UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1996
-----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6986
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PUBLIC SERVICE COMPANY OF NEW MEXICO
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(Exact name of registrant as specified in its charter)
New Mexico 85-0019030
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Alvarado Square, Albuquerque, New Mexico 87158
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(Address of principal executive offices)
(Zip Code)
(505) 241-2700
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(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock--$5.00 par value 41,774,083 shares
----------------------------- -------------------------------
Class Outstanding at October 31, 1996
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Report of Independent Public Accountants.......................... 3
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Earnings--
Three Months and Nine Months Ended September 30, 1996 and 1995.... 4
Consolidated Balance Sheets--
September 30, 1996 and December 31, 1995.......................... 5
Consolidated Statements of Cash Flows--
Nine Months Ended September 30, 1996 and 1995..................... 6
Notes to Consolidated Financial Statements........................ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 8
PART II. OTHER INFORMATION:
ITEM 5. OTHER INFORMATION............................................. 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................. 17
Signature .............................................................. 18
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Public Service Company of New Mexico:
We have reviewed the accompanying condensed consolidated balance sheet of Public
Service Company of New Mexico (a New Mexico corporation) and subsidiaries as of
September 30, 1996, and the related condensed consolidated statements of
earnings for the three-month and nine-month periods ended September 30, 1996 and
1995, and the condensed consolidated statements of cash flows for the nine-month
periods ended September 30, 1996 and 1995. These financial statements are the
responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Public Service Company of New
Mexico and subsidiaries as of December 31, 1995 (not presented herein), and, in
our report dated February 13, 1996, we expressed an unqualified opinion on that
statement. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1995, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
October 29, 1996
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ITEM 1. FINANCIAL STATEMENTS
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ -----------------------
1996 1995 1996 1995
---------- --------- --------- ----------
(In thousands except per share amounts)
Operating revenues:
Electric $ 180,214 $ 168,115 $ 486,754 $ 446,421
Gas 30,543 27,410 163,504 164,736
Water 0 61 0 6,196
--------- --------- --------- ----------
Total operating revenues 210,757 195,586 650,258 617,353
--------- --------- --------- ----------
Operating expenses:
Fuel and purchased power 47,786 40,980 128,359 105,769
Gas purchased for resale 9,877 7,480 75,580 71,476
Other operation and maintenance 80,906 71,641 232,388 230,889
Depreciation and amortization 19,835 19,767 58,420 61,019
Taxes, other than income taxes 9,079 8,321 26,907 26,859
Income taxes 10,862 12,663 32,371 27,852
--------- --------- --------- ----------
Total operating expenses 178,345 160,852 554,025 523,864
--------- --------- --------- ----------
Operating income 32,412 34,734 96,233 93,489
--------- --------- --------- ----------
Other income and deductions, net of taxes: 644 7,510 2,497 22,203
--------- --------- --------- ----------
Income before interest charges 33,056 42,244 98,730 115,692
--------- --------- --------- ----------
Interest charges:
Interest on long-term debt 12,101 12,215 36,304 40,606
Other interest charges 1,015 1,060 2,496 4,514
--------- --------- --------- ----------
Net interest charges 13,116 13,275 38,800 45,120
--------- --------- --------- ----------
Net earnings 19,940 28,969 59,930 70,572
Preferred stock dividend requirements 147 495 440 3,567
--------- --------- --------- ----------
Net earnings applicable to common stock $ 19,793 $ 28,474 $ 59,490 $ 67,005
========= ========= ========= ==========
Average shares of common stock outstanding 41,774 41,774 41,774 41,774
========= ========= ========= ==========
Net earnings per share of common stock $ 0.47 $ 0.68 $ 1.42 $ 1.60
========= ========= ========= ==========
Dividends paid per share of common stock $ 0.12 $ - $ 0.24 $ -
========= ========= ========= ==========
The accompanying notes are an integral part of these financial statements.
