ML17296A707

Forwards Az Public Svc Co,Psc of Nm,El Paso Electric Co & Southern CA Edison Co Annual Financial Repts 1979

ML17296A707
Person / Time
Site:	Palo Verde
Issue date:	05/13/1980
From:	Van Brunt E ARIZONA PUBLIC SERVICE CO. (FORMERLY ARIZONA NUCLEAR
To:	Office of Nuclear Reactor Regulation
Shared Package
ML17296A708	List: ML17296A707 ML17296A709 ML19305E882 ML19305E883 ML19312A396
References
ANPP-15429, NUDOCS 8005200565
Download: ML17296A707 (99)

Text

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U REGULATORY4FORMATION OISTRI BUTION SEM (RIBS)

P ACCESSION NBR ~ 80052005b5 DOC ~ DATE ~ 80/05/13 NOTARIZKDe YES DO

¹ FACIL:STN 50 528 Palo Ver de Nuclear Stati one Unit i~ Arizona 'Publ i 00052 STN 50-529 Palo Ver de Nuclear Stat i on~

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STN 50 530 Palo Verde Nuclear Stationi Unit 3i Arizona Publi 05000530 AUTH'AME AUTHOR AFFILIATION VAN BRUNT,E.E.

Arizona Public Service Co.

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Southern CA Edison Co Annu~l Financial Repts 1979. G~

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PHOENIXA ARIZONA 85036 May 13, 1980 ANPP-15429 - JMA/JPS Director of Nuclear Reactor Regulation U.S. Nuclear Regulatory Commission Washington, D.C.

20555 Re:

Palo Verde Nuclear Generating Station Units 1, 2 and 3

NRC Docket Nos.

STN 50-528/529/530

Dear S'ir:

Pursuant to 10 CFR Part 50.71(b), Arizona Public Service Company (APS) submits herewith two (2) copies of the 1979 financial state-ments for each of the Participants who jointly own the Palo Verde Nuclear Generating Station.

Respectfully submitted, ARIZONA PUBLIC SERVICE C

NY EEVBJr/JPS/av Attachment STATE OF ARI'Z(liiA

)

) ss.

County of Maricopa)

By:

Edwin E.

an Brunt, Jr.

Vice President On its own behalf and as agent for all other joint participants Subscribed and sworn to before me this ~5 day of /fyAS9, 1980.

Notary Pu ic

• j

\\

'>>:"'" My Commission expires:

jssieb Espbes Iaa 28, EESS g P0@g00565

ARTHUR ANDERSEN 8: CO.

PHOENIX, ARIZONA To the Board of Directors, Salt River Project Agricultural Improvement and Power District, and Board of Governors, Salt River Valley Water Users'ssociation:

We have examined the combined balance sheets of SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT (a political subdivision of the State of Arizona) and its agent, SALT RIVER VALLEY WATER USERS'SSOCIATION, together referred to as the SALT RIVER

PROJECT, as of December 31, 1979 and 1978, and the related combined statements of net revenues and sources of funds for additions to utility plant for the years then ended.

Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the financial statements referred to above present fairly the financial position of the Salt River Project as of December 31, 1979 and 1978, and the results of its operations and sources of funds for additions to utility plant for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.

Phoenix, Arizona, February 15, 1980.

ASSETS SALT RIVER PROJECT AGRICULTURAL IHPROVEHENT AND POWER DISTRICT AND ITS AGENT SALT RIVER VALLEY WATER USERS'SSOCIATION COHBINED BALANCE SHEETS - DECEHBER 31 1979 AND 1978 CAPITALIZATIONAND LIABILITIES

($000)

($000)

UTILITY PLANT, at original cost (Notes I, 2, 3 and 4):

Plant in service-Electric Irrigation General 1979 1978

$ 1,467,048 891,865 67,381 66,140 51,792 44,468 LONG-TERN DEBT (Note 5):

Electric system revenue bonds General obligation bonds and other 1,914,080 1,656,014 1979 1978

$ 1,658,844

$ 1,386,725 255,236 269,289 Total plant in service Less-Accumulated depreciation on plant in service Construction work in progress 286,099 1,300,122 769,562 254,019 748,454

.909,666 1,586,221 1,002,473 ACCUHULATED NET REVENUES, invested principally in utility plant:

Balance beginning of year Net revenues for the year Balance end of year 276,684 100,435 377,119 210,891 65,793 276,684 2,069,684 1,658,120 Total capitalization 2,291,199 1,932,698 SEGREGATED FUNDS, consisting of cash, U. S.-

Government obligations and bankers'cceptances set aside in accordance with resolutions of bond issues:

Debt service funds, excluding $54,768,000 in 1979 and

$47,156,000 in 1978 for payment of accrued interest (Note 5)

Construction funds CURRENT ASSETS:

Cash Temporary investments, at cost, held primarily for construction Deposit in debt service fund for payment of accrued interest on bonds Trade and other accounts receivable, less reserves of $1,455,000 in 1979 and

$ 1,335,000 in 1978 for doubtful accounts Fuel stocks, at average cost Haterials and supplies, at average cost Prepayments, interesr. receivable and other DEFERRED CHARGES AND OTHER ASSETS (Note 1) 138,540 246 138,786 396 115,631 54,768 37,335 77,427 20,625 9,935 316,117 59,249

$2,583,836 118,487 491 118,978 524 119,938 47,156 38,621 15,221 14,926 8,387 244,773 47,053

$2>068,924 CURRENT LIABILITIES, excluding

$ 18,999,000 in 1979 and

$ 16,132,000 -in 1978 representing current portion of long-term debt which is to be paid from segregated funds:

Notes payable to banks (Note 7)

Accounts payable Accrued taxes and tax equivalents (Note 6)

Accrued interest Customers'eposits Other current and accrued liabilities DEFERRED CREDITS AND RESERVES COHHITHENTS AND CONTINGENCIES (Notes 3 and 6) 120,000 74,302 18,419 56,044 6,440 7,271 282,476 50,635 17,875 47,156 5,255 6,572 127,493 10,161 8,733

$2,583,836

$2,068,924 The accompanying notes are an integral part of these combined balance sheets.

~

~

SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT AND ITS AGENT, SALT RIVER VALLEY WATER USERS'SSOCIATION COMBINED STATEMENTS OF NET REVENUES FOR THE YEARS ENDED DECEMBER 31, 1979 AND 1978 1979

($ooo) 1978 OPERATING REVENUES:

Electric Water and irrigation Total operating revenues

$413,066

$333,329 4,723 4,435 417,789 337,764 OPERATING EXPENSES Power purchased Fuel used in electric generation Other operation expenses Maintenance Depreciation and amortization (Note 1)

Taxes and tax equivalents (Note 6) 25,020 100,352 57,876 32,508 32,995 42,859 23,449 73,050 52,051 29,201 30,806 38,340 Total operating expenses Net operating revenues 291,610 246,897 126,179 90,867 FINANCING COSTS:

Interest on bonds at coupon rates Amortization of bond discount Amortization of bond issue expense Amortization of loss on defeased debt Interest on other obligations Interest earned on investments and

.deposits Net financing costs 104,964 1,100 231 976 6,475 (28,841) 84,905 88,125 953 211 901 1,797 (25,059) 66,928 Less-Allowance for funds used during construction (Note 1)

Financing costs less allowance for funds used during construction (59,735)

(42,183) 25,170 24,745 OTHER DEDUCTIONS, net NET REVENUES FOR THE YEAR 574 329

$ 100,435

$ 65,793 The accompanying notes are an integral part of these combined statements.

AND ITS AGENT SALT RIVER VALLEY WATER USERS'SSOCIATION COMBINED STATEMENTS OF SOURCES OF FUNDS FOR ADDITIONS TO UTILITY PLANT FOR THE YEARS ENDED DECEMBER 31 1979 AND 1978 GROSS ADDITIONS TO UTILITY PLANT, excluding allowance for funds used during construction

($ 000) 1979 1978

$394,728

$406,124 FUNDS GENERATED FROM OPERATIONS:

Net revenues for the year Add-Depreciation (including charges to clearing accounts) and other charges not requiring current funds Deduct-Allowance for funds used during construction not providing current funds Total funds generated from operations before retirement of debt Less-Repayment of long-term debt Net funds generated from operations

$ 100,435

$ 65,793 37,624 34,969 (59,735)

(42,183) 78,324 58,579 (16,167)

(15,393) 62,157 43,186 FUNDS OBTAINED FROM FINANCING:

Proceeds of bond issues, less defeased bonds Advances from U.S.

Government for rehabilitation of irrigation'lant Contributions in aid of construction Borrowings, net of repayments Total funds obtained from financing Other-Increase in segregated funds set aside for debt service Decrease in segregated funds set aside for construction Decrease in temporary investments held primarily for construction Net funds obtained from financing CHANGES IN OTHER ITEMS AFFECTING FUNDS:

Decrease in receivable on sale of plant Increase in unamortized loss on defeased debt Increase in accounts payable Decrease (increase) in accounts receivable'Increase) decrease in fuel stocks and materials and supplies Increase in deposits for payment of accrued interest on bonds Increase in accrued interest (Increase) decrease in cash Change in other assets

.and liabilities, net Net change in other items FUNDS USED FOR ADDITIONS TO UTILITY PLANT 273,122 239,588 766 7,582 119,256 1,236 7,898 926 400,726 249,648 23,667 1,286 47,480 (6,639) 9,563 (7,413)

(67,905) 5,998 (7,612) 8,888 128 (11,106)

(52,654)

(8,300) 8,300 (183) 1,528 50,334

$394,728

$406,124 (20,053)

(13,417) 245 49,856 4,307 26,517 385,225 312,604 The accompanying notes are an integral part of these combined statements'

SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT AND ITS AGENT, SALT RIVER VALLEY WATER USERS'SSOCIATION NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1979 AND 1978 (1)

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES:

(a)

The Project's Board of Directors serves as its regulatory agent.

(b)

Principles of Combination The combined financial statements include the accounts of the Salt River Project Agricultural Improvement and Power District

("the District") and the accounts of its agent, the Salt River Valley Water Users'ssociation, together referred to as the Salt River Project ("the Project" ), and a wholly owned subsidiary, Salt River Generating Company.

All significant intercompany transactions have been eliminated.

(c) Utility Plant, Depreciation and Maintenance The accounting records of the Project are maintained substantially in accordance with the Uniform System of Accounts pre-scribed for electric utilities by the Federal Energy Regulatory Commission.

Utility plant is stated at the historical cost of con-struction.

Construction costs include labor, materi'als, services purchased under contract, and allocations of indirect charges for engineering, supervision, transportation, and administrative expenses.

An allowance for funds used to finance construction work in progress. is capitalized as a part of the electric and general plant.

This allowance is deducted from net financing costs in the combined statements of net revenues and added to utility plant.

Capitalization rates of 7.2% and 7.5% were used in 1979 and 1978, respectively.

Depreciation expense is computed on the straight-line basis over estimated useful -lives of the various classes of plant.

Rates in effect resulted in provisions approximating 3

49% for 1979 and 3.46%

for 1978 on the average.cost of depreciable electric plant, and 1.94%

.for 1979 and 1.93% for 1978 for depreciable irrigation plant.

When property representing a retirement unit is replaced,

removed, or abandoned, the cost of such property is credited to the appropriate utility plant account, and such cost together with removal costs less salvage is charged to accumulated depreciation.

The Project charges to maintenance expense the cost of labor, materials, and other expenses incurred in the repair, restoration of condition and replacement of minor-items of property.

~ ~

(d)

Bond Expense Bond discount,

premium, and bond issue expense are being amortized over the terms of the related bond issues.

(e)

Unamortized Loss on Defeased Debt In April 1978 and August 1977 electric system revenue bonds were sold.

Portions of the proceeds of these bonds were used to defease

$ 210,000,000 of the outstanding electric system revenue bonds.

These defeasances resulted in gross savings in.

debt service over the lives of the new issues of $ 32,300,000.

The combined financing costs of the defeasances were

$ 26,055,000.

The District Board of Directors approved deferral of the financing costs and their amortization over the lives of the April 1978 and August 1977 issues.

(f)

Employes'etirement Plan The Project has a retirement plan covering substantially all employes.

The plan is funded entirely from employers'ontri-butions and the earnings of the invested assets.

The estimated unfunded past service liability, as determined by the plan's actuary using the "entry age normal cost" valuation method, with frozen initial liability, was

$ 9,641,776 as of July 1, 1979.

This amount is being funded and amortized over a period ending in 2009.

The employers'ontributions to this plan totaled

$ 7,392,482 in 1979 and

$ 5,970,882 in 1978.

At July 1,

1979, the plan's assets exceeded the actuarially computed value of the vested benefits at the same date.

(g)

Revenues Meters for residential, commercial and small industrial customers are read cyclically and sales recorded only when billed.

This system of billing results in earned but unbilled revenues which amounted to

$ 10,438,200 at December 31,

1979, and

$ 8,956,000 at December 31, 1978.

For large industrial customers, meters are read near month-end and billings recorded on the accrual basis.

Electric revenue billings are adjusted periodically for changes in costs of fuel and purchased power.

Revenues from water and irrigation operations are recorded when earned.

(h)

Electric Rates Under Arizona law, the District Board of Directors has the exclusive authority to establish electric rates.

The District is required to follow certain procedures, including certain public notice requirements and holding a special Board meeting, before implementing any changes in the standard electric rate schedules.

A general rate increase of 9.6% approved by the District's Board on January 29, 1980 becomes effective March 1, 1980.

(2)

POSSESSION AND USE OF UTILITY PLANT:

The United States of America retains a paramount right or claim in the Project which arises from the original construction and operation of the Project's facilities as a Federal Reclamation Project.

The Project's right to the possession and use of, and to all revenues produced by, these facilities is evidenced by contractual arrangements with the United States.

(3)

CONSTRUCTION PROGRAM:

Balances shown for construction work in progress represent expenditures for new facilities required to serve anticipated customer

needs, and consist of:

December 31

($ 000) 1979 1978 Electric generating facilities Transmission and distribution Irrigation plant Other construction

$741,638

$ 828,371 19,937 75,349 5,219 3,247 2,768 2,699 Total

$769,562

$ 909,666 Construction expenditures planned for 1980 through 1984 approximate

$328,200,000;

$ 300,900,000;

$ 197,500,000;

$ 281,100,000 and

$ 221,100,000, respectively.

At December 31,

1979, necessary commitments had been entered into for delivery of materials and services on construc-tion projects.

In addition, various firm commitments exist under coal and fuel oil supply contracts.

Palo Verde Nuclear Generating Station (PVNGS):

The Project has a 29.1% interest in PVNGS.

From informa-tion now available the Project cannot assess whether the construction schedule used for Units 1, 2 and 3 will be affected by delays or moratoriums in the issuance of permits and licenses of the nature currently under review by Congress and the Nuclear Regulatory Commission as a result of the Three Mile Island incident.

Currently there is a -contingency allowance to reflect the possibility of one year delays in the completion of Unit 2 and 3, and the possibility of more stringent regulatory requirements related to nuclear facilities.

There can be no assurance that this provision will be adequate to cover possible increased costs associated with any major changes mandated by regulatory agencies as a result of the Three Mile Island incident.

Anti-nuclear groups active in Arizona are circulating petitions for ballot measures that purport to prohibit the con-struction and operation of any nuclear facilities in Arizona, including those now under construction, until certain conditions are met, and to deny recovery of expenses resulting from accidents and outages of such facilities to PVNGS participants whose rates are regulated by the Arizona Corporation Commission.

If these measures are on the:1980 Arizona general election ballot,, the PVNGS participants intend to actively oppose their approval.

(4)

INTERESTS IN JOINTLY OWNED ELECTRIC UTILITY PLANTS:

The Project has entered into various agreements with other electric utilities for the joint ownership of electric generating and transmission facilities.

Each participating owner in these facilities must provide for and furnish the financing for its ownership share.

The following schedule reflects the Project's ownership interest (at cost) in jointly owned electric utility plant at December 31, 1979.

In Millions Plant Name Ownership Plant Construction Share in Accumulated Work in Eour Corners (New Mexico)

Mohave (Nevada) 10.0 10.0 0 21.0 30.5 6.7 7.9 3.1 2.7 Craig (Colorado) 29.0 Palo Verde (Arizona) 29.1 Navajo (Arizona) 21.7 Hayden (Colorado) 80.0 Coronado (Arizona) 70.0 200.6 102.1 439.8 124.5 3.4 8921.9 29.5 11.7

.5 q56.4

.3 167.2 78.0 428.6 8680.0 The Project's share of direct expenses of the jointly owned plants is included in the corresponding operating expenses in the combined statements of net revenues.

(5)

LONG-TERti DEBT:

Interest Rate 1979

($000)

Future 1978 Haturities Electric System Revenue Bonds 1973 Series A and B

1974 Series A and B

1976 Series A, B, C and D

1977 Series A,

B Refunding and C

1978 Series A,

B and C

1979 Series A,

B and C

Unamortized bond discount (a):

5 to 6-1/2 5.7 to 7.6 4.0 to 7.2 3-3/4 to 6-1/8 4.4 to 7

4-3/4 to 7-1/4 395,915 317,900 281,107 395,915 317,900 1980-2017 1981"2018 1983-2019 1,684,012 1,404,700 (25,168)

(17,975)

$'44,090 145,885 1980"2011 140,000 140,000 1983"2012 405,000 '05,000 1980-2016 Total electric system revenue bonds outstanding 1,658,844 1,386,725 General Obligations Bonds and Other, 1/ to 7.77/ (b) 255,236 269)289 1980"2004 Total long-term debt

$ 1,914,080

$1,656,014 (a)

Electric system revenue bonds are secured by a pledge of, and a lien on, the revenues of the electric system after deducting "operating expenses",

as defined in the bond resolutions, subject to prior liens of general obligation bonds of

$ 241,074,998 and amounts due the United States of $ 12,545,337.

In all years to date electric revenues, after deducting "operating expenses" as defined in the bond resolutions, have been more than sufficient to meet all debt service requirements.

(b)

General obligation bonds are a lien upon the real property included in the District and are additionally secured by a pledge of revenues from, the operation of the electric system.

If the net electric revenues, as defined in the bond resolutions, are not sufficient to meet the principal and interest

payments, the bonds and interest are payable from a levy of taxes on the real property.

The annual maturities of bonds and other long-term debt outstanding as of December 31, 1979 due in each of the years 1980 through 1984 are

$ 19,524,000;

$21,934,000;

$22,814,000;

$ 23,220,000 and

$24,642,000, respectively.

Interest and amortization of discount on the various issues outstanding during the year resulted in an effective rate of 6.17%

for 1979 and 6.04% in 1978.

This rate approximates 6.40% over the remaining terms of the bonds.

The debt service portion of segregated funds includes

$29,309,000 at December 31,

1979, and

$ 22,463,000 at December 31, 1978, restricted for operating reserve requirements under bond resolutions.

Electric system revenue bonds totaling

$405,888,000 principal amount are authorized, but unissued.

Electric system refunding revenue bonds not to exceed

$ 115,000,000 principal amount were also authorized, but unissued.

In Harch 1980, the District plans to issue Electric System Revenue Bonds (1980 Series A) for an estimated amount of

$ 100,000,000.

(6)

LITIGATION:

Environmental Various pending litigation or administrative proceedings involving environmental matters could affect interests owned by the Project in present and-proposed generating facilities, In

general, these lawsuits seek to impose higher air quality standards for generating plants.

If ultimately decided adversely to the interest of the Project, the outcome of the lawsuits could result in increased construction costs, increased future operating costs, and a possible loss in the operational reliability of certain generating plants'll of these effects would increase the costs to be passed on to customers through increased electric rates.

Property Valuation Lawsuits filed by the State of Arizona against the Project to increase contributions in lieu of property taxes over the amounts already paid by the Project for the years 1970 through 1974 and 1978 were settled and

$ 2,100,000 was paid in August, 1979 to the various taxing authorities in full and final settlement of all claims.

~

~

Navajo Tax The Navajo. Tribe has created a Tax Commission which claims authority to tax facilities on the Navajo Indian Reservation.

The Tribe has adopted a possessory interest tax and a business activity tax on certain facilities and operations on the Reservation, and the District is informed that such taxes are intended to apply to the Navajo and Four Corners Projects.

The District is unable to estimate the magnitude of the possessory interest taz because of its inability to interpret the way the tax is to be calculated.

The District estimates that the business activity taz, if upheld by the

courts, could expose it to claims approximating

$4.6 million per year.

The District and other Navajo and Four Corners Project co-owners have filed actions in the Federal District Court for Arizona and New Mexico contesting the validity and imposition of the taxes.

The District has appealed a decision from Federal District Court for Arizona upholding the right of the Tribe to impose the possessory interest tax to the Ninth Circuit Court of Appeals.

The Navajo Tribal Council has adopted resolutions

which, if valid, require permits and the quarterly payment of taxes for emission of sulphur at rates which commence at

$.15 per lb. the first year and increase annually to

$.75 per lb. in the fifth year.

The District and other Navajo and Four Corners Project co-owne s

filed actions in Federal District Court for Arizona and New Mexico.

The tax will become effective subsequent to either approval of the Secretary of the Interior or a finding by him that such approval is not required.

If such tax is upheld by the courts, the District could be exposed to claims approximating

$ 3 million in the first year and increasing to

$ 15 million in the fifth year and each year thereafter, 1

The assertion-by the tribal council of taxing and regulatory authority on the Navajo Indian Reservation has caused the Board of Directors of the District to adopt a resolution allowing it to recover from its customers the amounts of such tazes if the payment thereof is ultimately required.

Other Principally as a result of certain water flooding in March and December 1978, various lawsuits have been filed against the Project alleging that the Project has a responsibility in regard to flood control and a liability in regard to flood damage.

The ultimate liability, if any, is "not determinable, but management ezpects that a significant portion of any liabilities which might result from flood damage claims will be covered by insurance.

(7)

LINE OF CREDIT:

The District has a line-of-credit agreement with 14 banks, which provides for a maximum commitment of $ 120,000,000 with interest on borrowings at a rate equal to 60% of the banks'rime rate as established from time to time by a lead bank.

No compensating balances nor commitment fees are required under the line of credit.

The current agreement terminates on September 2,

1980.

The line-of-credit borrowings are borrowed in the name of and payable from the General Fund and rank junior to payments required for the Prior Lien Bonds and the Revenue Bonds.

At December 31,

1979,

$ 120,000,000 was borrowed at an initial rate of 9.45'/ payable on or before September 2,

1980.

(8)

IRRIGATION AND WATER OPERATIONS:

The expenses, including depreciation, for irrigation and water operations exceeded the assessments, delivery fees, and other revenues therefrom by approximately

$ 6,182,000 in 1979 and

$ 7,507,000 in 1978.

These amounts do not include expenditures for additions and improvements to irrigation plant and for repayment of long-term debt.

THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE DIVISION OF DOCUMENT CONTROL.

THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS FACILITY BRANCH 016.

PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL. REMOVALOF ANY PAGEOS)

FROM DOCUMENT FOR REPRODUCTION MUST BE REFERRED TO FILE PERSONNEL.

DEADLINE RETURN DATE Oa I

R~G

'5G-528

~ a.a RECORDS FACILITYBRANCH

FINANCIALHIGHLIGHTS Page No.

I PRESIDENT'S LETTER ECONOMIC PICTURE New Mexico Economy Construction and Financing Revenues and Expenses Earnings.................

Rates and Regulation 4

4 4

4 5

5 ELECTRIC OPERATIONS WATER OPERATIONS THE FUTURE...............

Construction and Financing Sales and Rate Activities 7

7 7

THE COMPANY AND ITS PEOPLE Employee Development Employee Benefits Promotions and Management Changes 8

8 8

8 SUBSIDIARIES RESEARCH, DEVELOPMENT AND DEMONSTRATION INDEX TO FINANCIALDATA DIRECTORS AND OFFICERS SYSTEM MAP 10 32 Inside Back Cover The annual meeting of stockholders is scheduled to be held April 22, 1980. A proxy form and notice of the annual meeting will be mailed to all stockholders on March 3, 1980.

