ML18192A383

Public Service Company of New Mexico 1976 Annual Report

ML18192A383
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Site:	Palo Verde
Issue date:	07/11/2018
From:	Public Service Co of New Mexico
To:	Office of Nuclear Reactor Regulation
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HIGHLIGHTS CONDENSED EARNINGS STATEMENTS Total Operating Revenues 1976

$ 99,523,146 Increase 1975 (Decrease)

$ 84,977,929 17.1 Operating Expenses:

Operations and Maintenance...

Depreciation and Amortization Income Taxes................

Other Taxes 51,535,167 9,548,173 8,028,464 5,874,485 39,784,697 8,649,772 8,626,084 5,1.14,600 29.5 10.4 (6.9) 14.9 Total Operating Expenses......

Operating Income Other Income and Deductions, Net.............

Income Before Interest Charges Interest Charges...............

Net Earnings..................

Preferred Dividends Earnings on Common Stock 74,986,289 24,536,857 6,489,956 31,026,813 13,669,650 17,357,163 4,194,268

$ 13,162,895 62,175,153 20.6 22,802,776 7.6 2,972,762 118.3 25,775,538 20.4 11,559,366 18.3 14,216,172 22.1 2,952,133 42.1

$ 11,264,039 16.9 Earnings per Common Share....

2.16 Dividends per Common Share...

1.42 2.44 1.26 (11.5) 12.7 Gross Investment in Property Kilowatt-Hour Sales Peak Load (Kilowatts)

$532,277,564 3,595,233,061 633,000

$401,744,032 32.5 3,297,675,395 9.0 586,000 8.0 Tho annual mooting of stockholders is scheduled to bo held April 29, 1977. A proxy form and notico of tho annual meeting will bo mailed to all stockholdors on March 25, 1977.

For furthor information and dotails pertaining to the information provided in this report contact D. E.

Peckham, Secrotary and Treasuror, Public Servico Company of New Mexico, Post Offico Box 2297, Albu-quorquo, New Mexico 87103.

Tho Common Stock of this Company is traded on the Now York Stock Exchange under the symbol PNM.

This Annual Report and tho financial statements con-tained herein are submitted for the genoral informa-tion of the stockholders of tho Company and are not.,

intendod for uso in connection with any salo or pur-

'haso of, or any offer or solicitation of offers to buy or sell, any securities of tho Company.

MESSAGE TQ THE STOCKHOLDERS:

This has been a rather unusual year for utilities. Unfortunately, it seems as if that statement is beginning to apply to each pass-ing year. Large industries, such as electric utilities, require extremely long-range plan-ning which must be based on stable informa-tion. For the past several years the country has experienced a high degree of instability in certain areas which has made long-range economic planning quite difficult.

Remarkably, it is the overall performance of our social and economic system in periods of uncertainty which attests to the basic soundness of the ideas upon which this country was founded. During 1976 the coun-try seemed to move on sheer inertia while our long and involved political process absorbed the balance of the time and atten-tion of the citizens.

Critical decisions on energy and the determination to create an understanding among citizens of just what sociological,

economic, environmental and political factors are involved with energy have largely been deferred for the past sev-eral years while government, industry and the general populace tried to sort out the various components and establish priorities.

It is our feeling that the initial phase of recognizing the problem and quantifying it is now moving into the second phase which will result in making far-reaching decisions with regard to the future of energy in the United States.

Historically, it is recognized that we, as a self-determining

society, have not always shown a capability for reacting quickly. How-ever, it is also a historical fact that when free people reach a consensus and come to a decision regarding a course of action, solu-tions are inevitable and rapidly realized.

This is what creates a feeling of excite-ment at PNM. Even during the worst eco-nomic downturn since the Great Depression, we have been required to constantly expand Jerry D. Geist, PNM president, discusses system expansion plans.

our electric and water capacity to serve the needs of our customers. Now, as more people realize how drastically important energy is to the social and economic welfare of our country, it appears that we are finally rolling up our sleeves and really turning to the task.

New Mexico is a state of great natural beauty. However, much of the state is high, semi-arid range land, desert or rugged moun-tains unsuitable for farming. New Mexico is blessed with both energy resources and an extensive scientific community capable of the research needed to assure the fullest and most effective use of the state's energy resources.

Within New Mexico's borders are almost half of the United States'ranium ores, bil-lions of tons of coal (fifth among the states in reserves),

vast pools of oil (sixth in pro-duction in the U.S.) and great quantities of natural gas (fourth largest supplier). In addi-tion to these more common energy resources are extensive geothermal potential and tre-mendous solar energy available due to New Mexico's climate and geographical location.

There is no question that New Mexico will provide our country with vast resources, both human and

physical, as we come to grips with the energy dilemma. We believe that Public Service Company of New Mexico willbe called upon to provide basic electrical energy requirements for this inevitable demand and for the needs of the people who will be working here in energy-related fields.

The people of New Mexico are determined that the development of energy resources be carried out in such a way as to make the least possible impact on the state's natural beauty and the relaxed way of life they enjoy. This becomes our responsibility also.

We feel that energy resources can be obtained with-out irreparable damage to the land and our way of life. It is a challenge that New Mexi-cans have already come to grips with, and some of the most exciting ideas with regard to energy have already been developed within the state.

The financial highlights, on page one of this report, are reviewed in detail in the next section. As you will quickly note, our reve-nues increased but expenses also went up.

The next year willgive us the opportunity to fine-tune the new rate making system and our management techniques to the benefit of both our stockholders and customers.

With more specific regard to Company operations, the water departments which have been an integral part of the service pro-vided by PNM are the center of considerable activity. After many costly improvements, rates are being requested and applied which will make the water operation realize earn-ings more commensurate with the Company's electric operations.

Your management appreciates the loyalty of the shareowners and the dedication of our employees.

We look forward to the coming years.

7. D. Geist President Ag /Jwm G. A. Schreiber Chairman of the Board

DISCLJSSIQN QF 197Ei FINANCIALHIGHLIGHTS Commonly Asked Questions About PNMFinancial Highlights In 1976 PNM increased its gross reve-

~'ues by 17.1 percent, or $14.5 million.

What accounted for this growth?

Generally, this increase can be traced

'o several components:

population growth in our service

area, increased elec-trical use by existing customers, revenue needed to cover the rising cost of fuel, our Cost of Service Index plan and our new time-of-day wholesale rates. But let us look at these items more closely.

New

Mexico, in, the Rocky Mountain southwest, is part of the "Sunbelt" region-the fastest growing area in the country. Thus, in 1976 PNM's KWH sales rose by 9 percent and our peak demand increased by 8 percent.

The cost of fuel has had the greatest effect on our operating revenues.

The increase in cost of natural gas, for instance, accelerated in 1976.

Increased fuel costs are passed through to our customers in the fuel cost adjustment. For example, revenues from this adjustment alone rose by $1.5 million in 1975 and $5.3 million in 1976. It should be noted that these increased revenues merely cover the increased cost of fuel and are not avail-able for other operating expenses.

Inciden-tally, with the completion of the second unit at the San Juan Generating Station last

December, we are projecting that coal will represent 64 percent of our total fuel require-ments in 1977. Since coal costs less than nat-ural gas or oil, this should make a difference in our fuel costs in 1977.

Another important component which con-tributed to increased revenues last year was the Cost of Service Index plan. New Mexico was the first state in the country to adopt such a plan for adjusting electric utilityrates.

In effect since May, 1975, the Index allows PNM to adjust its rates upward quarterly when the imputed return on the applicable common equity is below 13.5 percent. When such return is above 14.5 percent, the rates are adjusted downward. The Index applies to'our New Mexico jurisdictional electric customers about 82 percent of our KWH"sales and it provided additional revenues of approxi-mately

$6 million in 1976.

This unique concept for establishing electric rates has allowed your Company to maintain its finan-cial integrity and frees our management team to work on new approaches to other utility problems.

Another area of increased revenue which should be mentioned, and one which has a

positive effect on our load pattern, can be found in the new time-of-day rates applied to PNM's three largest customers.

These rates were in effect on 12.6 percent of total KWH sales in 1976. Electrical Week charac-terized PNM's time-of-day rates as "the most innovative and comprehensive on file with the Federal Power Commission."

While it is true PNM's revenues did

'ncrease substantially in 1976, expenses also went up.

Please give a breakdown of these expense items.

Expenses did go up in 1976. Operating

'xpenses went up by $12.8 million. But to give the number more meaning, let us look at some of these expenses. It was mentioned that PNM received more revenue through the fuel cost adjustment, But, again, these increased revenues went directly to pay for higher fuel costs. In 1976 natural gas repre-sented 43.1 percent of the total fuel used by PNMbut it accounted for 72 percent of the fuel bill. Coal, on the other hand, was 55.1 percent of the total fuel used last year but only represented 24 percent of the fuel bill.

