ML17305B108

1989 Annual Rept,Public Svc Co of New Mexico

ML17305B108
Person / Time
Site:	Palo Verde
Issue date:	12/31/1989
From:	Geist J PUBLIC SERVICE CO. OF NEW MEXICO
To:
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ML17305B105	List: ML17305B104 ML17305B106 ML17305B107 ML17305B108 ML17305B109 ML20059N661 ML20059N663
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NUDOCS 9010170094
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Text

Public SeNice Company of New Mexico i

-;..-,. nual Report 9010170094 901005 PDR AGOCK 05000528 I

PDC

Front Cover:

Ughtning strike over Albuquerque.

Back Cover:

Gas Operations'rocessing facilities at the Kutz Plant in northwest New Mexico.

'ectric E Water Operations

~" <Ir'I..

89 we saw solid o eratipnal,,ea 'es for mayor, they narrowly

" 'results.';r, ai.e,ectric,"."=apso d a city charter amendment

~omej'ost:;"pe j,: tjwghoyr','was'",: dtrecti'ity government to award the

".less ind9r89 Ihan in.19@-',",'tf>e gesult of,'.- ':~fef'e to the "lowest cost supplier."

'gnificani':c'ut,;iri.h 1,~Retail Weviewthemeasureasasmokescreen energysales grew

. percent, continu-forsome critics'goal fora citytakeover ing a three year average of approxi-ofour Albuquerque system.

mately 5 percent annual growtt>. On There are many legal and regulatory July5thwesetan all.timepeakdemand hurdles to a citytakeover. For eighteen of 1,006 MW. The number of retail monthssomecriticsclaimedthat,upon customers grew by about two percent franchise expiration, PNM's lines incity to 287,000. We now serve 64,000 more right-of-waywould become city prop.

customers with about 1,000 less em.

erty. In January, therefore, we asked a ployees than seven yeats ago.

Federal districtcourt to confirm PiVM's ownership ofdistribution lines on city SERVICE TO CGSTOMERS streets and alleys.

In our six regional divisions we'e Legal and regulatory actions aside, always maintained close, Iriendly con-however,ourbestdefenseagainstacity tactswith ourcustomers. We've worked takeover willalways be customers con-hardtobringthatpersonalizedsefvice vinced that we continue to offer the to the Albuquerque area. Our eight best combination of cost, reliability, Albuquerque neighborhood offices and service..

handled over 500,000 phone calls and 300,000 walk-in visits from customers.

POWER OPERATIONS We reduced overall outage duration by Our San Juan power plant had an 28 rcentand the numberofcustomer pe outages by 41 percent.

With growing success we'e able to tailor rates to meet business customer needs.

Over the last year, with new legislative authority, the Commission has approved economic development rates and certain load retention rates.

In December after six years ofnego.

tiation we signed a new contract with Kiftland Air Force Base, our largest retail customer (60 MV). Despite de-fense budget cuts nationwide Kirtland projects almost fiftypercent growth in power demand over the next ten years.

excellent year with an 88 percent avail-ability factor. San Juan's performance helped offset Palo Verde's being down 75 percent of the year through both unplanned outages and planned out-ages for refueling and maintenance.

Despite not having Palo Verde's energy available, in 1989 we exceeded our targets for short-term energy sales and revenues Irom wholesale transmission services to other utilities.

SANGRE DE CRISTO WATERCOMPANY InSanta Fewater consumption setan all.time dailypeakof19 milliongallons on June 2. Not to be outdone byAlbu.

querque's

example, some Santa Fe citizens are reopening the perennial issue of city takeover of Sangre de Cristo Water Company. The idea was last rejected by the voters in 1985. Our water company employees arecontinu.

ing their outstanding performance, and we look fofward to serving Santa Fe's water needs for years to come.

ALBGQUERQUEFRANCHISERENEWAL Having signed 25-year franchise ex-tensions for Belen, Deming, and Clay-ton in 1988, we'reworking to renew the Albuquerque &anchise. Though local voters rejected self-avowed anti.Pi%1 h

Hectric an Water~'Serior Managenett Team fnxnkftto right: Debits Jdf Sterba, Dcn Begky, Director, Commun-ications Group, MEgttnton, E'd ftrrft,HlenWJson, Jeny Godwin.Ms. fkffis Mr.Eght's~. Other tities see page 7.

tificationwould give usregulatory free.

dom to seek the best use forthis capa-city. Hearings begin in April.

PALO VERDEOPS ANDDOWNS iastyear I wrote "Unlikesome other nuclear investments, Palo Verde is a well-built,well-run plant."

I was right about Palo Verde's being "well.built." An exhaustive construc-tion audit for the Arizona Corporation Commission objected to only about one percent ofPalo Verde's brick-and-mortar cost.

But "well.run" is proving tougher to achieve.

This past year Palo Verde's operator, Arizona Public Service, ran into significant operational problems.

All three units were down for major periods.

We'e confident Palo Verde willyet be "well.run" but not without signifi-cant cost. Highly experienced nuclear j /

lIt

'(

C plant managers have replaced many previous top executives; many addi-tional workers havebeen hired. Despite expected increases in both operating and capital improvements expendi-tures, Palo Verde's costs will still be slightly below average for comparable nuclear power plants.

GROWTH INallLITYSALES In 1989 our operating revenues in-creased to $915 million. Retail electric energy sales increased 4.8 percent. We set an all-time record peak electric demand. Inour retail gas business, after dramatic declines earlier inthe decade, annual gas throughput increased for the third straight year.

For the 1990's we don't expect the booming Sunbelt growth ofthe 1970's when we made long-term commit-ments to major new power plants. At the retail level we do expect moderate but steady growth in customers and energy consumption for both gas and electric utilities.

GETllNG BACKTO BASICS In 1988 we decided to end our diversification program. Over the past year that goal was substantially accom.

plished.

This January Sunbelt Mining Com.

pany's operations ended with the sale of its gas gathering and gas processing subsidiaries to Gas Company of New Mexico.

During 1989 Meadows Resources sold its fiberboard plant, its telecom.

munications equipmentmanufacturing firm,andseveral real estate investments.

PNM itselfbought Meadows'nterest in two utility.related investments.

InJune Meadows'largest land invest-ment, the Bellamah Community Deve-lopment partnership, sought to re.

organize under Federal bankruptcy court protection. This January the Federal bankruptcy judge ordered Bellamah's immediate liquidation-certainly a setback forMeadows'opes for a more orderly liquidation.

Meadows is working to complete selling its remaining assets.

We don' expect Bellamah's forced liquidation or the sale ofMeadows'emaining assets to affect PiM'sbalancesheetadversely.

We believe we'e made full provision for Meadows'uture developments through losses already recognized.

RIMMINGGP So how does itall add up?

~ We were making steady progress on regulatorytreatmentofexcesscapacity until the hearing examiner's adverse recommendation in the associated rate case.

~ Palo Verde nuclear plant suffered operational problemsbutseems tobe back on course.

~ Our basic retail utilitybusinessescon-tinue to grow.

~ We substantially completed our exit from diversification.

In short, we'e still being bu6eted around in heavy financial seas. There are no blue skies immediately ahead, but we'e on a steady course.

~ We'e concentrating on our electric, gas, and water retail utilitybusinesses.

~ We'l keep fighting fora fairreturn on those utilityassets.

~ We'e seeking the best deal we can make for our excluded power plants.

It's proving tougher to get there, but we can see the far shores and the harbor ahead.

J.D. Geist Chairman and President Mardi 20, 1990

To L

tf olders

.,il

• i

'-'Foi,l959'we,*'r rded t-

'ings for c mmon-stec o

ers o

$72 mil.

lion, or $1.73 per share.%is compared with a net loss forcommon stockhold-ers of $241 million, or $5.78 per share, in 1988.

Our net losses in 1988 were the result of recognizing losses of $329 million for assets devalued by dete-riorating markets or regulatory treat-ment. In April 1989 we suspended common stock dividend payments.

Our net earnings in 1989 resulted primarily Irom basic utilityoperations and the finalyear ofa five-year,200MW wholesale power sale. For 1989 that sale meant about $110 million in reve-nues and $ 1.13 in earnings per share.

We'e been through tough times, and they'e not over. For two reasons 1990 willbe a hard year.

First, the 200 MWwholesale power sale that just expired has not been replaced witha similarlyprofitable sale.

'Ihe long-term wholesale market is im-proving, but withinthe western power market we face difficultnear-term mar-keting limitations: ample power sup-plies, low prices, low profit margins, and significant transmission barriers between our power plants and the best bulk power markets in California.

Second, as this annual report goes to press, we don't know the outcome of our major electric rate case. A New Mexico Public Service Commission hearing examiner has made very ad-verse recommendations.

By mid-April the Commission itself must reach its final decision.

Rather than speculate about the near future we shall report on further developments prior to the An.

nual Meeting.

BASIC VAUIES Before reviewing the past year'

events, I want to pause to note en-during basic values our company nn be proud of.

We nn be proud of our environ-mental record. We were national pace-settersin controllingpower plantpollu.

tion. Though a big share of our rates goes for environmental protection, for decades ofblue skies and clean water it's money well.spent.

We can be proud of(but never satis-fiedwith)ourservice to our customers.

High reliability backed by improved emergency

response, new neighbor-hood offices, better customer records systems, and aggressive energyinforma.

tion programs all testify to our commit-ment to our electric, gas, and water customers.

Finally, we can be proud ofour em-ployees. With fewer colleagues to help they'e serving more customers, gen-erating more electricity, pumping more water, and moving more gas thanbefore.

A year ago I cited four reasons for guarded optimism.

major progress in resolving the excess npacity issue; the quality ofthe Palo Verde nuclear plant;

~ growth in retail utilitysales, our basic business; and

. our decision to get back to the basics.

let me report on our successes and failures on each ofthese major issues.

RESOLVING EXCESS CAPACITYISRIES Dealing with excess capacity is our biggest challenge. Over the last three years the Commission has been consid-ering fourkeycases dealing withexcess capacity. Theypose the questions: What capacity will New Mexico's future rowth require? What should be paid or that capacity and when? What regu-latory freedom should PNM have to deal with the capacity New Mexico never wants?

In April 1989 the Commission an-swered the first question. Of our cur-rent excess capacity it ruled that 147 MWoftheSan Juan coal-fired plantand 260 MWofthePalo Verde nuclear plant would be needed for future growth. It excluded 130 MWofSan Juan and 130 MW of Palo Verde. The Commission also kept 100.200 MW of purchased power while excluding 105 MWfrom a buy-back agreement.

This March the Commission an-swered part of the cost question. It

~

approved a settlement ofthe Palo Verde prudence audit. Among other provi-sions we agreed not to seek rate recov-ery of $90 million of our Palo Verde investment. Intervenors have appealed both this decision and the April 1989 decision to the New Mexico Supreme Court.

The third case was to set rates based on these capacity and cost decisions.

We asked fora $12 millionrate increase and a ten-year phase-in plan for 130 MWofPaloVerde npacity. The hearing examiner, however, recommended a

$6 million rate cut and threw out any phase. in plan. As stated earlier, the Commission willact upon his recom.

mendations before mid.April.

Finallywe have requested the Com-mission to "decertify" the excluded power capacity (130 MW of San Juan and 130 MW of Palo Verde). Decer-

" able of Contents 4

x

= ~.

1 iF p.,

"~,;: ":;.!;",,"'i",'",-'.,",;.'-',"""'tlectricand Water Operations Gas Operations Stockholder Information Directors and Oficers Financial Information Index FORM 10.K 2

5 6

7 8

Following Page 8 OPERATIONS SQNMARY Public Service Company ofNew Mexico and Subsidiaries 1988 Change Earnings per Share of Common Stock

)

Operating revenues (')

Operating expenses (')

Yet earnings (loss)

Return on average common equity Earnings (loss) per common share Dividends paid per common share Book value per common share at 1ear.end Construction expenditures ELECTRIC:

Total kilowatt.hour sales 915/10000 S

S 762,074,000 S

82,593,000 S

9.5%

841 cr24,000 8.7 701/58,000 86 (230,137,000)

N/M (23.9)X N/M 8,006,050,000 8,193,184,000 (23) 1.73 (5.78)

N/M S

0.38 m

(Wr.7)

S 18.02 S

1803 (0.1) 78,289,000 97,181,000 (19.4)

Indudes sde of retained economic interest in oxd !cases

<<hkh ctxxrhxcd $.90 and $.73 per Are, reyeahefy in Rt and 583.

In 1%8,the~rcponcda tossoff3.78 pcr Aredue prirnuily to a prtxiYion for the eaimatcd toss fiom the tisccntintnnce ofthe Gxntxtny's non-utilityoperations, a preiYion for an extracnlinary kss cn tisccntinuatian of appticaticn cf reguhtory ccounttnng dnciptcs~

certain assets,the<<titeoffcf the oxcpxrs'simatment ina proposed coat fired generating station, the <<titeotf of deferred otrrltngccgsonuncommittcd eteeicneeating tapxityandcnc timecoasrebtcdtoa<<txkforcereducttcn Dentherm throughput (a) 79,015,000 58/03,000 358

(')

Operating revenues and operating expenses for 1989 include revenues and expenses ofthe ys gathering and processing subsidiaries in the aggieyte amount of $46@Q,000 and $42,950000, respectively. Prior to 19N, such items were included in other income and deductions.

(')

Gas dentherm throughput for 1989also includesys throughput of14,678,000dentherms kom the ys gathering subsidiary.

N/M Yot meaningful

"',/inc~- q,p c,

~

s"

~

ttlpanII+~;.< my~ et while opening up new uses.

.'f@eviMexicopi1)S5 tHe'naturals';-,.'-'Qfi'N'eat importance we keep adding

'usiness he&herjtraIisfo'rmed; In,the":.'

'Ior former customers back to our

'600 d D'a s".life; 'as

' '~u',","

stem for example, four potash plied its customers wit > all their g,...'ines and a power plant owned by NowanyNewMexicocustomercan r-.",.'nother utilityhave become transpor-chase gas from any independent s

tation customers since 1988.

plierand require Gas Company to In several key areas improved cus-deliver the gas. Iarge customers can tomer demand was buttressed by fa-even bypass Gas Companycompletely!

vorableregulatoryrulings. Wesecured Over these fiveyearswe've reshaped regulatory approval to continue the our gas operations to compete in the purchased gas adjustment clause, and newmarketenvironment.

1989marked to implement a standby fee for trans-our most successful year yet.

portation customers.

sharing ofcosts on settlements oftake-or-pay gas contracts between com-pany and customers.

We secured a

process for seeking recovery of dis-puted costs on renegotiated supply contracts.

The Commission alsoapproved Gas Company'sacquisition ofSunterra Gas Gathering Company and Sunterra Gas Processing Company a part of Sun-belt Mining Company's phase out.

Both operations are now subject to a regulated rate. of-return.

CUSTOMER SERVICE In over 100 communities through-out New Mexico, Gas Companyserves 339,000 customers. After a decline in volume to 55 bcfin 1986, this year we delivered Q bcf(including transpor-tation volumes), our third straightyear on the upswing. Aggressive marketing and award-winning advertising main-tained gas'ominance ofthe heating 0'.v GAS SUPPLY With the customer base no longer

assured, acquiring gas supplies has become a more complex task. Over the last year our regulatoryagenda has been heavy but successful. Case 2183 was Gas Company's mostcomprehen-sive case ever before the Public Ser-vice Commission. Aftera two.yearpro-ceeding we achieved an equitable k(,

GAS OPERATIONS OUTLOOK Modest but steady growththat' the business outlook forourgasopera-tions. The Commission has now sub.

stantially set the ground rules for the new era. Upside opportunities in-clude a new rate case and campaigns to convert customers from other fuels to gas.

Remaining take. or-pay con-troversies and disputedcontract prices represent downside risks.

Justafter the NewYear, we filedfora

$19millionrate increase.'Ihiswouldbe an eight percent overall increase. If granted in its entirety, our average cost per therm would still be below na-tional averages.

Finally,we intend to position natural firmlyinthe environmental agenda orthe 1990's withnatural gas.powered vehicles, gas fireplaces and gas logs, and high-tech, energy-saving gas equipment.

<<)/

)J Gas epations'senior Mamgement Team from nght to le: Etaine Map, pitris Bourque, DA lan" James,hdylanotti, John~ MtReat Ms. MrrruisMr.~'s seeretar7. hr tittes see page 7.

I

,,1 Stoc 'r Cf) i, ll

".... 'ormation LOST CERTIFICATES Stock certificates are valuable pieces ofpaper that should be kept in a safe place. Lost certificates maybe replaced only after issuance of an indemnity bond, for which a current premium of about two percent ofthe market value ofthe stock is charged by an insurance company. Immediately upon the dis-appearance or destruction of a certifi-cate,stockholdersshouldcontactStock-holder Services who will provide in-formation on the appropriate steps required to replace the certificate.

Ihe annual meeting ofstockholders of Public Service Company of New Mexico willbe held in the auditorium ofthe UNMContinuing Education Con.

ference Center, 1634 University Boule-vard N.E., Albuquerque, New Mexico on Tuesday, May 15, 1990 at 9:30 a.m.

Mountain Daylight Time. Stockholders are urged to attend; however, whether or not attending, proxies should be marked, signed, dated and returned promptly. Aproxy statement and form ofproxywillbe mailed tostockholders on or about April 12, 1990.

ABOUTYOUR SECURmES AND RECORDS The common stock ofPublic Service Company of New Mexico is listed on the New York Stock Exchange and is also traded on the Pacific and Philadel.

phia Stock Exchanges. A consolidated quote is published in numerous daily stock tables carried by many news.

papers.

The ticker symbol for the common stock is PNM. The most common newspaper symbol is PSvNM.

PNM is the sole transfer agent and registrar for PiNM common stock and PNMpreferred stock. PiNMmaintains all stockholder records ofthecorporation.

STOCKHOLDER INFORMATION Stockholders mayobtain information relating to their share position, divi-dends, transfer requirements, lostcerti-ficates, and other related matters by telephoning StockholderServices(num.

bers given below). Stockholders must provide their tax identification number, the name(s) in which their shares are registered and their record address when they request information. this service is available to all stockholders Monday through Friday 7:30 a.m. to 5:00 p.m. Mountain Time Zone. Stock-holders may also obtain this informa-tion bywritingto Stockholder Services, Pi%f, Alvarado Square, MS.0082, Albu.

querque, New Mexico, 87158.

DUPLICATEMAILINGS To reduce the overall volume of mailings, the Company makes itaprac-tice to combine the mailingoffinancial information with other stockholder mailings, such as dividend checks and proxies. If a single household owns stock under several

accounts, each account will be sent an individual mailing containing a check or proxy with the financial information. 'Ihis results in some households receiving duplicate copies of the financial ma.

terial. When the Company does not combine a mailing with a check or proxy, the duplicate mailings can be prevented ifthe stockholder has noti.

fied the Company in writing to mail only one copy to a specific address.

TAXREPORTS ON DMDENDINCOME PNM is required to report to the Internal Revenue Service the total amount ofstockholder dividends paid to each stockholder during the preced.

ing year. Form 1099 or 1042, which contains the information supplied by PiNM to the IRS for each stockholder

account, is mailed in January to all stockholders.

The Internal Revenue Service may require PNM to begin 20% backup withholding from dividends of stock-holders who fail to provide a Taxpayer Identification Number (TIN), or pro-vide an incorrect number, or when the IRS has notified PNMthatastockholder has underrepoited income. You may verify the Taxpayer Identification Number we have on record for your account by looking at your dividend check stub. Ifthe TIN is incorrect you can notify the Stockholder Records Department and a Form W-9 will be sent to you.

INQUIRIES-ADDmONALINFORMATION AVAIIABLETO STOCKHOLDERS Questions concerning stockholder transactions or questions about the activities ofthe Companyand operating results should be directed to Stock-holder Services, Pi%, Alvarado Square, MS-0082, Albuquerque, NM 87158.

TELEPHONE NUMBERS:

(505) 848-2122 (local) 1 800.545.4425

ire rs and Officers Ashton B. Collins, Jr.

Director since 1979, age 57 President and Chief Executive Officer Reddy Communications, Inc, a management consulting and services firm Albuquerque, Nhl CORPORATE Jerry D. Geist t Direaor since 1974, age 55 Chairman and President Public Service Company ofNew Mexico Joyce A. Godwm

'ireaor since 1989, age 47 Vice President, Southwest Community Hea!th Services Albuquerque, NM Claude E. Icyendecker

'irector since 1970, age 67 Chairman ofthe Board United New Mexico Bank at Mimbres Valley Deming, NM Arturo G. Ortega t Director since 1985, age 69 Attorney, senior member and president oflaw firmof Ortega and Snead, PA.

Albuquerque,Ã1 Robert R Rehder

'irector since 1975, age 59 Professor ofManagement

'ihe Robert 0. Anderson Graduate Schools ofhhtagement University ofNew Mexico Albuquerque, NM Russell H. Stephens

'irector since 1970, age 75 Retired Realtor Rociada, Nhl Jerry D. Geist (29), age 55 Chairman and President James B. hlulcock, Jr.

(17), age 50 Senior Vice President, Corporate Affairsand Secretary Max H. hlaerki (5), age 49 Senior Vice President and Chief Financial Officer BillyD. lackey (16), age 53 Vice President and Corporate Controller Joellyn K. Murphy (8), age 44 Vice President, Regulatory and Business Policy MtchellJ. Nance (14), age 42 Treasurer Karen A. Knight (14), age 50 hhtager ofStockholder Services and Assistant Secretary ARD'OK.DIRE -

R un'dnrnJt;

.".'-,;.'. -, -.: '-'- ",;.;,KR-Wcioidt;,",',

98+

..." -, ".. ';4iit@orsitlce,)

ge 78 e~tir f6mer President vateloyesto Electric Operations Santa e,

Public Service Company ofNew Mexico Robert B. Rountree Director Emeritus, age 65 Retired former Senior Vice President Public Service Company ofNew Mexico ELECTRIC AND WATER OPERATIONS Williamhf. Eglinton (19), age 41 Executive Vice President and ChiefOperating OAicer Jef E. Sterba (12), age 34 Senior Vice President, Business Development and Finance Group Jerry L Godwin (9), age 46 Vice President, Electric Opentions Group Ellen A. Wilson (11), age 42 Vice President, Human Resource Group Edwin A. Knft (19), age 41 Vice President, Customer Semce Group lawrence D. Ratliff (15), age 43 Vice President, Power Production Michael C. Slota (16), age 42 Vice President, Sales and hlarketing Robert hL Wilson (12), age 44 Controller and Assistant Secretary hfarilyn hlason.Plunkett (5), age 41 Direaor, Rates and Regulation and Assistant~

'ternber ofAudirGxnmiaee t Member orExeoxbe Commiaee

(

)YesrsolseolcenxbPGlorsB~t oxlolled s6illsre.

hges. lesrs olsenlce ssxt axnmlaee sssianmenrs ss ofDecember 31, l989.

GAS OPERATIONS John T. Ackerman (18), age 48 President and Chief Operating OAicer DA. "Zan"James (4), age 46 Vice President, Finance, Planning, Rates M. Phyllis Bourque (3), age 42 Vice President, Gas Supply Judith A. Zanotti (4), age 50 Vice President, Human Resources and Staff Services John Renner (3), age 61 Vice President, Processing and San Juan Opentions James A. Hunter (2), age 47 Vice President, hlarketing and Pub! ic Affairs David J. Davis (6),age45 Vice President, Metropolitan Opentions WilliamJ. Real 01),age41 Vice President, Operations and Engineering Terry D. Rister (18), age 38 Vice President, Regional Opentions Andrew R Vogt (3), age 39 Conuoller and Assistant eccertaty

inancial Information Index StockjDividend Data Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results ofOperations Management's Responsibility for Financial Statements Independent Auditors'eport Consolidated Statement ofEarnings (loss)

Consolidated Statement ofRetained Earnings (Deficit)

Consolidated Balance Sheet Consolidated Statement ofQsh Flows Consolidated Statement ofQpitalization Notes to Consolidated Financial Statements Consolidated Financial Statement Schedules Quarterly Operating Results Comparative Operating Statistics roosted in Bonn 10.K 23 24 24 31 32 33 35 36 37 38 53 6I 62 BOARDOF MtECrORS: Fromkft to right: ER Wor4 Robot R Rehder, Chrde E tererxkeker, Russett KStePhens, Jeny D. Creist,John R Bundrant, Jrrjec AGxh in, Ashton B. Cotrns, JrArturo G. Ortros.

UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K (Mark One)

[X]

ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1989 OR

[ ] TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from,................... to...,...,...,...,,...

Commission file number 1-6986 Public Service Company of New Mexico (Exact name of registrant as specified in its charter)

New Mexico 85-0019030 (State or other jurisdiction of (I.R.S. Employer incorporation or organization)

Identification No.)

Alvarado Square 87158 Albuquerque, New Mexico (Zip Code)

(Address of principal executive offices)

Registrant's telephone number, including area code: (505) 848-2700 Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchan e on which re istered Common Stock, $5.00 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act:

(Title of Class)

Cumulative Preferred Stock ($100 stated value and without sinking fund) comprised of the following series:

1965 Series, 4.58%

8.48% Series 8.80% Series 8.75% Cumulative Preferred Stock ($100 stated value and with a periodic sinking fund)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filingrequirements for the past 90 days.

YES X

NO The total number of shares of the Company's Common Stock outstanding as of February 1, 1990 was 41,774,083.

On such date, the aggregate market value of the voting stock held by non-affiliates of the Company, as computed by reference to the New York Stock Exchange composite transaction closing price of

$ 15'/4 per share reported by the Wall Street Journal, was $635,552,286.

DOCUMENTS INCORPORATED BY REFERENCE Portions of the followingdocument are incorporated by reference into the indicated part of this report:

Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A relating to the annual meeting of stockholders to be held on May 15, 1990PART III.

I n

j'!

h 4

n ll Ill l

GLOSSARY I

TABLEOF CONTENTS PART I Page ITEM 1.

BUSINESS THE COMPANY.

ELECTRIC OPERATIONS Service Area and Customers.

Power Sales Sources of Power.

Coal fired Plants' Nuclear, Plant.

Fuel and Water Supply.

Coal Natural Gas Nuclear Fuel.

Water NATURALGAS OPERATIONS Acquisition of Natural Gas Properties Gas Company of New Mexico Division Gathering Company Processing Company Gas Sales.....................................................

RATES AND REGULATION Inventorying Methodology Alternative to the Inventorying Methodology PVNGS Cost Investigation.

Electric Rate Case Decertification of Electric Generating Plant.

SDGB'cE Sales Agreement Other Electric Matters Natural Gas Operations NAVAJOTAXASSESSMENT ENVIRONMENTALFACTORS NON-UTILITYSUBSIDIARYOPERATIONS ITEM 2.

PROPERTIES ITEM 3.

LEGALPROCEEDINGS SHAREHOLDER LITIGATION.

Securities Law-Related Litigation Shareholder Derivative Litigation PVNGS WATER SUPPLY LITIGATION SAN JUAN RIVER ADJUDICATION NATURALGAS CONTRACTS LITIGATION Antitrust-Related Litigation.

Other Gas Supply Litigation OTHER PROCEEDINGS ITEM 4.

SUBMISSION OF MAXI'ERSTO A VOTE OF SECURITY HOLDERS..

SUPPLEMENTAL ITEM. EXECUTIVEOFFICERS OF THE COMPANY...........

10 12 13 14 14 14 15 15 16 16 18 18 18 18 19 19 19 19 20 21 21 22

PART II ITEM 5.

MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................

ITEM 6.

SELECTED FINANCIALDATA ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS ITEM 8.

FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.............

ITEM 9.

DISAGREEMENTS ON ACCOUNTINGAND FINANCIALDISCLOSURE..

Page 23 24 24 31 64 ITEM 10 ITEM 11 ITEM 12 ITEM 13 PART III DIRECTORS AND EXECUTIVEOFFICERS OF THE COMPANY..........

EXECUTIVECOMPENSATION SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS...........

PART IV 64 64 64 64 ITEM 14.

EXHIBITS, FINANCIALSTATEMENT SCHEDULES, AND REPORTS ON FORM 8-K SIGNATURES...............................,....................

64 II-1

GLOSSARY AFUDC APS BHP-Utah BTU.

decatherm DOE.

EIP El Paso EPA EPNG Exploration Company..

FASB.

FERC Gathering Company..

GCNM G.O. No. 49 Kwh.

Los Alamos mcf Meadows Meridian.

M-S-R.

MW.

Mwh.

NMEIB.

NMPSC NRC.

PGAC Processing Company...

PVNGS Salt River Project SCE.

SDG&E.

SJCC.

SJGS Southern Union.......

Southland SPS Sunbelt throughput Transwestern........

Tucson uncommitted capacity..

Unicon WSCC WSPP Allowance for funds used during construction Arizona Public Service Company BHP-Utah International, Inc.

