ML18192A381

Public Service Company of New Mexico 1977 Annual Report

ML18192A381
Person / Time
Site:	Palo Verde
Issue date:	05/21/1978
From:	Public Service Co of New Mexico
To:	Office of Nuclear Reactor Regulation
References
Download: ML18192A381 (36)

Text

gi l?esfhllrr<c Serr vrrIt:e Cemp i e0 Hem QQemrrce NOTICE THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE DIVISION OF DOCUMENT CONTROL. THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS FACILITY BRANCH 016. PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL. REMOVAL OF ANY PAGE(S) FROM DOCUMENT FOR REPRODUCTION MUST BE REFERRED TO FILE PERSONNEL.

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Page Financial Highlights . 1 Our Turn 2 Money 1977 .. 3 Coming In 3 Going Out . 3 Financing 4 Operations 4 Peak Leaps 13% 4 Load Factor at All-Time High . 4 Construction Pace Continues . 5 Explosion Shuts Down San Juan Unit 2 . 5 Water 6 Service Area .. 6 Subsidiaries . 7 R, D & D Research, Development and Demonstration 7 Tomorrow .. 9 Management Audit 9 Fuels . 9 Franchises . 10 Five-Year Forecast 10 Rates and Regulation 10 PNM People and Programs 11 Employee Relations . 11 Public Information ..

Index to Financial Data 12 Officers and Directors 32 System Map Inside Back Cover The annual meeting of stockholders is scheduled to be The Common Stock of this Company is traded on the held April 25, 1978. A proxy form and notice of the New York Stock Exchange under the symbol PNM.

annual meeting will be mailed to all stockholders on March 23, 1978.

This Annual Report and the financial statements con-For further information and details pertaining to the tained herein are submitted for the general information information provided in this report contact D. E. Peck.- of the stockholders of the Company and are not ham, Secretary and Treasurer, Public Service Company intended for use in connection with any sale or purchase of New Mexico, Post Office Box 2267, Albuquerque, of, or any offer or solicitation of offers to buy or sell, New Mexico 87103. any securities of the Company.

COVER PHOTO: Workers disassemble a steam turbine at the San Juan Generating Station as part of regularly scheduled maintenance procedures.

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I977 I976 Increase CONDENSED EARNINGS STATEMENT Total Operating Revenues,, $ 138,635,951 $ 99,523,146 39.3 Operating Expenses:

Operations and Maintenance,... 76,524,378 51,535,167 48.5 Depreciation and Amortization . 11,463,823 9,548,173 20.1 Income Taxes .. 10,986,162 8,028,464 36.8 Other Taxes 7,257,043 5,874,485 23.5 Total Operating Expenses .... 106,231,406 74,986,289 41.7 Operating Income 32,404,545 24,536,857 32.1 Other Income and Deductions, Net . , 7,653,033 4,797,724 59.5 Income Before Interest Charges . 40,057,578 29,334,581 36.6 Interest Charges 15,136,962 11,977,418 26.4 Net Earnings 24,920,616 17,357,163 43.6 Preferred Dividends 6,284,825 4,194,268 49.8 Earnings on Common Stock $ 18,635,791 $ 13,162,895 41.6 Earnings per Common Share . $ 2.46 $ 2.16 13.9 Dividends per Common Share $ 1.61 $ 1.42 13.4 Gross Investment in Property $ 682,058,276 $ 532,277,564 28.1 Kilowatt-Hour Sales .. 4,367,003,062 3,595,233,061 21.5 Peak Load (Kilowatts) 715,000 633,000 13.0

The past year saw PNM make the producers don't know how to some amazing strides and encoun- do their jobs and demand that ter some tremendously frustrating changes be made. There can be no problems. From a financial point of better scenario to study than the view, the year was better than most nuclear power industry. Every con-in recent history and this is encour- ceivable obstacle has been thrown aging. From an operational point of in the path of nuclear electric power view, the job is clearly becoming generation. The incredible tangle of more difficult. regulatory procedures has pushed The tremendous impact of infla- the cost in time and dollars to the tion, fuel cost increases, environ- point where the critics'laims that mental controls, and rapid capital nuclear power is not economical are expansion that people in the busi- on the verge of becoming self-ness have been all too aware of for fulfilling prophecies. Who benefits?

the past several years is being Not the people who repeatedly tell translated into increased power us that they want low-cost energy.

costs. Our customers are becoming There may be no good solution, conscious of those things which but those who believe that the mar-business and government have been ket system of determining the range trying to bring to their attention for and availability of goods and serv-the past several years. ices is a reasonably self-correcting Perhaps the story hasn't been told mechanism which works in the often enough, but that is doubtful. interest of the consumer might do The fact is that rising prices get well to go out into the fray and more attention than all the studies, confront their adversaries. The projections and prophecies that American public is clearly the best educated mass of people on earth. J. D. Gebi have been made. We now find the same people who brand themselves The communications system in this confident the task can be managed, as dedicated consumer advocates country makes Americans the best the sooner it is perceived as 'a and who have had a hand in pro- informed people who have ever societal problem, the sooner we ducing the climate of distrust and lived. The decisions the public is can get on with developing thc intervention that has contributed being asked to make regarding the solutions. We are confident that to the rising costs, disassociating future of their country must be the people of this country will themselves from responsibility and made based on as thorough an make the best decisions in their accusing the productive sector of understanding of the issues as pos- own interest once the entire scope failing in its stewardship by con- sible. The nature of our country of the problem is brought to their spiring to cheat customers through is to continually seek what de attention. The time of awareness increased prices. Tocqueville called, "The American is rapidly approaching.

Add to this astounding intellec- belief in the perfectability of man."

tual ambivalence the puzzling ten- To provide accurate information dency of some critics to decry bur- is the key. People who are more geoning governmental bureaucracy aware of the workings of the eco-while advocating governmental nomic system, from managers to ownership of all public utilities and employees to stockholders, should the conclusion comes to mind that commit themselves to insisting that J. D. Geist Lewis Carroll is writing letters to 'the information we all receive is President editors. accurate.

The question that all businesses The day-to-day problems of run-must come to grips with is whether ning a company such as PNM are the public will see this Mad Hatter's vexations that can be analyzed and G. A. Schreiber Tea Party for what it is or whether dealt with. 'The philosophical shifts Chairman of the Board the tendency to substitute opinion in attitude which dictate the man-for fact will become the rule of ner in which the economic system thumb in years to come. operates in this country are much Waiting for the solution to evolve more profound and are not prob-may be a fatal mistake. If producers lems that can be addressed by are fettered by various forces claim- management alone.

ing to be acting in thc public inter- Coping with these interrelated est to the point where production is changes is developing into the severely inhibited, the consuming most pressing challenge we all face public will probably conclude that in the future; and while we are 2

Coming In the newer claims are extending funds expended for utility plant Operating revenues topped the shafts far into the earth to get at additions during 1977 came to

$ 100,000,000 mark for the first ore bodies. The power required to $ 251,421,222.

time in PNM's history. The year' pump water from these deep mines Operating costs reached total revenues of $ 138,635,951 is one of the largest nev demands $ 106,231,406, an all-time high. As eclipsed the 1976 revenues of facing PNM. Last year thc amount previously noted, fuel played an

$ 99,523,146 by 39.3 percent. How- of kWhr delivered in thc industrial unusually strong part in the cost evera substantial portion of this area jumped 13.4 percent over picture. Because of the temporary increase went directly to fuel sup- 1976 levels. loss of the San Juan coal-fired unit pliers as it was collected under the With the ncw people and the in July (See 'Explosion Shuts Down fuel adjustment clause. While this new jobs come the corresponding San Juan Unit 2', page 5), the need pass-through of increased fuel costs increases in commercial activity to for additional gas-fired generation increases the gross revcnucs, it does serve the community. Commercial and purchased power further not increase net earnings. The demand, in terms of delivered kWhr, exacerbated fuel costs.

adjustmcnt is doing thc job it was increased 3.4 percent even though Over 270 new employees were designed for as the cost of fuels, commercial customers engaged in added during the year to enable particularly natural gas and oil, noticeable conservation efforts, often PNM to continue providing the continues to increase rapidly. assisted by PNM representatives. service our customers have come to The increase in operating reve- expect. Needless to say, mainten-nues also rcllects a 21.5 percent ance, general inflation and taxes increase in the amount of energy Going Out all contributed to the increase in delivered to customers over the Serving this increased energy operating expenses. Efforts made to 1976 total. These figures tell the demand means that operating costs hold down operating costs included real story of changes in New Mex- are going to risc. Ncw employees, budgeting procedure revisions, a ico and PNM's effort to improve new equipmcnt, ncw generators management audit by a professional operations. and new methods all take money. management evaluation firm and Although rising prices and the Although construction costs will be the development of morc compre-conservation ethic are certainly covered separately, it is interesting hensive project management making consumers aware of how to note that operating expenses plus activities.

they use energy, the demand con-tinues to grow. The per customer increase in residential sector usage was only 0.2 percent over 1976 consumption levels. This indicates 7 that people are slowing the rate at which their personal use of electric energy is increasing. However, jlijII PNM pcrsonncl installed an aver-age of thirty-five ncw services per day during the year. That's 9,000 I new mctcrs, an increase of 5.1 percent on the PNM system. This additional load put thc increase in sales to the rcsidcntial sector up 4.4 percent during the year.

Then there is the industrial load growth. As one of thc nation's lead-ing repositories of energy resources, New Mexico is experiencing a boom in mining activity. With reserves of oil, gas, uranium and various grades of coal, the state is I'4 I g

~ '~ gt! 4 being called on to provide energy for use in other parts of the coun-try as well as for its own growing Ijbu Iigh Qg l~ 'r dtP~t J

population. This industrialization, in a place where little has ever existed, is creating new demands for electrical energy. As much of Ihis hybrid cooling tower, combining both wet and dry techniques, will uso 80% loss water than the uranium ore near the earth' a conventional wot systom. Such systems aro more expensive but represent an important step in surface has already been mined water conservation so Important to tho arid Southwest.

Financing $ 1.2 billion through the year 1982.

At present, PNM has over This projected need for capital

$ 3,000 in plant investment for every coupled with the realization that the customer served. That is about $ 5 country is in a prolonged period of in equipment for every dollar of inflation prompted the development revenue realized in 1977. This of PNM's Cost of Service Indexing points out very graphically what for adjusting electric rates. (For people mean when they state that more on Cost of Service Indexing, W~W an electric utility is a "capital inten-sive" business. Few other businesses see 'Rates and Regulation'ection on page 10.)