Although we expect some increases in the cost of coal, it is clear why we are striving to make it our primary fuel.

Other factors also made a

significant impact on PNM's revenues.

Higher cost of labor is one example.

Wage rates went up as well as the number of people employed by PNM. The Company now employs over 1,500 people.

Expanded facilities at the San Juan Generating

Station, our water treatment plants and staff services to meet environmental requirements as well as long lead time planning required more personnel.

Amendments to PNM's pension plan caused an increase in expenses.

These changes were due to requirements of the Employee Retire-ment Income Security Act of 1974 and PNM's optional early retirement program.

There was also a rise in expenses for maintenance and repair. During 1976 these expenses rose by $1.5 million. This money went chiefly to pay for scheduled overhauls and inspections of our generating facilities.

These items indicate the kind of operat-ing expenses experienced in 1976. When the general impact of inflation felt by all of us is

added, you can see the effect on the increased revenues in 1976.

in 1976 net earnings were up, yet earn-ings per share declined from $2.44 in 1975 to 82.16 in 1976.

What caused this decline?

For the most part, the answer lies in

~~ the increased number of shares of Com-mon Stock outstanding.

Last year our net earnings available to Common were up 17 percent. But we now have 7.3 million shares of Common outstanding that is 65 percent more shares than we had 16 months ago.

Your five-year (1977-1981) construction budget is a record $946 million, and you have forecasted an external capital require-ment of $746 million. That is almost two times PNM's existing capitalization.

Please discuss the Company's construction program.

In the last three years the population of

'NM's service area has grown at an annual rate of about 2.2 percent.

This rate is expected to increase. We are planning gen-eration facilities to provide service to a popu-lation projected to grow at a rate of about 2.3 percent.

This is more than double that of the national projections.

In addition to residential and commercial

growth, New Mexico is experiencing a significant growth in industryparticularly mining. The major-ity of the electrical energy supplied to this rapidly expanding industry will come from PNM. Our total system energy requirements increased by 9 percent annually during the past eight years.

The national average is 5.4 percent.

This increased load is the challenge. Our construction program is part of the answer.

PNM spent

$132 million last year for new facilities. Most of this money went to the San Juan plant for generation and pollution-control equipment.

The second coal-fired unit, rated at 330 megawatts, went into com-rnercial service late in December just as new winter peak demands were being recorded.

The third and fourth units at San Juan Sta-tion are scheduled for completion in 1979 and 1981, respectively.

Construction now under-way on the nuclear plant in Arizona will cost over $250 million by 1986. This brief discussion does not cover our construction plans in detail but it should give you a pic-ture of the direction PNM is heading.

Facing such a large construction pro-

'ram, the ability to raise capital must certainly be uppermost in your mind. What is PNM doing to maintain growth in earnings and improve the earnings per share?

Due to the confidence in programs like

'he Cost of Service Indexing and time-of-day rates, our Hoard of Directors announced in June, 1976 a dividend policy with the objective of paying a cash dividend equal to 8 percent of book value. The Board's intention is for the dividend to reach this value within a reasonable period of time.

We believe this policy will keep PNM in a strong competitive position in the invest-ment market. The result will be lower long-term capital costs and a lower rate for our consumers.

Second, we are very active in several areas which willhave a positive effect on our earnings. In 1977 we willfile for revisions of our existing wholesale time-of-day

rates, using a future test year.

We also filed for annual water revenue increases of $3.8 mil-lion (209 percent) in one division and

$600,000 (130 percent) in another. An increase of 121 percent, the first step in the larger

request, has been approved by the New Mexico Public Service Commission.

These programs are aimed to provide an adequate return from all aspects of our business.

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Photovoltaic colts directly convert sunlight into electricity. This tracking device is capable of producing 50 watts.

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PNMToday and Tomorrow Electr ic The growth in peak demand for electricity which briefly abated in 1975, due to mild weather and noticeable conservation efforts by customers, resumed in 1976. The summer peak reached 633 megawatts in July.

The previous peak was 586 megawatts, recorded in August of'975. The first cold spell in late November and early December brought warn-ing of a severe winter which has affected the entire nation.

In December the demand reached 632 megawatts, nearly equaling the summer peak.

Construction of new facilities to keep pace with increased demands continued throughout the year. The second unit at the San Juan Generating Station was placed in commercial service in late December. This unit is nearly identical to the first unit which has been in operation since

November, 1973.

Both are coal-fired units rated at 322 and 330 mega-watts, respectively. PNM is the operator and 50 percent owner of the San Juan Generating Station.

The addition of the new unit to PNM's system will bring the coal-fired capacity available to our customers to well over 60 percent.

This will have an obvious and long-term effect on consumer costs as the prices of other fossil fuels continue to climb at a much faster pace than those of coal.

The third and fourth units at San Juan are now under construction. These two units are to be in the 468 megawatt range. Unit number three is scheduled for completion in 1979.

The fourth and final San Juan unit will be completed in 1981, bringing PNM's coal-fired generating capacity to over 80 percent. Also well underway are the structures and sup-port facilities for the sulfur dioxide removal systems for Units 1 and 2. When placed in operation later this year, the SO>

systems will become the largest of their type in com-mercial service in the world.

Construction began in May at the site of the Southwest's largest nuclear generating complex, the Palo Verde Nuclear Generating Station. Located about 50 miles southwest of

Phoenix, Arizona, the complex will event-ually consist of three 1,270 megawatt units powered by pressurized water reactors.

An Arizona statewide initiative which would have stopped the project was defeated by better than a two-to-one margin in November voting. PNM has a 10.2 percent interest in the project, and 130 megawatts from the first unit will begin flowing into New Mexico in 1982. The second and third units are sched-uled for completion in 1984 and 1986. The New Mexico Public Service Commission has issued its approval of PNM's participation.

Construction expenses connected with the expansion of electric operations, including generation, transmission and pollution-con-trol facilities, amounted to 8132 million dur-ing 1976.

Revenue from electric operations totaled

$97,134,344, or 97.6 percent of total Company revenues for the year.

N/ater PNM provides water service to custom-ers in the capital city, Santa Fe, and in Las Vegas, New Mexico. Extensive additions to these water systems along with improve-ments made necessary by growing demand and new water quality legislation have been underway for several years. As in the case of providing electric

service, the capital investments are quite large.

Over 816.7 million has been spent to expand and upgrade the Santa Fe system during the past six years.

This investment has not been ade-quately reflected in rates and the consequent revenues from water operations.

However, rate filings have been made which are designed to improve the water revenues (See Rates Water, Page 9).

Five-Year Forecast New Mexico's location in what has been termed the "Sunbelt" has been responsible for the high rate of growth experienced in the past three decades.

This influx of new resi-dents, factories, headquarter oilices and other activities too numerous to list, shows no sign of abating in the short-term.

In 1966 the Company's total investment in utility plant was

$133.6 million. By the end of 1976 this had increased to $532 mil-lion. During the next five years, $946 million in construction is planned. This provides $587 million for generation facilities including work at the San Juan Generating Station, the Palo Verde Nuclear Generating Station in Arizona and a large pumped storage project.

Over $175 million will be spent on environ-mental control facilities and related activi-ties.

Transmission, distribution and addi-tional operating facilities will be built at a cost of $184 million during the next Ave years.

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Artist's concopt of tho contrai receiver or power tower plan for thermal eiectric generation from solar enorgy. This facility is now under construction in Albuquerque in a s megawatt-thermal tost size.

PNMSERVING NEN/ MEXICO Service Areas Nearly half of the citizens of New Mexico are PNM retail customers.

New Mexico's population is growing and this growth is, for the most part, taking place in the urban areas of PNM service territory. Through its six operating divisions, PNM serves cities and towns along the Rio Grande Valley, as well as Las Vegas in the northeast and Deming in the southwest quadrants of the state.

The Company also provides electricity to other areas of New Mexico by way of wholesale contracts with other investor-owned and pub-lic utilities and agencies of the federal gov-ernment. Included in these sales are those to the Energy Research and Development Admin-istration facilities at Los Alamos; the City of Gallup, which has its own municipal distri-bution system; and Community Public Serv-ice Company, a utility which serves several areas in southern New Mexico. Other large customers are uranium mining and milling facilities near

Grants, the U.S. Air Force installation at Albuquerque and Plains Elec-tric Generation and Transmission Cooperative.

Albuquerque, New Mexico's largest city, has a population of over 325,000 in the metro area and is PNM's largest operating division.

The Company's headquarters are located in Albuquerque as is the system operations control center which coordinates the genera-tion and transmission of power from PNM's five wholly owned and two partially owned generation facilities. Albuquerque has expe-rienced extremely rapid growth for the past three decades and is now becoming a primary center for national energy research.

