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
Download: ML17305B108 (99)

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 excellent year with an 88 percent avail-

'results.';r, ai .e,ectric,"."=apso d a city charter amendment ability factor. San Juan's performance

~omej'ost:;"pe j,: tjwg hoyr','was'",: dtrecti'ity government to award the helped offset Palo Verde's being down

".less ind9r89 Ihan in.19@-',",'tf>e gesult of,'.-

'gnificani':c'ut,;iri. 1,~Retail

':~fef'e to the "lowest cost supplier." 75 percent of the year through both h Weviewthemeasureasasmokescreen unplanned outages and planned out-energysales grew . percent, continu- for some critics'goal fora city takeover ages for refueling and maintenance.

ing a three year average of approxi- of our Albuquerque system. Despite not having Palo Verde's energy mately 5 percent annual growtt>. On There are many legal and regulatory available, in 1989 we exceeded our July5thwesetan all.timepeakdemand hurdles to a city takeover. For eighteen targets for short-term energy sales and of 1,006 MW. The number of retail monthssomecriticsclaimedthat,upon revenues Irom wholesale transmission customers grew by about two percent franchise expiration, PNM's lines in city services to other utilities.

to 287,000. We now serve 64,000 more right-of-way would become city prop.

customers with about 1,000 less em. erty. In January, therefore, we asked a SANGRE DE CRISTO WATER COMPANY ployees than seven yeats ago. Federal districtcourt to confirm PiVM's In Santa Fewater consumption setan ownership of distribution lines on city all.time dailypeakof19 milliongallons SERVICE TO CGSTOMERS streets and alleys. on June 2. Not to be outdone byAlbu.

In our six regional divisions we'e Legal and regulatory actions aside, querque's example, some Santa Fe always maintained close, Iriendly con- however,ourbestdefenseagainstacity citizens are reopening the perennial tactswith ourcustomers. We've worked takeover willalways be customers con- issue of city takeover of Sangre de hardtobringthatpersonalizedsefvice vinced that we continue to offer the Cristo Water Company. The idea was to the Albuquerque area. Our eight best combination of cost, reliability, last rejected by the voters in 1985. Our Albuquerque neighborhood offices and service.. water company employees arecontinu.

handled over 500,000 phone calls and ing their outstanding performance, and 300,000 walk-in visits from customers. POWER OPERATIONS we look fofward to serving Santa Fe's We reduced overall outage duration by Our San Juan power plant had an water needs for years to come.

28 pe rcentand the numberofcustomer 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 Hectric projects almost fiftypercent growth in power demand over the next ten years.

ALBGQUERQUEFRANCHISERENEWAL h 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 an Water ~'Serior ications Group, MEgttnton, E'd ftrrft,Hlen WJson, Jeny Godwin.Ms. fkffis Mr. Eght's ~.

Managenett Team fnxnkft to right: Debits Jdf Sterba, Dcn Begky, Director, Commun-Other tities see page 7.

tification would give usregulatory free. plant managers have replaced many Federal bankruptcy judge ordered dom to seek the best use for this capa- previous top executives; many addi- Bellamah's immediate liquidation-city. Hearings begin in April. tional workers havebeen hired. Despite certainly a setback for Meadows'opes expected increases in both operating for a more orderly liquidation.

PALO VERDE OPS AND DOWNS and capital improvements expendi- Meadows is working to complete iastyear I wrote "Unlike some other tures, Palo Verde's costs will still be selling its remaining assets. We don' nuclear investments, Palo Verde is a slightly below average for comparable expect Bellamah's forced liquidation or well-built, well-run plant." nuclear power plants. the sale of Meadows'emaining assets I was right about Palo Verde's being to affect PiM'sbalancesheetadversely.

"well.built." An exhaustive construc- GROWTH IN all LITYSALES We believe we'e made full provision tion audit for the Arizona Corporation In 1989 our operating revenues in- for Meadows'uture developments Commission objected to only about creased to $ 915 million. Retail electric through losses already recognized.

one percent of Palo Verde's brick-and- energy sales increased 4.8 percent. We mortar cost. set an all-time record peak electric RIMMINGGP But "well.run" is proving tougher to demand. In our retail gas business, after So how does itall add up?

achieve. This past year Palo Verde's dramatic declines earlier in the decade, ~ We were making steady progress on operator, Arizona Public Service, ran annual gas throughput increased for regulatorytreatmentofexcesscapacity into significant operational problems. the third straight year. until the hearing examiner's adverse All three units were down for major For the 1990's we don't expect the recommendation in the associated periods. booming Sunbelt growth of the 1970's rate case.

We'e confident Palo Verde will yet when we made long-term commit- ~ Palo Verde nuclear plant suffered be "well.run" but not without signifi- ments to major new power plants. At operational problemsbutseems tobe cant cost. Highly experienced nuclear the retail level we do expect moderate back on course.

but steady growth in customers and ~

Our basic retail utilitybusinessescon-energy consumption for both gas and tinue to grow.

~ We electric utilities. substantially completed our exit from diversification.

GETllNG BACK TO BASICS In short, we'e still being bu6eted In 1988 we decided to end our around in heavy financial seas. There j/

diversification program. Over the past are no blue skies immediately ahead, year that goal was substantially accom. but we'e on a steady course.

~ We'e plished. concentrating on our electric, This January Sunbelt Mining Com. gas, and water retail utilitybusinesses.

lIt pany's operations ended with the sale ~ We'l keep fighting for a fair return on

'(

of its gas gathering and gas processing those utilityassets.

subsidiaries to Gas Company of New ~ We'e C seeking the best deal we can Mexico. make for our excluded power During 1989 Meadows Resources plants.

sold its fiberboard plant, its telecom. It's proving tougher to get there, but munications equipmentmanufacturing we can see the far shores and the firm,andseveral real estate investments. harbor ahead.

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

InJune Meadows'largest land invest-ment, the Bellamah Community Deve-lopment partnership, sought to re. J.D. Geist organize under Federal bankruptcy Chairman and President court protection. This January the Mardi 20, 1990

L To tf olders

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'-'Foi,l959'we,*'r rded t- 'ings BASIC VAUIES ering four keycases dealing with excess for c mmon-stec o ers o $ 72 mil. Before reviewing the past year' capacity. Theypose the questions: What lion, or $ 1.73 per share.%is compared events, I want to pause to note en- capacity will New Mexico's future with a net loss for common stockhold- during basic values our company nn rowth require? What should be paid ers of $ 241 million, or $ 5.78 per share, be proud of. or that capacity and when? What regu-in 1988. We nn be proud of our environ- latory freedom should PNM have to Our net losses in 1988 were the mental record. We were national pace- deal with the capacity New Mexico result of recognizing losses of $329 settersin controlling power plantpollu. never wants?

million for assets devalued by dete- tion. Though a big share of our rates In April 1989 the Commission an-riorating markets or regulatory treat- goes for environmental protection, for swered the first question. Of our cur-ment. In April 1989 we suspended decades of blue skies and clean water rent excess capacity it ruled that 147 common stock dividend payments. it's money well. spent. MWofthe San Juan coal-fired plantand Our net earnings in 1989 resulted We can be proud of(but never satis- 260 MWofthe Palo Verde nuclear plant primarily Irom basic utility operations fied with) ourservice to our customers. would be needed for future growth. It and the final year ofa five-year,200MW High reliability backed by improved excluded 130 MW of San Juan and 130 wholesale power sale. For 1989 that emergency response, new neighbor- MW of Palo Verde. The Commission sale meant about $ 110 million in reve- hood offices, better customer records also kept 100.200 MW of purchased nues and $ 1.13 in earnings per share. systems, and aggressive energyinforma. power while excluding 105 MWfrom a We'e been through tough times, tion programs all testify to our commit- buy-back agreement.

and they'e not over. For two reasons ment to our electric, gas, and water This March the Commission an-1990 will be a hard year. customers. swered part of the cost question. It ~

First, the 200 MW wholesale power Finally, we can be proud of our em- approved a settlement ofthe Palo Verde sale that just expired has not been ployees. With fewer colleagues to help prudence audit. Among other provi-replaced with a similarlyprofitable sale. they'e serving more customers, gen- sions we agreed not to seek rate recov-

'Ihe long-term wholesale market is im- erating more electricity, pumping more ery of $ 90 million of our Palo Verde proving, but within the western power water, and moving more gas thanbefore. investment. Intervenors have appealed market we face difficultnear-term mar- both this decision and the April 1989 keting limitations: ample power sup- A year ago I cited four reasons for decision to the New Mexico Supreme plies, low prices, low profit margins, guarded optimism. Court.

and significant transmission barriers major progress in resolving the excess The third case was to set rates based between our power plants and the best npacity issue; on these capacity and cost decisions.

bulk power markets in California. the quality of the Palo Verde nuclear We asked for a $ 12 millionrate increase Second, as this annual report goes to plant; and a ten-year phase-in plan for 130 press, we don't know the outcome of ~

growth in retail utilitysales, our basic MWofPalo Verde npacity. The hearing our major electric rate case. A New business; and examiner, however, recommended a Mexico Public Service Commission . our decision to get back to the basics. $ 6 million rate cut and threw out any hearing examiner has made very ad- let me report on our successes and phase. in plan. As stated earlier, the verse recommendations. By mid-April failures on each of these major issues. Commission will act upon his recom.

the Commission itself must reach its mendations before mid.April.

final decision. Rather than speculate RESOLVING EXCESS CAPACITYISRIES Finally we have requested the Com-about the near future we shall report on Dealing with excess capacity is our mission to "decertify" the excluded further developments prior to the An. biggest challenge. Over the last three power capacity (130 MW of San Juan nual Meeting. years the Commission has been consid- and 130 MW of Palo Verde). Decer-

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"~,;: ":;.!;",,"'i",'",-'.,",;.'-',"""'tlectricand Water Operations Gas Operations . 5 Stockholder Information 6 Directors and Oficers . 7 Financial Information Index 8 FORM 10.K Following Page 8 OPERATIONS SQNMARY Public Service Company of New Mexico and Subsidiaries 1988 Change Operating revenues (') $ 915/10000 S 841 cr24,000 8.7 Operating expenses (') S 762,074,000 $ 701/58,000 86 Yet earnings (loss) S 82,593,000 S (230,137,000) N/M Return on average common equity 9.5% (23.9)X N/M Earnings per Share of Common Stock Earnings (loss) per

) common share $ 1.73 $ (5.78) N/M Dividends paid per common share S 0.38 $ m (Wr.7)

Book value per common share at 1ear.end S 18.02 S 1803 (0.1)

Construction expenditures $ 78,289,000 $ 97,181,000 (19.4)

ELECTRIC:

Total kilowatt.hour sales 8,006,050,000 8,193,184,000 (23)

Indudes sde of retained economic interest in oxd !cases

<<hkh ctxxrhxcd $ .90 and $ .73 per Are, reyeahefy in Dentherm throughput (a) 79,015,000 58/03,000 358 Rt and 583.

In 1%8,the~rcponcda tossoff3.78 pcr Aredue prirnuily to a prtxiYion for the eaimatcd toss fiom the

~

tisccntintnnce of the Gxntxtny's non-utility operations, 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

(') Operating revenues and operating expenses for 1989 include revenues and expenses of the 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 of 14,678,000dentherms kom deferred otrrltngccgsonuncommittcd eteeicneeating the ys gathering subsidiary.

tapxityandcnc timecoasrebtcdtoa<<txkforcereducttcn N/M Yot meaningful

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

ttlpanII+~;.< my~ et while opening up new uses. sharing ofcosts on settlements oftake-

.'f@eviMexicopi1)S5 tHe'naturals';-,.'-'Qfi'N'eat importance we keep adding or-pay gas contracts between com-

'usiness he&herjtraIisfo'rmed; In,the":.' 'Ior former customers back to our pany and customers. We secured a

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

'~u',"," stem for example, four potash process for seeking recovery of dis-plied its customers wit > all their g,...'ines and a power plant owned by puted costs on renegotiated supply NowanyNewMexicocustomercan r-.",.'nother utilityhave become transpor- contracts.

chase gas from any independent s - tation customers since 1988. The Commission alsoapproved Gas plier and require Gas Company to In several key areas improved cus- Company'sacquisition ofSunterra Gas deliver the gas. Iarge customers can tomer demand was buttressed by fa- Gathering Company and Sunterra Gas even bypass Gas Companycompletely! vorableregulatoryrulings. Wesecured Processing Company a part of Sun-Over these fiveyearswe've reshaped regulatory approval to continue the belt Mining Company's phase out.

our gas operations to compete in the purchased gas adjustment clause, and Both operations are now subject to a newmarketenvironment. 1989marked to implement a standby fee for trans- regulated rate. of-return.

our most successful year yet. portation customers.

GAS OPERATIONS OUTLOOK CUSTOMER SERVICE GAS SUPPLY Modest but steady growth that' In over 100 communities through- With the customer base no longer the business outlook for ourgasopera-out New Mexico, Gas Companyserves assured, acquiring gas supplies has tions. The Commission has now sub.

339,000 customers. After a decline in become a more complex task. Over stantially set the ground rules for the volume to 55 bcf in 1986, this year we the last year our regulatoryagenda has new era. Upside opportunities in-delivered Q bcf(including transpor- been heavy but successful. Case 2183 clude a new rate case and campaigns tation volumes), our third straightyear was Gas Company's mostcomprehen- to convert customers from other fuels on the upswing. Aggressive marketing sive case ever before the Public Ser- to gas. Remaining take. or-pay con-and award-winning advertising main- vice Commission. After a two.yearpro- troversies and disputedcontract prices tained gas'ominance of the heating ceeding we achieved an equitable represent downside risks.

Justafter the New Year, we filed fora

$ 19million rate increase.'Ihiswouldbe an eight percent overall increase. If granted in its entirety, our average cost per therm would still be below na-0'.v tional averages.

Finally, we intend to position natural firmlyin the environmental agenda k(, or the 1990's with natural gas.powered vehicles, gas fireplaces and gas logs, and high-tech, energy-saving gas equipment.

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John ~ Mt Reat Ms. Mrrruis Mr. ~'s Gas epations'senior Mamgement Team from nght to le: Etaine Map, pitris Bourque, seeretar7. hr tittes see page 7.

DA lan" James,hdylanotti,

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Stoc 'r ,,1 I

Cf) i, LOST CERTIFICATES Stock certificates are valuable pieces of paper 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 of the market value

" ll of the stock is charged by an insurance

' ".... 'ormation 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.