British Thermal Unit 1,000,000 BTUs United States Department of Energy Eastern Interconnection Project El Paso Electric Company United States Environmental Protection Agency El Paso Natural Gas Company Southern Union Exploration Company, a subsidiary of Southern Union Financial Accounting Standards Board Federal Energy Regulatory Commission Sunterra Gas Gathering Company, a wholly-owned subsidiary of the Company Gas Company of New Mexico, a division of the Company NMPSC General Order Number 49, Cost Overrun Rule (recodified as NMPSC Rule No. 580)

KilowattHour The County of Los Alamos, New Mexico Thousand cubic feet Meadows Resources, Inc., a wholly-owned subsidiary of the Company Meridian Oil Company M-S-R Public Power Agency, a California public power agency Megawatt Megawatt Hour New Mexico Environmental Improvement Board New Mexico Public Service Commission United States Nuclear Regulatory Commission GCNM's Purchased Gas Adjustment Clause Sunterra Gas Processing Company, a wholly-owned subsidiary of the Company Palo Verde Nuclear Generating Station Salt River Project Agricultural Improvement and Power District Southern California Edison Company San Diego Gas and Electric Company San Juan Coal Company San Juan Generating Station Southern Union Company Southland Royalty Company Southwestern Public Service Company Sunbelt Mining Company, Inc., a wholly-owned subsidiary l1 of the Company Volumes of gas delivered, whether or not owned by GCNM or Gathering Company Transwestern Mining Company, a wholly-owned subsidiary of Sunbelt Tucson Electric'Ppwer Company Capacity in excess of that included (or to be included pursuant to an April 1989 order of the NMPSC) in New Mexico-jurisdictional rates or otherwise required to serve firm system load Unicon Producing Company, a partnership consisting of Union Texas Exploration Company, Exploration Finance Company and S.N.P.I.,

Inc.

Western System Coordinating Council Western Systems Power Pool 111

n

to provide electricity to the public or to wholesalers unless the franchise, license or right has been awarded by competitive bid to the lowest cost suppliers. The amendment allows the grant of multiple franchises, licenses or rights for all or part of the city and also provides that the total term of any franchise, license or right willnot exceed 25 years. The City of Albuquerque has selected a consultant to study alternatives available to it, including municipalization of the Company's distribution system, the viability of other alternatives, and the methods that may be available to the City to implement the recent charter amendment.

While the Company cannot predict the ultimate outcome of the franchise renewal issue, the Company is actively pursuing'he renewal of the franchise prior to its expiration. Furthermore, the Company, as necessary, will take vigorous action to protect the Company's ownership in the distribution system ofthe City franchise area. In furtherance of that effort, the Company petitioned the United States District Court for the District of New Mexico on January 5, 1990 for a declaratory judgment confirming the Company's ownership of the electric distribution system it has constructed on public rights-of-way.

In 1989, the Company furnished firm-requirements wholesale power in New Mexico to the cities of Farmington and Gallup, Texas-New Mexico Power Company and Plains Electric Generation &Transmission Cooperative, Inc. No firm-requirements wholesale customer accounted for more than 3% of the Company's total electric revenues for the year ended December 31, 1989.

Majoroff-system sales contracts in effect during 1989 were those with SDG&E and SPS, discussed below.

In November 1985, the Company and SDG&E executed an agreement providing for SDG&E to purchase 100 MW from the Company for the period May 1988 through April 2001. (See "RATES AND REGULATIONSDG&E Sales Agreement".) Energy sales under this agreement, which commenced in June 1988, accounted for 5.6% of the Company's total 1989 MWh sales and 6.6% of total 1989 electric revenues.

The Company and SPS entered into an agreement in 1982 to provide for a transmission interconnection between the two utilities. The interconnection agreement required the purchase by SPS of energy at a rate of 200 MW per hour from 1985 through 1989. Sales under the SPS agreement accounted for 20.2% of the Company's total 1989 MWh sales and 17.7% oftotal 1989 electric revenues. The agreement further requires the Company to p'urchase from SPS up to 100 MW of interruptible power from 1991 to 1995 and up to 200 MW of interruptible power from 1995 through 2011. The Company may reduce its purchases under the contract by 25 MW annually beginning in 1994 and upon three-years'otice.

Power Sales For the years 1984 through 1989, retail KWh sales have grown at a compound annual rate of 4.5%.

However, retail sales have been lower than had been anticipated at the time the Company committed to construct new generating units and sales of firm-requirements wholesale power have declined in recent years.

This has increased the importance to the Company ofoff-system sales. The Company's system and off-system sales and system peak demands in summer and winter are shown in the following tables:

ELECTRIC SALES BY MARKET (Thousands of dollars)

Retail.

Firm-requirements wholesale....

SPS Contract; Other contracted sales.........

Economy interchange*.

1989

$413,644 27,679 109,773 52,804 4,267

1988,

$404,863 27,554 100,006 62,525 6,903 1987

$387,542 32,312 91,064

'4,351 4,642 1986

$363,748 34,431 72,090 42,704 6,369 1985

$339,367 40,786 70,550 35,833 3,922 a Economy interchange sales are net of economy purchases and are accounted for as a reduction of fuel and purchased power expense.

ITEM 1.

BUSINESS PART I THE COMPANY Public Service Company of New Mexico was incorporated in the State of New Mexico in 1917 and has its principal offices at Alvarado Square, Albuquerque, New Mexico 87158 (telephone number 505-848-2700).

The Company is a public utilityengaged in the generation,'ransmission, distribution and sale of electricity (see "ELECTRIC OPERATIONS") and in the gathering, transmission, distribution and sale of natural gas (see "NATURALGAS OPERATIONS") within the State ofNew Mexico. The Company also owns facilities for the pumping, storage, transmission, distribution and sale of water in Santa Fe, New Mexico. Subsidiaries of the Company had been engaged in a program of diversification into non-utility areas. In 1988, however, the Company decided to discontinue the non-utility operations ofits subsidiaries and to dispose ofnon-utility properties. (See "NON-UTILITYSUBSIDIARYOPERATIONS".)

The total population of the area served by one or more of the Company's utilityservices is estimated to be approximately one million, of which 52% live in the greater Albuquerque area.

For the year ended December 31, 1989, the Company derived 67.8% of its utility operating revenues from electric operations, 30.9% from natural gas operations and 1.3% from water operations.

As of December 31, 1989, the Company employed 3,173 persons.

Financial information relating to amounts of revenue, operating income and identifiable assets attributable to the Company's industry segments is contained in note 12 ofthe notes to consolidated financial statements.

ELECTRIC OPERATIONS Service Area and Customers The Company's electric operations serve four principal markets. Sales to retail customers and sales to firm-requirements wholesale customers, sometimes referred to collectively as "system" sales, comprise two of these markets. The third market consists ofother contracted sales to utilities for which the Company commits to deliver a specified amount ofcapacity (measured in MW)or energy (measured in MWh) over a given period of time. The fourth market consists of economy interchange sales made on an hourly basis to utilities at fiuctuating, spot-market rates. Sales to the third and fourth markets are sometimes referred to collectively as "oA'-system" sales. The Company's success in marketing its uncommitted capacity largely depends on its ability to compete in the off-system markets on the basis of price and deliverability, and on its ability to demonstrate the economic, task performance and convenience benefits ofelectric systems to retail customers.

The Company provides retail electric service to a large area ofnorth central New Mexico, including the cities of Albuquerque, Santa Fe, Rio Rancho, Las Vegas, Belen and Bernalillo. The Company also provides retail electric service to Deming in southwestern New Mexico and to Clayton in northeastern New Mexico.

As of December 31, 1989, approximately 287,000 retail electric customers were served by the Company, the largest of which accounted for 3.3% of the Company's total electric revenues for the year ended December 31, 1989.

The Company holds long-term, non-exclusive franchises of varying durations for electric service in all incorporated communities where it is necessary to do so in order to carry on its electric utility business as it is now being conducted. The Company's electric service franchise with the City of Albuquerque, covering an area which contributed 43.7% of the Company's total 1989 electric revenues, expires in early 1992. In a municipal election held on November 1, 1989, voters approved an amendment to the charter of the City of Albuquerque that provides that the city has no power to grant or extend any franchises, licenses or other rights

ELECTRIC SALES BY MARKET tMcgawat t hours)

Retail.

Firm-requirements wholesale SPS contract...............

Other contracted sales.......

Economy interchange>>.......

>> Net of economy purchases 1989 4,909,592 397,792 1,618,694 1,079,972 289,432 1988 4,684,588 362,934 1,577,950 1,567,712 356,681 1987 4,447,798 396,297 1,585,639 508,990 226,941 1986 4,233,296 471,676 1,482,189 540,369 349,689 1985 4,079,842 721,809 1,609,518 1,025,893 318,015 Summer Winter)

SYSTEM PEAK DEMAND>>

(Megawatts) 1989 1988 1987 1,006 956 916 896 862 880 1986 1985 916 861 838 814' System peak demand relates to retail and firm-requirements wholesale markets only.

For the winter season beginning in the year noted.

For discussion of the competitive conditions affecting off-system

sales, see Part II, Item 7 "MANAGEMENT'SDISCUSSION AND ANALYSISOF FINANCIAL'CONDITIONAND RESULTS OF OPERATIONSCURRENT ISSUES FACING THE COMPANY The Wholesale Power Market".

4 Sources of Power The total net generation capacity of facilities owned or leased by the Company was 1,591 MW as of December 31, 1989, comprised ofgeneration from a nuclear plant, located in Arizona, and from two coal-fired plants and two gas/oil-fired plants, located in New Mexico. (See ITEM 2"PROPERTIES".) This amount includes capacity committed under sales contracts with other utilities (see "Service Area and Customers" ),

but does not include capacity purchases, totaling 109 MW, from other participants in SJGS Unit 4. The Company has also entered into an agreement to purchase power from SPS beginning in 1991. (See "Service Area and Customers".) The two gas/oil-fired plants are located in the Company's service area, with one in Las Vegas and one in Albuquerque, and are used for peaking capacity and transmission support requirements.

In addition, the Company is interconnected with various utilities making possible economy interchanges and mutual assistance in emergencies.

Coal fired Plants SJGS is located in northwestern New Mexico, and consists offour units operated by the Company. Units 1, 2, 3 and 4 at SJGS have net rated capacities of 316 MW, 312 MW, 488 MW and 498 MW, respectively.

SJGS Units 1 and 2 are owned on a 50% shared basis with Tucson, Unit 3 is owned on a 50% shared basis with Century Power Corporation and Unit 4 is owned 55.525% by the Company, 8.475% by the City of Farmington, 28.8% by M-S-R and 7.2% by Los Alamos. The Company's net aggregate ownership in SJGS is 835 MW. In connection with the Company's sale to M-S-R in December 1983 of a 28.8% interest in SJGS Unit 4, the Company agreed to purchase under certain conditions 73.53% (105 MW) of M-S-R.'s capacity through April30, 1995, an amount which may be reduced by M-S-R under certain conditions. The Company also agreed to market the energy associated with the remaining 26.47% portion of M-S-R's capacity through April30, 1995 in return for half the profits from such sales. This marketing arrangement may be terminated by M-S-R at any time upon 30 days notice. In connection with the Company'8 sale to Los Alamos in July

1985 of a 7.2% interest in SJGS Unit 4, the Company agreed to purchase capacity and associated energy of up to 4 MW from January 1, 1988 through December 31, 1990.

The Company also owns 192 MW of net rated capacity derived from its 13% interest in Units 4 and 5 of the Four Corners plant located in northwestern New Mexico on land leased from the Navajo Nation and adjacent to available coal deposits. Units 4 and 5 at the Four Corners plant are jointly owned with SCE, APS, Salt River Project, Tucson and El Paso and are operated by APS.

Nuclear Plant The Company's Interest in PVNGS.

The Company is participating in the three 1,270 MW units of PVNGS, also known as the Arizona Nuclear Power Project, with APS (the operating agent), Salt River Project, El Paso, SCE, Southern California Public Power Authority and The Department ofWater and Power of the City of Los Angeles. The Company has a 10.2% interest in PVNGS, with its interests in Units 1 and 2 held under lease. The Company's ownership and leasehold interests in PVNGS amount to 130 MW per unit, or a total of 390 MW. PVNGS Units 1, 2 and 3 were declared in commercial service by the Company in January 1986, September 1986 and January 1988, respectively. Commercial operation of PVNGS requires full power operating licenses which have been granted by the NRC. Maintenance of these licenses is subject to NRC regulation.

In eleven transactions consummated in 1985 and 1986, the Company sold and leased back its entire 10.2% interest in PVNGS Units 1 and 2, together with portions of the Company's undivided interest in certain PVNGS common facilities. In each transaction, the Company sold interests to an owner trustee under an owner trust agreement with an institutional equity investor. The owner trustees, as lessors, leased the interests to the Company under lease agreements having initial terms expiring January 15, 2015 (with respect to the Unit 1 leases) or January 15, 2016 (with respect to the Unit 2 leases). Each lease provides an option to the Company to extend the term of the lease as well as a repurchase option. The aggregate lease payments for the Company's PVNGS leases are approximately $84.6 million per year. Throughout the terms of the leases, the Company continues to have fulland exclusive authority and responsibility to exercise and perform all ofthe rights and duties of a participant in PVNGS under the Arizona Nuclear Power Project Participation Agreement and retains the exclusive right to sell and dispose of its 10.2% share of the power and energy generated by PVNGS Units 1 and 2. The Company also retains responsibility for payment of its share ofall

taxes, insurance premiutns, operating and maintenance

costs, costs related to capital improvements and decommissioning and all other similar costs and expenses associated with the leased facilities. Each lease describes certain events, the occurrence of which could require the Company to,.among other things, (1) pay the lessor and the equity investor, in return for such investor's interest in PVNGS, cash in the amount provided in the lease, which amount, primarily because ofcertain tax consequences, would exceed such equity investor's outstanding equity investment, and (2) assume debt obligations relating to the PVNGS lease. The Company believes the probability of such events occurring to be remote. The PVNGS leases are classified as operating leases in accordance with generally accepted accounting principles.

Allthree units of PVNGS were out of service for substantial periods during 1989. Unit 3 experienced an unscheduled outage on March 3, 1989, and Unit 1 experienced an unscheduled outage on March 5, 1989. On March 15, 1989, APS removed Unit 2 from service for testing. APS placed Units 3 and 1 in their scheduled refueling outages,on March 8, 1989 and April 8, 1989, respectively.

In March 1989, the NRC reviewed the events that took place during the Unit 1 and Unit 3 unscheduled outages and issued confirmatory action letters requiring APS to take certain corrective actions and to receive NRC approval before restarting any of the PVNGS units. With NRC approval, APS restarted Unit 2 on June 29, 1989 (although the unit experienced subsequent outages during the year) and Unit 3 on January 21, 1990. On February 24, 1990, APS placed Unit 2 in its second refueling outage, which is scheduled to continue approximately 100 days. APS is undertaking'corrective actions relating to PVNGS Unit 1 and currently estimates that it willrequest NRC approval to restart the unit during the first quarter of 1990. Because of the present uncertainties regarding the timing ofNRC approval and the extent of the corrective actions required for the restart ofUnit 1, APS cannot currently predict the restart date for that unit.

r In April 1989, the NRC reported the findings of an inspection team relating to the PVNGS Unit 3 unscheduled outage in March 1989. The report indicated that several system failures had occurred, and the NRC emphasized that each of these failures had clear precursors which had not been adequately addressed.

The report also noted certain operator deficiencies and errors. The NRC stressed its concern regarding APS's failure to recognize and to correct problems at the plant.

As a result of the inspection team findings, the NRC sent a Notice ofViolation and Proposed Imposition of Civil Penalty notifying APS in September 1989 that the NRC proposed to impose civil penalties in the cumulative amount of $250,000 for several violations categorized as three "Severity Level III"problems (on a scale ofI to V in accordance with the "General Statement of Policy and Procedure for NRC Enforcement Actions"). For two of the Severity Level IIIproblems, the NRC increased the base civil penalties of $50,000 to $ 100,000 because of,the length of time that deficiencies, one of which was identified by the NRC, were allowed to go uncorrected.

Although, the NRC notice acknowledged APS's implementation of a plan to improve the overall performance of PVNGS, the NRC concluded that the violations reflected a failure to establish a working atmosphere which demands that identified problems be expeditiously resolved and corrected. APS subsequently paid the civil penalties.

In April 1989, the manufacturer of the control rod drive mechanisms ofall three PVNGS units notified the NRC of a potential safety concern related to multiple control rod "slip or drop events". APS had previously reported to the NRC slippage of two control rods at Unit

1. APS implemented interim precautionary measures in the event of multiple slips or drops of control rods. In October 1989, APS discovered, and reported to the NRC, slippage of one control rod at PVNGS Unit 2. APS is working with the manufacturer to correct the problem.

In November 1989, the NRC began a diagnostic evaluation of PVNGS in order for NRC senior management to more fully evaluate overall plant performance. This evaluation is intended to supplement other assessment data reviewed by the NRC. The evaluation was completed in December 1989, and APS has informed the Company that it expects to receive a written report from the NRC in the near future.

During 1989, APS hired several experienced senior managers for PVNGS, including a new Executive Vice President of Nuclear who has more than 20 years of nuclear plant experience.

Decommissioning Funding.

The Company has a program for funding its share of decommissioning costs for PVNGS. Under this program, the Company will make a series of annual deposits to an external trust fund over the estimated useful life of each unit, and the trust funds willbe invested under a plan which allows the accumulation of funds largely on a tax-deferred basis. The Company began funding its share of decommissioning costs for PVNGS Units 1 and 2 in 1987 and Unit 3 in 1988. The annual trust deposit, currently set at $396,000 per unit, is based upon the Company's 10.2% share of total estimated PVNGS decommissioning costs and projected earnings on the trust funds over time. The annual funding amount is subject to periodic adjustment for changes in decommissioning cost estimates and earnings of the trust fund.

The Company's share ofUnit 1, Unit 2 and Unit 3 decommissioning costs has been estimated, in 1989 dollars, to be approximately $25 million, $25 million and $27 million, respectively.

PVNGS Liabilityand Insurance Matters.

The PVNGS participants have insurance for public liability payments resulting from nuclear energy hazards to the current $7.8 billion limit of liability under Federal law. This potential liability is covered by primary liability insurance provided by commercial insurance carriers in the amount of $200 millionand the balance by an industry-wide retrospective assessment program.

The maximum assessment per reactor under the retrospective rating program for each nuclear incident occurring at any nuclear power plant in the United States is approximately $66 million, subject to an annual limitof $ 10 million per incident. Based upon the Company's 10.2% interest in the three PVNGS units, the Company's maximum potential assessment per incident is approximately

$20 million, with an anriual payment limitation of $ 3 million. The insureds under this liabilityinsurance include the PVNGS participants

and "any other person or organization with respect to his legal responsibility for damage caused by the nuclear energy hazard."

W The PVNGS participants maintain "all-risk"(including nuclear hazards) insurance for nuclear property damage to, and decontamination of, property at PVNGS in the aggregate amount of $2.035 billion as of March 1, 1990, a substantial portion of which must first be applied to decontamination. The Company has also secured insurance against a portion ofe the increased cost of generation or purchased power resulting from certain accidental outages ofany ofthe PVNGS units. The PVNGS outages during 1989 and the current outage of the PVNGS Unit 1 are not covered by this insurance.

Fuel and Water Supply The percentages ofthe Company's generation ofelectricity (on the basis ofKWh) fueled by coal, nuclear fuel and gas and oil, and the average costs to the Company of those fuels (in'cents per million BTU), during the past five years were as follows:

Coal Nuclear Gas and Oil 1985.'986.

1987'988.

1989; Percent of Generation

'8.4 85.6 79.7 70.0 89.3 Average Cost 116.8 121.3 141.1 142.5'39.3 Although not included in the above table, start-up and test energy and 1987.

Percent of Average Percent of Average Ge etettoo Cost Ge e ottoo Cost 1.6 408.1 13.2 76.0 1.2 216.6 20.0 73.3'.3 246.6

, 29.6 75.9 0.4 320.9 10.3 76.3 0.4 364.1 was available from PVNGS in 1985, 1986 The estimated generation mix for 1990 is 70.2% coal, 29.2% nuclear and 0.6% gas and oil. Due to locally available natural gas and oil supplies, the utilization oflocally available coal deposits and the generally abundant supply of nuclear fuel, the Company believes that adequate sources of fuel are available for its generating stations.

Coal The coal requirements for SJGS are being supplied by SJCC, a wholly-owned subsidiary of BHP-Utah, from certain Federal, state and private coal leases under a coal sales agreement, pursuant to which SJCC will supply processed coal for operation of SJGS until 2017. BHP-Utah has guaranteed the obligationseof SJCC under the agreement, which contemplates the delivery of approximately 153 million tons of coal during its remaining term.

Such amount would supply substantially all the requirements of SJGS through approximately 2017. The primary sources of coal are a'mine adjacent to SJGS and a mine located approximately 25 miles northeast of SJGS in the La Plata area of northwestern New Mexico. The average cost of fuel, including ash disposal and land reclamation costs, for SJGS for the years 1987, 1988 and 1989 was 151.9 cents, 153.9 cents and 145.9 cents, respectively, per million BTU ($29.48, $30.04 and $28.80 per ton, respectively).

, 'he Four Corners plant is supplied with coal under a fuel agreement between the owner's and BHP-Utah, under which BHP-Utah has agreed to supply all the coal requirements for the life of the plant. BHP-Utah holds a long-term coal mining lease, with options for renewal, from the Navajo Nation and operates a strip mine adjacent to the Four Corners plant with the coal supply expected to be sufficient to supply the units for their estimated useful lives. The fuel agreement provides for certain adjustments in coal prices due to increases or decreases in the, cost of electricity, environmental compliance (including mine reclamation),

labor, materials, supplies, taxes and royalties. The average cost of fuel, including ash disposal and land reclamation costs, for the years 1987, 1988 and 1989 at the Four Corners plant was 103.3 cents, 101.4 cents and 108.3 cents, respectively, per million BTU ($ 18.21, $ 17.70 and $ 18.96 per ton, respectively).

Natural Gas The natural gas used as fuel for the Company's Albuquerque electric generating plant is delivered by GCNM. (See "NATURALGAS OPERATIONS".) In addition to rate changes under filed tariffs, the Company's cost of gas increases or decreases according to the average cost of gas supplied by GCNM or other sources.

I Nuclear Fuel The nuclear fuel cycle includes services performed by others. These services and the dates through which they are under contract for PVNGS are as follows:

Units 1

,and 2 Unit 3 Mining and millingof uranium concentrate Conversion of uranium concentrate to uranium hexafluoride Enrichment of uranium hexafluoride Fabrication of fuel assemblies Storage and disposal of spent fuel.

1997(a) 1997(a) 1992(b) 1992(b) 1999(c) 1999(c) 1996(d) 1998(d)

~e)

(e)

(a)

The PVNGS participants have obtained quantities of uranium concentrate anticipated to be sufficien, if

'certain contract options are exercised, to meet operational requirements through 1997. Spot purchases willbe made as appropriate in lieu ofany uranium which might be obtained pursuant to contract options.

(b) The participants have contracted for a substantial portion ofconversion services required through 1994.

(c)

DOE has contracted to provide enrichment services to the three PVNGS units.

(d)

Existing contracts will provide fuel assembly fabrication services for each of the PVNGS units for at least the first ten years of operation and ifoptions are exercised, for approximately twelve additional years of operation.

(e)

PVNGS is designed to permit on-site storage ofspent fuel discharged from normal operation ofall three PVNGS units through at least the year 2003. Pursuant to the Nuclear Waste Policy Act of 1982, APS, on its own behalf and on behalf ofthe other participants, entered into a contract with the DOE for spent fuel disposal. Under the agreement, DOE is responsible for'he ultimate disposition of spent fuel. The DOE announced in November 1989 that a permanent disposal facilitywould no't likely be available until 2010, and proposed to Congress separating the monitored retrievable storage facility from the disposal facility to allow them to begin receiving spent fuel in 1998 as originally specified. The Company believes that alternative interim spent fuel storage facilities will be available for use by PVNGS until DOE's scheduled shipments from PVNGS begin.

Water Water for the Four Corners plant and SJGS is obtained from the San Juan'iver.

(See ITEM 3 "LEGAL PROCEEDINGSSAN JUAN RIVER ADJUDICATION".)BHP-Utah holds rights to San Juan River water and'has committed a portion of such rights to the Four Corners plant. The Company and Tucson have a contract with the United States Bureau of Reclamation for consumption of 16,200,acre feet of water per year for SJGS, which contract expires in 2005, and in addition have been granted the authority to consume 8,000 acre feet per year ofwater under a state permit that is held by BHP-Utah. The Company is of the opinion that suAicient water is under contract for SJGS until 2005.

Sewage eflluent used for cooling purposes in the operation of the PVNGS units has been obtained under contracts with certain municipalities in the area.,The contracted quantity of eAluent exceeds the amount required for the three PVNGS units. The validity ofthese eflluent contracts is the subject oflitigation'in state and Federal courts.

(See ITEM.3"LEGAL PROCEEDINGSPVNGS WATER SUPPLY.

LITIGATION".)APS has stated that, although the litigation remains subject to further evaluation, it expects that the litigation willnot have a materially adverse impact on the operation of PVNGS.

NATURALGAS OPERATIONS Acquisition of Natural Gas Properties On January 28, 1985, the Company acquired substantially all ofthe New Mexico natural gas utilityassets of Southern Union (principally a natural gas retail distribution system operated by Southern Union as the Gas Company of New Mexico division and now operated by the Company as GCNM) and Sunbelt acquired all of the stock of Southern Union Gathering Company (subsequently renamed Sunterra Gas Gathering Company), a wholly-owned subsidiary of Southern Union, in connection with the settlement of antitrust litigation against Southern Union in which the Company and others were plaintiffs. In a separate transaction, Transwestern, a wholly-owned subsidiary of Sunbelt, acquired from Southern Union all of the stock of Southern Union Processing Company (subsequently renamed Sunterra Gas Processing Company) on December 31, 1986. In January 1990, GCNM acquired all of the common stock of Gathering Company and Processing Company from Sunbelt and Transwestern, respectively.

Gas Company of New Mexico Division The Company distributes natural gas through GCNM to most ofthe major communities in New Mexico, including Albuquerque and Santa Fe, serving approximately 339,000 customers as of December 31, 1989.

GCNM's customers include "sales-service" customers and "transportation-service" customers.

Sales-service customers purchase natural gas and receive transportation and delivery services from GCNM for which GCNM receives both cost-of-gas and cost-of-service revenues. Cost-of-gas revenues are a recovery ofthe cost of purchased gas in accordance with NMPSC rules and regulations. Transportation-service customers, who procure gas independently but contract with GCNM for transportation and related services, provide GCNM with cost-of-service revenues only.

GCNM is organized along geographic lines into three operating regions (central, eastern and )vestern) and one pipeline district. The central

region, comprised primarily of Albuquerque, accounts for approximately 54% of GCNM's total customers. The Company holds long-term, non-exclusive franchises with varying expiration dates in all incorporated communities where it is necessary to do so in order to carry on its gas utilitybusiness as it is now being conducted. The expiration dates for the Company's franchises in Albuquerque and Santa Fe are 1998 and 1995, respectively.

For the twelve months ended December 31, 1989, GCNM had throughput ofapproximately 64.3 million decatherms, including sales of 48.3 million decatherms to sales-service customers.

No'single customer accounted for more than 2% of GCNM's therm sales in 1989.

GCNM's total operating revenues for the year ended December 31, 1989, were approximately $236 million. Cost-of-gas

revenues, received from sales-service customers, accounted for approximately 57% of GCNM's total operating revenues.

Since a major portion of GCNM's load is related to heating, levels of therm sales are affected by the weather. Approximately 41% of GCNM's total therm sales in 1989 occurred in the months of January, February and December.

During the 1980's, FERC and NMPSC orders relating to the nondiscriminatory transportation of gas in certain instances, as well as other changes in the natural gas industry, led to increased competition for sales of natural gas within New Mexico. An order issued by the NMPSC requires New Mexico'gas utilities to offer transportation service to all customers. on an available capacity basis. Thus, GCNM's customers may choose to purchase natural gas from sources other than GCNM and require transportation by GCNM, subject to the capacity of GCNM's system. Approximately 25% of GCNM's deliveries in 1989 were of gas owned by transportation-service customers.

Transportation-service customers pay GCNM according to the services they receive.

X

GCNM obtains its supply of natural gas primarily from New Mexico wells pursuant to long-term contracts with producers. A significant portion ofGCNM's natural gas supply is provided through Gathering Company.