For further information and details pertaining to the infor-mation provided in this rcport contact D. E. Peckham, Secretary, Public Service Company of New Mexico, Post Office Box 2267, Albuquerque, New Mexico 87103.

The Common Stock of this Company is traded on the New York Stock Exchange under the symbol PNM.

This Annual Report and the financial statements contained herein are submitted for the general information of the stockholders ofthe Company and are not intended for use in connection with any sale or purchase of, or any offer or solicitation of offers to buy or sell, any securities of the Company.

Operating revenues Operating expenses Operating income Net earnings Net earnings applicable to common stock.......

Return on average common equity Average number ofcommon shares outstanding..

Net earnings per common share Dividends paid per common share Construction expenditures Gross investment in utilityproperty Kilowatt-hour sales (thousand kWhr)

Number ofelectric customers served at year end Average kWhr usage pcr residential customer...

Number ofemployees Number ofcommon stockholders 1979 244,370,000 184,554,000 59,816,000 54,803,000 42,607,000 13.6%

14,363,000 297 1.88 323,361,000

$ 1,197,514,000 4,960,451 206,000 5,929 2,311 34,236 1978

$ 187,205,000

$ 143,258,000

$ 43,947,000

$ 37,464,000

$ 29,081,000 13.0%

10,289,000 2.83 1.72

$ 198,976,000

$879,893,000 4,527,826 196,000 5,880 2,054 27,026

~Cli<<<<e 30.5 28.8 36.1 46.3 46.5 4.6 39.6 5.0 9.3 62.5 36.1 9.6 5.1

.8 12.5 26.7 I

~ <<

Bryan

The end of a decade has come. For our industry, as for the country in general, it was ten years of unrelenting change. The rules and the perceptions of society, the attitude of the government and the attitude toward the government seemed to shift daily. It was a strange ten jl years no matter who you were or hoav you looked at it.

,(

It was a decade which saw the United States disengage itself from a hvar which it neither bothered to,.'j declare nor set realistic military goals. It was a decade in g

which, for the first time, an American president resigned;;!!

in disgrace. It was a decade that saw "liberals" begin to militantly support the status quo under the no-growth v-theme and "conservatives" argue heatedly for growth and change. It was a decade that saw the nation seemingly go into shock and refuse to make decisions or take action on matters of paramount importance energy, defense, economic policy... the list is endless.

'.~3)

Yet, through it all, our institutions did manage to survive and to keep providing the public with far mori than human history could define as "basic necessitiis."

Life went on, although polls revealed that for the first time in American history many people no longer felt confident in the future essential,

'it was decided that a touchstone was needed to 1970 s, the last ten years may well go down as a decade help us all make sure we were looking in the right of solutions for PNM.

direction. A statement of principle was adopted. The full statement ls on page 31. As simpltsnc as these thoughts PNM initiated a shift to coal widioul governmenlal may seem, it is only necessary to reflect for a moment suggestion or advice more than two decades ago. The on the complexities of life and the confusion third unit at the San Juan Generating Station came surrounding us to see why a straightforward standard on-lme in 1979. During the past year, your Company was developed. IfPNM can adhere to these simple acquired full ownership of the fourth unit now under thoughts, our customers will have the service they expect construction at San Juan. By this action, we can assure at a price they can afford and in a manner they can our customers that they will have electricity in the understand.

Our employees willhave worthwhile jobs 1990's. Such assurance is becoming difficult for all and our owners willbe repaid for making it all possible.

utilities to make in these uncertain times.

An astounding expansion came about during this However, using coal as an energy iesource is not

decade, in part, as people in other states began to without its problems. Stringent constraints have been develop an appreciation for the way of life offered by established on the burning of coal. PNM is committed to New Mexico. It also resulted from the commitment the building and operating facilities to meet those people of New Mexico have made to their environment.

requirements.

When new regulations were being The investment in pollution control equipment at the San developed, and when regulatory actions were required, Juan Generating Station now exceeds the total investment we often found that the desires of environmentalists of the Company just ten years ago.

compounded our already complex business environment.

However, PNM has worhed hard to establish a good problems, companies, including PNM, had to come~u As a result, we have often been able to achieve with solutions to their ownproblems. In light of the agreements with those groups that contribute to the

preservation of New Mexico's environment and maintam a balanced consideration of the customers'eeds.

In addition, we continue to search for new and better ways to meet future needs without relying on natural gas and oil. As part of this search, work continued on the Palo Verde Nuclear Generating Station. As you know, your Company committed itself to a 10.2 percent share in that pioject in 1973. In the aftermath of Three Mile Island, extensive reviews of the engineering and construction at Palo Verde have been conducted and some are still underway. We are confident that Palo Verde will serve our customers safely and reliably. We are also confident that society willconclude that the benefits of having domestic energy resources beyond the control of international politics willoutweigh the limited risks of nuclear energy.

any unexpected circumstances, there will be little change in thc real price of electricity in the foreseeable fu~turc.

It is clear that in order to continue the financing required, our emphasis must be on performance for shareholders.

During f979, our common shareholders provided us~wiih more than $57.2 million of additional equity capital, 2,959,506 additional shares, to help finance needed facilities. In return, our common shareholders earned You, our shareholders, have taken long-term risks in order to ensure in adequate power supply. The rate structure simply must be such that the bottom line is enticing to shareholders.

Stock must be selling above book value, and we will do everything reasonable to make that happen.

1 To our employees we say thanks for a dedicated PNM studies continue to demonstrate that nuclear decade; your innovation and individual energy have power has economic, environmental, and safety made our Company part of the solution to our country' advantages over other available generating alternatives.

problems. To our directors we again express appreciation Even though this is the case, the nuclear option is for the widsom, stability and leadership you provide.

currently plagued with political and regulatory uncertainties. Therefore, PNM has not made a PNM enters the 1980's confident of its abihty to contmitmcnt to the construcuon of a nuclear plant wllhtn provide reliable service an~maturate the htgli~eve o~

New Mexico, but the Company does continue to include accountability to its custoiners and to you, our

==the nuclear option as a consideration in its generation shareholders.

planmng activities. Such planning includes the examination of design options, economics, and feasible Sincerely, sites for any future projects.

Work willsoon commence on PNM's and the country's first hot water geothermal generating facility.

Though geotherinal energy now provides a significant part of northern California's electricity, the hot dry steam used there is a geological rarity. Geothermal hot water is not as rare and, ifthe PNM project now under development with the Department of Energy and Union Oil Company is successful, the technology could lend itself to application in many areas of the country.

The decade of the 1970's was remarkable for both the nation and PNM. But changing the calendar has not changed all our problems; energy remains a critical issue; economics of uncertainty are stillpart of our everyday life; and the quest for understanding and solutions to these pressing issues will be the hallmark of the 1980's.

J. D. Geist President 3-Q. /J=~~ --

G. A. Schreiber Chairman of the Board Your Company's requirements for new construction in the 1980-84 five-year period is predicted to be $ 1,084 million. This is less than in the 1979-83 period. Barring

PNM is situated in one of the growth areas of the Rocky Mountain West, as the Company's construction budget over the past decade indicates. Projections show that during 1979-1984 population in PNM's service area will grow by 16 percent, or an average of 2.9 percent per year. The national annual growth rate is expected to be about I percent. In contrast, the growth rate over 1974-1979 was 14.5 percent, an annual rate of 2.5 percent. The population in PNM's service area is currently estimated to be 532,000. Total state population is about 1,241,000.

Einpfoymenl for the growing population in New Mexico is centered on government agencies plus trade and service businesses.

Manufacturing iepresents a small portion of the economy with about 7 percent employment. This low percentage of manufacturing workers serves as insulation, tending to protect New Mexico from the effects of any national recession.

The combined industrial segment of the economy (mining, manufacturing, and construction) provides about 20 percent of total employment.

3ut thIs industrial figure is climbfng due to significant growth in coal and uranium mthing.13esides the increasing development of huge coal reserves, the state currently supplies approximately 50 percent of the country's production of yellowcake. PNM supplies electnctty to about 70 percent of the state's uramum mining activity.

Nineteen seventy-nine was a significant year for PNM.

The year represented the peak of our construction program in terms of annual dollars spent. In 1979, net utility plant additions totaled about $317 million, compared to about $ 199 million in 1978. Our current construction budget indicates a downward trend in annual construction dollars for the next several years until we begin our next major generating project. Also, the Company acquired full ownership of San Juan Unit 4 by purchasing Tucson Electric Power Company's 50 percent share ofthe unit. Construction ofthis 472-megawatt unit is scheduled for completion in 1982; The third unit at the San Juan Generating Station went into commercial service in December, bringing 240 net megawatts into the grid for PNM's customers.

New external funding for 1979 included a $40 million 8.75 percent preferred stock issue, an issue of common stock for $48 million, and $ 130 million in 6.5 percent pollution control revenue bonds. Common stock totahng

$9.3 million was also raised through the Dividend Reinvestment Plan, the Employee Stock Purchase

Plan, and the Tax Reduction Act Stock Ownership Plan (TRASOP). The Company also obtained commitments to place directly with institutional investors $45 million of IOg/s percent first mortgage bonds, of which $ 17 million was received in 1979, with the remaining $28 million received in January 1980.

n addition to the traditional segments ofÃew Mexico's economy, there is also a large and active high technology research sector, including Los Alamos Scientific Laboratories and Sandia Laboratories. PNM is also recognized as a leader in energy research and development because of its work in projects such as solar and geothermal energy applications.

While the per capita income in New Mexico ranks in the bottom one-fifth of all states, the rate of increase is greater than most other states.

Since 1974, personal income in New Mexico has been growing at one of the fastest rates in the Rocky Mountain region. Per capita income in the Albuquerque metro area, in which 80 percent of PNM's customers live, is currently about equal to the national average. The continuation of these trends is expected to liftNew Mexico's per capita income above its current national ranking.

Revenues rose from $ 187 million in 1978 to $244 million in 1979, or 31 percent. This follows a 35 percent mcrease fiom 1977 to 1978. Of the $57 million increase in revenues, it is estimated that 26 percent resulted from increased kilowatt-hour sales, 26 percent from fuel clause adjustments and 48 percent from increases in base electric rates. Electric sales grew from about 4.5 billion to almost 5 billion kilowatt-hours, a 9.6 percent increase.

In 1979, fuel and purchased power expense was up by about 36 percent due to increased energy requirements and costs of fuel. Other operating and maintenance expenses climbed by 22 percent, compared to 26 percent in 1977-1978. Cost control programs were continued during the year and a trend toward improved cost-effectiveness is evident.

As a result of thc financing for our construction program, interest expenses on short-term debt rose due to a higher level of borrowing and increases in the interest levels. Long-term debt also grew in 1979 and total interest charges were up by about $3.7 million.

Preferred dividends increased by about $3.8 million.

During 1979, PNM's net earnings available to common shares grew from about $29 million to $43 million, or about 47 percent. However, reflecting the Company's increased investment in plant, shares outstanding climbed from approximately 12.6 million shares to 15.6 million, or 23 percent. Earnings pcr sharc for 1979 were $2.97, compared to $2.83 for 1978, on average shares outstanding.

The increase in average shares outstanding was due to the sale of common stock in 1978 and 1979 to finance our construction program. Return on average common equity for 1979 was 13.6 percent, compared to 13 percent for 1978.

JSEl@cAu6~NNfich/

As an electric and water utility operating in the State of New Mexico, PNM is subject to the jurisdiction of the New Mexico Public Service Commission (NMPSC).

Activities of the Company regulated by the NMPSC include rates, quality of service, issuance of securities, and generation and transmission construction. The Federal Energy Regulatory Commission (FERC) has jurisdiction over rates charged by PNM for electricity sold to other electric utilities.

Since mid-1975, PNM has used a method of rate adjustment called Cost of Service Indexing, which allows recovery of present-day costs of generating and distributing clcctricity. As originally designed, the Index was applied to rates under jurisdiction of the NMPSC, and allowed a quarterly adjustment when return on average common equity fell below or exceeded a band of 13.5 to 14.5 percent.

In May of 1979, however, the NMPSC ruled that the rate adjustment method could serve its intent by allowing annual adjustments.

At that time, the NMPSC allowed the "rolling-in"of the factor into the base rate charge and during the remainder of 1979 the Indexing factor was removed as a separate item. The NMPSC determined that PNM would be allowed to adjust rates in a manner designed to attain earnings of 13.5 percent on year-end common equity. The first annual Index factor was calculated on 1978 revenues and expenses, with certain adjustments.

Investment in the construction work in progress relating to San Juan Unit 3, placed in service in late 1979, and all pollution control equipment at the San Juan Generating Station was included in the revised calculations. The allowance for funds used during construction rate on other construction work in progress was changed from 6.5 percent to 7.5 percent. A composite return on accumulated deferred investment tax credits was allowed. With the switch from quarterly to annual adjustment of the factor and with the additional procedural and reporting requirements, Indexing has become less automatic; however, it retains many advantages over a traditional rate filing, including significant reductions in traditional regulatory lag. The New Mexico Attorney General appealed the May 1979 Order to thc Santa Fe District Court and is contending that the formula used by the NMPSC in arriving at the annual Index factor produces excessive revenues. Thc NMPSC and the Company are opposing the Attorney General's position.

On the basis of most measures of financial integrity, the Cost of Service Index has been successful to date.

PNM's total capitalization more than tripled between 1974 and 1978, compared to an industry average increase of about 40 percent. Yet, during. this period, PNM iinprovcd its position relative to the industry avcragc. Return on average capital, return on equity, before and after tax interest coverages, and market price-to-book value ratio improved markedly. In particular, return on average common equity rose approximately 39 percent from 9.7 percent in 1974 to 13.6 pcrccnt in 1979.

As part of a review of the Indexing procedures, PNM flilcd a rate redesign package ivith the NMPSC on'cccmber 31, 1979, to assist the NMPSC in complying with the Public Utilities Regulatory Policies Act (PURPA). Thc federal law requires utility regulators nationally to review cost and price standards, to promote conservation by utility customers and to increase thc efficiency of electric energy use.

'I Ifapproved by the NMPSC the Company's proposed rate redesign would promote energy conservation as well as provide rate incentives to.high-use customers who shift electric consumption off-peak when generating costs are lowest. The proposal would offer high-use electric customers the possibility of being billed for electricity based on the times of the day and seasons the power is used. The concept called Time-of-Day or Time-of-Use

rates currentl is not available from any utility in New Mexico.

The Compauy~has a fuel ad'ustmeut clause which allows the direct pass-through of increased fuel costs.

The ad'ustment is applicable to all sales. An additional art of the ro osed rate redesign filed with the NMPSC would allow the Com an to "zero out" the fuel for electrical service.

PNM through its operating divisions provides electric service to about half the ople living in New Mexico.

The Albuque ue Division service area includes roughly a third of the po ulation o'f the entire state. The Belen and Bernalillo Divisions serve the rapidly growing areas south and north of Albuquerque, respectively. The Santa Fe Division serves the State Capital and surrounding communities. The Las Vegas Division serves Las Vegas on the eastern slopes of the Sangre de Cristo Mountains in north-central New Mexico. The Deming Division service area lies in the extreme southern portion of the state, just north of the Mexican border. The Western Division serves a portion of the uranium and coal mining areas west of Albuquerque.

The power produced by PNM comes from generating facilities as shown in the following table:

PNM's Share of Capacity In addition to the operating divisions, PNM-generated electricity is purchased by several other utilities, both publicly and privately owned, for distribution to their customers within the state.

Location and Generating Station Coal-Fired Stations Near Farmington Four Corners Units 4 & 5 San Juan Units 1, 2, & 3 Gas-and Oil-Fired Stations Albuquerque Person Station Reeves Station Prager Station Santa Fe Santa Fe Station Las Vegas Las Vegas Turbine OT>L (MW) 208 550 96 175 22 20 1,082 As a regulated business, PNM operates under franchise agreements.

Municipal electric franchise expiration dates are as follows: Albuquerque 1992, Belen 1990, Bernalillo 1998, Deming 1993, Las Vegas 1996, and Santa Fe 1999.

Water service in Santa Fe and Las Vegas is also provided by PNM. The water facilities were acquired along with the Santa Fe and Las Vegas electric systems many years ago.

During the year, PNM reached agreement with the City of Santa Fe resulting in a new water franchise.

Resolution of conflictin oints of view ex ressed by the The Company holds a 13 percent ownership in Units 4 and 5 of the Four Corners Generating Station, a 50 rcent ownershi in San Juan Station Units 1, 2, and 3, stations. The Prager Santa Fe, and Las Vegas Stations are used p~rimaril to meet eak loads.

City, PNM, and Santa Fe County was gained by further ex ansion of the duties of the Metro olitan Water Board.

In an area where water is a critical resource and a key to development the Board will serve as a way for the three parties to combine their expertise and meet the long-term needs for all concerned.

accounting for about 67 percent of total kilowatt-hours produced. Natural gas rovided 31.5 ercent and oil 1.5 percent. With the addition of 240 megawatts of coal-fired capacity from San Juan Unit 3 in December of 1979 PNM's forecasted generation requirements from coal willrise to 83 percent with natural gas and oil 1980.

In large part, the credit for the success of the negotiations which resulted in the franchise agreement belongs to the PNM employees in Santa Fe. Their abilities and persistence turned a difficult situatioh into one of cooperation for the long-term future of water supply in Santa Fe. The new water franchise for Santa Fe will be in effect until the year 2004. The water franchise for Las Vcgas expires in 1993.

4Qgg~

percent. The forecasted peak demand for the summer of 1980 is 987 megawatts. To supply this peak demand and Capital expenditures in 1980 are expected to drop to maintain an adequate reserve margin for contingencies, about $299 million, the major portion of which is for the PNM has a total installed capacity of 1,082 megawatts construction of the fourth generating unit at San Juan (11 megawatts of which is scheduled for retirement in and the three units at the Palo Verde Nuclear Generating early 1980, subject to a current review) and has Station in Arizona. To provide funds for the 1980 contractually arranged to purchase an additional 160 construction program, your company anticipates that it megawatts of capacity from other utilities plus a will offer up to $50 million of preferred stock in April projected eight megawatts from load management for and approximately $60 million of common stock during resource capacity of 1,239 megawatts.

the second half of the year. PNM also expects to raise approximately $ 14 million through its internal stock During the fourth quarter of 1979, PNM and the Los programs.

Angeles Department of Water and Power completed negotiations for the sale of firm surplus energy from San In addition to the January receipt of the $28 million Juan Station to Los Angeles. Final contracts, signed in from the private placement first mongage bond January 1980, provide for the sale of 700,000 transaction, the Company's curient financing plan also megawatt-hours until April 1982.

includes a first mortgage issue of approximately $60 million during the second half of the year. Use of In January 1980, your Company completed contract approximately $77 million of low-cost pollution control negotiations with San Diego Gas and Electric Company revenue bonds cumntly held in trust is planned. Funding for the sale of contingent capacity from San Juan requirements will also be provided for by continued use Station. This delivery of energy is contingent on the of short-term debt. Additionally, your Company plans to availability of the four units at San Juan and Palo Verde participate with the City of Farmington in the issue of Unit 1. The contract specifies the sale of 236 megawatts~

$26 million in pollution control revenue bonds for each year over a six-year period (a total of about 8.6 environmental control structures it the Four Corners million megawatt-hours of energy) commencing with the Generating Station.

in-service date of San Juan Unit 4, anticipated to be May 1982.

PNM's planned construction program over the next five years is estimated to be $ 1,084 million. Of this As a result of the purchase of Tucson Electric Power amount, approximately $593 million is for Company's share of San Juan Unit 4, and the contingent generation-related construction, including nuclear fuel, sale of power from this unit to San Diego Gas and land and water acquisitions, with an additional $ 187 Electric during 1982-1987, PNM has not only assured million for environmental control systems.

The majority availability of electricity to its customers into the 1990's, of this money is for continuing construction at the San but additionally has been able to accomplish this at Juan Generating Station, the Palo Verde Nuclear capacity costs of the 1970's rather than the late 1980's.

Generating Station in Arizona, a large pumped storage The savings to PNM's customers will be substantial.

project, and PNM's interest in additional pollution control equipment for the Four Corners Generating According to the schedule set by the NMPSC, PNM Station. The balance of the $ 1,084 million will be spent has filed a new Cost of Service Indexing factor which over the next five years on transmission and distribution will be collected subject to refund beginning on March systems plus additional operating facilities for both 21, 1980, while the NMPSC decides the case. The factor electric and water customers. Additionally, PNM's refiects increased costs PNM experienced during 1979.

ivholly owned subsidiary, Paragon Resources, Inc., has a five~ear capital expenditure program of $48 million, In the near fuiurc, PNM will submit revised rates to with about $ 1$ million in 1980, primarily for the Federal Energy Regulatory Commission for developmenls related to future generation prodects.

wholesale customers based on test year 1980 budgeted operating data. Final decisions in pending cases have not yet been issued; however, the rates have been put into effect sub'ect to refund.

Total system requirements in 1980 including sales to wholesale customers~are projected to increase by 15.8 percent. Total peak demand is projected to grow by 15.4

Employees are PNM's most important asset. The employees work together to provide customers not only with the reliable service they expect today, but employees also test and implement new ideas and plans for dependable service in the years ahead.

During 1979 PNM added 257 additional employees.

Although the Company's continued growth accounted for some of the increase, it was growing regulatory and environmental requirements which accounted for much of the increase. Effective environmental performance requires that the Company constantly monitor power plant emissions and maintain the necessary pollution control equipment. Detailed environmental studies are now required to support the construction of new generation and transmission facilities. To encourage energy conservation and to meet the requirements of the Public Utilities Regulatory Policies Act, personnel were added to provide additional assistance to customers and prepare studies for submission to appropriate agencies.

The continued effect of these various activities on the total number of employees was significant.

PNM continues its tradition of attracting very talented and highly skilled new employees necessary to keep pace with customer needs. Of the 2,311 employees, almost 850 craft personnel are represented by Local Union 611 of the International Brotherhood of Electrical Workers.

The PNM-IBEW contract expires April 30, 1981.

AM5&lgA$'lydia An expressed principle of the Company is to promote from within its own ranks whenever practical. As a company operating in a growth mode, many jobs become available. During 1979, 877 employees were promoted to positions of higher responsibility.

The Company's Board of Directors elected two employees to vice president positions and promoted a third employee to Treasurer in April of 1979.

P. J. Archibeck was promoted to Treasurer from his previous position as Assistant Treasurer.

T. P. Warnke was elected District Vice President of PNM's San Juan area. Mr. Warnke, a former manager of PNM's Deming Division, previously served as manager of the San Juan area.

J. L. Wilkins was elected Vice President of Engineering and Construction. A past chairman of the National Electric Reliability Council, Mr. Wilkins previously was group manager of engineering and construction.

PNM has an intcrcst in two subsidiaries, Paragon Resources, Inc. (formerly Public Service Land Company) and Wcsrern Coal Co. Paragon Resources, Inc. is a wholly owned subsidiary, organized to secure A total of 1,730 employees participated in water rights and property for the Company's various Co'mpany-sponsored training programs during the projects and business-related needs. Chief among these 12-month period. Additional programs assisting needs are plant sites and water for Company water employees wishing to further their education and job systems and for cooling purposes at generating plants skills at local schools and universities are also offered.

Western Coal Co. is jointly owned by PNM and Tucson Electric Power Company. The purpose of Western Coal Co. is to secure coal leases and provide fuel for San Juan Generating Station. The San Juan As part of a continuing effort to retain skilled and trained employees as well as to attract new personnel, benefits, including life, health, and dental insurance as well as retirement plans, have been upgraded. Employee wages during 1979 stayed within the President's salary guidelines with isolated exceptions receiving prior approval by the federal government.

