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 June 30, 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 July 31, 1997
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION:
Report of Independent Public Accountants....................... 3
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Earnings--
Three Months and Six Months Ended June 30, 1997 and 1996....... 4
Consolidated Balance Sheets--
June 30, 1997 and December 31, 1996............................ 5
Consolidated Statements of Cash Flows--
Six Months Ended June 30, 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.......................................... 15
ITEM 5. OTHER INFORMATION.......................................... 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... 18
Signature ........................................................... 19
2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Public Service Company of New Mexico:
We have reviewed the accompanying condensed consolidated balance sheet of Public
Service Company of New Mexico (a New Mexico corporation) and subsidiaries as of
June 30, 1997, and the related condensed consolidated statements of earnings for
the three-month and six-month periods ended June 30, 1997 and 1996, and the
condensed consolidated statements of cash flows for the six-month periods ended
June 30, 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
July 31, 1997
3
ITEM 1. FINANCIAL STATEMENTS
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
---------------------- -----------------------
1997 1996 1997 1996
--------- ---------- --------- ----------
(In thousands except per share amounts)
Operating revenues:
Electric $ 166,390 $ 154,438 $ 327,651 $ 306,540
Gas 53,138 43,093 177,074 132,823
Energy Services 19,214 66 32,839 138
---------- ---------- ---------- ----------
Total operating revenues 238,742 197,597 537,564 439,501
---------- ---------- ---------- ----------
Operating expenses:
Fuel and purchased power 52,337 40,848 99,455 80,573
Gas purchased for resale 27,386 19,197 109,046 65,656
Gas purchased for resale - energy marketing 20,093 17 33,495 47
Other operation and maintenance 78,120 78,582 154,666 151,482
Depreciation and amortization 20,484 18,555 40,937 38,585
Taxes, other than income taxes 8,536 8,598 18,289 17,828
Income taxes 5,792 6,454 18,989 21,509
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Total operating expenses 212,748 172,251 474,877 375,680
---------- ---------- ---------- ----------
Operating income 25,994 25,346 62,687 63,821
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Other income and deductions, net of taxes 4,680 1,036 7,117 1,853
---------- ---------- ---------- ----------
Income before interest charges 30,674 26,382 69,804 65,674
---------- ---------- ---------- ----------
Interest charges:
Interest on long-term debt 11,561 12,118 23,684 24,203
Other interest charges 3,546 722 5,657 1,481
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Net interest charges 15,107 12,840 29,341 25,684
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Net earnings 15,567 13,542 40,463 39,990
Preferred stock dividend requirements 146 146 293 293
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Net earnings applicable to common stock $ 15,421 $ 13,396 $ 40,170 $ 39,697
========== ========== ========== ==========
Average shares of common stock outstanding 41,774 41,774 41,774 41,774
========== ========== ========== ==========
Net earnings per share of common stock $ 0.37 $ 0.32 $ 0.96 $ 0.95
========== ========== ========== ==========
Dividends paid per share of common stock $ 0.17 $ 0.12 $ 0.29 $ 0.12
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
4
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
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(Unaudited)
(In thousands)
ASSETS
Utility plant $2,533,991 $2,489,921
Accumulated provision for depreciation
and amortization (976,535) (937,228)
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Net utility plant 1,557,456 1,552,693
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Other property and investments 274,208 254,268
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Current assets:
Cash 3,526 11,125
Temporary investments, at cost 22,550 9,128
Receivables 163,655 197,025
Income taxes receivable 5,939 18,825
Fuel, materials and supplies 42,655 41,260
Gas in underground storage 6,075 2,679
Other current assets 8,346 6,632
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Total current assets 252,746 286,674
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Deferred charges 140,475 136,679
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$2,224,885 $2,230,314
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CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity:
Common stock $ 208,870 $ 208,870
Additional paid-in capital 470,271 470,358
Excess pension liability, net of tax (1,840) (2,102)
Retained earnings since January 1, 1989 103,152 77,185
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Total common stock equity 780,453 754,311
Cumulative preferred stock without mandatory
redemption requirements 12,800 12,800
Long-term debt, less current maturities 714,183 713,919
