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, 1998
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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)
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(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
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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 1, 1998
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 Ended March 31, 1998 and 1997...................... 4
Consolidated Statements of Comprehensive Income-
Three Months Ended March 31, 1998 and 1997...................... 5
Consolidated Balance Sheets-
March 31, 1998 and December 31, 1997............................ 6
Consolidated Statements of Cash Flows-
Three Months Ended March 31, 1998 and 1997...................... 7
Notes to Consolidated Financial Statements...................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................... 10
PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS........................................... 15
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............................ 20
Signature ............................................................ 21
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 consolidated balance sheet of Public Service
Company of New Mexico (a New Mexico corporation) and subsidiaries as of March
31, 1998, and the related consolidated statements of earnings, consolidated
statements of comprehensive income and consolidated statements of cash flows for
the three-month periods ended March 31, 1998 and 1997. 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, 1997 (not presented herein), and, in
our report dated February 10, 1998, we expressed an unqualified opinion on that
statement. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1997, 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
April 28, 1998
3
ITEM 1. FINANCIAL STATEMENTS
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended
March 31
-------------------------
1998 1997
-------- ---------
(In thousands except
per share amounts)
Operating revenues:
Electric $ 179,652 $ 161,261
Gas 102,712 123,936
Energy Services 47,400 13,625
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Total operating revenues 329,764 298,822
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Operating expenses:
Fuel and purchased power 55,032 47,118
Gas purchased for resale 64,711 81,660
Gas purchased for resale and
other - Energy Services 52,330 13,402
Other operation and maintenance 84,002 76,546
Depreciation and amortization 21,074 20,453
Taxes, other than income taxes 9,440 9,753
Income taxes 10,896 13,197
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Total operating expenses 297,485 262,129
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Operating income 32,279 36,693
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Other income and deductions, net of taxes 2,722 2,437
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Income before interest charges 35,001 39,130
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Interest charges:
Interest on long-term debt 11,386 12,123
Other interest charges 2,401 2,111
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Net interest charges 13,787 14,234
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Net earnings 21,214 24,896
Preferred stock dividend requirements 147 147
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Net earnings applicable to common stock $ 21,067 $ 24,749
========= =========
Average shares of common stock outstanding 41,774 41,774
========= =========
Net earnings per common share (Basic) $ 0.50 $ 0.59
========= =========
Net earnings per common share (Diluted) $ 0.50 $ 0.59
========= =========
Dividends paid per share of common stock $ 0.17 $ 0.12
========= =========
The accompanying notes are an integral part of these financial statements.
4
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
For the Quarter Ended
March 31
----------------------
1998 1997
-------- --------
(In thousands)
Net Earnings $ 21,214 $ 24,896
-------- --------
Other Comprehensive Income, net of tax (note 3):
Unrealized gain on securities:
Unrealized holding gains arising during the period 3,875 2,065
Reclassification adjustment for gains included
in net earnings (87) (77)
Minimum pension liability adjustment - 262
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Total other comprehensive income 3,788 2,250
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Total Comprehensive Income $ 25,002 $ 27,146
======== ========
The accompanying notes are an integral part of these financial statements.
5
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
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(Unaudited)
(In thousands)
ASSETS
Utility plant $ 2,597,836 $ 2,576,236
Accumulated provision for depreciation
and amortization (1,024,596) (1,003,086)
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Net utility plant 1,573,240 1,573,150
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Other property and investments 309,250 310,775
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Current assets:
Cash 8,186 8,705
Temporary investments, at cost 14,157 9,490
Receivables 174,505 216,305
Fuel, materials and supplies 34,032 33,664
Gas in underground storage 8,463 13,158
Other current assets 7,034 4,509
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Total current assets 246,377 285,831
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Deferred charges 152,963 149,811
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$ 2,281,830 $ 2,319,567
============ ============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity:
Common stock $ 208,870 $ 208,870
Additional paid-in capital 467,530 469,073
Accumulated other comprehensive income,
net of tax 3,811 23
Retained earnings since January 1, 1989 141,901 129,188
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Total common stock equity 822,112 807,154
Cumulative preferred stock without mandatory
redemption requirements 12,800 12,800
Long-term debt, less current maturities 574,344 713,995
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Total capitalization 1,409,256 1,533,949
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Current liabilities:
Short-term debt 243,860 114,100
Accounts payable 94,600 154,501
Dividends payable 8,501 7,248
Current maturities of long-term debt - 350
Accrued interest and taxes 42,561 24,161
Other current liabilities 31,620 26,102
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Total current liabilities 421,142 326,462
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Deferred credits 451,432 459,156
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$ 2,281,830 $ 2,319,567
============ ============
The accompanying notes are an integral part of these financial statements.