(See "Gathering Company".) The long-term contracts of GCNM and Gathering Company are generally sulficient to meet GCNM's peak-day demand. However, these long-term contracts, which generally predate the Company's acquisition of GCNM and Gathering Company, obligate GCNM and Gathering Company to take volumes of gas in excess of their annual demand. As a result of changes in regulations and market conditions since the execution of these long-term contracts, GCNM and Gathering Company face the challenge of marketing excess gas under unfavorable, off-peak conditions. GCNM and Gathering Company are disputing claims by certain producers relating to take-or-pay obligations, contract pricing and other matters, some of which are, or have

been, the subject of litigation. (See ITEM 3"LEGAL PROCEEDINGSNATURAL GAS CONTRACTS LITIGATION" and note 9 of the notes to consolidated financial statements.)

GCNM and Gathering Company have sought and are seeking reformation oftheir gas supply contracts with producers in an effort to match their obligations to take gas with the demand of GCNM customers. In recent years, GCNM has obtained new gas supplies through the negotiation oflong-term contracts containing no take-or-pay provisions and through spot market purchases.

GCNM and Gathering Company have also renegotiated a significant portion of their long-term contracts. These reformed contracts contain provisions that (a) greatly reduce GCNM's and Gathering Company's take-or-pay requirements and allow GCNM and Gathering Company (without penalty) not to purchase gas during the off-peak seasons; or (b) have no take-or-pay requirements.

Approximately 50% of GCNM gas supplies now come from contracts entered into or reformed since the Company's acquisition of GCNM and Gathering Company.

GCNM depends on EPNG and Transwestern Pipeline Company for its transportation of gas supplies purchased from sources that are not on GCNM's system. Such transportation is regulated by the FERC.

Gas purchased from or transported by these companies is the sole supply for GCNM in certain locations.

Gathering Company Gathering Company is engaged in the ownership and operation of gas gathering facilities primarily in the San Juan Basin in northwestern New Mexico, the purchase of gas under long-term contracts from sources in the San Juan Basin and the sale of gas to GCNM and other customers. In 1989, Gathering Company sold approximately 19.0 million decatherms to GCNM and 11.1 million decatherms to other customers primarily in the spot market.

In January 1988, Gathering Company entered into a natural gas sale and gas gathering contract with GCNM that was subject to NMPSC review. Consistent with an order from the NMPSC, a new contract was entered into between Gathering Company and GCNM in January 1990. The new contract allows Gathering Company to recover from GCNM substantially all of its operating costs, net of its third-party revenues (including revenues received from Processing Company), and to earn a regulated return on its investment in its operating assets. In addition to the recovery of its operating expenses plus a return on its investment in its operating assets, Gathering Company is permitted under the contract to charge to GCNM all costs arising from take-or-pay obligations and from contract reformation. (See "RATES ANDREGULATIONNatural Gas Operations.")

Processing Company Processing Company processes natural gas owned or transported by GCNM, Gathering Company and others. The natural gas is processed at Processing Company's plants under separate contracts. Both GCNM and Gathering Company executed new contracts in January of 1990. The GCNM contract provides that GCNM willreimburse Processing Company for all of its operating costs, net of its third-party revenues, and provides a return on Processing Company's investment in its operating assets, in return for providing the service of processing GCNM's natural gas throughput at the plants. Additionally, Processing Company reimburses GCNM for all revenues from liquid by-products derived from GCNM's throughput through the

plants. Such revenues are ultimately credited to GCNM's ratepayers through the PGAC. The Gathering Company's contract provides the same service for Gathering Company and in return for such service, Gathering Company will pay Processing Company a fee per MCF of gas which is processed on behalf of Gathering Company, Processing Company reimburses Gathering Company for all revenues from liquid by-products derived from Gathering Company's throughput through the plants.

Gas Sales The following table shows gas throughput by customer class:

Residential Commercial Industrial Public authorities Irrigation Sales for resale.

Brokerage Transportation*

Spot market sales GAS THROUGHPUT (Millionsof decathcrms) 1989 1988 23.2 24.7 10.7 11.5 1.5 1.7 5.5 6.2 2.0 1.4 4.6 2.7 0.8 0.9 19.6t 9.1 78.7t 79.0 58.2 1987 24.5 11.4 2.2 6.8 1.4 1.2 2.8 5.1 55A 1986 22.1 10.8 5.9 8.3 1.9 1.5 2.1 2.2 54.8, 198877 19.3 9.7 13.8 9.1 1.7

'1.7 55.3

• Customer-owned gas.

t Includes gas throughput from Gathering Company (see note I of statements).

tf Effective from acquisition date, January 28, 1985.

The following table shows gas revenues by customer class:

the notes to consolidated financial GAS REVENUES

'thousands of dollars) 19897 1988 1987 1986 1988ff Residential Commercial.

Industrial Public authorities Irrigation Sales for resale Brokerage Transportation*

Liquids.

Spot market sales Other

$ 130,130 47,876',693 21,757 7,001 9,874 1,378 7,618 25,742 19,810 5,948

$ 122,592 45,235 6,063 22,289 4,546 6,969 1,514 4,841 9,742

$ 114,164 42,120

" 8,102 22,729 3,7&1 3,819 5,213 4,315 6,391

$ 117,011 45,812

'3,139 30,213 6,142 5,675 3,759 2,207 10,708

$ 111,427 45,519 48,933 38,181 6,507 6,638 31 83 16,418

$282,827

$223,791

$210,634

$244,666

$273,737

• Customer-owned gas.

f Includes gas revenues from Gathering Company and Processing Company (see note 1 of the notes to consolidated financial statements).

ff Effective from acquisition date, January 28, 1985.

10

• RATES AND REGULATION

= The Company is subject to the jurisdiction of the NMPSC with respect to its retail electric, gas and water rates, service, accounting, issuance of securities, construction of new generation and transmission facilities and other matters. The FERC has jurisdiction over rates and other matters related to wholesale electric sales.

Inventorying Methodology ll Inventorying is an electric ratemaking methodology designed to move incremental base load plant into the New Mexico jurisdictional rate base in conjunction with increased New Mexico jurisdictional load. A substantial amount of the Company,'s capacity was treated as inventoried capacity under the inventorying methodology. The inventorying methodology allowed the Company to, defer (and to record as non-cash earnings) certain carrying costs associated with,inventoried plant, although the Company remained at risk for significant amounts ofdepreciation, property taxes and lease costs not recovered through of-system sales.

An order issued by the NMPSC in April 1989 provides for the termination of the inventorying methodology.

(See "Alternative to the Inventorying Methodology".) The Company wrote off, in 1988, the amounts previously deferred under, the inventorying methodology.

Alternative to the Inventorying Methodology M

On January 14, 1987, the NMPSC docketed a proceeding to obtain proposals for alternatives to the inventorying methodology and to determine how to implement any final determination in a NMPSC case concerning the reasonableness of costs relating to PVNGS. On April 5, 1989, the NMPSC issued an order which, among other things, provides for the inclusion in NMPSC jurisdictional electric rates of the Company's jurisdictional interests in PVNGS Units, 1 and 2, 147 MWofSJGS Unit 4 and the power purchase contract with SPS. However, the order excludes from New Mexicojurisdictional rates the Company's interest in PVNGS Unit 3, 130 MWofSJGS Unit 4 and the power purchase contract with M-S-R. (See",ELECTRIC OPERATIONSSources ofPower and Service Area and Customers".) The order states that as long as there is excess capacity in the Company's jurisdictional rates, then that excess capacity willshare of-system sales equitably with the capacity excluded in the order.

The order does not affect current rates. Rates based on the order will be implemented through a rate case, which the Company filed in June 1989 and the. results of which would likely be effective by mid-1990.

(See "Electric Rate Case".) The ultimate implementation of rates based on the inclusion of PVNGS costs willalso depend on the outcome of the PVNGS cost investigation. (See "PVNGS Cost Investigation").

I1 The NMPSC order provides that the Company's jurisdictional interest in 147 MW of SJGS Unit 4 will be immediately included in rates effective the date the NMPSC issues its final order in the rate case. The NMPSC order also provides that the rate case will consider (i) whether recovery of the Company's jurisdictional investment ofPVNGS Units 1 and 2 should start immediately or whether such recovery should be phased-in over a period oftime, (ii)whether there should be a fulland immediate return on PVNGS Units 1 and 2 or whether all or a portion of the return on such investment should be disallowed for some period of time and (iii)any other appropriate rate treatment of these units.

Two intervenors to the proceeding, the New Mexico Attorney General and the New Mexico Industrial Energy Consumers, have appealed the NMPSC's order to the New Mexico Supreme Court.

PVNGS Cost Investigation In December 1986, the NMPSC issued G.O. No. 49, requiring the evaluation of certain cost overruns associated with the construction ofelectric generating plant prior to the inclusion ofsuch plant in a company's rate base. In January 1987, the NMPSC docketed an investigation of PVNGS costs and indicated that the 11

proceeding would determine the prudence of such costs incurred by the Company and quantify the costs resulting from imprudence. The hearing examiner ruled that the Company has the burden of proving that PVNGS construction costs were reasonable and that its decision to invest in and continue participation in PVNGS were prudent.

t On May 31, 1989, the NMPSC staff and the Company reached an agreement (the "stipulation") settling all issues of prudence existing at that date, as they relate to the Company's 10.2% interest in PVNGS Units 1 and 2. The stipulation was approved by the NMPSC on March 6, 1990. The issues covered by the stipulation include, but are not limited to, the prudence of the Company's system planning and PVNGS construction costs.

The stipulation provides for the disallowance of $90 million from New Mexico jurisdictional electric rate base. This amount is in addition to the costs excluded from New Mexico, rates by the NMPSC in its April5, 1989 order. (See "Alternative to the Inventorying Methodology".) The $90 milliondisallowance does'ot require write-offs in addition to'the amounts written off by the Company in 1988. The $90 million disallowance includes $80 million of deferred carrying costs under the inventorying methodology and a further $ 10 million of costs associated with PVNGS Units 1 and 2. Of the $80 million, approximately $53 million is from previously deferred carrying costs calculated through December 31, 1988 which would have been permitted in rate base by the NMPSC's April5, 1989 order. Such order had also provided for the accrual of additional deferred carrying costs until the NMPSC final order in the Company's rate case, which the Company estimates to be approximately

$27 million. Under the stipulation, the Company will not seek recovery of these transitional deferr'ed costs.

. In addition, the stipulation sets performance standards for the operation ofPVNGS Units 1 and 2 which would be effective as of the first day of the month following the effective date of the NMPSC's final order in the rate case. Under the performance standards, a "dead band" would be established at capacity factors of 60% through 75% as measured by the capacity facto'r ofall three PVNGS units over the fuel cycle (currently 18 months). Within the dead band, the Company would receive no reward or penalty. The Company would be penalized with one-half of the additional fuel costs incurred for PVNGS capacity factors of 50% to 60%

and would be rewarded with one-half of the avoided fuel costs ifPVNGS operates at capacity factors from 75% through 85%. Capacity factors above 85% or below 50% would reward or penalize the Company by an amount equal to the additional fuel costs avoided or incurred.

On March 6, 1990, the NMPSC adopted the stipulation as filed and issued a final order. The New Mexico Attorney General has appealed the NMPSC's March 6, 1990 order to the New Mexico Supreme Court.

The NMPSC's April 5, 1989 order, which has been appealed to the New Mexico Supreme Court by two intervenors to the case, is material to the stipulation. In the event such order is remanded by the New Mexico Supreme Court to the NMPSC and subsequently modified, the stipulation would become void, unless reaffirmed by the Company and the NMPSC staff. The stipulation also provides that to the extent that a final FERC audit of the Company's share of PVNGS Units 1 and 2 construction costs results in a reduction of more than $90 million, such further reduction shall be refiected on an allocated basis in the next New Mexico jurisdictional rate case.

Electric Rate Case On June 12, 1989, the Company filed a request with the NMPSC, incorporating the April 5, 1989 order on excess capacity and the May 31, 1989 stipulation on PVNGS prudence, to increase its retail electric rates

$ 13.7 million, later revised to $ 12.2 million, from current annualized electric revenues." Data used in the filing are based on a historical test-year period which ended December 31, 1988. The proposed $ 12.2 million rate increase includes costs associated with the Company's jurisdictional interest in 147 MW of SJGS Unit 4 and begins to phase into rates the Company's interest in PVNGS Units 1 and 2 over a ten-year period. The 12

Company's rate r'equest excludes all costs associated with PVNGS Unit 3 and 130 MWofSJGS Unit 4, one-third ofthe Company's interest in the PVNGS Valley Transmission System and the purchase power contract with M-S-R Public Power Agency. Consistent with a stipulation between the Company and.the NMPSC staff (see "PVNGS Cost Investigation" ), the Company's rate request also excludes all carrying costs deferred under the inventorying methodology.

The $ 12.2 million rate increase request reflects inclusion of 50% of the Company's interest in PVNGS Units 1 and 2. The remainder of the Company's interest in PVNGS Units 1 and 2 would be included in rates in four 12.5% annual incr'ements. The carr'ying costs relating to the portion of PVNGS Units 1 and 2 not included in rates would be deferred and recovered beginning in the second year of the Company's ten-year phase-in. The inclusion of the phase-in costs in rates would require subsequent rate cases to be filed.'The timing.of the filing of future rate cases by the Company during the ten-year phase-in period would be dependent upon "a number of factors, including retail sales growth and the actual costs of operation. In contrast to the Company's rate request, the NMPSC Staff and the New Mexico Attorney General have filed testimony in the case proposing to include immediately in rates all of the Company's interests in generating plants allowed injurisdictional rates by the April 1989 NMPSC order, while still requesting decreas'es in r'ates from current electric rate levels.

f C

Hearings in the rate, case concluded in December 1989. On March 8, 1990, a NMPSC hearing examiner issued a recommended decision in the rate case, in which the examiner recommended that'the NMPSC order an annual rate reduction of $6.2 millionfrom current electric rates with PVNGS Units 1 and 2 fullyincluded in such rates. As a result, the Company's proposed phase-in plan for the PVNGS Units 1 and 2 would be denied, resulting in no deferrals of carrying costs of PVNGS Units 1 and 2. The hearing examiner also recommended that the NMPSC adopt a 12.05% return on equity. The Company proposed a 13.6% return on equity in the rate case filing. In addition, the hearing examiner recommended that all off-system capacity sales including unit contingent sales be shared between the included and excluded capacity based on the ratio of the included excess capacity to the excluded capacity.

The hearing examiner further stated in his recommended decision that as long as the Company has jurisdictional excess capacity, a full return of and on the Company's investment in PVNGS Units 1 and 2 cannot be guaranteed.

The Company would be required to file in its next rate case a detailed analysis of whether the Company should continue recovery of its investment in PVNGS Units 1 and 2, whether such recovery should be phased in over a period of time, or 'whether all or a portion of the return on such investment should be disallowed for some period of time.

n The recommended decision, ifapproved by the NMPSC as written, would result in a significant adverse impact on the Company's results ofoperations in 1990 and subsequent years and would result in an after-tax write-offof approximately $ 19 million. The Company has filed with the'.NMPSC its response to challenge the hearing examiner's recommended decision. The NMPSC is expected to issue a final order in the current electric rate case in April 1990.

Decertification of Electric Generating Plant On August 28, 1989, the Company filed with the NMPSC a request for regulatory abandonment and decertification of its interest in PVNGS Unit 3, in a 26.1% undivided interest in SJGS Unit 4 and in certain related common and transmission facilities. This capacity had been excluded from New Mexicojurisdictional rates in the NMPSC's April 5, 1989 order. The Company's request asks the NMPSC to relinquish its authority and jurisdiction over the specified facilities such that the Company may, without further action or assent by the NMPSC, use, change, modify, rebuild, sell, sell and lease back, mortgage, pledge, alienate, decommission or otherwise manage and control the assets, and also to sell power and energy therefrom, such that the Company shall be free to use the proceeds of any use or disposition of the assets and that such proceeds shall,not,be allowable to or charged or credited to the Company's New Mexico retail customers to the end that neither such assets nor the proceeds thereof shall benefit or burden such retail customers.

13

The NMPSC has bifurcated the case such that the Company's request related to PVNGS Unit 3 shall be considered separately from its request related to SJGS Unit 4. Hearings in both cases are expected. to be concluded by mid-1990.

SDG&E Sales Agreement In November 1985, the Company and SDG&E entered into an agreement providing for SDG&E to purchase 100 MW of capacity from the Company for the period May 1988 through April 2001.

(See "ELECTRIC OPERATIONSService Area and Customers".) In March 1988, the Company submitted the agreement to the FERC for approval. Subsequently, SDG&E filed an intervention and protest challenging the Company's filing at the FERC, and requesting that, due to allegedly inadequate information justifying the Company's request for approval, FERC either reject the filingor suspend it and set it aside for hearings.

SDG&E further requested that the FERC modify the agreement to reflect changes in southwestern utility fuel costs and in the purchase power market since the execution of the agreement.

On June 13, 1988, the FERC accepted the agreement and ordered service under the, agreement to be efl'ective as of that date. Sales to SDG&E began on June 14, 1988. On July 13, 1988, the Company filed a request for rehearing seeking an effective date of May 1, 1988, as provided in the agreement itself. SDG&E also filed a request for rehearing of the FERC order. On October 6, 1988, the FERC denied both the Company's and SDG&E's requests for rehearing. Both the Company and SDG&E have filed requests with the United States Court of Appeals for the District of Columbia Circuit for review of the FERC orders. The Court of Appeals has scheduled oral arguments on the appeals to be held on April 17, 1990.

(

Other Electric Matters The Company has electric fuel adjustment clauses covering all retail and firm-requirements wholesale kWh sales. There is an approximate 60-day time lag in implementation ofthe fuel adjustment. clause for billing

purposes, except for firm-requirements wholesale customers for which there is an approximate 30-day time lag.

Natural Gas Operations On January 2, 1990, GCNM filed a request with the NMPSC to increase its retail natural gas revenues

$ 19.0 million or 8% from its current level. GCNM's request is based on the twelve months ended September 30, 1989. The Company believes that the requested increases reflect the cost of service for respective classes of sales and transportation customers and provide for a reasonable return on investment.

In response to a;GCNM report concerning imbalances in its gas supply and demand (see "NATURAL GAS OPERATIONS Gas Company of New Mexico Division"), the NMPSC initiated, on February 29, 1988, a proceeding to examine the matter. The proceeding led to a stipulation which was filed with the NMPSC on July 19, 1989. In the stipulation all parties agreed to a settlement ofmost of the issues considered in this proceeding.

The stipulation, which was approved by the NMPSC on December 18, 1989, provides for the partial recovery of certain gas costs arising from reformation of gas purchase contracts and from claims by certain producers relating to take-or-pay obligations, contract pricing and other matters. Under the stipulation, GCNM willbear 25% of producer take-or-pay and contract-reformation costs (including such costs paid by GCNM to Gathering Company under their gas sale and gathering contract), and GCNM willbe permitted to recover from its sales and transportation customers the remaining 75% of such costs over a five-year period. The stipulation also provides that GCNM and Gathering Company may recover all costs prudently incurred (as determined by the NMPSC on a case-by-case basis) as the result of the settlement or litigation of claims arising from certain intrastate gas purchase contracts that were the subject of the antitrust litigation that resulted in the Company's acquisition ofGCNM from Southern Union in January 1985. (See ITEM3 "LEGAL PROCEEDINGSNATURAL GAS CONTRACTS LITIGATIONAntitrust-Related 14

Litigation".)The NMPSC order approving the stipulation also allows GCNM to recover from its customers all take-or-pay costs assessed by interstate pipelines.

Since January 1988, GCNM has deferred on its books and has not passed through to its customers the difference between the amounts GCNM paid to Gathering Company under the 1988 gas sales and gathering contract,(see "NATURALGAS OPERATIONSGathering Company" ) and the amounts that GCNM would have paid to Gathering Company under the previous contract The order of the NMPSC issued on December 18, 1989 allows the methodology agreed to in the stipulation to become effective as of January 1,

1988. GCNM believes that itshould be allowed to collect approximately $ 11.3 millionof these deferred costs from its customers.

Because the methodology is based on a,cost reimbursable concept, the NMPSC order does not allow GCNM to collect the deferred costs until it demonstrates the reasonableness of the expenses incurred by Gathering Company and quantifies the amount to be collected. GCNM filed a reconciliation report with the NMPSC on January 31, 1990 providing the information requested. A case has been docketed by the NMPSC for the purpose of holding a hearing related to the report that was filed on January 31, 1990.

Ifthe costs are approved, GCNM willcollect the amounts deferred via a surcharge over a period of no less than 24 months.

GCNM's retail gas rate schedules contain a PGAC which provides for timely recovery ofthe cost of gas purchased by GCNM for resale to its customers. GCNM is required to make its next biennual application for continued use of its PGAC pursuant to NMPSC rules in August 1990. The NMPSC, through its review of the PGAC costs, has jurisdiction over GCNM's recover'y from its customers, of amounts charged by Gathering Company and Processing Company for gas purchases and processing services provided.

NAVAJO TAXASSESSMENT In March 1988, the Company received notice from the Navajo Nation that the Navajo Nation's Tax Commission intends to impose the Navajo Nation's business activity, possessory interest and severance taxes (including past taxes, interest and penalties) on property and business activity in an area of northwestern New Mexico known as the Eastern Navajo Agency. It is possible that the amount of taxes that might ultimately be assessed against or paid by the Company and its subsidiaries would be significant. However, due to questions oflaw concerning the Navajo Nation's authority to impose the tax in the area, considerations of regulatory treatment and obligations of prior owners with respect to'certain past taxes asserted by the Navajo Nation (see ITEM 3"LEGAL PROCEEDINGSOTHER PROCEEDINGS" ), the Company believes it is unlikely that the impact of the tax on its financial condition or results of operations would be material.

ENVIRONMENTALFACTORS

'he Company, in common with other electric and gas utilities, is subject to stringent regulations for protection of the environment, by both state and Federal authorities. PVNGS is subject to the jurisdiction of the NRC, which has authority to.issue permits and licenses and to regulate nuclear facilities in order to protect the health and safety of, the public from radioactive hazards and to conduct environmental reviews pursuant to the National Environmental Policy Act. (See "ELECTRIC OPERATIONS Sources of Power

Nuclear Plant".) The Company does not currently expect that material expenditures for additional pollution control equipment for its facilities willbe required in 1990 or 1991.

The New Mexico regulation for nitrogen oxides is extremely stringent. Four Corners Units 4 and 5, which could not meet this regulatiori with existing pollution control equipment, have operated for several years under variances from this regulation. In December 1987, the NMEIB granted a variance which extended through September 30, 1989 for Unit 4 and which extends through September 30, 1991 for Unit 5.

This variance was granted by the NMEIBto provide time to install certain additional equipment intended to achieve compliance with existing emissions limitations without adverse operational impacts.

APS, the 15

operating agent for the Four Corners

plant, has successfully completed the installation of additional equipment on Unit 4 to meet the existing emissions limitations.

Revisions to environmental laws and regulations continue to be proposed and adopted at Federal and state levels. Pursuant to the Federal Clean AirAct Amendments of 1977, the EPA has adopted regulations, applicable to certain Federally-protected areas, that address visibilityimpairment which can be reasonably attributed to specific sources. The EPA may also adopt regulations to deal with visibilityimpairment resulting from regional haze. In addition, amendments to the Clean AirAct have been proposed which are intended to address problems of "acid rain," toxic air pollutants, and the nonattainment of national ambient air quality standards.

The Company cannot currently predict the financial and operational impacts of such

laws, regulations and proposals.

NON-UTILITYSUBSIDIARYOPERATIONS In 1988, the Company made the decision to discontinue the non-utility operations of its subsidiaries and to dispose of non-utility properties.

(See note 10 of the notes to consolidated financial statements.)

Such operations consisted primarily of fiberboard manufacturing, real estate, coal mining, telecommunications manufacturing and financial services and were carried out by Meadows, Sunbelt or their subsidiaries. During 1988, the Company's subsidiaries ceased all coal mining operations. During 1989, the Company's subsidiaries disposed of the fiberboard manufacturing and telecommunications manufacturing operations.

During 1989, Meadows defaulted on obligations owed to its secured creditors and such creditors subsequently made a claim against the Company, asserting that the Company was fully liable for the obligations ofMeadows due such secured creditors. Although the Company denied such claims, and without admitting any liability, the Company, in November 1989, entered into an agreement with such creditors which provides for the Company to pay damages to such creditors under certain circumstances.

In return, all ofthe secured creditors released the Company from all claims. At the time ofthe signing ofthe settlement, the Company estimated that there would be no damages to be paid by the Company. The Company's current evaluation, however, causes the Company to project damage payments which 'have been recorded in the consolidated financial statements.

(See note 10 of the notes to consolidated financial statements.)

During 1989, Sunbelt sold or otherwise disposed ofall remaining material assets and awarded a contract for the assumption of its major reclamation obligations in New Mexico.

During 1990, Transwestern is expected to complete arrangements for major reclamation obligations in Oklahoma and is expected to dispose of its interest in remaining mineral properties.

On January 4,

1990, Sunbelt and Transwestern sold their respective wholly-owned subsidiaries, Gathering Company and Processing Company, to GCNM. Using the proceeds from the transaction along with other cash resources available, Sunbelt and Transwestern paid off their respective bank debt and redeemed most of Sunbelt's preferred stock.

ITEM 2.

PROPERTIES Substantially all of the Company's utilityplant is mortgaged to secure its first mortgage bonds.

As of December 31, 1989, the total net generation capacity offacilities owned or leased by the Company was 1,591 MW. The Company's electric generating stations in commercial service as of December 31, 1989, were as follows:

16

Type Nuclear Coal Coal Gas/Oil Gas/Oil Name PVNGS (a)

SJGS (b)

Four Corners (c)

Reeves Las Vegas Location Wintersburg, Arizona Waterfiow, New Mexico-Fruitland, New Mexico Albuquerque, New Mexico Las Vegas, New Mexico Net MIV Generation Capacity 390 835 192 154 20 1,591 (a)

The Company is entitled to 10.2% of the power and energy generated by PVNGS Units 1 and 2 under leasehold interests. The Company has a 10.2% ownership interest in PVNGS Unit 3.

(b)

SJGS Units 1, 2 and 3 are 50% owned by the Company; SJGS Unit 4 is 55.525% owned by the Company.

(c)

Four Corners Units 4 and 5 are 13% owned by the Company.

The Four Corners plant and a portion of the facilities adjacent to'SJGS are located on land held under easements from the United States and also under leases from the Navajo Nation, the enforcement of which leases might require Congressional consent. The risk with respect to the enforcement of these easements and leases is not deemed by the Company to be material. However, the Company is dependent in some measure upon the willingness and ability of the Navajo Nation to protect these properties.

As of December 31, 1989, the Company owned, jointly owned or leased 2,784 circuit miles of electric transmission lines, 4,734 miles of distribution overhead lines, 2,393 cable miles of underground distribution lines (excluding street lighting) and 215 substations.

f The property owned by GCNM, as of December 31, 1989, consisted primarily of natural gas gathering, storage, transmission and distribution systems. The gathering systems consisted ofapproximately 1,200 miles (approximately 360 miles ofwhich are leased to Gathering Company) ofpipe with compression and treatment facilities. Provisions for storage made by GCNM include ownership and operation of an underground sforage facility located near Albuquerque and an agreement with owners of a unitized oil field located near Artesia, New Mexico, in w'hich GCNM has irijection and redelivery rights. The transmission systems consisted of approximately 1,300 miles ofpipe with appurtenant compression facilities. The distribution systems consisted of approximately 8,725 miles of pipe.

I GCNM leases approximately 130 miles of transmission pipe from the DOE for transportation ofnatural gas to Los Alamos and to certain other communities in northern New Mexico. The lease can be terminated by either party on 30 days written notice, although the Company would have the right to use the facility for two years thereafter.

The property of Gathering Company includes approximately 550 miles of gathering pipe with appurtenant. compression facilities.

'rocessing Company owns facilities located in northwestern New Mexico having an aggregate design capacity for processing of natural gas of approximately 300,000 mcf per day.

The electric and gas transmission and distribution lines are generally located within easements and rights-of-way on public, private or Indian lands.

The Company also owns a'n'd leases service and oAice facilities in Albuquerque and in other operating divisions throughout its service territory.

17

The Company's water property consists of wells, pumping and treatment plants, storage reservoirs and transmission and distribution mains.

I The Company leases interests in PVNGS Units 1 and 2 and related property (see ITEM 1"BUSINESS ELECTRIC OPERATIONS Sources of Power

'nuclear Plant"), EIP and associated equipment, data processing, communication, office and other equipment, office space, utilitypoles (joint use), vehicles and real estate.

Additional information required by this item is included in ITEM 1"BUSINESS".

ITEM 3.

LEGALPROCEEDINGS SHAREHOLDER LITIGATION Securities Law-Related Litigation A civil suit filed in the United States District Court for the District of New Mexico on April 18, 1989 against the Company and three individuals alleges misrepresentations and omissions of material facts in the Company's shareholder

reports, Securities and,Exchange Commission filings, news releases and other communications. The suit is being brought as a class action by two named plaintiffs, who seek to represent'ot only themselves but potentially thousands ofshareholders alleged to be "similarlysituated". The plaintiffs must follow a specified court procedure before a class is certified.