Generating Station has contracted with Western Coal Co.

to supply all coal required for the life of the plant.

PNM is involved in a number of research, development, and demonstration projects designed to increase Company operating efficiency, expand

knowledge in energy use and alternatives, and protect the environment.

~ Because water resources are scarce in New Mexico, PNM is evaluating treatment procedures necessary for water to be recovered from uranium mining activities for use in generating station applications.

~ PNM is investigating the economic recovery of deep seam Fruitland Formation coal at depths below strippable levels, using underground coal gasification technology.

~ Numerous solar research projects are underway including the performance of both passive and active solar residential and commercial systems plus water heating applications. PNM is also participating with Western Energy Supply and Transmission Associates (WEST) in the nation's largest solar monitoring project which will provide an excellent data base for future solar projects.

~ PNM is also studying the effect of transmission lines on birds of prey and their habitats. This nationally recognized study will bc completed in carly 1980.

~ At San Juan, PNM is developing techniques for remote measurement of visible and invisible power plant plumes. This project is also funded by WEST.

PNM is also testing the use of ceramic-lined pipe sections in an effort to find ways to increase abrasion resistance in coal-handling systems at San Juan.

~ An improved computer-assisted planning tool is being developed to enhance PNM engineers'bility to evaluate system distribution plans and alternatives.

~ In the area of nonconventional electric generation, PNM, along with the Department of Energy and Union Oil Co., is constructing the nation's first hot water geothermal generating facility. When completed, this demonstration plant will produce 50 megawatts.

Ultimately, the geothermal field could produce about 400 megawatts.

The Company is also in the beginning phase of work on a pumped storage facility which, when completed in 1989, will produce about 600 megawatts.

< In 1980, Company load management engineers will join with private individuals in the Deming area to construct a vertical wind axis generator for use in irrigation and rural homes.

~ Subsynchronous resonance, hardly a household word, is.very important to utilities. The problem lies in vibrations created by transmission lines which can damage the power plant turbine-generator.

PNM and ten other western utilities contracted with General Electric and Westinghouse in 1978 to develop a relay that could sense the vibrations and disconnect the generator before any damage could be done. As a result of this study, two relays were installed at the San Juan Generating Station in 1979 the first of their kind in the country. Additional equipment is scheduled to be installed in 1980.

~ Another major project during 1978 and 1979 was the High Silica Control Project. This involved experimentation with a new chemical to disperse silica in the water that normally collects as scale on heat transfer surfaces of power plant equipment, thereby reducing plant efficiency and causing the plant to use more water. The experiment carried out at Albuquerque's Person Generating Station resulted in saving onc million gallons of water per day on just one unit.

. A>N~AeJen P PiVAv

Ay

Growth Graphs Comparative Operating Statistics Summary ofOperations Management's Discussion and Analysis ofthe Summary ofOperations Consolidated Balance Sheet Consolidated Statement ofEarnings Consolidated Statement ofCapitalization Consolidated Statement ofChanges in Financial Position Notes to Consolidated Financial Statements Accountants'eport Stock1Dividend Data Supplementary Infoimation on Changing Prices.

Page 11 12 14 14 16 18 19 20 21 28 29 29 i~7 07 Syexo

182 193 213 257 285 328 402 532 682 880 1,198 MILLIONSOF DOLLARS 37 40 43 50 58 67 85 100 139 187 244 MILLIONSOF DOLLARS Pcckurl'LzkgmCmcdguieml'2~

'69 '70 '7g '72 '7V '74 'T5 '76 'T7 '7d '79 aVAI/P1$hX&hf5/N~Lf4/

te m v~ m'vv<vrv<'rrvXv 9

9 9

10 11 11 14 14 19 26 33 437 541 541 542 617 727 727 858 858 842 1>082 MII.LIONSOF DOLLARS THOUSANDS OF KILOWATTS

J~gie ELECTRIC-SERVICE-=

=- -=-

ENERGY-SALESkWhr (in thousands)

Residential Industrial Other ultimate customers Total sales to ultimate customers Sales for resale 1,067,755 1,403,282 858,533 159,396 3,488,966 1,471,485 l978 1,000,564 1,353,805 797,314 164,901 3,316,584 1,211,242 1972 957,390 1,320,651 686,845 160,922 3,125,808 1,241,195 1976 916,748 1,277,025 605,559 157,694 2,957,026 638,207

-Total-energy. sales.............

ELECTRIC REVENUES (in tliousands)

,'l1 Residential Commercial Industrial Other ultimate customers...........

Total revenue from ultimate customers...

Sales for resale Total revenue from energy

-sales..

Miscellaneous electric revenues......

Total electric revenue

. 4 960 45 I-

$'6,262 77,806 40,467 8,704 193,239 44,000 237,239 2,532 239,771-4,527,826

-4,367,003 51,414 60,125 28,860 7,052 39,547 45,520 18,918 5,215 147,451 32,568 109,200 23,219 180,019 132,419 2.581 2.605 182,600 135,024 3,595,233 32,423 36,198 13,070 4,168 85,859 9,340 95, 199 1,935 97,134 CUSTOMERS AT YEAR END Residential Commercial Industrial Other Total ultimate-customers

-Sales-for resale...

Total customers Reliable net capability kW Coincidental peak demand kW..

Average fuel cost per million BTU BTU per kWhr of net generation...

184,979 20,334 485 264 206,062 5

--206,067 1,082,000 855,000 120.72tt 10,476 175,439 19,496 482 263 195,680 5

195,685 842,000 809,000 105.52tt!

10,993 164,803 18,374 493 265 183,935 5

183,940 858,000 715,000 92.74/

11,004 156,116 17,483 489 250 174,338 5

174,343 858,000 633,000 61.83tt!

11,084 WATER SERVICE SALES Gallons (in thousands)

Customer sales.

Interdepartmental sales.........

Total-water-sales-............

2,509,868 5,947 2,515,815 2,747,924 5,198 2,726,059 5,742 2,753,122 2,731,801 2,959,209 4,014 2,963,223 REVENUES (in thousands)

Customer sales Interdepartmental sales...

Total water sales......

Customers at-year cnd..

4,595 4

4,599 18,755 4,599 6

4,605 18,079 3,606 6

3,612 17,427 2,386 3

2,389 16,838 (I) Reclassified against expense (2) Certain customers were reclassified-from-commercial to industrial during 1975. The reclassification accounted for a change of 220 customers in both-categories-.

1975 1974 875,361'28,243 I, 177,953 I, 128,576 530,188 549,622 136,136 137,843 786,108 1,110,147 616,405 128,171 2,719,638 578,037 3,297,675 2,644,284 250,901 2,895,185 2,640,831 122,656 2,763,487 S

28,912 30,851 9,993 3,361 S

23,314 20,552 25,403 22,283 8349 7,210 3,004

',613 706,973 985,431 653,761 123,568 2,469,733 114,333 2,584,066 17,760 19,421 7,229 2,204 S

13,910 14,784 5,963 2;056- --

15,295 16,309 6,549 1,994 648,626'83,136 885,782 792,376

'18,695 552,1'18 116.202 107,598 2,269,305 2,035,228 106,000 98,026 I

2,375,305 2,133,254 S

73,117 8,241 60,070 2,782 52,658 1,074 46,614 937 40,147 36,713 857 778 81,358 1,412 62,852 2,406 53,732 2,803 47,551 795 41,004 670 37 491 621 82,770

-$ -.65,258-- -- --$-56,535

- 48,346 41,674-38,112 151,111 16,738(2) 515(2) 246 147,516 16;469'98 231 143,201 16,241 295 229 136,515 15,754 303 221 127,911 14,775 308 205 120,865 13,908 300 201 168,610 4

164,514 159,966 4

3 152,793 3

143,199 3

135,274 3

168,614 164,518 159,969 152.796 143,202 135,277 727,000==

727,000 617,000

-542,000 586,000 583,400 533,000 491,700 47.23g 39.49g 26.169 24.47g 10,848 11,054 11,017 10,841 540,700 458,700 23.550 10,870 540,700 400,600 23.04l1 11;058 2,859,783 3,013,508 9,195 12,568 2 855 673 2 781 854 2 563 745 2 564 580 10,710 3,638 1,707 1,782 2,868,978 3,026.076 2,866,383

.2,785,492

=

.. 2,565,452 2,566,362

-. 16,437 16,158 2,205

=

S

2,103

6 S

2,208 2,109 1,567 S

1,570

= 15,848

-15,454 15,024

'S

=1,530

=

S 1,434

--(I)

I S

1,530 S

1,435 1,418

.I 1,419

. 14,495

1979 1978 1977 1976 (In thousands except per share amounts) 1975 Total operating revenues

$244,370

$ 187,205

$ 138.636

$99,523

$84,978 Operating expenses Operation and maintenance Provision for depreciation and amortization.........,......

Taxes,.other than income taxes.......

Income taxes. ~..

-Total operating expenses-;;; ;.;..

Operating income.............

Allowance for equity fundswsed during construction

= Other income and deductions; net....=....

=.

Income before interest charges.......

Net interest charges Net earnings Preferred stock dividend requirements.....

Netearningsapplicabletocommon stock 134,539 17,603 10,531 21,881 184,554-59,816 15,594 2,401 77,811

. 23,008 54,803 12,196

$ 42,607 103,864 76,524 14,451 8,221 16,722 11,464 7,257 10,986 143,258 106,231 43,947 32,405 10,541

'2,257 56,745 19,281 37,464 8,384 6,218 1,435 40,058 15,137 24,921 6,285

$ 29,080

-$-1 8,636 51,535 9,548 5,875 8,028 74,986 24,537 4,109 689 29,335 11.978 17,357 4,194

$ 13,163 39,785 8,650 5,114 8 626 62,175 22,803 1,583 530 24,916 10,700 14,216 2,952

$ 11,264 Average number of shares outstariding

. Per>hare amounts Netearnings.................

Dividends 14,363 2.97 1.88 10,289 7,569 6,106 4,609 2.83 2.46 2.16 2.44 1.72 1.61 1.42 1.26 gAi $

The following factors, wfiich may not be indicative offuture operations or earnings, have had a significant effect upon the Company's results ofoperations during the years 1978 and 1979.

Electric revenues increased

$47.6 million m 1978 and $57.2 million in 1979. The principal factors causing these increases are as follows:

--==--.- =-Increase in electric-revenues due to:

Increased kWhr sales (a)

Increased base rates (b)

Increased fuel cost-adjustment factor (c) 1979 1978 (In thousands)

$ 14,660

$ 4,584 27,597 29,912 14,963 13,104

$57,220

$47,600 (a) -kWhr-sales the-number-of-customers increased in each period-and the-average use per customer de-

-creased in 1978 but-increased-in 1979. Increases in kWhr sales were 3.7% in-1978 and 9.6% in 1979.

(b) Rate increases the Company-bills-most customers under a Cost of Service Index order based upon the

==--

=

jurisdictional-return on common equity. The Index order, formerly a quarterly adjustment, was revised to provide

-for-annual adjustments-to base rates effective May 15, 1979. The Company-has periodically negotiated higher rates with-certain-customers-whose rates are subject to the jurisdiction of the Federal Energy Regulatory Commission (FERC)=New-rates-for-such-customers-were-filed with the-FERC and accounted for revenues, net of recorded provisions-forpossible refund,-of $6.7 million in 1978 and $9.9 million in 1979 which are subject to refund pending a determination by the FERC. Accumulated revenues subject to refund, net of provisions for refund, at Decemberd1, 1979 are.$ 18.3 million. --

(c) Fuel cost adjustment natural gas fuel cos~ts cost of coal~r ton and purchased power have accelerated rapidly. Such costs are passed on to customers.

Water revenues increased

$ 1.0 million in 1978 as a result of rate increases allowed by the New Mexico Public Service Commission (Commission).

Operation and maintenance expenses increased $27.3 million in 1978 and $30.7 million in 1979. Principal causes are:

(a) Production ofenergy from the Company's own generating units decreased by 14.3% in 1978 but increased by 16.3% in 1979. A boiler explosion, causing the shutdown of the first unit at the San Juan Generating Plant in July 1977 nnd the return to service of the unit in Mey 1979, coupled with~the urchnse of lower cost energy on the interchange market rather than generating from the Company's gas and oil fired units, resulted in the Company being a net purchaser of 957 million kWhr in 1978. Although generation increased in 1979, the growth in kWhr sales resulted in the Company being a net purchaser of 752 million kWhr. Increased fuel and. purchased~ower expenses resulting from the boiler explosion were $6.9 millionfor the entire period ofthe outage. Ofsuch expenses

$6.6 million were passed on to customers through the fuel adjustment clause by approval of the Commission and are subject to refund ifit is determined that the Company was responsible for the explosion.

(b)

Rapidly accelerating fuel costs.

(c) Higher cost of labor and related benefits due to higher wage rates and an increase in the number of employees necessary to operate the expanded electric generating and water facilities.

(d) General inflationary factors.

(e) Maintenance and repair expenses increased by $3.0 million in 1978 and $ 1.9 million in 1979. Overhauls and inspections at Person Station, the Four Corners plant and the San Juan plant accounted for increased costs of

$2.4 millionin 1978 and $ 1.3 millionin 19797 The Company's gross utility plant increased by approximate~1 29% in 1978 and 36% in 1979 as a result of expanded operations, the need to maintain reliable service and increasing environmental protection requirements.

In addition, the Company purchased the fifty-percent undivided interest of Tucson Electric Power Company in San Juan Unit 4. This increase in utilityplant and the Company's construction program have been the primary causes of increases experienced in the following areas ofoperations:

(a) Depreciation and amortization.

(b) Taxes, other than income taxes increases in ad valorem taxes resulted from increased plant.

(c) Allowance for funds used during construction increased construction at the San Juan plant and the Palo Verde Nuclear Generating Station.

(d) Interest charges and preferred stock dividend requirements from 1977 through 1979 the Company issued

$ 112 million principal amount of first mortgage bonds, utilized $ 147 million of proceeds of pollution control revenue bonds and issued $86 millionof preferred stock, generally at higher rates than previous issues, and had up to $96 millionprincipal amount ofshort-term debt outstanding.

Other income and deductions, net, increased $.8 million in 1978~rima~ril because the Company's share ofearnings of its fifty-percent-owned subsidiary increased due to increased coal deliveries to the San Juan plant and an increase in the price per ton delivered.

As a result of items detailed above, earnings before income taxes, income taxes, net earnings and earning~ser share ofcommon stock all increased in 1978 and 1979.

December 31, 1979 and 1978 1979 1978 (In tltonsands J Utilityplant, at original cost (notes 4 and 8):

Electric plant in service

= =- - -- - Water plant in service Common plant in service Less accumulated depreciation and amortization Coristruction work in progress

'lectric plantheld for futureuse Net utilityplant i

Other property and investments:

"Noiiutilityproperty, ut cost, uct ofaccumulated depreciation of$757,000 in 1979 and $456,000 in 1978

= Investment-in fifty-percent-owned company

~

~--- =-Other, at cost Total other property and investments Current assets:

-- =Cash (note-5)

Receivables:

Customers--

,=Other

.Allowance fordoubtful receivables Fuel, materials and supplies, at average cost Prepaid expenses Deferred fuel costs Total current assets Deferred charges:

Construction advance Unamortized debt expense Other deferred charges Total deferred charges 712,096 31,639 17,340 761,075 127,939 633,136 435,353 1,086 1,069,575 17,362 6,111 1,875 25,348 3,810 23,818 13,809 (224) 22,073 2,040 11,322 76,648 6,918 7,957 14,875

$ 1,186,446

$462,621 30,284 t4,t48 507,053

'102,033 405,020 371,754 1,086 777,860 9,516

- 3,895--

--,747 15-,158=

1-,929

- -18,835 18,231 (106) 16,015 1,116 11,875 67,895 17 037 5,364 5,433 27,834

. $888,747 See.accompanying notes to consolidated financial statements.

htNAtk6 I979

=

= =1978 (In rhotisands)

Capitalization:

Common stock equity (note 2):

Common stock of$5 par value. Authorized 20,000,000 shares; outstanding 15,601,739 shares in 1979 and 12,642,233 shares in 1978 Additional paid-in capital

.Retained earnings Total common stock equity 78-,009 185,600 83,719.

347,328

$-63;2 l-l ---

--145,433~~

67,645~~

-276-,289 Cumulative preferred stock. Authorized 5,000,000 shares (note 3):

Without mandatory redemption requirements.

Outstanding 860,000 shares of $ 100 stated --

value and 800,000 shares of$25 stated value With mandatory redemption requirements.

Outstanding 400,000 shares of$ 100 stated value in 1979.

Long-term debt, less current maturities (notes 4 and II)

Total capitalization 40,000 431,655 356,347 924,983, 738,636

-106,000

- - - --106,000=

= =-=-

Current liabilities:

Short-term debt (note 5)

Accounts payable Preferred dividends declared Current maturities oflong-term debt (note 4)

Accrued interest Accrued taxes Other current liabilities.

Total current liabilities

95,960 51,695 2;869 5+24=

5;577 9,418 4,220 174-,963 23,80 43,072 1-,994 1-,189

- =---,424 7,191 4,226--,901---

Deferred credits:

Customer advances for construction Accumulated deferred investment tax credits (note 6)

Accumulated deferred income taxes (note 6)

Other deferred credits Total deferred credits 7,180 47,896 22,529 8,895 86,500 5,603 36,224 17,980

=4,403 64,210 Commitments and contingencies (notes 8, 9 and 10)

$ 1,186,446=

$888,747

Years enrled Decetnber 3 1, 1979 and 1978 Operating revenues:

Electric (note 10)

Water Total operating revenues

$239,771 4,599 244,370

$ 182>600 4,605 187,205 1979 1978 (lnlhonsantls except per sharc atnottnls)

Operating expenses:

Fuel and purchased power Other operation expenses Maintenance and repairs Provision for depreciation and amortization Taxes, other than income taxes Income taxes (note 6)

Total operating expenses Operating income 85,143 34,351 15,045 17,603 10,531 21,881 184,554 59,816 62,694 28,002 13,168 14,451 8,221 16,722 143,258 43,947 Other income and deductions:

Allowance for equity funds used during construction Equity in earnings offifty-percent-owned company, net oftaxes (note 6)

Other, net oftaxes (note 6)

Net other income and deductions Income before interest charges 15,594 2,151 250 17,995 77,811 10,541 1,498 759 12,798 56,745 Interest charges:

Interest on long-term debt Amortization ofdebt discount, expense and premium Other interest charges Allowance for borrowed funds used during construction Net interest charges Net earnings Preferred stock dividend requirements Net earnings applicable to common stock

--Average number ofshares outstanding Per share amounts:

Net earnings Dividends 24,236 394

= =4,302 (5,924) 23,008 54,803 12,196

$ 42,607

---14,363=

2.97 1.88 21,349 347 1,668 (4,083) 19,281 37,464 8,383

$ 29,081

-= -- 10,289-283

1.72 See accompanying notes to cottsolidated jinancial statements.

Years ended Deeentber 31, 1979 and 1978 1979 1978 (In thottsands)

P~ercenta es 1979

- --=-1978 Common stock equity:

Common stock:

Balance at beginning ofyear-Issuance ofcommon stock Balance at end ofyear

$ 63,211 14,798 78,009

$ 44,287 18,924 63,211 Additional paid-in capital:

Balance at beginning ofyear Premium on common stock-issued Expenses ofstock issuance Balance at end ofyear 145,433 42,466 (2,299) 185,600 90,947 57,241 (2,755)-

145,433 Retained earnings:

Balance at beginning ofyear Net earnings Cash dividends:

Cumulative preferred stock Common stock Balance at end ofyear Total common stock equity 67,645 54,803 122,448 12,196 26,533 38,729 83,719 347,328 56,213 37,464 93,677 8,383 17,649 26,032 67,646 276,289 37.5%

37.4%

Cumulative. preferred stock:

Without mandatory redemption requirements:

Balance at beginning ofyear Issuance ofpreferred stock Balance at end ofyear 106,000 106,000 80,000 26,000 106,000 11.5 14.4 With mandatory redemption requirements:

Balance at beginning ofyear Issuance ofpreferred stock Balance at end ofyear 40,000 40,000 4.3 Long-term debt, less current maturities:

Balance at beginning ofyear Addition to long-term debt Reduction oflong-term debt Net change in unamortized discount and premium Balance at end of~ear Total capitalization at end ofyear 356,347 82,763 (6,544)

(911) 431,655

$924,983 244,721 114,561 (2,305)

(630) 356,347

$738,636 46.7 48.2 100.0%

100.0'umber ofshares issued:

$ 100 stated value cumulative=- ----

preferred stock Common stock See accontpanying notes to consolidated financial st

-400--

2,960 atetnent.

260 3,785

Years curled December 31; 1979 and 1978 1979

1978 (In thousands)

Funds provided:

Net earnings Charges (credits) to earnings not requiring funds:

Depreciation and amortization Provision for noncurrent deferred income taxes, net

--Investment tax credit, net Allowance for equityfunds used during construction Undistributed earnings of fifty-percent-owned company Funds derived from operations Sale offiist mortgage bonds Sale ofcumulative preferred stock

-Proceeds-from-pollution control revenue bonds Sale ofcommon stock Proceeds-from other-long-term debt Proceeds from short-term debt Decrease in.deferred charges Utilityplant retirements, net ofremoval costs Decrease in working capital other than short-term debt Other S 54,803 19,128 4,549 11,672 (15,594)

(2,216) 72,342 17,000 40,000 62,166 57,264 3,597 290,315 12,405 14,137 8,154 6,113

$583,493 S 37,464 15,510 1,149 10,378 (10,541)

(1,621) 52,339 65,000 26,000 48,818 76,165 743 142,280 809 4,086 6416,240 Funds used:

Cash dividends Utilityplant. additions Payment ofshort-term debt Reduction oflong-term debt Additions to non-utility property Increase in deferred charges Increase in working capital other than short-term debt Other

$ 38,729 308,526 218,160 6,544 8,157 3,377

$583,493

$ 26,032 189,307 168,475 2,305 22,316 4,400 3,405

$416,240 Changes in working capital other than short-term debt:

Cash Receivables Fuel materials and supplies Prepaid expenses Deferred fuel costs Accounts payable Preferred dividends declared Current maturities of long-term debt Accrued interest Accrued taxes Other current liabilities 1,881 443 6,058 924 (553)

(8,623)

(875)

(4,035)

(1,153)

(2,227) 6 S

(3,708) 15,140 1,801 (115) 4,747 (9,87T)

(572) 176 (832)

(3,035) 675 Increase (decrease) in working capital other than short-term debt S

(8,154)

S 4,400 See.accompanying. notes.to consolidated financial statements.

Deceinber 3l, l979 ninl l978 (1) Summary ofSignificnnt rfccoinning Policies System ofAccounts-The Company inaintains its accounting records in accordance with the uniform system of accounts prescribed by the Federal Energy Regulatory Commission (FERC) and adopted by the New Mexico Public Service Commission (Commission). As a result of thc rate-making process, the application of generally accepted accounting principles by the Company differs in certain respects from the application by nonregulated businesses.

Such differences generally regard the time at which certain itcins enter into the determination of net earnings in order to follow the principle ofmatching costs and revenues.

Principles ofConsolidation-The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Paragon Resources, Inc. (formerly Public Scrvicc Land Company). All significant intercompany transactions have been eliminated.

UtilityPlant Utility plant is stated at original cost, which includes payroll-related costs such as taxes, pensions and other fringe benefits, administrative costs and an allowance for funds used during construction. Contributions re-ceived from customers to mcct the customers'pecial construction requirements are credited to utilityplant.