6
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31
----------------------
1998 1997
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(In thousands)
Cash Flows From Operating Activities:
Net earnings $ 21,214 $ 24,896
Adjustments to reconcile net earnings to net
cash flows from operating activities:
Depreciation and amortization 24,156 23,275
Accumulated deferred investment tax credit (1,109) (1,119)
Accumulated deferred income tax (1,323) 1,662
Net loss on market sensitive portfolio 2,698 -
Changes in certain assets and liabilities:
Receivables 41,347 30,872
Fuel, materials and supplies 4,326 (430)
Deferred charges (245) 5,116
Accounts payable (59,907) (49,171)
Accrued interest and taxes 18,400 4,741
Deferred credits (3,205) 2,320
Other 378 (4,650)
Other, net 1,618 5,203
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Net cash flows from operating activities 48,348 42,715
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Cash Flows From Investing Activities:
Utility plant additions (25,624) (27,856)
Increase in nuclear decommissioning trust (860) (23,000)
Return of principal PVNGS LOBs 4,994 820
Increase in other property and investments (3) (373)
Increase in temporary investments, net (4,667) (11,326)
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Net cash flows from investing activities (26,160) (61,735)
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Cash Flows From Financing Activities:
Bond redemption premium and costs (3,479) (1,474)
Redemption of first mortgage bonds (140,206) -
Short-term borrowings for first mortgage
bonds redemption 140,206 -
Trust borrowing for nuclear decommissioning 860 23,000
Repayments of short-term borrowings (11,306) (400)
Exercise of employee stock options (1,540) -
Dividends paid (7,242) (5,149)
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Net cash flows from financing activities (22,707) 15,977
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Decrease in cash (519) (3,043)
Cash at beginning of period 8,705 11,125
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Cash at end of period $ 8,186 $ 8,082
========= =========
Supplemental Cash Flow Disclosures:
Interest paid $ 10,936 $ 13,971
========= =========
Income taxes paid, net $ 6,121 $ -
========= =========
The accompanying notes are an integral part of these financial statements.
7
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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, 1997 (the "1997 Form
10-K") filed with the Securities and Exchange Commission ("SEC").
(2) New Senior Unsecured Notes and Indenture
On March 11, 1998, the Company retired $140 million principal amount of first
mortgage bonds and replaced first mortgage bonds in the principal amount of $463
million collateralizing pollution control revenue bonds ("PCBs") with senior
unsecured notes which were issued under a new indenture. While first mortgage
bonds continue to serve as collateral for $111 million of PCBs, the lien on the
mortgage has been substantially reduced to cover only the Company's ownership
interest in the Palo Verde Nuclear Generating Station ("PVNGS"). All future
long-term debt financings are expected to be issued under an indenture similar
to the new indenture.
Coincident with the above transactions, the Company established a five-year,
$300 million unsecured revolving credit facility to replace the Company's $100
million secured revolving credit facility. Funds borrowed through this new
facility were used to retire the $140 million principal amount of first mortgage
bonds.
(3) Other Comprehensive Income
The Company adopted as of January 1, 1998, Statement of Financial Accounting
Standards Board ("SFAS") No. 130, "Reporting Comprehensive Income". This
statement requires the reporting of certain changes in the common stock equity
section of the balance sheet as other comprehensive income.