PNM is playing an important role in this research.

Santa Fe is the state capital. The ancient city, with buildings still standing which were erected over 300 years

ago, has become a

popular place with more tourists each year.

The activities of state government play a

central role in Santa Fe, but incongruously enough, art seems to have a far more visible impact on the life of the city. The combina-tion leaves New Mexico with a city officially tabulated in the 50,000 population range, but the constant influx of visitors keeps the tally at well over 60,000 throughout the year.

Water service in Santa Fe is provided by PNM through a system of reservoirs and wells. The terrain in and around Santa Fe, as well as the variety of water sources, com-bine to make the water system complex.

Recent improvements make the Santa Fe water system one of the most advanced for its size in the entire country.

Between Albuquerque and Santa Fe are a number of smaller towns; Bernalillo, Pla-citas, Pena Blanca and Indian pueblos; San-dia, Santa Ana, Santo Domingo, San Felipe and Cochiti.

These communities are also served by

PNM, through the Bernalillo Division.

To the south of Albuquerque another series of towns along the Rio Grande Valley, as well as the Isleta pueblo, are in the Company's service area. The largest of these towns is Belen, where the Company's Belen Division is headquartered.

The Deming Division serves residents of that city, located about 250 miles southwest of Albuquerque and only 30 miles north of the Mexican border.

The Las Vegas Division provides PNM electric and water service to people living in and near Las Vegas, New Mexico. This com-munity is 60 miles east of Santa Fe on the eastern side of the Sangre de Cristo Moun-tains.

i=r anchises Public Service Company has long-term franchises in effect -in all of its divisions with regard to electric service. The Albuquer-que franchise will be in effect until 1992; Santa Fe until 1999; Las Vegas until 1996; Belen until 1990; Deming until 1993 and Ber-nalillo until 1988.

The franchises pertaining to water opera-tions in Las Vegas and Santa Fe will be in effect until 1996 and

1979, respectively.

Efforts are continuing to extend the Santa Fe franchise to a long-term period.

Fuel Supply To provide electricity at the lowest reas-onable cost

requires, among other

things, using the lowest cost fuels available.

For many years the lowest priced fuel was nat-ural gas. Not only was gas relatively inex-pensive, it was easy to handle and required less complex machinery to convert the energy to electricity. This is no longer the case.

Gas, as the nation finally recognized this winter, is in short supply and is no longer inexpensive.

Ten years ago PNM was entirely depend-ent upon natural

gas, using oil at gas-fired stations only as a standby fuel. Your Company perceived the potential problems with gas fuel availability and began preparations to bring coal into the fuel mix over a decade and a half ago. This transition is well underway and in 1976 natural gas accounted for less than half of the energy used to generate electricity for PNM customers.

Coal, even with fuel hand-ling, pollution abatement and mining prob-lems forcing the cost per kilowatt in plant installation expense beyond the investment needed for natural gas

plants, has proven its value. Natural gas plants are no longer being built because of supply and price considerations.

Natural gas will continue to be available, as will oil. However, the price and increas-ingly frequent supply problems associated with gas and oil make the transition to coal a sound decision indeed.

PNM's participation in the Palo Verde Nuclear Generating Station will add uranium to the fuel mix in the early 1980's. Nuclear fuel purchases are already underway and $15 million is presently allocated for nuclear fuel over the next five years.

The section on research and development (PNMResearch and the Environment) dis-cusses energy resources which may play an important part in PNM generation plans in coming years. Obtaining energy resources for future generation has always been a fore-most concern at PNM.

Rates and Regulations The Company is subject to the jurisdiction of the New Mexico Public Service Commis-sion (Commission) with respect to a majority of its rates, service, accounting, issuance of securities, construction of new generating and transmission facilities and other matters. The Federal Power Commission (FPC) has juris-diction with respect to rates for electric energy sold for resale.

The Company is currently applying a Cost of Service Index adjustment to substantially all electric billings subject to the jurisdiction of the Commission as authorized by the Com-mission in April, 1975

~ In 1976, the Index was applied to approximately 82 percent of the Company's total kilowatt hour sales and produced approximately

$6 million in addi-tional electric revenue.

The Index adjust-ment is computed quarterly and is based on the previous twelve months of operation. The stability of this regulatory mechanism is pro-viding capital at a lower cost to the benefit of PNM's customers.

The Company has fuel adjustment clauses covering approximately 99 percent of KWH sales.

Street lighting is the only service for which no adjustment is applicable.

The Company recently executed an agree-ment with Plains Electric Generation and Transmission Cooperative which will result in anticipated annual revenues for the Com-pany, during the first twelve months of such agreement, in excess of

$4,000,000.

Such agreements were approved by the FPC in December and service under the first contract became effective October 1, 1976. The ERDA, Community Public Service and Plains con-tracts each contain a time-of-day rate sched-ule designed to increase the Company's load factor in off-peak hours.

In July, 1976, the Company filed revised water rates for its Santa Fe Water Depart-ment. The revised rates were designed to pro-duce an initial 110 percent increase in reve-nues with two subsequent increases resulting in an aggregate increase of 209 percent by the end of 1978.

The Commission approved an increase in Santa Fe's water rates equal to $2.2 million annually, based on the 1975 test year. This increase will become effective subsequent to the rate design phase of this rate case. A final order is scheduled by the New Mexico Public Service Commission for early sum-mer 1977.

On November 3, 1976, the Company filed revised water rate schedules for the Las Vegas Water Department designed to increase revenues by 125 percent which would result in approximately $475,000 in increased reve-nue based upon 1975 sales.

Hearings are pending on this application.

PNMRESEARCH AND THE ENVIRONMENT 3HK&K 10 Concern with the environment in which we all live has resulted in broad legislation designed to minimize the impact of industrial operations on our land, air and water. How-ever, legislative intent and physical and eco-nomic laws are often quite different.

A great deal of the research for the past several years has been centered on devel-oping means to meet the legislated environ-mental control criteria. Another area of con-cern entered the public awareness with the oil embargo of 1973. The worst fears of fuel suppliers and utility companies were realized and the shortages gave impetus to wide-rang-ing energy research, along with the environ-mental control research already underway.

Much has happened in a very short period of time. PNM has made strong efforts to be aware of and to employ, when possible, the most advanced products of this recent research.

The San Juan Generating Station has been recogniz'ed as a model of what modern coal-fired generating stations can achieve in the way of emissions control. Even though the coal in the area is relatively high in ash con-tent (18 percent), the electrostatic precipitat-ors employed at San Juan can remove all but a fraction of a percent of this ash. This often leaves visitors wondering if the plant is even operating when the boiler is actually power-ing the turbine at peak capacity.

Regulations dealing with sulfur dioxide emission control have resulted in the largest application of the Wellman-Lord process in the United States now being constructed at the San Juan Generating Station. This system is engineered to remove 90 percent of the sulfur dioxide released in combustion, even though the sulfur content of the coal at San Juan averages only 8/10ths of 1 percent.

The third unit at San

Juan, now under construction, will employ a hybrid cooling tower. This combination of wet and dry cool-ing tower technology is designed to decrease the amount of water that would be needed for cooling. PNM is the first utility in the country to build such a system which uses 80 per cent less water than conventional wet cooling towers.

The San Juan Station also uses a brine concentrator in recycling water used at the plant. This particular system allows the oper-ation of the massive generating units without needing a wasteful evaporation pond. Evap-oration ponds are commonly used to remove minerals from.plant water systems.

Such technologies as the hybrid cooling tower and brine concentrator are important in the Southwest where water is scarce.

These activities at a conventional coal-fired plant are only part of the PNM pro-gram. The Company is a recognized leader in solar research as it applies to electric utilities.

Five homes will be constructed in Albu-querque this year in the final phase of a three-year study to evaluate various methods of heating and cooling homes with solar energy. This is a million dollar project which was awarded to PNM by the Electric Power Research Institute, In early 1977, studies were completed and a proposal was made to the United States Energy Research and Development Admin-istration, concerning a

PNM plan to add solar power to existing gas-fired generating stations.

This solar hybrid repowering con-cept was developed at PNM, but could have application at many conventional power plants across the Southwest.

The plan calls for the construction of solar boilers atop towers which are surrounded by fields of mirrors.

The concentrated sunlight would boil water for turbine operation and reduce daytime demand for fossil fuel. The conven-tional fuel could then be used as a backup at night and costly thermal storage systems would not be needed.

A test facility of the steam production por-tion only, based on this central receiver sys-tem, is being built in Albuquerque presently by Sandia Labs for ERDA. PNM's plan calls for a scaling up of that design and for tie-in with a present generating facility to study the economics of solar-generated electricity as it is actually used by customers.