LW require the investment in facilities During 1977, PNM issued SV' to provide a product that electric 1,526,238 shares of common stock utilities face. With capital invest- and 200,000 shares of preferred ment commitments of this size in stock, acquired $ 30 million through r rgb'IKp> comparison to revenues, it becomes the issuance of first mortgage bonds clear that significant financing is and utilized proceeds of approxi-required. mately $ 36 million from pollution As New Mexico continues to control bonds. Thc total capital grow in population and new uses acquired during thc year amounted for electricity come about, this to $ 118,244,362. These funds were need for capital will also increase. used primarily to finance the con-The five-year construction budget, struction programs at San Juan Gen-which was approved by the PNM erating Station, including pollution A steelworker continues his work seemtnttly at home in tho iron anthill of construction activity Board of Directors in late 1977, control equipment, and Palo Verde at tho San Juan plant. authorized expenditures of over Nuclear Generating Station.

eemmmme Peak Leaps 13% Although it is true that our cus- This is the result of the inability to Despite periodic allegations that tomers are practicing conservation store large amounts of electricity electric utilities are building to the extent that residential per and the need to have generation unneeded generators "excess customer use went up less than .2 equipment on hand to meet peak capacity" is the usual term PNM's percent in 1977, the additional demands. If demands were level, 1977 peak was up 13 percent over customers added to the system, the fewer generators would be needed the 1976 mark. The "excess capac- increased industrial load and the and they would be used more eco-ity" claim is based on the premise substitution of electricity for other nomically. The ratio of how much that demand for electricity has energy forms all played a role in an electric system is capable of leveled out due to conservation the new peak demand. producing as opposed to how much activities. The substitution effect is some- it actually is used is called the load thing that many people have appar- factor.

ently overlooked when forming PNM managed an annual load opinions about the need for addi- factor of 72.5 percent during 1977, tional electric generating capacity. which is considerably higher than As other forms of energy become the industry average, and the less available and more costly, the results can be attributed to a great users will make a decision to find a extent to time-of-day rates in effec replacement. We see solar energy with several large wholesale custom-entering thc home and water heat- ers. There arc times of the day ing market for just these reasons. when these customers can buy However, for various tasks from power from PNM more cheaply making steel to cooking food at than they can produce it themselves restaurants, electricity is being sub- or acquire it elsewhere. These times stituted for other energy forms. occur when PNM's regular custom-Should electric vehicles begin to be ers are not using the capacity which accepted, further demands for gen- was installed for their use. If PNM eration equipment will result. can sell energy during these off-peak hours, the resulting revenues hold Load Factor at All-Time High down the rates that our regular One of the critical problems fac- customers must pay for the ing electric utilities and their cus- facilities.

tomers is that the extremely costly One of the major efforts PNM New units continuo to take shape adjacent to machines used to convert fuel to will be making during coming years tho operational units at the San Juan plant. electricity are not used to capacity. is the development of load manage-

ment techniques to maintain and perhaps improve this load factor.

Such a plan will assure investors and customers that the investments we are making arc put to the best use possible.

Construction Pace Continues r')x Construction at thc San Juan Generating Station, jointly owned by PNM and Tucson Gas and Elec- ~f>/vs tric Company, continued through-out 1977 at a rapid pace. Thc repair to Unit 2 brought hundreds of addi-tional workers onto thc site in a dctcrmincd clfort to gct thc unit back on linc as quickly as possible.

Unit 3, rated at 468 megawatts, scheduled for scrvicc in mid-1979, is 50 percent finished. The stack and turbine deck foundations for Unit 4 arc in place. Unit 4, rated at 472 megawatts, will bc complctcd in 1981, and will bring thc total PNM system capacity based on /

coal to 77 percent. I The other major elfort at San /

I Juan during 1977 was the construc-tion of thc sulfur dioxide removal 5

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system for Units 1 and 2, which e

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Workers examine tho wreckago following tho boiler explosion which twistod motal fittings In San Jvan Unit 2 like a child's tin toy.

will bc complete in April 1978 at first is scheduled for service in an approximate cost of $ 120 mil- 1982. Thc second and third are lion. Thc system represents the state planned for 1984 and 1986. Each of thc art of sulfur dioxide control unit consists of a 1270-megawatt and is the largest installation of its turbine generator powered by a type in thc world. Not only is it pressurized water reactor.

designed to remove up to 90 per-cent of thc SOt resulting from com- Explosion Shuts Down bustion of low sulfur coal in the San Juan Unit 2 boiler, but the process concentrates In thc early morning of thc SO> from thc flue gas stream July 7, 1977, a tremendous explo-and reduces it to elemental sulfur. sion occurred in thc boiler of Unit In Arizona, construction on thc 2 at San Juan. The force of the Palo Verde Nuclear Generating Sta- blast ripped thc twenty-two story tion is well underway. Workers are boiler from bottom to top, pushing busy excavating, setting thousands steel I-beams up to three feet off-of tons of steel reinforcement bars ccnter and blowing insulation and rho secvrity gvard is campod at tho railhead at prewitt, New Mexico, whore ho watchos in thousands of cubic yards of con- metal hundreds of feet.

over an immense steam vessel. A special soml- crete as the first unit begins to take The concussion was severe tractor and trailer mvst bo constrvcted to haul shape. This $ 3 billion project, in enough to trip the adjacent Unit it overland 90 milos to tho San Joan plant as roads and bridgos simply aren't capablo of which PNM is a 10.2 pcrccnt par- 1 off linc at thc same time, and bearing its woight. ticipant, consists of three units. The PNM went from a position of

so that the need to purchase power from other utilities would be as limited as possible. The unit was 17.5 percent of PNM's entire sys-tem capacity and was base loaded at all times so that more expensive-to-operate gas units could be held in reserve for peaking. The unit was adequately insured, and its repair is estimated to be complete by June 1978.

Water r~ When PNM was being formed, two of the utilities that were acquired included municipal water r-.'~r! 'CPS,'." . Nip n operations along with the electric t businesses. Today, water service to the cities of Santa Fc and Las When Iho work on unit 2 is complete, a l 000 F inferno will rage in the boiler where this workman Vcgas is still provided by PNM.

is standing. Those early water systems, con-exporting several hundred mega- No similar incident has occurred sisting of reservoirs and gravity-fed watts to importing several hundred in the history of thc United States distribution networks, have been within seconds. However, the inter- electric utility industry. The explo- upgraded over the years in order to connections did their job and cus- sion occurred as the unit was being meet growing demands for water.

tomers were completely unaware of operated for the fourth consecutive Millions of dollars have been spent thc problem as service was not day at full load. No changes in in both communities on thc PNM interrupted in the least. Unit 1 operating settings were being made water systems. The newer installa-returned to service shortly there- and the unit was performing quite tions include deep wells, pumping after. normally. stations, massive storage tanks, Fortunately, a shift change was The most disconcerting problem treatment plants and computerized in progress and no workers were resulting from the blast as far as control systems. As communities killed, although two suffered minor PNM customers werc concerned across the nation struggle to injuries. Crews on duty responded was the fact that the power pro- upgrade their water systems to con-quickly and correctly to the acci- duced by the unit would now have form to the 1974 Safe Drinking dent and prcvcntcd subsequent to come from gas-fired genera- Water Act, Santa Fe's system will injuries. tors or through purchases from be a much studied model of how to As soon as the metal began cool- other utilities. Both of these options do the job.

ing, PNM engineers and representa- are considerably more expensive Higher rates in effect in both tives of the construction contractor, than the coal-fired kilowatts that communities resulted in a notice-boiler manufacturer and insuror San Juan produces. Since the, dam- able decrease in consumption dur-were probing the wreckage trying aged unit was unable to provide ing 1977. Conservation, particu-to determine the cause of the blast. power, personnel at PNM's gas- and larly in the Santa Fe area, resulted To date, no specific cause has been oil-fired plants coaxed every avail- in a decrease of 7.8 pcrccnt from identified. able kilowatt from their generators 1976 consumption levels.

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New Mexico, the 47th state, is good life change, it appears that 376,000 people live in greater the fifth largest in the Union. How- Ncw Mexico will continue to grow Albuquerque, and of the 9,000 new ever, because of climatic conditions for some time. Many newcomers, services connected to the PNM sys-unfavorable to agriculture and com- when asked why they chose New tem in 1977, more than 7,000 were paratively undeveloped transporta- Mexico, respond, "It's the last place in Albuquerque. New residents and tion systems, thc state remained one left." It may well be. new jobs are raising the standard of the least populated. Until This voluntary migration toward of living in Albuquerque and the recently, that is. Since the end of the Southwest is creating impacts changes will require much more World War II, a rather short period that arc destined to change the very energy in coming years.

as history goes, thc population of things that many people seek in Santa Fe, the capital, also is the state has increased by 98 coming here. Managing this growth experiencing sharp growing pains percent. is one of the state's most pressing as people who discover the oldest The greatest part of this growth problems and onc of PNM's most capital city in the United States has occurred in the urban areas, interesting challenges. continue to adopt it as their home.

precisely the areas PNM serves. As Albuquerque, 'the largest metro- State and Federal government agen-thc economy, the nation's weather politan area in New Mexico, is the cies, with their tendency to expand, and people's perceptions of the base for PNM operations. Over are spurring a great deal of the

growth in Santa Fe. community is similar to Phoenix, Las Vcgas, on the high plains at Arizona in its climate and geog-t ~

'0 r the foot of the eastern slopes of the Sangre de Cristo Mountains in north-central New Mexico, was originally a ranching town founded by Spanish settlers. Las Vegas raphy. Deming sits astride the major southern transportation route linking the East and West coasts.

Its location and climate will bring new people to Deming, particularly became a booming railroad town in light of recent eastern winters.

during the years of western expan- Small towns and Indian pueblos sion of the United States. Eastern-along thc Rio Grande north and

'~,(fag ers followed the railroad and south of Albuquerque are also became captivated by the clear served by PNM. To the north, the QL mountain air and open spaces. They Bernalillo Division serves Berna-stayed and the present-day Las lillo onc of the oldest European Vegas is a mixture of Spanish colonial architecture, turn of the cities in North America and sev-eral villages and Indian pueblos.

century railroad Victorian styles, and morc modern, if less aesthet- The Belen Division serves the ically interesting, architecture. communities immediately south of s~ The Montezuma Hotel, designed Albuquerque along with the Isleta by Burnham and Root, two of Indian Pueblo. Thc gains in popu-AKHHI5HOP J.lt.LA)IY Chicago's most noteworthy archi- lation which New Mexico is exper-tects of the post-Great Fire Renais- iencing are largely concentrated L sly ~

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sance, still stands on the outskirts near Albuquerque. However, with Archbishop lamy of Santa Fe, immortaliced of town, waiting for someone to mountains due cast, Indian land in Willa Cather's DEATH COMES To THE find a use appropriate to its north and south of the City and ARCHBISHOP, was a leading Iiguro in terri-torial New Mexico's roligious and political grandeur. essentially barren mesa land to the life. An ablo administrator, he was responsible Deming, only 30 miles from the west, many newcomers are settling for building numerous churches and schools Mexican border, is the lowest spot in thcsc smaller communities north throughout hb dlocoso In the iato 1880's, including tho Cathedral of Santa Fo, shown in PNM's service area, only 4,301 and south of Albuquerque along here. feet above sea level. This farming the Rio Grande.

