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 March 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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
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Class Outstanding at May 6, 1997
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
INDEX
Page No.
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PART I. FINANCIAL INFORMATION:
Report of Independent Public Accountants....................... 3
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Earnings--
Three Months Ended March 31, 1997 and 1996..................... 4
Consolidated Balance Sheets--
March 31, 1997 and December 31, 1996........................... 5
Consolidated Statements of Cash Flows--
Three Months Ended March 31, 1997 and 1996..................... 6
Notes to Consolidated Financial Statements..................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................. 8
PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS.......................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....... 16
ITEM 5. OTHER INFORMATION.......................................... 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... 19
Signature ........................................................... 21
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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
March 31, 1997, and the related condensed consolidated statements of earnings
for the three-month periods ended March 31, 1997 and 1996, and the condensed
consolidated statements of cash flows for the three-month periods ended March
31, 1997 and 1996. 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, 1996 (not presented herein), and, in
our report dated February 13, 1997, 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, 1996, 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
May 5, 1997
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ITEM 1. FINANCIAL STATEMENTS
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended
March 31
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1997 1996
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(In thousands except
per share amounts)
Operating revenues:
Electric $ 161,261 $ 152,102
Gas 123,936 89,730
Energy Services 13,625 72
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Total operating revenues 298,822 241,904
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Operating expenses:
Fuel and purchased power 47,118 39,725
Gas purchased for resale 81,660 46,459
Gas purchased for resale - energy marketing 13,402 30
Other operation and maintenance 76,546 72,900
Depreciation and amortization 20,453 20,030
Taxes, other than income taxes 9,753 9,230
Income taxes 13,197 15,055
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Total operating expenses 262,129 203,429
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Operating income 36,693 38,475
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Other income and deductions, net of taxes 2,437 817
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Income before interest charges 39,130 39,292
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Interest charges:
Interest on long-term debt 12,123 12,085
Other interest charges 2,111 759
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Net interest charges 14,234 12,844
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Net earnings 24,896 26,448
Preferred stock dividend requirements 147 147
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Net earnings applicable to common stock $ 24,749 $ 26,301
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Average shares of common stock outstanding 41,774 41,774
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Net earnings per share of common stock $ 0.59 $ 0.63
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Dividends paid per share of common stock $ 0.12 $ -
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The accompanying notes are an integral part of these financial statements.
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PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
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(Unaudited)
(In thousands)
ASSETS
Utility plant $ 2,509,996 $ 2,489,921
Accumulated provision for depreciation
and amortization (956,650) (937,228)
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Net utility plant 1,553,346 1,552,693
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Other property and investments 272,973 254,268
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Current assets:
Cash 8,082 11,125
Temporary investments, at cost 20,454 9,128
Receivables 184,168 197,025
Income taxes receivable 4,401 18,825
Fuel, materials and supplies 41,994 41,260
Gas in underground storage 2,374 2,679
Other current assets 8,190 6,632
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Total current assets 269,663 286,674
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Deferred charges 132,909 136,679
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$ 2,228,891 $ 2,230,314
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CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity:
Common stock $ 208,870 $ 208,870
Additional paid-in capital 470,319 470,358
Excess pension liability, net of tax (1,840) (2,102)
Retained earnings since January 1, 1989 94,833 77,185
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Total common stock equity 772,182 754,311
Cumulative preferred stock without
mandatory redemption requirements 12,800 12,800
Long-term debt, less current maturities 714,326 713,919
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Total capitalization 1,499,308 1,481,030
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Current liabilities:
Short-term debt 123,000 100,400
Accounts payable 81,500 130,661
Dividends payable 7,248 5,159
Current maturities of long-term debt 14,970 14,970
Accrued interest and taxes 28,097 23,356
Other current liabilities 22,292 25,477
