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, 1999
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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
(Exact name of registrant as specified in its charter)
New Mexico 85-0019030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Alvarado Square, 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
--- ---
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 40,774,083 shares
----------------------------- -------------------------------
Class Outstanding at May 1, 1999
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, 1999 and 1998........................... 4
Consolidated Statements of Comprehensive Income-
Three Months Ended March 31, 1999 and 1998........................... 5
Consolidated Balance Sheets-
March 31, 1999 and December 31, 1998................................. 6
Consolidated Statements of Cash Flows-
Three Months Ended March 31, 1999 and 1998........................... 7
Notes to Consolidated Financial Statements........................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................ 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ......................................................... 17
PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS............................................. 18
ITEM 5. OTHER INFORMATION............................................. 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................. 19
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 condensed consolidated balance sheet of Public
Service Company of New Mexico (a New Mexico corporation) and subsidiaries as of
March 31, 1999, and the related consolidated statements of earnings,
comprehensive income and cash flows for the three-month periods ended March 31,
1999 and 1998. 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, 1998 (not presented herein), and, in
our report dated March 2, 1999, 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, 1998, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
April 30, 1999
3
ITEM 1. FINANCIAL STATEMENTS
PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended
March 31
----------------------
1999 1998
--------- ---------
(In thousands except
per share amounts)
Operating revenues:
Electric $184,442 $179,652
Gas 84,864 102,712
Energy Services 3,512 196
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Total operating revenues 272,818 282,560
--------- ---------
Operating expenses:
Fuel and purchased power 62,153 55,032
Gas purchased for resale 48,256 64,711
Cost of sales and projects - Energy Services 2,618 330
Other operation and maintenance 82,758 81,607
Depreciation and amortization 23,081 21,074
Taxes, other than income taxes 9,321 9,436
Income taxes 9,563 13,744
--------- ---------
Total operating expenses 237,750 245,934
--------- ---------
Operating income 35,068 36,626
--------- ---------
Other income and deductions, net of tax: 6,099 2,722
--------- ---------
Income before interest charges 41,167 39,348
--------- ---------
Interest charges:
Interest on long-term debt 16,714 11,386
Other interest charges 1,323 2,401
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Net interest charges 18,037 13,787
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Net earnings from continuing operations 23,130 25,561
Discontinued operations, net of tax:
Loss from operations of gas marketing - (4,347)
Cumulative effect of a change in accounting
principle, net of tax 3,541 -
--------- ---------
Net earnings 26,671 21,214
Preferred stock dividend requirements 147 147
--------- ---------
Net earnings applicable to common stock $ 26,524 $ 21,067
========= =========
Average shares of common stock outstanding 41,767 41,774
========= =========
Net earnings (loss) per share of common stock:
Earnings from continuing operations $ 0.55 $ 0.61
Loss from discontinued operations - (0.10)
Cumulative effect of a change in
accounting principle 0.08 -
--------- ---------
Net earnings per common share (Basic) $ 0.64 $ 0.50
========= =========
Net earnings per common share (Diluted) $ 0.63 $ 0.50
========= =========
Dividends paid per share of common stock $ 0.20 $ 0.17
========= =========
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)
Three Months Ended
March 31
----------------------
1999 1998
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(In thousands)
Net Earnings $ 26,671 $ 21,214
--------- ---------
Other Comprehensive Income, net of tax:
Unrealized gain (loss) on securities:
Unrealized holding gains arising during
the period 1,070 759
Less reclassification adjustment for
gains included in net income (604) (98)
Minimum pension liability adjustment - -
--------- ---------
Total Other Comprehensive Income 466 661
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Total Comprehensive Income $ 27,137 $ 21,875
========= =========
Note: Tax expense for Total Other Comprehensive Income for the three months
ended March 31, 1999 and 1998 was $305 and $433, respectively.