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P s Public Service Company has interest in two subsidiaries, the wholly owned Public Service Land J Company and thc jointly owned t Western Coal Co. The Land Com-

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pany provides an agency which t acquires land and water rights for various utility expansion projects.

The work entailed requires a full-time operation as land and water '

-~-'-o are costly, much sought after c c'

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commodities.

Western Coal Co. manages fuel operations at thc San Juan Gener-ating Station and holds coal leases.

It is owned in equal partnership with Tucson Gas and Electric Only a few yards of rock cover tho coal at tho San Juan mlno. Bvt it takes giant draglines to Company. quickly remove this overburden so the coal can be mined.

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BKD>> o 'KON The thought persists in many places offer a better example than 50-year accumulation of property quarters that utilities are bending New Mexico. The growth here is and equipment was $ 170 million.

their every effor to encourage roughly twice the national average, In five years the figure will be well growth in their service areas in and PNM is developing conven- over $ 1.5 billion.

spite of thc fact that utilitics nation- tional generation resources at an Even with the development of wide are facing extremely diAicult incredible pace. Ten years ago the conventional generation there is times adding new capacity. Few entire value of the Company's still a need to look into new sources

of power in the face of such growth. projects, from a general point of Southwest. PNM is negotiating with Although fossil fuels offer well view, is the "Solar Hybrid Repow- the Department of Energy for the understood technology and com- cring Project." Several years ago construction of the first demon-paratively predictable prices these PNM engineers who were looking stration project, with the help of days, they have a problem with at the various proposals to build DOE funding, in the Company's which even elementary school chil- solar thermal electric plants began service area.

dren are becoming quite familiar their days are numbered. Although b nuclear fuels can provide power through known technology, prob-lems, both practical and philosophi-cal, presently cloud the future of this potent resource.

Consequently, PNM has under-taken numerous studies to look into ways of using energy sources that have not yet been put into large-scale use. Solar, of course, is the most often thought of energy resource when the idea of "alter-native energy" is brought up. Of course, PNM feels that the word alternative is quite misleading and I SIC that "supplementary" is far better, semantically. lisgitli'i+i ii~$r~+dJ ~9=>/gal Engineers in PNM's resource analysis section are currently involved in at least a dozen solar energy projects, geothermal energy studies, a pumped storage facility design and numerous more esoteric studies dealing with improving the The "power towor" at Sandia laboratorios noar Albuquerquo has already shown that it is efficiency of existing and future possible to use solar energy to heat wator lo boiler-level temperatures. PNM ongineers aro study-ing the feasibility of retrofittlng an exbting gas-gred power plant with similar solar hardwaro.

power plants.

One of the most promising wondering if the solar thermal con- Throughout his efforts to estab-cept could simply be added to an lish a national energy policy, Pres-kit, v ident Carter has emphasized near-existing fossil fuel plant. In this way, the sun's energy could run the term solar concepts. The solar rc-plant during the day, through peak powering idea is much more a ncar-periods, and if the plant's capacity term project titan stand-alone solar was needed at night, the fossil fuel plants.

boiler could be fired-up. Other interesting solar projects Most of thc plants which could underway include PNM's part of a be repowered with solar are older million dollar Electric Power gas-fired plants, which, if not Research Institute experiment on repowered, will have to be retired residential solar heating. Although before the turn of the century due the concept of using solar heat for to fuel problems; but the generators, residential space and water heating condensers, switchyards and all is certainly well understood and associated equipment will have a gaining wider acceptance every day, much longer life span if this plan is very few thorough studies designed successful. to accurately measure system per-formance of various designs have The repowering concept proved been conducted under controlled to be such an intriguing idea that conditions.

the Department of Energy awarded This project is centered on ten PNM a $ 700,000 grant to produce homes. Five are being built in Albu-a definitive study of the concept.

querque and the other five on Long So far the survey portion of the Island, Ncw York. Each home will Five solar homos aro under construction In study has identified 10,000 mega- have a different solar heating sys-Albuquerque as part of an Electric Powor watts of potential solar capacity in Research Institute project. PNM is a sponsor tem. The systems will be monitored in tho project which seeks to develop solar the Southwest. Because of this and over 100 functions constantly systems appropriate to tho New Mexico cli- immense capacity, the Department compared. At the end of thc test mate. At tho samo time tho project will help planners assess Iho impact of solar enorgy uso of Energy (DOE) is now planning there will be hard evidence as to on the utility genoratlon needs. two solar rcpowcring projects in the which is the most cKective.

0 00 Management Audit cent of PNM's gcncration came feet below the surface, this facility During 1976, the management from coal. Using coal as a fuel is would generate clcctricity through consulting firm of Theodore Barry not without its problems. Fuel han- a system called "flash-stcam." Hot and Associates was rctaincd by dling and emission controls all push water and stcam are pumped to the PNM to conduct an audit of Com- the cost pcr kilowatt for plant instal- surface. The water and steam are pany management practices. The lation beyond that needed for gas separated in flash tanks, the water purpose was to locate weak points plants. Nevertheless, thc decision to reinjected into thc reservoir and the as well as strengths so that mid- go with coal has proven a wise one steam used to run turbine genera-course corrections could be made because of thc price and supply ques- tors. A proposal is now before the during thc current period of rapid tions associated with natural gas. federal Department of Energy for expansion without unnecessarily In addition to coal generation, partial funding of this pioneering slowing down thc various processes your Company is also participating project. If funding is approved, this within thc Company. in the Palo Verde Nuclear Gener- geothermal source could be provid-The study was completed in 1977 ating Station near Phoenix, Arizona. ing needed electricity by the mid-and thc results werc, for the most The three units of thc project, with 1980's.

part, favorable. Several areas for an eventual total output of 3,810 The proposed National Energy improvcmcnt were cited and adjust- megawatts, arc scheduled to begin Act, currently under consideration ments were being made even before commercial service in 1982, 1984, by a joint Senate-House conference thc study was entirely complete to and 1986. PNM's 10.2 percent committee, contains provisions take advantage of potential savings. interest in the project will amount requiring electric utilities to convert Thc report was submitted to the to a total of 390 megawatts for from gas and oil as a boiler fuel to New Mexico Public Service Com- customers in Ncw Mexico. coal or other fuels. PNM's present mission in Junc 1977. The Barry Other sources arc also entering construction program provides for firm lies conducted similar studies PNM's fuel mix. A pumped storage coal burning facilitics which are for a number of electric utilities, project is now in its planning stages scheduled to replace its gas- and oil-often at the insistence of the local and will eventually produce 600 fired plants. Under these guidelines, regulatory body. megawatts as a peaking and inter- PNM is planning thc construction mediate type of generating facility. of a nominal 2,000 megawatt gen-Located near Scboyeta, New Mex- erating plant. This plant will be a Fuels ico, this facility will usc off-peak mine-mouth operation located in thc Thc ability to provide electricity base load energy to pump water to Bisti area about 35 miles south of to our customers at thc lowest rea- an upper reservoir. During the day, Farmington. Called "Ncw Mexico sonable cost is intimately tied to when demand for electricity is high, Station," the first unit is scheduled using thc lowest-priced fuels. In the the cycle is reversed and water to be installed in 1983. The final past this meant using natural gas. flowing down to a lower reservoir ownership in the first unit has not But today, with the cost of natural will generate electricity by passing been determined.

gas escalating sharply and even the through turbines. This project is In addition, PNM is currently availability of gas supplies in doubt, expected to come on linc in 1985. engaged in the initial stages of an PNM, like other utilities around the In cooperation with Union Oil early site review process for pos-country, is turning to other fuels. Company, PNM is exploring the sible nuclear generating facilities Ten years ago PNM used natural possible use of geothermal energy in New Mexico. This study is aimed gas exclusively, with oil as a standby in the Jemcz Mountains of New at gathering a data bank of infor-fuel, but today coal dominates the Mexico. Using a massive reservoir mation on hydrology, geology, seis-fuel mix. Last year about 60 per- of hot water lying thousands of mology and economics at poten-tially superior sites throughout thc state. The early site review is a necessary step should PNM decide to exercise the nuclear option for electrical generation in the 1990's and beyond.

These various projects arc being undertaken to provide the stability to electric service that comes from fuel diversification as well as to maintain that service at thc lowest reasonable cost. The future will, no doubt, see your Company explor-ing yet other ways to provide elec-tric service, other ways that today New Mexico may have its first geothermal power plant if the Department of Energy approves PNM's proposal to build in the Jemos Mountains. Shown horo ls ono of cloven producing wolls seem exotic but tomorrow will bc on tho Baca location. essential.

Franchises Public Service Company has long-term franchises for electric service in all of its divisions. Thc Albuquer-que franchise will bc in effec until 1992; Santa Fe until 1999; Las Vegas until 1996; Belen until 1990; Deming until 1993; and Bcrnalillo until 1988.

Water operation franchises in Santa Fe and Las Vegas will be in effect until 1979 and 1996, respec-tively. A 25-year franchise was granted for Santa Fe water service in November 1977, but was rejected by thc City's voters.

~

Five-Year Forecast During 1977, the growth rate in New Mexico and the rest of the Southwest continued as ncw resi-dents, businesses, and energy-related industries moved to this area of thc "Sunbelt." iI j Reflecting this growth, the Com-pany's five-year construction bud- lI get climbed to a record $ 1.2 bil-lion. With an annual growth rate in peak demand of 8 percent, more than twice the national average for i, Il

%Is utilities, PNM is one of the fastest lECl M wp~K t ecJ ~ tPJ growing utilities in the country.