The complaint alleges that the Company and others engaged in.conduct in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

Generally, the, complaint alleges misrepresentations and omissions relating to, among other things, (i) the recovery of investment in excess electric generating capacity, (ii) diversification, (iii) dividends on the Company's common stock and (iv') an attempted restructuring of the Company. It is alleged that the market, prices of the common stock were artificiallyinfiated during the period of March 14, 1987 through April 14, 1989 (the "class period") and that the plaintiffs were damaged by their purchases in reliance upon "the integrity of the market or upon statements disseminated by the defendants".

The complaint also seeks recovery based on a common-law theory of negligent misrepresentation.

The Company has filed its answer and intends to defend the lawsuit vigorously.

Shareholder Derivative Litigation On September 14, 1989, a shareholder of the Company filed a civil suit in the United States District Court for the District of New Mexico, alleging breaches of fiduciary duties,'ismanagement and waste by eleven individual defendants who currently serve, or formerly served, as directors or ofiicers of the Company.

Subsequently, a second shareholder joined the suit as a plaintiff. The plaintiffshareholders seek to bring the action derivatively on behalf of the Company, which was named as a nominal defendant.

The complaint alleges, among other things, that each of the defendants, because of his position as an officer or director of the Company, owed fiduciary duties to the Company and its shareholders in connection with the operations, management and direction of the Company and that, each breached those duties by causing the Company to invest in PVNGS, the Dinch Popover Project and diversified, non-utility operations, by causing a deficit in the retained earnings of the Company, forcing it to suspend dividends on the Company's common stock, and by exposing the Company to substantial liabilityand expense for securities fraud.

On July 25, 1989, the Company's Board of Directors created a special litigation committee to conduct an independent investigation, which generally encompasses the matters alleged in the September 14, 1989 18

suit, and to determine whether it is in the best interest of the Company to continue or seek dismissal of, or otherwise resolve, the litigation. The committee consists of the director who was elected as a new Board member at the May 1989 annual meeting ofshareholders and who is not a named defendant in the September 14, 1989 suit. The committee is to perform its responsibilities with the assistance of independent legal counsel and independent business advisors. On November 30; 1989, pursuant to a stipulation of the parties, the court stayed the litigation pending the completion of the committee's report of the results of its investigation and evaluation of the causes of action asserted in the suit. The court's order provides that after March 15, 1990 the plaintiffs may move to liftthe stay for cause shown.

PVNGS WATER SUPPLY LITIGATION The validity of the primary efiluent contract under which water necessary for the operation of the PVNGS units is obtained was challenged in a suit filed in January 1982 by the Salt River Pima-Maricopa Indian Community (the "community") against the Department, of the Interior, the Federal agency alleged to have jurisdiction over the use ofsuch efiluent. The PVNGS participants, including the Company, were named as additional defendants in the proceeding, which is before the United States District Court for the District of Arizona. The portion of the action challenging the efHuent contract has been stayed until the community litigates certain claims in the same action against the Department of the Interior and other defendants.

On October 21, 1988, Federal legislation was enacted conforming to the requirements of a proposed settlement that would terminate this case without affecting the validity of the primary emuent contract. Congress, however, has not yet appropriated the Federal money necessary to effectuate the settlement. Moreover, the Arizona state legislature is required to appropriate approximately

$3 million before the settlement will become final. Finally, the settlement must be approved by the court in the Lower Gila River, Watershed litigation referred to below.

The Company understands that a summons served on APS in early 1986 required all water claimants in the Lower Gila River Watershed of Arizona to assert any claims to water by January 20, 1987 in an action pending in the Maricopa County Superior Court. PVNGS is located within the geographic area subject to the summons and the 'rights of the PVNGS participants to the use of groundwater and efiluent at PVNGS are potentially at issue in this action. APS, as the PVNGS project manager, filed claims that dispute the court's jurisdiction over the PVNGS participants'roundwater rights and their contractual rights to efHuent and, alternatively, seek confirmation of such rights. No trial date has been set in this matter.

SAN JUAN RIVER ADJUDICATION In 1975, the State of New Mexico filed an action entitled State of New Mexico v. United States, et al., in the District Court of San Juan County, New Mexico, to adjudicate all water rights in the "San Juan River Stream System". The Company was made a defendant in the litigation in 1976. The action is expected to a'djudicate water rights used at the Four Corners plant, at SJGS and at Santa Fe.

(See ITEM 1 "BUSINESSELECTRIC OPERATIONSFuel and Water Supply'".) The Company cannot at this time anticipate the effect, ifany, of any water rights adjudication on the present arrangements for water at SJGS and the Four Corners plant, nor can it determine what effect the action willhave on water for Santa Fe. It is the Company's understanding that final resolution of the case cannot be expected for several 'years.

NATURALGAS CONTRACI'S LITIGATION Antitrust-Related Litigation GCNM and Gathering Company are experiencing gas purchase contract disputes and litigation relating largely to the previous antitrust litigation that resulted in the Company's acquisition of GCNM from 19

Southern Union in January 1985.

(See ITEM 1"BUSINESSNATURAL GAS OPERATIONS Acquisition of Natural Gas Properties".) Consistent with the Company's legal position in such previous antitrust litigation, and based upon the advice ofcounsel, GCNM and Gathering Company, under Company ownership, have refused to pay producers prices under certain 1976 pricing amendments to natural gas purchase contracts, which amendments the Company believes were the result of a price-fixing conspiracy.

GCNM and Gathering Company have paid what they believe to be the reasonable value of the gas at the time of delivery.

'f On December 31, 1986, Exploration Company filed a lawsuit against the Company and GCNM, which is pending in the United States District Court for the Northern District ofTexas, seeking damages alleged to result from GCNM's failure since 1985 to pay the prices under the 1976 pricing amendments to natural gas purchase contracts with Exploration Company. The lawsuit seeks damages for an estimated

$ 100 million.

The lawsuit also alleges damages resulting from GCNM's alleged failure to take the minimum quantity of gas required by the gas purchase contracts. The Company has filed an answer and counterclaim cont'ending that the 1976 pricing amendments were the result of the price-fixing conspiracy. Also, in response to the efforts of Exploration Company to enforce the 1976 pricing amendments, the Company filed suit on January 29, 1987, against Exploration Company in the United States District Court for the District of New Mexico seeking antitrust injunctive relief. The complaint alleges that the continued efforts by Exploration Company to enforce the 1976 pricing amendments constitute new antitrust violations and seeks an injunction against the continued enforcement of those amendments.

On June 2, 1989, the latter court transferred the Company's suit to the Northern District of Texas, where it was consolidated on July 27, 1989 with the Exploration Company suit. The Company and Exploration Company are currently engaged in negotiations of not only this dispute but also the disputes between the Company and Southern Union (see "OTHER PROCEEDINGS" ), the parent of Exploration Company. At the parties'equest, the court suspended all discovery and other proceedings in this case pending negotiations.

On May 4, 1988, the Company and Gathering Company filed a lawsuit in the United States District Court fo'r the District of New Mexico against Meridian, EPNG and Southland (wholly-owned by Meridian) that sought a declaration that the 1976 pricing amendments in contracts with EPNG and Southland were unlawful and unenforceable by reason of the price-fixing conspiracy and that sought an injunction against the defendants'ttempts to enforce the amendments.

On June 24, 1988, Southland filed a lawsuit in the District Court of Harris County, Texas against the Company and Gathering Company that sought damages for their alleged failure to perform under the Southland contracts. Southland's complaint alleged damages related to payments for gas purchased by GCNM and Gathering Company, and minimum-take provisions and sought an injunction for specific performance of the Southland contracts. In addition, Southland and Meridian filed a counterclaim in the action before the United States District Court for the District of New Mexico for substantially the same relief sought in the Texas proceeding.

On March 1, 1990, the parties reached an agreement that conditionally settles all claims in this litigation. Under the terms ofthe settlement, the Company and Gathering Company have agreed to make cash payments to Southland (see ITEM 1 "BUSINESSRATES AND REGULATIONNatural Gas Operations", ITEM.,7"MANAGEMENT'S DISCUSSION ANDANALYSISOF FINANCIALCONDITIONAND RESULTS OF OPERATIONS",

and note 9 of the notes to consolidated financial statements) and the parties have agreed to reform or terminate all gas purchase contracts between the adverse parties. Reformed contracts contain new pricing provisions significantly below the prior contract prices and GCNM and Gathering Company are not required to purchase any gas during off-peak seasons.

Other Gas Supply Litigation Unicon had asserted claims against Gathering Company and the Company relating to gas-contract provisions and to an alleged obligation to construct certain facility improvements.

These claims relate to events and agreements both predating and following the acquisition ofGCNM and Gathering Company from Southern Union in January 1985. On February 21, 1986, the Company and Gathering Company filed an 20

action against Unicon and Southern Union in the District Court of Bernalillo County, New Mexico and sought a declaration of the rights and obligations of the respective parties.

Subsequently, Unicon counterclaimed, and sought, among other things, injunctive relief and compensation for damages.

On July 17, 1989, a conditional agreement was reached settling all claims by Unicon in the action against the Company and Gathering Company. The settlement became final in October 1989 and, on October 26, 1989, the action was dismissed with prejudice. Under the terms of the settlement, Gathering Company made a cash payment to Unicon (see, ITEM 1

"BUSINESSRATES AND REGULATIONNatural Gas Operations",

ITEM 7"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSLIQUIDITYAND CAPITAL RESOURCES and CURRENT ISSUES FACING THE COMPANYNatural Gas Issues",

and note 9 of the notes to consolidated financial statements) and the parties reformed GCNM's and Gathering Company's purchase contracts with Unicon. The Gathering Company contract that was the subject of the lawsuit was reformed and contains a new pricing provision that is market based and also contains no take-or-pay provision. The take-or-pay requirements in the remaining contracts were significantly reduced.

'THER PROCEEDINGS See ITEM 1 "BUSINESSRATES ANDREGULATION"for a discussion of other proceedings and disputes.

In the 1984,agreement under which the Company purchased GCNM and Gathering Company, Southern Union agreed to indemnify and hold the Company harmless from any and all occurrences and legal actions (except assumed operational liabilities) arising prior to the closing date, January 28, 1985, in connection with such properties.

Pursuant to the agreement, the Company notified Southern Union of claims for indemnification. On September 23, 1988, Southern Union filed suit against the Company and Gathering Company in the District Court ofDallas County, Texas seeking a declaratory judgment that Southern Union has no liability to the Company or Gathering Company for various claims made by the Company and Gathering Company for indemnification. On November 8,

1988, the Company, Sunbelt, and Gathering Company filed suit against Southern Union in the District Court of Bernalillo County, New Mexico seeking damages for breach of the agreement by Southern Union for failing to indemnify for various claims. The Company anticipates that all of Southern Union's allegations in the Texas proceeding will be implicitlyat issue in the New Mexico litigation. Although the Company is unable to predict the ultimate outcome of the litigation, the Company believes that the indemnification claims made against Southern Union are valid. The parties are currently engaged in settlement negotiations and are jointly seeking orders from the respective courts suspending further action pending the negotiations.

On March 2, 1990, El Paso filed suit against the Company in the United States District Court for the Western District of Texas (El Paso Division) alleging, among other things, that the Company, as current operating agent of the Southern New Mexico Transmission

System, has wrongfully refused to allow interconnection and use of a transmission line completed by El Paso in Decetnber 1989 and has set unreasonable conditions for allowing importation ofEl Paso's power entitlements from PVNGS and the Four Corners plant to its customers in southern New Mexico and Texas. El Paso claims damages against the Company for violations ofthe Sherman Antitrust Act, breach ofcontract, violation ofthe New Mexico Unfair Practices Act and other alleged causes of action. The complaint seeks actual damages in an undetermined

amount, three times the amount of actual damages determined by the court, exemplary damages and attorneys'ees.

The Company strongly disputes El Paso's allegations and intends to defend the suit vigorously.

ITEM4.

SUBMISSION OF MATI'ERSTO A VOTE OF SECURITY HOLDERS None.

21

SUPPLEMENTAL ITEM. EXECUTIVEOFFICERS OF THE COMPANY'xecutive officers, their ages, offices held and initial efl'ective dates thereof, were as follows on December 31, 1989:

Name J. D. Geist.......

W. M. Eglinton...

J. T. Ackerman....

J. F. Jennings, Jr.

J. B. Mulcock, Jr.

M. H. Maerki..

Age OSce 55 Chairman of the Board and President 41 Executive Vice President and Chief Operating Oflicer, Electric and Water Operations 48 President and Chief Operating Officer, Gas Operations 56 President and Chief Executive Oflicer, Meadows Resources, Inc.

50 Senior Vice President, Corporate Affairs and Secretary 49 Senior Vice President and Chief Financial Officer In!tlat Effectiv Date November 23, 1982 June 1, 1988 February 1, 1985 May 29, 1986 April23, 1985 June 1, 1988 The Company's officers are elected annually by the Board of Directors of the Company. Mr. Jennings was elected by Meadows'oard of Directors. Mr. Jennings has resigned from Meadows effective January 23, 1990 and is no longer an executive officer.

Allof the above executive officers were employed by the Company and/or its subsidiaries for more than five years in executive or management positions.

I' 22

PART II Dividends per Sharc High ITEM 5.

MARKETFOR THE COMPANY'S COMMON EQUITYAND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the New York Stock Exchange. Ranges of sales prices of the Company's common stock, reported as composite transactions (Symbol:.PNM), and dividends paid on common stock for 1989 and 1988, by quarters, are as follows:

Range of Sales Prices Quarter Ended Low 1989:

December 31 September 30 June 30 March 31 Fiscal Year 1988:

December 31 September 30 June 30 March 31.

Fiscal Year 15 I/4 157/s 14>/4 14i/s 157/s 15'/4 143/4 17s/s 22s/s 22s/s 127/s 14 11 103/4 103/4 1 1 '/s 12'/s 14>/4 163/4 1 1 i/s

$0.00 0.00 0.00 0.38

$0:38

$0.38 0.38 0.38 0.73

$ 1.87 On February 1, 1990, there were 44,154 holders of record of the Company's common stock.

In April 1989, the Company announced the suspension ofdividend payments on the Company's common stock as a result of the deficit in retained earnings. For a discussion of the suspension of dividends on the Company's common st'ock, see note 2 of the notes to consohdated financial statements and ITEM 7 "MANAGEMENT'SDISCUSSION ANDANALYSISOF FINANCIALCONDITIONANDRESULTS OF OPERATIONS."

Cumulative Preferred Stock While isolated sales of the Company's cumulative preferred stock have occurred in the past, the Company is not aware of any active trading market for its cumulative preferred stock. Quarterly cash dividends were paid on each series of the Company's cumulative preferred stock at their stated rates during 1989 and '1988.

Jl 23

ITEM 6.

SELECI'ED FINANCIALDATA Total Operating Revenues*

Earnings (Loss) from Continuing Operations....

Net Earnings (Loss)

Earnings (Loss) per Common Share From Continuing Operations Earnings (Loss) per Common Share............

Total Assets Preferred Stock with Mandatory Redemption Requirements.

Long-Term Debt, less Current Maturities.......

Common Stock Data:

Dividends paid per common share...........

Dividend pay-out ratio Market price per common share at year end....

Book value per common share at year end.....

Average number ofcommon shares outstanding Return on Average Common Equity...........

Capitalization:

Common stock equity.

Preferred stock:

Without mandatory redemption requirements.

With mandatory redemption requirements...

Long-term debt, less current mafurities.......

1985 49,268 55,242 60,513 66,147 119,080 801,706 980,767 862,962 862,796

$ 1,112,381 038 22.0%

14.625 18.02 1.87 2.92 2.92 N/M 146.0%

88.8%

12.50 18.75 33.00 18.03 25.68 26.51 2.89 87.6%

29.50 25.73 41,774 9.5%

41,761 41,647 (23.9)%

7.7%

40,401 12.8%

37,059 13.2%

45.3%

40.7%

52.2%

52.6%

42.2%

3.5 3.2 2.9 3.0 3.0 2.9 48.2 53.1 42.0 2.8 4.6 3.2 5.1 41.4 48.1 100.0%

. 100.0%

100.0%

100.0%

100.0%

1988 1987 1986 (In thousands except per share amounts and ratios) 915,310 84,1,924 785,224 775,807 776,730 82,593 (9,942)t$

117,121 159,324 148,169

~ 82,593

$ (230,137) $,

95,389 151,005 146,310 Ik 1.73

.(.50)t$

2.52 3.49 3.35 1.73 (5.78) $

2.00 3.29 3.30

$2,387,005

$2,392,749

$2,717,141

$2,667,639

$2,968,344 a Includes gas operating revenues ofGCNM since January 28, 1985, the acquisition date ofthe gas operation.

Also includes gas operating revenues (excluding intercompany sales) ofGathering Company and Processing Company beginning with 1989. (See note 1 of the notes to consolidated financial statements.)

t Includes charges for the write-offof deferred carrying costs on uncommitted electric generating capacity, the write-offof a proposed generating station and other non-recurring charges aggregating $ 120.3 million

($2.88 per share).

N/MNot meaningful The selected financial data should be read in conjunction with the consolidated financial statements, the notes to consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this report.

ITEM 7.

MANAGEMENT'SDISCUSSION ANDANALYSISOF FINANCIALCONDITIONAND RESULTS OF OPERATIONS The following is management's assessment of the Company's financial condition and the significant factors which influence the results of operations.

This discussion should be read in conjunction with the Company's consolidated financial statements.

LIQUIDITYAND CAPITALRESOURCES The Company's major generating plant construction program has been concluded, and construction expenditures for the years 1990-1994 are expected to consist primarily of upgrading generating systems, upgrading 24

and expanding the electric transmission system and utilitydistribution systems and purchasing nuclear fuel.

For the period 1990-1994, the Company expects to incur $518 million of construction expenditures. This amount includes $85 million for the purchase of nuclear fuel and $ 16 million in AFUDC (a non-cash item that reflects the Company's costs of debt and equity capital used fo finance utility construction). The Company currently has no material capital commitments beyond 1994 which would significantly differ from the levels reflected in the five-year construction projections.

Actual construction expenditures for 1989 and the Company's projections for 1990-1994 are shown below:

Cash AFUDC..

Total 1989

$73 5

$78 1990

$ 99 3

$ 102 1991 199Z (In millions)

$91

$ 122 3

5

$94

$ 127 1993

$ 97 3

$ 100 1994

$93 2

$95 The Company conducts a continuing review of its construction program. This program and the above estimates are subject to periodic revisions based upon changes in assumptions as to system load growth, rates of inflation, the availability and tiining of environmental and other regulatory approvals, the availability and costs of outside sources of capital and changes in project construction schedules.

The Company's other major cash requirements include payments of long-term debt maturities, mandatory redemption of preferred stock, net payments pursuant to settlements of certain gas contract disputes (see PART I, ITEM 3"LEGAL PROCEEDINGSNATURAL GAS CONTRACTS LITIGATION A'ntitrust-Related Litigation") and estimated damage payments to Meadoivs'reditors as a result'of the settlement agreement with such creditors (see PART I, ITEM 1"BUSINESSNON-UTILITYSUBSIDIARY OPERATIONS".) Cash requirements'or the above items are estimated at $26.5 million for 1990 and $79.5 million for 1991-1994. Other major cash requirements also include annual lease payments of $84.6 million over the lifeof lease terms for the Company's leasehold interests in PVNGS Units 1'and 2.

The Company's ability to generate cash internally continues to be under pressure due to investments in and operating costs associated with substantial generation plant not in New Mexico retail ratebase, a soft market for wholesale electric power sales, increased competition from alternative sources and suppliers of energy and other factors. However, the Company believes its internal cash generation will be adequate to meet most of its financing requirements for the years 1990-1994.

Efforts to boost the Company's internal cash generation have included continuing cost control programs and increased efforts to market electricity at both the retail and wholesale levels. In addition, the Company filed an electric rate request with the NMPSC in June 1989 to increase its retail electric revenues $ 12.2 million from current annualized levels. The Company also filed a gas rate request with the NMPSC in January 1990 to increase its retail natural gas revenues

$ 19.0 million from its current level.

In April 1989, the Company announced the suspension ofdividend payments on the Company's common stock as a result of the deficit in retained earnings as of December 31, 1988. Although the implementation of the Company's quasi-reorganization, effective as of January 1, 1989, eliminated the retained earnings deficit, the Company's board of directors has not declared dividends on its common stock since January 1989. The Company's board of directors reviews its dividend. policy on a continuing basis. The payment of future dividends is dependent upon earnings, the financial condition ofthe Company, market requirements and other factors.

Although the Company currently expects to meet its financing requirements for the next five years primarily through internally generated funds, certain external sources of funds are available to the Company.

25

Such sources include bank borrowings and commercial paper. As of December 31, 1989, the Company had credit commitments from various banks totaling approximately $275.7 million. As ofsuch date, $ 19.1 million of these commitments had been used for bank borrowings, $ 14.8 million supported outstanding commercial paper and $241.8 millionwas available either to support the issuance ofadditional commercial paper or to be used for additional bank borrowings. The Company believes its credit commitments are, sufficient to meet the Company's liquidityrequirements. The Company may also raise external capital, upon NMPSC approval, by issuing common stock and, provided certain tests specified in the Company's mortgage indenture and Restated Articles ofIncorporation are met, first mortgage bonds and preferred stock. As ofJanuary 1, 1990, these tests did not restrict the Company's ability to issue additional first mortgage bonds or preferred stock in amounts adequate to fund its planned construction program for 1990 through 1994. The Company's ability to raise external capital and the cost of such funds also depend upon earnings, credit ratings and financial market conditions, among other factors.

In 1989, major rating agencies lowered the Company's securities ratings which could potentially increase the cost ofnew capital. An impact of the downgrading ofcertain of the Company's securities, including lease obligation bonds (which are secured indirectly by an assignment of rentals under leases to be paid by the Company) to below "investment grade", together with covenants in the Company's PVNGS Unit 1 and Unit 2 lease agreements (see PART I, ITEM 1"BUSINESSELECTRIC OPERATIONS Sources of Power

Nuclear Plant"), is to. limit the,Company's ability, without consent of the, owner participants. and bondholders in the lease transactions, (i) to enter into any merger or consolidation, or (ii)except in connection with normal dividend policy, to convey, transfer, lease or dividend more than 5% of its utility assets, including cash, in any single transaction or series of related transactions.

The Company had $ 17.8 million in cash and temporary cash investments at the end of 1989, compared to $ 165.0 million at the end of 1988. The Company reduced its commercial paper outstanding and bank borrowings from $ 144.7 millionas ofDecember 31, 1988 to $33.9 million as ofDecember 31, 1989. In August 1989, the Company redeemed approximately $30 million principal amount of its first mortgage bonds of the 13'/s% series due 1994.

The Company's capital structure at December 31, 1989 consisted of 48.2 percent long-term debt, 3.0 percent preferred stock with mandatory redemption requirements, 3.5 percent preferred stock without mandatory redemption requirements and 45.3 percent common stock equity.

RESULTS OF OPERATIONS Earnings per common share in 1989 were

$ 1.73, compared to a loss of $5.78 in 1988. The loss experienced in 1988 was due primarily to a provision for the estimated loss from the discontinuance of the Company's non-utility operations, a provision for an extraordinary loss on discontinuation of application of regulatory accounting principles regarding certain assets, the write-off of the Company's investment in a proposed coal-fired generating station, the write-off of deferred carrying costs on uncommitted electric generating capacity and one-tinie costs related to a work force reduction. The following discussion highlights significant items which affected the reported earnings in 1989 and 1988, and certain items impacting future earnings.

Continuing Operations Earnings (loss) from continuing operations for the last three years were:

1989 1988 1987 83 million or

$ 1.73 per share (10) million or

$(.50) per share 117 million or

$2.52 per share 26

Electric operating revenues increased

$ 13.1 million in 1989 due primarily to increased energy sales to retail customers of 4.8% and SPS of 2.6%, mostly offset by a 31.1% decrease in energy sales to other contracted wholesale customers as a result of outages at the PVNGS units. The $43.7 million increase'in 1988 was caused primarily by increased sales to wholesale customers. A long-term sales contract with SPS, which contributed $ 109.8 million, $ 100.0 million an'd $91.1 million in revenues in 1989, 1988 and

1987, respectively, expired in December 1989. Sales under th'e SPS contract contributed approximately $ 1.13 to 1989 earnings per share. The Company anticipates that replacement sales willbe at prices substantially lower than the SPS contract price and that the"expiration of the SPS contract willhave a material adverse imp'act on the Company's results of operations in "1990.

Gas operating revenues increased $59.0 millionin 1989 due primarily to inclusion in 1989 ofrevenues of

$46.4 million from Processing Company and Gathering Company. Revenues from these subsidiaries were included in the caption "Other Income and Deductions, net of taxes" in 1988 and 1987. A gas rate increase approved in August 1988 also contributed to the increased revenues for the current period. The increased revenues of $ 13.2 million in 1988 were primarily due to the implementation of the new gas rates in August 1988 and increased therm sales to wholesale customers.

Fuel and purchased power expense increased

$3.3 million in 1989 due mainly to additional purchases of energy and increased coal fuel expense resulting, in part, from the unscheduled outages at PVNGS. The PVNGS units were out 'of service for substantial periods during'1989. Fuel and purchased power expense increased

$ 10.3 million in 1988 due primarily to'n increase in nuclear fuel expenses resulting from the commercial operation of PVNGS Unit 3 in 1988'and higher e'nergy sales.

Gas purchased for resale increased

$32.7 million in 1989 primarily as a result of the inclusion of gas purchase costs of$20.7 millionfrom Gathering Company, whereas such expenses were reflected in the caption "Other Income and Deductions, net of taxes" in'1988'and 1987. In addition, certain ga's processing costs, previously deferred, are now being collected from ratepayers.

Other operation and maintenance expenses increased

$ 11.3 million in 1989.

Included therein are expenses of Processing Company and Gathering Company of $ 16.9 million for 1989, whereas such expenses were refiected in the caption "Other Income and Deductions, net of taxes" in 1988 and 1987. Excluding the expenses of the gas subsidia'ries, other operation and maintenance expenses decreased

$5.6 million in 1989 due primarily to a work-force reduction implemented in August 1988. However, expenses associated with the PVNGS units for 1989 increased

$ 12.1 milliondue primarily to outages at PVNGS and increased Arizona property taxes on the PVNGS units. The Company expects operation and maintenance expenses associated with the PVNGS units to increase in 1990 due to continuing corrective actions taken by APS to meet NRC requirements for operating PVNGS. (See PART I, ITEM 1 "BUSINESSELECTRIC OPERATIONS Sources of PowerNuclear Plant'".) Other operation expenses'ncreased

$ 17.2 million in 1988 due primarily to non-recurring early retirement, severance and other costs related to the work force reduction and due to the commercial operation of PVNGS Unit 3.

Operating income taxes for 1989 increased

$8.7 million. This increase primarily resulted from,a higher pre-tax operating income in 1989."'FUDC (equity and borrowed funds), a non'-cash item, decreased

$2.2 millionand $27.3 millionin 1989 and 1988, respectively.

Decreases are a result of lower average construction work in progress balances resulting largely from the commercial operation of PVNGS Unit 3 in 1988. This low level of"AFUDC is expected to continue into the 1990s, reflecting the planned reduction in utilityconstruction spending..

Pursuant to the NMPSC's order in the inventorying alternatives case, the Company discontinued the deferral of carrying costs on uncommitted electric'enerating capacity.~In 1988, the Company wrote off amounts previously deferred. (See note 11 of the notes to consolidated financial statements.) However, certain carrying costs on the PVNGS 'units may be deferred, starting in 1990, if the phase-in plan filed by the Company in the pending electric rate case is approved by the NMPSC.

27

The Company determined that recovery of its investment in a proposed coal-fired generating station is not probable. Accordingly, project development costs of $38.1 million (net'of income tax benefits) were written offin 1988.

Other, under Other Income and Deductions, net oftaxes, increased

$ 13.0 million in 1989. This increase was primarily due to losses recognized in 1988 primarily as a result of a write-offrelating to the stipulation reached between the NMPSC staff and the Company, which was recently approved by the NMPSC, settling all issues of prudence as they relate to the Company's 10.2% interest in PVNGS Units 1 and 2 (see PART I, ITEM I"BUSINESSRATES AND REGULATIONPVNGS Cost Investigation" ), the write-off of deferred gas processing costs and a provision for other losses.

Interest charges, decreased

$ 10.2 million in 1989, primarily due to a reduction in commercial paper outstanding. The $7.3 million increase in 1988 was a result of increased borrowings through commercial paper.