It is Company policy to charge repairs and minor replacements of property to maintenance expense and to charge major rcplaccments to utilityplant. Gains or losses resulting from retirements or other dispositions of operating property in the normal course ofbusiness are credited or charged to the accumulated provision for depreciation.

Allowance for Funds Used During Construction (AFUDC)

In accordance with the uniform system of accounts, AFUDC, a noncash income item, is charged to utility plant.

The Coinmission ordcrcd that AFUDC be limited to gcncrating plant construction, cffcctive April 22, 1975.

The Commission further ordered, effcctivc May 15, 1979, that the rate be increased from the previously approved 6.5% to 7.5% and allowed thc Company to eliminate the recording of AFUDC on Unit 3 at the San Juan Generating Station and on pollution control plant associated with all San Juan units. The allowance for equity funds used during construction is credited to other income and deductions and the allowance for borrowed funds used during construction is credited to interest charges.

The allocation of AFUDC between borrowed funds, after taxes, and equity funds is based on the method required by FERC.

Dcprcciation-Provision for depreciation of utility plant is made at annual straight-line rates approved by the Commission.

The average depreciation rates used were as follows:

Electric plant Water plant Common plant

/979 3.62%

1.88%

7. 13%

1978 3.39'7o 1.89 7o 5.89'7o The provision for depreciation and amortization of certain equipment, including amortization applicable to capital

leases, is charged to clearing accounts along with other costs of operation and subsequently apportioned to operating expenses and property accounts based on the usc of the equipment.

Depreciation of non-utility property is computed on thc straight-line method.

Investment in Fifty-Percent-Owned Company-The Company's investment in a fifty-percent-owned company is stated at equity. The co-owner, Tucson Electric Power Company, is participating with the Company in the construction and operation of a steam turbo-electric generating plant described in note (8). The generating plant utilizes coal from properties of the fifty-percent-owned company as a source of fuel.

Deferred Fuel Costs-The Company uses thc deferred method of accounting for the portion of fuel costs which is recoverable in sub-sequent periods under fuel adjustment clauses.

Amortization of Debt Discount, Expense and Prcmium-Discount, expense and prcmiuin incurred in the issuance of the presently outstanding debt are being amortized by charges to income over the lives of the respective issues on thc debt outstanding method.

Investment Tax Credits-The Company follows the practice of deferring investment tax credits and amortizes them over the estimated useful lives of the related properties. Investment tax credit carryforwards are recorded to the extent ofthe sum of the investment tax credits which would have been realized if taxes payable had been based on pretax accounting income adjusted for permanent differences and the existing net deferred tax credits which would reverse during the investment tax credit carryforward period.

Income Taxes-Certam revenue and expense items In the Consolidated Statement of Earnings are recorded in a year different from the year in which they are recorded for income tax purposes.

Deferred income taxes are provided on these timing differences to the extent allowed for rate-making purposes. This normalization method is used primarily for differences attributable to deferred fuel costs, the use of liberalized depreciation methods and different lives under the asset depreciation range (ADR) than under the guideline depreciation provisions. Certain other differ-ences result in a reduction in income tax expense in the current year. This flow-through method is used primarily for diiierences between tax depreciation computed under the guideline life provisions and book depreciation and certain capitalized construction costs, principally AFUDC, deducted currently for income tax purposes.

At present, rates applicable to certam customers subject to FERC control allow recovery of amounts necessary to provide additional tax normalization of the items described above which are accounted for under the flow-through method for other customers. Provision has been made for additional deferred income taxes attributable to amounts collected under these rates.

Revenues Revenues are recognized based on cycle billings rendered to customers monthly. The Company does not accrue revenues for services provided but not billed at the end of a fiscal period.

PensTon Plan-The Company's policy is to fund pension costs which are composed of normal costs and amortization of prior service costs over thirty years.

(2) Common Stock Equity The Board of Directors reserved 2,000,000 shares ofunissued common stock for the dividend reinvestment program, the Employee Stock Purchase Plan and the Tax Reduction Act Stock Ownership Plan, of which 1,229,413 shares remained unissued at December 31, 1979.

Charter provisions relating to the cumulative preferred stock and the indenture securing the first mortgage bonds impose certain restrictions upon the payment of cash dividends on common stock of the Company. At December 31; '1979, there were no retained earnings restricted under such provision.

(3j Ctttttu!strive Preferred Stock The=cumulative preferred stock may be redeemed by'he Company, upon thirty days notice thereof, at stated redemption prices (plus accrued and unpaid dividends). Inforination concerning the cumulative preferred stock is as follows:

= Stated Shares traiue Outstanding 130,000 170,000 100,000 800,000 200,000 260,000 1,660,000 Series Without mandatory redemp-

= =tion requirements:

1965 Series, 4.58%

$ 100 1974 Series, 9.2%

100 1975 Series, 10.12% (b) 100 9.16% Series (b) 25 8.48% Series (b) 100 8.80% Series (b)

==

100 Aggregate Stated Vaiue iin thousandsi

$ 13,000 17,000 10,000 20,000 20,000 26,000

$ 106,000 Stated Redemption Price (a)

$ 102.516 107.00 110.12 27.29 108.48 108.80

- - -=-With mandatory redemption

=-=requirements:

8g75% Series (b) (c)

=== --=100 400,000

$ 40,000

- = =-- - 108.75

(a)

Redemption prices are at reduced premiums in future years.

(b)

'Redemption may not be made through certain refunding operations prior to March 15, 1980 foi the 1975 Senes, or pnor to June I, 1981 for the 9.16% Series, or prior to April I, 1982 for the 8.48% Series, or prior to April I, 1983 for the 8.80% Series, or prior to February I, 1984 for the 8.75% Serie.

(c)

On February I, 1984 and on each February I thereafter, the Company shall redeem 13,000 shares of the 8.75% Series, pursuant to a mandatory sinking fund at a redemption price of $ 100 per share plus accrued and unpaid dividends.

(4) Long-Term Debt The details of-the Company's maturities, are as follows:

outstanding long-term debt including unamortized discount and premium, less current--

Isstte andhtatitrity First Mortgage Bonds:

1980 through 1984 1985 through 1989 1990 through 1994 1995 through 1999 2000 through 2004 2005 through 2009 2004 through 2009:

pollution control series, securing pollution control revenue bonds Funds held b)rtrustee Total first mortgage bonds Pollution control revenue bonds, due 1984 Other Total long-term debt Interest Rates 3

% to 3'/s%

4s/s%

47/s%

57/s% to 7'/4%

7t/s% to 10'/s%

8th% to 9'/s%

6

% to 67/s%

5

% to 7.6%

1979 I978 (In tltausaniTs) 274,061 145,000 (153,660)

(85,825) 350,403 277,303 77,000 4,252 77,000 2,044

$431,655

$356,347 5,241 9,012 =

8,580 8,690 9,880 10,002 32,197 32,602 55;031 38,532 119,073 119,290 Substantially all utilityplant is pledged to secure the first mortgage bonds.

-Approximately 25 percent of the original principal amount of each series of first mortgage bonds will be redeemed through sinking-fund requirements'prior to the aforementioned due dates. The aggregate amounts (in thousands)==

of maturities on long-term debt outstanding at December 31, 1979 are as follows:

1980

$5,224 1981 2,314 1982 5,508 1983 2,816 1984 4,914 In August 1977 the City of Farmington, New Mexico issued and sold $77,045,000 principal amount of-its 5.9%

Pollution Control Revenue Refunding Bonds, Series-1977, the proceeds of which are expected to be used-to-re-

- tire 7.6% Pollution Control Revenue Bonds and 5% Pollution-Control Revenue Bonds at their maturity in-l984.=-

From and after such retirement, but not before, the Refunding Bonds will be payable out of revenues received

=---

--by the City from the Company. Upon such retirement the Company willalso guarantee the payment of the Series 1977 Bonds and secure its guaranty with an equal principal amount ofits first mortgage bonds.

(5) Short-Term Debt and Compensating Balance Arrangements The. Company's interim-financing requirements are met through issuance of-unsecured notes payable to banks==--

and commercial paper. The Company has agreed to maintain compensating balances with certain lending-banks or to pay fees in lieu of such balances.

Compensating-balances are-generally equal to 20% of the outstanding-in-debtedness or 10% of the lines of credit at such banks, whichever is greater. Details of the Company's short-term

-=-=

debt at Decemberd I, 1979 and December 31, -1978 and for the years then ended were as follows:

/979

(/n Ihousatu/s)

/978 Aggregate short-term debt outstanding:

Notes payable to banks Commercial paper Average interest rate on outstanding debt:

Notes payable to banks Commercial paper Maximum short-term debt outstanding during year Average short-term debt outstanding during year Weighted average interest rate on short-term debt outstanding during year, computed using daily outstanding balances:

Stated interest rates Effective rate considering the effect ofcompensating balances and fees in lieu thereof Unused lines ofcredit (subject to cancellation at the banks'ption)

Compensating balances at end ofyear

$37,250

$58,710

$ 4,050

$ 19,755 14/4%

13/s%

$95,960

$38,460 1 1 '/4%

10'/s%

$68,600

$23,028 117/s /o 7%%

127/s'7o 8'/s%

$60,140

$53,120 1,956 S

916

= = =- -Compensating-balances have been rcduccd by the average difference between collected bank balances and book balances.--===---

(6) Incoiite Tnxes Income taxes consist ofthe followingcomponents:

Current Federal income tax Current>tate.income tax DeferredEederai income tax Deferred state income tax Amount equivalent to current. investment tax credit Amortization.ofaccumulated investment tax credit

-Total income taxes

/979

/978

(/n thousands)

$ 3,864

$ 1,609 1,467 1,048 3,583 2,130 677 657 13,611 12,413 (742)

(527)

$22,460

.$ 17,330 Charged to operating expenses Charged to other income and deductions Total income taxes

$21,881 579

$22,460

$ 16,722 608

$ 17,330

- -Deferred fuel costs Liberalized-depreciation methods and

-- asset-class lives shorter than guideline lives Other miscellaneous items

Investment tax credit carryforward

--- 4,376 47 (4,032)

S 2,787 8,049 662 (3;956)

S 4,260 The Company has investment tax credit carryforwards, for tax purposes, ofapproximately $56,000,000 as of.Decem-ber 31, 1979 which willexpire in 1985 and 1986. Of this amount, approximately $ 17,075,000 has been recorded,

= for financialstatement.purposes, as a reduction ofdeferred. Federal income tax credits.

Deferred income taxes result from timing differences in the recognition of income and expenses for tax and account-ing purposes. The major. sources ofthese differences and the tax effects ofeach were as follows:

/979-- -

/978

(/n thousands)

(495)

$ 2,396

The current portion of deferred income taxes (included in accrued taxes) results from timing differences on deferred fuel costs. Such balances amounted to $ 1,688,000 as of December 31, 1979 and $ 1,977,000 as of December 31, 1978 after reduction for investment tax credit carryforwards.

The Company's effective income tax rate was less than thc Fcdcral income tax statutory rate for each of the years shown. The differences are attributable to the following factors:

Federal income tax statutory rate Tax depreciation in excess ofbook depreciation caused by use of guideline depreciation provisions Allowance for funds used during construction, net ofdepreciation adjustments Certain employee benefits and taxes capitalized for financial statements, net ofdepreciation adjustments Amortization ofinvestment tax credits Other miscellaneous items Company's effective income tax rate 1979 46.0%

(2.7%)

(12.1%)

(.5 "7o)

(1.0%)

(.6%)

29.1%

1978 48.0%

(1.2%)

(12.3%)

(.7 7o)

(1.0 "7o)

(1.2%)

31.6%

San Juan Generating Station

$388,893 Palo Verde Nuclear Generating Station Four Corners Generating Station Units 4 and 5 10.2%

$ 170,159 6,087

$ 6,440 13

$ 26,019 (7) Pension Plan The Company has a pension plan covering substantially all of its employees, including officers. The plan provides for monthly pension payments to participating employees upon their attaining the age of 65 or the age of 62 with 30 years service, the amount of such payments being dependent upon length of service and the average wage of the five most highly compensated consecutive years of employment. Early retirement is optional after age 55 or 30 years of service. Normal retirement benefits are the lesser of 65% of the participant's average annual base earnings rate minus $ 1,320 or 2% of the participant's average annual base earnings rate times his years of credited service. The Company made contributions to the employees'ension plan of$3,058,000 in 1979 and $2,807,000 in 1978 including normal costs and amortization ofprior service costs.

Prior to May I, 1978, the employees contributed $ 3 for the first $400 of monthly base salary, plus 3 percent of that part of base salary in excess of $400 during each month. The Company's funding ofthis portion of pension costs after such date did not have a significant cffcct on net earnings.

As of January I, 1978, the most recent valuation date, the actuarially computed present value of vested benefits did not exceed the total market value of the pension fund assets and the estimated amount of the unfunded prior service liabilitywas approximately $3,400,000.

(8) Construction Progratn and Jointly-Oivned Plants The Company is participating with Tucson Electric Power Company in the construction of the steam turbo-electric San Juan Generating Station. The Company owns an undivided fifty-percent interest in the first three units of the station. The Company purchased Tucson's fifty-percent undivided interest in the fourth and final unit of the San Juan Station in 1979 and now owns all ofsuch unit.

The Company is also participating with several other utilities in the construction of the Palo Verde Nuclear Gen-erating Station with the first unit scheduled for completion in 1983.

It is estimated that the Company's construction expenditures for 1980 will approximate $299,000,000 including expenditures on the jointly-owned projects. In connection, therewith, substantial commitments have been made.

In addition to such amount, the Company's wholly-owned subsidiary forecasts construction expenditures of ap-proximately $ 15,000,000.

Details ofthe Company's interest injointly-owned plants at December 31, 1979 are as follows:

Plantin Sen'ice Accutnutaterl Depreciation Constructiott tYort:in Progress Sltare of Total Ptmrt (In tltousandsl

$26,788 65

'7o

he Com an 's share of ca ital costs and the Com an has rovided i T ese amounts represent t

p y

p p

y p

ts own inancmg.

Statement of Earnings. The Company also has undivided interests tn transmission famlities which are not stg-m icant.

9 Lease Commiirnenrs The Compaan'eases data processing communication office and other equipment office space utility poles (joint use and real estate.

Certain leases primarily for data processing equipment are capital leases.

AE other leases are o rating leases.

Certain leases rovide urchase options in the approximate amount of$2,146 000 for data processing equipment and

$~423 000 for construction equipment. Renewal options and contingent rental provisions were not significant.

Leased prop~ert under capital leases'at December 31 1979 and 1978 is as follows:

Data processing equipment Other l979

/978 (Ifffhousanf(sl 3-,871 2r310 232 181 Less accumulated amortization 4,103 1,550 970

$2,553

$ 1,521 utureminimumJease payments. (in.thousands). under. capital Jeases;at December.31, 1979.are:

1980 1981 1982 1983 1984 Later-years Total mmimum lease payments Less amount representmg executory costs Net minimum lease a ments Less amount representing interest resent value of.netminimum Jease.payments 922 927 812 320 230 457 3,668 142 3 526 770

$2,756 utute~inimuttLgentaLpayments (in thousands)mequired under operating leases that hare initial or remaining.noncancellable.lease.

terms. in.excess. ofone year. as. ofDecember.31, 1979 are:

1980 1981 1982 1983 1984 Lateryears Total minimum payments required 670 351 192 147 146 56

$1,862 ents charged to operating expenses were $J.,227,000 in 1929 and $J.,091,000 in 1928 Such. amounts exclude pay-ments. made orLcapitaLleasesMents.charged.to.utility plant were9236,000Jn J979 and.$ 577.,000Jn J978 Jie Company~as enteredJnto an agreement,mot included above,/or the lease of an office building currently under construction~are payments wilLcommence after construction is completed in fatei980 at ernie of 2'f construction cost per yeaMor the first three years and at9.62% per year for the remaining thirty-two~ears of theJnitiaLlease term Construction costs covered by the lease are projected to be approximately

$J 8,200,000Auch JeaseJs an operating. lease

(10) Revenues Subject to Refitttd A boiler explosion caused the shutdown of Unit 2 at the San Juan Generaling Station during the~rind Jul 1977 to May 1978. The major part of increased costs for replacement energy required during the shutdown was with the approval ofthe Commission, initiallypassed on to customers through the fuel adjustment clause; however, the Commission subsequently ruled that charges for such increased costs are subject to refund ifit is determined that the Company was responsible for the explosion. Amounts collected subject to refund, based upon a formula proposed to the Commission, were approximately $2.1 million in 1978 and $4.5 million in 1977. Based on the Company's investigation the Company is of the opinion that no refunds will be due. Thc Co~ma~n's insurance covered a major portion ofthe cost ofreplacement.

In addition, the Company has collected certain revenues and has established a provision for possible refund of a portion of those revenues that have been collected subject to refund under wholesale rate cases filed with the FERC.

Information concerning such revenues and provision is as follows:

Revenues Provision for Collected Possible Reffmd Ifiet (ln tlfoftsands)

S 1977 1978 1979 Total

$ 1,705 6,678 13,177 S

1,705 6,678 9,885

$ 18,268 3,292

$3,292

$21,560 (11) Subsequent Event On October 1, 1979 the Company entered into an agreement with a group of private investors to scil-$45 million==--

principal amount of 10t/8% first mortgage bonds due 2004. On October 24, 1979 the Company received-$ 17-=

millionprincipal amount ofsuch issue-with the balance of$28 millionreceived on January 28,-1980.

--=

- --=-==-=-=-

(12) Quarterly Results ofOperations (Unaudited)

The results ofoperations (in thousands except-per share amounts) by quarters for 1979 and 1978 are as follows;-

Total itlet Operating

Operating --

¹t Earnings

---=-==

-=-

gffarter Ended Revenues Ittcome Earnings per 5ifarnt December 31r 1979

-$64,335

-$ 16,378

-- -= $ 16,623

-$.87 September 30, 1979

$66,725 -- $ 18,998--

--$ 16,661--

=-$,88 June-30,-1979

=

$56,475

$ 13,192

$ 11,504

--$.61

March 31,-1979-

$56,835

$ 11,248

$ 10,015

- $ u57(a)

December 31; 1978

$49,473 S 9,548 S 7,781

$.45 September 30,'978

$50,643

$ 13,039

$ 11,725

$.90 June 30, 1978

$44,079

$ 1 1,148

$ 10,005

$.84 March 31, 1978

$43,010-

$ 10,212

S '7,953

$.71

== (a) In June 1979, the Company established a provision for possible refund'on certain revenues collected subject

-to refund since October1977. The 'effect of such provision was to reduce operating revenues,'et earnings and net-earnings per share by approximately $ 1.9 million, $ 1.3 million and $.10, respectively; for the first quarter of 1979. The quarterly results ofoperations have been restated accordingly.

In the opinion of management of the Company, all adjustments (consisting of normal recurring accruals) necessar for a fair statement ofthe results ofoperations for such periods have been included.

Certified Public Accountants Peat, Marwick,Mitchell%Co Suite 500 First Plaza Post Oflice Box 1027 Albuquerque, New Mexico 87103 The Board of Directors and Stockholders Public Service Company ofNew Mexico:

We have examined the consolidated balance sheet of Public Service Company of New Mexico and subsidiary as of December 31, 1979 and 1978 and the related consoli-dated statements of earnings, capitalization and changes in financial position for the years then ended. Our examinations were made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the aforementioned consolidated financial statements present fairly the financial position of Public Service Company of New Mexico and subsidiary at December 31, 1979 and 1978 and the results of their operations and changes in their

'inancial position for the years then ended, in conformity with generally accepted account-ing principles applied on a consistent basis.

February 19, 1980

Common Stock:

Range of sales prices of the Company's common stock, on the New York Stock Exchange (Symbol: PNM), and dividends paid on common stock for fiscal 1979 and 1978, by quarters, are as follows:

Ran eo SalesPrlees Dividends Fourth Quarter, 1979 Third Quarter, 1979 Second Quarter, 1979 First Quaiter, 1979 Fiscal Year 20'/4 21'/8 21/4 20/s 21'h Lew Per Share i7Pa 80.48 17s/s 0.48 19 0.48 19'/s 0.44 17 /s

$ 1. 88 Fourth. Quarter, 1978 Third Quarter, 1978 Second Quarter, 1978 First Quarter, 1978 Fiscal Year 20'h 21%

21'/s 21 /s 197s 21/~

18%

0.42

$ 1.72 187s

$0.44 19 /s 0.44 19'/~

0.42 Cumulative Preferred Stock:

While isolated sales of the Company's preferred stock have occurred in the past the Company is not aware of any active trading market for its preferred stock.

Quarterly cash dividends were paid on each series of the Company's preferred stock at their stated rates during 1978 and 1979.

The followingsupplementary information is supplied in accordance with the requirements of Financial Accounting Standards Board (FASB) Statement No. 33, Financial Reporting and Changing Prices, for the purpose of providing certain information about the effects of changing prices. It should be viewed as an estimate of the approximate effect of inflation, rather than as a precise measure.

Constant dollar amounts represent historical costs stated in terms ofdollars ofequal purchasing power, as measured by the average Consumer Price Index for All Urban Consumers (CPI-U). Current cost amounts reflect the changes in specific prices ofplant from the date the plant was acquired to the present, and differ from constant dollar amounts to the extent that specific prices have increased more or less rapidly than prices in general.

The current cost ofproperty, plant and equipment, which includes land, land rights, intangible plant, property held for future use and construction work in progress, represents the estimated cost ofreplacing existing plant assets and was determined by indices provided by an independent appraisal firm. These indices consist of a combination of the Handy-Whitman Index of Public UtilityConstruction Costs and special indices derived from actual appraisals ofcertain property, plant and equipment.

The accumulated provision for depreciation and amortization on the constant dollar and current cost amounts of property, plant and equipment was determined by calculating the ratio of the actual reserve to historical cost for each plant account and applying this ratio to the indexed amounts, The current year's provision for depreciation and amortization on the constant dollar and current cost amounts was determined by applying the Company's average annual depreciation and amortization rates for each plant account to the indexed amounts.

Fuel inventories~the cost of fuel used in generation, and power purchased for resale have not been restated from their historical cost. Regulation limits the recovery of fuel and purchased power through the operation of adjustment clauses or adjustments in basic rate schedules to actual costs. For this reason fuel inventories are effectively monetary assets.

As prescribed in Statement No. 33, income taxes were not adjusted. Accumulated Deferred Investment Tax Credits is treated as a monetary item, since it is returned to customers through adjustments in rates.

Under the rate making prescribed by the regulatory commissions to which the Company is subject, only the historical cost of plant is recoverable in revenues as depreciation. Therefore, the excess of the cost of plant stated in terms of constant dollars or current cost over the historical cost of plant is not presently recoverable in rates as depreciation, and is reflected as a reduction to net recoverable cost. While the rate-making process gives no recognition to the current cost of replacing property, plant and equipment, based on past practices, the Company believes it willbe allowed to earn on the increased cost of its net investment when replacement offacilities actually occurs.

To properly reflect the economics of rate regulation in the Statement of Earnings from Continuing Operations, the reduction of net property, plant and equipment should be offset by the gain from the decline in purchasing power of net amounts owed. During a riod of inflation, holders of monetary assets suffer a loss ofgeneral purchasing power while holders of monetary liabilities experience a gain. The gain from the decline in purchasing power of net amounts owed is primarily attributable to the substantial amount of debt which has been used to finance property, plant and equipment.

Since the depreciation on this plant is limited to the recovery of historical costs, the Company does not have the opportunity to realize a holding gain on debt and is limited to recovery only ofthe embedded cost ofdebt capital.