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,
1999 1998
------------ ------------
(Unaudited)
(In thousands)
ASSETS
Utility plant $ 2,604,620 $ 2,591,934
Accumulated provision for depreciation
and amortization (1,019,744) (998,175)
------------ ------------
Net utility plant 1,584,876 1,593,759
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Other property and investments 491,702 523,834
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Current assets:
Cash 481 2,573
Temporary investments, at cost 78,619 58,707
Receivables 185,004 197,906
Income tax receivable - 8,266
Fuel, materials and supplies 40,869 33,137
Gas in underground storage 1,914 2,537
Other current assets 6,688 4,666
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Total current assets 313,575 307,792
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Deferred charges 146,113 151,403
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$ 2,536,266 $ 2,576,788
============ ============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity:
Common stock $ 206,396 $ 208,870
Additional paid-in capital 459,234 465,386
Accumulated other comprehensive income,
net of tax 1,593 1,127
Retained earnings 204,389 186,220
------------ ------------
Total common stock equity 871,612 861,603
Minority interest 13,037 13,405
Cumulative preferred stock without mandatory
redemption requirements 12,800 12,800
Long-term debt, less current maturities 1,008,632 1,008,614
------------ ------------
Total capitalization 1,906,081 1,896,422
------------ ------------
Current liabilities:
Short-term debt - 26,620
Accounts payable 73,150 113,975
Dividends payable 147 147
Accrued interest and taxes 43,135 34,289
Other current liabilities 32,993 28,308
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Total current liabilities 149,425 203,339
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Deferred credits 480,760 477,027
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$ 2,536,266 $ 2,576,788
============ ============
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
1999 1998
-------- --------
(In thousands)
Cash Flows From Operating Activities:
Net earnings $ 26,671 $ 21,214
Adjustments to reconcile net earnings to
net cash flows from operating activities:
Depreciation and amortization 26,070 24,156
Accumulated deferred investment tax credit (855) (1,109)
Accumulated deferred income tax 718 (1,323)
Cumulative effect of a change in
accounting principle (5,862) -
Net loss on market sensitive portfolio - 2,698
Net gain on mark to market investments (214) -
Changes in certain assets and liabilities:
Receivables 20,775 41,347
Fuel, materials and supplies 233 4,326
Deferred charges 5,255 (245)
Accounts payable (43,660) (59,907)
Accrued interest and taxes 8,846 18,400
Deferred credits 2,082 (3,205)
Other (62) 378
Other, net 34 1,618
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Net cash flows from operating activities 40,031 48,348
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Cash Flows From Investing Activities:
Utility plant additions (18,217) (25,624)
(Increase) decrease in nuclear decommissioning
trust 26,620 (860)
Return of principal PVNGS LOBs - 4,994
Return of principal PVNGS Lessors' notes 9,029 -
Purchase of investment option (2,810) -
Sale of investment option 2,811 -
Increase in other property and investments (1,313) (3)
Increase in temporary investments, net (16,956) (4,667)
--------- ---------
Net cash flows from investing activities (836) (26,160)
--------- ---------
Cash Flows From Financing Activities:
Bond redemption premium and costs - (3,479)
Redemption of first mortgage bonds - (140,206)
Short-term borrowings for first mortgage
bonds redemption - 140,206
Return of CNA equity in Capital Trust (369) -
Repayments of trust borrowing for nuclear
decommissioning (26,620) 860
Repayments of short-term borrowings - (11,306)
Exercise of employee stock options - (1,540)
Common stock repurchase (5,848) -
Dividends paid (8,450) (7,242)
--------- ---------
Net cash flows from financing activities (41,287) (22,707)
--------- ---------
Decrease in cash (2,092) (519)
Cash at beginning of period 2,573 8,705
--------- ---------
Cash at end of period $ 481 $ 8,186
========= =========
Supplemental Cash Flow Disclosures:
Interest paid $ 20,528 $ 10,936
========= =========
Income taxes paid, net $ 1,475 $ 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, 1998 (the "1998 Form
10-K") filed with the Securities and Exchange Commission ("SEC").
(2) Accounting Changes
Effective January 1, 1999, the Company adopted Emerging Issues Task Force
("EITF") Issue No. 98-10, Accounting for Contracts Involved in Energy Trading
and Risk Management Activities. EITF Issue No. 98-10 requires gains or losses
resulting from the market value changes on energy trading contracts to be
recorded in earnings. The effect of the initial application of EITF Issue No.