TAXREPORTS ON DMDEND INCOME PNM is required to report to the Ihe annual meeting ofstockholders dends, transfer requirements, lostcerti- Internal Revenue Service the total of Public Service Company of New ficates, and other related matters by amount of stockholder dividends paid Mexico will be held in the auditorium telephoning StockholderServices(num. to each stockholder during the preced.

ofthe UNMContinuing Education Con. bers given below). Stockholders must ing year. Form 1099 or 1042, which ference Center, 1634 University Boule- provide their tax identification number, contains the information supplied by vard N.E., Albuquerque, New Mexico the name(s) in which their shares are PiNM to the IRS for each stockholder on Tuesday, May 15, 1990 at 9:30 a.m. registered and their record address account, is mailed in January to all Mountain Daylight Time. Stockholders when they request information. this stockholders.

are urged to attend; however, whether service is available to all stockholders The Internal Revenue Service may or not attending, proxies should be Monday through Friday 7:30 a.m. to require PNM to begin 20% backup marked, signed, dated and returned 5:00 p.m. Mountain Time Zone. Stock- withholding from dividends of stock-promptly. A proxy statement and form holders may also obtain this informa- holders who fail to provide a Taxpayer ofproxywillbe mailed tostockholders tion by writing to Stockholder Services, Identification Number (TIN), or pro-on or about April 12, 1990. Pi%f, Alvarado Square, MS.0082, Albu. vide an incorrect number, or when the querque, New Mexico, 87158. IRS has notified PNM thatastockholder ABOUT YOUR SECURmES has underrepoited income. You may AND RECORDS DUPLICATE MAILINGS verify the Taxpayer Identification The common stock of Public Service To reduce the overall volume of Number we have on record for your Company of New Mexico is listed on mailings, the Company makes itaprac- account by looking at your dividend the New York Stock Exchange and is tice to combine the mailing offinancial check stub. Ifthe TIN is incorrect you also traded on the Pacific and Philadel. information with other stockholder can notify the Stockholder Records phia Stock Exchanges. A consolidated mailings, such as dividend checks and Department and a Form W-9 will be quote is published in numerous daily proxies. If a single household owns sent to you.

stock tables carried by many news. stock under several accounts, each papers. The ticker symbol for the account will be sent an individual INQUIRIES-ADDmONALINFORMATION common stock is PNM. The most mailing containing a check or proxy AVAIIABLETO STOCKHOLDERS common newspaper symbol is PSvNM. with the financial information. 'Ihis Questions concerning stockholder PNM is the sole transfer agent and results in some households receiving transactions or questions about the registrar for PiNM common stock and duplicate copies of the financial ma. activities ofthe Companyand operating PNM preferred stock. PiNM maintains all terial. When the Company does not results should be directed to Stock-stockholder records ofthecorporation. combine a mailing with a check or holder Services, Pi%, Alvarado Square, proxy, the duplicate mailings can be MS-0082, Albuquerque, NM 87158.

STOCKHOLDER INFORMATION prevented if the stockholder has noti. TELEPHONE NUMBERS:

Stockholders mayobtain information fied the Company in writing to mail (505) 848-2122 (local) relating to their share position, divi- only one copy to a specific address. 1 800.545.4425

ire rs and Officers ELECTRIC AND ARD'OK.DIRE - R WATER OPERATIONS GAS OPERATIONS un'dnrnJt; .".'-,;.'. -, -.:

",;.;, KR-Wcioid t;,", ', .

William hf. Eglinton John T. Ackerman 98+ "

.. ';4iit@orsitlce,)

ge 78 (19), age 41 (18), age 48 e~tir f6mer President vateloyesto Executive Vice President and President and Chief Electric Operations Santa e, Chief Operating OAicer Operating OAicer Public Service Company of New Mexico Robert B. Rountree Jef E. Sterba DA. "Zan" James Director Emeritus, age 65 (12), age 34 (4), age 46 Ashton B. Collins, Jr. Retired former Senior Vice President Senior Vice President, Vice President, Finance, Director since 1979, age 57 Public Service Company of New Mexico Business Development Planning, Rates President and Chief Executive Officer and Finance Group Reddy Communications, Inc, M. Phyllis Bourque a management consulting Jerry L Godwin (3), age 42 and services firm CORPORATE (9), age 46 Vice President, Gas Supply Albuquerque, Nhl Vice President, Electric Opentions Group Judith A. Zanotti Jerry D. Geist t Direaor since 1974, age 55 Jerry D. Geist (29), age 55 Ellen A. Wilson (4), age 50 Vice President, Chairman and President Chairman and President (11), age 42 Human Resources Public Service Company Vice President, and Staff Services of New Mexico James B. hlulcock, Jr. Human Resource Group (17), age 50 John Renner Joyce A. Godwm Senior Vice President, Edwin A. Knft (3), age 61 since 1989, age 47

'ireaor Corporate Affairs and (19), age 41 Vice President, Processing Vice President, Southwest Community Secretary Vice President, and San Juan Opentions Hea! th Services Customer Semce Group Albuquerque, NM Max H. hlaerki James A. Hunter (5), age 49 lawrence D. Ratliff (2), age 47 Claude E. Icyendecker Senior Vice President (15), age 43 Vice President, hlarketing since 1970, age 67 'irector and Chief Financial Officer Vice President, and Pub! ic Affairs Chairman of the Board Power Production United New Mexico Bank BillyD. lackey David J. Davis at Mimbres Valley (16), age 53 Michael C. Slota (6),age45 Deming, NM Vice President and (16), age 42 Vice President, Corporate Controller Vice President, Metropolitan Opentions Arturo G. Ortega t Director since 1985, age 69 Joellyn K. Murphy Sales and hlarketing WilliamJ. Real Attorney, senior member and (8), age 44 Robert hL Wilson 01),age41 president of law firm of Vice President, Regulatory (12), age 44 Vice President, Operations Ortega and Snead, PA. and Business Policy Controller and and Engineering Albuquerque,Ã1 Assistant Secretary Mtchell J. Nance Terry D. Rister Robert R Rehder (14), age 42 hfarilyn hlason.Plunkett (18), age 38 since 1975, age 59 Professor of Management

'irector

'ihe Robert 0. Anderson Graduate Schools ofhhtagement University of New Mexico Treasurer Karen A. Knight (14), age 50 hhtager of Stockholder (5), age 41 and Assistant ~

Direaor, Rates and Regulation Vice President, Regional Opentions Andrew R Vogt (3), age 39 Albuquerque, NM Services and Assistant Secretary Conuoller and

'ternber of Audir Gxnmiaee Russell H. Stephens t)YesrsolseolcenxbPGlorsB~t Member orExeoxbe Commiaee Assistant eccertaty

(

since 1970, age 75 'irector oxlolled s6illsre.

Retired Realtor hges. lesrs olsenlce ssxt axnmlaee Rociada, Nhl sssianmenrs ss of December 31, l989.

inancial Information Index roosted in Bonn 10.K StockjDividend Data . 23 Selected Financial Data 24 Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Management's Responsibility for Financial Statements 31 Independent Auditors'eport . 32 Consolidated Statement of Earnings (loss) . 33 Consolidated Statement of Retained Earnings (Deficit)

Consolidated Balance Sheet 35 Consolidated Statement of Qsh Flows . 36 Consolidated Statement of Qpitalization 37 Notes to Consolidated Financial Statements . 38 Consolidated Financial Statement Schedules 53 Quarterly Operating Results 6I Comparative Operating Statistics 62 BOARD OF MtECrORS: Fromkft to right: ER Wor4 Robot R Rehder, Chrde E tererxkeker, Russett K StePhens, Jeny D. Creist,John R Bundrant, Jrrjec A Gxh in, Ashton B. Cotrns, JrArturo G. Ortros.

UNITED STATES 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

[ ] TRANSITION REPORT 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 filing requirements 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 following document 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, 1990 PART III.

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I TABLE OF CONTENTS Page GLOSSARY PART I 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 ..................................................... 10 RATES AND REGULATION Inventorying Methodology Alternative to the Inventorying Methodology PVNGS Cost Investigation.

Electric Rate Case 12 Decertification of Electric Generating Plant. 13 SDGB'cE Sales Agreement 14 Other Electric Matters 14 Natural Gas Operations . 14 NAVAJO TAX ASSESSMENT 15 ENVIRONMENTALFACTORS 15 NON-UTILITYSUBSIDIARY OPERATIONS 16 ITEM 2. PROPERTIES 16 ITEM 3. LEGAL PROCEEDINGS 18 SHAREHOLDER LITIGATION . 18 Securities Law-Related Litigation 18 Shareholder Derivative Litigation 18 PVNGS WATER SUPPLY LITIGATION 19 SAN JUAN RIVER ADJUDICATION 19 NATURALGAS CONTRACTS LITIGATION 19 Antitrust-Related Litigation . 19 Other Gas Supply Litigation 20 OTHER PROCEEDINGS 21 ITEM 4. SUBMISSION OF MAXI'ERS TO A VOTE OF SECURITY HOLDERS .. 21 SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY ........... 22

Page PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS .................... 23 ITEM 6. SELECTED FINANCIALDATA 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 24 ITEM 8. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA............. 31 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIALDISCLOSURE .. 64 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY .......... 64 ITEM 11 EXECUTIVE COMPENSATION 64 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 64 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........... 64 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 64 SIGNATURES ...............................,.................... II-1

GLOSSARY AFUDC Allowance for funds used during construction APS Arizona Public Service Company BHP-Utah BHP-Utah International, Inc.

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

Kwh. Kilowatt Hour Los Alamos The County of Los Alamos, New Mexico mcf Thousand cubic feet Meadows . Meadows Resources, Inc., a wholly-owned subsidiary of the Company Meridian. Meridian Oil Company M-S-R. M-S-R Public Power Agency, a California public power agency MW . Megawatt Mwh . Megawatt Hour NMEIB . New Mexico Environmental Improvement Board NMPSC . New Mexico Public Service Commission NRC. United States Nuclear Regulatory Commission PGAC GCNM's Purchased Gas Adjustment Clause Processing Company... Sunterra Gas Processing Company, a wholly-owned subsidiary of the Company PVNGS Palo Verde Nuclear Generating Station Salt River Project Salt River Project Agricultural Improvement and Power District SCE. Southern California Edison Company SDG&E . San Diego Gas and Electric Company SJCC. San Juan Coal Company SJGS San Juan Generating Station Southern Union....... Southern Union Company Southland . Southland Royalty Company SPS Southwestern Public Service Company Sunbelt Sunbelt Mining Company, Inc., a wholly-owned subsidiary l1 of the Company throughput Volumes of gas delivered, whether or not owned by GCNM or Gathering Company Transwestern ........ Transwestern Mining Company, a wholly-owned subsidiary of Sunbelt Tucson Tucson Electric'Ppwer Company uncommitted capacity .. 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 Unicon Producing Company, a partnership consisting of Union Texas Exploration Company, Exploration Finance Company and S.N.P.I.,

Inc.

WSCC Western System Coordinating Council WSPP . 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 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 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 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 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 REGULATION SDG&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% of total 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 of off-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) 1989 1988, 1987 1986 1985 Retail . $ 413,644 $ 404,863 $ 387,542 $ 363,748 $ 339,367 Firm-requirements wholesale.... 27,679 27,554 32,312 34,431 40,786 SPS Contract; 109,773 100,006 91,064 72,090 70,550 Other contracted sales ......... 52,804 62,525 '4,351 42,704 35,833 Economy interchange*. 4,267 6,903 4,642 6,369 3,922 a Economy interchange sales are net of economy purchases and are accounted for as a reduction of fuel and purchased power expense.

PART I ITEM 1. BUSINESS 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 utility engaged 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 of New 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 of its subsidiaries and to dispose of non-utility properties. (See "NON-UTILITYSUBSIDIARY OPERATIONS".)

The total population of the area served by one or more of the Company's utility services 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 of the 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 of other contracted sales to utilities for which the Company commits to deliver a specified amount of capacity (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 of electric systems to retail customers.

The Company provides retail electric service to a large area of north 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) 1989 1988 1987 1986 1985 Retail . 4,909,592 4,684,588 4,447,798 4,233,296 4,079,842 Firm-requirements wholesale . 397,792 362,934 396,297 471,676 721,809 SPS contract............... 1,618,694 1,577,950 1,585,639 1,482,189 1,609,518 Other contracted sales....... 1,079,972 1,567,712 508,990 540,369 1,025,893 Economy interchange>>....... 289,432 356,681 226,941 349,689 318,015

>> Net of economy purchases SYSTEM PEAK DEMAND>>

(Megawatts) 1989 1988 1987 1986 1985 Summer 1,006 956 916 916 861 Winter) 896 862 880 838 814' 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 ANALYSIS OF FINANCIAL'CONDITIONAND RESULTS OF OPERATIONS CURRENT 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 of generation 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 of four 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 April 30, 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 April 30, 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 of Water 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 full and exclusive authority and responsibility to exercise and perform all of the 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 of all 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 of certain 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.

All three 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 will request NRC approval to restart the unit during the first quarter of 1990. Because of the present uncertainties regarding the timing of NRC approval and the extent of the corrective actions required for the restart of Unit 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 of Violation 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 of I to V in accordance with the "General Statement of Policy and Procedure for NRC Enforcement Actions"). For two of the Severity Level III problems, 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 of all 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 will be 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 of Unit 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 Liability and 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 million and 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 limit of $ 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 liability insurance 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 of any of the 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 of the Company's generation of electricity (on the basis of KWh) 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 Percent of Average Percent of Average Percent of Average Generation Cost Ge etettoo Cost Ge e ottoo Cost

'8.4

'.3 1985.'986.

116.8 1.6 408.1 85.6 121.3 13.2 76.0 1.2 216.6 1987'988.

79.7 141.1 20.0 73.3 246.6 70.0 142.5'39.3

, 29.6 75.9 0.4 320.9 1989; 89.3 10.3 76.3 0.4 364.1 Although not included in the above table, start-up and test energy was available from PVNGS in 1985, 1986 and 1987.

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 of locally 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 "NATURAL GAS 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 milling of uranium concentrate 1997(a) 1997(a)

Conversion of uranium concentrate to uranium hexafluoride 1992(b) 1992(b)

Enrichment of uranium hexafluoride . 1999(c) 1999(c)

Fabrication of fuel assemblies . 1996(d) 1998(d)

Storage and disposal of spent fuel . ~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 of any uranium which might be obtained pursuant to contract options.

(b) The participants have contracted for a substantial portion of conversion 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 if options are exercised, for approximately twelve additional years of operation.

(e) PVNGS is designed to permit on-site storage of spent fuel discharged from normal operation of all 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 of the 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 facility would 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 PROCEEDINGS SAN 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 of water 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 of these eflluent contracts is the subject of litigation'in state and Federal courts. (See ITEM. 3 "LEGAL PROCEEDINGS PVNGS WATER SUPPLY.