Statement-of-Earnings-from-Continuing Operations Adjusted-for-Changing Prices Year-Ended-December-31;-1979 Adjusted for s>eported Gejiefal i>> >l>a Pri>>>ar~ln ariaa Adjustedfor Cliangesin Sp~eci ic Prices Statement (Constant Dollars)

(Current Cost)

(ln.thousands)

Operating revenues

$244,370

$ 244,370

$ 244,370

.uel.and.purchased. power Other operation expenses Maintenance and re airs De reciation and amortization Taxes, other than income taxes Income taxes Interest charges Other income and deductions net 85,L43 34 351 85,143 34 351 85,143 34 351 15,045 15,045 15 045 17,603 27,364 28,666 10,531 10,531 10,53'1 22,460 22,460 22,460 23;008 23;008 23;008 (18;574)

~((8;574

~((8;574 189,567 199,328 200,630 reduction to net recoverable cost)

$ 54,803 45,042*

43,740 Increase. in.specific. prices. (current. cost), of property,.plant.and.equipment held during.the year Reduction to net recoverable cost Effect of increase in general price level Excess. of.increase. in.general. price level.over

'ncreaseirLspecific prices afteueduction to net recoverable cost Gain from decline in urchasin ower ofnet amounts owed Net

$(103 ~692 62,665

$ (41,027) 62,686 (18 ~568 151,580 (102,462) 62,665

$ (39,797)

• Including.the reduction.to net.recoverable cost, the earnings (loss) from continuing operations on a constant dollar basis would have been'(58,650)XorJ929

Operating Historical cost. information adjusted for general inflation:

Earnings from continuing operations Earnings from continuing operations per common share Net assets at year-end at net recoverable cost

$ 45,042 2.29

$428,877=

Five Year Comparison of Selected Supplementary Financial Data Adjusted For Effects of Changing Prices Years Ended December 31, 1975 1976 1977 1978.

= U979 (Itt thousands ofaverage 1979 dollars--

except per share amounts) revenues

$ 114,657

$ 126,957

$ 166,134

$208,378

~244,370 Current cost information:

-Earnings from continuing operations Earnings from continuing operations per common share Excess of increase in general price level over increase in specific price after reduction to net recoverable cost Net assets at year-end at net recoverable cost General information:

Gain from decline in purchasing power of net amounts owed Cash dividends declared per common share Market price per common share at year-end Average consumer price index 1.70 24.36 161.2

==$=43;740

..$ = 2.20 =

$ 102,462

$428,877

~-62,666 1.81 1.93 1.91 1.88 29.95 25.13 21.31 17.27 170.5 181.5 195.4 217.5 Public Service Company of¹w hfexico believes that each successive generation's quality oflife willbe progressively more dependent upon the availability and reliabilityof electric and water service.

Consistent with this belief, we recognize our obligations to:

Our Customers An adequate and reliable source ofelectric and water service at the lowest reasonable cost; Our Shareholders A reasonable return on, with optimum security of, their investtnent t Our Employees An objective opportunity to progress and grow through productive aml meaningful participation; aml Our Future Generations A legacy ofadequate electric and ivater service provided through free enterprise ivith environmental and economic compatibilit>

To meet these obligations, ive a+irm a policy of:

Operating our Company in a responsible ntanner which rejlects the highest corporate integrity; Providing open communications in order to achieve a high level of umlerstamling and acceptance ofour purpose and endeavors; Sharing our teclmical and administrative sl'ills with all levels ofgovermnent to assist in assuring the best decisions are made; and Promoting, supporting and participating in ivortlnvliilecommunity activities atul development.

J. D. Geist, President

yJtNdritSJtrrreht Pgieev A B COLLINS~R~President,-RerldyCo>nrnunications, Inc Greenrvich, Connecticut H L GALLES,JR *Cliairtnan of the Board, Galles Chevrolet Company Albuquerqrrc, hie>v hlexico J. D. GEIST* President, Pirblic Service Coinpany ofiVerv h1exico C. E. LEYENDECKERtPresidem, hfimbres Valley Bank - Deming. hlerv h1exico

= D. W; REEVES*: Cliarnnan ofthe Executive Commhter ofthe Board ofDirectors, Prrbllc Servicb Company ofhlerv hfexlco R. R. REHDERt=Professorof hfanagement, Robert O. Anderson Graduate School ofhfanagement, University ofNerv hfexico-Albuquerque, iVew hfexico

. G. A SCH REI BER>> Cirairnran ofthe Board ofDirectors, Public Service Company ofIfew hfexico R. H. STEPHENSt President, Stephens.Irish Agency - Las Vegas. New hfcxico E. R. WOOD Presidenr, Sagitta Fe Motor Company - Santa Fe, iVerv hfexico

->>-hfembers-of the-Executive Committee fembers othe Audit Commiuee

====J. D. GEIST: President R. B. ROUNTREE Senior Vice President C. D.-BEDFORD Vice-President, Administration JP BUNDRANT,VicePresirlent, Division Operations B. D. LACKEYController R. F. MERSHON Vice President, Industrial Relations J. B. MULCOCK:Vice Presi<lent, Public Affairs R;-MULLINS Vice-President, Operations

==

D E PECKHAM Secretary anil Assistant Treasurer

,A J ROBISON Vice+residentFinance P. J. ARCHIBECKTreasurer nnrl Assistant Secretary J. L. WILKINSVice President, Engineering aml Operations B.= P. LOPEZ = Assistant Secretary

-=-= H;L.HITCHINS

,JR.AssistantSrcrctary and Assistant-Treasurer J. T. ACKERMAN District-Vice President, Albuquerque and IVestern Area P,R. GAMERTSFELDER District Vice President, Santa Fe and Las Vegas F. E. GRAYVice President, Urban Development R. A. LAKEDistrict Vice Presirlent, Belen, Bernalillo and Deming Divisions T. P; WARNKE=District Vice Presirlent, San Jrran

-=-=WvA;BADSGARDIVestern Division hfanager L C EDWARDS Bernalillo Division hfanager E. L. FOGLEMANLas Vegas Division hfanager R. H. HALLFORDDeming Division hfanager tV. M. HICKS, JR. hfanager, IVater Operations, Santa Fe J. L. SMITH:Bclen Division hfanager AI4 Silver Avenue SW, Albuquerque, New Mexico-

-Albuquerque National Bank, Albuquerque, Ncw Mexico Chemical Bank,New York, New York Irving Trust Company, New York, New York

~

~

First National Bank in Albuquerque, Albuquerque, New Mexico Chemical Barik, New'Yoik, New York IrvingTrust Company, New York, Ncw York

PUBLIC SERVICE COMPANY OF NEW MEXICO POST OFFICE BOX l047 ALBUQUERQUE, NET MEXICO 87I03 RETURN REQUESTED

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BULKRATE UEL POSI'AGE PAID Albuquerque, N.M.

Pennlt Ão. 13

p aoo<zoo <>r I

1979 Annual Report El Paso Electric Company MOTICE THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE DIVISION OF DOCUMENT CONTROL.

THEY HAVE BEEN, CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS FACILITY BRANCH 016.

PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL. REMOVALOF ANY PAGE(S)

FROM DOCUMENT FOR REPRODUCTION MUST BE REFERRED TO FILE PERSONNEL.

Docket g 50-5>8 DEADLINE RETURN DAl3bntro Da f Document REGULATORYD,O,CERT I<'IL K

RECORDS FACILITYBRANCH

Contents 1 Highlights 2 Letter to Shareholders 4 Report on the Palo Verde Nuclear Generating Station: Energy for the 80's 6 Year in Review - Operations and Area Development 8 Fuel 9 Rates and Regulations 10 Customer Communications 12 Board of Directors Officers 13 Financial MarketPriceof Common Stock and Dividends 14 Consolidated Balance Sheet 16 Consolidated Statement of Income 17 Consolidated Statement of Retained Earnings 18 Consolidated Statement of Changes in Financial Position 20 Notes to Consolidated Financial Statements 37 Report of Independent Certified Public Accountants 38 Summary of Operating Data 42 Management's Discussion and Analysis of the Consolidated Statement of Income 44 Corporate Information Dividend Reinvestment Another year of growth was noted in the Company's Dividend Reinvestment and Stock Purchase Plan. The plan is available to holders of record of Common Stock and is a convenient method of investing dividends and optional cash payments in new shares without payment of issuing expenses.

An enrollment card may be obtained by writing the Company Secretary.

About the Cover An on.site look at construction in progress inside the containment building at Palo Verde Nuclear Generating Station Unit No.2.

Figures appearing in this report are presented as general information and not inconnection withany sale or offer to sell or solicitation of any offerto buy any securities nor are they intended as a representationby the Company of the value of its securities.

Highlights At December 31, Operating Revenues (000)

Operating Expenses (000)

Net Income (000)

Net Income per share (Common)

Dividends per share (Common)

Book Value per share Common Shares Outstanding Number of Common Shareholders Number of Customers Number of Employees Peak Load Net Generating Capacity Average Residential Use Fuel Expense (000)

Energy Sales (MWH)

Electric Plant (000) 1979 159,712 135,643 23,190 1.45 1.07 10.44 14,503,373 32,995 175,311 965 688,000 KW 982,000 KW 6,072 KWH 81,669 3,424,284 561,783 1978 136,556 116,107 16,024 1.30 1.02 10.01 11,191,371 25,633 168,009

'08 690,000 KW 982,000 KW 6,153 KWH 73,447 3,320,649 438,085 El Paso Electric

Letter to Shareholders I

j j

The 1970's were a period of vast technological, industrial, economic and social change. The 1980's should also prove to be a pivotal period for the electric utilityindustry since we willcontinue to need additional energy facilities in the future despite reduced economic growth projections.

The 1980's willbe an era of great challenges as reliance on imported petroleum products continues while we make the difficultand expensive transition from a petroleum-based economy to alternative energy resources. You willfind in this report how The Electric Company is adjusting its operations and plans to address the new challenges it faces.

Dividends in 1979 totaled $ 1.07 a share, up 5e from 1978. The quarterly dividend on Common Stock was increased from 25e to 27-1/2e per share in September, 1979.

Dividends on Common Stock continued, without interruption, as they have since distribution of the Common Stock to the public in 1947.

Operating revenues for 1979 reached approximately $ 160 million. Total operating expenses were approximately $136 million, an increase of 17% over 1978. We continue to exercise careful control over expenses to insure that electricity is generated or purchased at the lowest possible cost to our customers.

Fuel costs represented 60% of the Company's total operating expenses.

Earnings per share of Common Stock for 1979 were

$ 1.45, compared with $1.30 in 1978. The weighted average number of common shares outstanding increased from 10.3 million in 1978 to 13.3 million in 1979.

A landmark negotiated settlement was reached between the City of El Paso and the Company regarding the Company's Texas rate increase request filed in June, 1979. Under terms of the settlement the Company received an $ 11.9 millionannual revenue increase for its Texas service area.

The negotiated settlement was adopted by the Public UtilityCommission of Texas for the unincorporated areas and forthe balance of the Company's Texas service area. To my knowledge this was the first time since the implementation of the Texas Public Utility Regulatory Act of 1975 that a municipality and an electric utilityreached a negotiated settlement of a major electric rate case.

In the settlement the Company was authorized a 15.5% return on common equity and the new rates were made effective with November, 1979 billings, two months earlier than had the case followed the usual course of appeal to the Public UtilityCommission of Texas.

In New Mexico the Company applied fora $7 million increase in December, 1978. The New Mexico Public Service Commission authorized an increase of $1.9 millionand disallowed the inclusion of construction work in progress (CWIP) in rate base relative to the Palo Verde Nuclear Generating Station. The Company presently has an application pending for an

$8.9 million increase in New Mexico including

$ 1.6 millioninterim rate relief. Testimony has been presented to the commission regarding the interim rate reliefand a decision is expected by May"1, 1980.

The funds for the Company's construction program are obtained from internally generated funds and sale of securities and long-term borrowings. Construction spending for 1979 was about $ 130 millionand approximately

$ 158 millionis budgeted for 1980.

Achieving adequate rates is a challenge for our Company and the utilityindustry in general.

Such nationwide problems as double-digit inflation, soaring interest rates, higher raw energy prices and increased environmental and other regulatory requirements have required periodic rate increases.

Rate structures that accurately reflect our cost to serve each customer and provide a fairreturn to investors are an integral part of the Company's rate requests.

Since the late 1920's The Electric Company has been largely dependent on natural gas and oilforboiler fuel. In 1969 the Company's cost of fuel was $6.5 million. The Company's total fuel bill in 1979 was approximately $81.7 million, representing an 11.6 times increase over the past ten years, primarily the result of the fuel shortage and rapid inflation. The price ofoil and natural gas has increased much faster than the inflation rate and fuel continues to be the Company's largest expense item.

. Your Company must contend with diminishing'and uncertain petroleum fuel supplies, inflationary costs, major capital requirements, and shifting often conflicting government policies and regulations to provide reliable electric service to a growing service territory. Our best hope to lessen the impact of these soaring costs and to lend stability to our customers'ising energy bills is the Palo Verde Nuclear Generating Station. Your Company owns an undivided 15.8% interest in the 3,810 megawatt Palo Verde Project, now under construction 50 miles west of Phoenix, Arizona.

Nuclear power willbe increasingly relied upon by the Company the remainder of this century to make it less dependent on risky petroleum fuels.

Public awareness of nuclear power was intensified in 1979 as a result of the accident at the Three Mile Island (TMI)nuclear power station in Pennsylvania. The accident at TMI was the most serious in the history of commercial nuclear power and opponents quickly seized the opportunity in an attempt to influence public opinion. AtTMInot a single injuryor fatality resulted. No energy source is 100% risk-free and the risk to the public posed by operating nuclear plants is less than those posed by other methods of generating the same quantity of electricity. Nuclear power will become an even safer and more efficient energy source as a result of industry and government actions followingthe TMIincident as explained elsewhere in this report.

Our customers view higher energy prices as particularly upsetting when accompanied by the dramatic rise in other livingcosts. Anumber of factors must be addressed during the near term by consumers, business and government to exert downward pressure on inflation. These include the reduction of excessive government spending, elimination of unnecessary and costly government regulations, reduction of business taxes and institution of measures to boost productivity and stimulate investment.

The Electric Company intends to continue its efforts to hold the line on costs wherever possible and continue to speak out whenever necessary to identify actions by government and regulators when their policies willresult in increased costs.

The Electric Company works agressively to protect natural resources as well as to comply with the many and proliferating laws and regulations in the environmental area. The Company is working on a number of projects to improve the environment primarily at the Four Corners Power Station. Construction improvements are continually being made to insure that all facilities are in satisfactory compliance with environmental requirements.

Looking back over the last decade itcan be said that your Company did its job of providing a necessary product exceptionally well in the face of many adversities.

This record of accomplishment is a tribute to the people of The Electric Company working together to serve the customers and communities in our service territory.

The many successes we have experienced over the years have been due to the combined efforts of many individuals: employees, directors, friends, and Shareholders. We look forward to their continuing support and active participation in meeting the challenges of the years ahead.

Evern R. Wall

'resident and Chief Executive Officer

A Report on The Palo Verde Nuclear Generating Station:

,4 Nuclear power is a proven technology forgenerating electricity economcally, cleanly and safely and now provides a substantial portion of the electricity consumed in the United States, saving thousands of barrels of oil daily.

AtThe Electric Company nuclear power willplay an increasingly significant role in satisfying the energy demands of our customers beginning in 1983 when the first unit at the Palo Verde Nuclear Generating Station is scheduled to go into commercial operation.

The Electric Company owns a 15.8% undivided interest in the Palo Verde Project, 50 miles west of Phoenix, along with four other Southwestern utilities: Public Service Company of New Mexico, Southern California Edison Co., Arizona Public Service Company and Salt River Project. The three Palo Verde units, each with a capacity of 1,270 megawatts, are scheduled for commercial operation in 1983, 1984, and 1986, respectively. Upon completion the Palo Verde Nuclear Generating Station willbe the largest nuclear power station in the United States, delivering three times the amount of electricity as the Hoover Dam. The Electric Company willreceive 200 megawatts from each unit.

Construction advanced significantly during 1979 on the Palo Verde Station and at year's end Unit 1 was 57% complete; Unit 2 was 26%

complete; and Unit 3 was 6% complete. The Company's estimated share of the cost of the Palo Verde Project, including transmission facilities and Allowance for Funds Used During Construction (AFUDC),

is approximately $853.9 million.As of December 31, 1979, the Company had invested approximately $241.3 million in the Project.

Labor and weather related problems at the site resulted in a one year delay in the completion of UnitOne until May of 1983 whilethe other two units remained on schedule.

When nuclear power becomes a part of the Company's fuel mix in the 1980's, it willbegin reducing the Company's dependence on oil and natural gas and help stabilize rising energy costs. The Electric Company is confident its investment in Palo Verde willprovide important economic benefits in the future. In 1979 commercial nuclear power saved the nation approximately 425 millionbarrels of oil while producing about 11.5% of all the electricity produced in this country. Atthe same time the Organization of Petroleum Exporting Countries (OPEC) raised oil prices by an average of 94% with further increases a certainty.

The nuclear industry experienced its first major industrial accident in the 25-year history of commercial nuclear power generation in 1979 at the Three Mile Island power station in Pennsylvania. The public was made more acutely aware of the nuclear industry as a result. While the planned nucfear safeguards functioned at TMIand the public was protected, several lessons were learned from the incident which willresult in an even safer nuclear industry.

Immediately after the TMIincident the Palo Verde participants organized a task force composed of experts from among the participants and suppliers of major components to conduct a thorough and exhaustive review of the safety related systems at Palo Verde. The task force is expected to issue its final report in mid-1980.

The industry demonstrated its seriousness and dedication to nuclear safety planning and operation in the immediate aftermath of the TMI incident, anticipating the "fundamental changes" recommended by the President's

Energy for the 80's Commission on the Accident at Three Mile Island. The industry moved swiftlyto establish the Nuclear Safety Analysis Center (NSAC) through the Electric Power Research Institute and the Institute of Nuclear Power Operations (INPO) which willset standards of excellence for operation and management of nuclear power programs. Another major component of the industry's efforts is a mutual insurance company to help protect utilities against some of the financial consequences of a prolonged nuclear reactor outage. Improved reactor operator training, equipment and controls improvement, and improved operating procedures are also being addressed.

The Electric Company views the future of nuclear power with confidence as the world petroleum situation tightens and international politics continues to distort the oil markets.

The energy shortage, clearly signaled at least in the late 1960's and confirmed by the arab oil embargo of 1973-74, is not difficultto comprehend. The world, and the United States in particular, simply has been consuming and continues to consume energy at a rate faster than new energy sources are being developed. Since before 1956 our nation has been using more energy than it produced domestically and since 1972 that gap has widened dramatically. OPEC has pushed the price of their exports higher since 1974 while in the United States federal controls on oil and natural gas pricing have discouraged production and stimulated use by maintaining prices at artificiallylow levels.

The Electric Company is examining various energy sources forthe long term and contemplates additional use of nuclear and coal in the foreseeable future. The Company participates in a variety of Research and Development programs through the Electric Power Research Institute and is increasing its level of participation withThe Department of Energy, private research organizations and area universities including several local solar, geothermal and wind energy projects. Nuclear fusion willprove to be a valuable energy option and EI Paso Electric is backing fusion research through the Texas Atomic Energy Research Foundation.

Allresearch is vital to the future application of alternate energy resources and it is part of the.commitment The Electric Company has made to its customers as a major energy supplier. Management remains convinced, after considering all the immediately available options, that nuclear power is the safest, most economical and environmentally superior method of generating electricity particularly in the 1980's and 1990's.

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Year In Review Throughout the 1970's El Paso and surrounding areas experienced substantial growth and development and has continued to develop as a major regional economic, trade and population center of the Sun Belt.

The El Paso area economy exhibited unusual strength in the 1970's and its solid development was supported by a modern and broad-based economy. One of the most solid indicators is employment which increased 15.6% during the past five years.

During the 1970's, the population of El Paso increased 27% to 410,000 and is projected to increase an additional 40% during the 1980's.

The economic impact of new industries locating in El Paso in 1979 is approximately

$ 1.1 billion as calculated by the Texas Industrial Commission. By the end of 1979 a total of 27 new industrial locations in El Paso and vicinityhad been announced. This growth willprovide about 3,000 new jobs. Interest in El Paso and twin plant locations in Ciudad Juarez, Mexico remains high and several large foreign and domestic firms have indicated an interest in far West Texas.

More than 105 American companies are operating under the Mexican Border Industrialization Program, or twin-plant concept. When Juarez begins to receive natural gas through a pipeline now under construction from the Mexican interior, the twin-plant operation could expand significantly, resulting in a strong economic impact on the entire area. In addition, El Paso is now the busiest international port of entry in the United States as measured by border crossings between the United States and Mexico.

Construction activity in 1979 continued at a moderate pace in El Paso and Las Cruces, New Mexico, the largest community served by the Company in its New Mexico jurisdiction.

The value of all building permits in El Paso totaled approximately $238 million in 1979, a nine percent increase over 1978.

Approximately $20 millionofthe 1979 total is for the new 18-story El Paso Natural Gas Company building now under construction in downtown El Paso.

A decrease in construction of single family units from 3,153 in 1978 to 2,606 in 1979 appears to be the result of sharply higher interest rates during the year.

Retail sales in El Paso have established new highs almost every year. In 1979 retail sales were up about 15 percent over 1978. Military installations continue to be major economic factors in the Company's service area. Fort Bliss ArmyAirDefense Center, William Beaumont Army Medical Center, White Sands Missile Range and Holloman AirForce Base are major facilities served by the Company.

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Division, headquartered in Las Cruces, New Mexico, also continued to attract new residents and businesses in 1979.

Building permit totals for 1979 in Las Cruces declined somewhat from last year's record pace.

The total for 1979 was

$29.3 million compared with $38.3 millionin 1978.

Las Cruces was designated a Standard Metropolitan Statistical Area in 1979 as a result of a special census. The population of Las Cruces grew from 48,000 in 1978 to 50,000 in 1979. At the end of the year the Company was serving 34,292 customers in New Mexico, five percent more than in 1978.

Business relocations to Las Cruces include the Joy Canning Company, Furtex, Inc., a synthetic fur manufacturer, and Davidson Rubber Company, an auto parts manufacturer.

In 1979, The Electric Company added approximately 7,300 new customers to its system reflecting the steady growth of the Southwest as an attractive place to live and work.

Total system sales climbed to 3,424,284 megawatt-hours (MWH),a 3.1 percent increase over 1978.

The commercial and industrial customer category, including schools, hospitals and other public facilities, as well as stores and offices, accounted for 1,632,000 MWH, up four percent from 1978. Residential customers accounted for 938,000 MWH, up three percent "-

from 1978. The average residential customer used 6,072 KWH,a one percent decrease in 1979. The average cost per KWHforresidential customers was 5.6c.

The annual growth rate in energy sales has slowed during the 1970's. Conservation and increased energy price awareness, while expected to continue, should not totally negate the impact of customer growth.

The 1979 maximum one hour peak demand on the system of 688,000 KWoccurred on July 10 and was slightly less than the all-time high system peak of690,000 KWestablished in 1978.

The EI Paso Electric 1979 net system capacity was 982 megawatts, composed of498 megawatts at Newman Power Station in El Paso; 372 megawatts at the Rio Grande Power Station, five miles from downtown El Paso in New Mexico, and a seven percent entitlement, or 112 megawatts, from the coal-fueled Four Corners Power Station near Farmington, New Mexico.

The Company is constructing a 73 megawatt combustion turbine generating station in El Paso to be used for peaking purposes. The unit, capable of operating on oil or gas, is scheduled foroperation in the second quarter of 1980. The total estimated cost of the peaking unit is $ 11 million.

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Fuel The Company's fuel mix in the 1980's willnot be derived totallyfrom oil and natural gas as has been the case formuch of its 78-year history. The events of the 1970's have served as additional stimulus for recognizing the need to reduce dependence on uncertain and increasingly expensive supplies of oil and natural gas.

