ML18192A383

Public Service Company of New Mexico 1976 Annual Report

ML18192A383
Person / Time
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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Download: ML18192A383 (42)

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J HIGHLIGHTS Increase 1976 1975 (Decrease)

CONDENSED EARNINGS STATEMENTS Total Operating Revenues $ 99,523,146 $ 84,977,929 17.1 Operating Expenses:

Operations and Maintenance ... 51,535,167 39,784,697 29.5 Depreciation and Amortization . 9,548,173 8,649,772 10.4 Income Taxes ................ 8,028,464 8,626,084 (6.9)

Other Taxes 5,874,485 5,1.14,600 14.9 Total Operating Expenses ...... 74,986,289 62,175,153 20.6 Operating Income 24,536,857 22,802,776 7.6 Other Income and Deductions, Net ............. 6,489,956 2,972,762 118.3 Income Before Interest Charges . 31,026,813 25,775,538 20.4 Interest Charges ............... 13,669,650 11,559,366 18.3 Net Earnings .................. 17,357,163 14,216,172 22.1 Preferred Dividends 4,194,268 2,952,133 42.1 Earnings on Common Stock $ 13,162,895 $ 11,264,039 16.9 Earnings per Common Share .... $ 2.16 $ 2.44 (11.5)

Dividends per Common Share ... $ 1.42 $ 1.26 12.7 Gross Investment in Property . $ 532,277,564 $ 401,744,032 32.5 Kilowatt-Hour Sales 3,595,233,061 3,297,675,395 9.0 Peak Load (Kilowatts) 633,000 586,000 8.0 Tho annual mooting of stockholders is scheduled to Tho Common Stock of this Company is traded on the bo held April 29, 1977. A proxy form and notico of tho Now York Stock Exchange under the symbol PNM.

annual meeting will bo mailed to all stockholdors on March 25, 1977.

This Annual Report and tho financial statements con-For furthor information and dotails pertaining to the tained herein are submitted for the genoral informa-information provided in this report contact D. E. tion of the stockholders of tho Company and are not .,

Peckham, Secrotary and Treasuror, Public Servico intendod for uso in connection with any salo or pur-Company of New Mexico, Post Offico Box 2297, Albu- of, or any offer or solicitation of offers to buy 'haso quorquo, New Mexico 87103. or sell, any securities of tho Company.

MESSAGE TQ THE STOCKHOLDERS:

This has been a rather unusual year for political factors are involved with energy utilities. Unfortunately, it seems as if that have largely been deferred for the past sev-statement is beginning to apply to each pass- eral years while government, industry and ing year. Large industries, such as electric the general populace tried to sort out the utilities, require extremely long-range plan- various components and establish priorities.

ning which must be based on stable informa- It is our feeling that the initial phase of tion. For the past several years the country recognizing the problem and quantifying it has experienced a high degree of instability is now moving into the second phase which in certain areas which has made long-range will result in making far-reaching decisions economic planning quite difficult. with regard to the future of energy in the Remarkably, it is the overall performance United States.

of our social and economic system in periods Historically, it is recognized that we, as a of uncertainty which attests to the basic self-determining society, have not always soundness of the ideas upon which this shown a capability for reacting quickly. How-country was founded. During 1976 the coun- ever, it is also a historical fact that when try seemed to move on sheer inertia while free people reach a consensus and come to a our long and involved political process decision regarding a course of action, solu-absorbed the balance of the time and atten- tions are inevitable and rapidly realized.

tion of the citizens. Critical decisions on This is what creates a feeling of excite-energy and the determination to create an ment at PNM. Even during the worst eco-understanding among citizens of just what nomic downturn since the Great Depression, sociological, economic, environmental and we have been required to constantly expand Jerry D. Geist, PNM president, discusses system expansion plans.

our electric and water capacity to serve the carried out in such a way as to make the least needs of our customers. Now, as more people possible impact on the state's natural beauty realize how drastically important energy is and the relaxed way of life they enjoy. This to the social and economic welfare of our becomes our responsibility also. We feel country, it appears that we are finally rolling that energy resources can be obtained with-up our sleeves and really turning to the task. out irreparable damage to the land and our New Mexico is a state of great natural way of life. It is a challenge that New Mexi-beauty. However, much of the state is high, cans have already come to grips with, and semi-arid range land, desert or rugged moun- some of the most exciting ideas with regard tains unsuitable for farming. New Mexico is to energy have already been developed within blessed with both energy resources and an the state.

extensive scientific community capable of the The financial highlights, on page one of research needed to assure the fullest and most this report, are reviewed in detail in the next effective use of the state's energy resources. section. As you will quickly note, our reve-Within New Mexico's borders are almost nues increased but expenses also went up.

half of the United States'ranium ores, bil- The next year will give us the opportunity to lions of tons of coal (fifth among the states fine-tune the new rate making system and in reserves), vast pools of oil (sixth in pro- our management techniques to the benefit duction in the U.S.) and great quantities of of both our stockholders and customers.

natural gas (fourth largest supplier). In addi- With more specific regard to Company tion to these more common energy resources operations, the water departments which are extensive geothermal potential and tre- have been an integral part of the service pro-mendous solar energy available due to New vided by PNM are the center of considerable Mexico's climate and geographical location. activity. After many costly improvements, There is no question that New Mexico rates are being requested and applied which will provide our country with vast resources, will make the water operation realize earn-both human and physical, as we come to ings more commensurate with the Company's grips with the energy dilemma. We believe electric operations.

that Public Service Company of New Mexico Your management appreciates the loyalty will be called upon to provide basic electrical of the shareowners and the dedication of our energy requirements for this inevitable employees. We look forward to the coming demand and for the needs of the people who years.

will be working here in energy-related fields.