LITIGATION".)APS has stated that, although the litigation remains subject to further evaluation, it expects that the litigation will not 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 of the New Mexico natural gas utility assets 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 of the 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 of the 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 utility business 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 of approximately 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 of GCNM'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 PROCEEDINGS NATURAL GAS CONTRACTS LITIGATION" and note 9 of the notes to consolidated financial statements.)

GCNM and Gathering Company have sought and are seeking reformation of their 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 of long-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 AND REGULATION Natural 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 will reimburse 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:

GAS THROUGHPUT (Millions of decathcrms) 1989 1988 1987 1986 198877 Residential . 23.2 24.7 24.5 22.1 19.3 Commercial 10.7 11.5 11.4 10.8 9.7 Industrial 1.5 1.7 2.2 5.9 13.8 Public authorities . 5.5 6.2 6.8 8.3 9.1 Irrigation 2.0 1.4 1.4 1.9 1.7 Sales for resale. 4.6 2.7 1.2 1.5 '1.7 Brokerage . 0.8 0.9 2.8 2.1 Transportation* 19.6t 9.1 5.1 2.2 Spot market sales 78.7t 79.0 58.2 55A 54.8, 55.3

• Customer-owned gas.

t Includes gas throughput from Gathering Company (see note I of the notes to consolidated financial statements).

tf Effective from acquisition date, January 28, 1985.

The following table shows gas revenues by customer class:

GAS REVENUES of dollars) 'thousands 19897 1988 1987 1986 1988ff Residential . $ 130,130 $ 122,592 $ 114,164 $ 117,011 $ 111,427 Commercial . 45,235 42,120 45,812 45,519 47,876',693 Industrial 6,063 "

8,102 '3,139 48,933 Public authorities 21,757 22,289 22,729 30,213 38,181 Irrigation 7,001 4,546 3,7&1 6,142 6,507 Sales for resale 9,874 6,969 3,819 5,675 6,638 Brokerage . 1,378 1,514 5,213 3,759 31 Transportation* 7,618 4,841 4,315 2,207 83 Liquids. 25,742 Spot market sales 19,810 Other 5,948 9,742 6,391 10,708 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 of depreciation, 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 MW of SJGS Unit 4 and the power purchase contract with SPS. However, the order excludes from New Mexico jurisdictional rates the Company's interest in PVNGS Unit 3, 130 MW of SJGS Unit 4 and the power purchase contract with M-S-R. (See",ELECTRIC OPERATIONS Sources of Power 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 will share 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 will also 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 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 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.

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 of electric generating plant prior to the inclusion of such 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 April 5, 1989 order. (See "Alternative to the Inventorying Methodology".) The $ 90 million disallowance 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 April 5, 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 of PVNGS 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 of all 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 if PVNGS 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 MW of SJGS Unit 4, one-third of the 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 in jurisdictional 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 million from current electric rates with PVNGS Units 1 and 2 fully included 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 of operations in 1990 and subsequent years and would result in an after-tax write-off of 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 Mexico jurisdictional 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 OPERATIONS Service 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 filing or 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 of the 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 of most 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 will bear 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 will be 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 of GCNM from Southern Union in January 1985. (See ITEM 3 "LEGAL PROCEEDINGS NATURAL GAS CONTRACTS LITIGATION Antitrust-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 OPERATIONS Gathering 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 it should be allowed to collect approximately $ 11.3 million of 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 will collect 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 of the 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 TAX ASSESSMENT 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 of law 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 PROCEEDINGS OTHER 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 will be 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 NMEIB to 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 Air Act Amendments of 1977, the EPA has adopted regulations, applicable to certain Federally-protected areas, that address visibility impairment which can be reasonably attributed to specific sources. The EPA may also adopt regulations to deal with visibility impairment resulting from regional haze. In addition, amendments to the Clean Air Act 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-UTILITYSUBSIDIARY OPERATIONS 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 of Meadows 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 of the secured creditors released the Company from all claims. At the time of the signing of the 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 of all 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 utility plant is mortgaged to secure its first mortgage bonds.

As of December 31, 1989, the total net generation capacity of facilities 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

Net MIV Generation Type Name Location Capacity Nuclear PVNGS (a) Wintersburg, Arizona 390 Coal SJGS (b) Waterfiow, New Mexico- 835 Coal Four Corners (c) Fruitland, New Mexico 192 Gas/Oil Reeves Albuquerque, New Mexico 154 Gas/Oil Las Vegas Las Vegas, New Mexico 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 of approximately 1,200 miles (approximately 360 miles of which are leased to Gathering Company) of pipe 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 of pipe 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 of natural 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.

Company owns facilities located in northwestern New Mexico having an aggregate design

'rocessing 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, utility poles (joint use), vehicles and real estate.

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

ITEM 3. LEGAL PROCEEDINGS 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 of shareholders alleged to be "similarly situated". 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 artificially infiated 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 plaintiff shareholders 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 liability and 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 of shareholders 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 lift the 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 of such 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 "BUSINESS ELECTRIC OPERATIONS Fuel and Water Supply'".) The Company cannot at this time anticipate the effect, if any, 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 will have 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 "BUSINESS NATURAL GAS OPERATIONS Acquisition of Natural Gas Properties".) Consistent with the Company's legal position in such previous antitrust litigation, and based upon the advice of counsel, 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 of Texas, 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 of the settlement, the Company and Gathering Company have agreed to make cash payments to Southland (see ITEM 1 "BUSINESS RATES AND REGULATION Natural Gas Operations", ITEM.,7 "MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIALCONDITION AND 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 of GCNM 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 "BUSINESS RATES AND REGULATION Natural Gas Operations", ITEM 7 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITYAND CAPITAL RESOURCES and CURRENT ISSUES FACING THE COMPANY Natural 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 "BUSINESS RATES AND REGULATION"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 of Dallas 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 implicitly at 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 of El 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 of the Sherman Antitrust Act, breach of contract, violation of the 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.

ITEM 4. SUBMISSION OF MATI'ERS TO A VOTE OF SECURITY HOLDERS None.

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

In!tlat Name Age OSce Effectiv Date J. D. Geist....... 55 Chairman of the Board and President November 23, 1982 W. M. Eglinton... 41 Executive Vice President and Chief Operating Oflicer, Electric and Water Operations June 1, 1988 J. T. Ackerman.... 48 President and Chief Operating Officer, Gas Operations February 1, 1985 J. F. Jennings, Jr. 56 President and Chief Executive Oflicer, Meadows Resources, Inc. May 29, 1986 J. B. Mulcock, Jr. 50 Senior Vice President, Corporate Affairs and Secretary April 23, 1985 M. H. Maerki .. 49 Senior Vice President and Chief Financial Officer 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.

All of 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 ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND 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 Dividends Quarter Ended High Low per Sharc 1989:

December 31 15 I/4 127/s $ 0.00 September 30 . 157/s 14 0.00 June 30 14>/4 11 0.00 March 31 14i/s 103/4 0.38 Fiscal Year 157/s 103/4 $ 0:38 1988:

December 31 15'/4 1 1 '/s $ 0.38 September 30 143/4 12'/s 0.38 June 30 17s/s 14>/4 0.38 March 31. 22s/s 163/4 0.73 Fiscal Year 22s/s 1 1 i/s $ 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 of dividend 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 AND ANALYSIS OF FINANCIALCONDITION AND RESULTS 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 1988 1987 1986 1985 (In thousands except per share amounts and ratios)

Total Operating Revenues* . $ 915,310 $ 84,1,924 $ 785,224 $ 775,807 $ 776,730 Earnings (Loss) from Continuing Operations .... $ 82,593 $ (9,942)t$ 117,121 $ 159,324 $ 148,169 Net Earnings (Loss) $ ~ 82,593 $ (230,137) $ , 95,389 $ 151,005 $ 146,310 Earnings (Loss) per Common Share From Ik Continuing Operations $ 1.73 $ .(.50)t$ 2.52 $ 3.49 $ 3.35 Earnings (Loss) per Common Share............ $ 1.73 $ (5.78) $ 2.00 $ 3.29 $ 3.30 Total Assets . $ 2,387,005 $ 2,392,749 $ 2,717,141 $ 2,667,639 $ 2,968,344 Preferred Stock with Mandatory Redemption Requirements. $ 49,268 $ 55,242 $ 60,513 $ 66,147 $ 119,080 Long-Term Debt, less Current Maturities ....... $ 801,706 $ 980,767 $ 862,962 $ 862,796 $ 1,112,381 Common Stock Data:

Dividends paid per common share ........... $ 038 $ 1.87 $ 2.92 $ 2.92 $ 2.89 Dividend pay-out ratio 22.0% N/M 146.0% 88.8% 87.6%

Market price per common share at year end.... $ 14.625 $ 12.50 $ 18.75 $ 33.00 $ 29.50 Book value per common share at year end..... $ 18.02 $ 18.03 $ 25.68 $ 26.51 $ 25.73 Average number of common shares outstanding . 41,774 41,761 41,647 40,401 37,059 Return on Average Common Equity ........... 9.5% (23.9)% 7.7% 12.8% 13.2%

Capitalization:

Common stock equity. 45.3% 40.7% 52.2% 52.6% 42.2%

Preferred stock:

Without mandatory redemption requirements. 3.5 3.2 2.9 2.8 4.6 With mandatory redemption requirements... 3.0 3.0 2.9 3.2 5.1 Long-term debt, less current mafurities ....... 48.2 53.1 42.0 41.4 48.1 100.0% . 100.0% 100.0% 100.0% 100.0%

a Includes gas operating revenues of GCNM since January 28, 1985, the acquisition date of the gas operation.

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

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

($ 2.88 per share).

N/M Not 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'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND 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 CAPITAL RESOURCES 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 utility distribution 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:

1989 1990 1991 199Z 1993 1994 (In millions)

Cash $ 73 $ 99 $ 91 $ 122 $ 97 $ 93 AFUDC .. 5 3 3 5 3 2 Total $ 78 $ 102 $ 94 $ 127 $ 100 $ 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 PROCEEDINGS NATURAL 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 "BUSINESS NON-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 life of 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 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 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 of the 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.

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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 of such date, $ 19.1 million of these commitments had been used for bank borrowings, $ 14.8 million supported outstanding commercial paper and $ 241.8 million was available either to support the issuance of additional commercial paper or to be used for additional bank borrowings. The Company believes its credit commitments are, sufficient to meet the Company's liquidity requirements. 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 of Incorporation are met, first mortgage bonds and preferred stock. As of January 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 of new capital. An impact of the downgrading of certain 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 "BUSINESS ELECTRIC 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 million as of December 31, 1988 to $ 33.9 million as of December 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 $ (10) million $ 117 million or or or

$ 1.73 per share $ (.50) per share $ 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 will be at prices substantially lower than the SPS contract price and that the"expiration of the SPS contract will have a material adverse imp'act on the Company's results of operations in "1990.

Gas operating revenues increased $ 59.0 million in 1989 due primarily to inclusion in 1989 of revenues 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 million from 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 million due 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 "BUSINESS ELECTRIC OPERATIONS Sources of Power Nuclear 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 million and $27.3 million in 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 utility construction 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 off in 1988.

Other, under Other Income and Deductions, net of taxes, increased $ 13.0 million in 1989. This increase was primarily due to losses recognized in 1988 primarily as a result of a write-off relating 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 "BUSINESS RATES AND REGULATION PVNGS 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-Utility Operations 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.) As a result, the Company made a provision for an estimated after-tax loss of $ 137.8 million on the disposal of non-utility assets, including a provision for after-tax operating losses of $ 29.5 million for the operations of such properties prior to their expected disposition. Estimated losses from the disposal of these assets were due primarily to the decrease in value of southwestern 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 million for 1987. The increased losses were due primarily to poor real estate sales, a provision for coal mining reclamation costs and the write-off of 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 MW of SJGS Unit 4 and a power purchase contract with SPS. However, the order excludes from New Mexico jurisdictional rates the Company's 130 MW interest in PVNGS Unit 3, 130 MW of SJGS Unit 4 and a power purchase contract with M-S-R. (See PART I, ITEM 1 "BUSINESS ELECTRIC OPERATIONS Sources of Power and Service Area and Customers and RATES AND REGULATION Alternative 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 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 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 of the 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 fully included 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 "BUSINESS RATES AND REGULATION Electric Rate Case".) The recommended decision, if approved 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-off of 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 of its 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 will be 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 of cogeneration, independent power producers and self-generation as competing energy sources. In addition, continuing utility merger 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 will have increasing capacity and energy requirements in the 1990s. However, the Company projects that the current soft wholesale power market will continue 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 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 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 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 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, Kirtlandi Air Force 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 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'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 "

LEGAL PROCEEDINGS NATURALGAS 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 REGULATION Natural 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 of claims 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 will have a material adverse impact on the Company's future financial condition'r results of operations. II 30

ITEM 8: FINANCIALSTATEMENTS "AND SUPPLEMENTARY DATA INDEX Page Management's Responsibility for Financial Statements; 31 Independent Auditors'eport . 32 Financial Statements:

Consolidated Statement of Earnings (Loss) . 33 Consolidated Statement of Retained Earnings (Deficit) . 34 Consolidated Balance Sheet 35 Consolidated Statement of Cash Flows .......... 36 Consolidated Statement of Capitalization . 37 Notes to Consolidated Financial Statements 38 Supplementary Data:

Consolidated Financial Statement Schedules. 53 Quarterly Operating Results 61 Operating Statistics .

'omparative 62 r

MANAGEMENT'S RESPONSIBILITY 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

"INDEPENDENT AUDITORS'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 of their 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 MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (LOSS)

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

Operating Revenues:

Electric...... $ 620,381 $ 607,317 $ 563,617 Gas (note 1) 282,827 223,791 210,634 Water . 12,102 10,816 10,973 Total operating revenues 915,310 841,924 785,224 Operating Expenses:

Fuel and purchased power. 155,279 152,017 "

141,766 Gas purchased for resale 155,232 122,575 116,202 Other operation expenses 268,826 261,687 244,467 Maintenance and repairs 50,755 46,568 43,501 Depreciation and amortization . 71,981 66,920 60,264 Taxes, other than income taxes . 34,043 34,823 31,683 Income taxes (note 4) 25,958 17,268 14,990 Total operating expenses 'I 762,074 701,858 652,873 Operating income 153,236 140,066 132,351 Other Income and Deductions, net of taxes (note 4):

Allowance for equity funds used during construction......... 2,909 4,658 26,690 Deferred carrying costs on uncommitted electric generating capacity (note 11) 20,234 13,069 Write-off of proposed generating station (note 6) ............

