on three energy and utility related activities under its Energy Services Unit. These activities will provide energy marketing, alternative fuel vehicle services and energy management services focused on residential and small customers, management services for water and wastewater systems and utility related management and operation services for Federal installations and other large commercial institutions. The Company believes that successful operation of these ventures will better position the Company in an increasingly competitive utility environment. The Company is currently seeking NMPUC approval for investment in energy and utility related subsidiaries under the Company's general diversification plan. The NMPUC Staff filed a motion in September 1995 to have the case dismissed. On January 31, 1996, the hearing examiner assigned to the case recommended that the NMPUC deny the Staff's motion. On February 5, 1996, the Staff filed a motion seeking to have the Company file an immediate report on its non-regulated activities being conducted without prior NMPUC approval; explain why NMPUC approval is not required; and explain why sanctions should not be considered if approval is required. On February 19, 1996, the Company filed its response describing its non-utility (energy and utility related) activities and presenting the legal authority demonstrating that prior NMPUC approval is not required. The Company currently cannot predict the ultimate outcome of this proceeding but intends to vigorously defend against any allegation that it is in violation of any legal requirements. LIQUIDITY AND CAPITAL RESOURCES Capital Requirements Total capital requirements include construction expenditures as well as other major capital requirements, including retirement of long-term debt, preferred stock and long-term debt sinking funds and preferred stock dividend requirements. The main focus of the construction program is upgrading generating systems, upgrading and expanding the electric and gas transmission and distribution systems, and purchasing nuclear fuel. Total capital requirements for 1995 and projections for 1996-2000 are $367.4 million and $676.8 million, respectively. These estimates are under continuing review and subject to on-going adjustment. The Company currently anticipates that internal cash generation will be sufficient to meet capital requirements during 1996 through 2000. To cover the difference in the amounts and timing of cash generation and cash requirements, the Company intends to utilize short-term borrowings under its liquidity arrangements. Liquidity and Financing The Company's construction expenditures for 1995 were entirely funded through cash generated from operations. In addition to cash flow from operations, the Company received approximately $206.5 million from the sale of gas gathering and processing assets and the Company's water division. During 1995, the Company retired approximately $133 million of PVNGS LOBs, redeemed, at par, $64 million of the Company's cumulative preferred stock and retired approximately $58 million of other long-term debt. At the end of 1995, the Company had $96 million of temporary investments and no short-term borrowings. 25 In addition, at year-end 1995, the Company had available liquidity arrangements of $151 million, consisting of a $100 million secured revolving credit facility ("Facility"), $40 million credit facility collateralized by the Company's electric customer accounts receivable (the "Accounts Receivable Facility") and $11 million in local lines of credit. On January 30, 1996, the Company requested NMPUC approval to increase the capacity of the Accounts Receivable Facility up to $100 million by including in the collateral pool the Company's gas accounts receivable and certain amounts being recovered from gas customers relating to certain gas contract settlements. The Facility will expire in June 1998 and includes a maximum allowed debt to capitalization ratio of 70%. As of December 31, 1995, such ratio was 65%. 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. All of the Company's securities are rated below investment grade by Standard & Poor's Corp., Moody's Investors Service and Fitch Investors Service, Inc., which may result in limited credit markets being available and/or higher financing costs to the Company. Duff & Phelps Credit Rating Co. maintains an investment grade rating for the Company's first mortgage bonds, but continues to rate all other of the Company's securities below investment grade. Financing Capability and Dividend Restrictions One impact of the Company's current ratings, together with covenants in the Company's PVNGS Units 1 and 2 lease agreements (see PART I, ITEM 2. -- "PROPERTIES -- Nuclear Plant"), is to limit the Company's ability, without consent of the owner participants and bondholders in the lease transactions, (i) to enter into any merger or consolidation, or (ii) except in connection with normal dividend policy, to convey, transfer, lease or dividend more than 5% of its assets in any single transaction or series of related transactions. The Facility and a reimbursement agreement associated with the letter of credit supporting $37.3 million of pollution control revenue bonds impose similar restrictions irrespective of credit ratings. The issuance of first mortgage bonds by the Company is subject to earnings coverage and bondable property provisions of the Company's first mortgage indenture. The Company also has the capability under the mortgage indenture, without regard to the earnings test but subject to other conditions, to issue first mortgage bonds on the basis of certain previously retired bonds. At December 31, 1995, based on the earnings test, the Company could have issued approximately $124 million of additional first mortgage bonds, assuming an annual interest rate of 9.25 percent. The Company's restated articles of incorporation limit the amount of preferred stock which may be issued. Assuming a preferred stock dividend rate of 9.75 percent, the Company could have issued $381 million of preferred stock as of year-end. The Company currently has no requirements for long-term financing during the period of 1996 through 2000. 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. The Company currently plans to retire approximately $90 million of long-term debt in 1996. The Company has not declared dividends on its common stock since January 1989 and anticipates announcing a dividend plan sometime before the end of the second quarter of 1996. The Company's board of directors reviews the Company's dividend policy on a continuing basis. The resumption of common dividends is dependent upon a number of factors including earnings and financial condition of the Company and market conditions. The deficit in retained earnings was eliminated during 1995. 26 Capital Structure: The Company's capitalization, including short-term debt, at December 31 is shown below: 1995 1994 1993 ---- ---- ---- Common Equity...................................... 48.6% 39.2% 34.4% Preferred Stock.................................... 0.9 4.8 5.2 Long-term Debt (including current maturities) ..... 50.5 56.0 60.4 ---- ---- ---- Total Capitalization*........................... 100.0% 100.0% 100.0% ===== ===== ===== - ----------- * Total capitalization does not include the present value of the Company's lease obligations for PVNGS Units 1 and 2 and EIP as debt but does include, for 1994 and 1993, the debt associated with the beneficial interests in certain PVNGS Units 1 and 2 leases purchased by the Company, which were retired in March 1995. RESULTS OF OPERATIONS Net earnings per common share in 1995 were $1.72, compared to net earnings of $1.77 per common share in 1994 and a loss of $1.64 per common share in 1993. The loss experienced in 1993 was due to the Company recording an after-tax charge of $108.2 million to earnings resulting from the write-down in connection with the Company's $30 million retail electric rate reduction. The financial 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 power purchase contract recorded in 1992. The gains from the sale of generating facilities to Anaheim recorded in August 1993 and to UAMPS recorded in June 1994 have also improved the financial performance of the excluded resources. A number of items contributed to the $3.5 million decrease in net earnings of the excluded resources as compared with 1994 results. The most significant item was the UAMPS gain recorded in June 1994. Operating results for the excluded resources for all these periods reflect the allocation of interest charges based on the average investment in excluded net utility plant as a percent of total utility plant for the period. Selected financial information for the excluded resources for 1995, 1994 and 1993 is shown below: 1995 1994 1993 ----------- ----------- ----------- (In thousands) Operating revenues..................$ 35,317 $ 39,227 $ 42,517 Operating income ...................$ 2,372 $ 2,358 $ 2,034 Net earnings (loss).................$ (1,710) $ 1,838 $ (2,099) Net utility plant at year-end.......$ 133,757 $ 133,697 $ 159,387 The following discussion highlights other significant items which affected the results of operations in 1995, 1994 and 1993, and certain items expected to impact future earnings. Electric gross margin (electric operating revenues less fuel and purchased power expense) decreased $37.9 million in 1995 due to the retail rate reduction implemented in late 1994, reduced off-system sales as a result of the expiration of three sales contracts and generally poor wholesale power market conditions. Partially offsetting such decreases was the increase in retail revenues resulting from retail sales growth. 27 Electric gross margin increased $32.3 million in 1994 compared to 1993, $23.2 million of which was due to an increase in jurisdictional energy sales. This increase was partially due to warmer weather and a difference of $6.7 million between the estimated unbilled revenues reported in 1993 and actual unbilled revenues in 1994. Gas gross margin (gas operating revenues less gas purchased for resale) decreased $16.4 million from a year ago due to a decrease of $5.5 million in gas deliveries resulting from warmer than normal weather in 1995 and reduced margin of $11.7 as a result of the gas gathering and processing assets sale in June 1995. Gas gross margin decreased $5.1 million in 1994 from 1993. Principal factors were the write-off of certain deferred charges relating to costs of gas and a decrease in gas deliveries resulting from a warmer than normal winter in 1994. Other operation and maintenance expenses ("O&M") decreased $12.3 million in 1995 due to the following: (i) a $2.1 million decrease in PVNGS O&M expense as a result of a reduction in scheduled maintenance outage hours and lower property taxes in the current period, (ii) decreased Four Corners O&M expenses of $2.0 million resulting from a maintenance outage of Unit 4 in 1994, (iii) decreased SJGS O&M expenses of $1.7 million resulting from lower maintenance outage hours in 1995, (iv) a decrease in gas production and products extraction expense of $6.2 million resulting from the gas assets sale in June 1995, (v) a decrease in injuries and damages expense of $4.5 million as a result of the recording of workers' compensation liability in 1994, (vi) lower office supplies and expenses of $3.0 million as a result of a decrease in temporary office labor and postage expense and (vii) a decrease in water O&M expense of $2.1 million resulting from the sale of the Company's water division in July 1995. Such decreases were partially offset by (i) higher administrative and general labor expense of $4.7 million, (ii) higher employee benefit expense of $2.7 million caused by the retroactive deferral of the gas operation's retirees health care costs for regulatory purposes recorded in 1994 and (iii) higher production O&M expenses for the gas and oil-fired plants of $1.7 million resulting from the maintenance outages in 1995. Other O&M expenses decreased $5.1 million in 1994 from 1993 due to the following: (i) a $10.6 million decrease as a result of the Company's 1993 severance program, (ii) a deferral of gas operation's retirees health care costs of $2.8 million for regulatory purposes and (iii) lower electric regulatory commission expense of $2.1 million. Offsetting such decrease was the following: (i) increased pension and retirees health care cost of $3.0 million, (ii) increased electric distribution expense of $3.6 million due to weather-related outages and increased tree trimming activity, (iii) increased generating station maintenance expense of $2.4 million and (iv) increased workers' compensation liability of $2.2 million. Depreciation and amortization expenses increased $6.7 million from a year ago as a result of the implementation of new depreciation rates approved by the NMPUC in November 1994. Other, under the caption Other Income and Deductions, increased $44.2 million from a year ago and increased $9.3 million in 1994 from 1993. Significant 1995 items, net of taxes, included the following: (i) the gain of $12.8 million recognized from the sale of the gas gathering and processing assets, (ii) the gain of $6.4 million recognized from the sale of the Company's water division, (iii) an after-tax accrual of $2.6 million of income pertaining to the carrying costs related to gas take-or-pay settlement amounts, (iv) income of $1.9 million for insurance recovery and (v) income of $1.4 million related to adjusting reclamation reserves for certain mining operations. Partially offsetting such increases were: (i) additional regulatory reserves of $4.8 million and (ii) write-downs of $1.8 million for various non-utility properties. Significant 1994 items, net of taxes, included the following: (i) the write-off of $3.0 million relating to gas take-or-pay settlement payments which are not recoverable through rates, (ii) additional provisions for legal expense of $3.6 million and (iii) a gain and associated tax benefits of $6.1 million from the sale of generating facilities to UAMPS. 28 Significant 1993 items, net of taxes, included the following: (i) the gain of $7.5 million recognized from the sale of an investment, (ii) the gain and associated tax benefits of $7.6 million from the sale of generating facilities to Anaheim and (iii) tax benefits of $3.2 million from the Federal income tax rate change which allows the Company to utilize its net operating loss at a higher tax rate. Partially offsetting such increases were: (i) additional provisions for legal and litigation expenses of $5.7 million, (ii) a write-off of $4.6 million of other deferred costs, (iii) PVNGS decommissioning fund adjustment of $2.8 million and (iv) a write-off of $2.1 million resulting from costs associated with refunding certain pollution control and EIP bonds, which represents the amount related to FERC firm-requirement wholesale customers and resources excluded from New Mexico jurisdictional rates. Net interest charges decreased $12.7 million in 1995 as a result of the retirement of $130 million of PVNGS LOBs in March 1995 and the retirement of $45 million of first mortgage bonds in April 1994. In 1994, net interest charges decreased $15.2 million compared to 1993. Major factors were: (i) lower short-term borrowings in 1994, (ii) the refinancing of $182 million of pollution control revenue bonds in January ($46 million) and September ($136 million) of 1993 and (iii) the retirement of $45 million of first mortgage bonds in April 1994. Preferred stock dividend requirements decreased $2.7 million in 1995 as a result of the retirement of $64 million of preferred stock in August 1995. OTHER ISSUES FACING THE COMPANY TRANSMISSION ISSUES OLE Transmission Project OLE, a proposed 345 Kv transmission line connecting the existing Ojo 345 Kv line to the Norton Station in northern New Mexico, was designed to provide a needed improvement to the northern New Mexico transmission system and to allow greater delivery of power into the Company's two largest service territories, the greater Albuquerque area and the Santa Fe/Las Vegas area. OLE has faced considerable opposition by persons concerned primarily about the environmental impacts of the project. The Company filed in 1991 for NMPUC approval for construction of OLE. On November 20, 1995, the NMPUC issued a final order disapproving the project. On December 20, 1995, the Company filed a limited Motion for Rehearing, accepting the NMPUC's determination that the OLE routing should not be pursued but seeking reconsideration of various parts of the final order which discuss system planning and reliability matters. The NMPUC took no action on the Company's request which in effect deemed it denied. The Company has elected not to appeal the NMPUC order or denial of rehearing. The Company has incurred approximately $17 million for the OLE project and has established accounting reserves as deemed appropriate. The Company intends to seek recovery of these costs as legitimate and prudent costs in future appropriate proceedings. Transmission Right-of-Way The Company has easements for right-of-way with the Navajo Nation for portions of several transmission lines that deliver the Company's generation resources to the Albuquerque metropolitan area. One grant of easement for approximately 4.2 miles of right-of-way for two parallel 345 Kv transmission lines expired in 1993. Prior to the expiration, the Company had numerous unsuccessful negotiation meetings with the Navajo Nation for the renewal of the long-term grant. In 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. During 29 1995, the Company reached a tentative agreement with the Navajo Nation for a twenty-year renewal of the transmission easement and a resolution of all other transmission right-of-way issues. Prior to the execution of the agreement, another agency of the Navajo Nation notified the Company that it was contesting certain water rights at the SJGS, which has delayed resolution of the transmission right-of-way issues. The Company continues to work with the Navajo Nation to resolve this conflict. The Company continues to assess its options but is not pursuing other alternatives unless it receives indications that settlement cannot be reached in a satisfactory manner. The Company currently cannot predict the outcome of the negotiations or the costs resulting therefrom; however, the Company believes that resolution of this issue will not have a material adverse impact on the Company's financial condition or results of operations. Transmission Disputes The Company receives approximately $14.0 million annually for the provision of firm transmission service to several customers. Most of these customers, through various actions, have initiated formal FERC investigations into the transmission service billing units and transmission rates charged by the Company. If these various allegations and requested rate reductions are approved by the FERC, the Company's revenues for transmission services could be reduced by as much as $9 million annually. The Company has responded to these allegations and has requested that the FERC dismiss the complaints. The Company is currently awaiting the FERC decision. In a related FERC filing, the Company committed to file, on or before April 1, 1996, a rate change for all firm, point-to-point and network service transmission customers, including those customers that have filed the pending complaints. Although the Company anticipates a reduction in rates resulting from the filing, the Company does not anticipate any material adverse impact on the Company's financial condition or results of operations. SALE OF GAS GATHERING AND PROCESSING ASSETS As part of the Company's announced action plan in 1993 to focus on its core utility business, the Company, in 1994, entered into an agreement with Williams for the sale of substantially all of the assets of Gathering Company and Processing Company and for the sale of Northwest and Southeast gas gathering and processing facilities of the Company. The sales transaction provides for three 10-year contracts, each with an option to renew for an additional 5-year term, with Williams for competitively priced gathering and processing services. The purchase and sale agreement contains contractual requirements for the Company to address various environmental deficiencies identified as retained liabilities. It also contains environmental representations and warranties and indemnification provisions whereby the Company indemnifies Williams for a five-year period after closing for breaches of the environmental representations and warranties and against third party claims to a maximum of $10.6 million. After the $10.6 million cap has been reached, or after the expiration of the five-year post-closing indemnification period, whichever comes first, Williams indemnifies the Company against further environmental expenditures related to the properties sold. On June 30, 1995, following NMPUC approval, the Company and Williams closed the sale of the assets. As a result, the Company and its gas subsidiaries received $154 million from Williams and recognized an after-tax gain of $12.8 million, or 31 cents per share. Under the NMPUC approval, the Company recorded a liability of approximately $35 million, representing an estimate of a portion of the gain resulting from the sale, which will be credited to the Company's gas customers' bills over five years. After completion of the fifth year, the amount of the gain will be recalculated to reflect actual expenses associated with the transaction which were appropriately and legitimately incurred. Such amount should include amounts expended to indemnify Williams as described above. Any resulting differences will be refunded or billed to customers over a one year period. 