The people of New Mexico are determined that the development of energy resources be

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

DISCLJSSIQN QF 197Ei FINANCIALHIGHLIGHTS Commonly Asked Questions About PNM Financial Highlights In 1976 PNM increased its gross reve- Another area of increased revenue which

~'ues by 17.1 percent, or $ 14.5 million. should be mentioned, and one which has a positive effect on our load pattern, can be What accounted for this growth?

found in the new time-of-day rates applied

'oGenerally, this increase can be traced several components: population to PNM's three largest customers. These rates were in effect on 12.6 percent of total growth in our service area, increased elec- KWH sales in 1976. Electrical Week charac-trical use by existing customers, revenue terized PNM's time-of-day rates as "the most needed to cover the rising cost of fuel, our innovative and comprehensive on file with Cost of Service Index plan and our new the Federal Power Commission."

time-of-day wholesale rates. But let us look at these items more closely. While it is true PNM's revenues did

'ncrease substantially in 1976, expenses New Mexico, in, the Rocky Mountain also went up. Please give a breakdown of southwest, is part of the "Sunbelt" region- these expense items.

the fastest growing area in the country. Thus, in 1976 PNM's KWH sales rose by 9 percent Expenses did go up in 1976. Operating and our peak demand increased by 8 percent. 'xpenses went up by $ 12.8 million. But to give the number more meaning, let us look The cost of fuel has had the greatest effect at some of these expenses. It was mentioned on our operating revenues. The increase in that PNM received more revenue through the cost of natural gas, for instance, accelerated fuel cost adjustment, But, again, these in 1976. Increased fuel costs are passed increased revenues went directly to pay for through to our customers in the fuel cost higher fuel costs. In 1976 natural gas repre-adjustment. For example, revenues from this sented 43.1 percent of the total fuel used by adjustment alone rose by $ 1.5 million in 1975 PNM but it accounted for 72 percent of the and $ 5.3 million in 1976. It should be noted fuel bill. Coal, on the other hand, was 55.1 that these increased revenues merely cover percent of the total fuel used last year but the increased cost of fuel and are not avail- only represented 24 percent of the fuel bill.

able for other operating expenses. Inciden- Although we expect some increases in the tally, with the completion of the second unit cost of coal, it is clear why we are striving to at the San Juan Generating Station last make it our primary fuel.

December, we are projecting that coal will Other factors also made a significant represent 64 percent of our total fuel require- impact on PNM's revenues. Higher cost of ments in 1977. Since coal costs less than nat- labor is one example. Wage rates went up ural gas or oil, this should make a difference as well as the number of people employed in our fuel costs in 1977. by PNM. The Company now employs over Another important component which con- 1,500 people. Expanded facilities at the tributed to increased revenues last year was San Juan Generating Station, our water the Cost of Service Index plan. New Mexico treatment plants and staff services to meet was the first state in the country to adopt environmental requirements as well as long such a plan for adjusting electric utility rates. lead time planning required more personnel.

In effect since May, 1975, the Index allows Amendments to PNM's pension plan caused PNM to adjust its rates upward quarterly an increase in expenses. These changes were when the imputed return on the applicable due to requirements of the Employee Retire-common equity is below 13.5 percent. When ment Income Security Act of 1974 and PNM's such return is above 14.5 percent, the rates are optional early retirement program.

adjusted downward. The Index applies to'our There was also a rise in expenses for New Mexico jurisdictional electric customers maintenance and repair. During 1976 these about 82 percent of our KWH"sales and it expenses rose by $ 1.5 million. This money provided additional revenues of approxi- went chiefly to pay for scheduled overhauls mately $ 6 million in 1976. This unique and inspections of our generating facilities.

concept for establishing electric rates has These items indicate the kind of operat-allowed your Company to maintain its finan- ing expenses experienced in 1976. When the cial integrity and frees our management team general impact of inflation felt by all of us to work on new approaches to other utility is added, you can see the effect on the problems. increased revenues in 1976.

in 1976 net earnings were up, yet earn- Facing such a large construction pro-ings per share declined from $ 2.44 in 'ram, the ability to raise capital must 1975 to 82.16 in 1976. What caused this certainly be uppermost in your mind. What is decline? PNM doing to maintain growth in earnings the most part, the answer lies in and improve the earnings per share?

~~ For the increased number of shares of Com- Due to the confidence in programs like mon Stock outstanding. Last year our net 'he Cost of Service Indexing and time-earnings available to Common were up 17 of-day rates, our Hoard of Directors percent. But we now have 7.3 million shares announced in June, 1976 a dividend policy of Common outstanding that is 65 percent with the objective of paying a cash dividend more shares than we had 16 months ago. equal to 8 percent of book value. The Board's Your five-year (1977-1981) construction intention is for the dividend to reach this budget is a record $ 946 million, and you value within a reasonable period of time.

have forecasted an external capital require- We believe this policy will keep PNM in a ment of $ 746 million. That is almost two strong competitive position in the invest-times PNM's existing capitalization. Please ment market. The result will be lower long-discuss the Company's construction program. term capital costs and a lower rate for our consumers.

In the last three years the population of Second, we are very active in several

'NM's service area has grown at an areas which will have a positive effect on our annual rate of about 2.2 percent. This rate earnings. In 1977 we will file for revisions of is expected to increase. We are planning gen- our existing wholesale time-of-day rates, eration facilities to provide service to a popu- using a future test year. We also filed for lation projected to grow at a rate of about annual water revenue increases of $ 3.8 mil-2.3 percent. This is more than double that lion (209 percent) in one division and of the national projections. In addition to $ 600,000 (130 percent) in another. An increase residential and commercial growth, New of 121 percent, the first step in the larger Mexico is experiencing a significant growth request, has been approved by the New in industry particularly mining. The major- Mexico Public Service Commission. These ity of the electrical energy supplied to this programs are aimed to provide an adequate rapidly expanding industry will come from return from all aspects of our business.

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 F facilities. Most of this money went to the San Juan plant for generation and pollution-

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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.

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Photovoltaic colts directly convert sunlight ~~

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into electricity. This tracking device is capable of producing 50 watts.

PNM Today and Tomorrow Electr ic The growth in peak demand for electricity Station. Located about 50 miles southwest of which briefly abated in 1975, due to mild Phoenix, Arizona, the complex will event-weather and noticeable conservation efforts ually consist of three 1,270 megawatt units by customers, resumed in 1976. The summer powered by pressurized water reactors. An peak reached 633 megawatts in July. The Arizona statewide initiative which would previous peak was 586 megawatts, recorded have stopped the project was defeated by in August of'975. The first cold spell in late better than a two-to-one margin in November November and early December brought warn- voting. PNM has a 10.2 percent interest in the ing of a severe winter which has affected the project, and 130 megawatts from the first entire nation. In December the demand unit will begin flowing into New Mexico in reached 632 megawatts, nearly equaling the 1982. The second and third units are sched-summer peak. uled for completion in 1984 and 1986. The Construction of new facilities to keep pace New Mexico Public Service Commission has with increased demands continued throughout issued its approval of PNM's participation.

the year. The second unit at the San Juan Construction expenses connected with the Generating Station was placed in commercial expansion of electric operations, including service in late December. This unit is nearly generation, transmission and pollution-con-identical to the first unit which has been in trol facilities, amounted to 8132 million dur-operation since November, 1973. Both are ing 1976.

coal-fired units rated at 322 and 330 mega- Revenue from electric operations totaled watts, respectively. PNM is the operator and $ 97,134,344, or 97.6 percent of total Company 50 percent owner of the San Juan Generating revenues for the year.