Other . 2,392 10,634 18,175 Net other income and deductions 5,301 (64,314) 57,934 before interest charges . 'ncome 158,537 75,752 190,285 Interest Charges:

Interest on long-term debt 71,572 81,775 67,573 Other interest charges. 6,283 6,329 13,222 Allowance for borrowed funds used during construction...... (1,911) (2,410) (7,631)

Net interest charges . 75,944 85,694 73,164 Earnings (Loss) from Continuing Operations ................. 82,593 (9,942) 117,121 Discontinued Operations, net of tax (note 10):

Loss from operations of non-utility operations .............. (35,826) (21,732)

Estimated loss on disposal of non-utility operations, including provision for operating losses during the phase-out period .. (137,773)

Earnings (Loss) before Extraordinary Item 82,593 (183,541) 95,389 Extraordinary Item loss on discontinuation of application of regulatory accounting principles regarding certam assets, net of tax (note 11) (46,596)

Net Earnings (Loss) . 82,593 (230,137) 95,389 Preferred Stock Dividend Requirements . 10,456 11,117 11,935 Net Earnings (Loss) Available for Common Stock............. $ 72,137 $ (241,254) $ 83,454 Average Number of Common Shares Outstanding............. 41,774 41,761 41,647 Earnings (Loss) per Share of Common Stock:

Earmngs (loss) from continuing operations................. $ 1.73 $ 2.52 Loss from discontinued operations . ( 52)

Estimated loss on disposal of non-utility operations..........

Earnings (loss) before extraordinary item . 1.73 Extraordinary item (1.12)

Net Earnings (Loss) $ 1.73 $ (5.78) $ 2.00 Dividends Paid per Share of Common Stock. $ .38 $ 1.87 $ 2.92 See accompanying notes to consolidated financial statements.

33

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENT, OF RETAINED EARNINGS (DEFICIT)

Year Ended December 31, 1989 1988 1987 ttn thousands)

Balance at Beginning of Year . $ (144,004) $ 175,337 $ 213,416 Elimination of deficit through quasi-reorganization of equity accounts (note 2) 144,004 Net Earnings (Loss) 82,593 (230,137) 95,389 Dividends:

Cumulative preferred stock (10,456) (11,117) (11,935)

Common stock (15,874) (78,087) (121,533)

Balance at End of Year $ 56,263 $ (144,004) $ 175,337 See accompanying notes to consolidated financial statements.

34

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED BALANCESHEET ASSETS December 31, 1989 1988 (In thousands)

Utility Plant, at Original Cost (notes 2, 6, and 11):

Electric plant in service $ 1,920,545 $ 1,864,136 Gas plant in service 426,666 358,531 Water plant in service 48,901 43,686 Common plant in service 46,579 41,528 Plant held for future use 16,782 21,975 2,459,473 2,329,856

, Less accumulated depreciation and amortization 652,890 568,661 I

1,806,583 1,761,195 Construction work in progress.... 67,981 72,401 Nuclear fuel, net of accumulated amortization . 57,281 51,347 Net utility plant 1,931,845 1,884,943 Other Property and Investments:

Non-utility property, at cost, net of accumulated depreciation, partially pledged .... 12,601 62,997 Other investments, at cost . 19,327 7,709 Total other property and investments 31,928 70,706 Current Assets:,

Cash 6,660 1,379 Temporary investments, at'ost 11,130 163,648 Receivables., 119,139 119,308 Income taxes receivable 37,024 Fuel, materials and supplies, at average cost 49,642 62,689 Gas in underground storage, at weighted average cost 11,700 11,590 Prepaid expenses 7,101 13,905 Total current assets 242,396 372,519 Deferred Charges (note 4) 180,836 64,581

$ 2,387,005 $ 2,392,749 Capitalization (note 2}:

CAPITALIZATIONAND LIABILITIES Common stock equity:

Common stock outstanding 41,774,083 shares . $ 208,870 $ 208,870

. Additional paid-in capital. 487,465 688,392 Retained earnings (deficit) (144,004)

Retained earnings since January 1, 1989. 56,263 Total common stock equity 752,598 753,258 Cumulative preferr'ed stock without mandatory redemption requirements .. 59,000 "59,000 Cumulative preferred stock with mandatory redemption requirements..... 49,268 55,242 Long-term debt, less current maturities 801,706 980,767 Total capitalization 1,662,572 1,848,267 Current Liabilities:

Short-term debt (note 3) 33,880 Accounts payable . 150,203 136,553 Current maturities of long-term debt (note 2) . '12,324 33,517 Accrued interest and taxes . 31,143 11,612 current liabilities. 'ther 41,164 54,192 Total current liabilities 268,714 235,874 Deferred Credits (note 4):

Accumulated deferred investment tax credits. 123,558 130,033 Accumulated deferred income taxes 139,756 70,836 Other deferred credits. 192,405 107,739 Total deferred credits ... 455,719 308,608 Commitments and Contingencies (notes 6 through 11)

$ 2,387,005 $ 2,392,749 See accompanying notes to consolidated financial statements.

35

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended December 31, 1989 1988 1987 (In thousands)

Cash Flows from Operating Activities:

Net earnings (loss), . $ 82,593 $ (230,137) $ 95,389 Adjustments to reconcile net earnings (loss) to net cash flows from operating activities:

Depreciation and amortization . 80,286 91,087 71,859 Allowance for equity funds used during construction....' (2,909) (4,658) (26,690)

Deferred carrying costs on uncommitted electric generatin g capacity .. 20,234 (13,069)

Accumulated deferred investment tax credit (6,475) (20,142) (34,713)

Accumulated deferred income tax 42,254 (67,963) 8,675 Write off of proposed generating station 50,970 Loss from extraordinary item 53,504 Provision for other losses 38,452 Changes in certain assets and liabilities:

Receivables (38,000) (17,779) , 5,000 Fuel, materials and supplies 15,878, (10,760) (15,137)

Net assets of discontinued operations 180,069 (3,691)

Deferred charges (32,993) 10,548 (9,121)

Accounts payable . (5,020) 31,464 25,877 Accrued interest and taxes . 23,361 6,904 (26,369)

Other current liabilities. (16,201) 16,315 (8,800)

Other, net... (10,281) ',420 4,202 Net cash flows from operating activities . 132,493 154,528 73,412 Cash Flows from Investing Activities:

Utilityplant additions (74,088) (86,549) (93,411)

Other property additions (12,081) '7,701) (3,015)

Other property sales 7,560 '9,729 4,951 Temporary investments, net....... 152,877 42,482 30,914 Net cash flows from investing activities . ,, 74,268 (42,039) (60,561)

Cash Flows from Financing Activities:

Proceeds from issuance of common stock 682 14,619 Redemptions and repurchases of preferred stock. (5,510) (5,257) (5,606)

Proceeds from long-term debt 3,043 50,195 56,302 Repayments of long-term debt (206,170) (66,468) (83;321)

Net increase (decrease) in short-term debt 33,880 (3,000) 135,500 "Dividends paid. (26,723) , (89,524) (132,698)

Net cash flows from financing activities

'ee

. (201,480) (113,372) (15,204)

'Increase (Decrease) in Cash 5,281 , (883) (2,353)

Cash at Beginning of Year . 1,379 .

2,262 4,615 Cash at End of Year $ 6,660 $ 1,379 $ 2,262 Supplemental Cash Flow Disclosures:

Interest paid. $ 86,444 $ 101,179 $ 89,963 Income taxes paid (refunded) $ 12,397 (9,842) $ 48,604 Cash consists of currency on hand and demand deposits.

accompanying notes to consolidated financial statements.

36

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CAPITALIZATION December 31, 1989 1988 tin thousands)

Common Stock Equity (note 2):

Common stock, par value $ 5 per share . $ 208,870 $ 208,870 Additional paid-in capital 487,465 688,392 Retained earnings (deficit). (144,004)

Retained earnings since January 1, 1989 . 56,263 Total common stock equity. 752,598 753,258 Shares Outstanding Current Stated at December 31, Redemption Value 1989 Price Cumulative Preferred Stock (note 2):

Without mandatory redemption requirements:

1965 Series, 4.58% ...... 4............. $ 100 130,000 $ 102.00 13,000 13,000 8.48% Series,,.... 100. 200,000 103.00 20,000 20,000 8,80% Series , 100 260,000 103.10 26,000 26,000 590,000 59,000 59,000 With mandatory redemption requirements:

8.75% Series 100 299,177 102.90 29,918 31,241 12.52% Series 50 440.020 22,001 26,334 739,197 51,919 57,575

'Redeemable within one year 49,837 2,651 2,333 689,360 49,268 55,242 Long-Term Debt (note 2):

Issue and Final Maturtty Interest Rates First mortgage bonds:

1989 through 1994 4 /s% to 13 /s% 8,655 38,677 1995 through 1999 5~/s% to 7'/4% 28,417 29,205 2000 through 2004 7t/z% to 10t/s% 79,251 79,598 2005 through 2009 8 /s% to 9 /s% 109,254 110,642 2010 through 2013 127/s% 1,716 2,366 1993 through 2013 pollution control series, securing pollution control revenue bonds...... 5.9% to 103/4% 437,045 437,045 Total first mortgage bonds . 664,338 697,533 Pollution control revenue bonds:

2003 through 2013 2009 .

Short-term debt expected to be refinanced (note 3) ..

10% to 10'/4%

variable rate 100,000 37 300 '7 100,000 300 144,678 Other, including unamortized premium and discount . 12,392 34,773 Total long-term debt 814,030 1,014,284 Current maturities . 12,324 33,517 Long-term debt, less current maturities ....... 801,706 980,767 Total Capitalization. $ 1,662,572 $ 1,848,267 See accompanying notes to consolidated financial statements.

37

PUBLIC SERVICE COMPANY OF NEW MEKICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIA'LSTATEMENTS December 31, 1989, 1988 and 1987 (1) Summary of Significant Accounting Policies 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.

Principles of Consolidation 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. All signficant intercompany transactions and balances have been eliminated.

UtilityPlant Utility plant 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. Utility plant 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 of property to maintenance expense and to charge major replacements to utility plant. 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 of utility plant is made at annual straight-line rates approved, by the NMPSC.

The average depreciation rates used are as follows:

1989" 1988 1987 Electric plant 2.87% 3.06% 3.14%

Gas plant . 3.11% 2.97% 3.11%

Water plant . 2.78% 2.25% 2.14%

Common plant 9.54% 8.62% 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 of borrowed 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 of enrichment to the extent allowed by regulatory commissions.

38

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES 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 of depreciatio'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, Accounting for the Effects of Certain 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 of income 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

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS Continued 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 liability method.

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 MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS Continued (2) Capitalization Changes in common stock, additional paid-in capital and cumulative preferred stock are as follows:

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

Balance at December 31, 1986.......... 41,313,358 $ 206,567 $ 675,353 590,000 $ 59,000 988,140 $ 66,147 Stock Plans 420,146 2,101 12,518 Redemption of preferred stock ...'.... 28 (53,008) (3;301)

Redeemable within one year ......... (46,660) (2,333)

Balance at December 31, 1987.....'..... 41,733,504 208,668 687,899 590,000 59,000 888,472 60,513 Stock Plans 40,579 202 436 Redemption of preferred stock ....... 57 (49,383) (2,938)

Redeemable within one year ......... (46,660) (2,333)

Balance at December 31, 1988.......... 41,774,083 208,870 688,392 590,000 59,000 792,429 55,242 Quasi-reorganization of equity accounts:

Elimination of deticit in retained earnings .................. (144,004)

Adoption of SFAS No. 96......... (32,302)

Other adjustments..........:..... (24,767)

Redemption of preferred stock ....... 146 (53,232) (3,323)

Redeemable within one year ......... (49,837) (2,651)

Balance at December 31, 1989.......'... 41,774,083 $ 208,870 '487,465 590,000 $ 59,000 689,360 $ 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 AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS Continued 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 of directors of the 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 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 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 of sinking 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 will be 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 $ 12,324 1991 $ 13,005 1992 $ 2,402' 1993 $ 11,200 1994 $ 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 million supported outstanding commercial paper and $ 241.8 million was available 42

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES 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 of its credit commitments. These commitments consist of both lines of credit 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 million of commercial paper and $ .3 million of 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.

(4) Income Taxes Income takes included in earnings (loss) from continuing operations consist of the following components:

1989 1988 1987 (In thousands)

Current Federal income tax . $ 5,425 $ 7,432 $ 26,683 Current State income tax (920) 1,521 1,777 Deferred Federal income tax . 26,852 (8,983) 2,959 Deferred State income tax 6,669 (916) 1,540 Investment tax credit utilized and deferred . (333) (3,329)

Amortization of accumulated investment tax credits (6,475), (6,383) (5,367)

, Total income taxes . $ 31,551 $ (7,662) $ 24,263 Charged to operating expenses $ 25,958 $ 17,268 $ 14,990 Charged (credited) to other income and deductions . 5,593 (24,930) 9,273 Total income taxes . $ 31,551 $ (7,662i $ 24,263 The Company's provision for income taxes from continuing operations, exclusive of extraordinary 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 1987 (In thousands)

Federal income tax at statutory rate of 34% for 1989 and 1988 and 40% for 1987. $ 38,809 $ (5,986) $ 56,554 Allowance for funds used during construction (989) (2,403) (13,728)

Deferred carrying costs on uncommitted electric generating capacity ',879 (5,228)

Investment tax credits (6,475) (6,383) (5,367)

PVNGS start-up and pre-operational costs. (3,354) (3,836) (7,582)

Depreciation of flow-through items 1,079 2,971 1,631 Gains on the sale and leaseback of PVNGS (960) (907) (1,193)

Amortization of pollution control facilities. (1,533) (1,528) (1,766)

'Reversal of permanent differences resulting from write-off of proposed generating station 6,234 State income tax, 3,855 ,(215) 2,410 Tax rate differential on capital loss carryback 2,197 Other. (1,07&) (2,488) (1,468)

Total income taxes $ 31,551 $ (7,662) $ 24,263 43

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS Continued Deferred income taxes result from certain differences between the recognition of income 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.

Advance lease payments Unbilled revenues (1,776) 14,710 (1,880)

'44 (4,113)

(2,486)

(4,903) 828 (2,689)

Alternative minimum tax in excess of regular tax ................. (6,548) (5,132) (6,709)

Write-off of proposed utility facilities. 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 of SFAS No. 96 resulted in the establishment of regulatory 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.