A program designed to present practical conservation measures which can result in measured savings to customers was initiated during 1976. The first phase of the program, which was dubbed the SMART program (Saves Money And Resources, Too!), involved informing our customers about the value of planning homes for additional insulation.

Since the information effort began in mid-year, SMART Homes have been rapidly gain-ing the attention and acceptance of the con-sumers in New Mexico. This cold winter with its rising fuel prices has underscored the importance of the SMART Home concept.

PNM consultants are facing a steadily increasing work load in assisting customers with technical applications of the ideas put forth in the SMART program.

Like other PNM

programs, the SMART Home has received national attention.

Studies into more advantageous applica-tions of waste heat, solar water heating, heat pump technology, geothermal energy, pumped hydro

storage, as well as environmental inquiries into the habits of birds of prey and revegetation of semi-arid land are but a few of the current activities going on at PNM to determine the best way to provide power in the future without damaging the environment in New Mexico.

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F Wind-driven gonorators wore installed by tho millionsin tho midwest about 40 yoars ago. This new design at Sandia Labs in Albuquorquo, hnown as a vortical axis wind turbine, may sorvo as a supplemontary onorgy source in the future.

PNMPEOPLE AND PROGRAMS Public Service Company of New Mexico has been able to attract the highly skilled and talented people whose ingenuity and work is quite apparent in the unique activities under-way at all levels within the Company. There are now more than 1,500 employees working together to provide customers with adequate electric and water service.

Management; Changes Jerry D. Geist was elected to succeed G. A.

Schreiber as President in April, 1976. Mr.

Schreiber, who had been PNM's President since 1966, continues his position as Chair-man of the Board of Directors. Mr. Geist joined PNM 16 years ago.

Other changes included:

Ron Mershon elected Vice President of Industrial Relations from Manager of Industrial Relations.

J. B.

Mulcock, formerly Manager of Public Affairs, assumed the duties of Vice President of Pub-lic Affairs. J. P. Bundrant assumed manage-ment of the water division when he was pro-moted from Division Vice President, Electric Operations to Vice President of Division Operations.

3H9M 12

E Called a holiostat, this largo mirror assembly is part of tho Solar Thormal Tost Facility now under constructionin Albuquerque. When corn ploted, the installation willhave 320 holiostats which willtrack the sun and focus its rays on a boilor atop a 200 foot tower.

PNM has proposed to EBDA a scaled-up version of this facility to bo built adjacent to an oxisting generating station near Albuquorquo. Tho PNM proposal would call for 1,500 heliostats and threo 400 foot 'power towers'o produce steam for about 30 megawatts of olectrical onorgy.

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Employee Relations Needless to say, retaining the employees needed to keep PNM in its position as an industry leader in so many areas is as important as attracting them. And in order to do this, the Company maintains a wide range of benefit programs including medical, dental and life insurance as well as an employee's stock purchase plan and retire-ment program.

Education and Training A new craft, Filter Plant Operator, was added to the Apprenticeship Program in 1976.

A total of 27 apprentices were graduated from various trades, and an all-time high of 33 new apprentices were indentured into the program.

The Education Assistance Program is being used more than ever before. In 1976, a total of 178 employees took advantage of the program by enrolling in local schools and universities to further their education.

Public Information Since energy has become a common inter-est with most people during the past several years, PNM has increased its efforts to make certain that our customers understand what we are doing and why. This has been done through paid advertising, as in the case of the SMART Home program; through the Speak-ers

Bureau, which addresses community groups on a variety of energy-related topics; demonstrations on energy use through the Consumer Education Department; and expla-nations on economics designed for students presented by Educational Resources Depart-ment representatives.

Plant tours for media personnel and other interest groups have been conducted and exhibits for an energy-related museum show and other public pre-sentations have been prepared.

Union The present contract with Local 611 of the International Brotherhood of Electrical Workers has been reopened for negotiations on wages and working conditions.

One of tho experiments in direct photovoltaic conversion to electricity uses a largo bank of photovoltaic cells with Fresnel lonses which intensify tho sunlight. This work is also under-way in Albuquerque.

INDEXTQ FINANCIALDATA 15 Growth Graphs 16 Comparative Operating Statistics 18 Summary of Operations Management Discussion and Analysis of the Summary of Operations 20 Consolidated Balance Sheet Assets Stockholders'quity and Liabilities 22 Consolidated Statement of Earnings 23 Consolidated Statement of Stockholders'quity 24 Consolidated Statement of Changes in Financial Position 25 Notes to Consolidated Financial Statements 34 Accountants'eport 35 Stock/Dividend Data Solar research underway in Albuquerque at Sandia Labs includes testing of parabolic col-lectors which convert solar radiation into thermal enorgy. High temporatures mado pos-sible by concontrating tho sun's rays may be used for heating or electricity generation.

GROWTH GRAPHS 1968 GROSS PLANT 1988 INVESTMENTS ""

1972 FIGURES INMILtlONSOF DOLLARS 1974 1976 64 100 138 172 208 244 280 318 352 388 424 460 496 532 568 GROSS REVENUES PICURES IN MILLIONSOP DOLLARS 1966 1968 1970 19'F2 1974 19FB 30 36 42 48 54 60 68 72

/8 84 90 98 102 108

FEDERAL, STATE, LOCAL AND GENERAL TAXES PICURES INMILLIONSOF DOLLARS 1960 1968 1970 1972 1974 19FB 5.4 6,2 7.0

'/.8 8.8 9.4 10.2 11.0 11,8 12.8 13.4 14.2 15,0 15.8 16,8 NUMBER QF CUSTOMERS ELECTRIC AND N/ATER FIGURES INTHOUSANDS OP CUSTOMERS 1968 1988 1970 1972 1974 1970 118 126 134 142 150 158 168 1/4 182 190 108 206 214 222 230 NET GENERATING CAPABILITY FIGURES INTHOUSANDS OF KILOWATTS 1960 1968 1970 1972 1974 1976 340 400 460 520 580 840 700 760 820 880 940 1,000 1,060 1e120

CQMPARATIVEQPERATING STATISTICS ELECTRIC SERVICE SALES KWH (Thousands)

Residential Commercial Industrial Other Sales Total Sales to Ultimate Customers Sales for Resale Total Energy Sales.....

ELECTRIC REVENUES (Thousands)

Residential Commercial Industrial Other Revenues Total Revenue from Ultimate Customers Sales for Resale Total Revenue from Energy Sales Miscellaneous Electric Revenues..

Total Electric Revenue.......

1FXK~

CUSTOMERS AT YEAR END Residential Commercial Industrial Other Customers................

Total Ultimate Customers....

Sales for Resale Total Customers Reliable net capability KW......

Coincidental peak demand KW...

Average Fuel cost per million BTU..

BTU per KWHof net generation.....

WATER SERVICE SALES Gallons (Thousands)

Customer sales Interdepartmental sales......."..

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

REVENUE Customer sales Interdepartmental sales Total water sales Customers at year end 1976 916,748 1,277,025 605,559 157,694 2,957,026 638,207 3,595,233 S2,42S 36,198 13,070 4,'168 85,859 9,340 95,'199 1,935 97,'l34 156,1'16 17,483 489 250 174,338 5

174,343 858,000 633,000 61.83$

11,084 2,959,209 4,014 2,963,223

$2,386,222 2I580

$2,388,802

'16,838 1975 875,361 1,177,953 530,188 136,136 2,719,638 578,037 3,297,675 28,912 30,851 9,993 3,361 73,117 8,241 81,358

'1,412 82,770 15'l,111 16,738 (2) 515 (2) 246

'l68,610 4

168,614 727,000 586,000 47.23$

10,848 2,859,783 9,'195 2,868,978

$2,204,967 2 721

$2,207,688 16,437 1974 828,243 l,128,576 549,622 137,843 2,644,284 250,901 2,895,185 23,314 25,403 8,349 3,004 60,070 2,782 62,852 2,406 65,258 147,516 16,469 298 231 164,514 4

164,5'18 727,000 583,400 39.49$

11,054 3,013,508 12,568 3,026,076

$2,'103,169 5,970

$2,109,139

'16,158 1973 786,108 1,1'10,147 616,405 128,171 2,640,831 122,656 2,763,487 20,552 22,283 7,210 2,613 52,658 1,074 53,732 2,803 56,535 143,201 16,241 295 229 159,966 3

'159,969 617,000 533,000 26.16$

11,017 2,855,673 10,710

()

2,866,383

$1,566,730 3,585

$1,570,315 15,848 (1) Reclassified Against Expense (2) Certain customers were reclassified from commercial to industrial during 1975. The reclassification accounted for a change of 220 customers in both categories.