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 N/ater climb at a much faster pace than those of coal. PNM provides water service to custom-The third and fourth units at San Juan are ers in the capital city, Santa Fe, and in Las now under construction. These two units are Vegas, New Mexico. Extensive additions to to be in the 468 megawatt range. Unit number these water systems along with improve-three is scheduled for completion in 1979. ments made necessary by growing demand The fourth and final San Juan unit will be and new water quality legislation have been completed in 1981, bringing PNM's coal-fired underway for several years. As in the case generating capacity to over 80 percent. Also of providing electric service, the capital well underway are the structures and sup- investments are quite large. Over 816.7 port facilities for the sulfur dioxide removal million has been spent to expand and upgrade systems for Units 1 and 2. When placed in the Santa Fe system during the past six operation later this year, the SO> systems years. This investment has not been ade-will become the largest of their type in com- quately reflected in rates and the consequent mercial service in the world. revenues from water operations. However, Construction began in May at the site of rate filings have been made which are the Southwest's largest nuclear generating designed to improve the water revenues (See complex, the Palo Verde Nuclear Generating Rates Water, Page 9).

Five-Year Forecast New Mexico's location in what has been in construction is planned. This provides $ 587 termed the "Sunbelt" has been responsible million for generation facilities including for the high rate of growth experienced in the work at the San Juan Generating Station, the past three decades. This influx of new resi- Palo Verde Nuclear Generating Station in dents, factories, headquarter oilices and other Arizona and a large pumped storage project.

activities too numerous to list, shows no Over $ 175 million will be spent on environ-sign of abating in the short-term. mental control facilities and related activi-In 1966 the Company's total investment ties. Transmission, distribution and addi-in utility plant was $ 133.6 million. By the tional operating facilities will be built at a end of 1976 this had increased to $ 532 mil- cost of $ 184 million during the next Ave lion. During the next five years, $ 946 million years.

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

PNM SERVING NEN/ MEXICO Service Areas Nearly half of the citizens of New Mexico Water service in Santa Fe is provided by are PNM retail customers. New Mexico's PNM through a system of reservoirs and population is growing and this growth is, for wells. The terrain in and around Santa Fe, as the most part, taking place in the urban areas well as the variety of water sources, com-of PNM service territory. Through its six bine to make the water system complex.

operating divisions, PNM serves cities and Recent improvements make the Santa Fe towns along the Rio Grande Valley, as well water system one of the most advanced for as Las Vegas in the northeast and Deming in its size in the entire country.

the southwest quadrants of the state. The Between Albuquerque and Santa Fe are Company also provides electricity to other a number of smaller towns; Bernalillo, Pla-areas of New Mexico by way of wholesale citas, Pena Blanca and Indian pueblos; San-contracts with other investor-owned and pub- dia, Santa Ana, Santo Domingo, San Felipe lic utilities and agencies of the federal gov- and Cochiti. These communities are also ernment. Included in these sales are those to served by PNM, through the Bernalillo the Energy Research and Development Admin- Division. To the south of Albuquerque istration facilities at Los Alamos; the City of another series of towns along the Rio Grande Gallup, which has its own municipal distri- Valley, as well as the Isleta pueblo, are in the bution system; and Community Public Serv- Company's service area. The largest of these ice Company, a utility which serves several towns is Belen, where the Company's Belen areas in southern New Mexico. Other large Division is headquartered.

customers are uranium mining and milling The Deming Division serves residents of facilities near Grants, the U.S. Air Force that city, located about 250 miles southwest installation at Albuquerque and Plains Elec- of Albuquerque and only 30 miles north of tric Generation and Transmission Cooperative. the Mexican border.

Albuquerque, New Mexico's largest city, The Las Vegas Division provides PNM has a population of over 325,000 in the metro electric and water service to people living in area and is PNM's largest operating division. and near Las Vegas, New Mexico. This com-The Company's headquarters are located in munity is 60 miles east of Santa Fe on the Albuquerque as is the system operations eastern side of the Sangre de Cristo Moun-control center which coordinates the genera- tains.

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 i=r anchises playing an important role in this research.

Santa Fe is the state capital. The ancient Public Service Company has long-term city, with buildings still standing which were franchises in effect -in all of its divisions erected over 300 years ago, has become a with regard to electric service. The Albuquer-popular place with more tourists each year. que franchise will be in effect until 1992; The activities of state government play a Santa Fe until 1999; Las Vegas until 1996; central role in Santa Fe, but incongruously Belen until 1990; Deming until 1993 and Ber-enough, art seems to have a far more visible nalillo until 1988.

impact on the life of the city. The combina- The franchises pertaining to water opera-tion leaves New Mexico with a city officially tions in Las Vegas and Santa Fe will be in tabulated in the 50,000 population range, but effect until 1996 and 1979, respectively.

the constant influx of visitors keeps the tally Efforts are continuing to extend the Santa at well over 60,000 throughout the year. Fe franchise to a long-term period.

Fuel Supply To provide electricity at the lowest reas- installation expense beyond the investment onable cost requires, among other things, needed for natural gas plants, has proven using the lowest cost fuels available. For its value. Natural gas plants are no longer many years the lowest priced fuel was nat- being built because of supply and price ural gas. Not only was gas relatively inex- considerations.

pensive, it was easy to handle and required Natural gas will continue to be available, less complex machinery to convert the as will oil. However, the price and increas-energy to electricity. This is no longer the ingly frequent supply problems associated case. Gas, as the nation finally recognized with gas and oil make the transition to coal this winter, is in short supply and is no a sound decision indeed.

longer inexpensive. PNM's participation in the Palo Verde Ten years ago PNM was entirely depend- Nuclear Generating Station will add uranium ent upon natural gas, using oil at gas-fired to the fuel mix in the early 1980's. Nuclear stations only as a standby fuel. Your Company fuel purchases are already underway and $ 15 perceived the potential problems with gas fuel million is presently allocated for nuclear fuel availability and began preparations to bring over the next five years.

coal into the fuel mix over a decade and a half The section on research and development ago. This transition is well underway and in (PNM Research and the Environment) dis-1976 natural gas accounted for less than half cusses energy resources which may play an of the energy used to generate electricity for important part in PNM generation plans in PNM customers. Coal, even with fuel hand- coming years. Obtaining energy resources for ling, pollution abatement and mining prob- future generation has always been a fore-lems forcing the cost per kilowatt in plant most concern at PNM.