98-10 is reported as a cumulative effect of a change in accounting principle
which increased the Company's consolidated net income by approximately $3.5
million (after related income tax expense of approximately $2.3 million), or
$.08 per common share. In addition, the Company recorded a gain of $100,000, net
of tax, resulting from market value changes with respect to these trading
activities during the first quarter of 1999.
(3) Segment Information
The Company's principal business segments are the four regulated business units:
Electric Service Business Unit ("Distribution"), Transmission Service Business
Unit ("Transmission"), Bulk Power Business Unit ("Generation") and the Gas
Services Business Unit ("Gas"). The Company's non operating subsidiaries and
Energy Services Business Unit are not reportable segments and are included in
"Other" for reconciliation purposes. Intersegment revenues are determined based
on a formula mutually agreed upon between affected segments and are not based on
market rates. Intersegment revenues are eliminated for consolidation purposes.
Summarized financial information by business segment for the three months ended
March 31, 1999 and 1998 is as follows:
Distribution Transmission Generation Gas Other Total
------------ ------------ ---------- -------- ------- --------
(In thousands)
1999:
Operating revenues:
External customers $129,183 $ 3,776 $ 51,483 $ 84,864 $ 3,512 $272,818
Intersegment revenues - $ 7,450 $ 77,970 - $ - $ 85,420
Segment net income (loss) $ 9,790 $ 1,315 $ 11,931 $ 4,983 $(1,348) $ 26,671
1998:
Operating revenues:
External customers $130,911 $ 3,817 $ 44,924 $102,712 $ 196 $282,560
Intersegment revenues - $ 7,273 $ 89,203 - $ - $ 96,476
Segment net income (loss) $ 4,254 $ 1,710 $ 13,830 $ 7,464 $(6,044) $ 21,214
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's 1998 Form 10-K PART II, ITEM 7. - "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" discussed
management's assessment of the Company's financial condition, results of
operations and other issues facing the Company. The following discussion and
analysis by management focuses on those factors that had a material effect on
the Company's financial condition and results of operations during the three
months ended March 31, 1999 and 1998. 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.
OPENING ELECTRIC COMPETITION AND THE SUPREME COURT'S DECISION ON THE ELECTRIC
RATE CASE
On April 8, 1999, the Governor of New Mexico signed the Electric Utility
Industry Restructuring Act of 1999 into law, opening the state's electric power
market to competition in a phased approach beginning in 2001. (See PART II, ITEM
7. - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - OTHER ISSUES FACING THE COMPANY - ELECTRIC INDUSTRY RESTRUCTURING
ACT OF 1999" in the Company's 1998 Annual Report on Form 10-K and Item 5, "Other
Events" in the Company's Current Report on Form 8-K dated April 14, 1999.)
The law requires the Company to file a transition plan with the Public
Regulation Commission ("PRC") by March 1, 2000, which will include, among other
things, separating regulated and non-regulated business activities into at least
two separate corporations, and proposed charges for the recovery of stranded
costs and transition costs. The law allows utilities to recover at least half of
their stranded costs with a provision for the recovery of more than half of
their stranded costs if utilities meet certain criteria specified in the law.
Utilities will also be allowed to recover through 2007 all transition costs
reasonably incurred to comply with the new law. Due to uncertainties surrounding
the stranded costs that the Company will be allowed to recover, the Company is
currently unable to determine the ultimate financial impact the new law will
have on the Company.
In March 1999, the New Mexico Supreme Court ("Supreme Court") overturned the
electric rate reduction order issued by the New Mexico Public Utility Commission
("NMPUC") in November 1998, and remanded the case to the PRC for further
proceedings consistent with the Supreme Court's opinion. The Company now has a
rate case pending before the PRC, which will likely result in a rate reduction.
(See "Electric Rate Case" in Item 5, "Other Events" in the Current Report on
Form 8-K dated March 30, 1999.)
9
On April 20, 1999, the PRC issued a procedural order on the remanded electric
rate case. Pursuant to the order, the parties to the case have until May 19,
1999, to file a negotiated settlement of some or all of the outstanding issues
with the PRC. If settlement is not reached, the case is scheduled for hearing.
The PRC directed the hearing examiner to issue a recommended decision so that a
final order could be issued by August 31, 1999. The Company and the parties
involved in the rate case have resumed settlement discussions. The Company is
currently unable to predict the ultimate outcome of this case.