Natural gas in 1979 provided 79% of the Company's fuel mix. The remainder of its fuel requirements were 13% coal and 8% oil. The gas and oil outlook has changed over the decade of the 1970's with even more uncertainty foreseen in the 1980's. The industry continues to receive mixed signals from the government concerning natural gas.

During the past 10 years the Company's total fuel bill increased more than eleven times. Individually, since 1970 the cost of oil has increased approximately 600%, natural gas increased 500% and coal increased 100%. Fuel costs increased approximately $8.3 million in 1979 over 1978 to approximately $81.7 million, or approximately 60% of 1979 operating expenses.

The nation's energy policies are designed to reduce dependence on expensive depleting petroleum fuels and to encourage conversion to more abundant alternative fuel supplies such as coal and nuclear power.

The National Energy Act goes so far as to prohibit new electric power plants from using natural gas or petroleum as a primary energy source except in certain cases and also requires the phasing out ofthese fuels in existing plants.

Converting to alternative fuel sources requires an extensive financial commitment by the Company but it is a commitment the Company must undertake in order to provide adequate and reliable electric service in the future at the most economical price.

The Palo Verde Nuclear Generating Station represents the Company's effort to reduce substantially the use of oil and gas and provide electricty to a growing service area at the most reasonable cost possible. With the Palo Verde Station the Company willregain some control over fuel costs by using uranium, one of the only viable domestic fuels available. The participants in the Palo Verde Project have firm contracts for the supply of uranium concentrate to fuel the three units extending to the year 2003. In addition, the participants have acquired a 50% interest in and are developing 60,000 acres of uranium properties in Wyoming which willfurther assure Palo Verde fuel requirements.

The Company began diversifying its fuel mix in the late 1960's when it became a part owner of the coal-fueled Four Corners Power Station. By the 1990's electric generation is expected to be approximately 60% coal and nuclear-fueled.

Franklin Land and Resources, Inc. is the Electric Company's wholly owned subsidiary, organized to secure property and water rights for the Company's various projects and business-related needs, primarily plant sites and water for cooling purposes at generating plants.

As we continue to develop important domestic energy resources like coal and nuclear fuels, we are increasingly concerned over rising inflation, higher fuel prices, increased operating expenses and higher interest rates.

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• 0',Z, Converting to alternate fuel sources to assure an adequate supply of electricity for the coming decades has required an extensive financial commitment by The Electric Company. It has been necessary for the Company to seek rate increases during the last few years to support its construction program and to offset the effects of persistent high inflation.

In 1979, the Company and the Cityof El Paso reached a landmark negotiated rate settlement calling fora revenue increase of$ 11.9 million, a 15.5% return on common equity and an effective'date two months earlier than would have otherwise been possible. In addition, the negotiated settlement eliminated the prospect of an appeal to the Public UtilityCommission of Texas, which has been costly in the past and provides an opportunity for the City and the Company to undertake settlements of pending litigation without further appeals.

If no further appeal to past cases is made by the City, the time and money which would otherwise be spent solving these problems in court willbe saved.

The negotiated rate settlement with the City of El Paso was the first since the implementation of the Texas Public UtilityRegulatory Act of 1975. The Act created the Public UtilityCommission of Texas as the appellate jurisdiction over electric rates and services in Texas municipalities and empowered it with original jurisdiction in unincorporated areas of the state. The PUC and other incorporated areas later adopted the City settlement to cover the balance of the Corripany's Texas service territory. Cooperation between the City and The Electric Company is very important to the community,and this agreement should pave the way to improved relations and cooperation for the benefit of all concerned since continued community support is essential if long-range energy needs are to be satisfied.

We believe it is clearly advantageous from an economic and financial standpoint to negotiate an agreement of this nature rather than undergo lengthy formal litigation over many months or even years at great expense to the Company and its customers.

The Company has appealed the New Mexico Public Service Commission decision that granted the Company a $1.9 millionincrease in annual revenues on retail sales in New Mexico. An application for an

$8.9 millionincrease in annual revenues is pending in New Mexico including $1.6 millioninterim rate relief. The commission has heard the Company's testimony regarding the interim rate relief and a decision is expected by May 1, 1980.

The Company was allowed to include in its rate base approximately

$49.9 millionofconstruction work in progress (CWIP) forthe Palo Verde Station by its Texas regulatory authorities. The New Mexico rate order did not authorize the Company to include CWIP in rate base.

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studies. This information willbe utilized for engineering and system planning as well as for regulatory requirements.

The Company continually strives to maintain rates which adequately cover all costs of service, including fair compensation to investors, and which preserve its financial integrity and abilityto attract the capital required to build the facilities to meet the needs of all customers. As the economic and regulatory factors described throughout this report continue to affect the Company's financial results and because the rates approved have been lower than requested, it willbe necessary for the Company to file for additional rate relief in the near future.

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Customer Communications 10 In a world where government actions and public opinion may have as much impact on business decisions as market considerations, the responsibilities of management must extend beyond day to day operations.

Responding to the impact of these external forces on the business environment The Electric Company, like other electric utilities, has started speaking out and providing information to its customers on important issues.

Throughout the 1970's energy conservation and proper energy management have been the predominant theme of corporate communications. This has been broadened to include pertinent information on such matters as the Company's construction program, electrical safety and nuclear power.

The Three Mile Island accident created some contusion and uncertainty regarding nuclear power in the United States. To provide accurate information and to facilitate better public understanding of nuclear power in general and the Company's participation in the Palo Verde Nuclear Generating Station, a thorough mass-media campaign addressing these issues was launched in 1979. Former astronaut Scott Carpenter appears in many of the advertisements speaking on behalf of The Electric Company and Palo Verde.

These messages have been well-received and are carrying the Company's message to customers: That Palo Verde and nuclear energy are essential to the continued economic well-being in the area served by the Company and that despite setbacks in 1979 nuclear power is as safe as any technology ever developed by man and sater than most comparable industrial undertakings.

The Company recognizes the diverse cultural backgrounds which exist throughout its service area and has attempted to tailor its communications to meet the needs of this population. Most corporate communications with customers are produced in both English and Spanish.

I The public demand forthe Company's various printed materials

-r regarding electrical safety, energy conservation, and alternative energy sources has been very strong withthousands ofcopies distributed to the public, local schools and organizations during the year. The Company's standardized monthly billinsert "The Electric Guide" has been favorably received by customers.

Much of this material is utilized by the Company's Community Services Section's public school energy education program.

Programs on the environment, solar energy, conservation, nuclear energy, safety and field trips to Company facilities are provided to consumers and area school districts. In addition, the Company has provided much valuable information to several schools through the Edison Electric Institute High School Grant Program.

The Company's Energy Utilization and Conservation Section is trained and statfed to provide energy management information and energy audits for residential and commercial customers. The National Energy Act requirements for utilities to offer home energy audits starting in 1980 willpose no unusual problems forthe Company since this activity has been offered for a number of years.

The Company continues to encourage construction of the WISE (Weatherized and Insulated to Save Energy) Home among local home builders as well as retrofitting existing homes to energy efficient standards.

Employees The Company's success in accomplishing its stated goals of:

protecting and enhancing the investment of its shareholders; providing an enriching and satisfying place to work; providing the best possible service to its customers at a reasonable cost; can be attributed to the skills and contributions ot its dedicated employees.

At year-end 1979 the Company had 965 employees in its two-state service area.

Employees continued to demonstrate interest in the Company's Employee Stock Purchase Plan through payroll deductions to purchase common stock. Approximately 180 ot the Company's employees were participating at the end of the year. The Company also offers an Employee Stock Ownership Plan (ESOP) which provides employees with greater participation in the ownership of the Company under attractive terms and provides the Company with additional tax credits towards its federal income tax liability.

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The Company continues to emphasize training in all its operations to further upgrade the quality of service as well as employee performance and productivity.

Atwo-year labor agreement between the Company and Local 960 of the International Brotherhood of Electrical Workers, which represents 340 bargaining unit employees, was finalized in February, 1980. The contract became effective March 1, 1980, and contains a mutually acceptable wage and benefit package forthe IBEW.

The Company's move to its new headquarters in the historic MillsBuilding in downtown El Paso was completed in the summer of 1979. The renovated MillsBuilding provides expanded and economical facilities conducive to the orderly and efficient operations of a growing employee family.

The firstwoman director of El Paso Electric Company was elected during the annual meeting of shareholders in May as one of two new directors. Mrs. Josefina A. Salas-Porras is executive director of Bl Language Services, a firm she founded in 1970, and also serves as a director of the El Paso branch of the Federal Reserve Bank of Dallas.

Leonard A. Goodman, Jr., general agent for John Hancock Mutual Life Insurance Company, was also elected to the Board.

Mrs. Salas-Porras and Mr. Goodman succeeded former Company president, Chairman of the Board and retiring director Dennis H. Lane and retiring director Dr. Joseph R. Smiley. Dr. SmileyandMr. Lane served as advisory directors to the Board during 1979.

Financing During 1979 the Company's construction program, beyond internally generated cash, was funded by the sale of a combination of Common Stock, Preferred Stock, First Mortgage Bonds, and various banking arrangements.

The permanent financing provided aggregate gross proceeds to the Company of approximately $107.8 million.

To finance the Company's construction program in the 1980's it is estimated that funds generated from operations willprovide approximately 30% to 32% ofthe cash required. Additionalfinancing will come from sources outside the Company and willbe influenced by market conditions, earnings performance and reasonable regulatory treatment.

Shareholders authorized additional future financing by approving an amendment to the Restated Articles of Incorporation to increase the number of authorized shares of Common Stock from 15 millionto 30 millionshares at the annual meeting in May, 1979.

An additional positive long-range financial step was taken in January, 1979, when the Company entered into a nuclear fuel financing arrangement whereby a Trust acquired a portion of the nuclear fuel necessary for the Palo Verde Nuclear Generating Station. Under this arrangement the Company was reimbursed for all previous nuclear fuel expenditures and intends to enter into a basic heat supply contract whereby title to the fuel willremain with the Trust and the Company will make lease payments forthe heat generated.

Board of Directors 12 0$

From left to right seated George G.

Matkln'hairman ofthe Board, The State National Bank of El Paso; Chairman of the Board PanNational Group, Inc.(13)

Paul Harvey'onorary Chairman of the Board of the Company; Honorary Vice President, El Paso National Bank; Chairman of the Board, First State Bank (39)

Evern R. Wall President and Chief Executive Officerof the Company (5)

Robert E.

Boney'nvestments, Las Cruces, New Mexico (32)

Robert H.

Cutler'hairman of the Board, illinois-CaliforniaExpress, Inc.; Chairman of the Board, ICX, Inc. (9)

From left to right standing Leonard A. Goodman, Jr.

Chartered LifeUnderwriter; General Agent, John Hancock Mutual Life insurance Co. (1)

Tad R. Smith Attorney; Partner, Kemp, Smith, White, Duncan and Hammond; Counsel forthe Company (19)

Josefina A. Salas-Porras Executive Director, BlLanguage Services (1)

Ben L. Ivey Farmer; Director, Chairman ofthe Board, Bank of Ysleta (10)

Members of the Executive Committee

( ) Years of Service on the Board Officers EVERN R. WALL, President and Chief Executive Officer ROLLANDE. YORK, Senior Vice President BILLYEE. BOSTIC, Senior Vice President HARRY I.ZIMMER, Vice President JAMES H. JONES, Vice President DONALDG. ISBELL, Vice President CHARLES MAIS, Vice President RALPH G. CROCKER, Treasurer WILLIAMJ. JOHNSON, Controller THETA S. FIELDS, Secretary ROBERT L. CORBIN, Assistant Treasurer and Assistant Secretary RICHARD E. FARLOW, Assistant Treasurer CECELIA R. SHEA Assistant Secretary

Financial 13 FINANCIALINFORMATION (Not covered by Report of Independent Certified Public Accountant)

WHERE THE REVENUE DOLLAR CAME FROM:

Residential 33C Sales to Public Authorities 17e Sales for Resale 3e Other 10 Commercial and Industrial Large 17C Commercial and Industrial Small 29C WHERE THE REVENUE DOLLAR WENT:

Taxes 14C Other Operating Expenses 108 Depreciation 5e Interest Expense 5c Dividends 12C Retained Earnings 3C Fuei Expense 51C MARKETPRICES OF COMMON STOCK AND DIVIDENDS (Not covered by Report of Independent Certified Public Accountants)

The followingtable indicates the high and low bid price of the common stock and dividends paid for the quarters indicated:

Bid Price Range Quarter 1979 First Quarter Second Quarter Third Quarter Fourth Quarter 1978 First Quarter Second Quarter Third Quarter Fourth Quarter High 10r/s 10s/s 11 10'/s 11s/s 11%

11'/2 1(84 1(Ati 9r/s 10 9'/s 10r/s 10s/s 10i/s 9~/s

'ividends S0.26 0.26 0.275 0.275

$0.25 025 0.26 0.26 El Paso Electric Company Common Stock is traded in the over-the-counter market.

The tabulation, which sets forth the high and low bid prices and represents prices between dealers, does not include retail markups, markdowns or commissions.

Financial 14 EL PASO ELECTRIC COMPANYAND SUBSIDIARY CONSOLIDATED BALANCESHEET ASSETS December 31, 1979 1978 (In thousands)

Utilityplant:

Electric plant (Notes B and E)

Accumulated provision fordepreciation Nonutilityproperty, at cost Accumulated provision fordepreciation

'Current assets:

Cash (Note F)

Accounts receivable (less allowance for doubtful accounts of $205,000 and $228,000, respectively)

Federal income taxes refundable Materials and supplies Fuel (Note H)

Prepayments Deferred fuel costs Other Deferred charges and other assets:

Unamortized debt expense Other

$561,783 (76,053) 485,730 2,357 (81) 2,276 10,684 18,327 2,694 3,880 8,060 1,712 309 721 46,387 844 1,881 2,725

$438,085 (68,672) 369,413 1,563 (27) 1,536 6,032 15,325 6,038 2,821 8,849 1,788 1,823 303 42,979 808 1,239 2,047

$537,118

$415,975 The accompanying notes are an integral part of the consolidated financial statements.

Financial 15 EL PASO ELECTRIC COMPANYAND SUBSIDIARY CONSOLIDATED BALANCESHEET (Continued)

LIABILITIESAND SHAREHOLDERS'QUITY December 31, 1979 1978 (In thousands)

Capitalization:

Common stock, no par value, 30,000,000 and 15,000,000 shares authorized, 14,503,373 and 11,191,371 shares issued and outstanding at December 31, 1979 and 1978, respectively (Note C)

Unamortized capital stock expense Retained earnings (Note E)

Common stock equity Preferred stock Redemption required, cumulative, no par value, 500,000 and 240,000 shares outstanding at December 31, 1979 and 1978, respectively (Note D)

Preferred stock Redemption not required, cumulative, no par value, 190,000 shares outstanding at December 31, 1979 and 1978 (Note D)

Long-term debt(Note E)

Total capitalization

=

Current liabilities:

Current portion of long-term debt (Note E)

Notes payable to banks (Note F)

Notes payable to other (Note F)

Commercial paper (Note F)

Turbine contract payable (Note B)

Fuel purchase commitment (Note H)

Accounts payable, principally trade Customer deposits Taxes accrued Deferred income taxes Interest accrued Other Deferred credits and other liabilities:

Accumulated deferred federal income taxes Accumulated deferred investment tax credit Customer advances for construction and other Long-term purchase commitment (Note B)

Commitments and contingencies (Notes H and J)

$106,329 (1,029) 46,126 151,426 50,000 18,873 171,721 392,020 4,549 2,125 15,290 34,332 7,754 7,958 10,607 2,849 6,123 284 3,183 1,841 96,895 241873 22,537 793 48,203

$ 71,269 (788) 41,541 112,022 24,000 18,873 126,152 281,047 1,045 26,600 32,175 8,747 8,982 2,447 5,419 1,021 2,831 955 90,222 17,998 19,191 354 37,543 7,163

$537,118

$415,975 The accompanying notes are an integral part of the consolidated financial statements.

Financial 16 EL PASO ELECTRIC COMPANYAND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME For the years ended December 31, 1979 and 1978 Operating revenues Operating expenses (Notes' and K):

Fuel Purchased and interchanged power Operation Maintenance Depreciation (Note B)

Taxes (Note G):

Federal income, current Federal income, deferred Charge equivalent to investment tax credit, net of amortization Other 81,669 (3,531) 20,962 6,725 8+45 73,447 (2,110) 17 722 5,559 7,361 1,238 6,138 (2,617)

(1,500) 4,083 10,114 9,014 9,231 1979 1978 (In thousands)

$159,712

$136,556 Operating income Other income:

Allowance for other funds used during construction (Note I).

Other income, net of other expenses Federal income taxes (Note G)

Income before interest charges Interest charges:

Interest on long-term debt Other interest (Note B)

Other interest capitalized (Note B)

Allowance for borrowed funds used during construction (Note I)

Net income(Note I)

Preferred dividend requirements (Note D)

Net income applicable to common stock (Note C) 135,643 24,069 7,450 561 (269) 7,742 31,811 11,589 7,420 (1,643)

(8,745) 8,621 23,190 3,948

.. $ 19,242 116,107 20,449 3,197 954 (463) 3,688 24,137 9,477 4,041 (1,098)

(4,307) 8,113 16,024 2,575

$ 13,449 Net income per share of common stock (Notes C and I)....

Weighted average number of common shares outstanding

$1.45

$1.30

...13,252,102 10,333,109 The accompanying notes are an integral part of the consolidated financial statements.

Financial 17 EL PASO ELECTRIC COMPANYANDSUBSIDIARY CONSOLIDATED STATEMENT OF RETAINED EARNINGS For the years ended December 31, 1979 and 1978 Retained earnings at beginning of year Net income Amortization of capital stock expense 1979 1978 (In thousands)

$41 541

$39,056 23,190 16,024 (134)

(139) 641597 54,941 Cash dividends:

Preferred stock Common stock Retained earnings at end of year 3,948 14,523 18,471

$46,126 2,575 10,825 13,400

$41,541 The accompanying notes are an integral part of the consolidated financial statements.

Financial 18 EL PASO ELECTRIC COMPANYAND SUBSIDIARY CONSOLIDATED STATEMENTOF CHANGES IN FINANCIALPOSITION For the years ended December 31, 1979 and 1978 1979 1978 (In thousands)

Source of funds:

From operations:

Net income Items not requiring outlay of working capital in the current period:

Depreciation Deferred federal income tax Investment tax credit Allowance for other funds used during construction.'..........

Other Funds provided by operations Other sources:

Sale of nuclear fuel to trust Sale of preferred stock Sale of common stock Sale of first mortgage bonds Sale of unsecured floating rate promissory note Long-term mortgages Long-term purchase commitment Advances forconstruction and other Application of funds:

Gross additions to plant Allowance for other funds used during construction....

Transfer of long-term purchase commitment to current Gross additions to other property and investments Increase (decrease) in other deferred debits Dividends on preferred stock Dividends on common stock Capital stock expense Reduction of long-term debt Increase in bond discount Other Decrease in working capital

$ 23,190 8,245 6,875 4,083 (7,450) 278 35,221 4,712 26,000 35,060 25,000 25,000 591 439 152)023 130,282 (7,450) 7,754 794 642 3,948 14,523 375 4,549 (129) 155,288 3,265

$ 16,024 7,361 1,354 9,014 (3,197) 223 30,779 14,000 30,205 9,000 2,124 563 (51) 86,620 100,101 (3,197) 1,539 (74) 2,575 10,825 431 1,000 2,196 903 116,299

$ 29,679 The accompanying notes are an integral part of the consolidated financial statements.

Financial 19 EL PASO ELECTRIC COMPANYAND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN FINANCIALPOSITION(Continued)

For the years ended December 31, 1979 and 1978 1979 1978 (In thousands)

Increase (decrease) in components of working capital:

Current assets:

Cash Restricted cash Accounts receivable Federal income tax refundable Materials and supplies Fuel P repayments Deferred fuel costs Other Current liabilities:

Current portion of long-term debt Notes payable to banks Notes payable, other Commercial paper Turbine contract payable Fuel purchase commitment Accounts payable Customer deposits Taxes accrued Deferred income taxes Interest accrued Other Decrease in working capital

$ 4)652 3,002 (3,344) 1)059 (789)

(76)

(1,514) 418 3,408 3,504 (24,475) 15,290 2,157 7,754 (789) 1,625 402 704 (737) 352 886 6)673

$3,265

$1,685 (6,600) 942 2,011 203 2,647 272 (5,411)

(534)

(4,785) 1,045 15,735 6,875 2,647 (823) 450 1,132 (2,854) 509 178 24,894

$29,679 The accompanying notes are an integral part of the consolidated financial statements.

Financial 20 EL PASO ELECTRIC COMPANYAND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS A. Summary of Significant Accounting Policies:

General The Company maintains its accounts in accordance with the Uniform System of Accounts prescribed for electric utilities by the Federal Energy Regulatory Commission (FERC).

Reclassification In accordance with the Securities and Exchange Commission Accounting Series Release No. 268 issued July 27, 1979, the Consolidated Balance Sheet at December 31, 1978, has been reclassified to state preferred stock-redemption required and preferred stock-redemption not required, separately.

Principles of Consolidation The consolidated financial statements include El Paso Electric Company and its wholly-owned subsidiary, Franklin Land 8 Resources, Inc. Allintercompany balances and significant intercompany transactions have been eliminated in consolidation.

UtilityPlant Utilityplant and equipment are stated at original cost. The Company provides fordepreciation on a straight-line basis at annual rates which willamortize the undepreciated cost ofdepreciable property over estimated remaining service lives.

The Company charges the cost of repairs and minor replacements to the appropriate operating expense and capitalizes the cost of renewals and betterments. The cost ofdepreciable plant retired or sold, and the cost of removal, less salvage, is charged to accumulated provision for depreciation.

Inventories Materials and supplies and fuel inventories are valued at the lower of average cost or market.

Unamortized Capital Stock Expense Unamortized amounts apply to outstanding issues and are being charged to retained earnings over a ten-year period.

Revenue(

Revenues are recognized based on cycle billings rendered to customers monthly. The Company does not accrue revenues in respect to energy consumed but not billed at the end of a fiscal period.

Financial 21 EL PASO ELECTRIC COMPANYAND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

Unamortized Expense, Premium and Discount on Debt Unamortized amounts apply to outstanding issues and are being amortized ratably over the lives ot such issues.

Federal Income Taxes and Investment Tax Credits Accelerated depreciation of utilityplant and amortization of emergency facilities are used for federal income tax reporting purposes which differs from the methods used forfinancial reporting purposes. Ditferences in the tax and financial methods of accounting forfuel costs and other capitalized costs also exist. In accordance with regulatory authority requirements, provision has been made in the financial statements for federal income taxes deferred to future years as a result of these items. The Company has not provided deferred taxes on certain other differences between financial and tax reporting, prior to 1979, since such differences were not approved as an expense in rate ot return computations by regulatory authorities.

Effective January 1, 1979, in accordance with a Texas rate order, the Company began providing deferred federal income taxes relating to the borrowed portion of AFUDC, to certain capitalized costs, and to all ditferences between book and tax depreciation forproperty placed in service after 1978.

Investment tax credits are deferred and amortized to income over the estimated service lives ot the related properties.

Pension Plan The Company has a noncontributory retirement annuity plan (future participation terminable at any time) under a group annuity contract. The pension plan provides annual pensions forregular employees with more than one year ot service. The Company's policy is to fund pension costs accrued. Prior service costs are being amortized over a thirty-year period beginning in 1972 and are included in the determination of annual expenses.

Net Income Per Common Share Net income per common share is computed using the weighted average number of common shares outstanding during the year. Common equivalent shares related to the Amended Employee Stock Purchase Plan are not significant.