Rates and Regulations The Company is subject to the jurisdiction pany, during the first twelve months of such of the New Mexico Public Service Commis- agreement, in excess of $ 4,000,000. Such sion (Commission) with respect to a majority agreements were approved by the FPC in of its rates, service, accounting, issuance of December and service under the first contract securities, construction of new generating and became effective October 1, 1976. The ERDA, transmission facilities and other matters. The Community Public Service and Plains con-Federal Power Commission (FPC) has juris- tracts each contain a time-of-day rate sched-diction with respect to rates for electric ule designed to increase the Company's load energy sold for resale. factor in off-peak hours.

The Company is currently applying a Cost In July, 1976, the Company filed revised of Service Index adjustment to substantially water rates for its Santa Fe Water Depart-all electric billings subject to the jurisdiction ment. The revised rates were designed to pro-of the Commission as authorized by the Com- duce an initial 110 percent increase in reve-mission in April, 1975 In 1976, the Index

~ nues with two subsequent increases resulting was applied to approximately 82 percent of in an aggregate increase of 209 percent by the the Company's total kilowatt hour sales and end of 1978.

produced approximately $ 6 million in addi- The Commission approved an increase in tional electric revenue. The Index adjust- Santa Fe's water rates equal to $ 2.2 million ment is computed quarterly and is based on annually, based on the 1975 test year. This the previous twelve months of operation. The increase will become effective subsequent to stability of this regulatory mechanism is pro- the rate design phase of this rate case. A viding capital at a lower cost to the benefit final order is scheduled by the New Mexico of PNM's customers. The Company has fuel Public Service Commission for early sum-adjustment clauses covering approximately mer 1977.

99 percent of KWH sales. Street lighting is On November 3, 1976, the Company filed the only service for which no adjustment is revised water rate schedules for the Las applicable. Vegas Water Department designed to increase The Company recently executed an agree- revenues by 125 percent which would result ment with Plains Electric Generation and in approximately $ 475,000 in increased reve-Transmission Cooperative which will result nue based upon 1975 sales. Hearings are in anticipated annual revenues for the Com- pending on this application.

PNM RESEARCH AND THE ENVIRONMENT Concern with the environment in which plant. This particular system allows the oper-we all live has resulted in broad legislation ation of the massive generating units without designed to minimize the impact of industrial needing a wasteful evaporation pond. Evap-operations on our land, air and water. How- oration ponds are commonly used to remove ever, legislative intent and physical and eco- minerals from .plant water systems. Such nomic laws are often quite different. technologies as the hybrid cooling tower and A great deal of the research for the past brine concentrator are important in the several years has been centered on devel- Southwest where water is scarce.

oping means to meet the legislated environ- These activities at a conventional coal-mental control criteria. Another area of con- fired plant are only part of the PNM pro-cern entered the public awareness with the gram. The Company is a recognized leader in oil embargo of 1973. The worst fears of fuel solar research as it applies to electric utilities.

suppliers and utility companies were realized Five homes will be constructed in Albu-and the shortages gave impetus to wide-rang- querque this year in the final phase of a ing energy research, along with the environ- three-year study to evaluate various methods mental control research already underway. of heating and cooling homes with solar Much has happened in a very short period energy. This is a million dollar project which of time. PNM has made strong efforts to be was awarded to PNM by the Electric Power aware of and to employ, when possible, the Research Institute, most advanced products of this recent In early 1977, studies were completed and research. a proposal was made to the United States 3HK&K The San Juan Generating Station has been Energy Research and Development Admin-recogniz'ed as a model of what modern coal- istration, concerning a PNM plan to add 10 fired generating stations can achieve in the solar power to existing gas-fired generating way of emissions control. Even though the stations. This solar hybrid repowering con-coal in the area is relatively high in ash con- cept was developed at PNM, but could have tent (18 percent), the electrostatic precipitat- application at many conventional power ors employed at San Juan can remove all but plants across the Southwest. The plan calls a fraction of a percent of this ash. This often for the construction of solar boilers atop leaves visitors wondering if the plant is even towers which are surrounded by fields of operating when the boiler is actually power- mirrors. The concentrated sunlight would ing the turbine at peak capacity. boil water for turbine operation and reduce Regulations dealing with sulfur dioxide daytime demand for fossil fuel. The conven-emission control have resulted in the largest tional fuel could then be used as a backup at application of the Wellman-Lord process in night and costly thermal storage systems the United States now being constructed at would not be needed.

the San Juan Generating Station. This system A test facility of the steam production por-is engineered to remove 90 percent of the tion only, based on this central receiver sys-sulfur dioxide released in combustion, tem, is being built in Albuquerque presently even though the sulfur content of the coal at by Sandia Labs for ERDA. PNM's plan calls San Juan averages only 8/10ths of 1 percent. for a scaling up of that design and for tie-in The third unit at San Juan, now under with a present generating facility to study the construction, will employ a hybrid cooling economics of solar-generated electricity as tower. This combination of wet and dry cool- it is actually used by customers.

ing tower technology is designed to decrease A program designed to present practical the amount of water that would be needed conservation measures which can result in for cooling. PNM is the first utility in the measured savings to customers was initiated country to build such a system which uses during 1976. The first phase of the program, 80 per cent less water than conventional wet which was dubbed the SMART program cooling towers. (Saves Money And Resources, Too!), involved The San Juan Station also uses a brine informing our customers about the value of concentrator in recycling water used at the planning homes for additional insulation.

Since the information effort began in mid- Studies into more advantageous applica-year, SMART Homes have been rapidly gain- tions of waste heat, solar water heating, heat ing the attention and acceptance of the con- pump technology, geothermal energy, pumped sumers in New Mexico. This cold winter with hydro storage, as well as environmental its rising fuel prices has underscored the inquiries into the habits of birds of prey and importance of the SMART Home concept. revegetation of semi-arid land are but a few PNM consultants are facing a steadily of the current activities going on at PNM to increasing work load in assisting customers determine the best way to provide power in with technical applications of the ideas put the future without damaging the environment forth in the SMART program. Like other in New Mexico.

PNM programs, the SMART Home has received national attention.

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F Wind-driven gonorators wore installed by tho millions in 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.