-4-
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1996 1995
------------ ----------
(Unaudited)
(In thousands)
ASSETS
Utility plant $2,478,017 $2,467,161
Accumulated provision for depreciation
and amortization (924,842) (892,727)
----------- -----------
Net utility plant 1,553,175 1,574,434
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Other property and investments 264,561 33,433
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Current assets:
Cash 5,130 4,228
Temporary investments, at cost 33,318 95,972
Receivables 122,926 127,642
Income taxes receivable - 4,792
Fuel, materials and supplies 42,149 44,660
Gas in underground storage 3,172 5,431
Other current assets 7,373 7,186
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Total current assets 214,068 289,911
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Deferred charges 134,891 137,891
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$2,166,695 $2,035,669
=========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity:
Common stock $ 208,870 $ 208,870
Additional paid-in capital 468,961 470,358
Excess pension liability, net of tax (2,101) (1,623)
Retained earnings since January 1, 1989 74,708 25,243
----------- -----------
Total common stock equity 750,438 702,848
Cumulative preferred stock without mandatory
redemption requirements 12,800 12,800
Long-term debt, less current maturities 712,271 728,843
----------- -----------
Total capitalization 1,475,509 1,444,491
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Current liabilities:
Short-term debt 114,000 -
Accounts payable 83,530 93,666
Dividends payable 293 147
Current maturities of long-term debt 16,440 146
Accrued interest and taxes 31,746 26,856
Other current liabilities 35,918 44,552
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Total current liabilities 281,927 165,367
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Deferred credits 409,259 425,811
----------- -----------
$2,166,695 $2,035,669
=========== ===========
The accompanying notes are an integral part of these financial statements.
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PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
-------------------
1996 1995
-------- --------
(In thousands)
Cash Flows From Operating Activities:
Net earnings $ 59,930 $ 70,572
Adjustments to reconcile net earnings to net cash
flows from operating activities:
Depreciation and amortization 74,871 73,429
Gain on sale of plant and property - (39,055)
Accumulated deferred investment tax credit (3,498) (3,866)
Accumulated deferred income tax (1,599) (36,450)
Changes in certain assets and liabilities:
Receivables 9,509 35,285
Fuel, materials and supplies 4,771 (29,871)
Deferred charges 5,246 10,754
Accounts payable (10,192) (46,990)
Accrued interest and taxes 4,890 45,366
Deferred credits (4,860) 24,384
Other (8,400) 4,043
Other, net 4,710 6,927
---------- --------
Net cash flows from operating activities 135,378 114,528
---------- --------
Cash Flows From Investing Activities:
Utility plant additions (66,385) (76,884)
Utility plant sales - 205,968
Other property additions (14,230) (26)
Escrow for purchase of PVNGS lease obligation bonds (218,090) -
Net decrease (increase) in temporary investments 62,654 (1,793)
---------- --------
Net cash flows from investing activities (236,051) 127,265
---------- --------
Cash Flows From Financing Activities:
Redemptions of PVNGS lease obligation bonds - 132,663)
Redemptions and repurchases of preferred stock - (64,175)
Bond redemption premium and costs (295) (373)
Proceeds from asset securitization - 18,758
Repayments of other long-term debt (326) (57,768)
Net increase in short-term debt 114,000 -
Exercise of employee stock options (1,395) -
Dividends paid (10,409) (4,943)
---------- --------
Net cash flows from financing activities 101,575 241,164)
---------- --------
Increase in cash 902 629
Cash at beginning of period 4,228 21,029
---------- --------
Cash at end of period $ 5,130 $ 21,658
========== ========
Supplemental Cash Flow Disclosures:
Interest paid $ 39,949 $ 52,576
========== ========
Income taxes paid, net $ 30,617 $ 38,205
========== ========
The accompanying notes are an integral part of these financial statements.
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PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) General Accounting Policy
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary for a fair presentation of the
consolidated financial statements. The significant accounting policies followed
by Public Service Company of New Mexico (the "Company") are set forth in note
(1) of notes to the Company's consolidated financial statements in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 Form
10-K") filed with the Securities and Exchange Commission ("SEC").