During the next five years, $ 690 million in generation-rclatcd con- Sulfur dioxide scrubbers presently being constructod at the San Juan plant represent stato of the struction is planned, with an addi- art octulpment and aro doslgned to remove 90% of Iho SOr from slack emisslons.

tional $ 248 million going for environmental control systems. This Palo Verde Nuclear Generating billion will be spent over the next money is earmarked for continued Station in Arizona, New Mexico five years on transmission and dis-construction on Units 3 and 4 at Generating Station and PNM's tribution systems plus additional San Juan Generating Station, a interest in Four Corners Generating operating facilities for both electric large pumped storage project, the Station. The balance of the $ 1.2 and water customers.

ASS BRDD 'iN(o3i8 The Company is subject to the Commission held an open meeting construction work in progress.

jurisdiction of the New Mexico to invite comments from the public Public Service Company has fuel Public Service Commission (the and the Company to determine thc adjustment clauses covering all Commission) with respect to most best way to review the Indexing. kWhr sales. Heretofore, street of its rates, service, accounting, As a result of that meeting, thc lighting was the only service for issuance of securities, construction Commission indicated that a series which no adjustment was applica-of new generating and transmission of hearings would be held to review ble. As of July, new rates were facilities and other matters. The the performance of Indexing as well approved which include a fuel Federal Energy Regulatory Com- as the Company's basic rate designs, adjustment clause applicable to mission (FERC), formerly the Fed- the Company's request for full tax street lighting.

eral Power Commission, has juris- normalization and full inclusion of In June, thc Company filed for a diction with respect to rates for construction work in progress in $ million annual increase in rates, 5

electric energy sold for resale. the rate base. based on a future test year, for cer-The Company is currently apply- In January 1978, the Commis- tain FERC customers. These cus-ing a Cost of Service Index adjust- sion denied the Company's request tomers include Community Public ment (Indexing) to all electric bill- for full tax normalization and Service Company, Plains Electric ings subject to the jurisdiction of issued an order beginning a year- Generation and Transmission Coop-the Commission. long inquiry into the operation of erative and the Department of In July 1977, the Public Service Indexing and the rate treatment of Energy at Los Alamos. This rate 10

was permitted to become effective from the City of Gallup by about of about $ 2,200,000. The new rates in October, subject to refund pend- $ 850,000 per year. Hearings before designed to generate this amount ing final approval. an Administrative Law Judge were went into effect on May 31.

In addition, the City of Farm- completed in late 1976 and an Last year the Commission also ington signed a contract in August increase of $ 544,000 was allowed approved the Company's request for for electric service under time-of- pending final approval by the FERC. rate relief for PNM's water opera-day rates similar to the Company's In February 1977, the Commis- tions in Las Vegas. The Commis-other FERC customers. sion approved a rate increase for sion's order in September granted The Company filed a revised Santa Fe water service. The original the Company an annual increase of electric rate tariff in 1975 which rate case was filed in 1976. This approximately $ 330,000 over 1975 would increase electric revenues increase represents annual revenues test year revenues.

~

p e Over recent years, Public Service Employee Relations Company of Ncw Mexico has had Keeping talented employees is as the enviable record of attracting important as attracting them in the highly skilled and talented people of first place. To help do this, PNM 5 various occupations. Their ability maintains a wide range of benefit is the key to your Company's suc- programs including medical, dental, cess. The many different and even life insurance, stock purchase and unique projects and activities of pension plans. Such programs are PNM are testimony to their energy a part of modern corporate life, of  !

and skill. There arc now morc than course, but their high quality here 1,750 employees working together at PNM also reflect thc commit-to provide our customers with ment of the Company's manage-reliable and economic electric and ment to the employees who make water service, both now and for the success possible.

future.

A. E. Rhodes, prcsidcnt of West- Public Information ern Coal Co., retired recently, hav-In 1977 energy remained in the ing served PNM since 1958. R. B. national and local spotlight. Rising Rountrec, PNM Senior Vice Presi-prices for utility services, efforts to dent, has replaced Rhodes as the establish a national energy policy, head of Western Coal Co.

environmental concerns, conserva-In June 1977, A. J. Robison was tion, freezing winter weather all G. A. Schreiber, former PNM President and promoted from Manager of Rates to the position of Assistant Treasurer.

these and more have captured the now Chairman of the Board, presides over last year's annual mooting of stockholders.

attention of the nation.

These public concerns about instance, has become more accepted energy also voice a need for infor- as a way to efficient residential mation. Responding to this need energy use.

from our customers, PNM has Communicating with our custom-increased its efforts to tell the pub- ers is done in other ways as well, lic what we are doing and why and through thc Speakers Bureau, which how it affects their lives. This is addresses community groups on an important process because our many energy-related topics. Demon-customers, like their fellow citizens strations on energy use plus expla-across the country, are faced with nations of economics designed for major decisions about energy that students are regularly offered by can determine the future of the PNM's Consumer Education and nation. Without accurate informa- Educational Resources Depart-tion, such decisions cannot be ments. Plant tours for media per-responsibly made. sonnel and public groups have been Conservation has been thc other conducted and exhibits for cnergy-main topic of interest to our cus- related museum shows and energy tomers. Through paid advertising, fairs have been prepared.

bill stuffers and numerous public The Company also has added a appearances, your Company has video production studio as another PNM'5 rapidly expanding systom demands given information to its customers tool to communicate with thc pub-constant training of new personnel. These on ways to conserve and make effi- lic and employees as well. This apprentico linemen aro practicing the pole top rescues that thoy all hope will never bo cient use of the energy they buy. facility has also been used as a necessary. The SMART Home concept, for support for community activities.

11

Page Growth Graphs . 13 Comparative Operating Statistics 14 Summary of Operations .. 16 Management's Discussion and Analysis of the Summary of Operations 16 Consolidated Balance Sheet . 18 Consolidated Statement of Earnings .. 20 Consolidated Statement of Stockholders'quity 21 Consolidated Statement of Changes in Financial Position . 22 Notes to Consolidated Financial Statements .. 23 Accountants'eport 30 Stock/Dividend Data .. 31 12

~

p ~

s 682 139 532 100 402 85 328 67 285 257 213 50 182 193 170 148 32 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 Gross Plant Total Operating Investment MILLIONS OF DOLLARS Revenues MILI.IONS OF DOLLARS 19 14 14 11 ll 10 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 Federal, State, Local and General Taxes MILI.IONS OF DOLLARS 196 188 179 182 172 858 163 154 142 146 727 727 136 617 541 542 858'967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 Average Number of Customers Net Generating Electric and Water THOUSANDS OF CUSTOMERS Capability THOUSANDS OF KILOWATTS

'an Juan Unit 2, the Company's share of which is 161,000 kW, is presently out of service. 13

l977 1976 l975 l974 ELECTRIC SERVICE ENERGY SALES kWhr (Thousands)

Residential 957,390 916,748 875,361 828,243 Commercial .. 1,320,651 1,277,025 1,177,953 1,128,576 Industrial .. 686,845 605,559 530,188 549,622 Other Ultimate Customers ........ 160,922 157,694 136,136 137,843 Total Sales to Ultimate Customers 3,125,808 2,957,026 2,719,638 2,644,284 Sales for Resale . 1,241,195 638,207 578,037 250,901 Total Energy Sales .......... 4,367,003 3,595,233 3,297,675 2,895,185 ELECTRIC REVENUES (Thousands)

Residential $ 39,547 $ 32,423 $ 28,912 $ 23,314 Commercial 45,520 36,198 30,851 25,403 Industrial .. 18,918 13,070 9,993 8,349 Other Ultimate Customers ........ 5,215 4,168 3,361 3,004 Total Revenue from Ultimate Customers 109,200 85,859 73,117 60,070 Sales for Resale . 23,219 9,340 8,241 2,782 Total Revenue from Energy Sales 132,419 95,199 81,358 62,852 Miscellaneous Electric Revenues.... 2,605 1,935 1,412 2,406 Total Electric Revenue ....... $ 135,024 $ 97,134 $ 82,770 $ 65,258 CUSTOMERS AT YEAR END Residential 164,803 156,116 151,111 147,516 Commercial 18,374 17,483 16,738 (2) 16,469 Industrial 493 489 515 (2) 298 Other 265 250 246 231 Total Ultimate Customers 183,935 174,338 168,610 164,514 Sales for Resale 5 5 4 4 Total Customers 183,940 174)343 168,614 164,518 Reliable net capability kW...... 858,000 858,000 727,000 727,000 Coincidental peak demand kW .. 715,000 633,000 586,000 583,400 Average Fuel Cost per million BTU .

BTU per kWhr of net generation ... 92.74'1,004 61.83'1,084 47.23'0,848 39.49'1,054 WATER SERVICE SALES Gallons (Thousands)

Customer sales 2,726,059 2,959,209 2,859,783 3,013,508 Interdepartmental sales 5,742 4,014 9,195 12,568 Total water sales ........ 2,731,801 2,963,223 2,868,978 3,026,076 REVENUES Customer sales $ 3,605,984 $ 2,386,222 $ 2,204,967 $ 2,103,169 Interdepartmental sales 5,642 2,580 2,721 5,970 Total water sales .... $ 3,611,626 $ 2,388,802 $ 2,207,688 $ 2,109,139 Customers at year cnd .. 17,427 16,838 16,437 16,158 (1) Reclassified Against Expense (2) Certain customers werc reclassified from commercial to industrial during 1975. The reclassification accounted for a change of 220 customers in both categories.