Minimum Accumulated
Unrealized Pension Other
Gains on Liability Comprehensive
Securities Adjustment Income
---------- ---------- -------------
Beginning Balance at January 1, 1998 $2,750 $(2,727) $ 23
Current Period Changes 3,788 - 3,788
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Ending Balance at March 31, 1998 $6,538 $(2,727) $3,811
====== ======= ======
8
The Company has two external trusts for funding its executive retirement program
and its share of decommissioning obligations for PVNGS, respectively. The trust
funds are invested partially in fixed income securities and domestic stock,
which are classified as available-for-sale. The Company reflects the unrealized
gains or losses on the investments for the executive retirement program and the
decommissioning trust for PVNGS Unit 3 in other comprehensive income. Such gains
or losses related to the PVNGS Units 1 and 2 trust investments are reflected in
the decommissioning reserve account. All prior periods have been restated for
comparability purposes.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company's 1997 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 1998 and 1997. 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 previously estimated capital requirements for 1998 of $218.9 million
included utility construction expenditures of $141.3 million and other cash
requirements for long-term debt sinking funds, purchase of PVNGS Lease
Obligation Bonds ("LOBs") and dividend payments for both common and preferred
stock. These projected capital requirements did not include funds for the
retirement of $140 million of taxable first mortgage bonds completed on March
11, 1998, or the planned refinancing of PVNGS lease debt through the issuance of
up to $435 million of senior unsecured notes ("SUNS") discussed below. During
the first quarter, the Company spent approximately $36.3 million for capital
requirements and anticipates spending approximately $182.6 million over the
remainder of 1998, including the $58 million spent on May 1, 1998, for the
purchase of PVNGS LOBs discussed below. The Company expects that these cash
requirements will be met primarily through internally generated cash. However,
to cover the difference in the amounts and timing of cash generation and cash
requirements, the Company intends to utilize short-term borrowings under its
liquidity arrangements. These estimates are under continuing review and subject
to on-going adjustment.
On March 11, 1998, the Company entered into a five-year, $300 million senior
unsecured revolving credit facility ("Revolver"). Also, on March 11, 1998, the
Company borrowed $148 million under the Revolver for the purpose of retiring its
outstanding taxable first mortgage bonds, which were defeased on March 11, 1998
and subsequently redeemed on April 10, 1998.
Also, on March 11, 1998, the Company replaced the first mortgage bonds
collateralizing $463 million of tax-exempt pollution control revenue bonds
("PCBs") with SUNs issued under a new senior unsecured note indenture. As of
March 31, 1998, there remains outstanding $111 million of tax-exempt PCBs
secured by first mortgage bonds. The 1947 Indenture of Mortgage and Deed of
Trust (the "Mortgage") was amended by vote of the bondholders on March 11, 1998.
A substantial amount of the Company's assets was released from the lien of the
Mortgage, leaving only the Company's owned interest in PVNGS under the lien of
the Mortgage. No future bonds can be issued under the Mortgage. With the
exception of the $111 million of first mortgage bonds securing tax-exempt PCBs,
the SUNs will be the senior debt of the Company. The SUNs indenture contains a
restriction on liens (except in certain limited circumstances) and certain other
covenants and restrictions.
10
The above mentioned transactions will result in increased administrative,
financial and strategic flexibility for the Company.
On May 1, 1998, the Company purchased $58 million of PVNGS LOBs, 10.15% Series.
The purchase of the LOBs was financed with the Company's liquidity facilities.
On April 27, 1998, the Company requested New Mexico Public Utility Commission
("NMPUC") approval to issue up to $435 million in SUNs to provide funds to
refinance the lease debt associated with the sale and leaseback portions of the
Company's interests in PVNGS ("Lease Debt"). As of May 1, 1998, the Company
holds $277 million in Lease Debt (including the $58 million mentioned above) as
an investment with the remaining $151 million in Lease Debt held in the public
market in the form of LOBs. The Company estimates that the replacement of the
Lease Debt with the issuance of the SUNs will save the Company an average of $3
million a year over the next 18 years. However, due to the recording of the
transaction costs in 1998, the replacement of the Lease Debt will have no impact
on 1998 earnings. Under an NMPUC order, any savings generated from the
refinancing will be split between the Company's customers (40%) and shareholders
(60%). The Company requested NMPUC approval on a schedule that would enable
completion of this transaction in the third quarter of 1998.
RESULTS OF OPERATIONS
Net earnings for the quarter decreased $3.7 million ($.09 per share) from the
corresponding period last year.
Electric gross margin (electric operating revenues less fuel and purchased power
expense) for the current quarter increased $10.5 million from a year ago due to
increased wholesale energy sales of 34.7% as a result of continued improvement
in the Company's wholesale power marketing efforts. However, gas gross margin
(gas operating revenues less gas purchased for resale) decreased $4.3 million
from the corresponding period a year ago as a result of changes in the rate
structure resulting from a 1997 gas rate order.
Energy Services Business Unit gross margin was negative and decreased $5.2
million from a year ago due to the recording of losses related to the gas
marketing portfolio. The Company does not anticipate an earnings contribution
from the Energy Services Business Unit over the next few years.
Other operation and maintenance expenses increased $7.5 million over the
corresponding quarter a year ago due to higher maintenance costs associated with
scheduled outages at the San Juan Generating Station ("SJGS"), increased pension
and benefit expense resulting from changes to the Company's pension plan and
higher costs related to gas marketing activities. Such increases were offset by
lower salary expense of $3.5 million resulting from the recording of
compensation expense in 1997 relating to the exercise of employee stock options.