1972 1971 1970 1969 1968 1967 1966 706,973 985,431 653,761 123,568 648,626 885,782 618,695 116,202 583,136 792,376 552,118 107,598 532,200 732,807 524,180 97,762 486,468 659,836 479,883 89,835 443,916 617,209 444,907 86,790 420,891 565,752 416,594 85,532 2,469,733 114,333 2,584,066 2,269,305 106,000 2,375,305 2,035,228 98,026 2,133,254 1,886,949 91,890 1,978,839 1,716,022 86,765 1,802,787 1,592,822 80,322 1,673,144 1,488,769 78,864 1,567,633 17,760

'19,421 7,229 2,204 46,614 937 47,SS1 795 48,346 136,515 15,754 303 221 I52,793 3

152,796 542,000 491,700 24.47/

'l0,841 15,295

'l6,309 6,549 1,994 40,147 857 41,004 670 41,674 127,911 14,775 308 205 143,'l99 3

143,202 540,700 458,700 23.554 10,870 13,910 14,784 5,963 2,056 36,713 778 37,491 621 38,112 120,865 13,908 300 201 135,274 3

135,277 540,700 400,600 23.044

'I1,058 12,861 13,719 5,662 1,889 34,131 659 34,790 654 35,444

'I15,595 1,3,395 290 199 129,479 2

129,481 437,400 372,300 24.48/

1'1,552 11,955 12,489 5,'187 1,751 31,382 557 31,939 640 32,579 112,765 13,084 296 187 126,332 2

126,334 334,000 347,800 24.26/

I'l,550 11,135 11,790 4,732 l,662 29,319 550 29,869 583 30,452 110,501 12,776 303 184 123,764 2

123,766 334,000 328,500 24.03(

11,263 10,652 10,979 4,625 1,639 27,895

'97 28,492 520 29,012~~,

108,845 12,588 319 187 121,939 3

121,942 334,000 316,300 24.004 11,199 2,781,854 3,638 2,785,492 2,563,745 1,707 2,565,452 2,564,580 1,782 2,566,362 2,397,078 1,609 2,398,687 2,356,690

'I 132 2,357,822 2,253,347 1,261 2,254,608 2,145,483 1,630 2,'147,113

$1,530,012 (1)

$1,530,012 15,454

$1,434,685 813

$1,435,498 15,024

$'I,417,697 899

$1,418,596 14,495

$1,209,617 780

$1,2'I0,397 14,216

$1,172,831 659

$1,173,490 14,092

$1,144,096 689

$1,144,785 13,811

$1,100,523 757

$1,101,280 13,679

SUMMARY

QF QPERATIQNS Operating revenue 1976

$99,523,146 1975 1974 1973 1972

$84,977,929

$67,367,044

$58,105,583

$49,875,643 Operating expenses:

Operations and maintenance............

Depreciation and amortization...........

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

Income taxes Total operating expenses..............

Operating income Allowance for funds used during construction Other income and deductions, net..........

Income before interest charges........

Interest charges Net earnings Preferred stock dividends................

Net earnings applicable to common stock Average common shares outstanding......

Per share amounts-Net earnings Dividends 51,535,167 9,548,173 5,874,485 8,028,464 74,986,289 24,536,857 5,801,275 688,681 31,026,813 13,669,650 17,357,163 4,194,268

$13,162,895 6,106,015

$2.16

$1.42 39,784,697 8,649,772 5,114,600 8,626,084 30,836,104 22,984,163 18,845,306 7,974,988 6,210,576 5,682,019 4,451,727 3,643,430 3,268,059 6,638,499 7,734,730 7,175,543 62,175,153 49,901,318 40,572,899 34,970,927 22,802,776 2,442,358 530,404 25,775,538 11,559,366 14,216,172 2,952,133 17,465,726 17,532,684 14,904,716 1,042,977 2,792,601 2,046,691 454,396 46,220 (14,622) 18,963,099 20,371,505 16,936,785 8,670,579 7,615,708 6,42'l,470 10,292,520 12,755,797 10,515,315 1,768,400 595,400 595,400

$2.44

$1.26

$1.95

$1.20

$2.81

$1.14

$2.50

$1.04

$11,264,039

$ 8,524,120

$12,160,397

$ 9,919,915 4,608,773 4,370,919 4,321,113 3,973,723 1FEBMt 18 I

MANAGEMENT'SDIS( USSIQN AND ANALYSISQF THE

SUMMARY

QF QPERATIQNS 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 1975 and 1976.

Electric revenues increased

$17.5 million in 1975 and $14.4 million in 1976. The prin-cipal factors causing these increases were:

(a) Fuel cost adjustmentnatural gas fuel costs have accelerated rapidly. Gener-ally, such costs are passed on to customers, and revenue from the fuel cost adjustment increased $1.5 millionin 1975 and $5.3 million in 1976.

(b) Rate increases the Company put into effect a general rate increase for elec-tric service under the jurisdiction of the New Mexico Public Service Commission of approximately 10% in November, 1974 and has periodically negotiated higher rates with certain customers whose rates are subject to the jurisdiction of the Federal Power Commission. 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 adjust-ments to rates based upon the jurisdictional return on common equity. The Company had revenues of $2.8 million in 1975 and $5.9 million in 1976 from such adjustments.

(c) KWH sales although the effect of conservation of electricity by the Com-pany's customers was experienced to a minor extent, both the number of customers and the average use per customer increased in each year. Wholesale customers pro-vided increased revenues of $5.5 million in 1975 and $1.1 million in 1976. KWH sales increased 13.9% in 1975 and 9.0% in 1976.

Operating and general expenses increased by $8.0 million in 1975 and $10.3 million in 1976. Principal causes were:

(a) Production of energy from the Company's own generating units decreased by 4.6 /o in 1976, due primarily to a scheduled major overhaul of the first San Juan gen-erating unit during the first quarter of 1976. Tile 9.0/o growth in KWH sales, coupled with the decline in generation, was made up through purchase and interchange agree-ments. The Company was a net purchaser of 313 million KWH in 1976, while in 1975 the Company sold 199 million KWH through interchange agreements.

(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 num-ber of employees necessary to operate the expanded electric generating and water treatment facilities.

(e) General inflationary factors.

Maintenance and repair expenses increased by $1.0 million in 1975 and $1.5 million in 1976. Overhauls and inspections in 1975 at the Four Corners plant and in 1976 at the San Juan plant accounted for increased costs of $.5 million in 1975 and $1.1 million in 1976.

In addition, maintenance of gas and oil-fired generating plants increased $.3 millionin 1975.-

The Company's gross utilityplant increased by approximately 23 /o in 1975 and 32o/o in 1976 as a result of expanded operations, the need to maintain reliable service and increasing environmental protection requirements.

This increase in utility plant and the Company's construction program have been the primary causes of increases experienced in the 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 increased construction at the San Juan plant and the Palo Verde Nuclear Generating Station resulted in an increase in AFUDC in 1975 and in 1976. The New Mexico Public Service Commission ordered, effec-tive April 22, 1975, that AFUDC be limited to generating plant construction.

(d) Interest charges and preferred dividendsfrom 1974 through 1976 the Com-pany issued

$25 million principal amount of First Mortgage Bonds and $47 million of Pre-ferred Stock and had up to $45.7 million principal amount of short-term debt outstanding, generally at higher interest and dividend rates than previous issues.

As a result of items detailed above, earnings before income taxes, income taxes, net earnings and earnings per share of common stock all increased in 1975. In 1976, earnings before income taxes and net earnings increased, Income taxes decreased due to tax bene-fits associated with increased AFUDC and increased tax depreciation resulting from guide-line depreciation provisions on the generating unit placed in service in December, 1976.

Both of these tax benefits are accounted for by the flow-through method. The increase in net earnings in 1976 did not result in a corresponding increase in earnings per share because of the increase in average common shares outstanding resulting from the issu-ance of 675,000 shares in September,

1975, 1,000,000 shares in February, 1976 and 1,200,000 shares in November, 1976.