At the April 20, 1999 open meeting, the PRC dismissed the City of Albuquerque's
petition for a retail pilot load aggregation program and closed the docket. (See
"City of Albuquerque ("COA") Retail Pilot Load Aggregation Program" in Item 5,
"Other Events" in the Current Report on Form 8-K dated March 30, 1999.)
Also, on March 30, 1999, Residential Electric, Inc. filed a motion for rehearing
with the Supreme Court, seeking dismissal of the petition for writ of mandamus.
The Supreme Court had partially granted the writ on March 1, 1999, with an
opinion issued March 15, 1999, ruling that the NMPUC had exceeded its authority
in ordering retail electric competition (see PART II, ITEM 7. - "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - OTHER
ISSUES FACING THE COMPANY - Residential Electric, Inc. ("REI")" in the 1998 Form
10-K). The Supreme Court denied the motion for rehearing on April 27, 1999. The
PRC has directed REI to file a verified statement concerning the current status
of its application and complaint by May 17, 1999, based on the Supreme Court's
opinion.
LIQUIDITY AND CAPITAL RESOURCES
The projection for total capital requirements for 1999 is $176 million which
includes $145 million of utility construction expenditures. During the first
quarter, the Company spent approximately $32.5 million for capital requirements
and anticipates spending approximately $143.5 million over the remainder of
1999. 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.
As of March 31, 1999, the Company had $405 million of available liquidity
arrangements, consisting of $300 million from a senior unsecured revolving
credit facility, $80 million from an accounts receivable securitization and $25
million in local lines of credit. At March 31, 1999, the Company did not have
any short-term borrowings and had $78.6 million in temporary investments.
10
The Company's ability to finance its construction program at a reasonable cost
is dependent largely upon its earnings, credit ratings, regulatory approvals and
financial market conditions. As a result of the recent passage of the electric
utility industry restructuring bill and the Supreme Court's ruling on the
Company's electric rate order, Duff & Phelps Credit Rating Co. removed the
"Rating Watch-Down" on the Company's debt and preferred stock and reaffirmed the
ratings on the Company's senior unsecured notes and first mortgage bonds.
Moody's Investors Service also changed the rating outlook on all of the
Company's securities to positive from stable.
On April 20, 1999, the Company requested PRC authorization for the issuance of
up to $11.5 million in tax-exempt pollution control revenue bonds to partially
reimburse the Company for expenditures associated with its share of a recently
completed upgrade of the emission control system at the San Juan Generating
Station ("SJGS"). The new bond issue is also subject to approval by the City of
Farmington and San Juan County.
RESULTS OF OPERATIONS
Net earnings applicable to common stock increased $5.5 million ($.14 per share)
for the quarter ended March 31, 1999, from the corresponding period last year.
The following discussion highlights significant items which affected the results
of operations for the quarters ended March 31, 1999 and 1998.
Continuing Operations
Electric gross margin (operating revenues less fuel and purchased power expense)
for the current quarter decreased $2.3 million from a year ago due to decreased
retail sales attributed to milder weather this year, offset by increased
wholesale sales, net of increased purchases for resale. In addition, 1998 fuel
expenses were lower than 1999 due to a tax settlement credit at Four Corners
Power Plant ("Four Corners") and extensive maintenance outages at SJGS Units 1
and 3 in 1998.
Gas gross margin (operating revenues less gas purchased for resale) decreased
$1.4 million from the corresponding period a year ago due to warmer weather
conditions in the current period and a monthly customer charge (access fee) not
being billed on some accounts during the first three months in 1999 as a result
of the new customer billing system problems.
Other operation and maintenance ("O&M") expenses increased $1.2 million for the
quarter over the corresponding period a year ago due to increases in customer
service related expenses, outside services and employee benefit costs, offset by
decreased electric maintenance expense due to higher maintenance outage
activities at SJGS in 1998.
Depreciation and amortization expenses increased $2.0 million over the same
period last year as a result of increases in plant balances and depreciation
rates.
11
Operating income taxes for the quarter ended March 31, 1999, decreased $4.2
million from the corresponding period a year ago due to decreased pre-tax
earnings from continuing operations for the current quarter.