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Total capitalization 1,507,436 1,481,030
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Current liabilities:
Short-term debt 103,000 100,400
Accounts payable 106,993 130,661
Dividends payable 7,248 5,159
Current maturities of long-term debt 340 14,970
Accrued interest and taxes 21,961 23,356
Other current liabilities 25,578 25,477
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Total current liabilities 265,120 300,023
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Deferred credits 452,329 449,261
----------- -----------
$2,224,885 $2,230,314
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30
----------------------
1997 1996
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(In thousands)
Cash Flows From Operating Activities:
Net earnings $ 40,463 $ 39,990
Adjustments to reconcile net earnings to net cash
flows from operating activities:
Depreciation and amortization 46,329 47,219
Accumulated deferred investment tax credit (2,238) (2,332)
Accumulated deferred income tax 3,564 20
Changes in certain assets and liabilities:
Receivables 49,846 10,996
Fuel, materials and supplies (4,791) 3,726
Deferred charges (1,917) 4,515
Accounts payable (23,695) (9,436)
Accrued interest and taxes (1,395) (140)
Deferred credits 1,261 (5,601)
Other (1,602) (7,447)
Other, net 5,336 2,958
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Net cash flows from operating activities 111,161 84,468
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Cash Flows From Investing Activities:
Utility plant additions (55,592) (40,655)
Increase in nuclear decommissioning trust (23,000) -
Return of principal PVNGS LOBs 820 -
Increase in other property and investments (687) (3,089)
Temporary investments, net (13,422) (33,159)
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Net cash flows from investing activities (91,881) (76,903)
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Cash Flows From Financing Activities:
Bond redemption premium and costs (2,319) (196)
Repayments of other long-term debt - (179)
Trust borrowing for nuclear decommissioning 23,000 -
Repayments of short-term borrowings (35,180) -
Dividends paid (12,380) (5,261)
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Net cash flows from financing activities (26,879) (5,636)
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Increase (Decrease) in cash (7,599) 1,929
Cash at beginning of period 11,125 4,228
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Cash at end of period $ 3,526 $ 6,157
========== ==========
Supplemental Cash Flow Disclosures:
Interest paid $ 30,036 $ 25,205
========== ==========
Income taxes paid, net $ 22,250 $ 25,500
========== ==========
The accompanying notes are an integral part of these financial statements.
6
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 is 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 June 30, 1997, the nuclear decommissioning trusts had net assets
with a market value of $26.8 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 six
months 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 of $214.0 million include utility construction
expenditures, purchases of PVNGS Lease Obligation Bonds ("LOBs") and cash
dividend requirements for both common and preferred stock. The Company spent
approximately $68.0 million for capital requirements during the first half of
1997 and anticipates spending approximately $146.0 million during the remainder
of 1997. The Company expects that such cash requirements will 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 June 30,
1997, the Company had $80 million of short-term borrowings against its liquidity
arrangements and had $140 million in unused liquidity capacity. Included in this
capacity were $100 million under a secured revolving credit facility
("Facility"), $20 million of 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 and $20 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.
As of June 30, 1997, the Company had approximately $22.6 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 June 3, 1997, the Company's board of directors ("Board") declared a quarterly
cash dividend of 17 cents per common share, payable August 22, 1997, to the
common stockholders of record as of August 1, 1997. 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.
8
RESULTS OF OPERATIONS
Net earnings applicable to common stock increased $2.0 million ($.05 per share)
for the quarter ended June 30, 1997 over the same quarter of last year. Net
earnings applicable to common stock for the six months ended June 30, 1997
increased $.5 million ($.01 per share) over the same period of last year. The
following discussion highlights significant items which affected the results of
operations for the quarter and six months ended June 30, 1997 and 1996.
Electric gross margin (electric operating revenues less fuel and purchased power
expense) increased $.5 million and $2.2 million for the quarter and six months
ended June 30, 1997, respectively, over the corresponding periods a year ago.
These increases were attributable to retail load growth for the quarter and
increased off-system sales margin for the six month period.