CONSOLIDATED BALANCESHEET December 31, 1976 and 1975 ASSETS 1976 1975 Utilityplant at original cost (note 3)

Electric plant in service Water plant in service Common plant in service

$353,407,866 25,945,445 9,612,883

$285,321,813 24,825,819 7,750,252 388,966,194 317,897,884 Less accumulated depreciation and amortization 77,225,'l59 67,707,323 Construction work in progress Net utilityplant 250,190,561 83,84B,148 311,741,035 143,311,370 455,052,405 334,036,709 3HiKiK 20 Other property and investments:

Non-utilityproperty, at cost, net of accumulated depreciation of $208,744 in 1976 and $199,740 in 1975 Investment in fifty-percent-owned company Other, at cost Total other property and investments 3,464,971 1,746,666 511,331 5,722,968 3,740,969 1,303,754 172,194 5,21B,917 Current assets:

Cash (note 4)

Receivables:

Customers Income tax refunds Other Allowance for doubtful receivables Materials and supplies, at average cost Prepaid expenses Deferred fuel costs Total current assets 3>055,958 7,813,645 5,649,579 3,562,726 (178,839) 9,'l64,552 788,210 4,534,721 34,390,552 4,539,556 6,928,952 3,409,675 (132,598) 9,954,181 884,257

'l,517,820 27,101,843 Deferred charges:

Unamortized debt expense Other deferred charges Total deferred charges 2,743,600 1,038,166 3,781,766 2>485,968 1,666,544 4,152,512

$498,947,691

$370,507,981 See accompanying notes to consolidated financial statements.

STQ( KHQLDERS'QUITYAND LIABILITIES 1976 1975 Stockholders'quity (note 2):

Cumulative preferred stock. Authorized 2,500,000 shares; outstanding 400,000 shares of $100 stated value in 1976 and 1975 and 800,000 shares of $25 stated value in 1976 Common stock of $5 par value. Authorized 10,000,000 shares; outstanding 7,331,152 shares in 1976 and 5,131,152 shares in 1975 Additional paid-in capital Retained earnings Total stockholders'quity

$ 60,000,000 36,655,760 68,238,436 49,476,949 214,371,145

$ 4o,ooo,ooo 25,655,760 36,364,940 44,680,290 146,700,990 Long-term debt, less maturities and sinking fund payments due within one year (note 3) 178,432,864 146,563,774 Current liabilities:

Short-term debt (note 4)

Accounts payable Preferred dividends declared Sinking fund requirements and maturities of long-term debt (note 3)

Customer deposits Accrued interest Accrued taxes Other current liabilities Total current liabilities 30,592,000 21,477,929 997,849 5,869,230 165,913 2,026,900 2>575,314 2,607,435 66,3I2,570 31,875,000 1'I,171,503 539,850 792>354 l45,732 2,'140,648 2,424,907 2,025,008 51,115,002 Deferred credits:

Customer advances for construction Accumulated deferred investment tax credits Accumulated deferred income taxes (note 5)

Other deferred credits Total deferred credits Commitments and construction program (note 7) 3,738,111 15,455,168 18,737,820 1,900,013 39,831,112

$498,947,691 3,398,269 6,995,771 15,212,382 521,793 26,128,215

$370,507,981

CONSOLIDATED STATEMENT QF EARNINGS Years ended December 31, 1976 and 1975 1976 1975 Operating revenues:

Electric Water Total operating 'revenues Operating expenses:

Operating and general expenses Maintenance and repairs Provision for depreciation and amortization Taxes, other than income taxes Income taxes (note 5)

Total operating expenses Operating income

$97 134 344 2,388,802 99,523,146 43,381,261 8,153,906 9,548,173 5,874,485 8,028,464 74,986,289 24,536,857

$82,770,241 2,207,688 84,977,929 33,107,425 6,677,272 8,649,772 5,114,600 8,626,084 62,175,153 22,802,776 PROM 22 Other income and deductions:

Allowance for funds used during construction Equity in earnings of fifty-percent-owned company, net of taxes (note 5)

Other, net of taxes (note 5)

Net other income and deductions Income before interest charges 5,801,275 409,375 279,306 6,489,956 31,026,813 2,442,358 424,015 106,389 2,972,762 25,775,538 Interest charges:

Interest on long-term debt Amortization of debt discount, expense and premium Other interest charges Total interest charges Net earnings Preferred stock dividend requirements Net earnings applicable to common stock Average number of shares outstanding Per share amounts:

Net earnings Dividends 11,683,381 205,205 1,781,064 13,669,650 17,357,163 4,194,268

$13,162,895 6,106,015 216 1.42 9,573,949 190,700 1,794,717 11,559,366 14,216,172 2,952,133

$11,264,039 4,608,773 2.44 1.26 See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENT OF STOCKHOLDERS'QUITY Years ended December 31, 1976 and 1975 1976 1975 Cumulative preferred stock:

Balance at beginning of year Issuance of preferred stock Balance at end of year

$ 40,000,000 20,000,000

$ 30,000,000 10,000,000 60,000,000

)

40,000,000 Common stock:

Balance at beginning of year Issuance of common stock Balance at end of year 25,655,760 11,000,000 36,655,760 22,060,725 3,595,035 25,655,760 Additional paid-in capital:

Balance at beginning of year Premium on common stock Expenses of stock issuance Balance at end of year Retained earnings:

Balance at beginning of year Net earnings 36,364,940 34,375,000 (2,501,504) 68,238,436 44,680,290 17,357,163 62,037,453 28,275,095 8,870,992 (781,147) 36,364,940 39,223,076 14,216,172 53,439,248 23 Cash dividends:

Cumulative preferred stock Common stock 4,194,268 8,366,236 2,952,133 5,806,825 Balance at end of year Total stockholders'quity at end of year 8,758,958 44,680,290 12,560,504 49,476,949

$214,371,145

$146,700,990 Number of shares issued:

$100 stated value preferred stock

$25 stated value preferred stock Common stock 800,000 2,200,000 100,000 719,007 See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENT OF CHANGES IN FINANCIALPOSITION Years ended December 31, 1976 and 1975 1976 1975 Funds provided:

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

Depreciation and amortization Provision for non-current deferred income taxes, net Investment tax credit, net Allowance for funds used during construction Undistributed earnings of fifty-percent-owned company Funds derived from operations Sale of first mortgage bonds Sale of preferred stock Proceeds from Pollution Control Revenue Bonds Sale of con6non stock Proceeds from other long-term debt Proceeds from short-term debt Utilityplant retirements, net of removal costs Customer advances for construction, net of refunds Decrease in other deferred charges Decrease in working capital other than short-term debt Other 10,171,832 3,525,438 8,459,397 (5,801,275) 9,056,324 2,552,603 1,822,676 (2,442,358)

(442,912)

(458,744) 33,269,643 20,000,000 36,653,858 45,375,000 1,825,658 71,310,000 1,094,079 339,842 566,168 24,746,673 25,000,000 10,000,000 7,139,244

'12,466,027 83,879 42,805,000 526,223 626,541 1,010,575 2,321,355 258,353 9,191,859 1,622,562

$221,248,669

$126,983,870

$ 17,357,163

$ 14,216,172 Funds used:

Cash dividends Utilityplant additions Payment of short-term debt Reduction of long-term debt Bond discount and expense Capital stock expense Additions to non-utility property Other

$ 12,560,504 126,163,627 72,593,000 6,605,800 485,097 2,501,504 339,137 8,758,958 72,731,774 42,880,000 1,184,000 326,688 781,147 304,422 16,881

$221,248,669

$126,983,870 Changes in working capital other than short-term debt:

Increase (decrease) in current assets:

Cash Receivables Materials and supplies Prepaid expenses Deferred fuel costs Increase (decrease) in current liabilities other than short-term debt:

Accounts payable Preferred dividends declared Sinking fund requirements and maturities of long-term debt Customer deposits Accrued interest Accrued taxes Other current liabilities Decrease in working capital other than short-term debt See accompanying notes to consolidated financial statements.

(1,483,598) 6,641,082 (789,629)

(96,047) 3,016,901 7,288,709 10,306,426 457,999 5,076,876 20,181 (u.3,748)

'150,407 582,427 16,480,568 9,'191,859 682,932 2,296,791 (729,005) 184,127 1,517,820 3,952,665 4,439,746 6,337 45,193 397,545 746,012 639,187 6,274,020 2,321,355

NOTES TQ CONSOLIDATED FINANCIALSTATEMENTS December 31, 1976 and 1975 (1)

Summary of Significant Accounting Policies System of Accounts-The Company maintains its accounting records in accordance with the uniform system of accounts prescribed by the Federal Power Com-mission and adopted by the New Mexico Public Service Commission.

As a result, the application of generally accepted accounting princi-ples 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 earn-ings in order to follow the principle of matching costs and revenues.

Principles of Consolidation-The consolidated financial statements include the accounts of the Com-pany 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.

Such allowance was computed using a rate of 6'/i% in 1976 and 1975 as approved by the New Mexico Public Service Commission. The Com-mission also ordered, effective April 22, 1975, that the allowance for funds used during construction be limited to generating plant con-struction. Contributions received from customers to meet the cus-tomers'pecial construction requirements are credited to utility plant.

1RKNK 25 It is Company policy to charge repairs and minor replacements of property to maintenance expense and to charge major replacements to utility plant. Gains or losses resulting from retirements or other dispositions of operating property in the normal course of business are credited or charged to the accumulated provision for depreciation.