Discontinuance of Non-UtilityOperations In 1988, the Company made the decision to discontinue the non-utility operations of its subsidiaries and to dispose ofnon-utility properties. (See note 10 ofthe notes to consolidated financial statements.) As a result, the Company made a provision for an estimated after-tax loss of $ 137.8 million on the disposal ofnon-utility assets, including a provision for after-tax operating losses of$29.5 millionfor the operations ofsuch properties prior to their expected disposition. Estimated losses from the disposal of these assets were due primarily to the decrease in value ofsouthwestern real estate holdings and the loss the Company expected to incur on the sale of a fiberboard manufacturing facility.

, Losses from operations of discontinued non-utility operations were $35.8 million for 1988 and $21.7 millionfor 1987. The increased losses were due primarily to poor real estate sales, a provision for coal mining reclamation costs and the write-offof certain coal property investments in 1988.

I!

Extraordinary Item In 1988, the Company wrote off$46.6 million (net of income tax) of costs which it no longer expects to recover through the regulatory process.

CURRENT ISSUES FACING THE COMPANY t

The Company's future financial condition and results of operations may be affected by the factors discussed below.

Regulatory Issues Electric Operations On April 5, 1989, the NMPSC issued an order which, among other things, provides for the inclusion in NMPSC jurisdictional electric rates of the Company's jurisdictional interests in PVNGS Units 1 and 2, 147 MWofSJGS Unit 4 and a power purchase contract with SPS. However, the order excludes from New Mexico jurisdictional rates the Company's 130 MWinterest in PVNGS Unit 3, 130 MWofSJGS Unit 4 and a power purchase contract with M-S-R. (See PART I, ITEM 1

"BUSINESSELECTRIC OPERATIONS Sources of Power and Service Area and Customers and RATES AND REGULATIONAlternative to the Inventorying Methodology".

r The NMPSC order, which has been appealed by two intervenors to the case, provides that the Company's jurisdictional interest in 147 MW of SJGS Unit 4 willbe immediately included in rates effective the date the NMPSC issues its final order in the, rate case. The NMPSC order also provides that the rate case willconsider (i) whether recovery ofthe Company's jurisdictional investment in PVNGS Units 1 and 2 should 28

start immediately or whether such recovery should be phased in over a period of time, (ii) whether there should be a full and immediate return on PVNGS Units 1, and 2 or whether all or a portion of the return on such investment should be disallowed for some period of time and (iii)any other appropriate, rate treatment of these units.

The April 1989 order did not affect current rates. However, the Company filed a request with the NMPSC in June 1989 pursuant to the April 1989 order to increase its retail electric rates. The proposed rate increase of $ 12.2 million includes, among other things, costs associated with the Company's jurisdictional interest in 147 MW of SJGS Unit 4 and 50% of the Company's interest in PVNGS Units 1 and 2. The remainder ofthe PVNGS Units 1 and 2 costs would be phased into rates and recovered over a ten-year period.

In contrast to the Company's rate request, the NMPSC staff and the New Mexico Attorney General have filed testimony in the case proposing to include immediately in rates all of the Company's interests in generating plants allowed in jurisdictional rates by the April 1989 NMPSC order, while still requesting decreases in rates from current electric rate levels.

On March 8, 1990, a NMPSC hearing examiner recommended that the NMPSC order an annual rate reduction of $6.2 million with PVNGS Units 1 and 2 fullyincluded in such rates. The recommended decision also provided that as long as the Company has jurisdictional excess capacity, a full return on the Company's investment in PVNGS Units 1 and 2 cannot be guaranteed.

(See PART I, ITEM 1"BUSINESSRATES AND REGULATIONElectric Rate Case".) The recommended decision, ifapproved by the NMPSC as written, would have a significant adverse impact on the Company's future results of operations and would result in an after-tax write-offof approximately $ 19 million. The Company has filed with the NMPSC its response to challenge the hearing examiner's recommended decision. The NMPSC is expected to issue a final order in the current electric rate case in April 1990 The Wholesale Power Market k'he Company is dependent primarily on the wholesale market for the ultimate recovery ofits investment in capacity excluded from New Mexico jurisdictional rates. The Company considers its potential market for wholesale power sales to be generally defined by those entities interconnected within'he WSCC. The Company's ability to market its uncommitted capacity is under pressure as a result of limited transmission availability and abundant alternative short-term energy resources from competitors. However, the Company believes that its investment in excluded resources willbe recovered over the life of the facilities.

7 The Company's ability to sell its power within the WSCC has been enhanced for short-term sales by the WSPP experiment, which was authorized by FERC in 1987 for,a two-year duration. The WSPP has allowed for market level pricing and negotiated transactions for transmission services. The WSPP is scheduled to expire on May 1, 1990, but its participants have requested a two-year extension. Technical limitations and jurisdictional service concerns of other utilities in the WSCC have made and are making long-term transmission service commitments difiicult to obtain. Environmental, technical and economic constraints combine to make the construction of new transmission facilities also difficult. However, the Company continues to believe that long-term transmission capacity can be secured through contractual arrangements with others and selected transmission construction projects. Price competition in this market is expected to continue to be intense due to the availability of surplus capacity from other utilities, projected low prices for oil and gas and the existence ofcogeneration, independent power producers and self-generation as competing energy sources. In addition, continuing utilitymerger activity in the WSCC may, the Company believes, add to the difficulty in obtaining deliverability for its power and reduce the market. for the Company's uncommitted capacity. The Company's market assessments indicate that other southwestern and western utilities willhave increasing capacity and energy requirements in the 1990s. However, the Company projects that the current soft wholesale power market willcontinue into the mid-1990s and that, as a result, there will continue to be downward pressure on near-term wholesale power prices.

29

The Retail Electric Market

~ 'g The Company's electric service franchise with the City of Albuquerque, covering an area which contributed 43.7% of the Company's 1989 electric revenues, expires in early 1992. In a municipal election held on November 1, 1989, voters approved an amendment to the charter of the City of Albuquerque that provides that the city has no power to grant or extend any franchises, licenses or other rights to provide electricity to the public or to wholesalers unless the franchise, license or right'as been'warded by competitive bid to the lowest cost suppliers. The amendment allows the grant ofmultiple franchises, licenses or rights for all or part of the City and also provides that the total term ofany franchise, license or right will not exceed 25 years. The City of Albuquerque has selected a consultant to study alternatives available to it, including municipalization of the Company's distribution system, the viabilityof other alternatives, and the methods that may be available to the City to implement the recent charter amendment. While the Company

. cannot predict the ultimate outcome of the franchise renewal issue, the'Company is actively pursuing the renewal of the franchise prior to its expiration. Furthermore, the Company, as necessary,'ill take vigorous action to protect the Company's ownership in the distribution system of the City franchise area.

In furtherance of that effort, the Company petitioned the United States District Court for the District of New Mexico on January, 5, 1990 for a declaratory judgment confirming the Company's ownership of the electric distribution system it has constructed on public rights-of-way.

In December 1989, KirtlandiAirForce Base, the Company's largest retail customer, representing 3.3%

of total 1989 electric revenues, signed a long-term retail service contract with the Company.

Natural Gas Issues GCNM and Gathering Company have long-term contracts for gas supplies generally sufficient to meet GCNM's peak-day demand.

However, these long-term contracts, which generally'predate the Company's acquisition of GCNM and Gathering Company, obligate GCNM and Gathering Company to take volumes of gas in excess of their annual demand. In recent years, GCNM has obtained new gas supplies through contracts that contain no take-or-pay provisions and GCNM and Gathering Company have also reriegotiated a significant portion oftheir long-term contracts. These reformed contracts contain provisions that (a) greatly reduce GCNM's and Gathering Company's take-or-pay requirements and allow GCNM and Gathering Company (without penalty) not to purchase gas during the off-peak seasons; or (b) have no take-or-pay requirements.

Approximately 50% of GCNM's gas supplies now come from contracts entered into or reformed since the Company's acquisition of GCNM and Gathering Company.

f 0

J GCNM and Gathering Company are continuing to dispute claims by certain natural gas producers relating to contract pricing, take-or-pay obligations and other matters, some of which are, or have been, the subject of litigation. In July 1989 and March 1990, the Company and Gathering Company settled certain natural gas litigation for amounts that were significant, but substantially lower than claimed by the producers.

(See PART I, ITEM 3"LEGALPROCEEDINGSNATURALGAS CONTRACTS LITIGATION".)

In each settlement, "GCNM and Gathering Company obtained reformed gas purchase contracts as described above.

P k

The NMPSC issued an order in December 1989, which allows GCNM and Gathering Company, among other things, to recover a substantial portion of take-or-pay assessments and other litigation and contract reformation costs from GCNM's customers.

(See PART I, ITEM 1

"BUSINESS

'RATES AND REGULATIONNatural Gas Operations".) In addition, Gathering Company settled for a substantial amount a claim it filed against a party who, the Company believes, contributed to the Company's liability.A provision for losses arising from natural gas contract disputes was made in 1988. In 1989, the Company made an adjustment to the provision reflecting the Company's further evaluation ofclaims by natural gas producers.

Based on settlements to date, the amounts it believes are recoverable under the December 1989 NMPSC or'der and the provisions made through 1989, the Company currently believes it is unlikely that remaining disput'es with natural gas producers willhave a material adverse impact on the Company's future financial condition'r results of operations.

II 30

ITEM 8:

FINANCIALSTATEMENTS "ANDSUPPLEMENTARY DATA INDEX Management's Responsibility for Financial Statements; Independent Auditors'eport Financial Statements:

Consolidated Statement of Earnings (Loss).

Consolidated Statement of Retained Earnings (Deficit).

Consolidated Balance Sheet Consolidated Statement of Cash Flows..........

Consolidated Statement of Capitalization Notes to Consolidated Financial Statements Supplementary Data:

Consolidated Financial Statement Schedules.

Quarterly Operating Results

'omparative Operating Statistics Page 31 32 33 34 35 36 37 38 53 61 62 r

MANAGEMENT'SRESPONSIBILITY FOR FINANCIALSTATEMENTS I

The management of Public Service Company of New Mexico is responsible for the preparation and presentation of the accompanying consolidated financial statements.

The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include amounts that are based on informed estimates and judgments of management.

Management maintains a system of internal accounting controls which it believes is adequate to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with management authorization and the financial records are reliable for,preparing the consolidated financial statements. The system of internal accounting controls is supported by written policies and procedures, by a staff of internal auditors who conduct comprehensive internal audits and by the selection and training of qualified personnel.

The Board of Directors, through its Audit Committee comprised entirely of outside directors, meets periodically with management, internal auditors and the Company's independent auditors to discuss auditing, internal control and financial reporting matters. To ensure their independence, both the internal auditors and independent auditors have full and free access to the Audit Committee.

The independent auditors, KPMG Peat Marwick, are engaged to audit the Company's consolidated financial statements in accordance with generally accepted auditing standards.

31

"INDEPENDENTAUDITORS'EPORT The Board of Directors and Stockholders Public Service Company of New Mexico:

We have audited the consolidated financial statements of Public Service Company of New Mexico and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management.

Our responsibility is to express an'opinion on these consolidated financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing standards.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

An audit also includes, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial presentation.

We believe that our audits provide a reasonable basis, for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material

respects, the financial position of Public Service Company of New Mexico and subsidiaries at December 31, 1989 and 1988, and the results oftheir operations and their cash fiows for each of the years in the three-year period ended December 31, 1989, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in note 11 to the consolidated financial statements, an uncertainty exists with respect to the Company's pending electric rate case.

The ultimate outcome of this matter cannot presently be determined. Accordingly, no provision for any loss that may ultimately be required upon resolution of this matter has been made in the accompanying consolidated financial statements.

's discussed in note 1 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1989.

KPMG PEAT MARWICK Albuquerque, New Mexico March 16, 1990 32

PUBLIC SERVICE COMPANY'OF NEW MEXICOAND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (LOSS)

Year Ended December 31, 1989 1988 1987 (In thousands except per share amounts)

Operating Revenues:

Electric......

Gas (note 1)

Water.

Total operating revenues Operating Expenses:

Fuel and purchased power.

Gas purchased for resale Other operation expenses Maintenance and repairs Depreciation and amortization Taxes, other than income taxes Income taxes (note 4)

Total operating expenses

'I Operating income Other Income and Deductions, net of taxes (note 4):

Allowance for equity funds used during construction.........

Deferred carrying costs on uncommitted electric generating capacity (note 11)

Write-offof proposed generating station (note 6)............

Other Net other income and deductions

'ncome before interest charges Interest Charges:

Interest on long-term debt Other interest charges.

Allowance for borrowed funds used during construction......

Net interest charges Earnings (Loss) from Continuing Operations.................

Discontinued Operations, net of tax (note 10):

Loss from operations of non-utility operations..............

Estimated loss on disposal ofnon-utility operations, including provision for operating losses during the phase-out period..

Earnings (Loss) before Extraordinary Item Extraordinary Item loss on discontinuation of application of regulatory accounting principles regarding certam assets, net of tax (note 11)

Net Earnings (Loss)

Preferred Stock Dividend Requirements Net Earnings (Loss) Available for Common Stock.............

Average Number of Common Shares Outstanding.............

Earnings (Loss) per Share of Common Stock:

Earmngs (loss) from continuing operations.................

Loss from discontinued operations Estimated loss on disposal of non-utility operations..........

Earnings (loss) before extraordinary item Extraordinary item Net Earnings (Loss)

Dividends Paid per Share of Common Stock.

$620,381 282,827 12,102

$ 607,317 223,791 10,816

$563,617 210,634 10,973 915,310 841,924 785,224 155,279 155,232 268,826 50,755 71,981 34,043 25,958 152,017 122,575 261,687 46,568 66,920 34,823 17,268 141,766

" 116,202 244,467 43,501 60,264 31,683 14,990 762,074 153,236 701,858 652,873 140,066 132,351 2,909 2,392 5,301 4,658 20,234 10,634 (64,314) 26,690 13,069 18,175 57,934 158,537 75,752 190,285 71,572 6,283 (1,911) 75,944 82,593 82,593 82,593 10,456 81,775 6,329 (2,410) 85,694 (9,942)

(35,826)

(137,773)

(183,541)

(46,596)

(230,137) 11,117 67,573 13,222 (7,631) 73,164 117,121 (21,732) 95,389 95,389 11,935

$ 72,137

$ (241,254)

$ 83,454 41,774 41,761 41,647 1.73 2.52

( 52) 1.73 (1.12) 1.73 (5.78) 2.00

.38 1.87 2.92 See accompanying notes to consolidated financial statements.

33

PUBLIC SERVICE COMPANY OF NEW MEXICO ANDSUBSIDIARIES CONSOLIDATEDSTATEMENT, OF RETAINEDEARNINGS (DEFICIT)

Balance at Beginning ofYear Elimination ofdeficit through quasi-reorganization of equity accounts (note 2)

Net Earnings (Loss)

Dividends:

Cumulative preferred stock

" Common stock Balance at End ofYear 144,004 82,593 (10,456)

(15,874) 56,263 (230,137) 95,389 (11,117)

(11,935)

(78,087)

(121,533)

$(144,004)

$ 175,337 Year Ended December 31, 1989 1988 1987 ttn thousands)

$(144,004)

$ 175,337

$ 213,416 See accompanying notes to consolidated financial statements.

34

PUBLIC SERVICE COMPANY OF NEW MEXICOANDSUBSIDIARIES CONSOLIDATED BALANCESHEET ASSETS UtilityPlant, at Original Cost (notes 2, 6, and 11):

Electric plant in service Gas plant in service Water plant in service Common plant in service Plant held for future use

, Less accumulated depreciation and amortization I

Construction work in progress....

Nuclear fuel, net of accumulated amortization Net utilityplant Other Property and Investments:

Non-utility property, at cost, net of accumulated depreciation, partially pledged....

Other investments, at cost Total other property and investments Current Assets:,

Cash Temporary investments, at'ost Receivables.,

Income taxes receivable Fuel, materials and supplies, at average cost Gas in underground storage, at weighted average cost Prepaid expenses Total current assets Deferred Charges (note 4)

CAPITALIZATIONAND LIABILITIES Capitalization (note 2}:

Common stock equity:

Common stock outstanding 41,774,083 shares

. Additional paid-in capital.

Retained earnings (deficit)

Retained earnings since January 1, 1989.

Total common stock equity Cumulative preferr'ed stock without mandatory redemption requirements..

Cumulative preferred stock with mandatory redemption requirements.....

Long-term debt, less current maturities Total capitalization Current Liabilities:

Short-term debt (note 3)

Accounts payable Current maturities of long-term debt (note 2)

Accrued interest and taxes

'ther current liabilities.

Total current liabilities Deferred Credits (note 4):

Accumulated deferred investment tax credits.

Accumulated deferred income taxes Other deferred credits.

Total deferred credits...

Commitments and Contingencies (notes 6 through 11)

See accompanying notes to consolidated financial statements.

December 31, 1989 1988 (In thousands)

$ 1,920,545 426,666 48,901 46,579 16,782 2,459,473 652,890 1,806,583 67,981 57,281 1,931,845 12,601 19,327 31,928 6,660 11,130 119,139 37,024 49,642 11,700 7,101 242,396 180,836

$2,387,005

$ 1,864,136 358,531 43,686 41,528 21,975 2,329,856 568,661 1,761,195 72,401 51,347 1,884,943 62,997 7,709 70,706 1,379 163,648 119,308 62,689 11,590 13,905 372,519 64,581

$2,392,749 208,870 487,465 56,263 752,598 59,000 49,268 801,706 1,662,572 33,880 150,203

'12,324 31,143 41,164 268,714 123,558 139,756 192,405 455,719 208,870 688,392 (144,004) 753,258 "59,000 55,242 980,767 1,848,267 136,553 33,517 11,612 54,192 235,874 130,033 70,836 107,739 308,608

$2,387,005

$2,392,749 35

PUBLIC SERVICE COMPANYOF NEW MEXICOANDSUBSIDIARIES CONSOLIDATEDSTATEMENT OF CASH FLOWS Year Ended December 31, 1989 1988 1987 (In thousands) m operating g capacity..

Supplemental Cash Flow Disclosures:

, Interest paid.

Income taxes paid (refunded)

Cash consists of currency on hand and demand deposits.

Cash Flows from Operating Activities:

Net earnings (loss),.

Adjustments to reconcile net earnings (loss) to net cash flows fro activities:

Depreciation and amortization Allowance for equity funds used during construction....'

Deferred carrying costs on uncommitted electric generatin Accumulated deferred investment tax credit Accumulated deferred income tax Write offof proposed generating station Loss from extraordinary item Provision for other losses Changes in certain assets and liabilities:

Receivables Fuel, materials and supplies Net assets of discontinued operations Deferred charges Accounts payable Accrued interest and taxes Other current liabilities.

Other, net...

Net cash flows from operating activities.

Cash Flows from Investing Activities:

Utilityplant additions Other property additions Other property sales Temporary investments, net.......

Net cash flows from investing activities Cash Flows from Financing Activities:

Proceeds from issuance of common stock Redemptions and repurchases of preferred stock.

Proceeds from long-term debt Repayments of long-term debt Net increase (decrease) in short-term debt "Dividends paid.

Net cash flows from financing activities

'Increase (Decrease) in Cash Cash at Beginning of Year.

Cash at End of Year 80,286 (2,909)

(6,475) 42,254 (38,000) 15,878, (32,993)

(5,020) 23,361 (16,201)

(10,281) 91,087 (4,658) 20,234 (20,142)

(67,963) 50,970 53,504 38,452 (17,779)

(10,760) 180,069 10,548 31,464 6,904 16,315

',420 71,859 (26,690)

(13,069)

(34,713) 8,675

, 5,000 (15,137)

(3,691)

(9,121) 25,877 (26,369)

(8,800) 4,202 132,493 154,528 73,412 (74,088)

(12,081) 7,560 152,877 (86,549)

'7,701)

'9,729 42,482 (93,411)

(3,015) 4,951 30,914

,, 74,268 (42,039)

(60,561)

(5,510) 3,043 (206,170) 33,880 (26,723)

(201,480) 5,281 1,379 6,660 682 (5,257) 50,195 (66,468)

(3,000)

, (89,524)

(113,372)

, (883)

. 2,262 1,379 14,619 (5,606) 56,302 (83;321) 135,500 (132,698)

(15,204)

(2,353) 4,615 2,262 86,444

$ 101,179

$ 89,963 12,397 (9,842)

$ 48,604 82,593

$(230,137)

$ 95,389

'ee accompanying notes to consolidated financial statements.

36

PUBLIC SERVICE COMPANY OF NEW MEXICOANDSUBSIDIARIES CONSOLIDATEDSTATEMENTOF CAPITALIZATION December 31, 1989 1988 tin thousands)

Common Stock Equity (note 2):

Common stock, par value $5 per share Additional paid-in capital Retained earnings (deficit).

Retained earnings since January 1, 1989 Total common stock equity.

Shares Outstanding Current Stated at December 31, Redemption Value 1989 Price 208,870 208,870 487,465 688,392 (144,004) 56,263 752,598 753,258 Cumulative Preferred Stock (note 2):

Without mandatory redemption requirements:

1965 Series, 4.58%...... 4.............

8.48% Series,,....

8,80% Series

$ 100 100.

, 100 130,000

$ 102.00 13,000 13,000 200,000 103.00 20,000 20,000 260,000 103.10 26,000 26,000 590,000 59,000 59,000 With mandatory redemption requirements:

8.75% Series 12.52% Series

'Redeemable within one year 100 50 299,177 440.020 739,197 49,837 689,360 102.90 29,918 31,241 22,001 26,334 51,919 57,575 2,651 2,333 49,268 55,242 Long-Term Debt (note 2):

Issue and Final Maturtty First mortgage bonds:

1989 through 1994 1995 through 1999 2000 through 2004 2005 through 2009 2010 through 2013 1993 through 2013pollution control series, securing pollution control revenue bonds......

Total first mortgage bonds Pollution control revenue bonds:

2003 through 2013 2009 Short-term debt expected to be refinanced (note 3)..

Other, including unamortized premium and discount Total long-term debt Current maturities.

Long-term debt, less current maturities.......

Total Capitalization.

Interest Rates 4 /s% to 13 /s%

5~/s% to 7'/4%

7t/z% to 10t/s%

8 /s% to 9 /s%

127/s%

5.9% to 103/4%

10% to 10'/4%

variable rate 8,655 28,417 79,251 109,254 1,716 38,677 29,205 79,598 110,642 2,366 437,045 437,045 664,338 697,533 100,000 100,000 37 300 '7 300 144,678 12,392 814,030 12,324 34,773 1,014,284 33,517 801,706 980,767

$ 1,662,572

$ 1,848,267 See accompanying notes to consolidated financial statements.

37

PUBLIC SERVICE COMPANY OF NEW MEKICOANDSUBSIDIARIES NOTES TO CONSOLIDATEDFINANCIA'LSTATEMENTS December 31, 1989, 1988 and 1987 (1) Summary of Significant Accounting Policies Principles ofConsolidation The consolidated financial statements'include the accounts of the Company and subsidiaries in which it owns a majority voting interest. To the extent the operations of the Company's subsidiaries have been discontinued (see note 10), all amounts have been segregated in the accompanying financial statements as discontinued operations. Allsignficant intercompany transactions and balances have been eliminated.

UtilityPlant Utilityplant is stated at original cost, which includes payroll-related costs such as taxes, pension and other fringe benefits, administrative costs and an allowance for funds used during construction. Utilityplant includes certain electric assets not subject to NMPSC regulation. The operations of such electric assets are included in operating income. (See note 11).'t is Company policy to charge repairs and minor replacements ofproperty to maintenance expense and to charge major replacements to utilityplant. Gains or losses resulting from retirements or other dispositions of operating property in the normal course of business are credited or charged to the accumulated provision for depreciation.

Depreciation and Amortization Provision for depreciation ofutilityplant is made at annual straight-line rates approved, by the NMPSC.

The average depreciation rates used are as follows:

1989" 2.87%

3.11%

2.78%

9.54%

1987 1988 3.06%

2.97%

2.25%

8.62%

Electric plant 3.14%

Gas plant 3.11%

Water plant 2.14%

Common plant 9.10%

The provision for depreciation of certain equipment is charged to"clearing'accounts and subsequently allocated to operating expenses or construction projects based on'he use of the equipment.

Depreciation of non-utility property is computed on the straight-line method. Amortization of nuclear fuel is computed based on the units of production method.

Allowance for Funds Used During Construction ("AFUDC")

As provided by the uniform systems of accounts, AFUDC, a noncash item, is charged to utility plant.

AFUDC represents the cost ofborrowed funds (allowance for borrowed funds used during construction) and a return on other funds (allowance for equity funds used during construction). The Company capitalizes AFUDC on construction work in progress and nuclear fuel in the process ofenrichment to the extent allowed by regulatory commissions.

System ofAccounts The Company maintains its accounts for utility operations primarily, in accordance with the uniform systems of accounts prescribed by the Federal Energy Regulatory Commission ("FERC") and the National Association of Regulatory Utility Commissioners and adopted by the New Mexico Public Service Commission ("NMPSC"). As a result of the ratemaking

process, the application of generally accepted accounting principles by the Company differs in certain respects from the application by non-regulated businesses.

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

38

PUBLIC SERVICE COMPANY OF NEW MEXICOANDSUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS Continued AFUDC is computed using the maximum rate permitted by the FERC. Beginning in 1989, the Company converted from an after-tax rate,to a pre-tax rate in order to comply with the requirements of Statement of Financial Accounting Standards ("SFAS") No. 96, Accounting for Income Taxes issued by the Financial Accounting Standards Board ("FASB").The rates used were 10.94%, 8.37% and 9.06% for 1989, 1988 and 1987, respectively, compounded semi-annually.,

Deferred Cariying Costs on Uncommitted Electric Generating Capacity A substantial portion of the Company's generating capacity was treated as inventoried capacity under the inventorying methodology.

Inventorying is an electric ratemaking methodology designed to move incremental base load plant into New Mexico jurisdictional rate base in conjunction with increased New Mexico jurisdictional load. The inventorying methodology allowed the Company to defer (and to record as non-cash earnings) certain carrying charges associated with inventoried plant, although the Company remained at risk for significant amounts ofdepreciatio'n, property taxes and lease costs not recovered through off-s'stem sales.

In 1987, the FASB issued SFAS No. 92, Regulated Enterprises Accounting for Phase-in Plans, as an amendment to SFAS No. 71, Accountingfor the Effects ofCertain Types ofRegulation. SFAS No. 92 required the Company to obtain NMPSC approval of modifications or alternatives to the Company's inventorying methodology to allow the full recovery'f deferred carrying costs within ten years from the date of such NMPSC approval.'he NMPSC order,:issued April 5, 1989, in the inventorying alternatives case did not provide for the recovery of deferred carrying costs pursuant to SFAS No. 92. Accordingly, the Company discontinued the inventorying methodology and wrote off, in 1988, amounts previously deferred. (See note 11.)

Fuel, Purchased Power and Gas Purchase Costs Economy sales and other near-term energy delivery transactions by the electric utility are shown as a reduction of fuel and purchased power expenses.

The Company uses the deferral method of accounting for the portion of fuel, net purchased power and gas purchase costs which are reflected in subsequent periods under fuel and purchased power clauses and gas adjustment clauses. Future recovery of these costs is based on orders issued'by the regulatory commissions.

II t

Amortization ofDebt Discount, Premium and Expense Discount, premium and expense related to the issuance and retirement of long-term debt are amortized over the lives of the respective issues.

Income Taxes Certain revenue and expense items in the consolidated statement of earnings (loss) are recorded for financial reporting purposes in a year different from the year in which they are reported for income tax purposes.

For ratemaking purposes, customers are charged currently for the tax effects of certain of these differences (normalization). However, the income tax effects of certain other differences result in reductions ofincome tax expense for ratemaking purposes in the current year as required by the NMPSC (fiow-through).

This fiow-through method is used primarily for certain capitalized start-up and pre-operational costs at Palo Verde Nuclear Generating Station ("PVNGS"), premiums on retirement of first mortgage bonds, losses on hedging transactions, accelerated amortization of pollution control facilities and for minor differences between book and tax depreciation. The recommended decision of the hearing examiner in the electric rate case (see note

11) seeks to reverse the Qow-through treatment previously accorded the premiums on retirement of first mortgage bonds and losses on hedging transactions and to retroactively require tax normalization of these items.

39

PUBLICSERVICE COMPANY OF NEW MEXICOANDSUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTSContinued Prior to 1989, in accordance with generally accepted accounting principles, deferred income taxes were provided to the extent allowed for ratemaking purposes through normalization. In addition, rates subject to FERC jurisdiction allow recovery of amounts necessary to provide additional tax normalization of the differences described above which are treated in ratemaking under the flow-through method for other customers.

Provision was made in prior years for additional deferred income taxes attributable to amounts collected under these rates. Deferred income taxes were also provided on all non-permanent differences between book and taxable income attributable to non-utility operations.

r Effective January 1, 1989, the Company adopted SFAS No. 96, which prescribes a new accounting standard for income taxes. SFAS No. 96 retains the requirement that deferred income taxes be recorded to refiect tax normalization. Additionally, it requires that such deferrals be recorded using the liabilitymethod.