Gas gross margin (gas operating revenues less gas purchased for resale)
increased $1.9 million and $.9 million for the quarter and six months ended June
30, 1997, respectively, over the corresponding periods a year ago. The main
contributor to these increases was the implementation of a new monthly customer
charge (access fee) starting February 1997 pursuant to a gas rate order.
The increase in Energy Services operating revenues and gas purchased for resale
reflects the activities related to the buying, selling, transporting and storing
of natural gas by the Company's Energy Services Business Unit.
Other operation and maintenance ("O&M") expenses decreased $.5 million and
increased $3.2 million for the quarter and six months ended June 30, 1997,
respectively, from the corresponding periods a year ago. The increase in O&M
expenses for the six months ended June 30, 1997 were due to increases in (i)
administrative and general ("A&G") labor expense of $2.1 million resulting from
a 1997 recording of compensation expense stemming from the exercise of stock
options, (ii) office supplies and expenses of $1.9 million resulting from
increased computer related costs, (iii) customer related service expenses of
$1.5 million and (iv) employee benefit expenses of $1.0 million. Such increased
expenses were offset by lower electric maintenance expenses of $3.3 million
resulting from lower scheduled maintenance outages at the PVNGS, San Juan
Generating Station ("SJGS") and Four Corners Generating Station ("Four
Corners"), lower PVNGS property tax and the 1996 incentive pay accrual.
Other income and deductions, net of taxes increased $3.6 million and $5.3
million for the quarter and the six months ended June 30, 1997, respectively,
over the corresponding periods of last year due to increased interest income
from the investment in the PVNGS LOBs and settlement of a litigated case.
Interest charges increased $2.3 million and $3.7 million for the quarter and the
six months ended June 30, 1997, respectively, over the same periods last year
due to increased short-term borrowings for the purchase of the $200 million of
PVNGS LOBs and interest accruals on the balance due customers related to the
gain associated with the 1995 gas asset sale.
9
OTHER ISSUES FACING THE COMPANY
Collaborative Effort on the Electric Industry Restructuring
As previously reported, the NMPUC issued an order in May 1997, accepting the
Company's proposal on the collaborative efforts intended to introduce
competition into the state's retail electric power market. The Company had
proposed a series of meetings including all interested parties to draft
legislation for consideration by the New Mexico Legislature in 1998. In order to
facilitate the collaborative process, the NMPUC suspended its earlier order
requiring the Company to file an electric rate case in June 1997. The NMPUC
indicated in its order that it would order the Company to file an electric rate
case by September 1, 1997, if the parties in the negotiation failed to reach
consensus on an industry restructuring plan by August 1, 1997, or thirty days
after the collaborative was terminated due to lack of consensus. (See Part I,
Item 2. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- OTHER ISSUES FACING THE COMPANY -- Filings Relating to
Electric Rate Case and Electric Industry Restructuring" in the Company's
quarterly report on Form 10-Q for the quarter ended March 31, 1997.)
The Company and interested parties, including a number of customer
organizations, an industrial energy users group, the state Attorney General
("AG"), the staff of the NMPUC, power marketers, environmental groups and
regulated utility companies have held extensive meetings for drafting proposed
legislation on restructuring the electric industry for the 1998 state
legislative session. On June 18, 1997, certain consumer groups announced that
the collaborative effort to draft legislation had reached an impasse and
requested the NMPUC to declare the process terminated and order the electric
rate case to be filed. The consumer groups had demanded that the Company and
other regulated utilities in the state either lease or divest their electric
distribution systems to an independent operator, or divest their generation and
energy services businesses. The groups also opposed stranded cost recovery in
the absence of divestiture. The Company and other regulated utilities
participating in the collaborative process found that position unacceptable. The
Company and certain other interested parties requested the NMPUC to order the
process to continue with additional guidelines and authority granted to the
facilitators.
On July 1, 1997, the NMPUC ordered the Company and the interested parties
involved in the discussions on electric restructuring to resume negotiations. In
ordering resumption of the discussions, the NMPUC revised its original rules
regarding the collaborative process. Under the new rules, the NMPUC will work
closely with the two facilitators who are to guide the discussions to resolve
intractable issues. By rescinding its definition of consensus as unanimity and
giving the facilitators more control over the process, the NMPUC encouraged the
parties to reach a mutually satisfactory agreement. The NMPUC ordered a Final
Report on the collaborative process to be filed no later than September 15,
1997, and thereafter, the NMPUC will report the results of the collaborative
process to the legislative interim committee charged with studying the electric
industry restructuring in New Mexico.