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

Management; Changes Jerry D. Geist was elected to succeed G. A. from Manager of Industrial Relations. J. B.

Schreiber as President in April, 1976. Mr. Mulcock, formerly Manager of Public Affairs, Schreiber, who had been PNM's President assumed the duties of Vice President of Pub-since 1966, continues his position as Chair- lic Affairs. J. P. Bundrant assumed manage-man of the Board of Directors. Mr. Geist ment of the water division when he was pro-joined PNM 16 years ago. moted from Division Vice President, Electric Other changes included: Ron Mershon Operations to Vice President of Division elected Vice President of Industrial Relations Operations.

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I I r Called a holiostat, this largo mirror J assembly is part of tho Solar Thormal Tost Facility now under constructionin Albuquerque. When corn ploted, the installation will have 320 holiostats which will track 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.

Employee Relations Public Information Needless to say, retaining the employees Since energy has become a common inter-needed to keep PNM in its position as an est with most people during the past several industry leader in so many areas is as years, PNM has increased its efforts to make important as attracting them. And in order certain that our customers understand what to do this, the Company maintains a wide we are doing and why. This has been done range of benefit programs including medical, through paid advertising, as in the case of the dental and life insurance as well as an SMART Home program; through the Speak-employee's stock purchase plan and retire- ers Bureau, which addresses community ment program. 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 Education and Training presented by Educational Resources Depart-A new craft, Filter Plant Operator, was ment representatives. Plant tours for media added to the Apprenticeship Program in 1976. personnel and other interest groups have A total of 27 apprentices were graduated been conducted and exhibits for an energy-from various trades, and an all-time high of related museum show and other public pre-33 new apprentices were indentured into the sentations have been prepared.

program.

The Education Assistance Program is Union being used more than ever before. In 1976, The present contract with Local 611 of a total of 178 employees took advantage of the International Brotherhood of Electrical the program by enrolling in local schools Workers has been reopened for negotiations and universities to further their education. on wages and working conditions.

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

photovoltaic cells with Fresnel lonses which

INDEX TQ 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 thermal enorgy. High temporatures mado pos-Sandia Labs includes testing of parabolic col- sible by concontrating tho sun's rays may be lectors which convert solar radiation into used for heating or electricity generation.

GROWTH GRAPHS 1968 GROSS PLANT INVESTMENTS ""

1988 1972 1974 FIGURES IN MILtlONS OF DOLLARS 1976 64 100 138 172 208 244 280 318 352 388 424 460 496 532 568 1966 GROSS 1968 REVENUES 1970 19'F2 PICURES IN MILLIONSOP DOLLARS 1974 19FB 30 36 42 48 54 60 68 72 /8 84 90 98 102 108 FEDERAL, 1960 STATE, LOCAL 1968 AND GENERAL 1970 TAXES 1972 1974 19FB PICURES IN MILLIONSOF DOLLARS 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 1968 ELECTRIC 1988 AND N/ATER 1970 1972 1974 FIGURES IN THOUSANDS OP 1970 CUSTOMERS 118 126 134 142 150 158 168 1/4 182 190 108 206 214 222 230 1960 NET 1968 GENERATING 1970 CAPABILITY 1972 1974 FIGURES IN THOUSANDS OF 1976 340 400 460 520 580 840 700 760 820 880 940 1,000 1,060 1e120 KILOWATTS

CQMPARATIVE QPERATING STATISTICS 1976 1975 1974 1973 ELECTRIC SERVICE SALES KWH (Thousands)

Residential 916,748 875,361 828,243 786,108 Commercial 1,277,025 1,177,953 l,128,576 1,1'10,147 Industrial 605,559 530,188 549,622 616,405 Other Sales 157,694 136,136 137,843 128,171 Total Sales to Ultimate Customers 2,957,026 2,719,638 2,644,284 2,640,831 Sales for Resale . 638,207 578,037 250,901 122,656 Total Energy Sales ..... 3,595,233 3,297,675 2,895,185 2,763,487 ELECTRIC REVENUES (Thousands)

Residential $ S2,42S $ 28,912 23,314 $ 20,552 Commercial 36,198 30,851 25,403 22,283 Industrial 13,070 9,993 8,349 7,210 Other Revenues . 4,'168 3,361 3,004 2,613 Total Revenue from Ultimate Customers $ 85,859 $ 73,117 60,070 $ 52,658 Sales for Resale 9,340 8,241 2,782 1,074 Total Revenue from Energy Sales $ 95,'199 81,358 62,852 53,732 Miscellaneous Electric Revenues .. 1,935 '1,412 2,406 2,803 Total Electric Revenue ....... $ 97,'l34 $ 82,770 65,258 $ 56,535 1FXK~

CUSTOMERS AT YEAR END Residential 156,1'16 15'l,111 147,516 143,201 Commercial 17,483 16,738 (2) 16,469 16,241 Industrial 489 515 (2) 298 295 Other Customers ................ 250 246 231 229 Total Ultimate Customers .... 174,338 'l68,610 164,514 159,966 Sales for Resale . 5 4 4 3 Total Customers 174,343 168,614 164,5'18 '159,969 Reliable net capability KW ...... 727,000 727,000 617,000 Coincidental peak demand KW ...

858,000 633,000 586,000 583,400 533,000 Average Fuel cost per million BTU .. 61.83$ 47.23$ 39.49$ 26.16$

BTU per KWH of net generation..... 11,084 10,848 11,054 11,017 WATER SERVICE SALES Gallons (Thousands)

Customer sales 2,959,209 2,859,783 3,013,508 2,855,673 Interdepartmental sales ......." .. 4,014 9,'195 12,568 10,710 ()

Total water sales ............. 2,963,223 2,868,978 3,026,076 2,866,383 REVENUE Customer sales $ 2,386,222 $ 2,204,967 $ 2,'103,169 $ 1,566,730 Interdepartmental sales . 2I580 2 721 5,970 3,585 Total water sales $ 2,388,802 $ 2,207,688 $ 2,109,139 $ 1,570,315 Customers at year end '16,838 16,437 '16,158 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 706,973 648,626 583,136 532,200 486,468 443,916 420,891 985,431 885,782 792,376 732,807 659,836 617,209 565,752 653,761 618,695 552,118 524,180 479,883 444,907 416,594 123,568 116,202 107,598 97,762 89,835 86,790 85,532 2,469,733 2,269,305 2,035,228 1,886,949 1,716,022 1,592,822 1,488,769 114,333 106,000 98,026 91,890 86,765 80,322 78,864 2,584,066 2,375,305 2,133,254 1,978,839 1,802,787 1,673,144 1,567,633