(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:

1989 1988 1987

,Service cost $ 4,165 $ 4,338 $ 6,598 Interest cost . 12,191 10,634 10,965 Actual return on plan assets... (25,360) (14,088) (10,432)

Other. 9,810 172 (1,356)

Net periodic pension cost 806 1,056 5,775 Termination loss . 9,036 Curtailment gain . (1,819)

Total pension cost $ 806 $ 8,273 $ 5,775

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

1989 1988 Vested benefits. $ 111,633 $ 81,570 Non-vested benefits. 663 5,147 Accumulated benefit obligation 112,296 86,717 Effect of future compensation levels . 38,598 32 377 Projected benefit obligation 150,894 119,094 Fair value of plan assets, at December 31, 1989 and 1988 . 166,002 141,487 Assets in excess'of projected benefit obligations $ 15,108 $ 22,393 The components of assets in excess of projected benefit obligations (in thousands) are as follows:

Accrued pension liability .

Unrecognized prior service cost'989 Net unrecognized gain from past experience different from assumed......

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

$ 5,900 13,962 (4,288)

(466)

$ 15,108 t988

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

$ 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 MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS Continued 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 of the SJGS and 55.5% of Unit 4; 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:

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

San Juan Generating Station (Coal) $ 814,959 $ 231,553 $ 2,549 51.6%

Palo Verde Nuclear Generating Station Unit 3 (Nuclear)*. $ 331,801 $ 19,130 $ 17,338 10.2%

Four Corners Generating Station Units 4 and 5 (Coal).... $ 97,929 $ 23,222 $ 17,559 13.0%

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

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 if the 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 off its investment of $ 38.1 million (net of income 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 off by the Company in 1988.

The PVNGS participants have insurance for public liability payments resulting from nuclear energy hazards to the full $ 7.8,billion limit of liability under 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 million and the balance by an industry-wide retrospective assessment program.

46

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS Continued 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 limit of $ 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 of the costs of decommissioning 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 of decommissioning costs for PVNGS Units 1 and 2 in 1987 and PVNGS Unit 3 in 1988.

All three 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 of the 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 will request 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 million for 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 will be $ 4.7 million, $ 8.0 million and $ 8.0 million, respectively. In addition, the Company will be required to pay for any energy purchased under the contract. The amount of minimum payments after 1993 will depend 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% of total 1989 revenues, 11.9% of total 1988 revenues and 11.5% of total 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 MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS Continued 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 utility services 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 $ 96,679 1991 95,831

.1992 95,539 1993 94,758 1994 94,578 Later years. 1,939,344

~

Total minimum lease payments $ 2,416,729 Operating lease expense was approximately $ 95.8 million in 1989, $ 101.4 million in 1988 and $ 102.6 million in 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 will continue to evaluate, the impact of

~

these matters on the Company.

On December 18, 1989, the NMPSC issued an order which provides for partial recovery of costs incurred for take-or-pay obligations, contract pricing and other gas purchase contract litigation items. Under the order, the Company will bear 25% of producer take-or-pay and contract~reformation costs. The Company will be permitted to recover from its sales and transportation customers the reinaining 75% of such 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 MEXICO AND SUBSIDIARIES 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-Utility Operations 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 of non-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 of non-utility operations in 1989. Approximately $ 13.8 million of the expected operating loss was incurred in 1988.,

Operating results of the discontinued operations prior to the date of discontinuation are shown separately in the accompanying Consolidated Statement of Earnings (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 of in 1988 and 1989 and the Company anticipates disposition of the remainder during 1990. In 1989, the Company reevaluated the cost of disposing 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 MW of 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 MEXICO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS Continued 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 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.

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 of excluded 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-off of 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 will be 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 fully included 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 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-off of 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 MEXICO AND SUBSIDIARIES NOTES TO CONSOLID'ATED FINANCIALSTATEMENTS 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 $ 620,381 $ 282,827 $ 12,102 $ 915,310 Operating expenses excluding income taxes . 475,405 254,677 6,034, 736,116 Pre-tax operating income . 144,976 28,150, 6,068 179,194 Operating income tax . 20,411 3,759 1,788 25,958 Operating income $ 124,565 $ 24,391 $ 4,280 $ 153,236 Depreciation and amortization expense..... $ 58,129 $ 12,730 $ 1,122 $ 71,981 Construction expenditures . $ 55,334 $ 20,375 $ 2,580 $ 78,289 Identifiable assets:

Net utility plant $ 1,603,242 $ 287,779 $ 40,824 $ 1,931,845 Other. 284,314 146,085 24,761 455,160 Total assets. $ 1,887,556 $ 433,864 $ 65,585 $ 2,387,005 1988:

Operating revenues $ 607,317 $ 223,791 $ 10,816 $ 841,924 Operating expenses excluding income taxes . 470,162 208,540 5,888 684,590 Pre-tax operating income . 137,155 15,251 4,928 157,334 Operating income tax . 15,624 448 1,196 17,268 Operating income $ 121,531 $ 14,803 $ 3,732 $ 140,066 Depreciation and amortization expense..... $ 56,450 $ 9,548 $ 922 $ 66,920 Construction expenditures $ 68,230 $ 19,524 $ 9,427 $ 97,181 Identifiable assets:

Net utility plant $ 1,601,556 $ 243,123 $ 40,264 $ 1,884,943 Other 323,006 93,616 91,184 507,806 Total assets . $ 1,924,562 $ 336,739 $ 131,448 $ 2,392,749 1987; Operating revenues $ 563,617 $ 210,634 $ 10,973 $ 785,224 Operating expenses excluding income taxes . 437,203 195,329 5,351 637,883 Pre-tax operating income . 126,414 15,305 5,622 147,341 Operating income tax . 12,703 463 1,824 14,990 Operating income. $ 113,711 $ 14,842 $ 3,798 $ 132,351 Depreciation and amortization expense..... $ 49,982 $ 9,313 $ 969 $ 60,264 Construction expenditures $ 102,548 $ 17,125 $ 5,050 $ 124,723 Identifiable assets:

Net utility plant $ 1,623,751 $ 233,331 $ 35,472 $ 1,892,554 Net assets of discontinued operations .. 180,069 180,069 Other 475,416 90,301 78,801 644,518 Total assets . $ 2,099,167 $ 323,632 $ 294,342 $ 2,717,141 51

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

1989 1988 1987 (In thousands)

Ad valorem $ 16,473 $ 14,950 $ 12,712 City franchise 6,664 8,890 8,996 Payroll 7,052 7,112 6,606 Other . '3,854 3,871, 3,369 Total. $ 34,043 $ 34,823 $ 31,683 Amortization of intangibles, royalties, and advertising costs were less than 1% of revenues in each of the above periods.

52

PUBLIC SERVICE< COMPANY OF NEW MEXICO AND SUBSIDIARIES SCHEDULE V PROPERTY, PLANT AND EQUIPMENT Years Ended December 31, 1989, 1988 and 1987 Balance at Balance at Classification Other Changes End Beginning, Additions Deeeeeer 31, l.i89 of Year at Cost Retirements Add Deduct of Year (In thousands)

Utility plant:

Electric plant in service:

Intangible ........ $ 12,169 $ 18,364 $ 35 $ 378 $ $ 30,876 Production 1,214,366 4,270 1,092 18,438 1 1,235,981 Transmission. 210,984 3,092 32 669 46 214,667 Distribution . 361,772 18,040 3,162 143 921 375,872 General '4,845 100 1,889 114 21 63,149 1,864,136 43,866 6,210 19,742 989 1,920,545 Gas plant in service:

Intangible . ',826 4,353 20 63 7,136 Production and processing . 57,949 580 767 50,190 498 107,454 Natural gas storage ....... 4,885 12 4,897 Transmission. 64,992 805 27 719 66,489 Distribution . 195,341 10,577 1,958 9 203,951 General 32,538 4,'141 1,485 1,545 36,739 358,531 20,468 4,237 52,474 '70 426,666 Water plant in'ervice:

Intangible ......... 259 111 74 296 Source of supply plant........ 4,964 13 4,977 Pumping plant .............. 2,110 36 16 2,130 Water treatment plant........ 3,968 6 11 3,963 Transmission and distribution .. 30,164 1,988 47 50 15 32,140 General 2,221 3,209 35 5,395 43,686 5,363 183 50 15 48,901 Common plant in service:

Intangible 14,389 3,346 1,735 2,536 18,536 General . 27,139 527 454 893 62 28,043 41,528 3,873 2,189 3,'429 62 46,579 Construction work in progress 72,401 (6,450) 2,030 67,981 Electric plant held for future use .,'.. 21,975 5,193 16,782 Nuclear fuel 77,971 10,706 1,238 1,245 88,670 Total. utility plant.......... 2,480,228 77,826 18,012 78,963 2,881 2,616,124 Non-utility property................ 82,206 463 10,339 144 57,104 15,370 Total property, plant and equipment.............. $ 2,562,434 $ 78,289 $ 28,351 $ 79,107 $ 59,985 $ 2,631,494 Description of other changes Transfers between accounts $ 57,143 $ 57,143 Transfer of expired contract deposits to plant in service .. 847 Adoption of SFAS No. 96 . 20,798 Miscellaneous corrections and adjustments 1,166 1,995 9 $ 79,107 $ 59,985 (Continued) 53

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES SCHEDULE V PROPERTY, PLANT AND EQUIPMENT (Continued)

Years Ended December 31, 1989, 1988 and 1987 Balance at Balance at Classificatio Beginning Additions Other Changes End December 31, 1988 of Year at Cost Retirements Add Deduct. of Year (In thousands)

Utility plant:

Electric plant in service:

Intangible $ 3,181 $ 8,988 $ $ $ $ 12,169 Production 905,110 311,538 1,171 859 1,970 1,214,366 Transmission 208,296 2,956 222 46 210,984 Distribution 340,067 25,713 3,338 14 684 361,772

. General 61,956 4,774 2,366 1,227 746 64,845 1,518,610 353,969 7,097 2,100 3,446 1,864,136 Gas plant in service:

Intangible 2,376 269, 181 2,826 Production . 57,816 1,428 969 326 57,949 Natural gas storage 4,885 4,885 Transmission 62,507 1,105 195 1,731 156 64,992 Distribution 182,200 14,837 1,690 . 6 195,341 General 29,058 4,098 1,130 512 32,538 338,842 21,737 3,984 2,424 488 358,531 Water plant in service:

Intangible 259 259 Source of supply plant ........ 4,964 4,964 Pumping plant............... 2,052 71 13 2,110 Water treatment plant ........ 3,968 3,968 Transmission and distribution .. 28,537 1,738 73 57 30,164 General 2,165 345 188 101 2,221 41,945 2,154 274 19 158 43,686 Common plant in service:

Intangible 13,613 776 14,389 General 28,613 1,138 2,552 83 143 27,139 42,226 1,914 2,552 83 143 41,528 Construction work in progress ..... 369,092 (296,867) 176 '2,401 Electric plant held for future use ... 33,103 277 11,405 21,975 Nuclear fuel. 76,826 9,808 8,663 77,971 Total utility plant .......... 2,420,644 92,992 22,570 4,802 15,640 2,480,228 Non-utility property*............... 139,884 4,189 12,931 1,200 '0,136 82,206 Total property, plant and

~

equipment .............. $ 2,560,528 $ 97,181 $ 35,501 $ 6,002 $ 65,776 $ 2,562,434 Description of other changes Transfers-between accounts $ 2,530 $ 2)530 Transfer of expired contract deposits to plant in service 449 Write-off of electric plant held for future use 11,405 Write-off of non-utility property .. 48,451 Original cost of property acquired . 1,742 156 Miscellaneous corrections and adjustments. 1,730 2,785

$ 6,002 $ 65,776

• Excludes properties of discontinued operations.

(Continued) 54

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES SCHEDULE V PROPERTY, PLANT AND EQUIPMENT (Continued)

Years Ended December 31, 1989, 1988 and 1987 Balance at Balance at Classtticatlon Additions Other Changes End Beginning December 31, 1987 of Year at Cost Retirements Add Deduct of Year (In thousands)

Utility plant:

Electric plant in service:

Intangible $ 3,750 $ $ 1,266 $ 1,091 $ 394 $ 3,181 Production 914,057 9,036 469 600 18,114 905,110 Transmission......... 207,227 1,691 116 506 208,296 Distribution ......... 316,802 28,293 3,306 657 2,379 340,067 General 57,712 6,274 1,564 96 562 61,956 1,499,548 45,294 6,721 2,444 21,955 1,518,610 Gas plant in service:

Intangible 2,212 186 20 2 2,376 Production 57,692 549 360 65 57,816 Natural gas storage . 4,874 11 4,885 Transmission....... 62,216 627 337 62,507 Distribution ....... 173,182 10,593 1,564 11 182,200 General . 27,012 3,041 954 41 29,058 327,188 15,007 3,235 1 119 338,842 Water plant in service:

Intangible 259, 259 Source of supply plant........ 4,949 15 4,964 Pumping plant .............. 2,058 2,052 Water treatment plant........ 3,968 3,968 Transmission and distribution.. 25,494 2,444 64 674 28,537 General . 2,106 139 100 20 2,165 38,834 2,598 170 694 11 41,945 Common plant in service:

Intangible 15,900 1,778 4,459 394 13,613 General . 28,920 917 640 376 960 28,613 44,820 2,695 . 5,099 770 960 42,226 Construction work in progress .... 321,164 47,598 330 369,092 Electric plant held for future use .. 74,132 2,168 15,218 58,408 33,103 Nuclear fuel 70,223 6,603 76,826 Total utility plant......... 2,375,909 121,963 15,232 19,457 81,453 2,420,644 Non-utility property*.............. 79,367 2,760 2,354 61,243 1,132 139,884 Total property, plant and equipment............. $ 2,455,276 $ 124,723 $ 17,586 $ 80,700 $ 82,585 $ 2,560,528 Description of other changes Transfers'between accounts $ 77,053 $ 77,053 Transfer of expired contract deposits to plant in service .. 636 Miscellaneous corrections and adjustments 3,647 4,896

$ 80,700 $ 82,585 e Excludes properties of discontinued operations.

55

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES SCHEDULE VI ACCUMULATEDDEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT Years Ended December 31, 1989, 1988 and 1987 Additions Description Balance at Charged to Charged Balance Other Changes Beginning Operating to Other End, December 31, 1989 of Year Expenses Accounts Retirements Add Deduct 'ofat Year (In thousands)

Utilityplant:

Accumulated provision for depreciation of utility plant:

Electric plant in service ..... $ 419,827 $ 53,065 $ 598 $ 5,642 $ 1,470 $ 52 $ 469,266 Gas plant in service ..........