(2) Palo Verde Nuclear Generating Station ("PVNGS") Lease
Obligation Bonds ("LOBs")
On October 17, 1996, the Company purchased $200 million of PVNGS LOBs at a
premium with accrued interest. In purchasing the LOBs, the Company utilized $118
million of its cash and borrowed $100 million against the credit facility
collateralized by the Company's utility customer accounts receivable and certain
amounts being recovered from gas customers relating to certain gas contract
settlements ("Accounts Receivable Facility"). Although the PVNGS LOBs are
off-balance sheet debt, these bonds have been included in the calculation of the
Company's debt to capitalization ratio as well as various financial coverage
ratios by the major rating agencies. The purchase of the LOBs will not only
improve these ratios, but will also increase earnings in the form of interest
income.
(3) PNM Direct Plan
On September 16, 1996, the Company implemented a dividend reinvestment and stock
purchase plan for investors, including customers and employees. The plan, called
PNM Direct, also includes safekeeping services and automatic investment
features. Initially, the Company's stock will be purchased in the open market to
meet plan requirements.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's 1995 Form 10-K PART II, ITEM 7. -- "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" discussed
management's assessment of the Company's financial condition, results of
operations and other issues facing the Company. The following discussion and
analysis by management focuses on those factors that had a material effect on
the Company's financial condition and results of operations during the three
months and nine months ended September 30, 1996 and 1995. It should be read in
conjunction with the Company's consolidated financial statements. Trends and
contingencies of a material nature are discussed to the extent known and
considered relevant.
Liquidity and Capital Resources
The capital requirements for 1996 were originally projected at $207 million,
including a discretionary cash outlay for debt retirement of $90 million. During
the second quarter, the Company revised its capital requirements to $317 million
to reflect the anticipated third quarter purchase of $200 million of PVNGS LOBs
and the postponement of the planned debt retirement of $90 million. In September
1996, the New Mexico Public Utility Commission ("NMPUC") granted the Company's
request for the purchase of up to $300 million of PVNGS LOBs and Eastern
Interconnection Project secured facility bonds over the next three years. On
October 17, 1996, the Company purchased $200 million of PVNGS LOBs at a premium
with accrued interest. In purchasing the LOBs, the Company borrowed $100 million
against the Accounts Receivable Facility and utilized $118 million of its cash.
The Company spent approximately $66 million for its utility construction
expenditures during the first nine months of 1996 and anticipates it will spend
approximately $44 million for additional construction expenditures during the
remaining period of 1996. The Company expects that such cash requirements are to
be met primarily through internally generated cash. However, to cover
differences in the amounts and timing of cash generation and cash requirements,
the Company utilizes short-term borrowings under its liquidity arrangements. At
September 30, 1996, the Company had $97 million of available liquidity
arrangements, consisting of $89 million from the $100 million revolving credit
facility ("Facility") and $8 million from the $11 million in local lines of
credit. The Facility will expire in June 1998 and includes a maximum allowed
debt to capitalization ratio of 70%. As of September 30, 1996, such ratio was
62.1%.
In July 1996, the Company requested NMPUC approval to refinance the $23 million
1984 Series A Pollution Control Revenue Bonds and the $77 million 1977 Series
Pollution Control Revenue Refunding Bonds. The NMPUC issued an order on October
7, 1996, approving the refinancings. On October 9, 1996, the Company filed a
case to refinance an additional $65 million of 1978 Series A Pollution Control
Revenue Bonds. A hearing was held on October 30. If approved, the Company
expects to refinance the entire $165 million of pollution control bonds before
year end with either fixed or variable rate bonds.
-8-
As of September 30, 1996, the Company had approximately $33.3 million in
temporary investments. The Company continues to evaluate its investment and debt
retirement options to optimize its financing strategy and earnings potential.
Credit Rating and Dividends
In September 1996, Moody's Investors Service ("Moody's") and Standard & Poor's
Corporation ("S&P") upgraded the Company's credit ratings to one level below
investment grade in response to the Company's announcement of the planned
purchase of $200 million of PVNGS LOBs. The purchase represents the latest step
in the Company's efforts to improve its debt to capitalization ratio and reduce
fixed costs. The positive rating outlook by Moody's anticipates the Company's
purchase of an additional $100 million of PVNGS LOBs over the next three years,
above-average growth in energy demand within the Company's service territory,
and gradual transition to retail competition in New Mexico. S&P indicated that
"ratings could be raised during the next several years if the Company can meet
several major challenges, including the threat of retail wheeling, relatively
high electric production costs, above-average retail electric rates, potential
further write downs of high cost nuclear generation, and the need for
satisfactory Palo Verde operating performance".