Other income and deductions, net of taxes increased $3.4 million over the same
period last year due to the recording of interest income from the Palo Verde
Nuclear Generating Station ("PVNGS") Capital Trust.
Net interest charges increased $4.3 million over the corresponding period a year
ago as a result of the issuance of $435 million of senior unsecured notes in
1998, offset by a decrease in short-term debt interest charges.
Discontinued Operations
In August 1998, the Company adopted a plan to discontinue the natural gas
trading operations of its Energy Services Business Unit and completely
discontinued these operations on December 31, 1998. As a result, the Company
reclassified the losses from discontinued operations for the three month period
ended March 31, 1998. Losses from discontinued operations, net of taxes, for the
three months ended March 31, 1998, were $4.3 million, or $.10 per common share.
Cumulative Effect of a Change in Accounting Principle
Effective January 1, 1999, the Company adopted EITF Issue No. 98-10, Accounting
for Contracts Involved in Energy Trading and Risk Management Activities. The
effect of the initial application of the new standard is reported as a
cumulative effect of a change in accounting principle. As a result, the Company
recorded additional earnings, net of taxes, of approximately $3.5 million, or
$.08 per common share to recognize the gain on net open physical electricity
purchase and sales commitments considered to be trading activities.
OTHER ISSUES FACING THE COMPANY
New Customer Billing System
As previously reported, in November 1998, the Company installed a new customer
billing system. Due to a significant number of problems associated with the
implementation of the new billing system, the Company either sent inaccurate
bills or did not send bills to approximately 10% of its accounts. Under PRC
rules and PRC-approved Company rules, the Company is required to issue customer
bills on a monthly basis. In February 1999, the Company filed with the PRC an
application for temporary variance. Subsequently, the PRC issued an order
granting the Company a temporary variance through April 15, 1999, which allowed
the Company to issue bills to customers that had been delayed from 60-120 days.
The order further provided that a hearing examiner take evidence on whether the
Company has violated or is violating PRC rules, regulations, orders or the New
12
Mexico Public Utility Act ("Utility Act"), and if so, whether sanctions or fines
should be imposed. The PRC may impose penalties for violations of the Utility
Act or failure to obey any lawful order of the PRC in the amount of $100 to
$100,000 for each violation. Because of the problems associated with the
Company's new customer billing system, the Company has been estimating revenues,
customer accounts receivable and bad debt expense since its implementation in
November 1998. The Company's financial, tax and regulatory reports reflect these
estimates. (See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - OTHER ISSUES FACING THE COMPANY - NEW CUSTOMER BILLING
SYSTEM" in the 1998 Form 10-K.)
The hearing examiner issued an order on April 16, 1999, extending the temporary
variance to April 28, 1999. On April 29, 1999, a pre-hearing conference was
conducted at the PRC at which time the Company presented an oral status report
to the hearing examiner, the PRC Staff and other parties on the resolution of
the billing system problems. The Company advised the parties that significant
progress had been made toward resolving the problems associated with the new
billing system including the fact that all previously delayed bills had been
sent to customers. The Company also confirmed that in accordance with the PRC
Staff's recommendation adopted in the PRC's order, it would submit a report on
June 1, 1999, which would include an assessment of any outstanding issues
associated with the billing system and other specific data requested by the PRC
Staff. Another pre-hearing conference was set for June 3, 1999.
Currently, the Company is unable to predict the ultimate timing for the
completion of all billing system remediation efforts and associated issues or
outcome of regulatory actions regarding these problems.
Kirtland Air Force Base ("KAFB") Contract
The Company has been informed that the Department of Energy ("DOE") has entered
into an agency agreement with the Western Area Power Administration ("Western")
on behalf of KAFB, one of the Company's largest retail electric customers, by
which Western will competitively procure power for KAFB. The proposed wholesale
power procurement would begin at the expiration of KAFB's power service contract
with the Company in December 1999. On May 4, 1999, the Company received a
request for network transmission service from Western pursuant to Section 211 of
the Federal Power Act to facilitate the delivery of wholesale power to KAFB over
the Company's transmission system. The Company is currently reviewing the
application to determine if Western is eligible to request transmission service
under the Open Access Transmission Tariff on behalf of KAFB.