116,689 11,457 706 2,216 14,231 974 139,893 Water plant in service....... 8,490 1,160 50 122 9,578 Common plant in service .... 10,395 1,680 1,440 426 1,943 27 15,005 555,401 67,362 2,794 8,406 17,644 1,053 633,742 Accumulated provision for amortization of intangible assets franchises and computer software........... 13,984 5,217, 231 1,843 19 17,570 Accumulated provision for amortization of nuclear fuel... 26,624 6,220 1,455 31,389 Retirement work in progress.... (724) (2,'310) (8) 1,578 Total utility plant.......... 595,285 72,579 9,245 7,939 17,636 2,527 684,279 Non-utility property ............ 19,209 98 385 16,153 ',769

$ 614,494 72,579 $ 9,343 $ 8,324 $ 17,636 $ 18,680 $ 687,048 Other (598)

$ 71,981 Description of other additions and changes 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. 6,220 Depreciation of non-utility property charged to other income and deductions................. ~........ 98 Transfers between accounts . 16,180 16,180 Miscellaneous corrections and adjustments II 1,456 2,500

$ 9,343 $ 17,636 $ 18,680 (Continued) 56

PUBLIC SERVICE COMPANY OF NEW MEXICO AND,SUBSIDIARIES SCHEDULE VI ACCUMULATEDDEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (Continued)

Years Ended December 31, 1989,,1988 and 1987 Additions Balance at Charged to Charged Balance Description Beginning Operating to Other at End December 31, 1988 of Year Expenses Accounts Retirements r 'dd Deduct of Year (In thousands)

Utility plant:

Accumulated provision for depreciation of utility plant:

Electric plant in service .."..... $ 373,936 $ 52,627 $

876 $ 7,482 $ 1,037 $ 1,167 $ 419,827 Gas plant in service ......".... 110,201 8,876 842 4,925 1,695, 116,689 Water plant in service ........ ,

7,846 ,

882 46 279 5 "8,490 Common plant in service...... 8,741 873 " 1,'552 765 99 105 10,395 500,724 63,258 3,316 13,451 2,831 1,277 555,401 Accumulated provision for amortization of intangible assets franchises and computer software........... 10,190 ., 3,626 226 58 13,984 Accumulated provision for amortization of nuclear fuel ... 18,088 ='9,106 1,907 26,624 Retirement work in progress ....

8,663'188)

(912) (724)

Total utility plant ...... '.... 528,090 66,884 22,648 21,926 2,831 3,242 595,285 Non-utility property* ............ 16,326 2,988 277 179 7 I 19,209

$ 544,416 66,884 $ 25,636 $ 22,203 $ 3,010 $ 3,249 $ 614,494 Other 36

$ 66,920 Description of other additions and changes Depreciation and amortization of equipment charged to clearing accounts for distribution in accordance with use $ 3,542 Amortization of nuclear fuel charged to fuel and purchased power . 19,106 Depreciation of non-utility property charged to other income and deductions . 2,988 Transfers between accounts 548,, 548 Accumulated depreciation on property acquired........ 1,397 Miscellaneous corrections and adjustments ............ 1,065 2,701

$ 25,636 $ 3,010 $ 3,249

• Excludes accumulated depreciation and amortization on properties of discontinued. operations.

(Continued) 57

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES SCHEDULE VI ACCUMULATEDDEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (Continued)

Years Ended December 31, 1989, 1988 and 1987 Additions Balance at Charged to Charged Balance Description Beginning Operating to Other Other Changes at End Deccmbcr 31, 1987 of Year Expenses Accounts Retirements Add Deduct of Year (In thousands)

Utilityplant:

Accumulated provision for depreciation of utility plant:

Electric plant in service ..... $ 333,334 $ 46,772 '1,471 $ 4,912 $ 1,719 $ 4,448 $ 373,936 Gas plant in service ........ 103,751 8,814 824 3,164 24 Water plant in service ...... 7,195 742 55 168 22 110,201 7,846 Common plant in service.... 7,061 798 1,861 474 769 -

1,274 8,741 451,341 57,126 4,211 8,718 2,510 5,746 500,724 Accumulated provision for amortization of intangible assets franchises and computer software..........

Accumulated provision for 12,637 2,654 648 5,748 45 t

'6 '0,190 amortization of nuclear fuel .. 9,460 ',628 18,088 Retirement work in progress ... (508) 404 (912)

Total utility plant ......... 472,930 59,780 13,487 14,870 2,555 5,792 528,090 Non-utility property* ........... 11,647 2,876 7 1,810 16,326

$ 484,577 59,780 $ 16,363 $ 14,877 $ 4,365 $ 5,792 $ 544,416 Other.. 484

$ 60,264 Description of other additions and changes Depreciation and amortization of equipment charged to clearing accounts for distribution in accordance with use $ 4,859 $ $

Amortization of nuclear fuel charged to fuel and purchased power 8,628 Depreciation of non-utility property charged to other income and deductions 2,876 Transfers between accounts 1,810 1,810 Miscellaneous corrections and adjustments ............ I' 2,555 3,982

$ 16,363 $ 4,365 $ 5,792 a Excludes accumulated depreciation and amortization on properties of discontinued operations.

58

PUBLIC SERVICE COMPANY OF NEW MEXICO AND'SUBSIDIARIES SCHEDULE VIII VALUATIONAND QUALIFYINGACCOUNTS AND RESERVES Years Ended December 31, 1989, 1988 and 1987 Additions Balance at Charged to Charged Balance Beginning Operating to Other at End of Year Expenses Accounts Deductions of Year (In thousands)-

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-off method for doubtful receivables as ordered for ratemaking purposes.

59

PUBLIC SERVICE COMPANY OF NEW MEXICO,. AND SUBSIDIARIES SCHEDULE IX SHORT-TERM BORROWINGS Years Ended December 31, 1989, 1988 and 1987 Ivcighted Maximum Average Average Average Amount Amount Interest Balance at Interest Outstanding Outstanding Rate Category of Aggregate End of Rate at End During During the During the Borrowings 'hort-Term Year of Year Year Year Yea (Dollars in thousands)

December 31, 1989:it)

Notes payable to banks $ 19,100 9.50% $ 19,100 $ 1,492 9.52%

Commercial paper $ 14,780 8.91% $ 62,250 $ 18,203 9.61%

December 31, 1988:<>>

Notes payable to banks . $ $ 8,528 $ 2,910 8.35%

Commercial paper $ $ 160,550 $ 12,898 7.06%

December 31, 1987:

Notes payable to banks $ 3,000 8.35% $ 27,841 $ 11,866 8.99%

Commercial paper $ 149,000 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 NEW MEXICO AND SUBSIDIARIES QUARTERLY OPERATING RESULTS The uriaudited operating results by quarters for 1989 and 1988 are as follows:

Quarter Ended March 31 June 30 September 30 December 31 r

(In thousands except per share amounts) 1989:

Operating Revenues<i) . $ 266,181 $ 210,617 $ 218,506 $ 220,006 Operating Income<<) $ 48,237 $ 29,144 $ 42,920 $ 32,935 Net Earnings $ 29,907 $ 14,265 $ 25,765 $ 12,656 Net Earnings per Share $ .65 $ .28 $ .55, $ .25 1988:

Operating Revenues $ 237,736 $ 195,743 $ 201,778 $ 206,667 Operating Income . $ 38,783 $ 31,604 $ 34,296 $ 35,383 Earnings (Loss) before Extraordinary Item<>> ..... $ 20,736 $ 12,344 $ (55,476) $ (161,145)

Net Earnings (LossP) . $ 20,736 $ 12,344 $ (82,101) $ (181,116)

Earnings (Loss) before Extraordinary Item per Shard>> . $ .43 $ .23 $ (1.39) $ (3.93)

Net Earnings (Loss) per Share<>) $ .43 $ .23 $ (2.03) $ (4.41)

In the opinion of management of the Company, all adjustments (consisting of normal 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 MEXICO AND SUBSIDIARIES COMPARATIVE OPERATING STATISTICS 1989 1988 1987 1986 1985 Electric Service Energy Sales KWh (in thousands):

Residential 1,527,108 1,493,009 1,448,989 1,353,933 1,319,529 Commercial 2,203,037 2,097,277 2,003,735 1,872,902 1,765,077 Industrial . 961,251 899,508 787,901 797,927 788,880 Other ultimate customers 218,196 194,794 207,173 208,534 206,356 Total sales to ultimate customers .. 4,909,592 4,684,588 4,447,798 4,233,296 4,079,842 Sales for resale 3,096,458 3,508,596 2,490,926 2,494,234 3,357,220 Total KWh sales 8,006,050 8,193,184 6,938,724 6,727,530 7,437,062 Electric Revenues (in thousands):

Residential . $ 141,465 $ 140,731 $ 136,194 $ 126,053 $ 119,026 Commercial 192,273 . 187,800 179,653 166,424 152,921 Industrial . 64,"519 62,401 56,534 56,649,53,127 Other ultimate customers 15,387 13,931 15,161 14,622 14,293 Total revenues from ultimate customers 413,644 404,863 387,542 363,748 339,367 Sales for resale . 190,256 190,085 167,727 149,225 147,169 Total revenues from energy sales....... 603,900 594,948 555,269 512,973 486,536 Miscellaneous electric revenues . 16,481 12,369 8,348 7,923 8,313 Total electric revenues $ 620,381 $ 607,317 $ 563,617 $ 520,896 $ 494,849 Customers at Year End:

Residential 254,864 250,076 244,427 237,759 227,420 Commercial 31,402 31,024 29,882 28,736 27,053 Industrial . 393 390 399 414 428 Other ultimate customers 415 376 332 213 216 Total ultimate customers 287,074 281,866 275,040 267,122 255,117 Sales for resale . 9 11 8 7 8 Total customers 287,083 281,877 275,048 267,129 255,125 Reliable Net Capability KW 1,591,000',591,000 1,461;000 1,566,000 1,305,000 Coincidental Peak Demand KW 1,006,000 956,000 916,000 916,000 861,000 Average Fuel Cost per Million BTU . $ 1.3445 $ 1.2460'$ 1.2894 $ 1.1710 $ 1.2233 BTU per KWh of Net Generation 11,034 11,146 '11,526 11",608 11,214 Water Service Water Sales Gallons (in thousands) 3,179,711 2,726,666 2,683,961 2,535,656 2,387,468 Revenues (in thousands) . $ 12,102 $ 10,816 $ 10,973 $ 10,245 $ 8,144 Customers at Year End. 20,565 19,713 19,448 18,820 18,240 62

PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES COMPARATIVE OPERATING STATISTICS 1989 1988 1987 1986 19850 Gas Service Gas Throughput Decatherms (in thousands)

GCNM:

Residential 23,253 24,692 24,510 22,076 19,232 Commercial 10,730 11,460 11,359 10,745 9,642 Industrial . 1,478 1,726 2,196 5,909 13,806 Public authorities 5>492 6,206 6,811 8,323 9,073 Irrigation 2,010 1,440 1,402 1,853 1,693 Sales for resale 4,557 2,667 1,211 ,1>535 1,702 Brokerage 776 879 2,796 2,079 13 GCNM sales 48,296 49,070 50,285 52,'520 55,161 Transportation throughput 16,041 9,133 5,149 2,245 147 GCNM throughput. 64,337 58,203 55,434 54,765 55,308 Gathering Company:

Spot market sales . 11,081" Transportation throughput 3,597 Total gas throughput 79,015 58,203 55,434 54,765 55,308 Gas Revenues (in thousands)

GCNM:

Residential $ 130,130 $ 122,592 $ 114,164 $ 117;011 $ 111,427 Commercial . 47,876 45,235 42,120 45,812 45>519 Industrial 5,693 6,063 8,102 23,139 48,933 Public authorities 21,757 22,289 22,'729 30,213 38,181 Irrigation 7,001 4,546 3,781 6,142 6,507 Sales for resale 9,874 6,969 3,819 5,675 6,638 Brokerage 1,378 1,514 5,213 3,759 31 Revenues from gas sales . 223,709 209,208 199 928 231 751 257,236 Transportation...........,. ,

6,788 4,841 :4,315 2,207 83 Other 5,948 9,742 6,391 10,708 16,418 GCNM gas revenues 236,445 223,791 210,634 "

244,666 . 273,737 Gathering Company:

Spot market sales ... 19,810 Transportation. 830 Processing Company Sales of liquids 25,742 Total gas revenues. $ 282,827 $ 223,791 $ 210,634 $ 244,666 $ 273,737 Customers at Year End GCNM:

Residential.... 306>604 303,173 297,204 290,175 283,530 Commercial . 28,949 28,858 28,661 28,218 27,435 Industrial 103 105 118 145 170 Public authorities . 2,242 2,469 2,425 2,444 2,427 Irrigation . 1,252 1,261 1,257 1,328 1,432 Sales for resale, 7 6 5 ll 10 Brokerage 1 2 2 14 1 Transportation. 28 20 16 16 4 GCNM customers. 339,186 335,894 329,688 322,351 315,009 Gathering Company:

Off-system sales 13, Transportation. 5 Processing Company 23 Total customers 339,227 335,894 329,688 322,351 315,009

• 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

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIALDISCLOSURE None.

PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS 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. EXECUTIVE COMPENSATION Reference is hereby made to "Executive Compensation" in the 1990 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is hereby made to'"Voting Information" and "Election of Directors" in the 1990 Proxy Statement.

'TEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 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 and amortization of property, plant and equipment.

Schedule VIII Valuation and depreciation 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 Description 10.26.2 Second Amendment to Restated and Amended Public Service Company of New Mexico Accelerated Management Performance Plan (1988) (December 29, 1989).

10.27.2 Second Amendment to Public Service Company of New Mexico Service Bonus Plan dated December 29, 1989.

10.29.1 First Amendment to Public Service Company of New Mexico Supplemental Executive Retirement Plan dated December 29, 1989.

10A5 Supplemental Employee Retireinent Agreement dated December 1, 1989.

10.46 Supplemental Retirement Agreement dated January, 23, 1990.

10.47 Supplemental Employee Retirement Agreement dated March 6, 1990.

10.48 Settlement'Agreement between Public Service Company of New Mexico and Creditors of Meadows Resources, Inc. dated November 2, 1989.

10.49 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 Restated Articles of Incorporation of the 4-(b) to Registration 2-99990 Company, as amended through May 10, Statement No. 2-99990 of 1985. the Company.

3.2 Bylaws of the Company as amended through 19.1 to the Company's 1-6986 July 25, 1989. Quarterly Report on Form 10-Q for the quarter ended September 30, 1989.