11
OTHER ISSUES FACING THE COMPANY
Electric Rate Case
As previously reported, in November 1997, the Company filed its electric rate
case pursuant to an NMPUC order. In the filing, the Company stated that,
although the Company could justify a $5 million rate increase, it would not seek
to increase rates, stating that rate stability is important in preparing for
industry restructuring. In conjunction with the rate case filing, the Company
had requested the New Mexico Supreme Court ("Supreme Court") to issue an order
disqualifying and removing the chairman of the NMPUC from participating in this
rate case. Pending a decision, the Supreme Court issued a stay prohibiting the
chairman of the NMPUC from participating in the rate case. (See PART II, ITEM
7.-"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - OTHER ISSUES FACING THE COMPANY - REGULATORY ISSUES - Electric Rate
Case" in the 1997 Form 10-K.) On April 17, 1998, the Supreme Court lifted the
stay, allowing the chairman of the NMPUC to participate in the Company's
electric rate case.
On April 6, 1998, the NMPUC staff and intervenors in the rate case filed their
testimony. The NMPUC staff recommended a decrease of $33.2 million in current
rates while the New Mexico Attorney General ("AG") and the City of Albuquerque
("COA") recommended decreases of $31.2 million and $45.4 million, respectively,
based on traditional cost of service ratemaking. In addition, the AG recommended
that market pricing should be used to price the generation portion of the
Company's rates and, if stranded costs exist as a result of this pricing, the
Company should only be allowed to recover 50% of such amounts. The Company's
review indicates that if the AG's revaluation proposal is adopted, there could
be an additional $105 million reduction in rates and more than a $960 million
write-down of the Company's generation assets. The New Mexico Industrial Energy
Consumers ("NMIEC") also recommended that the Company's generation assets should
be revalued for ratemaking purposes to reflect the market value of the
facilities. The Company's review indicates that if NMIEC's revaluation proposal
is adopted, there could be an additional $60 million reduction in rates and more
than a $550 million write-down of the Company's generation assets. The Company
has reviewed the testimony of the NMPUC Staff and other intervenors and filed
its rebuttal testimony on May 6, 1998.
In rebuttal testimony, the Company stated that (1) the cost of service rate
reductions proposed by the NMPUC staff, AG and COA were not justified and (2)
the recommendations made by the AG and NMIEC regarding the revaluation of the
Company's generation assets were highly speculative, subject to numerous highly
subjective assumptions, overly complex and inappropriate. The Company's rebuttal
demonstrates that the plant revaluation proposals submitted by the AG and NMIEC
are, in reality, an unjustified attempt to partially rely on the long
discredited reproduction cost method of rate base valuation associated with the
fair value concept of ratemaking found to be inferior to the original cost less
depreciation method of rate base valuation long preferred by courts and
regulators. Hearings in the case are scheduled to begin May 18, 1998 with a
final order from the NMPUC sometime toward the end of 1998. The Company is
unable to predict the ultimate outcome of this case but will vigorously defend
its position and avail itself of any and all judicial remedies to do so.
12
The City of Albuquerque Retail Pilot Load Aggregation Program
As previously reported, in September 1997, the COA filed a petition with the
NMPUC to institute a retail pilot load aggregation program. In the petition, the
COA stated that it would serve as the aggregator and proposed to solicit bids
for an energy supplier. The plan would apply to certain selected customers,
ranging from residential to industrial classes, and would comprise 10-12 MW of
the Company's peak load. The NMPUC staff presented an alternative proposal to
the COA pilot proposal, which was for a larger pilot that would include a
broader mix of customer classes. The NMPUC staff also proposed that the NMPUC
order a separate proceeding to identify what stranded costs, transition costs
and administrative costs would be incurred by the Company in connection with a
pilot and the proper methodology for quantifying any appropriate recovery. (See
PART II, ITEM 7.-"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - OTHER ISSUES FACING THE COMPANY - City of
Albuquerque Retail Pilot Load Aggregation Program" in the 1997 Form 10-K.)
On March 30, 1998, the NMPUC issued an order scheduling hearings for stranded
cost issues related to the implementation of the pilot program. The Company and
other parties filed testimony on April 16, 1998, addressing: (i) the definition
of stranded costs; (ii) the legal basis of stranded cost recovery; (iii) the
factual basis for stranded cost recovery; (iv) the Company's total stranded
cost; (v) the share, if any, of the Company's stranded costs to be allocated to
the COA's pilot program and the NMPUC staff's proposed pilot program; and (vi)
assuming entitlement to recovery, the methodology for recovery and collection of
the Company's allowable stranded costs.