30 As a result of the gas assets sales, the operations of the Company's two wholly-owned gas subsidiaries, Gathering Company and Processing Company, have been substantially discontinued, effective June 30, 1995. ENVIRONMENTAL ISSUES The Company is committed to complying with all applicable environmental regulations in a responsible manner. Environmental issues have presented and will continue to present a challenge to the Company. The Company has evaluated the potential impacts of the following environmental issues and believes, after consideration of established reserves, that the ultimate outcome of these environmental issues will not have a material adverse effect on the Company's financial condition or results of operations. Electric Operations Person Station The Company, in compliance with the New Mexico Environment Department Corrective Action Directive, determined that groundwater contamination exists in the deep and shallow water aquifers. The Company is required to delineate the extent of the contamination and remediate the contaminants in the groundwater. The extent of the contaminated plume in the deep water aquifer has been assessed and results have been reported to the NMED. The Company has also proposed revised remedial options to the NMED. The Company is awaiting a final response from the NMED. The Company's current estimate to decommission its retired fossil-fueled plants includes approximately $10.9 million to complete the groundwater remediation program at Person Station. As part of the financial assurance requirement of the Person Station Hazardous Waste Permit, the Company posted a $5.1 million performance bond with a trustee. The remediation program continues on schedule. Santa Fe Station The NMED has been conducting an investigation of the groundwater contamination detected beneath the Santa Fe Station site to determine the source of the contamination. The Company has been and is continuing to cooperate with the NMED site investigation pursuant to a settlement agreement between the Company and the NMED. In May 1995, the Company received a letter from the NMED indicating that the NMED had made a determination that Santa Fe Station was the source of gasoline-contaminated groundwater at the site and vicinity. The Company contested the NMED's determination and believes insufficient data exists to definitely identify the sources of groundwater contamination. A minimum site assessment ("MSA") of the two former underground storage tank sites at the Santa Fe Station site was conducted by the Company under the settlement agreement. The MSA report indicated that the Santa Fe Station site does not appear to have been a source of gasoline contamination. The MSA report has been submitted to the NMED and is currently pending NMED review. Albuquerque Electric Service Center Trenching work at the electric service center revealed oil contaminated soil in an area of the service center where used oil in drums were stored. The trenched area bisects a small portion of the storage area, indicating that potentially the area could be underlain with contaminated soil. The Company requested a laboratory analysis on the soil to determine the type of contamination. The Company may be required to assess soil and groundwater for contamination as well as remediate extensive volumes of soil in the area. The Company currently cannot predict the outcome of the analysis, to what extent the soil was contaminated or the costs of the remediation, if any. 31 In addition, leaking underground fuel lines, which have been replaced, caused soil and groundwater contamination in the vicinity of the leak. The Company proposed a quarterly sampling plan to the NMED for the site. The NMED has expressed concerns regarding the placement of monitoring wells and the relatively high levels of residual contamination remaining in the soil at the site. Based on the recent analysis of the groundwater sampling, the contaminated soil does not appear to be a continual recharge source to the groundwater contamination. The NMED may require additional monitoring wells and soil remediation work at the site. Gas Operations Air Permits In 1994, following an environmental audit performed in conjunction with the Company's sale of certain gas assets, which audit brought to light certain discrepancies regarding required air permits associated with certain natural gas facilities, the Company met with the NMED to discuss the nature of the permit discrepancies and to propose methods and schedules to resolve the discrepancies. The Company submitted in 1994 its permit modification application for the Lybrook Gas Processing Plant ("Lybrook"). The Lybrook permit has now been issued to Williams, the purchaser of the gas assets. The Company submitted an air permit modification application for the Kutz Canyon Gas Processing Plant ("Kutz") in the first quarter of 1995. In October 1995, the Company received a Notice of Violation ("NOV") from the NMED with specified corrective actions on the permit discrepancies in the Kutz air permit. In January 1996, the Company accepted a settlement offer for the NOV from the NMED in the amount of $15,000. The Company cannot predict when the final permit will be issued by the NMED or whether additional requirements will be imposed by the NMED as conditions for issuance of the permit. Gas Wellhead Pit Remediation The New Mexico Oil Conservation Commission ("NMOCC") issued an order, effective on January 14, 1993, that affects the gas gathering facilities, which were sold to Williams, located in the San Juan Basin in northwestern New Mexico. The order prohibits the further discharge of fluids associated with the production of natural gas into unlined earthen pits in certain specified areas of the San Juan Basin. The order also required the submission of closure plans for the closure of pits in which production fluids were previously discharged. The BLM has issued a similar ruling. The Company has complied with such rulings and submitted and received approval of the pit closure plans from the OCD, the Energy Minerals and Natural Resources Department, as well as the BLM. The Company has received letters and directives from the OCD directing the Company to determine if certain unlined discharge pits have contributed to the groundwater contamination plumes that were identified at those sites. The Company is currently assessing the sites in accordance with the OCD directive. The Company continues to assess unlined pits in accordance with the OCD directive and is addressing potential groundwater contamination issues as they arise during the assessment process. On March 3, 1995, the Jicarilla Apache Tribe ("Jicarilla") enacted an ordinance directing that unlined surface impoundments located within environmentally sensitive areas be remediated and closed by December 1996, and that all other unlined surface impoundments on Jicarilla's lands be remediated and closed by December 1998. The Company has received a claim for indemnification by Williams for the environmental work required to comply with the Jicarilla ordinance. The Company has submitted a closure/remediation plan to the Jicarilla, which has been approved, and the Company anticipates initiating the remediation process in the spring of 1996. The costs of remediation will be charged against the $10.6 million indemnification cap contained in the purchase 32 and sale agreement between the Company and Williams. The Company does not anticipate that the claim for indemnification will have any material impact on the Company's financial condition or results of operations. GAS RATE CASE On August 28, 1995, the Company filed a request for a $13.3 million increase in its retail natural gas sales and transportation rates. NMPUC Staff and intervenors in the case filed their testimony on January 16, 1996. The Staff recommended a $2.5 million rate decrease and the AG recommended a $14.7 million rate decrease. The major issues in the case center around the Company's request to recover certain costs associated with reservation fees, discounts given to large and industrial transportation customers and losses incurred to reacquire debt. The Company anticipates that it will have deferred as regulatory assets approximately $22 million related to these items through July 1, 1996, the date when rates are anticipated to go into effect. The Company will file its rebuttal testimony on February 23, 1996 and hearings will begin on March 4, 1996. Although the Company cannot predict the ultimate outcome of this case, the Company believes that it has meritorious claims and will vigorously pursue the recovery of these assets. ALBUQUERQUE FRANCHISE ISSUES The Company's non-exclusive electric service franchise with the City of Albuquerque (the "City") expired in 1992. The franchise agreement provided for the Company's use of City rights-of-way for placement of electric service facilities. The Company provides service to the area which contributed 46% of the Company's total 1995 electric operating revenues. The absence of a franchise does not change the Company's right and obligation to serve those customers under state law. In 1991, the NMPUC issued an order concluding, among other things, that the City could bid for services to its own facilities (Albuquerque municipal loads generated approximately $16.6 million in annual revenue for 1995), but not for service to other customers. However, the New Mexico Supreme Court ("Court") ruled that a city can negotiate rates for its citizens in addition to its own facility uses. The Court also ruled that any contracts with utilities for electric rates are a matter of statewide concern and subject to approval, disapproval or modification by the NMPUC. In addition, the Court reaffirmed the NMPUC's exclusive power to designate providers of utility service within a municipality and confirmed that municipal franchises are not licenses to serve but rather provide access to public rights-of-way. During 1992, representatives of the Company and the City had numerous meetings in attempts to resolve the franchise renewal issue. Since that time, no meetings have been held. The City continues to maintain its options by advocating industry restructuring and monitoring the municipalization activities of the City of Las Cruces. A measure designed to start municipalization activities in Albuquerque was defeated by the City Council. The Company continues to collect and pay franchise fees to the City. PVNGS NUCLEAR DECOMMISSIONING Decommissioning Costs and Trust Funds The Company has a program for funding its share of decommissioning costs for PVNGS. Under this program, the Company makes a series of annual deposits to an external trust fund over the estimated useful life of each unit with the trust funds being invested under a plan which allows the accumulation of funds largely on a tax-deferred basis through the use of life insurance policies on certain current and former employees. The results of the 1995 decommissioning study indicate that the Company's share of the PVNGS decommissioning costs will be approximately $145.6 million, a decrease from $157.8 million based on the previous 1992 study (both amounts are stated in 1995 dollars). 33 The Company has determined that a supplemental investment program will be needed as a result of both cost increases identified in the 1992 study and the lower than anticipated performance of the existing program. On September 29, 1995, the Company filed a request for permission from the NMPUC to establish a qualified tax advantaged trust for PVNGS Units 1 and 2. Due to Internal Revenue Service ("IRS") regulations, PVNGS Unit 3 will remain in a non-qualified trust. The Company, on February 7, 1996, filed a motion for interim relief for establishment of a qualified trust pending final NMPUC action. The interim request was necessary in order to meet the March 15 deadline under IRS requirements for the qualified trust to be effective for the current year. On February 19, 1996, the NMPUC granted this request. The market value of the existing trust at the end of 1995 was approximately $12.4 million, which includes the cash surrender value of the current insurance policies. Decommissioning Costs of Nuclear Power Plants In February 1996, the Financial Accounting Standards Board ("FASB") issued an Exposure Draft on the accounting for closure and removal costs, including decommissioning, of nuclear power plants. If current electric utility industry accounting practices for nuclear power plant decommissioning are changed, the annual provision for decommissioning could increase relative to 1995, and estimated costs for decommissioning could be recorded as a liability (rather than as accumulated depreciation), with recognition of an increase in the cost of related nuclear power plants. The Company is unable to predict the ultimate outcome of this project. PVNGS PROPERTY TAXES On June 29, 1990, an Arizona state tax law was enacted, effective as of December 31, 1989, which adversely impacted the Company's earnings in the years of 1990 through 1995 by approximately $5 million per year, before income taxes. On December 20, 1990, the PVNGS participants, including the Company, filed a lawsuit in the Arizona Tax Court, a division of the Maricopa County Superior Court, against the Arizona Department of Revenue, the Treasurer of the State of Arizona, and various Arizona counties, claiming, among other things, that portions of the new tax law are unconstitutional. In December 1992, the court granted summary judgment to the taxing authorities, holding that the law is constitutional. The PVNGS participants appealed this decision to the Arizona Court of Appeals. On November 21, 1995, the Arizona Court of Appeals ruled in favor of the PVNGS participants. Due to the significance of this decision, it is anticipated that the case will be further pursued through the courts. The Company cannot currently predict the ultimate outcome of this matter. EL PASO El Paso, one of the joint owners of PVNGS and Four Corners, has been operating under Chapter 11 of the Bankruptcy Code since 1992. After the failed merger transaction with Central and South West Corporation, in September 1995, El Paso filed with the bankruptcy court a revised plan whereby, among other things, certain issues would be resolved, including its assumption of the joint facilities operating agreements. The revised plan, as amended, was confirmed by order of the Bankruptcy Court on January 9, 1996. The order approves an amended Assumption and Cure Agreement between El Paso and all participants at PVNGS. As a part of its plan, El Paso also assumed agreements at Four Corners and paid all sums outstanding under the agreements. In addition, El Paso assumed various transmission agreements with the Company. Currently, there are no remaining claims by the Company to be resolved in connection with the bankruptcy. El Paso emerged from bankruptcy on February 12, 1996. 34 ACCOUNTING STANDARDS SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of In March 1995, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 121. This statement requires companies to review their long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. SFAS No. 121 also requires all regulatory assets, which must have a high probability of recovery to be initially established, must continue to meet that high probability standard to avoid being written off. However, if written off, a regulatory asset can be restored if, through regulatory actions, it again becomes probable of recovery. The adoption of SFAS No. 121 had no impact on the Company's financial condition or results of operations. PVNGS -- STEAM GENERATOR TUBES APS, as the operating agent of PVNGS, has encountered tube cracking in the steam generators and has taken, and will continue to take, remedial actions that it believes have slowed further tube degradation. The steam generator tubes in each unit continue to be inspected in conjunction with their respective outages. APS currently believes that the PVNGS steam generators in Units 1 and 3 are capable of operating for their designed life of forty years, although, at some point, long-term economic considerations may warrant examination of possible steam generator replacement. APS's ongoing analyses indicate that it will be economically desirable for APS to replace the Unit 2 steam generators, which have been most affected by tube cracking, in five to ten years. APS expects that the steam generator replacement can be accomplished within financial parameters established before replacement was a consideration. Based on APS's analyses, the Company believes that its share of the replacement costs (in 1995 dollars and including installation and replacement power costs) would be between $10.5 million and $17.5 million, most of which would be incurred after the year 2000. APS expects that the replacement would be performed in conjunction with a normal refueling outage in order to limit additional incremental outage time to approximately 50 days. APS believes that replacement of the Unit 2 steam generators within five to ten years will be economically desirable. The Company is evaluating this and other options in regards to this issue. All of the PVNGS units were operating at full power at December 31, 1995 and are expected to continue operating at full power, except for scheduled (mid-cycle or refueling) outages. Last year, PVNGS had three refueling outages, one for each of the three units. 35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX Page -------- Management's Responsibility for Financial Statements................... F-1 Report of Independent Public Accountants .............................. F-2 Financial Statements: Consolidated Statements of Earnings (Loss).......................... F-3 Consolidated Statements of Retained Earnings (Deficit).............. F-4 Consolidated Balance Sheets......................................... F-5 Consolidated Statements of Cash Flows............................... F-6 Consolidated Statements of Capitalization........................... F-7 Notes to Consolidated Financial Statements.......................... F-8 Supplementary Data: Quarterly Operating Results......................................... F-34 Comparative Operating Statistics.................................... F-35 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of Public Service Company of New Mexico is responsible for the preparation and presentation of the accompanying consolidated financial statements. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include amounts that are based on informed estimates and judgments of management. Management maintains a system of internal accounting controls which it believes is adequate to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with management authorization and the financial records are reliable for preparing the consolidated financial statements. The system of internal accounting controls is supported by written policies and procedures, by a staff of internal auditors who conduct comprehensive internal audits and by the selection and training of qualified personnel. The board of directors, through its audit committee comprised entirely of outside directors, meets periodically with management, internal auditors and the Company's independent auditors to discuss auditing, internal control and financial reporting matters. To ensure their independence, both the internal auditors and independent auditors have full and free access to the audit committee. The independent auditors, Arthur Andersen LLP, are engaged to audit the Company's consolidated financial statements in accordance with generally accepted auditing standards. F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Public Service Company of New Mexico: We have audited the accompanying consolidated balance sheets and statements of capitalization of Public Service Company of New Mexico (a New Mexico corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of earnings (loss), retained earnings (deficit), and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Public Service Company of New Mexico and subsidiaries as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As explained in notes 1 and 7 to the financial statements, effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, Employer's Accounting for Postretirement Benefits Other Than Pensions, and No. 109, Accounting for Income Taxes. ARTHUR ANDERSEN LLP Albuquerque, New Mexico February 13, 1996 F-2 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) Year Ended December 31, --------------------------------- 1995 1994 1993 ---- ---- ---- (In thousands except per share amounts) Operating Revenues: Electric.....................................$ 584,284 $ 621,794 $ 589,728 Gas.......................................... 217,985 269,510 271,087 Water........................................ 6,196 13,407 13,063 --------- --------- --------- Total operating revenues........................ 808,465 904,711 873,878 --------- --------- --------- Operating Expenses: Fuel and purchased power..................... 140,752 140,411 140,674 Gas purchased for resale..................... 94,299 129,381 125,940 Other operation expenses..................... 257,627 264,391 274,023 Maintenance and repairs...................... 55,809 61,386 56,821 Depreciation and amortization................ 80,865 74,137 77,326 Taxes, other than income taxes............... 35,531 39,717 40,089 Income taxes................................. 30,194 44,210 25,721 --------- --------- --------- Total operating expenses.................. 695,077 753,633 740,594 --------- --------- --------- Operating income.......................... 113,388 151,078 133,284 --------- --------- --------- Other Income and Deductions: Write-down of the PVNGS Units 1 and 2 leases, regulatory assets and other deferred costs............................ -- -- (178,954) Other........................................ 40,707 (3,512) (12,792) Income tax benefit (expense)................. (20,599) 3,339 82,799 --------- --------- --------- Net other income and deductions........... 20,108 (173) (108,947) --------- --------- --------- Income before interest charges............ 133,496 150,905 24,337 --------- --------- --------- Interest Charges: Interest on long-term debt................... 52,637 65,511 72,525 Other interest charges....................... 