Under this method, deferred tax liabilities are computed using the enacted tax rates scheduled to be in effect when the differences reverse. For regulated operations, any changes in tax rates applied to accumulated deferred income taxes may not be immediately recognized because of ratemaking and tax accounting provisions contained in the Tax Reform Act of 1986. For items accorded flow-through treatment under NMPSC orders, deferred income taxes and the future ratemaking efi'ects of such

taxes, as well as corresponding regulatory assets and liabilities, are recorded as required by SFAS No. 96. The adoption of SFAS No. 96 had no material impact upon 1989 operating results.

The Company defers investment tax credits related to utility assets and amortizes them over the estimated useful lives of those assets.

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

Gas Operations Due to a change in the regulatory treatment of two of the Company's subsidiaries engaged in the gathering and processing of natural gas, beginning in 1989, these activities are considered, for accounting

purposes, as utility operations in the consolidated financial statements.

Accordingly, the utility portion of their results of operations and property are reflected in operating income and utility plant, respectively, whereas such items had previously been included in other income and deductions and non-utility property, respectively.

40

PUBLIC SERVICE COMPANY OF NEW MEXICOANDSUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTSContinued (2) Capitalization Changes in common stock, additional paid-in capital and cumulative preferred stock are as follows:

Cumulative Preferred Stock Number of Shares Aggregate Par Value Common Stock Without Mandatory Redemption Requirements Additional Number Aggregate Paid-In of Stated Capital Shares Value (Dollars In thousands)

Number of Shares Aggregate Stated Value Ivith Mandatory Redemption Requirements Balance at December 31, 1986..........

Stock Plans Redemption ofpreferred stock...'....

Redeemable within one year.........

Balance at December 31, 1987.....'.....

Stock Plans Redemption of preferred stock.......

Redeemable within one year.........

Balance at December 31, 1988..........

Quasi-reorganization ofequity accounts:

Elimination of deticit in retained earnings..................

Adoption ofSFAS No. 96.........

Other adjustments..........:.....

Redemption ofpreferred stock.......

Redeemable within one year.........

Balance at December 31, 1989.......'...

41,313,358 420,146

$206,567 2,101

$675,353 12,518 28 41,733,504 40,579 208,668 202 687,899 436 57 41,774,083 208,870 688,392 (144,004)

(32,302)

(24,767) 146 41,774,083

$208,870

'487,465 590,000 59,000 590,000 59,000 590,000

$ 59,000 590,000

$ 59,000 988,140 (53,008)

(46,660) 888,472 (49,383)

(46,660) 792,429

$ 66,147 (3;301)

(2,333) 60,513 (2,938)

(2,333) 55,242 (53,232)

(3,323)

(49,837)

(2,651) 689,360

$ 49,268 Quasi-Reorganization On May 4, 1989, the Company's board of directors adopted a resolution approving elimination of the Company's deficit in retained earnings through a quasi-reorganization effective January 1, 1989. The quasi-reorganization resulted in the transfer of a portion of additional paid-in capital to retained earnings to eliminate the $ 144.0 million deficit in retained earnings and set the retained earnings balance to zero as of January 1, 1989.

In implementing the quasi-reorganization, the Company adopted SFAS No. 96. Such adoption resulted in a direct charge to additional paid-in capital of $32.3 million which represents the cumulative effect of applying SFAS No. 96. This amount relates primarily to deferred income taxes accrued under SFAS No. 96 for utility plant assets excluded from New Mexico jurisdictional electric rate base in an order issued by the NMPSC on April 5, 1989. (See note 11.)

The Company also evaluated other assets and liabilities recorded as of January 1, 1989 for the purpose of adjusting such assets and liabilities to fair value. Adjustments have been made based on further evaluation of discontinued operations, provisions for settlements of gas purchase contract disputes, abandoned

assets, regulatory adjustments and the income tax effects thereof totaling approximately $24.8 million. Such amounts have been recorded as a charge to additional paid-in capital.

41

PUBLIC SERVICE COMPANY OF NEW MEXICO ANDSUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTSContinued Common Stock 1

The number of authorized shares of common stock with par value of $5 per share is 80 million shares.

Prior to 1989, the Company periodically issued common stock for the Shareholder's Dividend Reinvestment Plan, the Employee Stock Purchase Plan, the Master Employee Savings Plans and the Consumer Stock Plan

("Stock Plans" ). The board ofdirectors ofthe Company terminated the Shareholder's Dividend Reinvestment Plan, the Employee Stock Purchase Plan and the Consumer Stock Plan as of September 1, 1988.

, The payment of cash dividends on the common stock of the Company is subject to certain restrictions, including those contained in the Company's mortgage indenture, which effectively prevent the payment of dividends on common stock'unless the Company has retained earnings.

In April 1989, the Company announced the suspension of dividend payments on the Company's common stock as a result of the deficit in retained earnings as of December 31,,1988.

Although the implementation of the Company's quasi-reorganization, effective as ofJanuary 1, 1989, eliminated the retained earnings deficit, the Company's board of directors has not declared dividends on its common stock since January 1989. The board of directors reviews its dividend policy on a continuing basis. The payment of future dividends is dependent upon earnings, the financial condition of the Company, market requirements and other factors.

Cumulative Preferred Stock The number of authorized shares of cumulative"preferred stock is 10 million shares The Company, upon 30 days notice, may redeem the cumulative preferred stock at stated redemption prices plus accrued and unpaid dividends. Redemption prices are at reduced premiums in future years. No redemptions for the 12.52% Series may be made prior to October 15, 1991, except for the use ofsinking fund and optional redemptions.

Mandatory redemption requirements for 1990 through 1994 are $2.7 million, $3.6 million, $3.6 million,

$3.6 million and $3.6 million, respectively.

In 1989, 1988 and 1987, the Company redeemed or purchased approximately $5.7 million, $5.3 million and $ 11.4 million, respectively, of the Company's cumulative preferred stock.

Long-Term Debt Substantially all utility plant is pledged to secure the Company's first mortgage bonds. A portion of certain series of long-term debt willbe redeemed serially prior to their due dates. The aggregate amounts (in thousands) of maturities through 1994 on long-term debt outstanding at December 31, 1989, are as follows:

1990 1991 1992 1993 1994

$ 12,324

$ 13,005 2,402'

$ 11,200 2,220 (3) Short-Term Debt The Company's interim financing requirements are.met through the issuance of commercial paper and notes payable to banks. As of December 31, 1989, the Company had credit commitments from various banks totaling approximately $275.7 million. As of such date, $ 19.1 million of these commitments had been used for bank borrowings, $ 14.8 millionsupported outstanding commercial paper and $241.8 million was available 42

PUBLIC SERVICE COMPANY OF NEW MEXICOANDSUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS Continued either to support the issuance of additional commercial paper or to be used for additional bank borrowings.

The Company generally pays commitment fees or maintains cash balances on deposit with banks to assure availability ofits credit commitments. These commitments consist ofboth lines ofcredit and revolving credit agreements ranging in duration from one to three years.

Effective February 1, 1988, certain bank loans and commercial paper were classified as long-term debt consistent with underlying credit agreements and the Company's intention to maintain this debt for more than 12 months. At December 31, 1988, $ 144.4 millionof commercial paper and $.3 millionof notes payable to banks were classified as long-term. Since June 30, 1989, such commercial paper and notes payable.to banks have been classified as short-term debt consistent with management's current intent not to refinance the commercial paper and notes payable to banks by existing long-term credit arrangements.

Current Federal income tax.

Current State income tax Deferred Federal income tax.

Deferred State income tax Investment tax credit utilized and deferred Amortization of accumulated investment tax credits (4) Income Taxes Income takes included in earnings (loss) from continuing operations consist ofthe followingcomponents:

1989 1988 1987 (In thousands)

$ 5,425 7,432

$26,683 (920) 1,521 1,777 26,852 (8,983) 2,959 6,669 (916) 1,540 (333)

(3,329)

(6,475),

(6,383)

(5,367)

, Total income taxes

$31,551

$ (7,662)

$24,263 Charged to operating expenses Charged (credited) to other income and deductions Total income taxes

$25,958

$ 17,268 5,593 (24,930)

$31,551

$ (7,662i

$ 14,990 9,273

$24,263 The Company's provision for income taxes from continuing operations, exclusive ofextraordinary items, was less than the Federal income tax computed at the statutory rate for each of the years shown. The differences are attributable to the following factors:

1989 1988 (In thousands) 1987 Federal income tax at statutory rate of 34% for 1989 and 1988 and 40% for 1987.

Allowance for funds used during construction Deferred carrying costs on uncommitted electric generating capacity Investment tax credits PVNGS start-up and pre-operational costs.

Depreciation of flow-through items Gains on the sale and leaseback of PVNGS Amortization of pollution control facilities.

'Reversal of permanent differences resulting from write-offof proposed generating station State income tax, Tax rate differential on capital loss carryback Other.

Total income taxes

$38,809 (989)

(6,475)

(3,354) 1,079 (960)

(1,533) 3,855 2,197 (1,07&)

$31,551

$ (5,986)

(2,403)

',879 (6,383)

(3,836) 2,971 (907)

(1,528)

$56,554 (13,728)

(5,228)

(5,367)

(7,582) 1,631 (1,193)

(1,766) 6,234

,(215) 2,410 (2,488)

(1,468)

$ (7,662)

$24,263 43

PUBLICSERVICE COMPANY OF NEW MEXICOANDSUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTSContinued (5) Employee and Post-Employment Benefits Pension Plan The Company and its subsidiaries have a pension plan covering substantially all of their employees, including officers. The plan is non-contributory and provides for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Company and their compensation rates near retirement. The Company's policy is to fund actuarially-determined contributions. Contributions to the plan reflect benefits attributed to employees'ears of service to date and also for services expected to be provided in the future. Plan assets primarily consist of common stock, fixed income securities (primarily United States government obligations), cash equivalents and real estate.

In 1988, the Company reduced its work-force by 799 positions in a program that included early retirements, voluntary and involuntary separation packages and layoffs. The effect of this reduction on pension costs is refiected in the table below.

The components of pension cost (in thousands) are as follows:

1987 6,598 10,965 (10,432)

(1,356) 1989 4,165 12,191 (25,360) 9,810 806 1988 4,338 10,634 (14,088) 172 1,056 9,036 (1,819) 8,273

,Service cost Interest cost Actual return on plan assets...

Other.

5,775 Net periodic pension cost Termination loss Curtailment gain Total pension cost 5,775 806 Deferred income taxes result from certain differences between the recognition ofincome and expense for tax and financial reporting purposes, as described in note 1. The major. sources of these differences for which deferred taxes have been provided and the tax effects of each are as follows:

1989 1988 1987 (In thousands)

Deferred fuel costs

$ 4,366 8,160

$ 2,968 Depreciation and cost recovery.

19,504

" 16,985 9,299 Pension cost 1,233 (1,067) 2,636 Contributions in aid of construction.

(1,776)

(4,113)

(4,903)

Advance lease payments 14,710 '44 828 Unbilled revenues (1,880)

(2,486)

(2,689)

Alternative minimum tax in excess of regular tax.................

(6,548)

(5,132)

(6,709)

Write-offof proposed utilityfacilities.

2p008 (12,865)

Other 1,904 (10,125) 3,069 Total deferred taxes

$33,521

$ (9,899)

$4,499 In addition, the balance of deferred income taxes at December 31, 1989 includes amounts for losses on disposition of assets, premiums on retirement of bonds, deferred gains on sale and leaseback transactions, deferred investment tax credits and regulatory assets and liabilities.

See notes 10 and 11 for income taxes applicable to discontinued operations and extraordinary item."

At December 31, 1989, the Company had net operating loss carryforwards for Federal income tax purposes of $21.4 million and $9.2 million which expire in 2003 and 2004, respectively.

The adoption ofSFAS No. 96 resulted in the establishment ofregulatory assets of$93.8 million, included in deferred charges, and an addition to utility plant of $20.8 million. This adoption also resulted in the establishment of regulatory liabilities of $86.7 million which is included in other deferred credits, and an increase in net deferred income tax liabilities of $58.3 million.

PUBLIC SERVICE COMPANY OF NEW MEXICOAND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTSContinued The following sets forth the plan's funded status and amounts (in thousands) at January I, 1989 and 1988:

Vested benefits.

Non-vested benefits.

Accumulated benefit obligation Effect of future compensation levels Projected benefit obligation Fair value of plan assets, at December 31, 1989 and 1988.

Assets in excess'of projected benefit obligations 1989

$ 111,633 663 112,296 38,598 150,894 166,002 1988

$ 81,570 5,147 86,717 32 377 119,094 141,487 15,108

$ 22,393 The components of assets in excess of projected benefit obligations (in thousands) are as follows:

Net unrecognized gain from past experience different from assumed......

Unamortized asset at transitionbeing amortized through the year 2002...

Accrued pension liability.

Unrecognized prior servicecost'989 5,900 13,962 (4,288)

(466) t988

$ 15,106 15,126 (7,839) 15,108

$ 22,393 The weighted average discount rate used to measure the projected benefit obligation was 9% for 1989 and 10% for 1988. For both years, the rate of increase in future compensation levels based on age-related scales was 6.5% and the expected long-term rate of return on plan assets was 10%.

Other Post-employment Benejits The Company also provides medical and dental benefits to eligible retirees who retire either at normal retirement date or. early retirement. Currently, retirees under age 65 are offered the same benefits as active employees.

Retirees age 65 and above are offered the, same benefits as active employees after refiecting Medicare coordination. The cost of providing these benefits for retirees was

$ 1,348,000,

$901,000 and

$686,000 for 1989, 1988 and 1987, respectively.

Employee Stock Ownership Plan Effective January 1,

1989, the Company adopted an Employee Stock Ownership Plan covering substantially all of its employees. Under the plan, the Company makes cash contributions which are utilized to purchase the Company's common stock on the open market without incurring any debt. Contributions to the plan were approximately $5.3 million in 1989.

(6) Construction Program and Jointly-Owned Plants It is estimated that the Company's construction expenditures (including AFUDC) for 1990 will approximate

$ 102 million, including expenditures. on jointly-owned projects. In connection therewith, substantial commitments have been made.

45

PUBLIC SERVICE COMPANY OF NEW MEXICOANDSUBSIDIARIES NOTES TO CONSOLIDATEDFINANCIALSTATEMENTSContinued The Company operates and jointly owns the San Juan Generating Station ("SJGS"). At December 31, 1989, the Company owned an undivided 50% interest in the first three units ofthe SJGS and 55.5% ofUnit4; The Company participated with several other utilities in the construction of three generating units at PVNGS. Commercial operation commenced in 1986 for Unit 1 and Unit 2 and 1988 for Unit 3. In 1985 and 1986, the Company completed sale and leaseback transactions for its undivided interests in Units 1 and 2 and certain related common facilities.

At December 31, 1989, the Company's ownership interest and investments in jointly-owned generating facilities are:

Station (Fuel Type)

Construction Composite Plant Accumulated Work in Ownership In Service Deprectatton Progress Interest (In thousands)

San Juan Generating Station (Coal)

$ 814,959

$231,553

$ 2,549 Palo Verde Nuclear Generating Station Unit 3 (Nuclear)*.

$331,801

$ 19,130

$ 17,338 Four Corners Generating Station Units 4 and 5 (Coal)....

$ 97,929

$ 23,222

$ 17,559

'ncludes the Company's remaining interest in common facilities for all PVNGS units.

51.6%

10.2%

13.0%

Since 1972, the Company had participated in a joint project, known as the Dinch Power Project, for the construction of a coal-fired generating station. The markets for such a project did not develop as had been anticipated and it could not be determined when or ifthe proposed station would be constructed. In 1988, the Company determined that the recovery of its investment in this project was remote. Accordingly, the Company wrote offits investment of$38.1 million (net ofincome taxes) in the proposed generating station in 1988.

The NMPSC has issued an order to investigate the prudence of the Company's investment in PVNGS.

The Company has the burden of proving, and the Company believes, that PVNGS construction costs were reasonable and that its decisions to invest in and continue participation in PVNGS were prudent.

In March 1989, the report on a PVNGS construction audit being performed for the Arizona Corporation Commission was released. The report concluded that certain PVNGS construction costs, AFUDC and ad valorem taxes were unreasonable.

The Company's share of such costs is approximately $7.8 million (after income taxes), which was charged to expense in 1988.

In May 1989, the NMPSC staff and the Company reached an agreement (the "stipulation") settling all issues of prudence existing at that date as they relate to the Company's 10.2% interest in PVNGS Units 1

and 2. (The Company's interest in PVNGS Unit-3 has been excluded from New Mexico jurisdictional rates.

See note 11.) The stipulation, which was opposed by the other parties to the PVNGS cost investigation case, was approved by the NMPSC on March 6, 1990. The New Mexico Attorney General has appealed the NMPSC's March 6, 1990 order to the New Mexico Supreme Court. The stipulation as approved by the NMPSC does not require write-offs in addition to the amounts written offby the Company in 1988.

The PVNGS participants have insurance for public liability payments resulting from nuclear energy hazards to the full$7.8,billion limitofliabilityunder Federal law as modified by legislation enacted in August 1988. This potential liability is covered by primary liability insurance provided by commercial insurance carriers in the amount of$200 millionand the balance by an industry-wide retrospective assessment program.

46

PUBLIC SERVICE COMPANY OF NEW MEXICOANDSUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTSContinued The maximum assessment per reactor under the retrospective rating, program for each nuclear incident occuring at any nuclear power plant in the United States is approximately $66 million, subject to an annual limitof $ 10 million per incident. Based upon the Company's 10.2% ownership interest in the three PVNGS units, the Company's maximum potential assessment per incident is approximately

$20 million, with an annual payment limitation of $3 million.

The PVNGS participants maintain "all-risk"(including nuclear hazards) insurance for nuclear property damage to, and decontamination of, property at PVNGS in the aggregate amount of $2.035 billion, a substantial portion of which must first be applied to decontamination.

The Company has also secured insurance against a portion of the increased cost of generation or purchased power resulting from the accidental outage of any of the three PVNGS units.

The Company's share of PVNGS decommissioning costs is presently estimated, in 1989 dollars, at approximately $77 million.The Company has a program for funding its share ofthe costs ofdecommissioning PVNGS. The plan calls for annual deposits to an external decommissioning trust of $396,000 per unit, subject to adjustment for changes in estimated decommissioning costs and trust fund earnings. The trust funds are invested under a plan which allows the Company to accumulate funds for decommissioning largely on a tax-deferred basis. The Company began funding its share ofdecommissioning costs for PVNGS Units 1 and 2 in 1987 and PVNGS Unit 3 in 1988.

Allthree units of PVNGS were out of service for substantial periods during 1989. In March 1989, the

=

Nuclear Regulatory Commission ("NRC") reviewed the events that took place during certain unscheduled outages and issued confirmatory action letters requiring the operator of PVNGS to take certain corrective actions and to receive NRC approval before restarting any ofthe PVNGS units. With NRC approval, Unit 2 and Unit 3 have been restarted. On February 24, 1990, the operator of PVNGS placed Unit 2 in its second

'efueling outage, which is scheduled to continue approximately 100 days. The operator of PVNGS is undertaking corrective actions relating to PVNGS Unit 1 and currently estimates that it willrequest NRC approval to restart the unit during the first quarter of 1990.

(7) Long-Term Power Contracts and Franchises The Company has entered into contracts for the purchase of electric power. Under a contract with M-S-R Public Power Agency, which contract expires in 1995, the Company is obligated to pay certain minimum amounts and a variable component representing the expenses associated with the energy purchased and debt service costs associated with capital improvements. Total payments under this contract amounted to approximately $41 millionfor each of 1989, 1988 and 1987, respectively. The minimum payment for each of the next five"years under this contract is $27.3 million annually.,

The Company has a long-term contract with Southwestern Public Service Company("SPS") requiring the Company to purchase capacity beginning in 1991. Minimum payments under the contract for 1991, 1992 and 1993 willbe $4.7 million, $8.0 million and $8.0 million, respectively. In addition, the Company willbe required to pay for any energy purchased under the contract. The amount of minimum payments after 1993 willdepend on whether the Company exercises certain options to reduce its purchase obligations.

The contract with SPS also required SPS to purchase power from the Company through the end of 1989.

This portion of the contract expired on December 31, 1989.

Revenues from such sales accounted for approximately 11.9% oftotal 1989 revenues, 11.9% oftotal 1988 revenues and 11.5% oftotal 1987 revenues.

Sales under the SPS contract'contributed approximately $ 1.13, $ 1.12 and $.85 to earnings per share in 1989, 1988 and 1987, respectively.

47

PUBLIC SERVICE COMPANY OF NEW MEXICOAND SUBSIDIARIES NOTES TO CONSOLIDATEDFINANCIALSTATEMENTSContinued The Company holds long-term, non-exclusive franchises of varying durations in all incorporated communities where it is necessary to do so in order to provide utilityservices within those communities. The Company's electric franchise in Albuquerque, covering an area which contributed 43.7% of the Company's 1989 electric revenues, expires in early 1992. The City of Albuquerque is studying alternatives, including municipalization of the Company's distribution system and awarding the franchise to other suppliers. While the Company cannot predict the ultimate outcome of the franchise renewal issues, the Company is actively pursuing the renewal of the franchise prior to its expiration.-Furthermore, the Company, as necessary, will take vigorous action to protect the Company's ownership in the distribution system of the City franchise area.

8 (8) Lease Commitments The Company classifies its leases in accordance with generally accepted accounting principles. The Company leases Units 1 and 2 of PVNGS, transmission facilities, ollice buildings and other equipment under operating leases. The aggregate lease payments for the PVNGS leases are $84.6 million per year over base lease terms expiring in 2015 and 2016. Each PVNGS lease contains renewal and fair market value purchase options at the end of the base lease term.

Future minimum operating lease payments (in thousands) at December 31, 1989 are:

1990 1991

.1992 1993 1994 Later years.

~ Total minimum lease payments 96,679 95,831 95,539 94,758 94,578 1,939,344

$2,416,729 Operating lease expense was approximately $95.8 million in 1989, $ 101.4 million in 1988 and $ 102.6 millionin 1987. As of December 31, 1989, the aggregate minimum payments to be received in future'periods under noncancelable subleases are approximately $ 1.0 million.

(9) Natural Gas Proceedings and Contract Disputes Gas Company of New Mexico ("GCNM"), a division of the Company, and Sunterra Gas Gathering Company ("Gathering Company" ), a subsidiary of the Company, have been disputing claims by certain gas producers relating to contract pricing, take-or-pay obligations and other matters, some of which are, or have been, the subject of litigation. In addition, other claims and litigation may arise. GCNM and Gathering Company are vigorously defending against these claims. Certain matters have been settled and the Company intends to continue active pursuit of negotiations to resolve these matters. In addition, the Company has either settled with or is asserting claims against third-parties w'ho, the Company believes, have contributed to the Company's potential liabilities. The Company has evaluated, and willcontinue to evaluate, the impact of

~ these matters on the Company.

On December 18, 1989, the NMPSC issued an order which provides for partial recovery ofcosts incurred for take-or-pay obligations, contract pricing and other gas purchase contract litigation items. Under the order, the Company willbear 25% of producer take-or-pay and contract~reformation costs. The Company willbe permitted to recover from its sales and transportation customers the reinaining 75% ofsuch costs over a five-year period. The order also provides that the Company may recover all take-or-pay costs'assessed by 48

PUBLIC SERVICE COMPANY OF NEW MEXICOANDSUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS Continued interstate pipelines and all costs prudently incurred (as determined by the NMPSC on a case-by-case basis) as the result of the 'settlement or'litigation of claims arisirig from certain intrastate gas purchase contracts that were the subject of antitrust litigation that resulted in the Company's acquisition of GCNM from Southern Union Company in January 1985.

A provision for losses arising from natural gas contract disputes was made in 1988. In 1989, the Company made an adjustment to'he provision reflecting the Company's further evaluation of claims by natural gas producers.

(See note 2.) Based on the amounts it believes are recoverable under the December 1989 NMPSC Order, the amounts of the settlements achieved and the provisions made through 1989, the Company currently believes it is unlikely that remaining disputes with natural gas producers will have

'a material adverse impact on the Company's future financial condition or results of operations.

(10) Discontinuance of.Non-UtilityOperations In 1988, the Company ma'de the decision to discontinue the non-utility operations of ifs subsidiaries.

Such operations consisted primarily of fiberboard manufacturing, real

estate, coal

mining, telecommunications manufacturing and financial services and were carried out by or through the Company's wholly-owned subsidiaries. Estimated losses on disposal ofnon-utility operations in 1988 were $ 137.8 million (net of income tax benefits of $64.1 million) which primarily reflected the decrease in the value of southwestern real estate holdings and the loss the Company expected to incur on the sale of a fiberboard manufacturing facility. Such losses also included a provision of $29.5 million for expected operating losses prior to their expected disposal ofnon-utility operations in 1989. Approximately $ 13.8 millionofthe expected operating loss was incurred in 1988.,

Operating results ofthe discontinued operations prior to the date ofdiscontinuation are shown separately in the accompanying Consolidated Statement ofEarnings (Loss).'uch amounts include income tax benefits related to the losses from discontinued operations of $ 13.6 million in 1988 and $ 15.7 million in 1987. Total sales from the discontinued operations were $ 128.0 million and $ 111.9 million in 1988 and 1987, respectively.

Prior to the decision to discontinue non-utility operations, such total sales and income tax benefits were included in other income and deductions in the Consolidated Statement of Earnings (Loss).

Substantial portions of the discontinued operations were disposed ofin 1988 and 1989 and the Company anticipates disposition of the remainder during 1990. In 1989, the Company reevaluated the cost ofdisposing of the discontinued operations including the related income tax effects and recorded appropriate adjustments.

(See note 2.)

(11) Regulatory Issues Electric Operations The Company's investment in PVNGS has been the subject of regulatory inquiry in recent years. In April 1989, the NMPSC issued an order which, among other things, provides for the inclusion in NMPSC jurisdictional electric rates of the Company's jurisdictional interests in PVNGS Units 1 and 2, 147 MW of SJGS Unit 4 and the power purchase contract with SPS.

(See note 7.) How'ever, the order excludes from New Mexico jurisdictional rates the Company's 130 MW interest in PVNGS Unit 3, 130 MWof SJGS Unit 4 and the power purchase contract with M-S-R. (See notes 6 and 7.) The order states that as long as there is excess capacity in the Company's jurisdictional rates, then that excess capacity will share off-system sales equitably with the capacity excluded in the order.

The NMPSC order provides that the Company's jurisdictional interests in 147 MW of SJGS Unit 4 will be immediately included in rates effective the date the NMPSC issues its final order in the rate case. The NMPSC order also provides that the rate case will consider (i) whether recovery of the Company's 49

PUBLIC SERVICE COMPANY OF NEW MEXICOANDSUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTSContinued jurisdictional investment of PVNGS Units 1 and 2 should start immediately or whether such recovery should be phased in over a period of time, (ii) whether there should be a fulland immediate return on PVNGS Units 1 and 2 or whether all or a portion of the return on such investment should be disallowed for some period of time and (iii)any other appropriate rate treatment of these units.

Since the order did not provide for the recovery of deferred carrying costs on uncommitted electric generating capacity pursuant to SFAS No. 92, the Company discontinued the inventorying methodology and, in 1988, wrote-off $70.1 million of such cost previously deferred.,Of such amount, $52.7 million, related to generating capacity to be included in New Mexico jurisdictional rates, was charged to other income and deductions and $ 17.4 million, related to excluded generating capacity, was reported as an extraordinary item.

In 1988, the Company discontinued the use of regulatory accounting principles for the resources excluded from regulation. Such discontinuance required the Company to adjust the carrying value ofexcluded resources by those items, other than AFUDC, which were recorded solely based on regulatory accounting principles. The Company recognized a loss, which was treated as an extraordinary item, of $46.6 million (including an income tax expense of $6.8 million and write-offof deferred carrying costs on uncommitted electric generating capacity) primarily as a result of these proceedings."...

The NMPSC's April 5, 1989 order, which has been appealed by two intervenors in the case, did not, affect current rates. Rates based on the order willbe implemented through a rate case, which the Company filed in June 1989. Hearings in the rate case concluded in December 1989.

On March 8, 1990, a NMPSC hearing examiner issued a recommended decision in the rate case, in which the examiner recommended that the NMPSC order an annual rate reduction of $6.2 million from current electric rates with PVNGS Units 1 and 2 fullyincluded in such rates. As a result, the Company's proposed phase-in plan for the PVNGS Units 1 and 2 would be denied, resulting in no deferrals of carrying costs of PVNGS Units 1 and 2. The hearing examiner also recommended that the NMPSC adopt a 12.05% return on equity. The Company proposed a 13.6% return on equity in the rate case filing. In addition, the hearing examiner recommended that all off-system capacity sales including unit contingent sales be shared between the included and excluded capacity based on the ratio ofthe included excess capacity to the excluded capacity.