$ 17,760 $ 15,295 $ 13,910 $ 12,861 $ 11,955 $ 11,135 $ 10,652

'19,421 'l6,309 14,784 13,719 12,489 11,790 10,979 7,229 6,549 5,963 5,662 5,'187 4,732 4,625 2,204 1,994 2,056 1,889 1,751 l,662 1,639

$ 46,614 $ 40,147 $ 36,713 $ 34,131 $ 31,382 $ 29,319 $ 27,895 937 857 778 659 557 550

'97

$ 47,SS1 $ 41,004 $ 37,491 $ 34,790 $ 31,939 29,869 $ 28,492 795 670 621 654 640 583 520

$ 48,346 $ 41,674 $ 38,112 $ 35,444 $ 32,579 $ 30,452 $ 29,012~~,

136,515 127,911 120,865 'I15,595 112,765 110,501 108,845 15,754 14,775 13,908 1,3,395 13,084 12,776 12,588 303 308 300 290 296 303 319 221 205 201 199 187 184 187 I52,793 143,'l99 135,274 129,479 126,332 123,764 121,939 3 3 3 2 2 2 3 152,796 143,202 135,277 129,481 126,334 123,766 121,942 542,000 540,700 540,700 437,400 334,000 334,000 334,000 491,700 458,700 400,600 372,300 347,800 328,500 316,300 24.47/ 23.554 23.044 24.48/ 24.26/ 24.03( 24.004

'l0,841 10,870 'I1,058 1'1,552 I'l,550 11,263 11,199 2,781,854 2,563,745 2,564,580 2,397,078 2,356,690 2,253,347 2,145,483 3,638 1,707 1,782 1,609 'I 132 1,261 1,630 2,785,492 2,565,452 2,566,362 2,398,687 2,357,822 2,254,608 2,'147,113

$ 1,530,012 $ 1,434,685 $ 'I,417,697 $ 1,209,617 $ 1,172,831 $ 1,144,096 $ 1,100,523 (1) 813 899 780 659 689 757

$ 1,530,012 $ 1,435,498 $ 1,418,596 $ 1,2'I0,397 $ 1,173,490 $ 1,144,785 $ 1,101,280 15,454 15,024 14,495 14,216 14,092 13,811 13,679

SUMMARY

QF QPERATIQNS 1976 1975 1974 1973 1972 Operating revenue $ 99,523,146 $ 84,977,929 $ 67,367,044 $ 58,105,583 $ 49,875,643 Operating expenses:

Operations and maintenance ............ 51,535,167 39,784,697 30,836,104 22,984,163 18,845,306 Depreciation and amortization ........... 9,548,173 8,649,772 7,974,988 6,210,576 5,682,019 Taxes, other than income taxes .......... 5,874,485 5,114,600 4,451,727 3,643,430 3,268,059 Income taxes 8,028,464 8,626,084 6,638,499 7,734,730 7,175,543 Total operating expenses.............. 74,986,289 62,175,153 49,901,318 40,572,899 34,970,927 Operating income . 24,536,857 22,802,776 17,465,726 17,532,684 14,904,716 Allowance for funds used during construction 5,801,275 2,442,358 1,042,977 2,792,601 2,046,691 Other income and deductions, net .......... 688,681 530,404 454,396 46,220 (14,622)

Income before interest charges ........ 31,026,813 25,775,538 18,963,099 20,371,505 16,936,785 Interest charges 13,669,650 11,559,366 8,670,579 7,615,708 6,42'l,470 Net earnings 17,357,163 14,216,172 10,292,520 12,755,797 10,515,315 Preferred stock dividends ................ 4,194,268 2,952,133 1,768,400 595,400 595,400 Net earnings applicable to common stock $ 13,162,895 $ 11,264,039 $ 8,524,120 $ 12,160,397 $ 9,919,915 Average common shares outstanding ...... 6,106,015 4,608,773 4,370,919 4,321,113 3,973,723 Per share amounts-Net earnings $ 2.16 $ 2.44 $ 1.95 $ 2.81 $ 2.50 Dividends $ 1.42 $ 1.26 $ 1.20 $ 1.14 $ 1.04 I

1FEBMt MANAGEMENT'S DIS( USSIQN AND ANALYSIS QF 18 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 adjustment natural 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 million in 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 million in 1975.-

The Company's gross utility plant 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 dividends from 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 BALANCE SHEET December 31, 1976 and 1975 ASSETS 1976 1975 Utilityplant at original cost (note 3)

Electric plant in service $ 353,407,866 $ 285,321,813 Water plant in service 25,945,445 24,825,819 Common plant in service 9,612,883 7,750,252 388,966,194 317,897,884 Less accumulated depreciation and amortization 77,225,'l59 67,707,323 311,741,035 250,190,561 Construction work in progress 143,311,370 83,84B,148 Net utility plant 455,052,405 334,036,709 Other property and investments:

Non-utility property, at cost, net of accumulated depreciation of $ 208,744 in 1976 and $ 199,740 in 1975 3,464,971 3,740,969 3HiKiK Investment in fifty-percent-owned company 1,746,666 1,303,754 Other, at cost 511,331 172,194 20 Total other property and investments 5,722,968 5,21B,917 Current assets:

Cash (note 4) 3>055,958 4,539,556 Receivables:

Customers 7,813,645 6,928,952 Income tax refunds 5,649,579 Other 3,562,726 3,409,675 Allowance for doubtful receivables (178,839) (132,598)

Materials and supplies, at average cost 9,'l64,552 9,954,181 Prepaid expenses 788,210 884,257 Deferred fuel costs 4,534,721 'l,517,820 Total current assets 34,390,552 27,101,843 Deferred charges:

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

$ 498,947,691 $ 370,507,981 See accompanying notes to consolidated financial statements.