5,297 5,341 13,719 Allowance for borrowed funds used during construction............................. -- (265) (421) --------- --------- --------- Net interest charges...................... 57,934 70,587 85,823 --------- --------- --------- Net Earnings (Loss)............................. 75,562 80,318 (61,486) Preferred Stock Dividend Requirements........... 3,714 6,433 6,829 --------- --------- --------- Net Earnings (Loss) Available for Common Stock..$ 71,848 $ 73,885 (68,315) ========= ========= ======= Average Number of Common Shares Outstanding..... 41,774 41,774 41,774 ========= ========= ======= Net Earnings (Loss) per Share of Common Stock...$ 1.72 $ 1.77 $ (1.64) ========= ========= ======= Dividends Paid per Share of Common Stock........$ -- $ -- $ -- ========= ========= ======= The accompanying notes are an integral part of these financial statements. F-3 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT) Year Ended December 31, --------------------------------- 1995 1994 1993 ---- ---- ---- (In thousands) Balance at Beginning of Year.................$(46,006) $(120,848) $ (52,533) Net earnings (loss).......................... 75,562 80,318 (61,486) Redemption of cumulative preferred stock..... (599) 957 -- Cumulative preferred stock dividends......... (3,714) (6,433) (6,829) -------- --------- --------- Balance at End of Year.......................$ 25,243 $ (46,006) $(120,848) ======== ========= ========= The accompanying notes are an integral part of these financial statements. F-4 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS December 31, ----------------------- 1995 1994 ---- ---- (In thousands) Utility Plant, at original cost except PVNGS: Electric plant in service.............................$1,871,897 $1,783,962 Gas plant in service.................................. 421,607 537,762 Water plant in service................................ -- 63,048 Common plant in service............................... 35,222 49,049 Plant held for future use............................. 639 894 ---------- ---------- 2,329,365 2,434,715 Less accumulated depreciation and amortization........ 892,727 890,905 ---------- ---------- 1,436,638 1,543,810 Construction work in progress......................... 106,892 119,308 Nuclear fuel, net of accumulated amortization of $26,395 and $35,333 ............................... 30,904 33,569 ---------- ---------- Net utility plant.................................. 1,574,434 1,696,687 ---------- ---------- Other Property and Investments: Non-utility property, net of accumulated depreciation of $1,547 and $1,328.................. 4,063 5,752 Other investments..................................... 29,370 28,771 ---------- ---------- Total other property and investments............... 33,433 34,523 ---------- ---------- Current Assets: Cash.................................................. 4,228 21,029 Temporary investments, at cost........................ 95,972 74,521 Receivables........................................... 127,642 129,048 Income taxes receivable............................... 4,792 4,182 Fuel, materials and supplies, at average cost......... 44,660 51,068 Gas in underground storage, at average cost........... 5,431 8,744 Other current assets.................................. 7,186 9,549 ---------- ---------- Total current assets............................. 289,911 298,141 ---------- ---------- Deferred charges......................................... 137,891 173,914 ---------- ---------- $2,035,669 $2,203,265 ========== ========== CAPITALIZATION AND LIABILITIES Capitalization: Common stock equity: Common stock outstanding-- 41,774,083 shares.......$ 208,870 $ 208,870 Additional paid-in capital......................... 470,358 469,648 Excess pension liability, net of tax............... (1,623) (1,106) Retained earnings (deficit) since January 1, 1989.. 25,243 (46,006) ----------- ---------- Total common stock equity........................ 702,848 631,406 Cumulative preferred stock without mandatory redemption requirements.......................... 12,800 59,000 Cumulative preferred stock with mandatory redemption requirements.......................... -- 17,975 Long-term debt, less current maturities............... 728,843 752,063 ----------- ---------- Total capitalization............................. 1,444,491 1,460,444 ----------- ---------- Current Liabilities: Short-term debt....................................... -- -- Accounts payable...................................... 93,666 105,213 Current maturities of long-term debt.................. 146 148,532 Accrued interest and taxes............................ 26,856 28,073 Other current liabilities............................. 44,699 43,662 ----------- ---------- Total current liabilities........................ 165,367 325,480 ----------- ---------- Deferred Credits: Accumulated deferred investment tax credits........... 66,734 71,564 Accumulated deferred income taxes..................... 78,829 77,207 Other deferred credits................................ 280,248 268,570 ----------- ---------- Total deferred credits........................... 425,811 417,341 ----------- ---------- Commitments and Contingencies (notes 2 through 12) $2,035,669 $2,203,265 ========== ========== The accompanying notes are an integral part of these financial statements. F-5 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, ---------------------------------- 1995 1994 1993 ---- ---- ---- (In thousands) Cash Flows From Operating Activities: Net earnings (loss)................................$ 75,562 $ 80,318 $(61,486) Adjustments to reconcile net earnings (loss) to net cash flows from operating activities: Depreciation and amortization................... 93,125 90,656 95,415 Accumulated deferred investment tax credit...... (4,830) (6,898) (8,321) Accumulated deferred income taxes............... 1,622 23,069 (63,393) Gain on sale of utility property................ (39,050) (6,576) (7,350) Gain on sale of other property and investments.. -- -- (12,394) Write-down of the PVNGS Units 1 & 2 leases, regulatory assets and other deferred costs.... -- -- 178,954 Changes in certain assets and liabilities: Receivables................................... 795 23,868 (12,551) Fuel, materials and supplies.................. (26,505) (3,126) 3,222 Deferred charges.............................. 6,731 8,427 20,936 Accounts payable.............................. (11,527) (11,893) (53,973) Accrued interest and taxes.................... (1,218) (1,919) 631 Deferred credits.............................. 29,185 (5,418) (7,137) Other......................................... 7,090 (3,604) 10,571 Other, net...................................... 16,095 14,160 14,181 ------ ------ ------ Net cash flows from operating activities... 147,075 201,064 97,305 ------- ------- ------ Cash Flows From Investing Activities: Utility plant additions............................ (106,627) (119,284) (100,784) Utility plant sales................................ 206,482 39,562 49,302 Other property additions........................... (801) (1,307) (2,554) Other property sales............................... -- -- 19,912 Temporary investments, net......................... (21,451) (26,671) (47,665) ------- ------- ------- Net cash flows from investing activities... 77,603 (107,700) (81,789) ------ -------- ------- Cash Flows From Financing Activities: Redemptions of PVNGS lease obligation bonds ....... (132,663) -- -- Redemptions and repurchases of preferred stock..... (64,175) (7,711) (600) Redemption of first mortgage bonds................. -- (45,000) -- Bond refinancing costs............................. -- -- (8,960) Bond redemption premium and costs.................. (505) (2,732) -- Proceeds from asset securitization................. 18,758 -- 60,475 Repayments of long-term debt....................... (57,768) (31,002) (8,842) Net decrease in short-term debt.................... -- -- (51,550) Dividends paid..................................... (5,126) (6,400) (6,609) ------ ------ ------ Net cash flows from financing activities... (241,479) (92,845) (16,086) -------- ------- ------- Increase (Decrease) in Cash........................... (16,801) 519 (570) Cash at Beginning of Year............................. 21,029 20,510 21,080 --------- --------- ---------- Cash at End of Year...................................$ 4,228 $ 21,029 $ 20,510 ========= ========= ========== Supplemental cash flow disclosures: Interest paid......................................$ 63,366 $ 70,720 $ 83,248 ========= ========= ========== Income taxes paid..................................$ 52,405 $ 20,000 $ 13,978 ========= ========= ========== Cash consists of currency on hand and demand deposits. The accompanying notes are an integral part of these financial statements. F-6 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITALIZATION December 31, ---------------------- 1995 1994 ---------- ---------- (In thousands) Common Stock Equity: Common Stock, par value $5 per share.................................... $ 208,870 $ 208,870 Additional paid-in capital.............................................. 470,358 469,648 Excess pension liability, net of tax.................................... (1,623) (1,106) Retained earnings (deficit) since January 1, 1989....................... 25,243 (46,006) ----------- ---------- Total common stock equity.......................................... 702,848 631,406 ----------- ---------- Shares Outstanding at Current Stated December 31, Redemption Value 1995 Price -------- ------------ ---------- Cumulative Preferred Stock: Without mandatory redemption requirements: 1965 Series, 4.58%........... $100 128,000 $102.00 12,800 13,000 8.48% Series................. 100 -- -- -- 20,000 8.80% Series................. 100 -- -- -- 26,000 ------- ------- ------- ---------- 128,000 12,800 59,000 ======= ------- ---------- With mandatory redemption requirements: 8.75% Series................. 100 -- -- -- 17,975 Redeemable within one year... -- -- -- ------- ------- ---------- -- -- 17,975 ======= ------- ---------- Long-Term Debt: Issue and Final Maturity Interest Rates - ------------------------ ---------------- First mortgage bonds: 1997............................... 5 7/8% 14,650 14,650 1999 through 2002.................. 7 1/4% to 8 1/8% 43,063 43,272 2004 through 2007.................. 8 1/8% to 9 1/8% 43,421 43,421 2008............................... 9 % 54,374 54,374 Pollution control revenue bonds: 2008 through 2023.................. 5.9% to 7 3/4% 537,045 537,045 2022............................... Variable rate 37,300 37,300 ---------- ---------- Total first mortgage bonds....... 729,853 730,062 Lease obligation bonds of First PV Funding Corporation: Funding Corporation: 1996 through 2016.................. 8.95% to 10.3% -- 132,663 Asset securitization.................. -- 38,805 Other, including unamortized premium and (discount), net........ (864) (935) ---------- ---------- Total long-term debt............. 728,989 900,595 Less current maturities............... 146 148,532 ---------- ---------- Long-term debt, less current maturities....................... 728,843 752,063 ---------- ---------- Total Capitalization..................... $1,444,491 $1,460,444 ========== ========== The accompanying notes are an integral part of these financial statements. F-7 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995, 1994 and 1993 (1) Summary of Significant Accounting Policies Systems of Accounts The Company maintains its accounts for utility operations primarily in accordance with the uniform systems of accounts prescribed by the Federal Energy Regulatory Commission ("FERC") and the National Association of Regulatory Utility Commissioners ("NARUC"), and adopted by the New Mexico Public Utility Commission ("NMPUC"). Organization Public Service Company of New Mexico (the "Company") is an investor-owned utility company engaged in the generation, transmission, distribution and sale of electricity. The Company provides retail electric service to a large area of north central New Mexico, including the cities of Albuquerque, Santa Fe, Rio Rancho, Las Vegas, Belen and Bernalillo. The Company provides service to customers in the City of Albuquerque without a franchise agreement, which contributes approximately one-half of the Company's total electric operating revenues. The absence of a franchise does not change the Company's right and obligation to serve these customers under state law. The Company also provides retail electric service to Deming in southwestern New Mexico and to Clayton in northeastern New Mexico. The Company is also engaged in the transmission, distribution and sale of natural gas within the State of New Mexico. The Company distributes natural gas to most of the major communities in New Mexico, including Albuquerque and Santa Fe. Principles of Consolidation The consolidated financial statements include the accounts of the Company and subsidiaries in which it owns a majority voting interest. All significant intercompany transactions and balances have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual recorded amounts could differ from those estimated. Utility Plant Utility plant, with the exception of Palo Verde Nuclear Generating Station ("PVNGS") Unit 3 and the Company's purchased 22% beneficial interests in the PVNGS Units 1 and 2 leases, is stated at original cost, which includes capitalized payroll-related costs such as taxes, pension and other fringe benefits, administrative costs and an allowance for funds used during construction ("AFUDC"). Utility plant includes certain electric assets not subject to NMPUC regulation. The results of operations of such electric assets are included in operating income. F-8 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (1) Summary of Significant Accounting Policies (Continued) PVNGS Unit 3 and the Company's purchased 22% beneficial interests in the PVNGS Units 1 and 2 leases were written down in 1992 and 1993, respectively, to their net realizable value to reflect a permanent impairment to their original costs. It is Company policy to charge repairs and minor replacements of property to maintenance expense and to charge major replacements to utility plant. Gains or losses resulting from retirements or other dispositions of operating property in the normal course of business are credited or charged to the accumulated provision for depreciation. Depreciation and Amortization Provision for depreciation and amortization of utility plant is made at annual straight-line rates approved by the NMPUC. The average rates used are as follows: 1995 1994 1993 ------------- ----------- ----------- Electric plant........................ 3.32% 3.01% 2.98% Gas plant............................. 3.21% 3.15% 3.12% Water plant (1)....................... -- 2.68% 2.62% Common plant (2)...................... -- 4.94% 4.90% (1) Water plant was sold in July 1995 (see note 12). (2) As a result of the water plant sale, common plant was transferred to electric plant. Effective January 1, 1995, depreciation rates were revised and include a provision for the recovery of fossil-fueled plant decommissioning costs approved by the NMPUC in 1994 (see note 11). The provision for depreciation of certain equipment is charged to clearing accounts and subsequently allocated to operating expenses or construction projects based on the use of the equipment. Depreciation of non-utility property is computed on the straight-line method. Amortization of nuclear fuel is computed based on the units of production method. Nuclear Decommissioning The Company accounts for nuclear decommissioning costs on a straight-line basis over the estimated useful life of the facilities. Such amounts are based on the net present value of expenditures estimated to be required to decommission the plant. Fuel and Purchased Power Adjustment Clause ("FPPCAC") The Company's FPPCAC for its retail customers was eliminated in November 1994. A base fuel cost was incorporated with the overall rates approved by the NMPUC. The Company uses the deferral method of accounting for fuel and purchased power costs for its firm-requirements wholesale customers. Such amounts are reflected in subsequent periods under a FPPCAC approved by the FERC. F-9 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (1) Summary of Significant Accounting Policies (Continued) Purchased Gas Adjustment Clause ("PGAC") The Company uses the deferral method of accounting for gas purchase costs which are settled in subsequent periods under gas adjustment clauses. Future recovery of these costs is subject to approval by the NMPUC. Amortization of Debt Discount, Premium and Expense Discount, premium and expense related to the issuance of long-term debt are amortized over the lives of the respective issues. In connection with the retirement of long-term debt, such amounts associated with resources subject to NMPUC regulation are amortized over the lives of the respective issues. Amounts associated with the Company's firm-requirements wholesale customers and its excluded resources are recognized immediately as expense or income as they are incurred. Income Taxes The Company reports income tax expense in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. SFAS No. 109 requires deferred income taxes for temporary differences between book and tax to be recorded using the liability method. Deferred income taxes are computed using the statutory tax rates scheduled to be in effect when the temporary differences reverse. Current NMPUC jurisdictional rates include the tax effects of the majority of these temporary differences (normalization). Recovery of reversing temporary differences previously accounted for under the flow-through method is also included in rates charged to customers. For regulated operations, any changes in tax rates applied to accumulated deferred income taxes may not be immediately recognized because of ratemaking and tax accounting provisions contained in the Tax Reform Act of 1986. For items accorded flow-through treatment under NMPUC orders, deferred income taxes and the future ratemaking effects of such taxes, as well as corresponding regulatory assets and liabilities, are recorded in the financial statements. Accounting for Stock-Based Compensation The Company has a stock option plan for certain selected key employees. The Company accounts for this plan under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation cost has been recognized (see note 7). Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of In March 1995, the FASB issued SFAS No. 121. This statement requires companies to review their long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. SFAS No. 121 also requires all regulatory assets, which must have a high probability of recovery to be initially established, must continue to meet that high probability standard to avoid being written off. However, if written off, a regulatory asset can be restored if, through regulatory actions, it again becomes probable of recovery. The adoption of SFAS No. 121 had no impact on the Company's financial condition or results of operations. F-10 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (2) Risks and Uncertainties Competitive Electric Market The electric utility industry is currently undergoing a period of fundamental change intended to promote a competitive environment in the retail and wholesale energy marketplaces. Legislators and regulators at both the state and Federal level are considering whether, and how, to promote competition among suppliers of electricity and how to provide customers with choice among suppliers. At the Federal level, the FERC promulgated a Notice of Proposed Rule Making ("Mega-NOPR") in March 1995, which proposes to require utilities to unbundle their generation and transmission services and to provide open access transmission. The Mega-NOPR also supplemented a prior NOPR concerning the appropriate treatment of stranded asset costs associated with the transition. Specifically, the FERC stated that recovery of legitimate and verifiable stranded asset costs is critical to the successful transition of the electric utility industry from a tightly regulated cost-of-service industry to an open transmission access, competitively priced industry. The Company in its response to the Mega-NOPR supported the FERC initiative toward open access transmission, but requested that all transmission asset owners, including municipal and Federal, be subject to the same requirements in order to establish a level playing field for all participants in the electric utility industry. The Company also agreed with the FERC regarding the proposed recovery of stranded asset costs. A final decision on the Mega-NOPR is expected in the middle of 1996. On January 22, 1996, a U.S. Senate bill, "Electricity Competition Act of 1996", was introduced, providing a national framework for a competitive electric industry by no later than the year 2010. The bill provides for recovery of stranded asset costs. On February 14, 1996, the Council of Economic Advisors issued an economic report to Congress in which it cautioned that electric industry competition should ensure competitive benefits to all power buyers and should not aggravate pollution or cause supply cuts to the poor. The report favors recovery of stranded asset costs borne by all parties on whose behalf the stranded costs were incurred, including customers that switch to other suppliers. Representative Dan Schaeffer, Chairman of the Energy Subcommittee of the House of Commerce Committee, has announced that he plans to conduct hearings on electric industry restructuring, possibly beginning this summer. The Company does not expect Congressional legislation to pass this year, but does expect Congressional interest to continue next year. F-11 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (2) Risks and Uncertainties (Continued) In November 1995, after three years of study, the Integrated