/

Instruments Defining the Rights of Security Holders, Including Indentures 4.1 Indenture of Mortgage and Deed of Trust 4-(d) to Registration 2-99990 dated as of June 1, 1947, between the Statement No. 2-99990 of Company and Irving Trust Company,'as the Company.

together with the Ninth 'rustee, Supplemental Indenture dated as of 1, 1967,'the Twelfth Supplemental

'anuary 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.

65

Exhibit No. Description Filed as Exhibit: File No.

4.2 Portions of sixteen supplemental indentures 4-(e) to Registration 2-99990 to the Indenture of Mortgage and Deed of Statement No. 2-99990 of Trust dated as of June 1, 1947, between the Company.

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 of shares of the Company's

'ommon Stock.

4.3 Agreement of the Company pursuant to Item 4-C to Annual Report of 1-6986 601(b)(4)(iii) of Regulation S-K. the Registrant on Form 10-K. for fiscal year ending December 31, 1983.

Material Contracts 10.1 Supplemental Indenture of Lease dated as of 4-D to Registration ~ 2-26116 July 19, 1966 between the Company and Statement No. 2-26116 of other participants in the Four Corners the Company.

Project and the Navajo Indian Tribal Council.

10.1.1 Amendment and Supplement No. 1 to 10.1.1 to Annual Report of 1-6986 Supplemental and Additional Indenture of the Registrant on Form Lease dated April 25, 1985 between the 10-K for fiscal year Navajo Tribe of Indians and Arizona ending December 31, Public Service Company, El Paso Electric 1985.

Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company, and Tucson Electric Power Company.

10.2 Fuel Agreement, as supplemented, dated as 4-H to Registration 2-35042 of September 1, 1966 between Utah Statement No. 2-35042 of Construction &'Mining Co. and the the Company.

participants in the Four Corners Project including the Company.

10.3 Fourth Supplement to Four Corners Fuel (10)-BB to Annual Report 1-6986 Agreement No. 2 effective as of January 1, of the Registrant on 1981, between Utah International Inc. and Form 10-K for the fiscal the participants in the Four Corners year ending December Project including the Company. 31, 1980.

66

Exhibit'No. Desc Ipllo Filed as Exhibit: File No.

Contract between the United Stafes and the 5-L'o Registration 2-41010 Company dated April 11, 1968, for - Statement No. 2-41010 of furnishing water. \ the Company.

10.4.1 Amendatory Contract between the United 5-R to Registration 2-60021 States and the Company dated September Statement No. 2-60021 of 29, 1977,for furnishing water. the Company.

10.5 Co-Tenancy Agreement between the 5-0 to Registration 2-44425 Company and Tucson Gas & Electric Statement No. 2-44425 of Company dated February 15, 1972 the Company.

pertaining to the San Juan generating plant.

10.5.1 Modification No. 4 to Co-Tenancy 10.5.1 to Annual Report of 1-6986 Agreement between the Company and the Re'gistran't on Form Tucson Electric Power Company dated 10-K for fiscal year October 25, 1984. ending December 31, 1985.

10.5.'2 Modification No. 5 to Co-Tenancy 10.5.2 to Annual Report of 1-6986 Agr'cement between the Company and the Registrant on Form Tucson Electric Power Company dated 10-K for fiscal year

'July 1,'985. ending December 31, 1985.

10.'6 San Juan Project Construction Agreement 5-R to Registration . 2-50338 between the Company and Tucson Gas & Statement No. 2-50338 of Electric Company, executed December 21, the Company.

1973 10.6.1 Modification No. 4 to San Juan Project 10.6.1 to Annual Report of 1-6986 Construction Ag'reement between the the Registrant on Form Company'and Tucson Electric Power '0-K for fiscal year Company dated October 25, 1984. ending December 31, 1985.

10.6.2 Modification No. 5 to San Juan Project 10.6.2 to Annual Report of 1-6986 Construction Agreement between the the Registrant on Form Company and Tucson Electric Power 10-K for fiscal year Company dated July 1, 1985. ending December 31, 1985.

10.7 San Juan Project Operating Agreement 5-S to Registration 2-50338 between the Company and Tucson Gas & Statement No. 2-50338 of Electric Company, executed December 21, the Company.

1973.

10.7.1 'Modification No. 4 to San Juan'Project 10.7.1 to Annual Report of 1-6986 Operating Agreement between the the Registrant on Form Company and Tucson Electric Power 10-K for fiscal year Company dated October 25, 1984: ending December 31, 1985.

67

Exhibit No. Description Filed as Exhibit: File No.

10.7.2 Modification No. 5 to San Juan Project 10.7.2 to Annual Report of 1-6986 Operating Agreement between the the Registrant on Form Company and Tucson Electric Power 10-K for fiscal year Company dated July 1, 1985. ending December 31, 1985.

10.8 Arizona Nuclear Power Project Participation 5-T to Registration 2-50338 Agreement among the Company and Statement No. 2-50338 of Arizona Public Service Company, Salt the Company.

River Project Agricultural Improvement and Power District, Tucson Gas &

Electric Company and El Paso Electric Company, dated August 23, 1973.

10.8.1 Amendments One through Four to Arizona (c) to Annual Report of the 1-6986 Nuclear Power Project Participation Registrant on Form 10-K Agreement. for fiscal year ending December 31, 1979.

10.8.2 Amendment No. 5 to the Arizona Nuclear 10-Z to Annual Report of 1-6986 Power Project Participation Agreement the Registrant on Form dated as of December 5, 1979. 10-K for fiscal year ending December 31, 1981.

10.8.3 Amendment No. 6 to the Arizona Nuclear 10-AA to Annual Report of 1-6986 Power Project Participation Agreement the Registrant on Form effective October 16, 1981. 10-K for fiscal year ending December 31, 1981.

10.8.4 Amendment No. 7, effective April 1, 1982, to 10-BB to Annual Report of 1-6986 the Arizona Nuclear Power Project the Registrant on Form Participation Agreement. 10-K for fiscal year ending December 31, 1982.

10.8.5 Amendment No. 8 elfective September 12, 10-JJ to Annual Report of 1-6986 1983, to the Arizona Nuclear Power, the Registrant on Form Project Participation Agreement. 10-K for fiscal year ending December 31, 1983.

10.8.6 Amendment No. 9 to Arizona Nuclear 10-JJ to Annual Report of 1-6986 Power Project Participation Agreement the Registrant on Form dated as of June 12, 1984. 10-K for fiscal year ending December 31, 1984.

10.8.7 Amendment No. 10 to Arizona Nuclear 10.8.7 to Annual Report of 1-6986 Power Project Participation Agreement the Registrant on Form dated as of November 21, 1985. 10-K for fiscal year ending December 31, 1985.

68

Exhibit No. Description Filed as Exhibit:

10.8.8 Amendment No. 11 to Arizona Nuclear 10.8.8 to Annual Report of Power Project Participation Agreement the Registrant on Form dated June 13, 1986 and effective January 10-K for fiscal year 10, 1987. ending December 31, 1986.

10.9 Coal SalesAgreement executed August 18, (10)-EE to Anttual Report 1980 between San Juan Coal Company, of the Registrant on the Company and Tucson Electric Power Form 10-K for fiscal year Company. ending December 31, 1980.

I 10.9.1 Amendment Number 1 to Coal Sales 10-V to Annual Report of Agreement dated September 30, 1981 the Registrant on Form among San Juan Coal Company, the 10-K for fiscal year Company and Tucson Electric Power ending December 31, Company. 1981.

10.9.2 Amendment No. Three to Coal Sales 10-NN to Annual Report of Agreement dated April 30, 1984 among the Registrant on Form San Juan Coal Company, the Company 10-K for fiscal year and Tucson Electric Power ending December 31, treatment has been Company'confidentiality 1984.

requested and exhibit is not filed herewith).

10.10 Modifications No. 1 to San Juan Project A part of 10-T to Annual Agreements. Report of the Registrant on Form 10-K for fiscal year endirig December 31, 1981, 10.11 San, Juan Unit 4 Early Purchase and 10-KK to Annual Report of Participation Agreement dated as of the Registrant on Form September 26, 1983, between the Company 10-K for fiscal year and M-S-R Public Power Agency, and ending December 31, Modifications No. 2 to the San Juan 1983, Project Agreements dated December 31, 1983.

10,11.1 Amendment No. 1 to the Early Purchase 10.11.1 to Annual Report of and Participation Agreement. between the Registrant on Form Public Service Company of New Mexico 10-K for fiscal year and M-S-R Public Power Agency, ending December 31, executed as of December 16, 1987, for San 1987.

Juan Unit 4.

II 10.12 Amended and Restated San Juan Unit 4 10-00 to Annual Report of Purchase and Participation Agreement the Registrant on Form dated. as 'of December 28, 1984 between 10-K for fiscal year the Company and the Incorporated ending December 31, County of Los Alamos. 1984.

69

Exhibit No. Description Filed as Exhibit 10.13 Modifications No. 3 to San Juan Project. 10-KK to Annual. Report of Agreements dated July 17, 1984. the Registrant on Form kl t

10-K for fiscal year ending December 31, 1984.

10.14 Participation Agreement among the

'ompany, Tucson Electric Power 'he 10-W to Annual Report of 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 Participation Agreement dated as of June 30, 10-II to Annual Report of 1983 among Security Trust Company, as the Registrant on Form Trustee, the Company, Tucson Electric . 10-K for fiscal year Power Company and certain financial "ending December 31, institutions relating to San Juan Coal Trust. '1983.'0-CC 10.16 Participation Agreement between the to Annual Report of Company, the Owner Trustee and the the Registrant on Form Equity Participants with respect to the 10-K for fiscal year leveraged preferred stock of the Company ending December 31, dated as of December 1, 1981. 1981.

10.17 Interconnection Agreement dated Nov'ember 10-II to Annual Report of 24, 1982, between the Company and the Registrant on Form Southwestern Public Service Company. 10-K for fiscal year ending December 31, 1982.

10.18* Lease dated February 5, 1985 between The 10.28 to Annual Report of First National Bank of Boston, Lessor, the Registrant on Form and the Company, Lessee. 10-K for fiscal year ending December 31, 1985.

10.18.1* Supplement No. 1 dated September 30, 1985, 10.28.1 to Annual Report of to Lease dated February 5, 1985 between the Registrant on Form The First National Bank of Boston, 10-K for fiscal year Lessor, and the Company, Lessee. ending December 31, 1985.

10.19 New Mexico Public Service Commission 10-PP fo Annual Report of Order dated December 12, 1984, and the Registrant on Form Exhibit A thereto, in NMPSC Case No. 10-K for fiscal year 1804, regarding inventoried ending December 31, capacity.'ew 1984.

10.20 Mexico Public Service Commission 10.20 to Annual Report of Order dated August 12, 1986, and the. Registrant on Form Attachment A thereto, in NMPSC Case 10-K for fiscal year No. 2011, regarding the application of the ending December 31, inventorying methodology to certain sale" 1986.

and leaseback transactions.

70

Exhibit No. Description Filed as Exhibit:

'acility Lease dated as of December 16, 28(a) to the Company's 1985, between The First National Bank of Current Report on Form 10.21'0.21. Boston, as Owner Trustee, and Public 8-K dated December 31, Service Company of New Mexico. 1985.

1*. Amendment No. I dated as of July 15, 1986, 28.1 to the Company's to Facility Lease dated as of December 16, Current Report on Form 1985. 8-K dated July 17, 1986.

10.21.2* Amendment No. 2 dated as of November 18, 28.1 to the Company's 1986, to Facility Lease dated as of Current Report on Form December 16, 1985. 8-K dated November 25, li 1986.

10.21.3 Amendment No. 3 dated as of March 30, 10.21.3 to Annual Report of 1987, to Facility Lease dated as of the Registrant on Form December 16, 1985. 10-K for fiscal year ending December 31, 1987.

10.22 Facility Lease dated as of July 31, 1986, 28.1 to the Company's between The First National Bank of Quarterly Report on Boston, as Owner Trustee, and Public Form 10-Q for the Service Company of New Mexico. quarter ended June 30, 1986.

10.22.1 Amendment No. 1 dated as of November 18, 28.5 to the Company's 1986, Facility Lease dated as of July 31, Current Report on Form 1986. 8-K dated November 25, 1986.

10.22.2 Amendment No. 2 dated as of December 11, 10.22.2 to Annual Report of 1986, to Facility Lease dated as of July 31, the Registrant on Form 1986. 10-K for liscal year ending December 31, 1986.

10.22.3 Amendment No. 3 dated as of April 8, 1987, 10.22.3 to Annual Report of to Facility Lease dated as of July 31, 1986. the Registrant on Form 10-K for fiscal year ending December 31, 1987.

10.23* Facility Lease dated as of August 12, 1986, 28.1 to the Company's between The First National Bank of Current Report on Form Boston, as Owner Trustee, and Public 8-K dated August 18, Service Company of New Mexico. 1986.

10.23.1* Amendment No. I dated as of November 18, 28.9 to the Company's 1986, to Facility'ease dated as of August Current Report on Form 12, 1986. 8-K dated November 25, 1986.

71

Exhibit No. Description Filed as Exhibit:

10.23.2 Amendment No. 2 dated as of November 25, 10.23.2 to Annual Report of 1986, to Facility Lease dated as of August the Registrant on Form 12, 1986. 10-K for fiscal year ending December 31, 1986.

10.24 Facility Lease dated as of December 15, '28.1 to the Company's 1986, between The First National Bank of Current Report on Form Bosto'n, as Owner Trustee, and Public 8-K dated December 17, Service Company of New Mexico (Unit 1 1986.

'ransaction).

10.24.1 Amendment No. 1 dated as of April 8, 1987, 10.24.1 to Annual Report of to Facility Lease dated as of December 15, the Registrant on Form 1986. 10-K for fiscal year ending December 31, 1987.

10.25 Facility Lease dated as of December 15, 28.9 to the Company's 1986, between The First National Bank of Current Report on Form Boston, as Owner Trustee, and Public 8-K dated December 17, Service Company of New Mexico (Unit 2 1986.

Transaction).

10.25.1 Amendment No. 1 dated as of April'8, 1987, 10.25.1 to Annual Report of to Facility Lease dated as of December 15, the Registrant on Form 1986. 10-K for fiscal year ending December 31, 1987.'9.5 10.26 Restated and Amended Public Service to the Company's Company of New Mexico Accelerated Report on Form 10-Q for Management Performance Plan (1988). the quarter ended

, (August 16, 1988.) September 30, 1988.

10.26.1 First Amendment to Restated 'and Amended 19.6 to the Company's Public Service Company of New Mexico Report on Form 10-Q for Accelerated Management Performance the quarter ended Plan (1988). (August 30, 1988.) September 30, 1988.