The Company resumed the payment of cash dividends on common stock starting in
May 1996. On October 8, 1996, the Company's board of directors ("Board")
declared a quarterly cash dividend of 12 cents per common share, payable
November 22, 1996, to shareholders of record as of November 1, 1996. The Board
reviews the Company's dividend policy on a continuing basis. The declaration of
common dividends is dependent upon a number of factors including earnings and
financial condition of the Company and market conditions.
RESULTS OF OPERATIONS
Net earnings applicable to common stock decreased $8.7 million ($.21 per share)
and $7.5 million ($.18 per share) for the quarter and nine months ended
September 30, 1996, respectively, from the corresponding periods last year.
The following discussion highlights significant items which affected the results
of operations for the quarter and nine months ended September 30, 1996 and 1995.
Electric gross margin (electric operating revenues less fuel and purchased power
expense) increased $5.3 million and $17.7 million for the quarter and nine
months ended September 30, 1996, respectively, from the corresponding periods a
year ago. These increases were attributable to retail load growth and warmer
than normal weather in 1996 and increased off-system sales margin due to the
Company's aggressive marketing strategies aided by the warmer than normal
weather.
Gas gross margin (gas operating revenues less gas purchased for resale)
decreased $5.3 million for the nine months ended September 30, 1996 from the
corresponding period a year ago. The main contributor to this decrease was the
effect of the sale of gas gathering and processing assets in 1995, which was
partially offset by increased off-system sales margin.
-9-
The sale of the Company's water division in July 1995 resulted in a decrease in
the current year's operating revenues by $6.2 million for the nine months ended
September 30, 1996.
Other operation and maintenance ("O&M") expenses increased $9.3 million for the
quarter over the corresponding period a year ago due to increases in (i) office
supplies and expense and outside services of $4.3 million, (ii) labor expense of
$3.6 million, (iii) distribution O&M expenses of $1.8 million, and (iv)
transmission O&M expenses of $1.1 million. Such increases were offset by a $2.0
million reduction in O&M associated with the PVNGS Units 1 and 2 leases as a
result of a the change in the Arizona property tax law.
Other O&M expenses for the nine months ended September 30, 1996 increased $1.5
million from the corresponding period last year. The various 1996 expense
increases were significantly offset by the reduction in O&M expenses of $9.9
million resulting from the sales of the water division and gas gathering and
processing assets in 1995.
Depreciation and amortization expenses decreased $2.6 million for the nine
months ended September 30, 1996 from the corresponding period a year ago as a
result of the sale of the Company's water division and gas assets in 1995 and an
adjustment recorded in the second quarter of 1996 for the over amortization of
certain intangible utility plant.
Operating income taxes for the quarter ended September 30, 1996 decreased $1.8
million from the corresponding period a year ago due mainly to decreased pre-tax
earnings for the current quarter. Operating income taxes for nine months ended
September 30, 1996 increased $4.5 million over the corresponding period a year
ago due mainly to increased pre-tax earnings for the current nine months.
Other income and deductions, net of taxes, for the quarter and nine months ended
September 30, 1996 decreased $6.9 million and $19.7 million, respectively, from
the corresponding periods a year ago. Significant items, net of taxes, for the
1995 quarter included the gain of $6.8 million from the sale of the Company's
water division in July 1995. In addition, year-to-date 1995 included, net of
tax, (i) the gain of $13.1 million from the gas assets sale in June 1995, (ii)
an accrual of $2.6 million of income pertaining to the carrying costs related to
gas take-or-pay settlement amounts and (iii) income of $1.4 million related to
adjusting reclamation reserves for certain mining operations. Offsetting such
decreases were an additional 1995 regulatory reserve of $1.5 million and an
after-tax write off of debt retirement costs of $.9 million.
Net interest charges decreased $6.3 million for the nine months ended September
30, 1996 from the corresponding period a year ago as a result of the retirement
of $132.7 million PVNGS LOBs in March 1995.