The hearing examiner further stated in his recommended decision that as long as the Company has jurisdictional excess capacity, a full return of and on the Company's investment in PVNGS Units I and 2 cannot be guaranteed.

The Company would be required to file in its next rate case a detailed analysis of whether the Company should continue recovery of its investment in PVNGS Units 1 and 2, whether such recovery should be phased in over a period of time, or whether all or a portion of the return on such investment should be disallowed for some period of time.

, The recommended decision, ifapproved by the NMPSC as written, would result in a significant adverse impact on the Company's results of operations in 1990 and subsequent years and would result in an after-tax write-offof approximately $ 19 million. The Company has filed with the NMPSC its response to challenge the hearing examiner's recommended decision. The NMPSC is expected to issue a final order in the current rate case in April 1990.

50

PUBLIC SERVICE COMPANY OF NEW MEXICOAND SUBSIDIARIES NOTES TO CONSOLID'ATEDFINANCIALSTATEMENTS Continued (12) Segment Information The financial information pertaining to the Company's electric, gas (see note I) and other operations for the years ended December 31, 1989, 1988 and 1987 are as follows:

Electric Gas Other Total (In thousands) 1989:

Operating revenues Operating expenses excluding income taxes Pre-tax operating income Operating income tax Operating income Depreciation and amortization expense.....

Construction expenditures Identifiable assets:

Net utilityplant Other.

Total assets.

1988:

Operating revenues Operating expenses excluding income taxes Pre-tax operating income Operating income tax Operating income Depreciation and amortization expense.....

Construction expenditures Identifiable assets:

Net utilityplant Other Total assets 620,381

$282,827 12,102 915,310 475,405 254,677 6,034, 736,116 144,976 20,411 28,150, 6,068 3,759 1,788 179,194 25,958

$ 1,603,242

$287,779

$ 40,824

$ 1,931,845 284,314 146,085 24,761 455,160

$ 1,887,556

$433,864

$ 65,585

$2,387,005 607,317

$223,791 10,816 841,924 470,162 208,540 5,888 684,590 137,155 15,624 15,251 4,928 157,334 448 1,196 17,268 121,531

$ 14,803 3,732 140,066 56,450 9,548 922 66,920 68,230

$ 19,524 9,427 97,181

$ 1,601,556

$243,123

$ 40,264

$ 1,884,943 323,006 93,616 91,184 507,806

$ 1,924,562

$336,739

$ 131,448

$2,392,749 124,565

$ 24,391 4,280 153,236 58,129

$ 12,730 1,122 71,981 55,334

$ 20,375 2,580 78,289 1987; Operating revenues Operating expenses excluding income taxes Pre-tax operating income Operating income tax Operating income.

Depreciation and amortization expense.....

Construction expenditures Identifiable assets:

Net utilityplant Net assets of discontinued operations..

Other Total assets 563,617

$210,634 10,973 785,224 437,203 195,329 5,351 637,883 126,414 12,703 113,711 49,982 102,548 15,305 5,622 147,341 463 1,824 14,990

$ 14,842 3,798 132,351 9,313 969 60,264

$ 17,125 5,050 124,723

$ 1,623,751

$233,331

$ 35,472

$ 1,892,554 180,069 180,069 475,416 90,301 78,801 644,518

$2,099,167

$323,632

$294,342

$2,717,141 51

PUBLIC SERVICE COMPANY OF. NEW MEXICOANDSUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL'STATEMENTSConcluded (13) Supplemental Income Statement Information Taxes, other than income taxes, charged to operating expenses were as follows:

Ad valorem City franchise Payroll Other Total.

1989

$ 16,473 6,664 7,052

'3,854

$34,043 1988 (In thousands)

$ 14,950 8,890 7,112 3,871,

$34,823 1987

$ 12,712 8,996 6,606 3,369

$31,683 Amortization of intangibles, royalties, and advertising costs were less than 1% of revenues in each of the above periods.

52

SCHEDULE VPROPERTY, PLANT AND EQUIPMENT Years Ended December 31, 1989, 1988 and 1987 Balance at Beginning, Additions Other Changes ofYear at Cost Retirements Add Deduct (In thousands)

Balance at End ofYear Classification Deeeeeer 31, l.i89 Utilityplant:

Electric plant in service:

Intangible........

Production Transmission.

Distribution General

$ 18,364 4,270 3,092 18,040 100 12,169 1,214,366 210,984 361,772

'4,845 35 1,092 32 3,162 1,889 6,210 378 30,876 18,438 1

1,235,981 669 46 214,667 143 921 375,872 114 21 63,149 19,742 989 1,920,545 1,864,136 43,866 PUBLIC SERVICE< COMPANY OF NEW MEXICOAND SUBSIDIARIES Gas plant in service:

Intangible Production and processing Natural gas storage.......

Transmission.

Distribution General

',826 57,949 4,885 64,992 195,341 32,538 4,353 580 12 805 10,577 4,'141 358,531 20,468 767 27 1,958 1,485 4,237 20 50,190 719 1,545 63 7,136 498 107,454 4,897 66,489 9

203,951 36,739 52,474

'70 426,666 Water plant in'ervice:

Intangible.........

Source of supply plant........

Pumping plant..............

Water treatment plant........

Transmission and distribution..

General 259 4,964 2,110 3,968 30,164 2,221 43,686 111 13 36 6

1,988 3,209 5,363 74 16 11 47 35 183 50 15 296 4,977 2,130 3,963 32,140 5,395 50 15 48,901 Common plant in service:

Intangible General 1,735 454 2,189 3,346 527 3,873 (6,450) 10,706 77,826 463 14,389 27,139 2,536

18,536 893 62 28,043 3,'429 62 46,579 41,528 72,401 21,975 77,971 Construction work in progress Electric plant held for future use.,'..

Nuclear fuel Total.utilityplant..........

Non-utilityproperty................

Total property, plant and equipment..............

Description ofother changes Transfers between accounts 2,030

67,981 16,782 1,238 1,245 88,670 5,193 2,480,228 82,206 18,012 10,339 78,963 2,881 2,616,124 144 57,104 15,370

$2,562,434

$78,289

$28,351

$79,107

$59,985

$2,631,494

$57,143

$57,143 847 20,798 1,166 1,995 9 $79,107

$59,985 (Continued)

Transfer of expired contract deposits to plant in service..

Adoption of SFAS No. 96 Miscellaneous corrections and adjustments 53

PUBLIC SERVICE COMPANY OF NEW MEXICOAND SUBSIDIARIES SCHEDULE VPROPERTY, PLANTAND EQUIPMENT (Continued)

Years Ended December 31, 1989, 1988 and 1987 Classificatio December 31, 1988 Balance at Beginning ofYear Additions Other Changes at Cost Retirements Add Deduct.

(In thousands)

Balance at End of Year Utilityplant:

Electric plant in service:

Intangible Production Transmission Distribution

. General Gas plant in service:

Intangible Production.

Natural gas storage Transmission Distribution General Water plant in service:

Intangible Source of supply plant........

Pumping plant...............

Water treatment plant........

Transmission and distribution..

General Common plant in service:

Intangible General 3,181 905,110 208,296 340,067 61,956 8,988 311,538 2,956 25,713 4,774 2,376 57,816 4,885 62,507 182,200 29,058

269, 1,428 1,105 14,837 4,098 338,842 21,737 259 4,964 2,052 3,968 28,537 2,165 71 1,738 345 41,945 2,154 13,613 28,613 776 1,138 42,226 1,914 1,518,610 353,969 1,171 222 3,338 2,366 7,097 969 195 1,690 1,130 3,984 13 73 188 274 2,552 2,552 859 1,970 46 14 684 1,227 746 12,169 1,214,366 210,984 361,772 64,845 181 1,731 512 2,826 326 57,949 4,885 156 64,992

. 6 195,341 32,538 2,424 488 358,531 57 101 259 4,964 2,110 3,968 30,164 2,221 19 158 43,686 14,389 83 143 27,139 83 143 41,528 2,100 3,446 1,864,136 Construction work in progress.....

Electric plant held for future use...

Nuclear fuel.

Total utilityplant..........

Non-utilityproperty*...............

Total

~ property, plant and equipment..............

369,092 (296,867) 33,103 277 76,826 9,808 2,420,644 139,884 92,992 4,189 8,663 22,570 12,931 176

'2,401 11,405 21,975 77,971 4,802 15,640 2,480,228 1,200 '0,136 82,206

$2,560,528

$ 97,181

$35,501

$6,002

$65,776

$2,562,434 Description of other changes Transfers-between accounts Transfer of expired contract deposits to plant in service Write-offof electric plant held for future use Write-offof non-utility property..

Original cost of property acquired Miscellaneous corrections and adjustments.

$2,530 1,742 1,730

$6,002

$ 2)530 449 11,405 48,451 156 2,785

$65,776

• Excludes properties of discontinued operations.

(Continued) 54

PUBLIC SERVICE COMPANY OF NEW MEXICOAND SUBSIDIARIES SCHEDULE VPROPERTY, PLANTANDEQUIPMENT(Continued)

Years Ended December 31, 1989, 1988 and 1987 Classtticatlon December 31, 1987 Balance at Beginning ofYear Additions Other Changes at Cost Retirements Add Deduct (In thousands)

Balance at End ofYear Utilityplant:

Electric plant in service:

Intangible Production Transmission.........

Distribution.........

General 3,750 914,057 207,227 316,802 57,712 9,036 1,691 28,293 6,274 1,499,548 45,294

$ 1,266 469 116 3,306 1,564 6,721

$ 1,091 394 3,181 600 18,114 905,110 506 208,296 657 2,379 340,067 96 562 61,956 2,444 21,955 1,518,610 Gas plant in service:

Intangible Production Natural gas storage Transmission.......

Distribution.......

General Water plant in service:

Intangible Source of supply plant........

Pumping plant..............

Water treatment plant........

Transmission and distribution..

General Common plant in service:

Intangible General 2,212 57,692 4,874 62,216 173,182 27,012 327,188

259, 4,949 2,058 3,968 25,494 2,106 38,834 15,900 28,920 44,820 186 549 11 627 10,593 3,041 15,007 15 2,444 139 2,598 1,778 917 2,695 20 360 337 1,564 954 3,235 64 100 170 4,459 640

. 5,099 2

2,376 65 57,816 4,885 62,507 11 182,200 41 29,058 1

119 338,842 674 20 259 4,964 2,052 3,968 28,537 2,165 694 11 41,945 394

13,613 376 960 28,613 770 960 42,226 Construction work in progress....

Electric plant held for future use..

Nuclear fuel Total utilityplant.........

Non-utilityproperty*..............

Total

property, plant and equipment.............

321,164 74,132 70,223 2,375,909 79,367

$2,455,276 47,598 2,168 6,603 121,963 2,760

$ 124,723 330

369,092 15,218 58,408 33,103 76,826 15,232 2,354 19,457 61,243 81,453 2,420,644 1,132 139,884

$ 17,586

$80,700

$82,585

$2,560,528 Description ofother changes Transfers'between accounts Transfer of expired contract deposits to plant in service..

Miscellaneous corrections and adjustments

$77,053

$77,053 636 3,647 4,896

$80,700

$82,585 e Excludes properties of discontinued operations.

55

PUBLIC SERVICE COMPANY OF NEW MEXICOAND SUBSIDIARIES SCHEDULE VIACCUMULATEDDEPRECIATION AND AMORTIZATION OF PROPERTY, PLANTAND EQUIPMENT Years Ended December 31, 1989, 1988 and 1987 Description December 31, 1989 Additions Balance at Charged to Charged Beginning Operating to Other of Year Expenses Accounts Retirements Other Changes Add Deduct Balance at End,

'of Year Utilityplant:

Accumulated provision for depreciation of utilityplant:

Electric plant in service.....

Gas plant in service..........

Water plant in service.......

Common plant in service....

Accumulated provision for amortization of intangible assets franchises and computer software...........

Accumulated provision for amortization of nuclear fuel...

Retirement work in progress....

Total utilityplant..........

Non-utility property............

Other Description ofother additions and changes (In thousands)

$419,827 116,689 8,490 10,395 555,401

$53,065 11,457 1,160 1,680 67,362 598 706 50 1,440 2,794

$5,642 2,216 122 426 8,406 26,624 (724) 595,285 19,209

$614,494 72,579 72,579 (598)

$71,981 6,220 9,245 98

$9,343 (2,'310) 7,939 385

$8,324 13,984 5,217, 231 1,843 19 17,570 1,455 (8) 31,389 1,578 17,636 2,527 16,153 684,279

',769

$ 17,636

$ 18,680

$687,048

$ 1,470 52

$469,266 14,231 974 139,893 9,578 1,943 27 15,005 17,644 1,053 633,742 Depreciation and amortization of equipment charged to clearing accounts for distribution in accordance with use

$3,025 Amortization of nuclear, fuel charged to fuel and purchased power.

Depreciation of non-utility property charged to other income and deductions................. ~........

Transfers between accounts Miscellaneous corrections and adjustments 6,220 98 II

$9,343 16,180 16,180 1,456 2,500

$ 17,636

$ 18,680 (Continued) 56

PUBLIC SERVICE COMPANY OF NEW MEXICOAND,SUBSIDIARIES SCHEDULE VIACCUMULATEDDEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT(Continued)

Years Ended December 31, 1989,,1988 and 1987 Description December 31, 1988 Additions Balance at Charged to Charged Beginning Operating to Other ofYear Expenses Accounts Retirements r 'dd Deduct Balance at End of Year Utilityplant:

Accumulated provision for depreciation of utilityplant:

Electric plant in service..".....

Gas plant in service......"....

Water plant in service........

Common plant in service......

Accumulated provision for amortization of intangible assets franchises and computer software...........

Accumulated provision for amortization of nuclear fuel...

Retirement work in progress....

Total utilityplant...... '....

Non-utility property*............

Other (In thousands)

$373,936

$52,627

" 876 110,201 8,876 842

, 7,846 882 46 8,741 873

" 1,'552 500,724 63,258 3,316 10,190

., 3,626 226 18,088 (912) 528,090 16,326

$544,416

='9,106 22,648 2,988

$25,636 66,884 66,884 36

$66,920

$ 7,482 4,925 279 765 13,451 8,663'188) 21,926 277

$22,203 58 1,907 2,831 3,242 179 7

13,984 26,624 (724) 595,285 I 19,209

$3,010

$3,249

$614,494

$ 1,037

$ 1,167

$419,827 1,695, 116,689 5

"8,490 99 105 10,395 2,831 1,277 555,401 Description ofother additions and changes Depreciation and amortization of equipment charged to clearing accounts for distribution in accordance with use Amortization of nuclear fuel charged to fuel and purchased power.

Depreciation ofnon-utility property charged to other income and deductions Transfers between accounts Accumulated depreciation on property acquired........

Miscellaneous corrections and adjustments............

$ 3,542 19,106 2,988

$25,636 548,,

548 1,397 1,065 2,701

$3,010

$3,249

• Excludes accumulated depreciation and amortization on properties of discontinued. operations.

(Continued) 57

PUBLIC SERVICE COMPANYOF NEW MEXICOANDSUBSIDIARIES SCHEDULE VIACCUMULATEDDEPRECIATION ANDAMORTIZATION OF PROPERTY, PLANTAND EQUIPMENT (Continued)

Years Ended December 31, 1989, 1988 and 1987 Description Deccmbcr 31, 1987 Additions Balance at Charged to Charged Beginning Operating to Other ofYear Expenses Accounts Retirements (In thousands)

Other Changes Add Deduct Balance at End of Year Utilityplant:

Accumulated provision for depreciation of utilityplant:

Electric plant in service.....

Gas plant in service........

Water plant in service......

Common plant in service....

Accumulated provision for amortization of intangible assets franchises and computer software..........

Accumulated provision for amortization of nuclear fuel..

Retirement work in progress...

Total utilityplant.........

Non-utility property*...........

Other..

Description of other additions and changes

$333,334 103,751 7,195 7,061 451,341

$46,772 '1,471 8,814 824 742 55 798 1,861 57,126 4,211

$ 4,912 3,164 168 474 8,718 12,637 2,654 648 5,748 472,930 59,780 11,647

$484,577 59,780 484

$60,264 13,487 2,876

$ 16,363 404 14,870 7

$ 14,877 9,460

',628 (508)

$ 1,719

$4,448

$373,936 24 110,201 22

7,846 769 1,274 8,741 2,510 5,746 500,724 t

45 '6 '0,190 18,088 (912) 2,555 5,792 528,090 1,810

16,326

$4,365

$5,792

$544,416 Depreciation and amortization of equipment charged to clearing accounts for distribution in accordance with use Amortization of nuclear fuel charged to fuel and purchased power Depreciation ofnon-utility property charged to other income and deductions Transfers between accounts Miscellaneous corrections and adjustments............

$ 4,859 8,628 2,876 I'

$ 16,363 1,810 1,810 2,555 3,982

$4,365

$5,792 a Excludes accumulated depreciation and amortization on properties of discontinued operations.

58

PUBLIC SERVICE COMPANY OF NEW MEXICOAND'SUBSIDIARIES SCHEDULE VIIIVALUATIONAND QUALIFYINGACCOUNTS AND RESERVES Years Ended December 31, 1989, 1988 and 1987 Balance at Beginning of Year Additions Charged to Charged Operating to Other Expenses Accounts Deductions (In thousands)-

Balance at End ofYear December 31, 1987:

Allowance for doubtful receivables...,...

$205

$28

$4(a)

$237(b)

(a)

Recoveries of amounts previously written oK (b)

Uncollectible receivables written oK Beginning in 1987, the Company discontinued using an allowance for doubtful receivables and began using the direct write-offmethod for doubtful receivables as ordered for ratemaking purposes.

59

PUBLIC SERVICE COMPANYOF NEW MEXICO,.ANDSUBSIDIARIES SCHEDULE IXSHORT-TERM BORROWINGS Years Ended December 31, 1989, 1988 and 1987 Category of Aggregate

'hort-Term Borrowings Balance at End of Year Ivcighted Average Interest Rate at End of Year Maximum Amount Outstanding During Year Average Amount Outstanding During the Year Average Interest Rate During the Yea (Dollars in thousands)

December 31, 1989:it)

Notes payable to banks Commercial paper

$ 19,100

$ 14,780 9.50%

8.91%

$ 19,100 1,492

$ 62,250 18,203 9.52%

9.61%

December 31, 1988:<>>

Notes payable to banks Commercial paper December 31, 1987:

Notes payable to banks Commercial paper 3,000

$ 149,000 8,528 2,910 8.35%

$ 160,550

$ 12,898 7.06%

8.35%

$ 27,841

$ 11,866 8.99%

8.58%

$ 163,600

$ 103,547 6.92%

(1)

Effective June 30, 1989, certain bank loans and commercial paper were reclassified as short-term debt consistent with management's current intent not to refinance by long-term credit arrangements.

(2)

Effective February 1, 1988 certain bank loans and commercial paper were classified as long-term debt consistent with underlying credit agreements and management's intention to maintain this debt for more than twelve months.

The average amount outstanding during the year is calculated using month-end balances. The average interest rate during the year is calculated by dividing interest expense by the average amount outstanding during the year.

The above table excludes short-term borrowings of discontinued operations.

60

PUBLIC'SERVICE COMPANY OF NEWMEXICOANDSUBSIDIARIES QUARTERLYOPERATING RESULTS The uriaudited operating results by quarters for 1989 and 1988 are as follows:

Quarter Ended r

1989:

Operating Revenues<i)

Operating Income<<)

Net Earnings Net Earnings per Share 1988:

Operating Revenues Operating Income Earnings (Loss) before Extraordinary Item<>>.....

Net Earnings (LossP)

Earnings (Loss) before Extraordinary Item Shard>>

Net Earnings (Loss) per Share<>)

$266,181

$210,617

$ 48,237

$ 29,144

$ 29,907

$ 14,265

.65

.28

$218,506

$ 220,006

$ 42,920 32,935

$ 25,765 12,656

.55,

.25

$237,736

$ 195,743

$ 38,783

$ 31,604

$ 20,736

$ 12,344

$ 20,736

$ 12,344 per

.43

.23

.43

.23

$201,778

$ 206,667

$ 34,296 35,383

$ (55,476)

$(161,145)

$ (82,101)

$(181,116)

(1.39)

(3.93)

(2.03)

(4.41)

March 31 June 30 September 30 December 31 (In thousands except per share amounts)

In the opinion ofmanagement ofthe Company, all adjustments (consisting ofnormal recurring accruals) necessary for a fair statement of the results of operations for such periods have been included.

(1)

Includes Gathering Company and Processing Company (see note 1 of the notes to consolidated financial statements).

(2)

During the third quarter of 1988, the Company's board of directors decided to discontinue the Company's non-utility subsidiary operations. As a result, estimated losses of $53.0 million for the third quarter and

$84.8 million for the fourth quarter were recognized.

(See note 10 of the, notes to consolidated financial statements.) In addition, during the fourth quarter of 1988, the Company recorded a write-off of deferred carrying costs on uncommitted electric generating

capacity, a write-off of a r

proposed generating station and other non-recurring charges, aggregating $ 105.5 million (net of taxes).

(3) In 1988, the Company discontinued the use of regulatory accounting principles for the resources excluded from regulation. Such discontinuance required the Company to adjust the carrying value of excluded resources by those items, excluding AFUDC, which were recorded solely based on regulatory, accounting principles. As a result, the Company recorded $26.6 million in the third quarter of 1988 and

$20.0 million in the fourth quarter of 1988 as an extraordinary item. (See note 11 of the notes to consolidated financial statements.)

61

PUBLIC SERVICE COMPANY OF NEW MEXICOANDSUBSIDIARIES COMPARATIVEOPERATING STATISTICS 1989 1988 1987

" 1986 1985 Electric Service Energy SalesKWh (in thousands):

Residential Commercial Industrial Other ultimate customers 1,527,108 2,203,037 961,251 218,196 1,493,009 1,448,989 2,097,277 2,003,735 899,508 787,901 194,794 207,173 1,353,933 1,872,902 797,927 208,534 1,319,529 1,765,077 788,880 206,356 Total sales to ultimate customers..

Sales for resale Total KWh sales 4,909,592 3,096,458 8,006,050 4,684,588 4,447,798 3,508,596 2,490,926 8,193,184 6,938,724 4,233,296 4,079,842 2,494,234 3,357,220 6,727,530 7,437,062 Electric Revenues (in thousands):

Residential Commercial Industrial Other ultimate customers

$ 141,465

$ 140,731

$ 136,194

$ 126,053

$ 119,026 192,273

. 187,800 179,653 166,424 152,921 64,"519 62,401 56,534 56,649,53,127 15,387 13,931 15,161 14,622 14,293 Total revenues from ultimate customers Sales for resale 413,644 190,256 404,863 190,085 387,542 167,727 363,748 149,225 339,367 147,169 Total revenues from energy sales.......

Miscellaneous electric revenues Total electric revenues 603,900 594,948 16,481 12,369 555,269 8,348 512,973 7,923 486,536 8,313

$ 620,381

$ 607,317

$ 563,617

$ 520,896

$ 494,849 Customers at Year End:

Residential Commercial Industrial Other ultimate customers Total ultimate customers Sales for resale 254,864 31,402 393 415 287,074 9

250,076 31,024 390 376 281,866 11 244,427 29,882 399 332 275,040 8

237,759 28,736 414 213 267,122 7

227,420 27,053 428 216 255,117 8

Total customers 287,083 281,877 275,048 267,129 255,125 Reliable Net CapabilityKW Coincidental Peak DemandKW Average Fuel Cost per MillionBTU.

BTU per KWh of Net Generation 1,591,000',591,000 1,461;000 1,566,000 1,305,000 1,006,000 956,000 916,000 916,000 861,000 1.3445 1.2460'$

1.2894 1.1710 1.2233 11,034 11,146 '11,526 11",608 11,214 Water Service Water Sales Gallons (in thousands)

Revenues (in thousands)

Customers at Year End.

3,179,711 2,726,666 2,683,961 12,102 10,816 10,973 20,565 19,713 19,448 2,535,656 2,387,468 10,245 8,144 18,820 18,240 62

PUBLIC SERVICE COMPANY OF NEW MEXICOAND SUBSIDIARIES COMPARATIVEOPERATING STATISTICS 1989 1988 1987 1986 19850 Gas Service Gas ThroughputDecatherms (in thousands)

GCNM:

Residential Commercial Industrial.

Public authorities Irrigation Sales for resale Brokerage GCNM sales Transportation throughput GCNM throughput.

Gathering Company:

Spot market sales Transportation throughput Total gas throughput Gas Revenues (in thousands)

GCNM:

Residential Commercial Industrial Public authorities Irrigation Sales for resale Brokerage Revenues from gas sales Transportation...........,.

Other GCNM gas revenues Gathering Company:

Spot market sales...

Transportation.

Processing Company Sales of liquids Total gas revenues.

Customers at Year End GCNM:

Residential....

Commercial Industrial Public authorities Irrigation.

Sales for resale, Brokerage Transportation.

GCNM customers.

Gathering Company:

Off-system sales Transportation.

Processing Company Total customers 23,253 10,730 1,478 5>492 2,010 4,557 776 48,296 16,041 64,337 11,081" 3,597 79,015 24,692 11,460 1,726 6,206 1,440 2,667 879 49,070 9,133 58,203 58,203

$ 130,130 47,876 5,693 21,757 7,001 9,874 1,378 223,709

, 6,788 5,948

$ 122,592 45,235 6,063 22,289 4,546 6,969 1,514 209,208 4,841 9,742 306>604 28,949 103

2,242 1,252 7

1 28 303,173 28,858 105 2,469 1,261 6

2 20 339,186 335,894 13, 5

23 339,227 335,894 236,445 223,791 19,810 830 25,742

$282,827

$223,791 24,510 11,359 2,196 6,811 1,402 1,211 2,796 50,285 5,149 55,434 22,076 10,745 5,909 8,323 1,853

,1>535 2,079 52,'520 2,245 54,765 19,232 9,642 13,806 9,073 1,693 1,702 13 55,161 147 55,308 55,434 54,765 55,308

$ 114,164 42,120 8,102 22,'729 3,781 3,819 5,213

$ 117;011 45,812 23,139 30,213 6,142 5,675 3,759

$ 111,427 45>519 48,933 38,181 6,507 6,638 31 199 928 231 751

4,315 2,207 6,391 10,708 257,236 83 16,418 210,634 244,666 273,737

$210,634

$244,666

$273,737 297,204 28,661 118 2,425 1,257 5

2 16 290,175 28,218 145 2,444 1,328ll 14 16 283,530 27,435 170 2,427 1,432 10 1

4 329,688 322,351 315,009 329,688 322,351 315,009

• Effective from acquisition date, January 28, 1985; Starting in 1989, Gas Throughput includes Gathering Company's gas throughput and Gas Revenues include revenues of Gathering Company and Processing Company. (See note 1 of the notes to consolidated financial statements.)

63

ITEM9. DISAGREEMENTS ON ACCOUNTINGAND FINANCIALDISCLOSURE None.

PART III ITEM 10. DIRECTORS AND EXECUTIVEOFFICERS OF THE COMPANY Reference is hereby made to "Election of Directors" in the Company's Proxy Statement relating to the annual meeting of stockholders to be held on May 15, 1990 (the "1990 Proxy Statement" ) and to PART I, SUPPLEMENTAL ITEM"EXECUTIVEOFFICERS OF THE COMPANY".

ITEM 11. EXECUTIVECOMPENSATION Reference is hereby made to "Executive Compensation" in the 1990 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT Reference is hereby made to'"Voting Information" and "Election of Directors" in the 1990 Proxy Statement.

'TEM 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS Reference is hereby made to the 1990 Proxy Statement for such disclosure, ifany, as may be required by this item.

PART IV ITEM 14. EXHIBITS, FINANCIALSTATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)

1. See Index to Financial Statements under Item 8.

d (a)

2. The following consolidated financial information for the years 1989, 1988 and 1987 is submitted under Item 8.,

Schedule V Property, plant and equipment.

Schedule VI Accumulated depreciation and amortization of property, plant and equipment.

Schedule VIIIValuation and qualifying accounts and reserves.

Schedule IX Short-term borrowings.

All other schedules are omitted for the reason that they are not applicable, not required or the

. information is otherwise supplied.

64

(a)3-A. Exhibits Filed:

Exhibit Number 10.26.2 10.27.2 10.29.1 10A5 10.46 10.47 10.48 10.49 Description

Second Amendment to Restated and Amended Public Service Company of New Mexico Accelerated Management Performance Plan (1988) (December 29, 1989).

Second Amendment to Public Service Company of New Mexico Service Bonus Plan dated December 29, 1989.

First Amendment to Public Service Company of New Mexico Supplemental Executive Retirement Plan dated December 29, 1989.