Water and Resource Planning Committee of the New Mexico State Legislature (the "IWRPC") issued a resolution reporting its findings on the advantages and disadvantages of retail wheeling and alternative restructuring schemes applicable to the electric power industry in New Mexico. The IWRPC's recommendation stated that any proposed restructuring (i) must benefit all ratepayers in the state, (ii) must maintain and possibly encourage the financial health and economic viability of each of the state's utilities, (iii) must provide for appropriate protection from unfair or advantaged competition from utilities or others from outside the state, and (iv) must share equitably any costs, including stranded asset costs, among the varied interests benefitted. The IWRPC also recommended that the NMPUC, under legislative direction and guidance, should monitor and evaluate the electric power industry and applicable market influences and factors and report its findings, conclusions and recommendations to the New Mexico State Legislature for legislative approval and action, as necessary, before any proposed restructuring may be implemented. The resolution further indicated that this continuing evaluation was necessary because of continuing changes even though restructuring and retail wheeling are not justified or in the public interest at this time. The Committee resolution was presented to the full Legislature as a Senate Joint Memorial. It was unanimously passed by the Senate and the House. In November 1995, the NMPUC issued a Notice of Inquiry regarding the restructuring of regulation of the electric utility industry in New Mexico. The NMPUC is seeking input on a variety of questions related to competition, retail wheeling and state vs. Federal jurisdiction. The Company in its February 15, 1996 response stated that it believes that: (i) competition and customer choice may be beneficial to all affected interests in New Mexico if done appropriately and (ii) in order to achieve restructuring, there must be cooperative state and Federal action to avoid prolonged uncertainty and litigation, as well as to avert inconsistent state actions that would inhibit the development of competitive markets and restrict the benefits that they may provide. The Company proposed a five-year period to accomplish the transition to a workable competitive market. The Company also stated that it supports action by the United States Congress to clarify boundaries between state and Federal jurisdiction over the electric utility industry, and to ensure that retail wheeling can be implemented in a manner that ensures fair competition and provide utilities the opportunity to recover all stranded asset costs. Although it is uncertain as to the ultimate outcome of possible open access or retail wheeling initiatives, the Company will continue to be active at both the state and Federal levels in the public policy debate on the restructuring of the electric utility industry. By working with customers, regulators and legislators, the Company believes that an agreement will be reached that will protect the interests of stockholders as well as offer the potential benefits of a competitive marketplace to all customers. F-12 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (2) Risks and Uncertainties (Continued) Uncertainties The future structure of the industry, the form and timing of competition and the method of regulation in a competitive environment remain uncertain. If retail wheeling is implemented, it is possible that, based on other deregulated industries' experiences, retail energy prices could drop significantly. Should that be the case, the value of a utility's assets could be affected significantly in the transition to a more competitive market from a traditional rate regulated environment. Currently, the Company's generation costs are above those of neighboring utilities to the north and east of the Company's service territory. The Company believes that the 1994 electric retail rate reduction improved its competitive position, but recognizes that lower cost producers may have an advantage if the regulatory framework changes significantly towards retail wheeling. The Company's owned nuclear capacity is currently valued at approximately $900 per KW. If the Company were required to value its leased nuclear capacity at the same level as its owned nuclear capacity, it would be valued at approximately $180 million versus approximately $560 million. If there were no provision for the recovery of stranded asset costs, the Company would be required to charge against earnings approximately $380 million. Preparation for the Changes In order to mitigate the exposures associated with a competitive electric market and transition into this changing environment, the Company established the following strategic plan in 1995: (i) secure financial flexibility by retiring debt, (ii) control operation and maintenance costs, (iii) focus on maximizing shareholder value for the nuclear generation assets, and (iv) develop new business opportunities in the energy and utility related area. As part of this plan, the Company restructured its operation into four distinctive business units, each targeted at a specific segment of its customer base with emphasis on being more customer oriented and responsive to the changing competitive environment. The four business units are as follows: (i) Electric Services, (ii) Gas Services, (iii) Bulk Power Services and (iv) Energy Services. In order to maximize value of the nuclear generation assets, the Company's board of directors (the "Board"), at its December 5, 1995 meeting, confirmed that it is in the best interest of the Company at this time to focus its efforts and resources on maximizing shareholder value from PVNGS as an asset (leased and owned) of the Company rather than disposing of it. Growth in the region, rapid growth in the Company's own local service territory and the continuous improvement in the operating performance of the plant this year were all factors in the change of approach. The Board stated that the Company no longer considers it to be a goal to dispose of its interests in PVNGS. F-13 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (2) Risks and Uncertainties (Continued) On December 30, 1994, the Company filed a petition for declaratory order with the NMPUC. In the petition, the Company requested, among other things, a declaratory order that its corporate reorganization into four main business units was in compliance with NMPUC regulations and previous orders and otherwise lawful. Subsequently, on June 23, 1995, the Company filed an application for authorization for the creation of three wholly-owned subsidiaries to: (i) manage and operate water and wastewater systems, (ii) pursue energy marketing, alternative fuel vehicle services and energy management services; and (iii) pursue utility management services and related energy management services for federal installations and large commercial customers. The Company sought approval to invest a maximum of $50 million in the three subsidiaries over time and to enter into reciprocal loan agreements for up to $30 million with these subsidiaries. The NMPUC Staff filed a motion on September 20, 1995 to have the case dismissed. On January 31, 1996, the hearing examiner assigned to the case recommended that the NMPUC deny the Staff's motion. On February 5, 1996, the Staff filed a motion seeking to have the Company file an immediate report on its non-regulated activities being conducted without prior NMPUC approval; explain why NMPUC approval is not required; and explain why sanctions should not be considered if approval is required. On February 19, 1996, the Company filed its response describing its non-utility (energy and utility related) activities and presenting the legal authority demonstrating that prior NMPUC approval is not required. The Company currently cannot predict the ultimate outcome of this proceeding but intends to vigorously defend against any allegation that it is in violation of any legal requirements. F-14 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (3) Regulatory Assets and Liabilities The Company is subject to the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation" on operations regulated by the NMPUC. Regulatory assets represent probable future revenue to the Company associated with certain costs which will be recovered from customers through the ratemaking process. Regulatory liabilities represent probable future reductions in revenues associated with amounts that are to be credited to customers through the ratemaking process. Regulatory assets and liabilities reflected in the Consolidated Balance Sheets as of December 31, relate to the following: 1995 1994 ---------- ---------- (in thousands) Deferred Income Taxes................................$ 71,094 $ 77,020 Gas Take-or-Pay Costs................................ 50,870 64,858 Gas Imputed Revenues................................. 8,113 4,529 Loss on Reacquired Debt.............................. 6,377 7,360 Gas Reservation Fees................................. 5,622 2,805 Gas Retirees' Health Care Costs...................... 4,437 2,776 Gas Rate Case Costs.................................. 1,100 -- Purchased Gas Adjustment Clause...................... 931 2,868 Fuel and Purchased Power Cost Adjustment Clause...... 121 1,224 --------- --------- Subtotal........................................ 148,665 163,440 --------- --------- Deferred Income Taxes................................ (60,815) (64,877) Customer Gain on Gas Assets Sale..................... (31,559) -- PVNGS Prudence Audit................................. (7,313) (7,688) Settlement Due Customers............................. (4,101) (5,049) Gain on Reacquired Debt.............................. (669) (842) Revenue Subject to Refund............................ (382) -- --------- --------- Subtotal (104,839) (78,456) --------- --------- Net Regulatory Assets...........................$ 43,826 $ 84,984 ========= ========= If a portion of the Company's operations under the NMPUC jurisdiction becomes no longer subject to the provisions of SFAS No. 71, a write off of related regulatory assets and liabilities would be required, unless some form of transition cost recovery (refund) continues through rates established and collected for the Company's remaining regulated operations. F-15 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (4) Capitalization Changes in common stock, additional paid-in capital and cumulative preferred stock are as follows: Cumulative Preferred Stock ------------------------------------------------ With Mandatory Without Mandatory Redemption Redemption Requirements Common Stock Requirements Requirements ----------------------------------------- ----------------------- ----------------------- Additional Aggregate Aggregate Number of Aggregate Paid-In Number Stated Number Stated Shares Par Value Capital of Shares Value of Shares Value ------------ ------------ ----------- ---------- ----------- ----------- ---------- (Dollars in thousands) Balance at December 31, 1993..... 41,774,083 $ 208,870 $ 470,149 590,000 $ 59,000 243,861 $ 24,386 Redemption of preferred stock. -- -- (501) -- -- (64,111) (6,411) ---------- ------------ ----------- ------- ----------- -------- ---------- Balance at December 31, 1994..... 41,774,083 208,870 469,648 590,000 59,000 179,750 17,975 Redemption of preferred stock. -- -- 710 (462,000) (46,200) (179,750) (17,975) ---------- ------------ ----------- ------- ----------- -------- ---------- Balance at December 31, 1995..... 41,774,083 $ 208,870 $ 470,358 128,000 $ 12,800 -- -- ========== ============ =========== ======= =========== ======== ========== Common Stock The number of authorized shares of common stock with par value of $5 per share is 80 million shares. The Company has not declared dividends on its common stock since January 1989 and anticipates announcing a dividend plan sometime before the end of the second quarter of 1996. The Company's board of directors reviews the Company's dividend policy on a continuing basis. The resumption of common dividends is dependent upon a number of factors including earnings and financial condition of the Company and market conditions. The deficit in retained earnings was eliminated during 1995. Cumulative Preferred Stock The number of authorized shares of cumulative preferred stock is 10 million shares. The Company's restated articles of incorporation limit the amount of preferred stock which may be issued. The earnings test in the Company's restated articles of incorporation currently allows for the issuance of preferred stock. On August 7, 1995, the Company redeemed, at par, all of its 8.48% Series, 8.80% Series and 8.75% Series of cumulative preferred stock outstanding as of July 6, 1995. The redemption price of $64 million included accrued dividends through the redemption date. Long-Term Debt Substantially all utility plant is pledged to secure the Company's first mortgage bonds. A portion of certain series of long-term debt will be redeemed serially prior to their due dates. The issuance of first mortgage bonds by the Company is subject to earnings coverage and bondable property provisions of the Company's first mortgage indenture. The Company also has the capability under the mortgage indenture to issue first mortgage bonds on the basis of certain previously retired bonds and earnings. F-16 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (4) Capitalization (Continued) On March 8, 1995, $121 million of PVNGS Lease Obligation Bonds ("LOBs") were retired. The retired LOBs consisted of $58 million of 10.30% LOBs due 2014 retired at a price of 100% of par and $63 million of 10.15% LOBs due 2016 retired at a price of 97.8% of par. Additionally, $4.4 million and $4.8 million of LOBs due 1996 and 1997 at interest rates of 9.125% and 8.95%, respectively, were retired at par on March 22, 1995. In conjunction with these retirements, the Company wrote off $1.5 million of net costs related to these transactions. The retirement of the LOBs, which were the Company's highest cost debt, will save the Company approximately $11 million annually in interest expense over a five year period. The aggregate amounts (in thousands) of maturities for 1996 through 2000 on long-term debt outstanding at December 31, 1995 are as follows: 1996.......................................................... $ 146 1997.......................................................... $ 16,470 1998.......................................................... $ 4,275 1999.......................................................... $ 16,185 2000.......................................................... $ 5,460 Fair Value of Financial Instruments The estimated fair value of the Company's financial instruments (including current maturities) at December 31, is as follows: 1995 1994 ----------------- ------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- (In thousands) Long-Term Debt.................$728,989 $730,337 $900,595 $805,000 Redeemable Preferred Stock..... -- -- $ 17,975 $ 15,638 Estimates are based on market quotes provided by the Company's investment bankers. F-17 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (5) Revolving Credit Facility and Other Credit Facilities The carrying amounts reflected on the consolidated balance sheets approximate fair value for cash, temporary investments, and receivables and payables due to the short period of maturity. At December 31, 1995, the Company had a $100 million secured revolving credit facility (the "Facility") with an expiration date of June 30, 1998. The Company must pay commitment fees of 3/8% per year on the total amount of the Facility. The Company also has a $40 million credit facility, collateralized by the Company's electric customer accounts receivable (the "Accounts Receivable Facility") with an expiration date of December 20, 1998. On January 30, 1996, the Company requested NMPUC approval to increase the capacity of the Accounts Receivable Facility up to $100 million by including in the collateral pool the Company's gas accounts receivable and certain amounts being recovered from gas customers relating to certain gas contract settlements. This would increase the Company's liquidity arrangements up to $211 million from $151 million, including local lines of credit of $11 million. As of December 31, 1995, there were no borrowings outstanding under the Facility, the Accounts Receivable Facility or any of the local lines of credit. F-18 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (6) Income Taxes Income taxes consist of the following components: 1995 1994 1993 ---- ---- ---- (In thousands) Current Federal income tax...........................$45,940 $24,243 $ 12,502 Current State income tax............................. 5,864 -- -- Deferred Federal income tax.......................... (3,212) 15,449 (52,827) Deferred State income tax............................ 7,031 8,077 (8,433) Amortization of accumulated investment tax credits... (4,442) (4,701) (5,036) Recognition of accumulated deferred investment tax credits relating to sales of utility property .... (388) (2,197) (3,284) ------ ------ ------- Total income taxes................................$50,793 $40,871 $(57,078) ======= ======= ======== Charged to operating expenses........................$30,194 $44,210 $ 25,721 Charged (credited) to other income and deductions.... 20,599 (3,339) (82,799) ------ ------ ------- Total income taxes ...............................$50,793 $40,871 $(57,078) ======= ======= ======== The Company's provision for income taxes differed from the Federal income tax computed at the statutory rate for each of the years shown. The differences are attributable to the following factors: 1995 1994 1993 ---- ---- ---- (In thousands) Federal income tax at statutory rates................$44,224 $42,417 $(41,497) Investment tax credits............................... (4,442) (4,701) (5,036) Depreciation of flow-through items................... 723 1,112 1,719 Gains on the sale and leaseback of PVNGS Units 1 and 2..................................... (527) (527) (514) State income tax..................................... 7,146 5,222 (5,585) Gains on sale of utility property.................... 3,090 (2,139) (3,169) Federal income tax rate change to 35%................ -- -- (2,527) Other................................................ 579 (513) (469) ------- ------- --------- Total income taxes ...............................$50,793 $40,871 $(57,078) ======= ======= ======== F-19 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (6) Income Taxes (Continued) Deferred income taxes result from certain differences between the recognition of income and expense for tax and financial reporting purposes, as described in note 1. The major sources of these differences for which deferred taxes have been provided and the tax effects of each are as follows: 1995 1994 1993 ------------- ------------ -------------- (In thousands) Deferred fuel costs............................................. $ (3,990) $ (1,945) $ 4,549 Depreciation and cost recovery.................................. 12,730 22,118 17,668 Loss provision for the M-S-R power purchase contract............ 3,497 5,632 6,335 Contributions in aid of construction............................ (4,308) (5,055) (4,491) Alternative minimum tax in excess of regular tax................ (26,002) (24,100) (13,808) Net operating losses utilized .................................. 55,217 35,077 15,067 PVNGS decommissioning........................................... (2,321) (2,445) (3,962) Write-down of interests in PVNGS Units 1 and 2.................. -- -- (51,585) Hedge loss write-off............................................ -- -- (3,908) Loss on reacquired debt write-off............................... -- -- (5,561) Gains on sale of utility property............................... (29,868) (8,421) (11,321) Contribution to 401(h) plan..................................... (885) 1,204 (3,226) Reserve for litigation.......................................... -- -- (1,979) OLE Transmission Project........................................ (3,177) (792) (929) Other........................................................... 2,926 2,253 (4,109) ------------- ----------- ---------- Net deferred taxes provided.................................. $ 3,819 $ 23,526 $ (61,260) ============= =========== ========== The components of the net accumulated deferred income tax liability were: 1995 1994 ------------ ------------ (In thousands) Deferred Tax Assets: Net operating losses.............................. $ -- $ 51,199 Alternative minimum tax credit carryforward....... 66,628 40,626 Nuclear decommissioning........................... 14,023 11,703 Regulatory liabilities............................ 60,070 64,877 Other............................................. 45,403 41,446 ------------ ------------ Total deferred tax assets......................$ 186,124 $ 209,851 ------------ ------------ Deferred Tax Liabilities: Depreciation......................................$ 168,562 $ 175,068 Investment tax credit............................. 66,734 71,564 Fuel costs........................................ 24,804 28,794 Regulatory assets................................. 70,348 77,020 Other............................................. 1,239 6,176 ------------ ------------ Total deferred tax liabilities................. 331,687 358,622 ------------ ------------ Accumulated deferred income taxes, net...............