Preferred stock dividend requirements decreased $3.1 million for the nine months
ended September 30, 1996 from the corresponding period a year ago due to the
retirement of $64 million of preferred stock in August 1995.
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OTHER ISSUES FACING THE COMPANY
Restructuring the Electric Industry in New Mexico
As previously reported, the electric utility industry is currently undergoing a
period of fundamental change intended to promote a competitive environment in
the retail and wholesale energy marketplaces. Legislators and regulators at both
the state and Federal level are considering whether, and how, to promote
competition among suppliers of electricity and how to provide customers with
choice among suppliers. (See ITEM 7. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OVERVIEW -- Competitive
Electric Market" in the 1995 Form 10-K.)
The Integrated Water and Resource Planning Committee of the New Mexico State
Legislature (the "IWRPC") has been holding ongoing hearings during 1996 which
continue to focus on the issues related to restructuring of the electric
industry in New Mexico. The Company has participated extensively in these
hearings and, at the invitation of the IWRPC, submitted draft legislation to be
used as a starting point for the various parties to consider regarding the
electric industry restructuring. The draft legislation would allow an electric
utility to recover all of its prudently incurred transition costs, and also
provides a path for business flexibility. The office of New Mexico Attorney
General's ("AG") has testified that retail competition should not be introduced
at this time but, if it is, there should be independent ownership of generation
and transmission and distribution, due to market power concerns. To date, the
IWRPC has not articulated a formal position on either the Company's proposed
legislation or any other restructuring proposals for the restructuring of the
electric industry in New Mexico.
In addition, the NMPUC has begun a series of workshop meetings in its
"Investigation of Restructuring of Regulation of the Electric Industry in New
Mexico". The Company has actively participated in these workshops and has
presented the Company's position on various matters related to industry
restructuring. The Company has provided data and analysis in the areas of market
structure, calculation and collection of stranded costs, market power, potential
changes in Company structure and issues related to the transition phase. The
Company continues to provide information and analysis to the NMPUC in this
ongoing matter.
The Company is currently unable to predict the ultimate outcome of this
proceeding and the timing of the electric industry restructuring in New Mexico.
Santa Fe Station
As previously reported, the New Mexico Environment Department ("NMED") has been
conducting an investigation of groundwater contamination detected beneath the
former Santa Fe Generating Station ("Santa Fe Station") site to determine the
source of the contamination. The Company has been and is continuing to cooperate
with the NMED site investigation pursuant to a settlement agreement ("Settlement
Agreement") between the Company and the NMED. On June 24, 1996, the Company
received a letter from the NMED, indicating that the NMED believes that the
Company is the source of the gasoline contamination in a municipal well
supplying the City of Santa Fe and the groundwater underlying the Santa Fe
Station. Further, the NMED letter stated that the Company was required to
-11-
proceed with the interim remediation of the contamination pursuant to the New
Mexico Water Quality Control Commission ("NMWQCC") regulations. (See PART I,
ITEM 2. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- OTHER ISSUES FACING THE COMPANY -- Santa Fe Station" in
the Company's quarterly report on Form 10-Q for the quarter ended June 30,
1996.)
On July 24, 1996, the Company filed an appeal with the NMWQCC regarding the
determinations and directives contained in the NMED's June 24, 1996 letter. As a
result of ongoing negotiations being conducted between the Company and the NMED
for a resolution of the groundwater contamination issue, the Company and the
NMED filed a joint motion to stay the appeal. The motion was granted by the
NMWQCC on September 10, 1996.
On October 3, 1996, the Company and the NMED signed an amendment to the
Settlement Agreement concerning the groundwater contamination. As part of the
amendment, the Company agreed to spend approximately $1.2 million ("Settlement
Amount") for certain costs related to sampling, monitoring, and development and
implementation of a remediation plan. The remediation plan is to be developed
jointly by the Company and the NMED. Since the contamination affects a municipal
well supplying the City of Santa Fe, the cooperation of the City of Santa Fe
will also be sought in the development of the plan.