The revenue loss to the Company, if DOE replaces the Company as the power
supplier to KAFB, is presently being evaluated. In 1998, the Company recorded
electric revenues of approximately $18 million from KAFB. The Company is
currently unable to predict the ultimate outcome of this matter.
13
City of Gallup ("Gallup") Complaint
As previously reported, in 1998, Gallup, Gallup Joint Utilities and the
Pittsburg & Midway Coal Mining Co. ("Pitt-Midway") filed a joint complaint and
petition ("Complaint") with the New Mexico Public Utility Commission ("NMPUC")
(predecessor of the PRC), seeking an interim declaratory order stating, among
other things, that Pitt-Midway is no longer an obligated customer of the
Company, Gallup is entitled to serve Pitt-Midway and the Company must wheel
power purchased by Gallup from other suppliers over the Company's transmission
system. In September 1998, the NMPUC issued an order without conducting a
hearing, granting the requests sought in the Complaint. The Company strongly
disagreed with the NMPUC's decision and filed, in September 1998, a motion with
the Supreme Court, requesting an emergency stay of the NMPUC order pending its
appeal of the order. (See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - OTHER ISSUES FACING THE COMPANY - NMPUC
REGULATORY ISSUES - City of Gallup ("Gallup") Complaint" in the 1998 Form 10-K.)
In 1998, the Company and Pitt-Midway agreed in principle to sell to Pitt-Midway
the 115 kV transmission line originating at the 115 kV Yah-Ta-Hey substation
near Gallup and terminating at the coal mine properties of Pitt-Midway. The
NMPUC final order directed the Company to complete the application at the FERC
no later than December 31, 1998. On December 28, 1998, the Company filed an
application at the FERC for an order authorizing the Company to sell the line to
Pitt-Midway.
On April 5, 1999, the FERC issued an order approving the sale of the
transmission line to Pitt-Midway and directing Pitt-Midway to file rate
schedules for the transmission services it will provide the Company as a result
of obtaining ownership of the line. The closing date for the transfer of
ownership of the line has not been determined.
The April 5 order also sets for hearing the issue of additional transmission
service to Gallup before an administrative law judge. FERC has directed the
parties to appear before a settlement judge for a settlement conference. Absent
settlement, the issue of transmission service to Gallup will be set for hearing.
The appeal of the final order to the Supreme Court remains pending.
The Year 2000 Issue
As previously reported, the Year 2000 issue is a consequence of computer
programs ("IT Systems") written using two digits rather than four digits to
define the applicable year. As a result, computer systems could recognize the
Year 2000 as the year 1900, leading potentially to systems failures or
miscalculations causing disruptions in operations. Equipment that contains
embedded chips ("Embedded Systems") may also be affected by the Year 2000 issue.
The Company adopted a plan to address the Year 2000 issue for internal systems
and external dependencies ("Year 2000 Project"). (See PART II, ITEM 7. -
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - OTHER ISSUES FACING THE COMPANY - THE YEAR 2000 ISSUE" in the
Company's 1998 Form 10-K.)
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The estimated status of each phase as of April 30 , 1999, is set out below:
Estimated Status of
Year 2000 Project Phase Completion*
----------------------- -----------
Awareness Phase Completed
Inventory Phase 97%
Assessment Phase 89%
Planning and Scheduling Phase 78%
Repair Phase 55%
Testing Phase 33%
Re-Integration/Deployment Phase 8%
Company-Wide Testing Phase 2%
* The stated percentages represent the status of completion as of
April 30 , 1999, of all of the Company's IT Systems and Embedded
Systems, including mission critical systems. For purposes of this
presentation, "mission critical systems" include systems whose
failures could cause an interruption in the supply of electricity
or gas to the Company's customers, could interfere with the
Company's ability to communicate with customers, or could
interfere with the Company's cash flow.
On April 9, 1999, the Company participated in a drill organized by the North
American Electric Reliability Council ("NERC") to test operational preparedness
of the electric power grids of the United States and Canada. The drill focused
on sustaining reliable electric system operations during a simulated partial
loss of voice and data communications. The drill did not involve customer
electrical facilities and caused no interruption of electric service. The drill
provided the Company with an understanding of how it would operate under such
conditions and the issues it needs to address beforehand.