10.27 Public Service Company of New Mexico 19.4 to the Company's Service Bonus Plan, October 23, 1984. Report on Form 10-Q for the quarter ended September 30, 1988.

10.27.1 First Amendment to Public Service 10.11.1 to Annual Report of Company of New Mexico Service Bonus the Registrant on Form Plan dated November 20, 1985. 10-K for fiscal year ending December 31, 1985.

10.28 Management Life Insurance Plan (July 1985) 10.39 to Annual Report of of the Company. the Registrant on Form

'10-K for fiscal year ending December 31, 1985.

72

Exhibit No. Description Filed as Exhibit: Fiie No.

10.29 Supplemental Executive Retirement Plan of 10.41 to Annual Report of 1-6986 the Company dated July 23, 1985. the Registrant on Form 10-K for fiscal year ending December 31, 1985.

10.30 Compensatory Agreement with Mr. James F. 10-MM to Annual Report 1-6986 Jennings, Jr. of the Regist'rant on Form 10-K for fiscal year ending December 31, 1984.

10.31 Public Service Coinpany of New Mexico 19.5 to the Company's 1-6986 Exec-U-Care Group Medical Quarterly Report on Reimbursement 'Insurance Trust Form 10-Q for Quarter Participation Agreement. ended March 31, 1987.

10.32 Amended and Restated Medical 19.6 to the Company's 1-6986 Reimbursement Plan of Public Service Quarterly Report on Company of New Mexico. Form 10-Q for Quarter ended March 31, 1987.

10.33 Republic Holding Company Series M 19.4 to the Company's 1-6986 Preferred Stock Program. Quarterly Report on Form 10-Q for Quarter ended June 30, 1987.

10.34 Meadows Resou'rces, Inc., Second Restated '9.3 to the Company's 1-6986 and A'mended Executive Deferred Quarterly Report on Compensation Plan, Alliance Form 10-Q for Quarter Telecommunications Investment. (August ended September 30,

'0;35 24, 1988.) 1988.

Amendment No. 2 dated as of April 10, 10.53 to Annual Report of 1-6986 1987,'o the Facility Lease dated as of the Registrant on Form August 12, 1986, between The First 10-K for fiscal year National Bank of Boston, as Owner ending December 31, Trustee, and Public Service Company of 1987.

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.)

10.36 Amendment No. 3 dated as of March 30, 10.54 to Annual Report of 1-6986 1987, to the Facility Lease dated as of the Registrant on Form December 16, 1985, between The First 10-K for fiscal year National Bank of Boston, as Owner ending December 31, Trustee, and Public Service Company of 1987.

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.)

73

Exhibit No. Description Filed as Exhibit: File No.

10.37 'ecommissioning Trust Agreement between 10.55 to Annual Report of 1-6986 Public Service Company of New Mexico the Registrant on Form and First Interstate Bank of Albuquerque 10-K for fiscal year dated as of July 31, 1987. ending December 31, 1987.

10.38 New Mexico Public Service Commission 10.56 to Annual Report of 1-6986 Order dated July 30, 1987, and Exhibit 1 the Registrant on Form thereto, in NMPSC Case No. 2004, 10-K for fiscal year regarding the PVNGS decommissioning ending December 31, trust fund. 1987.

10.39 '

MCB/RSB Management Incentive 10.57 to, Annual Report of 1-6986

~ Programs. (December 1, 1985.) 'the Registrant on Form 10-K for fiscal year ending December 31, 1987.

10.40 Form of Executive Retention Plan, CMC 10.61 to Annual Report of 1-6986 Group and January 24, 1989 Resolution the Registrant on Form Authorizing Plan. 10-K for fiscal year ending December 31, 1988.

10.41 Public Service Company of New Mexico and 10.62 to Annual Report of 1-6986 Paragon Resources, Inc. Deferred the Registrant on Form Compensation Trust Agreement dated 10-K for fiscal year December 30, 1988. ending December 31, 1988..

10.42 Executive Retention Agreements (1989). 19.2 to the Company's 1-6986 Quarterly Report on Form 10-Q for the quarter ended September 30, 1989.

10.43 Agreement to Continue Medical Benefits 19.3 to the Company's 1-6986 dated August 4, 1989. Quarterly Report on Form 10-Q for the quarter ended September 30, 1989.

10.44 Supplemental Employee Retirement to the Company's

'9.4 Agreements dated August 4, 1989.. Quarterly Report on t , Form 10-Q for, the quarter ended September 1-6986'ubsidiaries

.30, 1989.

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. Deae iptlon Filed as Exhibit: File No.

Additional Exhibits 1 28.1 Collateral Trust Indenture dated as of 28(i) to the Company's 1-6986 December 16, 1985, among First PV ,Current Report on Form Funding Corporation, Public Service 8-K dated December 31, Company of New Mexico and Chemical 1985.

Bank, as Trustee.

28.1.1 Series 1986A Bond Supplemental Indenture 28.4 to the'Compaiiy's . 1-6986 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.

28.1.2 Series 1986B Bond Supplemental Indenture 28.1.2 to the Company's 1-6986 dated as of November 18, 1986, to Current Report on Form Collateral Trust Indenture dated as of , 8-K dated November 25, December 16, 1985. 1986.

28.1.3 Unit 1 Supplemental Indenture of Pledge 28.8 to the Company's 1-6986 (Lease Obligation Bonds, Series 1986B) Current Report on Form dated as of December 15, 1986, to the 8-K dated December 17, Collateral Trust Indenture dated as of 1986.

16, 1985. 'ecember 28.1.4 Unit 2 Supplemental Indenture of Pledge 28.16 to,the Company's 1-6986 (Lease Obligation Bonds, Series 1986B) Current Report on Form dated as of December 15, 1986, to the 8-K dated December 17, Collateral Trust Indenture dated as of 1986.

December 16, 1985.

28.2>> Participation Agreement dated as of 2 to thc Compariy's Current 1-6986

'December 16, 1985, among the Owner Report on Form 8-K Participant named therein, First PV dated December 31, 1985.

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 in its individual capacity and as 'ank, 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.

28.2.1>> Amendment No. 1 dated as of July 15, 1986, 2.1 to the Company's 1-6986 to Participation Agreement dated as of , Current Report on Form December 16, 1985. 8-K dated July 17, 1986.

28.2.2>> Amendment No. 2 dated as of November 18, 2.1 to the Company's 1-6986 1986, to Participation Agreement dated as 'urrent Report on Form of December 16, 1985. 8-K dated November 25, 1986.

75

Description Filed as Exhibit: File No.

Trust Indenture, Mortgage, Security 28(b) to the Company's ., 1-6986 Agreement and Assignment of Rents Current Report on Form dated as of December 16, 1985, between 8-K dated December 31, The First National Bank of Boston, as 1985.

Owner Trustee, and Chemical Bank, as Indenture Trustee.

Supplemental Indenture No. 1 dated as of 28.2 to the Company's 1-6986 July 15, 1986, to the Trust Indenture, Current Report on Form Mortgage, Security Agreement and 8-K dated July 17, 1986.

Assignment of Rents dated as of December 16, 1985.

Supplemental Indenture No. 2 dated as of 28.2 to the Company's 1-6986 November 18, 1986, to the Trust Current Report on Form Indenture, Mortgage, Security Agreement 8-K dated November 25, and Assignment of Rents dated as of 1986.

December 16, 1985.

Assignment, Assumption and Further 28(e) to the Company's 1-6986 Agreement dated as of December 16, Current Report on Form 1985, between Public Service Company of 8-K dated December 31, New Mexico and The First National Bank 1985.

of Boston, as Owner Trustee.

'.1 Participation Agreement dated as of July 31, to the Company's 1-6986 1986, among the Owner Participant named Quarterly Report on therein, First PV Funding Corporation, Form 10-Q for Quarter The First National Bank of Boston, in its ended June 30, 1986.

individual capacity and as Owner Trustee (under a Trust Agreement dated as of July 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 of July 31, 1986, with the Owner Trustee), and Public Service Company of New Mexico, including Appendix A definitions.

Amendment No. 1 dated as of,November 18, 28.4'o the Company's 1-6986 1986, to Participation Agreement dated as Current Report on Form of July 31, 1986. 8-K dated November 25, 1986.

Trust Indenture, Mortgage, Security 28.2 to the Company's 1-6986 Agreement and Assignment of Rents Quarterly "Report on dated as of July 31, 1986, between The i 'orm 10-Q for Quarter First National Bank of Boston, as Owner ended June 30, 1986.

~ Trustee, and Chemical Bank, as Indenture Trustee.

76

Exhibit No. Description Filed as Exhibit:

28.6.1 Supplemental Indenture No. 1 dated as of 28.6 to the Company's 18, 1986, to the Trust 'ovember Current Report on Form Indenture, Mortgage, Security Agreement 8-K dated November 25, and Assignments of Rents dated as of July 1986. tl 31, 1986.

II 28.7 Assignment, Assumption, and Further 28.3 to the Company's Agreement dated as of July 31, 1986, Quarterly Report on between Public Service Company of New, Form 10-Q for quarter Mexico and The First National Bank of ended June 30, 1986.

Boston, as Owner Trustee.

28.8* Participation Agreement dated as of August 2.1 to the Company's 12, 1986, among the Owner Participant Current Report on Form named therein, First PV Funding 8-K dated August 18, Corporation, The First National Bank of 1986.

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.

28.8.1* Amendment No. 1 dated as of November 18, 28.8 to the Company's 1986, to Participation Agreement dated as Current Report on Form

, of August 12, 1986. 8-K dated November 25, 1986.,

28.9e Trust Indenture, Mortgage, Security 28.2 to the Company's Agreement and Assignment of Rents Current Report on Form dated as of August 12, 1986, between The 8-K dated August 18, First National Bank of Boston, as Owner 1986.

Trustee, and Chemical Bank, as Indenture Trustee.

28.9.1e Supplemental Indenture No. 1 dated as of 28.10 to the Company's November 18, 1986, to the Trust Current Report on Form Indenture, Mortgage, Security Agreement 8-K dated November 25, and Assignment of Rents dated as of 1986.

August 12, 1986.

28.10'ssignment, Assumption, and Further 28.3 to the Company's Agreement dated as of August 12, 1986, Current Report on Form between Public Service Company of New 8-K dated August 18, Mexico and The First National Bank of 1986.

Boston, as Owner Trustee.

77

Description Filed as Exhibit:

Participation Agreement dated as of 2.1 to the Company's December 15, 1986, among the Owner Current Report on Form Participant named therein, First PV 8-K dated December 17, Funding Corporation, The First National 1986.

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 28.2 to the Company's Agreement and Assignment of Rents Current Report on Form dated as of December 15, 1986, between 8-K dated December 17, The First National Bank of Boston, as 1986.

Owner Trustee, and Chemical Bank, as Indenture Trustee (Unit 1 Transaction).

Assignment, Assumption and Further 28.3 to the Company's Agreement dated as of December 15, Current Report on Form 1986, between Public Service Company of 8-K dated December 17, New Mexico and The First National Bank 1986.

of Boston, as Owner Trustee (Unit 1 Transaction).

Participation Agreement dated as of 2.2 to the Company's December 15, 1986, among the Owner Current Report on Form Participant named therein, First PV 8-K dated December 17, Funding Corporation, The First National 1986.

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).

78

Exhibit No. Description Filed as Exhibit: File No.

28.15 Trust'Indenture, Mortgage, Security 28. 10 to the Company's 1-6986 and Assignment of Rents'greenient Current Report on Form dated as of December 15, 1986, between 8-K dated December 17, the First National Bank of Boston, as 1986.

Owner Trustee, and Chemical Bank, as Indenture Trustee (Unit 2 Transaction).

28.16 Assignment, Assumption, and Further 28.11 to the Company's 1-6986 Agreement dated as of December 15, Current Report on Form 1986, between Public Service Company of 8-K dated December 17, New Mexico and The First National Bank 1986.

of Boston, as Owner Trustee (Unit 2 Transaction).

28.174 Waiver letter with respect to "Deemed Loss 28.12 to the Company's 1-6986 Event" dated as of August 18, 1986, Current Report on Form between the Owner Participant named 8-K dated August 18, therein, and Public Service'Company of 1986.

New Mexico.

28.18>> Waiver letter with respect to "Deemed Loss 28.13 to the Company's 1-6986 Event" dated as of August 18, 1986, Current, Report on Form between the Owner Participant named 8-K dated August 18, therein, and Public Service Company of 1986.

New Mexico.

28.19 'Agreement-'No. 13904 (Option'and Purchase 28.19 to Annual Report 'of 1-6986 of EAluent), dated April 23, 1973, among the Registrant on Form Arizona Public Service Company, Salt 10-K for fiscal year River Project Agricultural Improvement ending December 31, and Power District', the Cities of Phoenix, 1986.

Glendale, Mesa, Scottsdale, and Tempe,

, ~ and the Town of Youngtown.

28.20 Agreement for the Sale and Purchase of 28.20 to Annual Report of 1-6986 Wastewater ENuent, dated June 12, 1981, the Registrant on Form among Arizona'ublic Service Company, 10-K for fiscal year Salt River Project Agricultural ending December 31, Improvement and Power District and the 1986.

City of Tolleson, as amended.

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 of the 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 Principal Executive Officer

/s/ J. D. GEIsT and Director March 23, 1990 J. D. Geist Chairman of the Board and President

/S/ M. H. MAERKI Principal Financial OAicer March 23, 1990 M. H. Maerki Senior Vice President and Chief Financial 0+cer

/s/ B. D. LAGKEY Principal Accounting Officer March 23, 1990 B. D. Lackey Vice President and Corporate Controller

/s/ J. P. BUNDRANT Director March 23, 1990 J. P. Bundrant

/s/ A. B. Collins, Jr. Director March 23, 1990 A. B. Collins, Jr.

/s/ J. A. GQDwIN Director March 23, 1990 J. A. Godwin

/S/ C. E. LEYENDECKER Director March 23, 1990 C. E. Leyendecker

/s/ A. G. ORTEGA Director March 23, 1990 A. G. Ortega

/s/ R. R. REHDER Director March 23, 1990 R. R. Rehder

/s/ R. H. STEPHENs Director March 23, 1990 R. H. Stephens

/s/ E. R. WooD Director March 23, 1990 E. R. Wood 80

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Public Service Companyoftlewhiexico Design:

Ahmdo Square L~rrda CrLcpino Albuquerque, Yew Mexico 87158 Phorography:

Telephone: 95/8/82700 Srudio7 Ron Behrmann ONO MfL5CAkY ~ (rNCW NXCi Chuck Gallagher hllchael Barley