The amended Settlement Agreement does not, however, provide the Company with a
full and complete release from potential liability for remediation of the
groundwater contamination. After the Company has expended the Settlement Amount,
if the NMED can establish, through binding arbitration, that the Santa Fe
Station is the source of the contamination, the Company could be required to
perform further remediation that is determined to be necessary. The Company
continues to dispute any contention that the Santa Fe Station is the source of
the groundwater contamination and believes that insufficient data exists to
identify the sources of groundwater contamination.
Coal Fuel Supply
In July 1996, the Company was notified by BHP Minerals International, Inc.
("BHP"), fuel supplier to the SJGS, that the Navajo Nation has proposed to
select certain properties within the San Juan and La Plata Mines (the "mining
properties') pursuant to the Navajo-Hopi Land Settlement Act of 1974 (the
"Act"). The mining properties are operated by BHP under leases from the Bureau
of Land Management ("BLM") and comprise a portion of the fuel supply for SJGS.
An administrative appeal by BHP is pending. In the appeal, BHP has expressed
concern that transfer of the mining properties to the Navajo Nation may subject
the mining operations to taxation and additional regulation by the Navajo
Nation, both of which could increase costs to the coal price that might
potentially be passed on to SJGS through the existing coal sales agreement. A
stay of all actions by the BLM has been ordered by the Interior Board of Land
Appeals pending resolution of the issues on appeal. The Company is monitoring
closely the appeal and other developments on this issue and will continue to
assess potential impacts to SJGS and the Company's operations. Currently, the
Company is unable to predict the outcome of this matter or its possible impact
on the Company's results of operations.
-12-
Decommissioning Trust Funds
The Company has a program for funding its share of decommissioning costs for
PVNGS. Under this program, the Company makes a series of annual deposits to an
external trust over the estimated useful life of each unit with the trust funds
being invested under a plan which allows the accumulation of funds largely on a
tax-deferred basis through the use of life insurance policies on certain current
and former employees. A decommissioning cost study performed in 1995 indicated
that the Company's share of the PVNGS decommissioning costs will be
approximately $147.5 million (stated in 1995 dollars). The Company determined
that a supplemental investment program would be needed as a result of cost
increases identified in a 1992 study and the lower than anticipated performance
of the existing program. In 1995, the Company filed a request for permission
from the NMPUC to establish a qualified tax advantaged trust for PVNGS Units 1
and 2. Due to Internal Revenue Service regulations, PVNGS Unit 3 will remain in
a non-qualified trust. The NMPUC granted the Company's request. (See PART II,
ITEM 7. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- OTHER ISSUES FACING THE COMPANY" in the 1995 Form
10-K.)
Pursuant to NMPUC approval, in March and September 1996, the Company funded an
additional $12.5 million into qualified and non-qualified trusts. The estimated
market value of the trusts at the end of December 1996 is estimated to be
approximately $25.6 million, including the cash surrender value of the current
insurance policies.
Gas Rate Case
As previously reported, in August 1995, the Company filed a request for a $13.3
million increase for its retail natural gas sales and transportation rates. The
NMPUC Staff and intervenors in the case filed their testimony in January 1996.
The NMPUC Staff recommended a $2.5 million rate decrease and the AG recommended
a $13.2 million rate decrease. (See PART II, ITEM 7. -- "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OTHER ISSUES
FACING THE COMPANY -- GAS RATE CASE" in the 1995 Form 10-K.)
On August 29, 1996, the hearing examiner in the case issued a recommended
decision, proposing a rate decrease of approximately $.5 million. The proposed
rate decrease reflects the recovery of certain regulatory assets and the
postponement of recovery of other regulatory assets to future proceedings. The
NMPUC's final order in the case is expected in November 1996. The Company is
currently unable to predict the ultimate outcome of this proceeding.
Albuquerque Franchise Issues
As previously reported, the Company's non-exclusive electric service franchise
with the City of Albuquerque ("the City") expired in 1992. The franchise
agreement provided for the Company's use of City rights-of-way for placement of
electric service facilities. The Company provides service to the area which
contributed 46% of the Company's total 1995 electric operating revenues. The
absence of a franchise does not change the Company's right and obligation to
serve those customers under state law.