Financial 22 EL PASO ELECTRIC COMPANYAND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

B. UtilityPlant:

Electric plant consisted of the following:

December 31, Intangibles Production Transmission Distribution General Plant held forfuture use Construction work in progress Nuclear fuel and other investments Total 1979 (In 50 131,761 48,668 100>148 9,205 397 260,419 11,135

$561,783 1978 thousands) 50 130,714 47,159 92,959 9,324 397 143,826 13,656

$438,085 At December 31, 1979 and 1978, a commitment in the amount of approximately $7,754,000 and $7,163,000, respectively, to purchase a turbine from an independent trust no later than June 20, 1980, has been included in construction work in progress. Corresponding amounts have been reflected as a turbine contract payable and as a long-term purchase commitment at December 31, 1979 and 1978, respectively.

During the years ended December 31, 1979 and 1978, interest in the amount of approximately

$1,643,000 and $ 1,098,000, respectively, relative to funds borrowed by a turbine trust and the Company's subsidiary has been capitalized. The borrowed funds at rates ranging from 4-1/4% to 15-1/4% were used to acquire utilityplant (construction work in progress and nuclear fuel and other investments). The interest amount has been included in the Consolidated Statement of Income as "Other Interest" with a corresponding amount included in "Other Interest Capitalized." Such interest amounts prior to January 1, 1978, were minimal.

The Company has a 7% undividedinterest in Units 4 and 5 ofthe Four Corners Project located in northwestern New Mexico and a 15.8% undivided interest in Units 1, 2 and 3 of Palo Verde Nuclear Generating Station which are under construction near Phoenix, Arizona. The Company is also constructing transmission facilities related to this station. Participants in the joint plants are responsible forobtaining their respective financing. The extent of Company interests in these facilities, excluding nuclear fuel, is as follows:

December 31, Utilityplant (in service)

Accumulated provision for depreciation Utilityplant (under construction)

$241,352 (2>712) 1>453

$ 130,900 (2,362) 848 1979 1978 Palo Verde Nuclear Four Corners Palo Verde Nuclear Four Comers Generating Station Project Generating Station Project (In thousands)

$13>681

$ 13,391

Financial 23 EL PASO ELECTRIC COMPANYAND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

The Company's direct expenses associated with Four Corners Project are included in the applicable operating expense categories of the Consolidated Statement of Income.

Total depreciation was approximately $8,531,000 in 1979 and $7,616,000 in 1978, of which approximately $286,000 and $255,000, respectively, was applicable to transportation equipment and has been charged to other accounts.

The average annual depreciation rate used by the Company. for the years ended December 31, 1979 and 1978, was 2.93%.

C. Common Stock:

Under a shareholder approved employee stock purchase plan qualified employees may purchase shares of the Company's common stock at two specified dates each year for a period ending no later than June 30, 1984. The purchase price is 90% of the average bid price of the stock at the option dates. During 1979 and 1978, 6,717 and 11,120 shares of common stock, respectively, were purchased at an aggregate cost of approximately $63,000 and $111,000, respectively. The cumulative aggregate corresponding fair market values as of the purchase dates were approximately $70,000 and $ 117,000, in 1979 and 1978, respectively. At December 31, 1979, 66,878 shares were reserved forfuture purchases under the plan.

Proceeds from purchases are credited to common stock and no charges are reflected in income with respect to the plan.

The Company has a Dividend Reinvestment and Stock Purchase Plan which provides holders of its common stock the option to invest cash dividends and/or optional cash payments (up to

$3,000 per quarter) in additional shares ofthe Company's common stock. During 1979 and 1978, 178,652 and 116,904 shares, respectively, were purchased by shareholders who reinvested dividends and invested cash in the amounts of approximately $1,854,000 and $ 1,263,000, respectively. At December 31, 1979, 332,195 shares were reserved for future purchases under the plan. The purchase price is the average of the last bid and asked price of the stock on the purchase date.

Financial 24 EL PASO ELECTRIC COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

The Company adopted an employee stock ownership plan in May, 1978, pursuant to which it contributes common stock to the plan for the benetit of employees. The value ot such common stock is equal to a specified amount of investment tax credit. The Company reserved 500,000 shares ofcommon stock forissuance under the plan. In October, 1979, the Company contributed 126,633 shares of stock with a market value of approximately $ 1,287,000 to the plan. In June, 1978, the Company contributed 26,529 shares of stock with a market value ot approximately

$294,000 to the plan. At December 31, 1979, 346,838 shares were reserved for tuture contributions under the plan.

During June, 1979, the Company's Restated Articles of Incorporation were amended, increasing the number of authorized shares of common stock to 30,000,000.

Changes in common stock and unamortized capital stock expense were as follows (In thousands, except share amounts):

Description Balance, December 31, 1977...

Sales of Common Stock.....

Balance, December 31, 1978...

Sales of Common Stock.....

Balance, December 31, 1979...

Common Stock Shares 8,536,818 2,654,553 11,191,371 3 312,002 14,503,373 Amount S 41,064 30.205 71,269 35,060

$ 106,329 Unamortized Capital Stock Expense Net'$

496)

~202 (788)

~244

($1,029)

• Capital stock expenses reflected above are stated net of amortization and include expenses of all capital stock issues.

Subsequent to December 31, 1979 (in February 1980), the Company sold 1,500,000 shares for aggregate net proceeds of $ 13,518,000 before expenses ot sale.

Net income applicable to common stock, het income,per share of.common stock, and weighted average number of common shares outstanding for the year ended December 31, 1979, would have been $ 19,469,000, $ 1.34, and 14,502,102, respectively, assuming that the proceeds (betore expenses ofsale) of$ 121,374,000 from the sale offirst mortgage bonds, preferred stock, common stock and a promissory note during the year and in February, 1980, were used to retire short-term debt outstanding during the year ended December 31, 1979.

Financial 25 EL PASO ELECTRIC COMPANYAND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

D. Preferred Stock (authorized 1,000,000 shares):

Preferred stock Redemption required 1979 1978 (In thousands)

$10,000

$ 10,000 14,000 14,000 1,000 15,000

~10 000

$50,000

$24,000 Issue 100,000 Shares $ 1 0.75 Dividend 140,000 Shares $ 8.44 Dividend 10,000 Shares $ 8.44 Dividend 150,000 Shares $ 8.95 Dividend 100,000 Shares $ 9.00 Dividend

$110.75 108.44 108.44 108.95 Following is a summary of outstanding preferred stock redemption required:

Optional Redemption Stated Value Price Per Share December 31, December 31, 1979 The $ 10.75 preferred shares are entitled to the benefits of an annual sinking fund whereby on January 1 ofeach year, beginning in 1980, the Company willredeem 4,000 shares at the sinking fund redemption price ot $ 100 per share plus accrued dividends. The $10.75 preferred shares are redeemable at the option of the Company; however, no optional redemption of the shares may be made prior to January 1, 1985, as a part of, or.in anticipation of, any refunding involving the issue of indebtedness or preferred stock having an effective interest or dividend cost of less than 10.75% per annum.

The $8.44 preferred shares are entitled to the benetits of an annual sinking fund whereby on October 1 of each year, beginning in 1984, the Company willredeem 4% (and may, at its option, redeem an additional 4%) ot the aggregate maximum number of shares outstanding at the sinking fund redemption price of $100 per share plus accrued dividends. The $8.44 preferred shares are redeemable at the option ot the Company; however, except as set forth above, no optional redemption of the shares may be made prior to October 1, 1988, as a part of, or in anticipation of, any retunding involving the issue ot indebtedness or preferred stock having an effective interest or dividend cost of less than 8.44% per annum.

The $8.95 preferred shares are entitled to the benefits of an annual sinking fund whereby on October 1 of each year, beginning in 1985, the Company willredeem 5% (and may, at its option, redeem an additional 5%) of the aggregate maximum number of shares outstanding at the sinking fund redemption price of $100 per share plus accrued dividends. The $8.95 preferred shares are redeemable at the option of the Company; however, no optional redemption of the shares may be made prior to October 1, 1984, as a part ot, or in anticipation of, any refunding involving the issue of indebtedness or preferred stock having an effective interest or dividend cost of less than 8.95% per annum.

Sinking fund requirements for each of the above series are cumulative and, in the event they are not satisfied at any redemption date, the Company is restricted from paying any dividends on its common stock (other than dividends in common stock or other class ofstock ranking juniorto the preferred stock as to dividends and assets).

The $9.00 preferred shares have no provision for a sinking fund, are not redeemable at the option ofthe Company, and must be redeemed in fullon October 1, 1986 at $100 per share pIus accrued dividends. In the event the Company fails to provide sufficient funds forredemption, the Company is restricted from paying any dividends on its common stock (other than dividends in common stock or other class of stock ranking junior to the preferred stock as to dividends and assets).

Financial 26 EL PASO ELECTRIC COMPANYAND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

The aggregate amounts ofthe above preferred stock required to be retired foreach ofthe next five years are as follows:

(In thousands) 1980 1981 1982 1983 1984 400 400 400 400 1,000 Sales of preferred stock redemption required were as follows:

Description Shares Amount Balance, December 31, 1977 Issuance of Preferred Stock, $8.44 Dividend Balance, December 31

~ 1978 Issuance of Preferred Stock, $8.44 Dividend Issuance of Preferred Stock, $8.95 Dividend Issuance of Preferred Stock, $9.00 Dividend Balance, December 31, 1979 100,000 140 Mo 240,000 10,000 150,000 100,000 500,000 (In thousands)

$ 10,000 14,000 24,000 1,000 15,000 10,000

$50,000 Preferred stock Redemption not required Issue 1979 1978 (In thousands)

S 1,534

$ 1,534 11506 1,506 2,001 2,001 4,000 4,000 9 832 9,832

$18,873

$18,873

$109.00 103.98 104.00 100.00 107.52 15,000 Shares $4.50 Dividend.

15,000 Shares $4.12 Dividend.

20,000 Shares $4.72 Dividend.

40,000 Shares $4.56 Dividend.

100,000 Shares $8.24 Dividend.

The $8.24 preferred shares are redeemable at the option of the Company; however, no optional redemption ofthe shares may be made prior to April1, 1982, directly or indirectly as part of, or in anticipation of, any r'efunding involving the issue of the indebtedness or preferred stock having an interest or dividend cost less than the effective dividend cost of the $8.24 preferred stock.

Allpreferred stock issues (redemption required and redemption not required) are entitled, in preference to common stock, to $ 100.00 per share, plus accrued dividends, upon involuntary liquidation. Allissues except the $9.00 preferred stock are entitled to an amount per share equal to the applicable optional redemption price, plus accrued dividends, upon voluntary liquidation.

The $9.00 preferred stock issue is entitled to a fixed price ($109.00 per share at December 31, 1979), plus accrued dividends, upon voluntary liquidation.

There have been no changes in preferred stock redemption not required during the two years ended December 31, 1979.

Following is a summary of preferred stock which is not redeemable except at the option of the Optional Redemption Company:

Stated Value at Price Per Share December 31, at December 31, 1979

Financial 27 EL PASO ELECTRIC COMPANYAND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

E. Long-Term Debt:

Outstanding long-term debt is as follows:

First mortgage bonds:

2-7/8/o Series, due 1980 3-1/8'/o Series, due 1984 4-1/4'/o Series, due 1988 4-5/8 /o Series, due 1992 6-3/4%%d Series, due 1998 7-3/4'/o Series, due 2001 9'/o Series, due 2004

~.

9.95'/o Series, due 2004 10-1/2'/o Series, due 2005 8-1/2 /o Series, due 2007 4,500 4,950 6>100 101385 24,800 151838 20>000 25>000 15,000 25 000 1511573 4,500 4,950 6,100 10,385 24,800 15,838'0,000 15,000 25,000 126,573 December 31 1979 1078 (In >has>ands)

Redemption Price at December 31, 1979

$100.00 100.85 101.90 102.42 104.19 106.46 107.04 109.95 109.84 108.15 Unsecured floating rate (15.25/o at December 31, 1979) promissory note, due 1984 4-1/4/o pollution control revenue bonds, 1977 Series A, due 1979 Less funds on deposit with trustee Other, 8.8125/o, due in installments through 1998 Current maturities of long-term debt Unamortized premium and discount 25,000 2 124 178,697 (4>549)

~2427 8171 721 5,000 (4,000) 2,169 129,742 (1,045)

~2.545

$ 1 26,152 Scheduled maturities of long-term debt at December 31, 1979, are as follows 1980 1981 1982 1983 1984 Thereafter (in thousands):

4,549 54 59 64 30,020 143,951

$178,697

Financial 28 EL PASO ELECTRIC COMPANYAND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

The Company's indenture of mortgage provides forsinking and improvement funds. For each series other than the 9.95% series, the Company is required to make annual payments to the trustee equivalent to 1% ($1,275,000 at December31, 1979 and 1978) ofthe greatest aggregate principal amount ofsuch series outstanding prior to a specitied date. The Company has generally satisfied the 1% requirement by relinquishing the right to use a net amount of additional property forthe issuance of bonds or by purchasing bonds in the open market and expects to continue this practice in the future. With respect to the 9.95% series, commencing April30, 1985, the Company willbe required to make annual cash payments to the trustee equivalent to 4-1/4% of the greatest aggregate principal amount of such series outstanding at any one time prior to a specified date. The 4-1/4% cash payment must be applied to redeembonds ot the 9.95% series at 100% of the principal amount thereof plus accrued interest.

The premiums retlected in the redemption prices shown above continue at reduced amounts in future years, finallyresulting in each case in redemption at par at maturity.

Substantially all of the Company's utilityplant is subject to a lien under the indenture of mortgage collateralizing the Company's bonds.

In accordance with certain provisions of the indenture covering the first mortgage bonds, payment of cash dividends on common stock is restricted to an amount equal to retained earnings accumulated after December 31, 1966, plus $4,100,000. Retained earnings in the amount of approximately $27,800,000 is unrestricted as to the payment of cash dividends at December 31, 1979.

The funds on deposit with a trustee ($4,000,000) at December 31, 1978, represent a portion ot the proceeds from pollution control revenue bonds issued in November, 1977. The bonds were redeemed in November, 1979.

F. Notes Payable and Commercial Paper:

Short-term notes at, December 31, 1979, consisted of $34,332,000 of commercial paper with an effective weighted average interest rate, of 13,9%, $2,125,000 of notes payable to banks with an effective weighted average interest rate of 14.7%, and $15,290,000 of notes payable, other, with an etfective weighted average interest rate of 13.1%.

Short-term notes at December 31, 1978, consisted of $32,175,000 of commercial paper with an effective weighted average interest rate of 10.4% and $26,600,000 of notes payable to banks with an effective weighted average interest rate of 10.6%.

The Company and its subsidiary have informal lines of credit with various lenders. Certain of these arrangements provide for the maintenance of compensating balances for the available lines ot credit and the loans outstanding. At December 31, 1979 and 1978, the lines of credit available under these arrangements totaled $104,336,000 (including subsidiary lines of

$17,625,000 not guaranteed by the Company) and $67,925,000 (including subsidiary lines of

$10,925,000 not guaranteed by the Company), respectively. Average bank balances of approximately $4,710,000 and $2,550,000 were required to be maintained as compensating balances at December 31, 1979 and 1978, respectively, in connection with the informal lines of credit.

Financial 29 EL PASO ELECTRIC COMPANYAND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

The maximum and average amounts of aggregate short-term borrowings outstanding at any month-end during the year ended December 31, 1979, were $74,767,000 and $59,717,000, respectively, and for the year ended December 31, 1978, were $58,775,000 and $43,054,000, respectively. The weighted average interest rate was 10.9% and 7.4% during the years ended December 31, 1979 and 1978, respectively, and was calculated by dividing actual interest expense by the average month-end balances outstanding during the related period.

Through December 31, 1980, the FERG has authorized the Company to incur short-term debt (in the form of promissory notes or commercial paper) in an amount not to exceed $130,000,000 outstanding at any one time. The interest rates on the notes are to be at the prime rate in effect at the time of issuance, plus in some cases, provisions forcompensating balances of 20% under certain conditions. The net proceeds from the issuance of the short-term debt are to be used for construction expenditures.

G. Federal Income Taxes:

The provisions fordeferred federal income taxes, which arise from timing differences between financial and tax reporting, are as follows:

Years Ended December 31, 1979 1978 (In thousands)

Tax effect of:

Depreciation differences Deferred fuel costs Allowance for borrowed funds used during construction Other costs capitalized Amortization related to emergency faciiities Deferred rate case expense and other

$1,769 (1>074) 4,023 733 (111) 798

$6,138

$1,572 (2,597)

(111)

~364

($1,500)

Effective January 1, 1979, in accordance with a Texas rate order, the Company began providing deferred federal income taxes applicable to the allowance for borrowed funds used during construction, to other costs capitalized and to all differences between book and tax depreciation for property placed in service after 1978. Accordingly, additional deferred taxes of approximately $4,828,000 are reflected in deferred tax expense for the year ended December 31, 1979.

30 EL PASO ELECTRIC COMPANYAND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

Federal income tax provisions are less than the amounts computed by applying the statutory rate to income before federal income taxes. Details are as follows:

Years Ended December 31, Tax computed at statutory rate Decreases due to:

Allowance for funds used during construction Excess of straight-line tax depreciation over book depreciation Amortization of deferred investment tax credit Other Total federal income tax expense Effective federal income tax rate 1979 (In

$16,062 (3,427)

(176)

(296)

~425 211 722 33.6%

1978 thousands)

$10,264 (3,602)

(348)

(398)

(556)

S 5,360 25.1%

Total federal income tax expense is as follows:

Years Ended December 31, Federal income tax, current (credit)

Income taxes associated with other income Total current Deferred federal income tax (credit)

Deferred investment tax credit Amortization of deferred investment tax credit.

1979 (ln

$ 11238 269 1,507 61138 4,379

~226

$11,728 1978 thousands)

($2,617) 463 (2,154)

(1,500) 9,412

~398

$5,360 At December 31, 1979, the Company has available for federal income tax purposes an investment tax credit carryforward of approximately $7,000,000 expiring in 1986.

Financial 31 EL PASO ELECTRIC COMPANYAND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

H. Commitments and Contingencies:

The Company has a 15.8% interest in three units of a nuclear plant and related transmission lines and switchyard presently under construction. The costs to be incurred by the Company at December 31, 1979, are approximately $612,600,000, including approximately $169,700,000 of AFUDC. The Company is also committed at December 31, 1979, for construction of pollution control facilities in the amount of approximately $15,200,000, including approximately

$2,600,000 of AFUDC. The above amounts were computed assuming an estimated average annual inflation rate of 7%.

In January, 1979, the Company entered into an agreement with an independent trust whereby the Company sold to the trust, at cost, substantially all of its nuclear fuel. Under the trust agreement the Company has the option of either repurchasing the fuel from the trust or leasing the heat generated by the fuel. Management of the Company intends to enter into a basic heat supply contract whereby title to the fuel remains with the trust and the Company makes lease payments for the heat generated. Based on this intention and in accordance with industry practice, the nuclear fuel and related liabilityare not included in the accompanying balance sheet. At December 31, 1979, the trust has incurred cumulative costs of approximately

$8,200,000. The Company expects that fuel costs incurred willbe recouped at the time the fuel is used. The Company is committed to reimburse the trust for its cash investment in nuclear fuel, not expected to exceed a maximum cash amount of $68,000,000 during the ten-year period ending December 31, 1989, as well as for interest and other carrying costs of the trust.

The Company's fuel supply arrangements include short-term commitments under a fuel supply arrangement entered into in 1977 with a trust, whereby the Company concurrently assigned its principal long-term fuel supply contract to the trust and agreed to purchase all fuel oil delivered to the trust by the fuel supplier. Payments to the trust forfuel oilpurchases consist ofthe trust's cost of oil determined on an average cost basis plus related administrative and carrying costs. For financial reporting purposes, purchases of the trust are assumed to have been made on behalf of the Company. Accordingly, the balance sheet at December 31, 1979 and 1978, includes approximately $7,958,000 and $8,747,000, respectively, recorded as fuel and fuel purchase commitment, representing the Company's commitment to purchase the trust's fuel oil inventory as of those dates.

The Company's operations are subject to environmental protection measures imposed under federal and state laws and regulations. Management does not believe that the impact of any of these matters willhave a material adverse effect on the financial statements.

The Company's rates, including fuel adjustment clauses, are subject to the jurisdiction of local, state, and federal authorities. The Company believes that regulatory agencies willcontinue to allow rate increases designed to allow utilities to recover costs and a reasonable return on investment.

Revenues for 1979 and 1978 include approximately $623,000 and $635,000, respectively, subject to refund pending final determination by the FERC.

Financial 32 EL PASO ELECTRIC COMPANYAND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

I. Allowance for Funds Used During Construction:

The applicable regulatory uniform system of accounts provides for "allowance forfunds used during construction" ("AFUDC")which is defined as an amount which includes the net cost during a period of construction of borrowed funds used for construction purposes plus a reasonable rate on other funds when so used. While AFUDCresults in an increase inutilityplant under construction for ratemaking purposes with a corresponding credit to income, it is not a current cash item. AFUDC is realized in cash after the related plant is placed in service through the allowance fordepreciation charges based on the total cost of the plant, including AFUDC.

The amount ofAFUDC is determined by applying an accrual rate to the balance of certain utility plant additions. The Company used an accrual rate of 9-1/2% ln 1978. During 1979, the Company changed the rate used to calculate AFUDC from 9-1/2% to 11%, effective as of January 1, 1979. In this connection, the FERC promulgated procedures for the computation (a prescribed formula) of the accrual rate which became effective in 1977. The rates used by the Company do not exceed those permitted under the prescribed FERC formula.

The increase in the AFUDC rate as of January 1, 1979, increased net income by approximately $ 1,659,000 and net income per share by approximately $.13 for the year ended December 31, 1979. The AFUDCrate is reviewed quarterly and adjustments, ifany, are applied to the fullyear.

J. Pension Plan:

The Company had $751,000 of pension expense in 1979 and $680,000 in 1978. As of July 1, 1978, date of the most current actuarial valuation, assets of the pension fund exceeded vested benefits by approximately $677,000 and unfunded prior service benefits were estimated to be approximately $3,500,000.

K. Supplementary Profit and Loss Information:

Supplementary profit and loss information with respect to operating expenses is as follows:

Years Ended December 31, 1979 1978 (In thousands)

Taxes, other than federal income taxes:

Municipal and state property Occupancy and street rental State gross receipts Other Total Charged to:

Taxes, other Utilityplant and other accounts Total S 6,653 1 1964 27029 I 109 511 755 S10,114 I 64'I

$11,755 s 4,654 1,701 1,741 2 473 310 569 S 9,231 I 339

$ 10,569

Financial 33 EL PASO ELECTRIC COMPANYAND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

Expenditures for rents, royalties, advertising and development costs individually did not exceed 1% of total revenues and hence are not presented.

L. Quarterly Financial Summary (Unaudited):

The followingtable sets forth the quarterly financial summary of the Company for the years ended December 31, 1979 and 1978:

(In Thousands of Dollars Except for Per Share Data)

(AllQuarteAy Data, is Unaudited) 1979 1st quarter 2nd quarter..

3rd quarter..

4thquarter 1978 1stquarter 2nd quarter..

3rd quarter..

4thquarter Operating Revenues

$36,873 37,147 45,604 40,088 31,418 36,219 37,787 31,132 Operating Expenses

$32,119 31,564 37,927 34,033 27,142 30,899 31,470 26,596 Operating Income

$4,754 5,583 7,677 6,055 4,276 5,320 6,317 4,536 Net Income

$3,976 5,334 7,705 6,175 2,812 3,883 5,133 4,196 Net Income Applicable To Common Stock

$3,085 4,441 6,801 4,915 2,236 3,307 4,556 3,350 Net Income Per Common Share

$.25

.35

.50

.34

.24

.33

.43

.30 M. Replacement Cost Information (Unaudited):

The impact of inflation experienced in recent years has resulted in replacement costs of productive capacity that are significantly greater than the historical costs ofsuch assets reported in the Company's financial statements. The Company's abilityto maintain its productive capacity in the future willbe contingent upon its ability to finance the needed additions. This, in turn, will depend on the Company's ability to obtain adequate and timely rate relief. The Company retained Stone 8 Webster Appraisal Corporation of Boston, Massachusetts

("Stone 8 Webster Appraisal" ) to determine the approximate replacement cost of the Company's productive capacity.