14

1973'972 1971 1970 1969 lr)68 786,108 706,973 648,626 583,136 532,200 486,468 1,110,147 985,431 885,782 792,376 732,807 659,836 616,405 653,761 618,695 552,118 524,180 479,883 128,171 123,568 116,202 107,598 97,762 89,835 2,640,831 2,469,733 2,269,305 2,035,228 1,886,949 1,716,022 122,656 114,333 106,000 98,026 91,890 86,765 2,763,487 2,584,066 2,375,305 2,133,254 1,978,839 1,802,787

$ 20,552 17,760 $ 15,295 $ 13,910 12,861 $ 11,955 22,283 19,421 16,309 14,784 13,719 12,489 7,210 7,229 6,549 5,963 5,662 5,187 2,613 2,204 1,994 2,056 1,889 1,751 52,658 46,614 40,147 36,713 34,131 31,382 1,074 937 857 778 659 557 53,732 47,551 41,004 37,491 34,790 31,939 2,803 795 670 621 654 640

$ 56,535 48,346 $ 41,674 $ 38,112 35,444 $ 32,579 143,201 136,515 127,911 120,865 115,595 112,765 16,241 15,754 14,775 13,908 13,395 13,084 295 303 308 300 290 296 229 221 205 201 199 187 159,966 152,793 143,199 135,274 129,479 126,332 3 3 3 3 2 2 159,969 152,796 143,202 135,277 129,481 126,334 617,000 542,000 540,700 540,700 437,400 334,000 533,000 491,700 458,700 400,600 372,300 347,800 23.554 23.044 24.26It 26.16'1,017 24.47'0,841 24.48'1,552 10,870 11,058 11,550 2,855,673 2,781,854 2,563,745 2,564,580 2,397,078 2,356,690 10,710 3,638 1,707 1,782 1,609 1,132 2,866,383 2,785,492 2,565,452 2,566,362 2,398,687 2,357,822

$ 1,566,730 $ 1,530,012 $ 1,434,685 $ 1,417,697 $ 1,209,617 $ 1,172,831 3,585 (1) 813 899 780 659

$ 1,570,315 $ 1,530,012 $ 1,435,498 $ 1,418,596 $ 1,210,397 $ 1,173,490 15,848 15,454 15,024 14,495 14,216 14,092 15

(og Qo/QQQ)(oOj+

(977 1976 1975 l974 1973 Operating revenues $ 138,635,951 $ 99,523,146 $ 84,977,929 $ 67,367,044 $ 58,105,583 Operating expenses:

Operations and maintenance 76,524,378 51,535,167 39,784,697 30,836,104 22,984,163 Depreciation and amortization ........ 11,463,823 9,548,173 8,649,772 7,974,988 6,210,576 Taxes, other than income taxes ...,... 7,257,043 5,874,485 5,114,600 4,451,727 3,643,430 Income taxes . 10,986,162 8,028,464 8,626,084 6,638,499 7,734,730 Total operating expenses 106,231,406 74,986,289 62,175,153 49,901,318 40,572) 899 Operating income 32,404,545 24,536,857 22,802,776 17,465,726 17,532,684 Allowance for equity funds used during construction .. 6,218,281 4,109,043 1,582,648 431,792 1,970,459 Other income and deductions, net ...,.... 1,434,752 688,681 530,404 454,396 46,220 Income before interest charges ........ 40~057t578 29t334)581 24~915>828 18>351>914 19>549t363 Interest charges .. 15,136,962 11,977,418 10,699,656 8,059,394 6,793,566 Net earnings 24,920,616 17,357,163 14,216,172 10,292,520 12,755,797 Preferred stock dividends 6,284,825 4,194,268 2,952,133 1,768,400 595,400 Net earnings applicablc to common stock $ 18,635,791 $ 13,162,895 $ 11,264,039 $ 8,524,120 $ 12,160,397 Average common shares outstanding ...... 7>569~ 1 3 1 6 106~0 15 4>608p773 4p370~9 19 4~32 1 ~ 1 1 3 Per share amounts-Net earnings $ 2.46 $ 2.16 $ 2.44 $ 1.95 $ 2.81 Dividends $ 1.61 $ 1.42 $ 1.26 $ 1.20 $ 1.14 l3RBMBMNKSW IBB KH '

SMM The following factors, which may not be indicative of future operations or earnings, have had a significant effect upon the Company's results of operations during the years 1976 and 1977.

Electric revenues increased $ 14.4 million in 1976 and $ 37.9 million in 1977. The principal factors causing these increases were:

(a) Fuel cost adjustment natural gas fuel costs have accelerated rapidly, and the shutdown of the first unit of the San Juan Generating Station described below has resulted in a larger portion of the Company's system requirements being met through generation at gas-fired plants and through purchases from other utilities. Generally, such costs are passed on to customers, and revenue from the fuel cost adjustment increased $ 5.3 million in 1976 and $ 12.1 million in 1977.

(b) Rate increases in August 1975, the Company implemented rate increases for certain industrial customers. Also in August 1975, the Company began billing most customers under a Cost of Service Index order which provides for quarterly adjustments to rates based upon the jurisdictional return on common equity. Thc Company had revenues of $ 5.9 million in 1976 and

$ 16.8 million in 1977 from Index adjustments. The Company has periodically negotiated higher rates with certain customers whose rates are subject to the jurisdiction of the FERC. In 1977, new rates for time-of-day customers were filed with the FERC and accounted for $ 1.7 million of reve-nues which are subject to refund pending a determination by the FERC.

(c) kWhr sales although the effect of conservation of electricity by the Company's customers was experienced to a minor extent, both the number of customers and the average use per customer increased in each period. Wholesale customers provided increased base revenues of $ .6 million in 1976 and $ 10.3 million in 1977. Increases in kWhr sales were 9.0% in 1976 and 21.5% in 1977.

Water revenues increased $ 1.2 million in 1977, as a result of rate increases allowed by the New Mexico Public Service Commission.

16

Operating and general expenses increased by $ 10.3 million in 1976 and $ 23.0 million in 1977.

Principal causes were:

(a) Production of energy from the Company's own generating units decreased by 4.6% in 1976, due primarily to a scheduled major overhaul of the first San Juan generating unit during the first quarter of 1976. The growth in kWhr sales, coupled with the decline in generation, was made up through purchase and interchange agreements. The Company was a net purchaser of 313 million kWhr in 1976 while in 1975 the Company sold 199 million kWhr through interchange agreements. The second San Juan generating unit was declared operational in December 1976, and the production of energy from the Company's own generating units increased 26.2% during 1977. The growth in kWhr sales and the boiler explosion causing the shutdown of the first unit at the San Juan generating plant in July 1977 resulted in the Company being a net purchaser of 51 million kWhr for 1977. Increased fuel and purchased power expenses resulting from the boiler explosion are estimated at $ 4.5 million and are being passed on to customers through fuel adjustmcnt clauses by approval of the Ncw Mexico Public Service Commission. The Commis-sion has ruled that charges for such increased cost are subject to refund if it is determined that the Company was responsible for the explosion. Total increased costs, based upon a formula proposed to the Commission, are expected to bc approximately $ 10.9 million through May 1978.

(b) Rapidly accelerating fuel costs.

(c) Amendments to the Company's pension plan necessitated by the Employee Retirement Income Security Act of 1974 and revision of health benefit plans.

(d) Higher costs of labor due to escalating wage rates and an increase in the number of employees necessary to operate the expanded electric generating and water treatment facilities.

(e) General inflationary factors.

Maintenance and repair expenses increased by $ 1.5 million in 1976 and $ 2.0 million in 1977.

Overhauls and inspections at the San Juan plant in 1976 and at the Four Corners plant, the San Juan plant and the Las Vegas turbine in 1977 accounted for increased costs of $ 1.1 million in 1976 and

$ 1.7 million in 1977.

The Company's gross utility plant increased by approximately 32% in 1976 and 28% in 1977 as a result of expanded operations, the need to maintain reliable service and increasing environmental protection requirements. The increase in utility plant and the Company's construction program have been thc primary causes of increases experienced in thc following areas of operations:

(a) Depreciation and amortization.

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

(c) Allowance for funds used during construction incrcascd construction at the San Juan plant and the Palo Verde Nuclear Generating Station resulted in an increase in AFUDC in 1976 and in 1977. TheNewMexico Public Service Commission ordered, effective April 22, 1975, that AFUDC be limited to generating plant construction.

(d) Interest charges and preferred dividends from 1975 through 1977, the Company issued

$ 55 million principal amount of first mortgage bonds, utilized $ 80 million of proceeds of pollution control revenue bonds and issued $ 50 million cf Preferred Stock, generally at higher interest and dividend rates than previous issues,and had up to $ 56.1 million principal amount of short-term debt outstanding.

Other income and deductions, net of taxes increased by $ .7 million in 1977, primarily bccausc the Company's wholly owned subsidiary completed a transaction for the sale of certain real estate and for reimbursement of certain operating expenses.

As a result of items detailed above, earnings before income taxes and net earnings increased in 1976 and 1977. In 1976 income taxes decreased due to tax benefits associated with increased AFUDC and increased tax depreciation resulting from guideline depreciation provisions on the generating unit placed in service in Dcccmber 1976. Both of these tax benefits are accounted for by the fiow-through method.

In 1977 income taxes increased due to higher earnings before income taxes. The increase in net earnings in 1976 did not result in a corresponding increase in earnings per share because of thc increase in average common shares outstanding resulting from the issuance of 675,000 shares in September, 1975, 1,000,000 shares in February 1976, and 1,200,000 shares in November 1976.

17

December.31, 1)'77 and 1976 Assets 1977 1976 Utility plant, at original cost (note 3):

Electric plant in service $ 379,811,692 $ 353,407,866 Water plant in service 28,218,610 25,945,445 Common plant in service 12,190,902 9,612,883 420,221,204 388,966,194 Less accumulated depreciation and amortization 88,284,054 77,225,159 33 1,937,150 311,741,035 Construction work in progress 261,837,072 143,311,370 Net utility plant 593,774,222 455,052,405 Other property and investments:

Non-utility property, at cost, net of accumulated depreciation of $ 353,204 in 1977 and $ 208,744 in 1976 9,683,394 3,464,971 Investment in fifty-percent-owned company 2,273,077 1,746,666 Other, at cost 2,745,568 511,331 Total other property and investments 14,702,039 5,722,968 Current assets:

Cash (note 4) 5,637,329 3,055,958 Receivables:

Customers 14,867,486 7,813,645 Income tax refunds 264,589 5,649,579 Other 6,845,312 3,562,726 Allowance for doubtful receivables (158,340) (178,839)

Fuel, materials and supplies, at average cost 14,214,636 9,164,552 Prepaid expenses 1,231,591 788,210 Deferred fuel costs 7,128,200 4,534,721 Total current assets 50,030,803 34,390,552 Dcfcrred charges:

Unamortized debt expense 3,213,726 2,743,600 Other deferred charges 2,727,924 1,038,166 Total deferred charges 5,941,650 3,781,766

$ 664,448,714 $ 498,947,691 See acconipanying notes lo consolidaled finnncinl sta1emenrs.