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Total current liabilities 277,107 300,023
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Deferred credits 452,476 449,261
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$ 2,228,891 $ 2,230,314
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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)
Three Months Ended
March 31
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1997 1996
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(In thousands)
Cash Flows From Operating Activities:
Net earnings $ 24,896 $ 26,448
Adjustments to reconcile net earnings to net cash
flows from operating activities:
Depreciation and amortization 23,897 23,954
Accumulated deferred investment tax credit (1,119) (1,166)
Accumulated deferred income tax 1,662 (690)
Changes in certain assets and liabilities:
Receivables 30,872 11,032
Fuel, materials and supplies (430) 4,968
Deferred charges 5,116 1,009
Accounts payable (49,171) (22,583)
Accrued interest and taxes 4,741 9,323
Deferred credits 2,320 (3,453)
Other (4,650) (5,825)
Other, net 2,179 1,197
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Net cash flows from operating activities 40,313 44,214
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Cash Flows From Investing Activities:
Utility plant additions (25,454) (22,005)
Increase in nuclear decommissioning trust (23,000) -
Return of principal PVNGS LOBs 820 -
Increase in other property and investments (373) (1,805)
Increase in temporary investments, net (11,326) (18,092)
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Net cash flows from investing activities (59,333) (41,902)
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Cash Flows From Financing Activities:
Bond redemption premium and costs (1,474) (21)
Repayments of long-term debt - (105)
Trust borrowing for nuclear decommissioning 23,000 -
Repayments of short-term borrowings (400) -
Dividends paid (5,149) (153)
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Net cash flows from financing activities 15,977 (279)
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Increase (decrease) in cash (3,043) 2,033
Cash at beginning of period 11,125 4,228
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Cash at end of period 8,082 $ 6,261
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Supplemental Cash Flow Disclosures:
Interest paid $ 13,971 $ 17,502
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Income taxes paid, net $ - $ 4,000
========= ==========
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, 1996 (the "1996 Form
10-K") filed with the Securities and Exchange Commission ("SEC").
(2) Nuclear Decommissioning Costs
The Company's share of the Palo Verde Nuclear Generating Station ("PVNGS")
decommissioning costs will be approximately $147.5 million in 1995 dollars. The
Company makes regular payments under agreements approved by the New Mexico
Public Utility Commission ("NMPUC") to external tax qualified and non-qualified
trusts over the estimated useful life of each unit. A portion of the
non-qualified trust funds are invested in life insurance policies. The remaining
trust funds are invested primarily in equities, a municipal bond fund and a
money market fund. Decommissioning costs are charged to expense over the license
term and decommissioning costs for Units 1 and 2 are currently recovered in
rates. As of March 31, 1997, the nuclear decommissioning trusts had net assets
of $25.6 million.
(3) Refinancing
On February 21, 1997, the Company completed the refinancing of $190 million of
pollution control revenue bonds issued by the City of Farmington, all maturing
in April 2022. The $60 million 1978 Series A Pollution Control Revenue Bonds and
the $40 million 1979 Series A Pollution Control Revenue Bonds were refinanced as
variable rate bonds (Pollution Control Revenue Refunding Bonds, $40 million 1997
Series A, $37 million 1997 Series B and $23 million 1997 Series C). The initial
variable rates were 3.35% for $40 million 1997 Series A and $37 million 1997
Series B, and 3.30% for $23 million 1997 Series C. The remaining $90 million
1979 Series A Pollution Control Revenue Bonds were refinanced with a fixed rate
of 6.375% (Pollution Control Revenue Refunding Bonds, 1997 Series D).
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's 1996 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 first
quarter of 1997 and 1996. 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 1997 including a retrofit environmental project at
the San Juan Generating Station, purchases of PVNGS Lease Obligation Bonds
("LOBs") and cash dividend requirements for both common and preferred stock are
expected to be $214.4 million. The Company spent approximately $30.5 million for
its utility construction expenditures and dividend requirements during the first
quarter of 1997 and anticipates spending approximately $184 million during the
remainder of 1997. The Company expects that such cash requirements can be met
primarily through internally generated cash. However, to cover the differences
in the amounts and timing of cash generation and cash requirements, the Company
intends to utilize short-term borrowings under its liquidity arrangements. At
March 31, 1997, the Company had $100 million of short-term borrowings against
its liquidity arrangements and had $111 million in unused liquidity capacity.
Included in this capacity were $100 million under a secured revolving credit
facility ("Facility") and $11 million under local lines of credit. The Facility
will expire in June 1998 and the Company expects to renew the Facility before
its expiration date.
On February 21, 1997, the Company completed the refinancing of $190 million of
pollution control revenue bonds issued by the City of Farmington, all maturing
in April 2022 (see Note 3 of Notes to Financial Statements).
As of March 31, 1997, the Company had approximately $20.5 million in temporary
investments. The Company continues to evaluate its investment and debt
retirement options to optimize its financing strategy and earnings potential.