STQ( KHQLDERS'QUITY AND 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 $ 60,000,000 $ 4o,ooo,ooo 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 36,655,760 25,655,760 Additional paid-in capital 68,238,436 36,364,940 Retained earnings 49,476,949 44,680,290 Total stockholders'quity 214,371,145 146,700,990 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) 30,592,000 31,875,000 Accounts payable 21,477,929 1'I,171,503 Preferred dividends declared 997,849 539,850 Sinking fund requirements and maturities of long-term debt (note 3) 5,869,230 792>354 Customer deposits 165,913 l45,732 Accrued interest 2,026,900 2,'140,648 Accrued taxes 2>575,314 2,424,907 Other current liabilities 2,607,435 2,025,008 Total current liabilities 66,3I2,570 51,115,002 Deferred credits:

Customer advances for construction 3,738,111 3,398,269 Accumulated deferred investment tax credits 15,455,168 6,995,771 Accumulated deferred income taxes (note 5) 18,737,820 15,212,382 Other deferred credits 1,900,013 521,793 Total deferred credits 39,831,112 26,128,215 Commitments and construction program (note 7)

$ 498,947,691 $ 370,507,981

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

Electric $ 97 134 344 $ 82,770,241 Water 2,388,802 2,207,688 Total operating 'revenues 99,523,146 84,977,929 Operating expenses:

Operating and general expenses 43,381,261 33,107,425 Maintenance and repairs 8,153,906 6,677,272 Provision for depreciation and amortization 9,548,173 8,649,772 Taxes, other than income taxes 5,874,485 5,114,600 Income taxes (note 5) 8,028,464 8,626,084 Total operating expenses 74,986,289 62,175,153 Operating income 24,536,857 22,802,776 PROM Other income and deductions:

Allowance for funds used during construction 5,801,275 2,442,358 22 Equity in earnings of fifty-percent-owned company, net of taxes (note 5) 409,375 424,015 Other, net of taxes (note 5) 279,306 106,389 Net other income and deductions 6,489,956 2,972,762 Income before interest charges 31,026,813 25,775,538 Interest charges:

Interest on long-term debt 11,683,381 9,573,949 Amortization of debt discount, expense and premium 205,205 190,700 Other interest charges 1,781,064 1,794,717 Total interest charges 13,669,650 11,559,366 Net earnings 17,357,163 14,216,172 Preferred stock dividend requirements 4,194,268 2,952,133 Net earnings applicable to common stock $ 13,162,895 $ 11,264,039 Average number of shares outstanding 6,106,015 4,608,773 Per share amounts:

Net earnings $ 216 $ 2.44 Dividends $ 1.42 $ 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 $ 40,000,000 $ 30,000,000 Issuance of preferred stock 20,000,000 10,000,000 Balance at end of year 60,000,000 ) 40,000,000 Common stock:

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

Balance at beginning of year 36,364,940 28,275,095 Premium on common stock 34,375,000 8,870,992 Expenses of stock issuance (2,501,504) (781,147)

Balance at end of year 68,238,436 36,364,940 Retained earnings:

23 Balance at beginning of year 44,680,290 39,223,076 Net earnings 17,357,163 14,216,172 62,037,453 53,439,248 Cash dividends:

Cumulative preferred stock 4,194,268 2,952,133 Common stock 8,366,236 5,806,825 12,560,504 8,758,958 Balance at end of year 49,476,949 44,680,290 Total stockholders'quity at end of year $ 214,371,145 $ 146,700,990 Number of shares issued:

$ 100 stated value preferred stock 100,000

$ 25 stated value preferred stock 800,000 Common stock 2,200,000 719,007 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 $ 17,357,163 $ 14,216,172 Charges (credits) to earnings not requiring funds:

Depreciation and amortization 10,171,832 9,056,324 Provision for non-current deferred income taxes, net 3,525,438 2,552,603 Investment tax credit, net 8,459,397 1,822,676 Allowance for funds used during construction (5,801,275) (2,442,358)

Undistributed earnings of fifty-percent-owned company (442,912) (458,744)

Funds derived from operations 33,269,643 24,746,673 Sale of first mortgage bonds 25,000,000 Sale of preferred stock 20,000,000 10,000,000 Proceeds from Pollution Control Revenue Bonds 36,653,858 7,139,244 Sale of con6non stock 45,375,000 '12,466,027 Proceeds from other long-term debt 1,825,658 83,879 Proceeds from short-term debt 71,310,000 42,805,000 Utility plant retirements, net of removal costs 1,094,079 526,223 Customer advances for construction, net of refunds 339,842 626,541 Decrease in other deferred charges 566,168 1,010,575 Decrease in working capital other than short-term debt 9,191,859 2,321,355 Other 1,622,562 258,353

$ 221,248,669 $ 126,983,870 Funds used:

Cash dividends $ 12,560,504 $ 8,758,958 Utility plant additions 126,163,627 72,731,774 Payment of short-term debt 72,593,000 42,880,000 Reduction of long-term debt 6,605,800 1,184,000 Bond discount and expense 485,097 326,688 Capital stock expense 2,501,504 781,147 Additions to non-utility property 304,422 Other 339,137 16,881

$ 221,248,669 $ 126,983,870 Changes in working capital other than short-term debt:

Increase (decrease) in current assets:

Cash $ (1,483,598) 682,932 Receivables 6,641,082 2,296,791 Materials and supplies (789,629) (729,005)

Prepaid expenses (96,047) 184,127 Deferred fuel costs 3,016,901 1,517,820 7,288,709 3,952,665 Increase (decrease) in current liabilities other than short-term debt:

Accounts payable 10,306,426 4,439,746 Preferred dividends declared 457,999 Sinking fund requirements and maturities of long-term debt 5,076,876 6,337 Customer deposits 20,181 45,193 Accrued interest (u.3,748) 397,545 Accrued taxes '150,407 746,012 Other current liabilities 582,427 639,187 16,480,568 6,274,020 Decrease in working capital other than short-term debt $ 9,'191,859 2,321,355 See accompanying notes to consolidated financial statements.

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.

Utility Plant 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- 1RKNK mission also ordered, effective April 22, 1975, that the allowance for funds used during construction be limited to generating plant con-25 struction. Contributions received from customers to meet the cus-tomers'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 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:

1976 1975 Electric plant 3.14% 3.14%

Water plant 1.87% 1.83%

Common plant 4.74% 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-

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.

26 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.