18

Stockholders'quity and Liabilities 1977 l976 Stockholders'quity (note 2):

Cumulative preferred stock. Authorized 5,000,000 shares; outstanding 600,000 shares of $ 100 stated value in 1977 and 400,000 shares in 1976 and 800,000 shares of $ 25 stated value in 1977 and 1976 $ 80,000,000 $ 60,000,000 Common stock of $ 5 par value. Authorized 20,000,000 shares; outstanding 8,857,390 shares in 1977 and 7,331,152 shares in 1976 44,286,950 36,655,760 Additional paid-in capital 90,947,569 68,238,436 Retained earnings 56,212,750 49,476,949 Total stockholders'quity 271,447,269 214,371,145 Long-term debt, less maturities and sinking fund payments due within one year (note 3) 244,720,992 178,432,864 Current liabilities:

Short-term debt (note 4) 50,000,000 30,592,000 Accounts payable 33,195,095 21,477,929 Preferred dividends declared 1,421,850 997,849 Sinking fund requirements and maturities of long-term debt (note 3) 1,364,665 5,869,230 Accrued interest 3,591,742 2,026,900 Accrued taxes 4,156,580 2,575,314 Other current liabilities 4,900,941 2,773,348 Total current liabilities 98,630,873 66,312,570 Deferred credits:

Customer advances for construction 4,883,152 3,738,111 Accumulated deferred investment tax credits 25,845,594 15,455,168 Accumulated deferred income taxes (note 5) 16,830,639 18,737,820 Other deferred credits 2,090,195 1,900,013 Total deferred credits 49,649,580 39,831,112 Commitments and construction program (note 7)

$ 664,448,714 $ 498,947,691

Years ended Decetnber 31, l977 and l976 l977 l976 Operating revenues:

Electric (note 8) $ 135,024,325 $ 97,134,344 Water 3,611,626 2,388,802 Total operating revenues 138,635,951 99,523,146 Operating expenses:

Operating and general expenses 66,403,791 43,381,261 Maintenance and repairs 10,120,587 8,153,906 Provision for depreciation and amortization 11,463,823 9,548,173 Taxes, other than income taxes 7,257,043 5,874,485 Income taxes (note 5) 10,986,162 8,028,464 Total operating expenses 106,231,406 74,986,289 Operating income 32,404,545 24,536,857 Other income and deductions:

Allowance for equity funds used during construction 6,218,281 4,109,043 Equity in earnings of fifty-percent-owned company, net of taxes (note 5) 486,551 409,375 Other, net of taxes (note 5) 948,201 279,306 Net other income and deductions 7,653,033 4,797,724 Income before interest charges 40,057,578 29,334,581 Interest charges:

Interest on long-term debt 15,294,803 11,683,381 Amortization of debt discount, expense and premium 239,371 205,205 Other interest charges 2,161,477 1,781,064 Allowance for borrowed funds used during construction (2,558,689) (1,692,232)

Total interest charges 15,136,962 11,977,418 Net earnings 24,920,616 17,357,163 Preferred stock dividend requirements 6,284,825 4,194,268 Net earnings applicable to common stock $ 18,635,791 $ 13,162,895 Average number of shares outstanding 7,569,131 6,106,015 Pcr share amounts:

Net earnings 2.46 $ 2.16 Dividends 1.61 $ 1.42 See accoinpanyiag notes lo consolidated financial statenients.

20

D 9X)OOB ~o o Years ended Decetnber 3I, 1977 and 1976 1977 1976 Cumulative preferred stock:

Balance at beginning of year $ 60,000,000 $ 40,000,000 Issuance of preferred stock 20,000,000 20,000,000 Balance at end of year 80,000,000 60,000,000 Common stock:

Balance at beginning of year 36,655,760 25,655,760 Issuance of common stock 7,631,190 11,000,000 Balance at end of year 44,286,950 36,655,760 Additional paid-in capital:

Balance at beginning of year 68,238,436 36,364,940 Premium on common stock 24,195,102 34,375,000 Expenses of stock issuance (1,485,969) (2,501,504)

Balance at end of year 90,947,569 68,238,436 Retained earnings:

Balance at beginning of year 49,476,949 44,680,290 Net earnings 24,920,616 17,357,163 74,397,565 62,037,453 Cash dividends:

Cumulative preferred stock 6,284,825 4,194,268 Common stock 11,899,990 8,366,236 18,184,815 12,560,504 Balance at end of year 56,212,750 49,476,949 Total stockholders'quity at end of year $ 271,447,269 $ 214,371,145 Number of shares issued:

$ 100 stated value preferred stock 200,000

$ 25 stated value preferred stock 800,000 Common stock 1,526,238 2,200,000 See accompany>ing notes to consolidated financial statements.

21

0 0 D < D C+P (NMMXNKi8 Years ended Decent her 3I, l977 and l976 l977 1976 Funds provided:

Net earnings $ 24,920,616 17,357,163 Charges (credits) to earnings not requiring funds:

Depreciation and amortization 12,231,798 10,171,832 Provision for non-current deferred income taxes, nct (1,907,181) 3,525,438 Investmcnt tax credit, net 10,390,426 8,459,397 Allowance for equity funds used during construction (6,218,281) (4,109,043)

Undistributed earnings of fifty-percent-owned company (526,411) (442,912)

Funds derived from operations 38,890,967 34,961,875 Sale of first mortgage bonds 30,000,000 Sale of preferred stock 20,000,000 20,000,000 Proceeds from pollution control revenue bonds 36,418,069 36,653,858 Sale of common stock 31,826,293 45,375,000 Proceeds from other long-term debt 2,532,155 1,825,658 Procccds from short-term debt 158,350,000 71,310,000 Utility plant retirements, net of removal costs 1,035,275 1,094,079 Customer advances for construction, net of refunds 1,145,041 339,842 Decrease in other deferred charges 566,168 Dccreasc in working capital other than short-term debt 9,191,859 Other 213,697 1,622,562

$ 320,411,497 $ 222,940,901 Funds used:

Cash dividends $ 18,184,815 $ 12,560,504 Utility plant additions 145,189,816 127,855,859 Payment of short-term debt 138,942,000 72,593,000 Reduction of long-term debt 2,574,745 6,605,800 Bond discount and expense 820,362 485,097 Capital stock expense 1,485,970 2,501,504 Increase in other deferred charges 1 751 967 Additions to non-utility property 6,497,637 Increase in working capital other than short-term debt 2,729,948 Other 2,234,237 339,137

$ 320,411,497 $ 222,940,901 Changes in working capital other than short-term debt:

Increase (decrease) in current assets:

Cash $ 2,581,371 (1,483,598)

Rcccivables 4,971,936 6,641,082 Fuel, materials and supplies 5,050,084 (789,629)

Prepaid expenses 443,381 (96,047)

Deferred fuel costs 2,593,479 3,016,901 15,640,251 7,288,709 Increase (decrease) in current liabilities other than short-term debt:

Accounts payable 11,717,166 10,306,426 Preferred dividends declared 424,001 457,999 Sinking fund requirements and maturities of long-term debt (4,504,565) 5,076,876 Accrued interest 1,564,842 (113,748)

Accrued taxes 1,581,266 150,407 Other current liabilities 2,127,593 602,608 12,910,303 16,480,568 Increase (decrease) in working capital other than short-term debt $ 2,729,948 $ (9,191,859)

See accontpan>Iing notes to consolidated financial statenients.

22

~o tIQo 0 o 0 ~

~0 5iB December 3I, l977 anti l976 (l) Sutntnary ofSigntJicant Accounting Policies System of Accounts-The Company maintains its accounting records in accordance with the uniform system of accounts prescribed by the Federal Energy Regulatory Commission (FERC) and adopted by the New Mexico Public Service Commission. As a result, the application of generally accepted accounting principles by the Company differs in certain respects from the application by nonregulated businesses. Such differences generally regard the time at which certain items enter into the determination of net earnings in order to follow the principle of matching costs and revcnucs.

Principles of Consolidation-The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Public Service Land Company. All significant intercompany transactions have been eliminated.

UtilityPlant Utility plant is stated at original cost, which includes payroll-related costs such as taxes, pensions and other fringe benefits, administrative costs and an allowance for funds used during construction.

Contributions received from customers to meet the customers'pecial construction requirements are credited to utility plant.

It is Company policy to charge repairs and minor replacements of property to maintenance expense and to ctiarge 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 dcprcciation.

Allowance for Funds Used During Construction (AFUDC)

In accordance with the uniform system of accounts prescribed by the FERC, AFUDC, a noncash item, is charged to utility plant. The rate used for 1977 and 1976 was 6'h% as approved by the New Mexico Public Service Commission. The Commission also ordered, effective April 22, 1975, that AFUDC be limited to generating plant construction. Effective January I, 1977, thc FERC has ordered that the allowance for equity funds used during construction be credited to other income and deductions and that thc allowance for borrowed funds used during construction be credited to interest charges. The allowance for funds used during construction in 1976 has been reclassified accordingly in the accompanying consolidated statement of earnings. The allocation of AFUDC between borrowed funds, after taxes, and equity funds is based on themethodrcquircdby the FERC.

Depreciation Provision for depreciation of utility plant is made at annual straight-line rates prescribed by the New Mexico Public Service Commission. The average depreciation rates used were as follows:

1977 /976 Electric plant 3.09% 3.147o Water plant 1.89% 1.87%

Common plant 5.15% 4.74%

Thc provision for depreciation and amortization of certain equipment, including amortization applicable to capital leases, is charged to clearing accounts along with other costs of operation and subsequently apportioned to operating expenses and property accounts based on the use of the equipment. Depreciation of non-utility property is computed on the straight-line method.

Investment in Fifty-Percent-Owned Company-The Company's investment in a fifty-percent-owned company is stated at equity. The co-owner, Tucson Gas & Electric Company, is participating with the Company in thc construction and operation of a stcam turbo-electric generating plant described in note (7). The generating plant utilizes coal from properties of the fifty-percent-owned company as a source of fuel.

23

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

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

Investment Tax Crcdits-Thc Company follows the practice of deferring investmcnt tax credits and amortizes them over the estimated useful lives of the related properties. Investment tax credit carryforwards are recorded as a reduction of deferred federal income tax credits to thc extent of credits originating in the current year and those which will reverse in the investment tax credit carryforward period.

Income Taxes-For income tax purposes, the Company has availed itself of accelerated amortization of emergency facilities and liberalized depreciation methods allowed by the Internal Revenue Code. Amounts equal to the resulting tax reductions are charged to income and accumulated in the deferred income tax accounts to offset the increase in taxes which occurs when deductions arc less than they arc under the method used for accounting purposes (normalization method).

Generally, the Company uses guideline dcprcciation provisions for assets acquired prior to 1972 and the class life asset depreciation range system for assets acquired in 1972 and thereafter to compute depreciation for income tax purposes. The tax reductions related to guideline depreciation are recorded as a reduction in income tax expense in the current year (flow-through method). The reduction in income taxes attributable to asset class lives shorter than guideline lives is normalized by the method previously described.

For income tax purposes, thc Company deducts the allowance for funds used during construction and certain employee benefits and taxes related to construction projects which are capitalized for accounting purposes. The income tax effects are recorded as a reduction of income taxes as incurred, except the tax effects of payroll taxes capitalized which are normalized.