The replacement cost information does not purport to represent the current value or reproduction costs of the assets or the amounts which could be realized ifthe assets were sold.

Rather, replacement cost generally represents the estimated amount that would be required to replace, at today's prices, the productive capacity of certain of the Company's existing assets with assets of a modern type including additional pollution control equipment presently required under environmental regulations. Such replacement would result in changes in fuel, operation and maintenance cost which are not reflected in the data submitted.

Financial 34 EL PASO ELECTRIC COMPANYAND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

The replacement costs reflected in the table below were determined on the basis of replacing existing capacity (which uses gas, oiland coal as fuels) withcapacity fueled by oil and coal. Due to federal legislation in connection with a national energy policy, replacement of existing capacity with capacity fueled by oil may no longer be a viable alternative. To the extent existing capacity must be replaced by capacity using coal or nuclear fuel, replacement costs could be expected to increase substantially.

The difference between historical and replacement cost of net plant investment does not represent additional book value forthe Company's common stock; instead, it indicates the capital funds (in excess of booked depreciation and other prior capital provisions) that may have to be provided to replace existing service capacity of the plant of the Company.

The Company's business is subject to the jurisdiction of regulatory commissions in the determination of fair rates of return on its investment in utilityplant. Under current ratemaking policy, the Company recovers, through future depreciation charges, the historical dollars invested in productive capacity. The ratemaking process does not allowthe Company to recover the excess of replacement cost over historical cost. However, at such time as amounts are actually expended to replace existing assets, such amounts willbe considered in determining the Company's rate base for purposes of ratemaking.

The Company believes that the difference between depreciation based on historical cost and depreciation based on estimated replacement cost, which difference is not deductible in determining income tax expense, is not truly an additional amount of depreciation expense.

Rather, it is a measure of the extent to which the Company should be making provision in the current year forreplacement of its existing plant, assuming no growth in demands forservice and no further inflation in costs.

The consolidated replacement cost information on a comparative basis with historical cost is shown in the tabulation below as of December 31, 1979 and 1978 (amounts in thousands):

1979 1978 Estimated Actual Replacement Historical Cost Cost Estimated Replacement Cost Actual Historical Cost Plant investment subject to replacement cost disclosure '

Accumulated depreciation Net plant investment Depreciation expense for the year

.. $17043,102

$561,783 203 860 76 063

., S 839,242 S485,730 20,205 S

8,531

$854,720

$438,085 171 808 68,672

$682,912

$369,413 S 18,089 7,616 "Amounts exclude nonutility plant of approximately $2,357,000 and $ 1,563,000, respectively, and include land, intangible assets, construction work in progress, and nuclear fuel and other investments at original cost of approximately $275,712,000 and $160,750,000 as of December 31, 1979 and 1978, respectively.

Financial 35 EL PASO ELECTRIC COMPANYAND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

N. Estimated Effect of Inflation (Unaudited):

The Financial Accounting Standards Board issued Statement No. 33 "Financial Reporting and Changing Prices" to provide estimates ofthe impact from inflationon a business'perations.

The schedules below are intended to indicate the effect on the Company from general inflationary pressures as measured by the Consumer Piice Index (CPI). Due to estimating techniques and certain judgemental decisions, the information should be viewed as only an approximation of inflation's effect.

Constant dollar amounts represent historical costs stated in dollars of equal purchasing power, as measured by the Consumer Price Index for all Urban Consumers. The cost of plant was restated to average 1979 dollars and depreciation expense was calculated by applying the Company's depreciation rate to the restated amounts.

As prescribed in Statement 33 income taxes were not adjusted.

Fuel used in generation has not been restated from historical cost amounts nor have inventories. Fuel costs are recoverable currently through the operation of fuel adjustment clauses and inventory turnover periods are relatively short. In accordance with FASB Statement No. 33, other items of income and expense have not been restated.

The regulatory commissions having jurisdiction over the Company's rates allow for the recovery of the historical cost of plant through depreciation. The restated cost of plant is not presently recoverable. Therefore, the difference between historical plant cost and restated plant cost is shown below as a reduction to net recoverable cost. The reduction to recoverable cost should be offset by the gain from the decline. in purchasing power of net amounts owed.

During inflationary periods, holders of monetary assets suffer a loss of general purchasing power while holders of monetary liabilities experience a gain. The gain from the decline in purchasing power shown below is attributable to the substantial amount of debt used to finance property, plant and equipment. Since the depreciation on plant is limited to the recovery of historical costs, the Company does not have the opportunity to realize a holding gain on debt and is limited to the recovery only of the embedded cost of debt capital.

Financial 36 EL PASO ELECTRIC COMPANYAND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)

SUPPLEMENTARY STATEMENTOF INCOME FROM OPERATIONS ADJUSTED FOR CHANGING PRICES (Unaudited)

Year Ended December 31, 1979 Conventional Historical Cost (Thousands of Dollars)

Constant Dollar Average 1979 Dollars Operating Revenues Fuel Purchased and Interchanged Power Other Operating and Maintenance Expenses..

Depreciation Federal Income Tax Interest Expense Other Income Income From Operations Net Income Per Share of Common Stock Net Assets at Year End at Not Recoverable Amount Reduction of Plant to Not Recoverable Cost Gain From Decline in Purchasing Power of Net Amounts Owed Difference

$ 159,712 78,138 37,801 8,245 11,459 8,621 (7,742) 136,522

$ 23,190

$1.45

$159,712 78,138 37,801 15,614 11,459 8,621 (7,742) 143,891

$ 15,821'

.90

$208,321

($45,674)*

29,996

($15,678)

'nclusion of the reduction to net recoverablo cost in income from operations produces a loss of $29,853.

FIVE YEAR COMPARISON OF SELECTED FINANCIALDATA AVERAGE 1979 CONSTANT DOLLARS (Unaudited)

Years Ended December 31 ~

1979 1978 1977 1976 1975 Operating Revenues (Thousands)

Actual.......

1979 Dollars

$1591712

$136,556

$112,339

$ 111,188

$ 91,461 159,712 151,931 134,559 141,773 123,348 Cash Dividends Per Common Share Actual.......

1979 Dollars Year-End Market Price Per Common Share Actual........

1979 Dollars Average Consumer Price Index

$1.07

$1.07

$9.38

$8.87 217.4

$1.02

$ 1.13 S10.88 11.66 195.4

$.99

$1.19

$ 12.00 14.02 181.5

$.95

$ 1.21

$12.00 14.97 170.5 S.91

$1.23

$10.38 13.57 161.2

Financial 37 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors El Paso Electric Company We have examined the consolidated balance sheet of El Paso Electric Company and Subsidiary at December 31, 1979 and 1978, and the related consolidated statements of income, retained earnings and changes in financial position forthe years then ended. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the consolidated financial statements referred to above present fairlythe consolidated financial position of El Paso Electric Company and Subsidiary at December 31, 1979 and 1978, and the consolidated results of operations and changes in financial position forthe years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.

COOPERS 8cLYBRAND Dallas, Texas February 22, 1980

Financial 38

SUMMARY

OF OPERATING DATA Population served at retail, estimated (a)

Number of Customers:

Residential Commercial and industrial, small Commercial and industrial, large Other Total Annual system peak load, net kilowatts Output, net generated and purchased, thousand kilowatt-hours:

Steam Purchased and interchanged Total(b)(c)

Sales of electricit, thousands ofdollars:

Residential Commercial and industrial, small Commercial and industrial, large Other Total Sales, thousand kilowatt-hours:

Residential Commercial and industrial, small Commercial and industrial, large Other 1979 554,000 157,601 15>791 44 1,875 175,311 688,000 3>771,043 (119,166) 3,651,877 52,899 46,741 26,402 32,577

$ 158,619 937>858 949>514 682,163 854,749 1978 544,000 150,739 15,381 47 1,842 168,009 690,000 3,673,685 (84,609) 3,589,076 44,178 39,780 22,402 29,289

$ 135,649 907,956 913,038 650,542 849,113 1977 532,000 143,645 14,518 46 1,715 159,924 657,000 3,475,753 (3,574) 3,472,179 34,484 33,583 17,666 25,581

$ 111,314 874,140 902,699 617,955 847,930 Total(b)(c)

Average annual use per residential customer, kwh Average annual revenue per residential customer Average revenue per kwh sold, cents:

Residential (d)

Commercial and industrial ~ small (d)

Commercial and industrial, large (d)

Average revenue per kwh; total sales (d)

Electric line, pole miles:

Over 15,000 volts Less than 15,000 volts (e)

Total 3,424,284 6,072 3,320,649 6,153 3,242,724 6,261 5.64 4.92 3.87 4.63 4.87 4.36 4.14 4.09 3.94 3.72 3.47 3.45 2,070 2,794 4,864 1,999 2,759 4,758 1,811 2,755 4,566 342.49 5

299.40 S

246.99 Total employees 965 908 (a) Restated as a result of 1970 census.

(b) Differences between total output and total sales represent company use and losses.

(c) In addition to the Company's 345 kv transmission line between EI Paso and Albuquerque, the company system is interconnected at Las Cruces, New Mexico, with Public Service Company of New Mexico; Community Public Service Company, Plains Electric Generation and Transmission Cooperative, Inc., and Elephant Butte Generating Station through the facilities of the United States Bureau of Reclamation under a pool agreement.

(d) Includes adjustments under existing fuel clauses.

(e) Includes small amount of line on poles owned by telephone company.

39 1976 520,000 1975 505,000 1974 495,000 1973 485,000 1972 475,000 1971 465,000 1970 450,000 135,344 14,203 39 1,748 151,334 677,000 130,010 13,294 32 1,663 144,999 640,000 126,760 13,163 29 1,545 141,497 638,000 123,653 12,816 27 1,445 137,941 618,000 119,170 12,333 27 1,351 132,881 543,400 114,640 11,666 23 1,255 127,584 500,700 110,308 11,279 21 1,228 122,836 469,100 3,501,416 51,013 3,552,429 3,433,698 15,837 3,449,535 3,369,606 (13,709) 3,355,897 3,450,021 (180,767) 3,269,254 3,075,013 (112,435) 2,962,578 2,705,160 (43,375) 2,661,785 2,506,048 360 2,506,408 S

31,415 33,628 15,709 29,537 S 110,289 S

27,080 28,870 11,816 22,880 S

90,646 S

20,126 19,192 7,824 15,595 62,737 S

16,749 14.942 6,061 11,416 S

49168 S

15,133 12,948 5,231 9,696 43,008 S

14,081 11,515 4,517 8,565 S

38,678 S

13,099 10,336 4,194 8,155 35,784 816,169 929,556 582,125 1,030,812 3,358,662 6,193 782,285 909,967 513,637 1,006,311 3,212,200 6,097 765,636 853,960 508,482 980,175 3,108,253 6,116 755,701 799,997 536,754 958,252 3,050,704 6,211 694,855 696,584 487,945 853,978 2,733,362 5,948 643,313 610,876 440,568 758,769 2,453,526 5,718 598,240 540,529 426,177 763,597 2,328,543 5,499 S

238.36 S

211.04 160.72 S

137.59 129.53 S

125.16 S

120.39 3.85 3.62 2.70 3.30 3.46 3.17 2.30 2.82 2.63 2.25 1.54 2.02 2.22 1.87 1.13 1.61 2.18 1.86 1.07 1.57 2.19 1.89 1.03 1.58 2.19 1.91

.98 1.54 1,759 2 727 4,486 816 1,706 2,691 4,397 778 1,647 2,673 4,320 726 1,581 2,616 4,197 1,539 2,565 4,104 659 1,503 2,507 4,010 1,442 2,457 3,899 629

Financial 40

SUMMARY

OF OPERATIONS (Thousands of Dollars)

Year Ended December 31 Operating revenues Fuel Operation and maintenance Depreciation (a)

Taxes Other income 1979

$159,712 81,669 24,156 81245 21,573 (7,742) 1978

$136,556 73,447 21,171 7,361 14,128 (3,688) 1977

$112,339 59,442 16,685 6,498 12,377 (1,689)

Income before interest charges Total interest charges Income before cumulative effect on prior years of change in accounting method Cumulative effect to January 1, 1974 of change in accounting for fuel costs, net of related income taxes ($912,000)

Net income Earnings per share of common stock, based on weighted average number of shares outstanding during each year:

Income applicable to common stock before cumulative effect of change in accounting method Cumulative effect to January 1, 1974, of change in accounting for fuel costs Net income applicable to common stock Pro forma amounts assuming the new method of accounting for fuel costs is applied retroactively (b):

Net income applicable to common stock Earnings per share 1271901 31>811 8,621 23,190 112,419 24,137 8,113 16,024 93,313 19,026 7,604 11,422 S

1.45 S

1.30 1.11 S

1.45 S

1.30 S

1.11 S 23,190 S 16,024

$ 11,422 Dividends paid per share on common stock Electric Piant S

1.07 S

1.02

$561,783

$438,085 S

.99

$338,598 (a) Does not include depreciation on automobiles and trucks, which was allocated to other accounts.

(b) The effect of the accounting change in years prior to January 1, 1971, is not significant.

1976

$111,188 53,154 17,954 6,233 15,727 (838) 92,230 18,958 7,442 11,516 S 11,516 1975

$ 91,461 44,714 14,516 5,506 11,197 (1,423) 74,510 16,951 6,853 10,098 S 10,098 1974

$ 63,072 24,914 11,463 4,345 9,809 (770) 49,761 13,311 5,280 8,031 988 S

9019 1973

$ 49,483 15,766 8,160 4,102 9,573 (84) 37,517 11,966 3,962 8,004 S

8,004 1972

$ 43,284 10,951 8,101 3,776 9,279 (668) 31,439 11,845 3,591 8,254 S

8,254 1971

$ 38,919 8,974 7,717 3,509 8,151 (699) 27,652 11,267 3,450 7,817 7,817 1970

$ 36,026 7,330 7,149 3,256 8,194 (393) 25,536 10,490 3,073 7,417 S

7417 S

1.29 S

1.30 S

1.19 S

119 S

122 S

116 S

110

.15 S

129 S

130 S

134 S

119 S

122 S

116 S

110

.95

$274,502 S

.91

$250,375

.88

$227,196 S

8,270 S

1.29 S

.86

$185,058 8,035 1.25 S

.83

$ 174,485

$166,275

$150,859 S

7,481 S

1.17 S

.80 S

.76

Financial 42 MANAGEMENT'SDISCUSSION AND ANALYSIS OF THE CONSOLIDATED STATEMENT OF INCOME The factors discussed in the followingsummary of period to period changes, which may not be indicative of future operations or earnings, have had an effect upon the Company's results of operations during the years ended December 31, 1979 and 1978 (in thousands, except for per share data).

1979 Increase (Decrease)

Over 1978 1978 Increase Over 1977 Operating revenues....

Operating expenses Operating income Allowance for funds used during construction:

Other Sorrowed Other income Interest charges:

Long.term debt Other Net income Preferred dividend requirements Net income per share Weighted average number of common shares outstanding

$23,156 19,536 3,620 4,253 4,438 (199) 2,112 2,834 7,166 1,373

.15 2,919 170/o 16.8 lo 17 7/o 133.0/o 103.0/o (40 5/a) 22.3'lo 96 3o/o 44 7o/o 53.3'/o 11 5O/o 28.2O/o

$24,217 21,105 3,112 1,597 2,196 402 1,316 1,389 4,602 538

.19 1,845 21.6'/o 22.2o/o 18 oo/o 99.8/o 104.0O/o 451.7O/o 16.1O/o 89.4'lo 40.3o/o 26.4O/o 17 1o/o 21.7/o Operating Revenues Operating revenues increased in 1979 over 1978 principally as a result of an increase in the average base rate (calculated without giving effect to the recovery of fuel costs). The average base rate for 1979 was.3(f: per kilowatt-hour higher than itwas in 1978. Base rates, fuel (collected both in base rates and through fuel adjustment clauses) and volume accounted tor approximately 62/o, 29/o and 9/., respectively, of the total 17.0/o increase in revenues in 1979 over 1978.

Operating revenues increased in 1978 over 1977 partially as a result of increased base rates (calculated without giving effect to the recovery of fuel costs). Base rates for 1978 were approximately.3(f: per kilowatt-hour higher than those in 1977. Base rates, fuel (collected both in base rates and through fuel adjustment clauses) and volume accounted forapproximately 45'/o, 50 /o and 5 /o, respectively, of the total 21.6 /o increase in revenues in 1978 over 1977.

Operating Expenses Increases in operating expenses for 1979 over 1978 were due primarily to increases in fuel expense and federal income tax provisions. Escalations in fuel cost accounted forapproximately 42'/o of the total 16.8'/o increase, while federal income tax increases contributed 34'/o. Taxes increased in 1979 over 1978 partially due to the presence of tax credits in 1978 not present in 1979 and the deferral of taxes on allowance tor borrowed funds used during construction (ABFUDC)which began in January, 1979.

Increases in operations and maintenance expense (23o/o of the increase) were due primadly to inflationary pressure on wages, employee benetits, materials and other costs.

Increased operating expenses in 1978 over 1977 were due principally to escalating fuel costs and increases in the aggregate costs of operation, maintenance and depreciation. Such costs accounted for approximately 92/o of the total increase. The escalating fuel costs accounted for approximately 66/o of the total increase. Increased operations expense (18'/o of the increase) was due to inflationary pressure on wages, employee benetits, materials and other costs.

Increased depreciation expense, which accounted for approximately 4'/o of the increase, was due to increases in depreciable property together with increased average annual rates in 1978.

Increases in federal income taxes accounted for approximately 2'/o of the increase, while other taxes contributed 7'/o toward the total increase.

Financial 43 Operating Income Increases in operating income are directly related to changes in operating revenues and operating expenses in their respective periods. (See the captions "Operating Revenues" and "Operating Expenses" above.)

Allowance for Funds Used During Construction AFUDC increased in 1979 over 1978 and in 1978 over 1977 due to increased construction expenditures principally associated with the Palo Verde Station as well as increased accrual rates. The Company changed its accrual rate from 9-1/2% to 11% effective January 1, 1979, and from 7-1/2% to 9-1/2% effective January 1, 1978.

AFUDC amounted to 63% and 56% of net income applicable to common stock during the years ended December 31, 1979 and 1978. The 1979 AFUDCcontribution to net income is net of the effect of deferred federal income taxes on the borrowed portion of AFUDC.

Other Income Other income changed in each comparable period primarily as a result of fluctuations in interest income.

Interest Charges Interest on long-term debt increased in all periods due to the issuance of additional first mortgage bonds and a long-term promissory note during the periods. The changes in other interest in 1979 and 1978 reflect increased short-term borrowing and higher prevailing interest rates in both years.

Net Income Per Share Changes in net income per share are the result of fluctuations in net income, increases in preferred dividend requirements, and increases in common shares outstanding during the periods.

Corporate Information 44 Annual Meeting of Shareholders Common Stock Shareholders Allshareholders are invited to attend the 1980 Annual Meeting of Shareholders Monday, May 19, 1980 at 10 a.m.

El Paso time, in the Oleander Room of the Rodeway inn, 6201 Gateway West, El Paso, Texas.

Proxies for the meeting willbe solicited by the Board of Directors in a communication to be mailed in early April.

This Annual Report is not a part of such proxy solicitation and is not intended to be used as such.

Acopy of the Company's most recent 10-K Report, including the financial statements and schedules thereto, filed by EI Paso Electric Company with the Securities and Exchange Commission, willbe made available to Shareholders without charge upon written request to:

Theta S. Fields, Secretary El Paso Electric Company Post Office Box 982 EI Paso, Texas 79960 The Common Stockof the Company is heldineverystate of the union, the Districtol Columbia, some U.S. territories and many foreign countries. The number of Shareholders increased from 25,633 in 1978 to 32,995 in 1979. Many of our customers and other persons in the Southwest are Shareholders as evidenced by the 5,874 Shareholders in Texas and New Mexico who own 19 percent of the outstanding shares. Our records show that 82 percent of the Company's shareholders own less than 500 shares each.

Transfer Agents IrvingTrust Company One Wall Street New York, New York 10015 (Common and Preferred Stock)

The State National Bank of EI Paso Post Office Box 1072 El Paso, Texas 79958 (Common Stock Only)

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'OO Service Area 4p El Paso Electric is an investor-owned, tax.paying electric utilityoperating in Texas and New Mexico.

The Company is engaged in the generation, transmission, distribution and sale of electric energy. EI Paso Electric serves approximately 175,000 customers in West Texas and South Central New Mexico in a service area of approximately 10,000 square miles. The service area extends from the Caballo Darn in New Mexico southeasterly to Van Horn, Texas.

El Paso Electric Company P. O. Box 982 El Paso, Texas 79960 Equal Opportunity Employer

EL PASO ELECTRIC COMPANY P.O. Box 982 El Paso, Texas 79960 BULK RATE US. POSTAGE PAID EL PASO, TEXAS PERMIT NO. 552

HOT(CE THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE DIVISION OF DOCUMENT CONTROL.

THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS FACILITY BRANCH 016.

PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL. REMOVALOF ANY PAGE(S)

FROM DOCUMENT FOR REPRODUCTION MUST BE REFERRED TO FILE PERSONNEL.

0 D

~

DEADLINE RETURN DCPF~~+

Contml "P ~DO QaO4 of Document E

RECORDS FACILITYBRANCH

Eiighlights 19Z9 Property and Plant:

Total utility plant, year end Capital expenditures 1979

$2,735',073,000 0

468,i 16,000 1978

$2,288,604,000 405,789,000

% Increase (Decrease) 195 15.4 Sales and Customers:

Total operating revenues Total electric sales (mtvh)

Electric customers, year end Total gas sales (m therms)

Gas customers, year end 664,423,000 11,584,898 401,983 467,088 340,343 562,217,000 10,912,704 378,553 449,451 339,803 18.2 6.2 6.2 3.9 0.2 Income, Earnings, Dividends:

Net income Earnings for common stock Average common shares outstanding Earnings (based on average shares outstanding)

Dividends paid per share of common stock 2.90 1.94 3.15 1.73 121,578,000 5

106,759,000 99,696,000 0

89,288.000 34,426,346 28,363,223 13.9 I 1.7 21.4 (7.9) 12.1 Shareholders:

Common Preferred Employees, year end:

92,396 7,049 5,263 78,275 7,158 4,951 18.0 (1.5)

Annual Report This report is published to provide general information concerning the company and not in connection with any sale, offer for sale, or solicitation of an offer to buy, any securities.

Annual Meeting of Stockholders Allstockholders are invited to attend the company's sixtieth annual meeting. Itwillbe held at 10 a.m. Thurs-day, April 24, in the Regency Ballroom of the Hyatt Regency Hotel, 122 North Second Street, Phoenix, Arizona.

Our Cover:

The Arizona sky is ablaze with the sun, the ultimate energy source APS is working to harness for the future.

But while the search for new energy alternatives goes on, Ari-zona's energy needs continue to grow, reminding us of our more immediate task. And most of Arizona's energy needs-for the

'80s-must be met with conven-tional sources.

These energy needs are grow-ing at a time when energy issues have become the focal point of public debate and soaring infla-tion is pushing construction and operating costs higher and higher.

The planning, the people, the programs geared to meet these challenges as we begin a new decade are featured in your 1979 Annual Report.

Arizona MPersonal Income C3Retail Sales In Millions 1975 1976 1977 1978 1979 Arizona Public Service Company, 411 North Central Avenue, Phoenix, Arizona