Dividends
On March 12, 1997, the Company's board of directors ("Board") declared a
quarterly cash dividend of 17 cents per common share, payable May 23, 1997, to
the common stockholders of record as of May 12, 1996. This is an increase of 5
cents per share above the dividend paid in the prior quarter and represents the
first increase since the reinstatement of the common stock dividend a year ago.
The Company's 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.
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RESULTS OF OPERATIONS
Net earnings applicable to common stock decreased $1.6 million ($.04 per share)
for the quarter ended March 31, 1997, from the corresponding period last year.
The following discussion highlights significant items which affected the results
of operations for the quarter ended March 31, 1997 and 1996.
Electric gross margin (electric operating revenues less fuel and purchased power
expense) for the current quarter increased $1.8 million from a year ago due to
increased off-system sales. Higher gas prices on the West Coast and transmission
limitations from the Northwest to the California-Arizona market contributed to
the increase in off-system sales.
Gas gross margin (gas operating revenues less gas purchased for resale) for the
current quarter decreased $1.0 million from the previous year due to lower
off-system sales. Off-system sales margin decreased by $2.0 million from the
corresponding period a year ago because of lower price differentials between
market hubs.
Other operation and maintenance expenses increased $3.6 million for the quarter
over the same period last year. An adjustment of $3.4 million had reduced
retirees' health care costs in 1996. In 1997, compensation expense recorded for
the exercise of employee stock options (one-time item) increased administrative
and general labor expense by $3.8 million. That increase was offset by lower
electric production expense of $3.4 million as a result of reduced scheduled
maintenance outages in the current quarter.
Other income and deductions, net of taxes, for the quarter ended March 31, 1997
increased $1.6 million from the corresponding period a year ago due to increased
interest income resulting from the purchase of $200 million of LOBs in October
of 1996.
Net interest charges increased $1.4 million for the quarter ended March 31, 1997
from the corresponding period a year ago as a result of increased short-term
borrowings related to the purchase of the $200 million of LOBs.
OTHER ISSUES FACING THE COMPANY
Gas Rate Case
As previously reported, on February 13, 1997, the NMPUC issued a final order in
the gas rate case, ordering a rate decrease of approximately $6.9 million. In
the order, the NMPUC disallowed, among other things, the recovery of certain
regulatory assets. The Company had requested a $13.3 million increase in its
retail natural gas sales and transportation rates. The Company strongly
disagrees with the NMPUC's final order and has appealed it to the New Mexico
Supreme Court. (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 1996 Form 10-K.)
-9-
The New Mexico Attorney General ("AG") filed a notice of appeal of the gas rate
case on March 17, 1997. On March 21, 1997, the Company filed a docketing
statement on the appeal of the $6.9 million gas rate reduction order. This is
the second step in the appeal process following the filing of the appeal in
February 1997. The docketing statement identifies all of the errors in the final
order that the Company may raise in its appeal, which include, among other
things, (i) disallowance of loss on reacquired debt and reservation fees, (ii)
transportation discount amounts, (iii) a reliability cost surcharge on sales and
transportation customers, (iv) cost of capital issues, (v) the NMPUC's refusal
to hear a proposed settlement of the case stipulated among the interested
parties and (vi) the cumulative error of the order. The AG also filed a
docketing statement on April 16, 1997, challenging the NMPUC's rate design and
refusal to implement the reliability cost surcharge on sales and transportation
customers. The appeal will continue with the filing of briefs-in-chief by the
Company and the AG on June 11, 1997, response briefs by participants in the case
on August 29, 1997, reply briefs by all participants on September 22, 1997, and
oral argument before the Supreme Court at an as-yet unspecified date. The
Company is unable to predict the date that the Supreme Court will subsequently
issue its decision. While the appeal is pending, the NMPUC's final order remains
in effect.