Deferred fuel costs are deducted currently for income tax purposes. The Company accounts for thc related tax benefits by the normalization method.

Thc Company deducted, for tax purposes, costs incurred in training employees in the operation of a ncw generating station. Such costs were capitalized for accounting purposes. The Company also deducted, for tax purposes, a loss from abandonment of property which is being deferred and amortized over five years for accounting purposes. The Company has adopted the normalization method of accounting for the rclatcd tax benefits.

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

Segment Information Major Customers-The Company's operations are primarily in the electric utility industry. Revenues derived from sales to domestic federal, state, county and municipal governmental agencies aggregated approximately

$ 27.6 million, or 19.9% of total operating revenues during 1977.

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

24

(2) Stocl'.holders'qttity The cumulative preferred stock may be redeemed by the Company, upon thirty days notice thereof, at redemption prices per share (plus accrued and unpaid dividends) as follows:

Aggregate Shares Stated RedeInption Series Outstanding Value Price (a) 1965 Series, 4.58%, $ 100 stated value 130,000 $ 13,000,000 $ 103.032 1974 Series, 9.2%, $ 100 stated value (b) 170,000 17,000,000 109.20 1975 Series, 10.12'7o, $ 100 stated value (b) 100,000 10,000,000 110.12 9.16% Series, $ 25 stated value (b) 800,000 20,000,000 27.29 8.48% Series, $ 100 stated value (b) 200,000 20,000,000 108.48 1,400,000 $ 80,000,000 (a) Redemption prices are at reduced premiums in future years.

(b) Redemption may not be made through certain refunding operations prior to April 15, 1979 for the 1974 series, or prior to March 15, 1980 for the 1975 series, or prior to June 1, 1981 for the 9.16%

series, or prior to April 1, 1982 for the 8.48% series.

The Board of Directors has reserved 900,000 shares of unissued common stock for the dividend reinvestment program, the Employee Stock Purchase Plan and the Tax Reduction Act Stock Ownership Plan, of which 773,762 shares remained unissued at December 31, 1977.

Charter provisions relating to the preferred stock and thc indenture securing the first mortgage bonds impose certain restrictions upon the payment of cash dividends on common stock of the Company. At December 31, 1977, there were no rctaincd earnings restricted under such provisions.

(3) Long-Term Debt The details of the Company's outstanding long-term debt including unamortized discount and premium, less sinking fund payments and maturities due within one year, are as follows:

First Mortgage Bonds: l977 i976 3 %Series, due 1980 $ 3,750,000 $ 3,800,000 3% /o Series, due 1982 3,040,000 3,080,000 3/s% Series, due 1984 2,312,207 2,372,579 4ys% Series, due 1988 8,792,000 8,910,000 4~/s% Series, due 1991 10,090,000 10,177,000 57/s% Series, due 1997 18,768,962 18,979,660 7'/4% Series, due 1999 14,192,515 14,339,083 8/s% Series, due 2001 19,363,624 19,561,562 7'h% Series, due 2002 19,563,968 19,761,940 9i/s% Series, due 2005 25,000,000 25,000,000 8i/s% Series, due 2007 29,917,831 1976 Pollution Control Series, securing 67/s%

Pollution Control Revenue Bonds, Series 1976, due 2006 ($ 20,000,000 principal amount less $ 1,799,799 at December 31, 1977 and $ 8,787,969 at December 31, 1976 held by trustee) 18,200,201 11,212,031 7.6% Pollution Control Revenue Bonds, Series 1974, due 1984 ($ 55,000,000 principal amount less $ 15,273,651 at December 31, 1976 held by trustee) 55,000,000 39,726,349 5% Pollution Control Revenue Bonds, 1977 Series A, due 1984 ($ 22,000,000 principal amount less $ 7,843,752 at Deccmbcr 31, 1977 held by trustee) 14, 156,248 Other 2,573,436 1,512,660

$ 244,720,992 $ 178,432,864 Substantially all utility plant is pledged to sccurc thc first mortgage bonds.

25

Approximately 25 percent of the original principal amount of each series of first mortgage bonds will be redeemed through sinking fund requirements prior to the aforcmcntioncd due dates. The aggregate amounts of maturities and sinking fund requirements on long-term debt outstanding at December 31, 1977 are as follows:

1978 $ 1,364,665 1979 1,539,067 1980 5,508,936 1981 1,751,426 1982 4,796,204 In August 1977 the City of Farmington, New Mexico issued and sold $ 77,045,000 principal amount of its 5.9% Pollution Control Rcvcnue Refunding Bonds, Series 1977, the proceeds of which arc expected to be used to retire the Series 1974 Bonds and the 1977 Series A Bonds at their maturity in 1984. From and after such rctircment, but not before, the Refunding Bonds will be payable out of revenues received by the City from the Company. Upon such rctiremcnt the Company will also guarantee the payment of the Series 1977 Bonds and secure its guaranty with an equal principal amount of its first mortgage bonds.

In March 1978 thc City of Farmington expects to scil $ 125,000,000 principal amount of its 6% Pollution Control Revenue Bonds, 1978 Series A, the proceeds of which will be utilized in the construction of pollution control facilities at the San Juan Plant. The Company will guarantee the 1978 Series A Bonds and sccurc its guaranty with an equal principal amount of its first mortgage bonds.

(4) Short-Tenn Debt and Contpensating Balance Arrangements Thc Company's interim financing requirements arc met through issuance of unsecured notes payable to banks and commercial paper. The Company has agreed to maintain compensating balances with certain lending banks, generally equal to 20% of the outstanding indcbtcdness or 10% of the lines of credit at such banks, whichever is greater. Details of the Company's short-term debt at December 31, 1977 and December 31, 1976 and for the years then ended were as follows:

l977 t976 Aggregate short-term debt outstanding:

Notes payable to banks $ 19,050,000 $ 9,592,000 Commercial paper $ 30,950,000 $ 21,000,000 Average interest rate on outstanding debt:

Notes payable to banks 77/s% 6'/s%

Commercial paper 6s 4%%

Maximum short-term debt outstanding during year $ 56,120,000 $ 45,755,000 Average short-term debt outstanding during year $ 36,950,000 $ 28,450,000 Weighted average interest rate on short-term debt outstanding during year, computed using daily outstanding balances:

Stated interest rates 6 6'/4%

Effective rate considering the effect of compensating balances 6'/s% 6'/i%

Unused lines of credit (subject to cancellation at the banks'ption) $ 31,525,000 $ 29,678,000 Compensating balances at end of year $ 676,000 $ 1,125,000 Compensating balances have been reduced by thc average difference between collected bank balances and book balances.

26

(5) Income Tnxes Income taxes consist of thc following components:

/977 /976 Current Federal incornc tax $ 713,123 $ (4,772,252)

Current State income tax 647,462 316,911 Deferred Federal income tax (2,314,593) 2,515,933 Deferred State income tax 503,587 486,588 Amount equivalent to current investment tax credit 12,356,854 9,560,207 Amortization of accumulated investment tax credit (368,463) (264,627)

Total income taxes $ 11,537,970 $ 7,842,760 Charged to operating expcnscs $ 10,986, 162 $ 8,028,464 Charged to other income and deductions 551,808 (185,704)

Total income taxes $ 11,537,970 $ 7,842,760 Thc Company has investmcnt tax credit carryforwards which will expire in 1984 of approximately

$ 9,087,000.

Deferred income taxes result from timing differences in the recognition of income and expenses for tax and accounting purposes. Thc sources of these differences and the tax effects of each werc as follows: 1977 1976 Deferred fuel costs $ 1,309,188 $ 1,523,083 Accelerated amortization of emergency facilities, liberalized dcprcciation methods and asset class lives shorter than guideline lives 3,557,809 3,115,135 Extraordinary property losses 93,803 (31,397)

Undistributed earnings of fifty-percent-owncd company (included in other deductions) 39,860 33,538 Construction costs deducted for tax purposes and miscellaneous timing diffcrcnces 229,310 408,162 Investment tax credit carryforward (7,040,976) (2,046,000)

$ (1,811,006) $ 3,002,521 The current portion of deferred taxes (included in accrued taxes) results from timing differcnccs on deferred fuel costs. Such balance amounted to $ 339,302 as of December 31, 1977 and $ 243,127 as of December 31, 1976 after reduction for investment tax credit carryforwards.

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

1977 /976 Federal income tax statutory rate 48.0% 48.0%

Tax depreciation in excess of book depreciation caused by use of guideline depreciation provisions (2.8%) (4.7%)

Allowance for funds used during construction, net of depreciation adjustments (11.0%) (10.2%)

Certain employee benefits and taxes capitalized for financial statements, nct of depreciation adjustments (1.3%) (2.0%)

State income taxes, net of Federal tax effect 1.6% 1.5%

Undistributed earnings of fifty-perccnt-owned company (.6%) (.7%)

Amortization of investmcnt tax credits (1.0%) (1.0%)

Other miscellaneous items (1.3%) .2%

Company's effective income tax rate 31.6% 31.1%

27

(6) Pension Plan The Company has a pension plan covering substantially all of its employees, including officers. The plan provides for monthly pension payments to participating employees upon their attaining the age of 65 or the age of 62 with 30 years service, the amount of such payments being dependent upon length of service and the average wage of the five most highly compensated consecutive years of employment.

Early retirement is optional after age 55 or 30 years of service. Normal retirement benefits are the lesser of 2 lo of the participant's average annual'base earnings rate times his years of credited service or 65'7o of the participant's average annual base earnings rate minus $ 1,320. The Company made contributions to the employees'ension plan of $ 2,091,000 in 1977 and $ 1,753,700 in 1976 including normal costs and amortization of prior service costs. The actuarially computed value of vested benefits as of January 1, 1976, the most recent valuation date, exceeded the total of the pension fund assets by approximately $ 290,000.

In addition, the employees contribute $ 3 for the first $ 400 of monthly base salary, plus 3 percent of that part of base salary in excess of $ 400 during each month.

The cstimatcd amount of the unfunded prior service liability at January I, 1976 was approximately

$ 3,600,000.

(7) Committnents and Construction Program Thc Company is participating with Tucson Gas & Electric Company in the construction of a steam turbo-electric generating station located in San Juan County, New Mexico. The Company will own an undivided fifty-percent interest therein. The first unit of the station was placed in service in 1973 and the second unit was placed in service in December 1976.

Thc Company is also participating with several other utilities in the construction of a nuclear generating station with the first unit scheduled for completion in 1982.

It is estimated that the Company's construction expenditures for 1978 will approximate $ 215,000,000 including expenditures on the San Juan and nuclear projects. In connection therewith, substantial commitmcnts have been made.