In its filing, the Company stated that it is impossible to accurately quantify
the stranded generation costs due to the existence of a number of different
variables affecting the market clearing price for generation in New Mexico.
These include the following: (i) the timing of restructuring; (ii) the form of
the restructured industry; (iii) the nature and efficiency of the market; and
(iv) how choice will be made available to customers. Using certain assumptions,
the Company updated the estimate of its stranded costs, using the Texas Public
Utility Commission Economic Cost Over Market Model ("ECOM"), to be between $290
million and $1.2 billion (in year 2001 dollars), depending on the market price
of electricity. Such assumptions included, but were not limited to: (i) a full
access date of 2001, (ii) market price scenarios of 2.5 cents/kWh, 3.0 cents/kWh
and 3.5 cents/kWh; and (iii) price escalation of two percent per year. (See PART
II, ITEM 7.- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - OVERVIEW - Restructuring the Electric Utility Industry"
in the 1997 Form 10-K.) The Company advised the NMPUC that the results of the
ECOM model estimates for stranded generation costs are highly sensitive to
various assumptions, requiring a true-up mechanism to adjust any estimate after
the fact.
Hearings were held before the NMPUC on April 20 and 21, 1998. The Company is
unable to predict the ultimate outcome of this proceeding but still believes
that a pilot program designed as part of the framework for overall industry
restructuring under legislative direction will have the most value for an
effective transition to full retail access.
13
Supreme Court Decision on Optional Services
On March 18, 1998, the Supreme Court issued its decision on the Company's appeal
of the NMPUC's orders which had denied the Company's proposed tariffs for
certain electric and gas optional services. The Supreme Court ruled that the
NMPUC was within its authority in determining that the optional services could
potentially be conducted through a non-regulated subsidiary and found no
infringement on management prerogatives. It held that, because the optional
services were of the nature of utility service, the NMPUC had the power to
disapprove the offering of such optional services by the gas and electric
divisions. The Company has filed a motion for rehearing in the Supreme Court
asking the Supreme Court to reverse the NMPUC's decision. Action on the motion
for rehearing is expected shortly. The Supreme Court decision did not address
the legality of operations of the Company's Energy Services Business Unit which
has been conducting its operations as a division of the Company. The Company has
concluded that the best approach at this time is to treat the Supreme Court's
decision as providing the NMPUC with authority to require the Energy Services
Business Unit to be operated only as a separate subsidiary. The Company believes
that success in its non-core businesses is imperative if the Company is to
continue to be successful in the anticipated deregulated market environment. A
favorable decision by the NMPUC in Case 2620, an application filed in 1994 to
create three separate subsidiaries, would allow the Company to continue the
Energy Services Business Unit activities through those subsidiaries. The Company
will be filing with the NMPUC in the near future regarding these Energy Services
Business Unit activities, pending a decision in Case 2620.
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. Words such as "estimates," "expects," "anticipates," "plans,"
"believes," "projects," and similar expressions identify forward-looking
statements. 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 costs; (iv) the ability of the Company to
successfully compete outside its traditional regulated market; (v) regional
economic conditions, which could affect customer growth; (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; (x) the cost of
debt and equity capital; (xi) weather conditions; and (xii) technical
development in the utility industry.