NMPUC Order on the Cost of Gas Case
As previously reported, the NMPUC issued a final order in this case on February
13, 1997. In the order, the NMPUC imposed, but suspended, a fine of $2.2 million
to the Company due to an allegedly incorrect cost factor (too low) that was
filed in November 1996. In addition, the NMPUC disallowed collection of $1.6
million of gas costs and ordered an independent audit to be conducted to review
the Company's gas cost factor calculations for the period of December 1995
through January 1997. In the order, the NMPUC accused the Company of
intentionally filing an inaccurate factor to avoid a hearing, thus impairing the
NMPUC's ability to investigate rising gas prices. The NMPUC also ordered the
docketing of two new investigations. The first, which required a Company filing
by March 15, 1997, will investigate whether the Company should exit the merchant
function. The merchant function refers to the Company's purchase and sale of
natural gas for its sales customers. The second will investigate the prudence of
the Company's portfolio strategies and purchase practices. In addition, the
NMPUC ordered the Company to file a new gas rate case by August 1, 1997, and
also ordered the Company to file an electric retail rate case by May 1, 1997.
The Company strongly disagrees with the NMPUC's final order. (See PART II, ITEM
7. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- OTHER ISSUES FACING THE COMPANY -- NMPUC ORDER -- THE COMPANY'S
JANUARY 1997 PGAC FACTOR VARIANCE REQUEST; ORDER TO FILE NEW RETAIL ELECTRIC AND
GAS RATE CASES" in the 1996 Form 10-K.)
On March 5, 1997, the NMPUC, noting that the Company had by letter indicated
that it might request a rehearing, entered, on its own motion, an order
reopening the proceeding to, among other things, take additional testimony
regarding the allegedly incorrect gas cost factor. The reopening order
specifically left all of the findings and conclusions in the February 13 order
in place, but ruled that the February 13 order was now an interim order and
established a procedural schedule for the Company to present additional
testimony and for additional hearings. On March 14, 1997, the Company filed a
motion for rehearing of the reopening order asking the NMPUC to withdraw the
February 13 order and enter a new final order.
-10-
On April 2, 1997, the NMPUC issued an order, partially granting the Company's
rehearing motion and agreeing to withdraw and vacate portions of the February 13
order. In the April 2 order, the NMPUC (1) withdrew the finding that, because
the veracity of the Company's filings have been brought into question, rate
cases for both gas and electric operations were necessary, (2) withdrew the
requirement that the Company must pay for an independent audit of its gas cost
filings, (3) suspended the imposition of the $2.2 million civil penalty and the
order prohibiting the Company from recovering $1.6 million in gas costs incurred
in December 1996, and (4) reaffirmed the March 5 order reopening the proceeding
for additional testimony. That testimony from the Company is due on May 19,
1997, and further hearings are scheduled for June 23, 1997. The Board has
established an ad hoc committee of outside directors to investigate the
assertions of misconduct made by the NMPUC in its February 13 order. The
committee has retained independent counsel to assist in the investigation. The
investigation is expected to be completed by the time Company testimony is due.
In the April 2 order, the NMPUC further found that, because of the rapid changes
occurring in the electric industry, all major electricity suppliers, within the
jurisdiction of the NMPUC, which have not adopted a plan to provide retail open
access must make a general rate case filing with the NMPUC. The April 2 order
additionally requires the electric operations to make a general rate case filing
by June 2, 1997. The status of the electric rate case filing requirement is
discussed below.
Filings Relating to Electric Rate Case and Electric Industry Restructuring
On April 24, 1997, the Company filed related motions in two separate cases
before the NMPUC: Case No. 2681, the NMPUC's Notice of Inquiry into electric
industry restructuring and Case No. 2761, the Company's electric rate case
filing ordered by the NMPUC. The Company proposes that the NMPUC reconvene the
Case No. 2681 proceedings in an attempt to arrive at consensus legislation to
present to the 1998 session of the New Mexico Legislature. In its filing, the
Company offers to pay for an expert facilitator or mediator selected by the
NMPUC to drive the process towards consensus. However, the Company's proposal is
conditioned on the NMPUC granting the motion in Case No. 2761 to stay all
proceedings and vacate the existing requirements to file a rate case by June 2,
1997, together with unbundled tariffs. The Company contends that all interested
parties should focus their efforts on reaching consensus on industry
restructuring for the 1998 legislative session and points out that the NMPUC
will be replaced by the Public Regulation Commission ("PRC") on January 1, 1999.