-13-
In 1991, the NMPUC issued an order concluding, among other things, that the City
could bid for services to its own facilities (Albuquerque municipal loads
generated approximately $16.6 million in annual revenue for 1995), but not for
service to other customers. However, the New Mexico Supreme Court ("Court")
ruled that a city can negotiate rates for its citizens in addition to its own
facility uses. The Court also ruled that any contracts with utilities for
electric rates are a matter of statewide concern and subject to approval,
disapproval or modification by the NMPUC. In addition, the Court reaffirmed the
NMPUC's exclusive power to designate providers of utility service within a
municipality and confirmed that municipal franchises are not licenses to serve
but rather provide access to public rights-of-way.
During 1992, representatives of the Company and the City had numerous meetings
in attempts to resolve the franchise renewal issue. Since that time, no meetings
have been held. The City continues to maintain its options by advocating
industry restructuring and monitoring the municipalization activities of the
City of Las Cruces. A measure designed to start municipalization activities in
Albuquerque was defeated by the City Council. The Company continues to collect
and pay franchise fees to the City. (See PART II, ITEM 7. -- "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
OTHER ISSUES FACING THE COMPANY -- ALBUQUERQUE FRANCHISE ISSUES" in the 1995
Form 10-K.)
In an article in the October 25, 1996, Albuquerque Journal, it was reported that
the Mayor of the City had met with two NMPUC Commissioners about his concern
that State efforts regarding retail wheeling were proceeding too slowly and that
he was evaluating the City's options to implement Article XV of the City Charter
requiring competitive bids for electric franchises. The Company has taken the
position that the NMPUC does not have authority to order retail wheeling and, as
previously reported, the Legislature in 1996 unanimously adopted Senate Joint
Memorial 42, which stated that retail wheeling is not in the public interest at
this time although recognizing that industry restructuring must continue to be
studied.
In a related matter, the New Mexico Supreme Court on September 13, 1996, agreed
to decide the question of whether or not State law allows condemnation of
electric utilities in the case involving the attempt by the City of Las Cruces
to condemn El Paso Electric Company's ("EPE") distribution system and related
facilities serving Las Cruces. On August 21, 1996, the Federal Magistrate Court
ruled that the City of Las Cruces had failed to prove that condemnation would
not materially impair service by EPE to customers outside Las Cruces. This case
continues in the New Mexico Supreme Court. Although the Company believes that
State law does not allow condemnation of electric utilities, it cannot, at this
time, predict the outcome of this case or its possible effects on the City of
Albuquerque franchise issues.
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PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Purchase of 100 MW Contingent Peaking Capacity
On October 4, 1996, the Company entered into a long-term power purchase contract
with the Cobisa-Person Limited Partnership ("PLP") to purchase approximately 100
MW of unit contingent peaking capacity for a period of 20 years, with an option
to renew for an additional five years. The PLP is a partnership of subsidiaries
of Cobisa Corporation of Houston, Texas and U.S. Generating Company of Bethesda,
Maryland. The gas turbine generating unit will be located on the Company's
retired Person Generating Station site located in Albuquerque, New Mexico and
will be constructed and operated by PLP. Depending on the timing of NMPUC and
Federal Energy Regulatory Commission ("FERC") approvals and securing of
necessary permits, construction could start in August 1998 with commercial
operation beginning by May 1999. The Company believes that locating additional
peaking capacity in the Albuquerque area will not only add 100 MW of support for
the already constrained transmission system, but will also meet growing power
demands in central New Mexico. On October 11, 1996, the Company filed a request
for approval from the NMPUC.
Gas Transmission Pipeline
As previously reported, in May 1996, the Company submitted a bid for acquiring
the gas transmission pipeline from the Department of Energy ("DOE") which had
issued a request for proposal for the sale of 130 miles of transmission
pipeline. The Company currently leases the pipeline from the DOE for
transmission of natural gas to certain customers in northern New Mexico,
including the county of Los Alamos and Los Alamos National Laboratory. (See PART
I, ITEM 2. -- "PROPERTIES --NATURAL GAS" in the 1995 Form 10-K.) On June 21,
1996, the DOE accepted the Company's proposal to purchase the DOE pipeline for
$3.1 million, subject to the successful negotiations of the transfer and
transitional transportation agreements. The acquisition by the Company is
subject to the approval of the NMPUC and the DOE providing right-of-way
satisfactory to the Company. Hearings are scheduled for November 25, 1996. The
Company is currently working with the DOE to resolve the right-of-way issue
associated with the purchase.