14
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
Republic Savings Bank ("RSB") Litigation
As previously reported, in July 1996, the United States Supreme Court ruled in
the United States v. Winstar Corporation ("Winstar case") that the Federal
government had breached its contractual obligations with certain thrifts in
refusing to recognize the accounting practices of supervisory goodwill and
capital credits. Meadows Resources, Inc. ("Meadows"), a wholly owned subsidiary
of the Company, and Republic Holding Company ("RHC"), wholly owned by Meadows,
have pending before the United States Court of Federal Claims a lawsuit filed in
1992, alleging that the government breached similar contractual arrangements to
those at issue in the Winstar case by refusing to recognize supervisory goodwill
and capital credits. The Federal government filed a counterclaim alleging breach
by RHC of its obligation to maintain RSB's net worth and moved to dismiss
Meadows' claim for lack of standing. (See PART I, ITEM 3. - "LEGAL
PROCEEDINGS-OTHER PROCEEDINGS-Republic Savings Bank ("RSB") Litigation" in the
1997 Form 10-K.)
RSB filed a motion for partial summary judgment on the issue of liability under
its breach of contract claim based on the United States Supreme Court's decision
in the Winstar case. The Federal government filed a cross motion for summary
judgment and opposed RSB's motion. On December 22, 1997, the judge entered an
opinion, addressing eleven issues common to the question of governmental
liability in a number of cases including the RSB case, ruling in favor of the
plaintiffs on all issues and severely critical of the government's litigation
tactics. The judge ordered the Federal government to show cause within sixty
days as to why the motions for summary judgment on contract liability issues of
RSB and plaintiffs in similar cases should not be granted. The Federal
government timely filed its response to the show cause order and RSB filed its
reply.. Decision on summary judgment is still pending. The court has ordered the
parties to appoint representatives to try and develop a process for settlement
of the cases and has assigned a judge to assist with the process. It is
premature to estimate the amount of recovery, if any, by Meadows and RHC.
Nuclear Decommissioning Trust
On March 31 and April 21, 1998, the Company and the trustee of the Company's
master decommissioning trust filed a civil complaint and an amended complaint,
respectively, against several companies and individuals for the
under-performance of a life insurance program. The program, which was approved
by the NMPUC and set up in a trust in 1987, is a type of corporate owned life
insurance, and is used to fund a portion of the Company's nuclear
decommissioning obligations for its 10.2% interest in PVNGS. In the lawsuit, the
Company asserts various tort, contract and equity theories against the
defendants. The Company is seeking, among other things, damages in an amount
that represents the difference between what the defendants represented that the
life insurance program would achieve and the amount that the Company's experts
currently project that the life insurance program will achieve. The Company is
currently unable to predict the ultimate outcome or amount of recovery, if any.
15
On April 8, 1998, the Company filed a case before the NMPUC to relieve the
Company of the obligation of investing in the life insurance program. A hearing
date for the Company's request has not been scheduled.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Annual Meeting
At the meeting of shareholders held on April 28, 1998, the shareholders
reelected the following three nominees to serve as directors until the annual
meeting of shareholders in 2001, or until their successors are duly elected and
qualified, as follows:
Votes
Against Broker
Director Votes For or Withheld Abstentions Non-Votes
-------- --------- ----------- ----------- ---------
John T. Ackerman 36,036,016 406,388 * *
Joyce A. Godwin 36,038,580 403,824 * *
Manuel Lujan, Jr. 36,016,689 425,715 * *
As reported in the Definitive 14A Proxy Statement filed March 23, 1998, the name
of each other director whose term of office as director continues after the
meeting is as follows:
Robert G. Armstrong
Laurence H. Lattman
Benjamin F. Montoya
Reynaldo U. Ortiz
Robert M. Price
Paul F. Roth
The approval of the selection by the Company's Board of Directors of Arthur
Andersen LLP as independent auditors for the fiscal year ending December 31,
1998, was voted on, as follows:
Votes
Against Broker
Votes for or Withheld Abstentions Non-Votes
--------- ----------- ----------- ---------
35,961,751 76,915 403,738 *
*Not applicable or not readily available.
16
Bondholder Consents
By written consents executed March 11, 1998, the holders of more than 75% of the
outstanding first mortgage bonds under the Company's Mortgage, as supplemented
and amended, approved changes, amendments and alterations in the Mortgage, as
contained in the Fifty-third Supplemental Indenture dated as of March 11, 1998.
The holders of $463,345,000 principal amount of outstanding first mortgage bonds
approved the action, while the holders of $111 million principal amount of
outstanding first mortgage bonds did not vote. The revisions to the Mortgage
allow the Company more flexibility with respect to property releases, as well as
with respect to covenants and administrative requirements under the Mortgage.
(See Item 2. - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES".)
ITEM 5. OTHER INFORMATION
Cobisa-Person Limited Partnership ("PLP")
As previously reported, in October 1996, the Company entered into a long-term
power purchase contract with the PLP to purchase approximately 100 MW of unit
contingent peaking capacity from a gas turbine generating unit for a period of
20 years, with an option to renew for an additional five years. The gas turbine
unit will be constructed and operated by the PLP and will be located on the
Company's retired Person Generating Station site located in Albuquerque, New
Mexico. (See PART I, ITEM 1. - "BUSINESS - ELECTRIC OPERATIONS - Sources of
Power" in the 1997 Form 10-K.)