The Company also contends that the NMPUC's order requiring the rate case is for
the unlawful purpose of forcing retail competition since the NMPUC lacks such
authority, and that the Company's due process rights are violated by the
requirement to file a rate case in the time frame specified and because the lack
of a retail competition market structure makes it impossible to properly design
unbundled tariffs. The Company stated that it was prepared to litigate the
matter if its proposal to settle differences is not adopted by May 5, 1997
unless the NMPUC grants an initial extension to file the rate case to June 30 to
allow more time to consider the proposal. On April 28, 1997, the NMPUC issued an
order scheduling a hearing in Case No. 2681. The order stated that the NMPUC
should not rule on the two motions until it has a complete understanding of the
Company's proposal in both motions and, more importantly, the opportunity to
assess the likelihood that the collaborative efforts proposed by the Company
will succeed.
-11-
On May 6, 1997, the NMPUC issued an order, accepting the Company's proposal on
the collaborative efforts intended to introduce competition into the state's
retail electric power market. In the order, the NMPUC agreed to the Company's
proposal for a series of meetings including all interested parties to draft
legislation for consideration by the New Mexico Legislature in 1998. The NMPUC
suspended its earlier order requiring the Company to file an electric rate case
in June 1997 to facilitate the collaborative process. However, the NMPUC
indicated that it will order the Company to file an electric rate case by
September 1, 1997, if the parties in the negotiation fail to reach consensus on
an industry restructuring plan by August 1, 1997. If the collaborative process
terminates without consensus prior to August 1, the NMPUC will require the
Company to file an electric rate case no later than thirty days after issuance
of an order finding that the process has been terminated. The participants in
the collaborative process must file a plan outlining the process and
establishing the filing date for their restructuring proposals with the NMPUC.
In the order, the NMPUC also outlined three subjects which must be addressed in
the collaborative efforts, including (i) financial and economic issues, (ii)
consumer protection and environmental issues and (iii) timing of the transition
to a competitive market.
Filing Relating to Termination of Gas Merchant Function
As noted above, included in the February 13 order in the cost of gas case, the
NMPUC ordered the Company to make a separate filing addressing the terms and
conditions under which the Company would consider exiting the merchant function
and to identify any compelling issues that should be brought to the attention of
the NMPUC relating to exiting the merchant function. Since the cost of gas is
passed through to customers, the Company does not make a profit or loss on this
service.
On March 31, 1997, the Company filed its response in NMPUC Case No. 2760. In the
filing, the Company asserted that all customers should have the option to choose
their natural gas supplier, advocating that, ultimately, customer choice should
dictate whether the Company's gas operation retains its merchant function.
Currently, all customers may choose to become transportation customers on the
Company's distribution system, but nearly all residential and most small
commercial customers receive bundled sales service. The Company also outlined in
the filing that, in addition to continuing to provide customers with information
on their current options, it will conduct a customer survey to determine their
awareness of the choices and preferences of services provided by the Company and
other suppliers. As stated in the filing, the Company is currently planning to
file by May 16, 1997 a proposal with the NMPUC, outlining immediate measures to
facilitate the choice of transportation service by small commercial and
residential customers to be in place by next winter. By June 1, 1997, the
Company will also form a working group, consisting of customers, regulators, the
AG staff, the Company and gas marketers, to determine what is needed to increase
competition and more fully develop supplier choice for sales customers. In
addition, the Company apprised the NMPUC of its intent to file for approval of a
defined target purchased gas adjustment clause (similar to an incentive
mechanism) by September 1, 1997, to be in effect by the winter of 1998/1999.
-12-
Investigation of Gas Supply Procurement Practices
As noted above, included in the February 13 order in the cost of gas case, the
NMPUC established a docket in NMPUC Case No. 2759 to review the gas procurement
practices and policies of the Company's gas operations. On April 14, 1997, the
Company filed testimony supporting the prudence of its practices and policies.
The Company asserted that its procurement practices and policies were conducted
in accordance with the rules and regulations of the NMPUC and industry
standards, and all gas costs billed to customers were prudently incurred.
Hearings on the review are currently scheduled to commence on May 27, 1997.
Chihuahua, Mexico Project
As previously reported, in January 1997, the Company had submitted a joint bid
to develop, design, construct, manage and operate natural gas distribution
systems in the cities of Chihuahua and Cuauhtemoc-Anahuac and Delicias in the
State of Chihuahua, Mexico. (See PART II, ITEM 7, -- "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OVERVIEW --
Competitive Strategy" in the 1996 Form 10-K.) In January 1997, the Mexican
authority determined that the Company's joint bid did not pass the technical
review and awarded the project to another company. The Company continues to
explore and identify opportunities to provide energy and utility related
services and pursue new business opportunities in Mexico.