$ 145,563 $ 148,771 ============ ============ F-20 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (6) Income Taxes (Continued) The Company has no net operating loss carryforwards as of December 31, 1995. The Company defers investment tax credits related to utility assets and amortizes them over the estimated useful lives of those assets. Investment tax credits related to non-utility assets have been flowed through in earlier years. (7) Employee and Post-Employment Benefits Pension Plan The Company and its subsidiaries have a pension plan covering substantially all of their employees, including officers. The plan is non-contributory and provides for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Company and the average of their highest annual base salary for three consecutive years. The Company's policy is to fund actuarially-determined contributions. Contributions to the plan reflect benefits attributed to employees' years of service to date and also for services expected to be provided in the future. Plan assets primarily consist of common stock, fixed income securities, cash equivalents and real estate. The components of pension cost (in thousands) are as follows: 1995 1994 1993 ----------- ----------- ----------- Service cost...........................$ 6,770 $ 8,121 $ 7,263 Interest cost.......................... 18,332 17,589 16,849 Actual loss (return) on plan assets.... (42,148) 1,079 (18,148) Net amortization and deferral.......... 23,295 (18,731) (878) ----------- ----------- ----------- Net periodic pension cost.............. 6,249 8,058 5,086 Curtailment loss....................... -- -- 1,657 ----------- ----------- ----------- Total pension expense..................$ 6,249 $ 8,058 $ 6,743 =========== =========== =========== F-21 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (7) Employee and Post-Employment Benefits (Continued) The following sets forth the plan's funded status and amounts (in thousands) at December 31: 1995 1994 ------------ ------------ Vested benefits.................................... $ 222,501 $ 183,364 Non-vested benefits................................ 10,556 8,071 ------------ ------------ Accumulated benefit obligation..................... 233,057 191,435 Effect of future compensation levels............... 46,889 36,581 ------------ ------------ Projected benefit obligation....................... 279,946 228,016 Fair value of plan assets.......................... 246,670 208,751 ------------ ------------ Projected benefit obligation in excess of assets... 33,276 19,265 Unrecognized prior service cost.................... (214) (248) Net unrecognized loss from past experience different from assumed and the effects of changes in assumptions.......................... (41,185) (27,183) Unamortized asset at transition, being amortized through the year 2002........................... 6,978 8,142 ------------ ------------ Accrued pension asset.............................. $ (1,145) $ (24) ============ =========== The weighted average discount rate used to measure the projected benefit obligation was 7.50% and 8.25% for 1995 and 1994, respectively, and the expected long-term rate of return on plan assets was 8.75% for 1995 and 1994. The rate of increase in future compensation levels based on age-related scales was 4.1% for 1995 and 1994. Other Postretirement Benefits The Company provides medical and dental benefits to eligible retirees. Currently, retirees are offered the same benefits as active employees after reflecting Medicare coordination. The components of postretirement benefit cost (in thousands) are as follows: 1995 1994 1993 ---------- -------- ---------- Service cost................................$ 1,869 $ 1,389 $ 1,175 Interest cost............................... 4,962 3,250 2,974 Actual loss (return) on plan assets......... (2,726) 100 (56) Transition obligation amortization.......... 1,817 1,817 1,857 Net amortization and deferral............... 2,498 (295) -- ---------- -------- ---------- Net periodic postretirement benefit cost.... 8,420 6,261 5,950 Curtailment loss............................ -- -- 4,295 ---------- -------- ---------- Total postretirement benefit expense........$ 8,420 $ 6,261 $ 10,245 ========== ======== ========== F-22 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (7) Employee and Post-Employment Benefits (Continued) The following sets forth the plan's funded status and amounts (in thousands) at December 31: 1995 1994 ------------ ------------- Accumulated benefit obligations for: Retirees....................................... $ 29,088 $ 32,085 Fully eligible employees....................... 7,144 1,848 Active employees............................... 39,854 27,387 ----------- ------------ Accumulated benefit obligation.................... 76,086 61,320 Fair value of plan assets......................... 15,600 8,559 ----------- ------------ Funded status..................................... (60,486) (52,761) Net unrecognized loss............................. 22,196 15,310 Unrecognized transition obligation (being amortized through the year 2012)............... 30,891 32,708 ----------- ------------ Accrued postretirement liability.................. $ (7,399) $ (4,743) =========== ============ Plan assets consist primarily of domestic common stock, fixed income securities and cash equivalents. The weighted average discount rate used to measure the projected benefit obligation was 7.5% and 8.25% for 1995 and 1994, respectively, and the expected long-term rate of return on plan assets was 8.75% for 1995 and 1994. The health care cost trend rate was 8.0%, 7.5% and 6.0% for 1995, 1994 and 1993, respectively. The effect of a 1% increase in the health care trend rate assumption would increase the accumulated postretirement benefit obligation as of December 31, 1995 by approximately $11.8 million and the aggregate service and interest cost components of net periodic postretirement benefit cost for 1995 by approximately $1.2 million. The health care cost trend rate was expected to decrease to 6.0% by 2010 and to remain at that level thereafter. The Company received NMPUC approval in 1994 for the recovery of the full accrual amount of Electric Business Unit's retirees' health care costs expense. The Company currently defers the benefit costs in excess of the pay-as-you-go basis for PNMGS ($4.4 million deferred as of December 31, 1995) and has addressed the recovery of this amount as well as the full accrual amount of retirees' health care costs related to PNMGS in its general rate case which was filed in August 1995. Performance Stock Plan In 1993, the Company adopted a nonqualified stock option plan covering a group of management employees. Options are granted at the fair market value of the shares on the date of grant. Options granted through December 31, 1995, vest on June 30, 1996, and have a purchase term of up to 10 years. F-23 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (7) Employee and Post-Employment Benefits (Continued) The Performance Stock Plan activity for 1993, 1994 and 1995 is summarized as follows: Shares Range of Subject Exercise Prices to Option Per Share ------------- ---------------------- Balance at December 31, 1993....... 370,000 $13.75 Options Granted............... 817,135 $11.50 - $13.00 Options Cancelled............. -- Balance at December 31, 1994....... 1,173,542 $11.50 - $13.75 Options Granted............... 507,238 $17.625 Options Cancelled............. -- Balance at December 31, 1995....... 1,664,500 $11.50 - $17.625 Options may be exercised following vesting as described in the plan. The aggregate maximum number of options granted under the current plan during its five-year time frame is two million shares, subject to certain adjustments. As proposed under an amended plan, all subsequent awards granted after December 31, 1995, shall vest three years from the grant date of the award and the maximum number of options would be increased to five million shares through December 31, 2000. This amended plan is subject to shareholder approval at the next annual meeting in April 1996. Executive Retirement Program The Company has an executive retirement program for a group of management employees. The program was intended to attract, motivate and retain key management employees. The Company's projected benefit obligation for this program, as of December 31, 1995, was $18.5 million, of which the accumulated and vested benefit obligation was $17.6 million. As of December 31, 1995, the Company has recognized an additional liability of $1.6 million for the amount of unfunded accumulated benefits in excess of accrued pension costs. The net periodic pension cost for 1995, 1994 and 1993 was $2.0 million, $2.2 million and $2.1 million, respectively. In 1989, the Company established an irrevocable grantor trust in connection with the executive retirement program. Under the terms of the trust, the Company may, but is not obligated to, provide funds to the trust, which was established with an independent trustee, to aid it in meeting its obligations under such program. Funds in the amount of approximately $10.5 million (fair market value of $13.0 million) are presently in trust. No additional funds have been provided to the trust since 1989. (8) Construction Program and Jointly-Owned Plants It is estimated that the Company's construction expenditures for 1996 will be approximately $123 million, including expenditures on jointly-owned projects. The Company's proportionate share of expenses for the jointly-owned plants is included in operating expenses in the consolidated statements of earnings. F-24 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (8) Construction Program and Jointly-Owned Plants (Continued) At December 31, 1995, the Company's interests and investments in jointly-owned generating facilities are: Construction Plant in Accumulated Work in Composite Station (Fuel Type) Service Depreciation Progress Interest - ------------------- ------- ------------ -------- -------- (In thousands) San Juan Generating Station (Coal).... $ 729,516 $ 308,656 $ 5,653 46.3% Palo Verde Nuclear Generating Station (Nuclear)*................. $ 189,504 $ 38,301 $ 15,743 10.2% Four Corners Power Plant Units 4 and 5 (Coal)....................... $ 115,729 $ 42,179 $ 4,316 13.0% - ----------- * Includes the Company's interest in PVNGS Unit 3, the Company's interest in common facilities for all PVNGS units and the 22% beneficial interests in the PVNGS Units 1 and 2 leases. San Juan Generating Station ("SJGS") The Company operates and jointly owns SJGS. At December 31, 1995, SJGS Units 1 and 2 are owned on a 50% shared basis with Tucson Electric Power Company, Unit 3 is owned 50% by the Company, 41.8% by Southern California Public Power Authority and 8.2% by Century Power Corporation ("Century"). Century sold its remaining 8.2% interest to Tri-State Generation and Transmission Association, Inc. Unit 4 is owned 38.457% by the Company, 8.475% by the City of Farmington, 28.8% by M-S-R Public Power Agency, a California public power agency ("M-S-R"), 7.2% by the County of Los Alamos, 10.04% by the City of Anaheim, California and 7.028% by Utah Associated Municipal Power Systems. Palo Verde Nuclear Generating Station The Company has a 10.2% interest in PVNGS. Commercial operation commenced in 1986 for Unit 1 and Unit 2 and 1988 for Unit 3. In 1985 and 1986, the Company completed sale and leaseback transactions for its undivided interests in Units 1 and 2 and certain related common facilities. In 1992, the Company purchased approximately 22% of the beneficial interests in PVNGS Units 1 and 2 leases for approximately $17.5 million, recording $158.3 million as utility plant and $140.8 million as long-term debt. In 1993, such utility plant was written down to $46.7 million in conjunction with the electric retail rate reduction. F-25 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (8) Construction Program and Jointly-Owned Plants (Continued) The PVNGS participants have insurance for public liability payments resulting from nuclear energy hazards to the full limit of liability under Federal law. This potential liability is covered by primary liability insurance provided by commercial insurance carriers in the amount of $200 million and the balance by an industry wide retrospective assessment program. The maximum assessment per reactor under the retrospective rating program for each nuclear incident occurring at any nuclear power plant in the United States is approximately $79.3 million, subject to an annual limit of $10 million per incident. Based upon the Company's 10.2% interest in the three PVNGS units, the Company's maximum potential assessment per incident is approximately $24.3 million, with an annual payment limitation of $3 million. The insureds under this liability insurance include the PVNGS participants and "any other person or organization with respect to his legal responsibility for damage caused by the nuclear energy hazard". The PVNGS participants maintain "all-risk" (including nuclear hazards) insurance for nuclear property damage to, and decontamination of, property at PVNGS in the aggregate amount of approximately $2.75 billion as of January 1, 1996, a substantial portion of which must first be applied to stabilization and decontamination. The Company has also secured insurance against a portion of the increased cost of generation or purchased power resulting from certain accidental outages of any of the three PVNGS units if such outage exceeds 21 weeks. The Company has a program for funding its share of decommissioning costs for PVNGS. Under this program, the Company makes a series of annual deposits to an external trust over the estimated useful life of each unit with the trust funds being invested under a plan which allows the accumulation of funds largely on a tax-deferred basis through the use of life insurance policies on certain current and former employees. The results of the 1995 decommissioning study indicate that the Company's share of the PVNGS decommissioning costs will be approximately $145.6 million, a decrease from $157.8 million based on the previous 1992 study (both amounts are stated in 1995 dollars). The Company has determined that a supplemental investment program will be needed as a result of both cost increases identified in the 1992 study and the lower than anticipated performance of the existing program. On September 29, 1995, the Company filed a request for permission from the NMPUC to establish a qualified tax advantaged trust for PVNGS Units 1 and 2. Due to Internal Revenue Service ("IRS") regulations, PVNGS Unit 3 will remain in a non-qualified trust. The Company, on February 7, 1996, filed a motion for interim relief for establishment of a qualified trust pending final NMPUC action. The interim request was necessary in order to meet the March 15 deadline under IRS requirements for the qualified trust to be effective for the current year. On February 19, 1996, the NMPUC granted this request. The market value of the existing trust at the end of 1995 was approximately $12.4 million, which includes the cash surrender value of the current insurance policies. F-26 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (9) Long-Term Power Contracts and Franchises The Company had two long-term contracts for the purchase of electric power. Under a contract with M-S-R, which expired in early 1995, the Company was obligated to pay certain minimum amounts and a variable component representing the expenses associated with the energy purchased and debt service costs associated with capital improvements. Total payments under this contract amounted to approximately $14 million for 1995 and $42 million in each year for 1994 and 1993. The Company has a long-term contract with Southwestern Public Service Company ("SPS") for up to 200 MW of interruptible power from May 1995 through May 2011. Total payments under this contract amounted to approximately $12.1 million in 1995. Minimum payments under the contract amount to approximately $14.0 million for 1996 and 1997. In addition, the Company will be required to pay for any energy purchased under the contract. The amount of minimum payments for future years will depend on whether the Company exercises its option to reduce its purchase obligations under the contract. The Company provided such notice in 1995 to reduce the purchase by 25 MW in 1999. (10) Lease Commitments The Company classifies its leases in accordance with generally accepted accounting principles. The Company leases Units 1 and 2 of PVNGS, transmission facilities, office buildings and other equipment under operating leases. The lease expense for PVNGS is $66.3 million per year over base lease terms expiring in 2015 and 2016. Prior to 1992, the aggregate lease expense for the PVNGS leases was $84.6 million per year over the base lease terms; however, this amount was reduced by the purchase of approximately 22% of the beneficial interests in the PVNGS Units 1 and 2 leases (see note 8). Each PVNGS lease contains renewal and fair market value purchase options at the end of the base lease term. Future minimum operating lease payments (in thousands) at December 31, 1995 are: 1996................................................ $ 77,926 1997................................................ 77,674 1998................................................ 77,563 1999................................................ 77,268 2000................................................ 77,217 Later years......................................... 1,102,754 ------------- Total minimum lease payments..................... $ 1,490,402 ============= Operating lease expense, inclusive of PVNGS leases, was approximately $80 million in 1995, $79.1 million in 1994 and $80.6 million in 1993. Aggregate minimum payments to be received in future periods under noncancelable subleases are approximately $7.2 million. F-27 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (11) Environmental Issues and Fossil-Fueled Plant Decommissioning Costs The Company is committed to complying with all applicable environmental regulations in a responsible manner. Environmental issues have presented and will continue to present a challenge to the Company. The Company has evaluated the potential impacts of the following environmental issues and believes, after consideration of established reserves, that the ultimate outcome of these environmental issues will not have a material adverse effect on the Company's financial condition or results of operations. Electric Operations Person Station The Company, in compliance with the New Mexico Environment Department ("NMED") Corrective Action Directive, determined that groundwater contamination exists in the deep and shallow water aquifers. The Company is required to delineate the extent of the contamination and remediate the contaminants in the groundwater. The extent of the contaminated plume in the deep water aquifer has been assessed and results have been reported to the NMED. The Company has also proposed revised remedial options to the NMED. The Company is awaiting a final response from the NMED. The Company's current estimate to decommission its retired fossil-fueled plants includes approximately $10.9 million to complete the groundwater remediation program at Person Station. As part of the financial assurance requirement of the Person Station Hazardous Waste Permit, the Company posted a $5.1 million performance bond with a trustee. The remediation program continues on schedule. Santa Fe Station The NMED has been conducting an investigation of the groundwater contamination detected beneath the Santa Fe Station site to determine the source of the contamination. The Company has been and is continuing to cooperate with the NMED site investigation pursuant to a settlement agreement between the Company and the NMED. In May 1995, the Company received a letter from the NMED indicating that the NMED had made a determination that Santa Fe Station was the source of gasoline-contaminated groundwater at the site and vicinity. The Company contested the NMED's determination and believes insufficient data exists to definitely identify the sources of groundwater contamination. A minimum site assessment ("MSA") of the two former underground storage tank sites at the Santa Fe Station site was conducted by the Company under the settlement agreement. The MSA report indicated that the Santa Fe Station site does not appear to have been a source of gasoline contamination. The MSA report has been submitted to the NMED and is currently pending NMED review. F-28 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (11) Environmental Issues and Fossil-Fueled Plant Decommissioning Costs (Continued) Albuquerque Electric Service Center Trenching work at the electric service center revealed oil contaminated soil in an area of the service center where used oil in drums were stored. The trenched area bisects a small portion of the storage area, indicating that potentially the entire area could be underlain with contaminated soil. The Company requested a laboratory analysis on the soil to determine the type of contamination. The Company may be required to assess soil and groundwater for contamination as well as remediate extensive volumes of soil in the area. The Company currently cannot predict the outcome of the analysis, to what extent the soil was contaminated or the costs of the remediation, if any. In addition, leaking fuel lines, which have been replaced, caused soil and groundwater contamination in the vicinity of the leak. The Company proposed a quarterly sampling plan to the NMED for the site. The NMED has expressed concerns regarding the placement of monitoring wells and the relatively high levels of residual contamination remaining in the soil at the site. Based on the recent analysis of the groundwater sampling, the contaminated soil does not appear to be a continual recharge source to the groundwater contamination. The NMED may require additional monitoring wells and soil remediation work at the site. Gas Operations Air Permits In 1994, following an environmental audit performed in conjunction with the Company's sale of certain gas assets, which audit brought to light certain discrepancies regarding required air permits associated with certain natural gas facilities, the Company met with the NMED to discuss the nature of the permit discrepancies and to propose methods and schedules to resolve the discrepancies. The Company submitted in 1994 its permit modification application for the Lybrook Gas Processing Plant ("Lybrook"). The Lybrook permit has now been issued to Williams Gas Processing-Blanco, Inc.