The schedule for the Company's electric rate case has been postponed to October
1, 1997. Depending on the outcome of the collaborative process, the NMPUC will
determine at a later date whether the rate case is necessary.
10
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 ("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.) The AG
also filed a notice of appeal of the gas rate case on March 17, 1997. On June
11, 1997, the Company and the AG filed their briefs-in-chief with the Supreme
Court. The Company's brief challenged (i) the NMPUC's disallowance of loss on
reacquired debt, reservation fees and transportation discount amounts, (ii) the
NMPUC's rejection of a reliability cost surcharge on sales and transportation
customers, (iii) cost of capital issues, and (iv) the cumulative error of the
order, including the NMPUC's refusal to hear a proposed settlement of the case
stipulated among certain of the interested parties. The AG's brief challenged
the NMPUC's rate design and refusal to implement the reliability cost surcharge
on sales and transportation customers. Response briefs by participants in the
case are due on August 29, 1997; reply briefs by all participants are due on
September 22, 1997. Oral argument will be held 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 ("February 13 order"). 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 gas cost factor to avoid a hearing, thus
impairing the NMPUC's ability to investigate rising gas prices. The NMPUC also
ordered the docketing of three new proceedings. The first required a Company
filing by March 15, 1997 as to whether the Company should exit the merchant
function. The second investigated the prudence of the Company's portfolio
strategies and gas supply procurement practices. In the third, the NMPUC ordered
the Company to file a new gas rate case by August 1, 1997. (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.)
11
On March 5, 1997, the NMPUC issued 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 order.
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 (i) withdrew the finding that, because
the veracity of the Company's filings has been brought into question, rate cases
for both gas and electric operations were necessary, (ii) withdrew the
requirement that the Company must pay for the NMPUC to conduct an independent
audit of its gas cost filings, (iii) suspended the imposition of the $2.2
million fine and the order prohibiting the Company from recovering $1.6 million
in gas costs incurred in December 1996, and (iv) reaffirmed the March 5 order
reopening the proceeding for additional testimony.
The Board 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 retained independent counsel to assist in the investigation. On May 8,
1997, the report of the independent counsel was completed and sent to the NMPUC.
The report concluded that the Company neither falsified nor deliberately misled
the NMPUC in its gas cost factor statement that was filed in November 1996. The
report concluded that reliance on witnesses who had only secondary and general
information regarding the November 1996 filing after the resignation of a key
employee contributed to the finding by the NMPUC that the filing was false or
misleading. However, the report also concluded that the unusual procedural
setting of the proceeding including short notice of the issues to be considered,
dispensing with prefiled testimony and normal discovery and the fact that the
November 1996 filing became a focal point only after the hearing began
contributed significantly to the Company's inability to respond with appropriate
witnesses and evidence concerning the November 1996 filing.
On May 23, June 5, and July 9, 1997, the Company filed testimony in the reopened
proceeding. Hearings were held before the NMPUC on June 24, June 25 and July 16,
1997. The Company believes that it has presented unrebutted evidence that the
November 1996 gas cost filing contained no false or misleading information. The
NMPUC has not yet issued an order on rehearing.
In addition, the Company filed for an extension of time to file the new gas rate
case. On July 15, 1997, the NMPUC, without discussion, granted the Company an
extension until September 2, 1997 to file the new case.
12
Filing Relating to Termination of Gas Merchant Function
As previously reported, 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. 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.
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. (See Part I, Item 2. --
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- OTHER ISSUES FACING THE COMPANY -- Filing Relating to Termination
of Gas Merchant Function" in the Company's quarterly report on Form 10-Q for the
quarter ended March 31, 1997.) On June 1, 1997, the Company formed a working
group, consisting of customers, the AG, the NMPUC staff, the Company and gas
marketers, to determine what is needed to increase competition and more fully
develop supplier choice for sales customers. As a result, on June 30, 1997, the
Company filed a Stipulation entered into with several customers that outlined
interim measures to facilitate the choice of transportation service by small
commercial and residential customers to be in place by next winter. The Company
has also proposed that long-term solutions to issues raised by the working group
be addressed by a long-term working group on the Company's new gas rate case.