FERC Rate Filings
As previously reported, in April 1996, the Company filed a notice of change in
rates for its firm transmission service for all point-to-point and network
customers on the Company's high voltage transmission system. The Company also
requested changes for services provided to two customers which receive
integration and transmission service for power purchased from a third party. In
addition, the Company requested that this filing be consolidated with complaint
proceedings submitted by the affected customers. The Company submitted the same
cost support in the open access tariff and anticipates that the FERC will
determine rates for its open access tariff filing based on the results of the
rate change proceeding. (See PART I, ITEM 5. -- "OTHER INFORMATION -- FERC Rate
Filings" in the Company's quarterly report on Form 10-Q for the quarter ended
March 31, 1996.)
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Hearings in the cases were scheduled to begin October 21, 1996. However, due to
on-going settlement negotiations among the parties, the Administrative Law Judge
has granted a two week delay in the case. If there is no settlement reached
among the parties, hearings are scheduled to begin November 4, 1996. Although
the Company anticipates a reduction in the existing rates resulting from the
hearings or any settlement of the cases, the Company does not anticipate any
material adverse impact on the Company's financial condition or results of
operations.
Disclosure Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a new
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful, cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement.
Accordingly, the Company hereby identifies the following important factors which
could cause the Company's actual financial results to differ materially from any
such results which might be projected, forecasted, estimated or budgeted by the
Company in forward-looking statements: (i) adverse actions of utility regulatory
commissions, (ii) utility industry restructuring, (iii) failure to recover
stranded assets, (iv) failure to obtain new customers or retain existing
customers, (v) inability to carry out marketing and sales plans, (vi) adverse
impacts resulting from environmental regulations, (vii) loss of favorable fuel
supply contracts, (viii) failure to obtain water rights and rights-of-way, (ix)
operational and environmental problems at generating stations, and (x) failure
to maintain adequate transmission capacity.
Many of the foregoing factors discussed have been addressed in the Company's
previous filings with the SEC pursuant to the Securities Exchange Act of 1934.
The foregoing review of factors pursuant to the Act should not be construed as
exhaustive or as any admission regarding the adequacy of disclosures made by the
Company prior to the effective date of the Act.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
10.69* Refunding Agreement No. 3 dated as of September 27, 1996 between
Public Service Company of New Mexico, The Owner Participant named
therein, State Street Bank and Trust Company, as Owner Trustee, The
Chase Manhattan Bank, as Indenture Trustee, and First PV Funding
Corporation
15.0 Letter Re: Unaudited Interim Financial Information
27 Financial Data Schedule
99.21* 1996 Supplemental Indenture dated as of September 27, 1996 to Trust
Indenture, Mortgage, Security Agreement and Assignment of Rents
dated as of December 16, 1985 between State Street Bank and Trust
Company, as Owner Trustee, and The Chase Manhattan Bank, as
Indenture Trustee
*One or more additional documents, substantially identical in all material
respects to this exhibit, have been entered into, relating to one or more
additional sale and leaseback transactions. Although such additional
documents may differ in other respects (such as dollar amounts and
percentages), there are no material details in which such additional
documents differ from this exhibit.
In addition to those exhibits shown above, the Company hereby incorporates the
following exhibit pursuant to Exchange Act Rule 12b-32 and Regulation S-K,
Section 10, paragraph (d), by reference to the filing set forth below:
Description Filed as Exhibit
By-laws of Public Service Company of 3.2 to Annual Report of the
New Mexico With All Amendments to and Registrant on Form 10-K for fiscal
including December 5, 1994 year ended December 31, 1994
b. Reports on Form 8-K:
None.
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PUBLIC SERVICE COMPANY OF NEW MEXICO
------------------------------------
(Registrant)
Date: October 31, 1996 /s/ Donna M. Burnett
------------------------------------
Donna M. Burnett
Corporate Controller and
Chief Accounting Officer
(Officer duly authorized to sign
this report)
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