Update Regarding 1997 State Legislative Session Activities Affecting the
Electric Utility Industry in New Mexico
The 1997 New Mexico legislative session adjourned on March 22, 1997. Two retail
wheeling bills were introduced but both died on adjournment after being tabled
in the first committee.
Two joint memorials passed both chambers. One continues an interim committee
study of industry restructuring. The second directs a study on the tax impact on
any restructuring and alternative tax structures to preserve the state and local
revenue base. Gubernatorial action is not required.
A bill to create an interim committee to study transition to the new PRC which
will become effective January 1, 1999, passed but was vetoed by the Governor.
The Legislative Council can establish such a committee on its own or add those
duties to an existing interim committee. A bill that sets forth the five
districts for the new PRC commissioners was passed and signed into law by the
Governor. It is likely that legislation empowering the PRC will be discussed in
an interim committee and will be enacted during the 30-day 1998 session.
The Governor signed a bill authorizing the City of Las Cruces to condemn the
utility system owned by El Paso Electric Company that serves Las Cruces, New
Mexico; however, the new law is limited only to the City of Las Cruces.
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Disclosure Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful, cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement.
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.
New Mexico Industrial Energy Consumers ("NMIEC")
On April 22, 1997, NMIEC filed a petition for declaratory order with NMPUC. In
its petition, NMIEC states that the Company has interrupted service to NMIEC
members taking service under the Experimental Incremental Interruptible Power
Rate ("EIIPR") during off-peak periods and such interruptions violate the terms
of the EIIPR. The interruptions resulted from a scheduled maintenance for the
Company's 345 Kv line connected to the Four Corners Generating Station. NMIEC
alleges that its members have suffered economic harm from losses in production
due to such interruptions. The petition requests, among other things, (i)
clarification over the EIIPR to determine that EIIPR customers are entitled to
be treated the same as all other customers with similar consumption when system
emergency curtailments occur during the off-peak hours; (ii) determination that
the Company's practice of interrupting EIIPR customers during off-peak hours is
discriminatory; and (iii) the Company to discontinue such practice of
interrupting EIIPR customers. The Company is currently investigating the
complaint filed by NMIEC.
-14-
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Federal Deposit Insurance Corporation ("FDIC") Litigation, formerly Resolution
Trust Corporation ("RTC") Litigation ("MDL-995")
As previously reported, in April 1993, the Company and certain current and
former employees of the Company or Meadows Resources, Inc., a wholly-owned
subsidiary of the Company ("Meadows") ("BCD parties"), 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 Savings and Loan Association
("Western"). Three of the individuals sued by the RTC have indemnity agreements
with the Company. The claims related to alleged actions of the Company's or
Meadows' employees in 1987 in connection with a loan procured by Bellamah
Community Development ("BCD"), whose general partners include Meadows, from
Western and the purchase by that partnership of property owned by Western. The
FDIC (the FDIC was substituted for the RTC as plaintiff in MDL-995 in early
1996) 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 FDIC 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 FDIC claims that damages under the Arizona racketeering statute
would be trebled under applicable law. The prevailing parties on the Arizona
racketeering claims could seek fees and costs from the parties who do not
prevail.
In April 1996, representatives of the BCD parties and the FDIC met with a
mediator to continue settlement discussions. The mediation session resulted in
an agreement to settle the case for approximately $5.8 million, approximately
$3.1 million of which would be paid by the Company and the remainder to be paid
by insurance covering the BCD parties. (See PART I, ITEM 3. -- "LEGAL
PROCEEDINGS -- OTHER PROCEEDINGS" in the 1996 Form 10-K.)
Settlement documents are still being prepared. Delays have occurred due in part
to reassignment of attorneys for the FDIC but submission for court approval
appears imminent. After consideration of established reserves, the Company
believes that there will be no material adverse effect on the Company's
financial condition or results of operations. The Company continues to believe
that all of the claims made by the FDIC in this case are without merit but, for
business reasons, believes that the settlement is in the best interest of the
Company.
-15-
PVNGS Property Taxes
As previously reported, in April 1996, the PVNGS participants and Arizona
Department of Revenue reached an agreement to settle the litigation which was
pursued by the PVNGS participants, claiming that portions of the new tax law
enacted in 1990 are unconstitutional. The Arizona Court of Appeals ruled in
favor of the participants in 1995. As a result, in July 1996, a $200 million
property tax reduction was enacted which codifies the terms of the settlement.