The NMPUC staff and AG opposed the Stipulation, principally based on concerns
with proper gas cost allocation. A hearing was held with the NMPUC on the
Stipulation on July 17, 1997, but was recessed until August 1, 1997, to enable
the parties to attempt resolution of the contested issues.
Investigation of Gas Supply Procurement Practices
As previously reported, 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. (See
Part I, Item 2. -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- OTHER ISSUES FACING THE COMPANY -- Investigation of
Gas Supply Procurement Practices" in the Company's quarterly report on Form 10-Q
for the quarter ended March 31, 1997.) Hearings on the review were held on June
9 through June 11, 1997. At the conclusion of the hearing, the NMPUC issued an
oral ruling that the Company was not imprudent in its gas procurement practices
for the 1996-97 winter season. Looking forward to the coming winter heating
season, the NMPUC expressed its view that the Company should utilize appropriate
contracting and hedging tools to reach a reasonable balance between low cost and
mitigation of price volatility in its gas procurement practices. The Company has
requested that the NMPUC issue a final written order, but such an order has not
yet been entered.
13
Purchased Gas Adjustment Clause ("PGAC")
On July 3, 1997, the Company submitted a filing with the NMPUC seeking approval
to modify the method pursuant to which it recovers its gas costs through the
PGAC. The Company proposed two options; the first option, a more levelized
mechanism, similar to the current monthly PGAC, establishes a projected weighted
average cost of gas to be used to recover gas costs from customers for up to a
four month period. The second option, which will be limited to the first 20,000
customers who request the option, offers one fixed price which will remain in
effect for one year, regardless of market conditions. Both options include the
use of financial instruments to provide moderation in gas prices.
No hearing date has been established for this case.
Transmission Right-of-Way
As previously reported, the Company has easements for right-of-way with the
Navajo Nation for portions of several transmission lines and other associated
facilities that facilitate delivery of the Company's generation resources to the
Albuquerque metropolitan area. One grant of easement for approximately 4.2 miles
of right-of-way for two parallel 345 Kv transmission lines expired in 1993. In
1995, the Company reached a tentative agreement with the Navajo Nation for a
twenty-year renewal of the transmission easement and resolution of all other
major right-of-way issues. Prior to execution of the agreement, another agency
of the Navajo Nation notified the Company that it was contesting certain water
rights at the SJGS, which, among other things, delayed resolution of the
transmission right-of-way issues. (See PART II, ITEM 7. -- "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
OTHER ISSUES FACING THE COMPANY -- Transmission Right-of-Way" in the 1996 Form
10-K.)
In mid-July 1997, the settlement documents for the renewal of the right-of-way
issues were approved by the Bureau of Indian Affairs ("Bureau") and finalized.
Pursuant to the settlement, the Company paid approximately $14.4 million to the
Navajo Nation, of which a portion will be billed to Tucson Electric Power
Company for their respective share, and the Bureau issued the various
right-of-way grants. The settlement resulted in the Navajo Nation receiving $3
million of the $14.4 million in the Company's common stock as partial payment
for the right-of-way grants. The Company arranged for the purchase of the stock
in the open market. The Company will amortize its share of the settlement over
the twenty year term of the agreement.
14
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
obtain and 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.
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 ("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.
15
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 were executed as of July 3, 1997, and a motion seeking
Court approval of the settlement was filed on July 23, 1997. Other parties have
thirty days to object to the settlement. Delays have occurred due in part to
reassignment of attorneys for the FDIC. After consideration of established
reserves, 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.
The Company did not concede to any wrongdoing in the settlement.
For a discussion of other legal proceedings, see PART 1, ITEM 2. -- "MANAGEMENT
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
OTHER ISSUES FACING THE COMPANY".
ITEM 5. OTHER INFORMATION
Four Corners
As previously reported, Four Corners is located on land held under easements
from the Federal government and also under leases from the Navajo Nation.