("Williams"), the purchaser of the gas assets. The Company submitted an air permit modification application for the Kutz Canyon Gas Processing Plant ("Kutz") in the first quarter of 1995. In October 1995, the Company received a Notice of Violation ("NOV") from the NMED with specified corrective actions on the permit discrepancies in the Kutz air permit. In January 1996, the Company accepted a settlement offer for the NOV from the NMED in the amount of $15,000. The Company cannot predict when the final permit will be issued by the NMED or whether additional requirements will be imposed by the NMED as conditions for issuance of the permit. F-29 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (11) Environmental Issues and Fossil-Fueled Plant Decommissioning Costs (Continued) Gas Wellhead Pit Remediation The New Mexico Oil Conservation Commission ("NMOCC") issued an order, effective on January 14, 1993, that affects the gas gathering facilities, which were sold to Williams, located in the San Juan Basin in northwestern New Mexico. The order prohibits the further discharge of fluids associated with the production of natural gas into unlined earthen pits in certain specified areas of the San Juan Basin. The order also required the submission of closure plans for the closure of pits in which production fluids were previously discharged. The Bureau of Land Management ("BLM") has issued a similar ruling. The Company has complied with such rulings and submitted and received approval of the pit closure plans from the New Mexico Oil Conservation Division ("OCD"), the Energy Minerals and Natural Resources Department, as well as the BLM. The Company has received letters and directives from the OCD directing the Company to determine if certain unlined discharge pits have contributed to the groundwater contamination plumes that were identified at those sites. The Company is currently assessing the sites in accordance with the OCD directive. The Company continues to assess unlined pits in accordance with the OCD directive and is addressing potential groundwater contamination issues as they arise during the assessment process. On March 3, 1995, the Jicarilla Apache Tribe ("Jicarilla") enacted an ordinance directing that unlined surface impoundments located within environmentally sensitive areas be remediated and closed by December 1996, and that all other unlined surface impoundments on Jicarilla's lands be remediated and closed by December 1998. The Company has received a claim for indemnification by Williams for the environmental work required to comply with the Jicarilla ordinance. The Company has submitted a closure/remediation plan to the Jicarilla, which has been approved, and the Company anticipates initiating the remediation process in the spring of 1996. The costs of remediation will be charged against the $10.6 million indemnification cap contained in the purchase and sale agreement between the Company and Williams (see note 12). The Company does not anticipate that the claim for indemnification will have any material impact on the Company's financial condition or results of operations. Fossil-Fueled Plant Decommissioning Costs The Company's six owned or partially owned, in service and retired, fossil-fueled generating stations are expected to incur dismantling and reclamation costs as they are decommissioned. The Company's share of decommissioning costs for all of its fossil-fueled generating stations is projected to be approximately $141 million stated in 1995 dollars, including approximately $24.0 million (of which $12.1 million has already been expended) for Person, Prager and Santa Fe Stations which have been retired. The Company is currently recovering estimated decommissioning costs from NMPUC retail customers through its depreciation rates. Depreciation amounts for the retired generating units are not being recovered. F-30 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (12) Asset Sales Sale of Sangre de Cristo Water Company In February 1994, the Company and the City of Santa Fe (the "City") executed a purchase and sale agreement for the Company's water division, subject to NMPUC approval. On May 22, 1995, the NMPUC issued a final order approving the sale. On July 3, 1995, the closing of the sale was finalized. As a result, the Company received $51.2 million (exclusive of current assets netted against current liabilities) from the sale and recorded an after-tax gain of $6.4 million, or 15 cents per share. Pursuant to the purchase and sale agreement, the Company, through its Energy Services Unit, will continue to operate the water utility up to four years for a fee under a contract with the City. Sale of Gas Gathering and Processing Assets As part of the Company's announced action plan in 1993 to focus on its core utility business, the Company, in 1994, entered into an agreement with Williams for the sale of substantially all of the assets of Gathering Company and Processing Company and for the sale of Northwest and Southeast gas gathering and processing facilities of the Company. The sales transaction provides for three 10-year contracts, each with an option to renew for an additional 5-year term, with Williams for competitively priced gathering and processing services. The purchase and sale agreement contains contractual requirements for the Company to address various environmental deficiencies identified as retained liabilities. It also contains environmental representations and warranties and indemnification provisions whereby the Company indemnifies Williams for a five-year period after closing for breaches of the environmental representations and warranties and against third party claims to a maximum of $10.6 million. After the $10.6 million cap has been reached, or after the expiration of the five-year post-closing indemnification period, whichever comes first, Williams indemnifies the Company against further environmental expenditures related to the properties sold. On June 30, 1995, following NMPUC approval, the Company and Williams closed the sale of the assets. As a result, the Company and its gas subsidiaries received $154 million from Williams and recognized an after-tax gain of $12.8 million, or 31 cents per share. Under the NMPUC approval, the Company recorded a liability of approximately $35 million, representing an estimate of a portion of the gain resulting from the sale, which will be credited to the Company's gas customers' bills over five years. After completion of the fifth year, the amount of the gain will be recalculated to reflect actual expenses associated with the transaction which were appropriately and legitimately incurred. Such amount should include amounts expended to indemnify Williams as described above. Any resulting differences will be refunded or billed to customers over a one year period. As a result of the gas assets sales, the operations of the Company's two wholly-owned gas subsidiaries, Gathering Company and Processing Company, have been substantially discontinued, effective June 30, 1995. F-31 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (13) Segment Information The financial information pertaining to the Company's electric, gas and other operations for the years ended December 31, 1995, 1994 and 1993 are as follows: Electric* Gas Other Total --------------- ------------ ----------- -------------- (In thousands) 1995: Operating revenues.....................................$ 584,284 $ 217,985 $ 6,196 $ 808,465 Operating expenses excluding income taxes.............. 470,824 190,128 3,931 664,883 --------------- ------------ ----------- -------------- Pre-tax operating income............................... 113,460 27,857 2,265 143,582 Operating income tax................................... 24,884 4,313 997 30,194 --------------- ------------ ----------- -------------- Operating income.......................................$ 88,576 $ 23,544 $ 1,268 $ 113,388 =============== ============ =========== ============== Depreciation and amortization expense..................$ 63,047 $ 17,248 $ 570 $ 80,865 =============== ============ =========== ============== Construction expenditures..............................$ 76,610 $ 26,315 $ 4,741 $ 107,666 =============== ============ =========== ============== Identifiable assets: Net utility plant...................................$ 1,298,103 $ 276,218 $ 113 $ 1,574,434 Other............................................... 327,547 125,387 8,301 461,235 --------------- ------------ ----------- -------------- Total assets......................................$ 1,625,650 $ 401,605 $ 8,414 $ 2,035,669 =============== ============ =========== ============== 1994: Operating revenues.....................................$ 621,794 $ 269,510 $ 13,407 $ 904,711 Operating expenses excluding income taxes.............. 468,519 233,743 7,161 709,423 --------------- ------------ ----------- -------------- Pre-tax operating income............................... 153,275 35,767 6,246 195,288 Operating income tax................................... 32,998 9,158 2,054 44,210 --------------- ------------ ----------- -------------- Operating income.......................................$ 120,277 $ 26,609 $ 4,192 $ 151,078 =============== ============ =========== ============== Depreciation and amortization expense.....................$ 56,003 $ 16,847 $ 1,287 $ 74,137 =============== ============ =========== ============== Construction expenditures..............................$ 80,282 $ 31,518 $ 8,506 $ 120,306 =============== ============ =========== ============== Identifiable assets: Net utility plant...................................$ 1,302,467 $ 341,232 $ 52,988 $ 1,696,687 Other............................................... 307,010 187,748 11,820 506,578 --------------- ------------ ----------- -------------- Total assets......................................$ 1,609,477 $ 528,980 $ 64,808 $ 2,203,265 =============== ============ =========== ============== F-32 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1995, 1994 and 1993 (13) Segment Information (Continued) Electric* Gas Other Total --------------- ------------ ----------- -------------- (In thousands) 1993: Operating revenues.....................................$ 589,728 $ 271,087 $ 13,063 $ 873,878 Operating expenses excluding income taxes.............. 467,659 239,859 7,355 714,873 --------------- ------------ ----------- -------------- Pre-tax operating income............................... 122,069 31,228 5,708 159,005 Operating income tax................................... 19,184 5,347 1,190 25,721 --------------- ------------ ----------- -------------- Operating income.......................................$ 102,885 $ 25,881 $ 4,518 $ 133,284 =============== ============ =========== ============== Depreciation and amortization expense..................$ 59,298 $ 16,859 $ 1,169 $ 77,326 =============== ============ =========== ============== Construction expenditures..............................$ 67,886 $ 26,593 $ 2,847 $ 97,326 =============== ============ =========== ============== Identifiable assets: Net utility plant...................................$ 1,324,110 $ 333,862 $ 45,960 $ 1,703,932 Other............................................... 257,153 240,908 10,196 508,257 --------------- ------------ ----------- -------------- Total assets......................................$ 1,581,263 $ 574,770 $ 56,156 $ 2,212,189 =============== ============ =========== ============== - ----------- * Includes the resources excluded from NMPUC regulation. On June 30, 1995, the Company sold substantially all of the gas gathering and processing assets of the Company and its gas subsidiaries and on July 3, 1995, the Company sold its water division (see note 12). F-33 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES QUARTERLY OPERATING RESULTS The unaudited operating results by quarters for 1995 and 1994 are as follows: Quarter Ended ------------------------------------------------------------------ March 31 June 30 September 30 December 31 ------------- ------------- ---------------- --------------- (In thousands except per share amounts) ------------- ---------------- --------------- 1995: Operating Revenues............................... $ 230,235 $ 191,532 $ 195,586 $ 191,112 Operating Income................................. $ 33,731 $ 25,024 $ 34,734 $ 19,899 Net Earnings (1)................................. $ 18,184 $ 23,419 $ 28,969 $ 4,990 Net Earnings per Share (1)....................... $ 0.40 $ 0.52 $ 0.68 $ 0.12 1994: Operating Revenues............................... $ 260,807 $ 204,260 $ 218,717 $ 220,927 Operating Income................................. $ 42,671 $ 32,150 $ 43,606 $ 32,651 Net Earnings .................................... $ 24,103 $ 19,248 $ 21,789 $ 15,178 Net Earnings per Share .......................... $ 0.54 $ 0.42 $ 0.48 $ 0.33 In the opinion of management of the Company, all adjustments (consisting of normal recurring accruals) necessary for a fair statement of the results of operations for such periods have been included. - ------------------- (1) On June 30, 1995, the Company consummated the sale of substantially all of the gas gathering and processing assets of the Company and its gas subsidiaries to Williams. The Company recorded an after-tax gain of $12.8 million, or 31 cents per share. On July 3, 1995, the Company consummated the sale of the Company's water division to the City of Santa Fe. The Company recorded an after-tax gain of $6.4 million, or 15 cents per share. F-34 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES COMPARATIVE OPERATING STATISTICS 1995 1994 1993 1992 1991 ------------- ------------- ------------- -------------- -------------- Electric Service Energy Sales -- KWh (in thousands): Residential.................................. 1,795,371 1,786,292 1,683,213 1,650,491 1,606,993 Commercial................................... 2,578,243 2,534,507 2,398,725 2,353,152 2,299,213 Industrial................................... 1,434,974 1,268,208 1,145,369 1,087,357 1,025,420 Other ultimate customers..................... 220,777 364,144 219,481 267,246 208,328 --------- --------- --------- --------- --------- Total sales to ultimate customers......... 6,029,365 5,953,151 5,446,788 5,358,246 5,139,954 Sales for resale............................. 2,590,513 3,361,933 3,375,216 3,685,418 3,091,541 --------- --------- --------- --------- --------- Total KWh sales........................... 8,619,878 9,315,084 8,822,004 9,043,664 8,231,495 ========= ========= ========= ========= ========= Electric Revenues (in thousands): Residential.................................. $ 168,633 $ 172,559 $ 163,131 $ 158,190 $ 155,162 Commercial................................... 218,222 229,851 218,263 211,086 207,929 Industrial................................... 79,964 79,729 74,157 69,590 67,031 Other ultimate customers..................... 18,749 24,147 15,548 16,521 14,472 --------- --------- --------- --------- --------- Total revenues to ultimate customers............................... 485,568 506,286 471,099 455,387 444,594 Sales for resale............................. 80,949* 96,821* 99,895* 123,291 107,636 --------- --------- --------- --------- --------- Total revenues from energy sales.......... 566,517 603,107 570,994 578,678 552,230 Miscellaneous electric revenues.............. 17,767 18,687 18,734 17,645 16,256 --------- --------- --------- --------- --------- Total electric revenues................... $ 584,284 $ 621,794 $ 589,728 $ 596,323 $ 568,486 ============= ============= ============= ============== ============== Customers at Year End: Residential.................................. 296,821 287,369 278,357 271,155 264,425 Commercial................................... 35,390 34,336 33,568 32,504 31,666 Industrial................................... 374 384 381 386 385 Other ultimate customers..................... 598 599 576 537 499 --------- --------- --------- --------- --------- Total ultimate customers.................. 333,183 322,688 312,882 304,582 296,975 Sales for Resale............................. 37 42 37 47 33 --------- --------- --------- --------- --------- Total customers........................... 333,220 322,730 312,919 304,629 297,008 ======= ======= ======= ======= ======= Reliable Net Capability-- KW.................... 1,506,000 1,506,000 1,541,000 1,591,000 1,591,000 Coincidental Peak Demand-- KW................... 1,247,000 1,189,000 1,104,000 1,053,000 1,018,000 Average Fuel Cost per Million BTU............... $ 1.3177 $ 1.3488 $ 1.3844 $ 1.3263 $ 1.3696 BTU per KWh of Net Generation................... 10,811 10,817 11,036 11,039 11,086 Water Service** Water Sales-- Gallons (in thousands 1,616,544 3,366,388 3,414,950 3,224,271 2,996,587 Revenues (in thousands)...................... $ 6,196 $ 13,407 $ 13,063 $ 12,471 $ 11,613 Customers at Year End........................ 23,752 23,452 22,743 22,098 21,522 - --------- * Due to the provision for the loss associated with the M-S-R contingent power purchase contract recognized in 1992, operating revenues were reduced by $7.3 million, $25.0 and $20.5 million for 1995, 1994 and 1993, respectively. ** On July 3, 1995, the Company sold its water utility division (see note 12 of the notes to consolidated financial statements). Water Service's comparative operating statistics for 1995 are through this date. F-35 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES COMPARATIVE OPERATING STATISTICS 1995 1994 1993 1992 1991 ----------- ------------ ----------- ------------ ------------ PNMGS* Gas Throughput--Decatherms (in thousands) GCNM: Residential....................................... 25,865 27,139 28,031 27,063 26,237 Commercial........................................ 8,864 9,767 10,428 10,590 11,375 Industrial........................................ 661 831 923 707 766 Public authorities................................ 2,411 2,465 2,473 4,199 4,951 Irrigation........................................ 1,245 1,272 1,259 1,134 1,374 Sales for resale.................................. 2,442 680 1,041 2,035 1,357 Unbilled.......................................... (1,764) (309) (636) 649 -- ------- ------- ------- ------- ------- GCNM sales........................................ 39,724 41,845 43,519 46,377 46,060 Transportation throughput......................... 49,136 43,135 46,059 48,674 38,976 ------- ------- ------- ------- ------- GCNM throughput................................... 88,860 84,980 89,578 95,051 85,036 Gathering Company: Spot market sales................................. 39 -- -- 858 1,624 Transportation throughput......................... 20,695 47,091 45,754 24,889 23,631 ------- ------- ------- ------- ------- Total PNMGS throughput......................... 109,594 132,071 135,332 120,798 110,291 ======= ======= ======= ======= ======= Gas Revenues (in thousands) GCNM: Residential....................................... $ 125,290 $ 149,439 $ 149,796 $ 125,313 $ 137,436 Commercial........................................ 32,328 42,725 44,575 37,222 46,676 Industrial........................................ 1,873 2,905 3,369 2,063 2,754 ------- ------- ------- ------- ------- Public authorities................................ 7,939 9,969 9,694 12,313 17,711 Irrigation........................................ 3,077 4,061 4,418 2,713 4,495 Sales for resale.................................. 4,999 2,462 3,137 4,460 3,848 Imbalance penalties............................... 1,786 944 -- -- -- Unbilled.......................................... (2,430) 267 (1,573) 716 -- ------- ------- ------- ------- ------- Revenues from gas sales........................... 174,862 212,772 213,416 184,800 212,920 Transportation.................................... 18,532 19,742 19,376 14,861 13,386 Other............................................. 1,897 2,392 2,453 4,974 9,062 ------- ------- ------- ------- ------- GCNM gas revenues................................. 195,291 234,906 235,245 204,635 235,368 Gathering Company: Spot market sales................................. 42 -- 4 1,410 1,771 Transportation.................................... 3,640 7,850 7,353 3,892 3,611 Imbalance penalties............................... 418 26 -- -- -- Processing Company: Sales of liquids.................................. 13,414 16,090 18,724 26,427 30,500 Processing fees................................... 5,180 10,638 9,761 6,795 5,819 ------- ------- ------- ------- ------- Total PNMGS revenues........................... $ 217,985 $ 269,510 $ 271,087 $ 243,159 $ 277,069 =========== ============ =========== ============ ============ Customers at Year End GCNM: Residential....................................... 358,822 348,715 337,768 329,385 320,546 Commercial........................................ 30,493 30,139 30,151 29,765 29,608 Industrial........................................ 59 57 72 61 72 Public authorities................................ 2,444 2,463 1,958 2,004 2,153 Irrigation........................................ 886 899 951 1,012 1,043 Sales for resale.................................. 2 3 3 4 7 Transportation.................................... 38 43 37 43 41 ------- ------- ------- ------- ------- GCNM customers.................................... 392,744 382,319 370,940 362,274 353,470 Gathering Company: Off-system sales.................................. -- -- 1 2 13 Transportation.................................... -- 21 21 16 8 Processing Company................................... -- 32 25 22 21 Total customers................................ 