(See PART I, ITEM 3. -- "LEGAL PROCEEDINGS -- PVNGS PROPERTY TAXES" in the 1996
Form 10-K.) On February 11, 1997, the parties to this action signed the final
documents, resulting in a reduction to the Company's Arizona property taxes by
approximately $4.0 million annually beginning in 1996 and extending at least
three years, barring any subsequent changes in the applicable tax laws. Pursuant
to the settlement, the Company is required to relinquish its claims for relief
with respect to prior years, and the defendants will not challenge the Court of
Appeals' decision concerning prospective relief for tax years after 1995.
For a discussion of other legal proceedings, see PART 1, ITEM 2. -- "MANAGEMENT
DISCUSSION -- OTHER ISSUES -- Gas Rate Case and Filings Relating to Electric
Rate Case and Electric Industry Restructuring".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Annual Meeting
At the meeting of shareholders held on April 29, 1997, the shareholders
reelected the following three nominees to serve as directors until the annual
meeting of shareholders in 2000, or until their successors are duly elected and
qualified, as follows:
Votes
Against Broker
Director Votes For or Withheld Abstentions Non-Votes
-------- --------- ----------- ----------- ---------
Robert G. Armstrong 36,963,927 449,567 * *
Reynaldo U. Oritz 36,941,448 472,046 * *
Paul F. Roth 36,928,722 484,772 * *
As reported in the Definitive 14A Proxy Statement filed March 24, 1997, the name
of each other director whose term of office as a director continued after the
meeting is as follows:
John T. Ackerman
Joyce A. Godwin
Manuel Lujan, Jr.
Laurence H. Lattman
Benjamin F. Montoya
Robert M. Price
-16-
The approval of the selection by the Company's Board of Arthur Andersen LLP as
independent auditors for the fiscal year ending December 31, 1997, was voted on,
as follows:
Votes
Against Broker
Votes for or Withheld Abstentions Non-Votes
--------- ----------- ----------- ---------
37,223,423 61,105 128,966 *
*Not applicable or not readily available.
ITEM 5. OTHER INFORMATION
Independent System Operator ("ISO")
On March 14, 1997, the Company entered into a Memorandum of Understanding with
other transmission service providers to investigate the feasibility and benefits
of forming an ISO in the Southwest. Entities participating in the investigation
process include the Company, Arizona Electric Power Cooperative, Arizona Public
Power Company ("APS"), El Paso Electric Company, Nevada Power Company, Plains
Electric Generation & Transmission Cooperative, Salt River Project, Texas-New
Mexico Power Company, Tucson Electric Power Company and the Desert Southwest
Region of the Western Area Power Administration. Federal Energy Regulatory
Commission Order 888, issued in 1996, encourages utilities to investigate the
formation of such ISOs and provides criteria under which the formation,
operation and governance of ISOs would be reviewed.
The proposed ISO, named the Desert Southwest Transmission and Reliability
Operator ("Desert STAR"), would be empowered to serve as a transmission security
monitor, handle transmission service reservations, transmission service
scheduling and accounting, manage relief of congestion of the transmission grid,
procure ancillary services required for transmission system operation and
operate a grid-wide Open Access Same-time Information System. Desert STAR would
be governed by an independent board representing all industry customer sectors.
The feasibility study group has held five public forums to receive input from
interested entities regarding the formation of an ISO. The participants expect
that a six month investigation would result in a completed feasibility study for
Desert STAR. Implementation of the feasibility study would require various
regulatory approvals at both the state and Federal level. The Company is
currently unable to predict the timing of the formation or the ultimate outcome
of the proposed ISO.
-17-
Four Corners Generating Station ("Four Corners")
Four Corners is located on land held under easements from the Federal government
and also under leases from the Navajo Nation. APS is the operating agent of the
plant and the Company owns a 13% ownership interest in Units 4 and 5. The lease
for Four Corners contains a waiver until 2001 of the requirement that APS pay
certain taxes to the Navajo Nation. APS and the Navajo Nation are currently
attempting to negotiate an agreement that would settle certain issues regarding
this waiver and other matters, including the computation of royalties due on the
sales of coal and possessory interest taxes paid by the Four Corners coal
supplier. The Company is currently unable to predict the outcome of this matter.