27 (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:

Aggregate Shares Statod Redemption Sories Outstanding Value Price (a) 1965 Series, 4.58 /o, $ 100 stated value 130,000 $ 13,000,000 $ 103.032 1974 Series, 9.2o/o, $ 100 stated value (b) 170,000 17,000,000 109.20 1975 Series, -10.12o/o, $ 100 stated value (b) 100,000 10,000,000 110.'l2 9.16'/o Series, $ 25 stated value (b) 800,000 20,000,000 27.29 1,200,000 $ 60,000,000 (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 9.16o/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

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 '14,284,522 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) 11,212,031 Other 1,512,660 298,169

$ 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 will be 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 $ 9,592,000 $ 21,980,000 Commercial paper $ 21,000,000 $ 9,895,000 Average interest rate on outstanding debt:

Notes payable to banks 6'/o'/o 71/2 /o Commercial paper 4'/4o/o 5'/so/o Maximum short-term debt outstanding during year $ 45,755,000 $ 37,275,000 Average short-term debt outstanding during year $ 28,450,000 $ 22,900,000 Weighted average interest rate on short-term debt outstanding during year, computed using daily debt outstanding balances:

Stated interest rates 6'/4 /o 8 '/o Effective rate considering the effect of compensating balances 6'/2'/o 8/o /o Unused lines of credit (subject to cancellation at the banks'ption) $ 29,678,000 $ 16,600,000 Compensating balances at end of year $ 1,125,000 $ 1,800,000 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 components:

Charged to operating expenses: 1976 1975 Federal income tax $ (6,859,356) $2,813,830 State income tax 312,630 422,683 Deferred Federal income tax 4,531,558 2,965,194 Deferred State income tax, 483,425 318,724 Amount equivalent to current investment credit 9,560,207 2,136,409 Amortization of accumulated investment credit (30,756) 8,028,464 8,626,084

Charged to other income and deductions:

Federal income tax $ 41,104 . $ (33,277)

State income tax 4,281 (3,457)

Deferred Federal income tax 30,375 31,460 Deferred State income tax 3,163 3,269 Amortization of accumulated investment credit (264,627) (166,535)

(185,704) (168,540)

Total income taxes $ 7,842,760 $ 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:

l976 1975 Accelerated amortization of emergency facilities, liberalized depreciation methods and asset class lives shorter than guideline lives $ 3,115,135 $ 2,370,930 Training costs (10,041) (10,04i)

Deferred fuel costs 1,523,083 766,044 Abandonment loss (31,397) 156,985 Payroll taxes capitalized 418,203 Undistributed earnings of fifty-percent-owned company (included in other deductions) 33,538 34,729

$ 5,048,521 $ 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:

1976 1975 Federal income tax statutory rate 48.0o/o 48.0o/o Tax depreciation in excess o'f book depreciation caused by use of guideline depreciation provisions (4.7o/o) (3.0 /o)

Allowance for funds used during construction, net of depreciation adjustments (10.2 /o) (4.5 /o)

Certain employee benefits and taxes capitalized for financial statements, net of depreciation adjustments (2.0o/o) (2.7o/o)

State income taxes, net of Federal tax effect 1.5'/o Undistributed earnings of fifty-percent- 1.7o/o'.7o/o) owned company (.8 /0)

Amortization of investment tax credits (1.0o/o) (.9o/o)

Other miscellaneous items .2'/o (.5o/o)

Company's effective income tax rate 31.1o/o 37.3o/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 liability at 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. All other 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.

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

Data processing equipment $ 1,647,781 Real estate 93,600 1,741,381 Less accumulated amortization 460,090

$ 1,281,291 Future minimum lease payments under capital leases at December 31, 1976 were:

1977 $ 342,756 1978 342,756 1979 344,196 1980 344,196 1981 344,196 Later years 494,540 Total minimum lease payments 2,212,640 Less amount representing executory costs 99,275 Net minimum lease payments 2,113,365 Less amount representing interest 712,244 Present value of net minimum lease payments $ 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, March 31, 1976 1976 1976 1976 Total Operating Revenues $ 26,792,977 $ 24,707,277 $ 24,844,898 $ 23,177,994 Operating $ 6,402,957 $ 6,670,488 $ 5,711,626 $ 5,751,786 Income'et Earnings $ 4,969,674 $ 4,976,042 $ 3,749,347 $ 3,662,100 3HQM:

Net Earnings

$ .46 $ .52 33 per share $ .56 $ .61 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) Utility Plant 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.

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

CERTIFIED PUBLIC ACCOUNTANTS P. O.BOX NEW MEXICO GT103 102'LBUQUERQUE, 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)

COMMON STOCK Range of Sal'es Prices Dividends High Low Per Share Fourth Quarter, 1976 24e/a 19>h $ 0.S8 Third Quarter, 1976 23'/4 19 0.36 Second Quarter, 1976 19~/a 17e/e 0.34 First Quarter, 1976 20 a/e 18 a/a 0.34 Fiscal Year 24'/a 17e/e $ 1.42 Fourth Quarter, 1975 18~/a 15 $ 0.32 Third Quarter, 1975 21'/4 16~/4 0.32 Second Quarter, 1975 3F!KMI:

20y2 15~/4 0.32 First Quarter, 1975 16 11'/e 0.30 35 Fiscal Year 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 (Dividends per share)

Fourth Quarter, 1976 $ 1.145 $ 2.S0 $ 2.5S $ 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 Fourth Quarter, 1975 $ 1.145 $ 2.30 $ 2.53 Third Quarter, 1975 1.145 2.30 2.53 Second Quarter, 1975 1.145 2.30 2.446 First Quarter, 1975 1.145 2.30 Fiscal Year $ 4.58 $ 9.20 $ 7.506 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. LEYENDECKER t President, Mimbres Valley Bank Deming, New Moxico R. F. MATHER President, 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 t Prcsidont, Santa Fc Motor Company Santa Fe, Ncw Mexico

• Members of the Executivo Committco t Members of tho Audit Committee QFFICERS G. A. SCHREIBER Chairman of the Board J. D. GEIST President R. B. ROUNTREE Senior Vice President R. MULLINS Vico Presidont, Engineering and Construction C. D. BEDFORD Vice President, Administration J. P. BUNDRANT Vice President, Division Operations J. B. MULCOCK Vico President, Public Affairs R. F. MERSHON Vico Presidont, industrial Relations D. E. PECKHAM Secretary and Treasurer 3HVEK B. D. LACKEY Controller P. J. ARCHIBECK Assistant Secretary and Assistant Treasuror 36 B. P. LOPEZ Assistant Secretary H. L. HITCHINS, JR. Assistant Secretary and Assistant Treasurer W. A. BADSGARD Albuquerquo Division Vice President F. E. GRAY Vice President, Water Operations E. L. FOGLEMAN Las Vegas Division Vico President P. R. GAMERTSFELDER Santa Fo Division Electric Vice Prosident J. L. SMITH Bclon Division Manager R. A. LAKE Deming Division Manager T. P. WARNKE San 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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Permit No. 13 PUBLIC SERVICE COMPANY OF NEW MEXICO Post Office Box 1047 Albuquerque. New Mexico 87103 Return Requested