On March 18, 1998, the Company and PLP executed amendments to the power purchase
agreement ("PPA"), site lease and the interconnection agreement, and executed a
new water use lease. The PPA was amended to change the maximum capacity the
Company was obligated to take from 116 MW to 132 MW and to change the commercial
operation date from May 1999 to May 2000. The Company formally notified the
NMPUC of such contract changes on March 23, 1998.
As part of the final order concerning the PLP project, the NMPUC approved a
stipulation between the Company and NMPUC staff to develop and evaluate a
Request for Proposals ("RFP") for 5 MW of solar capacity. (See PART I, ITEM 1. -
"BUSINESS - ELECTRIC OPERATIONS - Sources of Power" in the 1997 Form 10-K.) The
stipulation states that the Company will not be obligated to build a unit or
commit to a power purchase agreement for solar power prior to NMPUC approval of
a full-cost recovery mechanism. Any cost recovery approval must not place the
Company at a competitive disadvantage.
An RFP to purchase power from solar generation resources was issued in January
1998. Seven proposals were received by the Company on March 24, 1998. In
cooperation with the NMPUC staff, the Company has selected two companies to
continue in contract negotiations for this project. The Company expects an NMPUC
decision on or about July 31, 1998. The anticipated in-service date of the solar
facility is May 1999.
17
The 1997 Gas Rate Case
As previously reported, in October 1997, the Company filed its gas rate case
with the NMPUC pursuant to an NMPUC order issued in February 1997. In its
filing, the Company requested a rate increase of $12.6 million. The NMPUC staff
recommended a rate increase of $2.5 million. The AG, however, recommended a rate
decrease of $4.9 million. Other parties to the rate case recommended certain
adjustments to the Company's proposed rate increase. (See PART II, ITEM 7. -
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OTHER ISSUES FACING THE COMPANY- REGULATORY ISSUES- The 1997 Gas Rate
Case" in the 1997 Form 10-K.)
An uncontested stipulation settling the case was filed with the NMPUC on April
3, 1998, for its approval. A hearing on the stipulation is scheduled for May 13,
1998. If approved, there would be no significant change in the Company's overall
revenue levels. However, the stipulation provides for a restructuring of
residential rates, including a decrease in the monthly access fee from $14.56 to
$9.00 with an offsetting increase in the variable rate for gas consumption.
Working groups would be established to address key issues related to
transportation service and rate design. The stipulation also establishes a
mechanism for the recovery of certain costs incurred by the Company in
settlement of past gas supply contracts. Recovery of these costs would be
partially offset by revenues stemming from off-system gas sales. The Company
anticipates a final order from the NMPUC on the stipulation during the second
quarter of 1998.
Should the stipulation be rejected by the NMPUC, a hearing of the full litigated
case would be scheduled for the near future. The Company is currently unable to
predict the ultimate outcome of this case.
Proposed Rulemaking
As previously reported, in February 1998, the NMPUC issued a notice of proposed
rulemaking (the "Notice") which, if adopted, would require additional
information to be disclosed on customer bills. The Notice proposed, among other
things, that each electric utility separately state in its bills to customers
the portions of its rates which are attributable to generation, transmission and
distribution functions, respectively. (See PART I, ITEM 1. - " BUSINESS - RATES
AND REGULATION - Proposed Rulemakings" in the 1997 Form 10-K.)
In March 1998, comments were filed by utility companies which are under NMPUC
jurisdiction, including the Company. The utility companies generally maintain
that dissemination of unbundled billing information as proposed in the Notice is
premature, will confuse consumers, and will not provide them with accurate
information. The utility companies also maintain that their existing billing
systems cannot accommodate such a change without spending large amounts of time
and money on a project of this nature. The utility companies, however, offered
alternatives, such as providing bill stuffers to customers in the interim and
conducting workshops or undertaking further study. The Company is currently
unable to predict the final outcome of this proposed rulemaking.
18
Nuclear Safety Performance Rating on PVNGS
On April 8, 1998, Arizona Public Service Company, the operating agent of PVNGS,
received the latest Systematic Assessment of Licensee Performance ("SALP")
rating from the Nuclear Regulatory Commission on the operations of the PVNGS
units.
SALP reports rate safety performance at nuclear plants in four functional areas:
(i) plant operations; (ii) maintenance; (iii) engineering; and (iv) plant
support. Ratings of category 1, 2, or 3 are assigned, reflecting "superior,"
"good" or "adequate" performance. PVNGS was rated as "superior" in maintenance,
engineering and plant support categories, and was rated as "good" in the area of
plant operations.