Depreciation Provision for depreciation of u'tility plant is made at annual straight-line rates prescribed by the New Mexico Public Service Commission.

The average depreciation rates used were as follows:

Electric plant Water plant Common plant 1976 3.14%

1.87%

4.74%

1975 3.14%

1.83%

2.98%

The provision for depreciation and amortization of. certain equipment, including amortization applicable to capital

leases, is charged to clearing accounts along with other costs of operation and subse-

26 quently apportioned to operating expenses and property accounts based on the use of the equipment. Depreciation of non-utility prop-erty 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 partici-pating with the Company in the construction and operation of a steam 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.

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 adjustment 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 the respective issues on the debt outstanding method.

Investment Tax Credits-The Company follows the practice of deferring investment tax credits and amortizes them over a thirty-year period.

Income Taxes-For iricome 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 are less than they are under the method used for accounting purposes (normalization method).

Generally, the Company uses guideline depreciation 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 guide-line lives is normalized by the method previously described.

For income tax purposes, the 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. In 1976, the Company received permission to deduct, for income tax purposes, payroll taxes capitalized since January 1, 1975 and to account for the related tax benefits by the normali-zation method.

Deferred fuel costs are deducted currently for income tax purposes.

The Company accounts for the related tax benefits by the normal-ization method.

The Company

deducted, for tax purposes, costs incurred in training employees in the operation of a new 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 related 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.

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.

(2)

Stockholders'quity The cumulative preferred stock may be redeemed by the Company, upon thirty days notice thereof, at redemption prices per share (plus ac-crued and unpaid dividends) as follows:

27 Sories 1965 Series, 4.58 /o, $100 stated value 1974 Series, 9.2o/o, $100 stated value (b) 1975 Series, -10.12o/o, $100 stated value (b) 9.16'/o Series, $25 stated value (b)

Shares Outstanding Aggregate Statod Value Redemption Price (a) 100,000 800,000 10,000,000 20,000,000 110.'l2 27.29 1,200,000

$60,000,000 130,000

$13,000,000

$103.032 170,000 17,000,000 109.20 (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 9.16o/o series.

The Board of Directors has authorized the Company to institute a dividend reinvestment program and has reserved 900,000 shares of unissued common stock for the dividend reinvestment

program, the employee

'14,284,522 11,212,031 1,512,660 298,169 stock purchase plan and an employee stock ownership plan, subject to approval of applicable regulatory authorities.

Charter provisions relating to the preferred stock and the indenture securing the first mortgage bonds impose certain restrictions upon the payment of cash dividends on common stock of the Company. At December 31, 1976, there were no retained earnings restricted'nder such provisions.

(3)

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

First Mortgage Bonds:

'1976 1975 2/e /o Series, due 1977

$ 4,830,642 3

/o Series, due 1980 3,800,000 3,850,000 3'/4'/o Series, due l982 3,080,000 3,120,000 3o/so/o Series, due 1984 2,372,579 2,402,958 4'/o'/o Series, due 1988 8,910,000 9,020,000 4'/so/o Series, due 1991 10,177,000 10,362,000 5/eo/o Series, due 1997 18,979,660 19, l90,670 7/ao/o Series, due 1999 14,339,083 14,485,535 8'/so/o Series, due 2001 19,561,562 19,759,413 7/2 /o Series, due 2002 19,761,940 19,959,865 9'/eo/o Series, due 2005 25,000,000 25,000,000 Pollution Control Revenue Bonds, 7.6o/o Series, due 1984 ($55,000,000 principal amount less $15,273,651 at December 31, 1976 and $40,715,478 at December 31, 1975 held by trustee) 39,726,349 Pollution Control Revenue Bonds, 6~/so/o Series, due 2006

($20,000,000 principal amount less $8,787,969 at December 31, 1976 held by trustee)

Other

$178,432,864

$146,563,774 Substantially all utility plant in service is pledged to secure the first mortgage bonds.

Approximately 25 percent of the original principal amount of each series of first mortgage bonds willbe redeemed through sinking fund require-ments prior to the aforementioned due dates. The aggregate amounts of maturities and sinking fund requirements on long-term debt out-standing at December 31, 1976 are as follows:

1977

$5,869,230 1978 1,353,101 1979 1,400,944

'I980 5,289,323 1981 1,576,395

(4)

Short-Term Debt and Compensating Balance Arrangements The Company's interim financing requirements are met through issuance of unsecured notes payable to banks and commercial paper. The Com-pany has agreed to maintain compensating balances with certain lend-ing banks, generally equal to 20 /o of the outstanding indebtedness or 10 /o of the lines of credit at such banks, whichever is greater. Details of the Company's short-term debt at December 31, 1976 and December 31, 1975 and for the years then ended were as follows:

1976 1975 Aggregate short-term debt outstanding:

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

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

Stated interest rates Effective rate considering the effect of compensating balances Unused lines of credit (subject to cancellation at the banks'ption)

Compensating balances at end of year 6'/o'/o 4'/4o/o 71/2 /o 5'/so/o

$45,755,000

$37,275,000

$28,450,000

$22,900,000 6'/4 /o 6'/2'/o 8

'/o 8/o /o

$29,678,000

$16,600,000

$ 1,125,000

$ 1,800,000

$ 9,592,000

$21,980,000

$21,000,000

$ 9,895,000 Compensating balances have been reduced by the average difference between collected bank balances and book balances, (5)

Income Taxes Income taxes consist of the following Charged to operating expenses:

Federal income tax State income tax Deferred Federal income tax Deferred State income tax, Amount equivalent to current investment credit Amortization of accumulated investment credit components:

1976

$ (6,859,356) 312,630 4,531,558 483,425 9,560,207 8,028,464 1975

$2,813,830 422,683 2,965,194 318,724 2,136,409 (30,756) 8,626,084

Charged to other income and deductions:

Federal income tax State income tax Deferred Federal income tax Deferred State income tax Amortization of accumulated investment credit Total income taxes 41,104 4,281 30,375 3,163 (264,627)

(185,704)

$7,842,760 (33,277)

(3,457) 31,460 3,269 (166,535)

(168,540)

$8,457,544 The Company had investment tax credits of approximately $6,500,000 in excess of the amount which it can utilize on its 1976 Federal income tax return. Of such amount $4,454,000 will be carried back and will result in refunds of prior year taxes. The carryforward amount of $2,046,000 is recorded in the accompanying financial statements as a reduction in accrued taxes and will be utilized in reducing 1977 taxes otherwise payable.

Deferred income taxes deducted currently result from timing differences in the recognition of income and expenses for tax and accounting pur-poses. The sources of these differences and the tax effects of each were as follows:

Accelerated amortization of emergency facilities, liberalized depreciation methods and asset class lives shorter than guideline lives Training costs Deferred fuel costs Abandonment loss Payroll taxes capitalized Undistributed earnings of fifty-percent-owned company (included in other deductions) l976

$3,115,135 (10,041) 1,523,083 (31,397) 418,203 33,538

$5,048,521 1975

$2,370,930 (10,04i) 766,044 156,985 34,729

$3,318,647 The Company's effective income tax rate was less than the Federal income tax statutory rate for each of the years shown. The differences are attributable to the following factors:

Federal income tax statutory rate Tax depreciation in excess o'f book depreciation caused by use of guideline depreciation provisions Allowance for funds used during construction, net of depreciation adjustments Certain employee benefits and taxes capitalized for financial statements, net of depreciation adjustments State income taxes, net of Federal tax effect Undistributed earnings of fifty-percent-owned company Amortization of investment tax credits Other miscellaneous items Company's effective income tax rate 1976 48.0o/o 1975 48.0o/o (4.7o/o)

(3.0 /o)

(2.0o/o) 1.5'/o (2.7o/o) 1.7o/o'.7o/o)

(1.0o/o)

.2'/o 31.1o/o

(.8 /0)

(.9o/o)

(.5o/o) 37.3o/o (10.2 /o)

(4.5 /o)

(6)

Pension Plan The Company has a pension plan covering substantially all of its employ-ees, 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 depend-ent upon length of service and the average wages of the five highest consecutive years of employment.

Early retirement is optional after age 55 or 30 years of service. Retirement benefits are 2 percent per year of service but not to exceed 65 percent of the employee's salary less a social security offset. The Company made contributions to the employ-ees'ension plan of $1,753,700 in 1976 and $984,400 in 1975 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. Amendments to the plan in 1976 to meet the requirements of the Employee Retirement Income Security Act of 1974 and to provide for optional early retirement had the effect of decreas-ing net earnings for 1976 by approximately $139,000 ($.02 per common share).

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 estimated amount of the unfunded prior service liabilityat January 1, 1976 was approximately $3,600,000.