Arizona Public Service Company ("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 have negotiated a
settlement 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. (See PART
II, ITEM 5. -- "OTHER INFORMATION -- Four Corners Generating Station ("Four
Corners")" in the Company's quarterly report on Form 10-Q for the quarter ended
March 31, 1997.)
The settlement agreement has been approved by all participants at Four Corners
but remains subject to approval of the Navajo Nation Tribal Council and various
committees of the tribe. The Company anticipates approval by the Navajo Nation
but is unable to predict the exact timing of such approval. Under the agreement,
the Company will receive a refund of approximately $3.2 million and will be
committed to making certain future payments to the Navajo Nation in lieu of
certain taxes that were in dispute. The payment obligation extends through the
term of the lease and is approximately sixty percent of the previous tax payment
made under protest in escrow by the Company.
16
Water Supply
As previously reported, the Company initiated the process for renewal and
extension of a contract with the United States Bureau of Reclamation ("USBR")
for 16,200 acre feet of water for SJGS through the year 2025. The Navajo Nation
requested the USBR to delay renewal of the USBR contract due to claimed water
shortages of the Navajo Indian Irrigation Project. (See PART 1, ITEM 1. --
"BUSINESS -- ELECTRIC OPERATIONS -- Fuel and Water Supply" in the 1996 Form
10-K.) The Company has continued its discussions with the Navajo Nation to
resolve their concerns relating to the Company's proposed renewal of the water
contract with the USBR for SJGS. On March 27, 1997, the Resource Committee of
the Navajo Nation Tribal Council approved an agreement that commits the parties
to good faith negotiations on the water supply for SJGS for a period of ninety
days. The agreement also acknowledges that the water supply issues must be
resolved in connection with the Company's support of the resolution of the
issues raised by BHP Minerals International, Inc., concerning the Navajo
Nation's proposed selection of certain mining properties within San Juan and La
Plata mines pursuant to the Navajo-Hopi Land Settlement Act of 1974. The Company
and counsel for the Navajo Nation have recently agreed to continue negotiations
for a period of sixty days, which would conclude on August 26, 1997. The Company
is currently unable to predict the outcome of these discussions.
On July 15, 1997, the Company was notified by the USBR that the USBR had
received from the Solicitor of the U.S. Department of Interior a Memorandum
Opinion concluding that the Company's contract extension with the USBR would
require Congressional approval pursuant to Section 11 of the Navajo Indian
Irrigation Project and San Juan-Chama Project Authorization Act of 1962. The
Company intends to pursue such an approval once the contract is negotiated with
the USBR.
Diversification Plan
On June 10, 1997, the NMPUC hearing examiner issued a recommended decision for
approval, with a number of conditions, of the Company's request for
authorization to create three energy-related subsidiaries. (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 the Company's 1995 filing for approval, the Company requested permission to
invest a maximum of $50 million in the subsidiaries. The hearing examiner's
recommendation indicated that any capital infusion or financial assistance to
its proposed subsidiaries beyond the $50 million will require prior approval
from the NMPUC. The recommendation also directed that all investments made in
the subsidiaries and their operations should not adversely affect the Company's
ratepayers.
Exceptions to the recommended decision were filed by the Company, AG and the New
Mexico Industrial Energy Consumers. The NMPUC will review the recommendation and
can accept, reject, or modify the hearing examiner's recommendation. The Company
is currently unable to predict the outcome of the NMPUC's final decision.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
3.1* Restated Articles of Incorporation of the Company, as amended
through May 10, 1985
3.2* By-laws of Public Service Company of New Mexico With All
Amendments to and including December 5, 1994
10.52 Memorandum of Agreement between the Navajo Nation and Public
Service Company of New Mexico (Nine-Mile Transmission R-O-W)
15.0 Letter Re: Unaudited Interim Financial Information
27 Financial Data Schedule
*The Company hereby incorporates the exhibits by reference pursuant
to Exchange Act Rule 12b-32 and Regulation S-K, Section 10,
paragraph (d).
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: July 31, 1997
------------------------------------
Donna M. Burnett
Corporate Controller and
Chief Accounting Officer
(Officer duly authorized to sign
this report)
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