Indian Tribes: Air Quality Planning and Management
On April 13, 1998, the Company, in conjunction with Salt River Project, Nevada
Power Company and Tucson Electric Power Company, filed a petition for review of
the United States Environmental Protection Agency ("EPA") final rule, "Indian
Tribes: Air Quality Planning and Management", in the United States Court of
Appeals for the District of Columbia Circuit. The purpose of this petition is to
challenge the final rule, which is based on treatment of tribes as states under
the Clean Air Act (the "Act"), on several grounds. The particular concerns for
the Company include the lack of judicial review provisions for operating
permits, jurisdictional issues and conflict with pre-existing treaties or
binding agreements. In the appeal, the Company's interests as operator and joint
owner of SJGS, owner of other facilities located on reservations located in New
Mexico, and joint owner of Four Corners Generating Station ("Four Corners") are
involved. The Navajo Nation is a tribe which would potentially assert its status
as a state under the Act pursuant to the EPA rule in question. The Company
cannot predict the outcome of this appeal but believes that the Navajo Nation
would not have jurisdiction to regulate SJGS as the plant is not within
reservation boundaries or within Indian country as that term is used in the EPA
rule in question. Similarly, the Company's position is that Four Corners is not
subject to environmental regulation by the tribe under the lease that is in
effect until 2002.
Transmission Rate Case Settlement
As previously reported, in December 1996, a settlement agreement reached by the
Company and firm transmission customers was filed with the Federal Energy
Regulatory Commission ("FERC"). In accordance with the stipulated agreement, the
Company will refund, including interest, approximately $4.0 million to its firm
transmission customers and its firm wholesale transmission service revenues were
reduced by approximately $1.6 million beginning in 1997. (See PART 1, ITEM 1 -
"BUSINESS - RATES AND REGULATION - Electric Rates and Regulation - FERC -
Transmission Rate Case Settlement" in the 1997 Form 10-K.)
On April 21, 1998, FERC approved the settlement with no changes. The Company was
ordered to refund amounts collected in excess of the settlement rates within 30
days.
The Company's ancillary service rates were not settled in this agreement and a
prehearing conference has been set for May 5, 1998, to set a schedule for the
hearing on these rates.
19
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
4.3 Fifty-third Supplemental Indenture, dated as of March 11, 1998,
supplemental to Indenture of Mortgage and Deed of Trust, dated as of
June 1, 1947, between the Company and The Bank of New York (formerly
Irving Trust Company), as Trustee
4.4 Indenture (for Senior Notes), dated as of March 11, 1998, between
the Company and The Chase Manhattan Bank, as Trustee
4.5 First Supplemental Indenture, dated as of March 11, 1998,
supplemental to Indenture, dated as of March 11, 1998, between the
Company and The Chase Manhattan Bank, as Trustee
4.6 Second Supplemental Indenture, dated as of March 11, 1998,
supplemental to Indenture, dated as of March 11, 1998, between the
Company and The Chase Manhattan Bank, as Trustee
10.72 Revolving Credit Agreement dated as of March 11, 1998 among the
Company, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty
Trust Company of New York, and Chase Securities, Inc., and the
Initial Lenders Named Therein
10.73 Refunding Agreement No. 8A, dated as of December 23, 1997, among the
Company, the Owner Participant Named Therein, State Street Bank and
Trust Company, as Owner Trustee, The Chase Manhattan Bank, as
Indenture Trustee, and First PV Funding Corporation
10.74** Third Restated and Amended Public Service Company of New Mexico
Performance Stock Plan
15.0 Letter Re: Unaudited Interim Financial Information
27 Financial Data Schedule
99.22 1997 Supplemental Indenture, dated as of December 23, 1997, to Trust
Indenture, Mortgage, Security Agreement and Assignment of Rents,
dated as of August 12, 1986, between State Street Bank and Trust, as
Owner Trustee, and The Chase Manhattan Bank, as Indenture Trustee
* The Company hereby incorporates the exhibits by reference pursuant to
Exchange Act Rule 12b-32 and Regulation S-K, Section 10, paragraph (d).
** Designates each management contract or compensatory plan or arrangement
required to be identified pursuant to paragraph 3 of Item 14 (a) of Form
10-K.
b. Reports on Form 8-K:
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, 1998 /s/ Donna M. Burnett
------------------------------------
Donna M. Burnett
Corporate Controller and
Chief Accounting Officer
(Officer duly authorized to
sign this report)
21