Supplemental Employee Retireinent Agreement dated December 1, 1989.

Supplemental Retirement Agreement dated January, 23, 1990.

Supplemental Employee Retirement Agreement dated March 6, 1990.

Settlement'Agreement between Public Service Company of New Mexico and Creditors of Meadows Resources, Inc. dated November 2, 1989.

Consulting Agreement between Public Service Company of New Mexico and North Sandia Partners, Inc. dated January 1, 1990.

(a) 3-B. Exhibits Incorporated By

Reference:

j In addition to those Exhibits shown above, the Company hereby incorporates the following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation 201.24 by reference to the filings set forth below:

Exhibit No.

Descnptlon Filed as Exhibit:

File No.

Articles of Incorporation and By-law' 3.1 3.2 Restated Articles of Incorporation of the Company, as amended through May 10, 1985.

4-(b) to Registration Statement No. 2-99990 of the Company.

Bylaws of the Company as amended through 19.1 to the Company's July 25, 1989.

Quarterly Report on Form 10-Q for the quarter ended September 30, 1989.

2-99990 1-6986

/

Instruments Defining the Rights of Security Holders, Including Indentures 4.1 Indenture of Mortgage and Deed ofTrust dated as of June 1, 1947, between the Company and Irving Trust Company,'as

'rustee, together with the Ninth Supplemental Indenture dated as of

'anuary 1, 1967,'the Twelfth Supplemental Indenture'dated as of September 15, 1971, the Fourteenth Supplemental Indenture dated as of December 1, 1974 and the Twenty-second Supplemental Indenture dated as of October 1, 1979 thereto relating to First Mortgage Bonds of the Company.

4-(d) to Registration 2-99990 Statement No. 2-99990 of the Company.

65

Exhibit No.

Description Filed as Exhibit:

File No.

4.2 Portions of sixteen supplemental indentures to the Indenture of Mortgage and Deed of Trust dated as ofJune 1, 1947, between the Company and Irving Trust Company, as Trustee, relevant to the declaration or payment of dividends or the making of other distributions on or the purchase by the Company ofshares of the Company's

'ommon Stock.

4-(e) to Registration 2-99990 Statement No. 2-99990 of the Company.

4.3 Agreement of the Company pursuant to Item 601(b)(4)(iii) of Regulation S-K.

4-C to Annual Report of the Registrant on Form 10-K. for fiscal year ending December 31, 1983.

1-6986 Material Contracts 10.1 Supplemental Indenture of Lease dated as of July 19, 1966 between the Company and other participants in the Four Corners Project and the Navajo Indian Tribal Council.

4-D to Registration

~

2-26116 Statement No. 2-26116 of the Company.

10.1.1 Amendment and Supplement No.

1 to Supplemental and Additional Indenture of Lease dated April25, 1985 between the Navajo Tribe of Indians and Arizona Public Service Company, El Paso Electric Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company, and Tucson Electric Power Company.

10.1.1 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1985.

1-6986 10.2 Fuel Agreement, as supplemented, dated as of September 1, 1966 between Utah Construction &'MiningCo. and the participants in the Four Corners Project including the Company.

4-H to Registration 2-35042 Statement No. 2-35042 of the Company.

10.3 Fourth Supplement to Four Corners Fuel Agreement No. 2 effective as ofJanuary 1,

1981, between Utah International Inc. and the participants in the Four Corners Project including the Company.

(10)-BB to Annual Report of the Registrant on Form 10-K for the fiscal year ending December 31, 1980.

1-6986 66

Exhibit'No.

Desc Ipllo Filed as Exhibit:

File No.

10.4.1 10.5 10.5.1 Contract between the United Stafes and the Company dated April 11, 1968, for furnishing water.

\\

Amendatory Contract between the United States and the Company dated September 29, 1977,for furnishing water.

Co-Tenancy Agreement between the Company and Tucson Gas &Electric Company dated February 15, 1972 pertaining to the San Juan generating plant.

Modification No. 4 to Co-Tenancy Agreement between the Company and Tucson Electric Power Company dated October 25, 1984.

10.5.1 to Annual Report of the Re'gistran't on Form 10-K for fiscal year ending December 31, 1985.

1-6986 5-L'o Registration 2-41010

- Statement No. 2-41010 of the Company.

5-R to Registration 2-60021 Statement No. 2-60021 of the Company.

5-0 to Registration 2-44425 Statement No. 2-44425 of the Company.

10.5.'2 Modification No. 5 to Co-Tenancy Agr'cement between the Company and Tucson Electric Power Company dated

'July 1,'985.

10.5.2 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1985.

1-6986 10.'6 San Juan Project Construction Agreement between the Company and Tucson Gas &

Electric Company, executed December 21, 1973 5-R to Registration.

2-50338 Statement No. 2-50338 of the Company.

10.6.1 10.6.2 Modification No. 4 to San Juan Project Construction Ag'reement between the Company'and Tucson Electric Power Company dated October 25, 1984.

Modification No. 5 to San Juan Project Construction Agreement between the Company and Tucson Electric Power Company dated July 1, 1985.

10.6.1 to Annual Report of the Registrant on Form

'0-K for fiscal year ending December 31, 1985.

10.6.2 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1985.

1-6986 1-6986 10.7 10.7.1 San Juan Project Operating Agreement between the Company and Tucson Gas &

Electric Company, executed December 21, 1973.

'Modification No. 4 to San Juan'Project Operating Agreement between the Company and Tucson Electric Power Company dated October 25, 1984:

10.7.1 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1985.

1-6986 5-S to Registration 2-50338 Statement No. 2-50338 of the Company.

67

Exhibit No.

Description Filed as Exhibit:

File No.

10.7.2 10.8 10.8.1 10.8.2 10.8.3 10.8.4 10.8.5 10.8.6 10.8.7 Modification No. 5 to San Juan Project Operating Agreement between the Company and Tucson Electric Power Company dated July 1, 1985.

Arizona Nuclear Power Project Participation Agreement among the Company and Arizona Public Service Company, Salt River Project Agricultural Improvement and Power District, Tucson Gas &

Electric Company and El Paso Electric Company, dated August 23, 1973.

Amendments One through Four to Arizona Nuclear Power Project Participation Agreement.

Amendment No. 5 to the Arizona Nuclear Power Project Participation Agreement dated as of December 5, 1979.

Amendment No. 6 to the Arizona Nuclear Power Project Participation Agreement effective October 16, 1981.

Amendment No. 7, effective April 1, 1982, to the Arizona Nuclear Power Project Participation Agreement.

Amendment No. 8 elfective September 12, 1983, to the Arizona Nuclear Power, Project Participation Agreement.

Amendment No. 9 to Arizona Nuclear Power Project Participation Agreement dated as ofJune 12, 1984.

Amendment No. 10 to Arizona Nuclear Power Project Participation Agreement dated as of November 21, 1985.

10.7.2 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1985.

5-T to Registration Statement No. 2-50338 of the Company.

(c) to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1979.

10-Z to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1981.

10-AA to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1981.

10-BB to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1982.

10-JJ to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1983.

10-JJ to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1984.

10.8.7 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1985.

1-6986 2-50338 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 68

Exhibit No.

Description Filed as Exhibit:

10.8.8 Amendment No. 11 to Arizona Nuclear Power Project Participation Agreement dated June 13, 1986 and effective January 10, 1987.

10.8.8 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1986.

10.9 I

10.9.1 10.9.2 Coal SalesAgreement executed August 18, 1980 between San Juan Coal Company, the Company and Tucson Electric Power Company.

Amendment Number 1 to Coal Sales Agreement dated September 30, 1981 among San Juan Coal Company, the Company and Tucson Electric Power Company.

Amendment No. Three to Coal Sales Agreement dated April30, 1984 among San Juan Coal Company, the Company and Tucson Electric Power Company'confidentiality treatment has been requested and exhibit is not filed herewith).

(10)-EE to Anttual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1980.

10-V to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1981.

10-NN to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1984.

10.10 Modifications No.

1 to San Juan Project Agreements.

A part of 10-T to Annual Report of the Registrant on Form 10-K for fiscal year endirig December 31, 1981, 10.11 10,11.1 10.12 San, Juan Unit 4 Early Purchase and Participation Agreement dated as of September 26, 1983, between the Company and M-S-R Public Power Agency, and Modifications No. 2 to the San Juan Project Agreements dated December 31, 1983.

Amendment No.

1 to the Early Purchase and Participation Agreement. between Public Service Company of New Mexico and M-S-R Public Power Agency, executed as of December 16, 1987, for San Juan Unit 4.

Amended and Restated San Juan Unit 4 Purchase and Participation Agreement dated. as 'of December 28, 1984 between the Company and the Incorporated County of Los Alamos.

10-KK to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31,

1983, 10.11.1 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1987.

II 10-00 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1984.

69

Exhibit No.

Description Filed as Exhibit 10.13 10.14 Modifications No. 3 to San Juan Project.

Agreements dated July 17, 1984.

kl t

Participation Agreement among the 10-KK to Annual. Report of the Registrant on Form

, 10-K for fiscal year ending December 31, 1984.

10-W to Annual Report of

'ompany, Tucson Electric Power

'he Registrant on Form Company and certain financial institutions 10-K for fiscal year relating to the San Juan Coal trust dated ending December 31, as of December 31, 1981.

1981.

10.15 10.16 10.17 10.18*

10.18.1*

10.19 10.20 Participation Agreement dated as ofJune 30, 1983 among Security Trust Company, as Trustee, the Company, Tucson Electric Power Company and certain financial institutions relating to San Juan Coal Trust.

Participation Agreement between the Company, the Owner Trustee and the Equity Participants with respect to the leveraged preferred stock of the Company dated as of December 1, 1981.

Interconnection Agreement dated Nov'ember 24, 1982, between the Company and Southwestern Public Service Company.

Lease dated February 5, 1985 between The First National Bank of Boston, Lessor, and the Company, Lessee.

Supplement No.

1 dated September 30, 1985, to Lease dated February 5, 1985 between The First National Bank ofBoston, Lessor, and the Company, Lessee.

New Mexico Public Service Commission Order dated December 12, 1984, and Exhibit A thereto, in NMPSC Case No.

1804, regarding inventoried capacity.'ew Mexico Public Service Commission Order dated August 12, 1986, and Attachment A thereto, in NMPSC Case No. 2011, regarding the application of the inventorying methodology to certain sale" and leaseback transactions.

10-II to Annual Report of the Registrant on Form 10-K for fiscal year "ending December 31,

'1983.'0-CC to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1981.

10-II to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1982.

10.28 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1985.

10.28.1 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1985.

10-PP fo Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1984.

10.20 to Annual Report of the. Registrant on Form 10-K for fiscal year ending December 31, 1986.

70

Exhibit No.

Description Filed as Exhibit:

10.21'0.21.

1*.

10.21.2*

'acility Lease dated as of December 16, 1985, between The First National Bank of Boston, as Owner Trustee, and Public Service Company of New Mexico.

Amendment No. I dated as ofJuly 15, 1986, to Facility Lease dated as of December 16, 1985.

Amendment No. 2 dated as of November 18, 1986, to Facility Lease dated as of December 16, 1985.

li 28(a) to the Company's Current Report on Form 8-K dated December 31, 1985.

28.1 to the Company's Current Report on Form 8-K dated July 17, 1986.

28.1 to the Company's Current Report on Form 8-K dated November 25, 1986.

10.21.3 Amendment No. 3 dated as of March 30, 1987, to Facility Lease dated as of

, December 16, 1985.

10.21.3 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1987.

10.22 Facility Lease dated as ofJuly 31, 1986, between The First National Bank of Boston, as Owner Trustee, and Public Service Company of New Mexico.

28.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1986.

10.22.1 10.22.2 Amendment No.

1 dated as of November 18, 1986, Facility Lease dated as of July 31, 1986.

Amendment No. 2 dated as of December 11, 1986, to Facility Lease dated as of July 31, 1986.

28.5 to the Company's Current Report on Form 8-K dated November 25, 1986.

10.22.2 to Annual Report of the Registrant on Form 10-K for liscal year ending December 31, 1986.

10.22.3 Amendment No. 3 dated as of April 8, 1987, to Facility Lease dated as of July 31, 1986.

10.22.3 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1987.

10.23*

Facility Lease dated as of August 12, 1986, between The First National Bank of Boston, as Owner Trustee, and Public Service Company of New Mexico.

28.1 to the Company's Current Report on Form 8-K dated August 18, 1986.

10.23.1*

Amendment No. I dated as of November 18, 1986, to Facility'ease dated as of August 12, 1986.

28.9 to the Company's Current Report on Form 8-K dated November 25, 1986.

71

Exhibit No.

Description Filed as Exhibit:

10.23.2 10.24 10.24.1 10.25 10.25.1 10.26 10.26.1 10.27 10.27.1 10.28 Amendment No. 2 dated as of November 25, 1986, to Facility Lease dated as of August 12, 1986.

Facility Lease dated as of December 15, 1986, between The First National Bank of Bosto'n, as Owner Trustee, and Public Service Company of New Mexico (Unit 1

'ransaction).

Amendment No.

1 dated as ofApril 8, 1987, to Facility Lease dated as of December 15, 1986.

Facility Lease dated as of December 15, 1986, between The First National Bank of Boston, as Owner Trustee, and Public Service Company of New Mexico (Unit 2 Transaction).

Amendment No.

1 dated as of April'8, 1987, to Facility Lease dated as of December 15, 1986.

Restated and Amended Public Service Company of New Mexico Accelerated Management Performance Plan (1988).

, (August 16, 1988.)

First Amendment to Restated 'and Amended Public Service Company of New Mexico Accelerated Management Performance Plan (1988). (August 30, 1988.)

Public Service Company of New Mexico Service Bonus Plan, October 23, 1984.

First Amendment to Public Service Company of New Mexico Service Bonus Plan dated November 20, 1985.

Management Life Insurance Plan (July 1985) of the Company.

10.23.2 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1986.

'28.1 to the Company's Current Report on Form 8-K dated December 17, 1986.

10.24.1 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1987.

28.9 to the Company's Current Report on Form 8-K dated December 17, 1986.

10.25.1 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1987.'9.5 to the Company's Report on Form 10-Q for the quarter ended September 30, 1988.

19.6 to the Company's Report on Form 10-Q for the quarter ended September 30, 1988.

19.4 to the Company's Report on Form 10-Q for the quarter ended September 30, 1988.

10.11.1 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1985.

10.39 to Annual Report of the Registrant on Form

'10-K for fiscal year ending December 31, 1985.

72

Exhibit No.

10.29 10.30 10.31 10.32 10.33 10.34

'0;35 10.36 Description Supplemental Executive Retirement Plan of the Company dated July 23, 1985.

Compensatory Agreement with Mr. James F.

Jennings, Jr.

Public Service Coinpany of New Mexico Exec-U-Care Group Medical Reimbursement 'Insurance Trust Participation Agreement.

Amended and Restated Medical Reimbursement Plan of Public Service Company of New Mexico.

Republic Holding Company Series M Preferred Stock Program.

Meadows Resou'rces, Inc., Second Restated and A'mended Executive Deferred Compensation Plan, Alliance Telecommunications Investment. (August 24, 1988.)

Amendment No. 2 dated as ofApril 10, 1987,'o the Facility Lease dated as of August 12, 1986, between The First National Bank of Boston, as Owner Trustee, and Public Service Company of New Mexico. (Unit 2 Transaction.) (This is an amendment to a Facility Lease'vhich is substantially similar to the Facility Lease filed as Exhibit 28.1 to the Company's Current Report on Form 8-K dated August 18, 1986.)

Amendment No. 3 dated as of March 30, 1987, to the Facility Lease dated as of December 16, 1985, between The First National Bank of Boston, as Owner Trustee, and Public Service Company of New Mexico. (Unit 1 Transaction.) (This is an amendment to a Facility Lease which is substantially similar to the Facility Lease filed as Exhibit 28(a) to the Company's Current Report on Form 8-K dated December 31, 1985.)

Filed as Exhibit:

10.41 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1985.

10-MM to Annual Report of the Regist'rant on Form 10-K for fiscal year ending December 31, 1984.

19.5 to the Company's Quarterly Report on Form 10-Q for Quarter ended March 31, 1987.

19.6 to the Company's Quarterly Report on Form 10-Q for Quarter ended March 31, 1987.

19.4 to the Company's Quarterly Report on Form 10-Q for Quarter ended June 30, 1987.

'9.3 to the Company's Quarterly Report on Form 10-Q for Quarter ended September 30, 1988.

10.53 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1987.

10.54 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1987.

Fiie No.

1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 73

Exhibit No.

Description Filed as Exhibit:

File No.

10.37 'ecommissioning Trust Agreement between Public Service Company of New Mexico and First Interstate Bank of Albuquerque dated as ofJuly 31, 1987.

10.55 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1987.

1-6986 10.38 10.39 New Mexico Public Service Commission Order dated July 30, 1987, and Exhibit 1 thereto, in NMPSC Case No. 2004, regarding the PVNGS decommissioning trust fund.

' MCB/RSB Management Incentive

~ Programs. (December 1, 1985.)

10.56 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1987.

10.57 to, Annual Report of

'the Registrant on Form 10-K for fiscal year ending December 31, 1987.

1-6986 1-6986 10.40 10.41 10.42 10.43 10.44 Form of Executive Retention Plan, CMC Group and January 24, 1989 Resolution Authorizing Plan.

Public Service Company of New Mexico and Paragon Resources, Inc. Deferred Compensation Trust Agreement dated December 30, 1988.

Executive Retention Agreements (1989).

Agreement to Continue Medical Benefits dated August 4, 1989.

Supplemental Employee Retirement Agreements dated August 4, 1989..

t 10.61 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1988.

10.62 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1988..

19.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989.

19.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989.

'9.4 to the Company's Quarterly Report on

, Form 10-Q for,the quarter ended September

.30, 1989.

1-6986 1-6986 1-6986 1-6986 1-6986'ubsidiaries of the Registrant 22 Certain Subsidiaries of the Registrant 22 to Annual Report of the 1-6986 Registrant on Form 10-K for fiscal year ending December 31, 1986.

74

Exhibit No.

Additional Exhibits Deae iptlon Filed as Exhibit:

File No.

28.1 28.1.1 28(i) to the Company's

,Current Report on Form 8-K dated December 31, 1985.

1 Collateral Trust Indenture dated as of December 16, 1985, among First PV Funding Corporation, Public Service Company of New Mexico and Chemical Bank, as Trustee.

Series 1986A Bond Supplemental Indenture 28.4 to the'Compaiiy's

" dated'as of July 15, 1986, to Collateral Current Report on Form Trust Indenture dated as of December 16, 8-K dated July 17, 1986.

1985.

1-6986 1-6986 28.1.2 28.1.3 28.1.4 Series 1986B Bond Supplemental Indenture dated as of November 18, 1986, to Collateral Trust Indenture dated as of December 16, 1985.

Unit 1 Supplemental Indenture of Pledge (Lease Obligation Bonds, Series 1986B) dated as of December 15, 1986, to the Collateral Trust Indenture dated as of

'ecember 16, 1985.

Unit 2 Supplemental Indenture of Pledge (Lease Obligation Bonds, Series 1986B) dated as of December 15, 1986, to the Collateral Trust Indenture dated as of December 16, 1985.

28.1.2 to the Company's Current Report on Form

, 8-K dated November 25, 1986.

28.8 to the Company's Current Report on Form 8-K dated December 17, 1986.

28.16 to,the Company's Current Report on Form 8-K dated December 17, 1986.

1-6986 1-6986 1-6986 28.2>>

Participation Agreement dated as of

'December 16, 1985, among the Owner Participant named therein, First PV Funding Corporation, The First National Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of December 16, 1985 with the Owner Participant), Chemical

'ank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 16, 1985 with the Owner Truste'e), and Public Service Company of New Mexico, including Appendix A definitions.

2 to thc Compariy's Current 1-6986 Report on Form 8-K dated December 31, 1985.

28.2.1>>

28.2.2>>

Amendment No.

1 dated as of July 15, 1986, to Participation Agreement dated as of December 16, 1985.

Amendment No. 2 dated as of November 18, 1986, to Participation Agreement dated as of December 16, 1985.

2.1 to the Company's

, Current Report on Form 8-K dated July 17, 1986.

2.1 to the Company's

'urrent Report on Form 8-K dated November 25, 1986.

1-6986 1-6986 75

Description Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 16, 1985, between The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee.

Filed as Exhibit:

File No.

28(b) to the Company's

., 1-6986 Current Report on Form 8-K dated December 31, 1985.

Supplemental Indenture No.

1 dated as of July 15, 1986, to the Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 16, 1985.

Supplemental Indenture No. 2 dated as of November 18, 1986, to the Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 16, 1985.

Assignment, Assumption and Further Agreement dated as of December 16, 1985, between Public Service Company of New Mexico and The First National Bank of Boston, as Owner Trustee.

Participation Agreement dated as ofJuly 31, 1986, among the Owner Participant named therein, First PV Funding Corporation, The First National Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as ofJuly 31, 1986, with the Owner Participant),

Chemical Bank, in its individual capacity, and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as ofJuly 31, 1986, with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions.

28.2 to the Company's Current Report on Form 8-K dated July 17, 1986.

28.2 to the Company's Current Report on Form 8-K dated November 25, 1986.

28(e) to the Company's Current Report on Form 8-K dated December 31, 1985.

'.1 to the Company's Quarterly Report on Form 10-Q for Quarter ended June 30, 1986.

1-6986 1-6986 1-6986 1-6986 Amendment No.

1 dated as of,November 18, 1986, to Participation Agreement dated as ofJuly 31, 1986.

28.4'o the Company's Current Report on Form 8-K dated November 25, 1986.

1-6986 Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of July 31, 1986, between The First National Bank of Boston, as Owner

~ Trustee, and Chemical Bank, as Indenture Trustee.

28.2 to the Company's Quarterly "Report on i 'orm 10-Q for Quarter ended June 30, 1986.

1-6986 76

Exhibit No.

Description Filed as Exhibit:

28.6.1 28.7 28.8*

Supplemental Indenture No.

1 dated as of

'ovember 18, 1986, to the Trust Indenture, Mortgage, Security Agreement and Assignments of Rents dated as ofJuly 31, 1986.

II Assignment, Assumption, and Further Agreement dated as ofJuly 31, 1986, between Public Service Company of New, Mexico and The First National Bank of Boston, as Owner Trustee.

Participation Agreement dated as ofAugust 12, 1986, among the Owner Participant named therein, First PV Funding Corporation, The First National Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of August 12, 1986, with the Owner Participant), Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of August 12, 1986, with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions.

28.6 to the Company's Current Report on Form 8-K dated November 25, 1986.

tl 28.3 to the Company's Quarterly Report on Form 10-Q for quarter ended June 30, 1986.

2.1 to the Company's Current Report on Form 8-K dated August 18, 1986.

28.8.1*

28.9e Amendment No.

1 dated as of November 18, 1986, to Participation Agreement dated as

, of August 12, 1986.

Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of August 12, 1986, between The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee.

28.8 to the Company's Current Report on Form 8-K dated November 25, 1986.,

28.2 to the Company's Current Report on Form 8-K dated August 18, 1986.

28.9.1e Supplemental Indenture No.

1 dated as of November 18, 1986, to the Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of August 12, 1986.

28.10 to the Company's Current Report on Form 8-K dated November 25, 1986.

28.10'ssignment, Assumption, and Further Agreement dated as of August 12, 1986, between Public Service Company of New Mexico and The First National Bank of Boston, as Owner Trustee.

28.3 to the Company's Current Report on Form 8-K dated August 18, 1986.

77

Description Filed as Exhibit:

Participation Agreement dated as of December 15, 1986, among the Owner Participant named therein, First PV Funding Corporation, The First National Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of December 15, 1986, with the Owner Participant),

Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 15, 1986, with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions (Unit 1 Transaction).

Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 15, 1986, between The First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee (Unit 1 Transaction).

Assignment, Assumption and Further Agreement dated as of December 15, 1986, between Public Service Company of New Mexico and The First National Bank of Boston, as Owner Trustee (Unit 1 Transaction).

Participation Agreement dated as of December 15, 1986, among the Owner Participant named therein, First PV Funding Corporation, The First National Bank of Boston, in its individual capacity and as Owner Trustee (under a Trust Agreement dated as of December 15, 1986, with the Owner Participant),

Chemical Bank, in its individual capacity and as Indenture Trustee (under a Trust Indenture, Mortgage, Security Agreement and Assignment of Rents dated as of December 15, 1986, with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions (Unit 2 Transaction).

2.1 to the Company's Current Report on Form 8-K dated December 17, 1986.

28.2 to the Company's Current Report on Form 8-K dated December 17, 1986.

28.3 to the Company's Current Report on Form 8-K dated December 17, 1986.

2.2 to the Company's Current Report on Form 8-K dated December 17, 1986.

78

Exhibit No.

Description Filed as Exhibit:

File No.

28.15 28.16 28.174 28.18>>

28.19 28.20 Trust'Indenture, Mortgage, Security

'greenient and Assignment of Rents dated as of December 15, 1986, between the First National Bank of Boston, as Owner Trustee, and Chemical Bank, as Indenture Trustee (Unit 2 Transaction).

Assignment, Assumption, and Further Agreement dated as of December 15, 1986, between Public Service Company of New Mexico and The First National Bank of Boston, as Owner Trustee (Unit 2 Transaction).

Waiver letter with respect to "Deemed Loss Event" dated as of August 18, 1986, between the Owner Participant named therein, and Public Service'Company of New Mexico.

Waiver letter with respect to "Deemed Loss Event" dated as of August 18, 1986, between the Owner Participant named therein, and Public Service Company of New Mexico.

'Agreement-'No.

13904 (Option'and Purchase of EAluent), dated April23, 1973, among Arizona Public Service Company, Salt River Project Agricultural Improvement and Power District', the Cities of Phoenix, Glendale, Mesa, Scottsdale, and Tempe,

~ and the Town of Youngtown.

Agreement for the Sale and Purchase of Wastewater ENuent, dated June 12, 1981, among Arizona'ublic Service Company, Salt River Project Agricultural Improvement and Power District and the City of Tolleson, as amended.

28. 10 to the Company's Current Report on Form 8-K dated December 17, 1986.

28.11 to the Company's Current Report on Form 8-K dated December 17, 1986.

28.12 to the Company's Current Report on Form 8-K dated August 18, 1986.

28.13 to the Company's Current, Report on Form 8-K dated August 18, 1986.

28.19 to Annual Report 'of the Registrant on Form 10-K for fiscal year ending December 31, 1986.

28.20 to Annual Report of the Registrant on Form 10-K for fiscal year ending December 31, 1986.

1-6986 1-6986 1-6986 1-6986 1-6986 1-6986 o One or more additional documents, substantially identical in all material respects to this exhibit, have been entered into, relating to one or more additional sale and leaseback transactions. Although such additional documents may differ in other respects (such as dollar amounts and percentages),

there are no material details, in which such additional documents differ from this exhibit.

(b) Reports on Form 8-K:

l The Company filed no reports on Form 8-K during the quarter ended December 31, 1989. During the period beginning January 1, 1990 and ending March 23, 1990, the Company filed, on the date indicated, the following reports on Form 8-K: Report dated December 19, 1989 and filed January 2,'990, relating to the lowering of ratings of the Company's securities.

79

SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, PUBLIC SERVICE COMPANY OF NEW MEXICO (Registrant)

Date: March 23, 1990 By

/s/ J. D. GElsT J. D. Geist Chat'rman ofthe Board and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

I Signature Capacity Date

/s/ J. D. GEIsT J. D. Geist Chairman ofthe Board and President Principal Executive Officer and Director March 23, 1990

/S/ M. H. MAERKI M. H. Maerki Senior Vice President and ChiefFinancial 0+cer

/s/ B. D. LAGKEY B. D. Lackey Vice President and Corporate Controller Principal Financial OAicer March 23, 1990 Principal Accounting Officer March 23, 1990

/s/ J. P. BUNDRANT J. P. Bundrant

/s/ A. B. Collins, Jr.

A. B. Collins, Jr.

/s/ J. A. GQDwIN J. A. Godwin

/S/ C. E. LEYENDECKER C. E. Leyendecker

/s/ A. G. ORTEGA A. G. Ortega

/s/ R. R. REHDER R. R. Rehder

/s/ R. H. STEPHENs R. H. Stephens

/s/ E. R. WooD E. R. Wood Director Director Director Director Director Director Director Director March 23, 1990 March 23, 1990 March 23, 1990 March 23, 1990 March 23, 1990 March 23, 1990 March 23, 1990 March 23, 1990 80

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Public Service Companyoftlewhiexico Ahmdo Square Albuquerque, Yew Mexico 87158 Telephone: 95/8/82700 ONO MfL5CAkY~ (rNCWNXCi Design:

L~rrda CrLcpino Phorography:

Srudio7 Ron Behrmann Chuck Gallagher hllchael Barley