392,744 382,372 370,987 362,314 353,512 ======= ======= ======= ======= ======= * On June 30, 1995, the Company sold substantially all of the gas gathering and processing assets of the Company and its gas subsidiaries (see note 12 of the notes to consolidated financial statements). PNMGS' comparative operating statistics for Gathering Company and Processing Company are through this date. F-36 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Reference is hereby made to "Election of Directors" in the Company's Proxy Statement relating to the annual meeting of stockholders to be held on April 30, 1996 (the "1996 Proxy Statement") and to PART I, SUPPLEMENTAL ITEM -- "EXECUTIVE OFFICERS OF THE COMPANY". ITEM 11. EXECUTIVE COMPENSATION Reference is hereby made to "Executive Compensation" in the 1996 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is hereby made to "Voting Information", "Election of Directors" and "Stock Ownership of Certain Executive Officers" in the 1996 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is hereby made to the 1996 Proxy Statement for such disclosure, if any, as may be required by this item. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) -- 1. See Index to Financial Statements under Item 8. (a) -- 2. Financial Statement Schedules for the years 1995, 1994, and 1993 are omitted for the reason that they are not required or the information is otherwise supplied. (a) -- 3-A. Exhibits Filed: Exhibit No. Description --- ----------- 10.1.1 Amendment and Supplement No. 1 to Supplemental and Additional Indenture of Lease dated April 25, 1985 between the Navajo Tribe of Indians and Arizona Public Service Company, El Paso Electric Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company, and Tucson Electric Power Company (refiled). 10.5.3 Modification No. 4 dated October 25, 1984 and Modification No. 5 dated July 1, 1985 to Co-Tenancy Agreement between the Company and Tucson Electric Power Company (refiled). 10.5.7 Modification No. 10 to San Juan Project Co-Tenancy Agreement between Public Service Company of New Mexico and Tucson Electric Power Company dated November 30, 1995. E-1 Exhibit No. Description --- ----------- 10.7.1 Modification No. 4 dated October 25, 1984 and Modification No. 5 dated July 1, 1985 to San Juan Project Operating Agreement between the Company and Tucson Electric Power Company (refiled). 10.7.5 Modification No. 10 dated November 30, 1995 to San Juan Project Operating Agreement between Public Service Company of New Mexico and Tucson Electric Power Company. 10.8.5 Amendment No. 10 dated as of November 21, 1985 and Amendment No. 11 dated as of June 13, 1986 and effective January 10, 1987 to Arizona Nuclear Power Project Participation Agreement (refiled). 10.9.5 Amendment No. Eight to Coal Sales Agreement, dated as of September 1, 1995, among San Juan Coal Company, the Company and Tucson Electric Power Company . 10.18* Facility Lease dated as of December 16, 1985 between The First National Bank of Boston, as Owner Trustee, and Public Service Company of New Mexico together with Amendments No. 1, 2 and 3 thereto. (refiled). 10.24** Management Life Insurance Plan (July 1985) of the Company (refiled). 10.67** Deferred Compensation Agreement for Jeffry E. Sterba 23.1 Consent of Arthur Andersen LLP. 27 Financial Data Schedule. 99.1 Collateral Trust Indenture dated as of December 16, 1985 among First PV Funding Corporation, Public Service Company of New Mexico and Chemical Bank, as Trustee together with Series 1986A Bond Supplemental, Series 1986B Bond Supplemental, Unit 1 Supplemental and Unit 2 Supplemental thereto (refiled). 99.2* Participation Agreement dated as of December 16, 1985, among the Owner Participant named therein, First PV Funding Corporation. The First National Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of December 16, 1985 with the Owner Participant), Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 16, 1985 with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions (refiled). 99.4* Assignment, Assumption and Further Agreement dated as of December 16, 1985, between Public Service Company of New Mexico and The First National Bank of Boston, as Owner Trustee (refiled). (a) -- 3-B. Exhibits Incorporated By Reference: - ----------- * One or more additional documents, substantially identical in all material respects to this exhibit, have been entered into, relating to one or more additional sale and leaseback transactions. Although such additional documents may differ in other respects (such as dollar amounts and percentages), there are no material details in which such additional documents differ from this exhibit. ** Designates each management contract or compensatory plan or arrangement required to be identified pursuant to paragraph 3 of Item 14(a) of Form 10-K. E-2 In addition to those Exhibits shown above, the Company hereby incorporates the following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation S-K section 10, paragraph (d) by reference to the filings set forth below: Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession Exhibit No. Description Filed As Exhibit: File No: 2.1 Purchase and Sale Agreement By and 4-(b) to Registration 2-99990 Among Public Service Company of New Statement No. 2-99990 of Mexico, Sunterra Gas Gathering the Company. Company, Sunterra Gas Processing (Sellers) and Williams Gas Processing- Blanco, Inc. (Buyer). 2.1.1 First Amendment to Purchase and Sale 2.1.1 to Annual Report of 1-6986 Agreement By and Among Public Service the Registrant on Form 10-K Company of New Mexico, Sunterra Gas for fiscal year ended Gathering Company, Sunterra Gas December 31, 1994. Processing Company (Sellers) and Williams Gas Processing-Blanco, Inc. (Buyer) 2.1.2 Second Amendment to Purchase and Sale 2.1.2 to Annual Report of 1-6986 Agreement By and Among Public Service the Registrant on Form 10-K Company of New Mexico, Sunterra Gas for fiscal year ended Gathering Company, Sunterra Gas December 31, 1994. Processing Company (Sellers) and Williams Gas Processing-Blanco, Inc. (Buyer) 2.2 2.2.1 First Amendment to Agreement to 2.2.1 to Annual Report of 1-6986 Purchase and Sell Between the City of the Registrant on Form 10-K Santa Fe, New Mexico and Public Service for fiscal year ended Company of New Mexico. December 31, 1994. 2.2.2 Second Amendment to Agreement to 2.2.2 to Annual Report of 1-6986 Purchase and Sell Between the City of the Registrant on Form 10-K Santa Fe, New Mexico and Public Service for fiscal year ended Company of New Mexico. December 31, 1994. 2.2.3 Third Amendment to Agreement to 2.2.3 to Annual Report of 1-6986 Purchase and Sell Between the City of the Registrant on Form 10-K Santa Fe, New Mexico and Public Service for fiscal year ended Company of New Mexico. December 31, 1994. 2.2.4 Fourth Amendment to Agreement to 2.2.4 to Annual Report of 1-6986 Purchase and Sell Between the City of the Registrant on Form 10-K Santa Fe, New Mexico and Public Service for fiscal year ended Company of New Mexico. December 31, 1994. E-3 Exhibit No. Description Filed As Exhibit: File No: 2.2.5 Fifth Amendment to Agreement to 2.2.5 to Annual Report of 1-6986 Purchase and Sell Between the City of the Registrant on Form 10-K Santa Fe, New Mexico and Public Service for fiscal year ended Company of New Mexico. December 31, 1994. 2.2.6 Sixth Amendment to Agreement to 2.2.6 to Annual Report of 1-6986 Purchase and Sell Between the City of the Registrant on Form 10-K Santa Fe, New Mexico and Public Service for fiscal year ended Company of New Mexico. December 31, 1994. 2.2.7 Seventh Amendment to Agreement to 2.2.7 to the Company's 1-6986 Purchase and Sell Between the City of Quarterly Report on Form Santa Fe, New Mexico and Public Service 10-Q for the quarter ended Company of New Mexico. June 30, 1995. Articles of Incorporation and By-laws 3.1 Restated Articles of Incorporation of the 4-(b) to Registration 2-99990 Company, as amended through May 10, Statement No. 2-99990 of 1985. the Company. Instruments Defining the Rights of Security Holders, Including Indentures 4.1 Indenture of Mortgage and Deed of Trust 4-(d) to Registration 2-99990 dated as of June 1, 1947, between the Statement No. 2-99990 of Company and The Bank of New York the Company. (formerly Irving Trust Company), as Trustee, together with the Ninth Supplemental Indenture dated as of January 1, 1967, the Twelfth Supplemental Indenture dated as of September 15, 1971, the Fourteenth Supplemental Indenture dated as of December 1, 1974 and the Twenty-second Supplemental Indenture dated as of October 1, 1979 thereto relating to First Mortgage Bonds of the Company. 4.2 Portions of sixteen supplemental 4-(e) to Registration 2-99990 indentures to the Indenture of Mortgage Statement No. 2-99990 of and Deed of Trust dated as of June 1, the Company. 1947, between the Company and The Bank of New York (formerly Irving Trust Company), as Trustee, relevant to the declaration or payment of dividends or the making of other distributions on or the purchase by the Company of shares of the Company's Common Stock. E-4 Exhibit No. Description Filed As Exhibit: File No: Material Contracts 10.1 Supplemental Indenture of Lease dated as 4-D to Registration 2-26116 of July 19, 1966 between the Company Statement No. 2-26116 of and other participants in the Four Corners the Company. Project and the Navajo Indian Tribal Council. 10.2 Fuel Agreement, as supplemented, dated 4-H to Registration 2-35042 as of September 1, 1966 between Utah Statement No. 2-35042 of Construction & Mining Co. and the the Company. participants in the Four Corners Project including the Company. 10.3 Fourth Supplement to Four Corners Fuel 10.3 to Annual Report of the 1-6986 Agreement No. 2 effective as of January 1, Registrant on Form 10-K for 1981, between Utah International Inc. fiscal year ended and the participants in the Four Corners December 31, 1991. Project, including the Company. 10.4 Contract between the United States and 5-L to Registration 2-41010 the Company dated April 11, 1968, for Statement No. 2-41010 of furnishing water. the Company. 10.4.1 Amendatory Contract between the United 5-R to Registration 2-60021 States and the Company dated Statement No. 2-60021 of September 29, 1977, for furnishing water. the Company. 10.5 Co-Tenancy Agreement between the 5-O to Registration 2-44425 Company and Tucson Gas & Electric Statement No. 2-44425 of Company dated February 15, 1972, the Company. pertaining to the San Juan generating plant. 10.5.5 Modification No. 8 to San Juan Project 10.5.5 to the Company's 1-6986 Co-Tenancy Agreement between Public Quarterly Report on Form Service Company of New Mexico and 10-Q for the quarter ended Tucson Electric Power Company dated March 31, 1994. September 15, 1993. 10.5.6 Modification No. 9 to San Juan Project 10.5.6 to the Company's 1-6986 Co-Tenancy Agreement between Public Quarterly Report on Service Company of New Mexico and Form 10-Q for the quarter Tucson Electric Power Company dated ended March 31, 1994. January 12, 1994. 10.7 San Juan Project Operating Agreement 5-S to Registration 2-50338 between the Company and Tucson Gas & Statement No. 2-50338 of Electric Company, executed December 21, the Company. 1973. 10.7.3 Modification No. 8 to San Juan Project 10.7.3 to the Company's 1-6986 Operating Agreement between Public Quarterly Report on Service Company of New Mexico and Form 10-Q for the quarter Tucson Electric Power Company dated ended March 31, 1994. September 15, 1993. E-5 Exhibit No. Description Filed As Exhibit: File No: 10.7.4 Modification No. 9 to San Juan Project 10.7.4 to the Company's 1-6986 Operating Agreement between Public Quarterly Report on Service Company of New Mexico and Form 10-Q for the quarter Tucson Electric Power Company dated ended March 31, 1994. January 12, 1994. 10.8 Arizona Nuclear Power Project 5-T to Registration 2-50338 Participation Agreement among the Statement No. 2-50338 of Company and Arizona Public Service the Company. Company, Salt River Project Agricultural Improvement and Power District, Tucson Gas & Electric Company and El Paso Electric Company, dated August 23, 1973. 10.8.1 Amendments No. 1 through No. 6 to 10.8.1 to Annual Report of 1-6986 Arizona Nuclear Power Project the Registrant on Form 10-K Participation Agreement. for fiscal year ended December 31, 1991. 10.8.2 Amendment No. 7 effective April 1, 1982, 10.8.2 to Annual Report of 1-6986 to the Arizona Nuclear Power Project the Registrant on Form 10-K Participation Agreement (refiled). for fiscal year ended December 31, 1991. 10.8.3 Amendment No. 8 effective September 12, 10.58 to Annual Report of 1-6986 1983, to the Arizona Nuclear Power the Registrant on Form 10-K Project Participation Agreement. (refiled) for fiscal year ended December 31, 1993. 10.8.4 Amendment No. 9 to Arizona Nuclear 10.8.4 to Annual Report of 1-6986 Power Project Participation Agreement the Registrant on Form 10-K dated as of June 12, 1984 (refiled). for fiscal year ended December 31, 1994. 10.8.7 Amendment No. 12 to Arizona Nuclear 19.1 to the Company's 1-6986 Power Project Participation Agreement Quarterly Report on dated June 14, 1988, and effective Form 10-Q for the quarter August 5, 1988. ended September 30, 1990. 10.8.8 Amendment No. 13 to the Arizona 10.8.10 to Annual Report of 1-6986 Nuclear Power Project Participation Registrant on Form 10-K for Agreement dated April 4, 1990, and the fiscal year ended effective June 15, 1991. December 31, 1990. 10.9 Coal Sales Agreement executed August 18, 10.9 to Annual Report of the 1-6986 1980 among San Juan Coal Company, the Registrant on Form 10-K for Company and Tucson Electric Power fiscal year ended Company, together with Amendments December 31, 1991. No. One, Two, Four, and Six thereto. E-6 Exhibit No. Description Filed As Exhibit: File No: 10.9.1 Amendment No. Three to Coal Sales 10.9.1 to Annual Report of 1-6986 Agreement dated April 30, 1984 among the Registrant on Form 10-K San Juan Coal Company, the Company for fiscal year ended and Tucson Electric Power Company. December 31, 1994 (confidentiality treatment was requested at the time of filing the Annual Report of the Registrant on Form 10-K for fiscal year ended December 31, 1984; exhibit was not filed therewith based on the same confidentiality request). 10.9.2 Amendment No. Five to Coal Sales 10.9.2 to Annual Report of 1-6986 Agreement dated May 29, 1990 among the Registrant on Form 10-K San Juan Coal Company, the Company for fiscal year ended and Tucson Electric Power Company. December 31, 1991 (confidentiality treatment was requested as to portions of this exhibit, and such portions were omitted from the exhibit filed and were filed separately with the Securities and Exchange Commission). 10.9.3 Amendment No. Seven to Coal Sales 19.3 to the Company's 1-6986 Agreement, dated as of July 27, 1992 Quarterly Report on among San Juan Coal Company, the Form 10-Q for the quarter Company and Tucson Electric Power ended September 30, 1992 Company. (confidentiality treatment was requested as to portions of this exhibit, and such portions were omitted from the exhibit filed and were filed separately with the Securities and Exchange Commission). 10.9.4 First Supplement to Coal Sales Agreement, 19.4 to the Company's 1-6986 dated July 27, 1992 among San Juan Coal Quarterly Report on Company, the Company and Tucson Form 10-Q for the quarter Electric Power Company. ended September 30, 1992 (confidentiality treatment was requested as to portions of this exhibit, and such portions were omitted from the exhibit as of filed and were filed separately with the Securities and Exchange Commission). E-7 Exhibit No. Description Filed As Exhibit: File No: 10.11 San Juan Unit 4 Early Purchase and 10.11 to the Company's 1-6986 Participation Agreement dated as of Quarterly Report on September 26, 1983 between the Form 10-Q for the quarter Company and M-S-R Public Power ended March 31, 1994. Agency, and Modification No. 2 to the San Juan Project Agreements dated December 31, 1983. (refiled) 10.11.1 Amendment No. 1 to the Early Purchase 10.11.1 to Annual Report of 1-6986 and Participation Agreement between the Registrant on Form 10-K Public Service Company of New Mexico for fiscal year ended and M-S-R Public Power Agency, executed December 31, 1987. as of December 16, 1987, for San Juan Unit 4. 10.12 Amended and Restated San Juan Unit 4 10.12 to Annual Report of 1-6986 Purchase and Participation Agreement the Registrant on Form 10-K dated as of December 28, 1984 between for the fiscal year ended Company and the Incorporated December 31, 1994. County of Los Alamos (refiled). 10.14 Participation Agreement among the 10.14 to Annual Report of 1-6986 Company, Tucson Electric Power the Registrant on Form 10-K Company and certain financial institutions for fiscal year ended relating to the San Juan Coal Trust dated December 31, 1992. as of December 31, 1981 (refiled). 10.16 Interconnection Agreement dated 10.16 to Annual Report of 1-6986 November 23, 1982, between the the Registrant on Form 10-K Company and Southwestern Public for fiscal year ended Service Company (refiled). December 31, 1992. 10.18.4* Amendment No. 4 dated as of March 8, 10.18.4 to the Company's 1-6986 1995, to Facility Lease between Public Quarter Report on Form 10- Service Company of New Mexico and the Q for the quarter ended First National Bank of Boston, dated as of March 31, 1995. December 16, 1985. 10.19 Facility Lease dated as of July 31, 1986, 28.1 to the Company's 1-6986 between The First National Bank of Quarterly Report on Boston, as Owner Trustee, and Public Form 10-Q for the quarter Service Company of New Mexico. ended June 30, 1986. 10.19.1 Amendment No. 1 dated as of 28.5 to the Company's 1-6986 November 18, 1986, to Facility Lease Current Report on Form 8-K dated as of July 31, 1986. dated November 25, 1986. 10.19.2 Amendment No. 2 dated as of 10.22.2 to Annual Report of 1-6986 December 11, 1986, to Facility Lease the Registrant on Form 10-K dated as of July 31, 1986. for fiscal year ended December 31, 1986. E-8 Exhibit No. Description Filed As Exhibit: File No: 10.19.3 Amendment No. 3 dated as of April 8, 10.22.3 to Annual Report of 1-6986 1987, to Facility Lease dated as of July 31, the Registrant on Form 10-K 1986. for fiscal year ended December 31, 1987. 10.20* Facility Lease dated as of August 12, 1986, 28.1 to the Company's 1-6986 between The First National Bank of Current Report on Form 8-K Boston, as Owner Trustee, and Public dated August 18, 1986. Service Company of New Mexico. 10.20.1* Amendment No. 1 dated as of 28.9 to the Company 1-6986 November 18, 1986, to Facility Lease Current Report on Form 8-K dated as of August 12, 1986. dated November 25, 1986. 10.20.2 Amendment No. 2 dated as of 10.23.2 to Annual Report of 1-6986 November 25, 1986, to Facility Lease the Registrant on Form 10-K dated as of August 12, 1986. for fiscal year ended December 31, 1986. 10.20.3 Amendment No. 3 dated as of March 8, 10.20.3 to the Company's 1-6986 1995, to Facility Lease between Public Quarterly Report on Form Service Company of New Mexico and the 10-Q for the quarter ended First National Bank of Boston, dated as of March 31, 1995. August 12, 1996. 10.21 Facility Lease dated as of December 15, 28.1 to the Company's 1-6986 1986, between The First National Bank of Current Report on Form 8-K Boston, as Owner Trustee, and Public dated December 17, 1986. Service Company of New Mexico (Unit 1 Transaction). 10.21.1 Amendment No. 1 dated as of April 8, 10.24.1 to Annual Report of 1-6986 1987, to Facility Lease dated as of the Registrant on Form 10-K December 15, 1986. for fiscal year ended December 31, 1987. 10.22 Facility Lease dated as of December 15, 28.9 to the Company's 1-6986 1986, between The First National Bank of Current Report on Form 8-K Boston, as Owner Trustee, and Public dated December 17, 1986. Service Company of New Mexico (Unit 2 Transaction). 10.22.1 Amendment No. 1 dated as of April 8, 10.25.1 to Annual Report of 1-6986 1987, to Facility Lease dated as of the Registrant on Form 10-K December 15, 1986. for fiscal year ended December 31, 1987. 10.23** Restated and Amended Public Service 19.5 to the Company's 1-6986 Company of New Mexico Accelerated Quarterly Report on Management Performance Plan (1988). Form 10-Q for the quarter (August 16, 1988.) ended September 30, 1988. E-9 Exhibit No. Description Filed As Exhibit: File No: 10.23.1** First Amendment to Restated and 19.6 to the Company's 1-6986 Amended Public Service Company of New Quarterly Report on Mexico Accelerated Management Form 10-Q for the quarter Performance Plan (1988). (August 30, ended September 30, 1988. 1988.) 10.23.2** Second Amendment to Restated and 10.26.2 to Annual Report of 1-6986 Amended Public Service Company of New the Registrant on Form 10-K Mexico Accelerated Management for fiscal year ended Performance Plan (1988). (December 29, December 31, 1989. 1989). 10.25** Amended and Restated Medical 19.6 to the Company's 1-6986 Reimbursement Plan of Public Service Quarterly Report on Company of New Mexico. Form 10-Q for the quarter ended March 31, 1987. 10.25.1** Second Restated and Amended Public 10.25.1 to Annual Report of 1-6986 Service Company of New Mexico the Registrant on Form 10-K Executive Medical Plan. for the fiscal year ended December 31, 1992. 10.27 Amendment No. 2 dated as of April 10, 10.53 to Annual Report of 1-6986 1987, to the Facility Lease dated as of the Registrant on Form 10-K August 12, 1986, between The First for fiscal year ended National Bank of Boston, as Owner December 31, 1987. Trustee, and Public Service Company of New Mexico. (Unit 2 Transaction.) (This is an amendment to a Facility Lease which is substantially similar to the Facility Lease filed as Exhibit 28.1 to the Company's Current Report on Form 8-K dated August 18, 1986.) 10.29 Decommissioning Trust Agreement 10.55 to Annual Report of 1-6986 between Public Service Company of New the Registrant on Form 10-K Mexico and First Interstate Bank of for fiscal year ended Albuquerque dated as of July 31, 1987. December 31, 1987. 10.30 New Mexico Public Service Commission 10.56 to Annual Report of 1-6986 Order dated July 30, 1987, and Exhibit 1 the Registrant on Form 10-K thereto, in NMPUC Case No. 2004, for fiscal year ended regarding the PVNGS decommissioning December 31, 1987. trust fund. 10.31** Executive Retention Agreements. 10.42 to Annual Report of 1-6986 the Registrant on Form 10-K for fiscal year ended December 31, 1990. 