The Company leases data processing, communication and office equipment, utility poles (joint use),

other equipmcnt and real estate. Certain data processing equipment, communication equipment and real estate leases are capital leases. Allother leases are operating leases.

Certain leases provide purchase options in the approximate amount of $ 1,984,000 for data processing equipment, $ 1,522,000 for construction equipment and $ 33,000 for other equipment. Renewal options and contingent rental provisions were not significant.

Leased property under capital leases by major classes at December 31, 1977 and 1976 was as follows:

1977 l976 Data processing equipinent $ 1,653,195 $ 1,647,781 Communication equipment 115,738 Real estate 94,800 93,600 1,863,733 1,741,381 Less accuinulatcd amortization 651,405 460,090

$ 1,212,328 $ 1,281,291 Future minimum lease payments under capital leases at December 31, 1977 were:

1978 $ 418,469 1979 419,909 1980 419,439 1981 418,026 1982 350,095 Later years 250,440 Total minimum lease payments 2,276,378 Less amount representing executory costs 305,000 Net minimum lease payments 1,971,378 Less amount representing interest 604,350 Present value of net minimum lease payments $ 1,367,028 28

Future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 1977 were:

1978 $ 667,932 1979 459,787 1980 348,251 1981 195,629 1982 144,506 Later years 611,182 Total minimum payments required $ 2,427,287 Rents charged to operating and general expenses were $ 969,919 in 1977 and $ 852,256 in 1976. Such amounts exclude payments made on capital leases. Rents charged to utility plant were $ 1,006,126 in 1977 and $ 620,138 in 1976.

(8) Revenues Subject to Refiind On July 7, 1977, a boiler explosion caused the shutdown of Unit 2 at the San Juan generating plant. The Company's portion of the total cost of repairs is estimated to be approximately $ 7 million. The managcmcnt of the Company currently believes that substantially all of thc costs of repair will be covered by insurance. The Company expects the unit to be back in operation in May 1978. The major part of increased costs for replacement energy required during the shutdown is, with the approval of the New Mexico Public Service Commission, being passed on to customers through fuel adjustment clauses; however, the Commission has ruled that charges for such increased costs are subject to refund if it is determined that the Company was responsible for the explosion. Such increased costs, based upon a formula proposed to the Commission, were $ 4,487,000 through December 31, 1977 and are expected to total approximately $ 10,900,000 through May 1978. The future effect on net earnings, if any, is not presently determinable.

In addition, wholesale rate increases have been implemented, providing rcvenucs of $ 1,705,000 which are subject to refund.

(9) Quarterly Results of Operations (Unaudited)

The results of operations by quarters for 1977 and 1976 were as follows:

Total Net Operating Operating Net Earnings Quarter Emled Revenues income Earnings r sh December 31, 1977 $ 41,208,201 $ 10,032,865 $ 8,739,356 $ .87 September 30, 1977 $ 36,566,841 $ 8,910,264 $ 6,647,733 $ .67 June 30, 1977 $ 31,317,032 $ 6,913,172 $ 4,803,972 $ .42 March 31, 1977 $ 29,543,877 $ 6,548,244 $ 4,729,555 $ .47 December 31, 1976 $ 26,792,977 $ 6,402,957 $ 4,969,674 $ .56 September 30, 1976 $ 24,707,277 $ 6,670,488 $ 4,976,042 $ .61 June 30, 1976 $ 24,844,898 $ 5,711,626 $ 3,749,347 $ .46 March 31, 1976 $ 23,177,994 $ 5,751,786 $ 3,662,100 $ .52 In the opinion of management of the Company, all adjustments (consisting only of normal recurring accruals) necessary for a fair statement of the results of operations for such periods have been included.

(l0) UtilityPlant Replaceinent Cost (Unautlited)

Replacing items of utility plant with assets having equivalent productive capacity generally requires a substantially greater capital investment than was required to purchase the assets which are being rcplaccd. Such additional capital investmcnt reflects the cumulative effect of inflation on the costs of these assets.

The Company's annual report on Form 10-K (a copy of which is available upon request) contains specific information with respect to replacement cost of utility plant in service as of December 31, 1977 and 1976 and the approximate effect which replacement cost would have had on the computation of depreciation expense for the years then ended.

~ ~

Q P PEAT, "WARWICK,MITCHELL & CO.

CERTIFIED PUBLIC ACCOUNTANTS P.O.BOX I02Z AI.BUQUERQUE,NEW MEXICO 8ZI03 The Board of Directors Public Service Company of New Mexico:

We have examined thc consolidated balance shcct of Public Service Company of Ncw Mexico and subsidiary as of December 3l, 1977 and l976 and the related consolidated statements of earnings, stockholders'quity and changes in financial position for the years then ended. Our examinations werc made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as wc considered necessary in the circumstances.

In our opinion, the aforementioned consolidated financial statements present fairly the financial position of Public Service Company of New Mexico and subsidiary at December 31, 1977 and l976 and thc results of their operations and changes in their financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.

February 24, l 978 30

Range of sales prices of the Company's common stock, on the New York Stock Exchange (Symbol: PNM), and dividends paid on both common and pre-ferred stock for fiscal 1977 and 1976, by quarters. (Unaudited)

COMMON STOCK Range of Sales Prices Dividends High Loiv Per Share Fourth Quarter, 1977 Third Quarter, 1977 22'0 23@, 21

$ 0.42 0.40 Second Quarter, 1977 23s/4 21'/s 0.40 First Quarter, 1977 24 21s/s 0.39 Fiscal Year 24 20 $ 1.61 Fourth Quarter, 1976 24s/e $ 0.38 Third Quarter, 1976 19 0.36 19'3'/4 Second Quarter, 1976 19~/s 17s/e 0.34 First Quarter, 1976 20s/s 18s/e 0.34 Fiscal Year 24~/8 17s/s $ 1.42 PREFERRED STOCK 1965 Series, 1974 Series, 1975 Series, 9.16% Series 8.48% Series

4. 58% 9. 2% 10. 12%

(Dividends per share)

Fourth Quarter, 1977 $ 1.145 $ 2.30 $ 2.53 $ 0.5725 $ 2.12 Third Quarter, 1977 1.145 2.30 2.53 0.5725 2.12 Second Quarter, 1977 1.145 2.30 2.53 0.5725 2.167 First Quarter, 1977 1.145 2.30 2.53 0.5725 Fiscal Year $ 4.58 $ 9.20 $ 10.12 $ 2.2900 $ 6.407 Fourth Quarter, 1976 $ 1.145 $ 2.30 $ 2.53 $ 0.5725 Third Quarter, 1976 1.145 2.30 2.53 0.1336 Second Quarter, 1976 1.145 2.30 2.53 First Quarter, 1976 1.145 2.30 2.53 Fiscal Year $ 4.58 $ 9.20 $ 10.12 $ 0.7061 Note: While isolated sales of the Company's preferred stock have occurred in the past, the Company is not aware of any active trading market for its preferred stock.

Board of Directors H. L. GALLES, JR.* Cltairtnan o/ the Board, Galles Chevrolet Company illbuquerque, New Mexico J. D. GEIST>> President, Public Service Company of Netv Mexico C. E. LEYENDECKERt President, Mimbres Valley Ban/ Deming, Ncw Mexico R. F. MATHER President, Creamland Dairies, Inc. Albuquerque, Ncw Mexico D. W. REEVES>> Cltairman of thc Executive Cotnmittec, Public Service Cotnpany of New Mexico R. R. REHDER Dean, Robert O. Anderson Scltool o/ Business and Administrative Sciences, University of New Mexico Albuquerque, New Mexico G. A. SCHREIBER>> Cltairman o/ thc Board, Public Service Contpany of New Mexico R. H. STEPHENSt President, Stepltens-Irish Agency Las Vegas, New Mexico E. R. WOODt President, Santa Fe Motor Company Santa Fe, New Mexico

>> Mentbers of the Executive Committee t Mentbers o/ thc Audit Cotnmittee Officers G. A. SCHREIBER Chairman of the Boartl J. D. GEIST President R. B. ROUNTREE Senior Vice President R. MULLINS Vice President, Engineering and Construction C. D. BEDFORD Vice President, Administration J. P. BUNDRANT Vice President, Division Operations J. B. MULCOCK Vice President, Public A//airs R. F. MERSHON Vice President, Imlustrial Rclatiotts D. E. PECKHAM Secretary aml Treasurer B. D. LACKEY Controller P. J. ARCHIBECK sfssistant Secretary anrl Assistant Treasurer A. J. ROBISON Assistant Treasurer B. P. LOPEZ Assistant Secretary H. L. HITCHINS, JR. Assistant Secretary anrl Assistant Treasurer W. A. BADSGARD Albuquerque Division Vice President F. E. GRAY Vice Presirlcnt, IVater Operations E. L. FOGLEMAN Las Vcgas Division Vice President P. R. GAMERTSFELDER Santa Fe Division Electric Vice President J. L. SMITH Belen Division Manager W. R. STONE Deming Division Manager T. P. WARNKE San Juan Operations Manager L. C. EDWARDS Bernalillo Division Manager W. M. HICKS, JR. IVestern Division Manager Executive Offices 414 Silver Avenue SW, Albuquerque, Ncw Mexico Transfer Agents Albuquerque National Bank, Albuquerque, New Mexico Chemical Bank, New York, New York Irving Trust Company, New York, New York Registrars First National Bank in Albuquerque, Albuquerque, New Mexico Chemical Bank, New York, New York Irving Trust Company, New York, New York 32

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~ L IIS 8 230KV OWNED BY PUBLIC SERVICE CO. OF NEW MEXICO 345KV OWNED BY PUBLIC SERVICE CO OF NEW MEXICO 345KV OWNED BY PUBLIC SERVICE CO OF NFW MEXICO 8 OTHERS 230KV 8 ABOVE HSKV OWNED GENERATION BY OWNED BY OTHERS OTHERS SWITCHING STATION LL, SYSTEM MAP CITIES SERVED BY PUBLIC SERVICE CO, OF NEW MEXICO GENERATION ~ OTHER UTILITIES PUBLIC SERVICE COMPANY OF NEW MEXICO 0 SWITCHING STATION OTHER UTILITIES 0 OTHER PRINCIPAL CITIES

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BULK RATE U.S. POSTAGE PAID Albvqverqve, N.M.

PUBLIC SERVICE COMPANY OF NEW MEXICO Permit No. 13 POST OFFICE BOX 1047 ALBUQUERQUE, NEW MEXICO 87103 0

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