The Company has a 10.2% undivided interest in PVNGS, with portions of its
interests held under leases. Arizona Public Service Company ("APS"), the
operating agent of PVNGS, is currently conducting testing and evaluation of the
Year 2000 compliance of PVNGS. The Company's share of the PVNGS costs associated
with Year 2000 activities is approximately $1.7 million. These costs have not
been included in any prior Year 2000-related cost disclosures by the Company.
The Company has spent approximately $3.3 million on non-PVNGS Year 2000 related
activities during the first three months of 1999, and approximately $8.6 million
since the project's commencement.
15
The Company is currently installing a new energy management system ("EMS") for
its electric transmission system. That EMS is scheduled for a Year 2000 upgrade
in the third quarter of 1999. The Company is in the process of performing Year
2000 remediation work on its current EMS and was scheduled to have the
remediation completed before June 30, 1999. However, the Company has experienced
delays in completing the remediation work on the current EMS. If there are
further delays, the remediation of the current EMS may not be completed by June
30, 1999.
The statements in this section are Year 2000 Readiness Disclosures pursuant to
the Year 2000 Information and Readiness Disclosure Act, Pub. L. No. 105-271, 112
Stat. 2386 (1998).
Navajo Nation Tax Issues
APS, the operating agent for Four Corners, has informed the Company that in
March 1999, APS initiated discussions with the Navajo Nation regarding various
tax issues in conjunction with the expiration of a tax waiver in July 2001,
which was granted by the Navajo Nation in 1985. The tax waver pertains to the
possessory interest tax and the business activity tax associated with the Four
Corners operations on the reservation. The Company believes that the resolution
of these tax issues will require an extended process and could potentially
affect the cost of conducting business activities on the reservation. The
Company is unable to predict the ultimate outcome of discussions with Navajo
Nation regarding these tax issues.
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 inability 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 developments in the
utility industry.
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The costs of the Company's Year 2000 Project and the dates on which the Company
believes it will complete the phases of the Project are based upon management's
best estimates, which were derived using numerous assumptions regarding future
events, including the continued availability of certain resources, third-party
remediation plans, and other factors. There can be no assurance that these
estimates will prove to be accurate and actual results could differ materially
from those currently anticipated. Specific factors that could cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in Year 2000 issues, the ability to identify, assess,
remediate and test all relevant computer codes and embedded technology, and
similar uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Equity and Other Investment Return Risk
On March 26, 1999, the Company entered into a "collar" to hedge the equity risks
associated with its equity investments in the Company's retiree medical trusts,
Rabbi trust for executive retirement programs and nuclear decommissioning trusts
(collectively the "Trusts"). The "collar" utilizes exchange-traded and
over-the-counter put and call option contracts on the S&P 500 Index. These
option instruments are settled in cash at expiration. At the contract expiration
date, the Company will make payment to the counterparty under the call options
if the spot price exceeds the call exercise price or the Company will receive
payment from the put options if the spot price is less than the put exercise
price. These options will expire with no cash transfer if the S&P 500 Index is
between the put and call exercise prices. The Company accounts for the impact of
changes in the market value of these options under mark-to-market accounting on
a quarterly basis. As of March 31, 1999, the Company had outstanding put and
call options covering approximately $62 million in equity investments held
within the Trusts. As of March 31, 1999, the Company had unrealized gains of
approximately $100,000 related to the outstanding put and call options. Neither
the net fair value of the derivatives outstanding nor the potential, near-term
derivative losses from reasonably possible near-term changes in market prices
are material to the financial position, results of operations or liquidity of
the Company.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Republic Savings Bank ("RSB") Litigation
As previously reported, Meadows Resources Inc. ("Meadows"), a subsidiary of the
Company, has a 100% direct ownership interest in Republic Holding Company
("RHC"), and RSB was a wholly-owned subsidiary of RHC. Meadows and RHC have
pending before the United States Court of Federal Claims a lawsuit filed in
1992, alleging 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. 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. 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 ("U.S. Supreme
Court") decision in a similar case for which the U.S. Supreme Court had ruled
that the Federal government breached its contractual obligations. A decision on
summary judgment is pending. (See PART I, ITEM 3. "LEGAL PROCEEDINGS - OTHER
PROCEEDINGS - Republic Savings Bank ("RSB") Litigation" in the 1998 Form 10-K.)