10.32** Supplemental Employee Retirement 19.4 to the Company's 1-6986 Agreements dated August 4, 1989. Quarterly Report on Form 10-Q for the quarter ended September 30, 1989. E-10 Exhibit No. Description Filed As Exhibit: File No: 10.33** Supplemental Employee Retirement 10.47 to Annual Report of 1-6986 Agreement dated March 6, 1990. the Registrant on Form 10-K for fiscal year ended December 31, 1989. 10.34 Settlement Agreement between Public 10.48 to Annual Report of 1-6986 Service Company of New Mexico and the Registrant on Form 10-K Creditors of Meadows Resources, Inc. for fiscal year ended dated November 2, 1989. December 31, 1989. 10.34.1 First amendment dated April 24, 1992 to 19.1 to the Company's 1-6986 the Settlement Agreement dated Quarterly Report on November 2, 1989 among Public Service Form 10-Q for the quarter Company of New Mexico, the lender ended September 30, 1992. parties thereto and collateral agent. 10.35 Amendment dated April 11, 1991 among 19.1 to the Company's 1-6986 Public Service Company of New Mexico, Quarterly Report on certain banks and Chemical Bank and Form 10-Q for the quarter Citibank, N.A., as agents for the banks. ended September 30, 1991. 10.36 San Juan Unit 4 Purchase and 19.2 to the Company's 1-6986 Participation Agreement Public Service Quarterly Report on Company of New Mexico and the City of Form 10-Q for the quarter Anaheim, California dated April 26, 1991. ended March 31, 1991. 10.36.1 Second stipulation in the matter of 10.38 to Annual Report of 1-6986 application of Public Service Company of the Registrant on Form 10-K New Mexico for NMPSC approval to sell a for fiscal year ended 10.04% undivided interest in San Juan December 31, 1992. Generating Station Unit 4 to the City of Anaheim, California, and for related orders and approvals. 10.37** Executive Retention Plan. 10.37 to Annual Report of 1-6986 the Registrant on Form 10-K for fiscal year ended December 31, 1991. 10.38 Restated and Amended San Juan Unit 4 10.2.1 to the Company's 1-6986 Purchase and Participation Agreement Quarterly Report on between Public Service Company of New Form 10-Q for the quarter Mexico and Utah Associated Municipal ended September 30, 1993. Power Systems. 10.39 Purchase agreement dated February 7, 10.39 to Annual Report of 1-6986 1992 between Burnham Leasing the Registrant on Form 10-K Corporation and Public Service Company for fiscal year ended of New Mexico. December 31, 1991. 10.40** Director Restricted Stock Retainer Plan. 10.40 to Annual Report of 1-6986 the Registrant on Form 10-K for fiscal year ended December 31, 1991. E-11 Exhibit No. Description Filed As Exhibit: File No: 10.40.1** First Amendment to the Public Service 19.3 to the Company's 1-6986 Company of New Mexico Director Quarterly Report on Restricted Stock Retainer Plan. Form 10-Q for the quarter ended March 31, 1993. 10.40.2** Second Amendment to the Public Service 10.40.2 to the Company's 1-6986 Company of New Mexico Director Quarterly Report on Restricted Stock Retainer Plan dated Form 10-Q for the quarter April 27, 1994. ended March 31, 1994. 10.41 Waste Disposal Agreement, dated as of 19.5 to the Company's 1-6986 July 27, 1992 among San Juan Coal Quarterly Report on Company, the Company and Tucson Form 10-Q for the quarter Electric Power Company. ended September 30, 1992 (confidentiality treatment was requested as to portions of this exhibit, and such portions were omitted from the exhibit and were filed separately with the Securities and Exchange Commission). 10.42 Stipulation in the matter of the 10.42 to Annual Report of 1-6986 application of Gas Company of New the Registrant on Form 10-K Mexico for an order authorizing recovery for fiscal year ended of MDL costs through Rate Rider December 31, 1992. Number 8. 10.43** Description of certain Plans which include 10.43 to Annual Report of 1-6986 executive officers as participants. the Registrant on Form 10-K for fiscal year ended December 31, 1992. 10.44** Public Service Company of New 10.44 to Annual Report of 1-6986 Mexico-Non-Union Voluntary Separation the Registrant on Form 10-K Program. for fiscal year ended December 31, 1992. 10.44.1** First Amendment dated April 6, 1993 to 19.2 to the Company's 1-6986 the First Restated and Amended Public Quarterly Report on Service Company of New Mexico Form 10-Q for the quarter Non-Union Severance Pay Plan dated ended March 31, 1993. August 1, 1992. 10.45** Public Service Company of New Mexico 99.1 to Registration 33-65418 Performance Stock Plan. Statement No. 33-65418 of the Company. 10.46** Public Service Company of New Mexico 10.1 to the Company's 1-6986 Asset Sales Incentive Plan. Quarterly Report on Form 10-Q for the quarter ended June 30, 1993. E-12 Exhibit No. Description Filed As Exhibit: File No: 10.46.1** Amendment No. 1 to the Public Service 10.46.1 to the Company's 1-6986 Company of New Mexico Asset Sales Quarterly Report on Incentive Plan dated August 1, 1994. Form 10-Q for the quarter ended June 30, 1994. 10.47** Compensation Arrangement with Chief 10.3 to the Company's 1-6986 Executive Officer. Quarterly Report on Form 10-Q for the quarter ended June 30, 1993. 10.47.1** Pension Service Adjustment Agreement for 10.3.1 to the Company's 1-6986 Benjamin F. Montoya. Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.47.2** Severance Agreement for Benjamin F. 10.3.2 to the Company's 1-6986 Montoya. Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.47.3** Executive Retention Agreement for 10.3.3 to the Company's 1-6986 Benjamin F. Montoya. Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.48** Public Service Company of New Mexico 10.4 to the Company's 1-6986 OBRA '93 Retirement Plan. Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.49** Employment Contract By and Between 10.49 to Annual Report of 1-6986 the Public Service Company of New the Registrant on Form 10-K Mexico and Roger J. Flynn. for fiscal year ended December 31, 1994. 10.50** Public Service Company of New Mexico 10.50 to Annual Report of 1-6986 Section 415 Plan. the Registrant on Form 10-K for fiscal year ended December 31, 1993. 10.51** First Amendment to the Public Service 10.51 to Annual Report of 1-6986 Company of New Mexico Executive the Registrant on Form 10-K Retention Plan. for fiscal year ended December 31, 1993. 10.51.1** Second Amendment to the Public Service 10.51.1 to the Company's 1-6986 Company of New Mexico Executive Quarterly Report on Retention Plan. Form 10-Q for the quarter ended June 30, 1994. 10.52** First Amendment to the Public Service 10.52 to Annual Report of 1-6986 Company of New Mexico Performance the Registrant on Form 10-K Stock Plan. for fiscal year ended December 31, 1993. E-13 Exhibit No. Description Filed As Exhibit: File No: 10.53 January 12, 1994 Stipulation. 10.53 to Annual Report of 1-6986 the Registrant on Form 10-K for fiscal year ended December 31, 1993. 10.54** Employment, Retirement and Release 10.54 to Annual Report of 1-6986 Agreement By and Between the Public the Registrant on Form 10-K Service Company of New Mexico and for fiscal year ended William M. Eglinton. December 31, 1993. 10.54.1** Health Care and Retirement Benefit 10.54.1 to the Company's 1-6986 Agreement By and Between the Public Quarterly Report on Service Company of New Mexico and Form 10-Q for the quarter John T. Ackerman dated February 1, ended March 31, 1994. 1994. 10.57 U.S. $100,000,000 Revolving Credit 10.57 to Annual Report of 1-6986 Agreement Dated as of December 14, the Registrant on Form 10-K 1993 Among Public Service Company of for fiscal year ended New Mexico and certain Banks Herein December 31, 1993. (Banks) and Chemical Bank and Citibank, N.A. (Co-Agents) 10.57.1 Amendment No. 1, dated June 7, 1995 to 10.57.1 to the Company's 1-6986 the U.S. $100,000,000 Revolving Credit Quarterly Report on Form Agreement Dated as of December 14, 10-Q for the quarter ended 1993 Among Public Service Company of June 30, 1995. New Mexico and certain Banks Herein (Banks) and Chemical Bank and Citibank, N.A. (Co-Agents) 10.59* Amended and Restated Lease dated as of 10.59 to Annual Report of 1-6986 September 1, 1993, between The First the Registrant on Form 10-K National Bank of Boston, Lessor, and the for fiscal year ended Company, Lessee. (EIP Lease) December 31, 1993. 10.60 Reimbursement Agreement, dated as of 4.5 to Registration Statement 33-65418 November 1, 1992 between Public Service No. 33-65418 of the Company of New Mexico and Canadian Company. Imperial Bank of Commerce, New York Agency. 10.60.1 Amendment No. 1 dated as of July 1, 10.60.1 to the Company's 1-6986 1994, to the Reimbursement Agreement Quarterly Report on dated as of November 1, 1992 between Form 10-Q for the quarter Public Service Company of New Mexico ended June 30, 1994. and Canadian Imperial Bank of Commerce, New York Agency. 10.60.2 Amendment No. 2 dated as of October 1, 10.60.2 to the Company's 1-6986 1995, to the Reimbursement Agreement Quarterly Report on Form dated as of November 1, 1992 between 10-Q for the quarter ended Public Service Company of New Mexico September 30, 1995. and Canadian Imperial Bank of Commerce, New York Agency. E-14 Exhibit No. Description Filed As Exhibit: File No: 10.61 Participation Agreement dated as of 10.61 to Annual Report of 1-6986 June 30, 1983 among Security Trust the Registrant on Form 10-K Company, as Trustee, the Company, for fiscal year ended Tucson Electric Power Company and December 31, 1993. certain financial institutions relating to the San Juan Coal Trust. (refiled) 10.62 Agreement of the Company pursuant to 10.62 to Annual Report of 1-6986 Item 601(b)(4)(iii) of Regulation SK. the Registrant on Form 10-K (refiled) for fiscal year ended December 31, 1993. 10.63 A Stipulation regarding sale of certain 10.63 to Current Report on 1-6986 natural gas gathering and processing Form 8-K dated January 26, assets. 1995. 10.64* Results Pay 10.64 to the Company's 1-6986 Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. 10.65 Agreement for Contract Operation and 10.64 to the Company's 1-6986 Maintenance of the City of Santa Fe Quarterly Report on Form Water Supply Utility System, dated July 3, 10-Q for the quarter ended 1995. June 30, 1995. 10.66 Stipulation regarding negotiated 10.50 to Annual Report of 1-6986 agreement with intervenors to settle all the Registrant on Form 10-K outstanding issues regarding recovery of for fiscal year ended payments GCNM made to settle gas December 31, 1994. take-or-pay contracts and pricing disputes. Additional Exhibits 22 Certain subsidiaries of the registrant. 22 to Annual Report of the 1-6986 Registrant on Form 10-K for fiscal year ended December 31, 1992. 99.1.5 1994 Supplemental Indenture dated as of 99.1.5 to the Company's 1-6986 June 8, 1994 among First PV Funding Quarterly Report on Corporation, Public Service Company of Form 10-Q for the quarter New Mexico, and Chemical Bank, as ended June 30, 1994. Trustee. 99.1.6 1995 Supplemental Indenture among First 99.1.6 to the Company's 1-6986 PV Funding Corporation, Public Service Quarterly Report on Form Company of New Mexico and Chemical 10-Q for the quarter ended Bank, as Trustee dated as of February 14, March 31, 1995. 1995. 99.2.1* Amendment No. 1 dated as of July 15, 2.1 to the Company's 1-6986 1986, to Participation Agreement dated as Current Report on Form 8-K of December 16, 1985. dated July 17, 1986. E-15 Exhibit No. Description Filed As Exhibit: File No: 99.2.2* Amendment No. 2 dated as of 2.1 to the Company's 1-6986 November 18, 1986, to Participation Current Report on Form 8-K Agreement dated as of December 16, dated November 25, 1986. 1985. 99.3* Trustee Indenture, Mortgage, Security 28(b) to the Company's 1-6986 Agreement and Assignment to Rents dated Current Report on Form 8-K as of December 16, 1985, between The dated December 31, 1985. First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee. 99.3.1* Supplemental Indenture No. 1 dated as of 28.2 to the Company's 1-6986 July 15, 1986, to the Trust Indenture, Current Report on Form 8-K Mortgage, Security Agreement and dated July 17, 1986. Assignment of Rents dated as of December 16, 1985. 99.3.2* Supplemental Indenture No. 2 dated as of 28.2 to the Company's 1-6986 November 18, 1986, to the Trust Current Report on Form 8-K Indenture, Mortgage, Security Agreement dated November 25, 1986. and Assignment of Rents dated as of December 16, 1985. 99.3.3 Supplemental Indenture No. 3 dated as of 99.3.3 to the Company's 1-6986 March 8, 1995, to Trust Indenture Quarterly Report on Form Mortgage, Security Agreement and 10-Q for the quarter ended Assignment of Rents between The First March 31, 1995. National Bank of Boston and Chemical Bank dated as of December 16, 1985. 99.5 Participation Agreement dated as of 2.1 to the Company's 1-6986 July 31, 1986, among the Owner Quarterly Report on Participant named therein, First Form 10-Q for the quarter PV Funding Corporation. The First ended June 30, 1986. National Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of July 31, 1986, with the Owner Participant), Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of July 31, 1986, with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions. 99.5.1 Amendment No. 1 dated as of 28.4 to the Company's 1-6986 November 18, 1986, to Participation Current Report on Form 8-K Agreement dated as of July 31, 1986. dated November 25, 1986. E-16 Exhibit No. Description Filed As Exhibit: File No: 99.6 Trust Indenture, Mortgage, Security 28.2 to the Company's 1-6986 Agreement and Assignment of Rents dated Quarterly Report on as of July 31, 1986, between The First Form 10-Q for the quarter National Bank of Boston, as Owner ended June 30, 1986. Trustee, and Chemical Bank, as Indenture Trustee. 99.6.1 Supplemental Indenture No. 1 dated as of 28.6 to the Company's 1-6986 November 18, 1986, to the Trust Current Report on Form 8-K Indenture, Mortgage, Security Agreement dated November 25, 1986. and Assignments of Rents dated as of July 31, 1986. 99.7 Assignment, Assumption, and Further 28.3 to the Company's 1-6986 Agreement dated as of July 31, 1986, Quarterly Report on between Public Service Company of New Form 10-Q for the quarter Mexico and The First National Bank of ended June 30, 1986. Boston, as Owner Trustee. 99.8* Participation Agreement dated as of 2.1 to the Company's 1-6986 August 12, 1986, among the Owner Current Report on Form 8-K Participant named therein, First dated August 18, 1986. PV Funding Corporation. The First National Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of August 12, 1986, with the Owner Participant), Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of August 12, 1986, with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions. 99.8.1* Amendment No. 1 dated as of 28.8 to the Company's 1-6986 November 18, 1986, to Participation Current Report on Form 8-K Agreement dated as of August 12, 1986. dated November 25, 1986. 99.9* Trust Indenture, Mortgage, Security 28.2 to the Company's 1-6986 Agreement and Assignment of Rents dated Current Report on Form 8-K as of August 12, 1986, between The First dated August 18, 1986. National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee. 99.9.1* Supplemental Indenture No. 1 dated as of 28.10 to the Company's 1-6986 November 18, 1986, to the Trust Current Report on Form 8-K Indenture, Mortgage, Security Agreement dated November 25, 1986. and Assignment of Rents dated as of August 12, 1986. E-17 Exhibit No. Description Filed As Exhibit: File No: 99.9.2 Supplemental Indenture No. 2 dated as of 99.9.1 to the Company's 1-6986 March 8, 1995, to Trust Indenture, Quarterly Report on Form Mortgage, Security Agreement and 10-Q for the quarter ended Assignment of Rents between The First March 31, 1995. National Bank of Boston and Chemical Bank dated as of August 12, 1986. 99.10* Assignment, Assumption, and Further 28.3 to the Company's 1-6986 Agreement dated as of August 12, 1986, Current Report on Form 8-K between Public Service Company of New dated August 18, 1986. Mexico and The First National Bank of Boston, as Owner Trustee. 99.11 Participation Agreement dated as of 2.1 to the Company's 1-6986 December 15, 1986, among the Owner Current Report on Form 8-K Participant named therein, First dated December 17, 1986. PV Funding Corporation, The First National Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of December 15, 1986, with the Owner Participant), Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 15, 1986, with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions (Unit 1 Transaction). 99.12 Trust Indenture, Mortgage, Security 28.2 to the Company's 1-6986 Agreement and Assignment of Rents dated Current Report on Form 8-K as of December 15, 1986, between The dated December 17, 1986. First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee (Unit 1 Transaction). 99.13 Assignment, Assumption and Further 28.3 to the Company's 1-6986 Agreement dated as of December 15, Current Report on Form 8-K 1986, between Public Service Company of dated December 17, 1986. New Mexico and The First National Bank of Boston, as Owner Trustee (Unit 1 Transaction). E-18 Exhibit No. Description Filed As Exhibit: File No: 99.14 Participation Agreement dated as of 2.2 to the Company's 1-6986 December 15, 1986, among the Owner Current Report on Form 8-K Participant named therein, First dated December 17, 1986. PV Funding Corporation, The First National Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of December 15, 1986, with the Owner Participant), Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 15, 1986, with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions (Unit 2 Transaction). 99.15 Trust Indenture, Mortgage, Security 28.10 to the Company's 1-6986 Agreement and Assignment of Rents dated Current Report on Form 8-K as of December 15, 1986, between the dated December 17, 1986. First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee (Unit 2 Transaction). 99.16 Assignment, Assumption, and Further 28.11 to the Company's 1-6986 Agreement dated as of December 15, Current Report on Form 8-K 1986, between Public Service Company of dated December 17, 1986. New Mexico and The First National Bank of Boston, as Owner Trustee (Unit 2 Transaction). 99.17* Waiver letter with respect to "Deemed 28.12 to the Company's 1-6986 Loss Event" dated as of August 18, 1986, Current Report on Form 8-K between the Owner Participant named dated August 18, 1986. therein, and Public Service Company of New Mexico. 99.18* Waiver letter with respect to "Deemed 28.13 to the Company's 1-6986 Loss Event" dated as of August 18, 1986, Current Report on Form 8-K between the Owner Participant named dated August 18, 1986. therein, and Public Service Company of New Mexico. 99.19 Agreement No. 13904 (Option and 28.19 to Annual Report of 1-6986 Purchase of Effluent), dated April 23, the Registrant on Form 10-K 1973, among Arizona Public Service for fiscal year ended Company, Salt River Project Agricultural December 31, 1986. Improvement and Power District, the Cities of Phoenix, Glendale, Mesa, Scottsdale, and Tempe, and the Town of Youngtown. E-19 Exhibit No. Description Filed As Exhibit: File No: 99.20 Agreement for the Sale and Purchase of 28.20 to Annual Report of 1-6986 Wastewater Effluent, dated June 12, 1981, the Registrant on Form 10-K among Arizona Public Service Company, for fiscal year ended Salt River Project Agricultural December 31, 1986. Improvement and Power District and the City of Tolleson, as amended. - ----------- * One or more additional documents, substantially identical in all material respects to this exhibit, have been entered into, relating to one or more additional sale and leaseback transactions. Although such additional documents may differ in other respects (such as dollar amounts and percentages), there are no material details in which such additional documents differ from this exhibit. ** Designates each management contract or compensatory plan or arrangement required to be identified pursuant to paragraph 3 of Item 14(a) of Form 10-K. (b) Reports on Form 8-K: During the quarter ended December 31, 1995 and during the period beginning January 1, 1996 and ending February 22, 1996, the Company filed, on the dates indicated, the following reports on Form 8-K. Dated: Filed: Relating to: ------ ------ ------------ December 8, 1995 December 8, 1995 Palo Verde Nuclear Generating Station December 21, 1995 December 21, 1995 Ojo Line Extension Transmission Project E-20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PUBLIC SERVICE COMPANY OF NEW MEXICO (Registrant) Date: February 22, 1996 By /s/ B. F. MONTOYA ------------------------------------- B. F. Montoya President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Capacity Date --------- -------- ---- /s/ B. F. MONTOYA Principal Executive Officer and February 22, 1996 - ------------------------------------------------- Director B. F. MONTOYA President and Chief Executive Officer /s/ M. H. MAERKI Principal Financial Officer February 22, 1996 - ------------------------------------------------- M. H. Maerki Senior Vice President and Chief Financial Officer /s/ D. M. BURNETT Principal Accounting Officer February 22, 1996 - ------------------------------------------------- D. M. Burnett Corporate Controller and Chief Accounting Officer /s/ J. T. ACKERMAN Chairman of the Board February 22, 1996 - ------------------------------------------------- J. T. Ackerman /s/ R. G. ARMSTRONG Director February 22, 1996 - ------------------------------------------------- R. G. Armstrong /s/ J. A. GODWIN Director February 22, 1996 - ------------------------------------------------- J. A. Godwin /s/ L. H. LATTMAN Director February 22, 1996 - ------------------------------------------------- L. H. Lattman /s/ M. LUJAN JR. Director February 22, 1996 - ------------------------------------------------- M. Lujan Jr. /s/ R. U. ORTIZ Director February 22, 1996 - ------------------------------------------------- R. U. Ortiz /s/ R. M. PRICE Director February 22, 1996 - ------------------------------------------------- R. M. Price /s/ P. F. ROTH Director February 22, 1996 - ------------------------------------------------- P. F. Roth E-21