(7)

Commitments and Construction Program The 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.

The Company is also participating with several other utilities in the con-struction of a nuclear generating station with the first unit scheduled for completion in 1982.

It is estimated that the Company's construction expenditures for 1977 will approximate

$142,000,000 including expenditures on the San Juan and nuclear projects. In connection therewith, substantial commitments have been made.

The Company leases data processing and office equipment, utility poles (joint use), other equipment and real estate.

Certain data processing equipment and real estate leases are capital leases. Allother leases are operating leases and expire over the next five years except for the utility pole lease which expires in 1984 and a real estate lease which expires in 2016.

Certain leases provide purchase options in the approximate amount of

$1,791,000 for data processing equipment,

$2,136,000 for construction equipment and $63,000 for other equipment. Renewal options and con-tingent rental provisions were not significant.

$1,647,781 93,600 Leased property under capital leases by major classes at December 31, 1976 was as follows:

Data processing equipment Real estate Less accumulated amortization 1,741,381 460,090

$1,281,291 Future minimum lease payments under capital 1976 were:

1977 1978 1979 1980 1981 Later years Total minimum lease payments Less amount representing executory costs Net minimum lease payments Less amount representing interest Present value of net minimum lease payments leases at December 31, 342,756 342,756 344,196 344,196 344,196 494,540 2,212,640 99,275 2,113,365 712,244

$1,401,121 Financial statements for years prior to 1976 have not been restated for the effect of leases which were capitalized in 1976 as such effect was insignificant.

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, 1976 were:

1977 699,708 1978 431,627 1979 291,498 1980 283,131 1981 222,722 Later years 686,777 Total minimum payments required

$2,615,463 Rents charged to operating and general expenses were $852,256 in 1976 and

$986,543 in 1975. The 1976 amount excludes payments made on capital leases.

Rents charged to utility plant were $620,138 in 1976 and

$632,069 in 1975.

(8)

Quarterly Results of Operations (Unaudited)

The results of operations for the four quarters of 1976 were as follows:

Quarter Ended December 31, September 30, Juno 30, 1976 1976 1976 March 31, 1976

$26,792,977

$24,707,277

$24,844,898

$23,177,994

$ 6,402,957

$ 6,670,488

$ 5,711,626

$ 5,751,786

$ 4,969,674

$ 4,976,042

$ 3,749,347

$ 3,662,100 Total Operating Revenues Operating Income'et Earnings Net Earnings per share

$.56

$.61

$.46

$.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.

(9)

UtilityPlant Replacement Cost (Unaudited)

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 replaced. Such additional capital investment reflects the cumulative effect of inflation on the costs of these assets.

The Company's annual report on Form 12-K (a copy of which is available upon request) contains specific information with respect to year-end 1976 replacement cost of utility plant in service and the approximate effect which replacement cost would have had on the computation of depreciation expense for the year.

3HQM:

33

ACCOUNTANTS'EPQRT PLAT, M~Hwzcxr., Mn'cHzx.L 8c Co.

CERTIFIED PUBLIC ACCOUNTANTS P. O.BOX 102'LBUQUERQUE, NEW MEXICO GT103 The Board of Directors and Stockholders Public Service Company of New Mexico:

We have examined the consolidated balance sheet of Public Service Company of New Mexico and subsidiary as of December 31, 1976 and 1975 and the related consolidated statements of earnings, stockholders'quity and changes in financial position for the years then ended.

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

In-our opinion, the aforementioned consolidated financial statements present fairly the financial position of Public Service Company of New Mexico and subsidiary at December 31, 1976 and 1975 and the 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 18, 1977

STD( K/DIVIDENDDATA Range of sales prices of the Company's conimon stock, on the New York Stock Exchange (symbol: PNM), and dividends paid on both common and preferred stock for fiscal 1976 and 1975, by quarters. (Unaudited)

Fourth Quarter, 1976 Third Quarter, 1976 Second Quarter, 1976 First Quarter, 1976 Fiscal Year Fourth Quarter, 1975 Third Quarter, 1975 Second Quarter, 1975 First Quarter, 1975 Fiscal Year COMMON STOCK Range of Sal'es Prices Dividends High Low Per Share 24e/a 19>h

$0.S8 23'/4 19 0.36 19~/a 17e/e 0.34 20 a/e 18 a/a 0.34 24'/a 17e/e

$1.42 18~/a 15

$0.32 21'/4 16~/4 0.32 20y2 15~/4 0.32 16 11'/e 0.30 21~/4 11 e/e

$1.26 PREFERRED STOCK 1965 Series, 1974'Series, 1975 Series, 9.16'/o Series 4.58o/o 9.2o/o 10.12o/o 3F!KMI:

35 Fourth Quarter, 1976 Third Quarter, 1976 Second Quarter, 1976 First Quarter, 1976 Fiscal Year Fourth Quarter, 1975 Third Quarter, 1975 Second Quarter, 1975 First Quarter, 1975 Fiscal Year

$ 1.145 1.145 1.145 1.145

$ 4.58

$ 1.145 1.145 1.145 1.145

$ 4.58 (Dividends

$ 2.S0 2.30 2.30 2.30

$ 9.20

$ 2.30 2.30 2.30 2.30

$ 9.20 per share)

$ 2.5S 2.53 2.53 2.53

$10.12

$ 2.53 2.53 2.446

$ 7.506

$ 0.5725 0.1336

$ 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 QF DIRECTORS H. L. GALLES, JR.* President, Galles Chevrolet Company Albuqucrquc, New Mexico J. D. GEIST"President, Public Service Company of Ncw Mexico C. E. LEYENDECKERtPresident, Mimbres Valley Bank Deming, New Moxico R. F. MATHERPresident, Creamland Dairics, Inc. Albuquerque, Now Moxico D. W. REEVES* Chairman of the Exccutivo Committee, Public Service Company of Now Mexico R. R. REHDER Dean, IIcbcrt O. Anderson School of Business ond Administrative

Sciences, University of New Mexico Albuquerque, New Mexico G. A. SCHREIBER* Chairman of the Board, Public Service Company of Ncw Mexico R. H. STEPHENS tPrcsidcnt, Stephens-Irish Agency Las Vegas, New Mexico E. R. WOOD tPrcsidont, Santa Fc Motor Company Santa Fe, Ncw Mexico

• Members of the Executivo Committco t Members of tho Audit Committee 3HVEK 36 QFFICERS G. A. SCHREIBER Chairman of the Board J. D. GEIST President R. B. ROUNTREE Senior Vice President R. MULLINSVico Presidont, Engineering and Construction C. D. BEDFORD Vice President, Administration J. P. BUNDRANTVice President, Division Operations J. B. MULCOCKVico President, Public Affairs R. F. MERSHONVico Presidont, industrial Relations D. E. PECKHAMSecretary and Treasurer B. D. LACKEYController P. J. ARCHIBECKAssistant Secretary and Assistant Treasuror B. P. LOPEZ Assistant Secretary H. L. HITCHINS, JR. Assistant Secretary and Assistant Treasurer W. A. BADSGARDAlbuquerquo Division Vice President F. E. GRAYVice President, Water Operations E. L. FOGLEMANLas Vegas Division Vico President P. R. GAMERTSFELDER Santa Fo Division Electric Vice Prosident J. L. SMITHBclon Division Manager R. A. LAKEDeming Division Manager T. P. WARNKESan juan Operations Manager L. C. EDWARDS Bcrnalillo Division Manager EXECUTIVE OFFICES 414 Silver Avenue SW, Albuquerque, New Mexico TRANSFER AGENTS Albuquerque National Bank, Albuquerque, New Mexico Chemical Bank, New York, New York REGISTRARS Irving Trust Company, New York, New York First National Bank in Albuquerque, Albuquerque, New Mexico

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C3 O0 115KV OWNER SY tUSLICSERVICE CO.OF NEW NEXICO TSGKV S ASOVE OWN E0 SY tU1LICSf RVICE CO. OF NEW NEXICO 115KV JOINTLYOWN E0 SY tUSLIC SERVICE CO. OF NEWllfXICO R 0THfRS 210 KVR A COVE JOINTLYOWNfO SY tUSLIC SERVICE CO. OF NEW IIEXICOR OTHERS 115KV OWNEO SY OTHERS TSOKV d ASOVE OWNfO SY OTHE RS GENERATION SWITCHING STATIONS CITYSERVEOSYtUSLICSERVICECO.OF NfWIIEXICO OTHE R FR IN CITAL CITIES

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0 BULK RATE U.S. POSTAGE PAID Albuquerque. N.M.

Permit No. 13 PUBLIC SERVICE COMPANY OF NEW MEXICO Post Office Box 1047 Albuquerque. New Mexico 87103 Return Requested