On April 9, 1999, the judge issued a significant precedential opinion in another
case, Glendale Federal Bank v. U.S., in which the judge awarded Glendale damages
of $909 million on its restitution and reliance theories of damages. The judge
expressly stated that his Glendale decision is the precedent for adjudicating
damages asserted by other plaintiffs. However, a different judge of the U.S.
Court of Claims issued a decision on April 16, 1999, in California Federal Bank
v. U.S., denying the plaintiff's claims for reliance, restitution and lost
profit damages but awarding the costs to raise new capital to replace its
goodwill. At this time, it is premature to estimate the amount of recovery, if
any, by Meadows and RHC.
Purported Navajo Environmental Regulation
In February 1999, the EPA promulgated regulations setting forth the EPA's
approach to issuing Federal operating permits to covered stationary sources on
reservations and in Indian country ("Federal operating permit rule"), pursuant
to the Clean Air Act Amendments of 1990. On April 15, 1999, APS, the operating
agent for the Four Corners Power Plant, filed a petition for review of the
Federal operating permit rule in the United States Court of Appeals for the
District of Columbia ("D.C. Circuit"). On April 20, 1999, the Company, the
operating agent for SJGS, also filed a petition for review of the Federal
operating permit rule in the D.C. Circuit. The Company cannot currently predict
the outcome of this matter.
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ITEM 5. OTHER INFORMATION
Repurchase of Common Stock
As previously reported, in March 1999, the Company announced plans to repurchase
up to one million shares of the Company's outstanding common stock. Repurchased
shares are to be immediately retired and, subject to regulatory approval, would
be reissued to meet current and future requirements of options granted for
certain of its employees under the Company's Performance Stock Plan. (See
"Repurchase of Common Stock" in Item 5, "Other Events" in the Company's Current
Report on Form 8-K dated March 30, 1999.) As of April 20, 1999, the Company
purchased and retired one million shares of its common stock at an average price
of $17.61 per share. The Company currently has 1,588,000 stock options
outstanding to key employees at a weighted average strike price of $18.41 per
share, exercisable over a ten year period. The Company believes that the buy
back of Company stock at current market value and the reissuance of new shares
when the options are exercised will reduce future financial exposure.
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
10.23.4** Fourth Amendment to the Restated and Amended Public Service
Company of New Mexico Accelerated Management Performance Plan,
as amended effective December 7, 1998
10.32.2** Second Amendment to the Supplemental Employee Retirement
Agreement for Max H. Maerki, as amended effective December 7,
1998
10.32.3** First Amendment to the Supplemental Employee Retirement
Agreement for John T. Ackerman, as amended effective December 7,
1998
10.45** Second Amendment to the Public Service Company of New Mexico
Service Bonus Plan, as amended effective December 7, 1998
10.47.5** First Amendment to the Executive Retention Agreement for
Benjamin F. Montoya
10.47.6** Second Amendment to the Pension Service Adjustment Agreement
for Benjamin F. Montoya, as amended effective December 7, 1998
10.48.1** First Amendment to the Public Service Company of New Mexico
OBRA `93 Retirement Plan, as amended effective December 7,
1998
10.50.1** First Amendment to the Public Service Company of New Mexico
Section 415 Plan, as amended effective December 7, 1998
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10.51.2** First Restated and Amended Executive Retention Plan, as
amended effective December 7, 1998
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).
** 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:
Report dated April 14, 1999, and filed on April 15, 1999, relating to
Electric Utility Industry Restructuring Act of 1999 and Annual
Stockholders Meeting.
Report dated March 30, 1999, and filed on March 31, 1999, relating to
Electric Rate Case; Electric Industry Restructuring Act of 1999; San
Diego Gas Electric Company Complaints; and City of Albuquerque Retail
Pilot Load Aggregation Program.
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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: May 11, 1999 /s/ Donna M. Burnett
-----------------------------------
Donna M. Burnett
Vice President,
Corporate Controller and
Chief Accounting Officer
(Officer duly authorized to
sign this report)
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