Person Station
The Company, in compliance with the New Mexico Environment Department's ("NMED")
Corrective Action Directive, determined that groundwater contamination exists in
the deep and shallow water aquifers at its retired fossil-fueled generating
station. The Company is required to delineate the extent of the contamination
and remediate the contaminants in the groundwater. The extent of the contaminant
plume in the deep water aquifer was assessed and results were reported to the
NMED. The Company estimated approximately $10.9 million to complete the
groundwater remediation program at Person Station. (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 -- Person Station" in the 1996 Form 10-K.)
Based on currently available information, the Company's revised estimate for
completion of the groundwater remediation program is approximately $6.3 million,
a reduction of $4.6 million from the previously reported estimate. As required
by regulation, the Company maintains a post-closure trust fund with a trustee to
demonstrate financial assurance for post closure activities. The current balance
of the trust fund is approximately $6.8 million. The remediation program
continues on schedule.
Organizational Change
Effective March 11, 1997, the Company's Board elected Mr. Jeff Sterba as
Executive Vice President and Chief Operating Officer, reporting directly to the
President and Chief Executive Officer. Mr. Sterba will focus his attention on
the operational side of the Company, overseeing the electric, gas, energy and
bulk power services business units. This change will enable the Company's
President to focus on industry restructuring and building better relationships
with regulatory and legislative leaders and customers to be a successful
competitor in the new energy marketplace.
-18-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
10.71** Reimbursement Agreement, dated as of February 1, 1997,
between Public Service Company of New Mexico and the Bank
named therein.
15.0 Letter Re: Unaudited Interim Financial Information
27 Financial Data Schedule
99.8 Participation Agreement dated as of August 12, 1986, 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 August 12, 1986, with the Owner
Participant), Chemical Bank, in its individual capacity and
as Indenture Trustee (under a Trust Indenture, Mortgage,
Security Agreement and Assignment of Rents dated as of
August 12, 1986, with the Owner Trustee), and Public Service
Company of New Mexico, including Appendix A definitions
(refiled).
99.8.1* Amendment No. 1 dated as of November 18, 1986, to
Participation Agreement dated as of August 12, 1986 (refiled).
99.10* Assignment, Assumption, and Further Agreement dated as of
August 12, 1986, between Public Service Company of New
Mexico and The First National Bank of Boston, as Owner
Trustee (refiled).
99.11* Participation Agreement dated as of December 15, 1986, 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 15, 1986, with the Owner
Participant), Chemical Bank, in its individual capacity and
as Indenture Trustee (under a Trust Indenture, Mortgage,
Security Agreement and Assignment of Rents dated as of
December 15, 1986, with the Owner Trustee), and Public
Service Company of New Mexico, including Appendix A
definitions (Unit 1 Transaction) (refiled).
99.12 Trust Indenture, Mortgage, Security Agreement and Assignment
of Rents dated as of December 15, 1986, between The First
National Bank of Boston, as Owner Trustee, and Chemical
Bank, as Indenture Trustee (Unit 1 Transaction) (refiled).
-19-
a. Exhibits (continued)
99.13 Assignment, Assumption, and Further Agreement dated as of
December 15, 1986, between Public Service Company of New
Mexico and The First National Bank of Boston, as Owner
Trustee (Unit 1 Transaction) (refiled).
99.14 Participation Agreement dated as of December 15, 1986, 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 15, 1986, with the Owner
Participant), Chemical Bank, in its individual capacity and
as Indenture Trustee (under a Trust Indenture, Mortgage,
Security Agreement and Assignment of Rents dated as of
December 15, 1986, with the Owner Trustee), and Public
Service Company of New Mexico, including Appendix A
definitions (Unit 2 Transaction) (refiled).
99.16 Assignment, Assumption, and Further Agreement dated as of
December 15, 1986, between Public Service Company of New
Mexico and The First National Bank of Boston, as Owner
Trustee (Unit 2 Transaction) (refiled).
*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.
**Two additional documents, substantially identical in all material respects
to this exhibit, have been entered into, relating to two additional letters
of credit supporting pollution control revenue refunding bonds. 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.
b. Reports on Form 8-K:
None.
-20-
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: May 8, 1997 /s/ Donna M. Burnett
------------------------------------
Donna M. Burnett
Corporate Controller and
Chief Accounting Officer
(Officer duly authorized to
sign this report)